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ALERE INC. SEC Filing Form 10-Q Quartely report 2/2017, submited: 2017-06-14

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Form 10-Q

The SEC form 10-Q is a comprehensive report of a company's performance that must be submitted quarterly by all public companies to the Securities and Exchange Commission. In the 10-Q, firms are required to disclose relevant information regarding their financial position. The form must be submitted on time, and the information should be available to all interested parties.

The 10-Q is due 35 days (it used to be 45 days) after each of the first three fiscal quarters. There is no filing after the fourth quarter because that is when the 10-K is filed.

10-Q 1 d374871d10q.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)

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

For the quarterly period ended March 31, 2017

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

 

 

 

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  ☒    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  ☒    No  ☐

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

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☐  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

The number of shares outstanding of the registrant’s common stock, par value of $0.001 per share, as of June 12, 2017 was 87,368,721.

 

 

 


Table of Contents

ALERE INC.

REPORT ON FORM 10-Q

For the Quarterly Period Ended March 31, 2017

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 for the fiscal year ended December 31, 2016 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 forward-looking statements and 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. For additional information on forward-looking statements, see page 41 of this Quarterly Report on Form 10-Q.

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  

EXPLANATORY NOTE

     3  

PART I.

 

FINANCIAL INFORMATION

     4  

Item 1.

 

Financial Statements (unaudited)

     4  
 

a) Consolidated Statements of Operations for the Three Months Ended March 31, 2017 and 2016 (as restated)

     4  
 

b) Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2017 and 2016 (as restated)

     5  
 

c) Consolidated Balance Sheets as of March 31, 2017 and December  31, 2016

     6  
 

d) Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (as restated)

     7  
 

e) Notes to Consolidated Financial Statements

     8  

Item 2.

 

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

     41  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     53  

Item 4.

 

Controls and Procedures

     53  

PART II.

 

OTHER INFORMATION

     56  

Item 1.

 

Legal Proceedings

     56  

Item 1A.

 

Risk Factors

     60  

Item 3.

 

Default Upon Senior Securities

     60  

Item 6.

 

Exhibits

     60  

SIGNATURE

     61  

 

2


Table of Contents

EXPLANATORY NOTE

As described in additional detail in the Explanatory Note to our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, or the 2016 Form 10-K, we had incorrectly recorded certain revenue transactions at our subsidiary in South Korea, Standard Diagnostics, Inc., or SD. Specifically, we failed to correctly apply U.S. generally accepted accounting principles, or U.S. GAAP, regarding the timing of revenue recognition primarily relating to transactions in which we recognized revenue prior to full satisfaction of all contractual criteria for title and risk of loss passing to the customer as required by U.S. GAAP. The principal cause of these misstatements in the timing of revenue recognition was inappropriate conduct at our SD subsidiary. These misstatements were primarily the result of conduct and practices initiated by a former employee in the sales organization. The inappropriate conduct and practices involved, among other things, misrepresentation and/or fabrication of documents used to validate revenue recognition that were intentionally concealed from our senior leadership team and our external auditors at the time of the transactions and during the global revenue recognition assessment conducted as part of the filing of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015. Further, other SD employees (in some cases subordinates of the initiating employee and local finance management responsible for other controls at SD) were involved in the inappropriate conduct or acted to conceal it.

These misstatements resulted in management and the Audit Committee of the Board of Directors of Alere Inc. concluding on April 12, 2017 that our financial statements as of December 31, 2015 and 2014 and for each of the years ended December 31, 2015, 2014 and 2013, and for each of the quarterly and year-to-date periods in 2015 and the first three quarterly and year-to-date periods in 2016 should not be relied upon. In addition, in the 2016 Form 10-K, we restated our audited financial statements as of December 31, 2015 and for the years ended December 31, 2015 and 2014, and we also restated certain unaudited financial information for each of the quarterly and year-to-date periods in 2015 and the first three quarterly and year-to-date periods in 2016, or the Restatement. We further included certain restated financial information as of December 31, 2014, 2013 and 2012 and for the years ended December 31, 2013 and 2012 in Item 6. “Selected Consolidated Financial Data” in our 2016 Form 10-K.

As a result of the review that led to the Restatement, we did not timely file the 2016 Form 10-K (which was filed with the Securities and Exchange Commission on June 5, 2017) or this Quarterly Report on Form 10-Q. As noted above, in connection with the Restatement, we restated certain financial information for the quarter ended March 31, 2016, and the restated results for such period are reflected in this Quarterly Report on Form 10-Q in Item 1. “Financial Statements (unaudited)”, Note 2 to such financial statements “Restatement of Previously Issued Financial Statements” and Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share amounts)

 

     Three Months Ended March 31,  
     2017     2016
(As Restated)
 

Net product sales

   $ 463,445     $ 468,502  

Services revenue

     122,129       115,709  
  

 

 

   

 

 

 

Net product sales and services revenue

     585,574       584,211  

License and royalty revenue

     2,642       2,729  
  

 

 

   

 

 

 

Net revenue

     588,216       586,940  
  

 

 

   

 

 

 

Cost of net product sales

     229,831       241,324  

Cost of services revenue

     75,899       73,100  
  

 

 

   

 

 

 

Cost of net product sales and services revenue

     305,730       314,424  

Cost of license and royalty revenue

     760       1,391  
  

 

 

   

 

 

 

Cost of net revenue

     306,490       315,815  
  

 

 

   

 

 

 

Gross profit

     281,726       271,125  

Operating expenses:

    

Research and development

     26,284       27,062  

Sales and marketing

     94,191       100,640  

General and administrative

     166,273       114,956  

Impairment and gain on dispositions, net

     —         (3,810
  

 

 

   

 

 

 

Operating (loss) income

     (5,022     32,277  

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

     (43,183     (42,106

Other (expense) income, net

     (2,516     (1,349
  

 

 

   

 

 

 

Loss from operations before provision (benefit) for income taxes

     (50,721     (11,178

Provision (benefit) for income taxes

     18,609       (172
  

 

 

   

 

 

 

Loss from operations before equity earnings of unconsolidated entities, net of tax

     (69,330     (11,006

Equity earnings of unconsolidated entities, net of tax

     5,201       5,034  
  

 

 

   

 

 

 

Net loss

     (64,129     (5,972

Less: Net income attributable to non-controlling interests

     183       103  
  

 

 

   

 

 

 

Net loss attributable to Alere Inc. and Subsidiaries

     (64,312     (6,075

Preferred stock dividends

     (5,250     (5,309
  

 

 

   

 

 

 

Net loss available to common stockholders

   $ (69,562   $ (11,384
  

 

 

   

 

 

 

Basic and diluted net loss per common share:

    

Net loss per common share

   $ (0.80   $ (0.13
  

 

 

   

 

 

 

Weighted-average shares – basic and diluted

     87,221       86,646  
  

 

 

   

 

 

 

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

 

4


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ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(unaudited)

(in thousands)

 

     Three Months Ended March 31,  
     2017     2016
(As Restated)
 

Net loss

   $ (64,129   $ (5,972
  

 

 

   

 

 

 

Other comprehensive income (loss), before tax:

    

Changes in cumulative translation adjustment

     53,330       22,193  

Minimum pension liability adjustment

     (71     155  
  

 

 

   

 

 

 

Other comprehensive income, before tax

     53,259       22,348  
  

 

 

   

 

 

 

Other comprehensive income

     53,259       22,348  
  

 

 

   

 

 

 

Comprehensive (loss) income

     (10,870     16,376  

Less: Comprehensive income attributable to non-controlling interests

     183       103  
  

 

 

   

 

 

 

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

   $ (11,053   $ 16,273  
  

 

 

   

 

 

 

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

 

5


Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except par value amounts)

 

     March 31, 2017
(unaudited)
    December 31, 2016  
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 601,472     $ 567,215  

Restricted cash

     53,143       51,550  

Marketable securities

     540       76  

Accounts receivable, net of allowances of $75,976 and $75,798 at March 31, 2017 and December 31, 2016, respectively

     387,687       413,535  

Inventories, net

     322,473       308,920  

Prepaid expenses and other current assets

     117,828       118,607  
  

 

 

   

 

 

 

Total current assets

     1,483,143       1,459,903  

Property, plant and equipment, net

     439,802       441,190  

Goodwill

     2,781,100       2,759,366  

Other intangible assets with indefinite lives

     22,118       27,164  

Finite-lived intangible assets, net

     785,065       805,577  

Restricted cash

     2,355       2,171  

Other non-current assets

     14,340       14,966  

Investments in unconsolidated entities

     79,227       72,225  

Deferred tax assets

     22,475       20,483  

Non-current income tax receivable

     44,244       45,234  
  

 

 

   

 

 

 

Total assets

   $ 5,673,869     $ 5,648,279  
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities:

    

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

   $ 82,506     $ 82,370  

Current portion of capital lease obligations

     2,901       3,064  

Accounts payable

     211,430       195,879  

Accrued expenses and other current liabilities

     416,447       394,843  
  

 

 

   

 

 

 

Total current liabilities

     713,284       676,156  
  

 

 

   

 

 

 

Long-term liabilities:

    

Long-term debt, net of current portion

     2,852,326       2,858,205  

Capital lease obligations, net of current portion

     6,674       7,221  

Deferred tax liabilities

     120,826       119,098  

Other long-term liabilities

     160,136       155,992  
  

 

 

   

 

 

 

Total long-term liabilities

     3,139,962       3,140,516  
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Series B preferred stock, $0.001 par value (liquidation preference: $709,701 at March 31, 2017 and December 31, 2016); Authorized: 2,300 shares; Issued: 2,065 shares at March 31, 2017 and December 31, 2016; Outstanding: 1,774 shares at March 31, 2017 and December 31, 2016

     606,406       606,406  

Common stock, $0.001 par value; Authorized: 200,000 shares; Issued: 95,021 shares and 94,770 shares at March 31, 2017 and December 31, 2016, respectively; Outstanding: 87,342 shares and 87,091 shares at March 31, 2017 and December 31, 2016, respectively

     95       95  

Additional paid-in capital

     3,474,861       3,474,979  

Accumulated deficit

     (1,671,431     (1,607,119

Treasury stock, at cost, 7,679 shares at March 31, 2017 and December 31, 2016

     (184,971     (184,971

Accumulated other comprehensive loss

     (409,139     (462,398
  

 

 

   

 

 

 

Total stockholders’ equity

     1,815,821       1,826,992  

Non-controlling interests

     4,802       4,615  
  

 

 

   

 

 

 

Total equity

     1,820,623       1,831,607  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 5,673,869     $ 5,648,279  
  

 

 

   

 

 

 

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

 

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Table of Contents

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

 

     Three Months Ended March 31,  
     2017     2016
(As Restated)
 

Cash Flows from Operating Activities:

    

Net loss

   $ (64,129   $ (5,972

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

    

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

     4,281       2,236  

Depreciation and amortization

     60,934       72,504  

Non-cash stock-based compensation expense

     10,363       9,602  

Impairment of inventory

     —         1,349  

Impairment of long-lived assets

     (342     608  

Loss on sale of fixed assets

     2,341       323  

Equity earnings of unconsolidated entities, net of tax

     (5,201     (5,034

Deferred income taxes

     (3,377     (6,812

Gain on business dispositions

     —         (3,810

Other non-cash items

     1,564       2,496  

Non-cash change in fair value of contingent consideration

     489       142  

Changes in assets and liabilities, net of acquisitions:

    

Accounts receivable, net

     33,105       (17,930

Inventories, net

     (19,272     (10,284

Prepaid expenses and other current assets

     3,750       (5,775

Accounts payable

     13,363       (31,542

Accrued expenses and other current liabilities

     17,714       (5,182

Other non-current assets and liabilities

     5,652       35  

Cash paid for contingent consideration

     (159     (143
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     61,076       (3,189
  

 

 

   

 

 

 

Cash Flows from Investing Activities:

    

Increase in restricted cash

     (1,445     (436

Purchases of property, plant and equipment

     (10,399     (14,504

Proceeds from sale of property, plant and equipment

     139       612  

Cash received from business disposition, net of cash divested

     —         21,470  

Cash paid for business acquisitions, net of cash acquired

     (3,060     (5,945

Cash received from sales of marketable securities

     (7     93  

Cash received from equity method investments

     —         2,205  

Cash paid for equity investments

     (232     (184

Proceeds from sale of equity investments

     229       —    

Increase (decrease) in other assets

     82       (540
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (14,693     2,771  
  

 

 

   

 

 

 

Cash Flows from Financing Activities:

    

Cash paid for financing costs

     —         (1

Cash paid for contingent consideration

     (128     (145

Proceeds from issuance of common stock, net of issuance costs

     496       11,124  

Proceeds from issuance of long-term debt

     —         325  

Payments on long-term debt

     (10,158     (17,275

Net proceeds (payments) under revolving credit facilities

     48       (127

Cash paid for dividends

     (5,323     (5,323

Cash paid for employee taxes related to shares withheld

     (5,601     (1,410

Principal payments on capital lease obligations

     (852     (1,107
  

 

 

   

 

 

 

Net cash used in financing activities

     (21,518     (13,939
  

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     9,392       2,820  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     34,257       (11,537

Cash and cash equivalents, beginning of period

     567,215       502,200  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 601,472     $ 490,663  
  

 

 

   

 

 

 

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

 

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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, or U.S. GAAP, 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, 2016 included information and footnotes necessary for such presentation and were included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on June 5, 2017. 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, 2016.

Our operating segments are currently (i) professional diagnostics; (ii) consumer diagnostics; and (iii) other non-reportable. In January 2015, we sold our condition management, case management, wellbeing, wellness, and women’s and children’s health businesses, which we refer to collectively as our health management business. As a result of the sale of our health management business, which was the largest component of our former patient self-testing reporting segment, as well as certain other transactions in 2015, the only component of the patient self-testing reporting segment that was retained by Alere was the Alere Home Monitoring business. Therefore, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, we reported our financial information in two reportable operating segments: (i) professional diagnostics and (ii) consumer diagnostics, and Alere Home Monitoring was reported as a component of the professional diagnostics segment. Due to the nature of the operations of Alere Home Monitoring and the manner in which this business is conducted, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and this Quarterly Report on Form 10-Q, we are reporting our Alere Home Monitoring business as a separate segment under the heading “other non-reportable segment.” Alere Home Monitoring distributes PT/INR coagulation monitors and facilitates the distribution of equipment and supplies to power and control customers’ implanted ventricular assist devices, or VADs, as well as telemonitoring services that allows VAD coordinators to monitor patients soon after discharge and receive alerts when critical patient values fall outside pre-established ranges. The information presented herein for the three months ended March 31, 2016 has been retroactively adjusted to reflect the foregoing changes in the segment presentation.

The consolidated financial statements include the accounts of Alere Inc. and its subsidiaries. Intercompany transactions and balances are eliminated and net earnings are reduced by the portion of the net earnings of subsidiaries applicable to non-controlling interests. Equity investments in which we exercise significant influence but do not control and are not the primary beneficiary are accounted for using the equity method. Investments in which we are not able to exercise significant influence over the investee and which do not have readily determinable fair values are accounted for under the cost method.

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

(2) Restatement of Previously Issued Financial Statements

On April 12, 2017, management and the Audit Committee of our Board of Directors concluded that our financial statements as of December 31, 2015 and 2014 and for each of the years ended December 31, 2015, 2014 and 2013, and for each of the quarterly and year-to-date periods in 2015 and the first three quarterly and year-to-date periods in 2016 should not be relied on.

In our Annual Report on Form 10-K for the year ended December 31, 2016, we restated the annual financial statements as of December 31, 2015 and for the years ended December 31, 2015 and 2014, and also restated unaudited condensed financial information for each of the quarterly and year-to-date periods in 2015 and the first three quarterly and year-to-date periods in 2016, which we refer to herein as the Restatement. As a result, the financial statements and information as presented in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 have been restated.

The Restatement was the result of the failure to correctly apply U.S. GAAP regarding the timing of revenue recognition primarily related to transactions in which we recognized revenue prior to full satisfaction of all contractual criteria for title and risk of loss passing to the customer as required by U.S. GAAP. The principal cause of these misstatements in the timing of revenue recognition is attributable to inappropriate conduct at our Standard Diagnostics subsidiary. These misstatements were primarily the result of conduct and practices initiated by a former employee in the sales organization. The inappropriate conduct and practices involved, among other things, misrepresentation and/or fabrication of documents used to validate revenue recognition that were intentionally concealed from our senior leadership team and our external auditors at the time of the transactions and during the global revenue recognition assessment conducted as part of the filing of the Annual Report on Form 10-K for the fiscal year ended December 31, 2015. Further, other Standard Diagnostics employees (in some cases subordinates of the initiating employee and local finance

 

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management responsible for other controls at Standard Diagnostics) were involved in the inappropriate conduct or acted to conceal it. In addition, the Restatement reflects corrections for certain other misstatements that we identified in 2017 relating to 2014, 2015 and 2016. These adjustments as they relate to the periods presented in this Quarterly Report on Form 10-Q relate to misstatements in the classification of certain amounts between current assets, noncurrent assets and current liabilities. The Restatement did not result in a change to our previously reported total amounts for net cash flows from operating activities, investing activities, or financing activities. There was no impact to net change in cash and cash equivalents for any previously reported periods.

 

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The following schedules reconcile the amounts as previously reported in the applicable financial statements as filed with the Securities and Exchange Commission (prior to the Restatement) to the corresponding restatement amounts for the three months ended March 31, 2016:

ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

     Three Months Ended March 31, 2016  
     As Previously
Reported
    Restatement
Adjustment (1)
     As Restated  

Net product sales

   $ 459,771     $ 8,731      $ 468,502  

Services revenue

     115,709       —          115,709  
  

 

 

   

 

 

    

 

 

 

Net product sales and services revenue

     575,480       8,731        584,211  

License and royalty revenue

     2,729       —          2,729  
  

 

 

   

 

 

    

 

 

 

Net revenue

     578,209       8,731        586,940  
  

 

 

   

 

 

    

 

 

 

Cost of net product sales

     237,461       3,863        241,324  

Cost of services revenue

     73,100       —          73,100  
  

 

 

   

 

 

    

 

 

 

Cost of net product sales and services revenue

     310,561       3,863        314,424  

Cost of license and royalty revenue

     1,391       —          1,391  
  

 

 

   

 

 

    

 

 

 

Cost of net revenue

     311,952       3,863        315,815  
  

 

 

   

 

 

    

 

 

 

Gross profit

     266,257       4,868        271,125  

Operating expenses:

       

Research and development

     27,062       —          27,062  

Sales and marketing

     99,813       827        100,640  

General and administrative

     114,956       —          114,956  

Impairment and (gain) loss on dispositions, net

     (3,810     —          (3,810
  

 

 

   

 

 

    

 

 

 

Operating income

     28,236       4,041        32,277  

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

     (42,106     —          (42,106

Other (expense) income, net

     (1,349     —          (1,349
  

 

 

   

 

 

    

 

 

 

Loss from operations before provision (benefit) for income taxes

     (15,219     4,041        (11,178

Provision (benefit) for income taxes

     (208     36        (172
  

 

 

   

 

 

    

 

 

 

(Loss) income from operations before equity earnings of unconsolidated entities, net of tax

     (15,011     4,005        (11,006

Equity earnings of unconsolidated entities, net of tax

     5,034       —          5,034  
  

 

 

   

 

 

    

 

 

 

Net (loss) income

     (9,977     4,005        (5,972

Less: Net income attributable to non-controlling interests

     103       —          103  
  

 

 

   

 

 

    

 

 

 

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

     (10,080     4,005        (6,075

Preferred stock dividends

     (5,309     —          (5,309
  

 

 

   

 

 

    

 

 

 

Net (loss) income available to common stockholders

   $ (15,389   $ 4,005      $ (11,384
  

 

 

   

 

 

    

 

 

 

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

       

Net (loss) income per common share

   $ (0.18   $ 0.05      $ (0.13
  

 

 

   

 

 

    

 

 

 

Weighted-average shares —basic and diluted

     86,646       —          86,646  
  

 

 

   

 

 

    

 

 

 

 

(1) All adjustments in this column relate to the misstatements associated with the Standard Diagnostics revenue recognition matter.

 

     Three Months Ended March 31, 2016  
     As Previously
Reported
     Restatement
Adjustment (1)
     As Restated  

Comprehensive income attributable to Alere Inc. and Subsidiaries

   $ 12,268      $ 4,005      $ 16,273  
  

 

 

    

 

 

    

 

 

 

 

(1) The restatement adjustment to total comprehensive income (loss) attributable to Alere Inc. and Subsidiaries is comprised solely of the restatement adjustment to net income (loss) for the period.

 

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ALERE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except per share amounts)

(unaudited)

 

     Three Months Ended March 31, 2016  
     As Previously
Reported (1)
    Restatement
Adjustment (2)
    As Restated  

Cash Flows from Operating Activities:

      

Net loss

   $ (9,977   $ 4,005     $ (5,972

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

      

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

     2,236       —         2,236  

Depreciation and amortization

     72,504       —         72,504  

Non-cash stock-based compensation expense

     9,602       —         9,602  

Impairment of inventory

     1,349       —         1,349  

Impairment of long-lived assets

     608       —         608  

Loss on sale of fixed assets

     323       —         323  

Equity earnings of unconsolidated entities, net of tax

     (5,034     —         (5,034

Deferred income taxes

     (6,812     —         (6,812

Gain on business dispositions

     (3,810     —         (3,810

Other non-cash items

     2,496       —         2,496  

Non-cash change in fair value of contingent consideration

     142       —         142  

Changes in assets and liabilities, net of acquisitions:

      

Accounts receivable, net

     (9,199     (8,731     (17,930

Inventories, net

     (14,147     3,863       (10,284

Prepaid expenses and other current assets

     (5,796     21       (5,775

Accounts payable

     (31,542     —         (31,542

Accrued expenses and other current liabilities

     (6,003     821       (5,182

Other non-current assets and liabilities

     14       21       35  

Cash paid for contingent consideration

     (143     —         (143
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (3,189     —         (3,189
  

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

      

Increase in restricted cash

     (436     —         (436

Purchases of property, plant and equipment

     (14,504     —         (14,504

Proceeds from sale of property, plant and equipment

     612       —         612  

Cash received from business disposition, net of cash divested

     21,470       —         21,470  

Cash paid for business acquisitions, net of cash acquired

     (5,945     —         (5,945

Cash received from sales of marketable securities

     93       —         93  

Cash received from equity method investments

     2,205       —         2,205  

Cash paid for equity investments

     (184     —         (184

Decrease in other assets

     (540     —         (540
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     2,771       —         2,771  
  

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

      

Cash paid for financing costs

     (1     —         (1

Cash paid for contingent consideration

     (145     —         (145

Proceeds from issuance of common stock, net of issuance costs

     11,124       —         11,124  

Proceeds from issuance of long-term debt

     325       —         325  

Payments on long-term debt

     (17,275     —         (17,275

Net payments under revolving credit facilities

     (127     —         (127

Cash paid for dividends

     (5,323     —         (5,323

Cash paid for employee taxes related to shares withheld

     (1,410     —         (1,410

Principal payments on capital lease obligations

     (1,107     —         (1,107
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (13,939     —         (13,939
  

 

 

   

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     2,820       —         2,820  
  

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (11,537     —         (11,537

Cash and cash equivalents, beginning of period

     502,200       —         502,200  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 490,663     $ —       $ 490,663  
  

 

 

   

 

 

   

 

 

 

 

(1) The figures presented in this column represent the amounts most recently presented in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and such amounts have been revised from the figures presented in such Quarterly Report on Form 10-Q as a result of the retrospective adoption of ASU 2016-09, which reclassified $1,410 of employee taxes related to shares withheld from operating activities to financing activities.
(2) All adjustments in this column relate to the misstatements associated with the Standard Diagnostics revenue recognition matter and the misstatements in the classification of certain amounts between current assets, noncurrent assets and current liabilities.

 

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(3) Merger Agreement

Merger Agreement with Abbott Laboratories

On January 30, 2016, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with Abbott Laboratories, or Abbott. The Merger Agreement provides for the merger of a wholly owned subsidiary of Abbott with and into Alere, or the merger, with Alere surviving the merger as a wholly owned subsidiary of Abbott, or the surviving corporation. Under the terms of the Merger Agreement, prior to its amendment (as described herein), holders of shares of our common stock were entitled to receive $56.00 in cash, without interest, in exchange for each share of common stock. On April 13, 2017, Abbott and Alere entered into an Amendment to Agreement and Plan of Merger, or the Merger Agreement Amendment, which amends the Merger Agreement (as amended by the Merger Agreement Amendment, the Amended Merger Agreement), which provides, among other things, that the holders of shares of our common stock will receive $51.00 in cash, without interest, in exchange for each share of common stock. Other than as expressly modified pursuant to the Merger Agreement Amendment, the Merger Agreement remains in full force and effect. The Amended Merger Agreement has been approved by our Board of Directors.

Each share of our Series B Preferred Stock issued and outstanding immediately prior to the effective time of the merger will remain issued and outstanding immediately following the consummation of the merger as one share of Series B Convertible Preferred Stock, par value $0.001 per share, of the surviving corporation. Completion of the merger pursuant to the Amended Merger Agreement is subject to customary closing conditions, including (1) the adoption of the Amended Merger Agreement by the affirmative vote of the holders of at least a majority of all outstanding shares of our common stock, (2) there being no judgment or law enjoining or otherwise prohibiting the consummation of the merger, (3) the expiration of the waiting period applicable to the merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or the HSR Act, and receipt of other required antitrust approvals and (4) the absence of a Material Adverse Effect (as defined in the Amended Merger Agreement). Under the terms of the Amended Merger Agreement, Abbott has agreed to make certain divestitures if necessary to obtain the consent of the antitrust authorities to the transaction contemplated by the Amended Merger Agreement, subject to certain exceptions set forth in the Amended Merger Agreement. The obligation of each of the parties to consummate the merger is also conditioned on the other party’s representations and warranties being true and correct (subject to certain materiality exceptions) and the other party having performed in all material respects its obligations under the Amended Merger Agreement. The Amended Merger Agreement contains certain termination rights that allow the Amended Merger Agreement to be terminated in certain circumstances.

In addition, the Merger Agreement Amendment extends the date after which each of Alere and Abbott would have a right to terminate the Amended Merger Agreement to September 30, 2017, subject to the terms and conditions set forth in the Amended Merger Agreement. The Merger Agreement Amendment reduces the termination fee that Alere may be required to pay Abbott under specified circumstances to $161 million, from $177 million. The Merger Agreement Amendment also provides that neither any matter set forth in our public filings made with the Securities and Exchange Commission, or SEC, between January 1, 2014 and April 13, 2017, nor any matter of which Abbott or any of Abbott’s representatives was made aware prior to April 13, 2017, could be taken into account in determining whether a Material Adverse Effect has occurred or would reasonably be expected to occur. Further, in addition to the qualifications set forth in the original Merger Agreement, the Amendment qualifies all of our representations and warranties made in the Amended Merger Agreement (including those made in the original Merger Agreement) by all matters set forth in our public filings made with the SEC between January 1, 2014 and April 13, 2017 and any matter known by Abbott or any of Abbott’s representatives prior to April 13, 2017.

In addition, the Merger Agreement Amendment changes Abbott’s commitment to provide Alere’s employees that continue with Abbott with specified levels of compensation and benefits to be a commitment through the first anniversary of the closing of the merger, rather than through December 31, 2017 and a 2018 long-term incentive award to each continuing employee employed by Abbott or its subsidiaries at the time annual long-term awards are made generally that is no less favorable than the long-term incentive award made to similarly situated employees of Abbott generally.

Antitrust Clearance

On May 2, 2016, Abbott and Alere received a request for additional information, or a “second request,” from the United States Federal Trade Commission, or the FTC, relating to Abbott’s potential acquisition of Alere. The second request was issued under the HSR Act. In addition, Abbott has agreed voluntarily to provide the FTC at least 60 days advance notice before certifying substantial compliance with the second request and to extend the waiting period imposed by the HSR Act to not less than 60 days after Abbott and Alere have certified substantial compliance with the second request, unless the period is further extended voluntarily by the parties or terminated sooner by the FTC.

On June 23, 2016, Abbott and Alere received a request for additional information, or a “supplemental information request,” from the Canadian Competition Bureau, or the Bureau, relating to Abbott’s potential acquisition of Alere. The supplemental information request was issued under the Competition Act of Canada, or the Competition Act. The effect of the supplemental information request is to extend the waiting period imposed by the Competition Act until 30 days after Abbott and Alere have each complied with the supplemental information request, unless the period is extended voluntarily by the parties or terminated sooner by the Bureau. On June 8, 2017, the Bureau notified the parties that it will be requiring a Canadian consent agreement requiring the divestiture of the epoc and Triage product lines. The purchasers and terms of sale need to be approved by the Bureau.

 

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On January 25, 2017, the European Commission approved the merger under the EU Merger Regulation. The approval is conditional on, and the merger may not be completed until, Abbott has entered into binding agreements to divest the epoc and Triage product lines, as well as Alere’s activities relating to the commercialization of BNP assays for use on Beckman-Coulter laboratory analyzers, to one or more purchasers. The purchasers and terms of sale need to be approved by the European Commission.

As of the date of the filing of this Quarterly Report on Form 10-Q, we are not aware of any binding and definitive final agreements that have been entered into to divest any of the epoc product line, Triage product line or Alere’s activities relating to the commercialization of BNP assays for use on Beckman-Coulter analyzers.

On April 20, 2017, the South Korean antitrust authority informed Abbott that it would be expanding its review period by 90 days.

As of the date of the filing of this Quarterly Report on Form 10-Q, antitrust approvals from the FTC, the Bureau and the South Korean antitrust authorities, each of which is required pursuant to the Amended Merger Agreement, have not been obtained.

In connection with the divestiture of any of these businesses, we may need to enter into amendments to existing agreements or enter into new agreements to facilitate such divestitures. The terms of such amendments or new agreements may relate to, among other things, existing agreements with customers to purchase our products or may relate to the amendment to the agreements under which we initially acquired these businesses, including amendments to unresolved earn-out payment provisions. Any such agreement or amendment may require that we negotiate new terms and conditions with customers or with the previous owners of the business, and such terms may not be as advantageous to us as the current contracts or we may require that we incur material charges in connection with such amendments or agreements.

For information relating to the litigation with Abbott and the Settlement Agreement with Abbott, see Note 15(b).

(4) Cash and Cash Equivalents

We consider all highly-liquid cash investments with original maturities of three months or less at the date of acquisition to be cash equivalents. At March 31, 2017, our cash equivalents consisted of money market funds.

(5) Inventories

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

 

     March 31, 2017      December 31, 2016  

Raw materials

   $ 103,838      $ 97,652  

Work-in-process

     68,471        69,086  

Finished goods

     150,164        142,182  
  

 

 

    

 

 

 
   $ 322,473      $ 308,920  
  

 

 

    

 

 

 

(6) Stock-based Compensation

We recorded stock-based compensation expense in our consolidated statements of operations for the three months ended March 31, 2017 and 2016 as follows (in thousands):

 

     Three Months Ended March 31,  
     2017      2016  

Cost of net revenue

   $ 396      $ 479  

Research and development

     384        398  

Sales and marketing

     1,854        1,925  

General and administrative

     7,729        6,800  
  

 

 

    

 

 

 
     10,363        9,602  

Benefit for income taxes

     493        —    
  

 

 

    

 

 

 

Stock-based compensation, net of tax

   $ 10,856      $ 9,602  
  

 

 

    

 

 

 

 

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(7) Net Loss per Common Share

The following table sets forth the computation of basic and diluted net loss per common share for the three months ended March 31, 2017 and 2016 (in thousands, except per share amounts):

 

     Three Months Ended March 31,  
     2017      2016 (As
Restated)
 

Basic and diluted net loss per common share:

     

Numerator:

     

Loss from operations

   $ (64,129    $ (5,972

Preferred stock dividends

     (5,250      (5,309
  

 

 

    

 

 

 

Loss from operations attributable to common shares

     (69,379      (11,281

Less: Net income attributable to non-controlling interest

     183        103  
  

 

 

    

 

 

 

Net loss available to common stockholders

   $ (69,562      (11,384
  

 

 

    

 

 

 

Denominator:

     

Weighted-average common shares outstanding – basic and diluted

     87,221      $ 86,646  
  

 

 

    

 

 

 

Basic and diluted net loss per common share:

     

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

   $ (0.80    $ (0.13
  

 

 

    

 

 

 

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

 

     Three Months Ended March 31,  
     2017      2016  

Denominator:

     

Options to purchase shares of common stock

     6,322        7,378  

Conversion shares related to 3% convertible senior subordinated notes

     —          3,411  

Conversion shares related to Series B convertible preferred stock

     10,238        10,239  
  

 

 

    

 

 

 

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

     16,560        21,028  
  

 

 

    

 

 

 

(8) Stockholders’ Equity and Non-Controlling Interests

(a) Preferred Stock

For both the three months ended March 31, 2017 and 2016, Series B preferred stock dividends amounted to $5.3 million, which reduced earnings available to common stockholders for purposes of calculating net loss per common share for each of these periods. As of March 31, 2017, $5.3 million of Series B preferred stock dividends was accrued. As of April 15, 2017, payments have been made with respect to all dividends through March 31, 2017.

The Series B preferred stock dividends for the three months ended March 31, 2017 and 2016 were paid in cash in the subsequent quarters.

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

A summary of the changes in stockholders’ equity and non-controlling interests comprising total equity for the three months ended March 31, 2017 is provided below (in thousands):

 

     Three Months Ended March 31, 2017  
     Total
Stockholders’
Equity
     Non-
controlling
Interests
     Total
Equity
 

Equity, beginning of period

   $ 1,826,992      $ 4,615      $ 1,831,607  

Issuance of common stock under employee compensation plans

     424        —          424  

Surrender of common stock to settle taxes on restricted stock units

     (5,582      —          (5,582

Preferred stock dividends

     (5,323      —          (5,323

Stock-based compensation expense

     10,363        —          10,363  

Other adjustments

     —          4        4  

Net income (loss)

     (64,312      183        (64,129

Total other comprehensive income

     53,259        —          53,259  
  

 

 

    

 

 

    

 

 

 

Equity, end of period

   $ 1,815,821      $ 4,802      $ 1,820,623  
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

(9) Business Combinations

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

Net assets acquired are recorded at their estimated fair value 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.

 

  (a) Acquisition in 2016

EDTS

On February 11, 2016, we acquired all of the outstanding shares of European Drug Testing Services EDTS AB, or EDTS, located in Lidingo, Sweden, a provider of services related to on-site drug testing. The aggregate purchase price was approximately $6.5 million and was paid in cash. The operating results of EDTS are included in our professional diagnostics reporting unit and business segment.

Our consolidated statements of operations for the three months ended March, 31, 2017 and 2016 included revenue totaling approximately $1.6 million and $0.9 million, respectively, related to this business. Goodwill has been recognized in the acquisition and amounted to approximately $2.1 million, which is not deductible for tax purposes.

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

 

     Fair Value  

Current assets

   $ 1,371  

Property, plant and equipment

     115  

Goodwill

     2,060  

Intangible assets

     4,220  
  

 

 

 

Total assets acquired

   $ 7,766  
  

 

 

 

Current liabilities

   $ 368  

Non-current liabilities

     928  
  

 

 

 

Total liabilities assumed

   $ 1,296  
  

 

 

 

Net assets acquired

   $ 6,470  
  

 

 

 

Cash paid

   $ 6,470  
  

 

 

 

The following table provides information regarding the intangible assets acquired in connection with the EDTS acquisition and their respective fair values and weighted-average useful lives (dollars in thousands):

 

     Fair Value      Weighted-
average
Useful Life
 

Core technology and patents

   $ 540        10.0 years  

Trademarks and trade names

     310        20.0 years  

Customer relationships

     2,800        14.0 years  

Non-compete agreements

     570        3.0 years  
  

 

 

    

Total intangible assets

   $ 4,220     
  

 

 

    

 

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Table of Contents

(10) Restructuring

The following table sets forth aggregate restructuring charges recorded in our consolidated statements of operations for the three months ended March 31, 2017 and 2016 (in thousands):

 

     Three Months Ended March 31,  

Statement of Operations Caption

   2017      2016  

Cost of net revenue

   $ 815      $ 1,267  

Research and development

     127        1,920  

Sales and marketing

     10        650  

General and administrative

     2,078        3,826  
  

 

 

    

 

 

 

Total operating expenses

     3,030        7,663  

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

     1        5  
  

 

 

    

 

 

 

Total charges

   $ 3,031      $ 7,668  
  

 

 

    

 

 

 

 

  (a) Restructuring Plans

During 2016, 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 manufacturing and supply chain, and research and development groups, as well as closing certain business locations in Europe and the United States. The following table summarizes the restructuring activities, for the three months ended March 31, 2017 and 2016 and since inception for all restructuring plans adopted by us, including the 2016 restructuring plans. Our restructuring plans are disclosed in Note 23 to the condensed consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (in thousands):

 

     Three Months Ended March 31,      Since  
     2017      2016      Inception  

Professional Diagnostics

        

Severance-related costs

   $ 678      $ 3,091      $ 48,101  

Facility and transition costs

     443        981        16,378  

Other exit costs

     1        5        834  
  

 

 

    

 

 

    

 

 

 

Cash charges

     1,122        4,077        65,313  

Fixed asset and inventory impairments

     —          398        17,951  

Other non-cash charges

     —          213        2,160  
  

 

 

    

 

 

    

 

 

 

Total professional diagnostics charges

   $ 1,122      $ 4,688      $ 85,424  
  

 

 

    

 

 

    

 

 

 

Corporate and Other

        

Severance-related costs

   $ 1      $ 15      $ 4,624  

Facility and transition costs

     1,908        2,965        34,879  
  

 

 

    

 

 

    

 

 

 

Total corporate and other charges

   $ 1,909      $ 2,980      $ 39,503  
  

 

 

    

 

 

    

 

 

 

Total restructuring charges

   $ 3,031      $ 7,668      $ 124,927  
  

 

 

    

 

 

    

 

 

 

We anticipate incurring approximately $12.9 million in additional costs under our 2016 restructuring plans related to our professional diagnostics and corporate and other business segments, primarily related to integration and operational initiatives related to our international supply chain. We may develop additional restructuring plans over the remainder of 2017 and beyond. In addition, we anticipate incurring approximately $2.3 million in additional costs under earlier restructuring plans related to our professional diagnostics and corporate and other business segments, primarily related to the closure of our manufacturing facility in Israel.

 

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  (b) Restructuring Reserves

The following table summarizes our restructuring reserves related to the plans described above, of which $6.4 million is included in accrued expenses and other current liabilities and $0.3 million is included in other long-term liabilities on our accompanying consolidated balance sheets (in thousands):

 

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

Balance, December 31, 2016

   $ 3,339      $ 7,512      $ 39      $ 10,890  

Charges

     679        2,351        1        3,031  

Payments

     (766      (6,443      (40      (7,249

Currency adjustments

     15        20        —          35  
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance, March 31, 2017

   $ 3,267      $ 3,440      $ —        $ 6,707  
  

 

 

    

 

 

    

 

 

    

 

 

 

(11) Long-term Debt

We had the following long-term debt balances outstanding as of March 31, 2017 and December 31, 2016 (in thousands):

 

     March 31, 2017      December 31, 2016  

A term loans(1)(2)(3)

   $ 538,372      $ 544,745  

B term loans(1)(2)(3)

     950,756        952,664  

Revolving loans(1)(2)(3)

     125,000        125,000  

7.25% Senior notes(2)(3)(4)

     443,924        442,709  

6.5% Senior subordinated notes(2)(3)

     415,813        415,102  

6.375% Senior subordinated notes(2)(3)

     413,300        412,831  

Other lines of credit

     1,202        1,124  

Other

     46,465        46,400  
  

 

 

    

 

 

 
     2,934,832        2,940,575  

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

     (82,506      (82,370
  

 

 

    

 

 

 

Long-term debt

   $ 2,852,326      $ 2,858,205  
  

 

 

    

 

 

 

 

(1) Incurred under our secured credit facility entered into on June 18, 2015.
(2) As discussed more fully in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” (i) on March 31, 2016 we were in default under the credit agreement governing our secured credit facility, or the Credit Agreement, and the respective indentures governing our 7.25% senior notes due 2018, or the 7.25% senior notes, our 6.5% senior subordinated notes due 2020, or the 6.5% senior subordinated notes, our 6.375% senior subordinated notes due 2023, or the 6.375% senior subordinated notes, and our 3% convertible senior subordinated notes due 2016, or the 3% convertible senior subordinated notes, as a result of our failure to timely furnish to the holders of such debt our annual financial statements for the year ended December 31, 2015 and (ii) on April 22, 2016, we entered into an amendment to the Credit Agreement and, on May 10, 2016, we obtained consents from the requisite holders of our senior notes and senior subordinated notes (other than holders of our 3% convertible senior subordinated notes) to waive certain defaults and extend the deadline dates for the filing and delivery, as applicable, of our Annual Report on Form 10-K for the year ended December 31, 2015, our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 and certain related deliverables in order to avoid events of default under the Credit Agreement and the indentures governing our notes. As discussed more fully in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” in August 2016 we entered into a further amendment to the Credit Agreement with respect to our failure to timely file our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 to, among other things, extend the deadline date for such filing. In addition, because we had not filed our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 at or prior to the time set forth in the indentures governing our outstanding notes, we were also in default thereunder. However, the filing of such Quarterly Report on Form 10-Q on September 6, 2016 cured this default prior to the expiration of the applicable cure periods under the indentures governing our notes.
(3) As discussed more fully below, due to our failure to timely file our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, we were in default under the terms of the Credit Agreement and the indentures governing our 7.25% senior notes, our 6.5% senior subordinated notes and our 6.375% senior subordinated notes. In order to avoid events of default and the potential acceleration of the indebtedness under the Credit Agreement, in April 2017 and May 2017 we entered into two separate amendments to the Credit Agreement pursuant to which the lenders thereunder agreed to, among other things, extend the deadlines for delivery of the financial statements for the fiscal year ended December 31, 2016 and the fiscal quarter ended March 31, 2017 and certain related deliverables, as described below. As discussed more fully below, in May 2017, we obtained the consents from holders of our 7.25% senior notes, our 6.5% senior subordinated notes and our 6.375% senior subordinated notes to extend the deadlines for delivery of certain financial information and to waive through June 15, 2017 any default or event of default that occurred, is continuing or may occur under the respective indentures under which such notes were issued (and its consequences) in connection with any failure to timely file with the SEC or to timely furnish to the relevant trustees pursuant to the indentures, our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

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(4) The 7.25% senior notes mature on July 1, 2018, unless earlier redeemed. Upon maturity, we will be required to pay the principal amount of $450 million, plus all accrued and unpaid interest. Management expects that the acquisition of Alere by Abbott pursuant to the terms of the Amended Merger Agreement will take place prior to the maturity date of July 1, 2018 and, if this expectation is correct, the holders of the 7.25% senior notes will have the rights set forth in connection with such transaction as set forth below in this paragraph. In the event that the transactions contemplated by the Amended Merger Agreement do not close, we expect that we would be able to pay such principal and accrued interest by one or a combination of the following: refinancing such indebtedness as we have done in the past, using available cash resources, or utilizing amounts available under the revolving credit facility. If a change of control occurs, subject to specified conditions, we must give holders of the 7.25% senior 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. The merger under the Amended Merger Agreement, as described in Note 3 above will, if consummated, constitute a change of control under the indenture governing the 7.25% senior notes.

In connection with our significant long-term debt issuances, we recorded interest expense, including amortization and write-offs of deferred financing costs and original issue discounts, in our accompanying consolidated statements of operations for the three months ended March 31, 2017 and 2016 as follows (in thousands):

 

     Three Months Ended March 31,  
     2017      2016  

Secured credit facility (1)(2)

   $ 18,730      $ 17,043  

7.25% Senior notes (2)

     9,372        8,524  

6.375% Senior subordinated notes (2)

     7,242        7,003  

6.5% Senior subordinated notes (2)

     7,617        7,231  

3% Convertible senior subordinated notes

     —          1,244  

Other

     222        1,061  
  

 

 

    

 

 

 
   $ 43,183      $ 42,106  
  

 

 

    

 

 

 

 

(1) Includes “A” term loans, “B” term loans, and revolving line of credit loans.
(2) For the three months ended March 31, 2017, the amounts include $2.1 million related to the amortization of fees paid for certain debt modifications, of which there were none in the same period of 2016.

April 2017 Amendment to Credit Facility

On April 24, 2017, we entered into a Third Amendment to the Credit Agreement for our secured credit facility, dated as of June 18, 2015, among the Company, the several lenders from time to time party thereto, the Administrative Agents (as defined in the Credit Agreement) and certain other agents and arrangers. Pursuant to the Third Amendment, the lenders under the Credit Agreement have agreed to (i) waive certain Defaults and Events of Defaults (each as defined in the Credit Agreement) that may have occurred, are occurring or may occur after April 24, 2017, resulting from, among other things, (x) our failure to deliver to the Administrative Agents (as defined in the Credit Agreement) the financial statements and the related deliverables for the fiscal year ended December 31, 2016 by the applicable deadline under the Credit Agreement, (y) any restatement, revision or other adjustment of certain financial statements as a result of our review described in our Current Report on Form 8-K as filed with the SEC on April 17, 2017, or the April 8-K, as a result of our incorrect recognition of revenue transactions at our South Korean and Japanese locations for certain fiscal periods set forth in the Third Amendment and (z) any breach of any representation or affirmative covenant as a result of certain deliverables being incorrect when delivered, which breach is discovered as part of the review described in the April 8-K, to the extent that such breach is due to our incorrect recognition of revenue transactions at our South Korean and Japanese locations for certain fiscal periods set forth in the Third Amendment and (ii) extend the deadlines for delivery of the financial statements for the fiscal year ended December 31, 2016, and certain related deliverables, or the Financial Reports. In connection with the Third Amendment, we agreed to pay, among other fees and expenses, to each lender that approved the Third Amendment a consent fee of 0.125% of the sum of (i) the aggregate principal amount of such lender’s Term Loans (as defined in the Credit Agreement) outstanding on the effective date of the Third Amendment and (ii) such lender’s Revolving Credit Commitment (as defined in the Credit Agreement) in effect on the effective date of the Third Amendment. We incurred approximately $3.3 million in fees and expenses associated with this Third Amendment.

 

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May 2017 Consent Solicitation for Notes

On May 1, 2017, we commenced consent solicitations relating to the Notes. On May 4, 2017, we made certain modifications to the consent solicitations, which are reflected herein. We solicited consents from holders of each series of Notes to extend the deadline for delivery of certain financial information and to waive through and until 5:00 p.m., New York City time, on June 15, 2017, any default or event of default that occurred, is continuing or may occur under the indentures under which the Notes were issued (and its consequences) in connection with any failure to timely file with the SEC or to timely furnish to the relevant trustees pursuant to the indentures, our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, or the Fiscal Year 2016 Failure to File. If we did not file the Annual Report on Form 10-K for 2016 and if we had failed to obtain the waivers requested pursuant to the consent solicitations, in each case on or before (i) May 16, 2017, with respect to the 7.25% Senior Notes, (ii) May 19, 2017, with respect to the 6.5% Senior Subordinated Notes, and (iii) June 2, 2017, with respect to the 6.375% Subordinated Notes, an event of default would have arisen under the respective series of Notes and, among the remedies available to the noteholders, would have been the right to accelerate the payment of our obligations upon notice from the relevant trustees or holders of 25% of the applicable Notes. Subject to the terms and conditions of the consent solicitations set forth in the consent solicitation statement, dated May 1, 2017, as supplemented, we offered to pay to each holder of Notes, as of April 28, 2017, a cash payment equal to $17.50 for each $1,000 principal amount of such holder’s Notes, or the Consent Fee, in respect of which the holder validly delivered (and did not validly revoke) a consent prior to 5:00 p.m. New York City time, on May 5, 2017 (such time and date, the Expiration Date), provided that we received and accepted the requisite consents for all series of Notes. If, at any time prior to 9:30 a.m., New York City time, on May 8, 2017, we filed with the SEC the Annual Report on Form 10-K and we terminated the consent solicitations, we would pay to each holder of each series of Notes who delivered (and did not revoke) a valid and duly executed consent prior to the Expiration Date a cash payment, in lieu of the Consent Fee, equal to $10.00 for each $1,000 principal amount of Notes for which such Holder delivered its Consent, or the Consent Termination Fee. On May 8, 2017, we successfully completed this solicitation and, in connection with the completion, we paid the Consent Fee to the consenting holders in an aggregate amount of approximately $23.0 million. We filed our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and certain related deliverables prior to the June 15, 2017 deadline as established pursuant to this consent solicitation.

May 2017 Amendment to Credit Facility

On May 30, 2017, we entered into a fourth amendment to the Credit Agreement pursuant to which the lenders under the Credit Agreement agreed to (i) waive certain Defaults and Events of Defaults (each as defined in the Credit Agreement) that may have occurred, are occurring or occur after May 30, 2017, resulting from, among other things, (x) failure to deliver to the Administrative Agents (as defined in the Credit Agreement) the financial statements and the related deliverables for the fiscal year ended December 31, 2016 and the fiscal quarter ended March 31, 2017, in each case, by the applicable deadlines under the Credit Agreement, (y) any restatement, revision or other adjustment of certain financial statements as a result of the Company’s review described in our Current Report on Form 8-K (as filed with the SEC on May 22, 2017), or the May 8-K, as a result of our incorrect recognition of revenue transactions for certain fiscal periods set forth in the amendment and (z) any breach of any representation or affirmative covenant as a result of certain deliverables being incorrect when delivered that is discovered as part of the review described in the May 8-K, to the extent that such breach is due to our incorrect recognition of revenue transactions for certain fiscal periods set forth in the fourth amendment, (ii) extend the deadlines for delivery of the financial statements and the related deliverables for the fiscal year ended December 31, 2016, to the earlier of (A) July 15, 2017, and (B) the date that is three business days prior to the earliest date (after giving effect to any applicable cure periods or any waivers or other types of extensions) that an event of default would arise under the indentures governing our 6.5% senior subordinated notes, 6.375% senior subordinated notes and 7.25% senior notes as a result of the failure to timely deliver such financial statements and (iii) extend the deadlines for delivery of the financial statements and the related deliverables for the fiscal quarter ended March 31, 2017 to the earliest of (A) the date that is ten business days after delivery of the financial statements for the fiscal year ended December 31, 2016, (B) the date that is three business days prior to the earliest date (after giving effect to any applicable cure periods or any waivers or other types of extensions) that an event of default would arise under the indentures governing our 6.5% senior subordinated notes, 6.375% senior subordinated notes and 7.25% senior notes as a result of the failure to timely deliver the financial statements for the fiscal quarter ended March 31, 2017 and (C) July 28, 2017. In connection with this amendment, we agreed to pay, among other fees and expenses, to the lenders that approved the amendment a consent fee of 0.25% of the sum of such lender’s (i) aggregate principal amount of its Term Loans outstanding and (ii) Revolving Credit Commitment (each as defined in the Credit Agreement in effect on the effective date of the fourth amendment). We incurred approximately $5.4 million in fees and expenses associated with this Fourth Amendment. We delivered the financial statements for the fiscal year ended December 31, 2016 and March 31, 2017 and certain related deliverables prior to the deadlines as set forth in this amendment.

June 2017 Consent Solicitation for Notes

On June 1, 2017, we commenced consent solicitations relating to each series of our Notes. We solicited consents from holders of each series of Notes to further extend the deadline for delivery of certain financial information and to waive, in each case (i) through and until 5:00 p.m., New York City time, on August 4, 2017 (such time and date, the “First Waiver Date”), (ii) through and until 5:00 p.m., New York City time, on September 5, 2017 (such time and date, the “Second Waiver Date”) if uncured immediately prior to the First Waiver Date, and (iii) through and until 5:00 p.m., New York City time, on October 4, 2017 (such time and date, the

 

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“Third Waiver Date”) if uncured immediately prior to the Second Waiver Date, any default or event of default that occurred, is continuing or may occur under the indentures (and its consequences) in connection with any failure to timely file with the SEC or to timely furnish to the relevant trustees pursuant to the indentures, the 2016 Form 10-K (the “Fiscal Year 2016 10-K Failure to File”) and the Form 10-Q for the quarter ended March 31, 2017 (the “First Quarter 2017 Failure to File” and, together with the Fiscal Year 2016 10-K Failure to File, the “Failures to File”). If we had not filed our Annual Report on Form 10-K for 2016 by June 15, 2017, an event of default would have arisen under the respective series of notes and, among the remedies available to the noteholders, would have been the right to accelerate the payment of our obligations upon notice from the relevant trustee or holders of 25% of the applicable Notes. Subject to the terms and conditions of the consent solicitations set forth in the consent solicitation statement, dated as of June 1, 2017, and provided that we receive and accept the requisite consents for all series of Notes, we offered to pay to each holder of Notes as of 5:00 p.m., New York City time, on May 31, 2017, (1) a cash payment promptly following the Expiration Date (as defined below) equal to: $20.00 for each $1,000 principal amount of 6.375% Notes for which such holder delivered its consent (the “6.375% Notes First Consent Fee”), $15.00 for each $1,000 principal amount of 6.500% Notes for which such holder delivered its consent (the “6.500% Notes First Consent Fee”) and $12.50 for each $1,000 principal amount of 7.250% Notes for which such holder delivered its consent (the “7.250% Notes First Consent Fee” and, together with the 6.375% Notes First Consent Fee and the 6.500% Notes First Consent Fee, the “First Consent Fees” and each a “First Consent Fee”) and (2) if any default or event of default remains uncured immediately prior to the First Waiver Date in connection with the Failures to File, an additional cash payment on or prior to the First Waiver Date (with respect to each series of Notes, the “Second Consent Fee”), equal to $5.00 for each $1,000 principal amount of Notes and (3), if any default or event of default remains uncured immediately prior to the Second Waiver Date in connection with the Failures to File, an additional cash payment on or prior to the Second Waiver Date (with respect to each series of Notes, the “Third Consent Fee”), equal to $7.50 for each $1,000 principal amount of Notes, in each case in respect of which the holder validly delivers (and does not validly revoke) a consent prior to 5:00 p.m. New York City time, on June 7, 2017 (such time and date, as amended, extended or otherwise modified, the “Expiration Date”), provided that we received and accepted the requisite consents for all series of Notes. We filed our Annual Report on Form 10-K for 2016 on June 5, 2017, and we terminated this consent solicitation on June 5, 2017 and, in connection with this termination, we offered to pay a termination fee cash payment equal to $1.00 for each $1,000 principal amount of Notes (the “Termination Fee”) for which holders either (1) had delivered a valid, duly executed and unrevoked consent pursuant to the Consent Solicitation Statement prior to the termination of the consent solicitation, or (2) delivered a valid, duly executed and unrevoked consent pursuant to the Consent Solicitation Statement prior to 5:00 p.m., New York City time, on June 7, 2017. On June 8, 2017, we paid the Termination Fee to the consenting holders in an aggregate amount of approximately $1.3 million.

As of March 31, 2017, other than with respect to the delayed delivery of SEC filings for the fiscal year ended December 31, 2016 and the quarter ended March 31, 2017 and related deliverables as described in the preceding paragraphs, we were in compliance with all of our obligations and covenants under the Credit Agreement and the indentures governing our Notes.

(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 March 31, 2017 and December 31, 2016, and indicates the fair value hierarchy of the valuation techniques we utilized to determine such fair value (in thousands):

 

Description

   March 31,
2017
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Unobservable Inputs
(Level 3)
 

Assets:

           

Marketable securities

   $ 540      $ 540      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 540      $ 540      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent consideration obligations (1)

   $ 43,400      $ —        $ —        $ 43,400  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 43,400      $ —        $ —        $ 43,400  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Description

   December 31,
2016
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Unobservable Inputs
(Level 3)
 

Assets:

           

Marketable securities

   $ 76      $ 76      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 76      $ 76      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Contingent consideration obligations (1)

   $ 43,200      $ —        $ —        $ 43,200  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 43,200      $ —        $ —        $ 43,200  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 within general and administrative expenses. See Note 15(a) Commitments and Contingences for additional information on the valuation of our contingent consideration obligations.

Changes in the fair value of our Level 3 contingent consideration obligations during the three months ended March 31, 2017 were as follows (in thousands):

 

Fair value of contingent consideration obligations, December 31, 2016

   $ 43,200  

Payments

     (287

Fair value adjustments

     489  

Foreign currency adjustments

     (2
  

 

 

 

Fair value of contingent consideration obligations, March 31, 2017

   $ 43,400  
  

 

 

 

At March 31, 2017 and December 31, 2016, the carrying amounts of cash and cash equivalents, restricted cash, receivables, accounts payable and other current liabilities approximated their estimated fair values.

The carrying amount and estimated fair value of our long-term debt (including the current portion) were $2.9 billion and $3.0 billion, respectively, at March 31, 2017. The carrying amount and estimated fair value of our long-term debt (including the current portion) were, in each case, $2.9 billion at December 31, 2016. The estimated fair value of our long-term debt was determined using information derived from available market sources (Level 2 in the fair value hierarchy), including open-market trades and market quotes observed at or near period end, and may not be representative of actual values that could have been or will be realized in the future.

(13) Financial Information by Segment

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision-making group is composed of the chief executive officer and members of senior management. Our operating segments are currently (i) professional diagnostics; (ii) consumer diagnostics; and (iii) other non-reportable. Our corporate and other segment consists primarily of corporate expenses and assets that are not used in assessing operating segment performance and are necessary to reconcile the operating segments’ performance to the consolidated results. In January 2015, we sold our health management business. As a result of the sale of our health management business, which was the largest component of our former patient self-testing reporting segment, as well as certain other transactions in 2015, the only component of the patient self-testing reporting segment that was retained by Alere was the Alere Home Monitoring business. Therefore, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, we reported our financial information in two operating segments: (i) professional diagnostics and (ii) consumer diagnostics, and Alere Home Monitoring was reported as a component of the professional diagnostics segment. Due to the nature of the operations of Alere Home Monitoring and the manner in which this business is conducted, beginning in the Annual Report on Form 10-K for 2016, we now report our Alere Home Monitoring business as a separate operating segment under the heading “other non-reportable segment.” Alere Home Monitoring distributes PT/INR coagulation monitors and facilitates the distribution of equipment and supplies to power and control customers’ implanted

 

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ventricular assist devices, or VADs, as well as telemonitoring services that allows VAD coordinators to monitor patients soon after discharge and receive alerts when critical patient values fall outside pre-established ranges. The information provided in this Quarterly Report on Form 10-Q has been retroactively adjusted to reflect this change.

Our operating results include license and royalty revenue which are allocated to professional diagnostics and consumer diagnostics on the basis of the original license or royalty agreement. We evaluate performance of our operating segments based on revenue and operating income (loss). Segment information for the three months ended March 31, 2017 and 2016 is as follows (in thousands):

 

     Professional
Diagnostics
     Consumer
Diagnostics
     Other Non-
Reportable
Segments
     Corporate
and
Other
    Total  

Three Months Ended March 31, 2017:

             

Net revenue

   $ 534,317      $ 17,240      $ 36,659      $ —       $ 588,216  

Operating income (loss)

   $ 88,957      $ 71      $ 6,616      $ (100,666   $ (5,022

Depreciation and amortization

   $ 54,289      $ 1,155      $ 3,188      $ 2,302     $ 60,934  

Restructuring charge

   $ 1,122      $ —        $ —        $ 1,909     $ 3,031  

Stock-based compensation

   $ —        $ —        $ —        $ 10,363     $ 10,363  
     Professional
Diagnostics
     Consumer
Diagnostics
     Other Non-
Reportable
Segments
     Corporate
and
Other
    Total  

Three Months Ended March 31, 2016:

             

Net revenue, as restated

   $ 534,513      $ 17,442      $ 34,985      $ —       $ 586,940  

Operating income (loss), as restated

   $ 80,356      $ 167      $ 6,238      $ (54,484   $ 32,277  

Depreciation and amortization

   $ 63,673      $ 1,499      $ 5,159      $ 2,173     $ 72,504  

Restructuring charge

   $ 4,688      $ —        $ —        $ 2,980     $ 7,668  

Stock-based compensation

   $ —        $ —        $ —        $ 9,602     $ 9,602  

Assets:

             

As of March 31, 2017

   $ 5,170,280      $ 177,686      $ 88,366      $ 237,537     $ 5,673,869  

As of December 31, 2016

   $ 5,199,806      $ 175,362      $ 87,193      $ 185,918     $ 5,648,279  

The following table summarizes our net revenue from the professional diagnostics reporting segment by groups of similar products and services for the three months ended March 31, 2017 and 2016 (in thousands):

 

     Three Months Ended March 31,  
     2017      2016
(As Restated)
 

Cardiometabolic

   $ 125,176      $ 159,663  

Infectious disease

     222,934        191,956  

Toxicology

     150,637        146,783  

Other

     32,928        33,382  
  

 

 

    

 

 

 

Total professional diagnostics net product sales and services revenue

     531,675        531,784  

License and royalty revenue

     2,642        2,729  
  

 

 

    

 

 

 

Total professional diagnostics net revenue

   $ 534,317      $ 534,513  
  

 

 

    

 

 

 

(14) 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. Upon completion of the arrangement to form the joint venture, we ceased to consolidate the operating results of our consumer diagnostic products business related to the joint venture and instead account for our 50% interest in the results of the joint venture under the equity method of accounting.

We had a net payable to SPD of $4.7 million as of March 31, 2017 and $3.7 million as of December 31, 2016. The $4.7 million net payable balance as of March 31, 2017 is net of a receivable of approximately $1.2 million for costs incurred in connection with our 2008 SPD-related restructuring plans. The $3.7 million net payable balance as of December 31, 2016 is net of a receivable of

 

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approximately $1.2 million for costs incurred in connection with our 2008 SPD-related restructuring plans. We have also recorded a long-term receivable totaling approximately $6.2 million and $6.1 million as of March 31, 2017 and December 31, 2016, 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 amounts of $8.2 million and $7.5 million as of March 31, 2017 and December 31, 2016, respectively. In connection with the joint venture arrangement, the joint venture bears the collection risk associated with these receivables. Sales to the joint venture under our manufacturing agreement totaled $18.1 million and $17.7 million during the three months ended March 31, 2017 and 2016, respectively. Additionally, services revenue generated pursuant to the long-term services agreement with the joint venture totaled $0.3 million and $0.2 million during the three months ended March 31, 2017 and 2016, respectively. Sales under our manufacturing agreement and long-term services agreement are included in net product sales and services revenue, respectively, in our accompanying consolidated statements of operations.

Under the terms of our product supply agreement, 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. We defer our profit on products sold to SPD until the products are sold through to the customer.

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

 

Balance Sheet Caption

   March 31, 2017      December 31, 2016  

Accounts receivable, net of allowances

   $ 7,104      $ 7,855  

Prepaid expenses and other current assets

   $ 8,231      $ 7,486  

Other non-current assets

   $ 6,228      $ 6,122  

Accounts payable

   $ 32,413      $ 34,216  

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. The district court issued an injunction with respect to sales and advertising of such product and determined that SPD violated certain laws with respect to the advertising of such product. SPD’s appeal of this decision was unsuccessful. The competitor’s request for damages is now pending before the district court. In addition, a class action lawsuit was filed against SPD and P&G in the United States District Court for the Central District of California alleging violations of certain laws in connection with the sales and advertising of one of SPD’s products, which claims are based on similar grounds as those described above. On August 19, 2016, the class action lawsuit was dismissed with prejudice. The plaintiffs appealed the district court’s decision but, on March 30, 2017, the case was voluntarily dismissed upon initiation of the plaintiff. There may be additional lawsuits against SPD or us relating to this matter in the future. The ultimate resolution of the matter, including the amount of any damages that may be required to be paid, is not known at this time, nor is the potential impact that any pending litigation or future litigation may have on SPD or us, including whether any such resolution or any damages imposed by a 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.

(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 23.0 million (approximately $3.3 million at March 31, 2017), in order to finance the latter’s short-term working capital needs, with the HSBC Shanghai Branch, or HSBC. The agreement governs the setting up of an Entrustment Loan Account with HSBC, into which Alere Shanghai deposits certain monies. This restricted cash account provides a guarantee to HSBC of amounts borrowed from HSBC by SPD Shanghai. The Alere Shanghai HSBC account is recorded as restricted cash on our balance sheet and amounted to $3.3 million at March 31, 2017.

 

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(c) TechLab

On September 16, 2016, we sold our 49% interest in TechLab Inc., a company that provides diagnostic testing products used by physicians and other health care customers to diagnose, treat, and monitor intestinal diseases and other medical conditions. Prior to this sale, we accounted for this interest in TechLab as an equity method investment. Alere served as a distributor of TechLab products prior to the September 16, 2016 sale and will remain the principal global distributor of TechLab products pursuant to the terms of a distribution agreement with TechLab. We made product purchases from TechLab of $4.6 million during the three months ended March 31, 2016.

(15) 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 within general and administrative expenses.

Increases or decreases in the fair values of the contingent consideration obligations may result from, among other things, 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. From time to time, we have entered into amendments to modify the provisions governing the contingent consideration obligations, and such amendments have resulted in changes to the fair value of these obligations. We may in the future enter into additional amendments that may also result in changes to such fair values.

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

 

Acquisition

  

Acquisition Date

   Acquisition
Date Fair
Value
     Maximum
Remaining
Earn-out
Potential as of
March  31,
2017
     Remaining
Earn-out
Period as of
March 31,
2017
    Estimated
Fair Value as of
March 31,
2017
     Estimated
Fair Value as of
December 31,
2016
     Payments
Made
During
2017
 

TwistDx, Inc.(1)

   March 11, 2010    $ 35,600      $ 102,535        2017 – 2025 (3)    $ 36,300      $ 35,700      $ 159  

Epocal(2)

   February 1, 2013    $ 75,000      $ 15,375        2017 – 2018       3,000        3,000        —    

Other

   Various    $ 30,373      $ —            4,100        4,500        128  
             

 

 

    

 

 

    

 

 

 
              $ 43,400      $ 43,200      $ 287  
             

 

 

    

 

 

    

 

 

 

 

(1) The terms of the acquisition agreement require us to pay earn-outs upon successfully meeting certain revenue and product development targets through 2025.
(2) 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.
(3) The maximum earn-out period ends on the fifteenth anniversary of the acquisition date.

(b) Legal Proceedings

Litigation with Abbott Laboratories

After entering into the original Merger Agreement, Abbott informed Alere that it had serious concerns about, among other things, the accuracy of various representations, warranties and covenants made by Alere in the original Merger Agreement. Abbott indicated that these concerns related to the delay in the filing of Alere’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 as well as governmental investigations previously announced by Alere. Abbott requested information from Alere about these and other matters, citing contractual rights to receive information under the original Merger Agreement. In the initial meeting in which Abbott expressed its concerns to Alere, as part of a discussion about potential paths forward, Abbott requested that Alere agree to terminate the original Merger Agreement in return for a payment by Abbott to Alere in the range of between $30 and $50 million in respect of Alere’s transaction expenses. Alere’s Board of Directors promptly rejected that request. In these discussions, Abbott affirmed its commitment to abide by its obligations under the original Merger Agreement.

 

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On August 25, 2016, Alere filed a complaint against Abbott in the Delaware Chancery Court, and filed an accompanying motion to expedite the proceedings, asking the Delaware Chancery Court to require Abbott to specifically perform its obligations with respect to obtaining antitrust approvals as required by the original Merger Agreement.

On September 29, 2016, the Delaware Chancery Court entered an order that, among other things, adopted a detailed schedule setting forth actions required to be taken by specified dates in order to obtain all antitrust clearances required by the original merger agreement.

On November 3, 2016, Abbott filed a complaint against Alere in the Delaware Chancery Court asserting a claim against Alere for breach of contract from Alere’s alleged refusal to provide Abbott with certain information under the original Merger Agreement. On February 1, 2017, Alere filed a motion to dismiss Abbott’s November 3 complaint.

On December 7, 2016, Abbott filed a complaint (which was subsequently amended after the various actions were consolidated) in the Delaware Chancery Court seeking a declaration that Alere had experienced a Material Adverse Effect (as such term is defined in the original Merger Agreement) and that Abbott could terminate the original Merger Agreement.

On February 1, 2017, Abbott filed its answer to the complaint Alere had filed on August 25, 2016, and Alere filed an answer to Abbott’s amended complaint as well as counterclaims against Abbott. Alere’s counterclaims requested a declaratory judgment that, among other things, (i) there had been no Material Adverse Effect (as such term is defined in the original Merger Agreement); and (ii) Abbott had breached the parties’ original Merger Agreement and breached the implied covenant of good faith and fair dealing.

Settlement Agreement relating to the Amended Merger Agreement

Concurrently with the execution of the Merger Agreement Amendment on April 13, 2017, Alere and Abbott entered into a settlement agreement, or the Settlement Agreement. The Settlement Agreement released claims arising out of or related to the merger, and resolved the parties’ litigation that had been pending in Delaware Chancery Court. The Settlement Agreement provided reciprocal releases, except for any potential antitrust claims by Alere to the extent they relate to developments after August 25, 2016, which would not be released until the parties obtain all consents and regulatory clearances necessary for closing. Abbott’s potential claims based on information not excluded from the definition of Material Adverse Effect in the Amended Merger Agreement were also not released. Finally, the Settlement Agreement provided for dismissal of the Delaware litigation with prejudice, with the exception of the non-released antitrust claims, which were dismissed without prejudice.

Arriva Medical Billing Number

Arriva Medical is our durable medical equipment, or DME, supply business that furnishes diabetic testing supplies via mail order, including blood glucose monitors, test strips, lancets, lancing devices, and control solutions, as well as other related medical supplies in the United States. These products are generally covered by Medicare, Medicaid and other third-party payers. Competition for Medicare-reimbursed diabetes testing supplies, which represents the majority of our Arriva Medical business, changed significantly in 2013 as a result of implementation by CMS of a competitive bidding process to limit the number of eligible suppliers and the fees for which they may be reimbursed. Based on the most recent bidding process, we estimate that CMS currently reimburses approximately ten suppliers who have agreed to accept a contractual reimbursement rate for mail-order diabetic testing supplies for the period from July 2016 to December 2018 that is substantially lower than the established fee schedule for these products. Arriva Medical is one of those approximately ten suppliers that was awarded a national mail-order contract. Suppliers that were not awarded contracts are unable to be reimbursed by Medicare for mail-order diabetic testing supplies.

On October 12, 2016, Arriva Medical received a notice, dated October 5, 2016, that its Medicare enrollment would be revoked by CMS, based on CMS’ assertion that, over a five-year period, out of approximately 5.7 million Medicare claims made for about one million unique beneficiaries, Arriva had allegedly submitted claims for 211 Medicare beneficiaries who were deceased on the date their products were shipped (even if the products were appropriately ordered in advance of the patient’s death). Arriva Medical’s initial appeal of this determination was denied by CMS, and Arriva’s Medicare enrollment was revoked effective November 4, 2016, pending the outcome of further appeals. Arriva Medical conducted an investigation into the issue and does not believe that it received or, if received, retained, any Medicare reimbursement for the DME items at issue for these 211 Medicare beneficiaries. In addition, CMS subsequently provided notice that Arriva Medical’s competitive bidding contract would be terminated as a result of the revocation of its enrollment.

On December 27, 2016, Arriva Medical filed an appeal for an administrative law judge, or ALJ, hearing seeking to permanently reinstate Arriva’s Medicare enrollment status retroactive to the November 4, 2016 revocation date. On April 25, 2017, the ALJ upheld CMS’s revocation of Arriva Medical’s Medicare enrollment. On June 7, 2017, Arriva Medical has timely appealed the ALJ decision to the Department Appeals Board.

On December 28, 2016, Arriva Medical also filed a complaint in Federal District Court for the District of Columbia requesting a temporary restraining order, or TRO, and preliminary injunction, or PI, to prohibit CMS from terminating Arriva Medical’s competitive bidding contract and requesting that the court require CMS to reinstate Arriva’s Medicare billing status until due process could be provided in the form of the completion of the administrative appeals process prescribed by regulation. In conjunction with this case, on January 4, 2017, CMS agreed through its counsel that it would not revoke the competitive bidding contract while the

 

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administrative appeals process was underway, which mooted the request for the TRO. On March 9, 2017, the Federal District Court for the District of Columbia denied the PI to prohibit CMS from terminating Arriva Medical’s competitive bidding contract and also denied CMS’s motion to dismiss Arriva Medical’s complaint. On April 17, 2017, the court issued an order dismissing Arriva Medical’s complaint.

We are unable, at this time, to determine the outcome of these pending legal matters related to Arriva Medical’s billing number.

U.S. Securities and Exchange Commission Subpoena

On August 28, 2015, we received a subpoena from the 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. On January 14, 2016, we received a second subpoena from the SEC in connection with this formal investigation seeking, among other things, additional information related to sales of products and services to end-users in Africa, as well as revenue recognition relating to sales of products and services to end-users in Africa. We have also received, from time to time, requests in connection with the investigation to voluntarily produce additional information to the SEC, including information pertaining to certain other countries in Asia and Latin America, as well as additional information on revenue recognition matters and revisions to our financial statements referenced in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

We are cooperating with the SEC and have provided documents in response to the subpoenas and voluntary requests and we have made witnesses available to be interviewed by the SEC. We are unable to predict when this matter will be resolved or what further action, if any, the SEC may take in connection with it.

Department of Justice Grand Jury Subpoena

On March 11, 2016, we received a grand jury subpoena from the United States Department of Justice requiring the production of documents relating to, among other things, sales, sales practices and dealings with third parties (including distributors and foreign governmental officials) in Africa, Asia and Latin America and other matters related to the U.S. Foreign Corrupt Practices Act.

We are cooperating with the Department of Justice and have provided information in response to the subpoena. We are unable to predict when this matter will be resolved or what further action, if any, the Department of Justice may take in connection with it.

Securities Class Actions

On April 21, 2016 and May 4, 2016 two class action lawsuits captioned Godinez v. Alere Inc. and Breton v. Alere Inc., respectively, were filed against us in the United States District Court for the District of Massachusetts. Both actions purport to assert claims against us and certain current and former officers for alleged violations of Section 10(b) and Section 20(a) of the Exchange Act and Rule 10b-5 under the Exchange Act. On July 11, 2016, the court entered an order consolidating the two actions and appointing lead plaintiffs and lead counsel. Lead plaintiffs filed a supplemental and amended consolidated class action complaint on January 4, 2017, seeking to represent a proposed class of all persons who purchased or otherwise acquired our common stock during the period May 28, 2015 through December 7, 2016. The complaint seeks damages allegedly caused by alleged materially misleading statements and/or material omissions by us and the officers regarding our and our subsidiaries’ business, prospects and operations, which allegedly operated to inflate artificially the price paid for our common stock during the class period. The complaint seeks unspecified compensatory damages, including interest thereon, attorneys’ fees and costs. We filed our motion to dismiss the amended complaint on February 6, 2017 and the court has scheduled oral argument on that motion for June 27, 2017.

On November 14, 2016, a class action lawsuit captioned Khalid v. Alere Inc., was filed against us in the United States District Court for the Southern District of Florida. This suit asserts claims against us and certain current and former officers for alleged violations of Section 10(b) and Section 20(a) of the Exchange Act and Rule 10b-5 under the Exchange Act arising out of CMS’s revocation of Medicare billing rights of Arriva Medical. On December 30, 2016, this securities class action suit was transferred to the United States District Court for the District of Massachusetts. On January 9, 2017, the plaintiff filed a notice of voluntary dismissal without prejudice.

We are unable at this time to determine the outcome of these class action lawsuits or our potential liability, if any.

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 a Form FDA 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. In September 2014, as follow up to a further inspection of our San Diego facility, the FDA notified us that this inspection was classified “voluntary action indicated,” meaning that the objectionable conditions or practices found in the inspection did 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.

 

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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 government and are responding to the investigation, which is ongoing. We have been engaged in discussions with the government about this matter, including a resolution of potential related False Claims Act and common law liability exposure for the products under review. As a result of these discussions, management accrued, as of December 31, 2016, an aggregate of $35.0 million for potential liability of the claims related to this matter. We would need to obtain certain approvals before we could agree to any proposed resolution. There can be no assurance that future discussions with the government to resolve these matters will be successful, that the approvals we need will be obtained or that any potential settlement will be agreed to or finalized. 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. Based on the ongoing uncertainties and potentially wide range of outcomes associated with any potential resolution of the matter under investigation by the OIG, the ultimate amount of potential liability may materially exceed the $35.0 million accrual we have established.

INRatio Class Actions

On May 26, 2016, a class action lawsuit captioned Dina Andren and Sidney Bludman v. Alere Inc., et al., was filed against us in the United States District Court for the Southern District of California. This class action purports to assert claims against us under several legal theories, including fraud, breach of warranty, unjust enrichment and violation of applicable unfair competition/business practice statutes in connection with the manufacturing, marketing and sale of our INRatio products. The plaintiffs seek to represent a proposed class of all persons who purchased, rented or otherwise paid for the INRatio system during the period January 1, 2009 to May 26, 2016 in the United States, or alternatively, California, Maryland, New York, Colorado, Florida, Georgia and Pennsylvania. The plaintiffs seek restitution and damages allegedly resulting from inaccurate PT/INR readings and from the purchase of devices that claimants say they would not have purchased had they known of the alleged propensity of these devices to yield inaccurate PT/INR results. Among other things, the plaintiffs seek a refund of money spent on INRatio products and unspecified compensatory damages, injunctive relief, attorneys’ fees and costs. Several of the state classes also seek statutory penalties. Plaintiffs state that they do not seek recovery for personal injury.

We are unable, at this time, to determine the outcome of these class action lawsuits or our potential liability, if any.

Another class action lawsuit captioned J.E, J.D., and all others similarly situated v. Alere Inc., Alere San Diego, Inc. and Alere Home Monitoring, Inc., was filed against us in the United States District Court for the District of Massachusetts on July 22, 2016. In May 2017, prior to class certification proceedings, the parties agreed to dismiss this lawsuit. We have agreed to pay the plaintiffs and counsel for the plaintiffs an immaterial amount in connection with this dismissal.

Claims in the Ordinary Course and Other Matters

We are also party to certain other legal proceedings and other governmental investigations, or are requested to provide information in connection with such proceedings or investigations. For example, in December 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 in response to the subpoena. We and our subsidiary, Arriva Medical, LLC, are also in the process of responding to Civil Investigative Demands, or CIDs, from the United States Attorney’s office for the Middle District of Tennessee and the U.S. Department of Justice in connection with an investigation of possible improper claims submitted to Medicare and Medicaid. The most recent of the CIDs related to this matter was received in May 2017. The CIDs request patient and insurance billing and medical records, records related to interactions with third parties, and correspondence related to the same, communications with customers and terms of sale for diabetic products, dating back to January 2010. In an unrelated matter, in January 2017, our subsidiary Alere Home Monitoring, Inc., which offers home self-testing anticoagulation monitoring and VAD services and products, received a CID from the United States Attorney’s Office for the District of Massachusetts. The January 2017 CID, which covers similar subject matter to a letter request from the Department of Justice Civil Division dating back to June 2015, is broad in scope, but is understood to be primarily focused on obtaining records and information about Alere Home Monitoring, Inc.’s billing practices and policies relating to the frequency at which PT/INR self-testing is prescribed and performed since 2006. In addition, in March 2017, Alere Home Monitoring, Inc. received a second letter request from the Department of Justice Civil Division seeking additional information regarding billing frequencies of PT/INR self-testing beyond the original scope of the June 2015 request. We are cooperating with these various unrelated investigations and are providing documents and information responsive to each of the CIDs and letter requests. We cannot predict what effect, if any, these investigations, or any resulting claims, could have on us or our subsidiaries.

As previously disclosed, we received a U.S. Department of Justice criminal subpoena addressed to Alere Toxicology Services, Inc. on July 1, 2016 which seeks records related to Medicare, Medicaid and Tricare billings dating back to 2010 for specific patient samples tested at our Austin, Texas pain management laboratory and payments made to physicians. On June 8, 2017 we were informed that the U.S. Department of Justice is closing this investigation without taking any action against the Company or Alere Toxicology Services, Inc.

 

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We have received, from time to time, additional subpoenas and requests for information from the United States Department of Justice, other federal government agencies and state attorneys general, and we have, in each of these cases, cooperated with the applicable governmental entity in responding to the applicable subpoena or request for information. For example, in May 2016, we received a subpoena from the U.S. Attorney for the District of New Jersey, which seeks various documents related to the accuracy, reliability and performance of the INRatio system, including documents relating to prior interactions with the FDA and others regarding the system.

Our diabetes, toxicology and patient self-testing businesses 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, claims relating to the medical necessity of certain testing or billing practices are not in accord with applicable rules and guidelines 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, third-party subpoenas or various other lawsuits arising in the ordinary course of business, including infringement, employment or investor matters, disputes regarding the payment of contingent consideration obligations and we expect that this will continue to be the case in the future. For example, several individuals have filed suits against us alleging personal injury claims in connection with the use of our INRatio products (which are in addition to the class action suits described above). In addition, the former shareholders of Ionian Technologies Inc. filed a lawsuit against us in May 2017 alleging, among other things, that they are owed $30.0 million in earn-out payments under the agreement pursuant to which we acquired Ionian Technologies.

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, and cash flows.

(16) Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies that we adopt on or before 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 5(w), Recent Accounting Pronouncements, to our consolidated financial statements included within our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Recently Issued Standards

In March 2017, the FASB issued ASU No. 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, or ASU 2017-07. ASU 2017-07 improves the presentation of net periodic pension cost and net periodic postretirement benefit cost by requiring that an employer that offers to its employees defined benefit pension or other postretirement benefit plans report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. ASU 2017-07 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted within the first interim period. The amendments should be applied using a retrospective transition method for the presentation of the service cost component and other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets. We are currently evaluating the impact of the adoption of ASU 2017-07 on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment, or ASU 2017-04. ASU 2017-04 removes the requirement to perform a hypothetical purchase price allocation to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and should be applied prospectively with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2017-04 on our consolidated financial statements.

 

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In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, or ASU 2017-01. ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, and should be applied prospectively with early adoption permitted under certain scenarios. We are currently evaluating the impact of the adoption of ASU 2017-01 on our consolidated financial statements.

In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606: Revenue from Contracts with Customers, or ASU 2016-20. ASU 2016-20 clarifies specific aspects of previously issued guidance in ASU 2014-09, Revenue from Contracts with Customers (discussed below). ASU 2016-20 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2016-20 on our consolidated financial statements.

In December 2016, the FASB issued ASU No. 2016-19, Technical Corrections and Improvements, or ASU 2016-19. ASU 2016-19 provides simplification and minor improvements to Topics on insurance and troubled debt restructuring that result in editorial changes to the Accounting Standards Codification, or ASC. Most of the amendments in this ASU 2016-19 do not require transition guidance and are effective immediately. Early adoption is permitted for the amendments that require transition guidance. We do not expect the adoption of ASU 2016-19 to have a significant impact on our consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, or ASU 2016-18. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The amendments should be applied using a retrospective transition method to each period presented. We are currently evaluating the impact of the adoption of ASU 2016-18 on our consolidated financial statements.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, or ASU 2016-16. ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs and eliminates the exception for an intra-entity transfer of an asset other than inventory. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2016-16 on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15. ASU 2016-15 provides cash flow statement classification guidance for: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2016-15 on our consolidated financial statements.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, or ASU 2016-12. ASU 2016-12: (1) clarifies the objective of the collectability criterion for applying Accounting Standards Codification, or ASC, paragraph 606-10-25-7; (2) permits an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specifies that the measurement date for non-cash consideration is contract inception; (4) provides a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarifies that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarifies that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. ASU 2016-12 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We are currently evaluating the impact of the adoption of ASU 2016-12 on our consolidated financial statements.

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, or ASU 2016-10. ASU 2016-10 adds further guidance on identifying performance

 

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obligations and also to improve the operability and understandability of the licensing implementation guidance. ASU 2016-10 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2016-10 on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 requires lessees to recognize for all leases (with the exception of short-term leases) at the commencement date, a lease liability which is a lessee‘s obligation to make lease payments arising from a lease measured on a discounted basis, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and should be applied with a modified retrospective transition approach, with early adoption permitted. We are currently evaluating the impact of the adoption of ASU 2016-02 on our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, or ASU 2014-09, 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 August 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.

We believe that there were no other accounting standards recently issued that had or are expected to have a material impact on our consolidated financial statements.

Recently Adopted Standards

In March 2016, the FASB issued ASU No. 2016-09, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, or ASU 2016-09. ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions including income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, with early adoption permitted. Effective January 1, 2017, we adopted ASU 2016-09. The adoption of ASU 2016-09 had the following impact on our consolidated financial statements:

 

    All excess tax benefits or tax deficiencies are now recognized as income tax benefit or expense as applicable. Previously, we recorded the benefit or expense to additional paid-in capital. The tax benefit recorded in our consolidated statement of operations for the first quarter of 2017 was $0.1 million. The standard requires prospective presentation of this tax benefit. We also elected to adopt the cash flow presentation of the excess tax benefit prospectively commencing in the first quarter of 2017. The tax benefit (or expense) is required to be classified as an operating activity in the statement of cash flows. Previously, it was required to be classified within financing activities.

 

    All cash payments made to taxing authorities on the employees’ behalf for withheld shares are now presented as financing activities on the statement of cash flows. Previously, it was required to be classified within operating activities. This change was applied retrospectively with a reclassification of $1.4 million from operating to financing activities during the three months ended March 31, 2016.

We have elected to continue to estimate forfeitures expected to occur to determine the amount of compensation cost to be recognized in each period. None of the other provisions in this guidance had a significant impact on our consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, Investments — Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, or ASU 2016-07. ASU 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. ASU 2016-07 requires that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. ASU 2016-07 also requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and should be applied prospectively with early adoption permitted. Effective January 1, 2017, we adopted ASU 2016-07. The adoption of ASU 2016-07 did not have a significant impact on our consolidated financial statements.

 

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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. Effective January 1, 2017, we adopted ASU 2015-11. The adoption of ASU 2015-11 did not have a significant impact on our consolidated financial statements.

(17) Equity Investments

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

(a) SPD

We recorded earnings of $5.0 million and $4.6 million during the three months ended March 31, 2017 and 2016, respectively, in equity earnings of unconsolidated entities, net of tax, in our accompanying consolidated statements of operations, which represented our 50% share of SPD’s net income for the respective periods and elimination of intercompany profit in inventory related to sales from Alere to SPD which is reflected in SPD’s net income.

(b) TechLab

We recorded earnings of $0.2 million and $0.5 million during the three months ended March 31, 2017 and 2016, respectively, in equity earnings of unconsolidated entities, net of tax, in our accompanying consolidated statements of operations, which represented our minority share of TechLab’s net income for the respective periods.

On September 16, 2016, we completed the sale of our 49% interest in the TechLab business and, in connection with such sale, we recorded a gain in equity earnings of unconsolidated entities of $29.9 million.

Summarized financial information for SPD (and TechLab on a combined basis for the three months ended March 31, 2016) is as follows (in thousands):

 

     Three Months Ended March 31,  

Combined Condensed Results of Operations:

   2017      2016  

Net revenue

   $ 45,392      $ 53,434  
  

 

 

    

 

 

 

Gross profit

   $ 35,133      $ 36,219  
  

 

 

    

 

 

 

Net income after taxes

   $ 10,048      $ 10,141  
  

 

 

    

 

 

 

Combined Condensed Balance Sheet:

   March 31, 2017      December 31, 2016  

Current assets

   $ 85,888      $ 75,248  

Non-current assets

     21,246        20,578  
  

 

 

    

 

 

 

Total assets

   $ 107,134      $ 95,826  
  

 

 

    

 

 

 

Current liabilities

   $ 43,890      $ 44,234  

Non-current liabilities

     3,945        3,875  
  

 

 

    

 

 

 

Total liabilities

   $ 47,835      $ 48,109  
  

 

 

    

 

 

 

The dividends we received in cash as a return from capital from our equity investments have been included in cash flows from investing activities in our consolidated statements of cash flows for all the periods presented.

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

In January 2016, we completed the sale of our Alere E-Santé business, which was a component of our professional diagnostics reporting unit and business segment. We received cash consideration of approximately $8.1 million, net of a final working capital adjustment totaling approximately $0.2 million, and we are eligible to receive up to $1.5 million of contingent cash consideration. As a result of this transaction, we recorded a $3.8 million gain in the three months ended March 31, 2016 on the disposition of the Alere E-Santé business.

 

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

(19) Provision (Benefit) for Income Taxes

The provision for income taxes increased by $18.8 million to $18.6 million for the three months ended March 31, 2017, from a benefit of $0.2 million for the three months ended March 31, 2016. The effective tax rate for the three months ended March 31, 2017 and 2016, was (37%) and 2%, respectively.

The Company determines its estimated annual effective tax rate at the end of each interim period based on forecasted pre-tax income (loss) and facts known at that time. The estimated annual effective tax rate is applied to the year-to-date pre-tax income (loss) at the end of each interim period with certain adjustments. The tax effect of significant unusual or extraordinary items is discretely reflected in the period in which they occur. Our estimated annual effective tax rate is calculated based on forecasted pre-tax income (loss) across various jurisdictions, and can change based on the mix of jurisdictional pre-tax income (loss) and other factors.

Our $0.2 million income tax benefit for the three months ended March 31, 2016 is primarily related to foreign incomes taxes based on forecasted and year-to-date pre-tax foreign income (loss) by jurisdiction offset by U.S. federal and state income tax benefits based on forecasted and year-to-date pre-tax U.S. federal and state income (loss). Our $18.6 million income tax provision for the three months ended March 31, 2017 is primarily related to foreign incomes taxes based on forecasted and year-to-date pre-tax foreign income by jurisdiction as well as U.S. federal and state income taxes in connection with the increase of deferred tax liabilities on indefinite-lived intangible assets and certain other state income taxes. As of December 31, 2016, we recorded a valuation allowance due to uncertainties related to the future benefits and realization of our deferred tax assets related to U.S. federal and state net deferred tax assets and as such no U.S. federal and state income tax benefits were recorded related to the pre-tax U.S. federal and state loss during the three months ended March 31, 2017.

(20) Guarantor Financial Information

Our 7.25% senior notes, our 6.5% senior subordinated notes and our 6.375% senior subordinated notes are 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 March 31, 2017 and December 31, 2016, the related statements of operations, statements of comprehensive income (loss) and statements of cash flows for the three months ended March 31, 2017 and 2016, 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.

The quantitative impacts of the Restatement on the guarantor financial information are included in Note 29 to the consolidated financial statements in the Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

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CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended March 31, 2017

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —       $ 263,294     $ 272,910     $ (72,759   $ 463,445  

Services revenue

     —         109,531       12,598       —         122,129  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —         372,825       285,508       (72,759     585,574  

License and royalty revenue

     —         3,730       854       (1,942     2,642  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —         376,555       286,362       (74,701     588,216  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     1,139       131,757       161,862       (64,927     229,831  

Cost of services revenue

     45       76,484       7,588       (8,218     75,899  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     1,184       208,241       169,450       (73,145     305,730  

Cost of license and royalty revenue

     —         —         2,702       (1,942     760  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     1,184       208,241       172,152       (75,087     306,490  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (1,184     168,314       114,210       386       281,726  

Operating expenses:

          

Research and development

     1,220       17,890       7,174       —         26,284  

Sales and marketing

     1,925       48,344       43,922       —         94,191  

General and administrative

     94,300       34,522       37,764       (313     166,273  

Impairment and (gain) loss on dispositions, net

     —         —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (98,629     67,558       25,350       699       (5,022

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

     (42,961     (1,877     (2,278     3,933       (43,183

Other income (expense), net

     2,577       1,552       (2,711     (3,934     (2,516
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     (139,013     67,233       20,361       698       (50,721

Provision for income taxes

     13,547       —         5,062       —         18,609  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (152,560     67,233       15,299       698       (69,330

Equity in earnings of subsidiaries, net of tax

     88,202       —         —         (88,202     —    

Equity earnings of unconsolidated entities, net of tax

     229       —         4,972       —         5,201  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (64,129     67,233       20,271       (87,504     (64,129

Less: Net income attributable to non-controlling interests

     —         —         183       —         183  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (64,129     67,233       20,088       (87,504     (64,312

Preferred stock dividends

     (5,250     —         —         —         (5,250
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (69,379   $ 67,233     $ 20,088     $ (87,504   $ (69,562
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONSOLIDATING STATEMENT OF OPERATIONS

For the Three Months Ended March 31, 2016

(As Restated)

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net product sales

   $ —       $ 224,380     $ 305,568     $ (61,446   $ 468,502  

Services revenue

     —         104,484       11,225       —         115,709  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net product sales and services revenue

     —         328,864       316,793       (61,446     584,211  

License and royalty revenue

     —         2,920       2,558       (2,749     2,729  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net revenue

     —         331,784       319,351       (64,195     586,940  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales

     114       124,758       169,845       (53,393     241,324  

Cost of services revenue

     —         72,495       8,040       (7,435     73,100  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net product sales and services revenue

     114       197,253       177,885       (60,828     314,424  

Cost of license and royalty revenue

     —         17       4,123       (2,749     1,391  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of net revenue

     114       197,270       182,008       (63,577     315,815  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (loss)

     (114     134,514       137,343       (618     271,125  

Operating expenses:

          

Research and development

     4,134       14,459       8,469       —         27,062  

Sales and marketing

     1,336       54,465       44,839       —         100,640  

General and administrative

     44,615       33,186       37,155       —         114,956  

Impairment and (gain) loss on dispositions, net

     —         —         (3,810     —         (3,810
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (50,199     32,404       50,690       (618     32,277  

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

     (41,087     (2,652     (3,067     4,700       (42,106

Other income (expense), net

     1,988       2,502       (1,139     (4,700     (1,349
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (89,298     32,254       46,484       (618     (11,178

Provision (benefit) for income taxes

     (54     250       (368     —         (172
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (89,244     32,004       46,852       (618     (11,006

Equity in earnings of subsidiaries, net of tax

     82,591       —         —         (82,591     —    

Equity earnings of unconsolidated entities, net of tax

     681       —         4,581       (228     5,034  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (5,972     32,004       51,433       (83,437     (5,972

Less: Net income attributable to non-controlling interests

     —         —         103       —         103  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     (5,972     32,004       51,330       (83,437     (6,075

Preferred stock dividends

     (5,309     —         —         —         (5,309
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders

   $ (11,281   $ 32,004     $ 51,330     $ (83,437   $ (11,384
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended March 31, 2017

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
     Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income (loss)

   $ (64,129   $ 67,233      $ 20,271     $ (87,504   $ (64,129
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), before tax:

           

Changes in cumulative translation adjustment

     27       164        53,180       (41     53,330  

Minimum pension liability adjustment

     —         —          (71     —         (71
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income, before tax

     27       164        53,109       (41     53,259  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Other comprehensive income

     27       164        53,109       (41     53,259  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (64,102     67,397        73,380       (87,545     (10,870

Less: Comprehensive income attributable to non-controlling interests

     —         —          183       —         183  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

   $ (64,102   $ 67,397      $ 73,197     $ (87,545   $ (11,053
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended March 31, 2016

(As Restated)

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-
Guarantor
Subsidiaries
     Eliminations     Consolidated  

Net income (loss)

   $ (5,972   $ 32,004     $ 51,433      $ (83,437   $ (5,972
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss), before tax:

           

Changes in cumulative translation adjustment

     115       (129     22,207        —         22,193  

Minimum pension liability adjustment

     —         —         155        —         155  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss), before tax

     115       (129     22,362        —         22,348  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss)

     115       (129     22,362        —         22,348  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income (loss)

     (5,857     31,875       73,795        (83,437     16,376  

Less: Comprehensive income attributable to non-controlling interests

     —         —         103        —         103  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

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

   $ (5,857   $ 31,875     $ 73,692      $ (83,437   $ 16,273  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

36


Table of Contents

CONSOLIDATING BALANCE SHEET

March 31, 2017

(in thousands)

 

     Issuer      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 215,718      $ 4,168      $ 381,586      $ —       $ 601,472  

Restricted cash

     814        —          52,329        —         53,143  

Marketable securities

     —          83        457        —         540  

Accounts receivable, net of allowances

     —          182,775        204,912        —         387,687  

Inventories, net

     —          162,740        183,813        (24,080     322,473  

Prepaid expenses and other current assets

     21,817        23,570        67,839        4,602       117,828  

Intercompany receivables

     383,305        1,106,663        110,136        (1,600,104     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     621,654        1,479,999        1,001,072        (1,619,582     1,483,143  

Property, plant and equipment, net

     23,061        241,058        180,798        (5,115     439,802  

Goodwill

     —          1,823,446        957,654        —         2,781,100  

Other intangible assets with indefinite lives

     —          7,472        14,705        (59     22,118  

Finite-lived intangible assets, net

     2,362        487,478        298,425        (3,200     785,065  

Restricted cash

     —          —          2,355        —         2,355  

Other non-current assets

     463        1,739        12,946        (808     14,340  

Investments in subsidiaries

     3,554,484        158,631        57,651        (3,770,766     —    

Investments in unconsolidated entities

     875        14,765        47,932        15,655       79,227  

Deferred tax assets

     —          —          59,811        (37,336     22,475  

Non-current income tax receivable

     4,580        —          39,664        —         44,244  

Intercompany notes receivables

     1,677,641        633,767        3,000        (2,314,408     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,885,120      $ 4,848,355      $ 2,676,013      $ (7,735,619   $ 5,673,869  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

Current liabilities:

             

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

   $ 40,073      $ 4      $ 42,429      $ —       $ 82,506  

Current portion of capital lease obligations

     —          1,433        1,468        —         2,901  

Accounts payable

     56,545        77,416        77,469        —         211,430  

Accrued expenses and other current liabilities

     146,351        133,109        171,964        (34,977     416,447  

Intercompany payables

     505,213        860,907        233,912        (1,600,032     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     748,182        1,072,869        527,242        (1,635,009     713,284  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Long-term liabilities:

             

Long-term debt, net of current portion

     2,847,092        —          5,234        —         2,852,326  

Capital lease obligations, net of current portion

     —          1,732        4,942        —         6,674  

Deferred tax liabilities

     —          61,928        58,817        81       120,826  

Other long-term liabilities

     94,324        44,941        21,679        (808     160,136  

Intercompany notes payables

     379,701        1,188,611        746,096        (2,314,408     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term liabilities

     3,321,117        1,297,212        836,768        (2,315,135     3,139,962  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     1,815,821        2,478,274        1,307,201        (3,785,475     1,815,821  

Non-controlling interests

     —          —          4,802        —         4,802  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     1,815,821        2,478,274        1,312,003        (3,785,475     1,820,623  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 5,885,120      $ 4,848,355      $ 2,676,013      $ (7,735,619   $ 5,673,869  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

37


Table of Contents

CONSOLIDATING BALANCE SHEET

December 31, 2016

(in thousands)

 

     Issuer      Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 167,639      $ 3,161      $ 396,415      $ —       $ 567,215  

Restricted cash

     1,337        —          50,213        —         51,550  

Marketable securities

     —          76        —          —         76  

Accounts receivable, net of allowances

     —          186,067        227,468        —         413,535  

Inventories, net

     —          168,736        163,967        (23,783     308,920  

Prepaid expenses and other current assets

     15,983        22,318        68,748        11,558       118,607  

Intercompany receivables

     390,328        1,008,767        204,587        (1,603,682     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     575,287        1,389,125        1,111,398        (1,615,907     1,459,903  

Property, plant and equipment, net

     25,525        243,755        176,618        (4,708     441,190  

Goodwill

     —          1,822,290        937,076        —         2,759,366  

Other intangible assets with indefinite lives

     —          7,457        19,765        (58     27,164  

Finite-lived intangible assets, net

     2,490        507,060        299,227        (3,200     805,577  

Restricted cash

     —          —          2,171        —         2,171  

Other non-current assets

     509        2,267        13,060        (870     14,966  

Investments in subsidiaries

     3,409,001        158,195        57,650        (3,624,846     —    

Investments in unconsolidated entities

     684        14,765        42,523        14,253       72,225  

Deferred tax assets

     —          —          57,819        (37,336     20,483  

Non-current income tax receivable

     4,580        —          40,654        —         45,234  

Intercompany notes receivables

     1,757,723        709,965        744        (2,468,432     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,775,799      $ 4,854,879      $ 2,758,705      $ (7,741,104   $ 5,648,279  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

             

Current liabilities:

             

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

   $ 40,072      $ —        $ 42,298      $ —       $ 82,370  

Current portion of capital lease obligations

     —          1,560        1,504        —         3,064  

Accounts payable

     35,591        78,981        81,307        —         195,879  

Accrued expenses and other current liabilities

     65,582        133,506        223,778        (28,023     394,843  

Intercompany payables

     485,573        859,924        258,154        (1,603,651     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     626,818        1,073,971        607,041        (1,631,674     676,156  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Long-term liabilities:

             

Long-term debt, net of current portion

     2,852,978        —          5,227        —         2,858,205  

Capital lease obligations, net of current portion

     —          2,029        5,192        —         7,221  

Deferred tax liabilities

     —          51,314        67,702        82       119,098  

Other long-term liabilities

     91,042        44,563        21,257        (870     155,992  

Intercompany notes payables

     377,969        1,274,419        816,044        (2,468,432     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total long-term liabilities

     3,321,989        1,372,325        915,422        (2,469,220     3,140,516  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total stockholders’ equity

     1,826,992        2,408,583        1,231,627        (3,640,210     1,826,992  

Non-controlling interests

     —          —          4,615        —         4,615  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     1,826,992        2,408,583        1,236,242        (3,640,210     1,831,607  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 5,775,799      $ 4,854,879      $ 2,758,705      $ (7,741,104   $ 5,648,279  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

38


Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Three Months Ended March 31, 2017

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash Flows from Operating Activities:

          

Net income (loss)

   $ (64,129   $ 67,233     $ 20,271     $ (87,504   $ (64,129

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

          

Equity in earnings of subsidiaries, net of tax

     (88,202     —         —         88,202       —    

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

     4,251       1       29       —         4,281  

Depreciation and amortization

     2,390       37,398       21,384       (238     60,934  

Non-cash stock-based compensation expense

     6,241       1,857       2,265       —         10,363  

Impairment of long-lived assets

     —         (342     —         —         (342

Loss on sales of fixed assets

     —         2,222       119       —         2,341  

Equity earnings of unconsolidated entities, net of tax

     (229     —         (4,972     —         (5,201

Deferred income taxes

     2,252       —         (5,629     —         (3,377

Other non-cash items

     286       102       1,172       4       1,564  

Non-cash change in fair value of contingent consideration

     —         759       (270     —         489  

Changes in assets and liabilities, net of acquisitions:

          

Accounts receivable, net

     —         3,815       29,290       —         33,105  

Inventories, net

     —         (3,207     (15,605     (460     (19,272

Prepaid expenses and other current assets

     (5,982     (1,409     4,186       6,955       3,750  

Accounts payable

     21,415       (1,170     (6,882     —         13,363  

Accrued expenses and other current liabilities

     78,365       494       (54,191     (6,954     17,714  

Other non-current assets and liabilities

     921       9,665       (4,934     —         5,652  

Cash paid for contingent consideration

     —         (159     —         —         (159

Intercompany payable (receivable)

     111,553       (109,644     (2,158     249       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     69,132       7,615       (15,925     254       61,076  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

          

(Increase) decrease in restricted cash

     523       —         (1,968     —         (1,445

Purchases of property, plant and equipment

     (624     (5,143     (4,942     310       (10,399

Proceeds from sale of property, plant and equipment

     —         3       446       (310     139  

Cash paid for business acquisitions, net of cash acquired

     (3,100     40       —         —         (3,060

Cash received from sales of marketable securities

     —         (7     —         —         (7

Cash paid for equity investments

     (191     —         (41     —         (232

Proceeds from sale of equity investments

     229       —         —         —         229  

Decrease in other assets

     47       4       31       —         82  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (3,116     (5,103     (6,474     —         (14,693
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

          

Cash paid for contingent consideration

     —         —         (128     —         (128

Proceeds from issuance of common stock, net of issuance costs

     496       —         —         —         496  

Payments on long-term debt

     (10,018     —         (140     —         (10,158

Net proceeds (payments) under revolving credit facilities

     —         —         48       —         48  

Cash paid for dividends

     (5,323     —         —         —         (5,323

Cash paid for employee taxes related to shares withheld

     (3,092     (1,095     (1,414     —         (5,601

Principal payments on capital lease obligations

     —         (424     (428     —         (852
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (17,937     (1,519     (2,062     —         (21,518
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     —         14       9,632       (254     9,392  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     48,079       1,007       (14,829     —         34,257  

Cash and cash equivalents, beginning of period

     167,639       3,161       396,415       —         567,215  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 215,718     $ 4,168     $ 381,586     $ —       $ 601,472  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

39


Table of Contents

CONSOLIDATING STATEMENT OF CASH FLOWS

For the Three Months Ended March 31, 2016

(As Restated)

(in thousands)

 

     Issuer     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash Flows from Operating Activities:

          

Net income (loss)

   $ (5,972   $ 32,004     $ 51,433     $ (83,437   $ (5,972

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

          

Equity in earnings of subsidiaries, net of tax

     (82,591     —         —         82,591       —    

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

     2,188       4       44       —         2,236  

Depreciation and amortization

     2,203       45,691       23,722       888       72,504  

Non-cash stock-based compensation expense

     5,069       2,287       2,246       —         9,602  

Impairment of inventory

     —         —         1,349       —         1,349  

Impairment of long-lived assets

     —         608       —         —         608  

Loss on sale of fixed assets

     15       8       300       —         323  

Equity earnings of unconsolidated entities, net of tax

     (681     —         (4,581     228       (5,034

Deferred income taxes

     —         (100     (6,712     —         (6,812

Gain on business dispositions

     —         —         (3,810     —         (3,810

Other non-cash items

     105       303       2,088       —         2,496  

Non-cash change in fair value of contingent consideration

     (1,000     1,199       (57     —         142  

Changes in assets and liabilities, net of acquisitions:

          

Accounts receivable, net

     —         (7,875     (10,055     —         (17,930

Inventories, net

     —         (6,681     (3,333     (270     (10,284

Prepaid expenses and other current assets

     (1,137     1,514       (6,177     25       (5,775

Accounts payable

     (3,694     (6,773     (21,075     —         (31,542

Accrued expenses and other current liabilities

     10,584       (94,355     78,614       (25     (5,182

Other non-current assets and liabilities

     157,791       (159,277     1,583       (62     35  

Cash paid for contingent consideration

     (143     —         —         —         (143

Intercompany payable (receivable)

     (111,564     180,953       (69,389     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     (28,827     (10,490     36,190       (62     (3,189
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Investing Activities:

          

(Increase) decrease in restricted cash

     (513     —         77       —         (436

Purchases of property, plant and equipment

     (841     (5,615     (8,048     —         (14,504

Proceeds from sale of property, plant and equipment

     —         40       572       —         612  

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

     (1,337     —         22,807       —         21,470  

Cash paid for business acquisitions, net of cash acquired

     —         —         (5,945     —         (5,945

Cash received from sales of marketable securities

     —         93       —         —         93  

Cash received from equity method investments

     2,205       —         —         —         2,205  

Cash paid for equity investments

     (184     —         —         —         (184

Increase in other assets

     (64     (98     (440     62       (540
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (734     (5,580     9,023       62       2,771  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows from Financing Activities:

          

Cash paid for financing costs

     (1     —         —         —         (1

Cash paid for contingent consideration

     —         —         (145     —         (145

Proceeds from issuance of common stock, net of issuance costs

     11,124       —         —         —         11,124  

Proceeds from issuance of long-term debt

     —         —         325       —         325  

Payments on long-term debt

     (17,030     —         (245     —         (17,275

Net payments under revolving credit facilities

     —         —         (127     —         (127

Cash paid for dividends

     (5,323     —         —         —         (5,323

Cash paid for employee taxes related to shares withheld

     (1,291     (99     (20     —         (1,410

Principal payments on capital lease obligations

     —         (659     (448     —         (1,107
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (12,521     (758     (660     —         (13,939
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign exchange effect on cash and cash equivalents

     —         160       2,660       —         2,820  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (42,082     (16,668     47,213       —         (11,537

Cash and cash equivalents, beginning of period

     139,153       21,150       341,897       —         502,200  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 97,071     $ 4,482     $ 389,110     $ —       $ 490,663  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by forward-looking words such as “may,” “could,” “should,” “would,” “intend,” “will,” “expect,” “anticipate,” “believe,” “estimate,” “continue” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition or state other “forward-looking” information. Forward-looking statements include, without limitation, statements regarding information with respect to the transactions contemplated by the Amended Merger Agreement with Abbott Laboratories, the benefits of our improved products, our plans and timing for the voluntary withdrawal of the INRatio and INRatio2 PT/INR Monitoring Systems from the market, future competition in our markets, the need to enter into new agreements or amend exiting agreements and terms in connection with planned divestitures of certain businesses, future divestitures of certain businesses, expected future benefits and synergies from acquired businesses, anticipated expenses and costs in connection with certain restructuring plans, future restructuring plans, our expected ability to pay certain indebtedness at maturity, the sources of funds to pay the principal and interest on our indebtedness and certain expenses, future plans with respect to repayment or refinancing of our indebtedness, the implementation and effectiveness of efforts to remediate our material weaknesses in our internal control over financial reporting, the outcome of certain tax examinations, the timing of decisions and the outcome in connection with certain legal proceedings and governmental investigations to which we and other parties are subject, intention to retain earnings to support our growth strategy, future sales of certain products by our Alere Home Monitoring business, the source of funds and the expected ability to fund short and long-term working capital needs, future revenue changes in our consumer diagnostics business segment, future potential product releases that are currently under development by our research and development unit, the anticipated use of proceeds from divestitures, future plans with respect to the repatriation of cash held by foreign entities, future litigation being brought against us and the impact of such litigation, the expected impact of recently announced and adopted accounting standards and other accounting standards on our financial statements, anticipated increases or decreases to certain tax benefits, expected future expenses in connection with the voluntary withdrawal of INRatio products from the market, future charges in connection with a withdrawal of a product from the market, and the potential for selective divestitures of non-core assets. Actual results or developments could differ materially from those projected in such statements as a result of numerous factors, including, without limitation, those risks and uncertainties set forth in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2016 and other risk factors identified herein or from time to time in our periodic filings with the SEC. We do not undertake any obligation to update any forward-looking statements. This report and, in particular, the following discussion and analysis of our financial condition and results of operations, should be read in light of those risks and uncertainties and in conjunction with our accompanying consolidated financial statements and notes thereto.

Overview

We deliver reliable and actionable health information through rapid diagnostic tests, resulting in better clinical and economic healthcare outcomes globally. Our high-performance diagnostics for infectious disease, cardiometabolic disease and toxicology are designed to meet the growing global demand for accurate, easy-to-use and cost-effective near-patient tests. Our goal is to make our products accessible to more people around the world, even those located in remote and resource-limited areas, by making them affordable and usable in any setting. By making critical clinical diagnostic information available to doctors and patients in an actionable timeframe, our products help streamline healthcare delivery and improve patient outcomes.

Change in Reporting Segments

Our operating segments are currently (i) professional diagnostics; (ii) consumer diagnostics; and (iii) other non-reportable.

In January 2015, we sold our health management business. As a result of the sale of our health management business, which was the largest component of our former patient self-testing reporting segment, as well as certain other transactions in 2015, the only component of the patient self-testing reporting segment that we retained was the Alere Home Monitoring business. Therefore, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, we reported our financial information in two operating segments: (i) professional diagnostics and (ii) consumer diagnostics, and Alere Home Monitoring was reported as a component of the professional diagnostics segment. Due to the nature of the operations of Alere Home Monitoring and the manner in which this business is conducted, we are reporting our Alere Home Monitoring business as a separate operating segment under the heading “other non-reportable segment.” The information below for the three months ended March 31, 2016 has been retroactively adjusted to reflect the foregoing changes in the segment presentation.

Alere Home Monitoring distributes PT/INR coagulation monitors and facilitates the distribution of equipment and supplies to power and control customers’ implanted ventricular assist devices, or VADs, and also provides telemonitoring services that allows VAD coordinators to monitor patients soon after discharge and receive alerts when critical patient values fall outside pre-established ranges.

 

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Recent Developments

Merger Agreement with Abbott Laboratories

On January 30, 2016, we entered into the Merger Agreement with Abbott. The Merger Agreement provides for the merger of a wholly owned subsidiary of Abbott with and into Alere, or the merger, with Alere surviving the merger as a wholly owned subsidiary of Abbott, or the surviving corporation. Under the terms of the Merger Agreement, prior to its amendment (as described herein), holders of shares of our common stock were entitled to receive $56.00 in cash, without interest, in exchange for each share of common stock. On April 13, 2017, Abbott and Alere entered into an Amendment to Agreement and Plan of Merger, or the Merger Agreement Amendment, which amends the Merger Agreement (as amended by the Merger Agreement Amendment, the Amended Merger Agreement), which provides, among other things, that the holders of shares of our common stock will receive $51.00 in cash, without interest, in exchange for each share of common stock. Other than as expressly modified pursuant to the Merger Agreement Amendment, the Merger Agreement remains in full force and effect. For information regarding the Amended Merger Agreement, the status of the antitrust clearances and settlement of litigation relating to the original Merger Agreement, see Notes 3 and 15(b) to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

We incurred significant expenses in connection with responding to the information requests from Abbott received prior to the commencement of litigation in the Delaware Chancery Court and in connection with the litigation in the Delaware Chancery Court prior to entering the Amended Merger Agreement and Settlement Agreement with Abbott on April 13, 2017.

Arriva LLC Billing Number

Arriva Medical is our durable medical equipment, or DME, supply business that furnishes diabetic testing supplies via mail order, including blood glucose monitors, test strips, lancets, lancing devices, and control solutions, as well as other related medical supplies in the United States. These products are generally covered by Medicare, Medicaid and other third-party payers. On October 12, 2016, Arriva Medical received a notice, dated October 5, 2016, that its Medicare enrollment would be revoked by CMS, based on CMS’ assertion that, over a five-year period, out of the approximately 5.7 million Medicare claims made for about one million unique beneficiaries, Arriva had allegedly submitted claims for 211 Medicare beneficiaries who were deceased on the date their products were shipped (even if the products were appropriately ordered in advance of the patient’s death). Arriva Medical’s initial appeal of this determination was denied by CMS, and Arriva’s Medicare enrollment was revoked effective November 4, 2016, pending the outcome of further appeals. Arriva Medical conducted an investigation into the issue and does not believe that it received or, if received, retained, any Medicare reimbursement for the DME items at issue for these 211 Medicare beneficiaries. In addition, CMS subsequently provided notice that Arriva Medical’s competitive bidding contract would be terminated as a result of the revocation of its enrollment.

Unless and until its enrollment status is reactivated, Arriva Medical will be ineligible for reimbursement for any products or services furnished to Medicare beneficiaries after November 4, 2016. If the enrollment is reactivated retroactive to November 4, 2016, we would be able to bill and be reimbursed for all covered products or services furnished since that date. Our results of operations for the quarter ended March 31, 2017 included no revenue attributable to Arriva Medical’s products and services that were subject to the CMS revocation after November 4, 2016. During the quarter ended March 31, 2017, we furnished $14.5 million of Arriva’s products and services that were subject to the CMS revocation to customers but did not recognize any revenue for such products and services because they were not eligible for reimbursement by CMS at the time we furnished them. For the quarter ended March 31, 2017, Arriva Medical recognized approximately $2.9 million in revenue from the sale of products and services, such as diabetes supplies, that were reimbursed by other commercial payers and that were not subject to the CMS revocation.

For additional information on this matter as well as the status of the appeals processes that Arriva Medical is pursuing, see Part II - Item 1. “Legal Proceedings – Arriva Medical Billing Number.

INRatio and INRatio®2 PT/INR Monitoring System Voluntary Withdrawal

In June 2016, we announced that we would be initiating a voluntary withdrawal of the Alere INRatio and INRatio2 PT/INR Monitoring System. We are currently implementing the product withdrawal and product discontinuation which we expect will be completed in 2017.

We recorded a charge of approximately $38.0 million in the year ended December 31, 2015 related to impairment of inventory and production equipment and estimated costs of removing our INRatio and INRatio2 from the market. As of March 31, 2017, $9.1 million and $0.4 million of the estimated costs of removing INRatio and INRatio 2 from the market were included in accrued expenses and accounts payable, respectively. Additionally, our decision to withdraw the INRatio and INRatio2 PT/INR Monitoring Systems impacted the useful life assumptions of certain tangible and intangible assets. As a result of this change in estimate, we recorded approximately $4.1 million of accelerated amortization of intangible assets and approximately $0.7 million of accelerated depreciation of tangible assets during the three months ended March 31, 2016 and nothing in the three months ended March 31, 2017.

Alere Home Monitoring, our patient self-testing business, will continue to distribute other PT/INR coagulation monitors following the withdrawal of the INRatio and INRatio2 PT/INR Monitoring Systems from the market.

 

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Financial Highlights

 

    Net revenue increased by $1.3 million, or 0%, to $588.2 million for the three months ended March 31, 2017, from $586.9 million for the three months ended March 31, 2016.

 

    Gross profit increased by $10.6 million, or 4%, to $281.7 million for the three months ended March 31, 2017, from $271.1 million for the three months ended March 31, 2016.

 

    For the three months ended March 31, 2017, we generated a net loss available to common stockholders of $69.6 million, or $0.80 per basic and diluted common share, compared to a net loss available to common stockholders of $11.4 million, or $0.13 per basic and diluted common share, for the three months ended March 31, 2016.

Results of Operations

The following discussion relates to our results of operations, as reflected in our accompanying consolidated statements of operations.

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

Net Product Sales and Services Revenue, Total and by Business Segment. Total net product sales and services revenue increased by $1.4 million, or 0%, to $585.6 million for the three months ended March 31, 2017, from $584.2 million for the three months ended March 31, 2016. Net product sales and services revenue improved primarily as a result of a $32.0 million increase in sales of flu-related products and a $12.5 million increase in HIV-related products. The revenue increases were partially offset by decreased revenues of $32.1 million from Arriva Medical, due to the impact of Arriva Medical’s CMS enrollment revocation, decreased revenues of $5.9 million from malaria-related products, and a $4.7 million unfavorable impact of foreign currency exchange rates. On a constant currency basis, net product sales and services revenue for the three months ended March 31, 2017 increased by $6.1 million, or 1%, compared to the three months ended March 31, 2016.

Net product sales and services revenue by business segment for the three months ended March 31, 2017 and 2016 are as follows (in thousands):

 

     Three Months Ended March 31,      % Change  
     2017      2016 (As
Restated)
    

Professional diagnostics

   $ 531,675      $ 531,784        (0 )% 

Consumer diagnostics

     17,240        17,442        (1 )% 

Other non-reportable

     36,659        34,985        5
  

 

 

    

 

 

    

Net product sales and services revenue

   $ 585,574      $ 584,211        0
  

 

 

    

 

 

    

Professional Diagnostics

The following table summarizes our net product sales and services revenue from our professional diagnostics business segment by groups of similar products and services for the three months ended March 31, 2017 and 2016 (in thousands):

 

     Three Months Ended March 31,      % Change  
     2017      2016 (As
Restated)
    

Cardiometabolic

   $ 125,176      $ 159,663        (22 )% 

Infectious disease

     222,934        191,956        16

Toxicology

     150,637        146,783        3

Other

     32,928        33,382        (1 )% 
  

 

 

    

 

 

    

Professional diagnostics net product sales and services revenue

   $ 531,675      $ 531,784        (0 )% 
  

 

 

    

 

 

    

Net product sales and services revenue from our professional diagnostics business segment decreased by $0.1 million, to $531.7 million for the three months ended March 31, 2017, from $531.8 million for the three months ended March 31, 2016. On a constant currency basis, net product sales and services revenue from our professional diagnostics business segment increased by $4.4 million, or 1%, comparing the three months ended March 31, 2017 to the three months ended March 31, 2016.

 

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Net product sales and services revenue from our professional diagnostics business segment in the U.S. increased by $4.2 million, or 1%, to $287.1 million for the three months ended March 31, 2017 from $282.9 million for the three months ended March 31, 2016. The increase is primarily driven by a $30.9 million, or 151%, sales increase in flu-related products, a $4.0 million, or 65%, sales increase in strep A products and a $2.0 million, or 2%, increase in sales from our toxicology segment. These increases were partially offset by a $32.1 million, or 91%, decrease in Arriva revenue, as described above.

Net product sales and services revenue from our professional diagnostics business segment in international markets decreased $4.3 million, or 2%, to $244.6 million during the three months ended March 31, 2017, from $248.9 million in the comparable period in 2016. The lower sales in international markets were driven by: a $3.1 million, or 3%, decrease in revenues attributable to sales in Europe, primarily due to decreased INRatio product sales; a $2.8 million, or 14%, decrease in revenues attributable to sales in Latin America, primarily due to dengue-related products; and a $2.2 million decrease in sales in the Asia Pacific region. These decreases were partially offset by a $3.8 million increase in revenues in Africa, primarily due to HIV-related products.

Within our professional diagnostics business segment, our cardiometabolic net product sales and services revenue decreased by $34.5 million, or 22%, to $125.2 million for the three months ended March 31, 2017, from $159.7 million in the same period in 2016, primarily as a result of a decline in sales by Arriva, as described above. Infectious disease net product sales and services revenue increased by $30.9 million, or 16%, to $222.9 million for the three months ended March 31, 2017, from $192.0 million for the three months ended March 31, 2016. The increase in infectious disease revenue was primarily due to improved sales of flu-related products and HIV-related products in the first quarter of 2017 as compared to the first quarter of 2016. Toxicology net product sales and services revenue increased by $3.8 million, or 3%, to $150.6 million for the three months ended March 31, 2017, from $146.8 million for the same period in 2016, primarily as a result of increased sales in our eScreen and government testing services. Other revenue decreased by $0.5 million, or 1%, to $32.9 million during the three months ended March 31, 2017, compared to $33.4 million during the same period in 2016, primarily due to lower sales in the Asia Pacific region.

Consumer Diagnostics

Net product sales and services revenue from our consumer diagnostics business segment were relatively flat, with a decrease of $0.2 million, or 1%, to $17.2 million for the three months ended March 31, 2017, from $17.4 million for the three months ended March 31, 2016. The decrease was the result of a decrease in sales to SPD under our long-term manufacturing service agreement. In connection with litigation brought by a competitor of SPD with respect to the advertising of one of SPD’s products in the United States, the district court issued an injunction with respect to sales and advertising of such product. In the context of this ongoing litigation, the product was withdrawn from the market in the United States (for additional information on this litigation, see Note 15(a) to the consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q). We do not know if or when this product will be re-introduced to the United States market and, at this time, we are unable to determine the impact of the district court’s decision on our future net product sales and services revenue from our consumer diagnostics segment, but such revenue may decrease in future periods.

Other non-reportable

Net product sales and services revenue from our other non-reportable segment increased by $1.7 million, or 5%, to $36.7 million for the three months ended March 31, 2017, from $35.0 million for the same period in 2016. The increase is entirely attributable to our U.S. based patient self-testing business operated by Alere Home Monitoring. Alere Home Monitoring sales increases were primarily driven by growth in the businesses’ patient base as compared to the prior-year period.

License and Royalty Revenue. License and royalty revenue represents license and royalty fees from intellectual property license agreements with third parties. License and royalty revenues decreased slightly by 0.1 million, or 3%, to $2.6 million for the three months ended March 31, 2017, from $2.7 million for the three months ended March 31, 2016.

Gross Profit and Margin Percentage. Gross profit increased by $10.6 million, or 4%, to $281.7 million for the three months ended March 31, 2017, from $271.1 million for the three months ended March 31, 2016. The increase in gross profit during the three months ended March 31, 2017, compared to the same period in 2016, was driven primarily by strong growth in our flu-related products and the increase in our HIV related products, which were partially offset by a $30.9 million reduction in gross profit from our mail-order diabetes business, Arriva Medical, as it continued to incur expenses in the three months ended March 31, 2017 to provide product and services to customers as Arriva Medical continued to pursue appeals of CMS’s decision to revoke Arriva Medical’s billing privileges. Overall gross margin for the three months ended March 31, 2017 was 48%, as compared to 46% for the same period in 2016. The higher gross margin in the first quarter of 2017 principally reflects the impact of the revenue mix as discussed above.

 

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Gross Profit from Net Product Sales and Services Revenue, Total and by Business Segment. Gross profit from net product sales and services revenue increased by $10.1 million, or 4%, to $279.8 million for the three months ended March 31, 2017, from $269.8 million for the three months ended March 31, 2016. Gross profit from net product sales and services revenue by business segment for the three months ended March 31, 2017 and 2016 is as follows (in thousands):

 

     Three Months Ended March 31,      % Change  
     2017      2016 (As
Restated)
    

Professional diagnostics

   $ 259,069      $ 250,554        3

Consumer diagnostics

     1,288        952        35

Other non-reportable

     19,487        18,281        7
  

 

 

    

 

 

    

Gross profit from net product sales and services revenue

   $ 279,844      $ 269,787        4
  

 

 

    

 

 

    

Professional Diagnostics

Gross profit from our professional diagnostics net product sales and services revenue increased by $8.5 million, or 3%, to $259.1 million for the three months ended March 31, 2017, compared to $250.6 million for the three months ended March 31, 2016. The higher gross profit for the three months ended March 31, 2017 was driven by a strong growth in our flu-related products and increase in our HIV-related products, which were partially offset by a $30.9 million reduction in gross profit from our mail-order diabetes business, Arriva Medical, as it continued to incur expenses in the three months ended March 31, 2017 to provide product and services to customers as Arriva Medical continued to pursue appeals of CMS’s decision to revoke Arriva Medical’s billing privileges.

As a percentage of our professional diagnostics net product sales and services revenue, gross margin for the three months ended March 31, 2017 and 2016 was 49% and 47%, respectively. The higher gross margin in the three months ended March 31, 2017 principally reflects the impact of the revenue mix as discussed above, as compared to the three months ended March 31, 2016.

Consumer Diagnostics

Gross profit from our consumer diagnostics net product sales and services revenue increased by $0.3 million, or 35%, to $1.3 million for the three months ended March 31, 2017, compared to $1.0 million for the three months ended March 31, 2016. The increase in gross profit was primarily driven by reduced manufacturing costs offset in part by increased general and administrative expenses related to this business segment.

As a percentage of consumer diagnostics net product sales and services revenue, gross margin for the three months ended March 31, 2017 and 2016 was 7% and 5%, respectively.

Other non-reportable

Gross profit from our other non-reportable net product sales and services revenue increased by $1.2 million, or 7%, to $19.5 million for the three months ended March 31, 2017, compared to $18.3 million for the three months ended March 31, 2016. The increase is entirely attributable to our U.S. based patient self-testing business operated by Alere Home Monitoring. Alere Home Monitoring sales increases were primarily driven by growth in the businesses’ patient base as compared to the prior year period.

As a percentage of other non-reportable net product sales and services revenue, gross margin for the three months ended March 31, 2017 and 2016 was 53% and 52%, respectively.

Research and Development Expense. Research and development expense decreased by $0.8 million, or 3%, to $26.3 million in the three months ended March 31, 2017, from $27.1 million in the three months ended March 31, 2016. Research and development expense during the three months ended March 31, 2017 and 2016 is reported net of grant funding of $0.6 million and $0.2 million, respectively, arising from the research and development funding relationship with the Bill and Melinda Gates Foundation, or the Gates Foundation, and $1.9 million and $0.7 million of funding, respectively, related to our contract with the U.S. Department of Health and Human Services’ Biomedical Advanced Research and Development Authority, or BARDA, that we entered into in September 2014. For additional information on the agreements with BARDA and the Gates Foundation, including the April 2016 agreement to mutually terminate the February 2013 grant and the February 2013 loan agreement with the Gates Foundation, see Note 20 to the consolidated financial statements in the Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Research and development expense as a percentage of net revenue was 4% and 5% for the three months ended March 31, 2017 and 2016, respectively. Among our research and development undertakings are expanding the applications for our Alere i rapid point-of-care molecular platform for the qualitative detection of infectious diseases. For example, Alere i tests for sexual health and neuroviruses are currently in development by our research and development organization.

 

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Sales and Marketing Expense. Sales and marketing expense decreased by $6.4 million, or 6%, to $94.2 million for the three months ended March 31, 2017, from $100.6 million for the three months ended March 31, 2016. The decrease was principally the result of an $8.1 million reduction in amortization expense related to customer relationship intangibles during the first quarter of 2017 as compared to the first quarter of 2016. This decrease was offset in part by a $1.7 million increase due largely to an increase in employee compensation.

Sales and marketing expense as a percentage of net revenue was 16% and 17% for the three months ended March 31, 2017 and 2016, respectively.

General and Administrative Expense. General and administrative expense increased by $51.3 million, or 45%, to $166.3 million for the three months ended March 31, 2017, from $115.0 million for the three months ended March 31, 2016. The increase was primarily attributable to a $36.8 million increase related to legal fees associated with the pending transaction with Abbott and certain on-going government investigations, and $12.0 million attributed to higher employee compensation driven by increased staffing and standard annual employee compensation changes. The remaining increase of $2.5 million was driven by additional legal fees other than those related to the pending Abbott transaction and the previously mentioned on-going government investigations.

General and administrative expense as a percentage of net revenue was 28% and 20% for the three months ended March 31, 2017 and 2016, respectively.

Impairment and Gain on Dispositions, Net. In January 2016, we completed the sale of our Alere E-Santé business, which was a component of our professional diagnostics reporting unit and business segment. We received cash consideration of approximately $8.1 million, net of a final working capital adjustment totaling approximately $0.2 million, and we are eligible to receive up to $1.5 million of contingent cash consideration. As a result of this transaction, we recorded a $3.8 million gain in the first quarter of 2016 on the disposition of the Alere E-Santé business.

Interest Expense. Interest expense includes interest charges and the amortization of deferred financing costs and original issue discounts associated with certain debt issuances. Interest expense increased by $1.1 million, or 3%, to $43.2 million for the three months ended March 31, 2017, from $42.1 million for the three months ended March 31, 2016. The increase is principally due to increased amortization of deferred financing costs in the first quarter of 2017, compared to the first quarter of 2016.

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

 

     Three Months Ended March 31,      Change  
     2017      2016     

Interest income

   $ 983      $ 1,165      $ (182

Foreign exchange losses

     (3,702      (2,202      (1,500

Other income (expense), net

     203        (312      515  
  

 

 

    

 

 

    

 

 

 

Total other (expense) income, net

   $ (2,516    $ (1,349    $ (1,167
  

 

 

    

 

 

    

 

 

 

Interest income is related principally to our cash deposits, including restricted cash.

Foreign exchange gains (losses), net during the three months ended March 31, 2017 as compared to the same period in the prior year were primarily related to the impact of foreign currency translation on intercompany balances denominated in British Pound Sterling and Korean Won.

Provision (Benefit) for Income Taxes. Our provision for income taxes increased by $18.8 million to $18.6 million for the three months ended March 31, 2017, from a benefit of $0.2 million for the three months ended March 31, 2016. The effective tax rate for the three months ended March 31, 2017 and 2016, was (37)% and 2%, respectively.

Our $0.2 million income tax benefit for the three months ended March 31, 2016 is primarily related to foreign incomes taxes based on forecasted and year-to-date pre-tax foreign income (loss) by jurisdiction offset by U.S. federal and state income tax benefits based on forecasted and year-to-date pre-tax U.S. federal and state income (loss). Our $18.6 million income tax provision for the three months ended March 31, 2017 is primarily related to foreign incomes taxes based on forecasted and year-to-date pre-tax foreign income by jurisdiction as well as U.S. federal and state income taxes in connection with the increase of deferred tax liabilities on indefinite-lived intangible assets and certain other state income taxes. As of December 31, 2016, we recorded a valuation allowance due to uncertainties related to the future benefits and realization of our deferred tax assets related to U.S. federal and state net deferred tax assets and as such no U.S. federal and state income tax benefits were recorded related to the pre-tax U.S. federal and state loss during the three months ended March 31, 2017.

Equity Earnings of Unconsolidated Entities, Net of Tax. Equity earnings of unconsolidated entities are reported net of tax and include our share of earnings in entities that we account for under the equity method of accounting. Equity earnings of unconsolidated entities, net of tax, for the three months ended March 31, 2017 primarily reflect our 50% interest in SPD in the amount of $5.0 million. Equity earnings of unconsolidated entities, net of tax, for the three months ended March 31, 2016 reflect the following: (i) our 50% interest in SPD in the amount of $4.6 million, and (ii) our 49% interest in TechLab, Inc., or TechLab, in the amount of $0.5 million.

On September 16, 2016, we completed the sale of our 49% interest in the TechLab business and, in connection with such sale, we recorded a gain in equity earnings of unconsolidated entities of $29.9 million.

 

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Liquidity and Capital Resources

Working capital was $769.9 million at March 31, 2017 compared with $783.7 million at December 31, 2016. Our cash and cash equivalents increased by $34.3 million at March 31, 2017 compared to December 31, 2016 primarily as the result of increases in operating cash flows of $61.1 million largely related to positive changes in our accounts receivable, net, accounts payable and accrued expenses and other current liabilities balances, partially offset by repayments on our long-term debt obligations and capital expenditures.

Based upon our current working capital position, current operating plans and expected business conditions, we expect to fund our short and long-term working capital needs primarily using existing cash and our operating cash flow. As of March 31, 2017, we had $2.9 billion of indebtedness outstanding. As our various debt instruments mature over the next several years, we may need or want to re-finance some or all this indebtedness with new debt, including potential borrowings under our revolving credit facility, in order to preserve our existing cash for other uses, including to continue to fund our operations. Our 7.25% senior notes mature on July 1, 2018, unless earlier redeemed, and at that time we will be required to pay the principal amount of $450.0 million, plus all accrued and unpaid interest.

During 2016, we generated net cash proceeds of $21.5 million from divestitures, net of cash divested, and used $17.4 million of our cash to reduce our outstanding indebtedness under our credit facilities. Additionally, we received cash consideration in connection with our September 2016 sale of our minority stake in TechLab, which amount is reflected in cash and cash equivalents on our balance sheet as of March 31, 2017. We did not divest any businesses in the three months ended March 31, 2017. We may divest one or more of our businesses in accordance with the covenants under the Amended Merger Agreement with Abbott and we expect that, if and when completed, we will use all or a portion of the net proceeds of such divestitures to fund our working capital, operations, research and development or to reduce our outstanding debt, among other purposes, in each case to the extent permitted under the Amended Merger Agreement and in accordance with our secured credit facility and the indentures governing our notes.

As of March 31, 2017, we had $601.5 million of cash and cash equivalents, of which $220.5 million was held by domestic subsidiaries and $381.0 million was held by foreign entities. We do not currently plan to repatriate cash held by most of our foreign entities if there are adverse tax implications, including incremental U.S. tax liabilities and potential foreign withholding tax liabilities. If circumstances were to change, however, we may be required to repatriate all or a portion of the cash held by foreign entities, which could result in the payment of significant tax liabilities.

We may also utilize amounts available under our secured credit facility, as described below, or other new sources of financing to fund a portion of our capital expenditures, contractual contingent consideration obligations, other commitments, the refinancing of existing indebtedness and future acquisitions. New sources of financing may not be available on acceptable terms, or at all, and we may be required to obtain certain consents in connection with completing such financings, which we may not be able to obtain on acceptable terms or at all.

On June 18, 2015, we entered into a new secured credit facility, which initially provided for term loan facilities totaling $1.7 billion (consisting of $650.0 million of “A” term loans and $1.05 billion of “B” term loans), all of which were drawn at closing, and, subject to our continued compliance with the secured credit facility, a $250.0 million revolving credit facility (which includes a $50.0 million sublimit for the issuance of letters of credit). As of March 31, 2017, $125.0 million was drawn and outstanding under the revolving credit facility.

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 that facility was terminated, and to pay various fees and expenses associated with the transactions contemplated by the new secured credit facility.

In November 2015, we used $115.0 million of the net cash proceeds from our sale of the BBI business (which represented all of the net proceeds from the closing of the sale prior to giving effect to the final working capital adjustment) to repay $115.0 million in aggregate principal amount of outstanding “A” term loans and “B” term loans under the secured credit facility.

We must repay the “A” term loans in nineteen consecutive quarterly installments, which repayments began on September 30, 2015 and will continue through March 31, 2020, followed by a final installment on June 18, 2020; after giving effect to the prepayment of a portion of the “A” term loans in connection with our sale of the BBI business, the principal amount of each remaining installment through March 31, 2020 is approximately $7.6 million, and the principal amount of the final installment is approximately $461.9 million. We must repay the “B” term loans in twenty-seven consecutive quarterly installments, which repayments began on September 30, 2015 and will continue through March 31, 2022, followed by a final installment on June 18, 2022; after giving effect to the prepayment of a portion of the “B” term loans in connection with our sale of the BBI business, the principal amount of each remaining installment through March 31, 2022 is approximately $2.4 million, and the principal amount of the final installment is approximately $912.5 million. We may repay any borrowings under the revolving credit facility at any time (without any premium or penalty, other than customary LIBOR breakage costs, if applicable), but in no event later than June 18, 2020.

 

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As of March 31, 2017, we had $2.9 billion in aggregate principal amount of outstanding indebtedness, including $1.6 billion in aggregate principal amount outstanding under our secured credit facility, $443.9 million in aggregate outstanding principal amount of our 7.25% senior notes due 2018, $415.8 million in aggregate outstanding principal amount of our 6.5% senior subordinated notes due 2020 and $413.3 million in aggregate outstanding principal amount of our 6.375% senior subordinated notes due 2023. The terms and conditions of our outstanding debt instruments contain covenants that expressly restrict our ability to incur additional indebtedness and conduct other financings, subject to certain exceptions. In addition, the Amended Merger Agreement with Abbott contains restrictions on our ability to incur additional indebtedness and conduct other financings, subject to certain exceptions.

Beginning in 2017, we are required to make mandatory prepayments of the term loans and, after all term loans have been repaid, any revolving loans in various amounts under the credit agreement for our secured credit facility, or the Credit Agreement, if we have Excess Cash Flow (as defined in the Credit Agreement) for the immediately preceding year. However, we did not have Excess Cash Flow for 2016 and therefore are not required to make any such payments in 2017. We may, however, be required to make such payments in future years.

On April 22, 2016, we and the requisite lenders under the Credit Agreement entered into an amendment to the Credit Agreement. Pursuant to this amendment, these lenders agreed to (i) waive certain Defaults and Events of Defaults (each as defined in the Credit Agreement) resulting from, among other things, (x) our failure to deliver to the Administrative Agents (as defined in the Credit Agreement) the financial statements and certain related deliverables for 2015 by the applicable deadline under the Credit Agreement, (y) any restatement of certain financial statements as a result of our incorrect application of revenue recognition principles for 2013, 2014 and 2015, or (z) any breach of any representation or affirmative covenant as a result of certain deliverables being incorrect when delivered, which breach is discovered as part of the audit of our financial statements for 2015, to the extent that such breach is due to our incorrect application of revenue recognition principles for 2013, 2014 and 2015, and (ii) extend the deadlines for delivery of the financial statements for 2015, the financial statements for the quarter ended March 31, 2016 and certain related deliverables. Under the terms of this amendment, we were required to deliver our unaudited financial statements for the three months ended March 31, 2016 and certain related deliverables on or before August 18, 2016. We made the required deliveries before such date. In connection with this amendment, we paid, among other fees and expenses, consent fees to the consenting lenders in an aggregate amount of approximately $4.5 million. The amendment also increased the applicable interest rate margins for all loans outstanding under our secured credit facility by 0.25% per annum for the period from July 1, 2016 to the date of delivery of such financial reports and related deliverables under our secured credit facility.

On August 18, 2016, we and the requisite lenders under the Credit Agreement entered into a second amendment to the Credit Agreement pursuant to which they agreed to (i) waive certain Defaults and Events of Defaults (each as defined in the Credit Agreement) resulting from, among other things, our failure to deliver to the Administrative Agents (as defined in the Credit Agreement) (x) the financial statements and certain related deliverables for the three months ended March 31, 2016, which we refer to as the Q1 Financial Reports, by the applicable deadline under the Credit Agreement or (y) the financial statements and certain related deliverables for the three months ended June 30, 2016, which we refer to as the Q2 Financial Reports, by the applicable deadline under the Credit Agreement, and (ii) extend the deadline for delivery of the Q1 Financial Reports to August 25, 2016 and the deadline for the delivery of the Q2 Financial Reports to September 13, 2016. We delivered the Q1 Financial Reports and the Q2 Financial Reports prior to the deadlines set forth in this amendment to the Credit Agreement. In connection with this amendment, we paid, among other fees and expenses, consent fees to the consenting lenders in an aggregate amount of approximately $2.2 million.

In addition, on April 29, 2016, we commenced consent solicitations relating to our 6.5% senior subordinated notes, 6.375% senior subordinated notes and 7.25% senior notes, which we refer to collectively as the Notes. The consent solicitations were completed on May 9, 2016. Pursuant to the consent solicitations, the requisite holders of each series of Notes agreed to extend the deadline for delivery of certain financial information and to waive, through August 31, 2016, any default or event of default under the indentures under which the Notes were issued (and its consequences) in connection with any failure to timely file with the SEC, or to timely furnish to the relevant trustees pursuant to the indentures, our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and our subsequent Quarterly Reports on Form 10-Q, or the Failures to File. In connection with the Failures to File, we paid, in May and July 2016, consent fees to the consenting holders in an aggregate amount of $19.2 million.

On April 24, 2017, we entered into a third amendment to the Credit Agreement for our secured credit facility, dated as of June 18, 2015, among the Company, the several lenders from time to time party thereto, the Administrative Agents (as defined in the Credit Agreement) and certain other agents and arrangers. Pursuant to the Third Amendment, the lenders under the Credit Agreement have agreed to (i) waive certain Defaults and Events of Defaults (each as defined in the Credit Agreement) that may have occurred, are occurring or may occur, resulting from, among other things, (x) our failure to deliver to the Administrative Agents (as defined in the Credit Agreement) the financial statements and the related deliverables for the fiscal year ended December 31, 2016 by the applicable deadline under the Credit Agreement, (y) any restatement, revision or other adjustment of certain financial statements as

 

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a result of our review described in our Current Report on Form 8-K as filed with the SEC on April 17, 2017, or the April 8-K, as a result of our incorrect recognition of revenue transactions at our South Korean and Japanese locations for certain fiscal periods set forth in the Third Amendment and (z) any breach of any representation or affirmative covenant as a result of certain deliverables being incorrect when delivered, which breach is discovered as part of the review described in the April 8-K, to the extent that such breach is due to our incorrect recognition of revenue transactions at our South Korean and Japanese locations for certain fiscal periods set forth in the Third Amendment and (ii) extend the deadlines for delivery of the financial statements for the fiscal year ended December 31, 2016, and certain related deliverables, or the Financial Reports. We incurred approximately $3.3 million in fees and expenses associated with this third amendment.

On May 1, 2017, we commenced consent solicitations relating to each series of our Notes. On May 4, 2017, we made certain modifications to the consent solicitations, which are reflected herein. Pursuant to the consent solicitations, the holders of each series of Notes agreed to extend the deadline for delivery of certain financial information and to waive through and until 5:00 p.m., New York City time, on June 15, 2017, any default or event of default that occurred, is continuing or may occur under the indentures under which the Notes were issued (and its consequences) in connection with any failure to timely file with the SEC or to timely furnish to the relevant trustees pursuant to the indentures, our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, or the Fiscal Year 2016 Failure to File. If we did not file the Annual Report on Form 10-K for 2016 and if we had failed to obtain the waivers requested pursuant to the consent solicitations, in each case on or before (i) May 16, 2017, with respect to the 7.25% Senior Notes, (ii) May 19, 2017, with respect to the 6.5% Senior Subordinated Notes, and (iii) June 2, 2017, with respect to the 6.375% Senior Subordinated Notes, an event of default would have arisen under the respective series of Notes and, among the remedies available to the noteholders, would have been the right to accelerate the payment of our obligations upon notice from the relevant trustees or holders of 25% of the applicable Notes. Subject to the terms and conditions of the consent solicitations set forth in the consent solicitation statement, dated May 1, 2017, as supplemented, we offered to pay to each holder of Notes, as of April 28, 2017, a cash payment equal to $17.50 for each $1,000 principal amount of such holder’s Notes, or the Consent Fee, in respect of which the holder validly delivered (and did not validly revoke) a consent prior to 5:00 p.m. New York City time, on May 5, 2017 (such time and date, the Expiration Date), provided that we received and accepted the requisite consents for all series of Notes. If, at any time prior to 9:30 a.m., New York City time, on May 8, 2017, we filed with the SEC the Annual Report on Form 10-K for 2016 and we terminated the consent solicitations, we would pay to each holder of each series of Notes who delivered (and did not revoke) a valid and duly executed consent prior to the Expiration Date a cash payment, in lieu of the Consent Fee, equal to $10.00 for each $1,000 principal amount of Notes for which such Holder delivered its Consent, or the Consent Termination Fee. On May 8, 2017, we successfully completed this solicitation and, in connection with the completion, we paid the Consent Fee to the consenting holders in an aggregate amount of approximately $23.0 million. We filed our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 and certain related deliverables prior to the June 15, 2017 deadline as established pursuant to this consent solicitation.

On May 30, 2017, we entered into a fourth amendment to the Credit Agreement pursuant to which the lenders under the Credit Agreement agreed to (i)