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|Document and Entity Information (USD $)
In Billions, except Share data
|3 Months Ended|
|Mar. 31, 2011
||Apr. 29, 2011
||Jun. 30, 2010
|Document and Entity Information [Abstract]|
|Entity Registrant Name||GEN PROBE INC|
|Entity Central Index Key||0000820237|
|Document Period End Date||Mar 31, 2011|
|Document Fiscal Year Focus||2011|
|Document Fiscal Period Focus||FY|
|Current Fiscal Year End Date||--12-31|
|Entity Well-known Seasoned Issuer||Yes|
|Entity Voluntary Filers||No|
|Entity Current Reporting Status||Yes|
|Entity Filer Category||Large Accelerated Filer|
|Entity Public Float||$ 1.9|
|Entity Common Stock, Shares Outstanding||47,941,970|
|Consolidated Balance Sheets (Unaudited) (USD $)
|3 Months Ended||12 Months Ended|
|Mar. 31, 2011
||Dec. 31, 2010
|Cash and cash equivalents||$ 93,563||$ 59,690|
|Trade accounts receivable, net of allowance for doubtful accounts of $405 and $355 at March 31, 2011 and December 31, 2010, respectively||59,633||54,739|
|Accounts receivable - other||3,548||5,493|
|Deferred income tax||13,774||13,634|
|Prepaid income tax||26||2,993|
|Other current assets||5,698||5,148|
|Total current assets||433,167||390,433|
|Marketable securities, net of current portion||219,808||259,317|
|Property, plant and equipment, net||163,538||160,863|
|Capitalized software, net||14,014||13,981|
|Purchased intangibles, net||118,338||120,270|
|License, manufacturing access fees and other assets, net||62,427||60,175|
|Accrued salaries and employee benefits||19,066||26,825|
|Other accrued expenses||16,768||13,935|
|Income tax payable||7,649||634|
|Deferred income tax||91||0|
|Total current liabilities||306,505||297,174|
|Non-current income tax payable||8,864||8,315|
|Deferred income tax||27,308||29,775|
|Deferred revenue, net of current portion||2,318||2,500|
|Other long-term liabilities||7,149||6,654|
|Commitments and contingencies|
|Preferred stock, $0.0001 par value per share; 20,000,000 shares authorized, none issued and outstanding||0||0|
|Common stock, $0.0001 par value per share; 200,000,000 shares authorized, 47,663,833 and 47,966,156 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively||5||5|
|Additional paid-in capital||172,133||195,820|
|Accumulated other comprehensive (loss) income||(177)||678|
|Total stockholders' equity||822,114||823,379|
|Total liabilities and stockholders' equity||$ 1,174,258||$ 1,167,797|
|Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
In Thousands, except Share data
|Mar. 31, 2011
||Dec. 31, 2010
|Allowance for doubtful accounts||$ 405||$ 355|
|Preferred stock, par value||$ 0.0001||$ 0.0001|
|Preferred stock, shares authorized||20,000,000||20,000,000|
|Preferred stock, shares issued||0||0|
|Preferred stock, shares outstanding||0||0|
|Common stock, par value||$ 0.0001||$ 0.0001|
|Common stock, shares authorized||200,000,000||200,000,000|
|Common stock, shares issued||47,663,833||47,966,156|
|Common stock, shares outstanding||47,663,833||47,966,156|
|Consolidated Statements of Income (Unaudited) (USD $)
In Thousands, except Per Share data
|3 Months Ended|
|Mar. 31, 2011
||Mar. 31, 2010
|Product sales||$ 138,112||$ 130,569|
|Collaborative research revenue||3,568||3,264|
|Royalty and license revenue||1,358||1,586|
|Cost of product sales (excluding acquisition-related intangible amortization)||41,943||42,661|
|Acquisition-related intangible amortization||2,805||2,216|
|Research and development||28,963||29,681|
|Marketing and sales||16,522||14,781|
|General and administrative||18,153||14,679|
|Total operating expenses||108,386||104,018|
|Income from operations||34,652||31,401|
|Other income (expense):|
|Investment and interest income||735||3,898|
|Gain on contingent consideration||1,745|
|Other income (expense), net||177||(159)|
|Total other income, net||409||4,938|
|Income before income tax||35,061||36,339|
|Income tax expense||11,784||12,146|
|Net income||$ 23,277||$ 24,193|
|Net income per share:|
|Basic||$ 0.49||$ 0.49|
|Diluted||$ 0.48||$ 0.48|
|Weighted average shares outstanding:|
|Consolidated Statements of Cash Flows (Unaudited) (USD $)
|3 Months Ended|
|Mar. 31, 2011
||Mar. 31, 2010
|Net income||$ 23,277||$ 24,193|
|Adjustments to reconcile net income to net cash provided by operating activities:|
|Depreciation and amortization||11,345||11,308|
|Amortization of premiums on investments, net of accretion of discounts||2,673||2,216|
|Excess tax benefit from employee stock-based compensation||(1,425)||(1,596)|
|Deferred income tax||(615)||(1,360)|
|Gain on contingent consideration||(1,745)|
|Loss on disposal of property and equipment||24||47|
|Changes in assets and liabilities:|
|Trade and other accounts receivable||(2,816)||7,696|
|Other current assets||(536)||(95)|
|Other long-term assets||(132)||(257)|
|Accrued salaries and employee benefits||(7,847)||(5,256)|
|Other accrued expenses||(40)||(1,630)|
|Income tax payable||11,500||11,827|
|Other long-term liabilities||456||(575)|
|Net cash provided by operating activities||40,105||40,687|
|Proceeds from sales and maturities of marketable securities||30,460||139,425|
|Purchases of marketable securities||(5,731)||(71,390)|
|Purchases of property, plant and equipment||(10,762)||(7,828)|
|Purchases of capitalized software||(780)||(1,089)|
|Purchases of intangible assets, including licenses and manufacturing access fees||(923)||(722)|
|Net cash provided by investing activities||12,765||58,086|
|Repurchase and retirement of common stock||(47,972)||(10,961)|
|Proceeds from issuance of common stock and employee stock purchase plan||17,390||16,912|
|Repurchase and retirement of restricted stock for payment of taxes||(358)||(39)|
|Excess tax benefit from employee stock-based compensation||1,425||1,596|
|Net cash (used in) provided by financing activities||(19,515)||7,508|
|Effect of exchange rate changes on cash and cash equivalents||518||(1,620)|
|Net increase in cash and cash equivalents||33,873||104,661|
|Cash and cash equivalents at the beginning of period||59,690||82,616|
|Cash and cash equivalents at the end of period||$ 93,563||$ 187,277|
|Summary of significant accounting policies
||3 Months Ended|
|Mar. 31, 2011
|Summary of Significant Accounting (Policies) [Abstract]|
|Summary of significant accounting policies||
Note 1 — Summary of Significant Accounting Policies
Basis of Presentation
The accompanying interim consolidated financial statements of Gen-Probe Incorporated (“Gen-Probe” or the “Company”) at March 31, 2011, and for the three month periods ended March 31, 2011 and 2010, are unaudited and have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In management’s opinion, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring accruals, necessary to state fairly the financial information therein, in accordance with U.S. GAAP. Interim results are not necessarily indicative of the results that may be reported for any other interim period or for the year ending December 31, 2011.
These unaudited interim consolidated financial statements and related footnotes should be read in conjunction with the audited consolidated financial statements and related footnotes contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 855, Subsequent Events, the Company evaluated subsequent events after the balance sheet date of March 31, 2011 and through the date and time its consolidated financial statements were issued on May 4, 2011.
Principles of Consolidation
These unaudited consolidated financial statements include the accounts of Gen-Probe as well as its wholly owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation. The Company does not consolidate any interests in variable interest entities.
In December 2010, the Company acquired Genetic Testing Institute, Inc. (“GTI Diagnostics”), a privately held Wisconsin corporation now known as Gen-Probe GTI Diagnostics, Inc. GTI Diagnostics has broadened and strengthened the Company’s transplant diagnostics business, and has also provided the Company with access to new products in the specialty coagulation and transfusion-related blood bank markets. GTI Diagnostics’ results of operations have been included in the Company’s consolidated financial statements beginning in December 2010.
In October 2009, the Company acquired Prodesse, Inc. (“Prodesse”), a privately held Wisconsin corporation, now known as Gen-Probe Prodesse, Inc. Prodesse develops molecular diagnostic products for a variety of infectious disease applications. Prodesse’s results of operations have been included in the Company’s consolidated financial statements beginning in October 2009.
In April 2009, the Company acquired Tepnel Life Sciences plc (“Tepnel”), a United Kingdom (“UK”) based international life sciences products and services company, now known as Gen-Probe Life Sciences Ltd. Tepnel’s transplant diagnostics and genetic testing results of operations have been included in the Company’s consolidated financial statements beginning in April 2009.
The Company translates the financial statements of its non-U.S. operations using the end-of-period exchange rates for assets and liabilities and the average exchange rates for each reporting period for results of operations. Net gains and losses resulting from the translation of foreign financial statements and the effect of exchange rates on intercompany receivables and payables of a long-term investment nature are recorded as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive (loss) income.” These adjustments will affect net income upon the sale or liquidation of the underlying investment.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements. These estimates include assessing the collectability of accounts receivable, recognition of revenues, and the valuation of the following: stock-based compensation; marketable securities; equity investments in publicly and privately held companies; income tax; liabilities associated with employee benefit costs; inventories; and goodwill and long-lived assets, including patent costs, capitalized software, purchased intangibles and licenses and manufacturing access fees. Actual results could differ from those estimates.
The Company currently operates in one business segment, the development, manufacturing, marketing, sales and support of molecular diagnostic products primarily to diagnose human diseases, screen donated human blood and ensure transplant compatibility. Although the Company’s products comprise distinct product lines to serve different end markets within molecular diagnostics, the Company does not operate its business in operating segments. The Company is managed by a single functionally based management team that manages all aspects of the Company’s business and reports directly to the Chief Executive Officer. For all periods presented, the Company operated in a single business segment. Revenue by product line is presented in Note 11.
The Company records shipments of its clinical diagnostic products as product sales when the product is shipped, title and risk of loss have passed to the customer and when collection of the resulting receivable is reasonably assured.
The Company manufactures blood screening products according to demand schedules provided by its collaboration partner, Novartis Vaccines and Diagnostics, Inc. (“Novartis”). Upon shipment to Novartis, the Company recognizes blood screening product sales at an agreed upon transfer price and records the related cost of products sold. Based on the terms of the Company’s collaboration agreement with Novartis, the Company’s ultimate share of the net revenue from sales to the end user is not known until reported to the Company by Novartis. The Company then adjusts blood screening product sales upon receipt of customer revenue reports and a net payment from Novartis of amounts reflecting the Company’s ultimate share of net sales by Novartis for these products, less the transfer price revenues previously recognized.
In most cases, the Company provides its instrumentation to its clinical diagnostics customers without requiring them to purchase the equipment or enter into an equipment lease. Instead, the Company recovers the cost of providing the instrumentation in the amount it charges for its diagnostic assays. The depreciation costs associated with an instrument are charged to cost of product sales on a straight-line basis over the estimated life of the instrument. The costs to maintain these instruments in the field are charged to cost of product sales as incurred.
The Company sells its instruments to Novartis for use in blood screening and records these instrument sales upon delivery since Novartis is responsible for the placement, maintenance and repair of the units with its customers. The Company also sells instruments to its clinical diagnostics customers and records sales of these instruments upon delivery and receipt of customer acceptance. Prior to delivery, each instrument is tested to meet Gen-Probe’s and United States Food and Drug Administration (“FDA”) specifications, and is shipped fully assembled. Customer acceptance of the Company’s clinical diagnostic instrument systems requires installation and training by the Company’s technical service personnel. Installation is a standard process consisting principally of uncrating, calibrating and testing the instrumentation.
The Company records revenue on its research products and services in the period during which the related costs are incurred, or services are provided. This revenue consists of outsourcing services for the pharmaceutical, biotechnology and healthcare industries, including nucleic acid purification and analysis services, as well as the sale of monoclonal antibodies.
The Company analyzes each element of its collaborative arrangements to determine the appropriate revenue recognition. The Company recognizes revenue on up-front payments over the period of significant involvement under the related agreements unless the fee is in exchange for products delivered or services rendered that represent the culmination of a separate earnings process and no further performance obligation exists under the contract.
Revenue arrangements with multiple deliverables are evaluated for proper accounting treatment. In these arrangements, the Company records revenue as separate units of accounting if the delivered items have value to the customer on a stand-alone basis, and if the arrangement includes a general right of return relative to the delivered items, and delivery or performance of the undelivered items is considered probable and substantially within the Company’s control. For transactions entered into prior to 2011, consideration was generally allocated to each unit of accounting based on its relative fair value when objective and reliable evidence of fair value existed for all units of accounting in an arrangement. The fair value of an item was generally the price charged for the product, if the item was sold on a stand-alone basis. When the Company was unable to establish fair value for delivered items or when fair value of undelivered items had not been established, revenue was deferred until all elements were delivered and services had been performed or until fair value could be objectively determined for any undelivered elements. Beginning in 2011, arrangement consideration is allocated at the inception of the arrangement to all deliverables using the relative selling price method that is based on a three-tier hierarchy. The relative selling price method requires that the estimated selling price for each deliverable be based on vendor-specific objective evidence (“VSOE”) of fair value, which represents the price charged for each deliverable when it is sold separately or for a deliverable not yet being sold separately, the price established by management having the relevant authority. When VSOE of fair value is not available, third-party evidence (“TPE”) of fair value is acceptable, or a best estimate of selling price if VSOE and TPE are not available. A best estimate of selling price should be consistent with the objective of determining the price at which the Company would transact if the deliverable were sold regularly on a stand-alone basis and should also take into account market conditions and company specific factors.
The Company recognizes collaborative research revenue over the term of various collaboration agreements, as negotiated monthly contracted amounts are earned or reimbursable costs are incurred related to those agreements. Negotiated monthly contracted amounts are earned in relative proportion to the performance required under the applicable contracts. Non-refundable license fees are recognized over the related performance period or at the time that the Company has satisfied all performance obligations. Milestone consideration that is contingent upon achievement of a milestone in its entirety is recorded as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. These criteria include (i) the consideration being earned should be commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) the consideration being earned should relate solely to past performance, (iii) the consideration being earned should be reasonable relative to all deliverables and payment terms in the arrangement, and (iv) the milestone should be considered in its entirety and cannot be bifurcated into substantive and non-substantive components. Any amounts received prior to satisfying the Company’s revenue recognition criteria are recorded as deferred revenue on its consolidated balance sheets.
Royalty and license revenue is recognized related to the sale or use of the Company’s products or technologies under license agreements with third parties. For those arrangements where royalties are reasonably estimable, the Company recognizes revenue based on estimates of royalties earned during the applicable period and adjusts for differences between the estimated and actual royalties in the following period. Historically, these adjustments have not been material. For those arrangements where royalties are not reasonably estimable, the Company recognizes revenue upon receipt of royalty statements from the applicable licensee.
Stock-based compensation expense is recognized for restricted stock, deferred issuance restricted stock, performance stock awards, which include awards subject to performance conditions and/or market conditions, stock options, and shares purchasable under the Company’s Employee Stock Purchase Plan (“ESPP”). Stock-based compensation expense for restricted stock, deferred issuance restricted stock, and performance condition stock awards is measured based on the closing fair market value of the Company’s common stock on the date of grant. Stock-based compensation expense for market condition stock awards is measured based on the fair value of the award on the date of grant using a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple point variables that determine the probability of satisfying the market condition stipulated in the grant and calculates the fair value of the award.
The Company uses the Black-Scholes-Merton option pricing model to value stock options granted. The determination of the fair value of share-based payment awards on the date of grant using the Black-Scholes-Merton model is affected by the Company’s stock price and the implied volatility on its traded options, as well as the input of other subjective assumptions. These assumptions include, but are not limited to, the expected term of stock options and the Company’s expected stock price volatility over the term of the awards.
The Company used the following weighted average assumptions to estimate the fair value of stock options and performance stock awards granted under the Company’s equity incentive plans and the shares purchasable under the Company’s ESPP, as well as the resulting average fair values for the three month periods ended March 31, 2011 and 2010:
The Company’s unrecognized stock-based compensation expense as of March 31, 2011, before income taxes and adjusted for estimated forfeitures, related to outstanding unvested share-based payment awards was approximately as follows (in thousands, except number of years):
The following table summarizes the stock-based compensation expense that the Company recorded in its consolidated statements of income for the three month periods ended March 31, 2011 and 2010 (in thousands):
Net Income Per Share
Diluted net income per share is reported based on the more dilutive of the treasury stock or the two-class method. Under the two-class method, net income is allocated to common stock and participating securities. The Company’s restricted stock, deferred issuance restricted stock and performance stock awards meet the definition of participating securities. Basic net income per share under the two-class method is computed by dividing net income adjusted for earnings allocated to unvested stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share under the two-class method is computed by dividing net income adjusted for earnings allocated to unvested stockholders for the period by the weighted average number of common and common equivalent shares outstanding during the period. The Company excludes stock options from the calculation of diluted net income per share when the combined exercise price, average unamortized fair values and assumed tax benefits upon exercise are greater than the average market price for the Company’s common stock because their effect is anti-dilutive. Potentially dilutive securities totaling approximately 688,000 and 4,179,000 for the three month periods ended March 31, 2011 and 2010, respectively, were excluded from the calculations of diluted earnings per share (“EPS”) below because of their anti-dilutive effect.
The following table sets forth the computation of basic and diluted EPS for the three month periods ended March 31, 2011 and 2010 (in thousands, except per share amounts):
Adoption of Recent Accounting Pronouncements
Accounting Standards Update 2010-06
In January 2010, the FASB amended ASC Topic 820, Fair Value Measurements and Disclosures, to require reporting entities to make new disclosures about recurring and non-recurring fair value measurements, including significant transfers into and out of Level 1 and Level 2 fair value measurements and information about purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. Except for the detailed Level 3 roll forward disclosures, the guidance was effective January 1, 2010. The new disclosures about purchases, sales, issuances, and settlements in the roll forward activity for Level 3 fair value measurements were effective for the Company as of January 1, 2011. Upon adoption, the guidance did not have a material impact on the Company’s consolidated financial statements and is not expected to have a material impact on its future operating results.
Accounting Standards Update 2010-17
In March 2010, the FASB ratified the final consensus that offers an alternative method of revenue recognition for milestone payments. The guidance states that an entity can make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. The guidance will be effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2010 with early adoption permitted, provided that the revised guidance is applied retrospectively to the beginning of the year of adoption. The Company elected to adopt this guidance prospectively, effective for the Company’s fiscal year beginning January 1, 2011. Upon adoption, the guidance did not have a material impact on the Company’s consolidated financial statements and is not expected to have a material impact on its future operating results.
Accounting Standards Update 2009-13
In September 2009, the FASB revised the authoritative guidance for revenue arrangements with multiple deliverables. The guidance addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting and how the arrangement consideration should be allocated among the separate units of accounting. The guidance may be applied retrospectively or prospectively for new or materially modified arrangements. The Company elected to adopt this guidance prospectively, effective for the Company’s fiscal year beginning January 1, 2011. Upon adoption, the guidance did not have a material impact on the Company’s consolidated financial statements and is not expected to have a material impact on its future operating results.
||3 Months Ended|
|Mar. 31, 2011
|Business Combinations [Abstract]|
Note 2 — Business Combination
The acquisition below was accounted for as a business combination and, accordingly, the Company has included the results of operations of the acquired entity in its consolidated statements of income from the date of acquisition. Neither separate financial statements nor pro forma results of operations have been presented because the acquisition does not meet the quantitative materiality tests under Regulation S-X.
Acquisition of GTI Diagnostics
In December 2010, the Company acquired GTI Diagnostics, a privately held specialty diagnostics company focused on the transplantation, specialty coagulation and transfusion-related blood bank markets, for $53.0 million on a net-cash basis. As a result of the acquisition, GTI Diagnostics became a wholly owned subsidiary of the Company. The Company financed the acquisition with cash on hand.
The purchase price allocation for the acquisition of GTI Diagnostics set forth below is preliminary and subject to change as more detailed analysis is completed and additional information with respect to the fair value of the assets and liabilities acquired becomes available. The Company expects to finalize the purchase price allocation during the remainder of 2011. The preliminary allocation of the purchase price for the Company’s acquisition of GTI Diagnostics is as follows (in thousands):
The fair values of the acquired identifiable intangible assets with definite lives are as follows (in thousands):
The amortization periods for the acquired identifiable intangible assets with definite lives are as follows: six to nine years for patents, ten years for customer relationships, 20 years for trade secrets, and an estimated life to be determined for each in-process research and development project (to commence upon commercialization of the associated product). The Company is amortizing the acquired intangible assets set forth in the table above using the straight-line method of amortization. The Company believes that the use of the straight-line method is appropriate given the high customer retention rate of the acquired business and the historical and projected growth of revenues and related cash flows. The Company will monitor and assess the acquired intangible assets and will adjust, if necessary, the expected life, amortization method or carrying value of such assets to best match the underlying economic value.
The fair value assigned to trade secrets has been determined primarily by using the income approach and a variation of the income approach known as the relief from royalty method, which estimates the future royalties which would have to be paid to the licensor of the asset for its current use. Tax is deducted and a discount rate is used to state future cash flows to a present value. This is based on the asset in its current use and is based on savings from owning the asset, or relief from royalties that would be paid to the asset owner. The fair value assigned to patents, in-process research and development, and customer relationships has been determined primarily by using the income approach and a variation of the income approach known as the excess earnings method, which estimates the value of an asset based on discounted future earnings specifically attributed to that asset, that is, in excess of returns for other assets that contributed to those earnings. The discount rates used in these valuation methods ranged from 13 to 16 percent.
The estimated amortization expense for the acquired identifiable intangible assets over future periods, excluding the in-process research and development assets due to uncertainty with respect to the commercialization of such assets, is as follows (in thousands):
Changes in Goodwill Resulting From Acquisitions
The $53.0 million purchase price for GTI Diagnostics exceeded the value of the acquired tangible and identifiable intangible assets, and therefore the Company allocated $28.0 million to goodwill. Included in this initial goodwill amount was $11.1 million primarily related to deferred tax liabilities recorded as a result of non-deductible amortization of acquired identifiable intangible assets.
Changes in goodwill for the three months ended March 31, 2011 were as follows (in thousands):
|Consolidation of UK operations
||3 Months Ended|
|Mar. 31, 2011
|Consolidation of UK Operations [Abstract]|
|Consolidation of UK Operations||
Note 3 — Consolidation of UK Operations
Following its acquisition of Tepnel in April 2009, the Company had four locations in the UK: Manchester, Cardiff, Livingston, and Abingdon. In order to accommodate the anticipated growth in the business and to optimize expenses, the Company decided to consolidate its UK operations to Manchester and Livingston. This consolidation was communicated internally in May 2010. Consolidation activities related to the employees and facilities were accounted for under ASC Topic 420, Exit or Disposal Costs (“ASC 420”). The Company estimates that expenses related to this consolidation will total approximately $4.2 million and be incurred over a two-year period, as the consolidation will occur in phases. These expenses will include termination costs, including severance costs related to the elimination of certain redundant positions and relocation costs for certain key employees, and site closure costs.
During the three months ended March 31, 2011, the Company recorded approximately $0.4 million and $0.7 million of termination costs and site closure costs, respectively. These amounts are included in general and administrative expenses in the Company’s consolidated statements of income. As of March 31, 2011, the Company has recorded approximately $0.9 million and $1.3 million of cumulative termination costs and site closure costs, respectively, related to its UK consolidation activities.
The following table summarizes the restructuring activities accounted for under ASC 420 for the three months ended March 31, 2011, as well as the remaining restructuring accrual recorded on the Company’s consolidated balance sheets at March 31, 2011 (in thousands):
|Balance sheet information
||3 Months Ended|
|Mar. 31, 2011
|Balance Sheet Information [Abstract]|
|Balance sheet information||
Note 4 — Balance Sheet Information
The following tables provide details of selected balance sheet items as of March 31, 2011 and December 31, 2010 (in thousands):
Property, Plant and Equipment, Net
Purchased Intangibles, Net
License, Manufacturing Access Fees and Other Assets, Net
Other Accrued Expenses
||3 Months Ended|
|Mar. 31, 2011
|Marketable Securities [Abstract]|
Note 5 — Marketable Securities
The Company’s marketable securities include equity securities, treasury securities, tax advantaged municipal securities and Federal Deposit Insurance Corporation (“FDIC”) insured corporate bonds with a minimum Moody’s credit rating of A3 or a Standard & Poor’s credit rating of A-. The Company’s investment policy limits the effective maturity on individual securities to six years and an average portfolio maturity to three years. As of March 31, 2011, the Company’s portfolio had an average maturity of two years and an average credit quality of AA1 as defined by Moody’s.
The following is a summary of marketable securities as of March 31, 2011 and December 31, 2010 (in thousands):
The following table shows the estimated fair values and gross unrealized losses as of March 31, 2011 for the Company’s investments in individual debt securities that have been in a continuous unrealized loss position deemed to be temporary for less than 12 months and for more than 12 months (in thousands):
At March 31, 2011 and December 31, 2010, the Company had 83 and 110 marketable debt securities, respectively, in an unrealized loss position. Of the 83 securities in an unrealized loss position at March 31, 2011, the average estimated fair value and average unrealized loss was $2.4 million and $24,000, respectively. Of the 110 securities in an unrealized loss position at December 31, 2010, the average estimated fair value and average unrealized loss was $2.1 million and $27,000, respectively. The decrease in the number of debt securities held in an unrealized loss position from 2010 to 2011 is due to the timing of purchases and sales of the Company’s debt securities in 2011, along with increases in market interest rates.
The contractual terms of the debt securities held by the Company do not permit the issuer to settle the securities at a price less than the amortized cost of the investments. The Company does not consider its investments in debt securities with a current unrealized loss position to be other-than-temporarily impaired at March 31, 2011 because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost.
The following table shows the current and non-current classification of the Company’s marketable securities as of March 31, 2011 and December 31, 2010 (in thousands):
As of March 31, 2011, the Company held non-current marketable debt securities and marketable equity securities of $173.8 million and $46.0 million, respectively. As of December 31, 2010, the Company held non-current marketable debt securities and marketable equity securities of $207.2 million and $52.1 million, respectively. Investments in an unrealized loss position deemed to be temporary at March 31, 2011 and December 31, 2010 that have a contractual maturity of greater than 12 months have been classified on the Company’s consolidated balance sheets as non-current marketable securities under the caption “Marketable securities, net of current portion,” reflecting the Company’s current intent and ability to hold such investments to maturity. The Company’s investments in marketable debt securities and marketable equity securities are classified as available-for-sale.
The following table shows the gross realized gains and losses from the sale of marketable securities, based on the specific identification method, for the three month periods ended March 31, 2011 and 2010 (in thousands):
|Fair value measurements
||3 Months Ended|
|Mar. 31, 2011
|Fair Value Measurements [Abstract]|
|Fair value measurements||
Note 6 — Fair Value Measurements
The Company determines the fair value of its assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants as of the measurement date. There is an established hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Assets and liabilities are classified based upon the lowest level of input that is significant to the fair value measurement. The carrying amounts of financial instruments such as cash equivalents, accounts receivable, prepaid and other current assets, accounts payable and other current liabilities approximate the related fair values due to the short-term maturities of these instruments. The Company reviews the fair value hierarchy on a quarterly basis. Changes in the observations or valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
Set forth below is a description of the Company’s valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy. Where appropriate, the description includes details of the valuation models, the key inputs to those models, as well as any significant assumptions.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company’s marketable securities include equity securities, treasury securities, tax advantaged municipal securities, FDIC insured corporate bonds and money market funds. When available, the Company uses quoted market prices to determine fair value, and classifies such items as Level 1. If quoted market prices are not available, prices are determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company classifies such items as Level 2.
In connection with a collaboration agreement the Company entered into with Pacific Biosciences of California, Inc. (“Pacific Biosciences”) in June 2010, the Company purchased $50.0 million of Pacific Biosciences’ Series F preferred stock, as a participant in Pacific Biosciences’ Series F preferred stock round of financing that raised a total of approximately $109.0 million. In October 2010, Pacific Biosciences completed an initial public offering of its common stock, which now trades on the NASDAQ Global Select Market under the symbol “PACB”. As a result of the initial public offering, the preferred stock held by the Company was converted into common stock. During the quarter ended December 31, 2010, the Company reclassified its investment in Pacific Biosciences from a Level 3 investment to a Level 1 investment. The Company’s investment in Pacific Biosciences, which totaled $46.0 million as of March 31, 2011, is included in “Marketable securities, net of current portion,” on the Company’s consolidated balance sheets. The Company’s investment in Pacific Biosciences’ common stock was subject to a customary lock-up period, which generally prohibited the Company from selling or otherwise transferring such securities for a 180 day period after the date of the final prospectus relating to Pacific Biosciences’ initial public offering. This lock-up period expired in April 2011. As of May 4, 2011, the Company continues to hold this investment.
The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value on a recurring basis (as described above) as of March 31, 2011 and December 31, 2010 (in thousands):
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis
Certain assets and liabilities, including cost method investments, are measured at fair value on a non-recurring basis and therefore are not included in the table above. Such instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
Equity Investment in Public Company
In April 2009, the Company made a $5.0 million preferred stock investment in DiagnoCure, Inc. (“DiagnoCure”), a publicly-held company traded on the Toronto Stock Exchange. The Company’s equity investment was initially valued based on the transaction price under the cost method of accounting. The market value of the underlying common stock is the most observable value of the preferred stock, but because there is no active market for DiagnoCure’s preferred shares the Company has classified its equity investment in DiagnoCure as Level 2 in the fair value hierarchy. The Company’s investment in DiagnoCure, which totaled $5.0 million as of March 31, 2011, is included in “Licenses, manufacturing access fees and other assets, net” on the Company’s consolidated balance sheets.
Equity Investments in Private Companies
The valuation of investments in non-public companies requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such assets. The Company’s equity investments in private companies are initially valued based upon the transaction price under the cost method of accounting. Equity investments in non-public companies are classified as Level 3 in the fair value hierarchy.
Roka Bioscience, Inc.
In September 2009, the Company spun-off its industrial testing assets to Roka Bioscience, Inc. (“Roka”), a newly formed private company. In consideration for the contribution of assets, the Company received shares of preferred stock representing 19.9% of Roka’s capital stock on a fully diluted basis. The Company considers Roka to be a variable interest entity in accordance with ASC Topic 810, “Consolidation.” The Company is not the primary beneficiary of Roka and therefore has not consolidated Roka’s financial position or results of operations in the Company’s consolidated financial statements. The Company’s investment in Roka totaled approximately $0.7 million as of March 31, 2011, and is included in “Licenses, manufacturing access fees and other assets, net” on the Company’s consolidated balance sheets.
In April 2011, the Company purchased approximately $4.0 million of Roka’s Series C preferred stock as a participant in Roka’s Series C preferred stock round of financing that raised a total of approximately $20.0 million. Following this Series C investment, the Company owns shares of preferred stock representing approximately 19% of Roka’s capital stock on a fully diluted basis and its investment in Roka totaled approximately $4.7 million.
In 2006, the Company invested in Qualigen, Inc. (“Qualigen”), a private company. The Company’s investment in Qualigen, which totaled approximately $5.4 million as of March 31, 2011, is also included in “Licenses, manufacturing access fees and other assets, net” on the Company’s consolidated balance sheets.
The Company records impairment charges when an investment has experienced a decline that is deemed to be other-than-temporary. The determination that a decline is other-than-temporary is, in part, subjective and influenced by many factors. Future adverse changes in market conditions or poor operating results of investees could result in losses or an inability to recover the carrying value of the investments, thereby possibly requiring impairment charges in the future. When assessing investments in private companies for an other-than-temporary decline in value, the Company considers many factors, including, but not limited to, the following: the share price from the investee’s latest financing round; the performance of the investee in relation to its own operating targets and its business plan; the investee’s revenue and cost trends; the investee’s liquidity and cash position, including its cash burn rate; and market acceptance of the investee’s products and services. From time to time, the Company may consider third party evaluations or valuation reports. The Company also considers new products and/or services that the investee may have forthcoming, any significant news specific to the investee, the investee’s competitors and/or industry and the outlook of the overall industry in which the investee operates. In the event the Company’s judgments change as to other-than temporary declines in value, the Company may record an impairment loss, which could have an adverse effect on its results of operations.
||3 Months Ended|
|Mar. 31, 2011
Note 7 — Borrowings
In February 2009, the Company entered into a credit agreement with Bank of America, N.A. (“Bank of America”) which provided for a one-year senior secured revolving credit facility in an amount of up to $180.0 million that is subject to a borrowing base formula. Subject to the terms of the credit agreement, including the amount of funds that the Company is permitted to borrow from time to time under the credit agreement, the revolving credit facility has a sub-limit for the issuance of letters of credit in a face amount of up to $10.0 million. Advances under the revolving credit facility were used to consummate the Company’s acquisition of Tepnel and are also available for other general corporate purposes. At the Company’s option, loans accrue interest at a per annum rate based on, either: the base rate (the base rate is defined as the greatest of (i) the federal funds rate plus a margin equal to 0.50%, (ii) Bank of America’s prime rate and (iii) the London Interbank Offered Rate (“LIBOR”) plus a margin equal to 1.00%); or LIBOR plus a margin equal to 0.60%, in each case for interest periods of 1, 2, 3 or 6 months as selected by the Company. In connection with the credit agreement, the Company also entered into a security agreement, pursuant to which the Company secured its obligations under the credit agreement with a first priority security interest in the securities, cash and other investment property held in specified accounts maintained by Merrill Lynch, Pierce, Fenner & Smith Incorporated, an affiliate of Bank of America. In connection with the execution of the credit agreement with Bank of America, the Company terminated the commitments under its unsecured bank line of credit with Wells Fargo Bank, N.A., effective as of February 27, 2009. There were no amounts outstanding under the Wells Fargo Bank line of credit as of the termination date.
In March 2009, the Company and Bank of America amended the credit agreement to increase the amount that the Company can borrow from time to time under the credit agreement from $180.0 million to $250.0 million. The term of the credit facility with Bank of America has been extended twice and currently expires in February 2012. As of December 31, 2010, the total principal amount outstanding under the revolving credit facility was $240.0 million. The Company borrowed the remaining $10.0 million under the revolving credit facility during the first quarter of 2011. As a result, the total principal amount outstanding under the revolving credit facility was $250.0 million as of March 31, 2011 and the interest rate payable on such outstanding amount was approximately 0.86%.
||3 Months Ended|
|Mar. 31, 2011
|Income Tax [Abstract]|
Note 8 — Income Tax
As of March 31, 2011, the Company had total gross unrecognized tax benefits of $11.2 million. The amount of unrecognized tax benefits (net of the federal benefit for state taxes) that would favorably affect the Company’s effective income tax rate, if recognized, was $8.7 million. The Company’s federal tax returns for the 2007 through 2009 tax years, California tax returns for the 2005 through 2009 tax years, and UK tax returns for the 2006 through 2009 tax years are subject to future examination.
||3 Months Ended|
|Mar. 31, 2011
Note 9 — Contingencies
In connection with the acquisition of Prodesse, the Company was originally obligated to make certain contingent payments to Prodesse securityholders of up to $25.0 million based on multiple performance measures, including commercial and regulatory milestones. As a result of the failure to achieve a specified milestone, the maximum amount of contingent consideration the Company may be required to pay for its acquisition of Prodesse has been reduced to $15.0 million.
The Company initially recorded $18.0 million as of the date of acquisition as the fair value of this potential contingent consideration liability. In July 2010 the Company received FDA clearance of its ProFAST+ assay, thereby satisfying one of the acquisition-related milestones and triggering a $10.0 million payment to former Prodesse securityholders. The fair value of the remaining contingent consideration is $0 at March 31, 2011 because the Company does not currently expect to make any further milestone payments related to its acquisition of Prodesse. Future milestone payments, if any, will occur by the second quarter of 2012.
The Company is a party to the following litigation and may also be involved in other litigation arising in the ordinary course of business from time to time. The Company intends to vigorously defend its interests in these matters. The Company expects that the resolution of these matters will not have a material adverse effect on its business, financial condition or results of operations. However, due to the uncertainties inherent in litigation, no assurance can be given as to the outcome of these proceedings.
Becton, Dickinson and Company
In October 2009, the Company filed a patent infringement action against Becton, Dickinson and Company (“BD”) in the U.S. District Court for the Southern District of California. The complaint alleges that BD’s Vipertm XTRtm testing system infringes five of the Company’s U.S. patents covering automated processes for preparing, amplifying and detecting nucleic acid targets. The complaint also alleges that BD’s ProbeTectm Female Endocervical and Male Urethral Specimen Collection Kits for Amplified Chlamydia trachomatis/Neisseria gonorrhoeae (CT/GC) DNA assays used with the Viper XTR testing system infringe two of the Company’s U.S. patents covering penetrable caps for specimen collection tubes. The complaint seeks monetary damages and injunctive relief. In March 2010, the Company filed a second complaint for patent infringement against BD in the U.S. District Court for the Southern District of California alleging that BD’s BD MAX Systemtm (formerly known as the HandyLab Jaguar system) infringes four of its U.S. patents covering automated processes for preparing, amplifying and detecting nucleic acid targets. The second complaint also seeks monetary damages and injunctive relief. In June 2010, these two actions were consolidated into a single legal proceeding. There can be no assurances as to the final outcome of this litigation.
||3 Months Ended|
|Mar. 31, 2011
|Stockholders' Equity [Abstract]|
Note 10 — Stockholders’ Equity
Changes in stockholders’ equity for the three months ended March 31, 2011 were as follows (in thousands):
All components of comprehensive income, including net income, are reported in the consolidated financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income (loss), which includes certain changes in stockholders’ equity, such as foreign currency translation of the Company’s wholly owned subsidiaries’ financial statements and unrealized gains and losses on the Company’s available-for-sale securities, are reported, net of their related tax effect, to arrive at comprehensive income.
Components of comprehensive income, net of income tax, for the three month periods ended March 31, 2011 and 2010 were as follows (in thousands):
A summary of the Company’s stock option activity for all option plans for the three months ended March 31, 2011 is as follows (in thousands, except per share data and number of years):
Restricted Stock and Deferred Issuance Restricted Stock
A summary of the Company’s restricted stock and deferred issuance restricted stock award activity for the three months ended March 31, 2011 is as follows (in thousands, except per share data):
Performance Stock Awards
A summary of the Company’s performance stock award activity for the three months ended March 31, 2011 is as follows (in thousands, except per share data):
Beginning in 2010, the Company transitioned from its historical practice of granting certain senior Company employees annual restricted stock awards with time-based vesting provisions only, to granting these employees the right to receive a designated number of shares of Company common stock based on the achievement of specific performance criteria over a defined performance period (the “Performance Stock Awards”). All Performance Stock Awards have been granted under the Company’s 2003 Incentive Award Plan and are intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended.
In February 2010, the Compensation Committee of the Board of Directors of the Company granted certain senior Company employees Performance Stock Awards based on the Company’s 2010 revenues, earnings per share and return on invested capital (collectively, the “2010 Performance Stock Criteria”). Each recipient was eligible to receive between zero and 150% of the target number of shares of Company common stock subject to the applicable award based on actual performance as measured against the 2010 Performance Stock Criteria. In February 2011, the Company issued an aggregate of approximately 37,500 shares of Company common stock to award recipients based on actual performance. One-third of the issued shares vested on the date of issuance, one-third of the shares will vest on the first anniversary of the date of issuance and one-third of the shares will vest on the second anniversary of the date of issuance, as long as the award recipient is employed by the Company on each such vesting date.
In February 2011, the Compensation Committee granted certain senior Company employees Performance Stock Awards based on the Company’s adjusted relative stockholder return in comparison to a defined market index over a three-year performance period (the “2011 Performance Stock Criteria”). Each recipient is eligible to receive between zero and 200% of the target number of shares of Company common stock subject to the applicable award based on actual performance as measured against the 2011 Performance Stock Criteria. Performance under the awards will be measured annually from January 1, 2011 for performance intervals of one, two and three years, with each performance interval representing one-third of the total potential award. Shares issued following each annual performance measurement will be immediately vested upon issuance. Award recipients will be eligible to receive shares issued pursuant to such awards, as long as the award recipient is employed by the Company on each such issuance date.
Stock Repurchase Programs
In February 2011, the Company’s Board of Directors authorized the repurchase of up to $150.0 million of the Company’s common stock until December 31, 2011, through negotiated or open market transactions. There is no minimum or maximum number of shares to be repurchased under the program. As of March 31, 2011, approximately 756,000 shares have been repurchased under this program at an average price of $63.49 per share, or approximately $48.0 million in total.
In February 2010, the Company’s Board of Directors authorized the repurchase of up to $100.0 million of the Company’s common stock until December 31, 2010, through negotiated or open market transactions. There was no minimum or maximum number of shares to be repurchased under the program. The Company completed the program in December 2010, repurchasing and retiring approximately 2,165,000 shares since the program’s inception at an average price of $46.16 per share, or approximately $99.9 million in total.
|Product Line and Significant Customer Information
||3 Months Ended|
|Mar. 31, 2011
|Product Line And Significant Customer Information [Abstract]|
|Product line and significant customer information||
Note 11 — Product Line and Significant Customer Information
The Company currently operates in one business segment, the development, manufacturing, marketing, sales and support of molecular diagnostic products primarily to diagnose human diseases, screen donated human blood and ensure transplant compatibility.
Product sales by product line for the three month periods ended March 31, 2011 and 2010 were as follows (in thousands):
During the three month periods ended March 31, 2011 and 2010, 35% and 39%, respectively, of total revenues were from Novartis. No other customer accounted for more than 10% of the Company’s revenues during the three month periods ended March 31, 2011 and 2010.