Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________
FORM 10-Q
_______________________________________
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 1, 2018
or
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to ____________
Commission File Number 001-5075
_______________________________________
PerkinElmer, Inc.
(Exact name of Registrant as specified in its Charter)
_______________________________________
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Massachusetts | | 04-2052042 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
940 Winter Street
Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip code)
(781) 663-6900
(Registrant’s telephone number, including area code)
_______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ý | Accelerated filer | | ¨ |
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Non-accelerated filer | | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | | ¨ |
Emerging growth company | | ¨ | | | |
If an emerging growth company, indicate by check mark whether the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
As of August 2, 2018, there were outstanding 110,734,011 shares of common stock, $1 par value per share.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II. OTHER INFORMATION | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 6. | | |
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PART I. FINANCIAL INFORMATION
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Item 1. | Unaudited Financial Statements |
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2018 | | July 2, 2017 | | July 1, 2018 | | July 2, 2017 |
| (In thousands, except per share data) |
Product revenue | $ | 495,608 |
| | $ | 355,001 |
| | $ | 943,216 |
| | $ | 688,715 |
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Service revenue | 207,754 |
| | 191,961 |
| | 404,118 |
| | 372,362 |
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Total revenue | 703,362 |
| | 546,962 |
| | 1,347,334 |
| | 1,061,077 |
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Cost of product revenue | 229,723 |
| | 173,040 |
| | 449,979 |
| | 336,064 |
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Cost of service revenue | 133,499 |
| | 116,320 |
| | 264,993 |
| | 227,655 |
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Total cost of revenue | 363,222 |
| | 289,360 |
| | 714,972 |
| | 563,719 |
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Selling, general and administrative expenses | 204,880 |
| | 149,859 |
| | 404,605 |
| | 296,867 |
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Research and development expenses | 47,196 |
| | 33,560 |
| | 93,180 |
| | 66,846 |
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Restructuring and contract termination charges, net | — |
| | — |
| | 6,578 |
| | 9,651 |
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Operating income from continuing operations | 88,064 |
| | 74,183 |
| | 127,999 |
| | 123,994 |
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Interest and other expense, net | 16,356 |
| | 3,391 |
| | 27,786 |
| | 13,219 |
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Income from continuing operations before income taxes | 71,708 |
| | 70,792 |
| | 100,213 |
| | 110,775 |
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Provision for income taxes | 7,035 |
| | 8,066 |
| | 9,505 |
| | 11,987 |
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Income from continuing operations | 64,673 |
| | 62,726 |
| | 90,708 |
| | 98,788 |
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(Loss) income from discontinued operations before income taxes | — |
| | (3,109 | ) | | — |
| | 650 |
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(Loss) gain on disposition of discontinued operations before income taxes | (551 | ) | | 180,377 |
| | (551 | ) | | 180,377 |
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Provision for income taxes on discontinued operations and dispositions | 59 |
| | 35,925 |
| | 70 |
| | 37,143 |
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(Loss) income from discontinued operations and dispositions | (610 | ) | | 141,343 |
| | (621 | ) | | 143,884 |
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Net income | $ | 64,063 |
| | $ | 204,069 |
| | $ | 90,087 |
| | $ | 242,672 |
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Basic earnings per share: | | | | | | | |
Income from continuing operations | $ | 0.59 |
| | $ | 0.57 |
| | $ | 0.82 |
| | $ | 0.90 |
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(Loss) income from discontinued operations and dispositions | (0.01 | ) | | 1.29 |
| | (0.01 | ) | | 1.31 |
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Net income | $ | 0.58 |
| | $ | 1.86 |
| | $ | 0.82 |
| | $ | 2.21 |
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Diluted earnings per share: | | | | | | | |
Income from continuing operations | $ | 0.58 |
| | $ | 0.57 |
| | $ | 0.81 |
| | $ | 0.89 |
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(Loss) income from discontinued operations and dispositions | (0.01 | ) | | 1.28 |
| | (0.01 | ) | | 1.30 |
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Net income | $ | 0.57 |
| | $ | 1.84 |
| | $ | 0.81 |
| | $ | 2.20 |
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Weighted average shares of common stock outstanding: | | | | | | | |
Basic | 110,477 |
| | 109,894 |
| | 110,386 |
| | 109,681 |
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Diluted | 111,452 |
| | 110,762 |
| | 111,391 |
| | 110,484 |
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Cash dividends declared per common share | $ | 0.07 |
| | $ | 0.07 |
| | $ | 0.14 |
| | $ | 0.14 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2018 | | July 2, 2017 | | July 1, 2018 | | July 2, 2017 |
| (In thousands) |
Net income | $ | 64,063 |
| | $ | 204,069 |
| | $ | 90,087 |
| | $ | 242,672 |
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Other comprehensive income: | | | | | | | |
Foreign currency translation adjustments | (102,592 | ) | | 18,192 |
| | (84,093 | ) | | 37,400 |
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Unrealized gains on securities, net of tax | 4 |
| | 11 |
| | 45 |
| | 34 |
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Other comprehensive (loss) income | (102,588 | ) | | 18,203 |
| | (84,048 | ) | | 37,434 |
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Comprehensive (loss) income | $ | (38,525 | ) | | $ | 222,272 |
| | $ | 6,039 |
| | $ | 280,106 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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| July 1, 2018 | | December 31, 2017 |
| (In thousands, except share and per share data) |
Current assets: | | | |
Cash and cash equivalents | $ | 163,392 |
| | $ | 202,134 |
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Accounts receivable, net | 564,041 |
| | 552,304 |
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Inventories | 366,961 |
| | 351,675 |
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Other current assets | 108,019 |
| | 93,842 |
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Total current assets | 1,202,413 |
| | 1,199,955 |
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Property, plant and equipment: | | | |
At cost | 706,566 |
| | 630,919 |
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Accumulated depreciation | (402,028 | ) | | (332,853 | ) |
Property, plant and equipment, net | 304,538 |
| | 298,066 |
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Intangible assets, net | 1,270,867 |
| | 1,346,940 |
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Goodwill | 2,940,825 |
| | 3,002,198 |
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Other assets, net | 239,135 |
| | 244,304 |
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Total assets | $ | 5,957,778 |
| | $ | 6,091,463 |
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Current liabilities: | | | |
Current portion of long-term debt | $ | 17,315 |
| | $ | 217,306 |
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Accounts payable | 197,128 |
| | 222,093 |
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Accrued restructuring and contract termination charges | 7,443 |
| | 8,759 |
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Accrued expenses and other current liabilities | 488,642 |
| | 500,642 |
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Current liabilities of discontinued operations | 2,165 |
| | 2,102 |
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Total current liabilities | 712,693 |
| | 950,902 |
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Long-term debt | 1,983,953 |
| | 1,788,803 |
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Long-term liabilities | 743,955 |
| | 848,570 |
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Total liabilities | 3,440,601 |
| | 3,588,275 |
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Commitments and contingencies (see Note 20) |
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Stockholders’ equity: | | | |
Preferred stock—$1 par value per share, authorized 1,000,000 shares; none issued or outstanding | — |
| | — |
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Common stock—$1 par value per share, authorized 300,000,000 shares; issued and outstanding 110,716,000 shares and 110,361,000 shares at July 1, 2018 and at December 31, 2017, respectively | 110,716 |
| | 110,361 |
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Capital in excess of par value | 73,740 |
| | 58,828 |
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Retained earnings | 2,463,287 |
| | 2,380,517 |
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Accumulated other comprehensive loss | (130,566 | ) | | (46,518 | ) |
Total stockholders’ equity | 2,517,177 |
| | 2,503,188 |
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Total liabilities and stockholders’ equity | $ | 5,957,778 |
| | $ | 6,091,463 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) |
| | | | | | | |
| Six Months Ended |
| July 1, 2018 | | July 2, 2017 |
| (In thousands) |
Operating activities: | | | |
Net income | $ | 90,087 |
| | $ | 242,672 |
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Loss (income) from discontinued operations and dispositions, net of income taxes | 621 |
| | (143,884 | ) |
Income from continuing operations | 90,708 |
| | 98,788 |
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Adjustments to reconcile income from continuing operations to net cash provided by continuing operations: | | | |
Stock-based compensation | 12,148 |
| | 11,767 |
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Restructuring and contract termination charges, net | 6,578 |
| | 9,651 |
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Depreciation and amortization | 88,225 |
| | 49,505 |
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Loss on disposition of businesses and assets, net | — |
| | 301 |
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Change in fair value of contingent consideration | 7,065 |
| | 909 |
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Amortization of deferred debt financing costs and accretion of discount | 1,519 |
| | 1,231 |
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Amortization of acquired inventory revaluation | 18,160 |
| | 4,240 |
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Changes in assets and liabilities which provided (used) cash, excluding effects from companies acquired: | | | |
Accounts receivable, net | (18,768 | ) | | 5,215 |
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Inventories | (42,993 | ) | | (9,913 | ) |
Accounts payable | (24,384 | ) | | (20,855 | ) |
Accrued expenses and other | (79,831 | ) | | (55,193 | ) |
Net cash provided by operating activities of continuing operations | 58,427 |
| | 95,646 |
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Net cash provided by operating activities of discontinued operations | — |
| | 6,207 |
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Net cash provided by operating activities | 58,427 |
| | 101,853 |
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Investing activities: | | | |
Capital expenditures | (39,608 | ) | | (11,473 | ) |
Proceeds from disposition of cost-method investments | 173 |
| | — |
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Proceeds from surrender of life insurance policies | 72 |
| | 45 |
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Activity related to acquisitions and investments, net of cash and cash equivalents acquired | (40,557 | ) | | (123,578 | ) |
Net cash used in investing activities of continuing operations | (79,920 | ) | | (135,006 | ) |
Net cash provided by investing activities of discontinued operations | — |
| | 276,982 |
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Net cash (used in) provided by investing activities | (79,920 | ) | | 141,976 |
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Financing activities: | | | |
Payments on borrowings | (667,000 | ) | | (145,950 | ) |
Proceeds from borrowings | 342,000 |
| | 146,952 |
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Proceeds from sale of senior debt | 369,340 |
| | — |
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Payments of debt financing costs | (2,634 | ) | | — |
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Settlement of cash flow hedges | (32,711 | ) | | (4,314 | ) |
Net payments on other credit facilities | (10,154 | ) | | (577 | ) |
Payments for acquisition-related contingent consideration | — |
| | (8,940 | ) |
Proceeds from issuance of common stock under stock plans | 8,348 |
| | 13,223 |
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Purchases of common stock | (4,649 | ) | | (3,265 | ) |
Dividends paid | (15,471 | ) | | (15,363 | ) |
Net cash used in financing activities of continuing operations | (12,931 | ) | | (18,234 | ) |
Net cash used in financing activities of discontinued operations | — |
| | (533 | ) |
Net cash used in financing activities | (12,931 | ) | | (18,767 | ) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (4,351 | ) | | 14,928 |
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Net (decrease) increase in cash, cash equivalents and restricted cash | (38,775 | ) | | 239,990 |
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Cash, cash equivalents and restricted cash at beginning of period | 202,371 |
| | 376,568 |
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Cash, cash equivalents and restricted cash at end of period | $ | 163,596 |
| | $ | 616,558 |
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Supplemental disclosures of cash flow information | | | |
Reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total shown in the condensed consolidated statements of cash flows:
| | | |
Cash and cash equivalents | 163,392 |
| | 616,308 |
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Restricted cash included in other current assets | 204 |
| | 250 |
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Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | $ | 163,596 |
| | $ | 616,558 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Basis of Presentation
The condensed consolidated financial statements included herein have been prepared by PerkinElmer, Inc. (the “Company”), 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 31, 2017, filed with the SEC (the “2017 Form 10-K”). The balance sheet amounts at December 31, 2017 in this report were derived from the Company’s audited 2017 consolidated financial statements included in the 2017 Form 10-K. The condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods indicated. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for the three and six months ended July 1, 2018 and July 2, 2017, respectively, are not necessarily indicative of the results for the entire fiscal year or any future period.
The Company’s fiscal year ends on the Sunday nearest December 31. The Company reports fiscal years under a 52/53 week format and as a result, certain fiscal years will contain 53 weeks. The fiscal year ending December 30, 2018 ("fiscal year 2018") will include 52 weeks, and the fiscal year ended December 31, 2017 ("fiscal year 2017") included 52 weeks.
Recently Adopted and Issued Accounting Pronouncements: From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the "FASB") and are adopted by the Company as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on the Company’s consolidated financial position, results of operations and cash flows or do not apply to the Company’s operations.
In June 2018, the FASB issued Accounting Standards Update No. 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting ("ASU 2018-07") which supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-employees, and expands the scope of Topic 718 (which currently only includes share-based payments to employees) to also include share-based payments issued to non-employees for goods and services, except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). ASU 2018-07 specifies that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards, except for financing transactions, or awards issued to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers ("Topic 606"). The provisions of this guidance are to be applied using a modified retrospective approach, with a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year, for all (1) liability-classified non-employee awards that have not been settled as of the adoption date and (2) equity-classified non-employee awards for which a measurement date has not been established. ASU 2018-07 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606. The Company early adopted the provisions of this guidance effective July 2, 2018. The adoption did not have a material impact on the Company's consolidated financial position, results of operations and cash flow.
In March 2018, the FASB Issued Accounting Standards Update No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 ("ASU 2018-05"). ASU 2018-05 was issued to incorporate into Topic 740 recent SEC guidance related to the income tax accounting implications of the Tax Cut and Jobs Act (the "Tax Act"). The SEC issued Staff Accounting Bulletin No. 118 ("SAB 118") to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Act in the period of enactment. SAB 118 permits companies to disclose that some or all of the income tax effects from the Tax Act are incomplete by the due date of the financial statements, and if possible, disclose a reasonable estimate of such tax effects. ASU 2018-05 is effective immediately. The Company is applying the guidance in ASU 2018-05 when accounting for the enactment date effects of the Tax Act. At July 1, 2018, the Company has not completed the accounting for all of the tax effects of the Tax Act; however, it has made a reasonable estimate of their effects based on currently available information. Management will continue to refine
the calculations as additional guidance is available. These estimates may be affected as additional clarification and implementation guidance becomes available. These changes could be material to income tax expense (see Note 9, Income Taxes for further disclosures).
In February 2018, the FASB Issued Accounting Standards Update No. 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2018-03"). ASU 2018-03 was issued to clarify certain aspects of guidance concerning the recognition of financial assets and liabilities established in Accounting Standards Update No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities ("ASU 2016-01"). This includes treatment for discontinuations and adjustments for equity securities without a readily determinable market value, forward contracts and purchased options, presentation requirements for certain fair value option liabilities, fair value option liabilities denominated in a foreign currency, and transition guidance for equity securities without a readily determinable fair value. ASU 2018-03 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018. Early adoption is permitted for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, as long as the Company has adopted ASU 2016-01. The Company is evaluating the requirements of this guidance. The adoption is not expected to have a material impact on the Company's consolidated financial position, results of operations and cash flows.
In February 2018, the FASB Issued Accounting Standards Update No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ("ASU 2018-02"). ASU 2018-02 provides entities with an option to reclassify stranded tax effects within Accumulated Other Comprehensive Income ("AOCI") to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act (or portion thereof) is recorded. ASU 2018-02 requires entities to disclose a description of the accounting policy for releasing income tax effects from AOCI; whether they elect to reclassify the stranded income tax effects from the Tax Act; and information about the other income tax effects that are reclassified. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and entities should apply the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company is currently evaluating the requirements of this guidance and has not yet determined the impact of its adoption on the Company's consolidated financial position, results of operations and cash flows.
In August 2017, the FASB issued Accounting Standards Update No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"), which amends the hedge accounting recognition and presentation requirements in Topic 815. ASU 2017-12 makes targeted changes to the existing hedge accounting model to better align an entity’s financial reporting for hedging relationships with the entity’s risk management activities, and to reduce the complexity of, and simplify the application of, the hedge accounting model. Specifically, ASU 2017-12 expands the types of transactions eligible for hedge accounting, eliminates the requirement to separately measure and present hedge ineffectiveness, simplifies the way assessments of hedge ineffectiveness may be performed, relaxes the documentation requirements for entering into hedging positions, provides targeted improvements to fair value hedges of interest rate risk, and permits an entity to exclude the change in the fair value of cross-currency basis spreads in currency swaps from the assessment of hedge effectiveness. The standard also requires entities to provide new disclosures about the impact fair value and cash flow hedges have on their income statements and about cumulative basis adjustments arising from fair value hedges. The provisions of this guidance are to be applied using a modified retrospective approach to existing hedging relationships as of the adoption date. However, the transition provisions allow for certain elections at the date of adoption and entities may choose to apply any of the provided elections. ASU 2017-12 is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted, including adoption in any interim period. The Company early adopted the provisions of this guidance effective January 1, 2018. The adoption did not have a material impact on the Company's consolidated financial position, results of operations and cash flows.
In May 2017, the FASB issued Accounting Standards Update No. 2017-09, Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting ("ASU 2017-09"), which amends the scope of modification accounting for share-based payment arrangements. ASU 2017-09 provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Topic 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. If an entity modifies its awards and concludes that it is not required to apply modification accounting under the standard, it must still consider whether the modification affects its application of other guidance. Additionally, if a significant modification does not result in incremental compensation cost, entities are required to disclose the “lack of” incremental compensation cost resulting from such significant modification. The standard also removes the guidance in Topic 718 stating that modification accounting is not required when an entity adds an antidilution provision as long as that modification is not made in contemplation of an equity restructuring. The provisions of this guidance are to be
applied on a prospective basis to awards modified on or after the effective date. ASU 2017-09 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years. Early adoption is permitted, including adoption in any interim period. The Company adopted ASU 2017-09 effective January 1, 2018. The adoption did not have a material impact on the Company's consolidated financial position, results of operations and cash flows.
In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"), which amends the requirements in Topic 715 related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. ASU 2017-07 requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current employee compensation costs in their income statements and (2) present the other components elsewhere in their income statements and outside of income from operations, and disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. Additionally, the standard requires that only the service-cost component of net benefit cost is eligible for capitalization (e.g., as part of inventory or property, plant, and equipment). The change in income statement presentation requires retrospective application, while the change in capitalized benefit cost is to be applied prospectively. ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The standard provides a practical expedient that permits entities to use the components of cost disclosed in prior years as a basis for the retrospective application of the new income statement presentation. Entities need to disclose the use of the practical expedient. The Company adopted ASU 2017-07 effective January 1, 2018 using a retrospective approach for each period presented. For the three and six months ended July 2, 2017, $1.8 million and $3.6 million, respectively, of net periodic pension credit previously presented within operating income has been presented outside of operating income in the line item "Interest and other expense, net" in the condensed consolidated statement of operations due to the retrospective adoption of ASU 2017-07. The adoption did not have a material impact on the Company's consolidated financial position, results of operations and cash flows, other than the impact discussed above.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business ("ASU 2017-01"), which amends Topic 805 to provide a screen to determine when a set of assets and liabilities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the standard (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) removes the evaluation of whether a market participant could replace missing elements. The standard provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The standard also provides a framework that includes two sets of criteria to consider that depend on whether a set has outputs and a more stringent criteria for sets without outputs. Lastly, the standard narrows the definition of the term "output" so that the term is consistent with how outputs are described in Topic 606, Revenue from Contracts with Customers. The provisions of this guidance are to be applied prospectively. ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted in limited circumstances. The Company adopted ASU 2017-01 effective January 1, 2018. The adoption did not have a material impact on the Company's consolidated financial position, results of operations and cash flows.
In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash ("ASU 2016-18"), which amends Topic 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The provisions of this guidance are to be applied using a retrospective transition method to each period presented. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company adopted ASU 2016-18 effective January 1, 2018. For the six months ended July 2, 2017, $17.2 million of changes in restricted cash balances that was previously presented within investing activities in the condensed consolidated statement of cash flows has been excluded from the cash flows used in investing activities and the effect of exchange rate changes increased by $0.2 million due to the retrospective adoption of ASU 2016-18. Restricted cash amounting to $17.3 million and $0.3 million at January 1, 2017 and July 2, 2017, respectively, have been included with the cash and cash equivalents when reconciling the beginning of period and end of period total amounts on the condensed consolidated statement of cash flows for the six months ended July 2, 2017. The adoption did not have a material impact on the Company's consolidated financial position, results of operations and cash flows, other than the impact discussed above.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740), Intra-entity Transfer of Assets Other than Inventory ("ASU 2016-16"). ASU 2016-16 removes the prohibition in Topic 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The standard requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The provisions of this guidance are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company adopted ASU 2016-16 on January 1, 2018. The adoption of the standard resulted in a decrease in the retained earnings at January 1, 2018 of approximately $2.0 million with corresponding increase in deferred tax assets of $10.7 million and decrease in prepaid taxes of $12.8 million related to prior years’ intra-entity transfers of assets other than inventory. The adoption did not have a material impact on the Company's consolidated financial position, results of operations and cash flows, other than the impact discussed above.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard requires entities to use the expected loss impairment model and will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance sheet credit exposures. Entities are required to estimate the lifetime “expected credit loss” for each applicable financial asset and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The standard also amends the impairment model for available-for-sale (“AFS”) debt securities and requires entities to determine whether all or a portion of the unrealized loss on an AFS debt security is a credit loss. An entity will recognize an allowance for credit losses on an AFS debt security as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment. The provisions of this guidance are to be applied using a modified-retrospective approach. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is currently evaluating the requirements of this guidance and has not yet determined the impact of its adoption on the Company's consolidated financial position, results of operations and cash flows.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease of assets will primarily depend on its classification as a finance or operating lease. ASU 2016-02 also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The provisions of this guidance are effective for annual periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. ASU 2016-02 is to be applied using a modified retrospective approach. The Company is evaluating the requirements of this guidance and has not yet determined the impact of the adoption on its consolidated financial position, results of operations and cash flows. The Company does not intend to early adopt the provisions of this standard.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). Under this new guidance, an entity should use a five-step process to recognize revenue, depicting the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires new disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Subsequent to the issuance of the standard, the FASB decided to defer the effective date for one year to annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. In November 2017, the FASB also issued Accounting Standards Update No. 2017-14, Income Statement-Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606). ASU 2017-14 includes amendments to certain SEC paragraphs within the FASB Accounting Standards Codification ("Codification"). ASU 2017-14 amends the Codification to incorporate SEC Staff Accounting Bulletin No. 116 and SEC Interpretive Release on Vaccines for Federal Government Stockpiles (SEC Release No. 33-10403) to align existing SEC staff guidance with Revenue from Contracts with Customers (Topic 606). In May 2016, the FASB also issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients ("ASU 2016-12"), which amended its revenue recognition guidance in ASU 2014-09 on transition, collectability, non-cash consideration, contract modifications and completed contracts at transition and the presentation of sales and other similar taxes collected from
customers. In April 2016, the FASB also issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing ("ASU 2016-10"), which amended its revenue recognition guidance in ASU 2014-09 on identifying performance obligations to allow entities to disregard items that are immaterial in the context of the contract, clarify when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow an entity to elect to account for the cost of shipping and handling performed after control of a good has been transferred to the customer as a fulfillment cost (i.e., an expense). ASU 2016-10 also clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property ("IP") and requires entities to classify IP in one of two categories: functional IP or symbolic IP, which will determine whether it recognizes revenue over time or at a point in time. ASU 2016-10 also addresses how entities should consider license renewals and restrictions and apply the exception for sales- and usage-based royalties received in exchange for licenses of IP. In March 2016, the FASB also issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU 2016-08"), which amended the principal-versus-agent implementation guidance and illustrations in ASU 2014-09. ASU 2016-08 clarifies that an entity should evaluate when it is the principal or agent for each specified good or service promised in a contract with a customer. ASU 2017-14, ASU 2016-12, ASU 2016-10, ASU 2016-08 and ASU 2014-09 may be adopted either using a full retrospective approach or a modified retrospective approach. The Company adopted these standards beginning on January 1, 2018 using the modified retrospective approach only to contracts not completed as of January 1, 2018.
The most significant impact of the standards relates to the accounting for certain transactions with multiple elements or “bundled” arrangements. Specifically, for sales of software subscriptions or sales of licenses and maintenance, the Company will recognize the license revenue predominantly at the time of billing and delivery rather than recognizing the entire sales price ratably over the maintenance period, which is the Company's current practice. In addition, for certain sales of instruments that include customer-specified acceptance criteria, the Company will recognize revenue when the customer obtains control of the instrument which is typically upon delivery or when title has transferred to the customer, as the Company believes acceptance is perfunctory. The Company will also capitalize incremental commission fees as a result of obtaining contracts when these fees are recoverable and will amortize the assets based on the transfer of goods or services to which the assets relate which typically range from two to six years. The adoption of the standards resulted in an increase in retained earnings at January 1, 2018 of approximately $10.2 million for the cumulative effect of initially applying the standards as of that date. In addition, the adoption of the standards resulted primarily in a reduction in deferred revenue of approximately $11.5 million, mainly driven by the upfront recognition of license revenue and certain multi-year software subscriptions, and an increase in deferred income tax liability of approximately $3.0 million for the tax impact of the cumulative adjustments. The cumulative effect of recognizing instrument sales upon delivery or transfer of title and capitalizing the incremental commission fees were not material at January 1, 2018. The adoption of the standards had no impact to cash from or used in operating, investing, or financing activities in the Company's consolidated statement of cash flows at January 1, 2018. Refer to Note 3, Changes in Accounting Policies, for the impact of adoption of the standards on the Company's condensed consolidated financial statements for the quarter ended July 1, 2018. Also refer to Note 2, Revenue, for the disclosures required by the standards.
Note 2: Revenue
Significant accounting policy
The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. The Company recognizes revenue in an amount that reflects the consideration the Company expects to receive in exchange for the promised products or services when it satisfies a performance obligation by transferring control of those products or services to customers.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
The Company reports shipping and handling charges in revenue, to the extent these are billed to customers, and the associated costs in cost of product revenue.
Nature of goods and services
The following is a description of principal activities - separated by reportable segments - from which the Company generates its revenue. For more detailed information about the reportable segments, see Note 12.
i. Discovery & Analytical Solutions
The Discovery & Analytical Solutions ("DAS") segment of the Company principally generates revenue from (a) sales of instruments, consumables and services in the applied markets, (b) sales of instruments, reagents, informatics, detection and imaging technologies, extended warranty, training and services in the life sciences market. Products and services may be sold separately or in bundled packages. The typical length of a contract for service is 12 to 36 months.
For bundled packages, the Company accounts for individual products and services separately if they are distinct - i.e. if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services in a bundle based on their stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the products, extended warranties, and services. For items that are not sold separately, the Company estimates stand-alone selling prices by reference to the amount charged for similar items on a stand-alone basis.
The Company sells products and services predominantly through its direct sales force. As a result, the use of distributors is generally limited to geographic regions where the Company has no direct sales force. The Company does not offer product return or exchange rights (other than those relating to defective goods under warranty) or price protection allowances to its customers, including distributors. Payment terms granted to distributors are the same as those granted to end-customers and payments are not dependent upon the distributor's receipt of payment from their end-user customers.
In instances where the timing of revenue recognition differs from the timing of invoicing, the Company determined that the contracts generally do not include a significant financing component. The primary purpose of its invoicing terms is to provide customers with simplified and predictable ways of purchasing products and services, rather than to receive financing from the customers or to provide customers with financing. Examples include invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period, and multi-year software licenses or software subscriptions that are invoiced annually with revenue recognized upfront. In limited circumstances where the Company provides the customer with a significant benefit of financing, the Company uses the practical expedient and only adjusts the transaction price for the effects of the time value of money and only on contracts where the duration of financing is more than one year.
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Products and services | Nature, timing of satisfaction of performance obligations, and significant payment terms |
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Instruments | For instruments that include installation, and if the installation meets the criteria to be considered a separate performance obligation, product revenue is generally recognized upon delivery or when title has transferred to the customer, which is generally the point in time where control of the products has been transferred to customers, and installation revenue is recognized when the installation is complete. Certain of the Company's products require specialized installation and configuration at the customer's site. Revenue for these products is deferred until installation is complete and customer acceptance has been received. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 to 60 days. |
Consumables and reagents | The Company recognizes revenue from the sale of consumables and reagents upon delivery or when title has transferred to the customer, which is generally the point in time where control of the products has been transferred to customers. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 days. |
Software licenses and subscriptions | Customers may purchase perpetual or term licenses, or subscribe to licenses, which provide customers with the same functionality and differ mainly in the duration over which the customer benefits from the software. The Company sells its software subscriptions or software licenses with maintenance services and, in some cases, with consulting services. The Company recognizes revenue for the software upfront at the point in time when the software is made available to the customer. For maintenance and consulting services, revenue is recognized ratably over the period in which the services are provided. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. Software subscriptions and maintenance service contracts are non-cancelable. |
Cloud services | Cloud services, which allow customers to use hosted software over the contract period without taking possession of the software, are provided on either a subscription or consumption basis. Revenue related to cloud services provided on a subscription basis is recognized ratably over the contract period. Revenue related to cloud services provided on a consumption basis, such as the amount of storage used in a period, is recognized based on the customer utilization of such resources. Payment terms are generally net 30 days from signing of contract and contracts are non-cancelable. |
Extended warranty | The Company recognizes revenue for extended warranties on a straight-line basis over the extended warranty period in service revenue. In the majority of countries in which the Company operates, the customary warranty period is one year and the extended warranty covers periods beyond year one. Customers typically pay for extended warranties on an annual basis over the term of the warranty. In general, customers can cancel the extended warranty at any time with 30 days notice without significant penalty. |
Laboratory services and training | The Company's service offerings include service contracts, field service, including related time and materials, and training. The Company recognizes revenue as the services are performed. Revenue for the service contracts is recognized over the contract period or at a point in time when the service is billable based on time and materials. The Company recognizes revenue as training is provided in service revenue. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In general, customers can cancel the service contracts at any time with 30 to 90 days notice without significant penalty. |
ii. Diagnostics
The Diagnostics segment of the Company principally generates revenue from sales of instruments, solutions, consumables, reagents, extended warranty and services in the diagnostics market. Products and services may be sold separately or in bundled packages.
For bundled packages, the Company accounts for individual products and services separately if they are distinct - i.e. if a product or service is separately identifiable from other items in the bundled package and if a customer can benefit from it on its own or with other resources that are readily available to the customer. The consideration (including any discounts) is allocated between separate products and services in a bundle based on their stand-alone selling prices. The stand-alone selling prices are determined based on the prices at which the Company separately sells the products, extended warranties, and services. For items that are not sold separately, the Company estimates stand-alone selling prices by reference to the amount charged for similar items on a stand-alone basis.
The Company sells products and services predominantly through its direct sales force. As a result, the use of distributors is generally limited to geographic regions where the Company has no direct sales force. The Company does not offer product return or exchange rights (other than those relating to defective goods under warranty) or price protection allowances to its customers, including distributors. Payment terms granted to distributors are the same as those granted to end-customers and payments are not dependent upon the distributor's receipt of payment from their end-user customers.
In instances where the timing of revenue recognition differs from the timing of invoicing, the Company determined that the contracts generally do not include a significant financing component. The primary purpose of its invoicing terms is to provide customers with simplified and predictable ways of purchasing products and services, rather than to receive financing from the customers or to provide customers with financing. Examples include invoicing at the beginning of a storage period with revenue recognized ratably over the contract period. In limited circumstances where the Company provides the customer with a significant benefit of financing, the Company uses the practical expedient and only adjusts the transaction price for the effects of the time value of money and only on contracts where the duration of financing is more than one year.
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Products and services | Nature, timing of satisfaction of performance obligations, and significant payment terms |
| |
Instruments | For instruments that include installation, and if the installation meets the criteria to be considered a separate performance obligation, product revenue is generally recognized upon delivery or when title has transferred to the customer, which is generally the point in time where control of the products has been transferred to customers, and installation revenue is recognized when the installation is complete. Certain of the Company's products require specialized installation and configuration at the customer's site. Revenue for these products is deferred until installation is complete and customer acceptance has been received. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 to 60 days. |
Consumables and reagents | The Company recognizes revenue from the sale of consumables and reagents upon delivery or when title has transferred to the customer, which is generally the point in time where control of the products has been transferred to customers. Payment terms and conditions vary, although terms generally include a requirement of payment within 30 days. |
Solutions | When the Company sells the instrument and reagents that work only on those instruments to a customer or distributor, the Company considers the instrument and reagents as separate performance obligations. The Company recognizes revenue when an instrument is sold to the customer upon delivery or when title has transferred to the customer, which is generally the point in time where control of the products has been transferred to customers. Revenue from the sale of reagents are also recognized at the time of delivery or when title has transferred to the customer. Payment terms for instrument and reagent sales are usually net 30 days from invoice date.
When the Company places the instrument at the customer's site and sells the reagents to a customer, the instrument and reagents are accounted for together as one performance obligation. The Company does not charge a fee for the use of the instrument and retains ownership of the placed instrument. The Company has a right to remove the instrument and replace it with another instrument at the customer's site at any time throughout the contract term. The Company recognizes revenue upon delivery of reagents, which is the point in time where the Company has performed its obligation to provide a screening solution to the customer. Payment terms are usually net 30 days from invoice date. Payment terms for certain contracts are based on equal installments over the duration of the contract. |
Extended warranty | The Company recognizes revenue for extended warranties on a straight-line basis over the extended warranty period in service revenue. In the majority of countries in which the Company operates, the customary warranty period is one year and the extended warranty covers periods beyond year one. Customers typically pay for extended warranties on an annual basis over the term of the warranty. In general, customers can cancel the extended warranty at any time with 30 days notice without significant penalty. |
Services | The Company's service offerings include cord blood processing and storage, and training. The Company recognizes revenue for the cord blood processing and training as the services are performed in service revenue. Revenue for the storage contracts are recognized over the contract period. Storage is typically for a period of 1, 20, or 25 years or lifetime. Lifetime storage is recognized over a certain period that is based on the life expectancy estimate from Social Security data. For cord blood processing, customers pay the processing fee in full at the point of sale. The processing fee is non-refundable unless the cord blood is non-viable for storage. For storage, customers are required to pay the storage fees in full upfront. Storage fees are refundable to the customer on a pro-rated basis if the contract is canceled. |
Disaggregation of revenue
In the following tables, revenue is disaggregated by primary geographical market, end-markets and timing of revenue recognition. The tables also include a reconciliation of the disaggregated revenue with the reportable segments revenue.
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| Reportable Segments |
| Three Months Ended |
| July 1, 2018 |
| Discovery & Analytical Solutions | | Diagnostics | | Total |
| (In thousands) |
Primary geographical markets | | | | | |
Americas | $ | 170,973 |
| | $ | 98,395 |
| | $ | 269,368 |
|
Europe | 127,646 |
| | 69,700 |
| | 197,346 |
|
Asia | 132,009 |
| | 104,639 |
| | 236,648 |
|
| $ | 430,628 |
| | $ | 272,734 |
| | $ | 703,362 |
|
| | | | | |
Primary end-markets | | | | | |
Diagnostics | $ | — |
| | $ | 272,734 |
| | $ | 272,734 |
|
Life sciences | 233,906 |
| | — |
| | 233,906 |
|
Applied markets | 196,722 |
| | — |
| | 196,722 |
|
| $ | 430,628 |
| | $ | 272,734 |
| | $ | 703,362 |
|
| | | | | |
Timing of revenue recognition | | | | | |
Products and services transferred at a point in time | $ | 312,815 |
| | $ | 252,401 |
| | $ | 565,216 |
|
Services transferred over time | 117,813 |
| | 20,333 |
| | 138,146 |
|
| $ | 430,628 |
| | $ | 272,734 |
| | $ | 703,362 |
|
|
| | | | | | | | | | | |
| Reportable Segments |
| Six Months Ended |
| July 1, 2018 |
| Discovery & Analytical Solutions | | Diagnostics | | Total |
| (In thousands) |
Primary geographical markets | | | | | |
Americas | $ | 328,467 |
| | $ | 186,929 |
| | $ | 515,396 |
|
Europe | 247,019 |
| | 137,412 |
| | 384,431 |
|
Asia | 251,667 |
| | 195,840 |
| | 447,507 |
|
| $ | 827,153 |
| | $ | 520,181 |
| | $ | 1,347,334 |
|
| | | | | |
Primary end-markets | | | | | |
Diagnostics | $ | — |
| | $ | 520,181 |
| | $ | 520,181 |
|
Life sciences | 453,616 |
| | — |
| | 453,616 |
|
Applied markets | 373,537 |
| | — |
| | 373,537 |
|
| $ | 827,153 |
| | $ | 520,181 |
| | $ | 1,347,334 |
|
| | | | | |
Timing of revenue recognition | | | | | |
Products and services transferred at a point in time | $ | 583,588 |
| | $ | 478,869 |
| | $ | 1,062,457 |
|
Services transferred over time | 243,565 |
| | 41,312 |
| | 284,877 |
|
| $ | 827,153 |
| | $ | 520,181 |
| | $ | 1,347,334 |
|
Contract Balances
Contract assets: The unbilled receivables (contract assets) primarily relate to the Company's right to consideration for work completed but not billed at the reporting date. The unbilled receivables are transferred to trade receivables when billed to
customers. Contracts assets are generally classified as current assets and are included in "Accounts receivable, net" in the consolidated balance sheet. The balance of contract assets as of July 1, 2018 and as of the date of adoption of ASC 606 were $28.4 million and $22.7 million, respectively. The amount of unbilled receivables recognized at the beginning of the period that were transferred to trade receivables during the six months ended July 1, 2018 was $31.1 million. The increase in unbilled receivables during the six months ended July 1, 2018 as a result of recognition of revenue before billing to customers, excluding amounts transferred to trade receivables during the period, amounted to $36.7 million.
Contract liabilities: The contract liabilities primarily relate to the advance consideration received from customers for products and related installation for which transfer of control has not occurred at the balance sheet date. Contract liabilities are classified as either current in "Accounts payable" or long-term in "Long-term liabilities" in the consolidated balance sheet based on the timing of when the Company expects to recognize revenue. The balance of contract liabilities as of July 1, 2018 and as of the date of adoption of ASC 606 were $26.9 million and $29.0 million, respectively. The increase in contract liabilities during the six months ended July 1, 2018 due to cash received, excluding amounts recognized as revenue during the period, was $36.1 million. The amount of revenue recognized during the six months ended July 1, 2018 that was included in the contract liability balance at the beginning of the period was $38.2 million.
Contract costs: The Company recognizes the incremental costs of obtaining a contract with a customer as an asset if it expects the benefit of those costs to be longer than one year. The Company determined that certain sales incentive programs meet the requirements to be capitalized. Total capitalized costs to obtain a contract were immaterial during the period and are included in other current and long-term assets on the condensed consolidated balance sheet. The Company applies a practical expedient to expense costs as incurred for costs to obtain a contract with a customer when the amortization period would have been one year or less. These costs include the Company's internal sales force compensation program, as the Company determined that annual compensation is commensurate with annual sales activities.
Transaction price allocated to the remaining performance obligations
The Company applies the practical expedient in ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less. The estimated revenue expected to be recognized beyond one year in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the period are not material to the Company. Remaining performance obligations primarily include noncancelable purchase orders and noncancelable software subscriptions and cloud service contracts.
Note 3: Changes in Accounting Policies
Except for the changes below, the Company has consistently applied the accounting policies to all periods presented in these condensed consolidated financial statements.
The Company adopted ASC 606, Revenue from Contracts with Customers ("ASC 606"), with a date of the initial application of January 1, 2018. As a result, the Company has changed its accounting policy for revenue recognition as detailed below.
The Company applied ASC 606 using the modified retrospective method only to contracts that are not completed contracts as of January 1, 2018, and the cumulative effect of initially applying ASC 606 is recognized as an adjustment to the beginning retained earnings. Therefore, the comparative information has not been adjusted and continues to be reported under ASC 605. The details of the significant changes and quantitative impact of the changes are disclosed below.
A. Sales of software subscriptions or sales of licenses and maintenance in bundled arrangements
The Company previously recognized revenue from software licenses sold together with maintenance and/or consulting services upon shipment using the residual method, provided that the undelivered items in the arrangement have value to the customer on a stand-alone basis and vendor-specific objective evidence ("VSOE") of fair value can be determined. If VSOE of fair value for the undelivered elements cannot be established, the Company deferred all revenue from the arrangement until the earlier of the point at which such sufficient VSOE does exist or all elements of the arrangement have been delivered, or if the undelivered element is maintenance, then the Company recognized the entire fee ratably over the maintenance period. Under ASC 606, the total consideration in the contract is allocated to all products and services based on their stand-alone selling prices. The stand-alone selling prices are determined based on the list prices at which the Company sells the software license, software subscription, maintenance and/or consulting services. Accordingly, the Company now recognizes higher license revenue upfront and less service revenue over time.
B. Sales of instruments
The Company previously recognized revenue from sale of instruments when persuasive evidence of an arrangement existed, delivery had occurred, the price to the buyer was fixed or determinable, and collectability was reasonably assured. For certain sales of instruments that included customer-specified acceptance criteria, the Company previously recognized revenue after the acceptance criteria had been met. Under ASC 606, revenue is recognized when the Company satisfies a performance obligation by transferring control of the product to a customer. Accordingly, the Company now recognizes product revenue upon delivery or when title has transferred to the customer, as the Company believes acceptance is perfunctory.
C. Sales commissions
The Company previously recognized commission fees related to sales of products and services as selling expenses when they were incurred. Under ASC 606, the Company capitalizes those commission fees as costs of obtaining a contract, when they are incremental and, if they are expected to be recovered, the Company amortizes them consistently with the pattern of transfer of the product or service to which the asset relates. If the expected amortization period is one year or less, the commission fee is expensed when incurred.
D. Impacts on financial statements
The following tables summarize the impacts of ASC 606 adoption on the Company's condensed consolidated financial statements for the quarter ended July 1, 2018.
Consolidated Balance Sheet
|
| | | | | | | | | | | |
| As reported | | Adjustments | | Balances without adoption of ASC 606 |
| (In thousands) |
Cash and cash equivalents | $ | 163,392 |
| | $ | — |
| | $ | 163,392 |
|
Accounts receivable, net | 564,041 |
| | (12,505 | ) | | 551,536 |
|
Inventories | 366,961 |
| | 7,556 |
| | 374,517 |
|
Other current assets | 108,019 |
| | (679 | ) | | 107,340 |
|
Property, plant and equipment, net | 304,538 |
| | — |
| | 304,538 |
|
Intangible assets, net | 1,270,867 |
| | — |
| | 1,270,867 |
|
Goodwill | 2,940,825 |
| | — |
| | 2,940,825 |
|
Other assets, net | 239,135 |
| | — |
| | 239,135 |
|
Total assets | $ | 5,957,778 |
| | $ | (5,628 | ) | | $ | 5,952,150 |
|
Current portion of long-term debt | $ | 17,315 |
| | $ | — |
| | $ | 17,315 |
|
Accounts payable | 197,128 |
| | — |
| | 197,128 |
|
Accrued restructuring and contract termination charges | 7,443 |
| | — |
| | 7,443 |
|
Accrued expenses and other current liabilities | 488,642 |
| | 15,577 |
| | 504,219 |
|
Current liabilities of discontinued operations | 2,165 |
| | — |
| | 2,165 |
|
Long-term debt | 1,983,953 |
| | — |
| | 1,983,953 |
|
Long-term liabilities | 743,955 |
| | — |
| | 743,955 |
|
Total liabilities | 3,440,601 |
| | 15,577 |
| | 3,456,178 |
|
Commitments and contingencies | | | | | |
Preferred stock | — |
| | — |
| | — |
|
Common stock | 110,716 |
| | — |
| | 110,716 |
|
Capital in excess of par value | 73,740 |
| | — |
| | 73,740 |
|
Retained earnings | 2,463,287 |
| | (21,205 | ) | | 2,442,082 |
|
Accumulated other comprehensive loss | (130,566 | ) | | — |
| | (130,566 | ) |
Total stockholders’ equity | 2,517,177 |
| | (21,205 | ) | | 2,495,972 |
|
Total liabilities and stockholders’ equity | $ | 5,957,778 |
| | $ | (5,628 | ) | | $ | 5,952,150 |
|
Consolidated Statement of Operations
|
| | | | | | | | | | | |
| Three Months Ended |
| July 1, 2018 |
| As reported | | Adjustments | | Balances without adoption of ASC 606 |
| (In thousands) |
Product revenue | $ | 495,608 |
| | $ | (9,178 | ) | | $ | 486,430 |
|
Service revenue | 207,754 |
| | — |
| | 207,754 |
|
Total revenue | 703,362 |
| | (9,178 | ) | | 694,184 |
|
Cost of product revenue | 229,723 |
| | (3,566 | ) | | 226,157 |
|
Cost of service revenue | 133,499 |
| | — |
| | 133,499 |
|
Total cost of revenue | 363,222 |
| | (3,566 | ) | | 359,656 |
|
Selling, general and administrative expenses | 204,880 |
| | 74 |
| | 204,954 |
|
Research and development expenses | 47,196 |
| | — |
| | 47,196 |
|
Operating income from continuing operations | 88,064 |
| | (5,686 | ) | | 82,378 |
|
Interest and other expense, net | 16,356 |
| | — |
| | 16,356 |
|
Income from continuing operations before income taxes | 71,708 |
| | (5,686 | ) | | 66,022 |
|
Provision for income taxes | 7,035 |
| | (1,499 | ) | | 5,536 |
|
Income from continuing operations | 64,673 |
| | (4,187 | ) | | 60,486 |
|
Loss on disposition of discontinued operations before income taxes | (551 | ) | | — |
| | (551 | ) |
Provision for income taxes on discontinued operations and dispositions | 59 |
| | — |
| | 59 |
|
Loss from discontinued operations and dispositions | (610 | ) | | — |
| | (610 | ) |
Net income | $ | 64,063 |
| | $ | (4,187 | ) | | $ | 59,876 |
|
Consolidated Statement of Operations
|
| | | | | | | | | | | |
| Six Months Ended |
| July 1, 2018 |
| As reported | | Adjustments | | Balances without adoption of ASC 606 |
| (In thousands) |
Product revenue | $ | 943,216 |
| | $ | (22,364 | ) | | $ | 920,852 |
|
Service revenue | 404,118 |
| | — |
| | 404,118 |
|
Total revenue | 1,347,334 |
| | (22,364 | ) | | 1,324,970 |
|
Cost of product revenue | 449,979 |
| | (7,682 | ) | | 442,297 |
|
Cost of service revenue | 264,993 |
| | — |
| | 264,993 |
|
Total cost of revenue | 714,972 |
| | (7,682 | ) | | 707,290 |
|
Selling, general and administrative expenses | 404,605 |
| | 253 |
| | 404,858 |
|
Research and development expenses | 93,180 |
| | — |
| | 93,180 |
|
Restructuring and contract termination charges, net | 6,578 |
| | — |
| | 6,578 |
|
Operating income from continuing operations | 127,999 |
| | (14,935 | ) | | 113,064 |
|
Interest and other expense, net | 27,786 |
| | — |
| | 27,786 |
|
Income from continuing operations before income taxes | 100,213 |
| | (14,935 | ) | | 85,278 |
|
Provision for income taxes | 9,505 |
| | (3,939 | ) | | 5,566 |
|
Income from continuing operations | 90,708 |
| | (10,996 | ) | | 79,712 |
|
Loss on disposition of discontinued operations before income taxes | (551 | ) | | — |
| | (551 | ) |
Provision for income taxes on discontinued operations and dispositions | 70 |
| | — |
| | 70 |
|
Loss from discontinued operations and dispositions | (621 | ) | | — |
| | (621 | ) |
Net income | $ | 90,087 |
| | $ | (10,996 | ) | | $ | 79,091 |
|
The adoption of ASC 606 increased comprehensive income by $4.2 million and $11.0 million in the Company's condensed consolidated statement of comprehensive income for the three and six months ended July 1, 2018, respectively. The adoption of ASC 606 had no impact on cash from or used in operating, investing, or financing activities in the Company's condensed consolidated statement of cash flows as of and for the six months ended July 1, 2018.
Note 4: Business Combinations
Acquisitions in fiscal year 2018
During fiscal year 2018, the Company completed the acquisition of two businesses for aggregate consideration of $38.9 million. The acquired businesses were Shanghai Spectrum Instruments Co., Ltd. ("SSI"), which was acquired for total consideration of $15.4 million in cash, and RHS Limited ("RHS"), which was acquired for total consideration of $19.4 million in cash. The Company has an obligation to pay the former shareholders of SSI an additional consideration of $2.5 million in fiscal year 2019, which at closing had a present value of $2.4 million. The Company also has a potential obligation to pay the former shareholders of SSI additional contingent consideration of up to $2.0 million, which at closing had an estimated fair value of $1.7 million. The excess of the purchase price over the fair value of the acquired business' net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and has been allocated to goodwill, which is not tax deductible. The Company has reported the operations for SSI within the results of the Company's DAS segment and the other acquisition within the results of the Company's Diagnostics segment from the acquisition dates. Identifiable definite-lived intangible assets, such as core technology, trade names and customer relationships, acquired as part of these acquisitions had a weighted average amortization period of 12.0 years.
The total purchase price for the acquisitions in fiscal year 2018 has been allocated to the estimated fair values of assets acquired and liabilities assumed as follows:
|
| | | |
| 2018 Acquisitions |
| (In thousands) |
Fair value of business combination: | |
Cash payments | $ | 34,942 |
|
Other liability | 2,354 |
|
Contingent consideration | 1,700 |
|
Working capital and other adjustments | (101 | ) |
Less: cash acquired | (370 | ) |
Total | $ | 38,525 |
|
Identifiable assets acquired and liabilities assumed: | |
Current assets | $ | 2,750 |
|
Property, plant and equipment | 311 |
|
Identifiable intangible assets: | |
Core technology | 15,957 |
|
Trade names | 610 |
|
Customer relationships | 5,100 |
|
Goodwill | 19,793 |
|
Deferred taxes | (2,523 | ) |
Liabilities assumed | (3,473 | ) |
Total | $ | 38,525 |
|
Acquisitions in fiscal year 2017
Acquisition of EUROIMMUN Medizinische Labordiagnostika AG. During fiscal year 2017, the Company completed the acquisition of 99.98% of the outstanding stock of EUROIMMUN Medizinische Labordiagnostika AG (“EUROIMMUN”) for aggregate consideration of €1.2 billion (equivalent to $1.4 billion at December 19, 2017, the time of closing). The purchase price was funded by borrowings from the Company's senior unsecured revolving credit facility and senior unsecured term loan credit facility of $710.0 million and $200.0 million, respectively, and available cash on hand of $503.8 million. EUROIMMUN is based in Lübeck, Germany, has approximately 2,400 employees, and is recognized as a global leader in autoimmune testing and an emerging force in infectious disease and allergy testing. The excess of the purchase price over the fair value of the acquired net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired. As a result of the acquisition, the Company recorded goodwill of $582.7 million, which is not tax deductible, and intangible assets of $907.4 million. The Company has reported the operations for this acquisition within the results of the Company's Diagnostics segment from the acquisition date. Identifiable definite-lived intangible assets, such as core technology, trade names and customer relationships, acquired as part of this acquisition had a weighted average amortization period of 16.1 years.
Other acquisitions in 2017. During fiscal year 2017, the Company also completed the acquisition of two other businesses for aggregate consideration of $142.0 million. The acquired businesses were Tulip Diagnostics Private Limited (“Tulip”), which was acquired for total consideration of $127.3 million in cash and one other business acquired for total consideration of $14.7 million in cash. At the time of closing, the Company had a potential obligation to pay the former shareholders of Tulip up to INR1.6 billion, equivalent to $25.2 million, in additional consideration over a two year period that is accounted for as compensation expense in the Company's financial statements over a two year period and is excluded from the purchase price allocation shown below. The excess of the purchase prices over the fair values of the acquired businesses' net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforces acquired, and has been allocated to goodwill, which is not tax deductible. The Company has reported the operations of Tulip within the results of the Company's Diagnostics segment and the other acquired business within the results of the Company's DAS segment from the acquisition date. Identifiable definite-lived intangible assets, such as core technology, trade names and customer relationships, acquired as part of these acquisitions had a weighted average amortization period of 11.8 years.
During the first quarter of fiscal year 2018, the Company paid the former shareholders of Tulip a portion of the additional consideration amounting to INR716.3 million (equivalent to $11.3 million). As of July 1, 2018, the Company may have to pay the former shareholders of Tulip additional consideration of up to INR803.6 million (currently equivalent to $11.7 million) in the first quarter of fiscal year 2019.
The total purchase price for the acquisitions in fiscal year 2017 has been allocated to the estimated fair values of assets acquired and liabilities assumed as follows:
|
| | | | | | | |
| EUROIMMUN | | Other Acquisitions |
| (In thousands) |
Fair value of business combination: | | | |
Cash payments | $ | 1,413,780 |
| | $ | 140,861 |
|
Other liability | — |
| | 1,273 |
|
Working capital and other adjustments | — |
| | (93 | ) |
Less: cash acquired | (25,018 | ) | | (2,439 | ) |
Total | $ | 1,388,762 |
| | $ | 139,602 |
|
Identifiable assets acquired and liabilities assumed: | | | |
Current assets | $ | 121,174 |
| | $ | 16,268 |
|
Property, plant and equipment | 129,964 |
| | 11,356 |
|
Other assets | 49,944 |
| | 1,691 |
|
Identifiable intangible assets: | | | |
Core technology | 160,000 |
| | 12,400 |
|
Trade names | 36,000 |
| | 3,000 |
|
Customer relationships | 710,000 |
| | 43,700 |
|
In-process research and development ("IPR&D") | 1,400 |
| | — |
|
Goodwill | 582,692 |
| | 75,250 |
|
Deferred taxes | (253,354 | ) | | (15,735 | ) |
Liabilities assumed | (87,701 | ) | | (8,328 | ) |
Debt assumed | (61,357 | ) | | — |
|
Total | $ | 1,388,762 |
| | $ | 139,602 |
|
EUROIMMUN's revenue and net loss for the period from the acquisition date to December 31, 2017 were $13.5 million and $1.0 million, respectively. The following unaudited pro forma information presents the combined financial results for the Company and EUROIMMUN as if the acquisition of EUROIMMUN had been completed at the beginning of fiscal year 2016:
|
| | | | | | | |
| Three Months Ended July 2, 2017 | | Six Months Ended July 2, 2017 |
| (In thousands, except per share data)
|
Pro Forma Statement of Operations Information (Unaudited): | | | |
Revenue | $ | 625,525 |
| | $ | 1,206,079 |
|
Income from continuing operations | 53,024 |
| | 78,617 |
|
Basic earnings per share: | | | |
Income from continuing operations | $ | 0.48 |
| | $ | 0.72 |
|
Diluted earnings per share: | | | |
Income from continuing operations | $ | 0.48 |
| | $ | 0.71 |
|
The unaudited pro forma information for the three and six months ended July 2, 2017 has been calculated after applying the Company's accounting policies and the impact of acquisition date fair value adjustments. These pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments, such as
increased interest expense on debt obtained to finance the transaction and increased amortization for the acquired intangible assets recorded at fair value.
The pro forma information does not reflect the effect of costs or synergies that would have been expected to result from the integration of the acquisition. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the combination occurred at the beginning of each period presented, or of future results of the consolidated entities.
The preliminary allocations of the purchase prices for acquisitions are based upon initial valuations. The Company's estimates and assumptions underlying the initial valuations are subject to the collection of information necessary to complete its valuations within the measurement periods, which are up to one year from the respective acquisition dates. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired and liabilities assumed, assets and liabilities related to income taxes and related valuation allowances, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair values of the net assets acquired at the acquisition dates during the measurement periods. During the measurement periods, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition dates that, if known, would have resulted in the recognition of those assets and liabilities as of those dates. These adjustments will be made in the periods in which the amounts are determined and the cumulative effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition dates. All changes that do not qualify as adjustments made during the measurement periods are also included in current period earnings.
Allocations of the purchase price for acquisitions are based on estimates of the fair value of the net assets acquired and are subject to adjustment upon finalization of the purchase price allocations. The accounting for business combinations requires estimates and judgments as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair values for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed, including contingent consideration, are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. Contingent consideration is measured at fair value at the acquisition date, based on the probability that revenue thresholds or product development milestones will be achieved during the earnout period, with changes in the fair value after the acquisition date affecting earnings to the extent it is to be settled in cash. Increases or decreases in the fair value of contingent consideration liabilities primarily result from changes in the estimated probabilities of achieving revenue thresholds, changes in discount rates or product development milestones during the earnout period.
During the second quarter of fiscal year 2018, the Company obtained information relevant to determining the fair values of certain tangible and intangible assets acquired, and liabilities assumed, related to recent acquisitions and adjusted its purchase price allocation. Based on this information, for the EUROIMMUN acquisition, the Company recognized a decrease in liabilities assumed of $1.0 million, an increase in deferred tax liabilities of $2.9 million, an increase in intangible assets of $10.0 million and a decrease in goodwill of $8.1 million during the second quarter of fiscal year 2018.
As of July 1, 2018, the Company may have to pay contingent consideration related to acquisitions with open contingency periods of up to $85.0 million. As of July 1, 2018, the Company has recorded contingent consideration obligations with an estimated fair value of $74.1 million, of which $67.5 million was recorded in accrued expenses and other current liabilities, and $6.6 million was recorded in long-term liabilities. As of December 31, 2017, the Company had recorded contingent consideration obligations with an estimated fair value of $65.3 million, of which $52.2 million was recorded in accrued expenses and other current liabilities, and $13.1 million was recorded in long-term liabilities. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the condensed consolidated financial statements could result in a possible impairment of the intangible assets and goodwill, require acceleration of the amortization expense of definite-lived intangible assets or the recognition of additional contingent consideration which would be recognized as a component of operating expenses from continuing operations.
Total transaction costs related to acquisition and divestiture activities for the three and six months ended July 1, 2018 were $1.6 million and $4.2 million, respectively. Total transaction costs related to acquisition and divestiture activities for the three and six months ended July 2, 2017 were $3.7 million and $6.3 million, respectively. These transaction costs were expensed as incurred and recorded in selling, general and administrative expenses in the Company's condensed consolidated statements of operations.
Note 5: Disposition of Businesses and Assets
As part of the Company’s continuing efforts to focus on higher growth opportunities, the Company has discontinued certain businesses. When the discontinued operations represented a strategic shift that will have a major effect on the Company's operations and financial statements, the Company has accounted for these businesses as discontinued operations and accordingly, has presented the results of operations and related cash flows as discontinued operations. Any business deemed to be a discontinued operation prior to the adoption of ASU 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of An Entity, continues to be reported as a discontinued operation, and the results of operations and related cash flows are presented as discontinued operations for all periods presented. Any remaining assets and liabilities of these businesses have been presented separately, and are reflected within assets and liabilities of discontinued operations in the accompanying condensed consolidated balance sheets as of July 1, 2018 and December 31, 2017.
On May 1, 2017 (the "Varex Closing Date"), the Company completed the sale of its Medical Imaging business to Varex Imaging Corporation ("Varex") pursuant to the terms of the Master Purchase and Sale Agreement, dated December 21, 2016 (the “Agreement”), by and between the Company and Varian Medical Systems, Inc. ("Varian") and the subsequent Assignment and Assumption Agreement, dated January 27, 2017, between Varian and Varex, pursuant to which Varian assigned its rights under the Agreement to Varex. On the Varex Closing Date, the Company received consideration of approximately $277.4 million for the sale of the Medical Imaging business. During fiscal year 2017, the Company paid Varex $4.2 million to settle a post-closing working capital adjustment. During fiscal year 2017, the Company recorded a pre-tax gain of $179.6 million and income tax expense of $43.1 million related to the sale of the Medical Imaging business in discontinued operations and dispositions. The corresponding tax liability was recorded within the other tax liabilities in the condensed consolidated balance sheet, and the Company expects to utilize tax attributes to minimize the tax liability.
Following the closing, the Company provided certain customary transitional services during a period of up to 12 months. Commercial transactions between the parties following the closing of the transaction are not expected to be significant.
During fiscal year 2017, the Company sold Suzhou PerkinElmer Medical Laboratory Co., Ltd. for aggregate consideration of $2.3 million, recognizing a pre-tax loss of $1.1 million. The pre-tax loss recognized in fiscal year 2017 is included in interest and other expense, net in the consolidated statement of operations. Suzhou PerkinElmer Medical Laboratory Co., Ltd. was a component of the Company's Diagnostics segment. The divestiture of Suzhou PerkinElmer Medical Laboratory Co., Ltd. has not been classified as a discontinued operation in this Form 10-Q because the disposition does not represent a strategic shift that will have a major effect on the Company's operations and financial statements.
The summary pre-tax operating results of the discontinued operations, were as follows for the three and six months ended:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2018 | | July 2, 2017 | | July 1, 2018 | | July 2, 2017 |
| (In thousands) |
Revenue | $ | — |
| | $ | 8,249 |
| | $ | — |
| | $ | 44,343 |
|
Cost of revenue | — |
| | 8,138 |
| | — |
| | 32,933 |
|
Selling, general and administrative expenses | — |
| | 1,926 |
| | — |
| | 5,869 |
|
Research and development expenses | — |
| | 1,294 |
| | — |
| | 4,891 |
|
(Loss) income from discontinued operations before income taxes | $ | — |
| | $ | (3,109 | ) | | $ | — |
| | $ | 650 |
|
Note 6: Restructuring and Contract Termination Charges, Net
The Company has undertaken a series of restructuring actions related to the impact of acquisitions and divestitures, the alignment of the Company's operations with its growth strategy, the integration of its business units and its productivity initiatives. The current portion of restructuring and contract termination charges is recorded in accrued restructuring and contract termination charges and the long-term portion of restructuring and contract termination charges is recorded in long-term liabilities. The activities associated with these plans have been reported as restructuring and contract termination charges, net, as applicable, and are included as a component of income from continuing operations.
The Company implemented a restructuring plan in the first quarter of fiscal year 2018 consisting of workforce reductions principally intended to realign resources to emphasize growth initiatives (the "Q1 2018 Plan"). The Company implemented a restructuring plan in each of the fourth and third quarters of fiscal year 2017 consisting of workforce reductions principally
intended to realign resources to emphasize growth initiatives (the "Q4 2017 Plan and "Q3 2017 Plan", respectively). The Company implemented a restructuring plan in the first quarter of fiscal year 2017 consisting of workforce reductions and the closure of excess facility space principally intended to focus resources on higher growth end markets (the "Q1 2017 Plan"). Details of the plans initiated in previous years (the “Previous Plans”) are discussed more fully in Note 4 to the audited consolidated financial statements in the 2017 Form 10-K.
The following table summarizes the reductions in headcount, the initial restructuring or contract termination charges by reporting segment, and the dates by which payments were substantially completed, or the dates by which payments are expected to be substantially completed, for restructuring actions implemented during fiscal years 2018 and 2017 in continuing operations:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Workforce Reductions | | Closure of Excess Facility | | Total | | (Expected) Date Payments Substantially Completed by |
| Headcount Reduction | | Discovery & Analytical Solutions | | Diagnostics | | Discovery & Analytical Solutions | | Diagnostics | | | Severance | | Excess Facility |
| | | | | | |
| (In thousands, except headcount data) | | | | |
Q1 2018 Plan
| 47 | | $ | 5,096 |
| | $ | 902 |
| | $ | — |
| | $ | — |
| | $ | 5,998 |
| | Q2 FY2019 | | — |
Q4 2017 Plan
| 29 | | 1,680 |
| | 255 |
| | — |
| | — |
| | 1,935 |
| | Q1 FY2019 | | — |
Q3 2017 Plan
| 27 | | 1,321 |
| | 1,021 |
| | — |
| | — |
| | 2,342 |
| | Q4 FY2018 | | — |
Q1 2017 Plan | 90 | | 5,000 |
| | 1,631 |
| | 33 |
| | 33 |
| | 6,697 |
| | Q4 FY2018 | | Q4 FY2018 |
The Company does not currently expect to incur any future charges for these plans. The Company expects to make payments under the Previous Plans for remaining residual lease obligations, with terms varying in length, through fiscal year 2022.
In connection with the termination of various contractual commitments, the Company recorded additional pre-tax charges of $0.2 million during the six months ended July 1, 2018 in the DAS segment.
At July 1, 2018, the Company had $12.2 million recorded for accrued restructuring and contract termination charges, of which $7.4 million was recorded in short-term accrued restructuring and contract termination charges, $1.9 million was recorded in long-term liabilities, and $2.9 million was recorded in other reserves. At December 31, 2017, the Company had $14.0 million recorded for accrued restructuring and contract termination charges, of which $8.8 million was recorded in short-term accrued restructuring and contract termination charges, $2.3 million was recorded in long-term liabilities and $2.9 million was recorded in other reserves. The following table summarizes the Company's restructuring and contract termination accrual balances and related activity by restructuring plan, as well as contract termination accrual balances and related activity, during the six months ended July 1, 2018:
|
| | | | | | | | | | | | | | | | | | | |
| Balance at December 31, 2017 | | 2018 Charges | | 2018 Changes in Estimates, Net | | 2018 Amounts Paid | | Balance at July 1, 2018 |
| (In thousands) |
Severance: | | | | | | | | | |
Q1 2018 Plan | $ | — |
| | $ | 5,998 |
| | $ | — |
| | $ | (3,606 | ) | | $ | 2,392 |
|
Q4 2017 Plan | 1,919 |
| | — |
| | — |
| | (1,316 | ) | | 603 |
|
Q3 2017 Plan | 2,072 |
| | — |
| | — |
| | (863 | ) | | 1,209 |
|
Q1 2017 Plan | 2,498 |
| | — |
| | — |
| | (1,073 | ) | | 1,425 |
|
| | | | | | | | | |
Facility: | | | | | | | | | |
Q1 2017 Plan | 33 |
| | — |
| | — |
| | (22 | ) | | 11 |
|
| | | | | | | | | |
Previous Plans | 4,399 |
| | — |
| | 353 |
| | (1,435 | ) | | 3,317 |
|
Restructuring | 10,921 |
| | 5,998 |
| | 353 |
| | (8,315 | ) | | 8,957 |
|
Contract Termination | 3,048 |
| | — |
| | 227 |
| | — |
| | 3,275 |
|
Total Restructuring and Contract Termination | $ | 13,969 |
| | $ | 5,998 |
| | $ | 580 |
| | $ | (8,315 | ) | | $ | 12,232 |
|
Note 7: Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2018 | | July 2, 2017 | | July 1, 2018 | | July 2, 2017 |
| (In thousands) |
Interest income | $ | (173 | ) | | $ | (490 | ) | | $ | (438 | ) | | $ | (710 | ) |
Interest expense | 16,411 |
| | 10,672 |
| | 34,061 |
| | 21,536 |
|
Loss on disposition of businesses and assets, net | — |
| | 301 |
| | — |
| | 301 |
|
Other expense (income), net | 118 |
| | (7,092 | ) | | (5,837 | ) | | (7,908 | ) |
Total interest and other expense, net | $ | 16,356 |
| | $ | 3,391 |
| | $ | 27,786 |
| | $ | 13,219 |
|
Foreign currency transaction losses (gains) were $12.9 million and $(13.1) million for the three and six months ended July 1, 2018, respectively. Foreign currency transaction gains were $1.2 million and $2.7 million for the three and six months ended July 2, 2017, respectively. Net (gains) losses from forward currency hedge contracts were $(10.3) million and $12.3 million for the three and six months ended July 1, 2018, respectively. Net gains from forward currency hedge contracts were $4.1 million and $1.7 million for the three and six months ended July 2, 2017, respectively. The other components of net periodic pension credit were $2.5 million and $5.0 million for the three and six months ended July 1, 2018, respectively. The other components of net periodic pension credit were $1.8 million and $3.6 million for the three and six months ended July 2, 2017, respectively. These amounts were included in other income, net.
Note 8: Inventories
Inventories as of July 1, 2018 and December 31, 2017 consisted of the following:
|
| | | | | | | |
| July 1, 2018 | | December 31, 2017 |
| (In thousands) |
Raw materials | $ | 128,927 |
| | $ | 122,100 |
|
Work in progress | 21,376 |
| | 18,452 |
|
Finished goods | 216,658 |
| | 211,123 |
|
Total inventories | $ | 366,961 |
| | $ | 351,675 |
|
Note 9: Income Taxes
The Company regularly reviews its tax positions in each significant taxing jurisdiction in the process of evaluating its unrecognized tax benefits. The Company makes adjustments to its unrecognized tax benefits when: (i) facts and circumstances regarding a tax position change, causing a change in management’s judgment regarding that tax position; (ii) a tax position is effectively settled with a tax authority at a differing amount; and/or (iii) the statute of limitations expires regarding a tax position.
The total provision for income taxes included in the condensed consolidated statement of operations consisted of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2018 | | July 2, 2017 | | July 1, 2018 | | July 2, 2017 |
| (In thousands) |
Continuing operations | $ | 7,035 |
| | $ | 8,066 |
| | $ | 9,505 |
| | $ | 11,987 |
|
Discontinued operations | 59 |
| | 35,925 |
| | 70 |
| | 37,143 |
|
Total | $ | 7,094 |
| | $ | 43,991 |
| | $ | 9,575 |
| | $ | 49,130 |
|
At July 1, 2018, the Company had gross tax effected unrecognized tax benefits of $30.5 million, of which $28.8 million, if recognized, would affect the continuing operations effective tax rate. The remaining amount, if recognized, would affect discontinued operations.
The Company believes that it is reasonably possible that approximately $6.1 million of its uncertain tax positions at July 1, 2018, 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 2010 remain open to examination by certain jurisdictions in which the Company has significant business operations, such as Finland, Germany, Italy, Netherlands, Singapore, the United Kingdom and the United States. The tax years under examination vary by jurisdiction.
During the first six months of fiscal years 2018 and 2017, the Company recorded net discrete income tax benefits of $1.6 million and $4.9 million, respectively. The discrete tax benefits in the first six months of fiscal year 2018 and fiscal year 2017 include recognition of excess tax benefits on stock compensation of $1.9 million and $3.4 million, respectively.
On December 22, 2017, the President of the United States signed the Tax Act, which makes broad and complex changes to the U.S. Internal Revenue Code. Changes include, but are not limited to: (1) the lowering of the U.S. corporate tax rate from 35% to 21%; (2) the transition of U.S. international taxation from a worldwide tax system to a modified territorial system with a one-time transition tax on the deemed repatriation of cumulative foreign earnings as of December 31, 2017; (3) a new provision designed to tax global intangible low-taxed income (GILTI); (4) the creation of the base erosion anti-abuse tax (BEAT), which is effectively a new minimum tax; (5) the deduction for foreign-derived intangible income (FDII); (6) a new limitation on deductible interest expense; (7) the repeal of the domestic production activity deduction; and (8) limitations on the deductibility of certain executive compensation.
The Company is applying the guidance in ASU 2018-05 (see Note 1, Basis of Presentation) when accounting for the enactment date effects of the Tax Act. At July 1, 2018, the Company has not completed the accounting for all of the tax effects of the Tax Act; however, it has made a reasonable estimate of their effects based on currently available information. As described below, the Company has made changes to certain aspects of the provision for the Tax Act. Management will continue to refine the calculations as additional guidance is available. These estimates may be affected as additional clarification and implementation guidance becomes available. These changes could be material to income tax expense.
Remeasurement: The Company remeasured its future tax benefits and liabilities at the enacted tax rate of 21% and provided a provisional amount of $21.5 million during fiscal year 2017. During the six months ended July 1, 2018, the Company recognized an additional tax expense of $1.5 million for the remeasurement of certain future tax benefits and included these adjustments as a component of provision for income tax from continuing operations.
One-Time Transition Tax: The Tax Act requires the Company to pay a one-time transition tax on the unremitted earnings of foreign subsidiaries. Based on available information, the Company estimated the tax on the deemed repatriation of foreign earnings and has recorded a tax expense of $85.0 million in continuing operations at December 31, 2017. As the Company continues to refine the earnings and profit analysis and the calculations of the one-time transition tax, the measurement of this liability could be affected. As of July 1, 2018, no changes have been made to the Company’s provisional liability associated with the one-time transition tax.
GILTI, FDII, and other provisions: For fiscal year beginning in 2018, the Company is subject to several provisions of the Tax Act including computations under GILTI, FDII, and other provisions. Management has made a reasonable estimate of the impact of each provision of the Tax Act on the Company's effective tax rate for the six months ended July 1, 2018. Management will continue to refine the provisional estimates for the computations of the GILTI, FDII, and other provisions as additional clarification and implementation guidance becomes available.
Under U.S. GAAP, the Company is allowed to make an accounting policy on GILTI. The choice is either to (1) treat taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”), or (2) factor such amounts into the measurement of deferred taxes (the “deferred method”). At July 1, 2018, the Company is still evaluating the GILTI provisions and the analysis of future taxable income that is subject to GILTI, thus, the Company has not recorded any potential deferred tax effects related to the GILTI in the financial statements and has not made a policy decision regarding whether to record deferred taxes on GILTI or use the period cost method.
Note 10: Debt
Senior Unsecured Revolving Credit Facility. The Company's senior unsecured revolving credit facility provides for $1.0 billion of revolving loans and has an initial maturity of August 11, 2021. As of July 1, 2018, undrawn letters of credit in the aggregate amount of $11.4 million were treated as issued and outstanding when calculating the borrowing availability under the senior unsecured revolving credit facility. As of July 1, 2018, the Company had $488.6 million available for additional borrowing under the facility. The Company uses the senior unsecured revolving credit facility for general corporate purposes, which may include working capital, refinancing existing indebtedness, capital expenditures, share repurchases, acquisitions and
strategic alliances. The interest rates under the senior unsecured revolving credit facility are based on the Eurocurrency rate or the base rate at the time of borrowing, plus a margin. The base rate is the higher of (i) the rate of interest in effect for such day as publicly announced from time to time by JP Morgan Chase Bank, N.A. as its "prime rate," (ii) the Federal Funds rate plus 50 basis points or (iii) an adjusted one-month Libor plus 1.00%. The Eurocurrency margin as of July 1, 2018 was 110 basis points. The weighted average Eurocurrency interest rate as of July 1, 2018 was 2.12%, resulting in a weighted average effective Eurocurrency rate, including the margin, of 3.22%, which was the interest applicable to the borrowings outstanding under the Eurocurrency rate as of July 1, 2018. As of July 1, 2018, the senior unsecured revolving credit facility had outstanding borrowings of $500.0 million, and $2.9 million of unamortized debt issuance costs. As of December 31, 2017, the senior unsecured revolving credit facility had outstanding borrowings of $625.0 million, and $3.3 million of unamortized debt issuance costs. The credit agreement for the facility contains affirmative, negative and financial covenants and events of default. The financial covenants include a debt-to-capital ratio that remains applicable for so long as the Company's debt is rated as investment grade. In the event that the Company's debt is not rated as investment grade, the debt-to-capital ratio covenant is replaced with a maximum consolidated leverage ratio covenant and a minimum consolidated interest coverage ratio covenant.
Senior Unsecured Term Loan Credit Facility. The Company entered into a senior unsecured term loan credit facility on August 11, 2017 that provided for $200.0 million of term loans and had an initial maturity of twelve months from December 19, 2017, the date of the initial draw. The Company utilized the senior unsecured term loan facility for the acquisition of EUROIMMUN. The interest rates under the senior unsecured term loan credit facility were based on the Eurocurrency rate or the base rate at the time of the borrowing, plus a margin. The base rate is the higher of (i) the rate of interest in effect for such day as publicly announced from time to time by JP Morgan Chase Bank, N.A. as its "prime rate," (ii) the Federal Funds rate plus 50 basis points or (iii) an adjusted one-month Libor plus 1.00%. In April 2018, the Company paid in full the outstanding balance of $200.0 million on the Company’s senior unsecured term loan credit facility, from the proceeds of the 0.6% senior unsecured notes due in 2021 that were issued in April 2018.
5% Senior Unsecured Notes due in 2021. On October 25, 2011, the Company issued $500.0 million aggregate principal amount of senior unsecured notes due in 2021 (the “November 2021 Notes”) in a registered public offering and received $493.6 million of net proceeds from the issuance. The November 2021 Notes were issued at 99.4% of the principal amount, which resulted in a discount of $3.1 million. As of July 1, 2018, the November 2021 Notes had an aggregate carrying value of $496.9 million, net of $1.3 million of unamortized original issue discount and $1.8 million of unamortized debt issuance costs. As of December 31, 2017, the November 2021 Notes had an aggregate carrying value of $496.6 million, net of $1.4 million of unamortized original issue discount and $2.0 million of unamortized debt issuance costs. The November 2021 Notes mature in November 2021 and bear interest at an annual rate of 5%. Interest on the November 2021 Notes is payable semi-annually on May 15th and November 15th each year. Prior to August 15, 2021 (three months prior to their maturity date), the Company may redeem the November 2021 Notes in whole or in part, at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the November 2021 Notes to be redeemed, plus accrued and unpaid interest, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the November 2021 Notes being redeemed, discounted on a semi-annual basis, at the Treasury Rate plus 45 basis points, plus accrued and unpaid interest. At any time on or after August 15, 2021 (three months prior to their maturity date), the Company may redeem the November 2021 Notes, at its option, at a redemption price equal to 100% of the principal amount of the November 2021 Notes to be redeemed plus accrued and unpaid interest. Upon a change of control (as defined in the indenture governing the November 2021 Notes) and a contemporaneous downgrade of the November 2021 Notes below investment grade, each holder of November 2021 Notes will have the right to require the Company to repurchase such holder's November 2021 Notes for 101% of their principal amount, plus accrued and unpaid interest.
1.875% Senior Unsecured Notes due 2026. On July 19, 2016, the Company issued €500.0 million aggregate principal amount of senior unsecured notes due in 2026 (the “2026 Notes”) in a registered public offering and received approximately €492.3 million of net proceeds from the issuance. The 2026 Notes were issued at 99.118% of the principal amount, which resulted in a discount of €4.4 million. The 2026 Notes mature in July 2026 and bear interest at an annual rate of 1.875%. Interest on the 2026 Notes is payable annually on July 19th each year. The proceeds from the 2026 Notes were used to pay in full the outstanding balance of the Company's previous senior unsecured revolving credit facility. As of July 1, 2018, the 2026 Notes had an aggregate carrying value of $575.1 million, net of $4.3 million of unamortized original issue discount and $4.0 million of unamortized debt issuance costs. As of December 31, 2017, the 2026 Notes had an aggregate carrying value of $591.7 million, net of $4.7 million of unamortized original issue discount and $4.3 million of unamortized debt issuance costs.
Prior to April 19, 2026 (three months prior to their maturity date), the Company may redeem the 2026 Notes in whole at any time or in part from time to time, at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2026 Notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2026 Notes being redeemed, discounted on an annual basis, at the applicable Comparable Government Bond Rate (as defined in the indenture governing the 2026 Notes) plus 35 basis points; plus, in each case, accrued
and unpaid interest. In addition, at any time on or after April 19, 2026 (three months prior to their maturity date), the Company may redeem the 2026 Notes, at its option, at a redemption price equal to 100% of the principal amount of the 2026 Notes due to be redeemed plus accrued and unpaid interest.
Upon a change of control (as defined in the indenture governing the 2026 Notes) and a contemporaneous downgrade of the 2026 Notes below investment grade, the Company will, in certain circumstances, make an offer to purchase the 2026 Notes at a price equal to 101% of their principal amount plus any accrued and unpaid interest.
0.6% Senior Unsecured Notes due in 2021. On April 11, 2018, the Company issued €300.0 million aggregate principal amount of senior unsecured notes due in 2021 (the “April 2021 Notes”) in a registered public offering and received approximately €298.7 million of net proceeds from the issuance. The April 2021 Notes were issued at 99.95% of the principal amount, which resulted in a discount of €0.2 million. As of July 1, 2018, the April 2021 Notes had an aggregate carrying value of $347.2 million, net of $0.2 million of unamortized original issue discount and $2.7 million of unamortized debt issuance costs. The April 2021 Notes mature in April 2021 and bear interest at an annual rate of 0.6%. Interest on the April 2021 Notes is payable annually on April 9th each year. The proceeds from the April 2021 Notes were used to pay in full the outstanding balance of the Company’s senior unsecured term loan credit facility, and a portion of the outstanding senior unsecured revolving credit facility, and in each case the borrowings were incurred to pay a portion of the purchase price for the Company's acquisition of EUROIMMUM, which closed in December 19, 2017. Prior to the maturity date of the April 2021 Notes, the Company may redeem them in whole at any time or in part from time to time, at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the April 2021 Notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the April 2021 Notes being redeemed, discounted on an annual basis, at the applicable Comparable Government Bond Rate (as defined in the indenture governing the April 2021 Notes) plus 15 basis points; plus, in each case, accrued and unpaid interest. Upon a change of control (as defined in the indenture governing the April 2021 Notes) and a contemporaneous downgrade of the April 2021 Notes below investment grade, the Company will, in certain circumstances, make an offer to purchase the April 2021 Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest.
Other Debt Facilities. The Company's other debt facilities include Euro-denominated bank loans with an aggregate carrying value of $46.4 million (or €39.8 million) and $57.2 million (or €47.6 million) as of July 1, 2018 and December 31, 2017, respectively. These bank loans are primarily utilized for financing fixed assets and are repaid in monthly or quarterly installments with maturity dates extending to 2031. The bank loans in the aggregate amount of $42.8 million bear fixed interest rates between 1.1% and 7.9% and bank loans in the aggregate amount of $3.6 million bear variable interest rates based on the Euribor rate plus a margin between 1.3% and 1.5%. An aggregate amount of $5.6 million of the bank loans are secured by mortgages on real property and the remaining $40.8 million are unsecured. Certain credit agreements for the unsecured bank loans include financial covenants which are based on an equity ratio or an equity ratio and minimum interest coverage ratio.
In addition, the Company has other unsecured revolving credit facilities and a secured bank loan in the amount of $2.2 million and $0.3 million, respectively, as of July 1, 2018. The unsecured revolving debt facilities bear fixed interest rates between 0.05% and 1.95% and will mature in 2018. The secured bank loan of $0.3 million bears a fixed annual interest rate of 1.95% and is repaid in monthly installments until 2027.
Financing Lease Obligations. In fiscal year 2012, the Company entered into agreements with the lessors of certain buildings that the Company is currently occupying and leasing to expand those buildings. The Company provided a portion of the funds needed for the construction of the additions to the buildings, and as a result the Company was considered the owner of the buildings during the construction period. At the end of the construction period, the Company was not reimbursed by the lessors for all of the construction costs. The Company is therefore deemed to have continuing involvement and the leases qualify as financing leases under sale-leaseback accounting guidance, representing debt obligations for the Company and non-cash investing and financing activities. As a result, the Company capitalized $29.3 million in property, plant and equipment, net, representing the fair value of the buildings with a corresponding increase to debt. The Company has also capitalized $11.5 million in additional construction costs necessary to complete the renovations to the buildings, which were funded by the lessors, with a corresponding increase to debt. At July 1, 2018, the Company had $35.3 million recorded for these financing lease obligations, of which $1.5 million was recorded as short-term debt and $33.8 million was recorded as long-term debt. At December 31, 2017, the Company had $35.9 million recorded for these financing lease obligations, of which $1.4 million was recorded as short-term debt and $34.5 million was recorded as long-term debt. The buildings are being depreciated on a straight-line basis over the terms of the leases to their estimated residual values, which will equal the remaining financing obligation at the end of the lease term. At the end of the lease term, the remaining balances in property, plant and equipment, net and debt will be reversed against each other.
Note 11: 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 | | Six Months Ended |
| July 1, 2018 | | July 2, 2017 | | July 1, 2018 | | July 2, 2017 |
| (In thousands) |
Number of common shares—basic | 110,477 |
| | 109,894 |
| | 110,386 |
| | 109,681 |
|
Effect of dilutive securities: | | | | | | | |
Stock options | 786 |
| | 668 |
| | 824 |
| | 636 |
|
Restricted stock awards | 189 |
| | 200 |
| | 181 |
| | 167 |
|
Number of common shares—diluted | 111,452 |
| | 110,762 |
| | 111,391 |
| | 110,484 |
|
Number of potentially dilutive securities excluded from calculation due to antidilutive impact | 346 |
| | 457 |
| | 339 |
| | 558 |
|
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 12: Industry Segment Information
The Company discloses information about its operating segments based on the way that management organizes the segments within the Company for making operating decisions and assessing financial performance. The Company evaluates the performance of its operating segments based on revenue and operating income. Intersegment revenue and transfers are not significant. The accounting policies of the operating segments are the same as those described in Note 1 to the audited consolidated financial statements in the 2017 Form 10-K.
The principal products and services of the Company's two operating segments are:
| |
• | Discovery & Analytical Solutions. Provides products and services targeted towards the life sciences and applied markets. |
| |
• | Diagnostics. Develops diagnostics, tools and applications focused on clinically-oriented customers, especially within the reproductive health, emerging market diagnostics and applied genomics markets. The Diagnostics segment serves the diagnostics market. |
The Company has included the expenses for its corporate headquarters, such as legal, tax, audit, human resources, information technology, and other management and compliance costs, as well as the activity related to the mark-to-market adjustment on postretirement benefit plans, as “Corporate” below. The Company has a process to allocate and recharge expenses to the reportable segments when these costs are administered or paid by the corporate headquarters based on the extent to which the segment benefited from the expenses. These amounts have been calculated in a consistent manner and are included in the Company’s calculations of segment results to internally plan and assess the performance of each segment for all purposes, including determining the compensation of the business leaders for each of the Company’s operating segments.
Revenue and operating income (loss) from continuing operations by operating segment are shown in the table below:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2018 | | July 2, 2017 | | July 1, 2018 | | July 2, 2017 |
| (In thousands) |
Discovery & Analytical Solutions | | | | | | | |
Product revenue | $ | 263,325 |
| | $ | 227,290 |
| | $ | 501,020 |
| | $ | 442,450 |
|
Service revenue | 167,303 |
| | 155,838 |
| | 326,133 |
| | 302,438 |
|
Total revenue | 430,628 |
| | 383,128 |
| | 827,153 |
| | 744,888 |
|
Operating income from continuing operations | 64,665 |
| | 51,124 |
| | 100,862 |
| | 81,346 |
|
Diagnostics | | | | | | | |
Product revenue | 232,283 |
| | 127,711 |
| | 442,196 |
| | 246,265 |
|
Service revenue | 40,451 |
| | 36,123 |
| | 77,985 |
| | 69,924 |
|
Total revenue | 272,734 |
| | 163,834 |
| | 520,181 |
| | 316,189 |
|
Operating income from continuing operations | 38,780 |
| | 36,947 |
| | 57,174 |
| | 69,663 |
|
Corporate | | | | | | | |
Operating loss from continuing operations | (15,381 | ) | | (13,888 | ) | | (30,037 | ) | | (27,015 | ) |
Continuing Operations | | | | | | | |
Product revenue | 495,608 |
| | 355,001 |
| | 943,216 |
| | 688,715 |
|
Service revenue | 207,754 |
| | 191,961 |
| | 404,118 |
| | 372,362 |
|
Total revenue | 703,362 |
| | 546,962 |
| | 1,347,334 |
| | 1,061,077 |
|
Operating income from continuing operations | 88,064 |
| | 74,183 |
| | 127,999 |
| | 123,994 |
|
Interest and other expense, net (see Note 7) | 16,356 |
| | 3,391 |
| | 27,786 |
| | 13,219 |
|
Income from continuing operations before income taxes | $ | 71,708 |
| | $ | 70,792 |
| | $ | 100,213 |
| | $ | 110,775 |
|
Note 13: Stockholders’ Equity
Comprehensive Income:
The components of accumulated other comprehensive loss consisted of the following:
|
| | | | | | | |
| July 1, 2018 | | December 31, 2017 |
| (In thousands) |
Foreign currency translation adjustments | $ | (130,675 | ) | | $ | (46,582 | ) |
Unrecognized prior service costs, net of income taxes | 322 |
| | 322 |
|
Unrealized net losses on securities, net of income taxes | (213 | ) | | (258 | ) |
Accumulated other comprehensive loss | $ | (130,566 | ) | | $ | (46,518 | ) |
Stock Repurchases:
On July 27, 2016, the Board of Directors (the "Board") authorized the Company to repurchase up to 8.0 million shares of common stock under a stock repurchase program (the "Repurchase Program") that was scheduled to expire on July 26, 2018 unless terminated earlier by the Board. During the six months ended July 1, 2018, the Company had no stock repurchases under the Repurchase Program. As of July 1, 2018, 8.0 million shares remained available for repurchase under the Repurchase Program. On July 23, 2018, the Board authorized the Company to immediately terminate the Repurchase Program and further authorized the Company to repurchase shares of common stock for an aggregate amount up to $250.0 million under a new stock repurchase program (the "New Repurchase Program"). The New Repurchase Program will expire on July 23, 2020 unless terminated earlier by the Board and may be suspended or discontinued at any time.
In addition, the Board has authorized the Company to repurchase shares of common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards and restricted stock unit awards granted pursuant to the Company’s equity incentive plans and to satisfy obligations related to the exercise of stock options made pursuant to the Company's equity incentive plans. During the three months ended July 1, 2018, the Company repurchased 1,250
shares of common stock for this purpose at an aggregate cost of $0.1 million. During the six months ended July 1, 2018, the Company repurchased 59,699 shares of common stock for this purpose at an aggregate cost of $4.6 million. The repurchased shares have been reflected as additional authorized but unissued shares, with the payments reflected in common stock and capital in excess of par value.
Dividends:
The Board declared a regular quarterly cash dividend of $0.07 per share for the first two quarters of fiscal year 2018 and in each quarter of fiscal year 2017. At July 1, 2018, the Company has accrued $7.7 million for dividends declared on April 26, 2018 for the second quarter of fiscal year 2018 that will be payable on August 10, 2018. On July 23, 2018, the Company announced that the Board had declared a quarterly dividend of $0.07 per share for the third quarter of fiscal year 2018 that will be payable on November 10, 2018. 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 14: 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 restricted stock units, performance units and stock awards as part of the Company’s compensation programs. In addition to shares of the Company’s common stock originally authorized for issuance under the 2009 Plan, the 2009 Plan includes shares of the Company’s common stock previously granted under the Amended and Restated 2001 Incentive Plan and the 2005 Incentive Plan that were canceled or forfeited without the shares being issued.
The following table summarizes total pre-tax compensation expense recognized related to the Company’s stock option grants, restricted stock awards, performance restricted stock units, performance units and stock awards, included in the Company’s condensed consolidated statements of operations for the three and six months ended July 1, 2018 and July 2, 2017:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| July 1, 2018 | | July 2, 2017 | | July 1, 2018 | | July 2, 2017 |
| (In thousands) |
Cost of revenue | $ | 358 |
| | $ | 281 |
| | $ | 663 |
| | $ | 541 |
|
Research and development expenses | 386 |
| | 377 |
| | 694 |
| | 704 |
|
Selling, general and administrative expenses | 6,072 |
| | 6,183 |
| | 10,791 |
| | 10,522 |
|
Total stock-based compensation expense | $ | 6,816 |
| | $ | 6,841 |
| | $ | 12,148 |
| | $ | 11,767 |
|
The total income tax benefit recognized in the condensed consolidated statements of operations for stock-based compensation was $1.6 million and $4.5 million for the three and six months ended July 1, 2018, respectively. The total income tax benefit recognized in the condensed consolidated statements of operations for stock-based compensation was $5.1 million and $8.0 million for the three and six months ended July 2, 2017, respectively. Stock-based compensation costs capitalized as part of inventory were $0.4 million as of each of July 1, 2018 and July 2, 2017.
Stock Options: The fair value of each option grant is estimated using the Black-Scholes option pricing model. The Company’s weighted-average assumptions used in the Black-Scholes option pricing model were as follows:
|
| | | | | |
| Three and Six Months Ended |
| July 1, 2018 | | July 2, 2017 |
Risk-free interest rate | 2.9 | % | | 1.8 | % |
Expected dividend yield | 0.4 | % | | 0.5 | % |
Expected term | 5 years |
| | 5 years |
|
Expected stock volatility | 20.7 | % | | 22.4 | % |
The following table summarizes stock option activity for the six months ended July 1, 2018:
|
| | | | | | | | | | | | |
| Number of Shares | | Weighted- Average Exercise Price | | Weighted-Average Remaining Contractual Term | | Total Intrinsic Value |
| (In thousands) | | | | (In years) | | (In millions) |
Outstanding at December 31, 2017 | 2,154 |
| | $ | 42.77 |
| | | | |
Granted | 342 |
| | 77.61 |
| | | | |
Exercised | (194 | ) | | 42.98 |
| | | | |
Forfeited | (10 | ) | | 59.61 |
| | | | |
Outstanding at July 1, 2018 | 2,292 |
| | $ | 47.88 |
| | 3.9 | | $ | 58.1 |
|
Exercisable at July 1, 2018 | 1,464 |
| | $ | 40.05 |
| | 2.9 | | $ | 48.6 |
|
The weighted-average per-share grant-date fair value of options granted during the three and six months ended July 1, 2018 was $17.30 and $17.49, respectively. The weighted-average per-share grant-date fair value of options granted during the three and six months ended July 2, 2017 was $13.27 and $11.74, respectively. The total intrinsic value of options exercised during the three and six months ended July 1, 2018 was $0.7 million and $6.4 million, respectively. The total intrinsic value of options exercised during the three and six months ended July 2, 2017 was $9.1 million and $12.2 million, respectively. Cash received from option exercises for the six months ended July 1, 2018 and July 2, 2017 was $8.3 million and $13.2 million, respectively.
The total compensation expense recognized related to the Company’s outstanding options was $1.3 million and $2.6 million for the three and six months ended July 1, 2018, respectively, and $1.2 million and $2.4 million for the three and six months ended July 2, 2017, respectively.
There was $9.2 million of total unrecognized compensation cost related to nonvested stock options granted as of July 1, 2018. This cost is expected to be recognized over a weighted-average period of 2.1 years.
Restricted Stock Awards: The following table summarizes restricted stock award activity for the six months ended July 1, 2018:
|
| | | | | | |
| Number of Shares | | Weighted- Average Grant- Date Fair Value |
| (In thousands) | | |
Nonvested at December 31, 2017 | 496 |
| | $ | 50.30 |
|
Granted | 194 |
| | 75.37 |
|
Vested | (181 | ) | | 49.54 |
|
Forfeited | (12 | ) | | 55.62 |
|
Nonvested at July 1, 2018 | 497 |
| | $ | 60.26 |
|
The fair value of restricted stock awards vested during the three and six months ended July 1, 2018 was $0.7 million and $9.0 million, respectively. The fair value of restricted stock awards vested during the three and six months ended July 2, 2017 was $1.5 million and $9.3 million, respectively. The total compensation expense recognized related to the Company’s outstanding restricted stock awards was $3.2 million and $5.6 million for the three and six months ended July 1, 2018, respectively, and