Alere Inc. Announces Second Quarter 2011 Results

Alere Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and

Reconciliation to Non-GAAP Adjusted Cash Basis Amounts

(in $000s, except per share amounts)

Three Months Ended June 30, 2011

Three Months Ended June 30, 2010

Non-GAAP

Non-GAAP

Adjusted

Adjusted

Non-GAAP

Cash

Non-GAAP

Cash

GAAP

Adjustments

Basis (a)

GAAP

Adjustments

Basis (a)

Net product sales and services revenue

$ 562,380

$                    -

$     562,380

$ 516,880

$                    -

$     516,880

License and royalty revenue

4,805

-

4,805

6,080

-

6,080

Net revenue

567,185

-

567,185

522,960

-

522,960

Cost of net revenue

274,457

(18,541)

(b) (c) (d)

255,916

250,962

(21,359)

(b) (c) (d) (e)

229,603

     Gross profit

292,728

18,541

311,269

271,998

21,359

293,357

     Gross margin

52%

55%

52%

56%

Operating expenses:

Research and development

41,348

(9,016)

(b) (c) (d)

32,332

32,760

(3,002)

(b) (c) (d)

29,758

Selling, general and administrative

235,226

(64,093)

(b) (c) (d) (f) (g)

171,133

217,180

(64,820)

(b) (c) (d) (f) (g)

152,360

  Total operating expenses

276,574

(73,109)

203,465

249,940

(67,822)

182,118

     Operating income

16,154

91,650

107,804

22,058

89,181

111,239

Interest and other income (expense), net

(68,125)

29,966

(c) (h)

(38,159)

(29,494)

265

(c) (f)

(29,229)

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

(51,971)

121,616

69,645

(7,436)

89,446

82,010

Provision (benefit) for income taxes

(42,736)

65,844

(k)

23,108

(1,243)

29,411

(k)

28,168

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

(9,235)

55,772

46,537

(6,193)

60,035

53,842

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

(207)

360

(b) (c)

153

4,217

844

(b) (c)

5,061

Income (loss) from continuing operations

(9,442)

56,132

46,690

(1,976)

60,879

58,903

Income (loss) from discontinued operations, net of tax

-

-

-

(35)

1

(34)

Net income (loss)

(9,442)

56,132

46,690

(2,011)

60,880

58,869

Less: Net income (loss) attributable to non-controlling interests, net of tax

(40)

26

(i)

(14)

343

1,324

(i) (j)

1,667

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

$   (9,402)

$            56,106

$       46,704

$   (2,354)

$            59,556

$       57,202

Preferred stock dividends

$   (5,515)

$                    -

$       (5,515)

$   (5,984)

$                    -

$       (5,984)

Preferred stock repurchase

$   10,248

$          (10,248)

(o)

$              -

$           -

$                    -

$              -

Net income (loss) available to common stockholders

$   (4,669)

$       41,189

$   (8,338)

$       51,218

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

Basic income (loss) per common share from continuing operations

$     (0.05)

$           0.48

$     (0.10)

$           0.61

Basic income (loss) per common share from discontinued operations

$           -

$              -

$           -

$              -

Basic net income (loss) per common share

$     (0.05)

$           0.48

$     (0.10)

$           0.61

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

Diluted income (loss) per common share from continuing operations

$     (0.05)

(l)

$           0.46

(m)

$     (0.10)

(l)

$           0.57

(n)

Diluted income (loss) per common share from discontinued operations

$           -

(l)

$              -

(m)

$           -

(l)

$              -

(n)

Diluted net income (loss) per common share

$     (0.05)

(l)

$           0.46

(m)

$     (0.10)

(l)

$           0.57

(n)

Weighted average common shares - basic

85,703

85,703

84,193

84,193

Weighted average common shares - diluted

85,703

(l)

90,754

(m)

84,193

(l)

101,298

(n)

(a) In calculating net income or loss on an adjusted cash basis, the Company excludes from net income or loss (i) certain non-cash charges, including amortization expense and stock-based compensation expense, (ii) non-recurring charges and income, and (iii) certain other charges and income that have a significant positive or negative impact on results yet do not occur on a consistent or regular basis in its business.  In determining whether a particular item meets one of these criteria, management considers facts and circumstances that it believes are relevant.  Management believes that excluding such charges and income from net income or loss allows investors and management to evaluate and compare the Company's operating results from continuing operations from period to period in a meaningful and consistent manner.  Due to the frequency of their occurrence in its business, the Company does not adjust net income or loss for the costs associated with litigation, including payments made or received through settlements.  It should be noted that "net income or loss on an adjusted cash basis" is not a standard financial measurement under accounting principles generally accepted in the United States of America ("GAAP") and should not be considered as an alternative to net income or loss or cash flow from operating activities, as a measure of liquidity or as an indicator of operating performance or any measure of performance derived in accordance with GAAP. In addition, all companies do not calculate non-GAAP financial measures in the same manner and, accordingly, "net income or loss on an adjusted cash basis" presented in this press release may not be comparable to similar measures used by other companies.

(b) Amortization expense of $81.2 million and $74.1 million in the second quarter of 2011 and 2010 GAAP results, respectively, including $17.3 million and $15.7 million charged to cost of sales, $7.4 million and $1.2 million charged to research and development, $56.3 million and $57.0 million charged to selling, general and administrative, with $0.2 million and $0.2 million charged through equity earnings of unconsolidated entities, net of tax during each of the respective quarters.

(c) Restructuring charges associated with the decision to close facilities of $10.5 million and $7.1 million for the second quarter of 2011 and 2010 GAAP results, respectively.  The $10.5 million charge for the second quarter of 2011 included $0.8 million charged to cost of sales, $0.4 million charged to research and development, $9.1 million charged to selling, general and administrative expense, $0.1 million charged to interest expense and $0.1 million charged through equity earnings of unconsolidated entities, net of tax. The $7.1 million charge for the second quarter of 2010 included $2.4 million charged to cost of sales, $0.3 million charged to research and development, $3.5 million charged to selling, general and administrative expense, $0.2 million charged to interest expense and $0.7 million charged through equity earnings of unconsolidated entities, net of tax.

(d) Compensation costs of $6.2 million and $8.1 million associated with stock-based compensation expense for the second quarter of 2011 and 2010 GAAP results, respectively, including $0.4 million and $0.4 million charged to cost of sales, $1.2 million and $1.5 million charged to research and development and $4.6 million and $6.2 million charged to selling, general and administrative, in the respective periods.

(e) A write-off in the amount of $2.8 million during the second quarter of 2010, relating to inventory write-ups recorded in connection with the acquisition of Standard Diagnostics, Inc. during the first quarter of 2010.  (See also footnote j below.)

(f) Acquisition-related costs in the amount of $1.4 million and $2.0 million in the second quarter of 2011 and 2010 GAAP results, respectively, recorded in connection with ASC 805, Business Combinations. The $2.0 million of acquisition-related costs recorded during the second quarter of 2010 included $1.9 million charged to selling, general and administrative and $0.1 million charged to interest expense.

(g) $7.2 million and $3.8 million of income in the second quarter of 2011 and 2010 GAAP results, respectively, recorded in connection with fair value adjustments to acquisition-related contingent consideration obligations in accordance with ASC 805, Business Combinations.

(h) Interest expense of $29.9 million recorded in connection with fees paid for certain debt modifications and the termination of our senior secured credit facility and related interest rate swap agreement.

(i) Amortization expense of $34.0 thousand ($26.0 thousand, net of tax) and $1.0 million ($0.8 million, net of tax) in the second quarter of 2011 and 2010 GAAP results, respectively.

(j) A write-off in the amount of $0.7 million ($0.5 million, net of tax) during the second quarter of 2010 relating to inventory write-ups attributable to operating results of non-controlling interests.

(k) Tax effect on adjustments as discussed above in notes (b), (c), (d), (e), (f), (g) and (h).

(l) For the three months ended June 30, 2011 and 2010, potential dilutive shares were not used in the calculation of diluted net loss per common share under GAAP because inclusion thereof would be antidilutive.

(m) Included in the weighted average diluted common shares for the calculation of net income per common share for the three months ended June 30, 2011, on an adjusted cash basis, were dilutive shares consisting of 1,385,000 common stock equivalent shares from the potential exercise of stock options and warrants. Also included were dilutive shares consisting of 112,000 potentially issuable shares of common stock associated with contingent consideration arrangements, 3,438,000 common stock equivalent shares from the potential conversion of convertible debt securities and 116,000 common stock equivalents from the potential settlement of a portion of the deferred purchase price consideration related to the ACON Second Territory Business. Potential dilutive shares consisting of 10,637,000 common stock equivalent shares from the potential conversion of Series B convertible preferred stock were not included in the calculation of net income per common share , on an adjusted cash basis, for the three months ended June 30, 2011, because inclusion thereof would be antidilutive. The diluted net income per common share calculation for the three months ended June 30, 2011, on an adjusted cash basis, included the add back of interest expense related to the convertible debt of $0.7 million and the add back of interest expense related to the ACON Second Territory Business of $24.0 thousand resulting in net income available to common stockholders of $41.9 million for the three months ended June 30, 2011.

(n) Included in the weighted average diluted common shares for the calculation of net income per common share for the three months ended June 30, 2010, on an adjusted cash basis, were dilutive shares consisting of 1,510,000 common stock equivalent shares from the potential exercise of stock options and warrants. Also included were potential dilutive shares consisting of 3,438,000 common stock equivalent shares from the potential conversion of convertible debt securities, 11,542,000 common stock equivalent shares from the potential conversion of Series B convertible preferred stock and 615,000 common stock equivalents from the potential settlement of a portion of the deferred purchase price consideration related to the ACON Second Territory Business. The diluted net income per common share calculation for the three months ended June 30, 2010, on an adjusted cash basis, included the add back of interest expense related to the convertible debt of $0.7 million, the add back of $6.0 million of preferred stock dividends related to the Series B convertible preferred stock and the add back of interest expense related to the ACON Second Territory Business of $0.1 million resulting in net income available to common stockholders of $58.0 million for the three months ended June 30, 2010.

(o) Non-cash income allocated to net income available to common stockholders as a result of repurchases of preferred shares during the second quarter of 2011.

Alere Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and

Reconciliation to Non-GAAP Adjusted Cash Basis Amounts

(in $000s, except per share amounts)

Six Months Ended June 30, 2011

Six Months Ended June 30, 2010

Non-GAAP

Non-GAAP

Adjusted

Adjusted

Non-GAAP

Cash

Non-GAAP

Cash

GAAP

Adjustments

Basis (a)

GAAP

Adjustments

Basis (a)

Net product sales and services revenue

$ 1,137,175

$                    -

$  1,137,175

$ 1,026,285

$                    -

$  1,026,285

License and royalty revenue

12,474

-

12,474

11,929

-

11,929

Net revenue

1,149,649

-

1,149,649

1,038,214

-

1,038,214

Cost of net revenue

550,714

(37,195)

(b) (c) (d)

513,519

492,259

(41,013)

(b) (c) (d) (e)

451,246

     Gross profit

598,935

37,195

636,130

545,955

41,013

586,968

     Gross margin

52%

55%

53%

57%

Operating expenses:

Research and development

77,890

(12,267)

(b) (c) (d)

65,623

63,753

(6,461)

(b) (c) (d)

57,292

Selling, general and administrative

473,986

(133,573)

(b) (c) (d) (f) (g)

340,413

431,434

(131,835)

(b) (c) (d) (f) (g)

299,599

  Total operating expenses

551,876

(145,840)

406,036

495,187

(138,296)

356,891

     Operating income

47,059

183,035

230,094

50,768

179,309

230,077

Interest and other income (expense), net

(104,094)

31,935

(c) (h) (i)

(72,159)

(59,585)

456

(c) (f)

(59,129)

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

(57,035)

214,970

157,935

(8,817)

179,765

170,948

Provision (benefit) for income taxes

(47,066)

98,440

(m)

51,374

(797)

58,718

(m)

57,921

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

(9,969)

116,530

106,561

(8,020)

121,047

113,027

Equity earnings of unconsolidated entities, net of tax

804

770

(b) (c)

1,574

8,257

1,816

(b) (c)

10,073

Income (loss) from continuing operations

(9,165)

117,300

108,135

237

122,863

123,100

Income from discontinued operations, net of tax

-

-

-

11,911

167

(j)

12,078

Net income (loss)

(9,165)

117,300

108,135

12,148

123,030

135,178

Less: Net income (loss) attributable to non-controlling interests, net of tax

22

33

(k)

55

(327)

2,763

(k) (l)

2,436

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

$      (9,187)

$          117,267

$     108,080

$      12,475

$          120,267

$     132,742

Preferred stock dividends

$    (11,324)

$                    -

$     (11,324)

$    (11,837)

$                    -

$     (11,837)

Preferred stock repurchase

$      23,936

$          (23,936)

(r)

$              -

$              -

$                    -

$              -

Net income available to common stockholders

$        3,425

$       96,756

$           638

$     120,905

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

Basic income (loss) per common share from continuing operations

$          0.04

$           1.13

$        (0.13)

$           1.30

Basic income (loss) per common share from discontinued operations

$              -

$              -

$          0.14

$           0.14

Basic net income (loss) per common share

$          0.04

$           1.13

$          0.01

$           1.44

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

Diluted income (loss) per common share from continuing operations

$          0.04

(n)

$           1.08

(p)

$        (0.13)

(o)

$           1.21

(q)

Diluted income (loss) per common share from discontinued operations

$              -

(n)

$              -

(p)

$          0.14

(o)

$           0.12

(q)

Diluted net income (loss) per common share

$          0.04

(n)

$           1.08

(p)

$          0.01

(o)

$           1.33

(q)

Weighted average common shares - basic

85,536

85,536

84,001

84,001

Weighted average common shares - diluted

87,032

(n)

101,566

(p)

84,001

(o)

101,311

(q)

(a) In calculating net income or loss on an adjusted cash basis, the Company excludes from net income or loss (i) certain non-cash charges, including amortization expense and stock-based compensation expense, (ii) non-recurring charges and income, and (iii) certain other charges and income that have a significant positive or negative impact on results yet do not occur on a consistent or regular basis in its business.  In determining whether a particular item meets one of these criteria, management considers facts and circumstances that it believes are relevant.  Management believes that excluding such charges and income from net income or loss allows investors and management to evaluate and compare the Company's operating results from continuing operations from period to period in a meaningful and consistent manner.  Due to the frequency of their occurrence in its business, the Company does not adjust net income or loss for the costs associated with litigation, including payments made or received through settlements.  It should be noted that "net income or loss on an adjusted cash basis" is not a standard financial measurement under accounting principles generally accepted in the United States of America ("GAAP") and should not be considered as an alternative to net income or loss or cash flow from operating activities, as a measure of liquidity or as an indicator of operating performance or any measure of performance derived in accordance with GAAP. In addition, all companies do not calculate non-GAAP financial measures in the same manner and, accordingly, "net income or loss on an adjusted cash basis" presented in this press release may not be comparable to similar measures used by other companies.

(b) Amortization expense of $157.5 million and $146.3 million in the first six months of 2011 and 2010 GAAP results, respectively, including $34.2 million and $30.6 million charged to cost of sales, $9.7 million and $2.4 million charged to research and development, $113.2 million and $112.9 million charged to selling, general and administrative, with $0.4 million and $0.4 million charged through equity earnings of unconsolidated entities, net of tax during each of the respective periods.

(c) Restructuring charges associated with the decision to close facilities of $16.9 million and $15.0 million in the first six months of 2011 and 2010 GAAP results, respectively.  The $16.9 million charge for the six months ended June 30, 2011 included $2.2 million charged to cost of sales, $0.4 million charged to research and development, $13.9 million charged to selling, general and administrative expense, $0.1 million charged to interest expense and $0.3 million charged through equity earnings of unconsolidated entities, net of tax. The $15.0 million charge for the six months ended June 30, 2010 included $4.0 million charged to cost of sales, $0.2 million charged to research and development, $9.0 million charged to selling, general and administrative expense, $0.4 million charged to interest expense and $1.5 million charged through equity earnings of unconsolidated entities, net of tax.

(d) Compensation costs of $12.0 million and $15.7 million associated with stock-based compensation expense for the first six months of 2011 and 2010 GAAP results, respectively, including $0.8 million and $0.8 million charged to cost of sales, $2.1 million and $3.9 million charged to research and development and $9.1 million and $11.0 million charged to selling, general and administrative, in the respective periods.

(e) A write-off in the amount of $5.6 million during the first six months of 2010, relating to inventory write-ups recorded in connection with the acquisition of Standard Diagnostics, Inc. during the first quarter of 2010.  (See also footnote l below.)

(f) Acquisition-related costs in the amount of $3.3 million and $5.9 million in the first six months of 2011 and 2010 GAAP results, respectively, recorded in connection with ASC 805, Business Combinations. The $5.9 million of acquisition-related costs recorded during the six months ended June 30, 2010 included $5.8 million charged to selling, general and administrative and $0.1 million charged to interest expense.

(g) $5.8 million and $6.9 million of income in the first six months of 2011 and 2010 GAAP results, respectively, recorded in connection with fair value adjustments to acquisition-related contingent consideration obligations in accordance with ASC 805, Business Combinations.

(h) A $1.9 million realized foreign currency loss associated with the settlement of an acquisition-related contingent consideration obligation.

(i) Interest expense of $29.9 million recorded in connection with fees paid for certain debt modifications and the termination of our senior secured credit facility and related interest rate swap agreement.

(j) Expenses of $0.3 million ($0.2 million, net of tax) incurred in connection with the sale of our vitamins and nutritional supplements business. in the first six months of  2010.

(k) Amortization expense of $43.0 thousand ($33.0 thousand, net of tax) and $1.9 million ($1.5 million, net of tax) in the first six months of 2011 and 2010 GAAP results, respectively.

(l) A write-off in the amount of $1.7 million ($1.3 million, net of tax) in the first six months of 2010 relating to inventory write-ups attributable to operating results of non-controlling interests.

(m) Tax effect on adjustments as discussed above in notes (b), (c), (d), (e), (f), (g), (h) and (i).

(n) Included in the weighted average diluted common shares for the calculation of net income per common share on a GAAP basis for the six months ended June 30, 2011, are dilutive shares consisting of 1,384,000 common stock equivalent shares from the potential exercise of stock options and warrants. Also included were dilutive shares consisting of 112,000 potentially issuable shares of common stock associated with contingent consideration arrangements. Potential dilutive shares consisting of 3,438,000 common stock equivalent shares from the potential conversion of convertible debt securities, 116,000 common stock equivalents from the potential settlement of a portion of the deferred purchase price consideration related to the ACON Second Territory Business and 10,821,000 common stock equivalent shares from the potential conversion of Series B convertible preferred stock were not included in the calculation of net income per common share on a GAAP basis for the six months ended June 30, 2011, because inclusion thereof would be antidilutive.

(o) For the six months ended June 30, 2010, potential dilutive shares were not used in the calculation of diluted net income per common share under GAAP because inclusion thereof would be antidilutive.

(p) Included in the weighted average diluted common shares for the calculation of net income per common share for the six months ended June 30, 2011, on an adjusted cash basis, were dilutive shares consisting of 1,384,000 common stock equivalent shares from the potential exercise of stock options and warrants. Also included were dilutive shares consisting of 112,000 potentially issuable shares of common stock associated with contingent consideration arrangements. Also included were dilutive shares consisting of 3,438,000 common stock equivalent shares from the potential conversion of convertible debt securities, 10,981,000 common stock equivalent shares from the potential conversion of Series B convertible preferred stock and 116,000 common stock equivalents from the potential settlement of a portion of the deferred purchase price consideration related to the ACON Second Territory Business. The diluted net income per common share calculation for the six months ended June 30, 2011, on an adjusted cash basis, included the add back of interest expense related to the convertible debt of $1.4 million, the add back of $11.3 million of preferred stock dividends related to the Series B convertible preferred stock and the add back of interest expense related to the ACON Second Territory Business of $48.0 thousand resulting in net income available to common stockholders of $109.5 million for the six months ended June 30, 2011.

(q) Included in the weighted average diluted common shares for the calculation of net income per common share for the six months ended June 30, 2010, on an adjusted cash basis, were dilutive shares consisting of 1,706,000 common stock equivalent shares from the potential exercise of stock options and warrants.  Also included were potential dilutive shares consisting of 3,438,000 common stock equivalent shares from the potential conversion of convertible debt securities, 11,487,000 common stock equivalent shares from the potential conversion of Series B convertible preferred stock and 679,000 common stock equivalents from the potential settlement of a portion of the deferred purchase price consideration related to the ACON Second Territory Business. The diluted net income per common share calculation for the six months ended June 30, 2010, on an adjusted cash basis, included the add back of interest expense related to the convertible debt of $1.4 million, the add back of $11.8 million of preferred stock dividends related to the Series B convertible preferred stock and the add back of interest expense related to the ACON Second Territory Business of $0.3 million resulting in net income available to common stockholders of $134.4 million for the six months ended June 30, 2010.

(r)  Non-cash income allocated to net income available to common stockholders as a result of repurchases of preferred shares during the first six months of 2011.

Alere Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in $000s)

June 30,

December 31,

2011

2010

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$    556,662

$      401,306

Restricted cash

2,547

2,581

Marketable securities

1,177

2,094

Accounts receivable, net

406,002

397,148

Inventories, net

268,346

257,720

Prepaid expenses and other current assets

202,588

133,408

Total current assets

1,437,322

1,194,257

PROPERTY, PLANT AND EQUIPMENT, NET

421,888

390,510

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

4,539,757

4,567,064

DEFERRED FINANCING COSTS AND OTHER ASSETS, NET

206,484

178,543

Total assets

$ 6,605,451

$   6,330,374

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Current portion of notes payable

$      39,374

$        19,017

Current portion of deferred gain on joint venture

288,784

288,378

Other current liabilities

471,262

475,463

Total current liabilities

799,420

782,858

LONG-TERM LIABILITIES:

Notes payable, net of current portion

2,733,668

2,379,968

Deferred tax liability

385,767

420,166

Other long-term liabilities

137,587

169,656

Total long-term liabilities

3,257,022

2,969,790

TOTAL EQUITY

2,549,009

2,577,726

Total liabilities and equity

$ 6,605,451

$   6,330,374