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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C.  20549

 

Form 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2010

 

or

 

o         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: 001-34473

 


 

Talecris Biotherapeutics Holdings Corp.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

20-2533768

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

P.O. Box 110526

4101 Research Commons

79 T.W. Alexander Drive

Research Triangle Park, North Carolina 27709

(Address of principal executive offices, including Zip Code)

 

(919) 316-6300

(Registrants telephone number, including area code)

 

Not applicable

 (Former name, former address and former fiscal year, if changed since last report)

 

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 x  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

 


*The registrant has not yet been phased into the interactive data requirements.

 

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o  No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 125,324,916 shares of Common Stock, $0.01 par value, as of October 21, 2010

 

 

 


 


Table of Contents

 

Talecris Biotherapeutics Holdings Corp.

Form 10-Q

Table of Contents

 

 

 

Page

 

 

 

Part I- Financial Information

 

 

 

 

Item 1.

Unaudited Interim Consolidated Financial Statements:

1

 

 

 

 

Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009

1

 

 

 

 

Consolidated Income Statements for the Three and Nine Months Ended September 30, 2010 and 2009

2

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009

3

 

 

 

 

Notes to Consolidated Financial Statements

4

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

47

 

 

 

Item 4.

Controls and Procedures

48

 

 

 

Part II- Other Information

 

Item 1.

Legal Proceedings

49

 

 

 

Item 1A.

Risk Factors

50

 

 

 

Item 6.

Exhibits

54

 

 

 

 

Signatures

55

 



Table of Contents

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

Talecris Biotherapeutics Holdings Corp.

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

150,530

 

$

65,239

 

Accounts receivable, net of allowances of $2,613 and $3,461, respectively

 

170,872

 

136,978

 

Inventories

 

672,728

 

644,054

 

Deferred income taxes

 

88,076

 

88,652

 

Prepaid expenses and other

 

31,969

 

31,466

 

Total current assets

 

1,114,175

 

966,389

 

 

 

 

 

 

 

Property, plant, and equipment, net

 

331,490

 

267,199

 

Investment in affiliate

 

2,534

 

1,935

 

Intangible assets

 

10,880

 

10,880

 

Goodwill

 

172,860

 

172,860

 

Deferred income taxes

 

 

5,848

 

Other

 

16,804

 

19,894

 

Total assets

 

$

1,648,743

 

$

1,445,005

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

39,715

 

$

71,046

 

Accrued expenses and other liabilities

 

198,572

 

170,533

 

Current portion of capital lease obligations

 

832

 

740

 

Total current liabilities

 

239,119

 

242,319

 

 

 

 

 

 

 

Long-term debt and capital lease obligations

 

605,383

 

605,267

 

Deferred income taxes

 

19,552

 

 

Other

 

15,348

 

15,265

 

Total liabilities

 

879,402

 

862,851

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.01 par value; 400,000,000 shares authorized; 124,915,474 and 122,173,274 shares issued and outstanding, respectively

 

1,246

 

1,212

 

Additional paid-in capital

 

805,473

 

767,032

 

Accumulated deficit

 

(37,432

)

(186,446

)

Accumulated other comprehensive income, net of tax

 

54

 

356

 

Total stockholders’ equity

 

769,341

 

582,154

 

Total liabilities and stockholders’ equity

 

$

1,648,743

 

$

1,445,005

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements. 

 

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Table of Contents

 

Talecris Biotherapeutics Holdings Corp.

Consolidated Income Statements

(in thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net revenue:

 

 

 

 

 

 

 

 

 

Product

 

$

400,561

 

$

387,898

 

$

1,172,278

 

$

1,122,877

 

Other

 

6,440

 

7,833

 

18,510

 

20,219

 

Total

 

407,001

 

395,731

 

1,190,788

 

1,143,096

 

Cost of goods sold

 

229,908

 

230,666

 

670,476

 

663,875

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

177,093

 

165,065

 

520,312

 

479,221

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general, and administrative

 

61,383

 

79,488

 

205,007

 

213,913

 

Research and development

 

18,673

 

16,167

 

50,832

 

51,728

 

Total

 

80,056

 

95,655

 

255,839

 

265,641

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

97,037

 

69,410

 

264,473

 

213,580

 

 

 

 

 

 

 

 

 

 

 

Other non-operating (expense) income:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(11,529

)

(19,587

)

(34,915

)

(61,445

)

Merger termination fee

 

 

 

 

75,000

 

Equity in earnings of affiliate

 

273

 

112

 

599

 

296

 

Total

 

(11,256

)

(19,475

)

(34,316

)

13,851

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

85,781

 

49,935

 

230,157

 

227,431

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

(29,729

)

(14,125

)

(81,143

)

(74,914

)

 

 

 

 

 

 

 

 

 

 

Net income

 

56,052

 

35,810

 

149,014

 

152,517

 

 

 

 

 

 

 

 

 

 

 

Less dividends to preferred stockholders

 

 

(4,012

)

 

(11,744

)

Net income available to common stockholders

 

$

56,052

 

$

31,798

 

$

149,014

 

$

140,773

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.45

 

$

12.01

 

$

1.21

 

$

76.21

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.43

 

$

0.38

 

$

1.16

 

$

1.62

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

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Table of Contents

 

Talecris Biotherapeutics Holdings Corp.

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

Cash flows from operating activities:

 

$

149,014

 

$

152,517

 

Net income

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

26,482

 

21,403

 

Amortization of deferred loan fees and debt discount

 

3,163

 

2,823

 

Share-based compensation expense

 

14,203

 

39,625

 

Change in allowance for doubtful receivables

 

2,629

 

3,203

 

Amortization of deferred compensation

 

1,911

 

4,407

 

Equity in earnings of affiliate

 

(599

)

(296

)

Asset impairment

 

563

 

1,010

 

Decrease in deferred tax assets

 

25,976

 

8,409

 

Excess tax benefits from share-based payment arrangements

 

(10,836

)

(1,437

)

Other

 

478

 

710

 

Changes in assets and liabilities, excluding the effects of business acquisitions:

 

 

 

 

 

Accounts receivable

 

(36,515

)

(17,289

)

Inventories

 

(30,018

)

(52,112

)

Prepaid expenses and other assets

 

(1,723

)

16,775

 

Accounts payable

 

(31,331

)

4,825

 

Accrued expenses and other liabilities

 

30,600

 

15,827

 

Interest payable

 

8,523

 

(1,676

)

Net cash provided by operating activities

 

152,520

 

198,724

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant, and equipment

 

(91,691

)

(36,291

)

Business acquisitions, net of cash acquired

 

 

(27,113

)

Other

 

507

 

634

 

Net cash used in investing activities

 

(91,184

)

(62,770

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowings under Revolving Credit Facility

 

645

 

1,090,222

 

Repayments of borrowings under Revolving Credit Facility

 

(645

)

(1,202,319

)

Repayments of borrowings under term loan

 

 

(5,250

)

Financing transaction costs

 

(394

)

 

Repayments of capital lease obligations

 

(553

)

(407

)

Proceeds from exercises of stock options

 

19,251

 

 

Repurchases of common stock from employees

 

(4,917

)

(4,132

)

Excess tax benefits from share-based payment arrangements

 

10,836

 

1,437

 

Net cash provided by (used in) financing activities

 

24,223

 

(120,449

)

Effect of exchange rate changes on cash and cash equivalents

 

(268

)

465

 

Net increase in cash and cash equivalents

 

85,291

 

15,970

 

Cash and cash equivalents at beginning of period

 

65,239

 

16,979

 

Cash and cash equivalents at end of period

 

$

150,530

 

$

32,949

 

 

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

 

3


 


Table of Contents

 

Talecris Biotherapeutics Holdings Corp.

Notes to Unaudited Consolidated Financial Statements

 

1.                   Description of Business

 

We are a biopharmaceutical company that researches, develops, manufactures, markets, and sells protein-based therapies that extend and enhance the lives of individuals who suffer from chronic and acute, often life-threatening, conditions, such as primary immune deficiencies, chronic inflammatory demyelinating polyneuropathy (CIDP), alpha-1 antitrypsin deficiency-related emphysema, bleeding disorders, infectious diseases, and severe trauma.  Our primary products have orphan drug designation to serve populations with rare, chronic diseases. Our products are derived from human plasma, the liquid component of blood, which is sourced from our plasma collection centers or purchased from third parties with plasma collection centers located in the United States. Plasma contains many therapeutic proteins, which we extract through the process of fractionation at our Clayton, North Carolina and Melville, New York facilities. The fractionated intermediates are then purified, formulated into final bulk, and aseptically filled into final containers for sale. We also sell the fractionated intermediate products.

 

The majority of our sales are concentrated in two key therapeutic areas of the plasma business: Immunology/Neurology, through our intravenous immune globulin (IGIV) product for the treatment of primary immune deficiency and autoimmune diseases, such as CIDP, and Pulmonology, through our alpha-1 proteinase inhibitor (A1PI) product for the treatment of alpha-1 antitrypsin deficiency-related emphysema. These therapeutic areas are served by our branded products: Gamunex, Immune Globulin Intravenous (Human), 10% Caprylate/Chromatography Purified (Gamunex, Gamunex IGIV) and Prolastin Alpha-1 Proteinase Inhibitor (Human) (Prolastin, Prolastin A1PI, Prolastin-C A1PI).  In March 2010, we launched Prolastin-C A1PI, our next generation A1PI product, in the United States.  During the third quarter of 2010, we completed the conversion of our existing U.S. Prolastin patients to Prolastin-C A1PI.  During the third quarter of 2010, we launched Prolastin-C A1PI in Canada and anticipate full conversion of our existing Canadian Prolastin A1PI patients to Prolastin-C A1PI in the 2010 fourth quarter. Sales of Gamunex and Prolastin/Prolastin-C A1PI together comprised 75.2% and 72.8% of our net revenue for the three months ended September 30, 2010 and 2009, respectively, and 75.7% and 74.3% of our net revenue for the nine months ended September 30, 2010 and 2009, respectively.  We also have a line of hyperimmune therapies that provides treatment for tetanus, rabies, hepatitis A, hepatitis B, and Rh factor control during pregnancy and at birth. In addition, we provide plasma-derived therapies for critical care/hemostasis, including the treatment of hemophilia, an anti-coagulation factor (Thrombate III), as well as albumin to expand blood volume. Although we sell our products worldwide, the majority of our sales are concentrated in the United States and Canada.

 

We are headquartered in Research Triangle Park, North Carolina and our primary manufacturing facilities are a short distance away in Clayton, North Carolina.  Our Clayton site is one of the world’s largest plasma protein processing facilities whose operations include fractionation, purification, filling, and finishing.  We have an integrated plasma collection center platform, which as of September 30, 2010, consisted of 69 operating centers, of which 66 were FDA licensed and 3 were unlicensed.  Subsequent to September 30, 2010, we received FDA licensure for one of the unlicensed plasma collection centers.  In addition to our U.S. operations, we have operations located in Germany and Canada, as well as a team dedicated to the development of our international markets.

 

On October 6, 2009, we completed our initial public offering (IPO), which resulted in net primary proceeds to us of $519.7 million.  In addition, during October 2009, we amended our Revolving Credit Facility and completed the issuance of $600.0 million, 7.75% Unsecured Senior Notes, due November 15, 2016, at a price of 99.321% of par, in a private placement to certain qualified institutional buyers. The issuance of the notes resulted in net proceeds to us of $583.9 million. As discussed in Note 9, the notes were subsequently exchanged for notes registered under the Securities Act of 1933, as amended.  Proceeds from these transactions were used to repay and terminate our then existing First and Second Lien Term Loans, settle and terminate certain interest rate swap contracts, and repay amounts outstanding under our Revolving Credit Facility.  Additional information regarding our IPO and refinancing transactions is included in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (SEC) on February 23, 2010 (2009 Form 10-K).

 

As discussed in Note 3, we entered into a definitive merger agreement with Grifols S.A. and Grifols, Inc. (Grifols) on June 6, 2010.

 

2.                   Summary of Significant Accounting Policies

 

Throughout the unaudited interim consolidated financial statements, references to “Talecris Biotherapeutics Holdings Corp.,”

 

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Table of Contents

 

“Talecris,” “the Company,” “we,” “us,” and “our” are references to Talecris Biotherapeutics Holdings Corp. and its wholly-owned subsidiaries.

 

All tabular disclosures of dollar amounts are presented in thousands. All share and per share amounts are presented at their actual amounts.

 

A seven-for-one share dividend on our common stock was paid on September 10, 2009.  All share and per-share amounts have been retroactively adjusted to reflect the share dividend.

 

Interim Financial Statements

 

We have prepared the accompanying unaudited interim consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the SEC.  The accompanying unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our 2009 Form 10-K.  In our opinion, the accompanying unaudited interim consolidated financial statements have been prepared on the same basis as our annual audited consolidated financial statements and contain all material adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly our financial condition, results of operations, and cash flows for the periods presented. The consolidated balance sheet that we have presented as of December 31, 2009 has been derived from the audited consolidated financial statements on that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

 

Significant Accounting Policies

 

A detailed description of our significant accounting policies is presented in the footnotes to our annual audited consolidated financial statements included in our 2009 Form 10-K. Our significant accounting policies, estimates, and assumptions have not changed materially since December 31, 2009.

 

Recent Accounting Pronouncements

 

There were no accounting pronouncements during the nine months ended September 30, 2010 that are expected to have a material impact on our consolidated financial statements or related disclosures.

 

3.                   Definitive Merger Agreement with Grifols S.A. and Grifols, Inc. (Grifols)

 

We entered into a definitive merger agreement with Grifols on June 6, 2010. Under the terms of the agreement, Grifols will acquire, through merger transactions, all of the common stock of Talecris for a combination of $19.00 in cash and 0.641 of a newly-issued non-voting Grifols’ (Class B) ordinary share for each outstanding Talecris share (the merger consideration).  Under the terms of the agreement, completion of the transaction is subject to obtaining certain regulatory approvals, shareholder approvals, as well as other customary conditions. The 0.641 exchange ratio is generally fixed but is subject to adjustment to a lower exchange ratio to the extent that application of 0.641 exchange ratio would result in Grifols issuing in excess of 86.5 million Grifols non-voting shares in the transaction. The Grifols non-voting shares will be listed on NASDAQ in the form of American Depositary Shares and the Madrid, Barcelona, Bilbao and Valencia stock exchanges and quoted on the Automated Quotation System of the Spanish Stock Exchanges.  Grifols non-voting shares will carry the same economic rights as Grifols ordinary shares. Additionally, Talecris share-based compensation, whether vested or unvested, generally will be converted into the right to receive or acquire the merger consideration, or, in the case of employee stock options, the right to acquire the merger consideration, as described in the merger agreement in lieu of Talecris common stock.  The merger agreement provides that if the merger agreement is terminated under specified circumstances Grifols will be required to pay Talecris a termination fee of either $100 million or $375 million, depending on the specified circumstances. If the merger agreement is terminated under other specified circumstances, Talecris will be required to pay Grifols a termination fee of $100 million. Generally, except as noted above, all fees and expenses incurred in connection with the merger agreement and the transactions contemplated by the merger agreement will be paid by the party incurring those expenses.  We have incurred and will continue to incur significant costs related to investment banking, legal, and accounting activities, as well as retention expenses, related to this merger transaction. The leading shareholders of Grifols have entered into an agreement with us, subject to conditions, to vote their Grifols shares in favor of the transaction and, separately, an affiliate of Cerberus Capital Management, L.P., which owns approximately 49% of the outstanding Talecris common stock, has entered into an agreement with Grifols, subject to conditions, to vote its Talecris shares in favor of the transaction.

 

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Table of Contents

 

Under the terms of the definitive merger agreement with Grifols, we are permitted to offer retention amounts up to a total of $15.0 million to employees.  As of September 30, 2010, we have offered retention amounts totaling approximately $10.3 million to employees, of which $2.9 million was paid during the three months ended September 30, 2010 and the remaining amounts are expected to be paid in 2011, subject to the terms of the retention agreements.  We incurred retention expenses, including fringe benefits, of $3.7 million during the three and nine months ended September 30, 2010.  The remaining retention amounts will likely be recognized ratably through the second quarter of 2011.

 

We have entered into agreements with investment bankers related to our definitive merger agreement with Grifols.  We incurred fees totaling $2.5 million under these agreements during the nine months ended September 30, 2010.  We are obligated to pay additional fees totaling $21.3 million upon successful closing of the merger transaction.  During the three and nine months ended September 30, 2010, we also incurred legal, accounting, and other fees of $5.7 million and $11.6 million, respectively, associated with the definitive merger agreement.

 

4.                   Terminated Definitive Merger Agreement with CSL Limited (CSL)

 

We entered into a definitive merger agreement with CSL on August 12, 2008, which was subject to the receipt of certain regulatory approvals as well as other customary conditions.  The U.S. Federal Trade Commission filed an administrative complaint before the Commission challenging the merger and a complaint in Federal district court seeking to enjoin the merger during the administrative process.  On June 8, 2009, the merger parties agreed to terminate the definitive merger agreement, and as a result, CSL paid us a merger termination fee of $75.0 million during the 2009 second quarter.  The U.S. Federal Trade Commission’s complaints were subsequently dismissed.  We incurred retention expenses, including fringe benefits, of $1.6 million and $8.3 million for the three and nine months ended September 30, 2009, respectively, and legal costs associated with the regulatory review process of $6.0 million during the nine months ended September 30, 2009.  No amounts were incurred during 2010. All retention amounts were paid during 2009.

 

5.                   Inventories and Cost of Goods Sold

 

Inventories consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Raw material

 

$

168,343

 

$

171,866

 

Work-in-process

 

347,550

 

312,178

 

Finished goods

 

156,835

 

160,010

 

Total inventories

 

$

672,728

 

$

644,054

 

 

Our raw material inventories include unlicensed plasma and related testing costs of $5.4 million and $7.6 million at September 30, 2010 and December 31, 2009, respectively, which we believe are realizable.

 

6.                   Comprehensive Income

 

The following table includes the components of our comprehensive income:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income

 

$

56,052

 

$

35,810

 

$

149,014

 

$

152,517

 

Foreign currency translation adjustments

 

1,237

 

376

 

(302

)

466

 

Net unrealized gain on derivative financial instruments, net of tax

 

 

9

 

 

5,097

 

Total comprehensive income

 

$

57,289

 

$

36,195

 

$

148,712

 

$

158,080

 

 

During the fourth quarter of 2009, we settled and terminated our interest rate swap contracts as discussed further in our 2009 Form 10-K.

 

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Table of Contents

 

7.                   Income Taxes

 

Our income tax provision was $29.7 million and $14.1 million for the three months ended September 30, 2010 and 2009, respectively, resulting in effective income tax rates of 34.7% and 28.3%, respectively.  Our income tax provision was $81.1 million and $74.9 million for the nine months ended September 30, 2010 and 2009, respectively, resulting in effective income tax rates of 35.3% and 32.9%, respectively.

 

For the three months ended September 30, 2010, our effective income tax rate is lower than the U.S. statutory Federal income tax rate of 35% primarily due to a deduction for domestic production activities which, pursuant to the Internal Revenue Code, increased to 9% of qualified production activities income for taxable years beginning in 2010 from 6% in 2009, and to tax credits for orphan drug clinical testing expenditures.

 

For the nine months ended September 30, 2010, our effective income tax rate is higher than the U.S. statutory federal income tax rate, primarily due to the requirement to capitalize transaction costs related to our definitive merger agreement with Grifols and the effects of state taxes.  These items were partially offset by the increased deduction allowed with respect to domestic production activities and tax credits for orphan drug clinical testing expenditures.  The difference in the effective income tax rates for the three months and nine months ended September 30, 2010 is attributable to a benefit recognized in the third quarter from higher orphan drug tax credits and domestic production activity deductions reported on the 2009 Federal tax return that exceeded levels estimated in the 2009 financial statements.

 

For the three and nine months ended September 30, 2009, our effective income tax rate is lower than the U.S. statutory Federal income tax rate, primarily due to credits for Federal Research and Experimentation and orphan drug clinical testing expenditures.  For the nine months ended September 30, 2009, our effective income tax rate was also impacted by the deduction of previously capitalized transaction costs related to our terminated merger agreement with CSL.  These factors offset the effects of state taxes.

 

Following the completion of field work by the Internal Revenue Service examination team (IRS Exam) in connection with the audit of our 2005, 2006, and 2007 Federal income tax returns, the audit file was sent to the Joint Committee on Taxation (JCT) in accordance with requirements that the JCT review any refunds in excess of $2 million. The refund was attributable to additional tax credits for research and experimental expenditures and orphan drug expenditures claimed during the course of the audit. The JCT subsequently returned the audit file to the IRS Exam for additional fact finding.  In lieu of engaging with the company in fact-finding efforts, IRS Exam issued a new audit report disallowing the tax credits for research and experimental expenditures and orphan drug clinical testing expenditures and issued a 30 Day Letter indicating that IRS Exam and the company could not reach agreement on the issue.  The company has filed a timely protest to the adjustments proposed by IRS Exam and expects to favorably resolve this matter at the IRS Appeals level.  We do not believe the outcome of this matter will have a material adverse impact on our consolidated financial condition or results of operation. It is reasonably possible that, within the next twelve months, we will resolve this matter with the IRS and JCT, which may increase or decrease the unrecognized tax benefits for all open tax years.  The favorable resolution of this matter would increase earnings by approximately $4.7 million based on current estimates. Audit outcomes and the timing of audit settlements are subject to significant uncertainty.

 

8.                   Related Party Transactions

 

Until January 21, 2010, a majority of our outstanding common stock was owned by Talecris Holdings, LLC.  Talecris Holdings, LLC is owned by (i) Cerberus-Plasma Holdings LLC, the managing member of which is Cerberus Partners, L.P., and (ii) limited partnerships affiliated with Ampersand Ventures. Substantially all rights of management and control of Talecris Holdings, LLC are held by Cerberus-Plasma Holdings LLC. As of September 30, 2010, Talecris Holdings, LLC owned approximately 49% of our outstanding common stock.  We had a management agreement with Cerberus-Plasma Holdings, LLC and an affiliate of Ampersand Ventures, which was terminated as of September 30, 2009 in connection with our IPO.  We have a Master Consulting and Advisory Services Agreement with an affiliate of Cerberus to provide certain advisory services to us, for which we incurred no significant costs for the periods presented.

 

We have an equity investment in Centric Health Resources, Inc. (Centric); therefore, we consider Centric to be a related party during the periods presented.  Centric provides services in the management of our Prolastin and Gamunex Direct programs.  In this capacity, Centric provides warehousing, order fulfillment, distribution, home infusion, and customer relationship services for us primarily related to our U.S. sales of Prolastin/Prolastin-C A1PI.  Centric maintains inventory on our behalf which it utilizes to fill customer orders.  Centric also provides services to us in collecting accounts receivable for sales made under the Prolastin and Gamunex Direct programs. We provide Centric with a fee for each unit of product provided to patients which escalates with volume.

 

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The following table summarizes our related party expenses for the periods presented:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Centric (product distribution and other services)

 

$

5,957

 

$

5,128

 

$

11,076

 

$

15,076

 

Cerberus/Ampersand (management fees)

 

$

 

$

1,958

 

$

 

$

5,715

 

 

The following table summarizes our related party accounts payable balances:

 

 

 

September 30,

 

December 31,

 

 

 

2010

 

2009

 

Centric (product distribution and other services)

 

$

6,447

 

$

5,537

 

 

9.                   7.75% Notes Exchange

 

On July 19, 2010, we exchanged all of our then outstanding 7.75% Senior Notes due 2016 for 7.75% Senior Notes due 2016 that have been registered under the Securities Act of 1933, as amended (Exchange Notes). The exchange offer was made pursuant to the registration rights agreement that we entered into with the initial purchasers in connection with the issuance of the previously outstanding notes.  The Exchange Notes are substantially identical to the previously outstanding notes, except that the transfer restrictions, registration rights, and additional interest provisions relating to the previously outstanding notes will not apply to the Exchange Notes.  This exchange did not impact our capitalization.  Unless stated otherwise in the context of discussion, we use the term “7.75% Notes” to describe our previously outstanding notes and the Exchange Notes.

 

10.            Commitments and Contingencies

 

We have disclosed information regarding our commercial commitments in our 2009 Form 10-K.  The following summarizes our significant changes in material commitments and contingencies as of September 30, 2010.

 

Capital Commitments

 

As discussed in our 2009 Form 10-K, we have embarked on a substantial capital plan to address our manufacturing capacity constraints.  As of September 30, 2010, we have commitments and open purchase orders for capital spending under this capital program of approximately $222 million.

 

Litigation

 

We are involved in various legal and regulatory proceedings that arise in the ordinary course of business.  We record accruals for such contingencies to the extent that we conclude that their occurrence is both probable and estimable.  We consider many factors in making these assessments, including the professional judgment of experienced members of management and our legal counsel.  We have estimated the likelihood of settlement, unfavorable outcomes, and the amounts of such potential losses.  In our opinion, the ultimate outcome of these proceedings and claims is not anticipated to have a material adverse effect on our consolidated financial position, results of operations, or cash flows.  However, the ultimate outcome of litigation is unpredictable and actual results could be materially different from our estimates.  We record anticipated recoveries under applicable insurance contracts when we are assured of recovery.

 

Grifols Transaction

 

Four purported class action lawsuits have been filed by our stockholders challenging the proposed Grifols transaction. Two of the lawsuits were filed in the Court of Chancery of the State of Delaware and have been consolidated under the caption: In re Talecris Biotherapeutics Holdings Shareholder Litigation, Consol. C.A. No. 5614-VCL. The other two lawsuits were filed in the Superior Court of the State of North Carolina and are captioned Rubin v. Charpie, et al., No. 10 CV 004507 (North Carolina Superior Court, Durham County), and Kovary v. Talecris Biotherapeutics Holdings Corp., et al., No. 10 CV 011638 (North Carolina Superior Court, Wake County). The lawsuits name as defendants Talecris, the members of our board of directors, Grifols, S.A. and its subsidiary, Grifols, Inc., and, in the Delaware consolidated action, Talecris Holdings LLC and Stream Merger Sub, Inc, a wholly owned subsidiary of

 

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Talecris. The two North Carolina actions have been stayed.

 

All of the lawsuits allege that the individual defendants (and, in the consolidated Delaware action, Talecris Holdings LLC) breached their fiduciary duties to our stockholders in connection with the proposed transaction with Grifols, and that Grifols (and, in one of the North Carolina cases, Talecris, and in the Delaware action, Grifols, Inc.) aided and abetted those breaches. The Delaware complaint alleges, among other things, that the consideration offered to our stockholders pursuant to the proposed transaction is inadequate; that our board of directors failed to take steps to maximize stockholder value; that our IPO and debt refinancing in 2009 were intended to facilitate a sale of Talecris; that Cerberus and Talecris Holdings LLC arranged the proposed merger for the benefit of affiliates of Cerberus Associates, LLC, without regard to the interests of other stockholders; that the voting agreements impermissibly lock up the transaction; that the merger agreement contains terms, including a termination fee, that favor Grifols and deter alternative bids; and that the preliminary Form F-4 filed on August 10, 2010 contains material misstatements and/or omissions, including with respect to the availability of appraisal rights in the merger; the purpose and effects of the Virginia reincorporation merger; the antitrust risks of the proposed transaction; the financial advisors’ analyses regarding the Grifols’ non-voting stock to be issued in connection with the transaction; and the fees to be paid to Morgan Stanley by us and Grifols in connection with the proposed transaction. The Delaware complaint also alleges that our stockholders are entitled to appraisal rights in connection with the transaction pursuant to Section 262 of the Delaware General Corporation Law, and that the transaction violates the Delaware General Corporation Law by failing to provide such rights. The Delaware action seeks equitable and injunctive relief, including a determination that the stockholders have appraisal rights in connection with the merger, and damages. Plaintiffs have filed a motion for a preliminary injunction, which has been scheduled to be heard on November 8, 2010.

 

We believe that these lawsuits are without merit and intend to defend them vigorously.

 

National Genetics Institute/Baxter Healthcare Corporation Litigation

 

In May 2008, Baxter Healthcare Corporation (Baxter) and National Genetics Institute (NGI), a wholly-owned subsidiary of Laboratory Corporation of America, filed a complaint in the U.S. District Court for the Eastern District of North Carolina, alleging that we infringed U.S. Patent Nos. 5,780,222, 6,063,563, and 6,566,052. The patents deal primarily with a method of screening large numbers of biological samples utilizing various pooling and matrix array strategies, and the complaint alleges that the patents are owned by Baxter and exclusively licensed to NGI. In November 2008, we filed our answer to their complaint, asserting anti-trust and other counterclaims, and filed a request for re-examination of the patents with the Patent and Trademark Office (PTO), which was subsequently granted. We filed a motion to stay litigation pending the PTO proceedings. This case was settled effective October 1, 2010, with us receiving a paid-up license to the technology subject to the disputed patents and the parties dismissing their claims and counterclaims.

 

Plasma Centers of America, LLC and G&M Crandall Limited Family Partnership

 

We had a three year Amended and Restated Plasma Sale/Purchase Agreement with Plasma Centers of America, LLC (PCA) under which we were required to purchase annual minimum quantities of plasma from plasma collection centers approved by us, including the prepayment of 90% for unlicensed plasma.  We were also committed to finance the development of up to eight plasma collection centers, which were to be used to source plasma for us.  Under the terms of the agreement, we had the obligation to purchase such centers under certain conditions for a sum determined by a formula set forth in the agreement.  We provided $3.2 million in financing, including accrued interest, related to the development of such centers, and we advanced payment of $1.0 million for unlicensed plasma.  We recorded a provision within SG&A during 2008 related to these advances.

 

In August 2008, we notified PCA that they were in breach of the Amended and Restated Plasma Sale/Purchase Agreement.  We terminated the agreement in September 2008. In November 2008, TPR filed suit in federal court in Raleigh, North Carolina against the G&M Crandall Limited Family Partnership and its individual partners as guarantors of obligations of PCA. We were served in January 2009 in a parallel state action by PCA, alleging breach of contract by TPR. Motions to summary judgment by both parties have been denied. The two cases are proceeding in parallel, with trial in the state action set for November 2010.

 

Foreign Corrupt Practices Act Investigation

 

We are conducting an internal investigation into potential violations of the Foreign Corrupt Practices Act (FCPA) that we became aware of during the conduct of an unrelated review.  The FCPA investigation is being conducted by outside counsel under the direction of a special committee of our board of directors.  The investigation initially focused on sales to certain Eastern European and Middle Eastern countries, primarily Belarus, Russia and Iran, but we are also reviewing sales practices in Brazil, China, Georgia, Turkey and other countries as deemed appropriate.

 

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In July 2009, we voluntarily contacted the U.S. Department of Justice (DOJ) to advise them of the investigation and to offer our cooperation in any investigation that they want to conduct or they want us to conduct. The DOJ has not indicated what action it may take, if any, against us or any individual, or the extent to which it may conduct its own investigation. The DOJ or other federal agencies may seek to impose sanctions on us that may include, among other things, injunctive relief, disgorgement, fines, penalties, appointment of a monitor, appointment of new control staff, or enhancement of existing compliance and training programs. Other countries in which we do business may initiate their own investigations and impose similar penalties. As a result of this investigation, we have suspended shipments to some of these countries while we put additional safeguards in place. In some cases, safeguards involved terminating consultants and suspending relations with or terminating distributors in countries under investigation as circumstances warranted. These actions unfavorably affected revenue from these countries in 2009 and have an ongoing unfavorable impact on revenue in 2010. We have resumed sales in countries where we have appropriate safeguards in place and are reallocating product to other countries as necessary.  To the extent that we conclude, or the DOJ concludes, that we cannot implement adequate safeguards or otherwise need to change our business practices, distributors, or consultants in affected countries or other countries, this may result in a permanent loss of business from those countries. These sanctions or the loss of business could have a material adverse effect on us or our results of operations. Based on the information obtained to date, we have not determined that any potential liability that may result is probable or can be reasonably estimated. Therefore, we have not made any accrual in our unaudited interim consolidated financial statements as of September 30, 2010.

 

Compliance with Pharmaceutical Pricing Agreement under the Public Health Service Program

 

In November 2009, we received a letter from the United States Attorney’s Office for the Eastern District of Pennsylvania (USAO). The USAO requested a meeting to review our compliance with the terms of the Pharmaceutical Pricing Agreement (PPA) under the Public Health Service program. Specifically, the USAO asked for information related to the sale of our IGIV product, Gamunex, under that program.  In order to have federal financial participation apply to their products under the Medicaid program and to obtain Medicare Part B coverage, manufacturers are required to enter into a PPA. The PPA obligates manufacturers to charge covered entities the Public Health Service price for drugs intended for outpatient use. The Public Health Service price is based on the Medicaid rebate amount. We believe that we have complied with the terms of the PPA and federal law.  If the USAO determines that our practices are inconsistent with the terms of the PPA, the USAO has stated that it may file a civil action against us under the Anti-fraud Injunction Act and seek a court order directing the company to comply with the PPA or, potentially, proceed under some other legal theory.   We could also be subject to fines, damages, penalties, appointment of a monitor, or enhancement of existing compliance and training programs as a result of government action. We are cooperating with the investigation and intend to respond to information requests from the USAO. Based on the information obtained to date, we have not determined that any potential liability that may result is probable or can be reasonably estimated. Therefore, we have not made any accrual in our unaudited interim consolidated financial statements as of September 30, 2010.

 

11.            Share-Based Compensation

 

We have long-term incentive plans, which provide for the grant of awards in the form of incentive stock options, nonqualified stock options, share appreciation rights, restricted stock, restricted stock units (RSU’s), unrestricted shares of common stock, deferred share units, and performance share units (PSU’s), to eligible employees, directors, and consultants.

 

Share-based compensation expense for the three and nine months ended September 30, 2010 and 2009 was as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

SG&A

 

$

2,530

 

$

17,929

 

$

10,480

 

$

34,379

 

R&D

 

181

 

513

 

896

 

1,692

 

Cost of goods sold

 

908

 

1,012

 

2,827

 

3,554

 

Total expense

 

$

3,619

 

$

19,454

 

$

14,203

 

$

39,625

 

 

 

 

 

 

 

 

 

 

 

Capitalized in inventory

 

$

483

 

$

868

 

$

1,928

 

$

2,874

 

 

Amounts capitalized in inventory are recognized in cost of goods sold in our consolidated income statement primarily within twelve months.

 

The following table summarizes the estimated remaining unrecognized compensation cost related to our share-based

 

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compensation program as of September 30, 2010 and the weighted average period over which the non-cash compensation cost is expected to be recognized:

 

 

 

 

 

Weighted-

 

 

 

Unrecognized

 

Average

 

 

 

Compensation

 

Period

 

 

 

Cost

 

(Years)

 

Stock options

 

$

4,523

 

2.35

 

Restricted share awards

 

2,163

 

0.50

 

RSU’s

 

7,298

 

2.41

 

PSU’s

 

3,894

 

2.50

 

Total

 

$

17,878

 

 

 

 

In addition to the unrecognized compensation cost included in the table above, at September 30, 2010, $1.9 million of compensation cost was included in inventory on our unaudited interim consolidated balance sheet, which we expect to be recognized as non-cash compensation expense in our consolidated income statement primarily within the next twelve months.  The amount of share-based compensation expense that we will ultimately be required to record could change in the future as a result of additional grants, changes in the fair value of shares for performance-based awards, differences between our anticipated forfeiture rate and the actual forfeiture rate, the probability of achieving targets established for performance award vesting, and other actions by our board of directors or its compensation committee.

 

Stock Options

 

The following is a summary of stock option activity for the nine months ended September 30, 2010:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

Remaining

 

 

 

 

 

 

 

Average

 

Contractual

 

Aggregate

 

 

 

 

 

Exercise

 

Term

 

Intrinsic

 

 

 

Shares

 

Price

 

(Years)

 

Value

 

Outstanding at December 31, 2009

 

12,129,438

 

$

8.40

 

 

 

 

 

Granted

 

73,593

 

$

20.39

 

 

 

 

 

Forfeited

 

(18,805

)

$

19.00

 

 

 

 

 

Exercised

 

(2,989,023

)

$

6.44

 

 

 

 

 

Outstanding at September 30, 2010

 

9,195,203

 

$

9.11

 

6.0

 

$

126,587

 

 

 

 

 

 

 

 

 

 

 

Exercisable at September 30, 2010

 

8,542,702

 

$

8.35

 

5.1

 

$

124,157

 

 

 

 

 

 

 

 

 

 

 

Vested and expected to vest at September 30, 2010

 

9,142,593

 

$

9.00

 

6.0

 

$

126,862

 

 

The aggregate intrinsic value in the table above represents the difference between the $22.88 closing price of our common stock as reported by The NASDAQ Global Select Market on September 30, 2010 and the weighted average exercise price, multiplied by the number of options outstanding or exercisable.  The total cash proceeds to us from stock option exercises during the nine months ended September 30, 2010 were $19.3 million for shares with an estimated intrinsic value of $68.4 million.    We do not record the aggregate intrinsic value for financial accounting purposes and the value changes based upon changes in the fair value of our common stock.

 

The following weighted-average assumptions were used to estimate the fair value of stock options granted:

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2010

 

2009

 

Risk-free interest rate

 

2.66

%

2.66

%

Expected term (years)

 

5.66

 

5.96

 

Expected volatility

 

50

%

50

%

Expected dividend yield

 

0

%

0

%

 

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We generally apply a 3% forfeiture rate to the options granted over the term of the award, representing our estimate of those awards not expected to vest.

 

Restricted Stock

 

The following is a summary of restricted stock activity for the nine months ended September 30, 2010:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Unvested shares outstanding at December 31, 2009

 

913,856

 

$

15.27

 

Vested

 

(727,256

)

$

13.74

 

Unvested shares outstanding at September 30, 2010

 

186,600

 

$

21.25

 

 

During the nine months ended September 30, 2010, we repurchased 246,823 shares of our common stock from employees for $4.9 million to settle their withholding tax obligations upon vesting of 727,256 shares of restricted stock.  During the nine months ended September 30, 2009, we repurchased 248,512 shares of our common stock from employees for $4.1 million to settle their withholding tax obligations upon vesting of 771,744 shares of restricted stock.  The total fair value of the restricted stock that vested during the nine months ended September 30, 2010 and 2009 was $14.5 million and $12.8 million, respectively.

 

Restricted Stock Units (RSU’s)

 

The following is a summary of RSU activity for the nine months ended September 30, 2010:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted

 

Remaining

 

 

 

 

 

 

 

Average

 

Contractual

 

Aggregate

 

 

 

 

 

Grant Date

 

Term

 

Intrinsic

 

 

 

Shares

 

Fair Value

 

(Years)

 

value

 

Outstanding at December 31, 2009

 

480,024

 

$

19.00

 

 

 

 

 

Granted

 

36,015

 

$

20.40

 

 

 

 

 

Forfeited

 

(23,703

)

$

19.00

 

 

 

 

 

Outstanding at September 30, 2010

 

492,336

 

$

19.10

 

2.4

 

$

11,265

 

 

Performance Share Units (PSU’s)

 

The following is a summary of performance share unit activity for the nine months ended September 30, 2010:

 

 

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Unvested PSU’s outstanding at December 31, 2009

 

 

 

Granted

 

261,327

 

$

21.51

 

Forfeited

 

(1,627

)

$

21.51

 

Unvested PSU’s outstanding at September 30, 2010

 

259,700

 

$

21.51

 

 

PSU’s are awards that vest based on the achievement of pre-established objective performance goals, which are generally financial in nature. For performance awards, the compensation committee establishes a performance period and the performance targets for each performance measure that must be achieved at the end of the performance period for awards to vest. The number of shares issued upon the vesting of the performance awards varies based on actual performance in a year relative to a defined minimum and maximum financial target for that year. The PSU’s granted on March 8, 2010 will vest annually over a three-year performance period with the potential for 0% to 125% payout, based on the achievement of annual earnings per share targets that were established at the time of grant.

 

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Income Taxes

 

In connection with stock option exercises and restricted stock vesting, we recognized net tax benefits of $12.4 million and

$4.7 million for the nine months ended September 30, 2010 and 2009, respectively.  We record income tax benefits realized upon exercise or vesting of an award in excess of that previously recognized in earnings as additional paid-in-capital.  We recognized excess tax benefits related to share-based compensation of $10.8 million and $1.4 million for the nine months ended September 30, 2010 and 2009, respectively.

 

12.            Segment Reporting

 

We operate our plasma-derived protein therapeutics business as a single reportable business segment since all operating activities are directed from our North Carolina headquarters and all of our products are derived from a single source and result from a common manufacturing process. All products are manufactured from a single raw material source, human plasma, and are processed in whole, or in part, at our principal manufacturing facilities located in Clayton, North Carolina. Our Melville, New York, facility primarily supplies intermediate plasma fractions to our Clayton facilities. Gamunex and Prolastin/Prolastin-C A1PI constitute the majority of our net revenue. Although we sell our products worldwide, the majority of our net revenue was concentrated in the United States and Canada for the periods presented.

 

In the following table, we have presented our net revenue by significant product category. Our Immunology/Neurology product category includes the products that are used to provide antibodies to patients who have a genetic or acquired inability to produce these antibodies, as well as a treatment for CIDP, and also products that provide antibodies to counter specific antigens such as rabies. Our Pulmonology product category is comprised of our Prolastin/Prolastin-C A1PI product, which is used to treat patients with a genetic alpha-1 antitrypsin deficiency.  Our Critical Care/Hemostasis product category includes products that are used to supplement, restore, or maintain normal plasma parameters such as volume or coagulation values.  Other product net revenue primarily consists of sales of PPF powder and intermediate products, such as cryoprecipitate.  Other net revenue consists of royalties and licensing fees, milestones, and revenues related to contracted services performed for third parties at our Melville, New York facility.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Product net revenue:

 

 

 

 

 

 

 

 

 

Immunology/ Neurology

 

$

246,393

 

$

237,395

 

$

718,101

 

$

700,938

 

Pulmonology

 

89,980

 

80,813

 

258,149

 

230,193

 

Critical Care/ Hemostasis

 

44,100

 

42,434

 

130,818

 

119,168

 

Other

 

20,088

 

27,256

 

65,210

 

72,578

 

Total product net revenue

 

400,561

 

387,898

 

1,172,278

 

1,122,877

 

Other revenue

 

6,440

 

7,833

 

18,510

 

20,219

 

Total net revenue

 

$

407,001

 

$

395,731

 

$

1,190,788

 

$

1,143,096

 

 

In the following table, we have presented our net revenue by geographic region. Net revenue for each region is based on the geographic location of the customer.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

United States

 

$

285,912

 

$

267,411

 

$

822,808

 

$

764,500

 

Canada

 

47,729

 

58,227

 

144,266

 

162,092

 

Europe

 

50,430

 

45,956

 

145,077

 

132,617

 

Other

 

22,930

 

24,137

 

78,637

 

83,887

 

Total net revenue

 

$

407,001

 

$

395,731

 

$

1,190,788

 

$

1,143,096

 

 

We did not maintain significant long-lived assets outside of the United States at September 30, 2010 and December 31, 2009.

 

13.            Earnings per Share

 

The following table illustrates the calculation of our basic earnings per common share outstanding:

 

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.

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Net income

 

$

56,052

 

$

35,810

 

$

149,014

 

$

152,517

 

Less:

 

 

 

 

 

 

 

 

 

Series A convertible preferred stock undeclared dividends

 

 

(3,280

)

 

(9,602

)

Series B convertible preferred stock undeclared dividends

 

 

(732

)

 

(2,142

)

Net income available to common stockholders

 

$

56,052

 

$

31,798

 

$

149,014

 

$

140,773

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

123,668,072

 

2,647,178

 

122,669,724

 

1,847,235

 

 

 

 

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.45

 

$

12.01

 

$

1.21

 

$

76.21

 

 

The following table illustrates the calculation of our diluted earnings per common share outstanding:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

56,052

 

$

35,810

 

$

149,014

 

$

152,517

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

123,668,072

 

2,647,178

 

122,669,724

 

1,847,235

 

Plus incremental shares from assumed conversions:

 

 

 

 

 

 

 

 

 

Series A preferred stock

 

 

71,217,391

 

 

71,736,264

 

Series B preferred stock

 

 

13,695,817

 

 

13,795,601

 

Stock options and restricted shares

 

5,266,418

 

6,350,815

 

5,844,003

 

6,540,453

 

Dilutive potential common shares

 

128,934,490

 

93,911,201

 

128,513,727

 

93,919,553

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share

 

$

0.43

 

$

0.38

 

$

1.16

 

$

1.62

 

 

Options at the weighted average exercise prices indicated below were outstanding but excluded from the computation of diluted earnings per common share because their exercise prices and assumed tax benefits upon exercise were greater than the average market price for the common shares during the periods presented, so including those options would be anti-dilutive.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Stock options

 

602,768

 

2,053,889

 

640,636

 

2,039,807

 

Weighted average exercise price

 

$

19.10

 

$

21.17

 

$

19.11

 

$

21.20

 

 

14.            Fair Value of Financial Instruments

 

At December 31, 2009, we had two interest rate cap contracts with a notional principal amount of $175.0 million outstanding for which the cap rate of 6.00% was significantly higher than prevailing market interest rates; therefore, the fair market value was zero. The interest rate caps matured during February 2010.

 

At September 30, 2010 and December 31, 2009, the estimated fair value of our 7.75% Notes was $657.8 million and $607.9 million, respectively.  We calculated the fair value by reference to open bid/ask quotations of our 7.75% Notes at each balance sheet date.  We had no amounts outstanding under our variable rate Revolving Credit Facility at September 30, 2010 and December 31, 2009.  At September 30, 2010 and December 31, 2009, we have notes receivable outstanding, which bear interest at market rates, and consequently, the recorded amounts approximate fair value.  The recorded amounts of all other financial instruments, which consists of cash and cash equivalents, accounts receivable, net, accounts payable, accrued expenses and other liabilities, approximate fair value due to the short duration of the instruments.

 

14



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15.            Condensed Consolidating Financial Information

 

In October 2009, we completed the issuance of our 7.75% Notes.  The 7.75% Notes are guaranteed on a senior unsecured basis by our existing and future domestic subsidiaries.  The accompanying condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”  Each of the subsidiary guarantors are 100% owned, directly or indirectly, by us, and all guarantees are full and unconditional and joint and several.  Our investments in our consolidated subsidiaries are presented under the equity method of accounting.  No significant administrative costs are borne by the Parent.  Our unaudited condensed consolidating financial statements are presented below:

 

Talecris Biotherapeutics Holdings Corp.

Condensed Consolidating Balance Sheets

September 30, 2010

 

 

 

Parent/

 

Guarantor

 

Non-Guarantor

 

Consolidating

 

 

 

 

 

Issuer

 

Subsidiaries

 

Subsidiaries

 

Adjustments

 

Consolidated

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

 

$

143,327

 

$

7,203

 

$

 

$

150,530

 

Accounts receivable, net

 

 

287,799

 

38,502

 

(155,429

)

170,872

 

Inventories

 

 

626,319

 

46,409

 

 

672,728

 

Other

 

 

119,158

 

887

 

 

120,045

 

Total current assets

 

 

1,176,603

 

93,001

 

(155,429

)

1,114,175

 

Property, plant, and equipment, net

 

 

330,355

 

1,135

 

 

331,490

 

Intangible assets

 

 

10,880

 

 

 

10,880

 

Goodwill

 

 

172,860

 

 

 

172,860

 

Investment in Subsidiaries

 

809,729

 

(33,839

)

 

(775,890

)

 

Advances and notes between Parent and Subsidiaries

 

1,400,295

 

826,572

 

 

(2,226,867

)

 

Other

 

 

19,029

 

309

 

 

19,338

 

Total assets

 

$

2,210,024

 

$

2,502,460

 

$

94,445

 

$

(3,158,186

)

$

1,648,743

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit):

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

75,963

 

$

119,181

 

$

(155,429

)

$

39,715

 

Accrued expenses and other liabilities

 

17,634

 

172,558

 

8,380

 

 

198,572

 

Current portion of capital lease obligations

 

 

832

 

 

 

832

 

Total current liabilities

 

17,634

 

249,353

 

127,561

 

(155,429

)

239,119

 

Long-term debt and capital lease obligations

 

596,477

 

8,906

 

 

 

605,383

 

Advances and notes between Parent and Subsidiaries

 

826,572

 

1,400,295

 

 

— (2,226,867

)

 

Other

 

 

34,177

 

723

 

 

34,900

 

Total liabilities

 

1,440,683

 

1,692,731

 

128,284

 

(2,382,296

)

879,402

 

Stockholders’ equity (deficit)

 

769,341

 

809,729

 

(33,839

)

(775,890

)

769,341

 

Total liabilities and stockholders’ equity (deficit)

 

$

2,210,024

 

$

2,502,460

 

$

94,445

 

$

(3,158,186

)

$

1,648,743

 

 

15


 


Table of Contents

 

Talecris Biotherapeutics Holdings Corp.

Condensed Consolidating Balance Sheets

December 31, 2009

 

 

 

Parent/

 

Guarantor

 

Non-Guarantor

 

Consolidating

 

 

 

 

 

Issuer

 

Subsidiaries

 

Subsidiaries

 

Adjustments

 

Consolidated

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

 

$

58,320

 

$

6,919

 

$

 

$

65,239

 

Accounts receivable, net

 

 

222,007

 

64,454

 

(149,483

)

136,978

 

Inventories

 

 

605,324

 

38,730

 

 

644,054

 

Other

 

 

117,670

 

2,448

 

 

120,118

 

Total current assets

 

 

1,003,321

 

112,551

 

(149,483

)

966,389

 

Property, plant, and equipment, net

 

 

266,067

 

1,132

 

 

267,199

 

Intangible assets

 

 

10,880

 

 

 

10,880

 

Goodwill

 

 

172,860

 

 

 

172,860

 

Investment in Subsidiaries

 

680,459

 

(27,925

)

 

(652,534

)

 

Advances and notes between Parent and Subsidiaries

 

1,346,520

 

862,406

 

 

(2,208,926

)

 

Other

 

 

27,054

 

623

 

 

27,677

 

Total assets

 

$

2,026,979

 

$

2,314,663

 

$

114,306

 

$

(3,010,943

)

$

1,445,005

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit):

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

103,460

 

$

117,069

 

$

(149,483

)

$

71,046

 

Accrued expenses and other liabilities

 

 

160,047

 

10,486

 

 

170,533

 

Current portion of capital lease obligations

 

 

740

 

 

 

740

 

Total current liabilities

 

 

264,247

 

127,555

 

(149,483

)

242,319

 

Long-term debt and capital lease obligations

 

596,046

 

9,221

 

 

 

605,267

 

Advances and notes between Parent and Subsidiaries

 

848,779

 

1,346,515

 

13,632

 

(2,208,926

)

 

Other

 

 

14,221

 

1,044

 

 

15,265

 

Total liabilities

 

1,444,825

 

1,634,204

 

142,231

 

(2,358,409

)

862,851

 

Stockholders’ equity (deficit)

 

582,154

 

680,459

 

(27,925

)

(652,534

)

582,154

 

Total liabilities and stockholders’ equity (deficit)

 

$

2,026,979

 

$

2,314,663

 

$

114,306

 

$

(3,010,943

)

$

1,445,005

 

 

16



Table of Contents

 

Talecris Biotherapeutics Holdings Corp.

Condensed Consolidating Income Statements

Three Months Ended September 30, 2010

 

 

 

Parent/

 

Guarantor

 

Non-Guarantor

 

Consolidating

 

 

 

 

 

Issuer

 

Subsidiaries

 

Subsidiaries

 

Adjustments

 

Consolidated

 

Net revenue

 

$

 

$

367,358

 

$

39,643

 

$

 

$

407,001

 

Cost of goods sold

 

 

196,723

 

33,185

 

 

229,908

 

Gross profit

 

 

170,635

 

6,458

 

 

177,093

 

Operating expenses

 

 

69,924

 

10,132

 

 

80,056

 

Income from operations

 

 

100,711

 

(3,674

)

 

97,037

 

Equity in earnings (losses) of Subsidiaries

 

56,052

 

(3,667

)

 

(52,385

)

 

Other non-operating (expense) income, net

 

 

(11,263

)

7

 

 

(11,256

)

Income (loss) before income taxes

 

56,052

 

85,781

 

(3,667

)

(52,385

)

85,781

 

Provision for income taxes

 

 

(29,729

)

 

 

(29,729

)

Net income (loss)

 

$

56,052

 

$

56,052

 

$

(3,667

)

$

(52,385

)

$

56,052

 

 

Talecris Biotherapeutics Holdings Corp.

Condensed Consolidating Income Statements

Three Months Ended September 30, 2009

 

 

 

Parent/

 

Guarantor

 

Non-Guarantor

 

Consolidating

 

 

 

 

 

Issuer

 

Subsidiaries

 

Subsidiaries

 

Adjustments

 

Consolidated

 

Net revenue

 

$

 

$

361,028

 

$

34,703

 

$

 

$

395,731

 

Cost of goods sold