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LIFE > SEC Filings for LIFE > Form 10-Q on 6-Nov-2012All Recent SEC Filings

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Form 10-Q for LIFE TECHNOLOGIES CORP


6-Nov-2012

Quarterly Report


ITEM 2. Management's 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, 2011.

Forward-looking Statements

Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance that are not historical facts are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as "believe," "anticipate," "should," "intend," "plan," "will," "expect(s)," "estimate(s)," "project(s)," "positioned," "strategy," "outlook" and similar expressions. Additionally, statements concerning future matters, such as the development of new products, enhancements of technologies, sales levels and operating results and other statements regarding matters that are not historical facts are forward-looking statements. Accordingly, all such forward-looking statements involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from the results expressed in the statements. Any forward-looking statements are qualified in their entirety by reference to the risk, uncertainties and other factors discussed throughout this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, including those described in Item 1-A - Risk Factors of our Annual Report on Form 10-K. Among the key factors that could cause our actual results to differ materially from those projected in our forward-looking statements, include our ability to:

• continually develop and offer new products and services that are commercially successful;

• successfully compete and maintain the pricing of products and services;

• maintain our revenue and profitability during periods of adverse economic and business conditions;

• successfully integrate and develop acquired businesses and technologies;

• successfully acquire new products, services, and technologies through additional acquisitions;

• successfully procure our products and supplies from our existing supply chain;

• successfully secure and deploy capital;

• satisfy our debt obligations; and

• the additional risks and other factors described under the caption "Risk Factors" under Item 1A of the Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission on February 29, 2012.

Because the factors referred to above could cause our actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, you should not place undue reliance on any such forward-looking statements. Further, any forward-looking statement speaks only as of the date of this Quarterly Report on Form 10-Q, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after such date.

OVERVIEW

Revenues for the three and nine months ended September 30, 2012 were $911.2 million and $2,799.6 million, respectively, with net income attributable to the Company of $65.9 million and $320.8 million, respectively. Revenues for the three and nine months ended September 30, 2011 were $928.2 million and $2,765.2 million, respectively, with net income attributable to the Company of $96.3 million and $285.4 million, respectively.

Our Business

We are a global life sciences company dedicated to helping our customers make scientific discoveries and applying those discoveries to ultimately improve the quality of life. Our systems and reagents enable, simplify and accelerate a broad spectrum of biological research of genes, proteins and cells within academic and life science research and commercial applications. Our scientific expertise assists in making biodiscovery research techniques more effective and efficient for pharmaceutical, biotechnology, agricultural, clinical, government and academic scientific professionals with backgrounds in a wide range of scientific disciplines.


Table of Contents

The Company offers many different products and services, and is continually developing and/or acquiring others. Some of our specific product categories include the following:

• Capillary electrophoresis, SOLiDTM, and Ion TorrentTM DNA sequencing systems and reagents, which are used to discover sources of genetic and epigenetic variation, to catalog the DNA structure of organisms, to verify the composition of genetic research material, and to apply these genetic analysis discoveries in markets such as forensic human identification and diagnostics.

• "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 the use of 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.

• 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, reagents and assays, 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 in the scale-up and manufacture of biological drugs at cGMP facilities.

• RNA Interference reagents, which enable scientists to selectively "turn off" genes in biology systems to gain insight into biological pathways.

The Company has modified its financial reporting from our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 into three new business groups to better reflect its internal organization and end markets. These business groups are Research Consumables, Genetic Analysis, and Applied Sciences. The Company's internal organization had previously been structured around its technology platforms of Molecular Biology Systems, Genetic Systems and Cell Systems. The Company has reclassified the historically presented business group revenue to conform to the current year presentation. The reclassification had no impact on previously reported consolidated results of operations or financial position.

The Research Consumables business group includes our molecular and cell biology reagents, endpoint PCR and other benchtop instruments and consumables. These products include RNAi, DNA synthesis, sample prep, transfection, cloning and protein expression profiling and protein analysis, cell culture media used in research, stem cells and related tools, cellular imaging products, antibodies and cell therapy related products.

The Genetic Analysis business group includes our capillary electrophoresis (also referred to as "CE") instruments used for research applications and all CE consumables, real-time and digital qPCR instruments used in research applications and all qPCR consumables and genomic assays, as well as our next generation sequencing systems and reagents for the SOLiD™ and Ion Torrent™ systems.

The Applied Sciences business group includes our BioProduction, forensics and animal health and food safety reagent kits, CE and qPCR instruments that are used in applied markets applications and our medical sciences business which includes our molecular medicine products and services and transplant diagnostics.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are those that require significant judgment. For additional information on our critical accounting policies, see our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and for additional information on the recent accounting pronouncements impacting our business, see Note 1 of the Notes to Consolidated Financial Statements.


Table of Contents

RESULTS OF OPERATIONS

Third Quarter of 2012 Compared to the Third Quarter of 2011

The following table compares revenues and gross profit for the Third quarter of
2012 and 2011:



                                Three months ended
                                   September 30,
  (in millions) (unaudited)     2012           2011         $ Decrease        % Decrease
  Research Consumables        $   384.4       $ 394.7      $      (10.3 )              (3 )%
  Genetic Analysis                353.4         357.7              (4.3 )              (1 )%
  Applied Sciences                173.5         174.1              (0.6 )               0 %
  Corporate and other              (0.1 )         1.7              (1.8 )              NM

  Total revenues              $   911.2       $ 928.2      $      (17.0 )              (2 )%

  Total gross profit          $   478.5       $ 539.2      $      (60.7 )             (11 )%
  Total gross profit %             52.5 %        58.1 %

Revenue

The Company's revenues decreased by $17.0 million or 2% for the third quarter of 2012 compared to the third quarter of 2011. The decrease in revenue was driven primarily by a decrease of $30.6 million in unfavorable currency impacts, net of hedging, partially offset by a net increase of $11.5 million in volume and pricing. Volume and pricing relates to the impact on revenue due to existing and new product total unit sales as well as year over year change in unit pricing and its impact on gross revenue.

The Company operates our business under three business groups-Research Consumables, Genetic Analysis, and Applied Sciences. Revenue for the Research Consumables business group decreased by $10.3 million or 3% in the third quarter of 2012 compared to the third quarter 2011. This decrease was driven primarily by a decrease of $13.1 million in unfavorable currency impacts, net of hedging, partially offset by a net increase of $2.3 million in volume and pricing. Revenue for the Genetic Analysis business group decreased $4.3 million or 1% for the third quarter of 2012 compared to the third quarter of 2011. This decrease was driven primarily by a decrease of $11.9 million in unfavorable currency impacts, net of hedging, partially offset by a $6.4 million net increase from volume and pricing. Revenue for the Applied Sciences business group decreased by $0.6 million for the third quarter of 2012 compared to the third quarter of 2011. The decrease was primarily driven by a decrease of $5.6 million in unfavorable currency impacts, net of hedging, partially offset by a $2.8 million net increase from volume and pricing.

Changes in exchange rates of foreign currencies, especially in the euro, British pound, and Japanese yen, can significantly increase or decrease our reported revenue on sales made in these currencies and could result in a material positive or negative impact on our reported results. In addition to currency exchange rates, we expect that future revenues will be affected by, among other things, new product introductions, competitive conditions, customer research budgets, government research funding, the rate of expansion of our customer base, price increases, product discontinuations, and acquisitions or dispositions of businesses or product lines.

Gross Profit

Gross profit decreased $60.7 million or 11% in the third quarter of 2012 compared to the third quarter of 2011. The decrease in gross profit was primarily driven by a verdict of $48.5 million on a case in litigation and $25.1 million in unfavorable currency impacts, net of hedging, partially offset by an $8.0 million net increase from price, volume, and product mix.

Operating Expenses

The following table compares operating expenses for the third quarter of 2012
and 2011:



                                                                 Three months ended September 30,
                                                          2012                                      2011
                                                                    As a                                     As a
                                            Operating          percentage of           Operating         percentage of          $ Increase/          % Increase/
(in millions) (unaudited)                    expense              revenues              expense            revenues             (Decrease)           (Decrease)
Operating Expenses:
Selling, general and administrative        $     270.6                      30 %      $     251.8                    27 %      $        18.8                    7 %

Research and development 84.8 9 % 103.9 11 % (19.1 ) (18 )% Business consolidation costs 10.6 1 % 23.1 2 % (12.5 ) (54 )%


Table of Contents

Selling, general and administrative

For the third quarter of 2012, selling, general and administrative expenses increased $18.8 million or 7% compared to the third quarter of 2011. This increase was driven primarily by an $11.4 million increase from a legal settlement, a $5.8 million increase in travel and discretionary spending, primarily due to lower spending in the third quarter of 2011, a $5.7 million increase of depreciation, amortization, and license fees, a $2.9 million increase in compensation and benefits, and a $2.8 million increase in purchased services, partially offset by $8.2 million of favorable currency impacts. As a percentage of revenue, the costs are up 1% from the prior period when excluding the above mentioned legal settlement.

Research and development

For the third quarter of 2012, research and development expenses decreased $19.1 million or 18% compared to the third quarter of 2011. The decrease was primarily driven by a $13.7 million fair value adjustment to the contingent consideration liability that was recognized during the third quarter of 2011, and a $4.3 million decrease in compensation and benefits. The Company continues to invest in research and development programs, however as a percentage of revenue, the costs are down from the prior year as a result of the activities that have contributed to increased efficiency in research and development spending.

Business Integration Costs

Business integration costs for the third quarter of 2012 were $10.6 million, compared to $23.1 million for the third quarter of 2011. The expenses for both periods primarily include costs of integration and restructuring efforts for our acquisitions and divestitures activities.

Other Income (Expense)

Interest Income

Interest income was $0.4 million for the third quarter of 2012 compared to $0.9 million for the third quarter of 2011.

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 operations, acquisitions, debt repayment, stock repurchase programs and other activities.

Interest Expense

Interest expense was $29.3 million for the third quarter of 2012 compared to $38.0 million for the third quarter of 2011. The decrease in interest expense was primarily driven by lower debt balances driven by the payoff of the 2024 Convertible Senior Notes in February 2012. The payoff of the 2024 Notes resulted in $5.1 million lower non-cash interest expense for the three months ended September 30, 2012 which was based on a bifurcation requirement, as prescribed by ASC Topic 470-20, Debt with Conversion and Other Options.

Other Expense, Net

Other expense, net, was $2.8 million for the third quarter of 2012 compared to $3.0 million for the same period of 2011. Included in the third quarter of 2012 and 2011 were foreign currency losses of $1.4 million and $2.8 million, net of hedging activities, respectively, driven by currency fluctuation in major currencies.

Provision for Income Taxes

The provision for income taxes as a percentage of pre-tax income from continuing operations was 18.9% for the third quarter of 2012 compared with 20.2% for the third quarter of 2011. The lower third quarter 2012 effective tax rate was primarily driven by a lower proportion of pretax earnings in high tax jurisdictions offset by the 2012 expiration of the federal research credit. The third quarter 2012 effective tax rate of 18.9% was lower than the estimated rate for the year of 22.9% primarily due to a lower proportion of pre-tax earnings in high tax jurisdictions as a result of a legal verdict recorded in the quarter, offset by an increase in tax reserves.


Table of Contents

First Nine Months of 2012 Compared to the First Nine Months of 2011

The following table compares revenues and gross profit for the first nine months
of 2012 and 2011:



                                Nine months ended
                                  September 30,             $ Increase/        % Increase/
 (in millions) (unaudited)     2012           2011          (Decrease)         (Decrease)
 Research Consumables        $ 1,207.3      $ 1,196.6      $        10.7                  1 %
 Genetic Analysis              1,062.2        1,065.8               (3.6 )                0 %
 Applied Sciences                528.6          498.3               30.3                  6 %
 Corporate and other               1.5            4.5               (3.0 )               NM

 Total revenues              $ 2,799.6      $ 2,765.2      $        34.4                  1 %

 Total gross profit          $ 1,576.8      $ 1,582.9      $        (6.1 )                0 %
 Total gross profit %             56.3 %         57.2 %

Revenue

The Company's revenues increased by $34.4 million or 1% for the first nine months of 2012 compared to the first nine months of 2011. The increase in revenue was driven primarily by a $50.9 million net increase in volume and pricing, and $5.0 million associated with acquisitions, partially offset by a decrease of $10.0 million in unfavorable currency impacts, net of hedging, a $7.7 million decrease from divestiture activities, and a net decrease of $5.5 million from royalties including licensing settlements and product discontinuation. Volume and pricing relates to the impact on revenue due to existing and new product total unit sales as well as year over year change in unit pricing and its impact on gross revenue.

The Company operates our business under three business groups-Research Consumables, Genetic Analysis, and Applied Sciences. Revenue for the Research Consumables business group increased by $10.7 million or 1% in the first nine months of 2012 compared to the first nine months 2011. This increase was driven primarily by $8.9 million in net increase from volume and pricing, and an increase of $5.0 million from royalties including licensing settlements, partially offset by a decrease of $3.3 million in unfavorable currency impacts, net of hedging. Revenue for the Genetic Analysis business group decreased $3.6 million for the first nine months of 2012 compared to the first nine months of 2011. This decrease was driven primarily by a net decrease of $13.7 million from royalties including licensing settlements, and a decrease of $4.4 million in unfavorable currency impacts, partially offset by a $14.3 million net increase from volume and pricing. Revenue for the Applied Sciences business group increased by $30.3 million or 6% for the first nine months of 2012 compared to the first nine months of 2011. This increase was driven primarily by $27.7 million in net increase from volume and pricing, and $5.0 million associated with acquisitions, partially offset by a decrease of $2.4 million in unfavorable currency impacts, net of hedging.

Changes in exchange rates of foreign currencies, especially in the euro, British pound, and Japanese yen, can significantly increase or decrease our reported revenue on sales made in these currencies and could result in a material positive or negative impact on our reported results. In addition to currency exchange rates, we expect that future revenues will be affected by, among other things, new product introductions, competitive conditions, customer research budgets, government research funding, the rate of expansion of our customer base, price increases, product discontinuations, and acquisitions or dispositions of businesses or product lines.

Gross Profit

Gross profit decreased $6.1 million in the first nine months of 2012 compared to the first nine months of 2011. The decrease in gross profit was primarily driven by a verdict of $48.5 million on a case in litigation, partially offset by a $38.7 million net increase from price, volume, and product mix, and a $7.3 million decrease in purchased intangible amortization.

Operating Expenses

The following table compares operating expenses for the first nine months of
2012 and 2011:



                                                                  Nine months ended September 30,
                                                           2012                                      2011
                                                                    As a                                      As a
                                            Operating           percentage of           Operating         percentage of          $ Increase/          % Increase/
(in millions) (unaudited)                    expense              revenues               expense            revenues             (Decrease)           (Decrease)
Operating Expenses:
Selling, general and administrative        $     790.0                       28 %      $     759.4                    27 %      $        30.6                    4 %

Research and development 258.2 9 % 287.7 10 % (29.5 ) (10 )% Business consolidation costs 34.3 1 % 56.5 2 % (22.2 ) (39 )%


Table of Contents

Selling, general and administrative

For the first nine months of 2012, selling, general and administrative expenses increased $30.6 million or 4% compared to the first nine months of 2011. This increase was driven primarily by a $13.8 million increase in compensation and benefits, a $12.5 million increase in purchased services, an $11.4 million increase from a legal settlement, and an $8.5 million increase from travel and discretionary spending, partially offset by $14.5 million of favorable currency impacts. As a percentage of revenue, the costs are relatively flat compared to the prior year when excluding the above mentioned legal settlement.

Research and development

For the first nine months of 2012, research and development expenses decreased $29.5 million or 10% compared to the first nine months of 2011. The decrease was primarily driven by a $14.1 million decrease in compensation and benefits and a $13.7 million fair value adjustment to the contingent consideration liability that was recognized during the third quarter of 2011. The Company continues to invest in research and development programs, however as a percentage of revenue, the costs are down from the prior year as a result of the activities that have contributed to increased efficiency in research and development spending.

Business Integration Costs

Business integration costs for the first nine months of 2012 were $34.3 million, compared to $56.5 million for the first nine months of 2011. The expenses for both periods primarily include costs of integration and restructuring efforts for our acquisitions and divestitures activities.

Other Income (Expense)

Interest Income

Interest income was $1.7 million for the first nine months of 2012 compared to $3.0 million for the first nine months of 2011.

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 operations, acquisitions, debt repayment, stock repurchase programs and other activities.

Interest Expense

Interest expense was $94.3 million for the first nine months of 2012 compared to $123.9 million for the first nine months of 2011. The decrease in interest expense was primarily driven by lower debt balances driven by the payoff of the 2024 and 2025 Convertible Senior Notes in February 2012 and June 2011, respectively, partially offset by $3.7 million charged as a result of the extinguishment of a line of credit during the nine months ended September 30, 2012. The payoff of the 2024 and 2025 Notes resulted in $17.8 million lower non-cash interest expense for the nine months ended September 30, 2012, which was based on a bifurcation requirement as prescribed by ASC Topic 470-20, Debt with Conversion and Other Options.

Other Expense, Net

Other expense, net, was $11.1 million for the first nine months of 2012 compared to $8.0 million for the same period of 2011. Included in the first nine months of 2012 was $5.3 million of charges associated with divestiture related activities and foreign currency losses of $2.6 million. Included in the first nine months of 2011 were foreign currency losses of $6.5 million. The foreign currency losses for both periods are net of hedging activities and driven by currency fluctuation in major currencies.

Provision for Income Taxes

The provision for income taxes as a percentage of pre-tax income from continuing operations was 17.9% for the first nine months of 2012 compared with 18.7% for the first nine months of 2011. The first nine months 2012 effective tax rate of 17.9% was lower than the prior year effective tax rate of 18.7% primarily due to tax benefits associated with the Company's election to utilize the single sales factor for apportioning income to California and the release of reserves for uncertain tax positions, offset by the loss of the federal research tax credit in 2012.


Table of Contents

The differences between the U.S. federal statutory tax rate and the Company's effective tax rate without the discrete items are as follows:

   Statutory U.S. federal income tax rate                               35.0  %
   State income tax                                                       0.9
. . .
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