PKI-9.30.2012-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________
FORM 10-Q
_______________________________________
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2012
or
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¨ | 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)
_______________________________________
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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 ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ý | Accelerated filer | | ¨ |
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Non-accelerated filer | | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of November 1, 2012, there were outstanding 114,780,142 shares of common stock, $1 par value per share.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II. OTHER INFORMATION | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 6. | | |
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PART I. FINANCIAL INFORMATION
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Item 1. | Unaudited Financial Statements |
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2012 | | October 2, 2011 | | September 30, 2012 | | October 2, 2011 |
| | | (As adjusted) | | | | (As adjusted) |
| (In thousands, except per share data) |
Product revenue | $ | 349,067 |
| | $ | 301,788 |
| | $ | 1,070,504 |
| | $ | 934,333 |
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Service revenue | 160,537 |
| | 151,147 |
| | 471,780 |
| | 444,845 |
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Total revenue | 509,604 |
| | 452,935 |
| | 1,542,284 |
| | 1,379,178 |
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Cost of product revenue | 182,179 |
| | 162,001 |
| | 555,078 |
| | 495,333 |
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Cost of service revenue | 96,685 |
| | 91,578 |
| | 285,658 |
| | 274,984 |
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Total cost of revenue | 278,864 |
| | 253,579 |
| | 840,736 |
| | 770,317 |
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Selling, general and administrative expenses | 145,442 |
| | 133,119 |
| | 452,026 |
| | 404,217 |
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Research and development expenses | 32,408 |
| | 30,102 |
| | 99,101 |
| | 84,319 |
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Restructuring and contract termination charges, net | 9,672 |
| | — |
| | 21,034 |
| | 3,340 |
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Operating income from continuing operations | 43,218 |
| | 36,135 |
| | 129,387 |
| | 116,985 |
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Interest and other expense, net | 11,872 |
| | 3,916 |
| | 36,060 |
| | 13,943 |
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Income from continuing operations before income taxes | 31,346 |
| | 32,219 |
| | 93,327 |
| | 103,042 |
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Provision for income taxes | 2,357 |
| | 4,215 |
| | 8,694 |
| | 18,646 |
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Net income from continuing operations | 28,989 |
| | 28,004 |
| | 84,633 |
| | 84,396 |
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Gain on disposition of discontinued operations before income taxes | 898 |
| | 3,813 |
| | 1,915 |
| | 2,072 |
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Provision for (benefit from) income taxes on disposition of discontinued operations | 293 |
| | (4,805 | ) | | 752 |
| | (4,828 | ) |
Net income from discontinued operations and dispositions | 605 |
| | 8,618 |
| | 1,163 |
| | 6,900 |
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Net income | $ | 29,594 |
| | $ | 36,622 |
| | $ | 85,796 |
| | $ | 91,296 |
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Basic earnings per share: | | | | | | | |
Net income from continuing operations | $ | 0.25 |
| | $ | 0.25 |
| | $ | 0.75 |
| | $ | 0.75 |
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Net income from discontinued operations and dispositions | 0.01 |
| | 0.08 |
| | 0.01 |
| | 0.06 |
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Net income | $ | 0.26 |
| | $ | 0.32 |
| | $ | 0.76 |
| | $ | 0.81 |
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Diluted earnings per share: | | | | | | | |
Net income from continuing operations | $ | 0.25 |
| | $ | 0.25 |
| | $ | 0.74 |
| | $ | 0.74 |
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Net income from discontinued operations and dispositions | 0.01 |
| | 0.08 |
| | 0.01 |
| | 0.06 |
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Net income | $ | 0.26 |
| | $ | 0.32 |
| | $ | 0.75 |
| | $ | 0.80 |
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Weighted average shares of common stock outstanding: | | | | | | | |
Basic | 113,860 |
| | 112,703 |
| | 113,491 |
| | 113,065 |
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Diluted | 114,998 |
| | 113,425 |
| | 114,565 |
| | 114,063 |
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Cash dividends per common share | $ | 0.07 |
| | $ | 0.07 |
| | $ | 0.21 |
| | $ | 0.21 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2012 | | October 2, 2011 | | September 30, 2012 | | October 2, 2011 |
| | | (As adjusted) | | | | (As adjusted) |
| (In thousands) |
Net income | $ | 29,594 |
| | $ | 36,622 |
| | $ | 85,796 |
| | $ | 91,296 |
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Other comprehensive income (loss): | | | | | | | |
Foreign currency translation adjustments, net of tax | 20,446 |
| | (42,134 | ) | | 3,868 |
| | 21,477 |
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Reclassification adjustments for losses on derivatives included in net income, net of tax | 299 |
| | 299 |
| | 897 |
| | 897 |
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Unrealized gains (losses) on securities, net of tax | 19 |
| | (75 | ) | | 41 |
| | (57 | ) |
Other comprehensive income (loss) | 20,764 |
| | (41,910 | ) | | 4,806 |
| | 22,317 |
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Comprehensive income (loss) | $ | 50,358 |
| | $ | (5,288 | ) | | $ | 90,602 |
| | $ | 113,613 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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| September 30, 2012 | | January 1, 2012 |
| | | (As adjusted) |
| (In thousands, except share data) |
Current assets: | | | |
Cash and cash equivalents | $ | 170,828 |
| | $ | 142,342 |
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Accounts receivable, net | 394,937 |
| | 409,888 |
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Inventories, net | 261,400 |
| | 240,763 |
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Other current assets | 113,627 |
| | 89,857 |
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Current assets of discontinued operations | 202 |
| | 202 |
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Total current assets | 940,994 |
| | 883,052 |
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Property, plant and equipment, net: | | | |
At cost | 501,327 |
| | 451,953 |
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Accumulated depreciation | (299,679 | ) | | (277,386 | ) |
Property, plant and equipment, net | 201,648 |
| | 174,567 |
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Marketable securities and investments | 1,144 |
| | 1,105 |
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Intangible assets, net | 606,100 |
| | 661,607 |
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Goodwill | 2,092,351 |
| | 2,094,235 |
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Other assets, net | 47,734 |
| | 41,075 |
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Total assets | $ | 3,889,971 |
| | $ | 3,855,641 |
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Current liabilities: | | | |
Short-term debt | $ | 1,470 |
| | $ | — |
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Accounts payable | 155,728 |
| | 173,153 |
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Accrued restructuring costs | 21,161 |
| | 13,958 |
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Accrued expenses | 402,807 |
| | 410,142 |
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Current liabilities of discontinued operations | 1,111 |
| | 1,429 |
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Total current liabilities | 582,277 |
| | 598,682 |
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Long-term debt | 930,860 |
| | 944,908 |
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Long-term liabilities | 434,394 |
| | 469,835 |
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Total liabilities | 1,947,531 |
| | 2,013,425 |
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Commitments and contingencies (see Note 18) |
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Stockholders’ equity: | | | |
Preferred stock—$1 par value per share, authorized 1,000,000 shares; none issued or outstanding | — |
| | — |
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Common stock—$1 par value per share, authorized 300,000,000 shares; issued and outstanding 114,595,000 shares and 113,157,000 shares at September 30, 2012 and at January 1, 2012, respectively | 114,595 |
| | 113,157 |
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Capital in excess of par value | 196,568 |
| | 164,290 |
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Retained earnings | 1,572,385 |
| | 1,510,683 |
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Accumulated other comprehensive income | 58,892 |
| | 54,086 |
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Total stockholders’ equity | 1,942,440 |
| | 1,842,216 |
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Total liabilities and stockholders’ equity | $ | 3,889,971 |
| | $ | 3,855,641 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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| | | | | | | |
| Nine Months Ended |
| September 30, 2012 | | October 2, 2011 |
| | | (As adjusted) |
| (In thousands) |
Operating activities: | | | |
Net income | $ | 85,796 |
| | $ | 91,296 |
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Less: net income from discontinued operations and dispositions, net of income taxes | (1,163 | ) | | (6,900 | ) |
Net income from continuing operations | 84,633 |
| | 84,396 |
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Adjustments to reconcile net income from continuing operations to net cash provided by continuing operations: | | | |
Restructuring and contract termination charges, net | 21,034 |
| | 3,340 |
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Depreciation and amortization | 94,791 |
| | 78,718 |
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Stock-based compensation | 15,352 |
| | 9,427 |
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Amortization of deferred debt issuance costs | 2,655 |
| | 2,114 |
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Losses on dispositions, net | — |
| | 200 |
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Amortization of acquired inventory revaluation | 4,774 |
| | 432 |
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Changes in operating assets and liabilities which provided (used) cash, excluding effects from companies purchased and divested: |
Accounts receivable, net | 15,088 |
| | 17,373 |
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Inventories, net | (24,447 | ) | | (17,844 | ) |
Accounts payable | (18,611 | ) | | (15,512 | ) |
Excess tax benefit from exercise of equity grants | (1,767 | ) | | (9,303 | ) |
Accrued expenses and other | (79,725 | ) | | (1,884 | ) |
Net cash provided by operating activities of continuing operations | 113,777 |
| | 151,457 |
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Net cash used in operating activities of discontinued operations | (1,131 | ) | | (9,108 | ) |
Net cash provided by operating activities | 112,646 |
| | 142,349 |
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Investing activities: | | | |
Capital expenditures | (24,350 | ) | | (24,979 | ) |
Proceeds from dispositions of property, plant and equipment, net | — |
| | 456 |
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Changes in restricted cash balances | 670 |
| | 1,123 |
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Payments for acquisitions and investments, net of cash and cash equivalents acquired | (6,750 | ) | | (311,269 | ) |
Net cash used in investing activities of continuing operations | (30,430 | ) | | (334,669 | ) |
Net cash provided by investing activities of discontinued operations | 1,976 |
| | 32,252 |
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Net cash used in investing activities | (28,454 | ) | | (302,417 | ) |
Financing activities: | | | |
Payments on debt | (333,000 | ) | | (496,000 | ) |
Proceeds from borrowings | 291,000 |
| | 580,000 |
|
Payments of debt issuance costs | (416 | ) | | (1,000 | ) |
Payments on other credit facilities | (143 | ) | | (2,303 | ) |
Payments for acquisition-related contingent consideration | (12,459 | ) | | (137 | ) |
Excess tax benefit from exercise of equity grants | 1,767 |
| | 9,303 |
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Proceeds from stock options exercised | 22,944 |
| | 23,670 |
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Purchases of common stock | (2,092 | ) | | (110,004 | ) |
Dividends paid | (23,875 | ) | | (23,913 | ) |
Net cash used in financing activities of continuing operations | (56,274 | ) | | (20,384 | ) |
Net cash used in financing activities of discontinued operations | — |
| | (1,908 | ) |
Net cash used in financing activities | (56,274 | ) | | (22,292 | ) |
Effect of exchange rate changes on cash and cash equivalents | 568 |
| | 10,376 |
|
Net increase (decrease) in cash and cash equivalents | 28,486 |
| | (171,984 | ) |
Cash and cash equivalents at beginning of period | 142,342 |
| | 420,086 |
|
Cash and cash equivalents at end of period | $ | 170,828 |
| | $ | 248,102 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by PerkinElmer, Inc. (the “Company”), without audit, in accordance with accounting principles generally accepted in the United States of America (the “U.S.” or the "United States") and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information in the footnote disclosures of the financial statements has been condensed or omitted where it substantially duplicates information provided in the Company’s latest audited consolidated financial statements, in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes included in its Annual Report on Form 10-K for the fiscal year ended January 1, 2012, filed with the SEC (the “2011 Form 10-K”). The balance sheet amounts at January 1, 2012 in this report were derived from the Company’s audited 2011 consolidated financial statements included in the 2011 Form 10-K. The Company adjusted the balance sheet amounts at January 1, 2012, where appropriate, to account for the measurement period adjustments related to the Caliper Life Sciences, Inc. (“Caliper”) purchase price allocation discussed in Note 2 included in this Quarterly Report on Form 10-Q. The condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods indicated. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for the three and nine months ended September 30, 2012 and October 2, 2011, respectively, are not necessarily indicative of the results for the entire fiscal year or any future period. The Company has evaluated subsequent events from September 30, 2012 through the date of the issuance of these condensed consolidated financial statements and has determined that no material subsequent events have occurred that would affect the information presented in these condensed consolidated financial statements or would require additional disclosure.
Change in Accounting for Pension and Other Postretirement Benefits: During the fourth quarter of fiscal year 2011 the Company changed its method of recognizing defined benefit pension and other postretirement benefit costs. Accordingly, the financial data for all periods presented has been retrospectively adjusted to reflect the effect of these accounting changes. Actuarial gains and losses are measured annually as of fiscal year end and accordingly will be recorded in the fourth quarter, unless the Company is required to perform an interim remeasurement. This change in accounting method for pension and other postretirement benefits is described in more detail in Note 1 to the Company’s audited consolidated financial statements filed with the 2011 Form 10-K. For the three and nine months ended October 2, 2011 the retrospective changes in recognizing defined benefit pension and other postretirement benefit costs increased operating income from continuing operations by $1.9 million and $5.9 million, net income by $1.3 million and $3.9 million, basic earnings per share by $0.01 and $0.03, diluted earnings per share by $0.01 and $0.03, and other comprehensive income (loss) by $1.0 million and $4.0 million, respectively. There were no changes to the previously reported cash flows from operating, investing or financing activities for the three and nine months ended October 2, 2011.
Immaterial Restatement: As disclosed in the Company's 2011 Form 10-K, prior to the fiscal year 2011 annual financial statements, the Company had reported revenue and cost of revenue as single line items and had not broken out product and service revenue and related cost of revenue separately. Accordingly, the Company has restated previously reported revenue and cost of revenue for the three and nine months ended October 2, 2011 to separately report product revenue, service revenue, and the related cost of product revenue and cost of service revenue.
Recently Adopted Accounting Pronouncements: During the first quarter of fiscal year 2012 the Company adopted new guidance applicable to certain of its health care businesses that recognize patient service revenue at the time the services are rendered where the Company does not assess the patient's ability to pay at the time of the sale. The new guidance requires the Company to present the provision for bad debts related to such revenue as a deduction from revenue (net of contractual allowances and discounts) on the statements of operations. The effects of the adoption on the Company's condensed consolidated statements of operations resulted in a decrease to revenue and a decrease to selling, general and administrative expenses of $0.7 million and $2.1 million for the three and nine months ended September 30, 2012, respectively, and a decrease to revenue and a decrease to selling, general and administrative expenses of $0.8 million and $1.9 million for the three and nine months ended October 2, 2011, respectively. Accordingly, the financial data for all periods presented has been retrospectively adjusted to reflect the effect of these accounting changes.
Recently Issued Accounting Pronouncements: From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board and are adopted by the Company as of the specified effective dates. Unless otherwise discussed, the Company believes that such recently issued pronouncements will not have a significant impact on the Company’s condensed consolidated financial position, results of operations and cash flows or do not apply to the Company’s operations.
Note 2: Business Combinations
Acquisition of Caliper Life Sciences, Inc. In November 2011, the Company acquired all of the outstanding stock of Caliper. Caliper is a provider of imaging and detection solutions for life sciences research, diagnostics and environmental markets. Caliper develops and sells integrated systems, consisting of instruments, software, reagents, laboratory automation tools, and assay development and discovery services, primarily to pharmaceutical, biotechnology, and diagnostics companies, and government and other not-for-profit research institutions. The Company expects this acquisition to enhance its molecular imaging and detection technologies and to complement its offerings in life science, diagnostics, environmental and food markets. The Company paid the shareholders of Caliper $646.3 million in cash for the stock of Caliper. The Company financed the acquisition by issuing $500.0 million aggregate principal amount of senior unsecured notes due 2021 in a registered public offering and received approximately $496.9 million of net proceeds from the issuance, with the remainder of the purchase price paid from available cash. The excess of the purchase price over the fair value of the acquired net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and has been allocated to goodwill, none of which is tax deductible. The Company has reported the operations for this acquisition within the results of the Company’s Human Health segment from the acquisition date. The total purchase price has been preliminarily allocated to the estimated fair values of assets acquired and liabilities assumed as follows:
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| | | |
| Caliper (Preliminary) |
| (In thousands) |
Fair value of business combination: | |
Cash payments | $ | 646,317 |
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Less: cash acquired | (43,576 | ) |
Total | $ | 602,741 |
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Identifiable assets acquired and liabilities assumed: | |
Current assets | $ | 55,027 |
|
Property, plant and equipment | 14,580 |
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Identifiable intangible assets: | |
Core technology | 52,000 |
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Trade names | 14,200 |
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Licenses | 18,000 |
|
Customer relationships | 93,000 |
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Goodwill | 353,103 |
|
Deferred taxes | 52,472 |
|
Deferred revenue | (6,554 | ) |
Liabilities assumed | (43,087 | ) |
Total | $ | 602,741 |
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The weighted average amortization periods of identifiable definite-lived intangible assets were 5.0 years for core technology, 6.0 years for licenses, 7.0 years for customer relationships, and 7.0 years for trade names.
The following unaudited pro forma information presents the combined financial results for the Company and Caliper as if the acquisition of Caliper had been completed as of January 2, 2011:
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| | | | | | | |
| Three Months Ended | | Nine Months Ended |
| October 2, 2011 | | October 2, 2011 |
| (In thousands) |
Pro Forma Statement of Operations Information (Unaudited): | | | |
Revenue | $ | 489,623 |
| | $ | 1,489,384 |
|
Net income from continuing operations | 18,430 |
| | 51,973 |
|
Basic earnings per share: | | | |
Continuing operations | $ | 0.16 |
| | $ | 0.46 |
|
Diluted earnings per share: | | | |
Continuing operations | $ | 0.16 |
| | $ | 0.46 |
|
The unaudited pro forma information for the three and nine months ended October 2, 2011 has been calculated after applying the Company's accounting policies and the impact of acquisition date fair value adjustments. The pro forma net income from continuing operations was adjusted to exclude nonrecurring expenses related to the fair value adjustments associated with the Caliper acquisition. These pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments, such as fair value adjustment to inventory and deferred revenue, increased interest expense on debt obtained to finance the transaction, and increased amortization for the fair value of acquired intangible assets. The pro forma information does not reflect the effect of costs or synergies that would have been expected to result from the integration of the acquisition. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred at the beginning of each period presented, or of future results of the consolidated entities.
During the third quarter of fiscal year 2012, the Company obtained information to assist in determining the fair values of certain tangible and intangible assets acquired and liabilities assumed as of the Caliper acquisition date. Based on such information, the Company retrospectively adjusted the fiscal year 2011 comparative information resulting in an increase in other current assets of $20.8 million, an increase in goodwill of $0.6 million, and a decrease in accrued expenses of $1.4 million, offset by an increase in long-term liabilities of $22.8 million. There were no changes to the previously reported condensed consolidated statements of operations or statements of cash flows.
As of September 30, 2012, the purchase price and related allocation for the Caliper acquisition were preliminary. The preliminary allocation of the purchase price for the Caliper acquisition was based upon an initial valuation and the Company's estimates and assumptions underlying the initial valuation are subject to change within the measurement period (up to one year from the acquisition date). The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the 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 date during the measurement period. During the measurement period, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. Adjustments to the preliminary allocation of the purchase price during the measurement period require the revision of comparative prior period financial information when reissued in subsequent financial statements. The effect of adjustments to the allocation of the purchase price made during the measurement period would be as if the adjustments had been completed on the acquisition date. The effects of such adjustments may cause changes in depreciation, amortization, or other income or expense recognized in prior periods. All changes that do not qualify as adjustments made during the measurement period are included in current period earnings.
Allocations of the purchase price for acquisitions are based on estimates of the fair value of the net assets acquired and are subject to adjustment upon finalization of the purchase price allocations. The accounting for business combinations requires estimates and judgments as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair values for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed, including contingent consideration, are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. 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, or require acceleration of the amortization expense of definite-lived intangible assets.
In connection with the purchase price and related allocations for acquisitions, the Company estimates the fair value of deferred revenue assumed with its acquisitions. The estimated fair value of deferred revenue is determined by the legal performance obligation at the date of acquisition, and is generally based on the nature of the activities to be performed and the related costs to be incurred after the acquisition date. The fair value of an assumed liability related to deferred revenue is estimated based on the current market cost of fulfilling the obligation, plus a normal profit margin thereon. The estimated costs to fulfill the deferred revenue are based on the historical direct costs related to providing the services. The Company does not include any costs associated with selling effort, research and development, or the related fulfillment margins on these costs. In most acquisitions, profit associated with selling effort is excluded because the acquired businesses would have concluded the selling effort on the support contracts prior to the acquisition date. The estimated research and development costs are not included in the fair value determination, as these costs are not deemed to represent a legal obligation at the time of acquisition. The sum of the costs and operating income approximates, in theory, the amount that the Company would be required to pay a third-party to assume the obligation.
Total transaction costs related to acquisition activities for the three and nine months ended September 30, 2012 were $0.3 million and $0.6 million, respectively. Total transaction costs related to acquisition activities for the three and nine months ended October 2, 2011 were $0.8 million and $4.8 million, respectively. These transaction costs were expensed as incurred and recorded in selling, general and administrative expenses in the Company's condensed consolidated statements of operations.
Note 3: Discontinued Operations
As part of the Company’s continuing efforts to focus on higher growth opportunities, the Company has discontinued certain businesses. The Company has accounted for these businesses as discontinued operations and, accordingly, has presented the results of operations and related cash flows as discontinued operations for all periods presented. The assets and liabilities of these businesses have been presented separately, and are reflected within the assets and liabilities from discontinued operations in the accompanying condensed consolidated balance sheets as of September 30, 2012 and January 1, 2012.
The Company recorded the following gains and losses, which have been reported as gain on disposition of discontinued operations:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2012 | | October 2, 2011 | | September 30, 2012 | | October 2, 2011 |
| (In thousands) |
Loss on disposition of Illumination and Detection Solutions business | $ | (73 | ) | | $ | (125 | ) | | $ | (57 | ) | | $ | (1,784 | ) |
Gain (loss) on disposition of Photoflash business | 974 |
| | (55 | ) | | 1,966 |
| | (64 | ) |
(Loss) gain on disposition of other discontinued operations | (3 | ) | | 3,993 |
| | 6 |
| | 3,920 |
|
Gain on disposition of discontinued operations before income taxes | $ | 898 |
| | $ | 3,813 |
| | $ | 1,915 |
| | $ | 2,072 |
|
In November 2010, the Company sold its Illumination and Detection Solutions business, which was included in the Company’s Environmental Health segment, for $510.3 million, including an adjustment for net working capital. During the first nine months of fiscal year 2011, the Company updated the net working capital adjustment associated with the sale of this business and other potential contingencies, which resulted in the recognition of a pre-tax loss of $1.8 million. This loss was recognized as loss on disposition of discontinued operations.
In June 2010, the Company sold the Photoflash business, which was included in the Company's Environmental Health segment, for $13.5 million, including an adjustment for net working capital, plus potential additional contingent consideration. During the first nine months of fiscal year 2012, the Company recognized a pre-tax gain of $2.0 million for contingent consideration related to this sale. This gain was recognized as gain on disposition of discontinued operations.
During the first nine months of both fiscal years 2012 and 2011, the Company settled various commitments related to the divestiture of other discontinued operations. The Company recognized a pre-tax gain of $3.9 million in the first nine months of fiscal year 2011, which included a pre-tax gain of $4.0 million for contingent consideration related to the sale of its semiconductor business in fiscal year 2006.
The Company recorded tax provisions of $0.3 million and $0.8 million on disposition of discontinued operations for the three and nine months ended September 30, 2012, respectively. The Company recorded tax benefits of $4.8 million on disposition of discontinued operations for both the three and nine months ended October 2, 2011.
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, alignment with the Company’s growth strategy and the integration of its business units. The current portion of restructuring and contract termination charges, net, is recorded in accrued restructuring costs, and the long-term portion of restructuring and contract termination charges, net, is recorded in long-term liabilities. The activities associated with these plans have been reported as restructuring and contract termination charges, net, and are included as a component of operating expenses from continuing operations.
A description of the restructuring plans and the activity recorded for the nine months ended September 30, 2012 is listed below. Details of the plans initiated in previous years, particularly those listed under “Previous Restructuring and Integration Plans,” are discussed more fully in Note 4 to the audited consolidated financial statements in the 2011 Form 10-K.
The restructuring plan for the third quarter of fiscal year 2012 was intended to shift certain of the Company's operations into a newly established shared service center. The restructuring plans for the first and second quarters of fiscal year 2012 were intended principally to realign operations, research and development resources, and production resources as a result of recent acquisitions. The restructuring plans for the second and fourth quarters of fiscal year 2011 were intended principally to shift resources to higher growth geographic regions and end markets.
Q3 2012 Restructuring Plan
During the third quarter of fiscal year 2012, the Company’s management approved a plan to shift certain of the Company's operations into a newly established shared service center (the “Q3 2012 Plan”). As a result of the Q3 2012 Plan, and during the three months ended September 30, 2012, the Company recognized $3.7 million in pre-tax restructuring charges in both the Human Health and Environmental Health segments related to a workforce reduction from reorganization activities. As part of the Q3 2012 Plan, the Company will reduce headcount by 66 employees. All employees were notified of termination under the Q3 2012 Plan by September 30, 2012.
The following table summarizes the Q3 2012 Plan activity for the nine months ended September 30, 2012:
|
| | | |
| Severance |
| (In thousands) |
Provision | $ | 7,446 |
|
Amounts paid and foreign currency translation | (30 | ) |
Balance at September 30, 2012 | $ | 7,416 |
|
The Company anticipates that the remaining severance payments of $7.4 million for workforce reductions will be completed by the end of the fourth quarter of fiscal year 2014.
Q2 2012 Restructuring Plan
During the second quarter of fiscal year 2012, the Company’s management approved a plan to realign operations, research and development resources, and production resources as a result of recent acquisitions (the “Q2 2012 Plan”). As a result of the Q2 2012 Plan, and during the nine months ended September 30, 2012, the Company recognized a $5.6 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities and recognized a $0.2 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities. The Company expects to recognize an additional $4.1 million of incremental restructuring expense in future periods as services are provided for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits, and will be recognized ratably over the future service period. As part of the Q2 2012 Plan, the Company will reduce headcount by 215 employees. All employees were notified of termination under the Q2 2012 Plan by July 1, 2012.
The following table summarizes the Q2 2012 Plan activity for the nine months ended September 30, 2012:
|
| | | |
| Severance |
| (In thousands) |
Provision | $ | 5,890 |
|
Amounts paid and foreign currency translation | (2,244 | ) |
Balance at September 30, 2012 | $ | 3,646 |
|
The Company anticipates that the remaining severance payments of $3.6 million for workforce reductions will be completed by the end of the second quarter of fiscal year 2014.
Q1 2012 Restructuring Plan
During the first quarter of fiscal year 2012, the Company’s management approved a plan to realign operations and production resources as a result of recent acquisitions (the “Q1 2012 Plan”). As a result of the Q1 2012 Plan, and during the nine months ended September 30, 2012, the Company recognized a $5.4 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities and recognized a $1.0 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. The Company expects to recognize an additional $0.1 million of incremental restructuring expense in future periods as services are provided for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits, and will be recognized ratably over the future service period. As part of the Q1 2012 Plan, the Company will reduce headcount by 121 employees. All employees were notified of termination and the Company completed all actions related to the closure of excess facility space under the Q1 2012 Plan by April 1, 2012.
The following table summarizes the Q1 2012 Plan activity for the nine months ended September 30, 2012:
|
| | | | | | | | | | | |
| Severance | | Closure of Excess Facility Space | | Total |
| (In thousands) |
Provision | $ | 6,336 |
| | $ | 79 |
| | $ | 6,415 |
|
Amounts paid and foreign currency translation | (4,326 | ) | | (79 | ) | | (4,405 | ) |
Balance at September 30, 2012 | $ | 2,010 |
| | $ | — |
| | $ | 2,010 |
|
The Company anticipates that the remaining severance payments of $2.0 million for workforce reductions will be completed by the end of the fourth quarter of fiscal year 2013.
Q4 2011 Restructuring Plan
During the fourth quarter of fiscal year 2011, the Company’s management approved a plan to shift resources to higher growth geographic regions and end markets (the “Q4 2011 Plan”). As a result of the Q4 2011 Plan, the Company recognized a $2.3 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities. The Company also recognized a $4.6 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. During the first nine months of fiscal year 2012, the Company recorded a pre-tax restructuring reversal of $0.1 million relating to the Q4 2011 Plan due to a reduction in the estimated costs associated with the closure of an excess facility in the Environmental Health segment. As part of the Q4 2011 Plan, the Company reduced headcount by 114 employees. All employees were notified of termination and the Company completed all actions related to the closure of excess facility space under the Q4 2011 Plan by January 1, 2012.
The following table summarizes the Q4 2011 Plan activity for the nine months ended September 30, 2012:
|
| | | | | | | | | | | |
| Severance | | Closure of Excess Facility Space | | Total |
| (In thousands) |
Balance at January 1, 2012 | $ | 4,674 |
| | $ | 370 |
| | $ | 5,044 |
|
Change in estimates | — |
| | (135 | ) | | (135 | ) |
Amounts paid and foreign currency translation | (3,932 | ) | | (235 | ) | | (4,167 | ) |
Balance at September 30, 2012 | $ | 742 |
| | $ | — |
| | $ | 742 |
|
The Company anticipates that the remaining severance payments of $0.7 million for workforce reductions will be completed by the end of the second quarter of fiscal year 2013.
Q2 2011 Restructuring Plan
During the second quarter of fiscal year 2011, the Company’s management approved a plan to shift resources to higher growth geographic regions and end markets (the “Q2 2011 Plan”). As a result of the Q2 2011 Plan, the Company recognized a $2.2 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. The Company also recognized a $3.4 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. As part of the Q2 2011 Plan, the Company reduced headcount by 72 employees. All employees were notified of termination and the Company completed all actions related to the closure of excess facility space under the Q2 2011 Plan by July 3, 2011.
The following table summarizes the Q2 2011 Plan activity for the nine months ended September 30, 2012:
|
| | | |
| Severance |
| (In thousands) |
Balance at January 1, 2012 | $ | 1,283 |
|
Amounts paid and foreign currency translation | (504 | ) |
Balance at September 30, 2012 | $ | 779 |
|
The Company anticipates that the remaining severance payments of $0.8 million for workforce reductions will be completed by the end of the fourth quarter of fiscal year 2012.
Previous Restructuring and Integration Plans
The principal actions of the restructuring and integration plans from fiscal years 2001 through 2010 were workforce reductions related to the integration of the Company’s businesses in order to reduce costs and achieve operational efficiencies as well as workforce reductions in both the Human Health and Environmental Health segments by shifting resources into geographic regions and end markets that are more consistent with the Company’s growth strategy. During the nine months ended September 30, 2012, the Company paid $3.3 million related to these plans and recorded an additional charge of $0.3 million to reduce the estimated sublease rental payments reasonably expected to be obtained for an excess facility in Europe within the Environmental Health segment, as well as a charge of $0.4 million related to higher than expected costs associated with workforce reductions in Europe within the Human Health segment. As of September 30, 2012, the Company had $11.9 million of remaining liabilities associated with these restructuring and integration plans, primarily for residual lease obligations related to closed facilities and remaining severance payments for workforce reductions in both the Human Health and Environmental Health segments. The Company expects to make payments for these leases, the terms of which vary in length, through fiscal year 2022.
Contract Termination Charges
The Company has terminated various contractual commitments in connection with certain disposal activities and has recorded charges, to the extent applicable, for the costs of terminating these contracts before the end of their terms and costs that will continue to be incurred for the remaining terms without economic benefit to the Company. The Company recorded a pre-tax charge of $0.8 million and made payments for these obligations of $1.1 million in the first nine months of fiscal year 2012. The remaining balance of these accruals as of September 30, 2012 was $1.7 million.
Note 5: Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2012 | | October 2, 2011 | | September 30, 2012 | | October 2, 2011 |
| (In thousands) |
Interest income | $ | (74 | ) | | $ | (549 | ) | | $ | (434 | ) | | $ | (1,354 | ) |
Interest expense | 11,360 |
| | 4,449 |
| | 34,136 |
| | 12,578 |
|
Other expense, net | 586 |
| | 16 |
| | 2,358 |
| | 2,719 |
|
Total interest and other expense, net | $ | 11,872 |
| | $ | 3,916 |
| | $ | 36,060 |
| | $ | 13,943 |
|
Note 6: Inventories, Net
Inventories as of September 30, 2012 and January 1, 2012 consisted of the following:
|
| | | | | | | |
| September 30, 2012 | | January 1, 2012 |
| (In thousands) |
Raw materials | $ | 82,905 |
| | $ | 72,913 |
|
Work in progress | 14,150 |
| | 14,656 |
|
Finished goods | 164,345 |
| | 153,194 |
|
Total inventories, net | $ | 261,400 |
| | $ | 240,763 |
|
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; and/or (iii) the statute of limitations expires regarding a tax position.
At September 30, 2012, the Company had gross tax effected unrecognized tax benefits of $50.0 million, of which $43.0 million, if recognized, would affect the continuing operations effective tax rate. The remaining amount, if recognized, would affect discontinued operations.
At September 30, 2012, the Company had uncertain tax positions of $9.5 million, including accrued interest, net of tax benefits and penalties, which are expected to be resolved within the next year. A portion of the uncertain tax positions could affect the continuing operations effective tax rate depending on the ultimate resolution; however, the Company cannot quantify an estimated range at this time. The Company is subject to U.S. federal income tax as well as to income tax of numerous state and foreign jurisdictions.
Tax years ranging from 2003 through 2011 remain open to examination by various tax jurisdictions in which the Company has significant business operations, such as China, Finland, Germany, Italy, Netherlands, Singapore, the United Kingdom, and the United States. The tax years under examination vary by jurisdiction.
As a result of the Caliper acquisition, the Company concluded that certain foreign operations did not require the same level of capital as previously expected, and therefore the Company plans to repatriate approximately $350.0 million of previously unremitted earnings and has provided for the estimated taxes on the repatriation of those earnings. As a result of the planned repatriation, the Company recorded an increase to the Company’s tax provision of $79.7 million in continuing
operations in fiscal year 2011. The Company expects to utilize tax attributes, primarily those acquired in the Caliper acquisition, to minimize the cash taxes paid on the repatriation. As of September 30, 2012, the Company had completed the repatriation of $229.2 million of the $350.0 million of these previously unremitted earnings. The Company continues to maintain its permanent reinvestment assertion with regard to the remaining unremitted earnings of its foreign subsidiaries, and therefore does not accrue U.S. tax for the repatriation of its remaining unremitted foreign earnings.
Note 8: Debt
Senior Unsecured Revolving Credit Facility. On December 16, 2011, the Company entered into an amended and restated senior unsecured revolving credit facility. The agreement for the facility provides for $700.0 million of revolving loans and has an initial maturity of December 16, 2016. As of September 30, 2012, undrawn letters of credit in the aggregate amount of $12.0 million were treated as issued and outstanding under the senior unsecured revolving credit 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 at the time of borrowing plus a margin, or the base rate from time to time. 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 Bank of America, N.A. as its "prime rate," (ii) the Federal Funds rate plus 50 basis points or (iii) one-month Libor plus 1.00%. The Eurocurrency margin as of September 30, 2012 was 130 basis points. The weighted average Eurocurrency interest rate as of September 30, 2012 was 0.22%, resulting in a weighted average effective Eurocurrency rate, including the margin, of 1.52%. The Company had $256.0 million of borrowings in U.S. Dollars outstanding under the senior unsecured revolving credit facility as of September 30, 2012, with interest based on the above described Eurocurrency rate. The credit agreement for the facility contains affirmative, negative and financial covenants and events of default customary for financings of this type and those contained in the Company's previous senior revolving credit agreement. The financial covenants in the Company's amended and restated senior unsecured revolving credit facility includes a debt-to-capital ratio, and two contingent covenants, a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio, applicable only if the Company's credit rating is downgraded below investment grade.
6% Senior Unsecured Notes due 2015. On May 30, 2008, the Company issued $150.0 million aggregate principal amount of senior unsecured notes due 2015 (the “2015 Notes”) in a private placement and received $150.0 million of proceeds from the issuance. The 2015 Notes mature in May 2015 and bear interest at an annual rate of 6%. Interest on the 2015 Notes is payable semi-annually on May 30th and November 30th each year. The Company may redeem some or all of the 2015 Notes at any time, at its option, at a make-whole redemption price plus accrued and unpaid interest. The indenture governing the 2015 Notes includes financial covenants of debt-to-capital ratios and a contingent multiple of total debt to earnings ratio, applicable only if the Company's credit rating is downgraded below investment grade.
5% Senior Unsecured Notes due 2021. On October 25, 2011, the Company issued $500.0 million aggregate principal amount of senior unsecured notes due 2021 (the “2021 Notes”) in a registered public offering and received approximately $496.9 million of net proceeds from the issuance. The 2021 Notes were issued at 99.372% of the principal amount, which resulted in a discount of $3.1 million. The 2021 Notes mature in November 2021 and bear interest at an annual rate of 5%. Interest on the 2021 Notes is payable semi-annually on May 15th and November 15th each year. Prior to August 15, 2021 (three months prior to their maturity date), the Company may redeem the 2021 Notes in whole or in part, at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2021 Notes being redeemed, discounted on a semi-annual basis, at the Treasury Rate plus 45 basis points, plus accrued and unpaid interest. At any time on or after August 15, 2021 (three months prior to their maturity date), the Company may redeem the 2021 Notes, at its option, at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed plus accrued and unpaid interest. Upon a change of control (as defined in the indenture governing the 2021 Notes ) and a contemporaneous downgrade of the 2021 Notes below investment grade, each holder of 2021 Notes will have the right to require the Company to repurchase such holder's 2021 Notes for 101% of their principal amount, plus accrued and unpaid interest.
Financing Lease Obligations. During the third quarter of fiscal year 2012, the Company entered into agreements with the lessors of 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, which resulted in the Company being considered the owner of the buildings during the construction period. At the end of the construction period, the Company will not be reimbursed by the lessors for all of the construction costs. The Company is therefore deemed to have continuing involvement and the leases will qualify as financing leases under sale-leaseback accounting guidance, representing debt obligations for the Company and noncash investing and financing activities. As a result, the Company capitalized $29.3 million in property and equipment, net, representing the fair value of the buildings with a corresponding increase to debt. In addition, the Company expects to capitalize additional construction costs, which are not expected to exceed $15.0 million, and funding
provided by the lessors to complete the additions to the buildings. The Company's total rental payments to the lessors are expected to be $0.6 million for 2012, $1.7 million for 2013, $2.6 million for 2014, $2.6 million for 2015, $2.6 million for 2016 and $27.0 million thereafter. The buildings are being depreciated on a straight-line basis over the terms of the leases to their estimated residual values.
Note 9: Earnings Per Share
Basic earnings per share was computed by dividing net income by the weighted-average number of common shares outstanding during the period less restricted unvested shares. Diluted earnings per share was computed by dividing net income by the weighted-average number of common shares outstanding plus all potentially dilutive common stock equivalents, primarily shares issuable upon the exercise of stock options using the treasury stock method. The following table reconciles the number of shares utilized in the earnings per share calculations:
|
| | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2012 | | October 2, 2011 | | September 30, 2012 | | October 2, 2011 |
| (In thousands) |
Number of common shares—basic | 113,860 |
| | 112,703 |
| | 113,491 |
| | 113,065 |
|
Effect of dilutive securities: | | | | | | | |
Stock options | 830 |
| | 566 |
| | 827 |
| | 861 |
|
Restricted stock awards | 308 |
| | 156 |
| | 247 |
| | 137 |
|
Number of common shares—diluted | 114,998 |
| | 113,425 |
| | 114,565 |
| | 114,063 |
|
Number of potentially dilutive securities excluded from calculation due to antidilutive impact | 1,381 |
| | 2,738 |
| | 1,448 |
| | 1,792 |
|
Antidilutive options were excluded from the calculation of diluted net income per share and could become dilutive in the future.
Note 10: Industry Segment Information
The Company discloses information about its operating segments based on the way that management organizes the segments within the Company for making operating decisions and assessing financial performance. The Company evaluates the performance of its operating segments based on revenue and operating income. Intersegment revenue and transfers are not significant. The Company’s management reviews the results of the Company’s operations by the Human Health and Environmental Health operating segments. The accounting policies of the operating segments are the same as those described in Note 1 to the audited consolidated financial statements in the 2011 Form 10-K. The principal products and services of these operating segments are:
| |
• | Human Health. Develops diagnostics, tools and applications to help detect diseases earlier and more accurately and to accelerate the discovery and development of critical new therapies. The Human Health segment serves both the diagnostics and research markets. |
| |
• | Environmental Health. Provides technologies and applications to facilitate the creation of safer food and consumer products, more secure surroundings and efficient energy resources. The Environmental Health segment serves the environmental, industrial and laboratory services markets. |
The Company has included the expenses for its corporate headquarters, such as legal, tax, audit, human resources, information technology, and other management and compliance costs, as well as the expense related to mark-to-market and curtailments 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) by operating segment, excluding discontinued operations, are shown in the table below:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2012 | | October 2, 2011 | | September 30, 2012 | | October 2, 2011 |
| (In thousands) |
Human Health | | | | | | | |
Product revenue | $ | 217,997 |
| | $ | 172,534 |
| | $ | 653,547 |
| | $ | 526,760 |
|
Service revenue | 39,248 |
| | 34,080 |
| | 116,081 |
| | 99,992 |
|
Total revenue | 257,245 |
| | 206,614 |
| | 769,628 |
| | 626,752 |
|
Operating income from continuing operations | 35,020 |
| | 27,549 |
| | 88,503 |
| | 77,532 |
|
Environmental Health | | | | | | | |
Product revenue | 131,070 |
| | 129,254 |
| | 416,957 |
| | 407,573 |
|
Service revenue | 121,289 |
| | 117,067 |
| | 355,699 |
| | 344,853 |
|
Total revenue | 252,359 |
| | 246,321 |
| | 772,656 |
| | 752,426 |
|
Operating income from continuing operations | 17,853 |
| | 14,679 |
| | 72,407 |
| | 66,669 |
|
Corporate | | | | | | | |
Operating loss from continuing operations(1) | (9,655 | ) | | (6,093 | ) | | (31,523 | ) | | (27,216 | ) |
Continuing Operations | | | | | | | |
Product revenue | $ | 349,067 |
| | $ | 301,788 |
| | $ | 1,070,504 |
| | $ | 934,333 |
|
Service revenue | 160,537 |
| | 151,147 |
| | 471,780 |
| | 444,845 |
|
Total revenue | 509,604 |
| | 452,935 |
| | 1,542,284 |
| | 1,379,178 |
|
Operating income from continuing operations | 43,218 |
| | 36,135 |
| | 129,387 |
| | 116,985 |
|
Interest and other expense, net (see Note 5) | 11,872 |
| | 3,916 |
| | 36,060 |
| | 13,943 |
|
Income from continuing operations before income taxes | $ | 31,346 |
| | $ | 32,219 |
| | $ | 93,327 |
| | $ | 103,042 |
|
____________________________
| |
(1) | The expenses related to mark-to-market and curtailments on postretirement benefit plans have been included in the Corporate operating loss from continuing operations, and together constituted a pre-tax loss of $1.2 million and a pre-tax gain of $0.2 million for the nine months ended September 30, 2012 and October 2, 2011, respectively. |
Note 11: Stockholders’ Equity
Comprehensive Income:
The components of accumulated other comprehensive income consisted of the following:
|
| | | | | | | |
| September 30, 2012 | | January 1, 2012 |
| (In thousands) |
Foreign currency translation adjustments, net of income taxes | $ | 60,032 |
| | $ | 56,164 |
|
Unrecognized prior service costs, net of income taxes | 2,169 |
| | 2,169 |
|
Unrealized and realized losses on derivatives, net of income taxes | (3,191 | ) | | (4,088 | ) |
Unrealized net losses on securities, net of income taxes | (118 | ) | | (159 | ) |
Accumulated other comprehensive income | $ | 58,892 |
| | $ | 54,086 |
|
The tax effects on the foreign currency translation component of other comprehensive income have historically been minimal due to the Company’s position that undistributed earnings of foreign subsidiaries are indefinitely reinvested. During fiscal year 2011, as a result of the Caliper acquisition, the Company concluded that certain foreign operations did not require the same level of capital as previously expected, and therefore the Company plans to repatriate approximately $350.0 million of previously unremitted earnings and has provided for the estimated taxes on the repatriation of those earnings. Taxes have not been provided for unremitted earnings that the Company continues to consider indefinitely reinvested, which is based on its future operational and capital requirements.
During the fourth quarter of fiscal year 2011 the Company changed its method of recognizing defined benefit pension and other postretirement benefit costs. Accordingly, the financial data for all periods presented has been retrospectively adjusted to reflect the effect of these accounting changes. See Note 1 for a discussion of the Company's changes in accounting and reporting for its pension and other postretirement benefits.
Stock Repurchase Program:
On October 23, 2008, the Company announced that the Board of Directors (the “Board”) authorized the Company to repurchase up to 10.0 million shares of common stock under a stock repurchase program (the “Repurchase Program”). On August 31, 2010, the Company announced that the Board had authorized the Company to repurchase an additional 5.0 million shares of common stock under the Repurchase Program. The Repurchase Program expired on October 22, 2012. On October 24, 2012, the Board authorized the Company to repurchase up to 6.0 million shares of common stock under a new stock repurchase program (the "New Repurchase Program"). The New Repurchase Program will expire on October 24, 2014 unless terminated earlier by the Board, and may be suspended or discontinued at any time. During the first nine months of fiscal year 2012, the Company did not repurchase any shares of common stock in the open market under either of the stock repurchase programs. As of September 30, 2012, 6.0 million shares of the Company’s common stock remained available for repurchase from the 15.0 million shares authorized by the Board under the Repurchase Program.
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. During the first nine months of fiscal year 2012, the Company repurchased 81,776 shares of common stock for this purpose at an aggregate cost of $2.1 million. The repurchased shares have been reflected as a reduction in shares outstanding, but remain available to be reissued with the payments reflected in common stock and capital in excess of par value.
Dividends:
The Board declared a regular quarterly cash dividend of $0.07 per share in each of the first three quarters of fiscal year 2012 and in each quarter of fiscal year 2011. At September 30, 2012, the Company has accrued $8.0 million for dividends related to the second quarter of fiscal year 2012 which were declared prior to the end of the third quarter. On October 24, 2012, the Company announced that the Board had declared a quarterly dividend of $0.07 per share for the third quarter of fiscal year 2012 that will be payable in February 2013. 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
The Company utilizes one stock-based compensation plan, the 2009 Incentive Plan (the “2009 Plan”). Under the 2009 Plan, 10.0 million shares of the Company’s common stock, as well as shares of the Company’s common stock previously granted under the Amended and Restated 2001 Incentive Plan and the 2005 Incentive Plan that were cancelled or forfeited without the shares being issued, are authorized for stock option grants, restricted stock awards, performance units and stock grants as part of the Company’s compensation programs (the “Plan”).
The following table summarizes total pre-tax compensation expense recognized related to the Company’s stock options, restricted stock, restricted stock units, performance units and stock grants, net of estimated forfeitures, included in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2012 and October 2, 2011:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2012 | | October 2, 2011 | | September 30, 2012 | | October 2, 2011 |
| (In thousands) |
Cost of revenue | $ | 327 |
| | $ | 243 |
| | $ | 906 |
| | $ | 750 |
|
Research and development expenses | 186 |
| | 138 |
| | 547 |
| | 432 |
|
Selling, general and administrative expenses | 4,588 |
| | 1,086 |
| | 13,899 |
| | 8,245 |
|
Total stock-based compensation expense | $ | 5,101 |
| | $ | 1,467 |
| | $ | 15,352 |
| | $ | 9,427 |
|
The total income tax benefit recognized in the condensed consolidated statements of operations for stock-based compensation was $1.6 million and $5.0 million for the three and nine months ended September 30, 2012, respectively. The total income tax benefit recognized in the condensed consolidated statements of operations for stock-based compensation was $0.3 million and $3.0 million for the three and nine months ended October 2, 2011, respectively. Stock-based compensation
costs capitalized as part of inventory were $0.3 million and $0.4 million as of September 30, 2012 and October 2, 2011, respectively. The excess tax benefit recognized from stock awards, classified as a financing cash activity, was $1.8 million and $9.3 million for the nine months ended September 30, 2012 and October 2, 2011, respectively.
Stock Options: The fair value of each option grant is estimated using the Black-Scholes option pricing model. The Company’s weighted-average assumptions used in the Black-Scholes option pricing model were as follows:
|
| | | | | |
| Three and Nine Months Ended |
| September 30, 2012 | | October 2, 2011 |
Risk-free interest rate | 0.6 | % | | 1.9 | % |
Expected dividend yield | 1.2 | % | | 1.1 | % |
Expected lives | 4 years |
| | 4 years |
|
Expected stock volatility | 38.7 | % | | 38.1 | % |
The following table summarizes stock option activity for the nine months ended September 30, 2012:
|
| | | | | | | | | | | | | |
| Number of Shares | | Weighted- Average Price | | Weighted-Average Remaining Contractual Term | | Total Intrinsic Value |
| (In thousands) | | | | (In years) | | (In millions) |
Outstanding at January 1, 2012 | 5,346 |
| | $ | 20.57 |
| | | | |
Granted | 756 |
| | 26.28 |
| | | | |
Exercised | (1,171 | ) | | 19.59 |
| | | | |
Canceled | (210 | ) | | 22.34 |
| | | | |
Forfeited | (14 | ) | | 22.02 |
| | | | |
Outstanding at September 30, 2012 | 4,707 |
| | $ | 21.65 |
| | 3.9 |
| | $ | 25.8 |
|
Exercisable at September 30, 2012 | 3,110 |
| | $ | 20.22 |
| | 2.9 |
| | $ | 21.4 |
|
Vested and expected to vest in the future | 4,518 |
| | $ | 21.55 |
| | 3.8 |
| | $ | 25.2 |
|
The weighted-average per-share grant-date fair value of options granted for the three and nine months ended September 30, 2012 was $7.71 and $7.36, respectively. The weighted-average per-share grant-date fair value of options granted for the three and nine months ended October 2, 2011 was $7.99 and $7.86, respectively. The total intrinsic value of options exercised for the three and nine months ended September 30, 2012 was $3.9 million and $9.1 million, respectively. The total intrinsic value of options exercised for the three and nine months ended October 2, 2011 was $0.05 million and $6.9 million, respectively. Cash received from option exercises for the nine months ended September 30, 2012 and October 2, 2011 was $22.9 million and $23.7 million, respectively.
The total compensation expense recognized related to the Company’s outstanding options was $1.2 million and $3.7 million for the three and nine months ended September 30, 2012, respectively, and $1.1 million and $3.3 million for the three and nine months ended October 2, 2011, respectively.
There was $7.8 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options granted as of September 30, 2012. This cost is expected to be recognized over a weighted-average period of 2.0 fiscal years and will be adjusted for any future changes in estimated forfeitures.
Restricted Stock Awards: The following table summarizes restricted stock award activity for the nine months ended September 30, 2012:
|
| | | | | | |
| Number of Shares | | Weighted- Average Grant- Date Fair Value |
| (In thousands) | | |
Nonvested at January 1, 2012 | 672 |
| | $ | 23.62 |
|
Granted | 357 |
| | 25.85 |
|
Vested | (182 | ) | | 23.22 |
|
Forfeited | (52 | ) | | 23.72 |
|
Nonvested at September 30, 2012 | 795 |
| | $ | 24.71 |
|
The weighted-average per-share grant-date fair value of restricted stock awards granted during the three and nine months ended September 30, 2012 was $27.06 and $25.85, respectively. The weighted-average per-share grant-date fair value of restricted stock awards granted during the three and nine months ended October 2, 2011 was $25.19 and $26.68, respectively. The fair value of restricted stock awards vested for the three and nine months ended September 30, 2012 was $0.1 million and $4.2 million, respectively. The fair value of restricted stock awards vested for the three and nine months ended October 2, 2011 was $0.02 million and $5.3 million, respectively. The total compensation expense recognized related to the Company’s outstanding restricted stock awards was $1.9 million and $6.1 million for the three and nine months ended September 30, 2012, respectively, and $1.6 million and $4.6 million for the three and nine months ended October 2, 2011, respectively.
As of September 30, 2012, there was $11.5 million of total unrecognized compensation cost, net of forfeitures, related to nonvested restricted stock awards. That cost is expected to be recognized over a weighted-average period of 1.5 fiscal years.
Performance Units: The Company granted 122,675 and 89,828 performance units during the nine months ended September 30, 2012 and October 2, 2011, respectively, as part of the Company’s executive incentive program. The weighted-average per-share grant-date fair value of performance units granted during the nine months ended September 30, 2012 and October 2, 2011 was $26.18 and $26.71, respectively. The total compensation expense recognized related to these performance units was $1.9 million and $4.9 million for the three and nine months ended September 30, 2012, respectively, and $1.2 million and $0.8 million for the three and nine months ended October 2, 2011, respectively. As of September 30, 2012, there were 322,516 performance units outstanding and subject to forfeiture, with a corresponding liability of $8.2 million recorded in accrued expenses.
Stock Awards: The Company generally grants stock awards only to non-employee members of the Board. The Company granted 4,535 and 3,544 shares to each non-employee member of the Board during the nine months ended September 30, 2012 and October 2, 2011, respectively. The weighted-average per-share grant-date fair value of stock awards granted during the nine months ended September 30, 2012 and October 2, 2011 was $27.87 and $28.22, respectively. No compensation expense was recognized related to these stock awards in each of the three months ended September 30, 2012 and October 2, 2011, respectively. The total compensation expense recognized related to these stock awards was $0.7 million and $0.8 million for the nine months ended September 30, 2012 and October 2, 2011, respectively.
Employee Stock Purchase Plan: During the nine months ended September 30, 2012, the Company issued 53,961 shares of common stock under the Company's Employee Stock Purchase Plan at a weighted-average price of $24.51 per share. At September 30, 2012, an aggregate of 1.2 million shares of the Company’s common stock remained available for sale to employees out of the 5.0 million shares authorized by shareholders for issuance under this plan.
Note 13: Goodwill and Intangible Assets, Net
The Company tests goodwill and non-amortizing intangible assets at least annually for possible impairment. Accordingly, the Company completes the annual testing of impairment for goodwill and non-amortizing intangible assets on the later of January 1 or the first day of each fiscal year. In addition to its annual test, the Company regularly evaluates whether events or circumstances have occurred that may indicate a potential impairment of goodwill or non-amortizing intangible assets.
The process of testing goodwill for impairment involves the determination of the fair value of the applicable reporting units. The test consists of a two-step process. The first step is the comparison of the fair value to the carrying value of the reporting unit to determine if the carrying value exceeds the fair value. The second step measures the amount of an impairment loss, and is only performed if the carrying value exceeds the fair value of the reporting unit. The Company performed its annual impairment testing for its reporting units as of January 2, 2012, its annual impairment date for fiscal year 2012, and concluded based on the first step of the process that there was no goodwill impairment.
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 rate 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 long-term terminal growth rates for the Company’s reporting units ranged from 4.0% to 6.0% for the fiscal year 2012 impairment analysis. The range for the discount rates for the reporting units was 10.5% to 12.0%. Keeping all other variables constant, a 10.0% change in any one of the input assumptions for the various reporting units would still allow the Company to conclude, based on the first step of the process, that there was no impairment of goodwill.
The Company has consistently employed the relief from royalty model to estimate the current fair value when testing for impairment of non-amortizing intangible assets. The impairment test consists of a comparison of the fair value of the non-amortizing intangible asset with its carrying amount. If the carrying amount of a non-amortizing intangible asset exceeds its fair value, an impairment loss in an amount equal to that excess is recognized. In addition, the Company currently evaluates the remaining useful life of its non-amortizing intangible assets at least annually to determine whether events or circumstances continue to support an indefinite useful life. If events or circumstances indicate that the useful lives of non-amortizing intangible assets are no longer indefinite, the assets will be tested for impairment. These intangible assets will then be amortized prospectively over their estimated remaining useful lives and accounted for in the same manner as other intangible assets that are subject to amortization. The Company performed its annual impairment testing as of January 2, 2012, and concluded that there was no impairment of non-amortizing intangible assets. An assessment of the recoverability of amortizing intangible assets takes place when events have occurred that may give rise to an impairment. No such events occurred during the first nine months of fiscal year 2012.
The changes in the carrying amount of goodwill for the period ended September 30, 2012 from January 1, 2012 were as follows, (the January 1, 2012 balances have been retrospectively adjusted to reflect measurement period adjustments to the Caliper purchase price allocation, see Note 2):
|
| | | | | | | | | | | |
| Human Health | | Environmental Health | | Consolidated |
| (In thousands) |
Adjusted balance at January 1, 2012 | $ | 1,391,180 |
| | $ | 703,055 |
| | $ | 2,094,235 |
|
Foreign currency translation | (1,249 | ) | | (635 | ) | | (1,884 | ) |
Balance at September 30, 2012 | $ | 1,389,931 |
| | $ | 702,420 |
| | $ | 2,092,351 |
|
Identifiable intangible asset balances at September 30, 2012 and January 1, 2012 by category were as follows:
|
| | | | | | | |
| September 30, 2012 | | January 1, 2012 |
| (In thousands) |
Patents | $ | 107,899 |
| | $ | 107,437 |
|
Less: Accumulated amortization | (89,227 | ) | | (85,188 | ) |
Net patents | 18,672 |
| | 22,249 |
|
Trade names and trademarks | 34,207 |
| | 35,214 |
|
Less: Accumulated amortization | (12,987 | ) | | (11,086 | ) |
Net trade names and trademarks | 21,220 |
| | 24,128 |
|
Licenses | 81,351 |
| | 79,873 |
|
Less: Accumulated amortization | (45,025 | ) | | (37,339 | ) |
Net licenses | 36,326 |
| | 42,534 |
|
Core technology | 391,346 |
| | 385,112 |
|
Less: Accumulated amortization | (239,490 | ) | | (212,834 | ) |
Net core technology | 151,856 |
| | 172,278 |
|
Customer relationships | 323,638 |
| | 316,782 |
|
Less: Accumulated amortization | (98,419 | ) | | (69,710 | ) |
Net customer relationships | 225,219 |
| | 247,072 |
|
IPR&D | 7,095 |
| | 7,131 |
|
Less: Accumulated amortization | (1,322 | ) | | (819 | ) |
Net IPR&D | 5,773 |
| | 6,312 |
|
Net amortizable intangible assets | 459,066 |
| | 514,573 |
|
Non-amortizing intangible assets: | | | |
Trade names and trademarks | 147,034 |
| | 147,034 |
|
Totals | $ | 606,100 |
| | $ | 661,607 |
|
Total amortization expense related to definite-lived intangible assets for the nine months ended September 30, 2012 and October 2, 2011 was $68.7 million and $56.0 million, respectively. Estimated amortization expense related to definite-lived intangible assets for each of the next five years is $22.0 million for the remainder of fiscal year 2012, $87.2 million for fiscal year 2013, $76.9 million for fiscal year 2014, $63.4 million for fiscal year 2015, and $54.4 million for fiscal year 2016.
During the third quarter of fiscal year 2012, the Company entered into a strategic agreement under which we acquired certain intangible assets and received a license to certain core technology for an analytics and data discovery platform, as well as the exclusive right to distribute the platform in certain scientific research and development markets. For the nine months ended September 30, 2012, the Company paid $6.8 million for net intangible assets and $10.0 million for prepaid royalties, and expects to pay an additional $28.2 million in prepaid royalties within the next year. Royalties are expected to be expensed at the fair value royalty rate as revenue is recognized. As a result, these intangible assets are being amortized over their estimated useful lives. The Company has reported the amortization of these intangible assets within the results of the Company's Human Health segment from the execution date.
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” on the condensed consolidated balance sheets.
Warranty reserve activity for the three and nine months ended September 30, 2012 and October 2, 2011 is summarized below:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2012 | | October 2, 2011 | | September 30, 2012 | | October 2, 2011 |
| (In thousands) |
Balance beginning of period | $ | 10,625 |
| | $ | 9,057 |
| | $ | 10,412 |
| | $ | 8,250 |
|
Provision charged to income | 4,063 |
| | 3,493 |
| | 12,960 |
| | 10,552 |
|
Payments | (4,304 | ) | | (3,863 | ) | | (13,344 | ) | | (11,025 | ) |
Adjustments to previously provided warranties, net | 221 |
| | 365 |
| | 708 |
| | 922 |
|
Foreign currency translation and acquisitions | 154 |
| | (255 | ) | | 23 |
| | 98 |
|
Balance end of period | $ | 10,759 |
| | $ | 8,797 |
| | $ | 10,759 |
| | $ | 8,797 |
|
Note 15: Employee Postretirement Benefit Plans
During the fourth quarter of fiscal year 2011 the Company changed its method of recognizing defined benefit pension and other postretirement benefit costs. Accordingly, the financial data for all periods presented has been retrospectively adjusted to reflect the effect of these accounting changes. See Note 1 for a discussion of the Company's changes in accounting and reporting for its pension and other postretirement benefits.
The following table summarizes the components of net periodic benefit cost (credit) for the Company’s various defined benefit employee pension and postretirement plans for the three and nine months ended September 30, 2012 and October 2, 2011:
|
| | | | | | | | | | | | | | | |
| Defined Benefit Pension Benefits | | Postretirement Medical Benefits |
| Three Months Ended |
| September 30, 2012 | | October 2, 2011 | | September 30, 2012 | | October 2, 2011 |
| (In thousands) |
Service cost | $ | 977 |
| | $ | 971 |
| | $ | 28 |
| | $ | 22 |
|
Interest cost | 5,774 |
| | 6,322 |
| | 37 |
| | 40 |
|
Expected return on plan assets | (5,140 | ) | | (5,649 | ) | | (219 | ) | | (221 | ) |
Amortization of prior service costs | (60 | ) | | (57 | ) | | — |
| | (63 | ) |
Net periodic benefit cost (credit) | $ | 1,551 |
| | $ | 1,587 |
| | $ | (154 | ) | | $ | (222 | ) |
| | | | | | | |
| Defined Benefit Pension Benefits | | Postretirement Medical Benefits |
| Nine Months Ended |
| September 30, 2012 | | October 2, 2011 | | September 30, 2012 | | October 2, 2011 |
| (In thousands) |
Service cost | $ | 2,934 |
| | $ | 2,915 |
| | $ | 85 |
| | $ | 64 |
|
Interest cost | 17,381 |
| | 18,960 |
| | 111 |
| | 122 |
|
Expected return on plan assets | (15,422 | ) | | (16,946 | ) | | (657 | ) | | (663 | ) |
Amortization of prior service | (180 | ) | | (168 | ) | | — |
| | (190 | ) |
Net periodic benefit cost (credit) | $ | 4,713 |
| | $ | 4,761 |
| | $ | (461 | ) | | $ | (667 | ) |
During the first nine months of fiscal year 2012, the Company made a contribution of $17.0 million for the 2011 plan year to its defined benefit pension plan in the United States. During the first nine months of fiscal year 2012, the Company made contributions of $8.2 million in the aggregate to its defined benefit pension plans outside of the United States.
Note 16: Derivatives and Hedging Activities
The Company uses derivative instruments as part of its risk management strategy only, and includes derivatives utilized as economic hedges that are not designated as hedging instruments. By nature, all financial instruments involve market and credit risks. The Company enters into derivative instruments with major investment grade financial institutions and has policies
to monitor the credit risk of those counterparties. The Company does not enter into derivative contracts for trading or other speculative purposes, nor does the Company use leveraged financial instruments. Approximately 60% of the Company’s business is conducted outside of the United States, generally in foreign currencies. The fluctuations in foreign currency can increase the costs of financing, investing and operating the business. 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.
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. 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. Unrealized gains and losses on the Company’s foreign currency contracts are recognized immediately in earnings for hedges designated as fair value and, for hedges designated as cash flow, the related unrealized gains or losses are deferred as a component of other comprehensive income (loss) in the accompanying condensed consolidated balance sheets. Deferred gains and losses are recognized in income in the period in which the underlying anticipated transaction occurs and impacts earnings.
Principal hedged currencies include the British Pound, Canadian Dollar, Euro, Japanese Yen and Singapore Dollar. The Company held forward foreign exchange contracts with U.S. equivalent notional amounts totaling $66.6 million at September 30, 2012 and $131.8 million at October 2, 2011, and the approximate fair value of these foreign currency derivative contracts was insignificant. The gains and losses realized on foreign currency derivative contracts are not material. The duration of these contracts was generally 30 days during both fiscal years 2012 and 2011. Also, during the nine months ended September 30, 2012 the Company entered into two forward foreign exchange contracts with the same institution and having the same settlement date in October 2012, with Euro denominated notional amounts of Euro 125.0 million. The fair value of these currency derivative contracts at September 30, 2012 was a net receivable of $4.1 million.
In May 2008, the Company settled forward interest rate contracts with notional amounts totaling $150.0 million upon the issuance of its 2015 Notes, and recognized $8.4 million, net of taxes of $5.4 million, of accumulated derivative losses in other comprehensive income (loss). The derivative losses are being amortized into interest expense when the hedged exposure affects interest expense. As of September 30, 2012, the balance remaining in accumulated other comprehensive income related to the effective cash flow hedges was $3.2 million, net of taxes of $2.1 million. The Company amortized into interest expense $1.5 million for each of the nine months ended September 30, 2012 and October 2, 2011, respectively.
Note 17: Fair Value Measurements
The Company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during the nine months ended September 30, 2012. 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 at September 30, 2012 and January 1, 2012 classified in one of the three classifications described above:
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at September 30, 2012 Using: |
| Total Carrying Value at September 30, 2012 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (In thousands) |
Marketable securities | $ | 1,144 |
| | $ | 1,144 |
| | $ | — |
| | $ | — |
|
Foreign exchange derivative assets, net | 4,050 |
| | — |
| | 4,050 |
| | — |
|
Foreign exchange derivative liabilities, net | (35 | ) | | — |
| | (35 | ) | | — |
|
Contingent consideration | (1,206 | ) | | — |
| | — |
| | (1,206 | ) |
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at January 1, 2012 Using: |
| Total Carrying Value at January 1, 2012 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (In thousands) |
Marketable securities | $ | 1,105 |
| | $ | 1,105 |
| | $ | — |
| | $ | — |
|
Foreign exchange derivative liabilities, net | (213 | ) | | — |
| | (213 | ) | | — |
|
Contingent consideration | (20,298 | ) | | — |
| | — |
| | (20,298 | ) |
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 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 has classified its net liabilities for contingent consideration relating to its acquisitions of chemagen Biopolymer-Technologie AG, ArtusLabs, Inc., ID Biological Systems, Inc., and Dexela Limited within Level 3 of the fair value hierarchy because the fair value is determined using significant unobservable inputs, which included probability weighted cash flows. A description of the acquisitions is included within Note 2 to the Company's audited consolidated financial statements filed with the 2011 Form 10-K. Contingent consideration is measured at fair value at the acquisition date, based on revenue thresholds or product development milestones anticipated to be achieved during the earnout period. Increases or decreases in the fair value of contingent consideration liabilities primarily result from changes in the estimated probabilities of achieving revenue thresholds or product development milestones during the earnout period. The Company may have to pay contingent consideration of up to $21.0 million, with an estimated fair value of $1.2 million at September 30, 2012. The earnouts periods for these acquisitions do not exceed three years from acquisition.
A reconciliation of the beginning and ending Level 3 net liabilities is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2012 | | October 2, 2011 | | September 30, 2012 | | October 2, 2011 |
| (In thousands) |
Balance beginning of period | $ | (7,315 | ) | | $ | (20,909 | ) | | $ | (20,298 | ) | | $ | (1,731 | ) |
Additions | — |
| | — |
| | — |
| | (20,131 | ) |
Amounts paid and foreign currency translation | 3,771 |
| | — |
| | 17,417 |
| | 1,908 |
|
Change in fair value (included within selling, general and administrative expenses) | 2,338 |
| | (130 | ) | | 1,675 |
| | (1,085 | ) |
Balance end of period | $ | (1,206 | ) | | $ | (21,039 | ) | | $ | (1,206 | ) | | $ | (21,039 | ) |
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.
The Company’s senior unsecured revolving credit facility, with a $700.0 million available limit, had carrying values of $256.0 million and $298.0 million as of September 30, 2012 and January 1, 2012, respectively. 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 nine months of fiscal year 2012. Consequently, the carrying value of the current year and prior year credit facilities approximate fair value and would be classified as Level 2.
The Company’s 2015 Notes, with a face value of $150.0 million, had an aggregate carrying value of $150.0 million and a fair value of $166.1 million as of September 30, 2012. The 2015 Notes had an aggregate carrying value of $150.0 million and a fair value of $165.7 million as of January 1, 2012. The Company's 2021 Notes, with a face value of $500.0 million, had an aggregate carrying value of $497.1 million, net of $2.9 million of unamortized original issue discount, and a fair value of $552.6 million as of September 30, 2012. The 2021 Notes had an aggregate carrying value of $496.9 million, net of $3.1 million of unamortized original issue discount, and a fair value of $518.3 million as of January 1, 2012. The fair values of the 2015 Notes and the 2021 Notes are estimated using market quotes from brokers, or are based on current rates offered for similar debt. As of September 30, 2012, long-term debt was classified as Level 2. The Company's financing lease obligations had an aggregate carrying value of $29.3 million as of September 30, 2012 and approximated the fair value given the timing of the recognition of these obligations to the balance sheet date.
As of September 30, 2012, there has not been any significant impact to the fair value of the Company’s derivative liabilities due to credit risk. Similarly, there has not been any significant adverse impact to the Company’s derivative assets based on the evaluation of its counterparties’ credit risks.
Note 18: Contingencies
The Company is conducting a number of environmental investigations and remedial actions at current and former locations of the Company and, along with other companies, has been named a potentially responsible party (“PRP”) for certain waste disposal sites. The Company accrues for environmental issues in the accounting period that the Company’s responsibility is established and when the cost can be reasonably estimated. The Company has accrued $6.3 million as of September 30, 2012, which represents management’s estimate of the total cost of the ultimate remediation of known environmental matters, and does not include any potential liability for related personal injury or property damage claims. This amount is not discounted and does not reflect the recovery of any amounts through insurance or indemnification arrangements. These 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.
Enzo Biochem, Inc. and Enzo Life Sciences, Inc. (collectively, “Enzo”) filed a complaint dated October 23, 2002 in the United States District Court for the Southern District of New York, Civil Action No. 02-8448, seeking injunctive and monetary relief against Amersham plc, Amersham BioSciences, PerkinElmer, Inc., PerkinElmer Life Sciences, Inc., Sigma-Aldrich Corporation, Sigma Chemical Company, Inc., Molecular Probes, Inc., and Orchid BioSciences, Inc. (the “New York Case”). The complaint alleges that the Company breached its distributorship and settlement agreements with Enzo, infringed Enzo's patents, engaged in unfair competition and fraud, and committed torts against Enzo by, among other things, engaging in commercial development and exploitation of Enzo's patented products and technology, separately and together with the other defendants. The Company filed an answer and a counterclaim alleging that Enzo's patents are invalid. In 2007, after the court issued a decision in 2006 regarding the construction of the claims in Enzo's patents that effectively limited the coverage of certain of those claims and, the Company believes, excludes certain of the Company's products from the coverage of Enzo's patents, summary judgment motions were filed by the defendants. The case was assigned to a new district court judge in January 2009 and in March 2009, the new judge denied the pending summary judgment motions without prejudice and ordered a stay of the case until the federal appellate court decided Enzo's appeal of the judgment of the United States District Court for the District of Connecticut in Enzo Biochem vs. Applera Corp. and Tropix, Inc. (the “Connecticut Case”), which involves a number of the same patents and which could materially affect the scope of Enzo's case against the Company. In March 2010, the United States Court of Appeals for the Federal Circuit affirmed-in-part and reversed-in-part the judgment in the Connecticut Case. The New York Case against the Company and other defendants remains stayed except that the district court has permitted the Company and the other defendants to jointly file a motion for summary judgment on certain patent and other issues common to all of the defendants. On September 12, 2012, the court granted in part and denied in part the Company's motion for summary judgment of non-infringement, and also asked that the parties submit a joint letter advising the court of their position on what steps should take place next in the action.
The Company believes it has meritorious defenses to the matter described above, and it is contesting the action vigorously. While this matter is subject to uncertainty, in the opinion of the Company’s management, based on its review of the information available at this time, the resolution of this matter will not have a material adverse effect on the Company’s condensed consolidated financial statements.
The Company is also subject to various other 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 other contingencies at September 30, 2012 should 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.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This quarterly report on Form 10-Q, including the following management’s discussion and analysis, contains forward-looking information that you should read in conjunction with the condensed consolidated financial statements and notes to the condensed consolidated financial statements that we have included elsewhere in this report. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Words such as “believes,” “plans,” “anticipates,” “intends,” “expects,” “will” and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from the plans, intentions or expectations we disclose in the forward-looking statements we make. We have included important factors below under the heading “Risk Factors” in Part II, Item 1A. that we believe could cause actual results to differ materially from the forward-looking statements we make. We are not obligated to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are a leading provider of technology, services and solutions to the diagnostics, research, environmental and safety, industrial and laboratory services markets. Through our advanced technologies, solutions and services, we address critical issues that help to improve the health and safety of people and their environment in two reporting segments:
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• | Human Health. Develops diagnostics, tools and applications to help detect diseases earlier and more accurately and to accelerate the discovery and development of critical new therapies. The Human Health segment serves both the diagnostics and research markets. |
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• | Environmental Health. Provides technologies and applications to facilitate the creation of safer food and consumer products, more secure surroundings and efficient energy resources. The Environmental Health segment serves the environmental, industrial and laboratory services markets. |
Overview of the Third Quarter of Fiscal Year 2012
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. Both our 2012 and 2011 fiscal years include 52 weeks.
During the third quarter of fiscal year 2012, we continued to see good performance from acquisitions, investments in our ongoing technology and sales and marketing initiatives. Our overall revenue in the third quarter of fiscal year 2012 increased $56.7 million, or 13%, as compared to the third quarter of fiscal year 2011, reflecting an increase of $50.6 million, or 25%, in our Human Health segment revenue and an increase of $6.0 million, or 2%, in our Environmental Health segment revenue. The increase in our Human Health segment revenue during the three months ended September 30, 2012 was due to growth in the research market, including the addition of Caliper Life Sciences, Inc. ("Caliper"), as well as growth generated from both our screening and our medical imaging businesses within the diagnostics market. The increase in our Environmental Health segment revenue during the three months ended September 30, 2012 was due to growth in our informatics offerings within the laboratory services market, partially offset by decreased demand for our applications in the industrial markets.
In our Human Health segment during the third quarter of fiscal year 2012 as compared to the third quarter of fiscal year 2011, we experienced growth in the research market due to continued demand for our in-vivo imaging systems with the addition of Caliper imaging systems, as well as increased demand for our JANUS® automation tools, our Operetta® cellular imaging systems, and our EnVision® and EnSpire™ multi-mode plate readers. The growth in the research market was partially offset by a decline in demand for our suite of radioactive reagents. We also experienced growth in the diagnostics market as birth rates in the United States continue to stabilize and from continued expansion of our prenatal, newborn and infectious disease screening solutions in key regions outside the United States, particularly in emerging markets such as China. In our medical imaging business, we had continued growth from our traditional diagnostic imaging offerings, as well as increased demand for our complementary metal-oxide-semiconductor (“CMOS”) imaging technology, particularly in the fields of mammography, dental and orthopedics. As the rising cost of healthcare continues to be one of the critical issues facing our customers, we anticipate that the benefits of providing earlier detection of disease, which can result in savings of long-term health care costs as well as creating better outcomes for patients, are increasingly valued and we expect to see continued growth in these markets.
In our Environmental Health segment, our laboratory services business offers services designed to enable our customers to increase efficiencies and production time, while reducing maintenance costs, all of which continue to be critical for our customers. During the third quarter of fiscal year 2012, we had increased demand for our informatics offerings, and we continued to grow our laboratory services business by adding new customers to our OneSource multivendor service offering. Sales of our products in the industrial markets declined slightly in the third quarter of fiscal year 2012, as compared to the third quarter of fiscal year 2011. This decline was partially offset by continued strength in our inorganic analysis solutions, as trace
metals identification remains a critical component of contaminant detection for environmental, as well as food and consumer safety, applications. We anticipate that the continued development of contaminant testing protocols and corresponding regulations will result in increased demand for efficient, analytically sensitive and information rich testing solutions.
Our consolidated gross margins increased 126 basis points in the third quarter of fiscal year 2012, as compared to the third quarter of fiscal year 2011, due to increased sales volume, changes in product mix with growth in sales of higher gross margin product offerings and productivity improvements. Our consolidated operating margin increased 50 basis points in the third quarter of fiscal year 2012, as compared to the third quarter of fiscal year 2011, primarily as a result of higher gross margins, cost containment and productivity initiatives, partially offset by increased costs related to growth and productivity investments.
We believe we are well positioned to continue to take advantage of the stable spending trends in our end markets and to promote our efficiencies in markets where current conditions may increase demand for certain services. Overall, we believe that our strategic focus on Human Health and Environmental Health coupled with our breadth of end markets, deep portfolio of technologies and applications, leading market positions, global scale and financial strength will provide us with a strong foundation for continued 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, sales and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, warranty costs, bad debts, inventories, accounting for business combinations and dispositions, long-lived assets, income taxes, restructuring, pensions and other postretirement benefits, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are those policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. We believe our critical accounting policies include our policies regarding revenue recognition, warranty costs, allowances for doubtful accounts, inventory valuation, business combinations, value of long-lived assets, including goodwill and other intangibles, employee compensation and benefits, restructuring activities, gains or losses on dispositions and income taxes.
For a more detailed discussion of our critical accounting policies and estimates, please refer to the Notes to our Audited Consolidated Financial Statements and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended January 1, 2012 (our “2011 Form 10-K”), as filed with the Securities and Exchange Commission.
Consolidated Results of Continuing Operations
Revenue
Revenue for the three months ended September 30, 2012 was $509.6 million, as compared to $452.9 million for the three months ended October 2, 2011, an increase of $56.7 million, or 13%, which includes an approximate 3% decrease in revenue attributable to unfavorable changes in foreign exchange rates and an approximate 9% increase from acquisitions. The analysis in the remainder of this paragraph compares segment revenue for the three months ended September 30, 2012 as compared to the three months ended October 2, 2011 and includes the effect of foreign exchange rate fluctuations and acquisitions. The total increase in revenue reflects an increase of $50.6 million, or 25%, in our Human Health segment revenue due to an increase in research market revenue of $39.1 million and an increase in diagnostics market revenue of $11.5 million. Our Environmental Health segment revenue increased $6.0 million, or 2%, due to an increase in laboratory services market revenue of $9.5 million, partially offset by decreases in environmental and safety and industrial markets revenue of $3.5 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $5.2 million of revenue for the three months ended September 30, 2012 and $9.9 million for the three months ended October 2, 2011 that otherwise would have been recorded by the acquired businesses during each of the respective periods.
Revenue for the nine months ended September 30, 2012 was $1,542.3 million, as compared to $1,379.2 million for the nine months ended October 2, 2011, an increase of $163.1 million, or 12%, which includes an approximate 3% decrease in revenue attributable to unfavorable changes in foreign exchange rates and an approximate 9% increase from acquisitions. The analysis in the remainder of this paragraph compares segment revenue for the nine months ended September 30, 2012 as compared to the nine months ended October 2, 2011 and includes the effect of foreign exchange rate fluctuations and acquisitions. The total increase in revenue reflects an increase of $142.9 million, or 23%, in our Human Health segment revenue due to an increase in research market revenue of $100.8 million, and an increase in diagnostics market revenue of $42.1 million. Our Environmental Health segment revenue increased $20.2 million, or 3%, due to an increase in laboratory services market revenue of $25.1 million, partially offset by decreases in environmental and safety and industrial markets revenue of $4.9 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $22.2 million of revenue for the nine months ended September 30, 2012 and $16.3 million for the nine months ended October 2, 2011 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 September 30, 2012 was $278.9 million, as compared to $253.6 million for the three months ended October 2, 2011, an increase of $25.3 million, or 10%. As a percentage of revenue, cost of revenue decreased to 54.7% for the three months ended September 30, 2012, from 56.0% for the three months ended October 2, 2011, resulting in an increase in gross margin of 126 basis points to 45.3% for the three months ended September 30, 2012, from 44.0% for the three months ended October 2, 2011. Amortization of intangible assets decreased and was $12.7 million for the three months ended September 30, 2012, as compared to $13.9 million for the three months ended October 2, 2011. Stock-based compensation expense increased and was $0.3 million for the three months ended September 30, 2012, as compared to $0.2 million for the three months ended October 2, 2011. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions completed in fiscal year 2011 was $0.1 million for the three months ended October 2, 2011. The increase in gross margin was primarily the result of increased sales volume, changes in product mix with growth in sales of higher gross margin product offerings and productivity improvements.
Cost of revenue for the nine months ended September 30, 2012 was $840.7 million, as compared to $770.3 million for the nine months ended October 2, 2011, an increase of $70.4 million, or 9%. As a percentage of revenue, cost of revenue decreased to 54.5% for the nine months ended September 30, 2012, from 55.9% for the nine months ended October 2, 2011, resulting in a increase in gross margin of 134 basis points to 45.5% for the nine months ended September 30, 2012, from 44.1% for the nine months ended October 2, 2011. Amortization of intangible assets was $38.7 million for both the nine months ended September 30, 2012 and October 2, 2011. Stock-based compensation expense increased and was $0.9 million for the nine months ended September 30, 2012, as compared to $0.8 million for the nine months ended October 2, 2011. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions completed in fiscal year 2011 was $4.8 million for the nine months ended September 30, 2012, as compared to $0.4 million for the nine months ended October 2, 2011. The increase in gross margin was primarily the result of increased sales volume, changes in product mix with growth in sales of higher gross margin product offerings and productivity improvements, partially offset by increased costs related to acquisitions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 30, 2012 were $145.4 million, as compared to $133.1 million for the three months ended October 2, 2011, an increase of $12.3 million, or 9%. As a percentage of revenue, selling, general and administrative expenses decreased and were 28.5% for the three months ended September 30, 2012, as compared to 29.4% for the three months ended October 2, 2011. Amortization of intangible assets increased and was $9.2 million for the three months ended September 30, 2012, as compared to $6.3 million for the three months ended October 2, 2011. Stock-based compensation expense increased and was $4.6 million for the three months ended September 30, 2012, as compared to $1.1 million for the three months ended October 2, 2011. Acquisition related costs for integration, contingent consideration and other acquisition costs related to certain acquisitions provided income of $1.8 million for the three months ended September 30, 2012, as compared to an expense of $1.2 million for the three months ended October 2, 2011. The increase in selling, general and administrative expenses was primarily the result of costs related to growth and productivity investments, partially offset by cost containment initiatives.
Selling, general and administrative expenses for the nine months ended September 30, 2012 were $452.0 million, as compared to $404.2 million for the nine months ended October 2, 2011, an increase of $47.8 million, or 12%. As a percentage of revenue, selling, general and administrative expenses were 29.3% for both the nine months ended September 30, 2012 and October 2, 2011. Amortization of intangible assets increased and was $29.6 million for the nine months ended September 30, 2012, as compared to $16.6 million for the nine months ended October 2, 2011. Stock-based compensation expense increased and was $13.9 million for the nine months ended September 30, 2012, as compared to $8.2 million for the nine months ended
October 2, 2011. Acquisition related costs for integration, contingent consideration and other acquisition costs related to certain acquisitions provided income of $0.3 million for the nine months ended September 30, 2012, as compared to an expense of $6.1 million for the nine months ended October 2, 2011. The increase in selling, general and administrative expenses was primarily the result of costs related to acquisitions and growth and productivity investments, particularly in emerging territories, partially offset by cost containment initiatives.
Research and Development Expenses
Research and development expenses for the three months ended September 30, 2012 were $32.4 million, as compared to $30.1 million for the three months ended October 2, 2011, an increase of $2.3 million, or 8%. As a percentage of revenue, research and development expenses decreased and were 6.4% for the three months ended September 30, 2012, as compared to 6.6% for the three months ended October 2, 2011. Amortization of intangible assets was $0.1 million for both the three months ended September 30, 2012 and October 2, 2011. Stock-based compensation expense increased and was $0.2 million for the three months ended September 30, 2012, as compared to $0.1 million for the three months ended October 2, 2011. We primarily directed research and development efforts during fiscal years 2012 and 2011 toward the diagnostics and research markets within our Human Health segment, and the environmental, and laboratory service and support markets within our Environmental Health segment, in order to help accelerate our growth initiatives.
Research and development expenses for the nine months ended September 30, 2012 were $99.1 million, as compared to $84.3 million for the nine months ended October 2, 2011, an increase of $14.8 million, or 18%. As a percentage of revenue, research and development expenses increased and were 6.4% for the nine months ended September 30, 2012, as compared to 6.1% for the nine months ended October 2, 2011. Amortization of intangible assets decreased and was $0.4 million for the nine months ended September 30, 2012, as compared to $0.6 million for the nine months ended October 2, 2011. Stock-based compensation expense increased and was $0.5 million for the nine months ended September 30, 2012, as compared to $0.4 million for the nine months ended October 2, 2011.
Restructuring and Contract Termination Charges, Net
We have undertaken a series of restructuring actions related to the impact of acquisitions and divestitures, alignment with our growth strategy and the integration of our business units. The current portion of restructuring and contract termination charges, net, is recorded in accrued restructuring costs, and the long-term portion of restructuring and contract termination charges, net, is recorded in long-term liabilities. The activities associated with these plans have been reported as restructuring and contract termination charges, net, and are included as a component of operating expenses from continuing operations.
A description of the restructuring plans and the activity recorded for the nine months ended September 30, 2012 is listed below. Details of the plans initiated in previous years, particularly those listed under “Previous Restructuring and Integration Plans,” are discussed more fully in Note 4 to the audited consolidated financial statements in our 2011 Form 10-K.
The restructuring plan for the third quarter of fiscal year 2012 was intended to shift certain of our operations into a newly established shared service center. The restructuring plans for the first and second quarters of fiscal year 2012 were intended principally to realign operations, research and development resources, and production resources as a result of recent acquisitions. We expect the impact of immediate cost savings from the restructuring plans on operating results and cash flows to approximately offset the increased spending required to realign operations. We expect the impact of future cost savings from these restructuring activities on operating results and cash flows will exceed $11.0 million on an annual basis beginning in fiscal year 2014, primarily as a decrease to cost of revenue and a decrease to selling, general and administrative expenses.
The restructuring plans for the second and fourth quarters of fiscal year 2011 were intended principally to shift resources to higher growth geographic regions and end markets. We expect the impact of immediate cost savings from the restructuring plans on operating results and cash flows to approximately offset the increased spending required in higher growth geographic regions. We expect the impact of future cost savings from these restructuring activities on operating results and cash flows to be negligible, as we will incur offsetting costs by shifting such resources.
Q3 2012 Restructuring Plan
During the third quarter of fiscal year 2012, our management approved a plan to shift certain of our operations into a newly established shared service center (the “Q3 2012 Plan”). As a result of the Q3 2012 Plan, and during the three months ended September 30, 2012, we recognized $3.7 million in pre-tax restructuring charges in both the Human Health and Environmental Health segments related to a workforce reduction from reorganization activities. As part of the Q3 2012 Plan, we will reduce headcount by 66 employees. All employees were notified of termination under the Q3 2012 Plan by September 30, 2012.
The following table summarizes the Q3 2012 Plan activity for the nine months ended September 30, 2012:
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| | | |
| Severance |
| (In thousands) |
Provision | $ | 7,446 |
|
Amounts paid and foreign currency translation | (30 | ) |
Balance at September 30, 2012 | $ | 7,416 |
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We anticipate that the remaining severance payments of $7.4 million for workforce reductions will be completed by the end of the fourth quarter of fiscal year 2014.
Q2 2012 Restructuring Plan
During the second quarter of fiscal year 2012, our management approved a plan to realign operations, research and development resources, and production resources as a result of recent acquisitions (the “Q2 2012 Plan”). As a result of the Q2 2012 Plan, and during the nine months ended September 30, 2012, we recognized a $5.6 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities and recognized a $0.2 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities. We expect to recognize an additional $4.1 million of incremental restructuring expense in future periods as services are provided for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits, and will be recognized ratably over the future service period. As part of the Q2 2012 Plan, we will reduce headcount by 215 employees. All employees were notified of termination under the Q2 2012 Plan by July 1, 2012.
The following table summarizes the Q2 2012 Plan activity for the nine months ended September 30, 2012:
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| | | |
| Severance |
| (In thousands) |
Provision | $ | 5,890 |
|
Amounts paid and foreign currency translation | (2,244 | ) |
Balance at September 30, 2012 | $ | 3,646 |
|
We anticipate that the remaining severance payments of $3.6 million for workforce reductions will be completed by the end of the second quarter of fiscal year 2014.
Q1 2012 Restructuring Plan
During the first quarter of fiscal year 2012, our management approved a plan to realign operations and production resources as a result of recent acquisitions (the “Q1 2012 Plan”). As a result of the Q1 2012 Plan, and during the nine months ended September 30, 2012, we recognized a $5.4 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities and recognized a $1.0 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. We expect to recognize an additional $0.1 million of incremental restructuring expense in future periods as services are provided for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits, and will be recognized ratably over the future service period. As part of the Q1 2012 Plan, we will reduce headcount by 121 employees. All employees were notified of termination and we completed all actions related to the closure of excess facility space under the Q1 2012 Plan by April 1, 2012.
The following table summarizes the Q1 2012 Plan activity for the nine months ended September 30, 2012:
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| | | | | | | | | | | |
| Severance | | Closure of Excess Facility Space | | Total |
| (In thousands) |
Provision | $ | 6,336 |
| | $ | 79 |
| | $ | 6,415 |
|
Amounts paid and foreign currency translation | (4,326 | ) | | (79 | ) | | (4,405 | ) |
Balance at September 30, 2012 | $ | 2,010 |
| | $ | — |
| | $ | 2,010 |
|
We anticipate that the remaining severance payments of $2.0 million for workforce reductions will be completed by the end of the fourth quarter of fiscal year 2013.
Q4 2011 Restructuring Plan
During the fourth quarter of fiscal year 2011, our management approved a plan to shift resources to higher growth geographic regions and end markets (the “Q4 2011 Plan”). As a result of the Q4 2011 Plan, we recognized a $2.3 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities. We also recognized a $4.6 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. During the first nine months of fiscal year 2012, we recorded a pre-tax restructuring reversal of $0.1 million relating to the Q4 2011 Plan due to a reduction in the estimated costs associated with the closure of an excess facility in the Environmental Health segment. As part of the Q4 2011 Plan, we reduced headcount by 114 employees. All employees were notified of termination and we completed all actions related to the closure of excess facility space under the Q4 2011 Plan by January 1, 2012.
The following table summarizes the Q4 2011 Plan activity for the nine months ended September 30, 2012:
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| | | | | | | | | | | |
| Severance | | Closure of Excess Facility Space | | Total |
| (In thousands) |
Balance at January 1, 2012 | $ | 4,674 |
| | $ | 370 |
| | $ | 5,044 |
|
Change in estimates | — |
| | (135 | ) | | (135 | ) |
Amounts paid and foreign currency translation | (3,932 | ) | | (235 | ) | | (4,167 | ) |
Balance at September 30, 2012 | $ | 742 |
| | $ | — |
| | $ | 742 |
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We anticipate that the remaining severance payments of $0.7 million for workforce reductions will be completed by the end of the second quarter of fiscal year 2013.
Q2 2011 Restructuring Plan
During the second quarter of fiscal year 2011, our management approved a plan to shift resources to higher growth geographic regions and end markets (the “Q2 2011 Plan”). As a result of the Q2 2011 Plan, we recognized a $2.2 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. We also recognized a $3.4 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. As part of the Q2 2011 Plan, we reduced headcount by 72 employees. All employees were notified of termination and we completed all actions related to the closure of excess facility space under the Q2 2011 Plan by July 3, 2011.
The following table summarizes the Q2 2011 Plan activity for the nine months ended September 30, 2012:
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| | | |
| Severance |
| (In thousands) |
Balance at January 1, 2012 | $ | 1,283 |
|
Amounts paid and foreign currency translation | (504 | ) |
Balance at September 30, 2012 | $ | 779 |
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We anticipate that the remaining severance payments of $0.8 million for workforce reductions will be completed by the end of the fourth quarter of fiscal year 2012.
Previous Restructuring and Integration Plans
The principal actions of the restructuring and integration plans from fiscal years 2001 through 2010 were workforce reductions related to the integration of our businesses in order to reduce costs and achieve operational efficiencies as well as workforce reductions in both the Human Health and Environmental Health segments by shifting resources into geographic regions and end markets that are more consistent with our growth strategy. During the nine months ended September 30, 2012, we paid $3.3 million related to these plans and recorded an additional charge of $0.3 million to reduce the estimated sublease
rental payments reasonably expected to be obtained for an excess facility in Europe within the Environmental Health segment, as well as a charge of $0.4 million related to higher than expected costs associated with workforce reductions in Europe within the Human Health segment. As of September 30, 2012, we had $11.9 million of remaining liabilities associated with these restructuring and integration plans, primarily for residual lease obligations related to closed facilities and remaining severance payments for workforce reductions in both the Human Health and Environmental Health segments. We expect to make payments for these leases, the terms of which vary in length, through fiscal year 2022.
Contract Termination Charges
We have terminated various contractual commitments in connection with certain disposal activities and have recorded charges, to the extent applicable, for the costs of terminating these contracts before the end of their terms and costs that will continue to be incurred for the remaining terms without economic benefit to us. We recorded a pre-tax charge of $0.8 million and made payments for these obligations of $1.1 million in the first nine months of fiscal year 2012. The remaining balance of these accruals as of September 30, 2012 was $1.7 million.
Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2012 | | October 2, 2011 | | September 30, 2012 | | October 2, 2011 |
| (In thousands) |
Interest income | $ | (74 | ) | | $ | (549 | ) | | $ | (434 | ) | | $ | (1,354 | ) |
Interest expense | 11,360 |
| | 4,449 |
| | 34,136 |
| | 12,578 |
|
Other expense, net | 586 |
| | 16 |
| | 2,358 |
| | 2,719 |
|
Total interest and other expense, net | $ | 11,872 |
| | $ | 3,916 |
| | $ | 36,060 |
| | $ | 13,943 |
|
Interest and other expense, net, for the three months ended September 30, 2012 was an expense of $11.9 million, as compared to