e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-25317
LIFE TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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33-0373077
(I.R.S. Employer
Identification No.) |
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5791 Van Allen Way, Carlsbad, CA
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92008 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (760) 603-7200
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 þ No o
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
o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
þ |
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Accelerated filer
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o or No þ
As of August 3, 2009, 176,339,485 shares of the Registrants common stock were outstanding.
PART I. FINANCIAL INFORMATION
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ITEM 1. |
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Financial Statements |
LIFE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share data)
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June 30, |
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December 31, |
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2009 |
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2008 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
483,606 |
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$ |
335,930 |
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Short-term investments |
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8,186 |
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Restricted cash and investments |
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90,847 |
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112,387 |
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Trade accounts receivable, net of allowance for doubtful accounts of $10,801 and $14,649,
respectively |
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636,837 |
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580,907 |
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Inventories, net |
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364,568 |
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420,029 |
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Deferred income tax assets |
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22,038 |
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25,563 |
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Prepaid expenses and other current assets |
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141,044 |
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137,355 |
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Total current assets |
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1,747,126 |
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1,612,171 |
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Long-term investments (includes $35,375 and $35,600 measured at fair value, respectively) |
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377,852 |
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490,853 |
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Property and equipment, net |
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768,635 |
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748,056 |
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Goodwill |
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3,846,217 |
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3,574,779 |
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Intangible assets, net |
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2,184,652 |
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2,291,767 |
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Deferred income tax assets |
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11,265 |
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Other assets |
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173,574 |
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181,133 |
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Total assets |
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$ |
9,109,321 |
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$ |
8,898,759 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
115,000 |
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$ |
80,000 |
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Accounts payable |
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196,521 |
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204,279 |
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Restructuring accrual |
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40,961 |
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69,099 |
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Deferred compensation and related benefits |
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220,827 |
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231,851 |
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Deferred revenues and reserves |
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114,978 |
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81,166 |
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Accrued expenses and other current liabilities |
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187,395 |
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235,418 |
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Accrued income taxes |
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142,890 |
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105,429 |
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Total current liabilities |
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1,018,572 |
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1,007,242 |
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Long-term debt |
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3,342,261 |
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3,396,420 |
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Pension liabilities |
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204,986 |
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201,833 |
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Deferred income tax liabilities |
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678,590 |
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674,215 |
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Income taxes payable |
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88,217 |
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65,128 |
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Other long-term obligations, deferred credits and reserves |
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98,827 |
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97,383 |
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Total liabilities |
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5,431,453 |
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5,442,221 |
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Commitments and contingencies (Note 6) |
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Stockholders equity: |
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Preferred stock; $0.01 par value, 6,405,884 shares authorized; no shares issued or outstanding |
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Common stock; $0.01 par value, 400,000,000 shares authorized; 191,692,685 and 189,629,084
shares issued, respectively |
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1,917 |
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1,896 |
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Additional paid-in-capital |
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4,591,702 |
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4,508,259 |
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Accumulated other comprehensive loss |
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(13,871 |
) |
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(98,807 |
) |
Retained earnings |
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64,156 |
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9,610 |
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Less cost of treasury stock: 16,209,921 and 16,158,839 respectively |
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(966,036 |
) |
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(964,420 |
) |
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Total stockholders equity |
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3,677,868 |
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3,456,538 |
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Total liabilities and stockholders equity |
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$ |
9,109,321 |
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$ |
8,898,759 |
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See accompanying notes to unaudited consolidated financial statements.
3
LIFE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
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For the three months |
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For the six months |
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ended June 30, |
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ended June 30, |
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2009 |
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2008 |
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2009 |
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2008 |
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(Unaudited) |
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Revenues |
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$ |
832,763 |
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$ |
367,791 |
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$ |
1,608,500 |
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$ |
718,009 |
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Cost of revenues |
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280,254 |
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125,268 |
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600,413 |
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239,823 |
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Purchased intangibles amortization |
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70,881 |
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17,416 |
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141,772 |
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34,319 |
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Gross profit |
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481,628 |
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225,107 |
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866,315 |
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443,867 |
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Operating expenses: |
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Selling, general and administrative |
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253,014 |
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115,526 |
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494,109 |
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229,259 |
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Research and development |
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81,798 |
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33,173 |
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162,119 |
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63,806 |
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Business integration costs |
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28,891 |
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1,413 |
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56,289 |
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1,914 |
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Total operating expenses |
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363,703 |
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150,112 |
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712,517 |
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294,979 |
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Operating income |
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117,925 |
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74,995 |
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153,798 |
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148,888 |
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Other income (expense): |
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Interest income |
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666 |
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5,348 |
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2,082 |
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14,272 |
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Interest expense |
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(49,700 |
) |
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(17,317 |
) |
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(97,837 |
) |
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(34,442 |
) |
Other income (expense) |
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(643 |
) |
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(357 |
) |
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(437 |
) |
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1,437 |
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Total other expense, net |
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(49,677 |
) |
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(12,326 |
) |
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(96,192 |
) |
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(18,733 |
) |
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Income from continuing operations, before provision for income taxes |
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68,248 |
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62,669 |
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57,606 |
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130,155 |
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Income tax provision |
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(29,305 |
) |
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(15,795 |
) |
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(3,060 |
) |
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(31,162 |
) |
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Net income from continuing operations |
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38,943 |
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46,874 |
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54,546 |
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|
98,993 |
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Net income from discontinued operations, net of tax |
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1,358 |
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Net income |
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$ |
38,943 |
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$ |
46,874 |
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$ |
54,546 |
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$ |
100,351 |
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Basic earnings per common share: |
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Net income from continuing operations |
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$ |
0.22 |
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$ |
0.51 |
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$ |
0.31 |
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$ |
1.07 |
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Net income from discontinued operations |
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0.01 |
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Net income |
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$ |
0.22 |
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$ |
0.51 |
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$ |
0.31 |
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$ |
1.08 |
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Weighted average shares outstanding |
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|
174,722 |
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|
91,907 |
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|
174,218 |
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|
92,387 |
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Diluted earnings per common share: |
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Net income from continuing operations |
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$ |
0.22 |
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|
$ |
0.48 |
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$ |
0.31 |
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$ |
1.02 |
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Net income from discontinued operations |
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|
|
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|
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|
0.01 |
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Net income |
|
$ |
0.22 |
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|
$ |
0.48 |
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$ |
0.31 |
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$ |
1.03 |
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Weighted average shares outstanding |
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|
178,951 |
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|
97,129 |
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|
177,276 |
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|
97,497 |
|
See accompanying notes to unaudited consolidated financial statements.
4
LIFE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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For the six months |
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ended June 30, |
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2009 |
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2008 |
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(Unaudited) |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
54,546 |
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$ |
100,351 |
|
Adjustments to reconcile net income to net cash provided
by operating activities, net of effects of businesses
acquired and divested: |
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Depreciation |
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54,963 |
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|
19,559 |
|
Amortization of intangible assets |
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|
147,196 |
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|
34,319 |
|
Amortization of deferred debt issue costs |
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9,954 |
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|
1,650 |
|
Amortization of purchased inventory adjustments |
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62,137 |
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Amortization of purchased deferred revenue adjustments |
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|
23,209 |
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Share-based compensation |
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27,647 |
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|
21,735 |
|
Incremental tax benefits from stock options exercised |
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|
(3,189 |
) |
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|
(15,838 |
) |
Deferred income taxes |
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|
(12,167 |
) |
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|
4,730 |
|
Loss on disposal of assets |
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|
3,521 |
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|
707 |
|
Debt discount amortization |
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|
21,084 |
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|
19,754 |
|
Other non-cash adjustments |
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|
64 |
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(764 |
) |
Changes in operating assets and liabilities: |
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Trade accounts receivable |
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|
(56,520 |
) |
|
|
(5,595 |
) |
Inventories |
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|
(1,585 |
) |
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|
(21,499 |
) |
Prepaid expenses and other current assets |
|
|
12,914 |
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|
2,556 |
|
Other assets |
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(5,266 |
) |
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|
(426 |
) |
Accounts payable |
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|
(17,768 |
) |
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|
(959 |
) |
Accrued expenses and other liabilities |
|
|
(16,082 |
) |
|
|
(3,632 |
) |
Income taxes |
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|
(53,572 |
) |
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|
(7,219 |
) |
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|
Net cash provided by operating activities |
|
|
251,086 |
|
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|
149,429 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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|
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|
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Maturities of available-for-sale securities |
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|
24,930 |
|
Purchases of investments |
|
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(8,919 |
) |
|
|
(3,189 |
) |
Net cash paid for business combinations |
|
|
(45,328 |
) |
|
|
(58,760 |
) |
Net cash paid for asset purchases |
|
|
(24,540 |
) |
|
|
|
|
Purchases of property and equipment |
|
|
(67,908 |
) |
|
|
(28,264 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(146,695 |
) |
|
|
(65,283 |
) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
Principal payments on long-term obligations |
|
|
(40,000 |
) |
|
|
(138 |
) |
Purchase of treasury stock |
|
|
(1,616 |
) |
|
|
(100,000 |
) |
Incremental tax benefits from stock options exercised |
|
|
3,189 |
|
|
|
15,838 |
|
Proceeds from issuance of common stock |
|
|
48,271 |
|
|
|
33,423 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
9,844 |
|
|
|
(50,877 |
) |
Effect of exchange rate changes on cash |
|
|
33,441 |
|
|
|
3,765 |
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
147,676 |
|
|
|
37,034 |
|
Cash and cash equivalents, beginning of period |
|
|
335,930 |
|
|
|
606,145 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
483,606 |
|
|
$ |
643,179 |
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
5
LIFE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
Financial Statement Preparation
The unaudited consolidated financial statements have been prepared by Life Technologies
Corporation according to the rules and regulations of the Securities and Exchange Commission (SEC)
and, therefore, certain information and disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States have been
omitted.
In the opinion of management, the accompanying unaudited consolidated financial statements for
the periods presented reflect all adjustments, which are normal and recurring, necessary to fairly
state the financial position, results of operations and cash flows. These unaudited consolidated
financial statements should be read in conjunction with the audited financial statements included
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the SEC on
March 2, 2009.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Life Technologies Corporation
and its majority owned or controlled subsidiaries collectively referred to as Life Technologies
(the Company). All significant intercompany accounts and transactions have been eliminated in
consolidation. For purposes of these Notes to Consolidated Financial Statements, gross profit is
defined as revenues less cost of revenues including amortization of purchased intangibles and gross
margin is defined as gross profit divided by revenues. Operating income is defined as gross profit
less operating expenses, and operating margin is defined as operating income divided by revenues.
Reclassification
The Company has reclassified the historically presented sales and marketing and general and
administrative expense classifications on the Statement of Operations as one combined
classification of selling, general and administrative costs as this reflects the underlying
nature of the incurred costs.
In connection with the acquisition of Applied Biosystems, Inc. (AB) and resulting
reorganization, the Company has determined in accordance with SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information, to operate as one operating segment. The Company
believes our chief operating decision maker (CODM) makes decisions based on the Company as a whole.
In addition, the Company shares the common basis of organization, types of products and services
which derive revenues and consistent product margins, and the economic environments. Accordingly,
we believe it is appropriate to operate as one reporting segment. The Company will disclose the
revenues for each of its internal divisions to allow the reader of the financial statements the
ability to gain transparency into the operations of the Company in Item 2 Managements Discussion
and Analysis of Financial Condition and Results of Operations. We have restated historical
divisional revenue information to conform to the current year presentation.
Long-Lived Assets
The Company periodically re-evaluates the original assumptions and rationale utilized in the
establishment of the carrying value and estimated lives of its long-lived assets. The criteria used
for these evaluations include managements estimate of the assets continuing ability to generate
income from operations and positive cash flow in future periods as well as the strategic
significance of any intangible asset to the Companys business objectives. If assets are considered
to be impaired, the impairment recognized is the amount by which the carrying value of the assets
exceeds the fair value of the assets, which is determined by applicable market prices, when
available. The Company recognized no significant impairment during the period.
6
Computation of Earnings Per Share
On April 30, 2008, the Company announced a two-for-one stock split in the form of a 100% stock
dividend with a record date of May 16, 2008, and a distribution date of May 27, 2008. Share and per
share amounts have been restated to reflect the stock splits for all periods presented.
Basic earnings per share are computed by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted earnings per share reflect the potential
dilution that could occur from the following items:
|
|
|
Convertible subordinated notes where the effect of
those securities is dilutive; |
|
|
|
|
Dilutive stock options; |
|
|
|
|
Dilutive restricted stock; and |
|
|
|
|
Employee Stock Purchase Plan (ESPP) |
Computations for basic and diluted earnings per share were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
Shares |
|
|
Earnings |
|
(in thousands, except per share data) (unaudited) |
|
(Numerator) |
|
|
(Denominator) |
|
|
Per Share |
|
Three Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
$ |
38,943 |
|
|
|
|
|
|
|
|
|
Net income from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic earnings |
|
$ |
38,943 |
|
|
|
174,722 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options |
|
|
|
|
|
|
2,979 |
|
|
|
|
|
Dilutive restricted stock |
|
|
|
|
|
|
320 |
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
|
|
|
|
62 |
|
|
|
|
|
2% Convertible Senior Notes due 2023 |
|
|
99 |
|
|
|
868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations plus assumed conversions |
|
|
39,042 |
|
|
|
|
|
|
|
|
|
Net income from discontinued operations, net of tax, plus assumed conversions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted earnings |
|
$ |
39,042 |
|
|
|
178,951 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities not included above since they are antidilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive stock options |
|
|
|
|
|
|
9,580 |
|
|
|
|
|
3 1/4% Convertible Senior Notes due 2025 |
|
|
|
|
|
|
7,124 |
|
|
|
|
|
1 1/2 % Convertible Senior Notes due 2024 |
|
|
|
|
|
|
8,821 |
|
|
|
|
|
Three Months Ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
$ |
46,874 |
|
|
|
|
|
|
|
|
|
Net income from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic earnings |
|
$ |
46,874 |
|
|
|
91,907 |
|
|
$ |
0.51 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options |
|
|
|
|
|
|
2,299 |
|
|
|
|
|
Dilutive restricted stock |
|
|
|
|
|
|
366 |
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
|
|
|
|
36 |
|
|
|
|
|
2% Convertible Senior Notes due 2023 |
|
|
24 |
|
|
|
2,445 |
|
|
|
|
|
1 1/2% Convertible Senior Notes due 2024 |
|
|
10 |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations plus assumed conversions |
|
$ |
46,908 |
|
|
|
|
|
|
|
|
|
Net income from discontinued operations, net of tax, plus assumed conversions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted earnings |
|
$ |
46,908 |
|
|
|
97,129 |
|
|
$ |
0.48 |
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities not included above since they are antidilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive stock options |
|
|
|
|
|
|
1,208 |
|
|
|
|
|
3 1/4% Convertible Senior Notes due 2025 |
|
|
|
|
|
|
7,124 |
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
Shares |
|
|
Earnings |
|
(in thousands, except per share data) (unaudited) |
|
(Numerator) |
|
|
(Denominator) |
|
|
Per Share |
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
$ |
54,546 |
|
|
|
|
|
|
|
|
|
Net income from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic earnings |
|
$ |
54,546 |
|
|
|
174,218 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options |
|
|
|
|
|
|
2,134 |
|
|
|
|
|
Dilutive restricted stock |
|
|
|
|
|
|
320 |
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
|
|
|
|
59 |
|
|
|
|
|
2% Convertible Senior Notes due 2023 |
|
|
126 |
|
|
|
545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations plus assumed conversions |
|
|
54,672 |
|
|
|
|
|
|
|
|
|
Net income from discontinued operations, net of tax, plus assumed conversions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted earnings |
|
$ |
54,672 |
|
|
|
177,276 |
|
|
$ |
0.31 |
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities not included above since they are antidilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive stock options |
|
|
|
|
|
|
12,432 |
|
|
|
|
|
3 1/4% Convertible Senior Notes due 2025 |
|
|
|
|
|
|
7,124 |
|
|
|
|
|
1 1/2 % Convertible Senior Notes due 2024 |
|
|
|
|
|
|
8,821 |
|
|
|
|
|
Six Months Ended June 30, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations |
|
$ |
98,993 |
|
|
|
|
|
|
|
|
|
Net income from discontinued operations, net of tax |
|
|
1,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total basic earnings |
|
$ |
100,351 |
|
|
|
92,387 |
|
|
$ |
1.08 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive stock options |
|
|
|
|
|
|
2,214 |
|
|
|
|
|
Dilutive restricted stock |
|
|
|
|
|
|
373 |
|
|
|
|
|
Employee Stock Purchase Plan |
|
|
|
|
|
|
35 |
|
|
|
|
|
2% Convertible Senior Notes due 2023 |
|
|
49 |
|
|
|
2,412 |
|
|
|
|
|
1 1/2% Convertible Senior Notes due 2024 |
|
|
19 |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations plus assumed conversions |
|
$ |
99,061 |
|
|
|
|
|
|
|
|
|
Net income from discontinued operations, net of tax, plus assumed conversions |
|
|
1,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total diluted earnings |
|
$ |
100,419 |
|
|
|
97,497 |
|
|
$ |
1.03 |
|
|
|
|
|
|
|
|
|
|
|
Potentially dilutive securities not included above since they are antidilutive: |
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive stock options |
|
|
|
|
|
|
2,262 |
|
|
|
|
|
3 1/4% Convertible Senior Notes due 2025 |
|
|
|
|
|
|
7,124 |
|
|
|
|
|
8
Share-Based Compensation
The Company has various stock plans in which share-based compensation has been made or will be
made in future periods. Under these plans, the Company has the ability to grant stock options,
restricted stock units and restricted stock awards. Stock option awards are granted to eligible
employees and directors at an exercise price equal to no less than the fair market value of such
stock on the date of grant, generally vest over a period of time ranging up to five years, are
exercisable in whole or in installments and expire ten years from the date of grant. Restricted
stock awards and restricted stock units are granted to eligible employees and directors and
represent rights to receive shares of common stock at a future date.
In addition, the Company has a qualified employee stock purchase plan (purchase rights)
whereby eligible employees of Life Technologies (previously known as Invitrogen Corporation) may
elect to withhold up to 15% of their compensation to purchase shares of the Companys stock on a
quarterly basis at a discounted price equal to 85% of the lower of the employees offering price or
the closing price of the stock on the date of purchase. The Company also has a qualified employee
stock purchase plan (purchase rights) whereby eligible legacy Applied Biosystems employees may
elect to withhold up to 10% of their compensation to purchase shares of the Companys stock on a
quarterly basis at a discounted price equal to 85% of the lower of the employees offering price or
the closing price of the stock on the date of purchase.
The Company used the Black-Scholes option-pricing model (Black-Scholes model) to value
share-based employee stock option and purchase right awards. The determination of fair value of
stock-based payment awards using an option-pricing model requires the use of certain estimates and
assumptions that affect the reported amount of share-based compensation cost recognized in the
Consolidated Statements of Operations. Among these include the expected term of options, estimated
forfeitures, expected volatility of the Companys stock price, expected dividends and the risk-free
interest rate.
The expected term of share-based awards represents the weighted-average period the awards are
expected to remain outstanding and is an input in the Black-Scholes model. In determining the
expected term of options, the Company considered various factors including the vesting period of
options granted, employees historical exercise and post-vesting employment termination behavior,
expected volatility of the Companys stock and aggregation by homogeneous employee groups. The
Company used a combination of the historical volatility of its stock price and the implied
volatility of market-traded options of the Companys stock with terms of up to approximately two
years to estimate the expected volatility assumption input to the Black-Scholes model in accordance
with SFAS 123R and the SECs Staff Accounting Bulletin No. 107 (SAB 107). The Companys decision to
use a combination of historical and implied volatility was based upon the availability of actively
traded options of its stock and its assessment that such a combination was more representative of
future expected stock price trends. The risk-free interest rate is based upon U.S. Treasury
securities with remaining terms similar to the expected term of the share-based awards. The
expected dividend yield assumption is based on the Companys expectation of future dividend
payouts. The Company has never declared or paid any cash dividends on its common stock and
currently does not anticipate paying such cash dividends, although Applied Biosystems historically
declared and paid dividends prior to the merger. The Company currently anticipates that it will
retain all of its future earnings for use in the development and expansion of its business, for
debt repayment and for general corporate purposes.
Stock Options and Purchase Rights
The underlying assumptions used to value employee stock options and purchase rights granted
during the six months ended June 30, 2009 and 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
June 30, |
(unaudited) |
|
2009 |
|
2008 |
Stock Options |
|
|
|
|
|
|
|
|
Weighted average risk free interest rate |
|
|
1.68 |
% |
|
|
3.09 |
% |
Expected term of share-based awards |
|
4.5 |
yrs |
|
5.0 |
yrs |
Expected stock price volatility |
|
|
46 |
% |
|
|
31 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Weighted average fair value of share-based awards granted |
|
$ |
11.42 |
|
|
$ |
15.09 |
|
Purchase Rights |
|
|
|
|
|
|
|
|
Weighted average risk free interest rate |
|
|
1.11 |
% |
|
|
4.77 |
% |
Expected term of share-based awards |
|
0.2 |
yrs |
|
1.6 |
yrs |
Expected stock price volatility |
|
|
62 |
% |
|
|
32 |
% |
Expected dividend yield |
|
|
0 |
% |
|
|
0 |
% |
Weighted average fair value of share-based awards granted |
|
$ |
7.23 |
|
|
$ |
9.99 |
|
9
The Company is required to estimate forfeitures at the time of grant and revise those
estimates in subsequent periods on a cumulative basis in the period the estimated forfeiture rate
changes. The Company considered its historical experience of pre-vesting option forfeitures as the
basis to arrive at its estimated annual pre-vesting option forfeiture rate of 5.8% and 9.0% per
year for the six months ended June 30, 2009 and 2008, respectively. All option awards, including
those with graded vesting, were valued as a single award with a single average expected term and
are amortized on a straight-line basis over the requisite service period of the awards, which is
generally the vesting period. At June 30, 2009, there was $57.5 million remaining in unrecognized
compensation cost related to employee stock options, which is expected to be recognized over a
weighted average period of 2.1 years. No compensation cost was capitalized in inventory during the
six months ended June 30, 2009 as the amounts involved were not material.
Total share-based compensation expense for employee stock options and purchase rights for the
three and six months ended June 30, 2009 and 2008 were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(in thousands, except per share amounts) (unaudited) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Cost of revenues |
|
$ |
686 |
|
|
$ |
819 |
|
|
$ |
1,598 |
|
|
$ |
2,221 |
|
Selling, general and administrative |
|
|
6,392 |
|
|
|
5,908 |
|
|
|
14,070 |
|
|
|
12,317 |
|
Research and development |
|
|
1,139 |
|
|
|
868 |
|
|
|
2,443 |
|
|
|
1,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense before taxes |
|
|
8,217 |
|
|
|
7,595 |
|
|
|
18,111 |
|
|
|
16,422 |
|
Related income tax benefits |
|
|
3,362 |
|
|
|
2,276 |
|
|
|
5,956 |
|
|
|
4,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense, net of taxes |
|
$ |
4,855 |
|
|
$ |
5,319 |
|
|
$ |
12,155 |
|
|
$ |
11,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net share-based compensation expense per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.03 |
|
|
$ |
0.06 |
|
|
$ |
0.07 |
|
|
$ |
0.12 |
|
Diluted |
|
$ |
0.03 |
|
|
$ |
0.05 |
|
|
$ |
0.07 |
|
|
$ |
0.12 |
|
Restricted Stock Units
Restricted stock units represent a right to receive shares of common stock at a future date
determined in accordance with the participants award agreement. An exercise price and monetary
payment are not required for receipt of restricted stock units or the shares issued in settlement
of the award. Instead, consideration is furnished in the form of the participants services to the
Company. Restricted stock units generally vest over two to three years. Compensation cost for these
awards is based on the estimated fair value on the date of grant and recognized as compensation
expense on a straight-line basis over the requisite service period. There were no pre-vesting
forfeitures estimated for the six months ended June 30, 2009 and 2008. For the three months ended
June 30, 2009 and 2008, the Company recognized $5.6 million and $2.7 million, respectively, and for
the six months ended June 30, 2009 and 2008, the Company recognized $9.5 million and $5.3 million,
respectively, in share-based compensation cost related to these restricted stock unit awards. At
June 30, 2009, there was $40.3 million remaining in unrecognized compensation cost related to these
awards, which is expected to be recognized over a weighted average period of two years. The
weighted average fair value of restricted stock units granted during the six months ended June 30,
2009 and 2008 was $29.83 and $42.95, respectively.
Recent Accounting Pronouncements
In June 2009, FASB issued Statement of Financial Accounting Standard (SFAS) No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principlesa replacement of FASB Statement No. 162. Codification will become the source of authoritative U.S. generally accepted accounting
principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. The Codification will
supersede all then-existing non-SEC accounting and reporting standards and all other
nongrandfathered non-SEC accounting literature not included in the Codification will become
nonauthoritative. This Statement is effective for financial statements issued for interim and
annual periods ending after September 15, 2009. The Company will adopt this guidance in the
interim period beginning July 1, 2009 and it is not expected to have a material impact on the
Companys financial results.
In May 2009, FASB issued SFAS No. 165, Subsequent Events. This Statement establishes general
standards of accounting for and disclosures of events that occur after the balance sheet date but
before financial statements are issued or are available to be issued. It defines subsequent events
and also requires the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date. This Statement is effective for interim and annual periods
ending after June 15, 2009. The Company has adopted this guidance in the interim period beginning
April 1, 2009 and has included all necessary disclosures (Note 11).
In December 2008, FASB issued FSP No. FAS 132R-1, Employers Disclosures about Postretirement
Benefit Plan Assets, amends FASB SFAS No. 132R, Employers Disclosures about Postretirement Benefit
Plan Assets, to provide for additional disclosure and documentation surrounding benefit plan assets
and activities in annual disclosures. Adoption of this FSP is required for years ending
10
after December 15, 2009. The Company does not believe this will have a material impact on the
Companys results from operations, however, the Company does believe it will significantly expand
its annual pension disclosure requirements.
In May 2008, FASB issued FASB Staff Position No. APB 14-1, Accounting for Convertible Debt
Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement) (FSP
APB 14-1) that significantly impacts the accounting for convertible debt. The FSP requires cash
settled convertible debt, such as the Companys $1,150.0 million aggregate principal amount of
convertible notes that are currently outstanding, to be separated into debt and equity components
at issuance and a value to be assigned to each. The value assigned to the debt component is the
estimated fair value, as of the issuance date, of a similar bond without the conversion feature.
The difference between the bond cash proceeds and this estimated fair value is recorded as a debt
discount and amortized to interest expense over the expected life of the bond, with the
corresponding offset to additional paid in capital. Although FSP APB 14-1 has no impact on the
Companys actual past or future cash flows, it requires the Company to record a significant amount
of non-cash interest expense as the debt discount is amortized. The Company adopted this FSP in the
year beginning January 1, 2009. As a result, there was a material adverse impact on the results of
operations and earnings per share upon retrospective adoption in both the current year and prior
year results of operations. In addition, if our convertible debt is redeemed or converted prior to
maturity, any unamortized debt discount would result in a loss on extinguishment. Refer to Note 4,
Long-Term Debt, for additional discussion related to the adoption of the FSP.
In June 2008, the FASB ratified EITF 07-5, Determining Whether an Instrument (or Embedded
Feature) is Indexed to an Entitys Own Stock, which addresses the accounting for certain
instruments as derivatives under SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133). The Company currently has outstanding convertible debt with embedded
features which are considered indexed to the entitys own stock and as a stand alone instrument
would have been included in stockholders equity, and therefore subject to a scope exception in
SFAS 133. Under this new pronouncement, specific guidance is provided regarding requirements for an
entity to consider embedded features as indexed to the entitys own stock. The Company adopted this
standard in the current year beginning January 1, 2009, without material impact to the financial
statements. The embedded features continue to be considered indexed to the Companys own stock
under this guidance, therefore, the adoption of EITF 07-5 did not have an impact on the Companys
financial results.
In March 2008, FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging
Activitiesan amendment of FASB Statement No. 133, which provides for additional disclosure and
documentation surrounding derivative positions and hedging activity. The Company has adopted this
guidance in the year beginning January 1, 2009 and has adjusted its disclosures accordingly.
In December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51, which impacts the accounting for noncontrolling interest in
the consolidated financial statements of filers. The statement requires the reclassification of
noncontrolling interest from the liabilities section or the mezzanine section between liabilities
and equity to the equity section of the balance sheet. The statement also requires that the results
from operations attributed to the noncontrolling interest to be disclosed separately from those of
the parent, in addition to the change in accounting and reporting requirement for deconsolidated
subsidiaries. The Company has adopted this guidance in the year beginning January 1, 2009 without
material impact.
In December 2007, FASB issued SFAS No. 141R, Business Combinations, which impacts the
accounting for business combinations. The statement requires changes in the measurement of assets
and liabilities required in favor of a fair value method consistent with the guidance provided in
SFAS 157 (see below). Additionally, the statement requires a change in accounting for certain
acquisition related expenses and business adjustments which no longer are considered part of the
purchase price. Adoption of the statement will require prospective application for all acquisitions
beginning with the date of adoption. Additionally, the statement changes the accounting for
acquisition costs, restructuring costs, in-process research and development and the resolution of
certain acquired tax items. The Company has adopted SFAS No. 141R in the period beginning January
1, 2009. The adoption will have significant impacts for all business combinations in the current
and future years.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value and expands disclosures about fair value
measurements. The Company adopted this standard partially in 2008 for financial assets and
liabilities due to the deferral period provided by FSP 157-2, Effective Date of SFAS 157.
Subsequently, the Company adopted the standard for non-financial assets and liabilities in the year
beginning January 1, 2009 without material impact.
2. Composition of Certain Financial Statement Items
11
Fair Value of Financial Instruments
The estimated fair value of the convertible notes is determined by using observable market
information and valuation methodologies that correlate fair value with the market price of the
Companys common stock, and the estimated fair value of the term loans and the secured loan is
determined by using observable market information.
The fair value and carrying amounts of the Companys long-term debts were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
Carrying Amounts |
|
|
June 30, |
|
December 31, |
|
June 30, |
|
December 31, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
(in thousands) |
(unaudited) |
|
|
|
(unaudited) |
|
|
|
|
|
3 1/4% Convertible Senior Notes (principal due 2025) |
|
$ |
364,805 |
|
|
$ |
308,000 |
|
|
$ |
332,236 |
|
|
$ |
328,114 |
|
1 1/2% Convertible Senior Notes (principal due 2024) |
|
|
445,667 |
|
|
|
342,000 |
|
|
|
400,620 |
|
|
|
391,924 |
|
2% Convertible Senior Notes (principal due 2023) |
|
|
443,601 |
|
|
|
332,128 |
|
|
|
331,033 |
|
|
|
322,774 |
|
Term A Loan (principal due 2013) |
|
|
1,341,113 |
|
|
|
1,260,000 |
|
|
|
1,365,000 |
|
|
|
1,400,000 |
|
Term B Loan (principal due 2015) |
|
|
996,222 |
|
|
|
927,675 |
|
|
|
992,500 |
|
|
|
997,500 |
|
Secured Loan (principal due 2010) |
|
|
35,375 |
|
|
|
35,600 |
|
|
|
35,375 |
|
|
|
35,600 |
|
For details on the carrying amounts of the long-term debts, refer to Note 4 Long-Term Debt.
The carrying amounts of financial instruments such as cash equivalents, foreign cash accounts,
accounts receivable, prepaid expenses, other current assets, accounts payable, accrued expenses,
other current liabilities, and other long term liabilities approximate the related fair values due
to the short-term maturities of these instruments.
The Company invests its excess cash in marketable securities, money market funds, corporate
notes, government securities, highly liquid debt instruments, time deposits, and certificates of
deposit with original maturities of three months or less at the date of purchase. These instruments
are readily convertible into cash. The Company has established guidelines that maintain safety and
liquidity. The Company considers all highly liquid investments with maturities of three months or
less from the date of purchase to be cash equivalents.
Investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
Short-term |
|
|
|
|
|
|
|
|
Bank deposits |
|
$ |
8,186 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
|
8,186 |
|
|
|
|
|
Long-term |
|
|
|
|
|
|
|
|
Auction rate securities |
|
|
30,949 |
|
|
|
29,407 |
|
Put option |
|
|
4,426 |
|
|
|
6,193 |
|
Equity securities |
|
|
342,477 |
|
|
|
455,253 |
|
|
|
|
|
|
|
|
Total long-term investments |
|
|
377,852 |
|
|
|
490,853 |
|
|
|
|
|
|
|
|
Total investments |
|
$ |
386,038 |
|
|
$ |
490,853 |
|
|
|
|
|
|
|
|
The amortized cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity. The amortization and accretion, interest income and realized gains and
losses are included in interest income within the Consolidated Statements of Operations. The cost
of securities sold is based on the specific identification method.
The Company evaluates its investments in equity and debt securities that are accounted for
using the equity method or cost method or that are classified as available-for-sale or
held-to-maturity to determine whether an other-than-temporary impairment or a credit loss exists at
period end for such investments. At June 30, 2009, the aggregate carrying amounts of cost method
investments in non-publicly traded companies, which approximated the fair value of the investments,
was $7.3 million. The assessment of fair value is based on valuation methodologies including
discounted cash flows, estimates of sales proceeds and appraisals, as appropriate. At June 30,
2009, the Company did not carry any available-for-sale securities. During the three months and six
months ended June 30, 2009, there were no unrealized gains or losses recorded in accumulated other
comprehensive income and there were no gains or losses reclassified out of accumulated other
comprehensive income to earnings as a result of the sales of available-for-sale securities. In
12
addition, the Company did not recognize any net gains or losses related to the trading
securities for the three months and six months ended June 30, 2009.
The Company adopted SFAS 157, Fair Value Measurements, which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements. The
Company adopted this standard partially in 2008 for financial assets and liabilities measured at
fair value on a recurring basis due to the deferral period provided by FSP 157-2, Effective Date of
SFAS 157. Subsequently, the Company adopted the standard for non-financial assets and liabilities
measured at fair value on a nonrecurring basis in the current year. The framework requires for the
valuation of assets and liabilities subject to fair value measurements using a three tiered
approach. The statement requires fair value measurement be classified and disclosed in one of the
following three categories:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date
for identical, unrestricted assets or liabilities;
Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices in
markets that are not active, or inputs which are observable, either directly or indirectly, for
substantially the full term of the asset or liability;
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair
value measurement and unobservable (i.e. supported by little or no market activity).
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table represents the financial instruments measured at fair value on a recurring
basis on the financial statements of the Company subject to SFAS 157 and the valuation approach
applied to each class of the financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Active Markets |
|
|
Significant Other |
|
|
Significant |
|
(in thousands)(unaudited) |
|
June 30, |
|
|
for Identical Assets |
|
|
Observable Inputs |
|
|
Unobservable Inputs |
|
Description |
|
2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Bank time deposits |
|
$ |
8,186 |
|
|
$ |
8,186 |
|
|
$ |
|
|
|
$ |
|
|
Money market funds |
|
|
113,047 |
|
|
|
111,270 |
|
|
|
|
|
|
|
1,777 |
|
Deferred compensation plan assets |
|
|
22,084 |
|
|
|
22,084 |
|
|
|
|
|
|
|
|
|
Assets-derivative forward exchange contracts |
|
|
16,925 |
|
|
|
|
|
|
|
16,925 |
|
|
|
|
|
Assets-derivative swap contracts |
|
|
6,855 |
|
|
|
|
|
|
|
6,855 |
|
|
|
|
|
Auction rate securities |
|
|
30,949 |
|
|
|
|
|
|
|
|
|
|
|
30,949 |
|
Put option |
|
|
4,426 |
|
|
|
|
|
|
|
|
|
|
|
4,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
202,472 |
|
|
$ |
141,540 |
|
|
$ |
23,780 |
|
|
$ |
37,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities-derivative forward exchange contracts |
|
|
14,615 |
|
|
|
|
|
|
|
14,615 |
|
|
|
|
|
Liabilities-derivative swap contracts |
|
|
859 |
|
|
|
|
|
|
|
859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
15,474 |
|
|
$ |
|
|
|
$ |
15,474 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009, the carrying value of the financial instruments measured and classified
within Level 1 was based on quoted prices and marked to market.
Exchange traded derivatives are valued using quoted market prices and classified within Level
1 of the fair value hierarchy. Level 2 derivatives include foreign currency forward contracts for
which fair value is determined by using observable market spot rates and forward points adjusted by
risk-adjusted discount rates. Level 2 derivatives also include interest rate swap agreements for
which fair value is determined by using quoted active market prices adjusted by risk-adjusted
discount rates. The risk-adjusted discount rate is derived by U.S. dollar zero coupon yield bonds
for the corresponding duration of the maturity of derivatives, then adjusted with a counter party
default risk for the value of our derivative assets or our credit risk for the value of our
derivative liabilities. Credit risk is derived by observable credit default swaps (CDS) spreads.
Because CDS spreads information is not available for our Company, our credit risk is determined by
analyzing CDS spreads of similar size public entities in the same industry with similar credit
ratings. The value of our derivatives discounted by risk-adjusted discount rates represents the
present value of amounts estimated to be received for the assets or paid to transfer the
liabilities at the measurement date from a marketplace participant in settlement of these
instruments.
13
The valuation technique of money market funds based on Level 3 unobservable inputs consisted
of recommended fair values provided by our broker combined with internal analysis of interest rate
spreads and credit quality.
The Company holds unsecured commercial paper within the Reserve Primary Money Market Fund
(Fund) which is currently in orderly liquidation subject to the supervision of the SEC, estimated
to be completed by the end of fiscal year 2009. The most recent net asset values (NAV) communicated
by the Reserve Fund were $0.97 per share in February 2009, however, under the terms of the Plan of
Liquidation adopted by the Reserve Fund, distributions are to be made up to the amount of a special
reserve to cover the cost and possible liabilities associated with the liquidation. Consequently
Fund distributions are currently being made at $0.92 per share. The Company recognized
other-than-temporary impairment of $5.4 million during the six months ended June 30, 2009 against
the purchase price of AB, accordingly. Due to the Fund managements expectations to liquidate at or
above amortized cost, recent cash recoveries, future expected proceeds and taking into
consideration the short-term nature of the Funds weighted average maturity, management concluded
that the last published NAV was a reasonable fair value, and what the Company expects to recover.
The valuation of the Fund as of June 30, 2009 was included in other current assets in the
Consolidated Balance Sheets.
As of June 30, 2009, the Company holds $35.4 million in AAA rated auction rate securities with
UBS Investment Bank. Auction rate securities are collateralized long-term debt instruments that
provide liquidity through a Dutch auction process that resets the applicable interest rate at
pre-determined intervals, typically every 7 to 35 days. The underlying assets of the auction rate
securities we hold, including the securities for which auctions have failed, are student loans
which are guaranteed by the U.S. government under the Federal Education Loan Program. Beginning in
February 2008, auctions failed for the Companys holdings because sell orders exceeded buy orders.
As a result of the failed auctions, the Company is holding illiquid securities because the funds
associated with these failed auctions will not be accessible until the issuer calls the security, a
successful auction occurs, a buyer is found outside of the auction process, or the security
matures. In August 2008, UBS announced that it agreed to a settlement in principle with the SEC and
other state regulatory agencies represented by North American Securities Administrators Association
to restore liquidity to all remaining clients who hold auction rate securities. UBS committed to
repurchase auction rate securities from their private clients at par beginning January 1, 2009.
During the second quarter of 2009, UBS repurchased $0.2 million auction rate securities at par from
the Company. The Company intends to have the settlement of the remaining balance of $35.4 million
completed by July, 2012. Until UBS fully redeems the Companys auction rate securities, UBS has
loaned the Company at par without recourse and with accrued interest charges at the same rate as
the yields earned on the underlying securities that serve as collateral for the loan. Because the
Company has a right to sell its auction rate securities to UBS, this right is considered to be a
put option, however, this put option does not meet the definition of derivative under SFAS 133,
Accounting for Derivative Instruments and Hedging Activities, as auction rate securities are not
readily convertible to cash. Thus, this put option will not be subsequently adjusted to fair value
each reporting period. To create accounting symmetry for the fair value movement between auction
rate securities and the put option, the Company elected the fair value option for the put option in
accordance with SFAS 159, The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an amendment of FASB Statement No. 115, upon the execution of the loan
agreement with UBS on the election date in November 2008. In addition, the Company elected a
transfer of auction rate securities from available-for-sale securities to trading securities in
accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, due to
the nature of the market conditions and the Companys intended holding period.
The Company anticipates that any future changes in the fair value of the put option will be
offset by the changes in the underlying fair value of the related auction rate securities with no
material net impact to the Consolidated Statements of Operations. This is further supported as the
Company has already been loaned the amount of the securities by UBS. The put option will continue
to be measured at fair value utilizing Level 3 inputs until the earlier of its maturity or
exercise. During the three months and six months ended June 30, 2009, the Company did not recognize
a net gain or loss related to the auction rate securities and the related put option. The fair
market value of auction rate securities and the put option were $30.9 million and $4.4 million at
June 30, 2009, and $29.4 million and $6.2 million at December 31, 2008, respectively, and are
reflected in long term investments in the Consolidated Balance Sheets.
14
For those financial instruments with significant Level 3 inputs, the following table
summarizes the activity for the six months ended June 30, 2009 by investment type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant |
|
|
|
|
|
|
Unobservable Inputs (Level 3) |
|
|
|
|
|
|
Auction Rate |
|
|
|
|
|
|
Money Market |
|
|
|
|
(in thousands)(unaudited) |
|
Securities |
|
|
Put Option |
|
|
Funds |
|
|
Total |
|
Beginning balance at January 1, 2009 |
|
$ |
29,407 |
|
|
$ |
6,193 |
|
|
$ |
18,260 |
|
|
$ |
53,860 |
|
Transfers in to Level 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total realized/unrealized gains (losses) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings |
|
|
1,767 |
|
|
|
(1,767 |
) |
|
|
|
|
|
|
|
|
Revalued as part of Applied Biosystems merger |
|
|
|
|
|
|
|
|
|
|
(5,358 |
) |
|
|
(5,358 |
) |
Purchases, issuances and settlements |
|
|
(225 |
) |
|
|
|
|
|
|
(11,125 |
) |
|
|
(11,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance at June 30, 2009 |
|
$ |
30,949 |
|
|
$ |
4,426 |
|
|
$ |
1,777 |
|
|
$ |
37,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amount of unrealized losses for the period
included in other comprehensive loss
attributable to the change in fair market value
of related assets still held at the reporting
date |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
All realized gains or losses related to financial instruments whose fair value is determined
based on Level 3 inputs are included in other income. All unrealized gains or losses related to
financial instruments whose fair value is determined based on Level 3 inputs are included in other
comprehensive income.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The non-financial assets and liabilities are recognized at fair value subsequent to initial
recognition when they are deemed to be other-than-temporarily impaired. There were no
non-financial assets and liabilities measured at fair value on a nonrecurring basis for the three
months and six months ended June 30, 2009.
Derivative Financial Instruments
Some of the Companys reporting entities conduct a portion of their business in currencies
other than the entitys functional currency. These transactions give rise to receivables and
payables that are denominated in currencies other than the entitys functional currency. The value
of these receivables and payables is subject to changes in currency exchange rates from the point
in which the transactions are originated until the settlement in cash. Both realized and unrealized
gains or losses in the value of these receivables and payables are included in the determination of
net income. Net currency exchange gains or (loss) recognized on business transactions, net of
hedging transactions, were $(8.3) million and $(0.1) million for the three months ended June 30,
2009 and June 30, 2008, respectively, and $(6.8) million and $2.1 million for the six months ended
June 30, 2009 and June 30, 2008, respectively, and such gains and losses are included in other
income in the Consolidated Statements of Operations. To manage the foreign currency exposure risk,
we use derivatives for activities in entities which have receivables and payables denominated in a
currency other than the entitys functional currency. Realized and unrealized gains or losses on
the value of financial contracts entered into to hedge the exchange rate exposure of these
receivables and payables are also included in the determination of net income as they have not been
designated for hedge accounting under SFAS 133, Accounting for Derivative Investments and Hedging
Activities. These contracts, which settle July 2009 through November 2009, effectively fix the
exchange rate at which these specific receivables and payables will be settled in, so that gains or
losses on the forward contracts offset the gains or losses from changes in the value of the
underlying receivables and payables. At June 30, 2009, the Company had $912.1 million in foreign
currency forward contracts outstanding to hedge currency risk relative to our foreign receivables
and payables.
The Companys international operating units conduct business in, and have functional
currencies that differ from the parent entity, and therefore, the ultimate conversion of these
sales to cash in U.S. dollars is subject to fluctuations in foreign currency. The Companys intent
is to limit this exposure on the Companys Consolidated Statement of Operations and Consolidated
Statement of Cash Flows from changes in currency exchange rates through hedging. Upon entering
derivative transactions, when the US dollar strengthens significantly against foreign currencies,
the decline in the US dollar value of future foreign currency revenue is offset by gains in the
value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the
opposite occurs. The Companys currency exposures vary, but are primarily concentrated in the euro,
British pound sterling, Japanese yen and Canadian dollar. The Company uses foreign currency forward
contracts to mitigate foreign currency risk on forecasted foreign currency intercompany sales which
are expected to be settled within the next twelve months. The change in fair value prior to their
maturity is accounted for as cash flow hedges, and recorded in other comprehensive income, net of
tax, in the Consolidated Balance Sheets according to SFAS 133. To the extent any portion of the
forward contracts is determined to not be an effective hedge, the increase or decrease in value
prior to the maturity is recorded in other income or expense in the Consolidated Statements of
Operations. At June 30, 2009, the Company had $254.6 million in foreign currency forward contracts
outstanding to hedge foreign currency revenue risk under SFAS 133. During the six months ended June
30, 2009, the Company did not have any material losses or gains related to the ineffective portion
of its hedging instruments in other expense in the Consolidated Statements of Operations. No
hedging relationships were terminated as a result of ineffective hedging or forecasted transactions
no longer probable of occurring. The Company continuously monitors the probability of forecasted
transactions as part of the hedge effectiveness testing. The Company reclasses
15
deferred gains or losses reported in accumulated other comprehensive income into revenue when
the consolidated earnings are impacted, which for intercompany sales are when the inventory is sold
to a third party. For intercompany sales hedging, the Company uses an inventory turnover ratio for
each international operating unit to align the timing of a hedged item and a hedging instrument to
impact the Consolidated Statements of Operations during the same reporting period. At June 30,
2009, the Company expects to recognize $4.0 million of net gains on derivative instruments
currently classified under accumulated other comprehensive income to revenue offsetting the change
in revenue due to foreign currency translation during the next twelve months.
The Company entered into interest rate swap agreements that effectively convert variable rate
interest payments to fixed rate interest payments for a notional amount of $1,000.0 million in
January 2009, of which $300.0 million of swap payment arrangements expire in January of 2012 and
$700.0 million of swap payment arrangements expire in January of 2013. The Company has entered into
such swap arrangements to manage variability of cash flows and interest expense related to the
interest payments on a portion of the Companys term loan A facility. The change in fair value
prior to their maturity is accounted for as cash flow hedges, and recorded in other comprehensive
income, net of tax, in the Consolidated Balance Sheets according to SFAS 133. To the extent any
portion of the swap agreements is determined to not be an effective hedge, the increase or decrease
in value prior to the maturity was recorded in other income or expense in the Consolidated
Statements of Operations. During the six months ended June 30, 2009, there was no recognized gain
or loss related to the ineffective portion of its hedging instruments in other expense in the
Consolidated Statements of Operations. No hedging relationships were terminated as a result of
ineffective hedging or forecasted transactions no longer probable of occurring. The Company
continuously monitors the underlying term loan principal balance as part of the hedge effectiveness
testing.
The following table summarizes the fair values of derivative instruments at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
Balance Sheet |
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
(in thousands)(unaudited) |
|
Location |
|
|
Fair Value |
|
|
Location |
|
|
Fair Value |
|
Derivatives designated as
cash flow hedging under
Statement
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts |
|
Other current assets |
|
$ |
4,008 |
|
|
Other current liabilities |
|
$ |
11,754 |
|
Interest rate swap contracts |
|
Other assets |
|
|
6,855 |
|
|
Other long-term obligations |
|
|
859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
10,863 |
|
|
|
|
|
|
$ |
12,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as
hedging instruments under
Statement 133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts |
|
Other current assets |
|
$ |
12,917 |
|
|
Other current liabilities |
|
$ |
2,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
12,917 |
|
|
|
|
|
|
$ |
2,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives at June 30, 2009 |
|
|
|
|
|
$ |
23,780 |
|
|
|
|
|
|
$ |
15,474 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
The following table summarizes the effect of derivative instruments on the Consolidated
Statements of Operations for the three and six months ended June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2009 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
|
|
|
|
Amount of |
|
|
|
Amount of |
|
|
Location of |
|
|
Gain/(Loss) |
|
|
Amount of |
|
|
Location of |
|
|
Gain/(Loss) |
|
|
|
(Gain)/Loss |
|
|
(Gain)/Loss |
|
|
Reclassified from |
|
|
(Gain)/Loss |
|
|
(Gain)/Loss |
|
|
Reclassified from |
|
|
|
Recognized in |
|
|
Reclassified from |
|
|
AOCI |
|
|
Recognized in |
|
|
Reclassified from |
|
|
AOCI |
|
|
|
OCI |
|
|
AOCI into Income |
|
|
into Income |
|
|
OCI |
|
|
AOCI into Income |
|
|
into Income |
|
(in thousands)(unaudited) |
|
Effective Portion |
|
Effective Portion |
Derivatives in Statement
133 cash flow hedging
relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
$ |
10,883 |
|
|
Revenue |
|
$ |
(368 |
) |
|
$ |
(8,305 |
) |
|
Revenue |
|
$ |
846 |
|
Interest rate swap contracts |
|
|
(7,400 |
) |
|
Interest expense |
|
|
|
|
|
|
(3,658 |
) |
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
$ |
3,483 |
|
|
|
|
|
|
$ |
(368 |
) |
|
$ |
(11,963 |
) |
|
|
|
|
|
$ |
846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2009 |
|
|
2009 |
|
|
|
|
|
|
|
Amount of |
|
|
|
|
|
|
Amount of |
|
|
|
Location of |
|
|
(Gain)/Loss |
|
|
Location of |
|
|
(Gain)/Loss |
|
|
|
(Gain)/Loss |
|
|
recognized in |
|
|
(Gain)/Loss |
|
|
recognized in |
|
|
|
Recognized in Income |
|
|
Income |
|
|
Recognized in Income |
|
|
Income |
|
(in thousands)(unaudited) |
|
Ineffective Portion |
|
Ineffective Portion |
Derivatives in Statement
133 cash flow hedging
relationships |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts |
|
Other (income)/expense |
|
$ |
* |
|
|
Other (income)/expense |
|
$ |
* |
|
Interest rate swap contracts |
|
Other (income)/expense |
|
|
|
|
|
Other (income)/expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives |
|
|
|
|
|
$ |
* |
|
|
|
|
|
|
$ |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
Six months ended June 30, |
|
|
|
2009 |
|
|
2009 |
|
|
|
Location of (Gain)/Loss |
|
|
Amount of (Gain)/Loss |
|
|
Location of (Gain)/Loss |
|
|
Amount of (Gain)/Loss |
|
(in thousands)(unaudited) |
|
Recognized in Income |
|
|
Recognized in Income |
|
|
Recognized in Income |
|
|
Recognized in Income |
|
Derivatives not designated
as hedging instruments under
Statement 133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts |
|
Other income |
|
$ |
(31,788 |
) |
|
Other income |
|
$ |
(31,841 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivatives |
|
|
|
|
|
$ |
(31,788 |
) |
|
|
|
|
|
$ |
(31,841 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
De minimus amount recognized in the hedge relationship. |
Concentration of Credit Risk
Our derivatives instruments have an element of risk in that the counterparties may be unable
to meet the terms of the agreements. We attempt to minimize this risk by limiting the
counterparties to a diverse group of highly-rated domestic and international financial
institutions. In the event of non-performance by these counterparties, the asset position carrying
values of our financial instruments represent the maximum amount of loss we could incur as of June
30, 2009. However, we do not expect to record any losses as a result of counterparty default in the
foreseeable future. We do not require and are not required to pledge collateral for these financial
instruments. The Company does not use derivative financial instruments for speculation or trading
purposes nor for activities other than risk management, and we are not a party to leveraged
derivatives. In addition, we do not carry any master netting arrangements to mitigate the credit
risk. The Company continually evaluates the costs and benefits of its hedging program.
Other financial instruments that potentially subject us to concentrations of credit risk are
cash and cash equivalents, investments, and accounts receivable. We attempt to minimize the risks
related to cash and cash equivalents and investments by using highly-rated financial institutions
that invest in a broad and diverse range of financial instruments. We have established guidelines
relative to credit ratings and maturities intended to maintain safety and liquidity. Concentration
of credit risk with respect to accounts receivable is limited due to our large and diverse customer
base, which is dispersed over different geographic areas. Allowances are maintained for potential
credit losses and such losses have historically been within our expectations. Our investment
portfolio is maintained in accordance with our investment policy which defines allowable
investments, specifies credit quality standards and limits the credit exposure of any single
issuer.
17
Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
Raw materials and components |
|
$ |
99,807 |
|
|
$ |
94,332 |
|
Work in process (materials, labor and overhead) |
|
|
53,355 |
|
|
|
58,091 |
|
Finished goods (materials, labor and overhead) |
|
|
210,796 |
|
|
|
204,858 |
|
Adjustment to write up acquired finished goods inventory to fair value |
|
|
610 |
|
|
|
62,748 |
|
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
364,568 |
|
|
$ |
420,029 |
|
|
|
|
|
|
|
|
Property and Equipment
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
June 30, |
|
|
December 31, |
|
(in thousands) |
|
useful life |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
Land |
|
|
|
|
|
$ |
132,635 |
|
|
$ |
127,197 |
|
Building and improvements |
|
1-50 years |
|
|
|
365,023 |
|
|
|
363,385 |
|
Machinery and equipment |
|
1-10 years |
|
|
|
322,970 |
|
|
|
304,389 |
|
Internal use software |
|
1-10 years |
|
|
|
134,808 |
|
|
|
124,305 |
|
Construction in process |
|
|
|
|
|
|
104,952 |
|
|
|
71,641 |
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment |
|
|
|
|
|
|
1,060,388 |
|
|
|
990,917 |
|
Accumulated depreciation and amortization |
|
|
|
|
|
|
(291,753 |
) |
|
|
(242,861 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net |
|
|
|
|
|
$ |
768,635 |
|
|
$ |
748,056 |
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill and Other Intangible Assets
The $271.4 million increase in goodwill on the consolidated balance sheet from December 31,
2008 to June 30, 2009 was the result of $247.1 million in additions, adjustments, and purchase
price allocations to goodwill related to the AB merger and $25.4 million in foreign currency
translation adjustments, offset by $1.1 million in goodwill adjustments related to other mergers.
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
average |
|
|
Gross carrying |
|
|
Accumulated |
|
|
average |
|
|
Gross carrying |
|
|
Accumulated |
|
(in thousands) |
|
Life |
|
|
amount |
|
|
amortization |
|
|
Life |
|
|
amount |
|
|
amortization |
|
|
|
|
|
|
|
(unaudited) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technology |
|
7 years |
|
$ |
1,083,747 |
|
|
$ |
(656,547 |
) |
|
8 years |
|
$ |
1,056,395 |
|
|
$ |
(605,864 |
) |
Purchased tradenames and trademarks |
|
9 years |
|
|
317,132 |
|
|
|
(71,702 |
) |
|
9 years |
|
|
314,312 |
|
|
|
(55,174 |
) |
Purchased customer base |
|
12 years |
|
|
1,422,009 |
|
|
|
(108,123 |
) |
|
12 years |
|
|
1,421,925 |
|
|
|
(48,344 |
) |
Other intellectual property |
|
5 years |
|
|
246,456 |
|
|
|
(55,771 |
) |
|
5 years |
|
|
235,304 |
|
|
|
(34,238 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
3,069,344 |
|
|
$ |
(892,143 |
) |
|
|
|
|
|
$ |
3,027,936 |
|
|
$ |
(743,620 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased tradenames and trademarks |
|
|
|
|
|
$ |
7,451 |
|
|
|
|
|
|
|
|
|
|
$ |
7,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
Amortization expense related to intangible assets for the three months ended June 30, 2009 and
2008 was $70.9 million and $17.4 million, respectively and for the six months ended June 30, 2009
and 2008 was $141.8 million and $34.3 million, respectively. Estimated aggregate amortization
expense is expected to be $143.6 million for the remainder of fiscal year 2009. Estimated aggregate
amortization expense for fiscal years 2010, 2011, 2012 and 2013 is $277.9 million, $269.3 million,
$253.5 million and $241.2 million, respectively.
In addition, the Company recorded $2.1 million and zero of amortization expense in other
income (expense) for the three months ended June 30, 2009 and 2008, respectively, and $4.8 million
and zero for the six months ended June 30, 2009 and 2008, respectively, in connection with its
joint venture investment.
Comprehensive Income (Loss)
Total comprehensive income consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(in thousands, unaudited) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income, as reported |
|
$ |
38,943 |
|
|
$ |
46,874 |
|
|
$ |
54,546 |
|
|
$ |
100,351 |
|
Unrealized loss on investments, net of related tax effects |
|
|
|
|
|
|
(473 |
) |
|
|
|
|
|
|
(1,469 |
) |
Realized (gain) loss on hedging transactions, reclassed into earnings,
net of related tax effects |
|
|
368 |
|
|
|
|
|
|
|
(846 |
) |
|
|
|
|
Unrealized gain (loss) on hedging transactions, net of related tax effects |
|
|
(3,483 |
) |
|
|
|
|
|
|
11,963 |
|
|
|
|
|
Foreign currency translation adjustment, net of related tax effects |
|
|
88,600 |
|
|
|
(2,700 |
) |
|
|
73,819 |
|
|
|
48,036 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
124,428 |
|
|
$ |
43,701 |
|
|
$ |
139,482 |
|
|
$ |
146,918 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
(in thousands) |
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
Accrued hedge liabilities |
|
$ |
14,615 |
|
|
$ |
58,602 |
|
Accrued royalties |
|
|
51,015 |
|
|
|
50,794 |
|
Accrued warranty |
|
|
12,061 |
|
|
|
12,616 |
|
Accrued other |
|
|
109,704 |
|
|
|
113,406 |
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities |
|
$ |
187,395 |
|
|
$ |
235,418 |
|
|
|
|
|
|
|
|
3. Business Combinations and Consolidations Costs
Merger with Applied Biosystems, Inc.
On November 21, 2008, the Company completed the merger with Applied Biosystems, Inc. (AB),
formerly known as Applera Corporation, under which the Company acquired all outstanding shares of
AB in a cash and stock transaction. AB is a global leader in the development and marketing of
instrument-based systems, consumables, software, and services for academic research, the life
science industry and commercial markets. AB commercializes innovative technology solutions for DNA,
RNA, protein and small molecule analysis. Customers across the disciplines of academic and clinical
research, pharmaceutical research and manufacturing, forensic DNA analysis, and agricultural
biotechnology use ABs tools and services to accelerate scientific discovery, improve processes
related to drug discovery and development, detect potentially pathogenic microorganisms, and
identify individuals based on DNA sources. AB has a comprehensive service and field applications
support team for a global installed base of high-performance genetic and protein analysis
solutions. The merger enabled the two companies to broaden their customer offering to include a
full range of instruments, equipment, reagents, consumables and services.
At the effective time of the merger, each outstanding share of AB stock was converted into the
right to receive either a combination of cash and shares of Life Technologies common stock or all
cash or all shares of Life Technologies common stock, in each case subject to the election and
allocation procedures provided in the prospectus as selected by the shareholder. The consideration
was based on the 20 day weighted average price of the Company immediately preceding the merger
date. Based on the weighted average closing price prior to the merger the ultimate consideration paid
under Emerging Issues Task Force (EITF) abstract 99-12, Determination of the Measurement Date for
the Market Price of Acquirer Securities Issued in a Purchase Business Combination, the
19
value was $22.25 per share with $1,801.8 million paid in stock and $3,229.2 million paid in
cash and $23.8 million related to the exchange of AB stock options for Life Technologies stock
options.
Had the merger with AB been completed as of the beginning of 2008, the Companys pro forma
results for the six months ended June 30, 2008 would have been as follows:
|
|
|
|
|
|
|
2008 |
(in thousands, except per share data) |
|
(unaudited) |
Revenue |
|
$ |
1,590,440 |
|
Operating Income |
|
|
207,943 |
|
Net Income |
|
|
138,729 |
|
Earnings per Share: |
|
|
|
|
Basic |
|
$ |
0.80 |
|
Diluted |
|
$ |
0.78 |
|
Basic Weighted Average Shares |
|
|
173,187 |
|
Diluted Weighted Average Shares |
|
|
178,297 |
|
The primary adjustments relate to the purchase accounting impacts of the acquired intangible
assets and increased debt associated with the merger. The above pro forma information was
determined based on historical GAAP results adjusted for the purchase price allocation and
estimated related changes in income associated with the merger with AB. Excluded from the pro forma
results are purchase accounting adjustments related to in-process research and development, the
fair market value adjustment of inventory and deferred revenue as these adjustments do not reflect
ongoing operations. Additionally, the Company excluded the impact of the expense associated with
the acceleration of equity vesting and discontinuation of hedging relationships associated with the
Applied Biosystems merger as these adjustments do not reflect ongoing operations as if the
Companies merged on January 1, 2008.
The Company is still finalizing the allocation of the purchase price. The Company expects to
complete the allocation of the purchase price during fiscal year 2009. The components of the
preliminary purchase price allocation for AB as of June 30, 2009 are as follows:
|
|
|
|
|
Purchase Consideration: |
|
|
|
|
(in thousands) |
|
|
|
|
Fair value of common stock issued to AB Shareholders |
|
$ |
1,801,770 |
|
Fair value of Life Technologies options exchanged for AB options |
|
|
23,773 |
|
Cash paid to AB shareholders |
|
|
3,229,192 |
|
Transaction costs |
|
|
38,847 |
|
Cash acquired |
|
|
(529,181 |
) |
|
|
|
|
|
|
$ |
4,564,401 |
|
|
|
|
|
|
|
|
|
|
Allocation of Purchase Price: |
|
|
|
|
(in thousands) |
|
|
|
|
Current assets |
|
$ |
901,018 |
|
Property, plant, and equipment |
|
|
392,458 |
|
Acquired intangible assets |
|
|
2,167,400 |
|
In-process research and development |
|
|
65,400 |
|
Goodwill |
|
|
2,580,484 |
|
Other assets |
|
|
392,163 |
|
Liabilities assumed |
|
|
(1,934,522 |
) |
|
|
|
|
|
|
$ |
4,564,401 |
|
|
|
|
|
The acquired identified intangible assets with definite lives from the merger with AB are as
follows:
|
|
|
|
|
Acquired Intangible Assets |
|
|
|
|
(in thousands) |
|
|
|
|
Customer relationships |
|
$ |
1,396,000 |
|
Purchased technology |
|
|
342,700 |
|
Acquired tradenames |
|
|
239,700 |
|
PCR royalty contracts |
|
|
189,000 |
|
|
|
|
|
|
|
$ |
2,167,400 |
|
|
|
|
|
20
The weighted-average amortization periods for intangible assets with definite lives are: 12
years for customer relationships, 7 years for purchased technology, 9 years for tradenames and 5
years for acquired PCR Royalty contracts. The acquired purchase technology relates to Applied
Biosystems Molecular Cell Biology business which includes the SOLiD high throughput instruments and
consumables, genomic assays technology for both research and applied markets, functional analysis
and the Proteomics and Small Molecule business which includes Mass Spectrometry. The acquired
tradenames primarily relate to the acquired Applied Biosystems and Ambion tradenames. The Company
amortizes these intangibles based on the straight line method of amortization, which approximates
the timing of expected cash flows of the acquired intangibles.
The Company allocated $65.4 million of the purchase price in connection with the merger to
purchased in-process research and development. This amount estimates the fair value of various
acquired in-process projects that have not yet reached technological feasibility and do not have
future alternative use as of the date of the merger. The in-process research and development is
primarily related to the ongoing research projects which seek to enhance the Companys current
technology platform. The Company included this allocated value into expense as a separate line item
on the financial statements as of the date of the merger.
The purchase price exceeded the value of acquired tangible and identifiable intangible assets,
and therefore the Company has allocated $2,580.5 million to goodwill. Of this allocation of
purchase price to goodwill, none is expected to be deductible for tax purposes. Included in the
goodwill amount is $1,056.3 million related to deferred tax liabilities recorded as a result of the
inability to deduct intangible amortization expense associated with the merger. The Companys tax
cost basis in the intangible assets is zero requiring an adjustment to the deferred tax liability
to properly capture the Companys ongoing tax rate. The remainder of the goodwill balance is
related to estimated synergies in the purchase price and non-capitalizable intangible assets (i.e.
employee workforce) acquired in association with the merger. The Company anticipates cost savings
and revenue synergies as a result of the combination of the two businesses. The cost savings are
expected to be driven by operating efficiencies and elimination of redundant positions as well as
the elimination of duplicate facilities. Revenue synergies are expected to be driven by increased
market presence and leveraging of the combination of reagent and instrument sales platforms.
As part of the merger with AB, the Company acquired a joint venture, Applied Biosystems/MDS
Analytical Technologies Instruments, of which the Company is a 50% owner. The Company accounts for
its investment in the joint venture totaling $335.2 million using the equity method, consistent
with the guidance in APB No. 18, The Equity Method of
Accounting for Investments in Common Stock,
the Company believes the equity method is appropriate as where the Company is unable to unilaterally influence the operating or
financial decisions of the investee, shares in the risks and rewards of all related business
activities and the joint venture is a stand alone legal entity. The Company accounts for the
results of the joint venture in the Consolidated Statements of Operations in the other
income/(expense) line. The Company accounts for non-operating and stand alone assets and
liabilities, which includes goodwill and intangibles associated with the acquisition, of the joint
venture in the long term investment line in the Consolidated Balance Sheet. The Company continues
to assign value and allocate the purchase price to the various acquired components of the Applied
Biosystems merger, including the valuation of the acquired joint venture. Due to the nature of the
joint venture, with sales, distribution and service commingled with the Companys operations,
operating assets and liabilities specifically related to the joint venture are commingled or
inseparable. As a result, for operating assets and liabilities the Company records these assets in
the functional operating asset and liability classifications which represent the underlying asset
or liability and do not record these assets or liabilities in the long term investment account.
The Company has undertaken restructuring activities in connection with the AB merger. These
activities, which have been accounted for in accordance with Emerging Issues Task Force (EITF)
Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, have
primarily included one-time termination costs, specifically severance costs related to duplicative
positions and change in control agreements, to mostly sales, finance, IT, research and development,
and manufacturing employees of AB. The restructuring plan does also include charges associated with
closure of certain AB leased facilities and one-time relocation costs to AB employees, whose
employment positions have been moved to another location. The Company expects that the
restructuring plan will result in approximately $105.1 million in restructuring costs, of which
approximately $89.5 million will be one-time termination costs, $3.0 million will be one-time
relocation costs and $12.6 million will be site closure costs. In accordance with EITF Issue No.
95-3, the Company will finalize its restructuring plan no later than one year from the date of the
AB merger. Upon finalization of the restructuring plan for less than the expected amount, any
excess reserves will be reversed with a corresponding decrease in goodwill. If the finalization of
the restructuring plan exceeds the expected amount, any additional costs will be recorded in
business consolidation costs in the Consolidated Statements of Operations.
21
The following table summarizes the restructuring activity in connection with the AB merger for
the period ended June 30, 2009, as well as the remaining restructuring accrual in the Consolidated
Balance Sheets at June 30, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time |
|
|
One-Time |
|
|
One-Time |
|
|
|
|
|
|
Termination |
|
|
Site Closure |
|
|
Relocation |
|
|
|
|
(in thousands) (unaudited) |
|
Costs |
|
|
Costs |
|
|
Costs |
|
|
Total |
|
Restructuring accrual at December 31, 2008 |
|
$ |
65,502 |
|
|
$ |
|
|
|
$ |
379 |
|
|
$ |
65,881 |
|
Additional costs recorded to goodwill |
|
|
15,577 |
|
|
|
1,547 |
|
|
|
666 |
|
|
|
17,790 |
|
Amounts paid |
|
|
(52,068 |
) |
|
|
(63 |
) |
|
|
(218 |
) |
|
|
(52,349 |
) |
Foreign currency translation |
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring accrual at June 30, 2009 |
|
$ |
28,995 |
|
|
$ |
1,484 |
|
|
$ |
827 |
|
|
$ |
31,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Business Consolidation Costs
The Company continues to integrate recent and pending acquisitions into its operations and
recorded approximately $28.9 million and $1.4 million for the three months ended June 30, 2009 and
2008, respectively, and $56.3 million and $1.9 million for the six months ended June 30, 2009 and
2008, respectively, related to these efforts. Expenses for the three and six months ended June 30,
2009 related primarily to integration and restructuring efforts currently underway related to the
AB merger, as well as severance and other costs associated with previous acquisitions and
consolidations. For details on the restructuring plan, refer to Note 10 Restructuring Costs.
4. Long-Term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
(in thousands) |
|
(unaudited) |
|
|
|
|
|
3 1/4% Convertible Senior Notes (principal due 2025), net of unamortized discount |
|
$ |
332,236 |
|
|
$ |
328,114 |
|
1 1/2% Convertible Senior Notes (principal due 2024), net of unamortized discount |
|
|
400,620 |
|
|
|
391,924 |
|
2% Convertible Senior Notes (principal due 2023), net of unamortized discount |
|
|
331,033 |
|
|
|
322,774 |
|
Term Loan A (principal due 2013) |
|
|
1,365,000 |
|
|
|
1,400,000 |
|
Term Loan B (principal due 2015) |
|
|
992,500 |
|
|
|
997,500 |
|
Secured Loan (principal due 2010) |
|
|
35,375 |
|
|
|
35,600 |
|
Capital leases |
|
|
497 |
|
|
|
508 |
|
|
|
|
|
|
|
|
Total debt |
|
|
3,457,261 |
|
|
|
3,476,420 |
|
Less current portion |
|
|
(115,000 |
) |
|
|
(80,000 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
3,342,261 |
|
|
$ |
3,396,420 |
|
|
|
|
|
|
|
|
In November 2008, the Company entered into a $2,650.0 million credit agreement (the Credit
Agreement) consisting of a revolving credit facility of $250.0 million, a term loan A facility of
$1,400.0 million, and a term loan B facility of $1,000.0 million. The credit agreement governing
the Companys new credit facilities contains financial maintenance covenants, including a maximum
leverage ratio and minimum fixed charge coverage ratio.
For the revolving credit facility and the term loan A, interest is computed based on the
Companys leverage ratio as shown below:
|
|
|
|
|
|
|
|
|
|
|
Pricing |
|
Total Leverage |
|
|
|
|
|
Revolving Credit |
Level |
|
Ratio |
|
LIBOR Rate |
|
Base Rate |
|
Commitment Fee |
1
|
|
³ 3.0:1
|
|
LIBOR + 2.50%
|
|
Base Rate + 1.50%
|
|
|
0.500 |
% |
2
|
|
< 3.0:1 but ³ 2.5:1
|
|
LIBOR+2.25%
|
|
Base Rate + 1.25%
|
|
|
0.375 |
% |
3
|
|
< 2.5:1 but ³ 2.0:1
|
|
LIBOR+2.00%
|
|
Base Rate + 1.00%
|
|
|
0.375 |
% |
4
|
|
< 2.0:1
|
|
LIBOR+1.50%
|
|
Base Rate + 0.50%
|
|
|
0.250 |
% |
For the period ended June 30, 2009, the interest on the revolving credit facility and the term
loan A was at Pricing Level 1, which was LIBOR plus 2.50%, and the term loan B was at the Base Rate
plus 2.00%. As a result, the Company recognized interest expense, net of hedging transactions, of
$14.4 million and $13.0 million based on the weighted average interest rates of 3.44% and 5.25% for
term loan A and term loan B, respectively, for the three months ended June 30, 2009, and $27.7
million and $25.9 million based on the weighted average interest rates of 3.36% and 5.25% for term
loan A and term loan B, respectively, for the six months ended June 30, 2009. In association with
the term loan agreement, the Company entered into swap agreements for $1,000.0 million that convert
variable rate interest payments to fixed rate interest payments. For further discussion on the
Companys interest rate swap, refer to Note 2 of the Notes to Consolidated Financial Statements.
The Company made principal payments of $17.5 million and $2.5 million
22
for term loan A and term loan B, respectively, for the three months ended June 30, 2009, and
$35.0 million and $5.0 million for term loan A and term loan B, respectively, for the six months
ended June 30, 2009.
Effective January 1, 2009, the Company adopted the provisions of FSP APB14-1 Accounting for
Convertible Debt Instruments that May be Settled in Cash upon Conversion (Including Partial Cash
Settlement) with the retrospective application for our outstanding $1,150 million of Convertible
Senior Notes, consisting of $350.0 million related to the 2% Convertible Senior Note (2023 Note),
$450.0 million related to the 1 1/2% Convertible Senior Note (2024 Note) and $350.0 million related
to the 3 1/4% Convertible Senior Note (2025 Note). Upon adoption of FSP APB14-1, the Company
retroactively recognized the carrying amount of $100.0 million, $129.8 million, and $47.6 million
for the equity components of the 2023, 2024 and 2025 Notes, respectively, with deferred tax impacts
of $39.1 million, $50.7 million and $18.6 million for the 2023, 2024 and 2025 Notes, respectively,
and a liability component classified in long term debt of $250.0 million, $320.2 million and $302.4
million for the 2023, 2024 and 2025 Notes, respectively.
As of June 30, 2009, the net carrying amount of convertible debt was $1,063.8 million, of
which $331.0 million, $400.6 million and $332.2 million pertained to the 2023, 2024 and 2025 Notes,
respectively. Additionally at June 30, 2009 is an unamortized debt discount of $18.9 million, $49.4
million and $17.8 million for the 2023, 2024 and 2025 Notes, respectively, which is expected to be
recognized over a weighted average period of 2.2 years. The Company recognized total interest cost
of $16.9 million and $16.4 million for the three months ended June 30, 2009 and 2008, respectively,
and $33.7 million and $32.5 million for the six months ended June 30, 2009 and 2008, respectively,
based on the effective interest rates of 7.21%, 6.10% and 5.95% for the 2023, 2024 and 2025 Notes,
respectively. The interest expense consisted of $6.3 million and $6.4 million of contractual
interest based on the stated coupon rate and $10.6 million and $10.0 million of amortization of the
discount on the liability component for the three months ended June 30, 2009 and 2008,
respectively. The interest expense consisted of $12.6 million and $12.7 million of contractual
interest based on the stated coupon rate and $21.1 million and $19.8 million of amortization of the
discount on the liability component for the six months ended June 30, 2009 and 2008, respectively.
In conjunction with the adoption of FSP APB14-1, the Company applied the guidance to the
Companys debt issuance costs. As a result, the Company allocated the underlying issuance costs
associated with the Convertible Senior Notes to equity in the same ratio as when determining the
appropriate debt discount. The Company allocated $6.9 million to equity with a deferred tax impact
of $2.7 million, and reduced the amount of the debt issuance costs by $6.9 million. Due to the
required retrospective application, the Company allocated $5.0 million as a reduction to retained
earnings.
5. Lines of Credit
In November 2008, the Company entered into a revolving credit facility of $250.0 million (the
Revolving Credit Facility) with Bank of America, N.A. Interest rates on outstanding borrowings are
determined by reference to LIBOR or to an alternate base rate, with margins determined based on
changes in the Companys leverage ratio. Under the credit agreement governing the Companys new
credit facilities, the Company has the right to make up to three requests to increase the aggregate
commitments under the revolving credit facility and/or term loan facilities in an aggregate
principal amount for all such requests of up to $500.0 million, provided certain conditions are
met. The Credit Agreement requires the Company to meet certain financial covenants, including a
maximum consolidated leverage ratio and minimum fixed charge ratio, and includes certain other
restrictions, including restrictions limiting acquisitions, indebtedness, stock repurchases,
capital expenditures and asset sales. If necessary, the Company currently anticipates using the
proceeds of the Revolving Credit Facility for the purpose of general working capital and capital
expenditures and/or other capital needs as they may arise. As of June 30, 2009, the Company has
issued $14.3 million in letters of credit under the revolving credit facility, and accordingly, the
remaining available credit is $235.7 million.
At June 30, 2009, the Companys foreign subsidiaries in China, Japan, and India had available
bank lines of credit denominated in local currency to meet short-term working capital requirements.
The credit facilities bear interest at a fixed rate, the respective banks prime rate, or the Japan
TIBOR rate. The U.S. dollar equivalent of these facilities totaled $12.9 million, none of which was
outstanding at June 30, 2009. Additionally, the Companys Japan subsidiary has an outstanding
letter of credit with a U.S. dollar equivalent of $1.0 million at June 30, 2009 to support its
import duty.
The weighted average interest rate of the Companys total lines of credit was 3.11% at June
30, 2009.
23
6. Commitments and Contingencies
Letters of Credit
The Company had outstanding letters of credit totaling $42.1 million at June 30, 2009, of
which $11.7 million was to support liabilities associated with the Companys self-insured workers
compensation programs, $6.0 million was to support its building lease requirements, $23.4 million
was to support performance bond agreements, and $1.0 million was to support duty on imported
products.
Executive Employment Agreements
The Company has employment contracts with key executives that provide for the continuation of
salary if terminated for reasons other than cause, as defined in those agreements. At June 30,
2009, future employment contract commitments for such key executives were approximately $28.4
million for the remainder of fiscal year 2009.
Contingent Acquisition Obligations
As a result of prior year acquisitions, the Company may have payment obligations based on
percentages of future sales of certain products and services; however, such amounts could not be
reasonably estimated as of June 30, 2009. Several of the purchase agreements the Company has
entered into do not limit the payments to a maximum amount, nor do they restrict the payments
deadline. In addition, several of the purchase agreements may require cash payments of
approximately $59.7 million by the Company based upon the achievement of certain technological and
patent milestones, some without restriction of the payment deadline. For acquisitions accounted for
under SFAS 141, Business Combinations, the Company will account for any such contingent payments as
an addition to the purchase price of the acquired company accordingly. For acquisitions accounted
for under SFAS 141R, Business Combinations, these obligations will be accounted for at fair value
at the time of acquisition with subsequent revisions reflected in the Statement of Operations. For
the six months ended June 30, 2009, none of the contingent payments have been earned or paid.
Environmental Liabilities
As a result of the merger with Applied Biosystems Inc., the Company assumed certain
environmental exposures. At June 30, 2009, the environmental reserves, which are not discounted,
were approximately $2.6 million, including current reserves of $2.5 million. In addition, some of
the assumed environmental reserves are covered under insurance policies. At June 30, 2009, the
Company also has receivables of approximately $1.1 million, of which $1.0 million is included in
short-term assets, for expected reimbursements under the insurance policies.
The Company assumed certain environmental exposures as a result of the merger with Dexter
Corporation in 2000 and recorded reserves to cover estimated environmental clean-up costs. The
environmental reserves, which are not discounted, were approximately $6.7 million at June 30, 2009,
and include current reserves of $0.8 million. In addition, the Company has an insurance policy to
cover these assumed environmental exposures.
Based upon currently available information, the Company believes that it has adequately
provided for these environmental exposures and that the outcome of these matters will not have a
material adverse effect on its consolidated results of operations.
Litigation
The Company is subject to potential liabilities under government regulations and various
claims and legal actions that are pending or may be asserted. These matters have arisen in the
ordinary course and conduct of the Companys business, as well as through acquisitions, and some
are expected to be covered, at least partly, by insurance. Claim estimates that are probable and
can be reasonably estimated are reflected as liabilities of the Company. The ultimate resolution of
these matters is subject to many uncertainties. It is reasonably possible that some of the matters
that are pending or may be asserted could be decided unfavorably to the Company. Although the
amount of liability at June 30, 2009 with respect to these matters cannot be ascertained, the
Company believes that any resulting liability should not materially affect its consolidated
financial statements.
Indemnifications
In the normal course of business, we enter into agreements under which we indemnify third
parties for intellectual property infringement claims or claims arising from breaches of
representations or warranties. In addition, from time to time, we provide indemnity protection to
third parties for claims relating to past performance arising from undisclosed liabilities, product
liabilities, environmental obligations, representations and warranties, and other claims. In these
agreements, the scope and amount of remedy, or the period in which claims can be made, may be
limited. It is not possible to determine the maximum potential amount of future payments, if any,
due under these indemnities due to the conditional nature of the obligations and the unique facts
and circumstances involved in each agreement. Historically, payments made related to these
indemnifications have not been material to our consolidated financial position.
24
Guarantees
There are three types of guarantees related to our business activities that are included in
the scope of FASB Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others which are leases with
recourse provisions, the guarantee of pension benefits for a divested business, and product
warranties.
Leases
We provide lease-financing options to our customers through third party financing companies.
For some leases, the financing companies have recourse to the Company for any unpaid principal
balance upon default by the customer. The leases typically have terms of two to three years and are
secured by the underlying instrument. In the event of default by a customer, we would repossess the
underlying instrument and reimburse the financing company to the extent of the recourse provisions.
We record revenues from these transactions on the completion of installation and acceptance of
products and maintain a reserve for estimated losses on all lease transactions with recourse
provisions based on historical default rates and current economic conditions. At June 30, 2009, the
financing companies outstanding balance of lease receivables with recourse to us was $11.5
million. We believe that we could recover the entire balance from the resale of the underlying
instruments in the event of default by all customers subject to recourse provisions.
Pension Benefits
As part of the Applied Biosystems divestiture of the Analytical Instruments business in
fiscal 1999, the purchaser of the Analytical Instruments business is paying for the pension
benefits for employees of a former German subsidiary. However, we guaranteed payment of these
pension benefits should the purchaser fail to do so, as these payment obligations were not
transferable to the buyer under German law. The guaranteed payment obligation, which approximated
$49.8 million at June 30, 2009, is not expected to have a material adverse effect on the
Consolidated Financial Statements.
Product Warranties
We accrue warranty costs for product sales at the time of shipment based on historical
experience as well as anticipated product performance. Our product warranties extend over a
specified period of time ranging up to two years from the date of sale depending on the product
subject to warranty. The product warranty accrual covers parts and labor for repairs and
replacements covered by our product warranties. We periodically review the adequacy of our warranty
reserve, and adjust, if necessary, the warranty percentage and accrual based on actual experience
and estimated costs to be incurred. At June 30, 2009 and December 31, 2008, the outstanding balance
of product warranties was $12.1 million and $12.6 million, respectively.
The following table provides the analysis of the warranty reserve for the six months ended
June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
(in thousands) (unaudited) |
|
2009 |
|
|
2008 |
|
Balance at January 1 |
|
$ |
12,616 |
|
|
$ |
213 |
|
Accruals for warranties |
|
|
6,106 |
|
|
|
|
|
Settlements made during the year |
|
|
(6,705 |
) |
|
|
|
|
Currency translation |
|
|
44 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30 |
|
$ |
12,061 |
|
|
$ |
213 |
|
|
|
|
|
|
|
|
25
7. Pension Plans and Postretirement Health and Benefit Program
The Company has several defined benefit pension plans covering its U.S. employees and
employees in several foreign countries.
The components of net periodic pension cost or (benefit) for the Companys pension plans and
postretirement benefits plans for the three and six months ended June 30, 2009 and 2008,
respectively were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans |
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
|
(in thousands) (unaudited) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost (benefit) |
|
$ |
76 |
|
|
$ |
(20 |
) |
|
$ |
151 |
|
|
$ |
|
|
Interest cost |
|
|
9,128 |
|
|
|
819 |
|
|
|
18,243 |
|
|
|
1,591 |
|
Expected return on plan assets |
|
|
(8,258 |
) |
|
|
(942 |
) |
|
|
(17,116 |
) |
|
|
(1,853 |
) |
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial loss |
|
|
896 |
|
|
|
19 |
|
|
|
955 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost (benefit) |
|
$ |
1,842 |
|
|
$ |
(124 |
) |
|
$ |
2,233 |
|
|
$ |
(153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement Plans |
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(in thousands) (unaudited) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
53 |
|
|
$ |
|
|
|
$ |
106 |
|
|
$ |
|
|
Interest cost |
|
|
912 |
|
|
|
87 |
|
|
|
1,833 |
|
|
|
157 |
|
Expected return on plan assets |
|
|
(46 |
) |
|
|
(150 |
) |
|
|
(195 |
) |
|
|
(299 |
) |
Amortization of prior service cost |
|
|
60 |
|
|
|
60 |
|
|
|
120 |
|
|
|
120 |
|
Amortization of actuarial loss |
|
|
244 |
|
|
|
149 |
|
|
|
393 |
|
|
|
299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
1,223 |
|
|
$ |
146 |
|
|
$ |
2,257 |
|
|
$ |
277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Plans |
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
(in thousands) (unaudited) |
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Service cost |
|
$ |
1,151 |
|
|
$ |
651 |
|
|
$ |
2,296 |
|
|
$ |
1,234 |
|
Interest cost |
|
|
1,196 |
|
|
|
935 |
|
|
|
2,358 |
|
|
|
1,839 |
|
Expected return on plan assets |
|
|
(883 |
) |
|
|
(829 |
) |
|
|
(1,735 |
) |
|
|
(1,634 |
) |
Amortization of actuarial loss |
|
|
59 |
|
|
|
62 |
|
|
|
123 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
1,523 |
|
|
$ |
819 |
|
|
$ |
3,042 |
|
|
$ |
1,564 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Income Taxes
Income taxes are determined using an estimated annual effective tax rate applied against
income, and then adjusted for the tax impacts of certain significant and discrete items. For the
six months ended June 30, 2009, the Company treated the release of a $25 million valuation
allowance relating to a capital loss carry forward and $14.6 million in capital gains tax related
to ongoing corporate restructuring as discrete items for which the tax effect was recognized
separately from the application of the estimated annual effective tax rate. Excluding the impact
of the discrete items, the effective tax rate is 24.2%.
In accordance with FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (FIN
48), the Company has classified uncertain tax positions as non-current income tax liabilities
unless expected to be paid in one year. The Companys continuing practice is to recognize interest
and/or penalties related to income tax matters in income tax expense.
The following table summarizes the activity related to our unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2009 |
|
|
December 31, 2008 |
|
(in thousands) |
|
(unaudited) |
|
|
|
|
|
Gross unrecognized tax benefits at January 1 |
|
$ |
74,904 |
|
|
$ |
27,784 |
|
Increases in tax positions for prior years |
|
|
10 |
|
|
|
26 |
|
Decreases in tax positions for prior years |
|
|
(4 |
) |
|
|
(1,293 |
) |
Increases in tax positions for current year relating to ongoing operations |
|
|
1,977 |
|
|
|
5,981 |
|
Increases in tax positions for current year relating to acquisition |
|
|
5,487 |
|
|
|
46,200 |
|
Decreases in tax positions due to settlements with taxing authorities |
|
|
|
|
|
|
(3,794 |
) |
|
|
|
|
|
|
|
Gross unrecognized tax benefits |
|
$ |
82,374 |
|
|
$ |
74,904 |
|
|
|
|
|
|
|
|
When combined with interest and other indirect tax benefits when recognized,
the $82.4 million
of gross unrecognized tax benefits become $82.8 million in net unrecognized tax benefits, and of
which, $79.4 million would reduce our income tax expense and effective tax rate, if recognized
after the measurement period. In conjunction with the adoption of FIN48, the Company has
classified uncertain tax positions as non-current income tax liabilities unless expected to be paid
in one year. The Companys continuing practice is to recognize interest and/or penalties related
to income tax matters in income tax expense. As of June 30, 2009, the total amount of accrued
income tax-related interest and penalties included in the consolidated statement of operations was
$5.1 million, and $11.5 million in the consolidated statement of financial position.
26
It is reasonably possible that there will be a reduction to the balance of unrecognized tax
benefits up to $45.0 million in the next twelve months.
The Company is subject to routine compliance reviews on various tax matters around the world
in the ordinary course of business. Currently, income tax audits are in Argentina, Austria,
Belgium, Canada, China, Hungary, Israel, Italy, Japan, Norway, Singapore, Switzerland, United
Kingdom, and the United States.
9. Stock Repurchase Program
In July 2007, the Board of Directors of the Company (Board) approved a program authorizing
management to repurchase up to $500.0 million of common stock over the next three years, of which
$265.0 million remains open and available for purchase at June 30, 2009. Under this plan, the
Company repurchased 1.2 million shares at a total cost of approximately $100.0 million for the year
ended December 31, 2008. The cost of repurchased shares are included in treasury stock and reported
as a reduction in stockholders equity. The amount of stock the Company is able to repurchase is
limited by the covenants of the new debt financing associated with the Applied Biosystems merger.
10. Restructuring Costs
In November 2008, the Company completed the merger with Applied Biosystems to form a company
that combines both businesses into a global leader in biotechnology reagents and instrument systems
dedicated to improving the human condition. In connection with the merger and also the desire to
achieve synergies associated with economies of scale, the Company initiated a restructuring plan to
provide one-time termination costs, specifically severance and retention bonuses, to those
employees whose employment positions would be eliminated and one-time relocation costs to those
employees whose employment positions would be relocated. The restructuring plan also includes
closure of certain leased facilities that will no longer be used in the Companys operations. The
costs included in this restructuring plan relate to facilities and employees existing at the
Company prior to the merger with Applied Biosystems. We estimate the total restructuring expenses
to be incurred in connection with the restructuring plan will be approximately $25.5 million. Of
this total, approximately $19.0 million relates to one-time termination costs and $4.0 million
relates to one-time relocation costs. The remaining $2.5 million relates to site closures. We
anticipate that we will incur these restructuring expenses through
2010. The restructuring plan associated with the acquisition of AB
accounted for under
GITF 95-3 is disclosed under Note 3 Business
Combinations and Consolidation Costs.
During the three and six months ended June 30, 2009, $5.0 million and $6.8 million,
respectively, of one-time termination costs and $0.8 million and $2.5 million, respectively, of
one-time relocation costs were included in business consolidation costs in the Consolidated
Statements of Operations in accordance with Statement of Financial Accounting Standards (SFAS) 146,
Accounting for Costs Associated with Exit or Disposal Activities. During the three and six months
ended June 30, 2009, $0.2 million and $0.3 million, respectively, of one-time site closure costs
were also included in business consolidation costs.
The following table summarizes the charges and spending relating to the restructuring plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One-Time |
|
|
One-Time |
|
|
One-Time |
|
|
|
|
|
|
Termination |
|
|
Site Closure |
|
|
Relocation |
|
|
|
|
(in thousands) (unaudited) |
|
Costs |
|
|
Costs |
|
|
Costs |
|
|
Total |
|
Restructuring reserves as of December 31, 2008 |
|
$ |
3,218 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,218 |
|
Charged to expenses |
|
|
6,795 |
|
|
|
252 |
|
|
|
2,538 |
|
|
|
9,585 |
|
Amounts paid |
|
|
(2,605 |
) |
|
|
(13 |
) |
|
|
(759 |
) |
|
|
(3,377 |
) |
Foreign currency translation |
|
|
226 |
|
|
|
3 |
|
|
|
|
|
|
|
229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring reserves as of June 30, 2009 |
|
$ |
7,634 |
|
|
$ |
242 |
|
|
$ |
1,779 |
|
|
$ |
9,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative amount incurred to date |
|
$ |
10,332 |
|
|
$ |
252 |
|
|
$ |
2,538 |
|
|
$ |
13,122 |
|
11. Subsequent Events
The
Company has completed an evaluation of all subsequent events through August 6, 2009, which
is the issuance date of these Consolidated Financial Statements and concluded one subsequent event
occurred that required disclosure. On July 24th, 2009, the Company paid approximately
$200.0 million to reduce the obligations under Term Loan B (as discussed in
Note 4 Long-Term
Debt). With the extinguishment of the debt, the Company will record a loss on the
extinguishment of approximately $6.8 million in the third
quarter of 2009 related to the acceleration of debt issuance costs.
27
|
|
|
ITEM 2. |
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion and analysis of financial condition and results of operations should
be read in conjunction with the Unaudited Consolidated Financial Statements and Notes thereto
included elsewhere in this report and the Consolidated Financial Statements and Notes thereto
included in our annual report on Form 10-K for the fiscal year ended December 31, 2008.
Forward-looking Statements
Some of the statements in this Quarterly Report on Form 10-Q about our expectations, beliefs,
plans, objectives, prospects, financial condition, assumptions or future events or performance are
not historical facts and are forward-looking statements as that term is defined under the Federal
Securities Laws. These statements are often, but not always, made through the use of words or
phrases such as believe, anticipate, should, intend, plan, will, expect, estimate,
project, positioned, strategy, outlook, and similar words. You should read statements that
contain these types of words carefully. Such forward-looking statements are subject to a number of
risks, uncertainties and other factors that could cause actual results to differ materially from
what is expressed or implied in such forward-looking statements. There may be events in the future
that we are not able to predict accurately or over which we have no control. Potential risks and
uncertainties include, but are not limited to, those detailed in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission on March
2, 2009. We do not undertake any obligation to release publicly any revisions to such
forward-looking statements to reflect events or uncertainties after the date hereof or to reflect
the occurrence of unanticipated events.
OVERVIEW
Revenues for the three and six months ended June 30, 2009 were $832.8 million and $1,608.5
million, respectively, with net income of $38.9 million and $54.5 million, respectively.
Our Business
We are a global biotechnology tools company dedicated to helping our customers make scientific
discoveries and ultimately improve the quality of life. Our systems, reagents, and services enable
researchers to accelerate scientific exploration, driving to discoveries and developments that make
life better. Life Technologies customers do their work across the biological spectrum, working to
advance personalized medicine, regenerative science, molecular diagnostics, agricultural and
environmental research, and 21st century forensics.
Our systems and reagents, enable, simplify and improve a broad spectrum of biological research
of genes, proteins and cells within academic and life science research and commercial applications.
Our scientific know-how is making biodiscovery research techniques more effective and efficient to
pharmaceutical, biotechnology, agricultural, government and academic researchers with backgrounds
in a wide range of scientific disciplines.
As of January 1, 2009, we aligned our business under four divisions Molecular Biology
Systems, Genetic Systems, Cell Systems and Mass Spectrometry. The Mass Spectometry division is
comprised of a 50% interest in a joint venture that the Company acquired as a part of the AB
merger. The Company accounts for this investment using the equity method.
We offer many different products and services, and are continually developing and/or acquiring
others. Some of our specific product categories include the following:
|
|
High-throughput gene cloning and expression technology, which allows customers to clone
and expression-test genes on an industrial scale. |
|
|
|
Pre-cast electrophoresis products, which improve the speed, reliability and convenience of
separating nucleic acids and proteins. |
|
|
|
Antibodies, which allow researchers to capture and label proteins, visualize their location
through use of Molecular Probes dyes and discern their role in disease. |
|
|
|
Magnetic beads, which are used in a variety of settings, such as attachment of molecular
labels, nucleic acid purification, and organ and bone marrow tissue type testing. |
28
|
|
Molecular Probes fluorescence-based technologies, which facilitate the labeling of
molecules for biological research and drug discovery. |
|
|
|
Transfection reagents, which are widely used to transfer genetic elements into living cells
enabling the study of protein function and gene regulation. |
|
|
|
PCR and Real Time PCR systems and reagents, which enable researchers to amplify and detect
targeted nucleic acids (DNA and RNA molecules) for a host of applications in molecular
biology. |
|
|
|
Cell culture media and reagents used to preserve and grow mammalian cells, which are used
in large scale cGMP bio-production facilities to produce large molecule biologic therapies. |
|
|
|
RNA Interference reagents, which enable scientists to selectively turn off genes in
biology systems to gain insight into biological pathways. |
|
|
|
Capillary electrophoresis and massively parallel SOLiD(tm) DNA sequencing systems
and reagents, which are used to discover sources of genetic and epigenetic variation, to
catalog the DNA structure of organisms de novo, to verify the composition of genetic research
material, and to apply these genetic analysis discoveries in markets such as forensic human
identification. |
|
|
|
High performance mass spectrometer systems which are used in numerous applications such as
drug discovery and clinical development of therapeutics as well as in basic biological
research, food and beverage quality testing, environmental testing, and other applied or
clinical research applications. |
The principal markets for our products include the life sciences research market and the
biopharmaceutical production market. We divide our principal market and customer base into
principally three categories:
Life science researchers. The life sciences research market consists of laboratories generally
associated with universities, medical research centers, government institutions such as the United
States National Institutes of Health, or the NIH, and other research institutions as well as
biotechnology, pharmaceutical, diagnostic, energy, agricultural, and chemical companies.
Researchers at these institutions are using our products and services in a broad spectrum of
scientific activities, such as: searching for drugs or other techniques to combat a wide variety of
diseases, such as cancer and viral and bacterial disease; researching diagnostics for disease
identification or prognosis or for improving the efficacy of drugs to targeted patient groups; and
assisting in vaccine design, bioproduction, and agriculture. Our products and services provide the
research tools needed for genomics studies, proteomics studies, gene splicing, cellular analysis,
and other key research applications that are required by these life science researchers. In
addition, our research tools are important in the development of diagnostics for disease
determination as well as identification of patients for more targeted therapy.
Commercial producers of biopharmaceutical and other high valued proteins. We serve industries
that apply genetic engineering to the commercial production of useful but otherwise rare or
difficult to obtain substances, such as proteins, interferons, interleukins, t-PA and monoclonal
antibodies. The manufacturers of these materials require larger quantities of the same sera and
other cell growth media that we provide in smaller quantities to researchers. Industries involved
in the commercial production of genetically engineered products include the biotechnology,
pharmaceutical, food processing and agricultural industries.
Users who apply our technologies to enable or improve particular activities. We provide tools
that apply our technology to enable or improve activities in particular markets, which we refer to
as applied markets. The current focus of our products for these markets is in the areas of:
forensic analysis, which is used to identify individuals based on their DNA; quality and safety
testing, such as testing required to measure food, beverage, or environmental quality, and
pharmaceutical manufacturing quality and safety; and biosecurity, which refers to products needed
in response to the threat of biological terrorism and other malicious, accidental, and natural
biological dangers. The Applied Biosystems branded forensic testing and human identification
products and services are innovative and market-leading tools that have been widely accepted by
investigators and laboratories in connection with, for example, criminal investigations, the
exoneration of individuals wrongly accused or convicted of crimes, identifying victims of
disasters, and paternity testing.
CRITICAL ACCOUNTING POLICIES
29
In connection with the acquisition of AB and resulting reorganization, the Company has
determined in accordance with SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information, to operate as one operating segment. The Company believes our chief operating decision
maker (CODM) makes decisions based on the Company as a whole. In addition, the Company shares the
common basis of organization, types of products and services which derive revenues, and the
economic environments. Accordingly, we believe it is appropriate to operate as one reporting
segment. The Company will disclose the revenues for each of its internal divisions to allow the
reader of the financial statements the ability to gain transparency into the operations of the
Company. We have restated historical divisional revenue information to conform to the current year
presentation. Other than this, there were no significant changes in critical accounting policies
from those at December 31, 2008.
During the current fiscal year, we have adopted FSP APB 14-1, Accounting for Convertible Debt
Instruments that May be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP
APB 14-1 requires retrospective application upon adoption hence there was a material adverse impact
on the results of operations and earnings per share in the current fiscal year. We adopted SFAS
168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles- a replacement of SFAS 162, SFAS 165, Subsequent Events, FSP SFAS No 115-2 and SFAS
124-2, Recognition and presentation of Other-Than-Temporary Impairments, and FSP SFAS 107-1 and APB
28-1, Interim Disclosures about Fair Values of Financial Instruments, in the interim period
beginning April 1, 2009. In addition, we adopted SFAS 132R-1, Employers Disclosures about
Postretirement Benefit Plan Assets, the ratification of EITF 07-5, Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock, SFAS 161, Disclosures About
Derivative Instruments and Hedging Activitiesan amendment of FASB Statement No. 133, SFAS 160,
Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB No. 51, SFAS
141R, Business Combinations, and SFAS 157, Fair Value Measurements for non-financial assets and
liabilities due to the deferral period provided by FSP 157-2, Effective Date of SFAS 157. For
additional information on the recent accounting pronouncements impacting our business, see Note 1
of the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
Second Quarter of 2009 Compared to the Second Quarter of 2008
The following table compares revenues and gross margin for the second quarter of 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
(in millions)(unaudited) |
|
2009 |
|
|
2008 |
|
|
Increase |
|
|
% Increase |
|
Molecular Biology Systems |
|
$ |
399.1 |
|
|
$ |
162.8 |
|
|
$ |
236.3 |
|
|
|
145 |
% |
Cell Systems |
|
|
200.7 |
|
|
|
192.2 |
|
|
|
8.5 |
|
|
|
4 |
% |
Genetic Systems |
|
|
232.6 |
|
|
|
12.8 |
|
|
|
219.8 |
|
|
NM |
|
Corporate and other |
|
|
0.4 |
|
|
|
|
|
|
|
0.4 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
832.8 |
|
|
$ |
367.8 |
|
|
$ |
465.0 |
|
|
|
126 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
481.6 |
|
|
$ |
225.1 |
|
|
$ |
256.5 |
|
|
|
114 |
% |
Total gross profit margin % |
|
|
57.8 |
% |
|
|
61.2 |
% |
|
|
|
|
|
|
|
|
Revenue
The Companys revenues increased by $465.0 million or 126% for the second quarter of 2009
compared to the second quarter of 2008. The increase in revenue is driven primarily by an increase
of $476.0 million due to the acquisition of AB. The remaining year over year change in revenue was
due to increases of $11.9 million in volume and pricing offset by decreases of $23.8 million in
unfavorable currency impacts including hedging.
As of January 1, 2009, we aligned our business under four divisions Molecular Biology
Systems, Genetic Systems, Cell Systems and Mass Spectrometry. The Mass Spectrometry division is
comprised of a 50% interest in a joint venture that the Company acquired as a part of the AB
acquisition. The Company accounts for this investment using the equity method. Our share of
earnings or losses, including revenue, is included in other income. The Molecular Biology Systems
(MBS) division includes the molecular biology based technologies including basic and real-time PCR,
RNAi, DNA synthesis, thermo-cycler instrumentation, cloning and protein expression profiling and
protein analysis. Revenue in this division increased by $236.3 million or 145% in the second
quarter of 2009 compared to the second quarter of 2008. This increase was driven primarily by
$236.2 million from the acquisition of AB and $11.1 million in increased volume and pricing,
partially offset by $11.6 million in unfavorable currency impacts including hedging. The Cell
Systems (CS) division includes all product lines used in the study of cell function, including cell
culture media and sera, stem cells and related tools, cellular imaging products, antibodies, drug
discovery services, and cell therapy related products. Revenue in this division increased $8.5
million or 4% in the second quarter of 2009 compared to the second quarter of 2008. This increase
was driven primarily by $16.4 million from the acquisition of AB and $3.6 million in increased
volume and pricing, partially offset by
30
$11.3 million in unfavorable currency impacts including hedging. The Genetic System (GS)
division includes sequencing systems and reagents, including capillary electrophoresis and the
SOLiD system, as well as reagent kits developed specifically for applied markets, such as
forensics, food safety and pharmaceutical quality monitoring. Revenue in this division increased by
$219.8 million in the second quarter of 2009 compared to the second quarter of 2008 driven
primarily by the acquisition of AB.
Gross Profit
Gross profit increased $256.5 million or 114% in the second quarter of 2009 compared to the
second quarter of 2008. The increase in gross profit was primarily due to the acquisition of AB,
offset by an increase of $53.5 million in purchased intangible assets amortization. Amortization
expense related to purchased intangible assets acquired in our business combinations was $70.9
million for the second quarter of 2009 compared to $17.4 million for the second quarter of 2008.
The increase was the result of the amortization of intangibles resulting from the acquisition of
AB.
Operating Expenses
The following table compares operating expenses for the second quarter of 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, |
|
|
|
|
|
|
2009 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
As a |
|
|
|
|
|
As a |
|
|
|
|
|
|
Operating |
|
percentage of |
|
Operating |
|
percentage of |
|
|
|
|
(in millions)(unaudited) |
|
expense |
|
revenues |
|
expense |
|
revenues |
|
$ Increase |
|
% Increase |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
$ |
253.0 |
|
|
|
30 |
% |
|
$ |
115.5 |
|
|
|
31 |
% |
|
$ |
137.5 |
|
|
|
119 |
% |
Research and development |
|
|
81.8 |
|
|
|
10 |
% |
|
|
33.2 |
|
|
|
9 |
% |
|
|
48.6 |
|
|
|
146 |
% |
Business consolidation costs |
|
|
28.9 |
|
|
|
3 |
% |
|
|
1.4 |
|
|
|
|
|
|
|
27.5 |
|
|
NM |
Selling, general and administrative. For the second quarter of 2009, selling, general and
administrative expenses increased $137.5 million or 119% compared to the second quarter of 2008.
This increase was driven primarily by $122.6 million related to the acquisition of AB, an increase
of $8.5 million in compensation, bonus and benefits, an increase of $4.8 million related to a legal
settlement charge, and an increase of $4.2 million in outside services partially offset by $5.1
million in favorable currency impacts.
Research and development. For the second quarter of 2009, research and development expenses
increased $48.6 million or 146% compared to the second quarter of 2008. This increase was driven
primarily by $47.5 million related to the acquisition of AB and an increase of $0.9 million in
outside services partially offset by $1.5 million in favorable currency impacts.
Business Consolidation Costs. Business consolidation costs for the second quarter of 2009 were
$28.9 million, compared to $1.4 million in the second quarter of 2008, and represent costs
associated with our integration efforts related to AB and to realign our business and consolidate
certain facilities. Included in these costs are various activities related to the acquisition which
were associated with combining the two companies and consolidating redundancies. Also included in
these expenses are one time expenses associated with third party providers assisting in the
realignment of the two companies. We expect to continue to incur business consolidation costs
throughout 2009 as we further consolidate operations and facilities and realign the previously
existing businesses.
Other Income (Expense)
Interest Income
Interest income was $0.7 million for the second quarter of 2009 compared to $5.3 million for
the second quarter of 2008. The decrease was primarily due to economic conditions leading to lower
interest rates and a lower balance in cash and cash equivalents as a result of the purchase price
paid for the AB acquisition.
Interest income in the future will be affected by changes in short-term interest rates and
changes in cash balances, which may materially increase or decrease as a result of acquisitions,
debt repayment, stock repurchase programs and other financing activities.
Interest Expense
Interest expense was $49.7 million for the second quarter of 2009 compared to $17.3 million
for the second quarter of 2008. The increase in interest expenses was driven by the interest
incurred on the $2,400 million of debt issued in November 2008 in connection with the acquisition
of AB.
31
The Company adopted FSP APB14-1during the first quarter of 2009 and as a result has incurred
an additional $10.6 million in expense in the second quarter of 2009 and has restated the prior
year accounts to include $10.0 million in expense related to the adoption in the second quarter of
2008.
Other Income (Expense), Net
Other expense, net, was $0.6 million for the second quarter of 2009 compared to $0.4 million
for the same period of 2008. Included in the second quarter of 2009 was a net gain of $8.3 million
related to our interest in the joint venture. This gain included $14.5 million in income from
operations of the joint venture offset by $6.2 million in expenses associated with the amortization
of purchased intangibles and amortization of deferred revenue fair market value adjustments, which
all are directly attributable to the joint venture. This gain was primarily offset by $8.9 million
in foreign currency losses and other miscellaneous items.
Provision for Income Taxes
The provision for income taxes as a percentage of pre-tax income from continuing operations
was 42.9% for the second quarter of 2009 compared with 25.2% for the second quarter of 2008. The
increase in the effective tax rate was primarily attributable to $14.6 million of tax related to
ongoing corporate restructuring incurred in the second quarter,
without which the effective tax rate for the second quarter of 2009
would have been 21.6%.
First Six Months of 2009 compared to First Six Months of 2008
The following table compares revenues and gross margin for the first six months of 2009 and
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
|
|
|
|
(in millions)(unaudited) |
|
2009 |
|
|
2008 |
|
|
Increase |
|
|
% Increase |
|
Molecular Biology Systems |
|
$ |
765.6 |
|
|
$ |
325.0 |
|
|
$ |
440.6 |
|
|
|
136 |
% |
Cell Systems |
|
|
392.4 |
|
|
|
368.9 |
|
|
|
23.5 |
|
|
|
6 |
% |
Genetic Systems |
|
|
451.8 |
|
|
|
24.1 |
|
|
|
427.7 |
|
|
NM |
Corporate and other |
|
|
(1.3 |
) |
|
|
|
|
|
|
(1.3 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,608.5 |
|
|
$ |
718.0 |
|
|
$ |
890.5 |
|
|
|
124 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
866.3 |
|
|
$ |
443.9 |
|
|
$ |
422.4 |
|
|
|
95 |
% |
Total gross profit margin % |
|
|
53.9 |
% |
|
|
61.8 |
% |
|
|
|
|
|
|
|
|
Revenue
The Companys revenues increased by $890.5 million or 124% for the first six months of 2009
compared to the first six months of 2008. The increase in revenue is driven primarily by an
increase of $911.3 million due to the acquisition of AB. The remaining year over year change in
revenue was due to increases of $26.6 million in volume and pricing offset by decreases of $4.9
million in lower settlement revenue and $41.2 million in unfavorable currency impacts including
hedging.
Revenue in the MBS division increased by $440.6 million or 136% in the first half of 2009
compared to the same period of 2008. This increase was driven primarily by $448.7 million from the
acquisition of AB and $15.5 million in increased volume and pricing, partially offset by $4.9
million in lower settlement revenue and $19.7 million in unfavorable currency impacts including
hedging. Revenue in the CS division increased by $23.5 million or 6% during the first half of 2009
compared to the first half of 2008. This increase was driven primarily by $32.1 million from the
acquisition of AB and $12.6 million in increased volume and pricing, partially offset by $20.1
million in unfavorable currency impacts including hedging. Revenue in the GS division increased by
$427.7 million in the first half of 2009 compared to the first half of 2008 driven primarily by the
acquisition of AB.
Gross Profit
Gross profit increased $422.4 million or 95% in the first six months of 2009 compared to the
same period of 2008. The increase in gross profit was primarily due to the acquisition of AB,
offset by an increase of $107.5 million in purchased intangible assets amortization. Amortization
expense related to purchased intangible assets acquired in our business combinations was $141.8
million for the first six months of 2009 compared to $34.3 million for the first six months of
2008. The increase was the result of the amortization of intangibles resulting from the acquisition
of AB.
32
Operating Expenses
The following table compares operating expenses for the first six months of 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, |
|
|
|
|
|
|
2009 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
As a |
|
|
|
|
|
As a |
|
|
|
|
|
|
Operating |
|
percentage of |
|
Operating |
|
percentage of |
|
|
|
|
(in millions)(unaudited) |
|
expense |
|
revenues |
|
expense |
|
revenues |
|
$ Increase |
|
% Increase |
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
$ |
494.1 |
|
|
|
31 |
% |
|
$ |
229.3 |
|
|
|
32 |
% |
|
$ |
264.8 |
|
|
|
115 |
% |
Research and development |
|
|
162.1 |
|
|
|
10 |
% |
|
|
63.8 |
|
|
|
9 |
% |
|
|
98.3 |
|
|
|
154 |
% |
Business consolidation costs |
|
|
56.3 |
|
|
|
4 |
% |
|
|
1.9 |
|
|
|
|
|
|
|
54.4 |
|
|
NM |
Selling, general and administrative. For the first six months of 2009, selling, general and
administrative expenses increased by $264.8 million or 115% compared to the first six months of
2008. This increase was driven primarily by $239.7 million related to the acquisition of AB, an
increase of $13.6 million in compensation, bonus and benefits, an increase of $7.4 million in
outside services, an increase of $4.8 million related to a legal settlement charge, and an increase
of $2.3 million in depreciation and other expenses, partially offset with $5.3 million in favorable
currency impacts.
Research and development. For the first six months of 2009, research and development expenses
increased by $98.3 million or 154% compared to the first six months of 2008. This increase was
driven primarily by $96.2 million related to the acquisition of AB, ,a $2.1 million increase in
compensation, bonus, benefits, and an increase of $1.5 million in outside services, partially
offset by decreases in favorable currency impacts of $0.9 million.
Business Consolidation Costs. Business consolidation costs for the first six months of 2009
were $56.3 million, compared to $1.9 million in the first six months of 2008, and represent costs
associated with our integration efforts related to AB and to realign our business and consolidate
certain facilities. Included in these costs are various activities related to the acquisition which
were associated with combining the two companies and consolidating redundancies. Also included in
these expenses are one time expenses associated with third party providers assisting in the
realignment of the two companies. We expect to continue to incur business consolidation costs
throughout 2009 as we further consolidate operations and facilities and realign the previously
existing businesses.
Other Income (Expense)
Interest Income
Interest income was $2.1 million for the first six months of 2009 compared to $14.3 million
for the first six months of 2008. The decrease was primarily due to economic conditions leading to
lower interest rates and a lower balance in cash and cash equivalents as a result of the purchase
price paid for the AB acquisition.
Interest income in the future will be affected by changes in short-term interest rates and
changes in cash balances, which may materially increase or decrease as a result of acquisitions,
debt repayment, stock repurchase programs and other financing activities.
Interest Expense
Interest expense was $97.8 million for the first six months of 2009 compared to $34.4 million
for the first six months of 2008. The increase in interest expenses was driven by the interest
incurred on the $2,400 million of debt issued in November 2008 in connection with the acquisition
of AB.
The Company adopted FSP APB14-1in the first quarter of 2009 and as a result has incurred an
additional $21.1 million in expense in the first half of 2009 and has restated the prior year
accounts to include $19.8 million in expense related to the adoption in the first half of 2008.
Other Income (Expense), Net
Other income (expense), net, was $(0.4) million for the first six months of 2009 compared to
$1.4 million for the same period of 2008. Included in the first six months of 2009 was a net gain
of $7.9 million related to our interest in the joint venture. This gain included $23.5 million in
income from operations of the joint venture offset by $15.6 million in expenses associated with the
amortization of purchased intangibles, amortization of inventory fair market value adjustments and
amortization of deferred revenue fair market value adjustments, which all are directly attributable
to the joint venture. This gain was primarily offset by $8.3 million in foreign currency losses
and other miscellaneous items.
33
Provision for Income Taxes
The provision for income taxes as a percentage of pre-tax income from continuing operations
was 5.3% for the first six months of 2009 compared with 23.9% for the first six months of 2008.
Based on certain tax planning strategies developed during the first six months of 2009, the Company
was able to release $25.0 million of valuation allowance relating to a capital loss carry forward
offset by $14.6 million of tax related to ongoing corporate restructuring incurred in the second
quarter. The effective tax rate for 2009 would have been 24.2% without the impact of the release
of the valuation allowance and additional tax costs related to ongoing corporate restructuring.
The differences between the U.S. federal statutory tax rate and the Companys effective tax
rate without the discrete items are as follows:
|
|
|
|
|
Statutory U.S. federal income tax rate |
|
|
35.0 |
% |
State income tax |
|
|
1.2 |
|
Foreign earnings taxed at non-U.S. rates (includes a significant
benefit relating to the Singapore tax exemption grant) |
|
|
(18.5 |
) |
Repatriation of other foreign earnings, net of related benefits |
|
|
9.8 |
|
Credits and incentives |
|
|
(6.6 |
) |
Non-deductible compensation & other adjustments |
|
|
1.8 |
|
Other |
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate |
|
|
24.2 |
% |
34
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $483.6 million at June 30, 2009, an increase of $147.7 million
from December 31, 2008 primarily due to cash provided by operating activities of $251.1 million and
cash from financing activities of $9.8 million offset by cash used in investing activities of
$146.7 million, and an increase of $33.5 million in the US dollar value of cash at our foreign
subsidiaries. Cash flow from discontinued operations is included in the Consolidated Statements of
Cash Flows.
Operating Activities. Operating activities provided net cash of $251.1 million through the
second quarter of 2009 primarily from our net income of $54.5 million plus net noncash charges of
$334.4 million, partially offset by a decrease in cash from operating assets and liabilities of
$137.9 million. Non-cash charges were primarily comprised of amortization of intangibles of $147.2
million, amortization of purchased fair market inventory adjustments of $62.1 million, depreciation
of $55.0 million, stock based compensation expense of $27.6 million, amortization of purchased
deferred revenue adjustments of $23.2 million and non-cash interest expense of $21.1 million
resulting from the adoption of APB 14-1. The decrease in cash within operating assets and
liabilities was mainly due to a $53.6 million net decrease in income tax liabilities, a $33.9
million decrease in accounts payable, accrued expenses and other liabilities, a $56.5 million
increase in trade accounts receivable, and a $6.9 million increase in inventories and other assets,
partially offset by a $12.9 million decrease in prepaid expenses and other current assets.
The Companys pension plans and post retirement benefit plans are funded in accordance with
local statutory requirements or by voluntary contributions. The funding requirement is based on the
funded status, which is measured by using various actuarial assumptions, such as interest rate,
rate of compensation increase, or expected return on plan assets. The Companys future contribution
may change when new information is available or local statutory requirement is changed.
Investing Activities. Net cash used in investing activities through the second quarter of 2009
was $146.7 million. The cash was used for purchases of property plant and equipment of $67.9
million, $45.3 million in additional cash considerations associated with the acquisition of Applied
Biosystems, $24.5 million in asset purchases from third parties as well as $8.9 million on
purchases of investments.
The Company has undertaken restructuring activities in connection with the merger of Applied
Biosystems, which primarily include one-time termination benefits related to elimination of
duplicative positions, mostly in manufacturing research and development functions, and executive
termination and change in control agreements. The restructuring plan also includes charges
associated with closure of certain leased facilities and relocation costs. As a result of the plan,
the Company expects to achieve operating efficiencies in future periods related to salary and
overhead costs specifically related to its selling, general and administrative and research and
development costs. As of June 30, 2009, the Company had recorded liabilities of $31.3 million
related to this plan. The Company plans to continue to incur restructuring charges until the
completion of its plan, which is expected to be by mid 2010. Total restructuring expenditures are
estimated to be approximately $105.1 million, of which $86.7 million was incurred in the financial
statements since the inception of the plan.
At June 30, 2009, the Company holds $35.4 million in AAA rated auction rate securities.
Beginning in February 2008, auctions failed for the Companys holdings because sell orders exceeded
buy orders. As a result of the failed auctions, the Company is holding illiquid securities because
the funds associated with these failed auctions will not be accessible until the issuer calls the
security, a successful auction occurs, a buyer is found outside of the auction process, or the
security matures. In August 2008, UBS announced that it has agreed to a settlement in principle
with the Securities and Exchange Commission (SEC) and other state regulatory agencies represented
by North American Securities Administrators Association to restore liquidity to all remaining
clients who hold auction rate securities. UBS committed to repurchase auction rate securities from
their private clients at par beginning January 1, 2009. During six months ended June
30, 2009, UBS repurchased $0.2 million auction rate securities at par from the Company. The
Company intends to have the settlement completed by July 2012. Until UBS fully redeems the
Companys auction rate securities, UBS has loaned to the Company the par value of the auction rate
securities with the underlying auction rate securities as the collateral. The Company will be
charged interest on the loan equal to the interest earned on the auction rate securities during
this period. As a result, the Company already has access to cash associated with these auction rate
securities and does not believe there are liquidity concerns associated with these instruments.
Financing Activities. Net cash provided by financing activities through the second quarter of
2009 was $9.8 million. The primary drivers were proceeds from the exercise of employee stock
options and purchase rights of $48.3 million partially offset by $40.0 million from principal
payments on long term obligations.
In November 2008, the Company entered into a $2,650.0 million Credit Agreement consisting of
the Revolving Credit Facility of $250.0 million, a term loan A facility of $1,400.0 million, and a
term loan B facility of $1,000.0 million to fund a portion of the cash consideration paid as part
of the Applied Biosystems merger. The remainder of the borrowing was used to pay for merger
transaction costs, to facilitate normal operations, and to refinance credit facility outstanding
previous to the merger. The Credit Agreement
35
requires the Company to meet certain financial covenants, including a maximum consolidated
leverage ratio and minimum fixed charge ratio, and includes certain other restrictions, including
restrictions limiting acquisitions, indebtedness, stock repurchases, capital expenditures and asset
sales. For the period ended June 30, 2009, the interest on the revolving credit facility and the
term loan A was LIBOR plus 2.50% and the term loan B was at the Base Rate plus 2%. Aggregate
interest and principal paid on the credit facilities were $46.0 million and $40.0 million,
respectively, for the six months ended June 30, 2009. The Company has issued $14.3 million in
letters of credit through the new revolving credit facility, and, accordingly, the remaining credit
available under that facility is $235.7 million.
The Companys foreign subsidiaries in China, Japan, and India had available bank lines of
credit denominated in local currency to meet short-term working capital requirements. The U.S.
dollar equivalent of these facilities totaled $12.9 million, none of which was outstanding at June
30, 2009.
We believe our current cash and cash equivalents, investments, cash provided by operations and
interest income earned thereon and cash available from bank loans and lines of credit will satisfy
our working capital requirements for the foreseeable future. Our future capital requirements and
the adequacy of our available funds will depend on many factors, including future business
acquisitions, future stock or debt repayment or repurchases, scientific progress in our research
and development programs and the magnitude of those programs, our ability to establish
collaborative and licensing arrangements, the cost involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims and competing technological and market developments. We may
seek to retire or repurchase our outstanding debt. Such
repurchases or exchanges will depend on prevailing market conditions, our liquidity requirements,
contractual restrictions and other factors and it may have a material impact to our financial
results. In light of the current market conditions surrounding the credit market, the risk of the
inability to obtain credit in the market is a potential risk. We believe that our annual positive
cash flow generation and secured financing arrangements allow the company to mitigate this risk and
ensures the company has the necessary working capital requirements to fund continued operations.
We intend to continue our strategic investment activities in new product development, in-licensing
technologies and acquisitions that support our platforms. In the event additional funding needs
arise, we may obtain cash through new debt or stock issuance, or a combination of sources. The
Company believes in the event of a necessary refinancing in the next four years, the Company will
have access to the funding to complete such a refinancing.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any material off balance sheet arrangements. For further discussion
on the Companys commitments and contingencies, refer to Note 6 Commitments and Contingencies in
the notes to the Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS
We did not enter into any material contractual obligations during the three months ended June
30, 2009. We have no material contractual obligations not fully recorded on our Consolidated
Balance Sheets or fully disclosed in the Notes to our Consolidated Financial Statements.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk related to changes in foreign currency exchange rates, commodity
prices and interest rates, and we selectively use financial instruments to manage these risks. We
do not enter into financial instruments for speculation or trading purposes. These financial
exposures are monitored and managed by us as an integral part of our overall risk management
program, which recognizes the unpredictability of financial markets and seeks to reduce potentially
adverse effects on our results.
Foreign Currencies
As of June 30, 2009, the Company had $432.7 million of accounts receivable and $39.4 million
of accounts payable, respectively, denominated in a foreign currency. The Company has accounts
receivables and payables denominated in both the functional currency of the legal entity as well as
receivables denominated in a foreign currency that differs from the functional currency of the
legal entity. For receivables and payables denominated in the currency of the parents functional
currency, the Company does not have financial statement risk, and therefore does not hedge such
transactions. For those receivables denominated in a currency that differs from the functional
currency of the parent, the Company hedges such transactions to prevent financial statement risk
(refer to Note 2 Financial Instruments for more information on the Companys hedging programs).
As a result, a hypothetical movement in foreign currency
36
rates would not be expected to have a material financial statement impact on the settlement of
these outstanding receivables and payables.
We have operations in Europe, Asia-Pacific and the Americas. As a result, our financial
position, results of operations and cash flows can be affected by fluctuations in foreign currency
exchange rates. Some of our reporting entities conduct a portion of their business in currencies
other than the entitys functional currency. These transactions give rise to receivables and
payables that are denominated in currencies other than the entitys functional currency. The value
of these receivables and payables is subject to changes in exchange rates because they may become
worth more or less than they were worth at the time we entered into the transaction due to changes
in exchange rates. Both realized and unrealized gains and losses on the value of these receivables
and payables were included in other income and expense in the Consolidated Statements of
Operations. Net currency exchange loss recognized on business transactions, net of hedging
transactions, was $8.3 million for the three months ended June 30, 2009 and $6.8 million for the
six months ended June 30, 2009, and such losses are included in other expense in the Consolidated
Statements of Operations
The Companys intercompany foreign currency receivables and payables are primarily
concentrated in the euro, British pound sterling, Canadian dollar and Japanese yen. Historically,
we have used foreign currency forward contracts to mitigate foreign currency risk on these
intercompany foreign currency receivables and payables. At June 30, 2009, we had $912.1 million in
foreign currency forward contracts outstanding to hedge currency risk on specific receivables and
payables, both intercompany and as mentioned above, for third party receivables denominated in a
currency that differs from the legal entitys functional currency. These foreign currency forward
contracts as of June 30, 2009, which settle in July 2009 through November 2009, effectively fix the
exchange rate at which these specific receivables and payables will be settled in, so that gains or
losses on the forward contracts offset the losses or gains from changes in the value of the
underlying receivables and payables. The Company does not have any material un-hedged foreign
currency intercompany receivables or payables at June 30, 2009.
The notional principal amounts provide one measure of the transaction volume outstanding as of
period end, but do not represent the amount of our exposure to market loss. The estimates of fair
value are based on applicable and commonly used pricing models using prevailing financial market
information. The amounts ultimately realized upon settlement of these financial instruments,
together with the gains and losses on the underlying exposures, will depend on actual market
conditions during the remaining life of the instruments.
Cash Flow Hedges
The ultimate U.S. dollar value of future foreign currency sales generated by our reporting
units is subject to fluctuations in foreign currency exchange rates. The Companys intent is to
limit this exposure from changes in currency exchange rates through hedging. When the dollar
strengthens significantly against the foreign currencies, the decline in the U.S. dollar value of
future foreign currency revenue is offset by gains in the value of the forward contracts designated
as hedges. Conversely, when the dollar weakens, the opposite occurs. The Company uses foreign
currency forward contracts to mitigate foreign currency risk on forecasted foreign currency sales
which are expected to be settled within the next twelve months. The change in fair value prior to
their maturity was accounted for as cash flow hedges, and recorded in other comprehensive income,
net of tax, in the Consolidated Balance Sheets according to SFAS 133. To the extent any portion of
the forward contracts is determined to not be an effective hedge, the increase or decrease in value
prior to the maturity was recorded in other income or expense in the consolidated statements of
operations.
During the six months ended June 30, 2009, the Company did not recognize material net losses
related to the ineffective portion of its hedging instruments in other expense in the Consolidated
Statements of Operations. No hedging relationships were terminated as a result of ineffective
hedging or forecasted transactions no longer probable of occurring. The Company continually
monitors the probability of forecasted transactions as part of the hedge effectiveness testing. As
of June 30, 2009, the Company had $254.6 million in foreign currency forward contracts outstanding
to hedge currency risk under SFAS 133, and the fair value of foreign currency forward contracts is
reported in other current assets or other current liabilities in the Consolidated Balance Sheet as
appropriate. The Company reclasses deferred gains or losses reported in accumulated other
comprehensive income into revenue when the underlying foreign currency sales occur and are
recognized in consolidated earnings. The Company uses inventory turnover ratio for each
international operating unit to align the timing of a hedged item and a hedging instrument to
impact the Consolidated Statements of Operations during the same reporting period. At June 30,
2009, the Company expects to reclass $4.0 million of net gains on derivative instruments from
accumulated other comprehensive income to earnings during the next twelve months. At June 30, 2009,
a hypothetical 10% change in foreign currency rates against the U.S. dollar would result in a
decrease or an increase of $22.0 million in the fair value of foreign currency derivatives
accounted under cash flow hedges. Actual gains or losses could differ materially from this analysis
based on changes in the timing and amount of currency rate movements.
37
Commodity Prices
Our exposure to commodity price changes relates to certain manufacturing operations that
utilize certain commodities such as raw materials. We manage our exposure to changes in those
prices primarily through our procurement and sales practices.
Interest Rates
Our investment portfolio is maintained in accordance with our investment policy which defines
allowable investments, specifies credit quality standards and limits the credit exposure of any
single issuer. The fair value of our cash equivalents, marketable securities, and derivatives is
subject to change as a result of changes in market interest rates and investment risk related to
the issuers credit worthiness or our own credit risk. The Company uses credit default swap spread
to derive risk-adjusted discount rate to measure the fair value of some of our financial
instruments. At June 30, 2009, we had $960.5 million in cash, cash equivalents, restricted cash,
short term investments and long term investments, of which cash, cash equivalents, restricted cash
and short term investments are stated at fair value. Changes in market interest rates would not be
expected to have a material impact on the fair value of $582.6 million of our cash, cash
equivalents, restricted cash, and short term investments at June 30, 2009, as these consisted of
highly liquid securities with maturities of less than three months. Any gains or losses derived
from the change in fair market value in our long term investments, other than auction rate
securities and the related put option, will not be recognized in our statement of operations until
the investment is sold or if the reduction in fair value was determined to be an
other-than-temporary impairment. The Company recognized $5.4 million of other-than-temporary
impairment against the investments in the Primary Reserve Funds during the six months ended June
30, 2009 as a result of updated net asset value (NAV) published by the Reserve Fund. The Company
accounts for $335.2 million of its long term investment in the joint venture under the equity
method and $7.3 million of its long term investments in non-publicly traded companies under the
cost method, thus, changes in market interest rates would not be expected to have an impact on
these investments. Gain or losses from the changes in market interest rates in other long term
investment of $35.4 million will be recognized in our statement of operations immediately, however
$35.4 million of securities and the related put option would have a limited risk exposure to the
changes in market interest rates as such securities interest rates are reset frequently. A
hypothetical 10% increase or decrease in interest rates would not be expected to have a material
impact on $35.4 million of our investments.
Due to the nature of the Companys variable rate debt, a hypothetical 10% increase or decrease
in applicable rates would have a pretax impact of $9.9 million on interest expense for the next
twelve months on term loan A and term loan B. To mitigate this risk, the Company entered into
interest rate swap agreements that effectively convert variable rate interest payments to fixed
rate interest payments for notional amounts of $1,000.0 million in January 2009, which are expected
to be settled in January 2012 for $300.0 million and January 2013 for $700.0 million, to manage
variability of cash flows in the interest payments on a portion of the term loan A facility and
also to comply with the term loan agreement. The change in fair value prior to their maturity is
accounted for as cash flow hedges, and recorded in other comprehensive income, net of tax, in the
Consolidated Balance Sheets according to SFAS 133. To the extent any portion of the swap agreements
is determined to not be an effective hedge, the increase or decrease in value prior to the maturity
was recorded in other income or expense in the Consolidated Statements of Operations. During the
six months ended June 30, 2009, there was no recognized gain or loss related to the ineffective
portion of its hedging instruments in other expense in the Consolidated Statements of Operations.
No hedging relationships were terminated as a result of ineffective hedging or forecasted
transactions no longer probable of occurring. The Company continuously monitors the probability of
forecasted transactions as part of the hedge effectiveness testing.
Fair Value Measurements
The Company adopted SFAS 157, Fair Value Measurement, which requires certain financial and
non-financial assets and liabilities measured at fair value using a three tiered approach. The
assets and liabilities which used level 3 or significant unobservable inputs to measure the fair
value represent an insignificant portion of total Companys financial positions at June 30, 2009.
$16.7 million was transferred out of level 3 for the six months ended June 30, 2009, of which $5.4
million was due to the other-than-temporary impairment of our holdings in the Reserve Primary Money
Market Fund (Fund), $11.1 million was the third and fourth cash distributions by the Fund, and $0.2
million related to settlement on auction rate securities with UBS. The Company believes the
remaining balance of the Fund, $1.8 million, is recoverable as this investment is going to fully
liquidate and distribute its holdings. Additionally, the Company has already received a cash loan
for the value of the auction rate securities, and therefore does not believe there is any credit
risk. For further discussion on the Companys fair value measurements and valuation methodologies,
refer to Note 2 of the Notes to Consolidated Financial Statements.
38
ITEM 4. Controls and Procedures
The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act in 1934, as amended (the Exchange Act), that are
designed to ensure that information required to be disclosed in the Companys reports filed under
the Exchange Act, is recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and that such information is accumulated and communicated to the
Companys management, including the Companys Principal Executive Officer and Principal Financial
Officer, as appropriate, to allow for timely decisions regarding required disclosure.
As of the end of the period covered by this report (the Evaluation Date), an evaluation of the
effectiveness of the design and operation of the Companys disclosure controls and procedures as of
the Evaluation Date was carried out under the supervision and with the participation of the
Companys management, including the Companys Principal Executive Officer and Principal Financial
Officer. Based upon that evaluation, the Principal Executive Officer and Principal Financial
Officer have concluded that the Companys disclosure controls and procedures were effective as of
the Evaluation Date.
There have been no changes to the Companys internal controls over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the last fiscal quarter
that have materially affected, or are reasonably likely to materially affect, the Companys
internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We are engaged in various legal actions arising in the ordinary course of our business and
believe that the ultimate outcome of these actions will not have a material adverse effect on our
business or financial condition.
ITEM 1A. Risk Factors
There are no material changes from risk factors disclosed in our Form 10-K for the year ended
December 31, 2008.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 30, 2009, our stockholders approved our 2009 Equity Incentive Plan and an increase in
available shares of our common stock under the Invitrogen Corporation 1998 Employee Stock Purchase
Plan. As we prepared registration statements on Form S-8 to register the shares approved by our
stockholders, we discovered that we had inadvertently failed to file with the SEC certain
registration statements relating to our securities under the Invitrogen Corporation 1998 Employee
Stock Purchase Plan. In 2006 and 2008, stockholders approved additional shares for issuance under
our Invitrogen Corporation 1998 Employee Stock Purchase Plan. We recently discovered that the
issuances of these additional shares were never registered. Consequently, between October 2006 and
April 2009, we issued approximately 1.5 million shares under this plan out of 176,339,485 shares
currently outstanding (as of August 3, 2009).
We have filed registration statements on Form S-8 registering all remaining available shares under
our active equity plans. We have implemented monitoring and reporting procedures to ensure that in
the future we timely meet our registration obligations with respect to these and other employee
benefit plans. The failure to file registration statements noted above was inadvertent, and we have
always treated the shares issued under the Invitrogen Corporation 1998 Employee Stock Purchase Plan
as outstanding for financial reporting purposes. Consequently, the unregistered transactions do not
represent any additional dilution. We believe that we have always provided the
employee-participants in this plan with the same information they would have received had the
registration statements been filed.
ITEM 3. Defaults Upon Senior Securities
None.
39
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on April 30, 2009.
(b) See (c) below
(c) PROPOSAL I. The following members of the Board of Directors were elected to serve for
three years and until their successors are elected and qualified:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Votes for |
|
Total Votes Withheld |
|
|
|
|
Each Director |
|
from Each Director |
|
Term Expires |
Donald W. Grimm |
|
|
142,485,775 |
|
|
|
11,478,173 |
|
|
|
2012 |
|
Gregory T. Lucier |
|
|
147,436,443 |
|
|
|
6,527,505 |
|
|
|
2012 |
|
Per A. Peterson, Ph.D. |
|
|
148,807,472 |
|
|
|
5,156,476 |
|
|
|
2012 |
|
William S. Shanahan |
|
|
148,698,032 |
|
|
|
5,265,916 |
|
|
|
2012 |
|
The following member of the Board of Directors was elected to serve for one year and until his
successor is elected and qualified:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Votes for |
|
Total Votes Withheld |
|
|
|
|
Each Director |
|
from Each Director |
|
Term Expires |
Arnold J. Levine, Ph.D. |
|
|
149,622,104 |
|
|
|
4,341,844 |
|
|
|
2010 |
|
The following members of the Board of Directors were previously elected to serve for terms expiring
in 2010 and until their successors are elected and qualified:
George F. Adam, Jr.
Raymond V. Dittamore
Bradley G. Lorimier
David C. UPrichard, Ph.D.
The following members of the Board of Directors were previously elected to serve for terms expiring
in 2011 and until their successors are elected and qualified:
Balakrishnan S. Iyer
William H. Longfield
Ronald A. Matricaria
W. Ann Reynolds, Ph.D.
PROPOSAL II. A proposal to ratify the appointment of Ernst & Young as independent
auditors for the Company for the Companys fiscal year ending December 31, 2009 was
approved by 144,049,144 affirmative votes vs. 9,809,838 negative votes vs. 104,966
abstentions and broker non-votes.
PROPOSAL III. A proposal to amend the Invitrogen Corporation 1998 Employee Stock Purchase
Plan was approved by 132,442,187 affirmative votes vs. 4,669,138 negative votes vs.
16,852,623 abstentions and broker non-votes. Invitrogen Corporation is a legacy company
to the Company.
PROPOSAL IV. A proposal to adopt the Life Technologies Corporation 1999 Employee Stock
Purchase Plan, formerly known as the Applera Corporation 1999 Employee Stock Purchase
Plan was approved by 131,794,714 affirmative votes vs. 5,389,685 negative votes vs.
16,779,549 abstentions and broker non-votes. Applera Corporation is a legacy company of
Applied Biosystems, Inc., which is a legacy company of the Company.
PROPOSAL V. A proposal to adopt the Companys 2009 Equity Incentive Plan was approved by
113,337,010 affirmative votes vs. 23,526,279 negative votes vs. 17,100,659 abstentions
and broker non-votes.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
Exhibits: For a list of exhibits filed with this report, refer to the Index to Exhibits.
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
LIFE TECHNOLOGIES CORPORATION |
|
|
|
|
|
|
|
|
|
Date:
August 6, 2009 |
|
|
|
|
|
|
|
|
By:
|
|
/s/ David F. Hoffmeister
|
|
|
|
|
|
|
David F. Hoffmeister |
|
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
(Principal Financial Officer and Authorized Signatory) |
|
|
41
INDEX TO EXHIBITS
|
|
|
EXHIBIT |
|
|
NUMBER |
|
DESCRIPTION OF DOCUMENT |
|
|
|
2.1
|
|
Agreement and Plan of Merger by and among Invitrogen Corporation, Atom Acquisition, LLC and Applera
Corporation dated as of June 11, 2008.(1) |
|
|
|
2.2
|
|
Amendment No. 1 to Agreement and Plan of Merger by and among Invitrogen Corporation, Atom acquisition, LLC
and Applied Biosystems Inc., dated as of September 9, 2008.(2) |
|
|
|
2.3
|
|
Amendment No. 2 to Agreement and Plan of Merger by and among Invitrogen Corporation, Atom acquisition, LLC
and Applied Biosystems Inc., dated as of October 15, 2008.(3) |
|
|
|
3.1
|
|
Restated Certificate of Incorporation of Life Technologies.(4) |
|
|
|
3.2
|
|
Fourth Amended and Restated Bylaws of Life Technologies.(5) |
|
|
|
4.1
|
|
Specimen Common Stock Certificate.(6) |
|
|
|
4.2
|
|
2% Convertible Senior Notes Due 2023, Registration Rights Agreement, by and among Life Technologies and
UBS Securities LLC and Credit Suisse First Boston LLC, as Initial Purchasers, dated August 1, 2003.(7) |
|
|
|
4.3
|
|
Indenture, by and between Life Technologies and U.S. Bank National Association, dated August 1, 2003.(7) |
|
|
|
4.4
|
|
11/2% Convertible Senior Notes Due 2024, Registration Rights Agreement, by and among
Life Technologies and UBS Securities LLC and Bear Stearns & Co Inc., as Initial Purchasers, dated February
19, 2004.(8) |
|
|
|
4.5
|
|
Indenture, by and between Life Technologies and U.S. Bank National Association, dated February 19, 2004.(8) |
|
|
|
4.6
|
|
Indenture, by and between Life Technologies and U.S. Bank National Association, dated as of December 14,
2004.(9) |
|
|
|
4.7
|
|
3.25% Convertible Senior Notes Due 2025, Registration Rights Agreement, by and among Life Technologies and
UBS Securities LLC and Banc of America Securities LLC., as Initial Purchasers, dated June 20, 2005.(10) |
|
|
|
4.8
|
|
3.25% Convertible Senior Notes Due 2025, Indenture, by and between Life Technologies and U.S. Bank
National Association, dated June 20, 2005.(10) |
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1
|
|
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2
|
|
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
(1) |
|
Incorporated by reference to Registrants Current Report on Form 8-K, filed on June 16, 2008 (File No.
000-25317). |
|
(2) |
|
Incorporated by reference to Registrants Current Report on Form 8-K, filed on June 16, 2008 (File No.
000-25317). |
|
(3) |
|
Incorporated by reference to Registrants Current Report on Form 8-K, filed on October 15, 2008 (File No.
000-25317). |
|
(4) |
|
Incorporated by reference to the Registrants Annual Report on Form 10-K for the year ended December 31,
2008 (File No. 000-25317), as amended. |
|
(5) |
|
Incorporated by reference to Registrants Current Report on Form 8-K, filed on July 27, 2009 (File No.
000-25317). |
42
|
|
|
(6) |
|
Incorporated by reference to Registrants Registration Statement on Form S-1 (File No. 333-68665). |
|
(7) |
|
Incorporated by reference to Registrants Registration Statement on Form S-3, filed on October 29, 2003.
(File No. 333-110060). |
|
(8) |
|
Incorporated by reference to Registrants Quarterly Report on Form 10-Q for the Quarterly Period ended
March 31, 2004 (File No. 000-25317). |
|
(9) |
|
Incorporated by reference to the Registrants Annual Report on Form 10-K for the Year Ended December 31,
2004 (File No. 000-25317), as amended. |
|
(10) |
|
Incorporated by reference to the Registrants Current Report on Form 8-K, filed on June 24, 2005 (File No.
000-25317). |
43