Alere Inc. Announces Third Quarter 2010 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 September 30, 2010

Three Months Ended September 30, 2009

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

$      534,556

$                        -

$            534,556

$         504,817

$                          -

$            504,817

License and royalty revenue

4,123

-

4,123

7,848

-

7,848

Net revenue

538,679

538,679

512,665

-

512,665

Cost of net revenue

253,133

(17,314)

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

235,819

232,368

(14,084)

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

218,284

     Gross profit

285,546

17,314

302,860

280,297

14,084

294,381

     Gross margin

53%

56%

55%

57%

Operating expenses:

Research and development

32,434

(2,936)

(b) (c) (d)

29,498

27,720

(2,462)

(b) (c) (d)

25,258

Selling, general and administrative

221,737

(68,180)

(b) (c) (d) (g) (h)

153,557

202,727

(67,272)

(b) (c) (d) (g)

135,455

Gain on disposition

-

-

(3,355)

3,355

(j)

-

     Operating income

31,375

88,430

119,805

53,205

80,463

133,668

Interest and other income (expense), net

(26,655)

(3,411)

(c)

(30,066)

(29,393)

(504)

(c) (k) (l) (m)

(29,897)

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

4,720

85,019

89,739

23,812

79,959

103,771

Provision (benefit) for income taxes

(167)

30,432

(o)

30,265

6,001

28,798

(o)

34,799

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

4,887

54,587

59,474

17,811

51,161

68,972

Equity earnings of unconsolidated entities, net of tax

(62)

1,896

(b) (c)

1,834

2,059

1,139

(b) (c)

3,198

Income (loss) from continuing operations

4,825

56,483

61,308

19,870

52,300

72,170

Income (loss) from discontinued operations, net of tax

2

13

(n)

15

413

33

(b)

446

Net income (loss)

4,827

56,496

61,323

20,283

52,333

72,616

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

1,494

700

(i)

2,194

141

-

141

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

$          3,333

$                55,796

$              59,129

$           20,142

$                  52,333

$              72,475

Preferred stock dividends

$        (6,147)

$              (6,147)

$           (5,843)

$               (5,843)

Net income (loss) available to common stockholders

$        (2,814)

$              52,982

$           14,299

$              66,632

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

Basic income (loss) per common share from continuing operations

$          (0.03)

$                  0.62

$               0.17

$                  0.81

Basic income (loss) per common share from discontinued operations

$                -

$                     -

$               0.01

$                  0.01

Basic net income (loss) per common share

$          (0.03)

$                  0.62

$               0.18

$                  0.82

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

Diluted income (loss) per common share from continuing operations

$          (0.03)

(p)

$                  0.59

(r)

$               0.17

(q)

$                  0.74

(s)

Diluted income (loss) per common share from discontinued operations

$                  -

(p)

$                        -

(r)

$               0.01

(q)

$                        -

(s)

Diluted net income (loss) per common share

$          (0.03)

(p)

$                  0.59

(r)

$               0.17

(q)

$                  0.74

(s)

Weighted average common shares - basic

84,796

84,796

81,625

81,625

Weighted average common shares - diluted

84,796

(p)

101,126

(r)

83,418

(q)

98,616

(s)

(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 $74.4 million and $65.4 million in the third quarter of 2010 and 2009 GAAP results, respectively, including $16.1 million and $10.3 million charged to cost of sales, $1.2 million and $0.9 million charged to research and development, $56.9 million and $53.9 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. Amortization associated with discontinued operations amounted to $0.1 million ($33.0 thousand, net of tax) during the third quarter of 2009. (See also footnote i below.)

(c) Restructuring associated with the decision to close facilities resulted in a net recovery of $1.6 million and a net charge of $6.2 million for the third quarter of 2010 and 2009 GAAP results, respectively.  The $1.6 million net recovery for the third quarter of 2010 included a net recovery of $0.7 million recorded to cost of sales, $0.2 million charged to research and development, $0.6 million charged to selling, general and administrative expense, a net recovery of $3.4 million recorded to interest and other income (expense) and $1.7 million charged through equity earnings of unconsolidated entities, net of tax. The $6.2 million charge for the third quarter of 2009 included $2.6 million charged to cost of sales, $0.1 million charged to research and development, $2.4 million charged to selling, general and administrative, $0.2 million charged to interest expense and $0.9 million charged through equity earnings of unconsolidated entities, net of tax.

(d) Compensation costs of $7.3 million and $7.8 million associated with stock-based compensation expense for the third quarter of 2010 and 2009 GAAP results, respectively, including $0.6 million and $0.6 million charged to cost of sales, $1.5 million and $1.4 million charged to research and development and $5.2 million and $5.8 million charged to selling, general and administrative, in the respective periods.

(e) A write-off in the amount of $1.3 million during the third quarter of 2010, relating to inventory write-ups recorded in connection with acquisitions.

(f) A write-off in the amount of $0.7 million relating to an inventory write-up recorded in connection with an acquisition during the third quarter of 2009.  

(g) Acquisition-related costs in the amount of $0.9 million and $5.1 million in the third quarter of 2010 and 2009 GAAP results, respectively, recorded in connection with ASC 805, Business Combinations.

(h) $4.6 million of expense recorded in connection with fair value adjustments to acquisition-related contingent consideration obligations in accordance with ASC 805, Business Combinations.

(i)  Amortization expense of $0.9 million ($0.7 million, net of tax) attributable to operating results of non-controlling interests.

(j) A $3.4 million gain associated with management's decision to dispose of our Diamics, Inc. operations.

(k) A $2.9 million net realized foreign currency gain associated with restricted cash established in connection with the acquisition of Concateno plc.

(l) A $1.9 million compensation-related charge recorded in connection with the acquisition of Concateno plc.

(m) A $0.3 million loss recorded in connection with the deferred payment of a portion of the ACON Second Territory Business purchase price consideration to be paid with our common stock.

(n)  Expenses of $21.0 thousand ($13.0 thousand, net of tax) incurred in connection with the sale of our vitamins and nutritional supplements business.

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

(p) For the three months ended September 30, 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.

(q) Included in the weighted average diluted common shares for the calculation of net income per common share on a GAAP basis for the three months ended September 30, 2009, were dilutive shares consisting of 1,793,000 common stock equivalent shares from the potential exercise of stock options and warrants. Potential dilutive shares consisting of 3,438,000 common stock equivalent shares from the potential conversion of convertible debt securities, 614,000 common stock equivalents from the potential settlement of a portion of the deferred purchase price consideration related to the ACON Second Territory Business and potential dilutive shares consisting of 11,146,000 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 three months ended September 30, 2009, because inclusion thereof would be antidilutive for continuing operations.

(r) Included in the weighted average diluted common shares for the calculation of net income per common share for the three months ended September 30, 2010, on an adjusted cash basis, were dilutive shares consisting of 1,030,000 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, 11,727,000 common stock equivalent shares from the potential conversion of Series B convertible preferred stock and 135,000 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 September 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 $6.1 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 $24.0 thousand resulting in net income available to common stockholders of $59.9 million for the three months ended September 30, 2010.

(s) Included in the weighted average diluted common shares for the calculation of net income per common share for the three months ended September 30, 2009, on an adjusted cash basis, are dilutive shares consisting of 1,793,000 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, 11,146,000 common stock equivalent shares from the potential conversion of Series B convertible preferred stock and 614,000 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 September 30, 2009, on an adjusted cash basis, includes the add back of interest expense related to the convertible debt of $0.7 million, the add back of $5.8 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 $0.1 million resulting in net income available to common stockholders of $73.3 million for the three months ended September 30, 2009.

Alere Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and

Reconciliation to Non-GAAP Adjusted Cash Basis Amounts

(in $000s, except per share amounts)

Nine Months Ended September 30, 2010

Nine Months Ended September 30, 2009

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

$   1,560,841

$                        -

$         1,560,841

$      1,355,882

$                          -

$         1,355,882

License and royalty revenue

16,052

-

16,052

20,588

-

20,588

Net revenue

1,576,893

-

1,576,893

1,376,470

-

1,376,470

Cost of net revenue

745,392

(58,327)

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

687,065

623,827

(38,729)

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

585,098

     Gross profit

831,501

58,327

889,828

752,643

38,729

791,372

     Gross margin

53%

56%

55%

57%

Operating expenses:

Research and development

96,187

(9,397)

(b) (c) (d)

86,790

80,811

(7,793)

(b) (c) (d)

73,018

Selling, general and administrative

653,171

(200,015)

(b) (c) (d) (g) (h)

453,156

564,257

(182,455)

(b) (c) (d) (g)

381,802

Gain on disposition

-

-

-

(3,355)

3,355

(k)

-

     Operating income

82,143

267,739

349,882

110,930

225,622

336,552

Interest and other income (expense), net

(86,240)

(2,955)

(c) (g)

(89,195)

(71,074)

(231)

(c) (l) (m) (n)

(71,305)

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

(4,097)

264,784

260,687

39,856

225,391

265,247

Provision (benefit) for income taxes

(964)

89,150

(o)

88,186

12,901

79,129

(o)

92,030

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

(3,133)

175,634

172,501

26,955

146,262

173,217

Equity earnings of unconsolidated entities, net of tax

8,195

3,712

(b) (c)

11,907

5,539

4,597

(b) (c)

10,136

Income (loss) from continuing operations

5,062

179,346

184,408

32,494

150,859

183,353

Income (loss) from discontinued operations, net of tax

11,913

180

(i)

12,093

(1,100)

99

(b)

(1,001)

Net income (loss)

16,975

179,526

196,501

31,394

150,958

182,352

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

1,167

3,463

(j)

4,630

465

-

465

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

$        15,808

$              176,063

$            191,871

$           30,929

$                150,958

$            181,887

Preferred stock dividends

$      (18,001)

$            (18,001)

$         (17,056)

$             (17,056)

Net income (loss) available to common stockholders

$        (2,193)

$            173,870

$           13,873

$            164,831

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

Basic income (loss) per common share from continuing operations

$          (0.17)

$                  1.92

$               0.19

$                  2.08

Basic income (loss) per common share from discontinued operations

$            0.14

$                  0.14

$             (0.01)

$                 (0.01)

Basic net income (loss) per common share

$          (0.03)

$                  2.06

$               0.17

$                  2.07

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

Diluted income (loss) per common share from continuing operations

$          (0.17)

(p)

$                  1.80

(r)

$               0.18

(q)

$                  1.93

(s)

Diluted income (loss) per common share from discontinued operations

$            0.14

(p)

$                  0.12

(r)

$             (0.01)

(q)

$                 (0.01)

(s)

Diluted net income (loss) per common share

$          (0.03)

(p)

$                  1.92

(r)

$               0.17

(q)

$                  1.92

(s)

Weighted average common shares - basic

84,269

84,269

79,682

79,682

Weighted average common shares - diluted

84,269

(p)

101,124

(r)

81,110

(q)

95,864

(s)

(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 $220.7 million and $185.3 million in the first nine months of 2010 and 2009 GAAP results, respectively, including $46.7 million and $30.5 million charged to cost of sales, $3.5 million and $3.2 million charged to research and development, $169.8 million and $150.7 million charged to selling, general and administrative, with $0.7 million and $0.7 million charged through equity earnings of unconsolidated entities, net of tax during each of the respective periods. Amortization associated with discontinued operations amounted to $0.2 million  ($0.1 million, net of tax) during the first nine months of 2009. (See also footnote j below.)

(c) Restructuring charges associated with the decision to close facilities of $13.5 million and $16.5 million in the first nine months of 2010 and 2009 GAAP results, respectively.  The $13.5 million charge for the nine months ended September 30, 2010 included $3.3 million charged to cost of sales, $0.5 million charged to research and development, $9.6 million charged to selling, general and administrative expense, a net recovery of $3.1 million recorded to interest and other income (expense) and $3.2 million charged through equity earnings of unconsolidated entities, net of tax. The $16.5 million charge for the nine months ended September 30, 2009 included $6.1 million charged to cost of sales, $0.9 million charged to research and development, $5.1 million charged to selling, general and administrative, $0.5 million charged to interest expense and $3.9 million charged through equity earnings of unconsolidated entities, net of tax.

(d) Compensation costs of $22.9 million and $20.3 million associated with stock-based compensation expense for the first nine months of 2010 and 2009 GAAP results, respectively, including $1.4 million and $1.5 million charged to cost of sales, $5.4 million and $3.7 million charged to research and development and $16.1 million and $15.1 million charged to selling, general and administrative, in the respective periods.

(e) A write-off in the amount of $7.0 million during the first nine months of 2010, relating to inventory write-ups recorded in connection with acquisitions.  (See also footnote j below.)

(f) A write-off in the amount of $0.7 million during the first nine months of 2009, relating to an inventory write-up recorded in connection with an acquisition during the third quarter of 2009.

(g) Acquisition-related costs in the amount of $6.9 million and $11.5 million in the first nine months of 2010 and 2009 GAAP results, respectively, recorded in connection with ASC 805, Business Combinations. The $6.9 million of acquisition-related costs recorded during the nine months ended September 30, 2010 included $6.8 million charged to selling, general and administrative and $0.1 million charged to interest expense.

(h) $2.3 million of income recorded in connection with fair value adjustments to acquisition-related contingent consideration obligations in accordance with ASC 805, Business Combinations.

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

(j) Amortization expense of $2.9 million ($2.2 million, net of tax) and a write-off in the amount of $1.7 million ($1.3 million, net of tax) relating to inventory write-ups attributable to operating results of non-controlling interests.

(k) A $3.4 million gain associated with management's decision to dispose of our Diamics, Inc. operations.

(l) A $2.9 million net realized foreign currency gain associated with restricted cash established in connection with the acquisition of Concateno plc.

(m) A $1.9 million compensation-related charge recorded in connection with the acquisition of Concateno plc.

(n) A $0.3 million loss recorded in connection with the deferred payment of a portion of the ACON Second Territory Business purchase price consideration to be paid with our common stock.

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

(p) For the nine months ended September 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.

(q) Included in the weighted average diluted common shares for the calculation of net income per common share on a GAAP basis for the nine months ended September 30, 2009, were dilutive shares consisting of 1,428,000 common stock equivalent shares from the potential exercise of stock options and warrants. Potential dilutive shares consisting of 3,422,000 common stock equivalent shares from the potential conversion of convertible debt securities, 346,000 common stock equivalents from the potential settlement of a portion of the deferred purchase price consideration related to the ACON Second Territory Business and potential dilutive shares consisting of 10,985,000 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 nine months ended September 30, 2009, because inclusion thereof would be antidilutive for continuing operations.

(r) Included in the weighted average diluted common shares for the calculation of net income per common share for the nine months ended September 30, 2010, on an adjusted cash basis, were dilutive shares consisting of 1,453,000 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, 11,573,000 common stock equivalent shares from the potential conversion of Series B convertible preferred stock and 391,000 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 nine months ended September 30, 2010, on an adjusted cash basis, included the add back of interest expense related to the convertible debt of $2.1 million, the add back of $18.0 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 $0.2 million resulting in net income available to common stockholders of $194.2 million for the nine months ended September 30, 2010.

(s) Included in the weighted average diluted common shares for the calculation of net income per common share for the nine months ended September 30, 2009, on an adjusted cash basis, were dilutive shares consisting of 1,428,000 common stock equivalent shares from the potential exercise of stock options and warrants. Also included were potential dilutive shares consisting of 3,422,000 common stock equivalent shares from the potential conversion of convertible debt securities, 10,985,000 common stock equivalent shares from the potential conversion of Series B convertible preferred stock and 346,000 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 nine months ended September 30, 2009, on an adjusted cash basis, included the add back of interest expense related to the convertible debt of $2.1 million, the add back of $17.1 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 $0.2 million resulting in net income available to common stockholders of $184.2 million for the nine months ended September 30, 2009.

Alere Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in $000s)

September 30,

December 31,

2010

2009

ASSETS

CURRENT ASSETS:

Cash and cash equivalents

$              487,581

$               492,773

Restricted cash

2,699

2,424

Marketable securities

5,684

947

Accounts receivable, net

384,828

354,453

Inventories, net

262,466

221,539

Prepaid expenses and other current assets

107,276

140,674

Assets held for sale

-

54,148

Total current assets

1,250,534

1,266,958

PROPERTY, PLANT AND EQUIPMENT, NET

369,795

324,388

GOODWILL AND OTHER INTANGIBLE ASSETS, NET

5,502,459

5,193,429

DEFERRED FINANCING COSTS AND OTHER ASSETS, NET

180,945

159,217

Total assets

$           7,303,733

$            6,943,992

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:

Current portion of notes payable

$                16,863

$                 19,869

Liabilities related to assets held for sale

-

11,558

Current portion of deferred gain on joint venture

288,565

-

Other current liabilities

423,356

406,587

Total current liabilities

728,784

438,014

LONG-TERM LIABILITIES:

Notes payable, net of current portion

2,375,102

2,129,455

Deferred tax liability

427,485

442,049

Other long-term liabilities

125,973

405,585

Total long-term liabilities

2,928,560

2,977,089

Redeemable non-controlling interest

50,371

-

TOTAL EQUITY

3,596,018

3,528,889

Total liabilities and equity

$           7,303,733

$            6,943,992