|
|
Item 1.
|
Unaudited Financial Statements
|
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 2,
2016
|
|
October 4,
2015
|
|
October 2,
2016
|
|
October 4,
2015
|
|
(In thousands, except per share data)
|
Product revenue
|
$
|
368,459
|
|
|
$
|
378,325
|
|
|
$
|
1,126,879
|
|
|
$
|
1,126,356
|
|
Service revenue
|
179,595
|
|
|
185,111
|
|
|
532,526
|
|
|
527,887
|
|
Total revenue
|
548,054
|
|
|
563,436
|
|
|
1,659,405
|
|
|
1,654,243
|
|
Cost of product revenue
|
177,077
|
|
|
193,375
|
|
|
555,153
|
|
|
579,659
|
|
Cost of service revenue
|
110,178
|
|
|
115,458
|
|
|
328,073
|
|
|
332,095
|
|
Total cost of revenue
|
287,255
|
|
|
308,833
|
|
|
883,226
|
|
|
911,754
|
|
Selling, general and administrative expenses
|
145,793
|
|
|
147,728
|
|
|
447,332
|
|
|
440,343
|
|
Research and development expenses
|
33,175
|
|
|
31,095
|
|
|
101,967
|
|
|
95,898
|
|
Restructuring and contract termination charges, net
|
603
|
|
|
(118
|
)
|
|
5,692
|
|
|
4,838
|
|
Operating income from continuing operations
|
81,228
|
|
|
75,898
|
|
|
221,188
|
|
|
201,410
|
|
Interest and other expense, net
|
11,263
|
|
|
11,944
|
|
|
27,742
|
|
|
32,208
|
|
Income from continuing operations before income taxes
|
69,965
|
|
|
63,954
|
|
|
193,446
|
|
|
169,202
|
|
Provision for income taxes
|
12,216
|
|
|
9,057
|
|
|
26,970
|
|
|
24,998
|
|
Income from continuing operations
|
57,749
|
|
|
54,897
|
|
|
166,476
|
|
|
144,204
|
|
Gain on discontinued operations before income taxes
|
—
|
|
|
8
|
|
|
—
|
|
|
6
|
|
Gain on (loss from) disposition of discontinued operations before income taxes
|
630
|
|
|
(3
|
)
|
|
619
|
|
|
(26
|
)
|
Provision for (benefit from) income taxes on discontinued operations
|
252
|
|
|
39
|
|
|
(2,355
|
)
|
|
13
|
|
Gain on (loss from) discontinued operations
|
378
|
|
|
(34
|
)
|
|
2,974
|
|
|
(33
|
)
|
Net income
|
$
|
58,127
|
|
|
$
|
54,863
|
|
|
$
|
169,450
|
|
|
$
|
144,171
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
0.53
|
|
|
$
|
0.49
|
|
|
$
|
1.52
|
|
|
$
|
1.28
|
|
Gain on (loss from) discontinued operations
|
0.00
|
|
|
(0.00
|
)
|
|
0.03
|
|
|
(0.00
|
)
|
Net income
|
$
|
0.53
|
|
|
$
|
0.49
|
|
|
$
|
1.55
|
|
|
$
|
1.28
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
0.52
|
|
|
$
|
0.48
|
|
|
$
|
1.51
|
|
|
$
|
1.27
|
|
Gain on (loss from) discontinued operations
|
0.00
|
|
|
(0.00
|
)
|
|
0.03
|
|
|
(0.00
|
)
|
Net income
|
$
|
0.53
|
|
|
$
|
0.48
|
|
|
$
|
1.54
|
|
|
$
|
1.27
|
|
Weighted average shares of common stock outstanding:
|
|
|
|
|
|
|
|
Basic
|
109,192
|
|
|
112,632
|
|
|
109,524
|
|
|
112,763
|
|
Diluted
|
110,078
|
|
|
113,422
|
|
|
110,372
|
|
|
113,565
|
|
Cash dividends per common share
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
$
|
0.21
|
|
|
$
|
0.21
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 2,
2016
|
|
October 4,
2015
|
|
October 2,
2016
|
|
October 4,
2015
|
|
(In thousands)
|
Net income
|
$
|
58,127
|
|
|
$
|
54,863
|
|
|
$
|
169,450
|
|
|
$
|
144,171
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
(9,441
|
)
|
|
(46,629
|
)
|
|
(8,868
|
)
|
|
(58,055
|
)
|
Unrealized gains (losses) on securities, net of tax
|
9
|
|
|
(80
|
)
|
|
39
|
|
|
(143
|
)
|
Other comprehensive loss
|
(9,432
|
)
|
|
(46,709
|
)
|
|
(8,829
|
)
|
|
(58,198
|
)
|
Comprehensive income
|
$
|
48,695
|
|
|
$
|
8,154
|
|
|
$
|
160,621
|
|
|
$
|
85,973
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
October 2,
2016
|
|
January 3,
2016
|
|
(In thousands, except share and per share data)
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
311,663
|
|
|
$
|
237,932
|
|
Accounts receivable, net
|
443,275
|
|
|
439,015
|
|
Inventories
|
306,041
|
|
|
288,028
|
|
Other current assets
|
92,587
|
|
|
68,186
|
|
Total current assets
|
1,153,566
|
|
|
1,033,161
|
|
Property, plant and equipment:
|
|
|
|
At cost
|
525,396
|
|
|
494,956
|
|
Accumulated depreciation
|
(350,170
|
)
|
|
(327,927
|
)
|
Property, plant and equipment, net
|
175,226
|
|
|
167,029
|
|
Marketable securities and investments
|
1,539
|
|
|
1,586
|
|
Intangible assets, net
|
452,458
|
|
|
490,811
|
|
Goodwill
|
2,313,900
|
|
|
2,276,149
|
|
Other assets, net
|
207,867
|
|
|
197,559
|
|
Total assets
|
$
|
4,304,556
|
|
|
$
|
4,166,295
|
|
Current liabilities:
|
|
|
|
Current portion of long-term debt
|
$
|
1,160
|
|
|
$
|
1,123
|
|
Accounts payable
|
162,321
|
|
|
152,726
|
|
Accrued restructuring and contract termination charges
|
9,133
|
|
|
17,090
|
|
Accrued expenses and other current liabilities
|
373,207
|
|
|
388,446
|
|
Current liabilities of discontinued operations
|
2,170
|
|
|
2,100
|
|
Total current liabilities
|
547,991
|
|
|
561,485
|
|
Long-term debt
|
1,131,925
|
|
|
1,011,762
|
|
Long-term liabilities
|
489,218
|
|
|
482,607
|
|
Total liabilities
|
2,169,134
|
|
|
2,055,854
|
|
Commitments and contingencies (see Note 18)
|
|
|
|
Stockholders’ equity:
|
|
|
|
Preferred stock—$1 par value per share, authorized 1,000,000 shares; none issued or outstanding
|
—
|
|
|
—
|
|
Common stock—$1 par value per share, authorized 300,000,000 shares; issued and outstanding 109,511,000 shares and 112,034,000 shares at October 2, 2016 and at January 3, 2016, respectively
|
109,511
|
|
|
112,034
|
|
Capital in excess of par value
|
19,209
|
|
|
52,932
|
|
Retained earnings
|
2,061,487
|
|
|
1,991,431
|
|
Accumulated other comprehensive loss
|
(54,785
|
)
|
|
(45,956
|
)
|
Total stockholders’ equity
|
2,135,422
|
|
|
2,110,441
|
|
Total liabilities and stockholders’ equity
|
$
|
4,304,556
|
|
|
$
|
4,166,295
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
October 2,
2016
|
|
October 4,
2015
|
|
(In thousands)
|
Operating activities:
|
|
|
|
Net income
|
$
|
169,450
|
|
|
$
|
144,171
|
|
(Gain on) loss from discontinued operations, net of income taxes
|
(2,974
|
)
|
|
33
|
|
Income from continuing operations
|
166,476
|
|
|
144,204
|
|
Adjustments to reconcile income from continuing operations to net cash provided by continuing operations:
|
|
|
|
Restructuring and contract termination charges, net
|
5,692
|
|
|
4,838
|
|
Depreciation and amortization
|
79,287
|
|
|
83,757
|
|
Gain on disposition of businesses and assets, net
|
(5,562
|
)
|
|
—
|
|
Stock-based compensation
|
13,819
|
|
|
12,483
|
|
Change in fair value of contingent consideration
|
9,678
|
|
|
—
|
|
Amortization of deferred debt financing costs and accretion of discount
|
1,507
|
|
|
1,112
|
|
Amortization of acquired inventory revaluation
|
396
|
|
|
7,275
|
|
Changes in assets and liabilities which provided (used) cash, excluding effects from companies purchased and divested:
|
|
|
|
Accounts receivable, net
|
1,848
|
|
|
36,361
|
|
Inventories
|
(12,350
|
)
|
|
(50,824
|
)
|
Accounts payable
|
8,986
|
|
|
(19,916
|
)
|
Accrued expenses and other
|
(70,859
|
)
|
|
(57,361
|
)
|
Net cash provided by operating activities of continuing operations
|
198,918
|
|
|
161,929
|
|
Net cash provided by (used in) operating activities of discontinued operations
|
2,974
|
|
|
(70
|
)
|
Net cash provided by operating activities
|
201,892
|
|
|
161,859
|
|
Investing activities:
|
|
|
|
Capital expenditures
|
(25,311
|
)
|
|
(17,814
|
)
|
Proceeds from disposition of businesses
|
21,000
|
|
|
—
|
|
Proceeds from surrender of life insurance policies
|
44
|
|
|
757
|
|
Changes in restricted cash balances
|
(2,000
|
)
|
|
59
|
|
Activity related to acquisitions and investments, net of cash and cash equivalents acquired
|
(71,924
|
)
|
|
(18,735
|
)
|
Net cash used in investing activities
|
(78,191
|
)
|
|
(35,733
|
)
|
Financing activities:
|
|
|
|
Payments on revolving credit facility
|
(804,507
|
)
|
|
(371,000
|
)
|
Proceeds from revolving credit facility
|
375,507
|
|
|
347,000
|
|
Proceeds from sale of senior debt
|
546,190
|
|
|
—
|
|
Payments of debt financing costs
|
(7,868
|
)
|
|
—
|
|
Settlement of cash flow hedges
|
1,674
|
|
|
19,210
|
|
Net payments on other credit facilities
|
(835
|
)
|
|
(800
|
)
|
Payments for acquisition-related contingent consideration
|
(113
|
)
|
|
(26
|
)
|
Proceeds from issuance of common stock under stock plans
|
12,081
|
|
|
13,081
|
|
Purchases of common stock
|
(151,640
|
)
|
|
(76,158
|
)
|
Dividends paid
|
(23,131
|
)
|
|
(23,737
|
)
|
Net cash used in financing activities
|
(52,642
|
)
|
|
(92,430
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
2,672
|
|
|
(13,451
|
)
|
Net increase in cash and cash equivalents
|
73,731
|
|
|
20,245
|
|
Cash and cash equivalents at beginning of period
|
237,932
|
|
|
174,821
|
|
Cash and cash equivalents at end of period
|
$
|
311,663
|
|
|
$
|
195,066
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
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 and nine
months ended
October 2, 2016
and
October 4, 2015
, respectively, are not necessarily indicative of the results for the entire fiscal year or any future period.
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 consisted 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 August 2016, the FASB issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
("ASU 2016-15"). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other topics. The provisions of this guidance are to be applied using a retrospective transition method to each period presented, and if it is impracticable to apply the amendments retrospectively for some of the issues, ASU 2016-15 allows the amendments for those issues to be applied prospectively as of the earliest date practicable. ASU 2015-16 is effective for annual reporting periods beginning after December 15, 2017, 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 June 2016, the FASB issued Accounting Standards Update No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
("ASU 2016-13"). ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard requires entities to use the expected loss impairment model and will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance sheet credit exposures. Entities are required to estimate the lifetime “expected credit loss” for each applicable financial asset and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The standard also amends the impairment model for available-for-sale (“AFS”) debt securities and requires entities to determine whether all or a portion of the unrealized loss on an AFS debt security is a credit loss. An entity will recognize an allowance for credit losses on an AFS debt security as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment. The provisions of this guidance are to be applied using a modified-retrospective approach. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for
annual periods beginning after December 15, 2018, and interim periods therein. 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 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. Excess tax benefits related to exercised options and vested restricted stock and restricted stock units during the
nine
months ended
October 2, 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
three
and
nine
months ended
October 2, 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
("ASU 2014-09"). 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. In May 2016, the FASB also issued Accounting Standards Update No. 2016-12,
Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients
("ASU 2016-12")
,
which amended its revenue recognition guidance in ASU 2014-09 on transition, collectibility, non-cash consideration and the presentation of sales and other similar taxes. In April 2016, the FASB also issued Accounting Standards Update No. 2016-10,
Revenue from Contracts with Customers (Topic 606), Identifying
Performance Obligations and Licensing
("ASU 2016-10")
,
which amended its revenue recognition guidance in ASU 2014-09 on identifying performance obligations to allow entities to disregard items that are immaterial in the context of the contract, clarify when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow an entity to elect to account for the cost of shipping and handling performed after control of a good has been transferred to the customer as a fulfillment cost (i.e., an expense). ASU 2016-10 also clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property ("IP") and requires entities to classify IP in one of two categories: functional IP or symbolic IP, which will determine whether it recognizes revenue over time or at a point in time. ASU 2016-10 also address how entities should consider license renewals and restrictions and apply the exception for sales- and usage-based royalties received in exchange for licenses of IP. ASU 2016-12, ASU 2016-10 and ASU 2014-09 may be adopted either using a full retrospective approach or a modified retrospective approach. The Company is evaluating the requirements of the foregoing standards and has not yet determined the impact of their adoption on the Company’s consolidated financial position, results of operations and cash flows. The Company intends to adopt these standards using the modified retrospective approach, and the Company does not intend to early adopt these standards.
Note 2: Business Combinations
Acquisitions in fiscal year 2016
During the first
nine
months of
fiscal year 2016
, the Company completed the acquisition of two businesses for a total consideration of
$72.4 million
in cash. The acquired businesses included Bioo Scientific Corporation, which was acquired for total consideration of
$63.6 million
in cash and one other business acquired for a total consideration of
$8.8 million
in cash. The excess of the purchase prices over the fair values of each of the acquired businesses' 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 acquisitions, the Company recorded goodwill of
$45.8 million
, which is not tax deductible, and intangible assets of
$19.9 million
. 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, trade names and customer relationships, acquired as part of these acquisitions had weighted average amortization periods of
9.5 years
.
The total purchase price for the acquisitions in
fiscal year 2016
has been allocated to the estimated fair values of assets acquired and liabilities assumed as follows:
|
|
|
|
|
|
2016 Acquisitions
|
|
(In thousands)
|
Fair value of business combination:
|
|
Cash payments
|
$
|
72,497
|
|
Working capital and other adjustments
|
(122
|
)
|
Less: cash acquired
|
(2,152
|
)
|
Total
|
$
|
70,223
|
|
Identifiable assets acquired and liabilities assumed:
|
|
Current assets
|
$
|
7,293
|
|
Property, plant and equipment
|
7,542
|
|
Identifiable intangible assets:
|
|
Core technology
|
5,500
|
|
Trade names
|
570
|
|
Customer relationships
|
13,800
|
|
Goodwill
|
45,787
|
|
Deferred taxes
|
(8,284
|
)
|
Liabilities assumed
|
(1,985
|
)
|
Total
|
$
|
70,223
|
|
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 businesses' 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
|
52,221
|
|
Deferred taxes
|
(17,637
|
)
|
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
October 2, 2016
, the Company may have to pay contingent consideration related to acquisitions with open contingency periods of up to
$94.6 million
. As of
October 2, 2016
, the Company has recorded contingent consideration obligations with an estimated fair value of
$66.9 million
, of which
$10.2 million
was recorded in accrued expenses and other current liabilities, and
$56.7 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
five years
from the respective acquisition dates, and the remaining weighted average expected earnout period at
October 2, 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 and divestiture activities for the
three and nine
months ended
October 2, 2016
were
$0.4 million
and
$1.0 million
, respectively. Total transaction costs related to acquisition and divestiture activities for the
three and nine
months ended
October 4, 2015
were
$0.1 million
and
$0.5 million
, respectively. These transaction costs were expensed as incurred and recorded in selling, general and administrative expenses in the Company's condensed consolidated statements of operations.
Note 3: Disposition of Businesses and Assets
As part of the Company’s continuing efforts to focus on higher growth opportunities, the Company has discontinued certain businesses. When the discontinued operations represent a strategic shift that will have a major effect on the Company's operations and financial statements, 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. Any business deemed to be a discontinued operation prior to the adoption of ASU 2016-08,
Reporting Discontinued Operations and Disclosures of Disposals of Components of An Entity,
continues to be reported as a discontinued operation, and the results of operations and related cash flows are presented 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
October 2, 2016
and
January 3, 2016
.
During
fiscal years 2016 and 2015
, the Company settled various commitments related to the divestiture of discontinued operations and recognized net pre-tax gain of
$0.6 million
and a net pre-tax loss of
$0.03 million
for the
nine
months ended
October 2, 2016
and
October 4, 2015
, respectively, and a net pre-tax gain of
$0.6 million
for the
three
months ended
October 2, 2016
. The Company recorded a tax
provision
of
$0.3 million
and a tax benefit of
$2.4 million
on discontinued operations and dispositions for the
three
and
nine
months ended
October 2, 2016
, respectively. The Company recorded a tax
provision
of
$0.04 million
and
$0.01 million
on discontinued operations and dispositions for the
three
and
nine
months ended
October 4, 2015
, respectively.
During the second quarter of 2016, the Company completed the sale of its investment in PerkinElmer Labs, Inc., recognizing a pre-tax gain of
$7.1 million
. The sale generated a capital loss for tax purposes of
$7.3 million
, which resulted in an income tax benefit of
$2.5 million
that was recognized as a discrete benefit during the second quarter of 2016. PerkinElmer Labs, Inc. was a component of the Company's Human Health segment. The pre-tax gain recognized in the second quarter of 2016 is included in interest and other expense, net in the condensed consolidated statement of operations. The divestiture of PerkinElmer Labs, Inc. has not been classified as a discontinued operation in this Form 10-Q because the disposition does not represent a strategic shift that will have a major effect on the Company's operations and financial statements.
During the second quarter of 2016, the Company entered into a letter of intent to contribute certain assets to an academic institution in the United Kingdom. The Company recognized a pre-tax loss of
$1.6 million
related to the write-off of assets in the second quarter of 2016 which is included in interest and other expense, net in the condensed consolidated statement of operations.
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 third quarter of fiscal year 2016 consisting of workforce reductions principally intended to focus resources on higher growth product lines (the "Q3 2016 Plan"). The Company implemented a restructuring plan in the second quarter of fiscal year 2016 consisting of workforce reductions principally intended to focus resources on higher growth end markets (the "Q2 2016 Plan"). The Company implemented a restructuring plan in the fourth quarter of fiscal year 2015 consisting of workforce reductions and closure of excess facility space 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 that were implemented during
fiscal years 2016 and 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)
|
|
|
|
|
Q3 2016 Plan
|
22
|
|
$
|
727
|
|
|
$
|
1,093
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,820
|
|
|
Q4 FY2017
|
|
—
|
Q2 2016 Plan
|
90
|
|
4,049
|
|
|
1,239
|
|
|
—
|
|
|
—
|
|
|
5,288
|
|
|
Q3 FY2017
|
|
—
|
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
October 2, 2016
, the Company had
$12.9 million
recorded for accrued restructuring and contract termination charges, of which
$9.1 million
was recorded in short-term accrued restructuring and contract termination charges and
$3.8 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
nine
months ended
October 2, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2016
|
|
2016 Charges
|
|
2016 Changes in Estimates, Net
|
|
2016 Amounts Paid
|
|
Balance at October 2, 2016
|
|
(In thousands)
|
Severance:
|
|
|
|
|
|
|
|
|
|
Q3 2016 Plan
|
$
|
—
|
|
|
$
|
1,820
|
|
|
$
|
—
|
|
|
$
|
(104
|
)
|
|
$
|
1,716
|
|
Q2 2016 Plan
|
—
|
|
|
5,288
|
|
|
(43
|
)
|
|
(3,095
|
)
|
|
2,150
|
|
Q4 2015 Plan
|
10,370
|
|
|
—
|
|
|
(953
|
)
|
|
(8,052
|
)
|
|
1,365
|
|
Q2 2015 Plan
|
1,149
|
|
|
—
|
|
|
(543
|
)
|
|
(408
|
)
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
Facility:
|
|
|
|
|
|
|
|
|
|
Q4 2015 Plan
|
259
|
|
|
—
|
|
|
—
|
|
|
(248
|
)
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
Previous Plans
|
10,287
|
|
|
—
|
|
|
35
|
|
|
(3,029
|
)
|
|
7,293
|
|
Restructuring
|
22,065
|
|
|
7,108
|
|
|
(1,504
|
)
|
|
(14,936
|
)
|
|
12,733
|
|
Contract Termination
|
132
|
|
|
—
|
|
|
88
|
|
|
(76
|
)
|
|
144
|
|
Total Restructuring and Contract Termination
|
$
|
22,197
|
|
|
$
|
7,108
|
|
|
$
|
(1,416
|
)
|
|
$
|
(15,012
|
)
|
|
$
|
12,877
|
|
Note 5: Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 2,
2016
|
|
October 4,
2015
|
|
October 2,
2016
|
|
October 4,
2015
|
|
(In thousands)
|
Interest income
|
$
|
(124
|
)
|
|
$
|
(147
|
)
|
|
$
|
(361
|
)
|
|
$
|
(488
|
)
|
Interest expense
|
10,998
|
|
|
9,874
|
|
|
30,778
|
|
|
28,564
|
|
Gain on disposition of businesses and assets, net (see Note 3)
|
—
|
|
|
—
|
|
|
(5,562
|
)
|
|
—
|
|
Other expense, net
|
389
|
|
|
2,217
|
|
|
2,887
|
|
|
4,132
|
|
Total interest and other expense, net
|
$
|
11,263
|
|
|
$
|
11,944
|
|
|
$
|
27,742
|
|
|
$
|
32,208
|
|
During the
three and nine
months ended
October 2, 2016
, foreign currency transaction (gains) losses were
$(1.6) million
and
$2.0 million
, respectively. During the
three and nine
months ended
October 4, 2015
, foreign currency transaction (gains) losses were
$(1.3) million
and
$23.9 million
, respectively. Net losses from forward currency hedge contracts were
$2.1 million
and
$1.1 million
for the
three and nine
months ended
October 2, 2016
, respectively. During the
three and nine
months ended
October 4, 2015
, net losses (gains) from forward currency hedge contracts were
$3.5 million
and
$(19.9) million
, respectively. These amounts were included in other expense, net.
Note 6: Inventories
Inventories as of
October 2, 2016
and
January 3, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
October 2,
2016
|
|
January 3,
2016
|
|
(In thousands)
|
Raw materials
|
$
|
101,815
|
|
|
$
|
98,984
|
|
Work in progress
|
20,446
|
|
|
17,858
|
|
Finished goods
|
183,780
|
|
|
171,186
|
|
Total inventories
|
$
|
306,041
|
|
|
$
|
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
October 2, 2016
, the Company had gross tax effected unrecognized tax benefits of
$27.6 million
, of which
$25.9 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
$2.6 million
of its uncertain tax positions at
October 2, 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
nine
months of
fiscal years 2016 and 2015
, the Company recorded net discrete income tax
benefit
s of
$7.1 million
and
$5.2 million
, respectively. The discrete tax benefit in the first
nine
months of
fiscal year 2016
includes the tax benefits from the sale of a subsidiary amounting to
$2.5 million
.
Note 8: Debt
Senior Unsecured Revolving Credit Facility.
On August 11, 2016, the Company terminated its previous senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with a five year term and an expansion of borrowing capacity from
$700.0 million
to
$1.0 billion
. The new senior unsecured revolving credit facility provides for
$1.0 billion
of revolving loans and has an initial maturity of
August 11, 2021
. As of
October 2, 2016
, undrawn letters of credit in the aggregate amount of
$11.4 million
were treated as issued and outstanding when calculating the borrowing availability under the new senior unsecured revolving credit facility. As of
October 2, 2016
, the Company had
$935.6 million
available for additional borrowing under the facility. The Company uses the new 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) an adjusted one-month Libor plus 1.00%. At
October 2, 2016
, borrowings under the new senior unsecured revolving credit facility were accruing interest primarily based on the Eurocurrency rate. The Eurocurrency margin as of
October 2, 2016
was
110
basis points. The weighted average Eurocurrency interest rate as of
October 2, 2016
was
0.56%
, resulting in a weighted average effective Eurocurrency rate, including the margin, of
1.66%
. As of
October 2, 2016
, the new senior unsecured revolving credit facility had an aggregate carrying value of
$48.5 million
, which was net of
$4.5 million
of unamortized debt issuance costs. As of
January 3, 2016
, the previous 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 include a debt-to-capital ratio that remains applicable for so long as the Company's debt is rated as investment grade. In the event that the Company's debt is not rated as investment grade, the debt-to-capital ratio covenant is replaced with a maximum consolidated leverage ratio covenant and a minimum consolidated interest coverage ratio covenant.
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
October 2, 2016
, the 2021 Notes had an aggregate carrying value of
$495.7 million
, net of
$1.8 million
of unamortized original issue discount and
$2.6 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.
1.875% Senior Unsecured Notes due 2026.
On July 19, 2016, the Company issued
€500.0 million
aggregate principal amount of senior unsecured notes due in 2026 (the “2026 Notes”) in a registered public offering and received approximately
€492.3 million
of net proceeds from the issuance. The 2026 Notes were issued at
99.118%
of the principal amount, which resulted in a discount of
€4.4 million
. The 2026 Notes mature in
July 2026
and bear interest at an annual rate of
1.875%
. Interest on the 2026 Notes is payable annually on July 19th each year. The proceeds from the 2026 Notes were used to pay in full the outstanding balance of the Company's previous senior unsecured revolving credit facility. As of
October 2, 2016
, the 2026 Notes had an aggregate carrying value of
$551.6 million
, net of
$4.9 million
of unamortized original issue discount and
$4.9 million
of unamortized debt issuance costs.
Prior to April 19, 2026 (three months prior to their maturity date), the Company may redeem the 2026 Notes in whole at any time or in part from time to time, at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2026 Notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2026 Notes being redeemed, discounted on an annual basis, at the applicable Comparable Government Bond Rate (as defined in the indenture governing the 2026 Notes) plus 35 basis points; plus, in each case, accrued and unpaid interest. In addition, at any time on or after April 19, 2026 (three months prior to their maturity date), the Company may redeem the 2026 Notes, at its option, at a redemption price equal to 100% of the principal amount of the 2026 Notes due to be redeemed plus accrued and unpaid interest.
Upon a change of control (as defined in the indenture governing the 2026 Notes) and a contemporaneous downgrade of the 2026 Notes below investment grade, the Company will, in certain circumstances, make an offer to purchase the 2026 Notes at a price equal to
101%
of their principal amount plus any 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
October 2, 2016
, the Company had
$37.4 million
recorded for these financing lease obligations, of which
$1.2 million
was recorded as short-term debt and
$36.2 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
|
|
Nine Months Ended
|
|
October 2,
2016
|
|
October 4,
2015
|
|
October 2,
2016
|
|
October 4,
2015
|
|
(In thousands)
|
Number of common shares—basic
|
109,192
|
|
|
112,632
|
|
|
109,524
|
|
|
112,763
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options
|
663
|
|
|
580
|
|
|
670
|
|
|
633
|
|
Restricted stock awards
|
223
|
|
|
210
|
|
|
178
|
|
|
169
|
|
Number of common shares—diluted
|
110,078
|
|
|
113,422
|
|
|
110,372
|
|
|
113,565
|
|
Number of potentially dilutive securities excluded from calculation due to antidilutive impact
|
220
|
|
|
521
|
|
|
522
|
|
|
649
|
|
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
|
|
Nine Months Ended
|
|
October 2,
2016
|
|
October 4,
2015
|
|
October 2,
2016
|
|
October 4,
2015
|
|
(In thousands)
|
Human Health
|
|
|
|
|
|
|
|
Product revenue
|
$
|
238,895
|
|
|
$
|
238,553
|
|
|
$
|
728,668
|
|
|
$
|
712,207
|
|
Service revenue
|
99,346
|
|
|
105,083
|
|
|
295,492
|
|
|
298,970
|
|
Total revenue
|
338,241
|
|
|
343,636
|
|
|
1,024,160
|
|
|
1,011,177
|
|
Operating income from continuing operations
|
64,562
|
|
|
63,147
|
|
|
176,881
|
|
|
179,560
|
|
Environmental Health
|
|
|
|
|
|
|
|
Product revenue
|
129,564
|
|
|
139,772
|
|
|
398,211
|
|
|
414,149
|
|
Service revenue
|
80,249
|
|
|
80,028
|
|
|
237,034
|
|
|
228,917
|
|
Total revenue
|
209,813
|
|
|
219,800
|
|
|
635,245
|
|
|
643,066
|
|
Operating income from continuing operations
|
27,662
|
|
|
22,838
|
|
|
78,855
|
|
|
53,606
|
|
Corporate
|
|
|
|
|
|
|
|
Operating loss from continuing operations
|
(10,996
|
)
|
|
(10,087
|
)
|
|
(34,548
|
)
|
|
(31,756
|
)
|
Continuing Operations
|
|
|
|
|
|
|
|
Product revenue
|
368,459
|
|
|
378,325
|
|
|
1,126,879
|
|
|
1,126,356
|
|
Service revenue
|
179,595
|
|
|
185,111
|
|
|
532,526
|
|
|
527,887
|
|
Total revenue
|
548,054
|
|
|
563,436
|
|
|
1,659,405
|
|
|
1,654,243
|
|
Operating income from continuing operations
|
81,228
|
|
|
75,898
|
|
|
221,188
|
|
|
201,410
|
|
Interest and other expense, net (see Note 5)
|
11,263
|
|
|
11,944
|
|
|
27,742
|
|
|
32,208
|
|
Income from continuing operations before income taxes
|
$
|
69,965
|
|
|
$
|
63,954
|
|
|
$
|
193,446
|
|
|
$
|
169,202
|
|
The Company recently announced a new alignment of its businesses effective October 3, 2016 to better position the Company to grow in attractive end markets and expand share with the Company's core product offerings through an improved customer focus, more value-add collaboration and breakthrough innovations. The Company's diagnostics business, focused on reproductive health, emerging market diagnostic solutions and applied genomics, will become a standalone business segment
seeking to better meet the needs of clinically oriented customers in regulated markets. Microfluidics and automation products within the research market were combined with the existing diagnostics business to form the Diagnostics segment. The remaining products within the research market were combined with the existing Environmental Health business to form the Discovery & Analytical Solutions segment. This combination is intended to advance the Company's success in serving and innovating for its applications-oriented customers in the food, environmental, industrial, and life sciences markets.
Note 11: Stockholders’ Equity
Comprehensive Income:
The components of accumulated other comprehensive loss consisted of the following:
|
|
|
|
|
|
|
|
|
|
October 2,
2016
|
|
January 3,
2016
|
|
(In thousands)
|
Foreign currency translation adjustments
|
$
|
(55,714
|
)
|
|
$
|
(46,846
|
)
|
Unrecognized prior service costs, net of income taxes
|
1,259
|
|
|
1,259
|
|
Unrealized net losses on securities, net of income taxes
|
(330
|
)
|
|
(369
|
)
|
Accumulated other comprehensive loss
|
$
|
(54,785
|
)
|
|
$
|
(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"). On July 27, 2016, the Board authorized the Company to immediately terminate the Repurchase Program and further authorized the Company to repurchase up to
8.0 million
shares of common stock under a new stock repurchase program (the "New Repurchase Program"). The New Repurchase Program will expire on July 26, 2018 unless terminated earlier by the Board, and may be suspended or discontinued at any time. During the
nine
months ended
October 2, 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. No shares remain available for repurchase under the Repurchase Program due to its cancellation. As of
October 2, 2016
,
8.0 million
shares remained available for repurchase under the New 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
nine
months ended
October 2, 2016
, the Company repurchased
72,058
shares of common stock for this purpose at an aggregate cost of
$3.4 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 three quarters of
fiscal year 2016
and in each quarter of
fiscal year 2015
. At
October 2, 2016
, the Company has accrued
$7.7 million
for dividends declared on
July 27, 2016
for the
third
quarter of
fiscal year 2016
that will be payable on
November 10, 2016
. On
October 26, 2016
, the Company announced that the Board had declared a quarterly dividend of
$0.07
per share for the
fourth
quarter of
fiscal year 2016
that will be payable on
February 10, 2017
. 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 and nine
months ended
October 2, 2016
and
October 4, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 2,
2016
|
|
October 4,
2015
|
|
October 2,
2016
|
|
October 4,
2015
|
|
(In thousands)
|
Cost of product and service revenue
|
$
|
304
|
|
|
$
|
323
|
|
|
$
|
826
|
|
|
$
|
964
|
|
Research and development expenses
|
220
|
|
|
119
|
|
|
655
|
|
|
419
|
|
Selling, general and administrative expenses
|
3,384
|
|
|
3,848
|
|
|
12,338
|
|
|
11,100
|
|
Total stock-based compensation expense
|
$
|
3,908
|
|
|
$
|
4,290
|
|
|
$
|
13,819
|
|
|
$
|
12,483
|
|
The total income tax benefit recognized in the condensed consolidated statements of operations for stock-based compensation was
$2.3 million
and
$9.2 million
for the
three and nine
months ended
October 2, 2016
, respectively. The total income tax benefit recognized in the condensed consolidated statements of operations for stock-based compensation was
$1.4 million
and
$4.1 million
for the
three and nine
months ended
October 4, 2015
, respectively. Stock-based compensation costs capitalized as part of inventory were
$0.3 million
and
$0.4 million
as of
October 2, 2016
and
October 4, 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 and Nine Months Ended
|
|
October 2,
2016
|
|
October 4,
2015
|
Risk-free interest rate
|
1.2
|
%
|
|
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
nine
months ended
October 2, 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
|
594
|
|
|
44.65
|
|
|
|
|
|
Exercised
|
(512
|
)
|
|
23.58
|
|
|
|
|
|
Canceled
|
(1
|
)
|
|
12.95
|
|
|
|
|
|
Forfeited
|
(93
|
)
|
|
45.03
|
|
|
|
|
|
Outstanding at October 2, 2016
|
2,360
|
|
|
$
|
37.64
|
|
|
4.0
|
|
$
|
40.0
|
|
Exercisable at October 2, 2016
|
1,401
|
|
|
$
|
32.61
|
|
|
2.8
|
|
$
|
30.8
|
|
The weighted-average per-share grant-date fair value of options granted during the
three and nine
months ended
October 2, 2016
was
$12.24
and
$10.16
, respectively. The weighted-average per-share grant-date fair value of options granted during the
three and nine
months ended
October 4, 2015
was
$11.44
and
$11.00
. The total intrinsic value of options exercised during the
three and nine
months ended
October 2, 2016
was
$3.6 million
and
$15.6 million
, respectively. The total intrinsic value of options exercised during the
three and nine
months ended
October 4, 2015
was
$0.7 million
and
$22.6 million
, respectively. Cash received from option exercises for the
nine
months ended
October 2, 2016
and
October 4, 2015
was
$12.1 million
and
$13.1 million
, respectively.
The total compensation expense recognized related to the Company’s outstanding options was
$1.1 million
and
$3.5 million
for the
three and nine
months ended
October 2, 2016
, respectively, and
$1.2 million
and
$3.2 million
for the
three and nine
months ended
October 4, 2015
, respectively.
There was
$7.1 million
of total unrecognized compensation cost related to nonvested stock options granted as of
October 2, 2016
. This cost is expected to be recognized over a weighted-average period of
1.9
years.
Restricted Stock Awards
:
The following table summarizes restricted stock award activity for the
nine
months ended
October 2, 2016
:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted-
Average
Grant-
Date Fair
Value
|
|
(In thousands)
|
|
|
Nonvested at January 3, 2016
|
502
|
|
|
$
|
42.61
|
|
Granted
|
278
|
|
|
47.34
|
|
Vested
|
(206
|
)
|
|
38.94
|
|
Forfeited
|
(53
|
)
|
|
45.21
|
|
Nonvested at October 2, 2016
|
521
|
|
|
$
|
46.31
|
|
The fair value of restricted stock awards vested during the
three and nine
months ended
October 2, 2016
was
$0.2 million
and
$8.0 million
, respectively. The fair value of restricted stock awards vested during the
three and nine
months ended
October 4, 2015
was
$0.2 million
and
$7.1 million
, respectively. The total compensation expense recognized related to the Company’s outstanding restricted stock awards was
$2.0 million
and
$7.1 million
for the
three and nine
months ended
October 2, 2016
, respectively, and
$2.2 million
and
$6.5 million
for the
three and nine
months ended
October 4, 2015
, respectively.
As of
October 2, 2016
, there was
$14.8 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
1.60
years.
Performance Units
:
The Company granted
72,164
and
66,509
performance units during the
nine
months ended
October 2, 2016
and
October 4, 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
nine
months ended
October 2, 2016
and
October 4, 2015
was
$42.79
and
$46.83
, respectively. During the
nine
months ended
October 2, 2016
and
October 4, 2015
,
19,584
and
8,860
performance units were forfeited, respectively. The total compensation expense recognized related to performance units was
$0.7 million
and
$2.4 million
for the
three and nine
months ended
October 2, 2016
, respectively, and
$0.8 million
and
$2.1 million
for the
three and nine
months ended
October 4, 2015
, respectively. As of
October 2, 2016
, there were
190,700
performance units outstanding and subject to forfeiture, with a corresponding liability of
$5.9 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. The Company granted
1,821
shares and
1,953
shares to each continuing non-employee member of the Board during the
nine
months ended
October 2, 2016
and
October 4, 2015
, respectively. In addition, the Company granted
1,526
shares to a new non-employee member of the Board during the three months ended
October 2, 2016
. The per-share grant-date fair value of the stock award granted during the three months ended
October 2, 2016
was
$54.61
. The weighted-average per-share grant-date fair value of the stock awards granted during the
nine
months ended
October 2, 2016
and
October 4, 2015
was
$54.88
and
$51.01
, respectively. The total compensation expense recognized related to these stock awards was
$0.8 million
and
$0.7 million
for the
nine
months ended
October 2, 2016
and
October 4, 2015
, respectively, and
$0.1 million
for the
three
months ended
October 2, 2016
.
Employee Stock Purchase Plan
:
During the
nine
months ended
October 2, 2016
, the Company issued
23,898
shares of common stock under the Company's Employee Stock Purchase Plan at a weighted-average price of
$49.80
per share. During the
nine
months ended
October 4, 2015
, the Company issued
54,374
shares of common stock under the Company's Employee Stock Purchase Plan at a weighted-average price of
$45.41
per share. At
October 2, 2016
, an aggregate of
0.9 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
nine
months of
fiscal year 2016
.
The changes in the carrying amount of goodwill for the
nine
months ended
October 2, 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
|
(664
|
)
|
|
(274
|
)
|
|
(938
|
)
|
Disposition of businesses
|
(7,923
|
)
|
|
—
|
|
|
(7,923
|
)
|
Acquisitions and other
|
21,888
|
|
|
24,724
|
|
|
46,612
|
|
Balance at October 2, 2016
|
$
|
1,685,792
|
|
|
$
|
628,108
|
|
|
$
|
2,313,900
|
|
Identifiable intangible asset balances at
October 2, 2016
and
January 3, 2016
by category were as follows:
|
|
|
|
|
|
|
|
|
|
October 2,
2016
|
|
January 3,
2016
|
|
(In thousands)
|
Patents
|
$
|
39,923
|
|
|
$
|
39,911
|
|
Less: Accumulated amortization
|
(31,772
|
)
|
|
(29,788
|
)
|
Net patents
|
8,151
|
|
|
10,123
|
|
Trade names and trademarks
|
40,619
|
|
|
40,249
|
|
Less: Accumulated amortization
|
(23,181
|
)
|
|
(20,686
|
)
|
Net trade names and trademarks
|
17,438
|
|
|
19,563
|
|
Licenses
|
60,221
|
|
|
58,969
|
|
Less: Accumulated amortization
|
(48,396
|
)
|
|
(45,286
|
)
|
Net licenses
|
11,825
|
|
|
13,683
|
|
Core technology
|
313,254
|
|
|
307,242
|
|
Less: Accumulated amortization
|
(232,729
|
)
|
|
(211,829
|
)
|
Net core technology
|
80,525
|
|
|
95,413
|
|
Customer relationships
|
396,148
|
|
|
391,566
|
|
Less: Accumulated amortization
|
(210,884
|
)
|
|
(191,655
|
)
|
Net customer relationships
|
185,264
|
|
|
199,911
|
|
IPR&D
|
82,922
|
|
|
85,679
|
|
Less: Accumulated amortization
|
(4,251
|
)
|
|
(4,145
|
)
|
Net IPR&D
|
78,671
|
|
|
81,534
|
|
Net amortizable intangible assets
|
381,874
|
|
|
420,227
|
|
Non-amortizing intangible assets:
|
|
|
|
Trade names
|
70,584
|
|
|
70,584
|
|
Total
|
$
|
452,458
|
|
|
$
|
490,811
|
|
Total amortization expense related to definite-lived intangible assets was
$17.3 million
and
$55.3 million
for the
three and nine
months ended
October 2, 2016
, respectively, and
$18.8 million
and
$58.5 million
for the
three and nine
months
October 4, 2015
, respectively. Estimated amortization expense related to definite-lived intangible assets for each of the next five years is
$17.4 million
for the remainder of fiscal year
2016
,
$65.7 million
for fiscal year
2017
,
$63.7 million
for fiscal year
2018
,
$51.5 million
for fiscal year
2019
, and
$42.3 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 and nine
months ended
October 2, 2016
and
October 4, 2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 2,
2016
|
|
October 4,
2015
|
|
October 2,
2016
|
|
October 4,
2015
|
|
(In thousands)
|
Balance at beginning of period
|
$
|
10,396
|
|
|
$
|
10,810
|
|
|
$
|
10,922
|
|
|
$
|
10,783
|
|
Provision charged to income
|
4,038
|
|
|
4,240
|
|
|
11,890
|
|
|
12,728
|
|
Payments
|
(3,905
|
)
|
|
(4,412
|
)
|
|
(12,189
|
)
|
|
(12,158
|
)
|
Adjustments to previously provided warranties, net
|
(459
|
)
|
|
129
|
|
|
(740
|
)
|
|
(342
|
)
|
Foreign currency translation and acquisitions
|
30
|
|
|
(155
|
)
|
|
217
|
|
|
(399
|
)
|
Balance at end of period
|
$
|
10,100
|
|
|
$
|
10,612
|
|
|
$
|
10,100
|
|
|
$
|
10,612
|
|
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 and nine
months ended
October 2, 2016
and
October 4, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Benefits
|
|
Postretirement
Medical Benefits
|
|
Three Months Ended
|
|
October 2,
2016
|
|
October 4,
2015
|
|
October 2,
2016
|
|
October 4,
2015
|
|
(In thousands)
|
Service cost
|
$
|
1,094
|
|
|
$
|
1,083
|
|
|
$
|
25
|
|
|
$
|
27
|
|
Interest cost
|
4,701
|
|
|
5,176
|
|
|
35
|
|
|
36
|
|
Expected return on plan assets
|
(6,126
|
)
|
|
(6,513
|
)
|
|
(258
|
)
|
|
(265
|
)
|
Curtailment gain
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Actuarial loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service costs
|
(54
|
)
|
|
(59
|
)
|
|
—
|
|
|
—
|
|
Net periodic benefit credit
|
$
|
(385
|
)
|
|
$
|
(313
|
)
|
|
$
|
(198
|
)
|
|
$
|
(202
|
)
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Benefits
|
|
Postretirement
Medical Benefits
|
|
Nine Months Ended
|
|
October 2,
2016
|
|
October 4,
2015
|
|
October 2,
2016
|
|
October 4,
2015
|
|
(In thousands)
|
Service cost
|
$
|
3,282
|
|
|
$
|
3,274
|
|
|
$
|
75
|
|
|
$
|
81
|
|
Interest cost
|
14,158
|
|
|
15,602
|
|
|
107
|
|
|
108
|
|
Expected return on plan assets
|
(18,488
|
)
|
|
(19,535
|
)
|
|
(776
|
)
|
|
(797
|
)
|
Curtailment gain
|
—
|
|
|
(816
|
)
|
|
—
|
|
|
—
|
|
Actuarial loss
|
—
|
|
|
821
|
|
|
—
|
|
|
—
|
|
Amortization of prior service costs
|
(163
|
)
|
|
(182
|
)
|
|
—
|
|
|
—
|
|
Net periodic benefit credit
|
$
|
(1,211
|
)
|
|
$
|
(836
|
)
|
|
$
|
(594
|
)
|
|
$
|
(608
|
)
|
During the
nine
months ended
October 2, 2016
and
October 4, 2015
, the Company contributed
$7.6 million
and
$6.5 million
, respectively, in the aggregate, to pension plans outside of the United States. During the
nine
months ended
October 2, 2016
, the Company did not make contributions to its defined benefit pension plan in the United States. During the
nine
months ended
October 4, 2015
, the Company contributed
$20.0 million
to its defined benefit pension plan in 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
$128.5 million
,
$127.3 million
and
$104.7 million
at
October 2, 2016
,
January 3, 2016
and
October 4, 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
nine
months ended
October 2, 2016
and
October 4, 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
October 2, 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
€50.7 million
and combined U.S. Dollar notional amounts of
$9.2 million
. The combined Euro notional amounts of these outstanding hedges was
€107.4 million
and
€108.7 million
as of
January 3, 2016
and
October 4, 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 and nine
months ended
October 2, 2016
and
October 4, 2015
. The Company paid
$0.1 million
and received
$19.2 million
during the
nine
months ended
October 2, 2016
and
October 4, 2015
, respectively, from the settlement of these hedges.
During the third quarter of 2016, the Company entered into a series of foreign currency forward contracts with a notional amount of
€492.3 million
to hedge its investments in certain foreign subsidiaries. Realized and unrealized translation adjustments from these hedges will be included in the foreign currency translation component of accumulated other comprehensive income ("AOCI"), as well as to offset translation adjustments on the underlying net assets of foreign subsidiaries. The cumulative translation gains or losses will remain in AOCI until the foreign subsidiaries are liquidated or sold. The foreign currency forward contracts were settled during the third quarter of 2016 and the Company recorded a net realized foreign exchange gain in AOCI amounting to
$1.8 million
during the three and nine months ended October 2, 2016.
During the third quarter of 2016, in connection with the issuance of the 2026 Notes, the Company designated the 2026 Notes to hedge its investments in certain foreign subsidiaries. Realized and unrealized translation adjustments from these hedges will be included in the foreign currency translation component of AOCI, as well as to offset translation adjustments on the underlying
net assets of foreign subsidiaries. The cumulative translation gains or losses will remain in AOCI until the foreign subsidiaries are liquidated or sold. As of
October 2, 2016
, the total notional amount of foreign currency denominated debt designated to hedge investments in foreign subsidiaries was
€495.7 million
. The unrealized foreign exchange loss recorded in AOCI related to the net investment hedge was
$10.2 million
for the
three and nine
months ended
October 2, 2016
.
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
October 2, 2016
.
The Company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during the
nine
months ended
October 2, 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
October 2, 2016
and
January 3, 2016
classified in one of the three classifications described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at October 2, 2016 Using:
|
|
Total Carrying Value at October 2, 2016
|
|
Quoted Prices in
Active Markets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
(In thousands)
|
Marketable securities
|
$
|
1,539
|
|
|
$
|
1,539
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign exchange derivative assets
|
1,148
|
|
|
—
|
|
|
1,148
|
|
|
—
|
|
Foreign exchange derivative liabilities
|
(124
|
)
|
|
—
|
|
|
(124
|
)
|
|
—
|
|
Contingent consideration
|
(66,915
|
)
|
|
—
|
|
|
—
|
|
|
(66,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
October 2, 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
third
quarter of
fiscal year 2016
, the Company updated the fair value of the contingent consideration and recorded a liability of
$66.7 million
as of
October 2, 2016
. The key assumptions used to determine the fair value of the contingent consideration as of
October 2, 2016
included projected milestone dates of
2016
to
2019
, discount rates ranging from
2.0%
to
9.6%
, conditional probabilities of success of each individual milestone ranging from
85%
to
100%
and cumulative probabilities of success for each individual milestone ranging from
59%
to
100%
. 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
October 2, 2016
, the Company may have to pay contingent consideration related to acquisitions with open contingency periods of up to
$94.6 million
. The expected maximum earnout period for acquisitions with open contingency periods does not exceed
five years
from the respective acquisition dates, and the remaining weighted average earnout period at
October 2, 2016
was
two years
.
A reconciliation of the beginning and ending Level 3 net liabilities for contingent consideration is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 2,
2016
|
|
October 4,
2015
|
|
October 2,
2016
|
|
October 4,
2015
|
|
(In thousands)
|
Balance at beginning of period
|
$
|
(62,878
|
)
|
|
$
|
(475
|
)
|
|
$
|
(57,350
|
)
|
|
$
|
(91
|
)
|
Additions
|
—
|
|
|
—
|
|
|
—
|
|
|
(475
|
)
|
Amounts paid and foreign currency translation
|
14
|
|
|
26
|
|
|
113
|
|
|
36
|
|
Change in fair value (included within selling, general and administrative expenses)
|
(4,051
|
)
|
|
(70
|
)
|
|
(9,678
|
)
|
|
11
|
|
Balance at end of period
|
$
|
(66,915
|
)
|
|
$
|
(519
|
)
|
|
$
|
(66,915
|
)
|
|
$
|
(519
|
)
|
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
October 2, 2016
, the Company’s new senior unsecured revolving credit facility, which provides for
$1.0 billion
of revolving loans, had borrowings outstanding of
$53.0 million
, which excluded
$4.5 million
of unamortized debt issuance costs and letters of credit. As of
January 3, 2016
, the Company's previous 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 new 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
nine
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
$495.7 million
, net of
$1.8 million
of unamortized original issue discount and
$2.6 million
of unamortized debt issuance costs as of
October 2, 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
$552.2 million
and
$518.9 million
as of
October 2, 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 2026 Notes, with a face value of
€500 million
, had an aggregate carrying value of
$551.6 million
, net of
$4.9 million
of unamortized original issue discount and
$4.9 million
of unamortized debt issuance costs as of
October 2, 2016
. The 2026 Notes had a fair value of
€523.7 million
as of
October 2, 2016
. The fair value of the 2026 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
$37.4 million
and
$38.2 million
as of
October 2, 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
October 2, 2016
, the 2021 Notes, 2026 Notes and financing lease obligations were classified as Level 2.
As of
October 2, 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
$10.3 million
and
$11.8 million
as of
October 2, 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
October 2, 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.
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
This quarterly report on Form 10-Q, including the following management’s discussion and analysis, contains forward-looking information that you should read in conjunction with the condensed consolidated financial statements and notes to the condensed consolidated financial statements that we have included elsewhere in this report. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Words such as “believes,” “plans,” “anticipates,” “intends,” “expects,” “will” and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from the plans, intentions or expectations we disclose in the forward-looking statements we make. We have included important factors below under the heading “Risk Factors” in Part II, Item 1A. that we believe could cause actual results to differ materially from the forward-looking statements we make. We are not obligated to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are a leading provider of products, services and solutions to the diagnostics, research, environmental, industrial and laboratory services markets. Through our advanced technologies, solutions, and services, we address critical issues that help to improve the health and safety of people and the environment. The principal products and services of our two operating segments are:
|
|
•
|
Human Health
. Concentrates on developing diagnostics, tools and applications to help detect diseases earlier and more accurately and to accelerate the discovery and development of critical new therapies. Within our Human Health segment, we serve both the diagnostics and research markets.
|
|
|
•
|
Environmental Health
. Provides products, services and solutions to facilitate a cleaner and safer environment, including the creation of secure food and consumer products. Our Environmental Health segment serves the environmental, industrial and laboratory services market.
|
We recently announced a new alignment of our businesses effective October 3, 2016 to better position us to grow in attractive end markets and expand share with our core product offerings through an improved customer focus, more value-add collaboration and breakthrough innovations. Our diagnostics business, focused on reproductive health, emerging market diagnostic solutions and applied genomics, will become a standalone business segment seeking to better meet the needs of clinically oriented customers in regulated markets. Microfluidics and automation products within the research market were combined with the existing diagnostics business to form the Diagnostics segment. The remaining products within the research market were combined with the existing Environmental Health business to form the Discovery & Analytical Solutions segment. This combination is intended to advance our success in serving and innovating for our applications-oriented customers in the food, environmental, industrial and life sciences markets.
Overview of the
Third
Quarter of Fiscal Year
2016
Our fiscal year ends on the Sunday nearest December 31. We report 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 our third quarter, which consisted of
14
weeks as compared to our third quarter of fiscal year 2016, which consisted of
13
weeks.
Our overall revenue in the
third
quarter of
fiscal year 2016
was
$548.1 million
and
decrease
d
$15.4 million
, or
3%
, as compared to the
third
quarter of
fiscal year 2015
, reflecting a
decrease
of
$5.4 million
, or
2%
, in our Human Health segment revenue and a
decrease
of
$10.0 million
, or
5%
, in our Environmental Health segment revenue. The
decrease
in our Human Health segment revenue during the
third
quarter of
fiscal year 2016
was primarily driven by decreases in revenue in our academic and government product offerings within our research market due to reduced government funding and weaker demand in our medical imaging business, which was partially offset by the strong performance of our newborn and infectious disease screening solutions in emerging markets such as China, as well as Europe. The
decrease
in our Environmental Health segment revenue during the
third
quarter of
fiscal year 2016
was primarily due to a
decrease
in our food and environmental business due to weak harvest conditions.
In our Human Health segment, we experienced growth during the
third
quarter of
fiscal year 2016
in several of our products within our end markets, as compared to the
third
quarter of
fiscal year 2015
. In our diagnostics market, we experienced growth from continued expansion of our newborn screening, blood banking and screening businesses. Birth rates in the United States continue to stabilize and demand for greater access to newborn screening in rural areas outside the United States is also increasing, as evidenced by prenatal trends during the
third
quarter of
fiscal year 2016
. This was offset by weaker demand in our medical imaging business due to a change in customer ordering patterns. In our research market, we experienced
decreases in revenue in our academic and government product offerings due to reduced government funding and a slight decrease in revenue in our OneSource service offerings due to the timing of renewals. Our OneSource business offers services designed to enable our customers to increase efficiencies and production time while reducing maintenance costs, all of which continue to be critical for them.
In our Environmental Health segment, we had a
decrease
in revenue for the
third
quarter of
fiscal year 2016
as compared to the
third
quarter of
fiscal year 2015
. The
decrease
in revenue was due to lower sales in our food and environmental business within our environmental and industrial markets due to weak harvest conditions. We nevertheless anticipate that the continued development of contaminant regulations and corresponding testing protocols will result in increased demand for efficient, analytically sensitive and information rich testing solutions.
Our consolidated gross margins
increase
d
240
basis points in the
third
quarter of
fiscal year 2016
, as compared to the
third
quarter of
fiscal year 2015
, primarily due to favorable changes in product mix, with an increase in sales of higher gross margin product offerings. Our consolidated operating margins
increase
d
135
basis points in the
third
quarter of
fiscal year 2016
, as compared to the
third
quarter of
fiscal year 2015
, primarily due to higher gross margins and lower costs as a result of cost containment and productivity initiatives, which were partially offset by increased costs related to investments in new product development.
We continue to believe that we are well positioned to take advantage of the spending trends in our end markets and to promote our efficiencies in markets where current conditions may increase demand for certain services. Overall, we believe that our strategic focus on diagnostics and discovery and analytical solutions markets, coupled with our deep portfolio of technologies and applications, leading market positions, global scale and financial strength will provide us with a foundation for growth.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, warranty costs, bad debts, inventories, accounting for business combinations and dispositions, long-lived assets, income taxes, restructuring, pensions and other postretirement benefits, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are those policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. We believe our critical accounting policies include our policies regarding revenue recognition, warranty costs, allowances for doubtful accounts, inventory valuation, business combinations, value of long-lived assets, including goodwill and other intangibles, employee compensation and benefits, restructuring activities, gains or losses on dispositions and income taxes.
For a more detailed discussion of our critical accounting policies and estimates, please refer to the Notes to our audited consolidated financial statements and Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
in our Annual Report on Form 10-K for the fiscal year ended
January 3, 2016
(our “
2015
Form 10-K”), as filed with the Securities and Exchange Commission (the "SEC"). There have been no significant changes in our critical accounting policies and estimates during the
nine
months ended
October 2, 2016
.
Consolidated Results of Continuing Operations
Revenue
Revenue for the
three
months ended
October 2, 2016
was
$548.1 million
, as compared to
$563.5 million
for the
three
months ended
October 4, 2015
, a
decrease
of
$15.4 million
, or
3%
, which includes an approximate
0.4%
decrease
in revenue attributable to
unfavorable
changes in foreign exchange rates and an approximate
1%
net
increase
in revenue attributable to the impact of prior year acquisitions and divestitures. In addition, the third quarter of fiscal year 2016 consisted of
13
weeks as compared to the third quarter of fiscal year 2015, which consisted of
14
weeks. The analysis in the remainder of this paragraph compares segment revenue for the
three
months ended
October 2, 2016
as compared to the
three
months ended
October 4, 2015
and includes the effect of foreign exchange rate fluctuations, acquisitions and divestitures. Our Human Health segment revenue was
$338.2 million
for the
three
months ended
October 2, 2016
, as compared to
$343.6 million
for the
three
months ended
October 4, 2015
, a
decrease
of
$5.4 million
, or
2%
, due to a
decrease
of
$5.6 million
from our research market revenue and an
increase
of
$0.2 million
from our diagnostics market revenue. Our Environmental Health segment revenue was
$209.8 million
for the
three
months ended
October 2, 2016
, as compared to
$219.8 million
for the
three
months ended
October 4, 2015
, a
decrease
of
$10.0 million
, or
5%
, due to a
decrease
of
$9.6 million
from our environmental and industrial markets revenue and a
decrease
of
$0.4 million
from our laboratory services market revenue. As a result of adjustments to deferred revenue related
to certain acquisitions required by business combination accounting rules, we did not recognize
$0.2 million
of revenue for each of the
three
months ended
October 2, 2016
and
October 4, 2015
that otherwise would have been recorded by the acquired businesses during each of the respective periods.
Revenue for the
nine
months ended
October 2, 2016
was
$1,659.4 million
, as compared to
$1,654.2 million
for the
nine
months ended
October 4, 2015
, an
increase
of
$5.2 million
, or
0.3%
, which includes an approximate
1%
decrease
in revenue attributable to
unfavorable
changes in foreign exchange rates and an approximate
0.3%
decrease
in revenue attributable to prior year acquisitions and divestitures. In addition, the additional week in fiscal year 2015 was reflected in our third quarter, which consisted of
14
weeks as compared to our third quarter of fiscal year 2016, which consisted of
13
weeks. The analysis in the remainder of this paragraph compares segment revenue for the
nine
months ended
October 2, 2016
as compared to the
nine
months ended
October 4, 2015
and includes the effect of foreign exchange rate fluctuations and acquisitions. Our Human Health segment revenue
increase
d
$13.0 million
, or
1%
, due to an
increase
in diagnostics market revenue of
$10.7 million
and an
increase
in research market revenue of
$2.3 million
. Our Environmental Health segment revenue
decrease
d
$7.9 million
, or
1%
, due to a
decrease
in environmental and industrial markets revenue of
$13.4 million
partially offset by an
increase
in laboratory services market revenue of
$5.6 million
. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination accounting rules, we did not recognize
$0.5 million
of revenue for the
nine
months ended
October 2, 2016
and
$0.6 million
for the
nine
months ended
October 4, 2015
that otherwise would have been recorded by the acquired businesses during each of the respective periods.
Cost of Revenue
Cost of revenue for the
three
months ended
October 2, 2016
was
$287.3 million
, as compared to
$308.8 million
for the
three
months ended
October 4, 2015
, a
decrease
of
$21.5 million
, or
7%
. As a percentage of revenue, cost of revenue
decrease
d to
52.4%
for the
three
months ended
October 2, 2016
from
54.8%
for the
three
months ended
October 4, 2015
, resulting in an
increase
in gross margin of
240
basis points from
45.2%
for the
three
months ended
October 4, 2015
to
47.6%
for the
three
months ended
October 2, 2016
. Amortization of intangible assets
decrease
d to
$7.3 million
for the
three
months ended
October 2, 2016
, as compared to
$10.7 million
for the
three
months ended
October 4, 2015
. Stock-based compensation expense was
$0.3 million
for each of the
three
months ended
October 2, 2016
and
October 4, 2015
. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was
$0.8 million
for the
three
months ended
October 4, 2015
. Other purchase accounting adjustments
added an incremental expense of
$0.02 million
for each of the
three
months ended
October 2, 2016
and
October 4, 2015
. In addition to the above items, the overall
increase
in gross margin was primarily the result of favorable changes in product mix, with an increase in sales of higher gross margin product offerings and benefits from our initiatives to improve our supply chain.
Cost of revenue for the
nine
months ended
October 2, 2016
was
$883.2 million
, as compared to
$911.8 million
for the
nine
months ended
October 4, 2015
, a
decrease
of
$28.6 million
, or
3%
. As a percentage of revenue, cost of revenue
decrease
d to
53.2%
for the
nine
months ended
October 2, 2016
, from
55.1%
for the
nine
months ended
October 4, 2015
, resulting in an
increase
in gross margin of
189
basis points to
46.8%
for the
nine
months ended
October 2, 2016
, from
44.9%
for the
nine
months ended
October 4, 2015
. Amortization of intangible assets
decrease
d and was
$24.1 million
for the
nine
months ended
October 2, 2016
, as compared to
$32.2 million
for the
nine
months ended
October 4, 2015
. Stock-based compensation expense was
$0.8 million
for the
nine
months ended
October 2, 2016
, as compared to
$1.0 million
for the
nine
months ended
October 4, 2015
. The mark-to-market adjustment for postretirement benefit plans was a
loss
of
$0.2 million
for the
nine
months ended
October 4, 2015
. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added
an incremental expense of
$0.4 million
for the
nine
months ended
October 2, 2016
as compared to
$7.3 million
for the
nine
months ended
October 4, 2015
. Other purchase accounting adjustments
added an incremental expense of
$0.05 million
for each of the
nine
months ended
October 2, 2016
and
October 4, 2015
. In addition to the above items, the overall
increase
in gross margin was primarily the result of favorable changes in product mix, with an increase in sales of higher gross margin product offerings and benefits from our initiatives to improve our supply chain.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the
three
months ended
October 2, 2016
were
$145.8 million
, as compared to
$147.7 million
for the
three
months ended
October 4, 2015
, a
decrease
of
$1.9 million
, or
1%
. As a percentage of revenue, selling, general and administrative expenses
increase
d and were
26.6%
for the
three
months ended
October 2, 2016
, as compared to
26.2%
for the
three
months ended
October 4, 2015
. Amortization of intangible assets
increase
d and was
$10.0 million
for the
three
months ended
October 2, 2016
, as compared to
$8.0 million
for the
three
months ended
October 4, 2015
. Stock-based compensation expense was
$3.4 million
for the
three
months ended
October 2, 2016
as compared to
$3.8 million
for the
three
months ended
October 4, 2015
. Other purchase accounting adjustments
added an incremental expense of
$4.1 million
for the
three
months ended
October 2, 2016
, as compared to
$0.02 million
for the
three
months ended
October 4, 2015
. Acquisition and divestiture-related expenses
added an incremental expense of
$0.4 million
for the
three
months ended
October 2, 2016
as compared to
$0.1 million
for the
three
months ended
October 4, 2015
. In addition to the above items, the
decrease
in selling, general and administrative expenses was primarily the result of lower costs as a result of cost containment and productivity initiatives, which was partially offset by costs related to growth investments.
Selling, general and administrative expenses for the
nine
months ended
October 2, 2016
were
$447.3 million
, as compared to
$440.3 million
for the
nine
months ended
October 4, 2015
, an
increase
of
$7.0 million
, or
2%
. As a percentage of revenue, selling, general and administrative expenses
increase
d and were
27.0%
for the
nine
months ended
October 2, 2016
, as compared to
26.6%
for the
nine
months ended
October 4, 2015
. Amortization of intangible assets
increase
d and was
$30.7 million
for the
nine
months ended
October 2, 2016
, as compared to
$26.0 million
for the
nine
months ended
October 4, 2015
. Stock-based compensation expense
increase
d and was
$12.3 million
for the
nine
months ended
October 2, 2016
, as compared to
$11.1 million
for the
nine
months ended
October 4, 2015
. The mark-to-market adjustment for postretirement benefit plans was a
loss
of
$0.8 million
for the
nine
months ended
October 4, 2015
. Other purchase accounting adjustments
added an incremental expense of
$9.7 million
for the
nine
months ended
October 2, 2016
, as compared to
$46 thousand
for the
nine
months ended
October 4, 2015
. Acquisition and divestiture-related expenses
added an incremental expense of
$1.0 million
for the
nine
months ended
October 2, 2016
, as compared to
an incremental expense of
$0.5 million
for the
nine
months ended
October 4, 2015
. In addition to the above items, the
increase
in selling, general and administrative expenses was primarily the result of costs related to growth investments, which was partially offset by lower costs as a result of cost containment and productivity initiatives.
Research and Development Expenses
Research and development expenses for the
three
months ended
October 2, 2016
were
$33.2 million
, as compared to
$31.1 million
for the
three
months ended
October 4, 2015
, an
increase
of
$2.1 million
, or
7%
. As a percentage of revenue, research and development expenses
increase
d and were
6.1%
for the
three
months ended
October 2, 2016
, as compared to
5.5%
for the
three
months ended
October 4, 2015
. Amortization of intangible assets was
$0.1 million
for each of the
three
months ended
October 2, 2016
and
October 4, 2015
. Stock-based compensation expense was
$0.2 million
for the
three
months ended
October 2, 2016
as compared to
$0.1 million
for the
three
months ended
October 4, 2015
. The
increase
in research and development expenses was primarily the result of investments in new product development, which was partially offset by lower costs as a result of cost containment and productivity initiatives.
Research and development expenses for the
nine
months ended
October 2, 2016
were
$102.0 million
, as compared to
$95.9 million
for the
nine
months ended
October 4, 2015
, an
increase
of
$6.1 million
, or
6%
. As a percentage of revenue, research and development expenses
increase
d and were
6.1%
for the
nine
months ended
October 2, 2016
, as compared to
5.8%
for the
nine
months ended
October 4, 2015
. Amortization of intangible assets
increase
d and was
$0.5 million
for the
nine
months ended
October 2, 2016
, as compared to
$0.4 million
for the
nine
months ended
October 4, 2015
. Stock-based compensation expense was
$0.7 million
for the
nine
months ended
October 2, 2016
, as compared to
$0.4 million
for the
nine
months ended
October 4, 2015
. In addition to the above items, the
increase
in research and development expenses was primarily the result of new product releases and investments in new product development, which was partially offset by cost containment and productivity initiatives. During the first
nine
months of each of
fiscal years 2016 and 2015
, we directed research and development efforts towards the diagnostics and research markets within our Human Health segment, and the environmental, industrial and laboratory service markets within our Environmental Health segment, in order to help accelerate our growth initiatives.
Restructuring and Contract Termination Charges, Net
We have undertaken a series of restructuring actions related to the impact of acquisitions and divestitures, the alignment of our operations with our growth strategy, the integration of our business units and our 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.
We implemented a restructuring plan in the third quarter of fiscal year 2016 consisting of workforce reductions principally intended to focus resources on higher growth product lines (the "Q3 2016 Plan"). We implemented a restructuring plan in the second quarter of fiscal year 2016 consisting of workforce reductions principally intended to focus resources on higher growth end markets (the "Q2 2016 Plan").We implemented a restructuring plan in the fourth quarter of fiscal year 2015 consisting of workforce reductions and closure of excess facility space principally intended to focus resources on higher growth end markets (the "Q4 2015 Plan"). We 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 that were implemented during
fiscal years 2016 and 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)
|
|
|
|
|
Q3 2016 Plan
|
22
|
|
$
|
727
|
|
|
$
|
1,093
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,820
|
|
|
Q4 FY2017
|
|
—
|
Q2 2016 Plan
|
90
|
|
4,049
|
|
|
1,239
|
|
|
—
|
|
|
—
|
|
|
5,288
|
|
|
Q3 FY2017
|
|
—
|
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
|
|
—
|
We expect to make payments under the Previous Plans for remaining residual lease obligations, with terms varying in length, through fiscal year
2022
.
We 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 us. We recorded additional pre-tax charges of
$0.1 million
during
fiscal year 2015
in our Environmental Health segment as a result of these contract terminations.
At
October 2, 2016
, we had
$12.9 million
recorded for accrued restructuring and contract termination charges, of which
$9.1 million
was recorded in short-term accrued restructuring and contract termination charges and
$3.8 million
was recorded in long-term liabilities. At
January 3, 2016
, we 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 our restructuring and contract termination accrual balances and related activity by restructuring plan, as well as contract termination accrual balances and related activity, during the
nine
months ended
October 2, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 3, 2016
|
|
2016 Charges
|
|
2016 Changes in Estimates, Net
|
|
2016 Amounts Paid
|
|
Balance at October 2, 2016
|
|
(In thousands)
|
Severance:
|
|
|
|
|
|
|
|
|
|
Q3 2016 Plan
|
$
|
—
|
|
|
$
|
1,820
|
|
|
$
|
—
|
|
|
$
|
(104
|
)
|
|
$
|
1,716
|
|
Q2 2016 Plan
|
—
|
|
|
5,288
|
|
|
(43
|
)
|
|
(3,095
|
)
|
|
2,150
|
|
Q4 2015 Plan
|
10,370
|
|
|
—
|
|
|
(953
|
)
|
|
(8,052
|
)
|
|
1,365
|
|
Q2 2015 Plan
|
1,149
|
|
|
—
|
|
|
(543
|
)
|
|
(408
|
)
|
|
198
|
|
|
|
|
|
|
|
|
|
|
|
Facility:
|
|
|
|
|
|
|
|
|
|
Q4 2015 Plan
|
259
|
|
|
—
|
|
|
—
|
|
|
(248
|
)
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
Previous Plans
|
10,287
|
|
|
—
|
|
|
35
|
|
|
(3,029
|
)
|
|
7,293
|
|
Restructuring
|
22,065
|
|
|
7,108
|
|
|
(1,504
|
)
|
|
(14,936
|
)
|
|
12,733
|
|
Contract Termination
|
132
|
|
|
—
|
|
|
88
|
|
|
(76
|
)
|
|
144
|
|
Total Restructuring and Contract Termination
|
$
|
22,197
|
|
|
$
|
7,108
|
|
|
$
|
(1,416
|
)
|
|
$
|
(15,012
|
)
|
|
$
|
12,877
|
|
Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
October 2,
2016
|
|
October 4,
2015
|
|
October 2,
2016
|
|
October 4,
2015
|
|
(In thousands)
|
Interest income
|
$
|
(124
|
)
|
|
$
|
(147
|
)
|
|
$
|
(361
|
)
|
|
$
|
(488
|
)
|
Interest expense
|
10,998
|
|
|
9,874
|
|
|
30,778
|
|
|
28,564
|
|
Gain on disposition of businesses and assets, net
|
—
|
|
|
—
|
|
|
(5,562
|
)
|
|
—
|
|
Other expense, net
|
389
|
|
|
2,217
|
|
|
2,887
|
|
|
4,132
|
|
Total interest and other expense, net
|
$
|
11,263
|
|
|
$
|
11,944
|
|
|
$
|
27,742
|
|
|
$
|
32,208
|
|
Interest and other expense, net, for the
three
months ended
October 2, 2016
was
an expense
of
$11.3 million
, as compared to
an expense
of
$11.9 million
for the
three
months ended
October 4, 2015
, a
decrease
of
$0.6 million
. The
decrease
in interest and other expense, net, for the
three
months ended
October 2, 2016
, as compared to the
three
months ended
October 4, 2015
, was primarily due to a net decrease in other expenses, net by
$1.8 million
which consisted primarily of expenses related to foreign currency transactions and translation of non-functional currency assets and liabilities. This was partially offset by an increase in interest expense by
$1.1 million
due to the issuance of the new higher interest rate 2026 notes, and a concurrent paydown of the lower variable rate previous senior unsecured revolving credit facility. A more complete discussion of our liquidity is set forth below under the heading “Liquidity and Capital Resources.”
Interest and other expense, net, for the
nine
months ended
October 2, 2016
was
an expense
of
$27.7 million
, as compared to
an expense
of
$32.2 million
for the
nine
months ended
October 4, 2015
, a
decrease
of
$4.5 million
. The decrease was primarily due to a gain on disposition of businesses and assets, net recognized during the
nine
months ended
October 2, 2016
which was partially offset by an
increase
in interest expense of
$2.2 million
due to the issuance of the new higher interest rate 2026 notes as well as an increase in borrowings under our previous and new senior unsecured revolving credit facilities partially offset by a
decrease
in other expense, net of
$1.2 million
, consisting primarily of expenses related to foreign currency transactions and translation of non-functional currency assets and liabilities.
Provision for Income Taxes
For the
three
months ended
October 2, 2016
, the provision for income taxes from continuing operations was
$12.2 million
, as compared to
$9.1 million
for the
three
months ended
October 4, 2015
. For the
nine
months ended
October 2, 2016
, the provision for income taxes from continuing operations was
$27.0 million
, as compared to
$25.0 million
for the
nine
months ended
October 4, 2015
.
The effective tax rate from continuing operations was
17.5%
and
13.9%
for the
three and nine
months ended
October 2, 2016
, respectively, as compared to
14.2%
and
14.8%
for the
three and nine
months ended
October 4, 2015
, respectively. The
lower
effective tax rate during the first
nine
months of
fiscal year 2016
, as compared to the first
nine
months of
fiscal year 2015
, was due to certain lower tax rate jurisdictions projected to have higher income in fiscal year 2016 as compared to fiscal year 2015 and higher tax benefits related to discrete items, which were
$7.1 million
in the first
nine
months of
fiscal year 2016
, as compared to
$5.2 million
in the first
nine
months of
fiscal year 2015
.
Disposition of Businesses and Assets
As part of our continuing efforts to focus on higher growth opportunities, we have discontinued certain businesses. When the discontinued operations represent a strategic shift that will have a major effect on our operations and financial statements, we accounted for these businesses as discontinued operations, and accordingly, has presented the results of operations and related cash flows as discontinued operations. Any business deemed to be a discontinued operation prior to the adoption of ASU 2016-08,
Reporting Discontinued Operations and Disclosures of Disposals of Components of An Entity,
continues to be reported as a discontinued operations, and the results of operations and related cash flows are presented 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
October 2, 2016
and
January 3, 2016
.
During
fiscal years 2016 and 2015
, we settled various commitments related to the divestiture of discontinued operations and recognized a net pre-tax gain of
$0.6 million
and a net pre-tax loss of
$0.03 million
for the
nine
months ended
October 2, 2016
and
October 4, 2015
, respectively, and a net pre-tax gain of
$0.6 million
for the
three
months ended
October 2, 2016
. We
recorded a tax
provision
of
$0.3 million
and a tax benefit of
$2.4 million
on discontinued operations and dispositions for the
three
and
nine
months ended
October 2, 2016
, respectively. We recorded a tax
provision
of
$0.04 million
and
$0.01 million
on discontinued operations and dispositions for the
three
and
nine
months ended
October 4, 2015
, respectively.
During the second quarter of 2016, we completed the sale of our investment in PerkinElmer Labs, Inc., recognizing a pre-tax gain of
$7.1 million
. The sale generated a capital loss for tax purposes of
$7.3 million
, which resulted in an income tax benefit of
$2.5 million
that was recognized as a discrete benefit during the second quarter of 2016. PerkinElmer Labs, Inc. was a component of our Human Health segment. The pre-tax gain recognized in the second quarter of 2016 is included in interest and other expense, net in the condensed consolidated statement of operations. The divestiture of PerkinElmer Labs, Inc. has not been classified as a discontinued operation in this Form 10-Q because the disposition does not represent a strategic shift that will have a major effect on our operations and financial statements.
During the second quarter of 2016, we entered into a letter of intent to contribute certain assets to an academic institution in the United Kingdom. We recognized a pre-tax loss of
$1.6 million
related to the write-off of assets in the second quarter of 2016 which is included in interest and other expense, net in the condensed consolidated statement of operations.
Contingencies, Including Tax Matters
We are conducting a number of environmental investigations and remedial actions at our current and former locations and, along with other companies, have been named a potentially responsible party (“PRP”) for certain waste disposal sites. We accrue for environmental issues in the accounting period that our responsibility is established and when the cost can be reasonably estimated. We have accrued
$10.3 million
and
$11.8 million
as of
October 2, 2016
and
January 3, 2016
, respectively, which represents our 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. Our 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 we have been named a PRP, our management does not currently anticipate any additional liability to result from the inability of other significant named parties to contribute. We expect 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 our 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.
Various tax years after
2009
remain open to examination by certain jurisdictions in which we have 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. We regularly review our tax positions in each significant taxing jurisdiction in the process of evaluating our unrecognized tax benefits. We make adjustments to our 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; and/or (iii) the statute of limitations expires regarding a tax position.
We are subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities. Although we have established accruals for potential losses that we believe are probable and reasonably estimable, in our opinion, based on our review of the information available at this time, the total cost of resolving these contingencies at
October 2, 2016
would not have a material adverse effect on our 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 us.
Reporting Segment Results of Continuing Operations
Human Health
Revenue for the
three
months ended
October 2, 2016
was
$338.2 million
, as compared to
$343.6 million
for the
three
months ended
October 4, 2015
, a
decrease
of
$5.4 million
, or
2%
, which includes a
2%
net
decrease
in revenue attributable to the impact of prior year acquisitions and divestitures. In addition, the third quarter of fiscal year 2016 consisted of
13
weeks as compared to the third quarter of fiscal year 2015, which consisted of
14
weeks. The analysis in the remainder of this paragraph compares selected revenue by market and product type for the
three
months ended
October 2, 2016
, as compared to the
three
months ended
October 4, 2015
, and includes the effect of foreign exchange fluctuations, acquisitions and divestitures. The
decrease
in revenue in our Human Health segment reflects a
decrease
of
$5.6 million
from our research market revenue
partially offset by an
increase
of
$0.2 million
from our diagnostics market revenue. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination accounting rules, we did not recognize
$0.2 million
of revenue in our Human Health segment for each of the
three
months ended
October 2, 2016
and
October 4, 2015
that otherwise would have been recorded by the acquired businesses during each of the respective periods. In our Human Health segment, we experienced growth during the
third
quarter of
fiscal year 2016
in several of our products within our end markets, as compared to the
third
quarter of
fiscal year 2015
. In our diagnostics market, we experienced growth from continued expansion of our newborn screening, blood banking and screening businesses. Birth rates in the United States continue to stabilize and demand for greater access to newborn screening in rural areas outside the United States is also increasing, as evidenced by prenatal trends during the
third
quarter of
fiscal year 2016
. This was offset by weaker demand in our medical imaging business due to a change in customer ordering patterns. In our research market, we experienced decreases in revenue in our academic and government product offerings and a slight decrease in revenue in our OneSource service offerings. Decreases in revenue in our academic and government product offerings was primarily a result of reduced government funding. The slight decreases in revenue in our OneSource service offering is primarily due to the timing of renewals. Our OneSource business offers services designed to enable our customers to increase efficiencies and production time while reducing maintenance costs, all of which continue to be critical for them.
Revenue for the
nine
months ended
October 2, 2016
was
$1,024.2 million
, as compared to
$1,011.2 million
for the
nine
months ended
October 4, 2015
, an
increase
of
$13.0 million
, or
1%
, which includes an approximate
1%
decrease
in revenue attributable to prior year acquisitions and divestitures. In addition, the additional week in fiscal year 2015 was reflected in our third quarter, which consisted of
14
weeks as compared to our third quarter of fiscal year 2016, which consisted of
13
weeks. The analysis in the remainder of this paragraph compares selected revenue by market and product type for the
nine
months ended
October 2, 2016
, as compared to the
nine
months ended
October 4, 2015
, and includes the effect of foreign exchange fluctuations and acquisitions. The
increase
in revenue in our Human Health segment reflects an
increase
in diagnostics market revenue of
$10.7 million
and an
increase
in research market revenue of
$2.3 million
. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize
$0.5 million
of revenue in our Human Health segment for the
nine
months ended
October 2, 2016
and
$0.6 million
for the
nine
months ended
October 4, 2015
that otherwise would have been recorded by the acquired businesses during each of the respective periods. In our diagnostics market, we experienced growth from continued expansion of our newborn and infectious disease screening solutions in key regions outside the United States, particularly in emerging markets such as China. Birth rates in the United States continue to stabilize and demand for greater access to newborn screening in rural areas outside the United States is also increasing, as evidenced by prenatal trends during the
third
quarter of
fiscal year 2016
. Demand in our medical imaging business declined slightly due to a change in customer ordering patterns. In our research market, we experienced growth in our OneSource service offerings, which was primarily offset by decreases in revenue from our academic and government product offerings due to reduced government funding.
Operating income from continuing operations for the
three
months ended
October 2, 2016
was
$64.6 million
, as compared to
$63.1 million
for the
three
months ended
October 4, 2015
, an
increase
of
$1.5 million
, or
2%
. Amortization of intangible assets
decrease
d and was
$13.7 million
for the
three
months ended
October 2, 2016
, as compared to
$15.3 million
for the
three
months ended
October 4, 2015
. Restructuring and contract termination charges, net, were
$0.4 million
for the
three
months ended
October 2, 2016
, as compared to
$0.2 million
for the
three
months ended
October 4, 2015
. Other purchase accounting adjustments
added an incremental expense of
$4.1 million
for the
three
months ended
October 2, 2016
, as compared to
$0.03 million
for the
three
months ended
October 4, 2015
. Acquisition and divestiture-related expenses
added an incremental expense of
$0.4 million
for the
three
months ended
October 2, 2016
, as compared to
$0.1 million
for the
three
months ended
October 4, 2015
. In addition to the above items,
increase
d operating income for the
three
months ended
October 2, 2016
, as compared to the
three
months ended
October 4, 2015
, was primarily the result of favorable changes in product mix, with an increase in sales of higher gross margin product offerings and benefits from our initiatives to improve our supply chain.
Operating income from continuing operations for the
nine
months ended
October 2, 2016
was
$176.9 million
, as compared to
$179.6 million
for the
nine
months ended
October 4, 2015
, a
decrease
of
$2.7 million
, or
1%
. Amortization of intangible assets
decrease
d and was
$41.1 million
for the
nine
months ended
October 2, 2016
, as compared to
$46.0 million
for the
nine
months ended
October 4, 2015
. Restructuring and contract termination charges, net, were
$4.7 million
for the
nine
months ended
October 2, 2016
, as compared to
$2.0 million
for the
nine
months ended
October 4, 2015
. Other purchase accounting adjustments
added an incremental expense of
$9.8 million
for the
nine
months ended
October 2, 2016
, as compared to
$0.1 million
for the
nine
months ended
October 4, 2015
. Acquisition and divestiture-related expenses
added an incremental expense of
$0.9 million
for the
nine
months ended
October 2, 2016
, as compared to
an incremental expense of
$0.3 million
for the
nine
months ended
October 4, 2015
. In addition to the above items,
decrease
d operating income for the
nine
months ended
October 2, 2016
, as compared to the
nine
months ended
October 4, 2015
, was primarily the result of increased costs related to investments in new product development, which were partially offset by pricing initiatives and lower costs related to cost containment and productivity initiatives.
Environmental Health
Revenue for the
three
months ended
October 2, 2016
was
$209.8 million
, as compared to
$219.8 million
for the
three
months ended
October 4, 2015
, a
decrease
of
$10.0 million
, or
5%
, which includes an approximate
1%
decrease
in revenue attributable to
unfavorable
changes in foreign exchange rates and an approximate
1%
net
increase
in revenue attributable to the impact of prior year acquisitions and divestitures. In addition, the third quarter of fiscal year 2016 consisted of
13
weeks as compared to the third quarter of fiscal year 2015, which consisted of
14
weeks. The analysis in the remainder of this paragraph compares selected revenue by market and product type for the
three
months ended
October 2, 2016
, as compared to the
three
months ended
October 4, 2015
, and includes the effect of foreign exchange fluctuations, acquisitions and divestitures. The
decrease
in revenue in our Environmental Health segment reflects a
decrease
of
$9.6 million
from our environmental and industrial revenue due to weak harvest conditions and a
decrease
of
$0.4 million
from our laboratory services market revenue.
Revenue for the
nine
months ended
October 2, 2016
was
$635.2 million
, as compared to
$643.1 million
for the
nine
months ended
October 4, 2015
, a
decrease
of
$7.9 million
, or
1%
, which includes an approximate
2%
decrease
in revenue attributable to
unfavorable
changes in foreign exchange rates and an approximate
1%
increase
in revenue attributable to acquisitions. In addition, the additional week in fiscal year 2015 was reflected in our third quarter, which consisted of
14
weeks as compared to our third quarter of fiscal year 2016, which consisted of
13
weeks. The analysis in the remainder of this paragraph compares selected revenue by market and product type for the
nine
months ended
October 2, 2016
, as compared to the
nine
months ended
October 4, 2015
, and includes the effect of foreign exchange fluctuations and acquisitions. The
decrease
in revenue in our Environmental Health segment reflects a
decrease
in environmental and industrial markets revenue of
$13.4 million
partially offset by an
increase
in laboratory services market revenue of
$5.6 million
.
Operating income from continuing operations for the
three
months ended
October 2, 2016
was
$27.7 million
, as compared to
$22.8 million
for the
three
months ended
October 4, 2015
, an
increase
of
$4.9 million
, or
21%
. Amortization of intangible assets was
$3.6 million
for each of the
three
months ended
October 2, 2016
and
October 4, 2015
. Restructuring and contract termination charges, net, were
$0.2 million
for the
three
months ended
October 2, 2016
, as compared to
$0.3 million
for the
three
months ended
October 4, 2015
. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was
$0.8 million
for the
three
months ended
October 4, 2015
. In addition to the above items, operating income
increase
d for the
three
months ended
October 2, 2016
, as compared to the
three
months ended
October 4, 2015
, due to favorable changes in product mix, with an increase in sales of higher gross margin product offerings and lower costs as a result of cost containment initiatives.
Operating income from continuing operations for the
nine
months ended
October 2, 2016
was
$78.9 million
, as compared to
$53.6 million
for the
nine
months ended
October 4, 2015
, an
increase
of
$25.3 million
, or
47%
. Amortization of intangible assets
increase
d and was
$14.1 million
for the
nine
months ended
October 2, 2016
, as compared to
$12.5 million
for the
nine
months ended
October 4, 2015
. Restructuring and contract termination charges, net, were
$1.0 million
for the
nine
months ended
October 2, 2016
, as compared to
$2.8 million
for the
nine
months ended
October 4, 2015
. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was
$0.4 million
for the
nine
months ended
October 2, 2016
, as compared to
$7.3 million
for the
nine
months ended
October 4, 2015
. In addition to the above items,
increase
d operating income for the
nine
months ended
October 2, 2016
, as compared to the
nine
months ended
October 4, 2015
, was primarily due to favorable changes in product mix, with an increase in sales of higher gross margin product offerings, early benefits from our initiatives to improve our supply chain, and lower costs related to cost containment initiatives partially offset by increased costs related to investments in new product development and unfavorable impacts from foreign currency.
Liquidity and Capital Resources
We require cash to pay our operating expenses, make capital expenditures, make strategic acquisitions, service our debt and other long-term liabilities, repurchase shares of our common stock and pay dividends on our common stock. Our principal sources of funds are from our operations and the capital markets, particularly the debt markets. We anticipate that our internal operations will generate sufficient cash to fund our operating expenses, capital expenditures, smaller acquisitions, interest payments on our debt and dividends on our common stock. However, we expect to use external sources to satisfy the balance of our debt when due, any larger acquisitions and other long-term liabilities, such as contributions to our postretirement benefit plans.
Principal factors that could affect the availability of our internally generated funds include:
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changes in sales due to weakness in markets in which we sell our products and services, and
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changes in our working capital requirements.
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Principal factors that could affect our ability to obtain cash from external sources include:
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financial covenants contained in the financial instruments controlling our borrowings that limit our total borrowing capacity,
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increases in interest rates applicable to our outstanding variable rate debt,
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a ratings downgrade that could limit the amount we can borrow under our senior unsecured revolving credit facility and our overall access to the corporate debt market,
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increases in interest rates or credit spreads, as well as limitations on the availability of credit, that affect our ability to borrow under future potential facilities on a secured or unsecured basis,
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a decrease in the market price for our common stock, and
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volatility in the public debt and equity markets.
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At
October 2, 2016
, we had cash and cash equivalents of
$311.7 million
, of which
$303.3 million
was held by our non-U.S. subsidiaries, and we had
$935.6 million
of additional borrowing capacity available under our new senior unsecured revolving credit facility. We had no other liquid investments at
October 2, 2016
.
We utilize a variety of tax planning and financing strategies to ensure that our worldwide cash is available in the locations in which it is needed. Of the
$303.3 million
of cash and cash equivalents held by our non-U.S. subsidiaries at
October 2, 2016
, we would incur U.S. taxes on approximately
$287.2 million
if transferred to the U.S. without proper planning. We expect the accumulated non-U.S. cash balances, which may not be transferred to the U.S. without incurring U.S. taxes, will remain outside of the U.S. and that we will meet U.S. liquidity needs through future cash flows, use of U.S. cash balances, external borrowings, or some combination of these sources.
On October 23, 2014, our Board of Directors (our "Board") authorized us to repurchase up to
8.0 million
shares of common stock under a stock repurchase program (the "Repurchase Program"). On July 27, 2016, our Board authorized us to immediately terminate the Repurchase Program and further authorized us to repurchase up to 8.0 million shares of common stock under a new stock repurchase program (the "New Repurchase Program"). The New Repurchase Program will expire on July 26, 2018 unless terminated earlier by our Board, and may be suspended or discontinued at any time. During the
nine
months ended
October 2, 2016
, we 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. No shares remain available for repurchase under the Repurchase Program due to its cancellation. As of
October 2, 2016
,
8.0 million
shares remained available for repurchase under the New Repurchase Program.
In addition, our Board has authorized us 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 our equity incentive plans and to satisfy obligations related to the exercise of stock options made pursuant to our equity incentive plans. During the
nine
months ended
October 2, 2016
, we repurchased
72,058
shares of common stock for this purpose at an aggregate cost of
$3.4 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. Any repurchased shares will be available for use in connection with corporate programs. If we continue to repurchase shares, the New Repurchase Program will be funded using our existing financial resources, including cash and cash equivalents, and our new senior unsecured revolving credit facility.
Distressed global financial markets could adversely impact general economic conditions by reducing liquidity and credit availability, creating increased volatility in security prices, widening credit spreads and decreasing valuations of certain investments. The widening of credit spreads may create a less favorable environment for certain of our businesses and may affect the fair value of financial instruments that we issue or hold. Increases in credit spreads, as well as limitations on the availability of credit at rates we consider to be reasonable, could affect our ability to borrow under future potential facilities on a secured or unsecured basis, which may adversely affect our liquidity and results of operations. In difficult global financial markets, we may be forced to fund our operations at a higher cost, or we may be unable to raise as much funding as we need to support our business activities.
During the first
nine
months of
fiscal year 2016
, we contributed
$7.6 million
, in the aggregate, to our defined benefit pension plans outside of the United States, and expect to contribute an additional
$1.7 million
by the end of
fiscal year 2016
. We could potentially have to make additional contributions in future periods for all pension plans. We expect to use existing cash and external sources to satisfy future contributions to our pension plans.
Our pension plans have not experienced a material impact on liquidity or counterparty exposure due to the volatility and uncertainty in the credit markets. We recognize actuarial gains and losses in operating results in the fourth quarter of the year in which the gains and losses occur, unless there is an interim remeasurement required for one of our plans. It is difficult to reliably predict the magnitude of such adjustments for gains and losses in
fiscal year 2016
. These adjustments are primarily driven by events and circumstances beyond our control, including changes in interest rates, the performance of the financial markets and mortality assumptions. To the extent the discount rates decrease or the value of our pension and postretirement investments decrease, a loss to operations will be recorded in
fiscal year 2016
. Conversely, to the extent the discount rates increase or the value of our pension and postretirement investments increase more than expected, a gain will be recorded in
fiscal year 2016
.
Cash Flows
Operating Activities.
Net cash provided by continuing operations was
$198.9 million
for the
nine
months ended
October 2, 2016
, as compared to
$161.9 million
for the
nine
months ended
October 4, 2015
,
an increase
in cash provided by operating activities of
$37.0 million
. The cash provided by operating activities for the
nine
months ended
October 2, 2016
was principally a result of income from continuing operations of
$166.5 million
adjusted for depreciation and amortization of
$79.3 million
, stock-based compensation expense of
$13.8 million
, restructuring and contract termination charges, net of
$5.7 million
, change in fair value of contingent consideration of
$9.7 million
and gain from disposition of businesses and assets, net of
$5.6 million
. These items were partially offset by a net cash
decrease
in accrued expenses, other assets and liabilities and other items of
$69.0 million
and a net cash
decrease
in working capital of
$1.5 million
. Contributing to the net cash
decrease
in working capital for the
nine
months ended
October 2, 2016
, excluding the effect of foreign exchange rate fluctuations, was
an increase
in inventory of
$12.4 million
, which was partially offset by
a decrease
in accounts receivable of
$1.8 million
and
an increase
in accounts payable of
$9.0 million
. The
increase
in inventory was primarily a result of expanding the amount of inventory held at sales locations within our Environmental Health and Human Health segments to improve responsiveness to customer requirements and for the introduction of new products. The
decrease
in accounts receivable was a result of accounts receivable collections during the first
nine
months of
fiscal year 2016
. The
increase
in accounts payable was primarily a result of the timing of disbursements during the first
nine
months of
fiscal year 2016
. Changes in accrued expenses, other assets and liabilities and other items
decrease
d cash provided by operating activities by
$69.0 million
for the
nine
months ended
October 2, 2016
, as compared to
$49.0 million
for the
nine
months ended
October 4, 2015
. These changes primarily related to the timing of payments for pensions, taxes, restructuring, and salary and benefits.
Investing Activities.
Net cash
used in
the investing activities of our continuing operations was
$78.2 million
for the
nine
months ended
October 2, 2016
, as compared to
$35.7 million
for the
nine
months ended
October 4, 2015
,
an increase
of
$42.5 million
. For the
nine
months ended
October 2, 2016
, the net cash used in investing activities of our continuing operations was principally a result of capital expenditures of
$25.3 million
and
$71.9 million
of cash used for acquisitions and investments. These items were partially offset by cash proceeds of
$21.0 million
, net of
$2.0 million
in restricted cash from the sale of businesses. Net cash used for capital expenditures was
$17.8 million
for the
nine
months ended
October 4, 2015
. The capital expenditures in each period were primarily for manufacturing and other capital equipment purchases. In addition, during the
nine
months ended
October 4, 2015
, we used
$18.7 million
in cash for acquisitions and investments.
Financing Activities.
Net cash used in financing activities was
$52.6 million
for the
nine
months ended
October 2, 2016
, as compared to
$92.4 million
for the
nine
months ended
October 4, 2015
,
a decrease
of
$39.8 million
. For the
nine
months ended
October 2, 2016
, we repurchased
3.3 million
shares of our common stock, which includes
72,058
shares of our common stock pursuant to our equity incentive plans, for a total cost of
$151.6 million
, including commissions. This compares to repurchases of
1.6 million
shares of common stock, which includes
89,558
shares of our common stock pursuant to our equity incentive plans for the
nine
months ended
October 4, 2015
, for a total cost of
$76.2 million
, including commissions. Proceeds from the issuance of common stock under stock plans was
$12.1 million
for the
nine
months ended
October 2, 2016
as compared to
$13.1 million
for the
nine
months ended
October 4, 2015
. During the
nine
months ended
October 2, 2016
, debt borrowings on our previous and new senior unsecured revolving credit facilities totaled
$375.5 million
, which were offset by debt payments of
$804.5 million
. During the
nine
months ended
October 4, 2015
, debt payments on our previous senior unsecured revolving credit facility totaled
$371.0 million
, which were offset by debt borrowings of
$347.0 million
. During the
nine
months ended
October 2, 2016
, proceeds from the sale of our senior unsecured debt was
$546.2 million
, and we paid
$7.9 million
for debt issuance costs. We paid
$23.1 million
and
$23.7 million
in dividends during the
nine
months ended
October 2, 2016
and
October 4, 2015
, respectively. We had net payments on other credit facilities of
$0.8 million
during each of the
nine
months ended
October 2, 2016
and
October 4, 2015
, respectively. During the
nine
months ended
October 2, 2016
, we received
$1.7 million
for settlement of forward foreign exchange contracts, as compared to
$19.2 million
received for the
nine
months ended
October 4, 2015
. During the
nine
months ended
October 2, 2016
, we made
$0.1 million
in payments for acquisition-related contingent consideration.
Borrowing Arrangements
Senior Unsecured Revolving Credit Facility.
On August 11, 2016, we terminated our previous senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with a five year term and an expansion of borrowing capacity from
$700.0 million
to
$1.0 billion
. The new senior unsecured revolving credit facility provides for
$1.0 billion
of revolving loans and has an initial maturity of
August 11, 2021
. As of
October 2, 2016
, undrawn letters of credit in the aggregate amount of
$11.4 million
were treated as issued and outstanding when calculating the borrowing availability under the new senior unsecured revolving credit facility. As of
October 2, 2016
, we had
$935.6 million
available for additional borrowing under the facility. We use 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) an adjusted one-month Libor plus 1.00%. At
October 2, 2016
, borrowings under the new senior unsecured revolving credit facility were accruing interest primarily based on the Eurocurrency rate. The Eurocurrency margin as of
October 2, 2016
was
110
basis points. The weighted average Eurocurrency interest rate as of
October 2, 2016
was
0.56%
, resulting in a weighted average effective Eurocurrency rate, including the margin, of
1.66%
. As of
October 2, 2016
, the new senior unsecured revolving credit facility had an aggregate carrying value of
$48.5 million
, which was net of
$4.5 million
of unamortized debt issuance costs. As of
January 3, 2016
, the previous 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 include a debt-to-capital ratio that remains applicable for so long as our debt is rated as investment grade. In the event that our debt is not rated as investment grade, the debt-to-capital ratio covenant is replaced with a maximum consolidated leverage ratio covenant and a minimum consolidated interest coverage ratio covenant. We were in compliance with all applicable covenants as of
October 2, 2016
.
5%
Senior Unsecured Notes due in 2021.
On October 25, 2011, we 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
October 2, 2016
, the 2021 Notes had an aggregate carrying value of
$495.7 million
, net of
$1.8 million
of unamortized original issue discount and
$2.6 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), we may redeem the 2021 Notes in whole or in part, at our 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), we may redeem the 2021 Notes, at our 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 us to repurchase such holder's 2021 Notes for
101%
of their principal amount, plus accrued and unpaid interest. We were in compliance with all applicable covenants as of
October 2, 2016
.
1.875% Senior Unsecured Notes due 2026.
On July 19, 2016, we issued
€500.0 million
aggregate principal amount of senior unsecured notes due in 2026 (the “2026 Notes”) in a registered public offering and received approximately
€492.3 million
of net proceeds from the issuance. The 2026 Notes were issued at
99.118%
of the principal amount, which resulted in a discount of
€4.4 million
. The 2026 Notes mature in
July 2026
and bear interest at an annual rate of
1.875%
. Interest on the 2026 Notes is payable annually on July 19th each year. The proceeds from the 2026 Notes were used to pay in full the outstanding balance of our senior unsecured revolving credit facility. As of
October 2, 2016
, the 2026 Notes had an aggregate carrying value of
$551.6 million
, net of
$4.9 million
of unamortized original issue discount and
$4.9 million
of unamortized debt issuance costs.
Prior to April 19, 2026 (three months prior to their maturity date), we may redeem the 2026 Notes in whole at any time or in part from time to time, at our option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2026 Notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2026 Notes being redeemed, discounted on an annual basis, at the applicable Comparable Government Bond Rate (as defined in the indenture governing the 2026 Notes) plus 35 basis points; plus, in each case, accrued and unpaid interest. In addition, at any time on or after April 19, 2026 (three months prior to their maturity date), we may redeem the 2026
Notes, at our option, at a redemption price equal to 100% of the principal amount of the 2026 Notes due to be redeemed plus accrued and unpaid interest.
Upon a change of control (as defined in the indenture governing the 2026 Notes) and a contemporaneous downgrade of the 2026 Notes below investment grade, we will, in certain circumstances, make an offer to purchase the 2026 Notes at a price equal to 101% of their principal amount plus any accrued and unpaid interest.
Financing Lease Obligations.
In fiscal year 2012, we entered into agreements with the lessors of certain buildings that we are currently occupying and leasing to expand those buildings. We provided a portion of the funds needed for the construction of the additions to the buildings, and as a result we were considered the owner of the buildings during the construction period. At the end of the construction period, we were not reimbursed by the lessors for all of the construction costs. We are therefore deemed to have continuing involvement and the leases qualify as financing leases under sale-leaseback accounting guidance, representing debt obligations for us and non-cash investing and financing activities. As a result, we capitalized
$29.3 million
in property, plant and equipment, net, representing the fair value of the buildings with a corresponding increase to debt. We have 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
October 2, 2016
, we had
$37.4 million
recorded for these financing lease obligations, of which
$1.2 million
was recorded as short-term debt and
$36.2 million
was recorded as long-term debt. At
January 3, 2016
, we 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.
Dividends
Our Board declared a regular quarterly cash dividend of
$0.07
per share for each of the first three quarters of
fiscal year 2016
and for each quarter of
fiscal year 2015
. At
October 2, 2016
, we had accrued
$7.7 million
for dividends declared on
July 27, 2016
for the
third
quarter of
fiscal year 2016
that will be payable on
November 10, 2016
. On
October 26, 2016
, we announced that our Board had declared a quarterly dividend of
$0.07
per share for the
fourth
quarter of
fiscal year 2016
that will be payable on
February 10, 2017
. In the future, our Board may determine to reduce or eliminate our common stock dividend in order to fund investments for growth, repurchase shares or conserve capital resources.
Contractual Obligations
Our contractual obligations, as described in the contractual obligations table contained in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended January 3, 2016 have changed due to new lease agreements for certain operating facilities, changes to our senior unsecured revolving credit facility and issuance of senior unsecured notes.
During the
nine
months ended
October 2, 2016
, we entered into new lease agreements for certain operating facilities. Our total rental payments to the lessors are now expected to be
$14.0 million
for the remainder of fiscal year 2016,
$44.1 million
for fiscal year 2017,
$31.6 million
for fiscal year 2018,
$24.8 million
for fiscal year 2019,
$20.6 million
for fiscal year 2020 and
$70.0 million
in the aggregate thereafter.
On August 11, 2016, we terminated our previous senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with a five year term and an expansion of borrowing capacity from $700.0 million to $1.0 billion. As of October 2, 2016, our new senior unsecured revolving credit facility with an initial maturity of August 11, 2021 had an aggregate outstanding amount of $53.0 million. As of October 2, 2016, we had no outstanding obligation in our previous senior unsecured revolving credit facility. The new senior unsecured revolving credit facility borrowings carry variable interest rates and the outstanding amount of $53.0 million does not include interest obligations.
On July 19, 2016, we issued €500.0 million aggregate principal amount of senior unsecured notes due in 2026 (the “2026 Notes”) in a registered public offering. The 2026 Notes mature in July 2026 and bear interest at an annual rate of 1.875%. Interest on the 2026 Notes is payable annually on July 19th each year. Our total debt payments under the 2026 Notes are expected to be €9.375 million for fiscal year 2017, €9.375 million for fiscal year 2018, €9.375 million for fiscal year 2019, €9.375 million for fiscal year 2020, €9.375 million for fiscal year 2021 and €546.875 million in the aggregate thereafter. These payments include interest obligations. As of October 2, 2016, the 2026 Notes had a carrying value of $551.6 million, net of $4.9 million of unamortized original issue discount and $4.9 million of unamortized debt issuance costs.
There have not been any other material changes during the first nine months of fiscal year 2016.
Effects of 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 us as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on our condensed consolidated financial position, results of operations and cash flows or do not apply to our operations.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
("ASU 2016-15"). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other topics. The provisions of this guidance are to be applied using a retrospective transition method to each period presented, and if it is impracticable to apply the amendments retrospectively for some of the issues, ASU 2016-15 allows the amendments for those issues to be applied prospectively as of the earliest date practicable. ASU 2015-16 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. We are evaluating the requirements of this guidance and have not yet determined the impact of its adoption on our consolidated financial position, results of operations and cash flows.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
("ASU 2016-13"). ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard requires entities to use the expected loss impairment model and will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance sheet credit exposures. Entities are required to estimate the lifetime “expected credit loss” for each applicable financial asset and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The standard also amends the impairment model for available-for-sale (“AFS”) debt securities and requires entities to determine whether all or a portion of the unrealized loss on an AFS debt security is a credit loss. An entity will recognize an allowance for credit losses on an AFS debt security as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment. The provisions of this guidance are to be applied using a modified-retrospective approach. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We are evaluating the requirements of this guidance and have not yet determined the impact of its adoption on our consolidated financial position, results of operations and cash flows.
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 expense or benefit 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. We adopted ASU No. 2016-09 at the beginning of the first quarter of fiscal year 2016. We 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. Excess tax benefits related to exercised options and vested restricted stock and restricted stock units during the
nine
months ended
October 2, 2016
have been recognized in the current period’s income statement. We also excluded the excess tax benefits from the calculation of diluted earnings per share for the
three
and
nine
months ended
October 2, 2016
. We 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. We have elected to account for forfeitures as they occur. The adoption of this accounting policy did not have a material impact on our consolidated financial position, results of operations or 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. We are evaluating the requirements of this guidance and have not yet determined the impact of its adoption on our 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. We are evaluating the requirements of this guidance. The adoption is not expected to have a material impact on our 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. In May 2016, the FASB also issued Accounting Standards Update No. 2016-12,
Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients
("ASU 2016-12")
,
which amended its revenue recognition guidance in ASU 2014-09 on transition, collectibility, non-cash consideration and the presentation of sales and other similar taxes. In April 2016, the FASB also issued Accounting Standards Update No. 2016-10,
Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing
("ASU 2016-10")
,
which amended its revenue recognition guidance in ASU 2014-09 on identifying performance obligations to allow entities to disregard items that are immaterial in the context of the contract, clarify when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow an entity to elect to account for the cost of shipping and handling performed after control of a good has been transferred to the customer as a fulfillment cost (i.e., an expense). ASU 2016-10 also clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property ("IP") and requires entities to classify IP in one of two categories: functional IP or symbolic IP, which will determine whether it recognizes revenue over time or at a point in time. ASU 2016-10 also address how entities should consider license renewals and restrictions and apply the exception for sales- and usage-based royalties received in exchange for licenses of IP. ASU 2016-12, ASU 2016-10 and ASU 2014-09 may be adopted either using a full retrospective approach or a modified retrospective approach. We are evaluating the requirements of the foregoing standards and has not yet determined the impact of their adoption on our consolidated financial position, results of operations and cash flows. We intend to adopt these standards using the modified retrospective approach, and we do not intend to early adopt these standards.