Perkinelmer Earnings 2018-12-30
PKI 10K Annual Report
| Balance Sheet | Income Statement | Cash Flow |
|---|---|---|
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_____________________________________
Form 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 30, 2018 | |
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to | |
Commission file number 001-5075
_____________________________________
PerkinElmer, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts | 04-2052042 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
940 Winter Street, Waltham, Massachusetts | 02451 | |
(Address of Principal Executive Offices) | (Zip Code) | |
(Registrant’s telephone number, including area code): (781) 663-6900
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, $1 Par Value | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ý | Accelerated filer | o | ||
Non-accelerated filer | o | Smaller reporting company | o | ||
Emerging growth company | o | ||||
If an emerging growth company, indicate by check mark whether the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The aggregate market value of the common stock, $1 par value per share, held by non-affiliates of the registrant on June 29, 2018, was $7,944,359,992 based upon the last reported sale of $73.23 per share of common stock on June 29, 2018.
As of February 22, 2019, there were outstanding 110,800,020 shares of common stock, $1 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of PerkinElmer, Inc.’s Definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April 23, 2019 are incorporated by reference into Part III of this Form 10-K.
1
TABLE OF CONTENTS
Page | ||
PART I | ||
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
PART III | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
PART IV | ||
Item 15. | ||
Item 16. | ||
2
PART I
Item 1. | Business |
Overview
We are a leading provider of products, services and solutions for the diagnostics, life sciences and applied markets. Through our advanced technologies and differentiated solutions, we address critical issues that help to improve lives and the world around us.
We are a Massachusetts corporation, founded in 1947. Our headquarters are in Waltham, Massachusetts, and we market our products and services in more than 180 countries. As of December 30, 2018, we employed approximately 12,500 employees. Our common stock is listed on the New York Stock Exchange under the symbol “PKI” and we are a component of the S&P 500 Index.
We maintain a website with the address http://www.perkinelmer.com. We are not including the information contained in our website as part of, or incorporating it by reference into, this annual report on Form 10-K. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, as soon as reasonably practicable after we electronically file these materials with, or otherwise furnish them to, the Securities and Exchange Commission.
Our Strategy
Our strategy is to develop and deliver innovative products, services and solutions in high-growth markets that utilize our knowledge and expertise to address customers’ critical needs and drive scientific breakthroughs. To execute on our strategy and accelerate revenue growth, we focus on broadening our offerings through both the acquisition of innovative technology and investment in research and development. Our strategy includes:
• | Achieving significant growth in both of our core business segments, Discovery & Analytical Solutions and Diagnostics, through strategic acquisitions and licensing; |
• | Accelerating innovation through both internal research and development and third-party collaborations and alliances; |
• | Strengthening our position within key markets, by expanding our global product and service offerings and maintaining superior product quality; |
• | Utilizing our share repurchase programs to help drive shareholder value; and |
• | Attracting, retaining and developing talented and engaged employees. |
Recent Developments
As part of our strategy to grow our core businesses, we have recently taken the following actions:
Acquisitions in Fiscal Year 2018:
We completed the acquisition of four businesses for aggregate consideration of $106.0 million. We reported the operations of these acquisitions within the results of our Discovery & Analytical Solutions or Diagnostics segments, as applicable, from the acquisition dates.
Restructuring:
During fiscal year 2018, we recorded pre-tax restructuring charges of $6.6 million in our Discovery & Analytical Solutions segment and $1.5 million in our Diagnostics segment related to a workforce reduction from restructuring activities. Our management approved these plans to realign resources to emphasize growth initiatives. We also terminated various contractual commitments in connection with certain disposal activities and have 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 pre-tax charges of $5.0 million in the Discovery & Analytical Solutions segment during fiscal year 2018 as a result of these contract terminations.
This pre-tax restructuring activity has been reported as restructuring and contract termination charges and is included as a component of income from continuing operations. We expect no significant impact on future operating results or cash flows from the restructuring activities executed in fiscal year 2018.
3
Business Segments and Products
We report our business in two segments: Discovery & Analytical Solutions and Diagnostics.
Discovery & Analytical Solutions Segment
Our comprehensive portfolio of technologies helps life sciences researchers better understand diseases and develop treatments. In addition, we enable scientists to detect, monitor and manage contaminants and toxic chemicals that impact our environment and food supply. Our Discovery & Analytical Solutions segment serves the life sciences and applied markets.
Life Sciences Market:
The life sciences market consists of the life sciences research market and laboratory services market. In the life sciences market, we provide a broad suite of solutions including reagents, informatics, and detection and imaging technologies that enable scientists to work smarter, make research breakthroughs and transform those breakthroughs to real-world outcomes. These products, solutions and services support pharmaceutical and biotech companies and academic institutions globally in discovering and developing better treatments and therapeutics to fight disease, faster and more efficiently.
We also provide services designed to help customers in the laboratory services market increase efficiencies and production time while reducing lab maintenance costs. Our OneSource® laboratory service business is aligned with customers' needs, enabling them to accelerate scientific progress and commercial opportunities.
Applied Markets:
The applied markets consist of environmental, food and industrial markets. For the environmental markets, we develop and provide analytical technologies, solutions and services that enable our customers to understand the characterization and health of many aspects of our environment, including air, water and soil. Our solutions are used to detect and help reduce the impact products and industrial processes have on our environment. For example, our solutions help ensure compliance with regulatory standards that protect the purity of the world's water supply by detecting harmful substances, including trace metals such as lead, and organic pollutants such as pesticides and benzene. We provide the tools needed to test functionality, meet quality specifications and safety standards, and innovate for next generation products.
We also offer a variety of solutions that help farmers and food producers provide a growing population with food that is safe, nutritious and appealing, and assist manufacturers with product consistency and maximizing production yield. Our instruments confirm food quality, including the level of moisture in grain or the level of fat in butter, as well as detect the presence of potentially dangerous contaminants, such as lead and mercury in milk. Our solutions can also be used to identify the origin of food products such as olive oil, which helps prevent counterfeiting. Our methods and analyses are transferable throughout the supply chain to enable customers to keep pace with industry standards as well as governmental regulations and certifications.
We also provide analytical instrumentation for the industrial market which includes the chemical, semiconductor and electronics, energy, lubricant, petrochemical and polymer industries. Our technologies for this market are primarily used by customers focusing on quality assurance standards.
Principal Products:
Our principal products and services for Discovery & Analytical Solutions applications include the following:
Life Sciences Market:
• | Radiometric detection solutions, including over 1,100 radiochemicals and the Tri-carb® and Quantulus™ GCT families of liquid scintillation analyzers, Wizard2® Gamma counters and MicroBeta2® plate based LSA, which are used for beta, gamma and luminescence counting in microplate and vial formats utilized in research, environmental and drug discovery applications. |
• | The Opera Phenix® high content screening system, which is used for sensitive and high speed phenotypic drug screening of complex cellular models. |
• | The Operetta® CLS™ high content analysis system, which enables scientists to reveal fine sub-cellular details from everyday assays as well as more complex studies, for example using live cells, 3D and stem cells. |
• | The EnSight® multimode plate reader benchtop system, offering well plate imaging alongside labeled detection technologies for target-based and phenotypic assays. |
• | The EnVision® multimode plate reader, designed for high-throughput screening laboratories, including those using AlphaScreen®, AlphaLISA® and/or AlphaPlex® technologies. |
4
• | A wide range of homogeneous biochemical and cell based assay reagents, including LANCE® Ultra™ and Alpha™ technology assay platforms used for the detection of drug discovery targets such as G-protein coupled receptors (“GPCR”), kinases, biomarkers and the modification of epigenetic enzymes. |
• | A broad portfolio of recombinant GPCR and ion channel cell lines, including over 300 products and 120 ready-to-use frozen cell lines for a wide range of disease areas. |
• | AlphaScreen®, AlphaLISA® and AlphaPlex® research assays, including over 500 no-wash biomarker detection kits for both biotherapeutics and small molecule drug discovery and development in a variety of therapeutic areas including cancer, inflammation, metabolic disorders, neurodegeneration and virology. |
• | TSATM Plus biotin kits, which can increase sensitivity of histochemistry and cytochemistry as much as 10 to 20 times. |
• | In vivo imaging technologies and reagents for preclinical research, including the IVIS® Spectrum™ series for 2D and 3D optical imaging, the FMT® series for 3D optical tomography and the IVIS® Lumina™ series for 2D imaging, along with a suite of bioluminescent and fluorescent imaging agents, cell lines and dyes. These technologies are designed to provide non-invasive longitudinal monitoring of disease progression, cell trafficking and gene expression patterns in living animals and are complemented by a broad portfolio of fluorescent and bioluminescent in vivo imaging reagents that can be useful for identifying, characterizing and quantifying a range of disease biomarkers and therapeutic efficacy in living animal models. |
• | The G8 PET/CT preclinical imaging system, delivering PET imaging with an intuitive user interface and efficient workflows, ensuring subject monitoring throughout preparation and imaging. |
• | The QuantumTM GX2 system, which enables in vivo imaging of multiple species across multiple disease areas by delivering industry leading high resolution imaging. Low dose scanning allows subjects to be imaged over time to evaluate disease progression while minimizing the harmful effects of radiation that could impact the biology of the animal. With the QuantumTM GX2 system, data from the IVIS® and FMT® imaging platforms can be seamlessly co-registered with microCT to deliver more information on the disease state. |
• | OneSource® laboratory services, a comprehensive portfolio of multivendor instrument management, QA/QC, lab relocation and regulatory compliance services. OneSource® programs are tailored to the specific needs and goals of individual customers and offer a series of informatics-based consulting, planning and management offerings to assist in laboratory productivity and the optimization of complex Information Technology platforms. |
• | OneSource® Dashboard, a TIBCO® Spotfire® technology driven interactive graphical platform, providing visibility to a customer’s global asset population, service event and downtime distribution, as well as key performance indicators to assist in asset operation. |
• | OneSource® Insights as a ServiceTM, which leverages comprehensive OneSource® analytics and industry data to develop and deliver customer-need driven recommendations to optimize, integrate and accelerate lab operations. |
• | PerkinElmer Signals Medical ReviewTM software, empowering medical monitors to detect safety signals faster and reduce overall time to submission by combining innovative medical review workflow with advanced analytics. |
• | PerkinElmer Signals Lead DiscoveryTM software, which enables researchers to quickly gain new insights into chemical and biomolecular research data, featuring guided search and analysis workflows and dynamic data visualizations for on-the-fly exploration. |
• | PerkinElmer SignalsTM Notebook, a scientific research data management solution, allowing researchers to record research data and experiments in digital notebooks, drag & drop, store, organize, share, find and filter data easily. |
• | PerkinElmer SignalsTM Translational data management, aggregation and analysis platform, which offers out-of-the-box support for the complete precision medicine workflow from data acquisition to biomarker discovery and validation. |
Applied Markets:
• | The Clarus® series of gas chromatographs, gas chromatographs/mass spectrometers and the TurboMatrix™ family of sample-handling equipment, which are used to identify and quantify compounds in the environmental, forensics, food and beverage, hydrocarbon processing/biofuels, materials testing, pharmaceutical and semiconductor industries. |
• | The Flexar™ ultra-high performance liquid chromatography (UHPLC) and Flexar advanced liquid chromatography systems, which provide high throughput and resolution chromatographic separations. |
• | The QSight® Triple Quad LC/MS/MS, a flow-based mass spectrometry system that provides high sensitivity and enables high levels of efficiency and productivity to meet both standard and regulatory requirements. |
• | The Torion® T-9 portable GC/MS, a fast person-portable GC/MS system, enabling rapid detection and actionable results to potentially hazardous and emergency environmental conditions. |
• | Our atomic spectroscopy family of instruments, including the PinAAcle® family of atomic absorption spectrometers, the Avio® family of inductively coupled plasma (“ICP”) optical emission spectrometers and the |
5
NexION® family of ICP mass spectrometers, which are used in the environmental and chemical industries, among others, to determine the elemental content of a sample.
• | Our infrared spectroscopy (IR) family of instruments, the Spectrum Two™ IR & NIR spectrometers, which are compact and portable and used for high-speed infrared analysis for unknown substance identification, material qualification or concentration determination in fuel and lubricant analysis, polymer analysis and pharmaceutical and environmental applications. This includes the Frontier™ IR and NIR spectrometers designed to provide high sensitivity and flexibility to address a range of sample types. Spotlight™ IR systems are designed for scientists whose samples demand higher sensitivity and simpler analysis and workflows. |
• | The LAMBDA™ UV/Vis, a series of spectrophotometers that provide sampling flexibility to enable measurement of a wide range of sample types, including liquids, powders and solid materials, both in regulated industries as well as QC/QA and research applications. |
• | The 2400 Series II CHNS/O Elemental Analyzer, one of the leading organic elemental analyzers. It is ideal for the rapid determination of carbon, hydrogen, nitrogen, sulfur, and oxygen content in organic and other types of materials. |
• | Our thermal analysis family, including our Differential Scanning Calorimetry (DSC) series that offers exclusive HyperDSC™ capability for unparalleled sensitivity and new insights into material processes, our Thermogravimetric (TGA) and Simultaneous Thermal Analysis (STA) instruments, which can be coupled to Fourier Transform Infrared (FT-IR), Mass Spectrometry (MS), or Gas Chromatography/Mass Spectrometry (GC/MS) to provide greater analysis power and knowledge. |
• | Perten's Falling Number® and Glutomatic® instruments, which determine the bread baking quality of wheat and flour, and Perten's DA NIR bench and in process analyzer determine constituent content for use across the food segment from meat to animal feed. |
• | The Delta™ range of milk quality analyzers, which help ensure the quality of dairy products and are used at Central Milk Testing labs as well as dairy processing facilities around the world. |
• | The Bioo Scientific® test kits for detection of toxins, veterinary drug residues and contaminants, which enable rapid and easy testing at different steps in the food value chain. |
New Products:
New products introduced or acquired for Discovery & Analytical Solutions applications in fiscal year 2018 include the following:
Life Sciences Market:
• | A range of new AlphaLISA®, Alpha SureFire® Ultra and LANCE® reagents and assay kits across key research and therapeutic areas, including cell signaling, inflammation, oncology, and biotherapeutics. |
• | ChemDraw® 18 chemical structure drawing and visualization application, which is now available on the cloud. |
• | Lead Discovery Premium software, which allows scientists to import, filter by, analyze and interpret chemical structures and biosequences alongside other related data in a highly visual and interactive environment for faster insights and better decisions. |
• | OneSource® Asset Genius™ Monitoring Solution, part of the Asset Genius family, which offers a 360o view of PC-driven laboratory instruments regardless of the manufacturer, correlating instrument usage, age and service data, allowing customers to visually pinpoint under-performing, ideally-performing and over-burdened assets, and to make informed decisions. |
Applied Markets:
• | The FL 6500TM and FL 8500TM fluorescence spectrophotometers, which address the challenges of bioscience, industrial, chemical, environmental, pharmaceutical, agricultural and academic application. They are designed to improve lab productivity and ensure standard compliance regulations are met. The FL 6500TM provides a high-energy pulsed Xenon light source that preserves sample integrity and the FL 8500TM provides a high-sensitivity source for testing diluted or small samples. |
• | The QSight® 400 series is a robust, powerful ready-to-implement triple quad LC/MS/MS system providing higher sensitivity and throughput that regulated food, cannabis and environmental testing labs need to meet their most stringent requirements. |
Brand Names:
Our Discovery & Analytical Solutions segment offers additional products under various brand names, including:
6
Life Sciences Market:
AlphaLISA®, AlphaPlex™, AlphaScreen®, Alpha™ SureFire®, AngioSense®, Annexin-Vivo™ , Cell carrier®, cell::explorer®, Chem3D®, ChemDraw®, ChemOffice®, Columbus™ ElementsTM, EnLite™, EnSight®, EnVision®, FMT®, FolateRSense™, High Content Profiler™, IntegriSense™, IVIS®, LANCE®, Living Image®, Lumina™, MicroBeta2®, MMPSense®, NENTM, OneSource®, Opera Phenix®, Operetta® CLS™, OsteoSense®, PerkinElmer Signals™ for Translational, ProSense®, Quantulus™ GCT, RediJect™, Spectrum™, Transferrin-Vivo™, Tri-Carb®, VICTOR Nivo™, ViewLux™, VivoTag®, Wizard2®, and XenoLightTM.
Applied Markets:
Altus®, Aquamatic™, Avio®, AxION®, Clarus®, DairyGuard™, Falling Number®, Frontier™, Glutomatic®, Honigs Regression™, HyperDSC®, Inframatic™, LAMBDA™, NexION®, OilExpress™, OilPrep™, Optima®, Perten®, Perten Instruments®, PinAAcle®, QSight®, Spectrum™, Spectrum Two™, Spotlight™, Supra-clean®, Supra-d™, Supra-poly®, Syngistix™, Torion®, TurboMatrix™ and Ultraspray®.
Diagnostics Segment
We offer instruments, reagents, assay platforms, and software to hospitals, medical labs, clinicians, and medical research professionals to help improve the health of families. Our Diagnostics segment is especially focused on reproductive health, emerging market diagnostics, and applied genomics.
We provide early detection for genetic disorders from pregnancy to early childhood, and infectious disease testing for the diagnostics market. Our screening products are designed to provide early and accurate insights into the health of expectant mothers during pregnancy and into the health of their babies. Diagnostics labs use our instruments, reagents and software for testing and screening genetic abnormalities and certain disorders and diseases, including Down syndrome, hypothyroidism, infertility and various metabolic conditions. We also develop technologies that enable and support genomic workflows using PCR and next-generation DNA sequencing for applications in oncology and drug discovery.
Principal Products:
Our principal products and services for Diagnostics applications include the following:
• | The DELFIA® Xpress screening platform, a complete solution for prenatal and maternal health screening, which includes a fast continuous loading system. It is supported by kits for first, second and third trimester analyses for prenatal screening and clinically validated LifeCycle™ software. |
• | The NeoBase™ non-derivatized MS/MS AAAC kit, which is used to support detection of metabolic disorders in newborns through tandem mass spectrometry. The kit analyzes newborn dry blood spot samples for measurement of amino acids and other metabolic analytes for specific diseases. |
• | The GSP® Neonatal hTSH, T4 17á-OHP, GALT IRT, BTD, PKU, Total Galactose, CK-MM and G6PD kits, used for screening congenital neonatal conditions from a drop of blood. |
• | The Specimen Gate® informatics data management solution, designed specifically for newborn screening laboratories. |
• | ViaCord® umbilical cord blood banking services for the banking of stem cells harvested from umbilical cord blood and cord tissue, for potential therapeutic application in transplant and regenerative medicine. |
• | An expanded portfolio of molecular-based infectious disease screening technologies for blood bank and clinical laboratory settings in China. The tools include a qualitative 3-in-1 assay for the detection of hepatitis B, hepatitis C and HIV, as well as assays for other communicable diseases. |
• | The EnLite™ Neonatal TREC™ System, a screening test for Severe Combined Immunodeficiency, consisting of EnLite™ Neonatal TREC™ reagent kits, the Victor EnLite™ instrument and EnLite™ workstation software. |
• | NeoLSDTM MSMS kit, the first commercial IVD kit for screening of Pompe, MPS-I, Fabry, Gaucher, Niemann-Pick A/B and Krabbe disorders from a single DBS sample. |
• | QSight® Triple Quad MSMS instrument, which is used for newborn screening. |
• | TRF based Anti HBs/HCV/TP kits for infectious disease testing. |
• | The chemagic™ Prime™ instrument, a fully automated, LIMS-compatible solution for primary sample transfer, DNA and RNA isolation, optional normalization, and the setup of PCR and NGS applications. |
• | Immune fluorescence testing (IFT), enzyme-linked immunosorbent assay (ELISA), chemiluminescence-based immunotesting, immunoblots, molecular microarrays, PCR, liquid handlers and software solutions. |
• | Autoimmune testing covering rheumatology, hepatology, gastroenterology, endocrinology, neurology, nephrology, dermatology and infertility. |
7
• | Infectious disease testing covering bacteria, viruses and parasites. |
• | IFT, ELISA and EUROLINETM assays for veterinary medical diagnostics. |
• | Automated liquid handling platforms (JANUS®, Sciclone® and Zephyr®) that offer a choice of robotic solutions in genomics, biotherapeutics, high throughput screening and high content analysis to assist life science research from bench to clinic. |
• | JANUS® BioTx™ workstation for automated small scale purification, offering column, tip and plate based chromatography on a single platform. |
• | The LabChip GXII® TouchTM platform, which provides a means of characterizing multiple protein product attributes for research labs through QC. |
• | The explorer® automated workstation, which allows integration of multiple laboratory instrumentation using a centralized robotic interface, allowing high throughput and turnkey-application focused solutions. |
New Products:
Significant new products introduced or acquired for Diagnostics applications in fiscal year 2018 include the following:
• | Vanadis®NIPT, a breakthrough cfDNA technology for use in genetic and biochemistry laboratories for screening common trisomies in pregnant population. |
• | Allergy testing covering allergen-specifi immunoglobin e (IgE) measuring the level of different IgE antibodies in blood using ELISA and EUROLINETM assays. |
• | PG-SeqTM and DOPlify® kits for preimplantation genetic testing. |
• | New NextFLEX® library prep kits and barcode for next generation sequencing. |
• | ProteinEXactTM assay for protein quantitation and sizing applications. |
Brand Names:
Our Diagnostics segment offers additional products under various brand names, including AutoDELFIA®, BACS-on-Beads®, BIOCHIPs, Bioo Scientific®, BoBs®, chemagic™, Datalytix™, DELFIA®, DELFIA® Xpress, DOPlify®, EUROArrayTM, EUROIMMUN®, EUROLabWorkstationTM, EUROlineTM, EUROPatternTM, Evolution™, explorer™, FragilEase®, Genoglyphix®, GSP®, iLab™, JANUS®, LabChip®, LifeCycle™, LimsLink™, MultiPROBE®, NEXTFLEX®, NextPrep™, Pannoramic™, PG-SeqTM, PG-FindTM, Protein ClearTM, ProteinEXactTM, QSight®, Sciclone®, Specimen Gate®, SymbioTM, Twister®, VanadisTM, VariSpec™, ViaCord®, and Zephyr®.
Marketing
All of our businesses market their products and services primarily through their own specialized sales forces. As of December 30, 2018, we employed approximately 4,800 sales and service representatives operating in approximately 35 countries and marketing products and services in more than 180 countries. In geographic regions where we do not have a sales and service presence, we utilize distributors to sell our products.
Raw Materials, Key Components and Supplies
Each of our businesses uses a wide variety of raw materials, key components and supplies that are generally available from alternate sources of supply and in adequate quantities from domestic and foreign sources. We generally have multi-year contracts, with no minimum purchase requirements, with our suppliers. For certain critical raw materials, key components and supplies required for the production of some of our principal products, we have qualified only a limited or a single source of supply. We periodically purchase quantities of some of these critical raw materials in excess of current requirements, in anticipation of future manufacturing needs. With sufficient lead times, we believe we would be able to qualify alternative suppliers for each of these raw materials and key components. See the applicable risk factor in “Item 1A. Risk Factors” for an additional description of this risk.
Intellectual Property
We own numerous United States and foreign patents and have patent applications pending in the United States and abroad. We also license intellectual property rights to and from third parties, some of which bear royalties and are terminable in specified circumstances. In addition to our patent portfolio, we possess a wide array of unpatented proprietary technology and know-how. We also own numerous United States and foreign trademarks and trade names for a variety of our product names, and have applications for the registration of trademarks and trade names pending in the United States and abroad. We believe that patents and other proprietary rights are important to the development of both of our reporting segments, but we also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and maintain the
8
competitive position of both of our reporting segments. We do not believe that the loss of any one patent or other proprietary right would have a material adverse effect on our overall business or on any of our reporting segments.
In some cases, we may participate in litigation or other proceedings to defend against or assert claims of infringement, to enforce our patents or our licensors’ patents, to protect our trade secrets, know-how or other intellectual property rights, or to determine the scope and validity of our or third parties’ intellectual property rights. Litigation of this type could result in substantial cost to us and diversion of our resources. An adverse outcome in any litigation or proceeding could subject us to significant liabilities or expenses, require us to cease using disputed intellectual property or cease the sale of a product, or require us to license the disputed intellectual property from third parties.
Backlog
We believe that backlog is not a meaningful indicator of future business prospects for either of our business segments due to the short lead time required for a majority of our sales. Therefore, we believe that backlog information is not material to an understanding of our business.
Competition
Due to the range and diversity of our products and services, we face many different types of competition and competitors. Our competitors range from foreign and domestic organizations, which produce a comprehensive array of goods and services and that may have greater financial and other resources than we do, to more narrowly focused firms producing a limited number of goods or services for specialized market segments.
We compete on the basis of service level, price, technological innovation, operational efficiency, product differentiation, product availability, quality and reliability. Competitors range from multinational organizations with a wide range of products to specialized firms that in some cases have well-established market positions. We expect the proportion of large competitors to increase through the continued consolidation of competitors.
Research and Development
We have a broad product base, and we do not expect any single research and development project to have significant costs. To accelerate our growth initiatives, we directed our research and development efforts in fiscal years 2018, 2017 and 2016 primarily toward our Diagnostics segment, and the life sciences and applied markets within our Discovery & Analytical Solutions segment. We expect to continue our strong investments in research and development to drive growth during fiscal year 2019, and to continue to emphasize the Diagnostics segment, and the life sciences and applied markets within our Discovery & Analytical Solutions segment.
Environmental Matters
Our operations are subject to various foreign, federal, state and local environmental and safety laws and regulations. These requirements include those governing uses, emissions and discharges of hazardous substances, the remediation of contaminated soil and groundwater, the regulation of radioactive materials, and the health and safety of our employees.
We may have liability under the Comprehensive Environmental Response Compensation and Liability Act and comparable state statutes that impose liability for investigation and remediation of contamination without regard to fault, in connection with materials that we or our former businesses sent to various third-party sites. We have incurred, and expect to incur, costs pursuant to these statutes.
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 $7.9 million and $9.4 million as of December 30, 2018 and December 31, 2017, 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. 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
9
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 consolidated financial statements. While it is possible that a loss exceeding the amounts recorded in the consolidated financial statements may be incurred, the potential exposure is not expected to be materially different from those amounts recorded.
We may become subject to new or unforeseen environmental costs or liabilities. Compliance with new or more stringent laws or regulations, stricter interpretations of existing laws, or the discovery of new contamination could cause us to incur additional costs.
Employees
As of December 30, 2018, we employed approximately 12,500 employees. Several of our subsidiaries are parties to contracts with labor unions and workers’ councils. As of December 30, 2018, we estimate that we employed an aggregate of approximately 1,700 union and workers’ council employees. We consider our relations with our employees to be satisfactory.
Item 1A. | Risk Factors |
The following important factors affect our business and operations generally or affect multiple segments of our business and operations:
If the markets into which we sell our products decline or do not grow as anticipated due to a decline in general economic conditions, or there are uncertainties surrounding the approval of government or industrial funding proposals, or there are unfavorable changes in government regulations, we may see an adverse effect on the results of our business operations.
Our customers include pharmaceutical and biotechnology companies, laboratories, academic and research institutions, public health authorities, private healthcare organizations, doctors and government agencies. Our quarterly revenue and results of operations are highly dependent on the volume and timing of orders received during the quarter. In addition, our revenues and earnings forecasts for future quarters are often based on the expected trends in our markets. However, the markets we serve do not always experience the trends that we may expect. Negative fluctuations in our customers’ markets, the inability of our customers to secure credit or funding, restrictions in capital expenditures, general economic conditions, cuts in government funding or unfavorable changes in government regulations would likely result in a reduction in demand for our products and services. In addition, government funding is subject to economic conditions and the political process, which is inherently fluid and unpredictable. Our revenues may be adversely affected if our customers delay or reduce purchases as a result of uncertainties surrounding the approval of government or industrial funding proposals. Such declines could harm our consolidated financial position, results of operations, cash flows and trading price of our common stock, and could limit our ability to sustain profitability.
Our growth is subject to global economic and political conditions, and operational disruptions at our facilities.
Our business is affected by global economic and political conditions as well as the state of the financial markets, particularly as the United States and other countries balance concerns around debt, inflation, growth and budget allocations in their policy initiatives. There can be no assurance that global economic conditions and financial markets will not worsen and that we will not experience any adverse effects that may be material to our consolidated cash flows, results of operations, financial position or our ability to access capital, such as the adverse effects resulting from a prolonged shutdown in government operations both in the United States and internationally. Our business is also affected by local economic environments, including inflation, recession, financial liquidity and currency volatility or devaluation. Political changes, some of which may be disruptive, could interfere with our supply chain, our customers and all of our activities in a particular location.
While we take precautions to prevent production or service interruptions at our global facilities, a major earthquake, fire, flood, power loss or other catastrophic event that results in the destruction or delay of any of our critical business operations could result in our incurring significant liability to customers or other third parties, cause significant reputational damage or have a material adverse effect on our business, operating results or financial condition.
Certain of these risks can be hedged to a limited degree using financial instruments, or other measures, and some of these risks are insurable, but any such mitigation efforts are costly and may not always be fully successful. Our ability to engage in such mitigation efforts has decreased or become even more costly as a result of recent market developments.
10
If we do not introduce new products in a timely manner, we may lose market share and be unable to achieve revenue growth targets.
We sell many of our products in industries characterized by rapid technological change, frequent new product and service introductions, and evolving customer needs and industry standards. Many of the businesses competing with us in these industries have significant financial and other resources to invest in new technologies, substantial intellectual property portfolios, substantial experience in new product development, regulatory expertise, manufacturing capabilities, and established distribution channels to deliver products to customers. Our products could become technologically obsolete over time, or we may invest in technology that does not lead to revenue growth or continue to sell products for which the demand from our customers is declining, in which case we may lose market share or not achieve our revenue growth targets. The success of our new product offerings will depend upon several factors, including our ability to:
• | accurately anticipate customer needs, |
• | innovate and develop new reliable technologies and applications, |
• | receive regulatory approvals in a timely manner, |
• | successfully commercialize new technologies in a timely manner, |
• | price our products competitively, and manufacture and deliver our products in sufficient volumes and on time, and |
• | differentiate our offerings from our competitors’ offerings. |
Many of our products are used by our customers to develop, test and manufacture their products. We must anticipate industry trends and consistently develop new products to meet our customers’ expectations. In developing new products, we may be required to make significant investments before we can determine the commercial viability of the new product. If we fail to accurately foresee our customers’ needs and future activities, we may invest heavily in research and development of products that do not lead to significant revenue. We may also suffer a loss in market share and potential revenue if we are unable to commercialize our technology in a timely and efficient manner.
In addition, some of our licensed technology is subject to contractual restrictions, which may limit our ability to develop or commercialize products for some applications.
We may not be able to successfully execute acquisitions or divestitures, license technologies, integrate acquired businesses or licensed technologies into our existing businesses, or make acquired businesses or licensed technologies profitable.
We have in the past supplemented, and may in the future supplement, our internal growth by acquiring businesses and licensing technologies that complement or augment our existing product lines, such as our various acquisitions during fiscal year 2018. However, we may be unable to identify or complete promising acquisitions or license transactions for many reasons, such as:
• | competition among buyers and licensees, |
• | the high valuations of businesses and technologies, |
• | the need for regulatory and other approval, and |
• | our inability to raise capital to fund these acquisitions. |
Some of the businesses we acquire may be unprofitable or marginally profitable, or may increase the variability of our revenue recognition. If, for example, we are unable to successfully commercialize products and services related to significant in-process research and development that we have capitalized, we may have to impair the value of such assets. Accordingly, the earnings or losses of acquired businesses may dilute our earnings. For these acquired businesses to achieve acceptable levels of profitability, we would have to improve their management, operations, products and market penetration. We may not be successful in this regard and may encounter other difficulties in integrating acquired businesses into our existing operations, such as incompatible management, information or other systems, cultural differences, loss of key personnel, unforeseen regulatory requirements, previously undisclosed liabilities or difficulties in predicting financial results. Additionally, if we are not successful in selling businesses we seek to divest, the activity of such businesses may dilute our earnings and we may not be able to achieve the expected benefits of such divestitures. As a result, our financial results may differ from our forecasts or the expectations of the investment community in a given quarter or over the long term.
To finance our acquisitions, we may have to raise additional funds, either through public or private financings. We may be unable to obtain such funds or may be able to do so only on terms unacceptable to us. We may also incur expenses related to
11
completing acquisitions or licensing technologies, or in evaluating potential acquisitions or technologies, which may adversely impact our profitability.
We may not be successful in adequately protecting our intellectual property.
Patent and trade secret protection is important to us because developing new products, processes and technologies gives us a competitive advantage, although it is time-consuming and expensive. We own many United States and foreign patents and intend to apply for additional patents. Patent applications we file, however, may not result in issued patents or, if they do, the claims allowed in the patents may be narrower than what is needed to protect fully our products, processes and technologies. The expiration of our previously issued patents may cause us to lose a competitive advantage in certain of the products and services we provide. Similarly, applications to register our trademarks may not be granted in all countries in which they are filed. For our intellectual property that is protected by keeping it secret, such as trade secrets and know-how, we may not use adequate measures to protect this intellectual property.
Third parties may also challenge the validity of our issued patents, may circumvent or “design around” our patents and patent applications, or may claim that our products, processes or technologies infringe their patents. In addition, third parties may assert that our product names infringe their trademarks. We may incur significant expense in legal proceedings to protect our intellectual property against infringement by third parties or to defend against claims of infringement by third parties. Claims by third parties in pending or future lawsuits could result in awards of substantial damages against us or court orders that could effectively prevent us from manufacturing, using, importing or selling our products in the United States or other countries.
If we are unable to renew our licenses or otherwise lose our licensed rights, we may have to stop selling products or we may lose competitive advantage.
We may not be able to renew our existing licenses, or licenses we may obtain in the future, on terms acceptable to us, or at all. If we lose the rights to a patented or other proprietary technology, we may need to stop selling products incorporating that technology and possibly other products, redesign our products or lose a competitive advantage. Potential competitors could in-license technologies that we fail to license and potentially erode our market share.
Our licenses typically subject us to various economic and commercialization obligations. If we fail to comply with these obligations, we could lose important rights under a license, such as the right to exclusivity in a market, or incur losses for failing to comply with our contractual obligations. In some cases, we could lose all rights under the license. In addition, rights granted under the license could be lost for reasons out of our control. For example, the licensor could lose patent protection for a number of reasons, including invalidity of the licensed patent, or a third-party could obtain a patent that curtails our freedom to operate under one or more licenses.
If we do not compete effectively, our business will be harmed.
We encounter aggressive competition from numerous competitors in many areas of our business. We may not be able to compete effectively with all of these competitors. To remain competitive, we must develop new products and periodically enhance our existing products. We anticipate that we may also have to adjust the prices of many of our products to stay competitive. In addition, new competitors, technologies or market trends may emerge to threaten or reduce the value of entire product lines.
Our quarterly operating results could be subject to significant fluctuation, and we may not be able to adjust our operations to effectively address changes we do not anticipate, which could increase the volatility of our stock price and potentially cause losses to our shareholders.
Given the nature of the markets in which we participate, we cannot reliably predict future revenue and profitability. Changes in competitive, market and economic conditions may require us to adjust our operations, and we may not be able to make those adjustments or make them quickly enough to adapt to changing conditions. A high proportion of our costs are fixed in the short term, due in part to our research and development and manufacturing costs. As a result, small declines in sales could disproportionately affect our operating results in a quarter. Factors that may affect our quarterly operating results include:
• | demand for and market acceptance of our products, |
• | competitive pressures resulting in lower selling prices, |
• | changes in the level of economic activity in regions in which we do business, |
• | changes in general economic conditions or government funding, |
• | settlements of income tax audits, |
12
• | expenses incurred in connection with claims related to environmental conditions at locations where we conduct or formerly conducted operations, |
• | contract termination and litigation costs, |
• | differing tax laws and changes in those laws, or changes in the countries in which we are subject to taxation, |
• | changes in our effective tax rate, |
• | changes in industries, such as pharmaceutical and biomedical, |
• | changes in the portions of our revenue represented by our various products and customers, |
• | our ability to introduce new products, |
• | our competitors’ announcement or introduction of new products, services or technological innovations, |
• | costs of raw materials, energy or supplies, |
• | changes in healthcare or other reimbursement rates paid by government agencies and other third parties for certain of our products and services, |
• | our ability to realize the benefit of ongoing productivity initiatives, |
• | changes in the volume or timing of product orders, |
• | fluctuation in the expense related to the mark-to-market adjustment on postretirement benefit plans, |
• | changes in our assumptions underlying future funding of pension obligations, |
• | changes in assumptions used to determine contingent consideration in acquisitions, and |
• | changes in foreign currency exchange rates. |
A significant disruption in third-party package delivery and import/export services, or significant increases in prices for those services, could interfere with our ability to ship products, increase our costs and lower our profitability.
We ship a significant portion of our products to our customers through independent package delivery and import/export companies, including UPS and Federal Express in the United States; TNT, UPS and DHL in Europe; and UPS in Asia. We also ship our products through other carriers, including national trucking firms, overnight carrier services and the United States Postal Service. If one or more of the package delivery or import/export providers experiences a significant disruption in services or institutes a significant price increase, we may have to seek alternative providers and the delivery of our products could be prevented or delayed. Such events could cause us to incur increased shipping costs that could not be passed on to our customers, negatively impacting our profitability and our relationships with certain of our customers.
Disruptions in the supply of raw materials, certain key components and other goods from our limited or single source suppliers could have an adverse effect on the results of our business operations, and could damage our relationships with customers.
The production of our products requires a wide variety of raw materials, key components and other goods that are generally available from alternate sources of supply. However, certain critical raw materials, key components and other goods required for the production and sale of some of our principal products are available from limited or single sources of supply. We generally have multi-year contracts with no minimum purchase requirements with these suppliers, but those contracts may not fully protect us from a failure by certain suppliers to supply critical materials or from the delays inherent in being required to change suppliers and, in some cases, validate new raw materials. Such raw materials, key components and other goods can usually be obtained from alternative sources with the potential for an increase in price, decline in quality or delay in delivery. A prolonged inability to obtain certain raw materials, key components or other goods is possible and could have an adverse effect on our business operations, and could damage our relationships with customers.
We are subject to the rules of the Securities and Exchange Commission requiring disclosure as to whether certain materials known as conflict minerals (tantalum, tin, gold, tungsten and their derivatives) that may be contained in our products are mined from the Democratic Republic of the Congo and adjoining countries. As a result of these rules, we may incur additional costs in complying with the disclosure requirements and in satisfying those customers who require that the components used in our products be certified as conflict-free, and the potential lack of availability of these materials at competitive prices could increase our production costs.
13
The manufacture and sale of products and services may expose us to product and other liability claims for which we could have substantial liability.
We face an inherent business risk of exposure to product and other liability claims if our products, services or product candidates are alleged or found to have caused injury, damage or loss. We may be unable to obtain insurance with adequate levels of coverage for potential liability on acceptable terms or claims of this nature may be excluded from coverage under the terms of any insurance policy that we obtain. If we are unable to obtain such insurance or the amounts of any claims successfully brought against us substantially exceed our coverage, then our business could be adversely impacted.
If we fail to maintain satisfactory compliance with the regulations of the United States Food and Drug Administration and other governmental agencies in the United States and abroad, we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil, criminal or monetary penalties.
Our operations are subject to regulation by different state and federal government agencies in the United States and other countries, as well as to the standards established by international standards bodies. If we fail to comply with those regulations or standards, we could be subject to fines, penalties, criminal prosecution or other sanctions. Some of our products are subject to regulation by the United States Food and Drug Administration and similar foreign and domestic agencies. These regulations govern a wide variety of product activities, from design and development to labeling, manufacturing, promotion, sales and distribution. If we fail to comply with those regulations or standards, we may have to recall products, cease their manufacture and distribution, and may be subject to fines or criminal prosecution.
We are also subject to a variety of laws, regulations and standards that govern, among other things, the importation and exportation of products, the handling, transportation and manufacture of toxic or hazardous substances, and our business practices in the United States and abroad such as anti-bribery, anti-corruption and competition laws. This requires that we devote substantial resources to maintaining our compliance with those laws, regulations and standards. A failure to do so could result in the imposition of civil, criminal or monetary penalties having a material adverse effect on our operations.
Changes in governmental regulations may reduce demand for our products or increase our expenses.
We compete in markets in which we or our customers must comply with federal, state, local and foreign regulations, such as environmental, health and safety, and food and drug regulations. We develop, configure and market our products to meet customer needs created by these regulations. Any significant change in these regulations could reduce demand for our products or increase our costs of producing these products.
The healthcare industry is highly regulated and if we fail to comply with its extensive system of laws and regulations, we could suffer fines and penalties or be required to make significant changes to our operations which could have a significant adverse effect on the results of our business operations.
The healthcare industry, including the genetic screening market, is subject to extensive and frequently changing international and United States federal, state and local laws and regulations. In addition, legislative provisions relating to healthcare fraud and abuse, patient privacy violations and misconduct involving government insurance programs provide federal enforcement personnel with substantial powers and remedies to pursue suspected violations. We believe that our business will continue to be subject to increasing regulation as the federal government continues to strengthen its position on healthcare matters, the scope and effect of which we cannot predict. If we fail to comply with applicable laws and regulations, we could suffer civil and criminal damages, fines and penalties, exclusion from participation in governmental healthcare programs, and the loss of various licenses, certificates and authorizations necessary to operate our business, as well as incur liabilities from third-party claims, all of which could have a significant adverse effect on our business.
Economic, political and other risks associated with foreign operations could adversely affect our international sales and profitability.
Because we sell our products worldwide, our businesses are subject to risks associated with doing business internationally. Our sales originating outside the United States represented the majority of our total revenue in fiscal year 2018. We anticipate that sales from international operations will continue to represent a substantial portion of our total revenue. In addition, many of our manufacturing facilities, employees and suppliers are located outside the United States. Accordingly, our future results of operations could be harmed by a variety of factors, including:
• | changes in actual, or from projected, foreign currency exchange rates, |
• | changes in a country’s or region’s political or economic conditions, particularly in developing or emerging markets, |
• | longer payment cycles of foreign customers and timing of collections in foreign jurisdictions, |
14
• | trade protection measures including embargoes and tariffs, such as the tariffs recently implemented by the U.S. government on certain imports from China and by the Chinese government on certain imports from the U.S., the extent and impact of which have yet to be fully determined, |
• | import or export licensing requirements and the associated potential for delays or restrictions in the shipment of our products or the receipt of products from our suppliers, |
• | policies in foreign countries benefiting domestic manufacturers or other policies detrimental to companies headquartered in the United States, |
• | differing tax laws and changes in those laws, or changes in the countries in which we are subject to tax, |
• | adverse income tax audit settlements or loss of previously negotiated tax incentives, |
• | differing business practices associated with foreign operations, |
• | difficulty in transferring cash between international operations and the United States, |
• | difficulty in staffing and managing widespread operations, |
• | differing labor laws and changes in those laws, |
• | differing protection of intellectual property and changes in that protection, |
• | expanded enforcement of laws related to data protection and personal privacy, |
• | increasing global enforcement of anti-bribery and anti-corruption laws, and |
• | differing regulatory requirements and changes in those requirements. |
If we do not retain our key personnel, our ability to execute our business strategy will be limited.
Our success depends to a significant extent upon the continued service of our executive officers and key management and technical personnel, particularly our experienced engineers and scientists, and on our ability to continue to attract, retain, and motivate qualified personnel. The competition for these employees is intense. The loss of the services of key personnel could have a material adverse effect on our operating results. In addition, there could be a material adverse effect on us should the turnover rates for key personnel increase significantly or if we are unable to continue to attract qualified personnel. We do not maintain any key person life insurance policies on any of our officers or employees.
Our success also depends on our ability to execute leadership succession plans. The inability to successfully transition key management roles could have a material adverse effect on our operating results.
If we experience a significant disruption in, or breach in security of, our information technology systems or those of our customers, suppliers or other third parties, or cybercrime, resulting in inappropriate access to or inadvertent transfer of information or assets, or if we fail to implement new systems, software and technologies successfully, our business could be adversely affected.
We rely on several centralized information technology systems throughout our company to develop, manufacture and provide products and services, keep financial records, process orders, manage inventory, process shipments to customers and operate other critical functions. Our information technology systems may be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors, catastrophes or other unforeseen events. If we were to experience a prolonged system disruption in the information technology systems that involve our interactions with customers, suppliers or other third parties, it could result in the loss of sales and customers and significant incremental costs, which could adversely affect our business. In addition, security breaches of our information technology systems or cybercrime, resulting in inappropriate access to or inadvertent transfer of information or assets, could result in losses or misappropriation of assets or unauthorized disclosure of confidential information belonging to us or to our employees, partners, customers or suppliers, which could result in our suffering significant financial or reputational damage.
We have a substantial amount of outstanding debt, which could impact our ability to obtain future financing and limit our ability to make other expenditures in the conduct of our business.
We have a substantial amount of debt and other financial obligations. Our debt level and related debt service obligations could have negative consequences, including:
15
• | requiring us to dedicate significant cash flow from operations to the payment of principal and interest on our debt, which reduces the funds we have available for other purposes, such as acquisitions and stock repurchases; |
• | reducing our flexibility in planning for or reacting to changes in our business and market conditions; and |
• | exposing us to interest rate risk since a portion of our debt obligations are at variable rates. |
In addition, we may incur additional indebtedness in the future to meet future financing needs. If we add new debt, the risks described above could increase.
Restrictions in our senior unsecured revolving credit facility and other debt instruments may limit our activities.
Our senior unsecured revolving credit facility, senior unsecured notes due in April 2021 ("April 2021 Notes"), senior unsecured notes due in November 2021 ("November 2021 Notes") and senior unsecured notes due in 2026 ("2026 Notes") include restrictive covenants that limit our ability to engage in activities that could otherwise benefit our company. These include restrictions on our ability and the ability of our subsidiaries to:
• | pay dividends on, redeem or repurchase our capital stock, |
• | sell assets, |
• | incur obligations that restrict our subsidiaries’ ability to make dividend or other payments to us, |
• | guarantee or secure indebtedness, |
• | enter into transactions with affiliates, and |
• | consolidate, merge or transfer all, or substantially all, of our assets and the assets of our subsidiaries on a consolidated basis. |
We are also required to meet specified financial ratios under the terms of certain of our existing debt instruments. Our ability to comply with these financial restrictions and covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control, such as foreign exchange rates, interest rates, changes in technology and changes in the level of competition. In addition, if we are unable to maintain our investment grade credit rating, our borrowing costs would increase and we would be subject to different and potentially more restrictive financial covenants under some of our existing debt instruments.
Any future indebtedness that we incur may include similar or more restrictive covenants. Our failure to comply with any of the restrictions in our senior unsecured revolving credit facility, the April 2021 Notes, the November 2021 Notes, the 2026 Notes or any future indebtedness may result in an event of default under those debt instruments, which could permit acceleration of the debt under those debt instruments, and require us to prepay that debt before its scheduled due date under certain circumstances.
The United Kingdom's vote in favor of withdrawing from the European Union could adversely impact our results of operations.
Nearly 3% of our net sales from continuing operations in fiscal year 2018 came from the United Kingdom. Following the referendum vote in the United Kingdom in June 2016 in favor of leaving the European Union (commonly referred to as “Brexit”), on March 29, 2017, the country formally notified the European Union of its intention to withdraw. Brexit has involved a process of lengthy negotiations between the United Kingdom and European Union member states to determine the future terms of the United Kingdom’s relationship with the European Union. The potential effects of Brexit remain uncertain. Brexit has caused, and may continue to create, volatility in global stock markets and regional and global economic uncertainty particularly in the United Kingdom financial and banking markets. Weakening of economic conditions or economic uncertainties tend to harm our business, and if such conditions worsen in the United Kingdom or in the rest of Europe, it may have a material adverse effect on our operations and sales.
Any significant weakening of the Great Britain Pound to the U.S. dollar will have an adverse impact on our European revenues due to the importance of our sales in the United Kingdom. Currency exchange rates in the pound sterling and the euro with respect to each other and the U.S. dollar have already been adversely affected by Brexit and that may continue to be the case. In addition, depending on the terms of Brexit, the United Kingdom could lose the benefits of global trade agreements negotiated by the European Union on behalf of its members, which may result in increased trade barriers which could make our doing business in Europe more difficult.
16
Our results of operations will be adversely affected if we fail to realize the full value of our intangible assets.
As of December 30, 2018, our total assets included $4.2 billion of net intangible assets. Net intangible assets consist principally of goodwill associated with acquisitions and costs associated with securing patent rights, trademark rights, customer relationships, core technology and technology licenses and in-process research and development, net of accumulated amortization. We test certain of these items—specifically all of those that are considered “non-amortizing”—at least annually for potential impairment by comparing the carrying value to the fair market value of the reporting unit to which they are assigned. All of our amortizing intangible assets are also evaluated for impairment should events occur that call into question the value of the intangible assets.
Adverse changes in our business, adverse changes in the assumptions used to determine the fair value of our reporting units, or the failure to grow our Discovery & Analytical Solutions and Diagnostics segments may result in impairment of our intangible assets, which could adversely affect our results of operations.
Our share price will fluctuate.
Over the last several years, stock markets in general and our common stock in particular have experienced significant price and volume volatility. Both the market price and the daily trading volume of our common stock may continue to be subject to significant fluctuations due not only to general stock market conditions but also to a change in sentiment in the market regarding our operations and business prospects. In addition to the risk factors discussed above, the price and volume volatility of our common stock may be affected by:
• | operating results that vary from our financial guidance or the expectations of securities analysts and investors, |
• | the financial performance of the major end markets that we target, |
• | the operating and securities price performance of companies that investors consider to be comparable to us, |
• | announcements of strategic developments, acquisitions and other material events by us or our competitors, and |
• | changes in global financial markets and global economies and general market conditions, such as interest or foreign exchange rates, commodity and equity prices and the value of financial assets. |
Dividends on our common stock could be reduced or eliminated in the future.
On October 24, 2018, we announced that our Board had declared a quarterly dividend of $0.07 per share for the fourth quarter of fiscal year 2018 that was paid in February 2019. On January 24, 2019, we announced that our Board had declared a quarterly dividend of $0.07 per share for the first quarter of fiscal year 2019 that will be payable in May 2019. 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.
Item 1B. | Unresolved Staff Comments |
Not applicable.
Item 2. | Properties |
As of December 30, 2018, our continuing operations occupied 3,347,929 square feet in over 215 locations. We own 879,799 square feet of this space, and lease the balance. We conduct our operations in manufacturing and assembly plants, research laboratories, administrative offices and other facilities located in 15 states and 33 foreign countries.
Facilities outside of the United States account for approximately 2,458,302 square feet of our owned and leased property, or approximately 75% of our total occupied space.
Our real property leases are both short-term and long-term. We believe that our properties are well-maintained and are adequate for our present requirements.
17
The following table indicates the approximate square footage of real property owned and leased attributable to the continuing operations of our reporting segments as of December 30, 2018:
Owned | Leased | Total | ||||||
(In square feet) | ||||||||
Discovery & Analytical Solutions | 158,285 | 1,319,811 | 1,478,096 | |||||
Diagnostics | 721,514 | 1,093,652 | 1,815,166 | |||||
Corporate offices | — | 54,667 | 54,667 | |||||
Continuing operations | 879,799 | 2,468,130 | 3,347,929 | |||||
Item 3. | Legal Proceedings |
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 the opinion of our management, based on its review of the information available at this time, the total cost of resolving these contingencies at December 30, 2018 should not have a material adverse effect on our consolidated financial statements included in this annual report on Form 10-K. However, each of these matters is subject to uncertainties, and it is possible that some of these matters may be resolved unfavorably to us.
Item 4. | Mine Safety Disclosures |
Not applicable.
18
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are our executive officers as of February 26, 2019. No family relationship exists between any one of these executive officers and any of the other executive officers or directors.
Name | Position | Age | ||
Robert F. Friel | Chairman and Chief Executive Officer | 63 | ||
Prahlad Singh | President and Chief Operating Officer | 54 | ||
James Corbett | Executive Vice President and President, Discovery & Analytical Solutions | 56 | ||
James M. Mock | Senior Vice President and Chief Financial Officer | 42 | ||
Joel S. Goldberg | Senior Vice President, Administration, General Counsel and Secretary | 50 | ||
Daniel R. Tereau | Senior Vice President, Strategy and Business Development | 52 | ||
Deborah Butters | Senior Vice President, Chief Human Resources Officer | 49 | ||
Tajinder Vohra | Senior Vice President, Global Operations | 53 | ||
Andrew Okun | Vice President and Chief Accounting Officer | 49 | ||
Robert F. Friel, 63. Mr. Friel currently serves as Chairman and Chief Executive Officer of PerkinElmer, having also served as our President from August 2007 through December 2018. Prior to being appointed President and Chief Executive Officer in February 2008 and Chairman in April 2009, Mr. Friel had served as President and Chief Operating Officer since August 2007, and as Vice Chairman and President of our Life and Analytical Sciences unit since January 2006. Mr. Friel was our Executive Vice President and Chief Financial Officer, with responsibility for business development and information technology in addition to his oversight of the finance functions, from October 2004 until January 2006. Mr. Friel joined PerkinElmer in February 1999 as our Senior Vice President and Chief Financial Officer. Prior to joining PerkinElmer, he held several senior management positions with AlliedSignal, Inc., now Honeywell International. He received a Bachelor of Arts degree in economics from Lafayette College and a Master of Science degree in taxation from Fairleigh Dickinson University. Mr. Friel is currently a director of NuVasive, Inc. and Xylem Inc., and previously served as a director of CareFusion Corporation until its acquisition by Becton, Dickinson and Company in March 2015. He also previously served on the national board of trustees for the March of Dimes Foundation.
Prahlad Singh, 54. Dr. Singh was elected President and Chief Operating Officer of PerkinElmer effective January 2019. Dr. Singh joined PerkinElmer as the President of our Diagnostics business in May 2014. He was elected Senior Vice President in September 2016 and Executive Vice President in March 2018. Prior to joining PerkinElmer, Dr. Singh was General Manager of GE Healthcare’s Women’s Health business from 2012 to 2014, with responsibility for its mammography and bone densitometry businesses. Before that, Dr. Singh held senior executive level roles in strategy, business development and mergers & acquisitions at both GE Healthcare from 2011 to 2012 and Philips Healthcare from 2007 to 2011. From 1995 to 2007, he held leadership roles of increasing responsibility at DuPont Pharmaceuticals and subsequently Bristol-Myers Squibb Medical Imaging, which included managing the Asia Pacific and Middle East region. Dr. Singh holds a doctoral degree in chemistry from the University of Missouri-Columbia and a Master of Business Administration from Northeastern University. His research work has resulted in several issued patents and publications in peer reviewed journals.
James Corbett, 56. Mr. Corbett was appointed President of our Discovery & Analytical Solutions business and Executive Vice President of PerkinElmer in October 2016. Mr. Corbett was appointed President of our Human Health business in March 2014 and a Senior Vice President and officer of PerkinElmer in February 2012. Mr. Corbett was previously appointed President of the Diagnostics business in May 2010 and President of the Life Sciences and Technology business in May 2013. Mr. Corbett joined the Company in October of 2007 through our acquisition of ViaCord, where he served as President. Prior to joining ViaCord, he co-founded CADx Systems, a company focused on the oncology market, where he held the position of Executive Vice President and Director with responsibility for worldwide sales and marketing, technical support and business development. Following the 2004 acquisition of CADx by iCAD, Inc., he was named Chief Commercial Officer. In addition, Mr. Corbett worked for Abbott Laboratories for 14 years in a variety of sales and marketing positions including Worldwide Marketing Manager for Abbott Diagnostics Immunoassay Systems and Region Manager for Abbott Diagnostics. Mr. Corbett holds a Bachelor of Science degree in business from the University of Massachusetts. Mr. Corbett also serves on the national board of trustees for the March of Dimes Foundation and on the board of directors for the Analytical, Life Science & Diagnostics Association.
James M. Mock, 42. Mr. Mock joined PerkinElmer in May 2018 as our Senior Vice President and Chief Financial Officer. Prior to joining us, Mr. Mock served for nearly 20 years in a wide range of financial oversight capacities within General Electric Company (GE). Mr. Mock was most recently Vice President, Corporate Audit Staff, a position in which he served from October 2015 to April 2018, where he worked globally across GE’s businesses on controllership reviews and operational excellence projects.
19
Mr. Mock previously served in a number of progressively responsible leadership positions with GE both in the United States and overseas, including as Vice President and Chief Financial Officer for GE Oil & Gas, Subsea Systems, from 2014 to 2015. Mr. Mock received a Bachelor’s degree in Economics from St. Lawrence University.
Joel S. Goldberg, 50. Mr. Goldberg currently serves as our Senior Vice President, Administration, General Counsel and Secretary, having joined as our Senior Vice President, General Counsel and Secretary in July 2008. Prior to joining us, Mr. Goldberg spent seven years at Millennium Pharmaceuticals, Inc., where he most recently served as Vice President, Chief Compliance Officer and Secretary. During his seven years with Millennium, he focused in the areas of mergers and acquisitions, strategic alliances, investment and financing transactions, securities and healthcare related compliance, and employment law. Previously, he was an associate of the law firm Edwards & Angell, LLP. Mr. Goldberg graduated from the Northeastern University School of Law and also holds a Master of Business Administration from Northeastern University. He completed his undergraduate degree at the University of Wisconsin-Madison.
Daniel R. Tereau, 52. Mr. Tereau was appointed Senior Vice President, Strategy and Business Development in January 2016, having joined the Company in April 2014 as Vice President, Strategy and Business Development. He is responsible for leading PerkinElmer’s overall strategic planning and business development activities. Prior to joining PerkinElmer, Mr. Tereau served on Novartis’ leadership team as Senior Vice President and Global Head of Strategy, Business Development and Licensing from 2011 to 2014, where he was responsible for global strategy and business development for the Consumer Health division. Prior to 2011, Mr. Tereau held similar roles at Thermo Fisher Scientific and GE Healthcare. Mr. Tereau holds a Bachelor of Science degree in finance from Ferris State University, a Juris Doctorate from Wayne State University, and earned his Master of Business Administration from Yale University.
Deborah Butters, 49. Ms. Butters joined PerkinElmer in July 2016 as Senior Vice President, Chief Human Resources Officer. Prior to joining us, she served as Head of North America Human Resources at IBM, where she led all aspects of the Human Resource function for IBM’s largest geography, which included 35,000 employees and was responsible for over $30B of IBM’s revenue. During her 17 year career there, she significantly helped shape IBM’s HR programs and practices, including leading its enterprise-wide, people transformation strategy to optimize employee engagement and business performance. Ms. Butters was with Lotus Development for eight years prior to its acquisition by IBM. Ms. Butters’ experiences working in the United Kingdom and Germany for Lotus Development, and in Switzerland and the United States for IBM, ranged from leading functional roles across workforce planning and talent management, to serving in five HR business partner roles in both software and consulting within IBM and Lotus Development, with the largest being IBM’s North America Consulting business. Ms. Butters holds a Bachelor of Science degree from the University of Bath and a diploma in Human Resources from London University.
Tajinder Vohra, 53. Mr. Vohra joined PerkinElmer in October 2015 as Vice President of Global Operations and was appointed Senior Vice President in January 2018. He oversees all of PerkinElmer’s global operations, including manufacturing, supply chain, customer care and distribution. Prior to joining PerkinElmer, Mr. Vohra served at ABB as a Country Operations Leader from 2011 to 2015, where he was responsible for India-wide operations and Supply Chains for India, Middle East and Africa. Prior to 2011, Mr. Vohra was a Senior Vice President with Genpact, managing Supply Chain and IT businesses, and held a number of global management operational positions with GE Healthcare. Mr. Vohra received his Bachelor’s degree in Mechanical Engineering from the University of Delhi, Master’s degree in Industrial Engineering from the University of Alabama and Master’s degree in Manufacturing Engineering from Lehigh University. Mr. Vohra is a certified Six Sigma Black Belt, and was trained in lean manufacturing at the Shingijitsu Training Institute in Japan.
Andrew Okun, 49. Mr. Okun serves as our Vice President and Chief Accounting Officer, a position in which he has served since April 2011. Mr. Okun joined us in 2001 and has served in financial and controllership positions of increasing responsibility, including Director of Finance for the Optoelectronics business from 2001 through 2005, Vice President of Finance from 2005 through 2009 and Vice President and Corporate Controller from 2009 through 2011. Prior to joining us, Mr. Okun most recently worked for Honeywell International as a Site Controller as well as for Coopers & Lybrand. Mr. Okun is a Certified Public Accountant and earned his Master of Business Administration from the University of Virginia. He completed his undergraduate degree at the University of California, Santa Barbara.
20
PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Common Equity
We only have one class of common stock. Our common stock is listed on the New York Stock Exchange under the symbol “PKI”. As of February 22, 2019, we had approximately 3,747 holders of record of our common stock.
Stock Repurchases
The following table provides information with respect to the shares of common stock repurchased by us for the periods indicated.
Issuer Repurchases of Equity Securities | |||||||||||||
Period | Total Number of Shares Purchased(1) | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | Maximum Aggregate Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||
October 1, 2018 - October 28, 2018 | 2,559 | $ | 93.24 | — | $ | 250,000,000 | |||||||
October 29, 2018 - November 25, 2018 | 650,379 | 80.28 | 650,000 | 197,803,699 | |||||||||
November 26, 2018 - December 30, 2018 | 62 | 86.63 | — | 197,803,699 | |||||||||
Activity for quarter ended December 30, 2018 | 653,000 | $ | 80.33 | 650,000 | $ | 197,803,699 | |||||||
________________
(1) | 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 fourth quarter of fiscal year 2018, we repurchased 3,000 shares of common stock for this purpose at an aggregate cost of $0.3 million. During the fiscal year 2018, we repurchased 66,506 shares of common stock for this purpose at an aggregate cost of $5.2 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. |
(2) | On July 27, 2016, 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 23, 2018, our Board authorized us to immediately terminate the Repurchase Program and further authorized us to repurchase shares of common stock for an aggregate amount up to $250.0 million under a new stock repurchase program (the "New Repurchase Program"). The New Repurchase Program will expire on July 23, 2020 unless terminated earlier by our Board and may be suspended or discontinued at any time. During fiscal year 2018, we had no stock repurchases under the Repurchase Program. No shares remain available for repurchase under the Repurchase Program due to its cancellation. During the fourth quarter of fiscal year 2018, we repurchased 650,000 shares of common stock under the New Repurchase Program at an aggregate cost of $52.2 million. As of December 30, 2018, $197.8 million remained available for aggregate repurchases of shares under the New Repurchase Program. |
21
Stock Performance Graph
Set forth below is a line graph comparing the cumulative total shareholder return on our common stock against the cumulative total return of the S&P Composite-500 Index and a Peer Group Index for the five fiscal years from December 29, 2013 to December 30, 2018. Our Peer Group Index consists of Agilent Technologies Inc., Thermo Fisher Scientific Inc., and Waters Corporation. The peer group is the same as the peer group used in the stock performance graph in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.
Comparison of Five-Year Cumulative Total Return
Among PerkinElmer, Inc. Common Stock, S&P Composite-500 and
Peer Group Index
TOTAL RETURN TO SHAREHOLDERS
(Includes reinvestment of dividends)
29-Dec-13 | 28-Dec-14 | 3-Jan-16 | 1-Jan-17 | 31-Dec-17 | 30-Dec-18 | ||||||||||||||||||
PerkinElmer, Inc. | $ | 100.00 | $ | 107.71 | $ | 131.70 | $ | 128.91 | $ | 181.56 | $ | 192.59 | |||||||||||
S&P 500 Index | $ | 100.00 | $ | 113.69 | $ | 115.26 | $ | 129.05 | $ | 157.22 | $ | 150.33 | |||||||||||
Peer Group | $ | 100.00 | $ | 111.88 | $ | 123.82 | $ | 125.84 | $ | 174.40 | $ | 193.72 | |||||||||||
22
Item 6. | Selected Financial Data |
The following table sets forth selected historical financial information as of and for each of the fiscal years in the five-year period ended December 30, 2018. We derived the selected historical financial information for the balance sheets for the fiscal years ended December 30, 2018 and December 31, 2017 and the statement of operations for each of the fiscal years in the three-year period ended December 30, 2018 from our audited consolidated financial statements which are included elsewhere in this annual report on Form 10-K. We derived the selected historical financial information for the statements of operations for the fiscal years ended January 3, 2016 and December 28, 2014 from our audited consolidated financial statements which are not included in this annual report on Form 10-K. We derived the selected historical financial information for the balance sheets as of January 1, 2017, January 3, 2016 and December 28, 2014 from our audited consolidated financial statements which are not included in this annual report on Form 10-K.
Our historical financial information may not be indicative of our future results of operations or financial position.
The following selected historical financial information should be read together with our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the related notes, included elsewhere in this annual report on Form 10-K.
Fiscal Years Ended | |||||||||||||||||||
December 30, 2018 | December 31, 2017 | January 1, 2017 | January 3, 2016 | December 28, 2014 | |||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||
Statement of Operations Data: | |||||||||||||||||||
Revenue(1) | $ | 2,777,996 | $ | 2,256,982 | $ | 2,115,517 | $ | 2,104,823 | $ | 2,069,880 | |||||||||
Operating income from continuing operations(2)(3) | 323,884 | 295,615 | 294,582 | 258,517 | 240,287 | ||||||||||||||
Interest and other expense, net(4) | 66,201 | (1,103 | ) | 50,514 | 49,710 | 116,419 | |||||||||||||
Income from continuing operations before income taxes | 257,683 | 296,718 | 244,068 | 208,807 | 123,868 | ||||||||||||||
Income from continuing operations, net of income taxes(5) | 237,475 | 156,890 | 215,706 | 188,785 | 130,139 | ||||||||||||||
Income from discontinued operations and dispositions, net of income taxes(6) | 452 | 135,743 | 18,593 | 23,640 | 27,639 | ||||||||||||||
Net income | $ | 237,927 | $ | 292,633 | $ | 234,299 | $ | 212,425 | $ | 157,778 | |||||||||
Basic earnings per share: | |||||||||||||||||||
Continuing operations | $ | 2.15 | $ | 1.43 | $ | 1.97 | $ | 1.68 | $ | 1.16 | |||||||||
Discontinued operations | 0.00 | 1.24 | 0.17 | 0.21 | 0.25 | ||||||||||||||
Net income | $ | 2.15 | $ | 2.66 | $ | 2.14 | $ | 1.89 | $ | 1.40 | |||||||||
Diluted earnings per share: | |||||||||||||||||||
Continuing operations | $ | 2.13 | $ | 1.42 | $ | 1.96 | $ | 1.67 | $ | 1.14 | |||||||||
Discontinued operations | 0.00 | 1.22 | 0.17 | 0.21 | 0.24 | ||||||||||||||
Net income | $ | 2.13 | $ | 2.64 | $ | 2.12 | $ | 1.87 | $ | 1.39 | |||||||||
Weighted-average common shares outstanding: | |||||||||||||||||||
Basic: | 110,561 | 109,857 | 109,478 | 112,507 | 112,593 | ||||||||||||||
Diluted: | 111,534 | 110,859 | 110,313 | 113,315 | 113,739 | ||||||||||||||
Cash dividends declared per common share | $ | 0.28 | $ | 0.28 | $ | 0.28 | $ | 0.28 | $ | 0.28 | |||||||||
23
As of | |||||||||||||||||||
December 30, 2018 | December 31, 2017 | January 1, 2017 | January 3, 2016 | December 28, 2014 | |||||||||||||||
(In thousands) | |||||||||||||||||||
Balance Sheet Data: | |||||||||||||||||||
Total assets | $ | 5,975,522 | $ | 6,091,463 | $ | 4,276,683 | $ | 4,166,295 | $ | 4,127,576 | |||||||||
Short-term debt | 14,856 | 217,306 | 1,172 | 1,123 | 1,075 | ||||||||||||||
Long-term debt(4)(7) | 1,876,624 | 1,788,803 | 1,045,254 | 1,011,762 | 1,045,393 | ||||||||||||||
Stockholders’ equity(1)(2)(8) | 2,584,955 | 2,503,188 | 2,153,570 | 2,110,441 | 2,042,102 | ||||||||||||||
Common shares outstanding(8) | 110,597 | 110,361 | 109,617 | 112,034 | 112,481 | ||||||||||||||
(1) | At the beginning of fiscal year 2018, we adopted Accounting Standards Codification No. 606, Revenue from Contracts with Customers ("ASC 606"), using a modified retrospective approach and as a result, the comparative information has not been restated and is reported under the accounting standards in effect for these years. See Note 1 to the Consolidated Financial Statements for additional information. |
(2) | Activity related to the mark-to-market adjustment on postretirement benefit plans was a pre-tax loss of $21.4 million in fiscal year 2018, a pre-tax gain of $2.1 million in fiscal year 2017, a pre-tax loss of $15.3 million in fiscal year 2016, a pre-tax loss of $12.4 million in fiscal year 2015 and a pre-tax loss of $75.4 million in fiscal year 2014. |
(3) | We recorded pre-tax restructuring and contract termination charges, net, of $11.1 million in fiscal year 2018, $12.7 million in fiscal year 2017, $5.1 million in fiscal year 2016, $13.5 million in fiscal year 2015 and $13.3 million in fiscal year 2014. |
(4) | In fiscal years 2018, 2017, 2016, 2015 and 2014, interest expense was $67.0 million, $43.9 million, $41.5 million, $38.0 million and $36.3 million, respectively. |
(5) | In fiscal years 2018 and 2017, provision for income tax on continuing operations was $20.2 million and $139.8 million, respectively. The higher provision for income taxes in fiscal year 2017 compared to that of fiscal year 2018 was primarily due to the $106.5 million discrete tax expense related to the Tax Cuts & Jobs Act of 2017. In fiscal years 2016, 2015 and 2014, tax expense (benefit) on continuing operations was $28.4 million, $20.0 million and $(6.3) million, respectively. The tax expense in fiscal years 2016 and 2015 was primarily due to income in high tax rate jurisdictions, partially offset by losses in low tax rate jurisdictions and a tax benefit of $9.6 million in fiscal year 2016 and $6.4 million in fiscal year 2015 related to discrete items. The benefit from income taxes in fiscal year 2014 was primarily due to a tax benefit of $7.1 million related to discrete items and losses in high tax rate jurisdictions, partially offset by provision for income taxes related to profits in low tax rate jurisdictions. |
(6) | In May 2017, we completed the sale of our Medical Imaging business. We recorded a pre-tax gain of $179.6 million and income tax expense of $43.1 million in fiscal year 2017. We accounted for this business as discontinued operations beginning in 2016 and the financial information relating to fiscal years 2015 and 2014 has been retrospectively adjusted to reflect the inclusion of this business in discontinued operations. |
(7) | In April 2018, we issued and sold three-year senior notes at a rate of 0.6% with a face value of €300.0 million and received €298.7 million of net proceeds from the issuance. The debt, which matures in April 2021, is unsecured. In July 2016, we issued and sold ten-year senior notes at a rate of 1.875% with a face value of €500.0 million and received €492.3 million of net proceeds from the issuance. The debt, which matures in July 2026, is unsecured. |
(8) | In fiscal year 2018, we repurchased in the open market 650,000 shares of our common stock at an aggregate cost of $52.2 million, including commissions, under the stock repurchase program authorized by our Board on July 23, 2018. In fiscal years 2018 and 2017, we did not repurchase any shares of our common stock under a stock repurchase program originally announced in July 2017 that was terminated in July 2018. In fiscal year 2016, we repurchased in the open market 3.2 million shares of our common stock at an aggregate cost of $148.2 million, including commissions under a stock repurchase program originally announced in October 2014 that was terminated in July 2016 (the "October 2014 Repurchase Program"). In fiscal year 2015, we repurchased in the open market 1.5 million shares of our common stock at an aggregate cost of $72.0 million, including commissions, under both the October 2014 Repurchase Program and a stock repurchase program originally announced in October 2012 that expired in October 2014 (the "October 2012 Repurchase Program"). In fiscal year 2014, we repurchased in the open market 1.4 million shares of our common stock at an aggregate cost of $61.3 million, including commissions, under the October 2012 Repurchase Program. 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. |
24
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This annual report on Form 10-K, including the following management’s discussion and analysis, contains forward-looking information that you should read in conjunction with the consolidated financial statements and notes to consolidated financial statements that we have included elsewhere in this annual report on Form 10-K. 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,” “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 above under the heading “Risk Factors” in Item 1A above 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.
Accounting Period
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. Each of the fiscal years ended December 30, 2018 ("fiscal year 2018"), December 31, 2017 ("fiscal year 2017") and January 1, 2017 ("fiscal year 2016") included 52 weeks. The fiscal year ending December 29, 2019 will include 52 weeks.
Overview of Fiscal Year 2018
During fiscal year 2018, we continued to see good performance from acquisitions, investments in our ongoing technology and sales and marketing initiatives. Our overall revenue in fiscal year 2018 increased $521.0 million, or 23%, as compared to fiscal year 2017, reflecting an increase of $114.8 million, or 7%, in our Discovery & Analytical Solutions segment revenue and an increase of $406.3 million, or 60%, in our Diagnostics segment revenue. The increase in our Discovery & Analytical Solutions segment during fiscal year 2018 was due to an increase of $73.5 million from our applied markets revenue and an increase of $41.3 million from our life sciences market revenue. The increase in our Diagnostics segment revenue during fiscal year 2018 was primarily due to our acquisition of EUROIMMUN, which contributed $359.4 million in revenue during fiscal year 2018, as well as continued expansion in our reproductive health, genetic testing, applied genomics and immuno-diagnostics solutions.
In our Discovery & Analytical Solutions segment, we experienced growth during fiscal year 2018 driven by successful new product introductions and an improving macro-environment. We also experienced strong demand for industrial, environmental and food offerings. In the life sciences market, we experienced strength in our drug discovery sales and strong performance in our Informatics business.
In our Diagnostics segment, we experienced growth from our acquisition of EUROIMMUN and continued expansion in our reproductive health, genetic testing, applied genomics, and immuno-diagnostics solutions, particularly in the Americas and emerging markets, such as China and India. We saw strong growth in newborn screening as an increased number of offerings helped to offset the effect of decreased birthrates. During fiscal year 2018, we expanded both the extent and reach of our capabilities to enable earlier treatments and better outcomes, both in terms of diseases and geographies. The acquisition of EUROIMMUN has increased our reagent mix, expanded our technical capabilities and positioned us in more attractive markets.
Our consolidated gross margins increased 70 basis points in fiscal year 2018, as compared to fiscal year 2017, primarily due to favorable shift in product mix and continued productivity initiatives to improve our supply chain. Our consolidated operating margin decreased 144 basis points in fiscal year 2018, as compared to fiscal year 2017 primarily due to increased amortization of intangible assets and acquired inventory revaluation, increased costs related to investments in new product development partially offset by lower costs as a result of cost containment and productivity initiatives.
We continue to believe that we are well positioned to take advantage of the spending trends in our end markets and to promote 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.
25
Consolidated Results of Continuing Operations
Revenue
2018 Compared to 2017. Revenue for fiscal year 2018 was $2,778.0 million, as compared to $2,257.0 million for fiscal year 2017, an increase of $521.0 million, or 23%, which includes an approximate 14% increase in revenue attributable to acquisitions and divestitures and a 1% increase in revenue attributable to changes in foreign exchange rates. The analysis in the remainder of this paragraph compares segment revenue for fiscal year 2018 as compared to fiscal year 2017 and includes the effect of foreign exchange rate fluctuations, and acquisitions and divestitures. The total increase in revenue reflects an increase in our Diagnostics segment revenue of $406.3 million, or 60%, primarily due to our acquisition of EUROIMMUN, which contributed $359.4 million in revenues during fiscal year 2018, and continued expansion in our reproductive health, genetic testing, applied genomics and immuno-diagnostics solutions. Our Discovery & Analytical Solutions segment revenue increased by $114.8 million, or 7%, due to an increase of $73.5 million from our applied markets revenue and an increase of $41.3 million from our life sciences market revenue. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $0.8 million of revenue primarily related to our Diagnostics segment for fiscal year 2018 and $0.7 million for fiscal year 2017 that otherwise would have been recorded by the acquired businesses during each of the respective periods.
2017 Compared to 2016. Revenue for fiscal year 2017 was $2,257.0 million, as compared to $2,115.5 million for fiscal year 2016, an increase of $141.5 million, or 7%, which includes an approximate 2% increase in revenue attributable to acquisitions and divestitures and a minimal increase in revenue attributable to changes in foreign exchange rates. The analysis in the remainder of this paragraph compares segment revenue for fiscal year 2017 as compared to fiscal year 2016 and includes the effect of foreign exchange rate fluctuations and acquisitions and divestitures. The total increase in revenue reflects an increase in our Diagnostics segment revenue of $76.0 million, or 13%, due to continued expansion in our newborn and infectious disease screening solutions and strong growth in applied genomics. Our new acquisitions, EUROIMMUN and Tulip, contributed $13.5 million and $38.5 million, respectively, in revenues during fiscal year 2017. Our Discovery & Analytical Solutions segment revenue increased by $65.5 million, or 4%, due to an increase of $36.2 million from our life sciences market revenue and an increase of $29.3 million from our applied markets revenue. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $0.7 million of revenue primarily related to our Diagnostics segment for each of the fiscal years 2017 and 2016 that otherwise would have been recorded by the acquired businesses during each of the respective periods.
Cost of Revenue
2018 Compared to 2017. Cost of revenue for fiscal year 2018 was $1,437.1 million, as compared to $1,183.2 million for fiscal year 2017, an increase of approximately $253.8 million, or 21%. As a percentage of revenue, cost of revenue decreased to 51.7% in fiscal year 2018 from 52.4% in fiscal year 2017, resulting in an increase in gross margin of approximately 70 basis points to 48.3% in fiscal year 2018 from 47.6% in fiscal year 2017. Amortization of intangible assets increased and was $46.2 million for fiscal year 2018, as compared to $29.3 million for fiscal year 2017. Stock-based compensation expense was $1.5 million for fiscal year 2018, as compared to $1.3 million for fiscal year 2017. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an incremental expense of $19.3 million for fiscal year 2018, as compared to $6.2 million for fiscal year 2017. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $0.1 million for each of fiscal years 2018 and 2017. In addition to the factors noted above, the increase in gross margin was primarily the result of a favorable shift in product mix and benefits from our initiatives to improve our supply chain.
2017 Compared to 2016. Cost of revenue for fiscal year 2017 was $1,183.2 million, as compared to $1,101.2 million for fiscal year 2016, an increase of approximately $82.1 million, or 7%. As a percentage of revenue, cost of revenue increased to 52.4% in fiscal year 2017 from 52.1% in fiscal year 2016, resulting in a decrease in gross margin of approximately 37 basis points to 47.6% in fiscal year 2017 from 47.9% in fiscal year 2016. Amortization of intangible assets decreased and was $29.3 million for fiscal year 2017, as compared to $30.3 million for fiscal year 2016. Stock-based compensation expense was $1.3 million for fiscal year 2017, as compared to $1.0 million for fiscal year 2016. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was $6.2 million for fiscal year 2017, as compared to $0.4 million for fiscal year 2016. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $0.1 million for each of fiscal years 2017 and 2016. In addition to the factors noted above, the decrease in gross margin was primarily the result of an unfavorable shift in product mix partially offset by benefits from our initiatives to improve our supply chain.
26
Selling, General and Administrative Expenses
2018 Compared to 2017. Selling, general and administrative expenses for fiscal year 2018 were $811.9 million, as compared to $626.0 million for fiscal year 2017, an increase of approximately $185.9 million, or 30%. As a percentage of revenue, selling, general and administrative expenses increased to 29.2% in fiscal year 2018 from 27.7% in fiscal year 2017. Amortization of intangible assets increased to $81.8 million for fiscal year 2018, as compared to $44.1 million for fiscal year 2017. Stock-based compensation expense increased to $25.9 million for fiscal year 2018, as compared to $22.8 million for fiscal year 2017. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $30.5 million for fiscal year 2018 as compared to $29.0 million for fiscal year 2017. During fiscal year 2018, legal costs for significant litigation matters were $5.5 million, as compared to $2.7 million for fiscal year 2017. In addition to the above items, the increase in selling, general and administrative expenses was primarily due to our acquisition of EUROIMMUN, which was partially offset by lower costs as a result of cost containment and productivity initiatives.
2017 Compared to 2016. Selling, general and administrative expenses for fiscal year 2017 were $626.0 million, as compared to $590.5 million for fiscal year 2016, an increase of approximately $35.5 million, or 6%. As a percentage of revenue, selling, general and administrative expenses decreased to 27.7% in fiscal year 2017, compared to 27.9% in fiscal year 2016. Amortization of intangible assets increased and was $44.1 million for fiscal year 2017, as compared to $40.7 million for fiscal year 2016. Stock-based compensation expense increased and was $22.8 million for fiscal year 2017, as compared to $15.2 million for fiscal year 2016. During fiscal year 2017, we recorded $2.7 million in legal costs for a particular case. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $29.0 million for fiscal year 2017 as compared to $17.5 million for fiscal year 2016. 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 the result of lower costs as a result of cost containment and productivity initiatives.
Research and Development Expenses
2018 Compared to 2017. Research and development expenses for fiscal year 2018 were $194.0 million, as compared to $139.5 million for fiscal year 2017, an increase of $54.5 million, or 39%. As a percentage of revenue, research and development expenses increased to 7.0% in fiscal year 2018, as compared to 6.2% in fiscal year 2017. Amortization of intangible assets was $7.9 million in fiscal year 2018, as compared to $0.3 million in fiscal year 2017. Stock-based compensation expense was $1.4 million in each of fiscal years 2018 and 2017. In addition to the above items, the increase in research and development expenses was primarily the result of investments in new product development and our acquisition of EUROIMMUN, which were partially offset by lower costs as a result of cost containment and productivity initiatives.
2017 Compared to 2016. Research and development expenses for fiscal year 2017 were $139.5 million, as compared to $124.2 million for fiscal year 2016, an increase of $15.3 million, or 12%. As a percentage of revenue, research and development expenses increased to 6.2% in fiscal year 2017, as compared to 5.9% in fiscal year 2016. Amortization of intangible assets was $0.3 million for each of fiscal years 2017 and 2016. Stock-based compensation expense increased and was $1.4 million for fiscal year 2017, as compared to $0.9 million for fiscal year 2016. In addition to the above items, the increase in research and development expenses was in large part the result of investments in new product development, primarily our investments in Vanadis' non-invasive prenatal screening and ionics mass spectrometry's food and environmental safety applications. This was partially offset by lower costs as a result of cost containment and productivity 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 productivity initiatives. Restructuring and contract termination charges for fiscal year 2018 were $11.1 million, as compared to $12.7 million for fiscal year 2017 and $5.1 million for fiscal year 2016.
We implemented a restructuring plan in each of the first, third and fourth quarters of fiscal year 2018 consisting of workforce reductions principally intended to realign resources to emphasize growth initiatives (the "Q1 2018 Plan", "Q3 2018 Plan" and "Q4 2018 Plan", respectively). We implemented a restructuring plan in each of the fourth and third quarters of fiscal year 2017 consisting of workforce reductions principally intended to realign resources to emphasize growth initiatives (the "Q4 2017 Plan and "Q3 2017 Plan", respectively). We implemented a restructuring plan in the first quarter of fiscal year 2017 consisting of workforce reductions and the closure of excess facility space principally intended to focus resources on higher growth end markets (the "Q1 2017 Plan"). 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"). All other previous restructuring plans were workforce reductions or the closure of excess facility space principally intended to integrate our businesses in order to realign
27
operations, reduce costs, achieve operational efficiencies and shift resources into geographic regions and end markets that are more consistent with our growth strategy (the "Previous Plans").
The following table summarizes the number of employees reduced, the initial restructuring or contract termination charges by operating segment, and the dates by which payments were substantially completed, or the expected dates by which payments will be substantially completed, for restructuring actions implemented during fiscal years 2018, 2017 and 2016 in continuing operations:
Workforce Reductions | Closure of Excess Facility | Total | (Expected) Date Payments Substantially Completed by | |||||||||||||||||||||||
Headcount Reduction | Diagnostics | Discovery & Analytical Solutions | Diagnostics | Discovery & Analytical Solutions | Severance | Excess Facility | ||||||||||||||||||||
(In thousands, except headcount data) | ||||||||||||||||||||||||||
Q4 2018 Plan | 1 | $ | — | $ | 348 | $ | — | $ | — | $ | 348 | Q1 FY2019 | — | |||||||||||||
Q3 2018 Plan | 61 | 618 | 1,146 | — | — | 1,764 | Q2 FY2019 | — | ||||||||||||||||||
Q1 2018 Plan | 47 | 902 | 5,096 | — | — | 5,998 | Q2 FY2019 | — | ||||||||||||||||||
Q4 2017 Plan | 29 | 255 | 1,680 | — | — | 1,935 | Q1 FY2019 | — | ||||||||||||||||||
Q3 2017 Plan | 27 | 1,021 | 1,321 | — | — | 2,342 | Q4 FY2018 | — | ||||||||||||||||||
Q1 2017 Plan | 90 | 1,631 | 5,000 | 33 | 33 | 6,697 | Q2 FY2018 | Q2 FY2018 | ||||||||||||||||||
Q3 2016 Plan | 22 | 41 | 1,779 | — | — | 1,820 | Q4 FY2017 | — | ||||||||||||||||||
Q2 2016 Plan | 72 | 561 | 4,106 | — | — | 4,667 | Q3 FY2017 | — | ||||||||||||||||||
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 have terminated various contractual commitments in connection with certain disposal activities and have 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 $5.0 million, $3.6 million and $0.1 million in the Discovery & Analytical Solutions segment during fiscal years 2018, 2017 and 2016, respectively, and $0.5 million during fiscal year 2017 in the Diagnostics segment as a result of these contract terminations.
28
At December 30, 2018, we had $6.2 million recorded for accrued restructuring and contract termination charges, of which $4.8 million was recorded in short-term accrued restructuring and $1.4 million was recorded in long-term liabilities. At December 31, 2017, we had $14.0 million recorded for accrued restructuring and contract termination charges, of which $8.8 million was recorded in short-term accrued restructuring, $2.3 million was recorded in long-term liabilities and $2.9 million was recorded in other reserves. The following table summarizes our restructuring accrual balances and related activity by restructuring plan, as well as contract termination accrual balances and related activity, during fiscal years 2018, 2017 and 2016 in continuing operations:
Balance at January 3, 2016 | 2016 Charges and Changes in Estimates, Net | 2016 Amounts Paid | Balance at January 1, 2017 | 2017 Charges and Changes in Estimates, Net | 2017 Amounts Paid | Balance at December 31, 2017 | 2018 Charges and Changes in Estimates, Net | 2018 Amounts Paid | Balance at December 30, 2018 | ||||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||||||||
Severance: | |||||||||||||||||||||||||||||||||||||||||
Q4 2018 Plan | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 348 | $ | — | $ | 348 | |||||||||||||||||||||
Q3 2018 Plan | — | — | — | — | — | — | — | 2,054 | (639 | ) | 1,415 | ||||||||||||||||||||||||||||||
Q1 2018 Plan | — | — | — | — | — | — | — | 5,998 | (4,389 | ) | 1,609 | ||||||||||||||||||||||||||||||
Q4 2017 Plan(1) | — | — | — | — | 1,935 | (16 | ) | 1,919 | (381 | ) | (1,538 | ) | — | ||||||||||||||||||||||||||||
Q3 2017 Plan(2) | — | — | — | — | 2,342 | (270 | ) | 2,072 | (1,204 | ) | (868 | ) | — | ||||||||||||||||||||||||||||
Q1 2017 Plan(3) | — | — | — | — | 6,631 | (4,133 | ) | 2,498 | (983 | ) | (1,232 | ) | 283 | ||||||||||||||||||||||||||||
Q3 2016 Plan | — | 1,820 | (612 | ) | 1,208 | (202 | ) | (1,006 | ) | — | — | — | — | ||||||||||||||||||||||||||||
Q2 2016 Plan | — | 4,667 | (3,231 | ) | 1,436 | (829 | ) | (607 | ) | — | 232 | (156 | ) | 76 | |||||||||||||||||||||||||||
Facility: | |||||||||||||||||||||||||||||||||||||||||
Q1 2017 Plan | — | — | — | — | 66 | (33 | ) | 33 | — | (33 | ) | — | |||||||||||||||||||||||||||||
Previous Plans | 22,018 | (1,451 | ) | (12,787 | ) | 7,780 | (537 | ) | (2,844 | ) | 4,399 | 338 | (2,425 | ) | 2,312 | ||||||||||||||||||||||||||
Restructuring | 22,018 | 5,036 | (16,630 | ) | 10,424 | 9,406 | (8,909 | ) | 10,921 | 6,402 | (11,280 | ) | 6,043 | ||||||||||||||||||||||||||||
Contract Termination | 132 | 88 | (103 | ) | 117 | 3,251 | (320 | ) | 3,048 | 4,742 | (7,653 | ) | 137 | ||||||||||||||||||||||||||||
Total Restructuring and Contract Termination | $ | 22,150 | $ | 5,124 | $ | (16,733 | ) | $ | 10,541 | $ | 12,657 | $ | (9,229 | ) | $ | 13,969 | $ | 11,144 | $ | (18,933 | ) | $ | 6,180 | ||||||||||||||||||
____________________________
(1) | During fiscal year 2018, we recognized pre-tax restructuring reversals of $0.2 million each in the Discovery & Analytical Solutions and Diagnostics segments, related to lower than expected costs associated with workforce reductions for the Q4 2017 Plan. |
(2) | During fiscal year 2018, we recognized pre-tax restructuring reversals of $0.8 million in the Discovery & Analytical Solutions segment and $0.4 million in the Diagnostics segment, related to lower than expected costs associated with workforce reductions for the Q3 2017 Plan. |
(3) | During fiscal year 2018, we recognized pre-tax restructuring reversals of $1.0 million in the Discovery & Analytical Solutions segment, related to lower than expected costs associated with workforce reductions for the Q1 2017 Plan. |
29
Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
December 30, 2018 | December 31, 2017 | January 1, 2017 | |||||||||
(In thousands) | |||||||||||
Interest income | $ | (1,141 | ) | $ | (2,571 | ) | $ | (702 | ) | ||
Interest expense | 66,976 | 43,940 | 41,528 | ||||||||
(Gain) loss on disposition of businesses and assets, net | (12,844 | ) | 309 | (5,562 | ) | ||||||
Other expense (income) , net | 13,210 | (42,781 | ) | 15,250 | |||||||
Total interest and other expense, net | $ | 66,201 | $ | (1,103 | ) | $ | 50,514 | ||||
2018 Compared to 2017. Interest and other expense, net, for fiscal year 2018 was an expense of $66.2 million, as compared to income of $1.1 million for fiscal year 2017, an increase of $67.3 million. The increase in interest and other expense, net, in fiscal year 2018 as compared to fiscal year 2017 was largely due to an increase in other expense, net of $56.0 million resulting from a one-time non-recurring net foreign exchange gain of $36.5 million in fiscal year 2017 related to remeasurement and settlement of EUROIMMUN pre-acquisition hedges, combined with an increase in pension-related expenses of $20.7 million in fiscal year 2018 as compared to fiscal year 2017. Interest expense increased by $23.0 million in fiscal year 2018 as compared to fiscal year 2017 primarily due to a higher outstanding total debt balance, beginning in the fourth quarter of fiscal year 2017, related to financing for the EUROIMMUN acquisition. Gain on disposition of businesses and assets, net increased $13.2 million in fiscal year 2018 as compared to fiscal year 2017 primarily due to sale of our multi-spectral imaging business in fiscal year 2018. Interest income decreased $1.4 million in fiscal year 2018 as compared to fiscal year 2017 due to the deployment of the cash proceeds realized from the sale of our Medical Imaging business in the second quarter of fiscal year 2017 that were initially invested, and subsequently utilized in the fourth quarter of fiscal year 2017 to support the settlement of the EUROIMMUN acquisition. A more complete discussion of our liquidity is set forth below under the heading “Liquidity and Capital Resources.”
2017 Compared to 2016. Interest and other expense, net, for fiscal year 2017 was income of $1.1 million, as compared to an expense of $50.5 million for fiscal year 2016, a decrease of $51.6 million. The decrease in interest and other expense, net, in fiscal year 2017 as compared to fiscal year 2016 was largely due to a decrease in other expense, net by $58.0 million, which consists primarily of net foreign exchange gain of $36.5 million in fiscal year 2017 related to remeasurement and settlement of the EUROIMMUN pre-acquisition hedges, combined with a decrease in pension-related expenses of $20.7 million in fiscal year 2017 as compared to fiscal year 2016, and an increase in interest income of $1.9 million in fiscal year 2017 as compared to fiscal year 2016. Interest income increased primarily due to investing the proceeds from the sale of our Medical Imaging business in money market mutual funds. This was partially offset by a net loss on disposition of businesses and assets, net of $0.3 million in fiscal year 2017 as compared to a net gain of $5.6 million in fiscal year 2016 and an increase in interest expense of $2.4 million in fiscal year 2017 as compared to fiscal year 2016 due to the issuance of the 2026 Notes, the proceeds of which were deployed to paydown our lower cost debt outstanding on our previous senior unsecured revolving credit facility.
Provision for Income Taxes
The effective tax rates on continuing operations were 7.8%, 47.1% and 11.6% for fiscal years 2018, 2017 and 2016, respectively. Certain of our subsidiaries have, at various times, been granted tax relief in their respective countries, resulting in lower income taxes than would otherwise be the case under ordinary tax rates. A reconciliation of income tax expense at the U.S. federal statutory income tax rate to the recorded tax provision is as follows for the fiscal years ended:
30
December 30, 2018 | December 31, 2017 | January 1, 2017 | |||||||||
(In thousands) | |||||||||||
Tax at statutory rate | $ | 54,114 | $ | 103,851 | $ | 85,424 | |||||
Non-U.S. rate differential, net | (27,281 | ) | (65,836 | ) | (52,648 | ) | |||||
U.S. taxation of multinational operations | 7,047 | 5,408 | 6,941 | ||||||||
State income taxes, net | 2,028 | 1,810 | 1,509 | ||||||||
Prior year tax matters | (6,034 | ) | (7,955 | ) | (9,621 | ) | |||||
Federal tax credits | (3,738 | ) | (8,249 | ) | (7,189 | ) | |||||
Change in valuation allowance | (759 | ) | 1,951 | (2,755 | ) | ||||||
Non-deductible acquisition expense | — | — | 5,701 | ||||||||
Impact of federal tax reform | (2,025 | ) | 106,538 | — | |||||||
Others, net | (3,144 | ) | 2,310 | 1,000 | |||||||
Total | $ | 20,208 | $ | 139,828 | $ | 28,362 | |||||
The variation in our effective tax rate for each year is primarily a result of the recognition of earnings in foreign jurisdictions, predominantly Singapore, Finland and The Netherlands, which are taxed at rates lower than the U.S. federal statutory rate, resulting in a benefit from income taxes of $18.7 million in fiscal year 2018, $55.9 million in fiscal year 2017 and $48.2 million in fiscal year 2016. These amounts include $10.3 million in fiscal year 2018, $10.1 million in fiscal year 2017 and $11.4 million in fiscal year 2016 of benefits derived from tax holidays in China and Singapore. The effect of these benefits derived from tax holidays on basic and diluted earnings per share for fiscal year 2018 was $0.09 and $0.09, respectively, for fiscal year 2017 was $0.09 and $0.09, respectively, and for fiscal year 2016 was $0.10 and $0.10, respectively. The tax holiday in one of our subsidiaries in China expired in 2017 and the tax holiday in one other subsidiary in China is scheduled to expire in fiscal year 2019. The tax holiday in one of our subsidiaries in Singapore is scheduled to expire in fiscal year 2023.
On December 22, 2017, the President of the United States signed into law tax reform legislation, known as the Tax Cuts and Jobs Act (the "Tax Act"), which makes broad and complex changes to the U.S. Internal Revenue Code. Changes include, but are not limited to: (1) the lowering of the U.S. corporate tax rate from 35% to 21%; (2) the transition of U.S. international taxation from a worldwide tax system to a modified territorial system with a one-time transition tax on the deemed repatriation of cumulative foreign earnings as of December 31, 2017; (3) a new provision designed to tax global intangible low-taxed income (GILTI); (4) the creation of the base erosion anti-abuse tax (BEAT), which is effectively a new minimum tax; (5) the deduction for foreign-derived intangible income (FDII); (6) a new limitation on deductible interest expense; (7) the repeal of the domestic production activity deduction; and (8) limitations on the deductibility of certain executive compensation. The impacts of the Tax Act have been recorded in tax expense from continuing operations, and the details are discussed more fully in Note 8, Income Taxes, in the Notes to Consolidated Financial Statements.
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 represented 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, have 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 Accounting Standards Update 2014-08, 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 consolidated balance sheets as of December 30, 2018 and December 31, 2017.
31
We recorded the following pre-tax gains and losses, which have been reported as a net gain or loss on disposition of discontinued operations during the three fiscal years included below:
December 30, 2018 | December 31, 2017 | January 1, 2017 | |||||||||
(In thousands) | |||||||||||
(Loss) gain on disposition of the Medical Imaging business | $ | (793 | ) | $ | 179,615 | $ | — | ||||
Gain on disposition of Technical Services business | — | — | 1,753 | ||||||||
Loss on disposition of Fluid Sciences Segment | (66 | ) | — | (1,134 | ) | ||||||
(Loss) gain on disposition of discontinued operations before income taxes | $ | (859 | ) | $ | 179,615 | $ | 619 | ||||
On May 1, 2017 (the "Closing Date"), we completed the sale of our Medical Imaging business to Varex Imaging Corporation ("Varex") pursuant to the terms of the Master Purchase and Sale Agreement, dated December 21, 2016 (the “Agreement”), by and between us and Varian Medical Systems, Inc. ("Varian") and the subsequent Assignment and Assumption Agreement, dated January 27, 2017, between Varian and Varex, pursuant to which Varian assigned its rights under the Agreement to Varex. On the Closing Date, we received consideration of approximately $277.4 million for the sale of the Medical Imaging business. During fiscal year 2017, we paid Varex $4.2 million to settle a post-closing working capital adjustment. During fiscal year 2017, we recorded a pre-tax gain of $179.6 million and income tax expense of $43.1 million related to the sale of the Medical Imaging business in discontinued operations and dispositions. The corresponding tax liability was recorded within the other tax liabilities in the consolidated balance sheet, and we expect to utilize tax attributes to minimize the tax liability. Following the closing, we provided certain customary transitional services during a period of up to 12 months. Commercial transactions between the parties following the closing of the transaction were not significant.
During the third quarter of fiscal year 2018, we completed the sale of substantially all of the assets and liabilities related to our multispectral imaging business for aggregate consideration of $37.3 million, recognizing a pre-tax gain of $13.0 million. The pre-tax gain is included in interest and other expense, net in the consolidated statement of operations. The multispectral imaging business was a component of our Discovery & Analytical Solutions segment. The divestiture of the multispectral imaging business has not been classified as a discontinued operation in this Form 10-K because the disposition does not represent a strategic shift that will have a major effect on our operations and financial statements.
During fiscal year 2017, we sold Suzhou PerkinElmer Medical Laboratory Co., Ltd. for aggregate consideration of $2.3 million, recognizing a pre-tax loss of $1.1 million. The pre-tax loss recognized in fiscal year 2017 is included in interest and other expense, net in the consolidated statement of operations. Suzhou PerkinElmer Medical Laboratory Co., Ltd. was a component of our Diagnostics segment. The divestiture of Suzhou PerkinElmer Medical Laboratory Co., Ltd. has not been classified as a discontinued operation in this Form 10-K because the disposition does not represent a strategic shift that will have a major effect on our operations and financial statements.
During fiscal year 2016, we sold PerkinElmer Labs, Inc. for cash consideration of $20.0 million, 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. During fiscal year 2017, we recognized an additional pre-tax gain of $1.1 million relating to the earn-out consideration received from the buyer. PerkinElmer Labs, Inc. was a component of our Diagnostics segment. The pre-tax gain recognized in fiscal years 2017 and 2016 is included in interest and other expense, net in the consolidated statements of operations. The divestiture of PerkinElmer Labs, Inc. has not been classified as a discontinued operation in this Form 10-K because the disposition does not represent a strategic shift that will have a major effect on our operations and financial statements.
In August 1999, we sold the assets of our Technical Service business. We recorded a pre-tax gain of $1.8 million in fiscal year 2016 for a contingency related to this business. This was recognized as a gain on disposition of discontinued operations before income taxes.
The summary pre-tax operating results of the discontinued operations were as follows during the three fiscal years ended:
32
December 30, 2018 | December 31, 2017 | January 1, 2017 | |||||||||
(In thousands) | |||||||||||
Revenue | $ | — | $ | 44,343 | $ | 146,217 | |||||
Cost of revenue | — | 32,933 | 95,395 | ||||||||
Selling, general and administrative expenses | — | 5,869 | 13,657 | ||||||||
Research and development expenses | — | 4,891 | 14,368 | ||||||||
Restructuring and contract termination charges, net | — | — | 568 | ||||||||
Income from discontinued operations before income taxes | $ | — | $ | 650 | $ | 22,229 | |||||
We recorded a (benefit from) provision for income taxes of $(1.3) million, $44.5 million and $4.3 million on discontinued operations and dispositions in fiscal years 2018, 2017 and 2016.
Business Combinations
Acquisitions in fiscal year 2018
During fiscal year 2018, we completed the acquisition of four businesses for aggregate consideration of $106.0 million. The excess of the purchase price over the fair value of the acquired businesses' net assets represents cost and revenue synergies specific to us, as well as non-capitalizable intangible assets, such as the employee workforces acquired, and has been allocated to goodwill, which is not tax deductible. We reported the operations for these acquisitions within the results of our Diagnostics and Discovery & Analytical Solutions segments, as applicable, 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 a weighted average amortization period of 11.2 years.
Acquisitions in fiscal year 2017
Acquisition of EUROIMMUN Medizinische Labordiagnostika AG. During fiscal year 2017, we completed the acquisition of 99.98% of the outstanding stock of EUROIMMUN Medizinische Labordiagnostika AG (“EUROIMMUN”) for aggregate consideration of €1.2 billion (equivalent to $1.4 billion at December 19, 2017, the time of closing). The purchase price was funded by borrowings from our senior unsecured revolving credit facility and senior unsecured term loan credit facility of $710.0 million and $200.0 million, respectively, and available cash on hand of $503.1 million. The excess of the purchase price over the fair value of the acquired net assets represents cost and revenue synergies specific to us, as well as non-capitalizable intangible assets, such as the employee workforce acquired. As a result of the acquisition, we recorded goodwill of $591.3 million, which is not tax deductible, and intangible assets of $907.4 million. We reported the operations for this acquisition within the results of our Diagnostics segment from the acquisition date. Identifiable definite-lived intangible assets, such as core technology, trade names and customer relationships, acquired as part of this acquisition had a weighted average amortization period of 16.1 years.
Other acquisitions in 2017. During fiscal year 2017, we also completed the acquisition of two other businesses for aggregate consideration of $142.0 million. The acquired businesses were Tulip Diagnostics Private Limited (“Tulip”), which was acquired for total consideration of $127.3 million in cash and one other business acquired for total consideration of $14.7 million in cash. At the time of closing, we had a potential obligation to pay the former shareholders of Tulip up to INR1.6 billion in additional consideration over a two year period, equivalent to $25.2 million, and is accounted for as compensation expense in our financial statements over a two year period and is excluded from the purchase price allocation shown below. The excess of the purchase prices over the fair values of the acquired businesses' net assets represents cost and revenue synergies specific to us, as well as non-capitalizable intangible assets, such as the employee workforces acquired, and has been allocated to goodwill, which is not tax deductible. We reported the operations of Tulip within the results of our Diagnostics segment and the other acquired business within the results of our Discovery & Analytical Solutions segment from the acquisition date. Identifiable definite-lived intangible assets, such as core technology, trade names and customer relationships, acquired as part of these acquisitions had a weighted average amortization period of 11.8 years.
During fiscal year 2018, we paid the former shareholders of Tulip a portion of the additional consideration amounting to INR716.3 million (equivalent to $11.3 million). As of December 30, 2018, we may have to pay the former shareholders of Tulip additional consideration of up to INR803.6 million (currently equivalent to $11.4 million) in the first quarter of fiscal year 2019.
33
Acquisitions in fiscal year 2016
During fiscal year 2016, we completed the acquisition of two businesses for total consideration of $72.3 million in cash. The acquired businesses were Bioo Scientific Corporation, which was acquired for total consideration of $63.5 million in cash and one other business acquired for 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 us, as well as non-capitalizable intangible assets, such as the employee workforces acquired. As a result of the acquisitions, we recorded goodwill of $43.1 million, which is not tax deductible, and intangible assets of $22.1 million. We have reported the operations for these acquisitions within the results of our Diagnostics and Discovery & Analytical Solutions 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 a weighted average amortization period of 9.4 years.
We do not consider the acquisitions completed during fiscal years 2018, 2017 and 2016, with the exception of the EUROIMMUN acquisition, to be material to our consolidated results of operations; therefore, we are only presenting pro forma financial information of operations for the EUROIMMUN acquisition. The aggregate revenue and the results of operations for the acquisitions completed during fiscal year 2018 for the period from their acquisition dates to December 30, 2018 were not material. The aggregate revenue for the acquisitions, with the exception of EUROIMMUN, completed during fiscal year 2017 for the period from their acquisition dates to December 31, 2017 was $38.5 million and the results of operations were not material. The aggregate revenue and results of operations for the acquisitions completed during fiscal year 2016 for the period from their respective acquisition dates to January 1, 2017 were minimal. We also determined that the presentation of the results of operations for each of those acquisitions, from the date of acquisition, is impracticable due to the integration of the operations upon acquisition.
As of December 30, 2018, the allocations of purchase prices for acquisitions completed in fiscal years 2017 and 2016 were final. The preliminary allocations of the purchase prices for acquisitions completed in fiscal year 2018 were based upon initial valuations. Our estimates and assumptions underlying the initial valuations are subject to the collection of information necessary to complete our 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. We expect 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, we 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.
During fiscal year 2018, we obtained information relevant to determining the fair values of certain tangible and intangible assets acquired, and liabilities assumed, related to recent acquisitions and adjusted our purchase price allocations. Based on this information, for the EUROIMMUN acquisition, we recognized an increase in intangible assets of $10.0 million, an increase in other assets of $21.7 million, an increase in liabilities assumed of $12.3 million, a decrease in property and equipment of $20.1 million, a decrease in deferred tax liabilities of $23.6 million, and a decrease in goodwill of $23.5 million.
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 or product development milestones during the earnout period.
As of December 30, 2018, we may have to pay contingent consideration, related to acquisitions with open contingency periods, of up to $76.5 million. As of December 30, 2018, we have recorded contingent consideration obligations of $69.7 million, of which $67.0 million was recorded in accrued expenses and other current liabilities, and $2.7 million was recorded in long-term liabilities. As of December 31, 2017, we have recorded contingent consideration obligations of $65.3 million, of which $52.2 million was recorded in accrued expenses and other current liabilities, and $13.1 million was recorded in long-
34
term liabilities. The expected maximum earnout period for acquisitions with open contingency periods does not exceed 1.78 years from December 30, 2018, and the remaining weighted average expected earnout period at December 30, 2018 was 5 months. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the 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.
In connection with the purchase price allocations for acquisitions, we estimate the fair value of deferred revenue assumed with our acquisitions. The estimated fair value of deferred revenue is determined by the legal performance obligation at the date of acquisition, and is generally based on the nature of the activities to be performed and the related costs to be incurred after the acquisition date. The fair value of an assumed liability related to deferred revenue is estimated based on the current market cost of fulfilling the obligation, plus a normal profit margin thereon. The estimated costs to fulfill the deferred revenue are based on the historical direct costs related to providing the services. We do not include any costs associated with selling effort, research and development, or the related margins on these costs. In most acquisitions, profit associated with selling effort is excluded because the acquired businesses would have concluded the selling effort on the support contracts prior to the acquisition date. The estimated research and development costs are not included in the fair value determination, as these costs are not deemed to represent a legal obligation at the time of acquisition. The sum of the costs and operating income approximates, in theory, the amount that we would be required to pay a third-party to assume the obligation.
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 $7.9 million and $9.4 million as of December 30, 2018 and December 31, 2017, respectively, in accrued expenses and other current liabilities, 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. 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 consolidated financial statements. While it is possible that a loss exceeding the amounts recorded in the consolidated financial statements may be incurred, the potential exposure is not expected to be materially different from those amounts recorded.
Various tax years after 2010 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 December 30, 2018 should not have a material adverse effect on our consolidated financial statements included in this annual report on Form 10-K. 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
Discovery & Analytical Solutions
2018 Compared to 2017. Revenue for fiscal year 2018 was $1,693.2 million, as compared to $1,578.5 million for fiscal year 2017, an increase of $114.8 million, or 7%, which includes an approximate 1% increase in revenue attributable to changes in foreign exchange rates. The analysis in the remainder of this paragraph compares revenue by end-market for fiscal year 2018, as compared to fiscal year 2017, and includes the effect of foreign exchange fluctuations and acquisitions and
35
divestitures. The increase in revenue in our Discovery & Analytical Solutions segment was a result of an increase of $73.5 million from our applied markets revenue, and an increase of $41.3 million from our life sciences market revenue. The increase in our applied markets revenue was driven by strength in sales of industrial, environmental and food offerings. The increase in our life sciences market revenue was driven by strength in our drug discovery sales and strong performance in our Informatics business.
Operating income from continuing operations for fiscal year 2018 was $230.5 million, as compared to $205.3 million for fiscal year 2017, an increase of $25.2 million, or 12%. Amortization of intangible assets decreased to $46.1 million for fiscal year 2018 as compared to $50.7 million for fiscal year 2017. Restructuring and contract termination charges, net decreased to $10.0 million for fiscal year 2018 as compared to $10.4 million for fiscal year 2017. Acquisition and divestiture-related costs, contingent consideration and other costs added an incremental expense of $3.1 million for fiscal year 2018, as compared to $0.4 million for fiscal year 2017. Legal costs for significant litigation matters were $5.3 million for fiscal year 2018, as compared to $2.7 million for fiscal year 2017. In addition to the factors noted above, operating income increased for fiscal year 2018 as compared to fiscal year 2017, as we continued to realize the benefits from our cost containment initiatives partially offset by higher costs in research and development expenses.
2017 Compared to 2016. Revenue for fiscal year 2017 was $1,578.5 million, as compared to $1,513.0 million for fiscal year 2016, an increase of $65.5 million, or 4%, which includes an approximate 0.3% increase in revenue attributable to favorable changes in foreign exchange rates with minimal impact from acquisitions and divestitures. The analysis in the remainder of this paragraph compares revenue by end-market for fiscal year 2017, as compared to fiscal year 2016, and includes the effect of foreign exchange fluctuations and acquisitions and divestitures. The increase in revenue in our Discovery & Analytical Solutions segment was due to an increase of $36.2 million from our life sciences market revenue, and an increase of $29.3 million from our applied markets revenue. The increase in our life sciences market revenue was primarily driven by increased demand for our OneSource laboratory service business, partially offset by continued decline in sales of radioactive reagents in our radio-nucleotide business. In our applied markets, we experienced higher growth in our industrial, environmental and food offerings, as a result of increased government regulation of soil and water and increased focus on food safety laws.
Operating income from continuing operations for fiscal year 2017 was $205.3 million, as compared to $196.5 million for fiscal year 2016, an increase of $8.8 million, or 4%. Amortization of intangible assets decreased and was $50.7 million for fiscal year 2017 as compared to $53.3 million for fiscal year 2016. Restructuring and contract termination charges, net increased and were $10.4 million for fiscal year 2017 as compared to $4.7 million for fiscal year 2016. Acquisition and divestiture-related costs, contingent consideration and other costs added an incremental expense of $0.4 million for fiscal year 2017, as compared to $0.6 million for fiscal year 2016. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an incremental expense of $0.4 million in fiscal year 2016. Legal costs for significant litigation matters were $2.7 million for fiscal year 2017. In addition to the factors noted above, operating income increased for fiscal year 2017 as compared to fiscal year 2016, as we continued to see the benefits from our cost containment initiatives partially offset by higher costs in research and development expenses and a shift in product mix, with an increase in sales of lower gross margin product offerings.
Diagnostics
2018 Compared to 2017. Revenue for fiscal year 2018 was $1,084.8 million, as compared to $678.5 million for fiscal year 2017, an increase of $406.3 million, or 60%, which includes an approximate 49% increase in revenue attributable to acquisitions. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $0.8 million of revenue primarily related to our Diagnostics segment for fiscal year 2018 and $0.7 million for fiscal year 2017. In our diagnostics market, we experienced growth primarily due to our acquisition of EUROIMMUN, which contributed $359.4 million in revenues during fiscal year 2018, and continued expansion of our reproductive health, applied genomics, genetic testing and immuno-diagnostics solutions, particularly in the Americas and emerging markets, such as China and India.
Operating income from continuing operations for fiscal year 2018 was $153.2 million, as compared to $146.9 million for fiscal year 2017, an increase of $6.3 million, or 4%. Amortization of intangible assets increased and was $89.8 million for fiscal year 2018 as compared to $23.0 million for fiscal year 2017. Restructuring and contract termination charges, net decreased and were $1.2 million for fiscal year 2018 as compared to $2.2 million for fiscal year 2017. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $28.2 million in fiscal year 2018, as compared to an incremental expense of $29.4 million for fiscal year 2017. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an incremental expense of $19.3 million in fiscal year 2018, as compared to $6.2 million for fiscal year 2017. Legal costs for significant litigation matters were $0.2 million for fiscal
36
year 2018. In addition to the factors noted above, operating income increased during fiscal year 2018, as compared to fiscal year 2017, primarily the result of higher sales volume, strong reproductive health sales and benefits from our initiatives to improve our supply chain.
2017 Compared to 2016. Revenue for fiscal year 2017 was $678.5 million, as compared to $602.5 million for fiscal year 2016, an increase of $76.0 million or 13%, which includes an approximate 6% increase in revenue attributable to acquisitions and divestitures and 0.5% increase in revenue attributable to changes in foreign exchange rates. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $0.7 million of revenue primarily related to our Diagnostics segment for each of the fiscal years 2017 and 2016 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 and India, and strong growth in applied genomics. EUROIMMUN and Tulip contributed $13.5 million and $38.5 million, respectively, in revenues during fiscal year 2017.
Operating income from continuing operations for fiscal year 2017 was $146.9 million, as compared to $148.0 million for fiscal year 2016, a decrease of $1.1 million, or 1%. Amortization of intangible assets increased and was $23.0 million for fiscal year 2017 as compared to $18.1 million for fiscal year 2016. Restructuring and contract termination charges, net increased and were $2.2 million for fiscal year 2017 as compared to $0.4 million for fiscal year 2016. Acquisition and divestiture-related expenses and other costs added an incremental expense of $29.4 million in fiscal year 2017, as compared to decreasing expenses by $17.7 million for fiscal year 2016. Excluding the impact of the above items, operating income increased during fiscal year 2017, as compared to fiscal year 2016 primarily due to strong reproductive health sales and benefits from our initiatives to improve our supply chain.
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:
• | changes in sales due to weakness in markets in which we sell our products and services, and |
• | changes in our working capital requirements. |
Principal factors that could affect our ability to obtain cash from external sources include:
• | financial covenants contained in the financial instruments controlling our borrowings that limit our total borrowing capacity, |
• | increases in interest rates applicable to our outstanding variable rate debt, |
• | 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, |
• | 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, |
• | a decrease in the market price for our common stock, and |
• | volatility in the public debt and equity markets. |
Cash Flows
Fiscal Year 2018
Operating Activities. Net cash provided by continuing operations was $311.2 million for fiscal year 2018, as compared to net cash provided by continuing operations of $292.2 million for fiscal year 2017, an increase of $19.1 million. The cash provided by operating activities for fiscal year 2018 was principally a result of income from continuing operations of $237.5
37
million, and non-cash charges, including depreciation and amortization of $180.6 million, stock based compensation expense of $28.8 million, change in fair value of contingent consideration of $14.6 million, a non-cash expense of $11.9 million related to our postretirement benefit plans, including the mark-to-market adjustment in the fourth quarter of fiscal year 2018, restructuring and contract termination charges, net, of $11.1 million, and amortization of deferred debt issuance costs and accretion of discounts of $3.3 million. These amounts were partially offset by a net increase in working capital of $115.8 million, deferred tax benefit of $51.1 million, a net increase of $3.7 million in accrued expenses, other assets and liabilities and other items, a gain from disposition of businesses and assets, net of $12.8 million, and a gain on sale of investments, net of $0.6 million. The change in accrued expenses, other assets and liabilities and other items increased cash provided by operating activities by $3.7 million for fiscal year 2018, primarily related to the timing of payments for pension, taxes, restructuring, royalties and salary and benefits. During fiscal year 2018, we made contributions of $8.5 million, in the aggregate, to pension plans outside of the United States and $15.0 million to our defined benefit pension plan in the United States for the plan year 2017. Contributing to the net increase in working capital for fiscal year 2018, excluding the effect of foreign exchange rate fluctuations, was an increase in accounts receivable of $94.5 million and an increase in inventory of $30.2 million, which were partially offset by an increase in accounts payable of $8.9 million. The increase in accounts receivable was a result of higher sales volume late in the fourth quarter of fiscal year 2018. The increase in inventory was primarily a result of overseas production moves to further increase our manufacturing localization and added inventory needed for our distribution center strategy. The increase in accounts payable was primarily a result of the timing of disbursements during the fourth quarter of fiscal year 2018.
Investing Activities. Net cash used in the investing activities of our continuing operations was $159.9 million for fiscal year 2018, as compared to net cash used in the investing activities of our continuing operations of $1,539.4 million for fiscal year 2017, a decrease of $1,379.5 million. For fiscal year 2018, we used $97.7 million of net cash for acquisitions, as compared to $1,527.2 million used in fiscal year 2017. Capital expenditures for fiscal year 2018 were $93.3 million, primarily for manufacturing equipment and other capital equipment purchases, as compared to $39.1 million for fiscal year 2017. During fiscal year 2018, we made equity investments that are accounted for using the cost method of accounting, amounting to $7.0 million as compared to $10.8 million in fiscal year 2017. These items were partially offset by $38.0 million in proceeds from disposition of investments and $0.1 million in proceeds from the surrender of life insurance policies in fiscal year 2018.
Financing Activities. Net cash used in the financing activities of our continuing operations was $179.2 million for fiscal year 2018, as compared to net cash provided by the financing activities of our continuing operations of $782.8 million for fiscal year 2017, an increase of $962.0 million. The cash used in financing activities in fiscal year 2018 was as a result of payments on borrowings, repurchases of our common stock, settlement of forward foreign exchange contracts, payments of dividends, net payments on other credit facilities, and payments for acquisition-related contingent consideration. During fiscal year 2018, payments on our senior unsecured revolving credit facility totaled $1,264.0 million, which was partially offset by proceeds from our senior unsecured revolving credit facility of $857.0 million and proceeds from the sale of our 0.6% senior unsecured notes due in 2021 of $369.3 million offset by debt issuance costs totaling $2.6 million. This compares to borrowings from our senior unsecured revolving credit facility of $1,061.0 million, which was partially offset by debt payments of $236.0 million in fiscal year 2017. During fiscal year 2018, we repurchased 650,000 shares of our common stock, in addition to repurchasing 66,506 shares of our common stock pursuant to our equity incentive plans, for a total cost of $57.4 million, including commissions. This compares to repurchases of 78,644 shares of our common stock pursuant to our equity incentive plans, for a total cost of $3.8 million during fiscal year 2017. During fiscal year 2018, we paid $34.1 million for the settlement of forward foreign exchange contracts, as compared to $13.8 million in fiscal year 2017. During each of the fiscal years 2018 and 2017, we paid $31.0 million in dividends. We had net payments on other credit facilities of $28.4 million during fiscal year 2018, as compared to $2.8 million during fiscal year 2017. We made $12.8 million in payments during fiscal year 2018 for acquisition-related contingent consideration, as compared to $8.9 million in fiscal year 2017. Cash used in financing activities in fiscal year 2018 was partially offset by proceeds from the issuance of common stock under stock plans of $24.8 million, as compared to proceeds from the issuance of common stock under stock plans of $18.0 million in fiscal year 2017.
Fiscal Year 2017
Operating Activities. Net cash provided by continuing operations was $292.2 million for fiscal year 2017, as compared to net cash provided by continuing operations of $323.8 million for fiscal year 2016, a decrease of $31.6 million. The cash provided by operating activities for fiscal year 2017 was principally a result of income from continuing operations of $156.9 million, and non-cash charges, including depreciation and amortization of $105.0 million, deferred taxes expense of $28.9 million, stock based compensation expense of $25.4 million, restructuring and contract termination charges, net, of $12.7 million, amortization of deferred debt issuance costs and accretion of discounts of $2.6 million, change in fair value of contingent consideration of $2.2 million, and a loss from disposition of businesses and assets, net of $0.3 million. These amounts were partially offset by a net decrease of $11.1 million in accrued expenses, other assets and liabilities and other items, a net increase in working capital of $20.2 million, and a non-cash gain related to our postretirement benefit plans, including the
38
mark-to-market adjustment in the fourth quarter of fiscal year 2017, of $10.4 million. The change in accrued expenses, other assets and liabilities and other items decreased cash provided by operating activities by $11.1 million for fiscal year 2017, primarily related to the timing of payments for taxes, defined benefit pension plans, royalties, restructuring, and salary and benefits. During fiscal year 2017, we made contributions of $8.4 million, in the aggregate, to pension plans outside of the United States. Contributing to the net increase in working capital for fiscal year 2017, excluding the effect of foreign exchange rate fluctuations, was an increase in accounts receivable of $36.6 million and an increase in inventory of $17.9 million, which were partially offset by an increase in accounts payable of $34.3 million. The increase in accounts receivable was a result of higher sales volume late in the fourth quarter of fiscal year 2017. The increase in inventory was primarily a result of expanding the amount of inventory held at sales locations within our Discovery & Analytical Solutions and Diagnostics segments to improve responsiveness to customer requirements and to facilitate the introduction of new products. The increase in accounts payable was primarily a result of the timing of disbursements during the fourth quarter of fiscal year 2017.
Investing Activities. Net cash used in the investing activities of our continuing operations was $1,539.4 million for fiscal year 2017, as compared to net cash used in the investing activities of our continuing operations of $82.6 million for fiscal year 2016, an increase of $1,456.8 million. For fiscal year 2017, we used $1,527.2 million of net cash for acquisitions, as compared to $71.9 million used in fiscal year 2016. The increase of $1,455.3 million in net cash for acquisitions primarily related to the acquisition of EUROIMMUN and Tulip during fiscal year 2017. Capital expenditures for fiscal year 2017 were $39.1 million, primarily for manufacturing equipment and other capital equipment purchases, as compared to $31.7 million for fiscal year 2016. During fiscal year 2017, we made an equity investment that is accounted for using the cost method of accounting, amounting to $10.8 million. In addition, we received $36.5 million from the settlement of acquisition-related foreign currency forward contracts, and $1.1 million from disposition of businesses in fiscal year 2017.
Financing Activities. Net cash provided by the financing activities of our continuing operations was $782.8 million for fiscal year 2017, as compared to net cash used in the financing activities of our continuing operations of $115.0 million for fiscal year 2016, an increase of $897.8 million. During fiscal year 2017, borrowings from our senior unsecured revolving credit facility totaled $1,061.0 million, which was partially offset by debt payments of $236.0 million. This compares to borrowings from our senior unsecured revolving credit facility of $420.5 million, which was more than offset by debt payments of $902.5 million in fiscal year 2016. During fiscal year 2017, proceeds from the issuance of common stock under stock plans was $18.0 million. This compares to proceeds from the issuance of common stock under stock plans of $14.4 million in fiscal year 2016. This cash provided by financing activities in fiscal year 2017 was partially offset by payments of dividends, settlement of forward foreign exchange contracts, payments for acquisition-related contingent consideration, repurchases of our common stock, and net payments on other credit facilities. During each of the fiscal years 2017 and 2016, we paid $30.8 million in dividends. During fiscal year 2017, we paid $13.8 million for the settlement of forward foreign exchange contracts, as compared to $1.9 million in fiscal year 2016. During fiscal year 2017, we made $8.9 million in payments for acquisition-related contingent consideration, as compared to $0.2 million in fiscal year 2016. During fiscal year 2017, we repurchased 78,644 shares of our common stock pursuant to our equity incentive plans, for a total cost of $3.8 million. This compares to repurchases of 3.2 million shares of our common stock, including 75,198 shares of our common stock pursuant to our equity incentive plans, for a total cost of $151.8 million, including commissions, during fiscal year 2016. We had net payments on other credit facilities of $2.8 million during fiscal year 2017, as compared to $1.1 million during fiscal year 2016.
Borrowing Arrangements
Senior Unsecured Revolving Credit Facility. Our senior unsecured revolving credit facility provides for $1.0 billion of revolving loans and has an initial maturity of August 11, 2021. As of December 30, 2018, 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 senior unsecured revolving credit facility. As of December 30, 2018, we had $570.6 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%. The Eurocurrency margin as of December 30, 2018 was 110 basis points. The weighted average Eurocurrency interest rate as of December 30, 2018 was 2.51%, resulting in a weighted average effective Eurocurrency rate, including the margin, of 3.61%, which was the interest applicable to the borrowings outstanding under the Eurocurrency rate as of December 30, 2018. As of December 30, 2018, the senior unsecured revolving credit facility had outstanding borrowings of $418.0 million, and $2.4 million of unamortized debt issuance costs. As of December 31, 2017, the senior unsecured revolving credit facility had $625.0 million outstanding borrowings, and $3.3 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
39
a maximum consolidated leverage ratio covenant and a minimum consolidated interest coverage ratio covenant. We were in compliance with all applicable covenants as of December 30, 2018.
Senior Unsecured Term Loan Credit Facility. We entered into a senior unsecured term loan credit facility on August 11, 2017 that provided for $200.0 million of term loans and had an initial maturity of twelve months from December 19, 2017, the date of the initial draw. We utilized the senior unsecured term loan facility for the acquisition of EUROIMMUN. The interest rates under the senior unsecured term loan credit facility were based on the Eurocurrency rate or the base rate at the time of the borrowing, plus a margin. The base rate was 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%. In April 2018, we paid in full the outstanding balance of $200.0 million on our senior unsecured term loan credit facility, from the proceeds of the 0.6% senior unsecured notes due in 2021 that were issued in April 2018.
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 “November 2021 Notes”) in a registered public offering and received $493.6 million of net proceeds from the issuance. The November 2021 Notes were issued at 99.4% of the principal amount, which resulted in a discount of $3.1 million. As of December 30, 2018, the November 2021 Notes had an aggregate carrying value of $497.4 million, net of $1.1 million of unamortized original issue discount and $1.6 million of unamortized debt issuance costs. As of December 31, 2017, the November 2021 Notes had an aggregate carrying value of $496.6 million, net of $1.4 million of unamortized original issue discount and $2.0 million of unamortized debt issuance costs. The November 2021 Notes mature in November 2021 and bear interest at an annual rate of 5%. Interest on the November 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 November 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 November 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 November 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 November 2021 Notes, at our option, at a redemption price equal to 100% of the principal amount of the November 2021 Notes to be redeemed plus accrued and unpaid interest. Upon a change of control (as defined in the indenture governing the November 2021 Notes) and a contemporaneous downgrade of the November 2021 Notes below investment grade, each holder of November 2021 Notes will have the right to require us to repurchase such holder's November 2021 Notes for 101% of their principal amount, plus accrued and unpaid interest.
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 previous senior unsecured revolving credit facility. As of December 30, 2018, the 2026 Notes had an aggregate carrying value of $564.5 million, net of $4.0 million of unamortized original issue discount and $3.8 million of unamortized debt issuance costs. As of December 31, 2017, the 2026 Notes had an aggregate carrying value of $591.7 million, net of $4.7 million of unamortized original issue discount and $4.3 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.
0.6% Senior Unsecured Notes due in 2021. On April 11, 2018, we issued €300.0 million aggregate principal amount of senior unsecured notes due in 2021 (the “April 2021 Notes”) in a registered public offering and received approximately €298.7 million of net proceeds from the issuance. The April 2021 Notes were issued at 99.95% of the principal amount, which resulted in a discount of €0.2 million. As of December 30, 2018, the April 2021 Notes had an aggregate carrying value of $341.3 million, net of $0.1 million of unamortized original issue discount and $2.0 million of unamortized debt issuance costs. The
40
April 2021 Notes mature in April 2021 and bear interest at an annual rate of 0.6%. Interest on the April 2021 Notes is payable annually on April 9th each year. The proceeds from the April 2021 Notes were used to pay in full the outstanding balance of our senior unsecured term loan credit facility, and a portion of the outstanding senior unsecured revolving credit facility, and in each case the borrowings were incurred to pay a portion of the purchase price for our acquisition of EUROIMMUN, which closed on December 19, 2017. Prior to the maturity date of the April 2021 Notes, we may redeem them 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 April 2021 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 April 2021 Notes being redeemed, discounted on an annual basis, at the applicable Comparable Government Bond Rate (as defined in the indenture governing the April 2021 Notes) plus 15 basis points; plus, in each case, accrued and unpaid interest. Upon a change of control (as defined in the indenture governing the April 2021 Notes) and a contemporaneous downgrade of the April 2021 Notes below investment grade, we will, in certain circumstances, make an offer to purchase the April 2021 Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest.
Other Debt Facilities. Our other debt facilities include Euro-denominated bank loans with an aggregate carrying value of $32.1 million (or €28.0 million) and $57.2 million (or €47.6 million) as of December 30, 2018 and December 31, 2017, respectively. These bank loans are primarily utilized for financing fixed assets and are repaid in monthly or quarterly installments with maturity dates extending to 2028. Of these bank loans, loans in the aggregate amount of $31.9 million bear fixed interest rates between 1.1% and 5.5% and a loan in the amount of $0.2 million bears a variable interest rate based on the Euribor rate plus a margin of 1.5%. An aggregate amount of $4.8 million of the bank loans are secured by mortgages on real property and the remaining $27.3 million are unsecured. Certain credit agreements for the unsecured bank loans include financial covenants which are based on an equity ratio or an equity ratio and minimum interest coverage ratio. We were in compliance with all applicable covenants as of December 30, 2018.
In addition, we had other unsecured revolving credit facilities and a secured bank loan in the amount of $5.8 million and $0.3 million, respectively, as of December 30, 2018 and $2.7 million and $0.3 million, respectively, as of December 31, 2017. The unsecured revolving debt facilities bear fixed interest rates between 2.3% and 17.6%. The secured bank loan of $0.3 million bears a fixed annual interest rate of 2.0% and is repaid in monthly installments until 2027.
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 December 30, 2018, we had $34.5 million recorded for these financing lease obligations, of which $1.5 million was recorded as short-term debt and $33.0 million was recorded as long-term debt. At December 31, 2017, we had $35.9 million recorded for these financing lease obligations, of which $1.4 million was recorded as short-term debt and $34.5 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 in each quarter of fiscal years 2018 and 2017, resulting in an annual dividend rate of $0.28 per share. At December 30, 2018, we had accrued $7.7 million for a dividend declared on October 24, 2018 for the fourth quarter of fiscal year 2018 that was paid in February 2019. On January 24, 2019, we announced that our Board had declared a quarterly dividend of $0.07 per share for the first quarter of fiscal year 2019 that will be payable in May 2019. 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.
41
Contractual Obligations
The following table summarizes our contractual obligations at December 30, 2018 for continuing and discontinued operations. Purchase commitments are minimal and have been excluded from this table:
Operating Leases | Sr. Unsecured Revolving Credit Facility Maturing 2021(1) | November 2021 Notes(2) | April 2021 Notes(3) | 2026 Notes(4) | Other Debt Facilities(5) | Financing Lease Obligations(6) | Employee Benefit Payments(7) | Unrecognized Tax Benefits(8) | Total | ||||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||||||
2019 | $ | 56,430 | $ | — | $ | 25,000 | $ | 2,060 | $ | 10,732 | $ | 13,763 | $ | 1,532 | $ | 30,223 | $ | — | $ | 139,740 | |||||||||||||||||||
2020 | 46,621 | — | 25,000 | 2,060 | 10,732 | 8,818 | 1,597 | 30,751 | — | 125,579 | |||||||||||||||||||||||||||||
2021 | 33,490 | ||||||||||||||||||||||||||||||||||||||