PKI-3.30.2014-10Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________
FORM 10-Q
_______________________________________
(Mark One)
|
| |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 30, 2014
or
|
| |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission File Number 001-5075
_______________________________________
PerkinElmer, Inc.
(Exact name of Registrant as specified in its Charter)
_______________________________________
|
| | |
Massachusetts | | 04-2052042 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
940 Winter Street
Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip code)
(781) 663-6900
(Registrant’s telephone number, including area code)
_______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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.
|
| | | | | |
Large accelerated filer | | ý | Accelerated filer | | ¨ |
| | | |
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 May 1, 2014, there were outstanding 113,219,986 shares of common stock, $1 par value per share.
TABLE OF CONTENTS
|
| | |
| | Page |
PART I. FINANCIAL INFORMATION |
| | |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 3. | | |
| | |
Item 4. | | |
| |
PART II. OTHER INFORMATION | |
| | |
Item 1. | | |
| | |
Item 1A. | | |
| | |
Item 2. | | |
| | |
Item 6. | | |
| |
| |
| |
| |
PART I. FINANCIAL INFORMATION
| |
Item 1. | Unaudited Financial Statements |
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
| | | | | | | |
| Three Months Ended |
| March 30, 2014 | | March 31, 2013 |
| (In thousands, except per share data) |
Product revenue | $ | 365,485 |
| | $ | 346,619 |
|
Service revenue | 166,419 |
| | 158,759 |
|
Total revenue | 531,904 |
| | 505,378 |
|
Cost of product revenue | 189,021 |
| | 181,130 |
|
Cost of service revenue | 107,363 |
| | 99,363 |
|
Total cost of revenue | 296,384 |
| | 280,493 |
|
Selling, general and administrative expenses | 153,204 |
| | 151,497 |
|
Research and development expenses | 29,449 |
| | 34,177 |
|
Restructuring and contract termination charges, net | 2,135 |
| | 3,310 |
|
Operating income from continuing operations | 50,732 |
| | 35,901 |
|
Interest and other expense, net | 11,289 |
| | 12,040 |
|
Income from continuing operations before income taxes | 39,443 |
| | 23,861 |
|
Provision for (benefit from) income taxes | 5,124 |
| | (8,428 | ) |
Income from continuing operations | 34,319 |
| | 32,289 |
|
Loss on disposition of discontinued operations before income taxes | (72 | ) | | (92 | ) |
Provision for (benefit from) income taxes on disposition of discontinued operations | 23 |
| | (19 | ) |
Loss on disposition of discontinued operations | (95 | ) | | (73 | ) |
Net income | $ | 34,224 |
| | $ | 32,216 |
|
Basic earnings per share: | | | |
Income from continuing operations | $ | 0.30 |
| | $ | 0.28 |
|
Loss on disposition of discontinued operations | (0.00 | ) | | (0.00 | ) |
Net income | $ | 0.30 |
| | $ | 0.28 |
|
Diluted earnings per share: | | | |
Income from continuing operations | $ | 0.30 |
| | $ | 0.28 |
|
Loss on disposition of discontinued operations | (0.00 | ) | | (0.00 | ) |
Net income | $ | 0.30 |
| | $ | 0.28 |
|
Weighted average shares of common stock outstanding: | | | |
Basic | 112,553 |
| | 113,454 |
|
Diluted | 113,777 |
| | 114,716 |
|
Cash dividends per common share | $ | 0.07 |
| | $ | 0.07 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
| | | | | | | |
| Three Months Ended |
| March 30, 2014 | | March 31, 2013 |
| (In thousands) |
Net income | $ | 34,224 |
| | $ | 32,216 |
|
Other comprehensive income: | | | |
Foreign currency translation adjustments | 634 |
| | (13,503 | ) |
Reclassification adjustments for losses on derivatives included in net income, net of tax | — |
| | 299 |
|
Unrealized (losses) gains on securities, net of tax | (32 | ) | | 11 |
|
Other comprehensive income (loss) | 602 |
| | (13,193 | ) |
Comprehensive income | $ | 34,826 |
| | $ | 19,023 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| | | | | | | |
| March 30, 2014 | | December 29, 2013 |
| (In thousands, except share and per share data) |
Current assets: | | | |
Cash and cash equivalents | $ | 224,113 |
| | $ | 173,242 |
|
Accounts receivable, net | 442,976 |
| | 470,028 |
|
Inventories, net | 279,031 |
| | 261,036 |
|
Other current assets | 151,462 |
| | 140,532 |
|
Total current assets | 1,097,582 |
| | 1,044,838 |
|
Property, plant and equipment, net: | | | |
At cost | 507,465 |
| | 504,184 |
|
Accumulated depreciation | (324,797 | ) | | (318,811 | ) |
Property, plant and equipment, net | 182,668 |
| | 185,373 |
|
Marketable securities and investments | 1,300 |
| | 1,319 |
|
Intangible assets, net | 437,882 |
| | 460,430 |
|
Goodwill | 2,142,475 |
| | 2,143,120 |
|
Other assets, net | 109,171 |
| | 111,632 |
|
Total assets | $ | 3,971,078 |
| | $ | 3,946,712 |
|
Current liabilities: | | | |
Short-term debt | $ | 2,626 |
| | $ | 2,624 |
|
Accounts payable | 168,039 |
| | 167,196 |
|
Accrued restructuring and contract termination charges | 19,410 |
| | 26,374 |
|
Accrued expenses and other current liabilities | 412,962 |
| | 404,064 |
|
Current liabilities of discontinued operations | 2,425 |
| | 2,538 |
|
Total current liabilities | 605,462 |
| | 602,796 |
|
Long-term debt | 926,897 |
| | 932,104 |
|
Long-term liabilities | 409,283 |
| | 417,325 |
|
Total liabilities | 1,941,642 |
| | 1,952,225 |
|
Commitments and contingencies (see Note 19) |
| |
|
Stockholders’ equity: | | | |
Preferred stock—$1 par value per share, authorized 1,000,000 shares; none issued or outstanding | — |
| | — |
|
Common stock—$1 par value per share, authorized 300,000,000 shares; issued and outstanding 113,104,000 shares and 112,626,000 shares at March 30, 2014 and at December 29, 2013, respectively | 113,104 |
| | 112,626 |
|
Capital in excess of par value | 127,472 |
| | 119,906 |
|
Retained earnings | 1,710,667 |
| | 1,684,364 |
|
Accumulated other comprehensive income | 78,193 |
| | 77,591 |
|
Total stockholders’ equity | 2,029,436 |
| | 1,994,487 |
|
Total liabilities and stockholders’ equity | $ | 3,971,078 |
| | $ | 3,946,712 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| | | | | | | |
| Three Months Ended |
| March 30, 2014 | | March 31, 2013 |
| (In thousands) |
Operating activities: | | | |
Net income | $ | 34,224 |
| | $ | 32,216 |
|
Less: loss from discontinued operations and dispositions, net of income taxes | 95 |
| | 73 |
|
Income from continuing operations | 34,319 |
| | 32,289 |
|
Adjustments to reconcile income from continuing operations to net cash provided by continuing operations: | | | |
Restructuring and contract termination charges, net | 2,135 |
| | 3,310 |
|
Depreciation and amortization | 29,443 |
| | 30,571 |
|
Stock-based compensation | 4,516 |
| | 4,416 |
|
Amortization of deferred debt issuance costs, interest rate hedges and accretion of discounts | 304 |
| | 813 |
|
Amortization of acquired inventory revaluation | — |
| | 129 |
|
Changes in operating assets and liabilities which provided (used) cash, excluding effects from companies purchased and divested: |
Accounts receivable, net | 27,023 |
| | 40,227 |
|
Inventories, net | (17,689 | ) | | (16,187 | ) |
Accounts payable | 904 |
| | 4,941 |
|
Accrued expenses and other | (13,036 | ) | | (89,391 | ) |
Net cash provided by operating activities of continuing operations | 67,919 |
| | 11,118 |
|
Net cash used in operating activities of discontinued operations | (208 | ) | | (187 | ) |
Net cash provided by operating activities | 67,711 |
| | 10,931 |
|
Investing activities: | | | |
Capital expenditures | (6,020 | ) | | (11,829 | ) |
Activity related to acquisitions and investments, net of cash and cash equivalents acquired | — |
| | 1,400 |
|
Net cash used in investing activities of continuing operations | (6,020 | ) | | (10,429 | ) |
Net cash provided by investing activities of discontinued operations | — |
| | 123 |
|
Net cash used in investing activities | (6,020 | ) | | (10,306 | ) |
Financing activities: | | | |
Payments on revolving credit facility | (95,000 | ) | | (135,000 | ) |
Proceeds from revolving credit facility | 90,000 |
| | 213,000 |
|
Payments of debt issuance costs | (1,724 | ) | | — |
|
Settlement of cash flow hedges | — |
| | 840 |
|
Net (payments on) proceeds from other credit facilities | (252 | ) | | 8,022 |
|
Proceeds from issuance of common stock under stock plans | 7,231 |
| | 5,462 |
|
Purchases of common stock | (3,916 | ) | | (126,858 | ) |
Dividends paid | (7,887 | ) | | (8,060 | ) |
Net cash used in financing activities | (11,548 | ) | | (42,594 | ) |
Effect of exchange rate changes on cash and cash equivalents | 728 |
| | (3,604 | ) |
Net increase (decrease) in cash and cash equivalents | 50,871 |
| | (45,573 | ) |
Cash and cash equivalents at beginning of period | 173,242 |
| | 171,444 |
|
Cash and cash equivalents at end of period | $ | 224,113 |
| | $ | 125,871 |
|
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 December 29, 2013, filed with the SEC (the “2013 Form 10-K”). The balance sheet amounts at December 29, 2013 in this report were derived from the Company’s audited 2013 consolidated financial statements included in the 2013 Form 10-K. The condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods indicated. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for the three months ended March 30, 2014 and March 31, 2013, respectively, are not necessarily indicative of the results for the entire fiscal year or any future period. The Company has evaluated subsequent events from March 30, 2014 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.
Recently Adopted and 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, such pronouncements did not have or will not have a significant impact on the Company’s condensed consolidated financial position, results of operations and cash flows or do not apply to the Company’s operations.
In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under this new guidance, only disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on an entity's operations and financial results will be presented as discontinued operations. The standard also requires new disclosures related to individually significant disposals that do not meet the definition of a discontinued operation. The provisions of this guidance are effective for interim and annual periods beginning after December 15, 2014. The Company is currently evaluating the requirements of this guidance and has not yet determined the impact of its adoption on the Company’s condensed consolidated financial position, results of operations and cash flows.
Note 2: Business Combinations
During fiscal year 2013, the Company completed the acquisition of four businesses for total consideration of $11.4 million, in cash. As of the closing date, the Company potentially had to pay additional contingent consideration for one of the acquired businesses of up to $2.2 million, which at closing had an estimated fair value of $1.1 million. The excess of the purchase prices over the fair values of each of the acquired businesses' net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and have been allocated to goodwill, none of which is tax deductible. The Company reported the operations for these acquisitions within the results of the Company's operations from the acquisition dates. As of March 30, 2014, the purchase accounting allocations related to these acquisitions were preliminary, with the exception of the acquisition completed during the first quarter of fiscal year 2013.
The preliminary allocations of the purchase prices for these acquisitions were based upon initial valuations. The Company's estimates and assumptions underlying the initial valuations are subject to the collection of information necessary to complete our valuations within the measurement periods, which are up to one year from the acquisition dates. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired and liabilities assumed, assets and liabilities related to income taxes and related valuation allowances, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair values of the net assets acquired at the acquisition dates during the measurement periods. During the measurement periods, the
Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition dates that, if known, would have resulted in the recognition of those assets and liabilities as of those dates. Adjustments to the preliminary allocations of the purchase prices during the measurement periods require the revision of comparative prior period financial information when reissued in subsequent financial statements. The effect of adjustments to the allocations of the purchase prices made during the measurement periods would be as if the adjustments had been completed on the acquisition dates. The effects of any such adjustments, if material, 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 periods 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. Contingent consideration is measured at fair value at the acquisition date, based on the probability that revenue thresholds or product development milestones will be achieved during the earnout period, with changes in the fair value after the acquisition date affecting earnings to the extent it is to be settled in cash. Increases or decreases in the fair value of contingent consideration liabilities primarily result from changes in the estimated probabilities of achieving revenue thresholds or product development milestones during the earnout period. The Company may have to pay contingent consideration, related to all acquisitions with open contingency periods, of up to $31.4 million as of March 30, 2014. As of March 30, 2014, the Company has recorded contingent consideration obligations relating to its acquisitions of Dexela Limited, Haoyuan Biotech Co. and Tetra Teknolojik Sistemler Limited Sirketi, with an estimated fair value of $5.0 million. The earnout period for each of these acquisitions does not exceed three years from the respective acquisition date. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the condensed consolidated financial statements could result in a possible impairment of the intangible assets and goodwill, require acceleration of the amortization expense of definite-lived intangible assets or the recognition of additional consideration which would be expensed.
Total transaction costs related to acquisition activities were $0.1 million for both the three months ended March 30, 2014 and March 31, 2013. 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. Any remaining 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 March 30, 2014 and December 29, 2013.
The Company recorded the following pre-tax gains and losses, which have been reported as a net loss on disposition of discontinued operations:
|
| | | | | | | |
| Three Months Ended |
| March 30, 2014 | | March 31, 2013 |
| (In thousands) |
Gain on disposition of Photoflash business | $ | — |
| | $ | 124 |
|
Loss on disposition of other discontinued operations | (72 | ) | | (216 | ) |
Loss on disposition of discontinued operations before income taxes | $ | (72 | ) | | $ | (92 | ) |
In June 2010, the Company sold its 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 three months ended March 31, 2013, the Company recognized a pre-tax gain of $0.1 million for contingent consideration related to this sale. This gain was recognized as a gain on disposition of discontinued operations.
During the first three months of both fiscal years 2014 and 2013, the Company settled various commitments related to the divestiture of other discontinued operations. The Company recognized pre-tax losses in the first three months of both fiscal years 2014 and 2013. These losses were recognized as a loss on disposition of discontinued operations.
The Company recorded a tax provision of $0.02 million and a tax benefit of $0.02 million on disposition of discontinued operations for the three months ended March 30, 2014 and March 31, 2013, respectively.
Note 4: Restructuring and Contract Termination Charges, Net
The Company has undertaken a series of restructuring actions related to the impact of acquisitions and divestitures, alignment with the Company’s growth strategy and the integration of its business units. The current portion of restructuring and contract termination charges is recorded in accrued restructuring and contract termination charges and the long-term portion of restructuring and contract termination charges is recorded in long-term liabilities. The activities associated with these plans have been reported as restructuring and contract termination charges, net, and are included as a component of operating expenses from continuing operations.
A description of the restructuring plans and the activity recorded for the three months ended March 30, 2014 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 2013 Form 10-K.
The restructuring plans for the first quarter of fiscal year 2014 and the first quarter of fiscal year 2013 were principally intended to focus resources on higher growth end markets. The restructuring plans for the fourth and third quarters of fiscal year 2013 were principally intended to shift certain of the Company's research and development resources into a newly opened Center for Innovation. The restructuring plan for the second quarter of fiscal year 2013 was principally intended to shift certain of the Company's operations into a newly established shared service center as well as realign operations, research and development resources and production resources as a result of previous acquisitions.
A description of the restructuring plans and the activity recorded are as follows:
Q1 2014 Restructuring Plan
During the first quarter of fiscal year 2014, the Company’s management approved a plan principally intended to focus resources on higher growth end markets (the “Q1 2014 Plan”). As a result of the Q1 2014 Plan, the Company recognized a $0.4 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. As part of the Q1 2014 Plan, the Company reduced headcount by 17 employees. All employees were notified of termination under the Q1 2014 Plan by March 30, 2014.
The following table summarizes the Q1 2014 Plan activity for the three months ended March 30, 2014:
|
| | | |
| Severance |
| (In thousands) |
Provision | $ | 567 |
|
Amounts paid and foreign currency translation | (120 | ) |
Balance at March 30, 2014 | $ | 447 |
|
The Company anticipates that the remaining severance payments of $0.4 million for workforce reductions will be substantially completed by the end of the fourth quarter of fiscal year 2015.
Q4 2013 Restructuring Plan
During the fourth quarter of fiscal year 2013, the Company’s management approved a plan principally intended to shift certain of the Company's research and development resources into a newly opened Center for Innovation (the “Q4 2013 Plan”). As a result of the Q4 2013 Plan, the Company recognized an $8.2 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 and recognized a $3.0 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities. As part of the Q4 2013 Plan, the Company reduced headcount by 74 employees. All employees were notified of termination under the Q4 2013 Plan by December 29, 2013.
The following table summarizes the Q4 2013 Plan activity for the three months ended March 30, 2014:
|
| | | | | | | | | | | |
| Severance | | Closure of Excess Facility Space | | Total |
| (In thousands) |
Balance at December 29, 2013 | $ | 1,988 |
| | $ | 6,854 |
| | $ | 8,842 |
|
Amounts paid and foreign currency translation | (995 | ) | | (249 | ) | | (1,244 | ) |
Balance at March 30, 2014 | $ | 993 |
| | $ | 6,605 |
| | $ | 7,598 |
|
The Company anticipates that the remaining severance payments of $1.0 million for workforce reductions will be substantially completed by the end of the second quarter of fiscal year 2014. The Company also anticipates that the remaining payments of $6.6 million, net of estimated sublease income, for the closure of the excess facility space will be paid through fiscal year 2019, in accordance with the terms of the applicable leases.
Q3 2013 Restructuring Plan
During the third quarter of fiscal year 2013, the Company’s management approved a plan principally intended to shift certain of the Company's research and development resources into a newly opened Center for Innovation (the “Q3 2013 Plan”). As a result of the Q3 2013 Plan, the Company recognized a $0.5 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. As part of the Q3 2013 Plan, the Company reduced headcount by 30 employees. All employees were notified of termination under the Q3 2013 Plan by September 29, 2013.
The following table summarizes the Q3 2013 Plan activity for the three months ended March 30, 2014:
|
| | | |
| Severance |
| (In thousands) |
Balance at December 29, 2013 | $ | 137 |
|
Amounts paid and foreign currency translation | (113 | ) |
Balance at March 30, 2014 | $ | 24 |
|
The Company anticipates that the remaining severance payments of $0.02 million for workforce reductions will be substantially completed by the end of the second quarter of fiscal year 2014.
Q2 2013 Restructuring Plan
During the second quarter of fiscal year 2013, the Company’s management approved a plan principally intended to shift certain of the Company's operations into a newly established shared service center as well as realign operations, research and development resources, and production resources as a result of previous acquisitions (the “Q2 2013 Plan”). As a result of the Q2 2013 Plan, the Company initially recognized a $9.9 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, and recognized a $8.8 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. Subsequent to the initial charge, during fiscal year 2013, the Company recorded an additional $0.6 million pre-tax restructuring charge in the Human Health segment for services that were provided for one-time benefits in which the employee was required to render service beyond the legal notification period. During the three months ended March 30, 2014, the Company recorded additional pre-tax restructuring charges of $0.1 million in each of the Human Health and Environmental Health segments due to higher than expected costs associated with the closure of the excess facility space. As part of the Q2 2013 Plan, the Company reduced headcount by 265 employees. All employees were notified of termination under the Q2 2013 Plan by June 30, 2013.
The following table summarizes the Q2 2013 Plan activity for the three months ended March 30, 2014:
|
| | | | | | | | | | | |
| Severance | | Closure of Excess Facility Space | | Total |
| (In thousands) |
Balance at December 29, 2013 | $ | 12,750 |
| | $ | — |
| | $ | 12,750 |
|
Change in estimates | — |
| | 184 |
| | 184 |
|
Amounts paid and foreign currency translation | (3,981 | ) | | (38 | ) | | (4,019 | ) |
Balance at March 30, 2014 | $ | 8,769 |
| | $ | 146 |
| | $ | 8,915 |
|
The Company anticipates that the remaining severance payments of $8.8 million for workforce reductions will be substantially completed by the end of the fourth quarter of fiscal year 2014, as local law requires some severance to be paid in monthly installments through the fourth quarter of fiscal year 2014. The Company also anticipates that the remaining payments of $0.1 million for the closure of the excess facility space will be paid through the third quarter of 2014, in accordance with the terms of the applicable lease.
Q1 2013 Restructuring Plan
During the first quarter of fiscal year 2013, the Company’s management approved a plan to focus resources on higher growth end markets (the “Q1 2013 Plan”). As a result of the Q1 2013 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 and recognized a $0.2 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities. As part of the Q1 2013 Plan, the Company reduced headcount by 62 employees. All employees were notified of termination under the Q1 2013 Plan by March 31, 2013.
The following table summarizes the Q1 2013 Plan activity for the three months ended March 30, 2014:
|
| | | |
| Severance |
| (In thousands) |
Balance at December 29, 2013 | $ | 208 |
|
Amounts paid and foreign currency translation | — |
|
Balance at March 30, 2014 | $ | 208 |
|
The Company anticipates that the remaining severance payments of $0.2 million for workforce reductions will be substantially completed by the end of the fourth quarter of fiscal year 2014.
Previous Restructuring and Integration Plans
The principal actions of the restructuring and integration plans from fiscal year 2001 through fiscal year 2012 were workforce reductions and the closure of excess facility space related to the integration of the Company’s businesses in order to realign operations, reduce costs, achieve operational efficiencies and shift resources into geographic regions and end markets that are more consistent with the Company’s growth strategy. During the three months ended March 30, 2014, the Company paid $3.0 million related to these plans. As of March 30, 2014, the Company had $10.3 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. The Company anticipates the remaining severance payments for workforce reductions will be substantially completed by the end of the fourth quarter of fiscal year 2014, as local law requires some severance to be paid in monthly installments through the fourth quarter of fiscal year 2014.
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 the costs that will continue to be incurred for the remaining terms without economic benefit to the Company. The Company recorded an additional pre-tax charge of $1.4 million, primarily as a result of terminating various contractual commitments in the Environmental Health segment. The Company made payments for these obligations of $1.1 million in the first three months of fiscal year 2014. The remaining balance of these accruals as of March 30, 2014 was $0.6 million.
Note 5: Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
|
| | | | | | | |
| Three Months Ended |
| March 30, 2014 | | March 31, 2013 |
| (In thousands) |
Interest income | $ | (94 | ) | | $ | (105 | ) |
Interest expense | 9,219 |
| | 11,693 |
|
Other expense, net | 2,164 |
| | 452 |
|
Total interest and other expense, net | $ | 11,289 |
| | $ | 12,040 |
|
Note 6: Inventories, Net
Inventories as of March 30, 2014 and December 29, 2013 consisted of the following:
|
| | | | | | | |
| March 30, 2014 | | December 29, 2013 |
| (In thousands) |
Raw materials | $ | 97,819 |
| | $ | 92,891 |
|
Work in progress | 18,190 |
| | 15,505 |
|
Finished goods | 163,022 |
| | 152,640 |
|
Total inventories, net | $ | 279,031 |
| | $ | 261,036 |
|
Note 7: Income Taxes
The Company regularly reviews its tax positions in each significant taxing jurisdiction in the process of evaluating its unrecognized tax benefits. The Company makes adjustments to its unrecognized tax benefits when: (i) facts and circumstances regarding a tax position change, causing a change in management’s judgment regarding that tax position; (ii) a tax position is effectively settled with a tax authority at a differing amount; and/or (iii) the statute of limitations expires regarding a tax position.
At March 30, 2014, the Company had gross tax effected unrecognized tax benefits of $36.0 million, of which $30.7 million, if recognized, would affect the continuing operations effective tax rate. The remaining amount, if recognized, would affect discontinued operations.
The Company believes that it is reasonably possible that approximately $1.9 million of its uncertain tax positions at March 30, 2014, including accrued interest and penalties, and net of tax benefits, may be resolved over the next twelve months as a result of lapses in applicable statutes of limitations and potential settlements. Various tax years after 2006 remain open to examination by certain 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.
During the first three months of fiscal years 2014 and 2013, the Company recorded net discrete income tax benefits of $2.0 million and $12.5 million, respectively, primarily for reversals of uncertain tax position reserves and resolution of other tax matters.
Note 8: Debt
Senior Unsecured Revolving Credit Facility. On January 8, 2014, the Company refinanced its debt held under the senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility. The new senior unsecured revolving credit facility provides for $700.0 million of revolving loans and has an initial maturity of January 8, 2019. As of March 30, 2014, undrawn letters of credit in the aggregate amount of $12.0 million were treated as issued and outstanding under the new senior unsecured revolving credit facility. As of March 30, 2014, the Company had $296.0 million available for additional borrowing under the new facility. The Company uses the new senior unsecured revolving credit facility for general corporate purposes, which may include working capital, refinancing existing indebtedness, capital expenditures, share repurchases, acquisitions and strategic alliances. The interest rates under the senior unsecured revolving credit facility are based on the Eurocurrency rate 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 JP Morgan Chase Bank, N.A. as its "prime rate," (ii) the Federal Funds rate plus 50 basis points or (iii) one-month Libor plus 1.00%. The Eurocurrency margin as of March 30, 2014 was 107 basis points. The weighted average Eurocurrency interest rate as of March 30, 2014 was 0.19%, resulting in a weighted average effective Eurocurrency rate, including the margin, of 1.26%, which is the interest applicable to borrowings outstanding under the Eurocurrency rate as of March 30, 2014. At March 30, 2014, the Company had $392.0 million of borrowings in U.S. Dollars outstanding under the senior unsecured revolving credit facility 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 similar to those contained in the Company's credit agreement for its previous facility. The financial covenants in the Company's senior unsecured revolving credit facility include a debt-to-capital ratio, and two contingent covenants, a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio, applicable if the Company's credit rating is downgraded below investment grade. During the three months ended March 30, 2014, the Company capitalized $1.8 million of debt issuance costs for the refinancing of debt held under its previous senior unsecured revolving credit facility. These debt issuance costs are being amortized into interest and other expense, net, on a straight-line basis, over the term of the new senior unsecured revolving credit facility.
The Company's previous senior unsecured revolving credit facility provided for $700.0 million of revolving loans and had an initial maturity of December 16, 2016. At December 29, 2013, the Company had $397.0 million of borrowings in U.S. Dollars outstanding under the previous senior unsecured revolving credit facility. The credit agreement for the previous facility contained affirmative, negative and financial covenants and events of default similar to those contained in the Company's new credit facility.
5% Senior Unsecured Notes due in 2021. On October 25, 2011, the Company issued $500.0 million aggregate principal amount of senior unsecured notes due in 2021 (the “2021 Notes”) in a registered public offering and received $496.9 million of net proceeds from the issuance. The 2021 Notes were issued at 99.372% of the principal amount, which resulted in a discount of $3.1 million. As of March 30, 2014, the 2021 Notes had an aggregate carrying value of $497.5 million, net of $2.5 million of unamortized original issue discount. As of December 29, 2013, the 2021 Notes had an aggregate carrying value of $497.4 million, net of $2.6 million of unamortized original issue discount. The 2021 Notes mature in November 2021 and bear interest at an annual rate of 5%. Interest on the 2021 Notes is payable semi-annually on May 15th and November 15th each year. Prior to August 15, 2021 (three months prior to their maturity date), the Company may redeem the 2021 Notes in whole or in part, at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2021 Notes being redeemed, discounted on a semi-annual basis, at the Treasury Rate plus 45 basis points, plus accrued and unpaid interest. At any time on or after August 15, 2021 (three months prior to their maturity date), the Company may redeem the 2021 Notes, at its option, at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed plus accrued and unpaid interest. Upon a change of control (as defined in the indenture governing the 2021 Notes ) and a contemporaneous downgrade of the 2021 Notes below investment grade, each holder of 2021 Notes will have the right to require the Company to repurchase such holder's 2021 Notes for 101% of their principal amount, plus accrued and unpaid interest.
Financing Lease Obligations. In September 2012, the Company entered into agreements with the lessors of certain buildings that the Company is currently occupying and leasing to expand those buildings. The Company provided a portion of the funds needed for the construction of the additions to the buildings, 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 was not reimbursed by the lessors for all of the construction costs. The Company is therefore deemed to have continuing involvement and the leases qualify as financing leases under sale-leaseback accounting guidance, representing debt obligations for the Company and non-cash investing and financing activities. As a result, the Company capitalized $29.3 million in property and equipment, net, representing the fair value of the buildings with a corresponding increase to debt. The Company has also capitalized $11.5 million in additional construction costs necessary to complete the renovations to the buildings, which were funded by the lessors, with a corresponding increase to debt. At March 30, 2014, the Company had $40.0 million recorded for these financing lease obligations, of which $2.6 million was recorded as short-term debt and $37.4 million was recorded as long-term debt. At December 29, 2013, the Company had $40.3 million recorded for these financing lease obligations, of which $2.6 million was recorded as short-term debt and $37.7 million was recorded as long-term debt. The buildings are being depreciated on a straight-line basis over the terms of the leases to their estimated residual values, which will equal the remaining financing obligation at the end of the lease term. At the end of the lease term, the remaining balances in property, plant and equipment, net and debt will be reversed against each other.
Note 9: Earnings Per Share
Basic earnings per share was computed by dividing net income by the weighted-average number of common shares outstanding during the period less restricted unvested shares. Diluted earnings per share was computed by dividing net income by the weighted-average number of common shares outstanding plus all potentially dilutive common stock equivalents, primarily shares issuable upon the exercise of stock options using the treasury stock method. The following table reconciles the number of shares utilized in the earnings per share calculations:
|
| | | | | |
| Three Months Ended |
| March 30, 2014 | | March 31, 2013 |
| (In thousands) |
Number of common shares—basic | 112,553 |
| | 113,454 |
|
Effect of dilutive securities: | | | |
Stock options | 1,052 |
| | 1,050 |
|
Restricted stock awards | 172 |
| | 212 |
|
Number of common shares—diluted | 113,777 |
| | 114,716 |
|
Number of potentially dilutive securities excluded from calculation due to antidilutive impact | 459 |
| | 479 |
|
Antidilutive securities include outstanding stock options with exercise prices and average unrecognized compensation cost in excess of the average fair market value of common stock for the related period. Antidilutive options were excluded from the calculation of diluted net income per share and could become dilutive in the future.
Note 10: Industry Segment Information
The Company discloses information about its operating segments based on the way that management organizes the segments within the Company for making operating decisions and assessing financial performance. The Company evaluates the performance of its operating segments based on revenue and operating income. Intersegment revenue and transfers are not significant. The Company’s management reviews the results of the Company’s operations by the Human Health and Environmental Health operating segments. The accounting policies of the operating segments are the same as those described in Note 1 to the audited consolidated financial statements in the 2013 Form 10-K. The principal products and services of the Company's two operating segments are:
| |
• | Human Health. Develops diagnostics, tools and applications to help detect diseases earlier and more accurately and to accelerate the discovery and development of critical new therapies. The Human Health segment serves both the diagnostics and research markets. |
| |
• | Environmental Health. Provides products, services and solutions to facilitate the creation of safer food and consumer products, more secure surroundings and efficient energy resources. The Environmental Health segment serves the environmental, industrial and laboratory services markets. |
The Company has included the expenses for its corporate headquarters, such as legal, tax, audit, human resources, information technology, and other management and compliance costs, as well as the activity related to the mark-to-market adjustment on postretirement benefit plans, as “Corporate” below. The Company has a process to allocate and recharge expenses to the reportable segments when these costs are administered or paid by the corporate headquarters based on the extent to which the segment benefited from the expenses. These amounts have been calculated in a consistent manner and are included in the Company’s calculations of segment results to internally plan and assess the performance of each segment for all purposes, including determining the compensation of the business leaders for each of the Company’s operating segments.
Revenue and operating income (loss) by operating segment, excluding discontinued operations, are shown in the table below:
|
| | | | | | | |
| Three Months Ended |
| March 30, 2014 | | March 31, 2013 |
| (In thousands) |
Human Health | | | |
Product revenue | $ | 239,030 |
| | $ | 219,073 |
|
Service revenue | 60,453 |
| | 62,256 |
|
Total revenue | 299,483 |
| | 281,329 |
|
Operating income from continuing operations | 43,060 |
| | 25,020 |
|
Environmental Health | | | |
Product revenue | 126,455 |
| | 127,546 |
|
Service revenue | 105,966 |
| | 96,503 |
|
Total revenue | 232,421 |
| | 224,049 |
|
Operating income from continuing operations | 21,499 |
| | 20,728 |
|
Corporate | | | |
Operating loss from continuing operations(1) | (13,827 | ) | | (9,847 | ) |
Continuing Operations | | | |
Product revenue | 365,485 |
| | 346,619 |
|
Service revenue | 166,419 |
| | 158,759 |
|
Total revenue | 531,904 |
| | 505,378 |
|
Operating income from continuing operations | 50,732 |
| | 35,901 |
|
Interest and other expense, net (see Note 5) | 11,289 |
| | 12,040 |
|
Income from continuing operations before income taxes | $ | 39,443 |
| | $ | 23,861 |
|
____________________________
| |
(1) | Activity related to the mark-to-market adjustment on postretirement benefit plans have been included in the Corporate operating loss from continuing operations, and together constituted a pre-tax gain of $0.1 million for both the three months ended March 30, 2014 and March 31, 2013. |
Note 11: Stockholders’ Equity
Comprehensive Income:
The components of accumulated other comprehensive income consisted of the following:
|
| | | | | | | |
| March 30, 2014 | | December 29, 2013 |
| (In thousands) |
Foreign currency translation adjustments | $ | 76,917 |
| | $ | 76,283 |
|
Unrecognized prior service costs, net of income taxes | 1,429 |
| | 1,429 |
|
Unrealized net losses on securities, net of income taxes | (153 | ) | | (121 | ) |
Accumulated other comprehensive income | $ | 78,193 |
| | $ | 77,591 |
|
In December 2013, the Company redeemed all of its 6% senior unsecured notes due in 2015 and wrote-off the remaining unamortized derivative losses for previously settled cash flow hedges. During the three months ended March 31, 2013, pre-tax losses of $0.5 million were reclassified from accumulated other comprehensive income into interest and other expense, net related to previously settled cash flow hedges. The Company recognized a tax provision of $0.2 million related to these amounts reclassified out of accumulated other comprehensive income for the three months ended March 31, 2013.
Stock Repurchase Program:
On October 24, 2012, the Board of Directors ("the Board") authorized the Company to repurchase up to 6.0 million shares of common stock under a stock repurchase program (the "Repurchase Program"). The 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 three months ended March 30, 2014, the Company did not repurchase any shares of common stock in the open market under
the Repurchase Program. As of March 30, 2014, 2.4 million shares of the Company’s common stock remained available for repurchase from the 6.0 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 three months ended March 30, 2014, the Company repurchased 90,230 shares of common stock for this purpose at an aggregate cost of $3.9 million. The repurchased shares have been reflected as additional authorized but unissued shares, with the payments reflected in common stock and capital in excess of par value.
Dividends:
The Board declared a regular quarterly cash dividend of $0.07 per share in the first quarter of fiscal year 2014 and in each quarter of fiscal year 2013. At March 30, 2014, the Company has accrued $7.9 million for dividends declared on January 24, 2014 for the first quarter of fiscal year 2014, payable in May 2014. On April 22, 2014, the Company announced that the Board had declared a quarterly dividend of $0.07 per share for the second quarter of fiscal year 2014 that will be payable in August 2014. In the future, the Board may determine to reduce or eliminate the Company’s common stock dividend in order to fund investments for growth, repurchase shares or conserve capital resources.
Note 12: Stock Plans
In addition to the Company's Employee Stock Purchase Plan, the Company utilizes one stock-based compensation plan, the 2009 Incentive Plan (the “2009 Plan”). Under the 2009 Plan, 10.0 million shares of the Company's common stock are authorized for stock option grants, restricted stock awards, performance units and stock grants as part of the Company’s compensation programs. In addition to shares of the Company’s common stock originally authorized for issuance under the 2009 Plan, the 2009 Plan includes shares of the Company’s common stock previously granted under the Amended and Restated 2001 Incentive Plan and the 2005 Incentive Plan that were canceled or forfeited without the shares being issued.
The following table summarizes total pre-tax compensation expense recognized related to the Company’s stock options, restricted stock, restricted stock units, performance units and stock grants, net of estimated forfeitures, included in the Company’s condensed consolidated statements of operations for the three months ended March 30, 2014 and March 31, 2013:
|
| | | | | | | |
| Three Months Ended |
| March 30, 2014 | | March 31, 2013 |
| (In thousands) |
Cost of product and service revenue | $ | 333 |
| | $ | 313 |
|
Research and development expenses | 141 |
| | 216 |
|
Selling, general and administrative expenses | 4,042 |
| | 3,887 |
|
Total stock-based compensation expense | $ | 4,516 |
| | $ | 4,416 |
|
The total income tax benefit recognized in the condensed consolidated statements of operations for stock-based compensation was $1.6 million and $1.4 million for the three months ended March 30, 2014 and March 31, 2013, respectively. Stock-based compensation costs capitalized as part of inventory were $0.3 million as of both March 30, 2014 and March 31, 2013. The excess tax benefit recognized from stock compensation, classified as a financing cash activity, was zero for both the three months ended March 30, 2014 and March 31, 2013.
Stock Options: The fair value of each option grant is estimated using the Black-Scholes option pricing model. The Company’s weighted-average assumptions used in the Black-Scholes option pricing model were as follows:
|
| | | | | |
| Three Months Ended |
| March 30, 2014 | | March 31, 2013 |
Risk-free interest rate | 1.5 | % | | 0.9 | % |
Expected dividend yield | 0.7 | % | | 0.8 | % |
Expected lives | 5 years |
| | 5 years |
|
Expected stock volatility | 30.9 | % | | 38.5 | % |
The following table summarizes stock option activity for the three months ended March 30, 2014:
|
| | | | | | | | | | | | |
| Number of Shares | | Weighted- Average Price | | Weighted-Average Remaining Contractual Term | | Total Intrinsic Value |
| (In thousands) | | | | (In years) | | (In millions) |
Outstanding at December 29, 2013 | 3,494 |
| | $ | 23.34 |
| | | | |
Granted | 446 |
| | 43.08 |
| | | | |
Exercised | (310 | ) | | 23.30 |
| | | | |
Canceled | (4 | ) | | 20.97 |
| | | | |
Forfeited | (16 | ) | | 29.58 |
| | | | |
Outstanding at March 30, 2014 | 3,610 |
| | $ | 25.75 |
| | 3.8 | | $ | 65.1 |
|
Exercisable at March 30, 2014 | 2,567 |
| | $ | 21.83 |
| | 2.9 | | $ | 56.4 |
|
Vested and expected to vest in the future | 3,565 |
| | $ | 25.66 |
| | 3.8 | | $ | 64.6 |
|
The weighted-average per-share grant-date fair value of options granted was $11.85 and $10.90 for the three months ended March 30, 2014 and March 31, 2013, respectively. The total intrinsic value of options exercised was $6.5 million and $3.1 million for the three months ended March 30, 2014 and March 31, 2013, respectively. Cash received from option exercises was $7.2 million and $5.5 million for the three months ended March 30, 2014 and March 31, 2013, respectively.
The total compensation expense recognized related to the Company’s outstanding options was $1.5 million and $1.3 million for the three months ended March 30, 2014 and March 31, 2013, respectively.
There was $9.5 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested stock options granted as of March 30, 2014. This cost is expected to be recognized over a weighted-average period of 2.2 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 three months ended March 30, 2014:
|
| | | | | | |
| Number of Shares | | Weighted- Average Grant- Date Fair Value |
| (In thousands) | | |
Nonvested at December 29, 2013 | 649 |
| | $ | 29.24 |
|
Granted | 216 |
| | 42.55 |
|
Vested | (246 | ) | | 27.70 |
|
Forfeited | (21 | ) | | 32.00 |
|
Nonvested at March 30, 2014 | 598 |
| | $ | 34.59 |
|
The weighted-average per-share grant-date fair value of restricted stock awards granted was $42.55 and $34.06 during the three months ended March 30, 2014 and March 31, 2013, respectively. The fair value of restricted stock awards vested was $6.8 million and $6.9 million for the three months ended March 30, 2014 and March 31, 2013, respectively. The total compensation expense recognized related to the Company’s outstanding restricted stock awards was $2.0 million and $2.1 million for the three months ended March 30, 2014 and March 31, 2013, respectively.
As of March 30, 2014, there was $15.7 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 1.8 years.
Performance Units: The Company granted 79,463 and 98,056 performance units during the three months ended March 30, 2014 and March 31, 2013, respectively, as part of the Company’s executive incentive program. The weighted-average per-share grant-date fair value of performance units granted during the three months ended March 30, 2014 and March 31, 2013 was $42.84 and $34.06, respectively. The total compensation expense recognized related to these performance units was $1.0 million for both the three months ended March 30, 2014 and March 31, 2013. As of March 30, 2014, there were 271,679 performance units outstanding and subject to forfeiture, with a corresponding liability of $3.7 million recorded in accrued expenses and other current liabilities.
Stock Awards: The Company generally grants stock awards only to non-employee members of the Board. The Company did not grant any stock awards during either the three months ended March 30, 2014 or March 31, 2013.
Employee Stock Purchase Plan: During the three months ended March 30, 2014, the Company issued 31,854 shares of common stock under the Company's Employee Stock Purchase Plan at a weighted-average price of $39.17 per share. During the three months ended March 31, 2013, the Company issued 45,762 shares of common stock under the Company's Employee Stock Purchase Plan at a weighted-average price of $30.15 per share. At March 30, 2014, an aggregate of 1.1 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 1, 2014, its annual impairment date for fiscal year 2014. The Company concluded based on the first step of the process that there was no goodwill impairment, and the fair value exceeded the carrying value by more than 90.0% for each reporting unit, with the exception of one reporting unit where the fair value exceeded the carrying value by approximately 11.0%. The carrying value of the goodwill for this one reporting unit was $796.3 million, at the annual impairment date for fiscal year 2014.
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 3.0% to 6.0% for the fiscal year 2014 impairment analysis. The range for the discount rates for the reporting units was approximately 10.0% to 11.5%. 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 1, 2014, and concluded that there was no impairment of non-amortizing intangible assets. An assessment of the recoverability of amortizing intangible assets takes place when events have occurred that may give rise to an impairment. No such events occurred during the first three months of fiscal year 2014.
The changes in the carrying amount of goodwill for the period ended March 30, 2014 from December 29, 2013 were as follows:
|
| | | | | | | | | | | |
| Human Health | | Environmental Health | | Consolidated |
| (In thousands) |
Balance at December 29, 2013 | $ | 1,648,332 |
| | $ | 494,788 |
| | $ | 2,143,120 |
|
Foreign currency translation | (502 | ) | | (143 | ) | | (645 | ) |
Balance at March 30, 2014 | $ | 1,647,830 |
| | $ | 494,645 |
| | $ | 2,142,475 |
|
Identifiable intangible asset balances at March 30, 2014 and December 29, 2013 by category were as follows:
|
| | | | | | | |
| March 30, 2014 | | December 29, 2013 |
| (In thousands) |
Patents | $ | 39,591 |
| | $ | 39,591 |
|
Less: Accumulated amortization | (24,864 | ) | | (24,207 | ) |
Net patents | 14,727 |
| | 15,384 |
|
Trade names and trademarks | 36,057 |
| | 36,058 |
|
Less: Accumulated amortization | (17,310 | ) | | (16,457 | ) |
Net trade names and trademarks | 18,747 |
| | 19,601 |
|
Licenses | 79,098 |
| | 79,180 |
|
Less: Accumulated amortization | (54,938 | ) | | (52,930 | ) |
Net licenses | 24,160 |
| | 26,250 |
|
Core technology | 302,011 |
| | 302,070 |
|
Less: Accumulated amortization | (178,908 | ) | | (169,326 | ) |
Net core technology | 123,103 |
| | 132,744 |
|
Customer relationships | 321,421 |
| | 321,395 |
|
Less: Accumulated amortization | (141,901 | ) | | (132,833 | ) |
Net customer relationships | 179,520 |
| | 188,562 |
|
IPR&D | 9,470 |
| | 9,483 |
|
Less: Accumulated amortization | (2,429 | ) | | (2,178 | ) |
Net IPR&D | 7,041 |
| | 7,305 |
|
Net amortizable intangible assets | 367,298 |
| | 389,846 |
|
Non-amortizing intangible assets: | | | |
Trade names and trademarks | 70,584 |
| | 70,584 |
|
Total | $ | 437,882 |
| | $ | 460,430 |
|
Total amortization expense related to definite-lived intangible assets was $20.7 million and $22.5 million for the three months ended March 30, 2014 and March 31, 2013, respectively. Estimated amortization expense related to definite-lived intangible assets for each of the next five years is $62.5 million for the remainder of fiscal year 2014, $69.2 million in fiscal year 2015, $60.2 million in fiscal year 2016, $50.7 million in fiscal year 2017, and $39.1 million in fiscal year 2018.
The Company entered into a strategic agreement in fiscal year 2012 under which it 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. During fiscal year 2012, the Company paid $6.8 million for net intangible assets and $25.0 million for prepaid royalties. During the third quarter of fiscal year 2013, the Company extended the existing agreement for an additional year. In addition, the Company entered into a new agreement to expand the distribution rights to the clinical and other related markets and acquired additional intangible assets. During fiscal year 2013, the Company paid $7.0 million for net intangible assets and $40.3 million for prepaid royalties. The prepaid royalties have been recorded primarily as other long-term assets. The Company does not expect to pay any additional prepaid royalties within the next twelve months. The Company expenses royalties as revenue is recognized. 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 and other current liabilities” on the condensed consolidated balance sheets.
A summary of warranty reserve activity for the three months ended March 30, 2014 and March 31, 2013 is as follows:
|
| | | | | | | |
| Three Months Ended |
| March 30, 2014 | | March 31, 2013 |
| (In thousands) |
Balance beginning of period | $ | 10,534 |
| | $ | 11,003 |
|
Provision charged to income | 4,077 |
| | 4,340 |
|
Payments | (3,967 | ) | | (4,824 | ) |
Adjustments to previously provided warranties, net | (297 | ) | | 365 |
|
Foreign currency translation and acquisitions | 10 |
| | (57 | ) |
Balance end of period | $ | 10,357 |
| | $ | 10,827 |
|
Note 15: Employee Postretirement Benefit Plans
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 months ended March 30, 2014 and March 31, 2013:
|
| | | | | | | | | | | | | | | |
| Defined Benefit Pension Benefits | | Postretirement Medical Benefits |
| Three Months Ended |
| March 30, 2014 | | March 31, 2013 | | March 30, 2014 | | March 31, 2013 |
| (In thousands) |
Service cost | $ | 1,030 |
| | $ | 925 |
| | $ | 24 |
| | $ | 28 |
|
Interest cost | 5,916 |
| | 5,315 |
| | 39 |
| | 36 |
|
Expected return on plan assets | (6,263 | ) | | (6,264 | ) | | (241 | ) | | (241 | ) |
Amortization of prior service costs | (71 | ) | | (67 | ) | | — |
| | — |
|
Net periodic benefit cost (credit) | $ | 612 |
| | $ | (91 | ) | | $ | (178 | ) | | $ | (177 | ) |
During the first three months of fiscal year 2014, the Company contributed $0.9 million, in the aggregate, to 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 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, Euro, Japanese Yen and Singapore Dollar. The Company held forward foreign exchange contracts, designated as fair value hedges, with U.S. equivalent notional amounts totaling $95.0 million, $138.4 million and $77.4 million at March 30, 2014, December 29, 2013 and March 31, 2013, respectively, and the 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 or less during both fiscal years 2014 and 2013.
In December 2012, the Company entered into two forward foreign exchange contracts with settlement dates in fiscal year 2013 and combined Euro denominated notional amounts of €50.0 million, designated as cash flow hedges. In March 2013, the Company settled one such forward foreign exchange contract with a notional amount of €25.0 million. The fair value of the remaining outstanding currency derivative contract at March 31, 2013 was $0.9 million. As of March 31, 2013, the net unrealized gain for the remaining outstanding currency derivative was included in foreign currency translation adjustments within accumulated other comprehensive income. The derivative gains were amortized into interest and other expense, net, when the hedged exposures affected interest and other expense, net. Such amounts were not material for the three months ended March 31, 2013.
Note 17: Fair Value Measurements
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, derivatives, marketable securities and accounts receivable. The Company believes it had no significant concentrations of credit risk as of March 30, 2014.
The Company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during the three months ended March 30, 2014. The Company’s financial assets and liabilities carried at fair value are primarily comprised of marketable securities, derivative contracts used to hedge the Company’s currency risk, and acquisition-related contingent consideration. The Company has not elected to measure any additional financial instruments or other items at fair value.
Valuation Hierarchy: The following summarizes the three levels of inputs required to measure fair value. For Level 1 inputs, the Company utilizes quoted market prices as these instruments have active markets. For Level 2 inputs, the Company utilizes quoted market prices in markets that are not active, broker or dealer quotations, or utilizes alternative pricing sources with reasonable levels of price transparency. For Level 3 inputs, the Company utilizes unobservable inputs based on the best information available, including estimates by management primarily based on information provided by third-party fund managers, independent brokerage firms and insurance companies. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible.
The following tables show the assets and liabilities carried at fair value measured on a recurring basis as of March 30, 2014 and December 29, 2013 classified in one of the three classifications described above:
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at March 30, 2014 Using: |
| Total Carrying Value at March 30, 2014 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (In thousands) |
Marketable securities | $ | 1,300 |
| | $ | 1,300 |
| | $ | — |
| | $ | — |
|
Foreign exchange derivative assets | 216 |
| | — |
| | 216 |
| | — |
|
Foreign exchange derivative liabilities | (238 | ) | | — |
| | (238 | ) | | — |
|
Contingent consideration | (4,981 | ) | | — |
| | — |
| | (4,981 | ) |
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at December 29, 2013 Using: |
| Total Carrying Value at December 29, 2013 | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| (In thousands) |
Marketable securities | $ | 1,319 |
| | $ | 1,319 |
| | $ | — |
| | $ | — |
|
Foreign exchange derivative assets | 293 |
| | — |
| | 293 |
| | — |
|
Foreign exchange derivative liabilities | (396 | ) | | — |
| | (396 | ) | | — |
|
Contingent consideration | (4,926 | ) | | — |
| | — |
| | (4,926 | ) |
Level 1 and Level 2 Valuation Techniques: The Company’s Level 1 and Level 2 assets and liabilities are comprised of investments in equity and fixed-income securities as well as derivative contracts. For financial assets and liabilities that utilize Level 1 and Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including common stock price quotes, foreign exchange forward prices and bank price quotes. Below is a summary of valuation techniques for Level 1 and Level 2 financial assets and liabilities.
Marketable securities: Include equity and fixed-income securities measured at fair value using the quoted market prices at the reporting date.
Foreign exchange derivative assets and liabilities: Include foreign exchange derivative contracts that are valued using quoted forward foreign exchange prices at the reporting date. The Company’s foreign exchange derivative contracts are subject to master netting arrangements that allow the Company and its counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in the Company's consolidated balance sheet on a net basis and are recorded in other assets. As of both March 30, 2014 and December 29, 2013, none of the master netting arrangements involved collateral.
Level 3 Valuation Techniques: The Company’s Level 3 liabilities are comprised of contingent consideration related to acquisitions. For liabilities that utilize Level 3 inputs, the Company uses significant unobservable inputs. Below is a summary of valuation techniques for Level 3 liabilities.
Contingent consideration: The Company has classified its net liabilities for contingent consideration relating to its acquisitions 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 significant acquisitions is included within Note 2 to the Company's audited consolidated financial statements filed with the 2013 Form 10-K. Contingent consideration is measured at fair value at the acquisition date, based on the probability that revenue thresholds or product development milestones will be achieved during the earnout period. 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, related to all acquisitions with open contingency periods, of up to $31.4 million as of March 30, 2014. As of March 30, 2014, the Company has recorded contingent consideration obligations relating to its acquisitions of Dexela Limited, Haoyuan Biotech Co. and Tetra Teknolojik Sistemler Limited Sirketi, with an estimated fair value of $5.0 million at March 30, 2014. The earnout period for each of these acquisitions does not exceed three years from the respective acquisition date, and the remaining weighted average earnout period at March 30, 2014 was one year.
A reconciliation of the beginning and ending Level 3 net liabilities for contingent consideration is as follows:
|
| | | | | | | |
| Three Months Ended |
| March 30, 2014 | | March 31, 2013 |
| (In thousands) |
Balance beginning of period | $ | (4,926 | ) | | $ | (3,017 | ) |
Amounts paid and foreign currency translation | — |
| | 64 |
|
Change in fair value (included within selling, general and administrative expenses) | (55 | ) | | 226 |
|
Balance end of period | $ | (4,981 | ) | | $ | (2,727 | ) |
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 new senior unsecured revolving credit facility, which provides for $700.0 million of revolving loans, had amounts outstanding, excluding letters of credit, of $392.0 million as of March 30, 2014. The Company’s previous senior unsecured revolving credit facility had amounts outstanding, excluding letters of credit, of $397.0 million as of December 29, 2013. The interest rate on the Company’s senior unsecured revolving credit facility is reset at least monthly to correspond to variable rates that reflect currently available terms and conditions for similar debt. The Company had no change in credit standing during the first three months of fiscal year 2014. 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 2021 Notes, with a face value of $500.0 million, had an aggregate carrying value of $497.5 million, net of $2.5 million of unamortized original issue discount, and a fair value of $524.2 million as of March 30, 2014. The 2021 Notes had an aggregate carrying value of $497.4 million, net of $2.6 million of unamortized original issue discount, and a fair value of $513.0 million as of December 29, 2013. The fair value of the 2021 Notes is estimated using market quotes from brokers and is based on current rates offered for similar debt. The Company's financing lease obligations had an aggregate carrying value of $40.0 million and $40.3 million as of March 30, 2014 and December 29, 2013, respectively, which approximated their fair value as there has been minimal change in the Company's incremental borrowing rate. As of March 30, 2014, the 2021 Notes and financing lease obligations were classified as Level 2.
As of March 30, 2014, there has not been any significant impact to the fair value of the Company’s derivative liabilities due to credit risk. Similarly, there has not been any significant adverse impact to the Company’s derivative assets based on the evaluation of its counterparties’ credit risks.
Note 18: Leases
On August 22, 2013, the Company sold one of its facilities located in Boston, Massachusetts for net proceeds of $47.6 million. Simultaneously with the closing of the sale of the property, the Company entered into a lease agreement to lease back the property for its continued use. The lease has an initial term of 15 years and the Company has the right to extend the term of the lease for two additional periods of ten years each. The lease is accounted for as an operating lease and at the transaction date the Company had deferred $26.5 million of gains which are being amortized in operating expenses over the initial lease term of 15 years. During the first quarter of fiscal year 2014, the Company amortized $0.4 million of deferred gains related to the lease. At March 30, 2014, $25.4 million of these deferred gains remained to be amortized, which were recorded in long-term liabilities. At December 29, 2013, $25.9 million of deferred gains remained to be amortized, which were recorded in long-term liabilities.
Note 19: Contingencies
The Company is conducting a number of environmental investigations and remedial actions at current and former locations of the Company and, along with other companies, has been named a potentially responsible party (“PRP”) for certain waste disposal sites. The Company accrues for environmental issues in the accounting period that the Company’s responsibility is established and when the cost can be reasonably estimated. The Company has accrued $13.7 million as of March 30, 2014, which represents management’s estimate of the cost of the remediation of known environmental matters, and does not include any potential liability for related personal injury or property damage claims. This amount is not discounted and does not reflect the recovery of any material 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 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, excluded 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 involved 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 district court 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. On December 21, 2012, the Company filed a second motion for summary judgment on claims that were not addressed in the first motion, which the court also granted in part and denied in part. As disclosed in the Company’s Annual Report on Form 10-K for fiscal year 2013, the Company expected this case to go to trial in March 2014, and incurred $3.2 million of expenses in preparation for the trial during the first three months of fiscal year 2014. The trial date was delayed, however the Company continues to expect the case to go to trial in 2014.
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 March 30, 2014 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.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This quarterly report on Form 10-Q, including the following management’s discussion and analysis, contains forward-looking information that you should read in conjunction with the condensed consolidated financial statements and notes to the condensed consolidated financial statements that we have included elsewhere in this report. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Words such as “believes,” “plans,” “anticipates,” “intends,” “expects,” “will” and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from the plans, intentions or expectations we disclose in the forward-looking statements we make. We have included important factors below under the heading “Risk Factors” in Part II, Item 1A. that we believe could cause actual results to differ materially from the forward-looking statements we make. We are not obligated to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are a leading provider of products, services and solutions to the diagnostics, research, environmental, industrial and laboratory services markets. Through our advanced technologies, solutions, and services, we address critical issues that help to improve the health and safety of people and their environment. The principal products and services of our two operating segments are:
| |
• | Human Health. Develops diagnostics, tools and applications to help detect diseases earlier and more accurately and to accelerate the discovery and development of critical new therapies. Our Human Health segment serves both the diagnostics and research markets. |
| |
• | Environmental Health. Provides products, services and solutions to facilitate the creation of safer food and consumer products, more secure surroundings and efficient energy resources. Our Environmental Health segment serves the environmental, industrial and laboratory services markets. |
Overview of the First Quarter of Fiscal Year 2014
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 2014 and 2013 fiscal years include 52 weeks.
Our overall revenue in the first quarter of fiscal year 2014 was $531.9 million and increased $26.5 million, or 5%, as compared to the first quarter of fiscal year 2013, reflecting an increase of $18.2 million, or 6%, in our Human Health segment revenue and an increase of $8.4 million, or 4%, in our Environmental Health segment revenue. The increase in our Human Health segment revenue during the first quarter of fiscal year 2014 was primarily due to growth generated from our newborn screening business within the diagnostics market and our informatics offerings within the research market. The increase in our Environmental Health segment revenue during the first quarter of fiscal year 2014 was due to an increase in our service revenue, which included our OneSource multivendor service offerings within our laboratory service market.
In our Human Health segment during the first quarter of fiscal year 2014 as compared to the first quarter of fiscal year 2013, we experienced growth in the diagnostics market 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. Birth rates are beginning to rebound in China, as evidenced by prenatal trends we saw during the first quarter of fiscal year 2014, and demand for greater access to newborn screening in rural areas is also increasing. In the research market we experienced growth as demand increased for our informatics, microfluidics, radiometric detection, and high-content screening offerings. Our medical imaging business was flat during the first quarter of fiscal year 2014 as compared to the first quarter of fiscal year 2013, despite growth in our advanced medical diagnostic imaging products. 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 create 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 first quarter of fiscal year 2014, we continued to grow our laboratory services business, which included the addition of new customers to our OneSource multivendor service offering, while revenue across our products in the environmental and industrial markets was approximately flat. We anticipate that the continued development of contaminant regulations and corresponding testing protocols will result in increased demand for efficient, analytically sensitive and information rich testing solutions.
Our consolidated gross margins decreased 22 basis points in the first quarter of fiscal year 2014, as compared to the first quarter of fiscal year 2013, due to unfavorable changes in product mix, with an increase in sales of lower gross margin product offerings, which were partially offset by increased sales volume and cost containment and productivity initiatives. Our consolidated operating margins increased 243 basis points in the first quarter of fiscal year 2014, as compared to the first quarter of fiscal year 2013, primarily due to cost containment and productivity initiatives, which were partially offset by lower gross margins.
We believe we are well positioned to continue to take advantage of the spending trends in our end markets and to promote our efficiencies in markets where current conditions may increase demand for certain services. Overall, we believe that our strategic focus on 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 foundation for growth.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, warranty costs, bad debts, inventories, accounting for business combinations and dispositions, long-lived assets, income taxes, restructuring, pensions and other postretirement benefits, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are those policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. We believe our critical accounting policies include our policies regarding revenue recognition, warranty costs, allowances for doubtful accounts, inventory valuation, business combinations, value of long-lived assets, including goodwill and other intangibles, employee compensation and benefits, restructuring activities, gains or losses on dispositions and income taxes.
For a more detailed discussion of our critical accounting policies and estimates, please refer to the Notes to our Audited Consolidated Financial Statements and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2013 (our “2013 Form 10-K”), as filed with the Securities and Exchange Commission (the "SEC"). There have been no significant changes in our critical accounting policies and estimates during the three months ended March 30, 2014.
Consolidated Results of Continuing Operations
Revenue
Revenue for the three months ended March 30, 2014 was $531.9 million, as compared to $505.4 million for the three months ended March 31, 2013, an increase of $26.5 million, or 5%, which includes an approximate 0.1% decrease in revenue attributable to unfavorable changes in foreign exchange rates and an approximate 0.2% increase from acquisitions. The analysis in the remainder of this paragraph compares segment revenue for the three months ended March 30, 2014 as compared to the three months ended March 31, 2013 and includes the effect of foreign exchange rate fluctuations and acquisitions. Our Human Health segment revenue increased $18.2 million, or 6%, due to an increase in diagnostics market revenue of $10.5 million and an increase in research market revenue of $7.7 million. Our Environmental Health segment revenue increased $8.4 million, or 4%, due to an increase in laboratory services market revenue of $9.5 million, partially offset by decreases in environmental and industrial markets revenue of $1.1 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $1.5 million of revenue for the three months ended March 30, 2014 and $1.9 million for the three months ended March 31, 2013 that otherwise would have been recorded by the acquired businesses during each of the respective periods.
Cost of Revenue
Cost of revenue for the three months ended March 30, 2014 was $296.4 million, as compared to $280.5 million for the three months ended March 31, 2013, an increase of $15.9 million, or 6%. As a percentage of revenue, cost of revenue increased to 55.7% for the three months ended March 30, 2014, from 55.5% for the three months ended March 31, 2013, resulting in a decrease in gross margin of 22 basis points to 44.3% for the three months ended March 30, 2014, from 44.5% for the three months ended March 31, 2013. Amortization of intangible assets decreased and was $12.7 million for the three months ended March 30, 2014, as compared to $12.9 million for the three months ended March 31, 2013. Stock-based compensation expense was $0.3 million for each of the three months ended March 30, 2014 and March 31, 2013. The mark-to-market adjustment for
postretirement benefit plans was a gain of $0.1 million for the three months ended March 30, 2014, as compared to a gain of $0.05 million for the three months ended March 31, 2013. Acquisition related costs for contingent consideration and other costs added an expense of $0.02 million for the three months ended March 30, 2014. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an expense of $0.1 million for the three months ended March 31, 2013. In addition to the above, the overall decrease in gross margin was primarily the result of unfavorable changes in product mix, with an increase in sales of lower gross margin product offerings, which were partially offset by increased sales volume and cost containment and productivity initiatives.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March 30, 2014 were $153.2 million, as compared to $151.5 million for the three months ended March 31, 2013, an increase of $1.7 million, or 1%. As a percentage of revenue, selling, general and administrative expenses decreased and were 28.8% for the three months ended March 30, 2014, as compared to 30.0% for the three months ended March 31, 2013. Amortization of intangible assets decreased and was $7.8 million for the three months ended March 30, 2014, as compared to $9.6 million for the three months ended March 31, 2013. Stock-based compensation expense increased and was $4.0 million for the three months ended March 30, 2014, as compared to $3.9 million for the three months ended March 31, 2013. Significant legal expenses related to preparation for the trial of a particular case were $3.2 million for the three months ended March 30, 2014. Acquisition related costs for contingent consideration and other acquisition costs increased and was an expense of $0.2 million for the three months ended March 30, 2014, as compared to providing income of $0.01 million for the three months ended March 31, 2013. In addition to the above, the increase in selling, general and administrative expenses was primarily the result of costs related to 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 March 30, 2014 were $29.4 million, as compared to $34.2 million for the three months ended March 31, 2013, a decrease of $4.7 million, or 14%. As a percentage of revenue, research and development expenses decreased and were 5.5% for the three months ended March 30, 2014, as compared to 6.8% for the three months ended March 31, 2013. Amortization of intangible assets increased and was $0.2 million for the three months ended March 30, 2014, as compared to $0.1 million for the three months ended March 31, 2013. Stock-based compensation expense decreased and was $0.1 million for the three months ended March 30, 2014, as compared to $0.2 million for the three months ended March 31, 2013. In addition to the above, the decrease in research and development expenses was primarily the result of the consolidation of research and development activities into our newly opened Center for Innovation. During the first three months of both fiscal year 2014 and fiscal year 2013, we directed research and development efforts toward the diagnostics and research markets within our Human Health segment, and the environmental, industrial and laboratory service markets within our Environmental Health segment, in order to help accelerate our growth initiatives.
Restructuring and Contract Termination Charges, Net
We have undertaken a series of restructuring actions related to the impact of acquisitions and divestitures, alignment with our growth strategy and the integration of our business units. The current portion of restructuring and contract termination charges is recorded in accrued restructuring and contract termination charges and the long-term portion of restructuring and contract termination charges is recorded in long-term liabilities. The activities associated with these plans have been reported as restructuring and contract termination charges, net, and are included as a component of operating expenses from continuing operations.
A description of the restructuring plans and the activity recorded for the three months ended March 30, 2014 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 2013 Form 10-K.
The restructuring plans for the first quarter of fiscal year 2014 and the first quarter of fiscal year 2013 were principally intended to focus resources on higher growth end markets. The restructuring plans for the fourth and third quarters of fiscal year 2013 were principally intended to shift certain of our research and development resources into a newly opened Center for Innovation. The restructuring plan for the second quarter of fiscal year 2013 was principally intended to shift certain of our operations into a newly established shared service center as well as realign operations, research and development resources and production resources as a result of previous acquisitions. We expect the impact of future cost savings on operating results and cash flows from the restructuring activities executed in fiscal year 2013 will exceed $9.0 million annually beginning in fiscal year 2015. The future cost savings will be primarily a decrease to research and development expenses.
A description of the restructuring plans and the activity recorded are as follows:
Q1 2014 Restructuring Plan
During the first quarter of fiscal year 2014, our management approved a plan principally intended to focus resources on higher growth end markets (the “Q1 2014 Plan”). As a result of the Q1 2014 Plan, we recognized a $0.4 million pre-tax restructuring charge in our Human Health segment related to a workforce reduction from reorganization activities and recognized a $0.2 million pre-tax restructuring charge in our Environmental Health segment related to a workforce reduction from reorganization activities. As part of the Q1 2014 Plan, we reduced headcount by 17 employees. All employees were notified of termination under the Q1 2014 Plan by March 30, 2014.
The following table summarizes the Q1 2014 Plan activity for the three months ended March 30, 2014:
|
| | | |
| Severance |
| (In thousands) |
Provision | $ | 567 |
|
Amounts paid and foreign currency translation | (120 | ) |
Balance at March 30, 2014 | $ | 447 |
|
We anticipate that the remaining severance payments of $0.4 million for workforce reductions will be substantially completed by the end of the fourth quarter of fiscal year 2015.
Q4 2013 Restructuring Plan
During the fourth quarter of fiscal year 2013, our management approved a plan principally intended to shift certain of our research and development resources into a newly opened Center for Innovation (the “Q4 2013 Plan”). As a result of the Q4 2013 Plan, we recognized an $8.2 million pre-tax restructuring charge in our Human Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space and recognized a $3.0 million pre-tax restructuring charge in our Environmental Health segment related to a workforce reduction from reorganization activities. As part of the Q4 2013 Plan, we reduced headcount by 74 employees. All employees were notified of termination under the Q4 2013 Plan by December 29, 2013.
The following table summarizes the Q4 2013 Plan activity for the three months ended March 30, 2014:
|
| | | | | | | | | | | |
| Severance | | Closure of Excess Facility Space | | Total |
| (In thousands) |
Balance at December 29, 2013 | $ | 1,988 |
| | $ | 6,854 |
| | $ | 8,842 |
|
Amounts paid and foreign currency translation | (995 | ) | | (249 | ) | | (1,244 | ) |
Balance at March 30, 2014 | $ | 993 |
| | $ | 6,605 |
| | $ | 7,598 |
|
We anticipate that the remaining severance payments of $1.0 million for workforce reductions will be substantially completed by the end of the second quarter of fiscal year 2014. We also anticipate that the remaining payments of $6.6 million, net of estimated sublease income, for the closure of the excess facility space will be paid through fiscal year 2019, in accordance with the terms of the applicable leases.
Q3 2013 Restructuring Plan
During the third quarter of fiscal year 2013, our management approved a plan principally intended to shift certain of our research and development resources into a newly opened Center for Innovation (the “Q3 2013 Plan”). As a result of the Q3 2013 Plan, we recognized a $0.5 million pre-tax restructuring charge in our Human Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. As part of the Q3 2013 Plan, we reduced headcount by 30 employees. All employees were notified of termination under the Q3 2013 Plan by September 29, 2013.
The following table summarizes the Q3 2013 Plan activity for the three months ended March 30, 2014:
|
| | | |
| Severance |
| (In thousands) |
Balance at December 29, 2013 | $ | 137 |
|
Amounts paid and foreign currency translation | (113 | ) |
Balance at March 30, 2014 | $ | 24 |
|
We anticipate that the remaining severance payments of $0.02 million for workforce reductions will be substantially completed by the end of the second quarter of fiscal year 2014.
Q2 2013 Restructuring Plan
During the second quarter of fiscal year 2013, our management approved a plan principally intended to shift certain of our operations into a newly established shared service center as well as realign operations, research and development resources, and production resources as a result of previous acquisitions (the “Q2 2013 Plan”). As a result of the Q2 2013 Plan, we initially recognized a $9.9 million pre-tax restructuring charge in our Human Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space, and recognized a $8.8 million pre-tax restructuring charge in our Environmental Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. Subsequent to the initial charge, during fiscal year 2013, we recorded an additional $0.6 million pre-tax restructuring charge in our Human Health segment for services that were provided for one-time benefits in which the employee was required to render service beyond the legal notification period. During the three months ended March 30, 2014, we recorded additional pre-tax restructuring charges of $0.1 million in each of our Human Health and Environmental Health segments due to higher than expected costs associated with the closure of the excess facility space. As part of the Q2 2013 Plan, we reduced headcount by 265 employees. All employees were notified of termination under the Q2 2013 Plan by June 30, 2013.
The following table summarizes the Q2 2013 Plan activity for the three months ended March 30, 2014:
|
| | | | | | | | | | | |
| Severance | | Closure of Excess Facility Space | | Total |
| (In thousands) |
Balance at December 29, 2013 | $ | 12,750 |
| | $ | — |
| | $ | 12,750 |
|
Change in estimates | — |
| | 184 |
| | 184 |
|
Amounts paid and foreign currency translation | (3,981 | ) | | (38 | ) | | (4,019 | ) |
Balance at March 30, 2014 | $ | 8,769 |
| | $ | 146 |
| | $ | 8,915 |
|
We anticipate that the remaining severance payments of $8.8 million for workforce reductions will be substantially completed by the end of the fourth quarter of fiscal year 2014, as local law requires some severance to be paid in monthly installments through the fourth quarter of fiscal year 2014. We also anticipate that the remaining payments of $0.1 million for the closure of the excess facility space will be paid through the third quarter of 2014, in accordance with the terms of the applicable lease.
Q1 2013 Restructuring Plan
During the first quarter of fiscal year 2013, our management approved a plan to focus resources on higher growth end markets (the “Q1 2013 Plan”). As a result of the Q1 2013 Plan, we recognized a $2.3 million pre-tax restructuring charge in our Human Health segment related to a workforce reduction from reorganization activities and recognized a $0.2 million pre-tax restructuring charge in our Environmental Health segment related to a workforce reduction from reorganization activities. As part of the Q1 2013 Plan, we reduced headcount by 62 employees. All employees were notified of termination under the Q1 2013 Plan by March 31, 2013.
The following table summarizes the Q1 2013 Plan activity for the three months ended March 30, 2014:
|
| | | |
| Severance |
| (In thousands) |
Balance at December 29, 2013 | $ | 208 |
|
Amounts paid and foreign currency translation | — |
|
Balance at March 30, 2014 | $ | 208 |
|
We anticipate that the remaining severance payments of $0.2 million for workforce reductions will be substantially completed by the end of the fourth quarter of fiscal year 2014.
Previous Restructuring and Integration Plans
The principal actions of the restructuring and integration plans from fiscal year 2001 through fiscal year 2012 were workforce reductions and the closure of excess facility space related to the integration of our businesses in order to realign operations, reduce costs, achieve operational efficiencies and shift resources into geographic regions and end markets that are more consistent with our growth strategy. During the three months ended March 30, 2014, we paid $3.0 million related to these plans. As of March 30, 2014, we had $10.3 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 our 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. We anticipate the remaining severance payments for workforce reductions will be substantially completed by the end of the fourth quarter of fiscal year 2014, as local law requires some severance to be paid in monthly installments through the fourth quarter of fiscal year 2014.
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 the costs that will continue to be incurred for the remaining terms without economic benefit to us. We recorded an additional pre-tax charge of $1.4 million, primarily as a result of terminating various contractual commitments in the Environmental Health segment. We made payments for these obligations of $1.1 million in the first three months of fiscal year 2014. The remaining balance of these accruals as of March 30, 2014 was $0.6 million.
Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
|
| | | | | | | |
| Three Months Ended |
| March 30, 2014 | | March 31, 2013 |
| (In thousands) |
Interest income | $ | (94 | ) | | $ | (105 | ) |
Interest expense | 9,219 |
| | 11,693 |
|
Other expense, net | 2,164 |
| | 452 |
|
Total interest and other expense, net | $ | 11,289 |
| | $ | 12,040 |
|
Interest and other expense, net, for the three months ended March 30, 2014 was an expense of $11.3 million, as compared to an expense of $12.0 million for the three months ended March 31, 2013, a decrease of $0.8 million. The decrease in interest and other expense, net, for the three months ended March 30, 2014, as compared to the three months ended March 31, 2013, was primarily due to the decrease in interest expense, which was partially offset by an increase in other expense, net. Interest expense decreased by $2.5 million for the three months ended March 30, 2014, as compared to the three months ended March 31, 2013, primarily due to an increased mix of variable rate debt with lower interest rates. Other expense, net increased by $1.7 million for the three months ended March 30, 2014, as compared to the three months ended March 31, 2013 and consisted primarily of expenses related to foreign currency transactions and foreign currency translation.
Provision for (Benefit from) Income Taxes
For the three months ended March 30, 2014, the provision for income taxes from continuing operations was a provision of $5.1 million, as compared to a benefit of $8.4 million for the three months ended March 31, 2013.
The effective tax rate from continuing operations was a provision of 13.0% for the three months ended March 30, 2014, as compared to a benefit of 35.3% for the three months ended March 31, 2013. The higher effective tax rate during the first three months of fiscal year 2014 as compared to the first three months of fiscal year 2013 was primarily due to tax benefits related to discrete items of $12.5 million in the first three months of fiscal year 2013 as compared to $2.0 million in the first three months of fiscal year 2014. Additionally, certain higher tax rate jurisdictions that had losses in fiscal year 2013 are projected to have income in fiscal year 2014, increasing the annual effective rate. The discrete items in the first three months of fiscal year 2013 included $9.4 million for lapses in statutes of limitations.
Discontinued Operations
As part of our continuing efforts to focus on higher growth opportunities, we have discontinued certain businesses. We have accounted for these businesses as discontinued operations and, accordingly, have presented the results of operations and related cash flows as discontinued operations for all periods presented. Any remaining assets and liabilities of these businesses have been presented separately, and are reflected within the assets and liabilities from discontinued operations in the accompanying condensed consolidated balance sheets as of March 30, 2014 and December 29, 2013.
We recorded the following pre-tax gains and losses, which have been reported as a net loss on disposition of discontinued operations:
|
| | | | | | | |
| Three Months Ended |
| March 30, 2014 | | March 31, 2013 |
| (In thousands) |
Gain on disposition of Photoflash business | $ | — |
| | $ | 124 |
|
Loss on disposition of other discontinued operations | (72 | ) | | (216 | ) |
Loss on disposition of discontinued operations before income taxes | $ | (72 | ) | | $ | (92 | ) |
In June 2010, we sold our Photoflash business, which was included in our Environmental Health segment, for $13.5 million, including an adjustment for net working capital, plus potential additional contingent consideration. During the three months ended March 31, 2013, we recognized a pre-tax gain of $0.1 million for contingent consideration related to this sale. This gain was recognized as a gain on disposition of discontinued operations.
During the first three months of both fiscal years 2014 and 2013, we settled various commitments related to the divestiture of other discontinued operations. We recognized pre-tax losses in the first three months of both fiscal years 2014 and 2013. These losses were recognized as a loss on disposition of discontinued operations.
We recorded a tax provision of $0.02 million and a tax benefit of $0.02 million on disposition of discontinued operations for the three months ended March 30, 2014 and March 31, 2013, respectively.
Contingencies, Including Tax Matters
We are conducting a number of environmental investigations and remedial actions at our current and former locations and, along with other companies, have been named a potentially responsible party (“PRP”) for certain waste disposal sites. We accrue for environmental issues in the accounting period that our responsibility is established and when the cost can be reasonably estimated. We have accrued $13.7 million as of March 30, 2014, which represents our management’s estimate of the cost of the remediation of known environmental matters, and does not include any potential liability for related personal injury or property damage claims. This amount is not discounted and does not reflect the recovery of any material 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 we have been named a PRP, our management does not currently anticipate any additional liability to result from the inability of other significant named parties to contribute. We expect that the majority of such accrued amounts could be paid out over a period of up to ten years. As assessment and remediation activities progress at each individual site, these liabilities are reviewed and adjusted to reflect additional information as it becomes available. There have been no environmental problems to date that have had, or are expected to have, a material adverse effect on our condensed consolidated financial statements. While it is possible that a loss exceeding the amounts recorded in the condensed consolidated financial statements may be incurred, the potential exposure is not expected to be materially different from those amounts recorded.
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 complaint alleges that we breached our 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. We 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, we believe, excluded certain of our 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 involved a number of the same patents and which could materially affect the scope of Enzo’s case against us. 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 district court permitted us 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 our motion for summary judgment of non-infringement. On December 21, 2012, we filed a second motion for summary judgment on claims that were not addressed in the first motion, which the court also granted in part and denied in part. As disclosed in our Annual Report on Form 10-K for fiscal year 2013, we expected this case to go to trial in March 2014 and incurred $3.2 million of expenses in preparation for the trial during the first three months of fiscal year 2014. The trial date was delayed, however we continue to expect the case to go to trial in 2014.
We believe we have meritorious defenses to the matter described above, and we are contesting the action vigorously. While this matter is subject to uncertainty, in the opinion of our 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 our condensed consolidated financial statements.
Various tax years after 2006 remain open to examination by certain tax jurisdictions in which we have 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. We regularly review our tax positions in each significant taxing jurisdiction in the process of evaluating our unrecognized tax benefits. We make adjustments to our unrecognized tax benefits when: (i) facts and circumstances regarding a tax position change, causing a change in management’s judgment regarding that tax position; (ii) a tax position is effectively settled with a tax authority; and/or (iii) the statute of limitations expires regarding a tax position.
We are also subject to various other claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities. Although we have established accruals for potential losses that we believe are probable and reasonably estimable, in the opinion of our management, based on its review of the information available at this time, the total cost of resolving these other contingencies at March 30, 2014 should not have a material adverse effect on our condensed consolidated financial statements. However, each of these matters is subject to uncertainties, and it is possible that some of these matters may be resolved unfavorably to us.
Reporting Segment Results of Continuing Operations
Human Health
Revenue for the three months ended March 30, 2014 was $299.5 million, as compared to $281.3 million for the three months ended March 31, 2013, an increase of $18.2 million, or 6%, which includes an approximate 0.3% increase in revenue attributable to favorable changes in foreign exchange rates and an approximate 0.2% increase from acquisitions. The analysis in the remainder of this paragraph compares selected revenue by market and product type for the three months ended March 30, 2014, as compared to the three months ended March 31, 2013, and includes the effect of foreign exchange fluctuations and acquisitions. The increase in revenue in our Human Health segment reflects an increase in diagnostics market revenue of $10.5 million and an increase in research market revenue of $7.7 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $1.5 million of revenue in our Human Health segment for the three months ended March 30, 2014 and $1.9 million for the three months ended March 31, 2013 that otherwise would have been recorded by the acquired businesses during each of the respective periods. The increase in our Human Health segment revenue during the three months ended March 30, 2014 was due to growth in the diagnostics market 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. Birth rates are beginning to rebound in China, as evidenced by prenatal trends we saw during the three months ended March 30, 2014, and demand for greater access to newborn screening in rural areas is also increasing. In the research market we experienced growth as demand increased for our informatics, microfluidics, radiometric detection, and high-content screening offerings. Our medical imaging business was flat for the three months ended
March 30, 2014 as compared to the three months ended March 31, 2013, despite growth in our advanced medical diagnostic imaging products.
Operating income from continuing operations for the three months ended March 30, 2014 was $43.1 million, as compared to $25.0 million for the three months ended March 31, 2013, an increase of $18.0 million, or 72%. Amortization of intangible assets decreased and was $17.9 million for the three months ended March 30, 2014, as compared to $20.0 million for the three months ended March 31, 2013. Restructuring and contract termination charges, net, were $0.5 million for the three months ended March 30, 2014, as compared to $3.2 million for the three months ended March 31, 2013. Acquisition related costs for contingent consideration and other acquisition costs were an expense of $0.1 million for the three months ended March 30, 2014, as compared to a benefit of $0.1 million for the three months ended March 31, 2013. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was $0.1 million for the three months ended March 31, 2013. The overall increase in operating income for the three months ended March 30, 2014, as compared to the three months ended March 31, 2013, was primarily the result of increased sales volume and cost containment initiatives, which was partial offset by the items above.
Environmental Health
Revenue for the three months ended March 30, 2014 was $232.4 million, as compared to $224.0 million for the three months ended March 31, 2013, an increase of $8.4 million, or 4%, which includes an approximate 1% decrease in revenue attributable to unfavorable changes in foreign exchange rates and an approximate 0.1% increase from acquisitions. The analysis in the remainder of this paragraph compares selected revenue by market and product type for the three months ended March 30, 2014, as compared to the three months ended March 31, 2013, and includes the effect of foreign exchange fluctuations and acquisitions. The increase in revenue in our Environmental Health segment reflects an increase in laboratory services market revenue of $9.5 million, partially offset by decreases in environmental and industrial markets revenue of $1.1 million. The increase in our Environmental Health segment revenue during the three months ended March 30, 2014 was due to growth in our laboratory services business, which included the addition of new customers to our OneSource multivendor service offering, while revenue across our products in the environmental and industrial markets was approximately flat.
Operating income from continuing operations for the three months ended March 30, 2014 was $21.5 million, as compared to $20.7 million for the three months ended March 31, 2013, an increase of $0.8 million, or 4%. Amortization of intangible assets increased and was $2.8 million for the three months ended March 30, 2014, as compared to $2.5 million for the three months ended March 31, 2013. Restructuring and contract termination charges, net, were $1.6 million for the three months ended March 30, 2014, as compared to $0.1 million for the three months ended March 31, 2013. Acquisition related costs for contingent consideration and other acquisition costs were $0.1 million for both the three months ended March 30, 2014 and March 31, 2013. The overall increase in operating income for the three months ended March 30, 2014, as compared to the three months ended March 31, 2013, was primarily the result of cost containment initiatives, which was partial offset by unfavorable changes in product mix, with an increase in sales of lower gross margin product offerings, and the items above.
Liquidity and Capital Resources
We require cash to pay our operating expenses, make capital expenditures, make strategic acquisitions, service our debt and other long-term liabilities, repurchase shares of our common stock and pay dividends on our common stock. Our principal sources of funds are from our operations and the capital markets, particularly the debt markets. We anticipate that our internal operations will generate sufficient cash to fund our operating expenses, capital expenditures, smaller acquisitions, interest payments on our debt and dividends on our common stock. However, we expect to use external sources to satisfy the balance of our debt when due, any larger acquisitions and other long-term liabilities, such as contributions to our postretirement benefit plans.
Principal factors that could affect the availability of our internally generated funds include:
| |
• | changes in sales due to weakness in markets in which we sell our products and services, and |
| |
• | changes in our working capital requirements. |
Principal factors that could affect our ability to obtain cash from external sources include:
| |
• | financial covenants contained in the financial instruments controlling our borrowings that limit our total borrowing capacity, |
| |
• | increases in interest rates applicable to our outstanding variable rate debt, |
| |
• | a ratings downgrade that could limit the amount we can borrow under our senior unsecured revolving credit facility and our overall access to the corporate debt market, |
| |
• | increases in interest rates or credit spreads, as well as limitations on the availability of credit, that affect our ability to borrow under future potential facilities on a secured or unsecured basis, |
| |
• | a decrease in the market price for our common stock, and |
| |
• | volatility in the public debt and equity markets. |
At March 30, 2014, we had cash and cash equivalents of $224.1 million, of which $216.7 million was held by our non-U.S. subsidiaries, and we had $296.0 million of additional borrowing capacity available under a senior unsecured revolving credit facility. We had no other liquid investments at March 30, 2014.
We utilize a variety of tax planning and financing strategies to ensure that our worldwide cash is available in the locations in which it is needed. Of the $216.7 million of cash and cash equivalents held by our non-U.S. subsidiaries at March 30, 2014, we would incur U.S. taxes on approximately $194.4 million if transferred to the U.S. without proper planning. We expect the remaining accumulated non-U.S. cash balances, which may not be transferred to the U.S. without incurring U.S. taxes, will remain outside of the U.S. and that we will meet U.S. liquidity needs through future cash flows, use of U.S. cash balances, external borrowings, or some combination of these sources.
On October 24, 2012, our Board of Directors (our "Board") authorized us to repurchase up to 6.0 million shares of common stock under a stock repurchase program (the "Repurchase Program"). The Repurchase Program will expire on October 24, 2014 unless terminated earlier by our Board, and may be suspended or discontinued at any time. During the three months ended March 30, 2014, we did not repurchase any shares of common stock in the open market under the Repurchase Program. As of March 30, 2014, 2.4 million shares of our common stock remained available for repurchase from the 6.0 million shares authorized by our Board under the Repurchase Program.
Our Board has authorized us to repurchase shares of common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards and restricted stock unit awards granted pursuant to our equity incentive plans. During the three months ended March 30, 2014, we repurchased 90,230 shares of common stock for this purpose at an aggregate cost of $3.9 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. Any repurchased shares will be available for use in connection with corporate programs. If we continue to repurchase shares, the Repurchase Program will be funded using our existing financial resources, including cash and cash equivalents, and our existing senior unsecured revolving credit facility.
Distressed global financial markets could adversely impact general economic conditions by reducing liquidity and credit availability, creating increased volatility in security prices, widening credit spreads and decreasing valuations of certain investments. The widening of credit spreads may create a less favorable environment for certain of our businesses and may affect the fair value of financial instruments that we issue or hold. Increases in credit spreads, as well as limitations on the availability of credit at rates we consider to be reasonable, could affect our ability to borrow under future potential facilities on a secured or unsecured basis, which may adversely affect our liquidity and results of operations. In difficult global financial markets, we may be forced to fund our operations at a higher cost, or we may be unable to raise as much funding as we need to support our business activities.
Our pension plans have not experienced a material impact on liquidity or counterparty exposure due to the volatility and uncertainty in the market. During the first three months of fiscal year 2014, we made contributions of $0.9 million in the aggregate to our defined benefit pension plans outside of the United States, and expect to contribute an additional $3.8 million by the end of fiscal year 2014. We could potentially have to make additional funding payments in future periods for all pension plans. We expect to use existing cash and external sources to satisfy future contributions to our pension plans. We recognize actuarial gains and losses in operating results in the fourth quarter of the year in which the gains and losses occur, unless there is an interim remeasurement required for one of our plans. It is difficult to reliably predict whether there will be an adjustment for gains and losses in fiscal year 2014. Such adjustments are primarily driven by events and circumstances beyond our control, including changes in interest rates and the performance of the financial markets. To the extent the discount rates decrease or the value of our pension and postretirement investments decrease, a loss to operations will be recorded in fiscal year 2014. Conversely, to the extent the discount rates increase or the value of our pension and postretirement investments increase more than expected, a gain will be recorded in fiscal year 2014.
Cash Flows
Operating Activities. Net cash provided by continuing operations was $67.9 million for the three months ended March 30, 2014, as compared to net cash provided by continuing operations of $11.1 million for the three months ended March 31, 2013, an increase in cash provided of $56.8 million. The cash provided by operating activities for the three months
ended March 30, 2014 was principally a result of income from continuing operations of $34.3 million, depreciation and amortization of $29.4 million, a net increase in working capital of $10.2 million, stock-based compensation expense of $4.5 million and restructuring and contract termination charges, net, of $2.1 million. Contributing to the net cash increase from working capital for the three months ended March 30, 2014, excluding the effect of foreign exchange rate fluctuations, was a decrease in accounts receivable of $27.0 million, an increase in accounts payable of $0.9 million, partially offset by an increase in inventory of $17.7 million. The decrease in accounts receivable was a result of strong performance in accounts receivable collections during the first three months of fiscal year 2014. The increase in accounts payable was primarily a result of the timing of disbursements during the first three months of fiscal year 2014. The increase in inventory overall was primarily a result of expanding the amount of inventory held at sales locations within our Environmental Health and Human Health segments to improve responsiveness to customer requirements and for the introduction of new products. Changes in accrued expenses, other assets and liabilities and other items, net, decreased cash provided by operating activities by $12.7 million for the three months ended March 30, 2014, as compared to $88.4 million for the three months ended March 31, 2013. These changes primarily related to the timing of payments for taxes, restructuring, and salary and benefits. During the three months ended March 31, 2013, we paid $12.9 million for prepaid royalties and we made contributions of $37.0 million to our defined benefit pension plan in the United States, which was included in accrued expenses.
Investing Activities. Net cash used in the investing activities of our continuing operations was $6.0 million for the three months ended March 30, 2014, as compared to net cash used in the investing activities of our continuing operations of $10.4 million for the three months ended March 31, 2013, a decrease in cash used of $4.4 million. The decrease in net cash used in the investing activities of our continuing operations was the result of capital expenditures for the three months ended March 30, 2014 of $6.0 million as compared to capital expenditures for the three months ended March 31, 2013 of $11.8 million, primarily for manufacturing and other capital equipment purchases. This decrease for the three months ended March 31, 2013, was partially offset by $1.4 million in net cash received related to acquisitions and investments.
Financing Activities. Net cash used in the financing activities of our continuing operations was $11.5 million for the three months ended March 30, 2014, as compared to net cash used in financing activities of our continuing operations of $42.6 million for the three months ended March 31, 2013, a decrease in cash used of $31.0 million. For the three months ended March 30, 2014, we repurchased 90,230 shares of our common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards, for a total cost of $3.9 million, including commissions. This compares to repurchases of 3.7 million shares of our common stock, including 112,302 shares of our common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards for the three months ended March 31, 2013, for a total cost of $126.9 million, including commissions. Proceeds from the issuance of common stock under stock plans was $7.2 million for the three months ended March 30, 2014 as compared to proceeds from the issuance of common stock under stock plans of $5.5 million for the three months ended March 31, 2013. During the three months ended March 30, 2014, debt payments on our senior unsecured revolving credit facility totaled $95.0 million, which were partially offset by debt borrowings of $90.0 million, which does not include the activity to refinance our previous senior unsecured revolving credit facility. During the three months ended March 31, 2013, debt payments on our previous senior unsecured revolving credit facility totaled $135.0 million, which were offset by debt borrowings of $213.0 million. We paid $7.9 million and $8.1 million in dividends during the three months ended March 30, 2014 and March 31, 2013, respectively. For the three months ended March 30, 2014, we made net payments on other credit facilities of $0.3 million. This compares to net proceeds from other credit facilities of $8.0 million for the three months ended March 31, 2013 primarily for $5.4 million of borrowings under other short-term obligation arrangements, as well as $3.5 million of financing related to capital improvements to leased buildings, which have been funded by the lessor. During the three months ended March 30, 2014, we paid $1.7 million of debt issuance costs for the refinancing of our debt held under the previous senior unsecured revolving credit facility. In addition, we received $0.8 million for settlement of forward foreign exchange contracts for the three months ended March 31, 2013.
Borrowing Arrangements
Senior Unsecured Revolving Credit Facility. On January 8, 2014, we refinanced our debt held under the senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility. The new senior unsecured revolving credit facility provides for $700.0 million of revolving loans and has an initial maturity of January 8, 2019. As of March 30, 2014, undrawn letters of credit in the aggregate amount of $12.0 million were treated as issued and outstanding under the new senior unsecured revolving credit facility. As of March 30, 2014, we had $296.0 million available for additional borrowing under the new facility. We use the senior unsecured revolving credit facility for general corporate purposes, which may include working capital, refinancing existing indebtedness, capital expenditures, share repurchases, acquisitions and strategic alliances. The interest rates under the senior unsecured revolving credit facility are based on the Eurocurrency rate 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 JP Morgan Chase Bank, N.A. as its "prime rate," (ii) the Federal Funds rate plus 50 basis points or (iii) one-month Libor plus 1.00%. The Eurocurrency margin as of March 30, 2014 was 107 basis points. The weighted average Eurocurrency interest rate as of March 30, 2014 was 0.19%, resulting in a weighted average
effective Eurocurrency rate, including the margin, of 1.26%, which is the interest applicable to borrowings outstanding under the Eurocurrency rate as of March 30, 2014. At March 30, 2014, we had $392.0 million of borrowings in U.S. Dollars outstanding under the senior unsecured revolving credit facility 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 similar to those contained in the credit agreement for our previous facility. The financial covenants in our senior unsecured revolving credit facility include a debt-to-capital ratio, and two contingent covenants, a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio, applicable if our credit rating is downgraded below investment grade. We were in compliance with all applicable covenants as of March 30, 2014. During the three months ended March 30, 2014, we capitalized $1.8 million of debt issuance costs for the refinancing of debt held under our previous senior unsecured revolving credit facility. These debt issuance costs are being amortized into interest and other expense, net, on a straight-line basis, over the term of the new senior unsecured revolving credit facility.
Our previous senior unsecured revolving credit facility provided for $700.0 million of revolving loans and had an initial maturity of December 16, 2016. At December 29, 2013, we had $397.0 million of borrowings in U.S. Dollars outstanding under the previous senior unsecured revolving credit facility. The credit agreement for the previous facility contained affirmative, negative and financial covenants and events of default similar to those contained in our new credit facility.
5% Senior Unsecured Notes due in 2021. On October 25, 2011, we issued $500.0 million aggregate principal amount of senior unsecured notes due in 2021 (the "2021 Notes") in a registered public offering and received $496.9 million of net proceeds from the issuance. The 2021 Notes were issued at 99.372% of the principal amount, which resulted in a discount of $3.1 million. As of March 30, 2014, the 2021 Notes had an aggregate carrying value of $497.5 million, net of $2.5 million of unamortized original issue discount. As of December 29, 2013, the 2021 Notes had an aggregate carrying value of $497.4 million, net of $2.6 million of unamortized original issue discount. The 2021 Notes mature in November 2021 and bear interest at an annual rate of 5%. Interest on the 2021 Notes is payable semi-annually on May 15th and November 15th each year. Prior to August 15, 2021 (three months prior to their maturity date), we may redeem the 2021 Notes in whole or in part, at our option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2021 Notes being redeemed, discounted on a semi-annual basis, at the Treasury Rate plus 45 basis points, plus accrued and unpaid interest. At any time on or after August 15, 2021 (three months prior to their maturity date), we may redeem the 2021 Notes, at our option, at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed plus accrued and unpaid interest. Upon a change of control (as defined in the indenture governing the 2021 Notes ) and a contemporaneous downgrade of the 2021 Notes below investment grade, each holder of 2021 Notes will have the right to require us to repurchase such holder's 2021 Notes for 101% of their principal amount, plus accrued and unpaid interest. We were in compliance with all applicable covenants as of March 30, 2014.
Financing Lease Obligations. In September 2012, we entered into agreements with the lessors of certain buildings that we are currently occupying and leasing to expand those buildings. We provided a portion of the funds needed for the construction of the additions to the buildings, which resulted in us being considered the owner of the buildings during the construction period. At the end of the construction period, we were not reimbursed by the lessors for all of the construction costs. We are therefore deemed to have continuing involvement and the leases qualify as financing leases under sale-leaseback accounting guidance, representing debt obligations for us and non-cash investing and financing activities. As a result, we capitalized $29.3 million in property and equipment, net, representing the fair value of the buildings with a corresponding increase to debt. We have also capitalized $11.5 million in additional construction costs necessary to complete the renovations to the buildings, which were funded by the lessors, with a corresponding increase to debt. At March 30, 2014, we had $40.0 million recorded for these financing lease obligations, of which $2.6 million was recorded as short-term debt and $37.4 million was recorded as long-term debt. At December 29, 2013, we had $40.3 million recorded for these financing lease obligations, of which $2.6 million was recorded as short-term debt and $37.7 million was recorded as long-term debt. The buildings are being depreciated on a straight-line basis over the terms of the leases to their estimated residual values, which will equal the remaining financing obligation at the end of the lease term. At the end of the lease term, the remaining balances in property, plant and equipment, net and debt will be reversed against each other.
Dividends
Our Board declared a regular quarterly cash dividend of $0.07 per share for the first quarter of fiscal year 2014 and for each quarter of fiscal year 2013. At March 30, 2014, we have accrued $7.9 million for dividends declared on January 24, 2014 for the first quarter of fiscal year 2014, payable in May 2014. On April 22, 2014, we announced that our Board had declared a quarterly dividend of $0.07 per share for the second quarter of fiscal year 2014 that will be payable in August 2014. In the future, our Board may determine to reduce or eliminate our common stock dividend in order to fund investments for growth, repurchase shares or conserve capital resources.
Contractual Obligations
During the first quarter of fiscal year 2014, we refinanced debt held under our previous senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility, with an initial maturity of January 8, 2019. Our contractual obligations, as described in the contractual obligations table contained in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended December 29, 2013 changed as a result of our entry into this credit facility. There have not been any other material changes during the first three months of fiscal year 2014 to the amounts presented in the aforementioned table.
Effects of Recently Adopted and Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board and are adopted by us as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on our condensed consolidated financial position, results of operations and cash flows or do not apply to our operations.
In April 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under this new guidance, only disposals of components of an entity that represent strategic shifts that have, or will have, a major effect on an entity's operations and financial results will be presented as discontinued operations. The standard also requires new disclosures related to individually significant disposals that do not meet the definition of a discontinued operation. The provisions of this guidance are effective for interim and annual periods beginning after December 15, 2014. We are currently evaluating the requirements of this guidance and have not yet determined the impact of its adoption on our condensed consolidated financial position, results of operations and cash flows.
| |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Market Risk. We are exposed to market risk, including changes in interest rates and currency exchange rates. To manage the volatility relating to these exposures, we enter into various derivative transactions pursuant to our policies to hedge against known or forecasted market exposures. We briefly describe several of the market risks we face below. The following disclosure is not materially different from the disclosure provided under the heading, Item 7A. “Quantitative and Qualitative Disclosure About Market Risk,” in our 2013 Form 10-K.
Foreign Currency Exchange Risk. The potential change in foreign currency exchange rates offers a substantial risk to us, as approximately 60% of our business is conducted outside of the United States, generally in foreign currencies. Our risk management strategy currently uses forward contracts to mitigate certain balance sheet foreign currency transaction exposures. The intent of these economic hedges is to offset gains and losses that occur on the underlying exposures, with gains and losses resulting from the forward contracts that hedge these exposures. Moreover, we are able to partially mitigate the impact that fluctuations in currencies have on our net income as a result of our manufacturing facilities located in countries outside the United States, material sourcing and other spending which occur in countries outside the United States, resulting in natural hedges.
We do not enter into derivative contracts for trading or other speculative purposes, nor do we use leveraged financial instruments. Although we attempt to manage our foreign currency exchange risk through the above activities, when the U.S. dollar weakens against other currencies in which we transact business, generally sales and net income will be positively, but not proportionately, impacted.
Principal hedged currencies include the British Pound, Euro, Japanese Yen and Singapore Dollar. We held forward foreign exchange contracts, designated as fair value hedges, with U.S. equivalent notional amounts totaling $95.0 million, $138.4 million and $77.4 million at March 30, 2014, December 29, 2013 and March 31, 2013, respectively, 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 or less during both fiscal years 2014 and 2013.
Foreign Currency Exchange Risk—Value-at-Risk Disclosure. We continue to measure foreign currency risk using the Value-at-Risk model described in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk,” in our 2013 Form 10-K. The measures for our Value-at-Risk analysis have not changed materially.
Interest Rate Risk. As described above, our debt portfolio includes variable rate instruments. Fluctuations in interest rates can therefore have a direct impact on both our short-term cash flows, as they relate to interest, and our earnings. To manage the volatility relating to these exposures, we periodically enter into various derivative transactions pursuant to our policies to hedge against known or forecasted interest rate exposures.
Interest Rate Risk—Sensitivity. Our 2013 Form 10-K presents sensitivity measures for our interest rate risk. The measures for our sensitivity analysis have not changed materially. More information is available in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk,” in our 2013 Form 10-K for our sensitivity disclosure.
| |
Item 4. | Controls and Procedures |
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of our fiscal quarter ended March 30, 2014. The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of the end of our fiscal quarter ended March 30, 2014, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
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 complaint alleges that we breached our 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. We 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, we believe, excluded certain of our 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 involved a number of the same patents and which could materially affect the scope of Enzo’s case against us. 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 district court permitted us 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 our motion for summary judgment of non-infringement. On December 21, 2012, we filed a second motion for summary judgment on claims that were not addressed in the first motion, which the court also granted in part and denied in part. As disclosed in our Annual Report on Form 10-K for fiscal year 2013, we expected this case to go to trial in March 2014 and incurred $3.2 million of expenses in preparation for the trial during the first three months of fiscal year 2014. The trial date was delayed, however we continue to expect the case to go to trial in 2014.
We believe we have meritorious defenses to the matter described above, and we are contesting the action vigorously. While this matter is subject to uncertainty, in the opinion of our 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 our condensed consolidated financial statements.
We are also subject to various other claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities. Although we have established accruals for potential losses that we believe are probable and reasonably estimable, in the opinion of our management, based on its review of the information available at this time, the total cost of resolving these other contingencies at March 30, 2014 should not have a material adverse effect on our condensed consolidated financial statements. However, each of these matters is subject to uncertainties, and it is possible that some of these matters may be resolved unfavorably to us.
The following important factors affect our business and operations generally or affect multiple segments of our business and operations:
If the markets into which we sell our products decline or do not grow as anticipated due to a decline in general economic conditions, or there are uncertainties surrounding the approval of government or industrial funding proposals, or there are unfavorable changes in government regulations, we may see an adverse effect on the results of our business operations.
Our customers include pharmaceutical and biotechnology companies, laboratories, academic and research institutions, public health authorities, private healthcare organizations, doctors and government agencies. Our quarterly revenue and results of operations are highly dependent on the volume and timing of orders received during the quarter. In addition, our revenues and earnings forecasts for future quarters are often based on the expected trends in our markets. However, the markets we serve do not always experience the trends that we may expect. Negative fluctuations in our customers’ markets, the inability of our customers to secure credit or funding, restrictions in capital expenditures, general economic conditions, cuts in government funding or unfavorable changes in government regulations would likely result in a reduction in demand for our products and services. In addition, government funding is subject to economic conditions and the political process, which is inherently fluid and unpredictable. Our revenues may be adversely affected if our customers delay or reduce purchases as a result of uncertainties surrounding the approval of government or industrial funding proposals. Such declines could harm our consolidated financial position, results of operations, cash flows and trading price of our common stock, and could limit our ability to sustain profitability.
Our growth is subject to global economic and political conditions, and operational disruptions at our facilities.
Our business is affected by global economic conditions and the state of the financial markets, particularly as the United States and other countries balance concerns around debt, inflation, growth and budget allocations in their policy initiatives. There can be no assurance that global economic conditions and financial markets will not worsen and that we will not experience any adverse effects that may be material to our consolidated cash flows, results of operations, financial position or our ability to access capital, such as the adverse effects resulting from a prolonged shutdown in government operations both in the United States and internationally. Our business is also affected by local economic environments, including inflation, recession, financial liquidity and currency volatility or devaluation. Political changes, some of which may be disruptive, could interfere with our supply chain, our customers and all of our activities in a particular location.
While we take precautions to prevent production or service interruptions at our global facilities, a major earthquake, fire, flood, power loss or other catastrophic event that results in the destruction or delay of any of our critical business operations could result in our incurring significant liability to customers or other third parties, cause significant reputational damage or have a material adverse effect on our business, operating results or financial condition.
Certain of these risks can be hedged to a limited degree using financial instruments, or other measures, and some of these risks are insurable, but any such mitigation efforts are costly and may not always be fully successful. Our ability to engage in such mitigation efforts has decreased or become even more costly as a result of recent market developments.
If we do not introduce new products in a timely manner, we may lose market share and be unable to achieve revenue growth targets.
We sell many of our products in industries characterized by rapid technological change, frequent new product and service introductions, and evolving customer needs and industry standards. Many of the businesses competing with us in these industries have significant financial and other resources to invest in new technologies, substantial intellectual property portfolios, substantial experience in new product development, regulatory expertise, manufacturing capabilities, and established distribution channels to deliver products to customers. Our products could become technologically obsolete over time, or we may invest in technology that does not lead to revenue growth or continue to sell products for which the demand from our customers is declining, in which case we may lose market share or not achieve our revenue growth targets. The success of our new product offerings will depend upon several factors, including our ability to:
| |
• | accurately anticipate customer needs, |
| |
• | innovate and develop new technologies and applications, |
| |
• | successfully commercialize new technologies in a timely manner, |
| |
• | price our products competitively, and manufacture and deliver our products in sufficient volumes and on time, and |
| |
• | differentiate our offerings from our competitors’ offerings. |
Many of our products are used by our customers to develop, test and manufacture their products. We must anticipate industry trends and consistently develop new products to meet our customers’ expectations. In developing new products, we may be required to make significant investments before we can determine the commercial viability of the new product. If we fail to accurately foresee our customers’ needs and future activities, we may invest heavily in research and development of products that do not lead to significant revenue. We may also suffer a loss in market share and potential revenue if we are unable to commercialize our technology in a timely and efficient manner.
In addition, some of our licensed technology is subject to contractual restrictions, which may limit our ability to develop or commercialize products for some applications.
We may not be able to successfully execute acquisitions or license technologies, integrate acquired businesses or licensed technologies into our existing businesses, make acquired businesses or licensed technologies profitable, or successfully divest businesses.
We have in the past supplemented, and may in the future supplement, our internal growth by acquiring businesses and licensing technologies that complement or augment our existing product lines. However, we may be unable to identify or complete promising acquisitions or license transactions for many reasons, such as:
| |
• | competition among buyers and licensees, |
| |
• | the high valuations of businesses and technologies, |
| |
• | the need for regulatory and other approval, and |
| |
• | our inability to raise capital to fund these acquisitions. |
Some of the businesses we acquire may be unprofitable or marginally profitable, or may increase the variability of our revenue recognition. Accordingly, the earnings or losses of acquired businesses may dilute our earnings. For these acquired businesses to achieve acceptable levels of profitability, we would have to improve their management, operations, products and market penetration. We may not be successful in this regard and may encounter other difficulties in integrating acquired businesses into our existing operations, such as incompatible management, information or other systems, cultural differences, loss of key personnel, unforeseen regulatory requirements, previously undisclosed liabilities or difficulties in predicting financial results. Additionally, if we are not successful in selling businesses we seek to divest, the activity of such businesses may dilute our earnings and we may not be able to achieve the expected benefits of such divestitures. As a result, our financial results may differ from our forecasts or the expectations of the investment community in a given quarter or over the long term.
To finance our acquisitions, we may have to raise additional funds, either through public or private financings. We may be unable to obtain such funds or may be able to do so only on terms unacceptable to us. We may also incur expenses related to completing acquisitions or licensing technologies, or in evaluating potential acquisitions or technologies, which may adversely impact our profitability.
We may not be successful in adequately protecting our intellectual property.
Patent and trade secret protection is important to us because developing new products, processes and technologies gives us a competitive advantage, although it is time-consuming and expensive. We own many United States and foreign patents and intend to apply for additional patents. Patent applications we file, however, may not result in issued patents or, if they do, the claims allowed in the patents may be narrower than what is needed to protect fully our products, processes and technologies. The expiration of our previously issued patents may cause us to lose a competitive advantage in certain of the products and services we provide. Similarly, applications to register our trademarks may not be granted in all countries in which they are filed. For our intellectual property that is protected by keeping it secret, such as trade secrets and know-how, we may not use adequate measures to protect this intellectual property.
Third parties may also challenge the validity of our issued patents, may circumvent or “design around” our patents and patent applications, or may claim that our products, processes or technologies infringe their patents. In addition, third parties may assert that our product names infringe their trademarks. We may incur significant expense in legal proceedings to protect our intellectual property against infringement by third parties or to defend against claims of infringement by third parties. Claims by third parties in pending or future lawsuits could result in awards of substantial damages against us or court orders that could effectively prevent us from manufacturing, using, importing or selling our products in the United States or other countries.
If we are unable to renew our licenses or otherwise lose our licensed rights, we may have to stop selling products or we may lose competitive advantage.
We may not be able to renew our existing licenses, or licenses we may obtain in the future, on terms acceptable to us, or at all. If we lose the rights to a patented or other proprietary technology, we may need to stop selling products incorporating that technology and possibly other products, redesign our products or lose a competitive advantage. Potential competitors could in-license technologies that we fail to license and potentially erode our market share.
Our licenses typically subject us to various economic and commercialization obligations. If we fail to comply with these obligations, we could lose important rights under a license, such as the right to exclusivity in a market. In some cases, we could lose all rights under the license. In addition, rights granted under the license could be lost for reasons out of our control. For example, the licensor could lose patent protection for a number of reasons, including invalidity of the licensed patent, or a third-party could obtain a patent that curtails our freedom to operate under one or more licenses.
If we do not compete effectively, our business will be harmed.
We encounter aggressive competition from numerous competitors in many areas of our business. We may not be able to compete effectively with all of these competitors. To remain competitive, we must develop new products and periodically enhance our existing products. We anticipate that we may also have to adjust the prices of many of our products to stay competitive. In addition, new competitors, technologies or market trends may emerge to threaten or reduce the value of entire product lines.
Our quarterly operating results could be subject to significant fluctuation, and we may not be able to adjust our operations to effectively address changes we do not anticipate, which could increase the volatility of our stock price and potentially cause losses to our shareholders.
Given the nature of the markets in which we participate, we cannot reliably predict future revenue and profitability. Changes in competitive, market and economic conditions may require us to adjust our operations, and we may not be able to make those adjustments or make them quickly enough to adapt to changing conditions. A high proportion of our costs are fixed, due in part to our research and development and manufacturing costs. As a result, small declines in sales could disproportionately affect our operating results in a quarter. Factors that may affect our quarterly operating results include:
| |
• | demand for and market acceptance of our products, |
| |
• | competitive pressures resulting in lower selling prices, |
| |
• | changes in the level of economic activity in regions in which we do business, |
| |
• | changes in general economic conditions or government funding, |
| |
• | settlements of income tax audits, |
| |
• | expenses incurred in connection with claims related to environmental conditions at locations where we conduct or formerly conducted operations, |
| |
• | differing tax laws and changes in those laws, or changes in the countries in which we are subject to taxation, |
| |
• | changes in our effective tax rate, |
| |
• | changes in industries, such as pharmaceutical and biomedical, |
| |
• | changes in the portions of our revenue represented by our various products and customers, |
| |
• | our ability to introduce new products, |
| |
• | our competitors’ announcement or introduction of new products, services or technological innovations, |
| |
• | costs of raw materials, energy or supplies, |
| |
• | changes in healthcare or other reimbursement rates paid by government agencies and other third parties for certain of our products and services, |
| |
• | our ability to realize the benefit of ongoing productivity initiatives, |
| |
• | changes in the volume or timing of product orders, |
| |
• | fluctuation in the expense related to the mark-to-market adjustment on postretirement benefit plans, |
| |
• | changes in our assumptions underlying future funding of pension obligations, and |
| |
• | changes in assumptions used to determine contingent consideration in acquisitions. |
A significant disruption in third-party package delivery and import/export services, or significant increases in prices for those services, could interfere with our ability to ship products, increase our costs and lower our profitability.
We ship a significant portion of our products to our customers through independent package delivery and import/export companies, including UPS and Federal Express in the United States; TNT, UPS and DHL in Europe; and UPS in Asia. We also ship our products through other carriers, including national trucking firms, overnight carrier services and the United States Postal Service. If one or more of the package delivery or import/export providers experiences a significant disruption in services or institutes a significant price increase, we may have to seek alternative providers and the delivery of our products could be prevented or delayed. Such events could cause us to incur increased shipping costs that could not be passed on to our customers, negatively impacting our profitability and our relationships with certain of our customers.
Disruptions in the supply of raw materials, certain key components and other goods from our limited or single source suppliers could have an adverse effect on the results of our business operations, and could damage our relationships with customers.
The production of our products requires a wide variety of raw materials, key components and other goods that are generally available from alternate sources of supply. However, certain critical raw materials, key components and other goods required for the production and sale of some of our principal products are available from limited or single sources of supply. We generally have multi-year contracts with no minimum purchase requirements with these suppliers, but those contracts may not fully protect us from a failure by certain suppliers to supply critical materials or from the delays inherent in being required
to change suppliers and, in some cases, validate new raw materials. Such raw materials, key components and other goods can usually be obtained from alternative sources with the potential for an increase in price, decline in quality or delay in delivery. A prolonged inability to obtain certain raw materials, key components or other goods is possible and could have an adverse effect on our business operations, and could damage our relationships with customers.
We are subject to the rules of the Securities and Exchange Commission requiring disclosure as to whether certain materials known as conflict minerals (tantalum, tin, gold and tungsten), which may be contained in our products are mined from the Democratic Republic of the Congo and adjoining countries. As a result of these rules, we may incur additional costs in complying with the disclosure requirements and in satisfying those customers who require that the components used in our products be certified as conflict-free, and the potential lack of availability of these materials at competitive prices could increase our production costs.
The manufacture and sale of products and services may expose us to product liability claims for which we could have substantial liability.
We face an inherent business risk of exposure to product liability claims if our products, services or product candidates are alleged or found to have caused injury, damage or loss. We may in the future be unable to obtain insurance with adequate levels of coverage for potential liability on acceptable terms or claims of this nature may be excluded from coverage under the terms of any insurance policy that we can obtain. If we are unable to obtain such insurance or the amounts of any claims successfully brought against us substantially exceed our coverage, then our business could be adversely impacted.
If we fail to maintain satisfactory compliance with the regulations of the United States Food and Drug Administration and other governmental agencies in the United States and abroad, we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil, criminal or monetary penalties.
Our operations are subject to regulation by different state and federal government agencies in the United States and other countries, as well as to the standards established by international standards bodies. If we fail to comply with those regulations or standards, we could be subject to fines, penalties, criminal prosecution or other sanctions. Some of the products produced by our Human Health segment are subject to regulation by the United States Food and Drug Administration and similar foreign and domestic agencies. These regulations govern a wide variety of product activities, from design and development to labeling, manufacturing, promotion, sales and distribution. If we fail to comply with those regulations or standards, we may have to recall products, cease their manufacture and distribution, and may be subject to fines or criminal prosecution.
We are also subject to a variety of laws, regulations and standards that govern, among other things, the importation and exportation of products, the handling, transportation and manufacture of toxic or hazardous substances, and our business practices in the United States and abroad such as anti-bribery, anti-corruption and competition laws. This requires that we devote substantial resources to maintaining our compliance with those laws, regulations and standards. A failure to do so could result in the imposition of civil, criminal or monetary penalties having a material adverse effect on our operations.
Changes in governmental regulations may reduce demand for our products or increase our expenses.
We compete in markets in which we or our customers must comply with federal, state, local and foreign regulations, such as environmental, health and safety, and food and drug regulations. We develop, configure and market our products to meet customer needs created by these regulations. Any significant change in these regulations could reduce demand for our products or increase our costs of producing these products.
The healthcare industry is highly regulated and if we fail to comply with its extensive system of laws and regulations, we could suffer fines and penalties or be required to make significant changes to our operations which could have a significant adverse effect on the results of our business operations.
The healthcare industry, including the genetic screening market, is subject to extensive and frequently changing international and United States federal, state and local laws and regulations. In addition, legislative provisions relating to healthcare fraud and abuse, patient privacy violations and misconduct involving government insurance programs provide federal enforcement personnel with substantial powers and remedies to pursue suspected violations. We believe that our business will continue to be subject to increasing regulation as the federal government continues to strengthen its position on healthcare matters, the scope and effect of which we cannot predict. If we fail to comply with applicable laws and regulations, we could suffer civil and criminal damages, fines and penalties, exclusion from participation in governmental healthcare programs, and the loss of various licenses, certificates and authorizations necessary to operate our business, as well as incur liabilities from third-party claims, all of which could have a significant adverse effect on our business.
Economic, political and other risks associated with foreign operations could adversely affect our international sales and profitability.
Because we sell our products worldwide, our businesses are subject to risks associated with doing business internationally. Our sales originating outside the United States represented the majority of our total revenue in the three months ended March 30, 2014. We anticipate that sales from international operations will continue to represent a substantial portion of our total revenue. In addition, many of our manufacturing facilities, employees and suppliers are located outside the United States. Accordingly, our future results of operations could be harmed by a variety of factors, including:
| |
• | changes in foreign currency exchange rates, |
| |
• | changes in a country’s or region’s political or economic conditions, particularly in developing or emerging markets, |
| |
• | longer payment cycles of foreign customers and timing of collections in foreign jurisdictions, |
| |
• | trade protection measures and import or export licensing requirements, |
| |
• | differing tax laws and changes in those laws, or changes in the countries in which we are subject to tax, |
| |
• | adverse income tax audit settlements or loss of previously negotiated tax incentives, |
| |
• | differing business practices associated with foreign operations, |
| |
• | difficulty in transferring cash between international operations and the United States, |
| |
• | difficulty in staffing and managing widespread operations, |
| |
• | differing labor laws and changes in those laws, |
| |
• | differing protection of intellectual property and changes in that protection, |
| |
• | increasing global enforcement of anti-bribery and anti-corruption laws, and |
| |
• | differing regulatory requirements and changes in those requirements. |
If we do not retain our key personnel, our ability to execute our business strategy will be limited.
Our success depends to a significant extent upon the continued service of our executive officers and key management and technical personnel, particularly our experienced engineers and scientists, and on our ability to continue to attract, retain, and motivate qualified personnel. The competition for these employees is intense. The loss of the services of key personnel could have a material adverse effect on our operating results. In addition, there could be a material adverse effect on us should the turnover rates for key personnel increase significantly or if we are unable to continue to attract qualified personnel. We do not maintain any key person life insurance policies on any of our officers or employees.
Our success also depends on our ability to execute leadership succession plans. The inability to successfully transition key management roles could have a material adverse effect on our operating results.
If we experience a significant disruption in, or breach in security of, our information technology systems, or if we fail to implement new systems, software and technologies successfully, our business could be adversely affected.
We rely on several centralized information technology systems throughout our company to provide products and services, keep financial records, process orders, manage inventory, process shipments to customers and operate other critical functions. Our information technology systems may be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors, catastrophes or other unforeseen events. If we were to experience a prolonged system disruption in the information technology systems that involve our interactions with customers or suppliers, it could result in the loss of sales and customers and significant incremental costs, which could adversely affect our business. In addition, security breaches of our information technology systems could result in the misappropriation or unauthorized disclosure of confidential information belonging to us or to our employees, partners, customers or suppliers, which could result in our suffering significant financial or reputational damage.
We have a substantial amount of outstanding debt, which could impact our ability to obtain future financing and limit our ability to make other expenditures in the conduct of our business.
Our debt level and related debt service obligations could have negative consequences, including:
| |
• | requiring us to dedicate significant cash flow from operations to the payment of principal and interest on our debt, which reduces the funds we have available for other purposes, such as acquisitions and stock repurchases; |
| |
• | reducing our flexibility in planning for or reacting to changes in our business and market conditions; and |
| |
• | exposing us to interest rate risk since a portion of our debt obligations are at variable rates. |
In addition, we may incur additional indebtedness in the future to meet future financing needs. If we add new debt, the risks described above could increase.
Restrictions in our senior unsecured revolving credit facility and other debt instruments may limit our activities.
Our senior unsecured revolving credit facility and our 2021 Notes include restrictive covenants that limit our ability to engage in activities that could otherwise benefit our company. These include restrictions on our ability and the ability of our subsidiaries to:
| |
• | pay dividends on, redeem or repurchase our capital stock, |
| |
• | incur obligations that restrict our subsidiaries’ ability to make dividend or other payments to us, |
| |
• | guarantee or secure indebtedness, |
| |
• | enter into transactions with affiliates, and |
| |
• | consolidate, merge or transfer all, or substantially all, of our assets and the assets of our subsidiaries on a consolidated basis. |
We are also required to meet specified financial ratios under the terms of certain of our existing debt instruments. Our ability to comply with these financial restrictions and covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control, such as foreign exchange rates, interest rates, changes in technology and changes in the level of competition. In addition, if we are unable to maintain our investment grade credit rating, our borrowing costs would increase and we would be subject to different and potentially more restrictive financial covenants under some of our existing debt instruments.
Any future indebtedness that we incur may include similar or more restrictive covenants. Our failure to comply with any of the restrictions in our senior unsecured revolving credit facility, our 2021 Notes or any future indebtedness may result in an event of default under those debt instruments, which could permit acceleration of the debt under those debt instruments, and require us to prepay that debt before its scheduled due date under certain circumstances.
Our results of operations will be adversely affected if we fail to realize the full value of our intangible assets.
As of March 30, 2014, our total assets included $2.6 billion of net intangible assets. Net intangible assets consist principally of goodwill associated with acquisitions and costs associated with securing patent rights, trademark rights, core technology and technology licenses, net of accumulated amortization. We test certain of these items—specifically all of those that are considered “non-amortizing”—at least annually for potential impairment by comparing the carrying value to the fair market value of the reporting unit to which they are assigned. All of our amortizing intangible assets are also evaluated for impairment should events occur that call into question the value of the intangible assets.
Adverse changes in our business, adverse changes in the assumptions used to determine the fair value of our reporting units, or the failure to grow our Human Health and Environmental Health segments may result in impairment of our intangible assets, which could adversely affect our results of operations.
Our share price will fluctuate.
Over the last several quarters, stock markets in general and our common stock in particular have experienced significant price and volume volatility. Both the market price and the daily trading volume of our common stock may continue to be subject to significant fluctuations due not only to general stock market conditions but also to a change in sentiment in the market regarding our operations and business prospects. In addition to the risk factors discussed above, the price and volume volatility of our common stock may be affected by:
| |
• | operating results that vary from our financial guidance or the expectations of securities analysts and investors, |
| |
• | the financial performance of the major end markets that we target, |
| |
• | the operating and securities price performance of companies that investors consider to be comparable to us, |
| |
• | announcements of strategic developments, acquisitions and other material events by us or our competitors, and |
| |
• | changes in global financial markets and global economies and general market conditions, such as interest or foreign exchange rates, commodity and equity prices and the value of financial assets. |
Dividends on our common stock could be reduced or eliminated in the future.
On January 24, 2014, we announced that our Board had declared a quarterly dividend of $0.07 per share for the first quarter of fiscal year 2014 that will be payable in May 2014. On April 22, 2014, we announced that our Board had declared a quarterly dividend of $0.07 per share for the second quarter of fiscal year 2014 that will be payable in August 2014. In the future, our Board may determine to reduce or eliminate our common stock dividend in order to fund investments for growth, repurchase shares or conserve capital resources.
| |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Stock Repurchase Program
The following table provides information with respect to the shares of common stock repurchased by us for the periods indicated.
|
| | | | | | | | | | | | |
| Issuer Repurchases of Equity Securities |
Period | Total Number of Shares Purchased(1)(2) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
December 30, 2013—February 2, 2014 | — |
| | $ | — |
| | — |
| | 2,400,000 |
|
February 3, 2014—March 2, 2014 | 90,230 |
| | $ | 43.40 |
| | — |
| | 2,400,000 |
|
March 3, 2014—March 30, 2014 | — |
| | $ | — |
| | — |
| | 2,400,000 |
|
Activity for quarter ended March 30, 2014 | 90,230 |
| | $ | 43.40 |
| | — |
| | 2,400,000 |
|
____________________
| |
(1) | On October 24, 2012, our Board authorized us to repurchase up to 6.0 million shares of common stock under a stock repurchase program (the "Repurchase Program"). The Repurchase Program will expire on October 24, 2014 unless terminated earlier by our Board, and may be suspended or discontinued at any time. During the first quarter of fiscal year 2014, we did not repurchase any shares of common stock in the open market under the Repurchase Program. As of March 30, 2014, 2.4 million shares authorized by our Board under the Repurchase Program remained available for repurchase. |
| |
(2) | Our Board has authorized us to repurchase shares of common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards and restricted stock unit awards granted pursuant to our equity incentive plans. During the first quarter of fiscal year 2014, we repurchased 90,230 shares of common stock for this purpose. The repurchased shares have been reflected as additional authorized but unissued shares with the payments reflected in common stock and capital in excess of par value. |
|
| | |
Exhibit Number | | Exhibit Name |
| |
10.1 | | Credit Agreement, dated as of January 8, 2014, among PerkinElmer, Inc., Wallac Oy and PerkinElmer Health Sciences, Inc. as Borrowers, JPMorgan Chase Bank N.A. as Administrative Agent, Bank of America, N.A. and Barclays Bank PLC as Co-Syndication Agents, The Royal Bank of Scotland PLC, Citibank, N.A. and HSBC Bank USA, National Association as Co-Documentation Agents, J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Barclays Bank PLC as Joint Bookrunners and Joint Lead Arrangers, and the other Lenders Party hereto, filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the SEC on January 10, 2014 and herein incorporated by reference. |
| | |
10.2 | | Amended and Restated Employment Agreement between Andrew Okun and PerkinElmer, Inc. dated as of January 1, 2014, filed as Exhibit 10.2(10) to the registrant’s Annual Report on Form 10-K filed with the SEC on February 25, 2014 and herein incorporated by reference. |
| | |
31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
32.1 | | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| |
101.INS | | XBRL Instance Document. |
| |
101.SCH | | XBRL Taxonomy Extension Schema Document. |
| |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
| |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
| |
101.LAB | | XBRL Taxonomy Extension Labels Linkbase Document. |
| |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
____________________________