NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by PerkinElmer, Inc. (the “Company”), in accordance with accounting principles generally accepted in the United States of America (the “U.S.” or the "United States") and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information in the footnote disclosures of the financial statements has been condensed or omitted where it substantially duplicates information provided in the Company’s latest audited consolidated financial statements, in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes included in its Annual Report on Form 10-K for the fiscal year ended
January 3, 2016
, filed with the SEC (the “
2015
Form 10-K”). The balance sheet amounts at
January 3, 2016
in this report were derived from the Company’s audited
2015
consolidated financial statements included in the
2015
Form 10-K. The condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods indicated. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for the
three
months ended
April 3, 2016
and
March 29, 2015
, respectively, are not necessarily indicative of the results for the entire fiscal year or any future period. The Company has evaluated subsequent events from
April 3, 2016
through the date of the issuance of these condensed consolidated financial statements and has determined that other than the events the Company has disclosed within the footnotes to the financial statements, no material subsequent events have occurred that would affect the information presented in these condensed consolidated financial statements or would require additional disclosure.
The Company’s fiscal year ends on the Sunday nearest December 31. The Company reports fiscal years under a 52/53 week format and as a result, certain fiscal years will contain 53 weeks. The fiscal year ending
January 1, 2017
("
fiscal year 2016
") will include
52
weeks, while the fiscal year ended
January 3, 2016
("
fiscal year 2015
") included
53
weeks. The additional week in fiscal year 2015 was reflected in the Company's third quarter, which consisted of
14
weeks as compared to the Company's third quarter of fiscal year 2016, which will consist of
13
weeks.
Recently Adopted and Issued Accounting Pronouncements:
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the "FASB") and are adopted by the Company as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on the Company’s condensed consolidated financial position, results of operations and cash flows or do not apply to the Company’s operations.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09,
Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting
("ASU No. 2016-09"). The new standard simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory withholding requirements, as well as the related classification in the statement of cash flows. The new standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The standard requires an entity to recognize all excess tax benefits and tax deficiencies as income tax benefit or expense in the income statement as discrete items in the reporting period in which they occur, and such tax benefits and tax deficiencies are not included in the estimate of an entity’s annual effective tax rate, applied on a prospective basis. Further, the standard eliminates the requirement to defer the recognition of excess tax benefits until the benefit is realized through a reduction to taxes payable. All excess tax benefits previously unrecognized, along with any valuation allowance, should be recognized on a modified retrospective basis as a cumulative adjustment to retained earnings as of the date of adoption. Under ASU No. 2016-09, an entity that applies the treasury stock method in calculating diluted earnings per share is required to exclude excess tax benefits and deficiencies from the calculation of assumed proceeds since such amounts are recognized in the income statement. Excess tax benefits should also be classified as operating activities in the same manner as other cash flows related to income taxes on the statement of cash flows, as such excess tax benefits no longer represent financing activities since they are recognized in the income statement, and should be applied prospectively or retrospectively to all periods presented. The Company adopted ASU No. 2016-09 at the beginning of the first quarter of fiscal year 2016. The Company recorded a cumulative increase of
$14.2 million
in the beginning of the first quarter of fiscal year 2016 retained earnings with a corresponding increase in deferred tax assets related to the prior years' unrecognized excess tax benefits. In addition, excess tax benefits related to exercised options and vested restricted stock and restricted stock units during the first quarter of fiscal year 2016 have been recognized in the current period’s income statement. The Company also excluded the
excess tax benefits from the calculation of diluted earnings per share for the first quarter of fiscal year 2016. The Company applied the cash flow presentation section of the guidance on a prospective basis, and the prior period statement of cash flows was not adjusted. ASU No. 2016-09 also allows an entity to elect as an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures for service based awards as they occur. An entity that elects to account for forfeitures as they occur should apply the accounting change on a modified retrospective basis as a cumulative effect adjustment to retained earnings as of the date of adoption. The Company has elected to account for forfeitures as they occur. The adoption of this accounting policy did not have a material impact on the Company’s consolidated financial position, results of operations and cash flows.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02,
Leases
. The new guidance requires lessees to recognize a lease liability and right-of-use asset on the balance sheet for financing and operating leases. The provisions of this guidance are to be applied using a modified retrospective approach and are effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company is evaluating the requirements of this guidance and has not yet determined the impact of its adoption on the Company's consolidated financial position, results of operations and cash flows.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11,
Simplifying the Measurement of Inventory
. Under this new guidance, companies that use inventory measurement methods other than last-in, first-out or the retail inventory method should measure inventory at the lower of cost and net realizable value. The provisions of this guidance are to be applied prospectively and are effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is evaluating the requirements of this guidance. The adoption is not expected to have a material impact on the Company’s consolidated financial position, results of operations and cash flows.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09,
Revenue from Contracts with Customers
. Under this new guidance, an entity should use a five-step process to recognize revenue, depicting the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires new disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Subsequent to the issuance of the standard, the FASB decided to defer the effective date for one year to annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. The standard may be adopted either using a full retrospective approach or a modified retrospective approach. The Company is evaluating the requirements of this guidance and has not yet determined the transition method to use or the impact of its adoption on the Company’s consolidated financial position, results of operations and cash flows. The Company does not intend to early adopt this standard.
Note 2: Business Combinations
Acquisitions in fiscal year 2016
During the first
three
months of fiscal year 2016, the Company completed the acquisition of a business for total consideration of
$8.8 million
in cash. The excess of the purchase price over the fair value of the acquired business's net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired. As a result of the acquisition, the Company recorded goodwill of
$3.7 million
, which is not tax deductible, and intangible assets of
$2.0 million
. The Company has reported the operations for this acquisition within the results of the Company's Environmental Health segment from the acquisition date. Identifiable definite-lived intangible assets, such as core technology and trade name, acquired as part of this acquisition had weighted average amortization periods of
11 years
.
Acquisitions in fiscal year 2015
During fiscal year 2015, the Company completed the acquisition of five businesses for a total consideration of
$77.1 million
in cash. The acquired businesses included Vanadis Diagnostics AB (“Vanadis”), which was acquired for total consideration of
$35.1 million
in cash, as further described in Note 17 below, and other acquisitions for aggregate consideration of
$42.0 million
in cash. The Company has a potential obligation to pay the shareholders of Vanadis additional contingent consideration of up to
$93.0 million
, which at closing had an estimated fair value of
$56.9 million
. The excess of the purchase prices over the fair values of each of the acquired business's net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and has been allocated to goodwill, of which
$9.2 million
is tax deductible. The Company has reported the operations for these acquisitions within the results of the Company’s Human Health and Environmental Health segments from the acquisition dates. Identifiable definite-lived intangible assets, such as core technology and trade names, acquired as part of these acquisitions had weighted average amortization periods of
nine years
.
The total purchase price for the acquisitions in fiscal year 2015 has been allocated to the estimated fair values of assets acquired and liabilities assumed as follows:
|
|
|
|
|
|
2015 Acquisitions
|
|
(In thousands)
|
Fair value of business combination:
|
|
Cash payments
|
$
|
75,285
|
|
Contingent consideration
|
56,878
|
|
Working capital and other adjustments
|
1,832
|
|
Less: cash acquired
|
(3,864
|
)
|
Total
|
$
|
130,131
|
|
Identifiable assets acquired and liabilities assumed:
|
|
Current assets
|
$
|
2,551
|
|
Property, plant and equipment
|
998
|
|
Identifiable intangible assets:
|
|
Core technology
|
15,759
|
|
Trade names
|
200
|
|
Licenses
|
116
|
|
Customer relationships
|
3,073
|
|
In-process research and development ("IPR&D")
|
75,700
|
|
Goodwill
|
51,356
|
|
Deferred taxes
|
(16,772
|
)
|
Liabilities assumed
|
(2,850
|
)
|
Total
|
$
|
130,131
|
|
The preliminary allocations of the purchase prices for acquisitions are based upon initial valuations. The Company's estimates and assumptions underlying the initial valuations are subject to the collection of information necessary to complete its valuations within the measurement periods, which are up to
one year
from the respective acquisition dates. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired and liabilities assumed, assets and liabilities related to income taxes and related valuation allowances, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair values of the net assets acquired at the acquisition dates during the measurement periods. During the measurement periods, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition dates that, if known, would have resulted in the recognition of those assets and liabilities as of those dates. These adjustments will be made in the periods in which the amounts are determined and the cumulative effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition dates. All changes that do not qualify as adjustments made during the measurement periods are also included in current period earnings.
Allocations of the purchase price for acquisitions are based on estimates of the fair value of the net assets acquired and are subject to adjustment upon finalization of the purchase price allocations. The accounting for business combinations requires estimates and judgments as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair values for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed, including contingent consideration, are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. Contingent consideration is measured at fair value at the acquisition date, based on the probability that revenue thresholds or product development milestones will be achieved during the earnout period, with changes in the fair value after the acquisition date affecting earnings to the extent it is to be settled in cash. Increases or decreases in the fair value of contingent consideration liabilities primarily result from changes in the estimated probabilities of achieving revenue thresholds, changes in discount rates or product development milestones during the earnout period.
As of
April 3, 2016
, the Company may have to pay contingent consideration related to acquisitions with open contingency periods of up to
$95.3 million
. As of
April 3, 2016
, the Company has recorded contingent consideration obligations with an estimated fair value of
$58.6 million
, of which
$9.3 million
was recorded in accrued expenses and other
current liabilities, and
$49.3 million
was recorded in long-term liabilities. As of
January 3, 2016
, the Company had recorded contingent consideration obligations with an estimated fair value of
$57.4 million
, of which
$9.4 million
was recorded in accrued expenses and other current liabilities, and
$48.0 million
was recorded in long-term liabilities. The expected maximum earnout period for acquisitions with open contingency periods does not exceed
six years
from the respective acquisition dates, and the remaining weighted average expected earnout period at
April 3, 2016
was
two years
. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the condensed consolidated financial statements could result in a possible impairment of the intangible assets and goodwill, require acceleration of the amortization expense of definite-lived intangible assets or the recognition of additional contingent consideration which would be recognized as a component of operating expenses from continuing operations.
Total transaction costs related to acquisition activities for the
three
months ended
April 3, 2016
and
March 29, 2015
were
$0.4 million
and
$0.2 million
, respectively, which were expensed as incurred and recorded in selling, general and administrative expenses in the Company's condensed consolidated statements of operations.
Note 3: Discontinued Operations
As part of the Company’s continuing efforts to focus on higher growth opportunities, the Company has discontinued certain businesses. The Company has accounted for these businesses as discontinued operations and, accordingly, has presented the results of operations and related cash flows as discontinued operations for all periods presented. Any remaining assets and liabilities of these businesses have been presented separately, and are reflected within assets and liabilities from discontinued operations in the accompanying condensed consolidated balance sheets as of
April 3, 2016
and
January 3, 2016
.
During the first
three
months of each of
fiscal years 2016 and 2015
, the Company settled various commitments related to the divestiture of discontinued operations and recognized a loss of
$0.04 million
and a gain of
$0.02 million
, respectively.
Note 4: Restructuring and Contract Termination Charges, Net
The Company has undertaken a series of restructuring actions related to the impact of acquisitions and divestitures, the alignment of the Company's operations with its growth strategy, the integration of its business units and its productivity initiatives. The current portion of restructuring and contract termination charges is recorded in accrued restructuring and contract termination charges and the long-term portion of restructuring and contract termination charges is recorded in long-term liabilities. The activities associated with these plans have been reported as restructuring and contract termination charges, net, as applicable, and are included as a component of operating expenses from continuing operations.
The Company implemented a restructuring plan in the fourth quarter of fiscal year 2015 consisting of workforce reductions principally intended to focus resources on higher growth end markets (the "Q4 2015 Plan"). The Company implemented a restructuring plan in the second quarter of fiscal year 2015 consisting of workforce reductions principally intended to realign resources to emphasize growth initiatives (the "Q2 2015 Plan"). Details of the plans initiated in previous years (“Previous Plans”) are discussed more fully in Note 4 to the audited consolidated financial statements in the
2015
Form 10-K.
The following table summarizes the number of employees reduced, the initial restructuring or contract termination charges by operating segment, and the dates by which payments were substantially completed, or the expected dates by which payments will be substantially completed, for restructuring actions implemented during
fiscal year 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce Reductions
|
|
Closure of Excess Facility
|
|
Total
|
|
(Expected) Date Payments Substantially Completed by
|
|
Headcount Reduction
|
|
Human Health
|
|
Environmental Health
|
|
Human Health
|
|
Environmental Health
|
|
|
Severance
|
|
Excess Facility
|
|
|
|
|
|
|
|
|
|
(In thousands, except headcount data)
|
|
|
|
|
Q4 2015 Plan
|
174
|
|
$
|
2,230
|
|
|
$
|
9,065
|
|
|
$
|
285
|
|
|
$
|
—
|
|
|
$
|
11,580
|
|
|
Q1 FY2017
|
|
Q4 FY2017
|
Q2 2015 Plan
|
97
|
|
1,850
|
|
|
4,160
|
|
|
—
|
|
|
—
|
|
|
6,010
|
|
|
Q2 FY2016
|
|
—
|
The Company expects to make payments under the Previous Plans for remaining residual lease obligations, with terms varying in length, through fiscal year
2022
.
The Company also terminated various contractual commitments in connection with certain disposal activities and recorded charges, to the extent applicable, for the costs of terminating these contracts before the end of their terms and the costs that will continue to be incurred for the remaining terms without economic benefit to the Company. The Company recorded additional pre-tax charges of
$0.1 million
during
fiscal year 2015
in the Environmental Health segment as a result of these contract terminations.
At
April 3, 2016
, the Company had
$15.3 million
recorded for accrued restructuring and contract termination charges, of which
$10.9 million
was recorded in short-term accrued restructuring and contract termination charges and
$4.4 million
was recorded in long-term liabilities. At
January 3, 2016
, the Company had
$22.2 million
recorded for accrued restructuring and contract termination charges, of which
$17.1 million
was recorded in short-term accrued restructuring and contract termination charges and
$5.1 million
was recorded in long-term liabilities. The following table summarizes the Company's restructuring and contract termination accrual balances and related activity by restructuring plan, as well as contract termination accrual balances and related activity, during the
three
months ended
April 3, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2016
|
|
2016 Amounts Paid
|
|
Balance at April 3, 2016
|
|
(In thousands)
|
Severance:
|
|
|
|
|
|
Q4 2015 Plan
|
$
|
10,370
|
|
|
$
|
(5,337
|
)
|
|
$
|
5,033
|
|
Q2 2015 Plan
|
1,149
|
|
|
(232
|
)
|
|
917
|
|
|
|
|
|
|
|
Facility:
|
|
|
|
|
|
Q4 2015 Plan
|
259
|
|
|
(58
|
)
|
|
201
|
|
|
|
|
|
|
|
Previous Plans
|
10,287
|
|
|
(1,273
|
)
|
|
9,014
|
|
Restructuring
|
22,065
|
|
|
(6,900
|
)
|
|
15,165
|
|
Contract Termination
|
132
|
|
|
—
|
|
|
132
|
|
Total Restructuring and Contract Termination
|
$
|
22,197
|
|
|
$
|
(6,900
|
)
|
|
$
|
15,297
|
|
Note 5: Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 3,
2016
|
|
March 29,
2015
|
|
(In thousands)
|
Interest income
|
$
|
(110
|
)
|
|
$
|
(209
|
)
|
Interest expense
|
9,841
|
|
|
9,388
|
|
Other expense, net
|
1,355
|
|
|
242
|
|
Total interest and other expense, net
|
$
|
11,086
|
|
|
$
|
9,421
|
|
Foreign currency transaction losses were
$4.2 million
and
$15.8 million
for the
three
months ended
April 3, 2016
and
March 29, 2015
, respectively. Net gains from forward currency hedge contracts were
$2.8 million
and
$15.5 million
for the
three
months ended
April 3, 2016
and
March 29, 2015
, respectively. These amounts were included in other expense, net.
Note 6: Inventories
Inventories as of
April 3, 2016
and
January 3, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
April 3,
2016
|
|
January 3,
2016
|
|
(In thousands)
|
Raw materials
|
$
|
101,838
|
|
|
$
|
98,984
|
|
Work in progress
|
20,194
|
|
|
17,858
|
|
Finished goods
|
192,028
|
|
|
171,186
|
|
Total inventories
|
$
|
314,060
|
|
|
$
|
288,028
|
|
Note 7: Income Taxes
The Company regularly reviews its tax positions in each significant taxing jurisdiction in the process of evaluating its unrecognized tax benefits. The Company makes adjustments to its unrecognized tax benefits when: (i) facts and circumstances regarding a tax position change, causing a change in management’s judgment regarding that tax position; (ii) a tax position is effectively settled with a tax authority at a differing amount; and/or (iii) the statute of limitations expires regarding a tax position.
At
April 3, 2016
, the Company had gross tax effected unrecognized tax benefits of
$28.2 million
, of which
$24.4 million
, if recognized, would affect the continuing operations effective tax rate. The remaining amount, if recognized, would affect discontinued operations.
The Company believes that it is reasonably possible that approximately
$5.5 million
of its uncertain tax positions at
April 3, 2016
, including accrued interest and penalties, and net of tax benefits, may be resolved over the next twelve months as a result of lapses in applicable statutes of limitations and potential settlements. Various tax years after
2009
remain open to examination by certain jurisdictions in which the Company has significant business operations, such as Finland, Germany, Italy, Netherlands, Singapore, the United Kingdom and the United States. The tax years under examination vary by jurisdiction.
During the first
three
months of
fiscal years 2016 and 2015
, the Company recorded net discrete income tax
benefit
s of
$0.8 million
and
$1.8 million
, respectively, primarily for reversals of uncertain tax position reserves and resolution of other tax matters. The discrete tax benefit in the first
three
months of
fiscal year 2016
was primarily due to the recognition of excess tax benefits from exercised options and vested restricted stock and restricted stock units during the period, as a result of adopting ASU No. 2016-09.
Note 8: Debt
Senior Unsecured Revolving Credit Facility.
The Company's senior unsecured revolving credit facility provides for
$700.0 million
of revolving loans and has an initial maturity of
January 8, 2019
. As of
April 3, 2016
, undrawn letters of credit in the aggregate amount of
$11.5 million
were treated as issued and outstanding when calculating the borrowing availability under the senior unsecured revolving credit facility. As of
April 3, 2016
, the Company had
$98.5 million
available for additional borrowing under the facility. The Company uses the senior unsecured revolving credit facility for general corporate purposes, which may include working capital, refinancing existing indebtedness, capital expenditures, share repurchases, acquisitions and strategic alliances. The interest rates under the senior unsecured revolving credit facility are based on the Eurocurrency rate or the base rate at the time of borrowing, plus a margin. The base rate is the higher of (i) the rate of interest in effect for such day as publicly announced from time to time by JP Morgan Chase Bank, N.A. as its "prime rate," (ii) the Federal Funds rate plus 50 basis points or (iii) one-month Libor plus 1.00%. At
April 3, 2016
, borrowings under the senior unsecured revolving credit facility were accruing interest primarily based on the Eurocurrency rate. The Eurocurrency margin as of
April 3, 2016
was
108
basis points. The weighted average Eurocurrency interest rate as of
April 3, 2016
was
0.47%
, resulting in a weighted average effective Eurocurrency rate, including the margin, of
1.55%
. As of
April 3, 2016
, the senior unsecured revolving credit facility had an aggregate carrying value of
$587.8 million
, which was net of
$2.2 million
of unamortized debt issuance costs. As of
January 3, 2016
, the senior unsecured revolving credit facility had an aggregate carrying value of
$479.6 million
, which was net of
$2.4 million
of unamortized debt issuance costs. The credit agreement for the facility contains affirmative, negative and financial covenants and events of default. The financial covenants in the Company's senior unsecured revolving credit facility include a debt-to-capital ratio, and two contingent covenants, a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio, applicable if the Company's credit rating is downgraded below investment grade.
5%
Senior Unsecured Notes due in 2021.
On October 25, 2011, the Company issued
$500.0 million
aggregate principal amount of senior unsecured notes due in 2021 (the “2021 Notes”) in a registered public offering and received
$496.9 million
of net proceeds from the issuance. The 2021 Notes were issued at
99.372%
of the principal amount, which resulted in a discount of
$3.1 million
. As of
April 3, 2016
, the 2021 Notes had an aggregate carrying value of
$495.2 million
, net of
$2.0 million
of unamortized original issue discount and
$2.8 million
of unamortized debt issuance costs. As of
January 3, 2016
, the 2021 Notes had an aggregate carrying value of
$495.1 million
, net of
$2.0 million
of unamortized original issue discount and
$2.9 million
of unamortized debt issuance costs. The 2021 Notes mature in
November 2021
and bear interest at an annual rate of
5%
. Interest on the 2021 Notes is payable semi-annually on May 15th and November 15th each year. Prior to August 15, 2021 (three months prior to their maturity date), the Company may redeem the 2021 Notes in whole or in part, at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2021 Notes being redeemed, discounted on a semi-annual basis, at the Treasury Rate plus 45 basis points, plus accrued and unpaid interest. At any time on or after August 15, 2021 (three months prior to their maturity date), the Company may redeem
the 2021 Notes, at its option, at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed plus accrued and unpaid interest. Upon a change of control (as defined in the indenture governing the 2021 Notes) and a contemporaneous downgrade of the 2021 Notes below investment grade, each holder of 2021 Notes will have the right to require the Company to repurchase such holder's 2021 Notes for
101%
of their principal amount, plus accrued and unpaid interest.
Financing Lease Obligations.
In fiscal year 2012, the Company entered into agreements with the lessors of certain buildings that the Company is currently occupying and leasing to expand those buildings. The Company provided a portion of the funds needed for the construction of the additions to the buildings, and as a result the Company was considered the owner of the buildings during the construction period. At the end of the construction period, the Company was not reimbursed by the lessors for all of the construction costs. The Company is therefore deemed to have continuing involvement and the leases qualify as financing leases under sale-leaseback accounting guidance, representing debt obligations for the Company and non-cash investing and financing activities. As a result, the Company capitalized
$29.3 million
in property, plant and equipment, net, representing the fair value of the buildings with a corresponding increase to debt. The Company has also capitalized
$11.5 million
in additional construction costs necessary to complete the renovations to the buildings, which were funded by the lessors, with a corresponding increase to debt. At
April 3, 2016
, the Company had
$37.9 million
recorded for these financing lease obligations, of which
$1.1 million
was recorded as short-term debt and
$36.8 million
was recorded as long-term debt. At
January 3, 2016
, the Company had
$38.2 million
recorded for these financing lease obligations, of which
$1.1 million
was recorded as short-term debt and
$37.1 million
was recorded as long-term debt. The buildings are being depreciated on a straight-line basis over the terms of the leases to their estimated residual values, which will equal the remaining financing obligation at the end of the lease term. At the end of the lease term, the remaining balances in property, plant and equipment, net and debt will be reversed against each other.
Note 9: Earnings Per Share
Basic earnings per share was computed by dividing net income by the weighted-average number of common shares outstanding during the period less restricted unvested shares. Diluted earnings per share was computed by dividing net income by the weighted-average number of common shares outstanding plus all potentially dilutive common stock equivalents, primarily shares issuable upon the exercise of stock options using the treasury stock method. The following table reconciles the number of shares utilized in the earnings per share calculations:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 3,
2016
|
|
March 29,
2015
|
|
(In thousands)
|
Number of common shares—basic
|
110,409
|
|
|
112,641
|
|
Effect of dilutive securities:
|
|
|
|
Stock options
|
661
|
|
|
677
|
|
Restricted stock awards
|
125
|
|
|
121
|
|
Number of common shares—diluted
|
111,195
|
|
|
113,439
|
|
Number of potentially dilutive securities excluded from calculation due to antidilutive impact
|
1,098
|
|
|
932
|
|
Antidilutive securities include outstanding stock options with exercise prices and average unrecognized compensation cost in excess of the average fair market value of common stock for the related period. Antidilutive options were excluded from the calculation of diluted net income per share and could become dilutive in the future.
Note 10: Industry Segment Information
The Company discloses information about its operating segments based on the way that management organizes the segments within the Company for making operating decisions and assessing financial performance. The Company evaluates the performance of its operating segments based on revenue and operating income. Intersegment revenue and transfers are not significant. The Company’s management reviews the results of the Company’s operations by the Human Health and Environmental Health operating segments. The accounting policies of the operating segments are the same as those described in Note 1 to the audited consolidated financial statements in the
2015
Form 10-K. The principal products and services of the Company's
two
operating segments are:
|
|
•
|
Human Health
. Develops diagnostics, tools and applications to help detect diseases earlier and more accurately and to accelerate the discovery and development of critical new therapies. The Human Health segment serves both the diagnostics and research markets.
|
|
|
•
|
Environmental Health
. Provides products, services and solutions to facilitate the creation of safer food and consumer products, more secure surroundings and efficient energy resources. The Environmental Health segment serves the environmental, industrial and laboratory services markets.
|
The Company has included the expenses for its corporate headquarters, such as legal, tax, audit, human resources, information technology, and other management and compliance costs, as well as the activity related to the mark-to-market adjustment on postretirement benefit plans, as “Corporate” below. The Company has a process to allocate and recharge expenses to the reportable segments when these costs are administered or paid by the corporate headquarters based on the extent to which the segment benefited from the expenses. These amounts have been calculated in a consistent manner and are included in the Company’s calculations of segment results to internally plan and assess the performance of each segment for all purposes, including determining the compensation of the business leaders for each of the Company’s operating segments.
Revenue and operating income (loss) from continuing operations by operating segment are shown in the table below:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 3,
2016
|
|
March 29,
2015
|
|
(In thousands)
|
Human Health
|
|
|
|
Product revenue
|
$
|
235,085
|
|
|
$
|
231,147
|
|
Service revenue
|
97,357
|
|
|
94,906
|
|
Total revenue
|
332,442
|
|
|
326,053
|
|
Operating income from continuing operations
|
54,727
|
|
|
55,882
|
|
Environmental Health
|
|
|
|
Product revenue
|
129,935
|
|
|
128,166
|
|
Service revenue
|
76,307
|
|
|
72,682
|
|
Total revenue
|
206,242
|
|
|
200,848
|
|
Operating income from continuing operations
|
25,597
|
|
|
11,346
|
|
Corporate
|
|
|
|
Operating loss from continuing operations
|
(11,557
|
)
|
|
(9,847
|
)
|
Continuing Operations
|
|
|
|
Product revenue
|
365,020
|
|
|
359,313
|
|
Service revenue
|
173,664
|
|
|
167,588
|
|
Total revenue
|
538,684
|
|
|
526,901
|
|
Operating income from continuing operations
|
68,767
|
|
|
57,381
|
|
Interest and other expense, net (see Note 5)
|
11,086
|
|
|
9,421
|
|
Income from continuing operations before income taxes
|
$
|
57,681
|
|
|
$
|
47,960
|
|
Note 11: Stockholders’ Equity
Comprehensive Income:
The components of accumulated other comprehensive loss income consisted of the following:
|
|
|
|
|
|
|
|
|
|
April 3,
2016
|
|
January 3,
2016
|
|
(In thousands)
|
Foreign currency translation adjustments
|
$
|
(15,279
|
)
|
|
$
|
(46,846
|
)
|
Unrecognized prior service costs, net of income taxes
|
1,259
|
|
|
1,259
|
|
Unrealized net losses on securities, net of income taxes
|
(337
|
)
|
|
(369
|
)
|
Accumulated other comprehensive loss
|
$
|
(14,357
|
)
|
|
$
|
(45,956
|
)
|
Stock Repurchases:
On October 23, 2014, the Board of Directors (the "Board") authorized the Company to repurchase up to
8.0 million
shares of common stock under a stock repurchase program (the "Repurchase Program"). The Repurchase Program will expire on October 23, 2016 unless terminated earlier by the Board, and may be suspended or discontinued at any time. During the
three
months ended
April 3, 2016
, the Company repurchased
3.2 million
shares of common stock in the open market at an aggregate cost of
$148.2 million
, including commissions, under the Repurchase Program. As of
April 3, 2016
,
2.7 million
shares remained available for repurchase under the Repurchase Program.
In addition, the Board has authorized the Company to repurchase shares of common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards and restricted stock unit awards granted pursuant to the Company’s equity incentive plans and to satisfy obligations related to the exercise of stock options made pursuant to the Company's equity incentive plans. During the
three
months ended
April 3, 2016
, the Company repurchased
66,658
shares of common stock for this purpose at an aggregate cost of
$3.1 million
. The repurchased shares have been reflected as additional authorized but unissued shares, with the payments reflected in common stock and capital in excess of par value.
Dividends:
The Board declared a regular quarterly cash dividend of
$0.07
per share for the first quarter of
fiscal year 2016
and in each quarter of
fiscal year 2015
. At
April 3, 2016
, the Company has accrued
$7.6 million
for dividends declared on
January 28, 2016
for the
first
quarter of
fiscal year 2016
that was paid in
May 2016
. On
April 25, 2016
, the Company announced that the Board had declared a quarterly dividend of
$0.07
per share for the
second
quarter of
fiscal year 2016
that will be payable in
August 2016
. In the future, the Board may determine to reduce or eliminate the Company’s common stock dividend in order to fund investments for growth, repurchase shares or conserve capital resources.
Note 12: Stock Plans
In addition to the Company's Employee Stock Purchase Plan, the Company utilizes
one
stock-based compensation plan, the 2009 Incentive Plan (the “2009 Plan”). Under the 2009 Plan,
10.0 million
shares of the Company's common stock are authorized for stock option grants, restricted stock awards, performance units and stock grants as part of the Company’s compensation programs. In addition to shares of the Company’s common stock originally authorized for issuance under the 2009 Plan, the 2009 Plan includes shares of the Company’s common stock previously granted under the Amended and Restated 2001 Incentive Plan and the 2005 Incentive Plan that were canceled or forfeited without the shares being issued.
The following table summarizes total pre-tax compensation expense recognized related to the Company’s stock options, restricted stock, restricted stock units, performance units and stock grants, included in the Company’s condensed consolidated statements of operations for the
three
months ended
April 3, 2016
and
March 29, 2015
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 3,
2016
|
|
March 29,
2015
|
|
(In thousands)
|
Cost of product and service revenue
|
$
|
204
|
|
|
$
|
249
|
|
Research and development expenses
|
185
|
|
|
159
|
|
Selling, general and administrative expenses
|
3,564
|
|
|
3,579
|
|
Total stock-based compensation expense
|
$
|
3,953
|
|
|
$
|
3,987
|
|
The total income tax benefit recognized in the Company's condensed consolidated statements of operations for stock-based compensation was
$1.9 million
and
$1.3 million
for the
three
months ended
April 3, 2016
and
March 29, 2015
, respectively. Stock-based compensation costs capitalized as part of inventory were
$0.3 million
and
$0.4 million
as of
April 3, 2016
and
March 29, 2015
, respectively.
Stock Options
:
The fair value of each option grant is estimated using the Black-Scholes option pricing model. The Company’s weighted-average assumptions used in the Black-Scholes option pricing model were as follows:
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 3,
2016
|
|
March 29,
2015
|
Risk-free interest rate
|
1.4
|
%
|
|
1.3
|
%
|
Expected dividend yield
|
0.6
|
%
|
|
0.6
|
%
|
Expected term
|
5 years
|
|
|
5 years
|
|
Expected stock volatility
|
25.2
|
%
|
|
26.5
|
%
|
The following table summarizes stock option activity for the
three
months ended
April 3, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of
Shares
|
|
Weighted-
Average Exercise
Price
|
|
Weighted-Average
Remaining
Contractual Term
|
|
Total
Intrinsic
Value
|
|
(In thousands)
|
|
|
|
(In years)
|
|
(In millions)
|
Outstanding at January 3, 2016
|
2,372
|
|
|
$
|
33.12
|
|
|
|
|
|
Granted
|
579
|
|
|
44.39
|
|
|
|
|
|
Exercised
|
(61
|
)
|
|
20.37
|
|
|
|
|
|
Canceled
|
(1
|
)
|
|
12.95
|
|
|
|
|
|
Forfeited
|
(1
|
)
|
|
46.48
|
|
|
|
|
|
Outstanding at April 3, 2016
|
2,888
|
|
|
$
|
35.65
|
|
|
4.1
|
|
$
|
35.4
|
|
Exercisable at April 3, 2016
|
1,812
|
|
|
$
|
30.30
|
|
|
2.9
|
|
$
|
31.7
|
|
The weighted-average per-share grant-date fair value of options granted during the
three
months ended
April 3, 2016
and
March 29, 2015
was
$10.10
and
$10.99
, respectively. The total intrinsic value of options exercised during the
three
months ended
April 3, 2016
and
March 29, 2015
was
$1.7 million
and
$17.7 million
, respectively. Cash received from option exercises for the
three
months ended
April 3, 2016
and
March 29, 2015
was
$1.2 million
and
$8.8 million
, respectively.
The total compensation expense recognized related to the Company’s outstanding options was
$1.1 million
and
$0.8 million
for the
three
months ended
April 3, 2016
and
March 29, 2015
, respectively.
There was
$10.3 million
of total unrecognized compensation cost related to nonvested stock options granted as of
April 3, 2016
. This cost is expected to be recognized over a weighted-average period of
2.3
years.
Restricted Stock Awards
:
The following table summarizes restricted stock award activity for the
three
months ended
April 3, 2016
:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Grant-
Date Fair
Value
|
|
(In thousands)
|
|
|
Nonvested at January 3, 2016
|
502
|
|
|
$
|
42.61
|
|
Granted
|
238
|
|
|
46.21
|
|
Vested
|
(182
|
)
|
|
38.09
|
|
Forfeited
|
(6
|
)
|
|
45.84
|
|
Nonvested at April 3, 2016
|
552
|
|
|
$
|
45.62
|
|
The fair value of restricted stock awards vested during the
three
months ended
April 3, 2016
and
March 29, 2015
was
$6.9 million
and
$6.6 million
, respectively. The total compensation expense recognized related to the Company’s outstanding restricted stock awards was
$2.3 million
for the
three
months ended
April 3, 2016
and
$2.0 million
for the
three
months ended
March 29, 2015
.
As of
April 3, 2016
, there was
$19.2 million
of total unrecognized compensation cost related to nonvested restricted stock awards. That cost is expected to be recognized over a weighted-average period of
1.9
years.
Performance Units
:
The Company granted
77,453
and
66,509
performance units during the
three
months ended
April 3, 2016
and
March 29, 2015
, respectively, as part of the Company’s executive incentive program. The weighted-average per-share grant-date fair value of performance units granted during the
three
months ended
April 3, 2016
and
March 29, 2015
was
$42.47
and
$46.83
, respectively. During the
three
months ended
April 3, 2016
and
March 29, 2015
,
no
performance units were forfeited. The total compensation expense recognized related to performance units was
$0.6 million
and
$1.1 million
for the
three
months ended
April 3, 2016
and
March 29, 2015
, respectively. As of
April 3, 2016
, there were
208,478
performance units outstanding and subject to forfeiture, with a corresponding liability of
$4.1 million
recorded in accrued expenses and other current liabilities.
Stock Awards
:
The Company’s stock award program provides non-employee directors an annual equity award. During the
three
months ended
April 3, 2016
, the Company did
no
t grant any stock awards. The Company granted
544
shares to a new non-employee member of the Board during the three months ended March 29, 2015. The weighted-average per-share grant-date fair value of the stock award granted during the
three
months ended
March 29, 2015
was
$45.98
. The total compensation expense recognized related to this stock award was
$0.03 million
for the
three
months ended
March 29, 2015
.
Employee Stock Purchase Plan
:
During the
three
months ended
April 3, 2016
, the Company did
no
t issue shares of common stock under the Company's Employee Stock Purchase Plan. During the
three
months ended
March 29, 2015
, the Company issued
29,565
shares of common stock under the Company's Employee Stock Purchase Plan at a weighted-average price of
$41.54
per share. At
April 3, 2016
, an aggregate of
1.0 million
shares of the Company’s common stock remained available for sale to employees out of the
5.0 million
shares authorized by shareholders for issuance under this plan.
Note 13: Goodwill and Intangible Assets, Net
The Company tests goodwill and non-amortizing intangible assets at least annually for possible impairment. Accordingly, the Company completes the annual testing of impairment for goodwill and non-amortizing intangible assets on the later of January 1 or the first day of each fiscal year. In addition to its annual test, the Company regularly evaluates whether events or circumstances have occurred that may indicate a potential impairment of goodwill or non-amortizing intangible assets.
The process of testing goodwill for impairment involves the determination of the fair value of the applicable reporting units. The test consists of a two-step process. The first step is the comparison of the fair value to the carrying value of the reporting unit to determine if the carrying value exceeds the fair value. The second step measures the amount of an impairment loss, and is only performed if the carrying value exceeds the fair value of the reporting unit. The Company performed its annual impairment testing for its reporting units as of
January 4, 2016
, its annual impairment date for
fiscal year 2016
. The Company concluded based on the first step of the process that there was no goodwill impairment, and the fair value exceeded the carrying value by more than
20.0%
for each reporting unit. The long-term terminal growth rate for the Company’s reporting units was
3.0%
for the
fiscal year 2016
impairment analysis. The range for the discount rates for the reporting units was
9.5%
to
12.5%
. Keeping all other variables constant, a
10.0%
change in any one of these input assumptions for the various reporting units would still allow the Company to conclude, based on the first step of the process, that there was no impairment of goodwill.
The Company has consistently employed the income approach to estimate the current fair value when testing for impairment of goodwill. A number of significant assumptions and estimates are involved in the application of the income approach to forecast operating cash flows, including markets and market share, sales volumes and prices, costs to produce, tax rates, capital spending, discount rates and working capital changes. Cash flow forecasts are based on approved business unit operating plans for the early years’ cash flows and historical relationships in later years. The income approach is sensitive to changes in long-term terminal growth rates and the discount rates. The long-term terminal growth rates are consistent with the Company’s historical long-term terminal growth rates, as the current economic trends are not expected to affect the long-term terminal growth rates of the Company. The Company corroborates the income approach with a market approach.
The Company has consistently employed the relief from royalty model to estimate the current fair value when testing for impairment of non-amortizing intangible assets. The impairment test consists of a comparison of the fair value of the non-amortizing intangible asset with its carrying amount. If the carrying amount of a non-amortizing intangible asset exceeds its fair value, an impairment loss in an amount equal to that excess is recognized
.
In addition, the Company evaluates the remaining useful lives of its non-amortizing intangible assets at least annually to determine whether events or circumstances continue to support an indefinite useful life. If events or circumstances indicate that the useful lives of non-amortizing intangible assets are no longer indefinite, the assets will be tested for impairment. These intangible assets will then be amortized prospectively over their estimated remaining useful lives and accounted for in the same manner as other intangible assets that are subject to amortization. The Company performed its annual impairment testing as of
January 4, 2016
, and concluded that there was no impairment of non-amortizing intangible assets. An assessment of the recoverability of amortizing intangible assets takes place when events have occurred that may give rise to an impairment. No such events occurred during the first
three
months of
fiscal year 2016
.
The changes in the carrying amount of goodwill for the
three
months ended
April 3, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Human
Health
|
|
Environmental
Health
|
|
Consolidated
|
|
(In thousands)
|
Balance at January 3, 2016
|
$
|
1,672,491
|
|
|
$
|
603,658
|
|
|
$
|
2,276,149
|
|
Foreign currency translation
|
13,003
|
|
|
4,691
|
|
|
17,694
|
|
Acquisitions and other
|
(1,370
|
)
|
|
3,673
|
|
|
2,303
|
|
Balance at April 3, 2016
|
$
|
1,684,124
|
|
|
$
|
612,022
|
|
|
$
|
2,296,146
|
|
Identifiable intangible asset balances at
April 3, 2016
and
January 3, 2016
by category were as follows:
|
|
|
|
|
|
|
|
|
|
April 3,
2016
|
|
January 3,
2016
|
|
(In thousands)
|
Patents
|
$
|
39,929
|
|
|
$
|
39,911
|
|
Less: Accumulated amortization
|
(30,463
|
)
|
|
(29,788
|
)
|
Net patents
|
9,466
|
|
|
10,123
|
|
Trade names and trademarks
|
40,802
|
|
|
40,249
|
|
Less: Accumulated amortization
|
(21,666
|
)
|
|
(20,686
|
)
|
Net trade names and trademarks
|
19,136
|
|
|
19,563
|
|
Licenses
|
59,266
|
|
|
58,969
|
|
Less: Accumulated amortization
|
(46,489
|
)
|
|
(45,286
|
)
|
Net licenses
|
12,777
|
|
|
13,683
|
|
Core technology
|
312,556
|
|
|
307,242
|
|
Less: Accumulated amortization
|
(220,582
|
)
|
|
(211,829
|
)
|
Net core technology
|
91,974
|
|
|
95,413
|
|
Customer relationships
|
395,951
|
|
|
391,566
|
|
Less: Accumulated amortization
|
(202,382
|
)
|
|
(191,655
|
)
|
Net customer relationships
|
193,569
|
|
|
199,911
|
|
IPR&D
|
88,554
|
|
|
85,679
|
|
Less: Accumulated amortization
|
(4,462
|
)
|
|
(4,145
|
)
|
Net IPR&D
|
84,092
|
|
|
81,534
|
|
Net amortizable intangible assets
|
411,014
|
|
|
420,227
|
|
Non-amortizing intangible assets:
|
|
|
|
Trade names
|
70,584
|
|
|
70,584
|
|
Total
|
$
|
481,598
|
|
|
$
|
490,811
|
|
Total amortization expense related to definite-lived intangible assets was
$19.0 million
and
$19.8 million
for the
three
months ended
April 3, 2016
and
March 29, 2015
, respectively. Estimated amortization expense related to definite-lived intangible assets for each of the next five years is
$53.9 million
for the remainder of fiscal year
2016
,
$63.0 million
for fiscal year
2017
,
$61.4 million
for fiscal year
2018
,
$49.5 million
for fiscal year
2019
, and
$40.8 million
for fiscal year
2020
.
Note 14: Warranty Reserves
The Company provides warranty protection for certain products usually for a period of one year beyond the date of sale. The majority of costs associated with warranty obligations include the replacement of parts and the time for service personnel to respond to repair and replacement requests. A warranty reserve is recorded based upon historical results, supplemented by management’s expectations of future costs. Warranty reserves are included in “Accrued expenses and other current liabilities” on the condensed consolidated balance sheets.
A summary of warranty reserve activity for the
three
months ended
April 3, 2016
and
March 29, 2015
is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 3,
2016
|
|
March 29,
2015
|
|
(In thousands)
|
Balance at beginning of period
|
$
|
10,922
|
|
|
$
|
10,783
|
|
Provision charged to income
|
3,884
|
|
|
4,158
|
|
Payments
|
(4,195
|
)
|
|
(3,762
|
)
|
Adjustments to previously provided warranties, net
|
(97
|
)
|
|
79
|
|
Foreign currency translation and acquisitions
|
262
|
|
|
(387
|
)
|
Balance at end of period
|
$
|
10,776
|
|
|
$
|
10,871
|
|
Note 15: Employee Postretirement Benefit Plans
The following table summarizes the components of net periodic credit for the Company’s various defined benefit employee pension and postretirement plans for the
three
months ended
April 3, 2016
and
March 29, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Benefits
|
|
Postretirement
Medical Benefits
|
|
Three Months Ended
|
|
April 3,
2016
|
|
March 29,
2015
|
|
April 3,
2016
|
|
March 29,
2015
|
|
(In thousands)
|
Service cost
|
$
|
1,092
|
|
|
$
|
1,106
|
|
|
$
|
25
|
|
|
$
|
27
|
|
Interest cost
|
4,730
|
|
|
5,250
|
|
|
36
|
|
|
36
|
|
Expected return on plan assets
|
(6,188
|
)
|
|
(6,512
|
)
|
|
(259
|
)
|
|
(266
|
)
|
Amortization of prior service costs
|
(54
|
)
|
|
(64
|
)
|
|
—
|
|
|
—
|
|
Net periodic benefit credit
|
$
|
(420
|
)
|
|
$
|
(220
|
)
|
|
$
|
(198
|
)
|
|
$
|
(203
|
)
|
During the
three
months ended
April 3, 2016
and
March 29, 2015
, the Company contributed
$2.3 million
and
$4.9 million
, respectively, in the aggregate, to pension plans outside of the United States.
The Company recognizes actuarial gains and losses, unless an interim remeasurement is required, in operating results in the fourth quarter of the year in which the gains and losses occur, in accordance with the Company's accounting method for defined benefit pension plans and other postretirement benefits as described in Note 1 of the Company's audited consolidated financial statements and notes included in its
2015
Form 10-K. Such adjustments for gains and losses are primarily driven by events and circumstances beyond the Company's control, including changes in interest rates, the performance of the financial markets and mortality assumptions.
Note 16: Derivatives and Hedging Activities
The Company uses derivative instruments as part of its risk management strategy only, and includes derivatives utilized as economic hedges that are not designated as hedging instruments. By nature, all financial instruments involve market and credit risks. The Company enters into derivative instruments with major investment grade financial institutions and has policies to monitor the credit risk of those counterparties. The Company does not enter into derivative contracts for trading or other speculative purposes, nor does the Company use leveraged financial instruments. Approximately
60%
of the Company’s business is conducted outside of the United States, generally in foreign currencies. As a result, fluctuations in foreign currency exchange rates can increase the costs of financing, investing and operating the business.
In the ordinary course of business, the Company enters into foreign exchange contracts for periods consistent with its committed exposures to mitigate the effect of foreign currency movements on transactions denominated in foreign currencies. The intent of these economic hedges is to offset gains and losses that occur on the underlying exposures from these currencies, with gains and losses resulting from the forward currency contracts that hedge these exposures. Transactions covered by hedge contracts include intercompany and third-party receivables and payables. The contracts are primarily in European and Asian currencies, have maturities that do not exceed
12
months, have no cash requirements until maturity, and are recorded at fair value on the Company’s condensed consolidated balance sheets. The unrealized gains and losses on the Company’s foreign currency
contracts are recognized immediately in interest and other expense, net. The cash flows related to the settlement of these hedges are included in cash flows from operating activities within the Company’s condensed consolidated statement of cash flows.
Principal hedged currencies include the British Pound, Euro, Japanese Yen and Singapore Dollar. The Company held forward foreign exchange contracts, designated as economic hedges, with U.S. dollar equivalent notional amounts totaling
$140.2 million
,
$127.3 million
and
$108.2 million
at
April 3, 2016
,
January 3, 2016
and
March 29, 2015
, respectively, and the fair value of these foreign currency derivative contracts was insignificant. The gains and losses realized on these foreign currency derivative contracts are not material. The duration of these contracts was generally
30
days or less during each of the
three
months ended
April 3, 2016
and
March 29, 2015
.
In addition, in connection with certain intercompany loan agreements utilized to finance its acquisitions and stock repurchase program, the Company enters into forward foreign exchange contracts intended to hedge movements in foreign exchange rates prior to settlement of such intercompany loans denominated in foreign currencies. The Company records these hedges at fair value on the Company’s condensed consolidated balance sheets. The unrealized gains and losses on these hedges, as well as the gains and losses associated with the remeasurement of the intercompany loans, are recognized immediately in interest and other expense, net. The cash flows related to the settlement of these hedges are included in cash flows from financing activities within the Company’s condensed consolidated statement of cash flows.
As of
April 3, 2016
, the outstanding forward exchange contracts designated as economic hedges, that were intended to hedge movements in foreign exchange rates prior to the settlement of certain intercompany loan agreements included combined Euro notional amounts of
€106.7 million
and combined U.S. Dollar notional amounts of
$9.9 million
. The combined Euro denominated notional amounts of these outstanding hedges was
€107.4 million
and
€273.7 million
as of
January 3, 2016
and
March 29, 2015
, respectively. The net gains and losses on these derivatives, combined with the gains and losses on the remeasurement of the hedged intercompany loans were not material for each of the
three
months ending
April 3, 2016
and
March 29, 2015
. The Company received
$2.6 million
and
$15.6 million
during the
three
months ended
April 3, 2016
and
March 29, 2015
, respectively, from the settlement of these hedges.
The Company does
no
t expect any material net pre-tax gains or losses to be reclassified from accumulated other comprehensive loss into interest and other expense, net within the next twelve months.
Note 17: Fair Value Measurements
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, derivatives, marketable securities and accounts receivable. The Company believes it had no significant concentrations of credit risk as of
April 3, 2016
.
The Company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during the
three
months ended
April 3, 2016
. The Company’s financial assets and liabilities carried at fair value are primarily comprised of marketable securities, derivative contracts used to hedge the Company’s currency risk, and acquisition-related contingent consideration. The Company has not elected to measure any additional financial instruments or other items at fair value.
Valuation Hierarchy:
The following summarizes the three levels of inputs required to measure fair value. For Level 1 inputs, the Company utilizes quoted market prices as these instruments have active markets. For Level 2 inputs, the Company utilizes quoted market prices in markets that are not active, broker or dealer quotations, or utilizes alternative pricing sources with reasonable levels of price transparency. For Level 3 inputs, the Company utilizes unobservable inputs based on the best information available, including estimates by management primarily based on information provided by third-party fund managers, independent brokerage firms and insurance companies. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible.
The following tables show the assets and liabilities carried at fair value measured on a recurring basis as of
April 3, 2016
and
January 3, 2016
classified in one of the three classifications described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at April 3, 2016 Using:
|
|
Total Carrying Value at April 3, 2016
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(In thousands)
|
Marketable securities
|
$
|
1,379
|
|
|
$
|
1,379
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign exchange derivative assets
|
2,004
|
|
|
—
|
|
|
2,004
|
|
|
—
|
|
Foreign exchange derivative liabilities
|
(2,429
|
)
|
|
—
|
|
|
(2,429
|
)
|
|
—
|
|
Contingent consideration
|
(58,579
|
)
|
|
—
|
|
|
—
|
|
|
(58,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at January 3, 2016 Using:
|
|
Total Carrying Value at January 3, 2016
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(In thousands)
|
Marketable securities
|
$
|
1,586
|
|
|
$
|
1,586
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign exchange derivative assets
|
2,659
|
|
|
—
|
|
|
2,659
|
|
|
—
|
|
Foreign exchange derivative liabilities
|
(442
|
)
|
|
—
|
|
|
(442
|
)
|
|
—
|
|
Contingent consideration
|
(57,350
|
)
|
|
—
|
|
|
—
|
|
|
(57,350
|
)
|
Level 1 and Level 2 Valuation Techniques:
The Company’s Level 1 and Level 2 assets and liabilities are comprised of investments in equity and fixed-income securities as well as derivative contracts. For financial assets and liabilities that utilize Level 1 and Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including common stock price quotes, foreign exchange forward prices and bank price quotes. Below is a summary of valuation techniques for Level 1 and Level 2 financial assets and liabilities.
Marketable securities:
Include equity and fixed-income securities measured at fair value using the quoted market prices in active markets at the reporting date.
Foreign exchange derivative assets and liabilities:
Include foreign exchange derivative contracts that are valued using quoted forward foreign exchange prices at the reporting date. The Company’s foreign exchange derivative contracts are subject to master netting arrangements that allow the Company and its counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in the Company's condensed consolidated balance sheet on a net basis and are recorded in other assets. As of both
April 3, 2016
and
January 3, 2016
, none of the master netting arrangements involved collateral.
Level 3 Valuation Techniques:
The Company’s Level 3 liabilities are comprised of contingent consideration related to acquisitions. For liabilities that utilize Level 3 inputs, the Company uses significant unobservable inputs. Below is a summary of valuation techniques for Level 3 liabilities.
Contingent consideration:
Contingent consideration is measured at fair value at the acquisition date using projected milestone dates, discount rates, probabilities of success and projected revenues (for revenue-based considerations). Projected risk-adjusted contingent payments are discounted back to the current period using a discounted cash flow model.
During fiscal year 2015, the Company acquired certain assets and assumed certain liabilities from Vanadis. Under the terms of the acquisition, the initial purchase consideration was
$32.0 million
, net of cash and the Company will be obligated to make potential future milestone payments, based on completion of a proof of concept, regulatory approvals and product sales, of up to
$93.0 million
ranging from 2016 to 2019. The fair value of the contingent consideration as of the acquisition date was estimated at
$56.9 million
. During the
first
quarter of
fiscal year 2016
, the Company updated the fair value of the contingent consideration and recorded a liability of
$58.2 million
as of
April 3, 2016
. The key assumptions used to determine the fair value of the contingent consideration as of April 3, 2016 included projected milestone dates of
2016
to
2019
, discount rates ranging from
2.6%
to
10.3%
, conditional probabilities of success of each individual milestone ranging from
85%
to
95%
and cumulative probabilities of success for each individual milestone ranging from
53%
to
90%
. A significant delay in the product development (including projected regulatory milestone) achievement date in isolation could result in a significantly lower fair value measurement; a significant
acceleration in the product development (including projected regulatory milestone) achievement date in isolation would not have a material impact on the fair value measurement; a significant change in the discount rate in isolation would not have a material impact on the fair value measurement; and a significant change in the probabilities of success in isolation could result in a significant change in fair value measurement.
The fair values of contingent consideration are calculated on a quarterly basis based on a collaborative effort of the Company’s regulatory, research and development, operations, finance and accounting groups, as appropriate. Potential valuation adjustments are made as additional information becomes available, including the progress towards completion of a proof of concept, regulatory approvals and product sales as compared to initial projections, the impact of market competition and market landscape shifts from non-invasive prenatal testing products, with the impact of such adjustments being recorded in the Company's consolidated statements of operations.
As of
April 3, 2016
, the Company may have to pay contingent consideration related to acquisitions with open contingency periods of up to
$95.3 million
. The expected maximum earnout period for acquisitions with open contingency periods does not exceed
six years
from the respective acquisition dates, and the remaining weighted average earnout period at
April 3, 2016
was
two years
.
A reconciliation of the beginning and ending Level 3 net liabilities for contingent consideration is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
April 3,
2016
|
|
March 29,
2015
|
|
(In thousands)
|
Balance at beginning of period
|
$
|
(57,350
|
)
|
|
$
|
(91
|
)
|
Amounts paid and foreign currency translation
|
94
|
|
|
10
|
|
Change in fair value (included within selling, general and administrative expenses)
|
(1,323
|
)
|
|
—
|
|
Balance at end of period
|
$
|
(58,579
|
)
|
|
$
|
(81
|
)
|
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturities of these assets and liabilities. If measured at fair value, cash and cash equivalents would be classified as Level 1.
As of
April 3, 2016
, the Company’s senior unsecured revolving credit facility, which provides for
$700.0 million
of revolving loans, had borrowings outstanding of
$590.0 million
, which excluded
$2.2 million
of unamortized debt issuance costs and letters of credit. As of
January 3, 2016
, the Company's senior unsecured revolving credit facility had
$482.0 million
of borrowings outstanding, which excluded
$2.4 million
of unamortized debt issuance costs and letters of credit. The interest rate on the Company’s senior unsecured revolving credit facility is reset at least monthly to correspond to variable rates that reflect currently available terms and conditions for similar debt. The Company had no change in credit standing during the first
three
months of
fiscal year 2016
. Consequently, the borrowing value of the current year and prior year credit facilities approximate fair value and would be classified as Level 2.
The Company's 2021 Notes, with a face value of
$500.0 million
, had an aggregate carrying value of
$495.2 million
, net of
$2.0 million
of unamortized original issue discount and
$2.8 million
of unamortized debt issuance costs as of
April 3, 2016
. The 2021 Notes had an aggregate carrying value of
$495.1 million
, net of
$2.0 million
of unamortized original issue discount and
$2.9 million
of unamortized debt issuance costs as of
January 3, 2016
. The 2021 Notes had a fair value of
$540.1 million
and
$518.9 million
as of
April 3, 2016
and
January 3, 2016
, respectively. The fair value of the 2021 Notes is estimated using market quotes from brokers and is based on current rates offered for similar debt.
The Company's financing lease obligations had an aggregate carrying value of
$37.9 million
and
$38.2 million
as of
April 3, 2016
and
January 3, 2016
, respectively. The carrying values of the Company's financing lease obligations approximated their fair value as there has been minimal change in the Company's incremental borrowing rate.
As of
April 3, 2016
, the 2021 Notes and financing lease obligations were classified as Level 2.
As of
April 3, 2016
, there has not been any significant impact to the fair value of the Company’s derivative liabilities due to credit risk. Similarly, there has not been any significant adverse impact to the Company’s derivative assets based on the evaluation of its counterparties’ credit risks.
Note 18: Contingencies
The Company is conducting a number of environmental investigations and remedial actions at current and former locations of the Company and, along with other companies, has been named a potentially responsible party (“PRP”) for certain waste disposal sites. The Company accrues for environmental issues in the accounting period that the Company’s responsibility is established and when the cost can be reasonably estimated. The Company has accrued
$11.7 million
and
$11.8 million
as of
April 3, 2016
and
January 3, 2016
, respectively, which represents its management’s estimate of the cost of the remediation of known environmental matters, and does not include any potential liability for related personal injury or property damage claims. These amounts were included in accrued expenses and other current liabilities. The Company's environmental accrual is not discounted and does not reflect the recovery of any material amounts through insurance or indemnification arrangements. The cost estimates are subject to a number of variables, including the stage of the environmental investigations, the magnitude of the possible contamination, the nature of the potential remedies, possible joint and several liability, the time period over which remediation may occur, and the possible effects of changing laws and regulations. For sites where the Company has been named a PRP, management does not currently anticipate any additional liability to result from the inability of other significant named parties to contribute. The Company expects that the majority of such accrued amounts could be paid out over a period of up to
ten
years. As assessment and remediation activities progress at each individual site, these liabilities are reviewed and adjusted to reflect additional information as it becomes available. There have been no environmental problems to date that have had, or are expected to have, a material adverse effect on the Company’s condensed consolidated financial statements. While it is possible that a loss exceeding the amounts recorded in the condensed consolidated financial statements may be incurred, the potential exposure is not expected to be materially different from those amounts recorded.
The Company is subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of its business activities. Although the Company has established accruals for potential losses that it believes are probable and reasonably estimable, in the opinion of the Company’s management, based on its review of the information available at this time, the total cost of resolving these contingencies at
April 3, 2016
would not have a material adverse effect on the Company’s condensed consolidated financial statements. However, each of these matters is subject to uncertainties, and it is possible that some of these matters may be resolved unfavorably to the Company.