QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
or
¨
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)
(781) 663-6900
(Registrant’s telephone number, including area code)
______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
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 such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an 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.
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 ¨ No þ
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of exchange on which registered
Common stock, $1 par value per share
PKI
The New York Stock Exchange
As of May 2, 2019, there were outstanding 110,918,491 shares of common stock, $1 par value per share.
Accrued restructuring and contract termination charges
9,238
4,834
Accrued expenses and other current liabilities
498,221
528,827
Current liabilities of discontinued operations
2,134
2,165
Total current liabilities
742,268
771,631
Long-term debt
1,848,935
1,876,624
Long-term liabilities
689,074
742,312
Operating lease liabilities
167,748
—
Total liabilities
3,448,025
3,390,567
Commitments and contingencies (see Note 19)
Stockholders’ equity:
Preferred stock—$1 par value per share, authorized 1,000,000 shares; none issued or outstanding
—
—
Common stock—$1 par value per share, authorized 300,000,000 shares; issued and outstanding 110,891,000 shares and 110,597,000 shares at March 31, 2019 and at December 30, 2018, respectively
110,891
110,597
Capital in excess of par value
58,090
48,772
Retained earnings
2,643,026
2,602,067
Accumulated other comprehensive loss
(173,535
)
(176,481
)
Total stockholders’ equity
2,638,472
2,584,955
Total liabilities and stockholders’ equity
$
6,086,497
$
5,975,522
The accompanying notes are an integral part of these condensed consolidated financial statements.
Loss from discontinued operations and dispositions, net of income taxes
41
11
Income from continuing operations
35,453
26,035
Adjustments to reconcile income from continuing operations to net cash used in continuing operations:
Stock-based compensation
6,097
5,332
Restructuring and contract termination charges, net
7,639
6,578
Depreciation and amortization
50,469
44,453
Loss on disposition of businesses and assets, net
2,133
—
Change in fair value of contingent consideration
3,102
117
Amortization of deferred debt financing costs and accretion of discount
861
615
Amortization of acquired inventory revaluation
283
9,208
Changes in assets and liabilities which provided (used) cash, excluding effects from companies acquired:
Accounts receivable, net
7,864
(10,280
)
Inventories
(38,441
)
(25,028
)
Accounts payable
(1,451
)
(10,026
)
Accrued expenses and other
(79,325
)
(61,562
)
Net cash used in operating activities of continuing operations
(5,316
)
(14,558
)
Net cash used in operating activities of discontinued operations
—
—
Net cash used in operating activities
(5,316
)
(14,558
)
Investing activities:
Capital expenditures
(19,875
)
(22,652
)
Purchases of investments
(519
)
—
Purchases of licenses
(5,000
)
—
Proceeds from disposition of businesses
550
—
Proceeds from surrender of life insurance policies
—
72
Activity related to acquisitions and investments, net of cash and cash equivalents acquired
(4,384
)
(1,087
)
Net cash used in investing activities of continuing operations
(29,228
)
(23,667
)
Net cash provided by investing activities of discontinued operations
—
—
Net cash used in investing activities
(29,228
)
(23,667
)
Financing activities:
Payments on borrowings
(152,000
)
(147,000
)
Proceeds from borrowings
179,000
204,000
Payments of debt financing costs
(88
)
—
Settlement of cash flow hedges
(1,675
)
(36,169
)
Net payments on other credit facilities
(3,476
)
(3,008
)
Payments for acquisition-related contingent consideration
(12,100
)
—
Proceeds from issuance of common stock under stock plans
8,610
7,468
Purchases of common stock
(5,293
)
(4,555
)
Dividends paid
(7,743
)
(7,727
)
Net cash provided by financing activities of continuing operations
5,235
13,009
Net cash provided by financing activities of discontinued operations
—
—
Net cash provided by financing activities
5,235
13,009
Effect of exchange rate changes on cash, cash equivalents and restricted cash
450
3,850
Net decrease in cash, cash equivalents and restricted cash
(28,859
)
(21,366
)
Cash, cash equivalents and restricted cash at beginning of period
166,315
202,371
Cash, cash equivalents and restricted cash at end of period
$
137,456
$
181,005
Supplemental disclosures of cash flow information
Reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total shown in the condensed consolidated statements of cash flows:
Cash and cash equivalents
134,252
180,800
Restricted cash included in other current assets
3,204
205
Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows
$
137,456
$
181,005
The accompanying notes are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by PerkinElmer, Inc. (the “Company”), in accordance with accounting principles generally accepted in the United States of America (the “U.S.” or the "United States") and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information in the footnote disclosures of the financial statements has been condensed or omitted where it substantially duplicates information provided in the Company’s latest audited consolidated financial statements, in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes included in its Annual Report on Form 10-K for the fiscal year ended December 30, 2018, filed with the SEC (the “2018 Form 10-K”). The balance sheet amounts at December 30, 2018 in this report were derived from the Company’s audited 2018 consolidated financial statements included in the 2018 Form 10-K. The condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods indicated. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for the three months ended March 31, 2019 and April 1, 2018, respectively, are not necessarily indicative of the results for the entire fiscal year or any future period.
The Company’s fiscal year ends on the Sunday nearest December 31. The Company reports fiscal years under a 52/53 week format and as a result, certain fiscal years will contain 53 weeks. The fiscal year ending December 29, 2019 ("fiscal year 2019") will include 52 weeks, and the fiscal year ended December 30, 2018 ("fiscal year 2018") included 52 weeks.
Recently Adopted and Issued Accounting Pronouncements: From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the "FASB") and are adopted by the Company as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on the Company’s consolidated financial position, results of operations and cash flows or do not apply to the Company’s operations.
In August 2018, the FASB issued Accounting Standards Update No. 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract ("ASU 2018-15"). ASU 2018-15 aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software (and hosting arrangements that include an internal-use software license). The provisions of this guidance are to be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. ASU 2018-15 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years with early adoption permitted. The Company is currently evaluating the requirements of this guidance and has not yet determined the impact of its adoption on the Company's consolidated financial position, results of operations and cash flows.
In August 2018, the FASB issued Accounting Standards Update No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans ("ASU 2018-14"). ASU 2018-14 adds, removes, and clarifies disclosure requirements related to defined benefit pension and other postretirement plans. ASU 2018-14 adds requirements for an entity to disclose the weighted-average interest crediting rates used in the entity’s cash balance pension plans and other similar plans; and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. Further, ASU 2018-14 removes guidance that currently requires the following disclosures: the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year; the amount and timing of plan assets expected to be returned to the employer; information about (1) benefits covered by related-party insurance and annuity contracts and (2) significant transactions between the plan and related parties; and the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost, and the benefit obligation for postretirement health care benefits. ASU 2018-14 also clarifies the guidance in Compensation-Retirement Benefits (Topic 715-20-50-3) on defined benefit plans to require disclosure of (1) the projected benefit obligation ("PBO") and fair value of plan assets for pension plans with PBOs in excess of plan assets (the same disclosure with reference to the accumulated postretirement benefit obligation rather than the PBO is required for other postretirement benefit plans) and (2) the accumulated benefit obligation ("ABO") and fair value of plan assets for pension plans with ABOs in excess of plan assets. The provisions of this guidance are
to be applied retrospectively to all periods presented upon their effective date. ASU 2018-14 is effective for annual reporting periods beginning after December 15, 2020, and interim periods within those years with early adoption permitted. The Company is currently evaluating the requirements of this guidance and has not yet determined the impact of its adoption on the Company's consolidated financial position, results of operations and cash flows.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("ASU 2018-13"). ASU 2018-13 adds, removes, and modifies certain disclosures related to fair value measurements. ASU 2018-13 adds requirements for an entity to disclose the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. Further, ASU 2018-13 removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. ASU 2018-13 also modifies existing disclosure requirements related to measurement uncertainty. The amendments regarding changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments are to be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for any removed or modified disclosures. The Company is currently evaluating the requirements of this guidance and has not yet determined the impact of its adoption on the Company's consolidated financial position, results of operations and cash flows.
In March 2018, the FASB Issued Accounting Standards Update No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("ASU 2018-05"). ASU 2018-05 was issued to incorporate into Topic 740 recent SEC guidance related to the income tax accounting implications of the Tax Cut and Jobs Act (the "Tax Act"). The SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Act in the period of enactment. SAB 118 permits companies to disclose that some or all of the income tax effects from the Tax Act are incomplete by the due date of the financial statements, and if possible, disclose a reasonable estimate of such tax effects. ASU 2018-05 is effective immediately. The Company is applying the guidance in ASU 2018-05 when accounting for the enactment date effects of the Tax Act. At December 30, 2018, the Company completed the accounting for all of the tax effects of the Tax Act using reasonable estimates based on currently available information. These estimates may be affected as additional clarification and implementation guidance becomes available. These changes could be material to the Company's income tax expense. See Note 7 for further disclosures.
In February 2018, the FASB Issued Accounting Standards Update No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). ASU 2018-02 provides entities with an option to reclassify stranded tax effects within accumulated other comprehensive income (“AOCI”) to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act (or portion thereof) is recorded. ASU 2018-02 requires entities to disclose a description of the accounting policy for releasing income tax effects from AOCI; whether they elect to reclassify the stranded income tax effects from the Tax Act; and information about the other income tax effects that are reclassified. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and entities should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company adopted ASU 2018-02 on December 30, 2018. The adoption of the standard resulted in an increase in retained earnings at December 30, 2018 in the amount of $6.5 million, with a corresponding decrease in AOCI. The adoption did not have a material impact on the Company's consolidated financial position, results of operations and cash flows, other than the impact discussed above.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard requires entities to use the expected loss impairment model and will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance sheet credit exposures. Entities are required to estimate the lifetime “expected credit loss” for each applicable financial asset and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The standard also amends the impairment model for available-for-sale (“AFS”) debt securities and requires entities to determine whether all or a portion of the unrealized loss on an AFS debt
security is a credit loss. An entity will recognize an allowance for credit losses on an AFS debt security as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment. The provisions of this guidance are to be applied using a modified-retrospective approach. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Subsequent to the issuance of ASU 2016-13, in November 2018, the FASB issued Accounting Standards Update No. 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses ("ASU 2018-19"). The amendments in ASU 2018-19 clarify that receivables arising from operating leases are not within the scope of Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. Instead, impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. The effective date and transition requirements for the amendments in ASU 2018-19 are the same as the effective date and transition requirements of ASU 2016-13, which is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is currently evaluating the requirements of this guidance and has not yet determined the impact of its adoption on the Company's consolidated financial position, results of operations and cash flows.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease of assets will primarily depend on its classification as a finance or operating lease. ASU 2016-02 also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The provisions of this guidance are effective for annual periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. ASU 2016-02 is to be applied using a modified retrospective approach. Subsequent to the issuance of ASU 2016-02, in July 2018, the FASB issued Accounting Standards Update No. 2018-10, Codification Improvements to Topic 842, Leases ("ASU 2018-10") and Accounting Standards Update No. 2018-11, Leases (Topic 842): Targeted Improvements ("ASU 2018-11"), and in March 2019, the FASB issued Accounting Standards Update No. 2019-01, Leases (Topic 842): Codification Improvements ("ASU 2019-01"). The amendments in ASU 2018-10 clarify, correct or remove inconsistencies in the guidance provided under ASU 2016-02 related to sixteen specific issues identified. The amendments in ASU 2018-11 provide entities with an additional (and optional) transition method to adopt the new leases standard. Under the new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity's reporting for the comparative periods presented in the financial statements in the period of adoption will continue to be in accordance with Accounting Standards Codification (“ASC”) 840, Leases ("ASC 840"). An entity that elects this additional (and optional) transition method must provide the required disclosures under ASC 840 for all periods that continue to be in accordance with ASC 840. ASU 2018-11 also provides lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component and, instead, to account for those components as a single component if certain criteria are met. ASU 2019-01 provides clarification on implementation issues associated with adopting ASU 2016-02. ASU 2019-01 provides guidance on transition disclosures related to Topic 250, Accounting Changes and Error Corrections, specifically paragraph 205-10-50-3, which requires entities to provide in the fiscal year in which a new accounting principle is adopted the identical disclosures for interim periods after the date of adoption. The guidance in ASU 2019-01 explicitly provides an exception to the paragraph 250-10-50-3 interim disclosure requirements in the Topic 842 transition disclosure requirements. The effective date and transition requirements for these standards are the same as the effective date and transition requirements of ASU 2016-02. The standards were effective for the Company beginning on December 31, 2018, the first day of the Company's fiscal year 2019. The Company did not early adopt these standards and adopted these standards using the optional transition method.
The Company applied the modified retrospective approach, and applied the new leases standards at December 31, 2018, with a cumulative effect adjustment recognized in the opening balance of retained earnings in fiscal year 2019. As a lessee, the most significant impact of the standards relates to the recognition of the right-of-use assets and lease liabilities for the operating leases in the balance sheet. In addition, the Company had deferred gains from sale-leaseback transactions that are being amortized in operating expenses over the lease terms and the leases are accounted for as operating leases under ASC 840. Under the new standards, the Company recognized the deferred gains from the sales as a cumulative effect adjustment in retained earnings at December 31, 2018. The Company also derecognized the impact of its build-to-suit arrangements in which the Company was the deemed owner during the construction period, for which the construction is complete and the lease commenced before the initial date of adoption. The adoption of the standards resulted in an increase in retained earnings at December 31, 2018 of approximately $13.3 million for the cumulative effect of initially applying the standards as of that date. In addition, the adoption of the standards resulted in the recognition of right-of-use assets of approximately $199.5 million and lease liabilities of approximately $147.1 million, primarily related to the facilities operating leases, a decrease in property and equipment of approximately $34.6 million and an increase in deferred tax liabilities of $4.6 million for the tax impact of the
cumulative adjustments. The adoption did not have an impact to cash from or used in operating, investing or financing activities in the Company's consolidated statement of cash flows at December 31, 2018.
Note 2: Revenue
Disaggregation of revenue
In the following table, revenue is disaggregated by primary geographical market, end-markets and timing of revenue recognition. The table also includes a reconciliation of the disaggregated revenue with the reportable segments revenue.
Reportable Segments
Three Months Ended
March 31, 2019
April 1, 2018
Discovery & Analytical Solutions
Diagnostics
Total
Discovery & Analytical Solutions
Diagnostics
Total
(In thousands)
Primary geographical markets
Americas
$
162,417
$
98,008
$
260,425
$
157,494
$
88,534
$
246,028
Europe
107,606
65,858
173,464
119,373
67,712
187,085
Asia
118,810
96,038
214,848
119,658
91,201
210,859
$
388,833
$
259,904
$
648,737
$
396,525
$
247,447
$
643,972
Primary end-markets
Diagnostics
$
—
$
259,904
$
259,904
$
—
$
247,447
$
247,447
Life sciences
217,377
—
217,377
219,710
—
219,710
Applied markets
171,456
—
171,456
176,815
—
176,815
$
388,833
$
259,904
$
648,737
$
396,525
$
247,447
$
643,972
Timing of revenue recognition
Products and services transferred at a point in time
$
275,438
$
239,247
$
514,685
$
282,084
$
225,831
$
507,915
Services transferred over time
113,395
20,657
134,052
114,441
21,616
136,057
$
388,833
$
259,904
$
648,737
$
396,525
$
247,447
$
643,972
Contract Balances
Contract assets: The unbilled receivables (contract assets) primarily relate to the Company's right to consideration for work completed but not billed at the reporting date. The unbilled receivables are transferred to trade receivables when billed to customers. Contract assets are generally classified as current assets and are included in "Accounts receivable, net" in the consolidated balance sheets. The balance of contract assets as of March 31, 2019 and December 30, 2018 were $41.6 million and $31.9 million, respectively. The amount of unbilled receivables recognized at the beginning of the period that were transferred to trade receivables during the three months ended March 31, 2019 was $12.8 million. The increase in unbilled receivables during the three months ended March 31, 2019 as a result of recognition of revenue before billing to customers, excluding amounts transferred to trade receivables during the period, amounted to $22.5 million.
Contract liabilities: The contract liabilities primarily relate to the advance consideration received from customers for products and related installation for which transfer of control has not occurred at the balance sheet date. Contract liabilities are classified as either current in "Accounts payable" or long-term in "Long-term liabilities" in the consolidated balance sheets based on the timing of when the Company expects to recognize revenue. The balance of contract liabilities as of March 31, 2019 and December 30, 2018 were $30.3 million and $30.8 million, respectively. The increase in contract liabilities during the three months ended March 31, 2019 due to cash received, excluding amounts recognized as revenue during the period, was $13.4 million. The amount of revenue recognized during the three months ended March 31, 2019 that was included in the contract liability balance at the beginning of the period was $13.9 million.
Contract costs: The Company recognizes the incremental costs of obtaining a contract with a customer as an asset if it expects the benefit of those costs to be longer than one year. The Company determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the period and are included in other current and long-term assets on the consolidated balance sheets. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include the Company's internal sales force compensation program, as the Company determined that annual compensation is commensurate with annual sales activities.
Transaction price allocated to the remaining performance obligations
The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less. The estimated revenue expected to be recognized beyond one year in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the period are not material to the Company. The remaining performance obligations primarily include noncancelable purchase orders and noncancelable software subscriptions and cloud service contracts.
Note 3: Business Combinations
Acquisition in fiscal year 2019
Subsequent to March 31, 2019, the Company completed the acquisition of Cisbio Bioassays SAS (“Cisbio”), a company based in Codolet, France, for a total consideration of $219.8 million in cash, net of cash acquired. The operations for this acquisition will be reported within the results of the Company's Discovery & Analytical Solutions segment from the acquisition date.
Acquisitions in fiscal year 2018
During fiscal year 2018, the Company completed the acquisition of four businesses for aggregate consideration of $105.8 million. The excess of the purchase price over the fair value of the acquired businesses' net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforces acquired, and has been allocated to goodwill, which is not tax deductible. The Company has reported the operations for these acquisitions within the results of the Company's 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 11.2 years.
The total purchase price for the acquisitions in fiscal year 2018 has been allocated to the estimated fair values of assets acquired and liabilities assumed as follows:
2018 Acquisitions
(In thousands)
Fair value of business combination:
Cash payments
$
95,950
Other liability
3,354
Contingent consideration
6,200
Working capital and other adjustments
262
Less: cash acquired
(1,132
)
Total
$
104,634
Identifiable assets acquired and liabilities assumed:
Current assets
$
6,079
Property, plant and equipment
1,166
Other assets
891
Identifiable intangible assets:
Core technology
34,021
Trade names
1,070
Customer relationships
10,200
Goodwill
65,003
Deferred taxes
(8,923
)
Debt assumed
(461
)
Liabilities assumed
(4,412
)
Total
$
104,634
The preliminary allocations of the purchase prices for acquisitions are based upon initial valuations. The Company's estimates and assumptions underlying the initial valuations are subject to the collection of information necessary to complete its valuations within the measurement periods, which are up to one year from the respective acquisition dates. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired and liabilities assumed, assets and liabilities related to income taxes and related valuation allowances, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair values of the net assets acquired at the acquisition dates during the measurement periods. During the measurement periods, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition dates that, if known, would have resulted in the recognition of those assets and liabilities as of those dates. These adjustments will be made in the periods in which the amounts are determined and the cumulative effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition dates. All changes that do not qualify as adjustments made during the measurement periods are also included in current period earnings.
During the first quarter of fiscal year 2019, the Company obtained information relevant to determining the fair values of certain tangible and intangible assets acquired, and liabilities assumed, related to recent acquisitions and adjusted its purchase price allocation. Based on this information, the Company recognized an increase in goodwill of $5.4 million, an increase in deferred tax liabilities of $5.1 million, an increase in liabilities assumed of $0.1 million and a decrease in current assets of $0.4 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, changes in discount rates or product development milestones during the earnout period.
As of March 31, 2019, the Company may have to pay contingent consideration related to acquisitions with open contingency periods of up to $38.0 million. As of March 31, 2019, the Company has recorded contingent consideration obligations with an estimated fair value of $34.3 million, of which $30.8 million was recorded in accrued expenses and other current liabilities, and $3.5 million was recorded in long-term liabilities. As of December 30, 2018, the Company had recorded contingent consideration obligations with an estimated fair value 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. The expected maximum earnout period for acquisitions with open contingency periods does not exceed 1.5 years from March 31, 2019, and the remaining weighted average expected earnout period at March 31, 2019 was 0.7 years. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the condensed consolidated financial statements could result in a possible impairment of the intangible assets and goodwill, require acceleration of the amortization expense of definite-lived intangible assets or the recognition of additional contingent consideration which would be recognized as a component of operating expenses from continuing operations.
Total acquisition and divestiture-related costs for the three months ended March 31, 2019 and April 1, 2018 were $1.8 million and $2.1 million, respectively. These amounts include $0.2 million and $(0.7) million of net foreign exchange loss (gain) related to the foreign currency denominated stay bonus associated with the Company's acquisition of Tulip Diagnostics Private Limited for the three months ended March 31, 2019 and April 1, 2018, respectively. These acquisition and divestiture-related costs were expensed as incurred and recorded in selling, general and administrative expenses and interest and other expense, net in the Company's consolidated statements of operations.
Note 4: Restructuring and Contract Termination Charges, Net
The Company has undertaken a series of restructuring actions related to the impact of acquisitions and divestitures, the alignment of the Company's operations with its growth strategy, the integration of its business units and its productivity initiatives. The current portion of restructuring and contract termination charges is recorded in accrued restructuring and contract termination charges and the long-term portion of restructuring and contract termination charges is recorded in long-term liabilities. The activities associated with these plans have been reported as restructuring and contract termination charges, net, as applicable, and are included as a component of income from continuing operations.
The Company implemented a restructuring plan in the first quarter of fiscal year 2019 consisting of workforce reductions principally intended to realign resources to emphasize growth initiatives (the "Q1 2019 Plan"). The Company 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). Details of the plans initiated in previous years (the “Previous Plans”) are discussed more fully in Note 6 to the audited consolidated financial statements in the 2018 Form 10-K.
The following table summarizes the reductions in headcount, the initial restructuring or contract termination charges by reporting segment, and the dates by which payments were substantially completed, or the dates by which payments are expected to be substantially completed, for restructuring actions implemented during fiscal years 2019 and 2018 in continuing operations:
Workforce Reductions
Total
(Expected) Date Payments Substantially Completed by
The Company does not currently expect to incur any future charges for these plans. The Company expects to make payments under the Previous Plans for remaining residual lease obligations, with terms varying in length, through fiscal year 2022.
In connection with the termination of various contractual commitments, the Company recorded additional pre-tax charges of $0.1 million and $0.2 million during the three months ended March 31, 2019 and April 1, 2018, respectively, in the Discovery & Analytical Solutions segment.
At March 31, 2019, the Company had $10.4 million recorded for accrued restructuring and contract termination charges, of which $9.2 million was recorded in short-term accrued restructuring and contract termination charges, $0.9 million was recorded in long-term liabilities, and $0.3 million was recorded in other reserves. At December 30, 2018, the Company 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 contract termination charges, and $1.4 million was recorded in long-term liabilities. The following table summarizes the Company's restructuring and contract termination accrual balances and related activity by restructuring plan, as well as contract termination accrual balances and related activity, during the three months ended March 31, 2019:
Balance at December 30, 2018
2019 Charges
2019 Changes in Estimates, Net
2019 Amounts Paid
Balance at March 31, 2019
(In thousands)
Severance:
Q1 2019 Plan
$
—
$
7,460
$
—
$
(1,381
)
$
6,079
Q4 2018 Plan
348
—
—
(348
)
—
Q3 2018 Plan
1,415
—
129
(534
)
1,010
Q1 2018 Plan
1,609
—
—
(282
)
1,327
Previous Plans
2,671
—
—
(842
)
1,829
Restructuring
6,043
7,460
129
(3,387
)
10,245
Contract Termination
137
—
50
—
187
Total Restructuring and Contract Termination
$
6,180
$
7,460
$
179
$
(3,387
)
$
10,432
Note 5: Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
Three Months Ended
March 31, 2019
April 1, 2018
(In thousands)
Interest income
$
(283
)
$
(265
)
Interest expense
15,850
17,650
Loss on disposition of businesses and assets, net
2,133
—
Other income, net
(1,135
)
(5,955
)
Total interest and other expense, net
$
16,565
$
11,430
During the three months ended March 31, 2019 and April 1, 2018, foreign currency transaction losses (gains) were $0.1 million and $(26.0) million, respectively. Net losses from forward currency hedge contracts were $0.3 million and $22.6 million for the three months ended March 31, 2019 and April 1, 2018, respectively. The other components of net periodic pension credit were $1.5 million and $2.5 million for the three months ended March 31, 2019 and April 1, 2018, respectively. These amounts were included in other income, net.
Inventories as of March 31, 2019 and December 30, 2018 consisted of the following:
March 31, 2019
December 30, 2018
(In thousands)
Raw materials
$
137,347
$
119,115
Work in progress
23,910
18,110
Finished goods
215,250
201,122
Total inventories
$
376,507
$
338,347
Note 7: Income Taxes
The Company regularly reviews its tax positions in each significant taxing jurisdiction in the process of evaluating its unrecognized tax benefits. The Company makes adjustments to its unrecognized tax benefits when: (i) facts and circumstances regarding a tax position change, causing a change in management’s judgment regarding that tax position; (ii) a tax position is effectively settled with a tax authority at a differing amount; and/or (iii) the statute of limitations expires regarding a tax position.
The total provision for income taxes included in the condensed consolidated statement of operations consisted of the following:
Three Months Ended
March 31, 2019
April 1, 2018
(In thousands)
Continuing operations
$
1,312
$
2,470
Discontinued operations
41
11
Total
$
1,353
$
2,481
At March 31, 2019, the Company had gross tax effected unrecognized tax benefits of $31.5 million, of which $29.8 million, if recognized, would affect the continuing operations effective tax rate. The remaining amount, if recognized, would affect discontinued operations.
The Company believes that it is reasonably possible that approximately $1.1 million of its uncertain tax positions at March 31, 2019, including accrued interest and penalties, and net of tax benefits, may be resolved over the next twelve months as a result of lapses in applicable statutes of limitations and potential settlements. Various tax years after 2009 remain open to examination by certain jurisdictions in which the Company has significant business operations, such as Finland, Germany, Italy, Netherlands, Singapore, the United Kingdom and the United States. The tax years under examination vary by jurisdiction.
During the first three months of fiscal years 2019 and 2018, the Company recorded net discrete income tax benefits of $4.0 million and $1.4 million, respectively. The discrete tax benefits in the first three months of fiscal year 2019 and fiscal year 2018 include recognition of excess tax benefits on stock compensation of $2.9 million and $1.9 million, respectively.
Note 8: Debt
Senior Unsecured Revolving Credit Facility. The Company's senior unsecured revolving credit facility provides for $1.0 billion of revolving loans and has an initial maturity of August 11, 2021. As of March 31, 2019, 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 March 31, 2019, the Company had $543.6 million available for additional borrowing under the facility. The Company uses the senior unsecured revolving credit facility for general corporate purposes, which may include working capital, refinancing existing indebtedness, capital expenditures, share repurchases, acquisitions and strategic alliances. The interest rates under the senior unsecured revolving credit facility are based on the Eurocurrency rate or the base rate at the time of borrowing, plus a margin. The base rate is the higher of (i) the rate of interest in effect for such day as publicly announced from time to time by JP Morgan Chase Bank, N.A. as its "prime rate," (ii) the Federal Funds rate plus 50 basis points or (iii) an adjusted one-month Libor plus 1.00%. The Eurocurrency margin as of March 31, 2019 was 110 basis points. The weighted average Eurocurrency interest rate as of March 31, 2019 was 2.50%, resulting in a weighted average
effective Eurocurrency rate, including the margin, of 3.60%, which was the interest applicable to the borrowings outstanding under the Eurocurrency rate as of March 31, 2019. As of March 31, 2019, the senior unsecured revolving credit facility had outstanding borrowings of $445.0 million, and $2.4 million of unamortized debt issuance costs. 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. The credit agreement for the facility contains affirmative, negative and financial covenants and events of default. The financial covenants include a debt-to-capital ratio that remains applicable for so long as the Company's debt is rated as investment grade. In the event that the Company's debt is not rated as investment grade, the debt-to-capital ratio covenant is replaced with a maximum consolidated leverage ratio covenant and a minimum consolidated interest coverage ratio covenant.
5% Senior Unsecured Notes due in 2021. On October 25, 2011, the Company issued $500.0 million aggregate principal amount of senior unsecured notes due in 2021 (the “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 March 31, 2019, the November 2021 Notes had an aggregate carrying value of $497.5 million, net of $1.0 million of unamortized original issue discount and $1.5 million of unamortized debt issuance costs. 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. 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), the Company may redeem the November 2021 Notes in whole or in part, at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 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), the Company may redeem the November 2021 Notes, at its 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 the Company 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, the Company issued €500.0 million aggregate principal amount of senior unsecured notes due in 2026 (the “2026 Notes”) in a registered public offering and received approximately €492.3 million of net proceeds from the issuance. The 2026 Notes were issued at 99.118% of the principal amount, which resulted in a discount of €4.4 million. The 2026 Notes mature in July 2026 and bear interest at an annual rate of 1.875%. Interest on the 2026 Notes is payable annually on July 19th each year. The proceeds from the 2026 Notes were used to pay in full the outstanding balance of the Company's previous senior unsecured revolving credit facility. As of March 31, 2019, the 2026 Notes had an aggregate carrying value of $553.4 million, net of $3.8 million of unamortized original issue discount and $3.7 million of unamortized debt issuance costs. 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.
Prior to April 19, 2026 (three months prior to their maturity date), the Company may redeem the 2026 Notes in whole at any time or in part from time to time, at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2026 Notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2026 Notes being redeemed, discounted on an annual basis, at the applicable Comparable Government Bond Rate (as defined in the indenture governing the 2026 Notes) plus 35 basis points; plus, in each case, accrued and unpaid interest. In addition, at any time on or after April 19, 2026 (three months prior to their maturity date), the Company may redeem the 2026 Notes, at its option, at a redemption price equal to 100% of the principal amount of the 2026 Notes due to be redeemed plus accrued and unpaid interest.
Upon a change of control (as defined in the indenture governing the 2026 Notes) and a contemporaneous downgrade of the 2026 Notes below investment grade, the Company will, in certain circumstances, make an offer to purchase the 2026 Notes at a price equal to 101% of their principal amount plus any accrued and unpaid interest.
0.6% Senior Unsecured Notes due in 2021. On April 11, 2018, the Company 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 March 31, 2019, the April 2021 Notes had an aggregate carrying value of $334.6 million, net of $0.1 million of unamortized original issue discount and $1.8 million of unamortized debt issuance costs. 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 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 the Company’s 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 the Company's acquisition of EUROIMMUN, which closed on December 19, 2017. Prior to the maturity date of the April 2021 Notes, the Company may redeem them in whole at any time or in part from time to time, at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 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, the Company 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. The Company's other debt facilities include Euro-denominated bank loans with an aggregate carrying value of $29.2 million (or €26.0 million) and $32.1 million (or €28.0 million) as of March 31, 2019 and December 30, 2018, 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 $29.0 million bear fixed interest rates between 1.1% and 4.5% and a loan in the amount of $0.1 million bears a variable interest rate based on the Euribor rate plus a margin of 1.5%. An aggregate amount of $4.5 million of the bank loans are secured by mortgages on real property and the remaining $24.7 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.
In addition, the Company had other unsecured revolving credit facilities and a secured bank loan in the amount of $4.8 million and $0.2 million, respectively, as of March 31, 2019 and $5.8 million and $0.3 million, respectively, as of December 30, 2018. The unsecured revolving debt facilities bear fixed interest at a rate of 2.3%. The secured bank loan of $0.2 million bears a fixed annual interest rate of 1.95% and is repaid in monthly installments until 2027.
Financing Lease Obligations. In fiscal year 2012, the Company entered into agreements with the lessors of certain buildings that the Company is currently occupying and leasing to expand those buildings. The Company provided a portion of the funds needed for the construction of the additions to the buildings, and as a result the Company was considered the owner of the buildings during the construction period. At the end of the construction period, the Company was not reimbursed by the lessors for all of the construction costs. The Company is therefore deemed to have continuing involvement and the leases qualify as financing leases under sale-leaseback accounting guidance, representing debt obligations for the Company and non-cash investing and financing activities. As a result, the Company capitalized $29.3 million in property, plant and equipment, net, representing the fair value of the buildings with a corresponding increase to debt. The Company has also capitalized $11.5 million in additional construction costs necessary to complete the renovations to the buildings, which were funded by the lessors, with a corresponding increase to debt. At December 30, 2018, the Company 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. Prior to adoption of ASC 842, Leases ("ASC 842"), the buildings were 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. Upon adoption of ASC 842, the Company derecognized the impact of this build-to-suit arrangement.
Basic earnings per share was computed by dividing net income by the weighted-average number of common shares outstanding during the period less restricted unvested shares. Diluted earnings per share was computed by dividing net income by the weighted-average number of common shares outstanding plus all potentially dilutive common stock equivalents, primarily shares issuable upon the exercise of stock options using the treasury stock method. The following table reconciles the number of shares utilized in the earnings per share calculations:
Three Months Ended
March 31, 2019
April 1, 2018
(In thousands)
Number of common shares—basic
110,543
110,296
Effect of dilutive securities:
Stock options
631
861
Restricted stock awards
119
173
Number of common shares—diluted
111,293
111,330
Number of potentially dilutive securities excluded from calculation
due to antidilutive impact
485
332
Antidilutive securities include outstanding stock options with exercise prices and average unrecognized compensation cost in excess of the average fair market value of common stock for the related period. Antidilutive options were excluded from the calculation of diluted net income per share and could become dilutive in the future.
Note 10: Industry Segment Information
The Company discloses information about its operating segments based on the way that management organizes the segments within the Company for making operating decisions and assessing financial performance. The Company evaluates the performance of its operating segments based on revenue and operating income. Intersegment revenue and transfers are not significant. The accounting policies of the operating segments are the same as those described in Note 1 to the audited consolidated financial statements in the 2018 Form 10-K.
The principal products and services of the Company's two operating segments are:
•
Discovery & Analytical Solutions. Provides products and services targeted towards the life sciences and applied markets.
•
Diagnostics. Develops diagnostics, tools and applications focused on clinically-oriented customers, especially within the reproductive health, immunodiagnostics and applied genomics markets. The Diagnostics segment serves the diagnostics market.
The Company has included the expenses for its corporate headquarters, such as legal, tax, audit, human resources, information technology, and other management and compliance costs, as well as the activity related to the mark-to-market adjustment on postretirement benefit plans, as “Corporate” below. The Company has a process to allocate and recharge expenses to the reportable segments when these costs are administered or paid by the corporate headquarters based on the extent to which the segment benefited from the expenses. These amounts have been calculated in a consistent manner and are included in the Company’s calculations of segment results to internally plan and assess the performance of each segment for all purposes, including determining the compensation of the business leaders for each of the Company’s operating segments.
Revenue and operating income (loss) from continuing operations by operating segment are shown in the table below:
Three Months Ended
March 31, 2019
April 1, 2018
(In thousands)
Discovery & Analytical Solutions
Product revenue
$
222,790
$
237,695
Service revenue
166,043
158,830
Total revenue
388,833
396,525
Operating income from continuing operations
36,927
36,197
Diagnostics
Product revenue
215,932
209,913
Service revenue
43,972
37,534
Total revenue
259,904
247,447
Operating income from continuing operations
31,486
18,394
Corporate
Operating loss from continuing operations
(15,083
)
(14,656
)
Continuing Operations
Product revenue
438,722
447,608
Service revenue
210,015
196,364
Total revenue
648,737
643,972
Operating income from continuing operations
53,330
39,935
Interest and other expense, net (see Note 5)
16,565
11,430
Income from continuing operations before income taxes
$
36,765
$
28,505
Note 11: Stockholders’ Equity
Comprehensive Income:
The components of accumulated other comprehensive loss consisted of the following:
March 31, 2019
December 30, 2018
(In thousands)
Foreign currency translation adjustments
$
(173,393
)
$
(176,459
)
Unrecognized prior service costs, net of income taxes
245
245
Unrealized net losses on securities, net of income taxes
(387
)
(267
)
Accumulated other comprehensive loss
$
(173,535
)
$
(176,481
)
Stock Repurchases:
On July 23, 2018, the Board of Directors (the "Board") authorized the Company to repurchase shares of common stock for an aggregate amount up to $250.0 million under a stock repurchase program (the "Repurchase Program"). The Repurchase Program will expire on July 23, 2020 unless terminated earlier by the Board and may be suspended or discontinued at any time. During the three months ended March 31, 2019, the Company had no stock repurchases under the Repurchase Program. As of March 31, 2019, $197.8 million remained available for aggregate repurchases of shares under the Repurchase Program.
In addition, the Board has authorized the Company to repurchase shares of common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards and restricted stock unit awards granted pursuant to the Company’s equity incentive plans and to satisfy obligations related to the exercise of stock options made pursuant to the Company's equity incentive plans. During the three months ended March 31, 2019, the Company repurchased 57,289 shares of common stock for this purpose at an aggregate cost of $5.3 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.
The Board declared a regular quarterly cash dividend of $0.07 per share for the first quarter of fiscal year 2019 and in each quarter of fiscal year 2018. At March 31, 2019, the Company has accrued $7.8 million for dividends declared on January 24, 2019 for the first quarter of fiscal year 2019 that will be payable in May 2019. On April 25, 2019, the Company announced that the Board had declared a quarterly dividend of $0.07 per share for the second quarter of fiscal year 2019 that will be payable in August 2019. In the future, the Board may determine to reduce or eliminate the Company’s common stock dividend in order to fund investments for growth, repurchase shares or conserve capital resources.
Note 12: Stock Plans
In addition to the Company's Employee Stock Purchase Plan, in the first quarter of fiscal year 2019, the Company utilized one stock-based compensation plan, the 2009 Incentive Plan (the “2009 Plan”). Under the 2009 Plan, 10.0 million shares of the Company's common stock are authorized for stock option grants, restricted stock awards, performance restricted stock units, performance units and stock awards as part of the Company’s compensation programs. In addition to shares of the Company’s common stock originally authorized for issuance under the 2009 Plan, the 2009 Plan includes shares of the Company’s common stock previously granted under the Amended and Restated 2001 Incentive Plan and the 2005 Incentive Plan that were canceled or forfeited without the shares being issued.
The following table summarizes total pre-tax compensation expense recognized related to the Company’s stock option grants, restricted stock awards, performance restricted stock units, performance units and stock awards, included in the Company’s condensed consolidated statements of operations for the three months ended March 31, 2019 and April 1, 2018:
Three Months Ended
March 31, 2019
April 1, 2018
(In thousands)
Cost of revenue
$
334
$
305
Research and development expenses
291
308
Selling, general and administrative expenses
5,472
4,719
Total stock-based compensation expense
$
6,097
$
5,332
The total income tax benefit recognized in the condensed consolidated statements of operations for stock-based compensation was $4.2 million and $3.1 million for the three months ended March 31, 2019 and April 1, 2018, respectively. Stock-based compensation costs capitalized as part of inventory was $0.4 million as of each of March 31, 2019 and April 1, 2018.
Stock Options: The fair value of each option grant is estimated using the Black-Scholes option pricing model. The Company’s weighted-average assumptions used in the Black-Scholes option pricing model were as follows:
The following table summarizes stock option activity for the three months ended March 31, 2019:
Number
of
Shares
Weighted-
Average Exercise
Price
Weighted-Average
Remaining
Contractual
Term
Total
Intrinsic
Value
(In thousands)
(In years)
(In millions)
Outstanding at December 30, 2018
1,765
$
52.91
Granted
294
93.65
Exercised
(186
)
46.21
Forfeited
(15
)
69.57
Outstanding at March 31, 2019
1,858
$
59.89
4.5
$
67.8
Exercisable at March 31, 2019
1,165
$
48.42
3.5
$
55.8
The weighted-average per-share grant-date fair value of options granted during the three months ended March 31, 2019 and April 1, 2018 was $22.66 and $17.50, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2019 and April 1, 2018 was $8.8 million and $5.7 million, respectively. Cash received from option exercises for the three months ended March 31, 2019 and April 1, 2018 was $8.6 million and $7.5 million, respectively.
The total compensation expense recognized related to the Company’s outstanding options was $1.4 million and $1.2 million for the three months ended March 31, 2019 and April 1, 2018, respectively.
There was $11.7 million of total unrecognized compensation cost related to nonvested stock options granted as of March 31, 2019. This cost is expected to be recognized over a weighted-average period of 2.3 years.
Restricted Stock Awards: The following table summarizes restricted stock award activity for the three months ended March 31, 2019:
Number of
Shares
Weighted-
Average
Grant-
Date Fair
Value
(In thousands)
Nonvested at December 30, 2018
465
$
61.72
Granted
148
94.91
Vested
(176
)
52.76
Forfeited
(10
)
67.84
Nonvested at March 31, 2019
427
$
76.26
The fair value of restricted stock awards vested during the three months ended March 31, 2019 and April 1, 2018 was $9.3 million and $8.2 million, respectively. The total compensation expense recognized related to the Company’s outstanding restricted stock awards was $2.7 million for the three months ended March 31, 2019, and $2.4 million for the three months ended April 1, 2018.
As of March 31, 2019, there was $25.9 million of total unrecognized compensation cost related to nonvested restricted stock awards. This cost is expected to be recognized over a weighted-average period of 2.0 years.
Performance Restricted Stock Units: As part of the Company's executive compensation program, the Company granted 74,948 performance restricted stock units during the three months ended March 31, 2019 that will vest based on performance of the Company. The weighted-average per-share grant date fair value of performance restricted stock units granted during the three months ended March 31, 2019 was $92.84. During the three months ended March 31, 2019, no performance restricted stock units were forfeited. The total compensation expense recognized related to the performance restricted stock units was $0.8 million and $0.4 million for the three months ended March 31, 2019 and April 1, 2018, respectively. As of March 31, 2019, there were 162,621 performance restricted stock units outstanding.
Performance Units: No performance units were granted during the three months ended March 31, 2019. During the three months ended March 31, 2019, 10,116 performance units were forfeited. The total compensation expense recognized related to performance units was $1.2 million and $1.3 million for the three months ended March 31, 2019 and April 1, 2018,
respectively. As of March 31, 2019, there were 134,035 performance units outstanding and subject to forfeiture, with a corresponding liability of $6.0 million recorded in accrued expenses and other current liabilities.
Stock Awards: The Company’s stock award program provides an annual equity award to non-employee directors. During the three months ended March 31, 2019, the Company did not grant any stock awards.
Employee Stock Purchase Plan: During the three months ended March 31, 2019, the Company issued 18,562 shares of common stock under the Company's Employee Stock Purchase Plan at a weighted-average price of $74.62 per share. At March 31, 2019, an aggregate of 0.8 million shares of the Company’s common stock remained available for sale to employees out of the 5.0 million shares authorized by shareholders for issuance under this plan.
Note 13: Goodwill and Intangible Assets, Net
The Company tests goodwill and non-amortizing intangible assets at least annually for possible impairment. Accordingly, the Company completes the annual testing of impairment for goodwill and non-amortizing intangible assets on the later of January 1 or the first day of each fiscal year. In addition to its annual test, the Company regularly evaluates whether events or circumstances have occurred that may indicate a potential impairment of goodwill or non-amortizing intangible assets.
The process of testing goodwill for impairment involves the determination of the fair value of the applicable reporting units. The test consists of the comparison of the fair value to the carrying value of the reporting unit to determine if the carrying value exceeds the fair value. If the carrying value of the reporting unit exceeds its fair value, an impairment loss in an amount equal to that excess is recognized up to the amount of goodwill. The Company performed its annual impairment testing for its reporting units as of January 1, 2019, its annual impairment testing date for fiscal year 2019. The Company concluded that there was no goodwill impairment. The range of the long-term terminal growth rates for the Company’s reporting units was 3% to 5% for the fiscal year 2019 impairment analysis. The range for the discount rates for the reporting units was 10.5% to 15%. Keeping all other variables constant, a 10% change in any one of these input assumptions for the various reporting units would still allow the Company to conclude that there was no impairment of goodwill.
The Company has consistently employed the income approach to estimate the current fair value when testing for impairment of goodwill. A number of significant assumptions and estimates are involved in the application of the income approach to forecast operating cash flows, including markets and market share, sales volumes and prices, costs to produce, tax rates, capital spending, discount rates and working capital changes. Cash flow forecasts are based on approved business unit operating plans for the early years’ cash flows and historical relationships in later years. The income approach is sensitive to changes in long-term terminal growth rates and the discount rates. The long-term terminal growth rates are consistent with the Company’s historical long-term terminal growth rates, as the current economic trends are not expected to affect the long-term terminal growth rates of the Company. The Company corroborates the income approach with a market approach.
Non-amortizing intangibles are also subject to an annual impairment test. The Company has consistently employed the relief from royalty model to estimate the current fair value when testing for impairment of non-amortizing intangible assets. The impairment test consists of a comparison of the fair value of the non-amortizing intangible asset with its carrying amount. If the carrying amount of a non-amortizing intangible asset exceeds its fair value, an impairment loss in an amount equal to that excess is recognized up to the amount of the amortizing intangible asset. In addition, the Company evaluates the remaining useful life of its non-amortizing intangible asset at least annually to determine whether events or circumstances continue to support an indefinite useful life. If events or circumstances indicate that the useful life of the Company's non-amortizing intangible asset is no longer indefinite, the asset will be tested for impairment. This intangible asset will then be amortized prospectively over its estimated remaining useful life and accounted for in the same manner as other intangible assets that are subject to amortization. The Company performed its annual impairment testing as of January 1, 2019, and concluded that there was no impairment of its non-amortizing intangible asset. An assessment of the recoverability of amortizing intangible assets takes place when events have occurred that may give rise to an impairment. No such events occurred during the first three months of fiscal year 2019.
The changes in the carrying amount of goodwill for the three months ended March 31, 2019 were as follows:
Discovery & Analytical Solutions
Diagnostics
Consolidated
(In thousands)
Balance at December 30, 2018
$
1,334,992
$
1,617,616
$
2,952,608
Foreign currency translation
(6,023
)
(12,859
)
(18,882
)
Acquisitions, earn-outs and other
5,356
—
5,356
Balance at March 31, 2019
$
1,334,325
$
1,604,757
$
2,939,082
Identifiable intangible asset balances by category were as follows:
March 31, 2019
December 30, 2018
(In thousands)
Patents
$
42,525
$
42,646
Less: Accumulated amortization
(38,211
)
(37,753
)
Net patents
4,314
4,893
Trade names and trademarks
77,276
78,146
Less: Accumulated amortization
(35,285
)
(33,801
)
Net trade names and trademarks
41,991
44,345
Licenses
58,665
53,305
Less: Accumulated amortization
(46,584
)
(45,550
)
Net licenses
12,081
7,755
Core technology
539,204
540,911
Less: Accumulated amortization
(278,755
)
(265,744
)
Net core technology
260,449
275,167
Customer relationships
1,092,783
1,089,527
Less: Accumulated amortization
(315,959
)
(293,964
)
Net customer relationships
776,824
795,563
IPR&D
1,333
1,360
Net amortizable intangible assets
1,096,992
1,129,083
Non-amortizing intangible asset:
Trade name
70,584
70,584
Total
$
1,167,576
$
1,199,667
Total amortization expense related to definite-lived intangible assets was $38.7 million and $32.9 million for the three months ended March 31, 2019 and April 1, 2018, respectively. Estimated amortization expense related to amortizable intangible assets for each of the next five years is $111.7 million for the remainder of fiscal year 2019, $152.8 million for fiscal year 2020, $137.5 million for fiscal year 2021, $127.3 million for fiscal year 2022, and $110.0 million for fiscal year 2023.
Note 14: Warranty Reserves
The Company provides warranty protection for certain products usually for a period of one year beyond the date of sale. The majority of costs associated with warranty obligations include the replacement of parts and the time for service personnel to respond to repair and replacement requests. A warranty reserve is recorded based upon historical results, supplemented by management’s expectations of future costs. Warranty reserves are included in “Accrued expenses and other current liabilities” on the condensed consolidated balance sheets.
A summary of warranty reserve activity is as follows:
Three Months Ended
March 31, 2019
April 1, 2018
(In thousands)
Balance at beginning of period
$
8,393
$
9,050
Provision charged to income
2,768
3,170
Payments
(3,254
)
(3,477
)
Adjustments to previously provided warranties, net
270
(110
)
Foreign currency translation and acquisitions
(18
)
153
Balance at end of period
$
8,159
$
8,786
Note 15: Employee Postretirement Benefit Plans
The following table summarizes the components of net periodic pension credit for the Company’s various defined benefit employee pension and postretirement plans:
Defined Benefit
Pension Benefits
Postretirement
Medical Benefits
Three Months Ended
March 31, 2019
April 1, 2018
March 31, 2019
April 1, 2018
(In thousands)
Service and administrative costs
$
1,633
$
1,756
$
22
$
27
Interest cost
4,159
4,104
29
30
Expected return on plan assets
(6,176
)
(7,346
)
(294
)
(314
)
Amortization of prior service costs
(39
)
(41
)
—
—
Net periodic pension credit
$
(423
)
$
(1,527
)
$
(243
)
$
(257
)
During the three months ended March 31, 2019 and April 1, 2018, the Company contributed $2.1 million and $2.2 million, respectively, in the aggregate, to pension plans outside of the United States.
The Company recognizes actuarial gains and losses, unless an interim remeasurement is required, in the fourth quarter of the year in which the gains and losses occur, in accordance with the Company's accounting method for defined benefit pension plans and other postretirement benefits as described in Note 1 of the Company's audited consolidated financial statements and notes included in its 2018 Form 10-K. Such adjustments for gains and losses are primarily driven by events and circumstances beyond the Company's control, including changes in interest rates, the performance of the financial markets and mortality assumptions.
Note 16: Derivatives and Hedging Activities
The Company uses derivative instruments as part of its risk management strategy only, and includes derivatives utilized as economic hedges that are not designated as hedging instruments. By nature, all financial instruments involve market and credit risks. The Company enters into derivative instruments with major investment grade financial institutions and has policies to monitor the credit risk of those counterparties. The Company does not enter into derivative contracts for trading or other speculative purposes, nor does the Company use leveraged financial instruments. Approximately 70% of the Company’s business is conducted outside of the United States, generally in foreign currencies. As a result, fluctuations in foreign currency exchange rates can increase the costs of financing, investing and operating the business.
In the ordinary course of business, the Company enters into foreign exchange contracts for periods consistent with its committed exposures to mitigate the effect of foreign currency movements on transactions denominated in foreign currencies. The intent of these economic hedges is to offset gains and losses that occur on the underlying exposures from these currencies, with gains and losses resulting from the forward currency contracts that hedge these exposures. Transactions covered by hedge contracts include intercompany and third-party receivables and payables. The contracts are primarily in European and Asian currencies, have maturities that do not exceed 12 months, have no cash requirements until maturity, and are recorded at fair value on the Company’s condensed consolidated balance sheets. The unrealized gains and losses on the Company’s foreign currency contracts are recognized immediately in interest and other expense, net. The cash flows related to the settlement of
these hedges are included in cash flows from operating activities within the Company’s condensed consolidated statement of cash flows.
Principal hedged currencies include the Chinese Yuan, Euro, Swedish Krona, and Singapore Dollar. The Company held forward foreign exchange contracts, designated as economic hedges, with U.S. dollar equivalent notional amounts totaling $171.7 million, $223.3 million and $165.6 million at March 31, 2019, December 30, 2018 and April 1, 2018, respectively, and the fair value of these foreign currency derivative contracts was insignificant. The gains and losses realized on these foreign currency derivative contracts are not material. The duration of these contracts was generally 30 days or less during each of the three months ended March 31, 2019 and April 1, 2018.
In addition, in connection with certain intercompany loan agreements utilized to finance its acquisitions and stock repurchase program, the Company enters into forward foreign exchange contracts intended to hedge movements in foreign exchange rates prior to settlement of such intercompany loans denominated in foreign currencies. The Company records these hedges at fair value on the Company’s condensed consolidated balance sheets. The unrealized gains and losses on these hedges, as well as the gains and losses associated with the remeasurement of the intercompany loans, are recognized immediately in interest and other expense, net. The cash flows related to the settlement of these hedges are included in cash flows from financing activities within the Company’s condensed consolidated statement of cash flows.
The outstanding forward exchange contracts designated as economic hedges, which were intended to hedge movements in foreign exchange rates prior to the settlement of certain intercompany loan agreements included combined Euro notional amounts of €22.8 million and combined U.S. Dollar notional amounts of $7.2 million as of March 31, 2019, combined Euro notional amounts of €37.3 million and combined U.S. Dollar notional amounts of $5.7 million as of December 30, 2018, and combined Euro notional amounts of €100.4 million and combined U.S. Dollar notional amounts of $629.0 million as of April 1, 2018. The net gains and losses on these derivatives, combined with the gains and losses on the remeasurement of the hedged intercompany loans were not material for each of the three months ended March 31, 2019 and April 1, 2018. The Company paid $1.7 million and $36.2 million during the three months ended March 31, 2019 and April 1, 2018, respectively, from the settlement of these hedges.
In April 2018, the Company designated a portion of the 2026 Notes to hedge its investments in certain foreign subsidiaries. Unrealized translation adjustments from a portion of the 2026 Notes were included in the foreign currency translation component of AOCI, which offsets translation adjustments on the underlying net assets of foreign subsidiaries. The cumulative translation gains or losses will remain in AOCI until the foreign subsidiaries are liquidated or sold. As of March 31, 2019, the total notional amount of the 2026 Notes that was designated to hedge investments in foreign subsidiaries was €225.0 million. The unrealized foreign exchange gain recorded in AOCI related to the net investment hedge was $4.8 million for the three months ended March 31, 2019.
During fiscal year 2018, the Company designated the April 2021 Notes to hedge its investments in certain foreign subsidiaries. Unrealized translation adjustments from the April 2021 Notes were included in the foreign currency translation component of AOCI, which offsets translation adjustments on the underlying net assets of foreign subsidiaries. The cumulative translation gains or losses will remain in AOCI until the foreign subsidiaries are liquidated or sold. As of March 31, 2019, the total notional amount of the April 2021 Notes that was designated to hedge investments in foreign subsidiaries was €298.7 million. The unrealized foreign exchange gain recorded in AOCI related to the net investment hedge was $6.9 million for the three months ended March 31, 2019.
The Company does not expect any material net pre-tax gains or losses to be reclassified from accumulated other comprehensive loss into interest and other expense, net within the next twelve months.
Note 17: Fair Value Measurements
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, derivatives, marketable securities and accounts receivable. The Company believes it had no significant concentrations of credit risk as of March 31, 2019.
The Company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during the three months ended March 31, 2019. The Company’s financial assets and liabilities carried at fair value are primarily comprised of marketable securities, derivative contracts used to hedge the Company’s currency risk, and acquisition-related contingent consideration. The Company has not elected to measure any additional financial instruments or other items at fair value.
Valuation Hierarchy: The following summarizes the three levels of inputs required to measure fair value. For Level 1 inputs, the Company utilizes quoted market prices as these instruments have active markets. For Level 2 inputs, the Company
utilizes quoted market prices in markets that are not active, broker or dealer quotations, or utilizes alternative pricing sources with reasonable levels of price transparency. For Level 3 inputs, the Company utilizes unobservable inputs based on the best information available, including estimates by management primarily based on information provided by third-party fund managers, independent brokerage firms and insurance companies. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible.
The following tables show the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2019 and December 30, 2018 classified in one of the three classifications described above:
Fair Value Measurements at March 31, 2019 Using:
Total Carrying Value at March 31, 2019
Quoted Prices in
Active Markets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
(In thousands)
Marketable securities
$
2,350
$
2,350
$
—
$
—
Foreign exchange derivative assets
318
—
318
—
Foreign exchange derivative liabilities
(228
)
—
(228
)
—
Contingent consideration
(34,349
)
—
—
(34,349
)
Fair Value Measurements at December 30, 2018 Using:
Total Carrying Value at December 30, 2018
Quoted Prices in
Active Markets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
(In thousands)
Marketable securities
$
2,447
$
2,447
$
—
$
—
Foreign exchange derivative assets
750
—
750
—
Foreign exchange derivative liabilities
(594
)
—
(594
)
—
Contingent consideration
(69,661
)
—
—
(69,661
)
Level 1 and Level 2 Valuation Techniques: The Company’s Level 1 and Level 2 assets and liabilities are comprised of investments in equity and fixed-income securities as well as derivative contracts. For financial assets and liabilities that utilize Level 1 and Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including common stock price quotes, foreign exchange forward prices and bank price quotes. Below is a summary of valuation techniques for Level 1 and Level 2 financial assets and liabilities.
Marketable securities: Include equity and fixed-income securities measured at fair value using the quoted market prices in active markets at the reporting date.
Foreign exchange derivative assets and liabilities: Include foreign exchange derivative contracts that are valued using quoted forward foreign exchange prices at the reporting date. The Company’s foreign exchange derivative contracts are subject to master netting arrangements that allow the Company and its counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in the Company's condensed consolidated balance sheet on a net basis and are recorded in other assets. As of both March 31, 2019 and December 30, 2018, none of the master netting arrangements involved collateral.
Level 3 Valuation Techniques: The Company’s Level 3 liabilities are comprised of contingent consideration related to acquisitions. For liabilities that utilize Level 3 inputs, the Company uses significant unobservable inputs. Below is a summary of valuation techniques for Level 3 liabilities.
Contingent consideration: Contingent consideration is measured at fair value at the acquisition date using projected milestone dates, discount rates, probabilities of success and projected revenues (for revenue-based considerations). Projected risk-adjusted contingent payments are discounted back to the current period using a discounted cash flow model.
During fiscal year 2015, the Company acquired certain assets and assumed certain liabilities from Vanadis Diagnostics AB. Under the terms of the acquisition, the initial purchase consideration was $32.0 million, net of cash and the Company will
be obligated to make potential future milestone payments, based on completion of a proof of concept, regulatory approvals and product sales, of up to $93.0 million ranging from 2016 to 2019. The fair value of the contingent consideration as of the acquisition date was estimated at $56.9 million. During the first quarter of fiscal year 2019, the Company updated the fair value of the contingent consideration and recorded a liability of $28.7 million as of March 31, 2019. The key assumptions used to determine the fair value of the contingent consideration as of March 31, 2019 included projected milestone dates within 2019, discount rates ranging from 2.4% to 4.3%, conditional probabilities of success of each individual milestone ranging from 95% to 100% and cumulative probabilities of success for each individual milestone ranging from 94.1% to 100%. A significant delay in the product development (including projected regulatory milestone) achievement date in isolation could result in a significantly lower fair value measurement; a significant acceleration in the product development (including projected regulatory milestone) achievement date in isolation would not have a material impact on the fair value measurement; a significant change in the discount rate in isolation would not have a material impact on the fair value measurement; and a significant change in the probabilities of success in isolation could result in a significant change in fair value measurement.
During the three months ended March 31, 2019, the Company paid $18.5 million of contingent consideration, of which $12.1 million was included in financing activities and $6.4 million was included in operating activities in the consolidated statements of cash flows. As of March 31, 2019, the Company had recorded $20.0 million in other current liabilities for a milestone achieved but not paid until the second quarter of fiscal year 2019.
The fair values of contingent consideration are calculated on a quarterly basis based on a collaborative effort of the Company’s regulatory, research and development, operations, finance and accounting groups, as appropriate. Potential valuation adjustments are made as additional information becomes available, including the progress towards achieving proof of concept, regulatory approvals and revenue targets as compared to initial projections, the impact of market competition and market landscape shifts from non-invasive prenatal testing products, with the impact of such adjustments being recorded in the Company's consolidated statements of operations.
As of March 31, 2019, the Company may have to pay contingent consideration, related to acquisitions with open contingency periods, of up to $38.0 million. The expected maximum earnout period for the acquisitions with open contingency periods does not exceed 1.5 years from March 31, 2019, and the remaining weighted average expected earnout period at March 31, 2019 was 0.7 years.
A reconciliation of the beginning and ending Level 3 net liabilities for contingent consideration is as follows:
Three Months Ended
March 31, 2019
April 1, 2018
(In thousands)
Balance at beginning of period
$
(69,661
)
$
(65,328
)
Amounts paid and foreign currency translation
18,414
—
Reclassified to other current liabilities for a milestone achieved
20,000
—
Change in fair value (included within selling, general and administrative expenses)
(3,102
)
(117
)
Balance at end of period
$
(34,349
)
$
(65,445
)
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturities of these assets and liabilities. If measured at fair value, cash and cash equivalents would be classified as Level 1.
As of March 31, 2019, the Company’s senior unsecured revolving credit facility, which provides for $1.0 billion of revolving loans, had a carrying value of $442.6 million, net of $2.4 million of unamortized debt issuance costs. As of December 30, 2018, the Company’s senior unsecured revolving credit facility had a carrying value of $415.6 million, net of $2.4 million of unamortized debt issuance costs. The interest rate on the Company’s senior unsecured revolving credit facility is reset at least monthly to correspond to variable rates that reflect currently available terms and conditions for similar debt. The Company had no change in credit standing during the first three months of fiscal year 2019. Consequently, the carrying value approximates fair value and were classified as Level 2.
The Company's November 2021 Notes, with a face value of $500.0 million, had an aggregate carrying value of $497.5 million, net of $1.0 million of unamortized original issue discount and $1.5 million of unamortized debt issuance costs as of March 31, 2019. 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 30, 2018. The November 2021 Notes had a fair value of $522.1 million and $516.1 million as of March 31, 2019 and December 30, 2018,
respectively. The fair value of the November 2021 Notes is estimated using market quotes from brokers and is based on current rates offered for similar debt.
The Company's 2026 Notes, with a face value of €500.0 million, had an aggregate carrying value of $553.4 million, net of $3.8 million of unamortized original issue discount and $3.7 million of unamortized debt issuance costs as of March 31, 2019. 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 30, 2018. The 2026 Notes had a fair value of €512.3 million and €496.1 million as of March 31, 2019 and December 30, 2018, respectively. The fair value of the 2026 Notes is estimated using market quotes from brokers and is based on current rates offered for similar debt.
The Company's April 2021 Notes, with a face value of €300.0 million, had an aggregate carrying value of $334.6 million, net of $0.1 million of unamortized original issue discount and $1.8 million of unamortized debt issuance costs as of March 31, 2019. 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 as of December 30, 2018. The April 2021 Notes had a fair value of €301.4 million and €300.5 million as of March 31, 2019 and December 30, 2018, respectively. The fair value of the April 2021 Notes is estimated using market quotes from brokers and is based on current rates offered for similar debt.
As of March 31, 2019, the April 2021 Notes, November 2021 Notes, and 2026 Notes were classified as Level 2.
The Company’s other debt facilities had an aggregate carrying value of $34.2 million and $38.2 million as of March 31, 2019 and December 30, 2018, respectively. As of March 31, 2019, these consisted of bank loans in the aggregate amount of $34.1 million bearing fixed interest rates between 1.1% and 4.5% and a bank loan in the amount of $0.1 million bearing a variable interest rate based on the Euribor rate plus a margin of 1.5%. The Company had no change in credit standing during the first three months of fiscal year 2019. Consequently, the carrying value approximates fair value and were classified as Level 2.
As of March 31, 2019, there has not been any significant impact to the fair value of the Company’s derivative liabilities due to credit risk. Similarly, there has not been any significant adverse impact to the Company’s derivative assets based on the evaluation of its counterparties’ credit risks.
Note 18: Leases
Changes in significant accounting policies
Except for the changes below, the Company consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.
The Company adopted ASC 842 with a date of initial application of December 31, 2018 ("transition date"). As a result, the Company has changed its accounting policy for leases as detailed below. The Company applied ASC 842 using the modified retrospective method and applied the new leases standard at transition date, with a cumulative effect adjustment recognized in the opening balance of retained earnings in fiscal year 2019. Therefore, the comparative information has not been adjusted and continues to be reported under ASC 840.
As a lessee, the Company recognized operating leases in the consolidated balance sheet under ASC 842. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in the Company's consolidated balance sheet. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities were recognized at the transition date based on the present value of the remaining lease payments over the lease term. As most of the Company's leases as of the transition date did not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at transition date in determining the present value of lease payments. The Company used the implicit rate when readily determinable. The operating lease ROU asset excludes lease incentives. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as cars, the Company accounts for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, the Company applies a portfolio approach to effectively account for the operating lease ROU assets and liabilities.
The Company has made an accounting policy election not to recognize ROU assets and lease liabilities that arise from short-term leases for facilities and equipment. Instead, the Company recognizes the lease payments in the consolidated
statement of operations on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred.
As a lessor, the Company applies the practical expedient to not separate non-lease components from the associated lease component, instead to account for those components as a single component if the non-lease components otherwise would be accounted for under ASC 606, Revenue From Contracts With Customers (“ASC 606”), and both of the following criteria are met: 1) the timing and pattern of transfer of the non-lease component or components and associated lease component are the same; and 2) the lease component, if accounted for separately, would be classified as an operating lease. If the non-lease component or components associated with the lease component are the predominant component of the combined component, the Company accounts for the combined component in accordance with ASC 606. Otherwise, the Company accounts for the combined component as an operating lease in accordance with ASC 842.
Lessee Disclosures
The Company leases certain property and equipment under operating and finance leases. The Company's leases have remaining lease terms of less than 1 year to 41 years, some of which include options to extend the lease for up to 5 years, and some of which include options to terminate the lease within 1 year. Finance leases are not material to the Company.
The components of lease expense were as follows:
Three Months Ended
March 31, 2019
(In thousands)
Lease cost:
Operating lease cost
$
13,545
Supplemental cash flow information related to leases was as follows:
Three Months Ended
March 31, 2019
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Supplemental balance sheet information related to leases was as follows:
Three Months Ended
March 31, 2019
(In thousands, except lease term and discount rate)
Operating Leases:
Operating lease right-of-use assets
$
191,251
Accrued expenses and other current liabilities
$
38,035
Operating lease liabilities
167,748
Total operating liabilities
$
205,783
Weighted Average Remaining Lease Term in Years
Operating leases
7.9
Weighted Average Remaining Discount Rate
Operating leases
3.3%
Maturities of lease liabilities as of March 31, 2019 were as follows:
Operating Leases
(In thousands)
2019
$
34,548
2020
41,305
2021
34,047
2022
24,100
2023
19,610
2024
17,857
2025 and thereafter
65,951
Total lease payments
237,418
Less imputed interest
(31,635
)
Total
$
205,783
Under ASC 840, minimum rental commitments under noncancelable operating leases as of December 30, 2018 were as follows: $56.4 million in fiscal year 2019, $46.6 million in fiscal year 2020, $33.5 million in fiscal year 2021, $22.1 million in fiscal year 2022, $15.6 million in fiscal year 2023 and $67.6 million in fiscal year 2024 and thereafter.
Lessor Disclosures
Certain of the Company's contracts require that it places its instrument at the customer's site and sells reagents to the customer. As the predominant component in these contracts with customers are the sales of reagents and when both of the criteria above are met, the Company accounts for the combined component under ASC 606. When one of the criteria above are not met, the Company accounts for the non-lease component under ASC 606 and the lease component under ASC 842. Profit or loss, interest income and aggregate net investment in sales-type leases that did not qualify for the practical expedient are not material to the Company.
Note 19: Contingencies
The Company is conducting a number of environmental investigations and remedial actions at current and former locations of the Company and, along with other companies, has been named a potentially responsible party (“PRP”) for certain
waste disposal sites. The Company accrues for environmental issues in the accounting period that the Company’s responsibility is established and when the cost can be reasonably estimated. The Company has accrued $8.4 million and $7.9 million as of March 31, 2019 and December 30, 2018, respectively, which represents its management’s estimate of the cost of the remediation of known environmental matters, and does not include any potential liability for related personal injury or property damage claims. These amounts were included in accrued expenses and other current liabilities. The Company's environmental accrual is not discounted and does not reflect the recovery of any material amounts through insurance or indemnification arrangements. The cost estimates are subject to a number of variables, including the stage of the environmental investigations, the magnitude of the possible contamination, the nature of the potential remedies, possible joint and several liability, the time period over which remediation may occur, and the possible effects of changing laws and regulations. For sites where the Company has been named a PRP, management does not currently anticipate any additional liability to result from the inability of other significant named parties to contribute. The Company expects that the majority of such accrued amounts could be paid out over a period of up to ten years. As assessment and remediation activities progress at each individual site, these liabilities are reviewed and adjusted to reflect additional information as it becomes available. There have been no environmental problems to date that have had, or are expected to have, a material adverse effect on the Company’s condensed consolidated financial statements. While it is possible that a loss exceeding the amounts recorded in the condensed consolidated financial statements may be incurred, the potential exposure is not expected to be materially different from those amounts recorded.
The Company is subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of its business activities. Although the Company has established accruals for potential losses that it believes are probable and reasonably estimable, in the opinion of the Company’s management, based on its review of the information available at this time, the total cost of resolving these contingencies at March 31, 2019 would not have a material adverse effect on the Company’s condensed consolidated financial statements. However, each of these matters is subject to uncertainties, and it is possible that some of these matters may be resolved unfavorably to the Company.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q, including the following management’s discussion and analysis, contains forward-looking information that you should read in conjunction with the condensed consolidated financial statements and notes to the condensed consolidated financial statements that we have included elsewhere in this report. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Words such as “believes,” “plans,” “anticipates,” “intends,” “expects,” “will” and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from the plans, intentions or expectations we disclose in the forward-looking statements we make. We have included important factors below under the heading “Risk Factors” in Part II, Item 1A. that we believe could cause actual results to differ materially from the forward-looking statements we make. We are not obligated to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are a leading provider of products, services and solutions 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.
The principal products and services of our two operating segments are:
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Discovery & Analytical Solutions. Provides products and services targeted towards the life sciences and applied markets.
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Diagnostics. Develops diagnostics, tools and applications focused on clinically-oriented customers, especially within the reproductive health, immunodiagnostics and applied genomics markets. The Diagnostics segment serves the diagnostics market.
Overview of the First Quarter of Fiscal Year 2019
Our fiscal year ends on the Sunday nearest December 31. We report fiscal years under a 52/53 week format and as a result, certain fiscal years will contain 53 weeks. The fiscal year ending December 29, 2019 ("fiscal year 2019") will include 52 weeks, and the fiscal year ended December 30, 2018 ("fiscal year 2018") included 52 weeks.
Our overall revenue in the first quarter of fiscal year 2019 was $648.7 million and increased $4.8 million, or 1%, as compared to the first quarter of fiscal year 2018, reflecting an increase of $12.5 million, or 5%, in our Diagnostics segment revenue and a decrease of $7.7 million, or 2%, in our Discovery & Analytical Solutions segment revenue. The increase in our Diagnostics segment revenue for the first quarter of fiscal year 2019 was driven by broad based growth across our reproductive health, immunodiagnostics and applied genomics businesses partially offset by unfavorable changes in foreign exchange rates. The decrease in our Discovery & Analytical Solutions segment revenue for the first quarter of fiscal year 2019 was driven by unfavorable changes in foreign exchange rates and a decrease in our life sciences and applied markets revenue.
In our Diagnostics segment, we experienced growth in reproductive health that was primarily driven by our genomic testing business. The growth in applied genomics was primarily driven by microfluidics and automated workstations. Our immunodiagnostics business grew from strong performances across both EUROIMMUN and Tulip.
In our Discovery & Analytical Solutions segment, we had a decrease in revenue for the first quarter of fiscal year 2019 as compared to the first quarter of fiscal year 2018, primarily driven by unfavorable changes in foreign exchange rates. The decrease in our life sciences market revenue was the result of a decrease in our academic and government market revenue driven by the timing of various service offerings and the US government shutdown, partially offset by an increase in revenue in our pharma and biotech markets driven by continued growth in our discovery and OneSource businesses. The decrease in our applied markets revenue was driven by the US government shutdown.
Our consolidated gross margins increased 207 basis points in the first quarter of fiscal year 2019, as compared to the first quarter of fiscal year 2018, primarily due to stronger productivity in our Diagnostics business and favorable product mix, partially offset by increased amortization expense. Our consolidated operating margins increased 202 basis points in the first quarter of fiscal year 2019, as compared to the first quarter of fiscal year 2018, primarily driven by stronger productivity in our gross margin and improved operating expense leverage.
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.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, warranty costs, bad debts, inventories, accounting for business combinations and dispositions, long-lived assets, income taxes, restructuring, pensions and other postretirement benefits, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are those policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. We believe our critical accounting policies include our policies regarding revenue recognition, warranty costs, allowances for doubtful accounts, inventory valuation, business combinations, value of long-lived assets, including goodwill and other intangibles, employee compensation and benefits, restructuring activities, gains or losses on dispositions and income taxes.
We adopted Accounting Standards Codification 842, Leases ("ASC 842") as of December 31, 2018. As a result, we changed our accounting policy for leases as detailed in Note 18, Leases, in the Notes to Condensed Consolidated Financial Statements. For a more detailed discussion of our critical accounting policies and estimates, other than the changes in lease accounting, refer to the Notes to our audited consolidated financial statements and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2018 (our “2018 Form 10-K”), as filed with the Securities and Exchange Commission (the "SEC"). There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2019, other than the changes in lease accounting mentioned above.
Consolidated Results of Continuing Operations
Revenue
Revenue for the three months ended March 31, 2019 was $648.7 million, as compared to $644.0 million for the three months ended April 1, 2018, an increase of $4.8 million, or 1%, which includes an approximate 4% decrease in revenue attributable to unfavorable changes in foreign exchange rates. The analysis in the remainder of this paragraph compares segment revenue for the three months ended March 31, 2019 as compared to the three months ended April 1, 2018 and includes the effect of foreign exchange rate fluctuations, acquisitions and divestitures. Our Discovery & Analytical Solutions segment revenue was $388.8 million for the three months ended March 31, 2019, as compared to $396.5 million for the three months ended April 1, 2018, a decrease of $7.7 million, or 2%, primarily due to a decrease of $5.4 million from our applied markets revenue and a decrease of $2.3 million from our life sciences market revenue. Our Diagnostics segment revenue was $259.9 million for the three months ended March 31, 2019, as compared to $247.4 million for the three months ended April 1, 2018, an increase of $12.5 million, or 5%, due to broad based growth across our reproductive health, immunodiagnostics and applied genomics businesses. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination accounting rules, we did not recognize $0.2 million of revenue for each of the three months ended March 31, 2019 and April 1, 2018 that otherwise would have been recorded by the acquired businesses during each of the respective periods.
Cost of Revenue
Cost of revenue for the three months ended March 31, 2019 was $340.9 million, as compared to $351.8 million for the three months ended April 1, 2018, a decrease of $10.8 million, or 3%. As a percentage of revenue, cost of revenue decreased to 52.6% for the three months ended March 31, 2019, from 54.6% for the three months ended April 1, 2018, resulting in an increase in gross margin of 207 basis points to 47.4% for the three months ended March 31, 2019, from 45.4% for the three months ended April 1, 2018. Amortization of intangible assets increased and was $14.8 million for the three months ended March 31, 2019, as compared to $11.7 million for the three months ended April 1, 2018. Stock-based compensation expense was $0.3 million for each of the three months ended March 31, 2019 and April 1, 2018. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an incremental expense of $0.3 million for the three months ended March 31, 2019 as compared to $9.2 million for the three months ended April 1, 2018. In addition to the above items, the overall increase in gross margin was primarily the result of stronger productivity in our Diagnostics business and a favorable shift in product mix.
Selling, general and administrative expenses for the three months ended March 31, 2019 were $198.9 million, as compared to $199.7 million for the three months ended April 1, 2018, a decrease of $0.9 million, or 0.4%. As a percentage of revenue, selling, general and administrative expenses decreased and were 30.7% for the three months ended March 31, 2019, as compared to 31.0% for the three months ended April 1, 2018. Amortization of intangible assets increased and was $23.9 million for the three months ended March 31, 2019, as compared to $21.1 million for the three months ended April 1, 2018. Stock-based compensation expense was $5.5 million for the three months ended March 31, 2019 as compared to $4.7 million for the three months ended April 1, 2018. Other purchase accounting adjustments added an incremental expense of $3.1 million for the three months ended March 31, 2019, as compared to $0.1 million for the three months ended April 1, 2018. Acquisition and divestiture-related expenses added an incremental expense of $1.6 million for the three months ended March 31, 2019, as compared to $2.6 million for the three months ended April 1, 2018. Legal costs for significant litigation matters were $0.4 million for the three months ended March 31, 2019, as compared to $4.3 million for the three months ended April 1, 2018. In addition to the above items, the decrease in selling, general and administrative expenses was primarily the result of cost containment and productivity initiatives.
Research and Development Expenses
Research and development expenses for the three months ended March 31, 2019 were $48.0 million, as compared to $46.0 million for the three mon