filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
133K characters. Original on sec.gov · Markdown
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This annual report on Form 10-K, including the following management’s discussion and analysis, contains forward-looking information that you should read in conjunction with the consolidated financial statements and notes to consolidated financial statements that we have included elsewhere in this annual report on Form 10-K. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Words such as “believes,” “plans,” “anticipates,” “expects,” “will” and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from the plans, intentions or expectations we disclose in the forward-looking statements we make. We have included important factors above under the heading “Risk Factors” in Item 1A above that we believe could cause actual results to differ materially from the forward-looking statements we make. We are not obligated to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
Accounting Period
Our fiscal year ends on the Sunday nearest December 31. We report fiscal years under a 52/53 week format and as a result, certain fiscal years will contain 53 weeks. The fiscal year ended January 3, 2016 ("fiscal year 2015") included 53 weeks. The additional week in fiscal year 2015 has been reflected in our third quarter. Each of the fiscal years ended December 28, 2014 ("fiscal year 2014") and December 29, 2013 ("fiscal year 2013") included 52 weeks. The fiscal year ending January 1, 2017 will include 52 weeks.
Overview of Fiscal Year 2015
We realigned our organization at the beginning of fiscal year 2015 to enable us to both deliver complete solutions targeted towards certain end markets and develop value-added applications and solutions to foster further expansion of those markets. OneSource, our multivendor laboratory service business that serves the life sciences end market, was moved from our Environmental Health segment into our Human Health segment. The results reported for fiscal year 2015 reflect this new alignment of our operating segments. Financial information in this report relating to fiscal years 2014 and 2013 has been retrospectively adjusted to reflect this change to our operating segments.
As a result of the realignment, we reallocated goodwill from our Environmental Health segment to our Human Health segment based on the relative fair value, determined using the income approach, of the OneSource business within the historical Environmental Health segment. The realignment resulted in $41.2 million of goodwill being reallocated from our Environmental Health segment to our Human Health segment as of December 28, 2014.
During fiscal year 2015, we continued to see good performance from acquisitions, investments in our ongoing technology and sales and marketing initiatives. Our overall revenue in fiscal year 2015 increased $25.1 million, or 1%, as compared to fiscal year 2014, reflecting an increase of $32.7 million, or 4%, in our Environmental Health segment revenue, which was partially offset by a decrease of $7.6 million, or 1%, in our Human Health segment revenue. The increase in our Environmental Health segment revenue during fiscal year 2015 was primarily due to revenue from our acquisition of Perten Instruments Group AB ("Perten") in December 2014, as well as increased demand in our laboratory services business, which was partially offset by unfavorable impacts from foreign currency. During fiscal year 2015, our Human Health segment revenue decreased due to unfavorable impacts from foreign currency, however we experienced increased demand for our OneSource laboratory service and informatics businesses, within our research market, as well as increased demand in our newborn and infectious disease screening business within our diagnostics market. In addition, new product introductions within our research market, such as the Opera Phenix, increased revenue in our Human Health segment.
In our Human Health segment, excluding the unfavorable impact of foreign currency exchange, we experienced growth during fiscal year 2015 in several of our products within both our research and diagnostics end markets, as compared to fiscal year 2014. In our research market, we experienced increased demand for our OneSource laboratory service and informatics businesses, as well as an increase in revenue from new product introductions, such as the Opera Phenix. Our OneSource laboratory service business offers services designed to enable our customers to increase efficiencies and production time while reducing maintenance costs, all of which continue to be critical for them. In our diagnostics market, we continued to expand our newborn and infectious disease screening solutions in emerging markets such as China. Birth rates in the United States continue to stabilize and demand for greater access to newborn screening in rural areas outside the United States is also increasing, as evidenced by prenatal trends we saw during fiscal year 2015. Our medical imaging business experienced slight growth due to increased demand for our CMOS and cassette panels, which was partially offset by a decrease in demand in our radiography and radiation oncology end markets. The growth in our Human Health segment was more than offset by unfavorable impacts from foreign currency as the U.S. dollar strengthened, particularly versus the Euro. As the rising cost of healthcare continues to be one of the critical issues facing our customers, we anticipate that the benefits of providing earlier
detection of disease, which can result in a reduction of long-term health care costs as well as create better outcomes for patients, are increasingly valued and we expect to see continued growth in these markets.
In our Environmental Health segment, we had an increase in revenue in fiscal year 2015, as compared to fiscal year 2014, despite unfavorable impacts from foreign currency. The increase in revenue was primarily due to revenue from our acquisition of Perten in December 2014, as well as growth in our materials characterization product family within our environmental and industrial markets, which was partially offset by unfavorable impacts from foreign currency. In addition, we had an increased demand in our laboratory services business, despite unfavorable impacts from foreign currency. We anticipate that the continued development of contaminant regulations and corresponding testing protocols will result in increased demand for efficient, analytically sensitive and information rich testing solutions.
Our consolidated gross margins increased 38 basis points in fiscal year 2015, as compared to fiscal year 2014, due to increased sales volume, benefits from initiatives to improve our supply chain, as well as a lower mark-to-market loss for our postretirement benefit plans in fiscal year 2015 as compared to fiscal year 2014. These items were partially offset by unfavorable changes in product mix, with an increase in sales of lower gross margin product offerings, and negative impacts from foreign currency exchange rates. Our consolidated operating margin increased 323 basis points in fiscal year 2015, as compared to fiscal year 2014, primarily due to a pre-tax loss of $12.4 million in fiscal year 2015 as compared to a pre-tax loss of $75.9 million in fiscal year 2014 for the mark-to-market adjustments for our postretirement plans, higher gross margins, and lower costs as a result of cost containment and productivity initiatives, which were partially offset by increased costs related to investments in new product development.
We believe we continue to be well positioned to take advantage of the spending trends in our end markets and to promote efficiencies in markets where current conditions may increase demand for certain services. Overall, we believe that our strategic focus on Human Health and Environmental Health coupled with our deep portfolio of technologies and applications, leading market positions, global scale and financial strength will provide us with a solid foundation for growth.
Consolidated Results of Continuing Operations
Revenue
2015 Compared to 2014. Revenue for fiscal year 2015 was $2,262.4 million, as compared to $2,237.2 million for fiscal year 2014, an increase of $25.1 million, or 1%, which includes an approximate 3% increase in revenue attributable to acquisitions, an approximate 6% decrease in revenue attributable to changes in foreign exchange rates and revenue attributable to an additional week during fiscal year 2015. The analysis in the remainder of this paragraph compares segment revenue for fiscal year 2015 as compared to fiscal year 2014 and includes the effect of foreign exchange rate fluctuations and acquisitions. The total increase in revenue reflects an increase in our Environmental Health segment of $32.7 million, or 4%, due to an increase in environmental and industrial markets revenue of $44.9 million, which was partially offset by a decrease in laboratory services market revenue of $12.2 million. Our Human Health segment revenue decreased $7.6 million, or 1%, due to a decrease in research market revenue of $4.0 million and a decrease in diagnostics market revenue of $3.6 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $0.8 million of revenue primarily related to our Human Health segment for fiscal year 2015 and $2.9 million for fiscal year 2014 that otherwise would have been recorded by the acquired businesses during each of the respective periods. The effect of foreign currency changes from prior year period on revenue is approximately $142.0 million in fiscal year 2015.
2014 Compared to 2013. Revenue for fiscal year 2014 was $2,237.2 million, as compared to $2,157.6 million for fiscal year 2013, an increase of $79.6 million, or 4%, which includes an approximate 1% increase in revenue attributable to acquisitions and an approximate 1% decrease in revenue attributable to changes in foreign exchange rates. The analysis in the remainder of this paragraph compares segment revenue for fiscal year 2014 as compared to fiscal year 2013 and includes the effect of foreign exchange rate fluctuations and acquisitions. The total increase in revenue reflects a $58.3 million, or 4%, increase in our Human Health segment revenue, due to an increase in diagnostics market revenue of $39.8 million and an increase in research market revenue of $18.5 million. Our Environmental Health segment revenue increased $21.3 million, or 3%, due to an increase in laboratory services market revenue of $17.8 million and an increase in environmental and industrial markets revenue of $3.5 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $2.9 million of revenue primarily related to our informatics business in our Human Health segment for fiscal year 2014 and $7.3 million for fiscal year 2013 that otherwise would have been recorded by the acquired businesses during each of the respective periods.
Cost of Revenue
2015 Compared to 2014. Cost of revenue for fiscal year 2015 was $1,237.9 million, as compared to $1,232.6 million for fiscal year 2014, an increase of approximately $5.2 million, or 0.4%. As a percentage of revenue, cost of revenue decreased to 54.7% in fiscal year 2015 from 55.1% in fiscal year 2014, resulting in an increase in gross margin of approximately 38 basis
points to 45.3% in fiscal year 2015 from 44.9% in fiscal year 2014. Amortization of intangible assets decreased and was $43.5 million for fiscal year 2015, as compared to $49.7 million for fiscal year 2014. The mark-to-market adjustment for postretirement benefit plans was a loss of $1.2 million for fiscal year 2015, as compared to a loss of $8.4 million for fiscal year 2014. Stock-based compensation expense was $1.3 million for fiscal year 2015, as compared to $1.5 million for fiscal year 2014. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an incremental expense of $7.3 million for fiscal year 2015, as compared to $2.4 million for fiscal year 2014. Acquisition related costs for integration, contingent consideration and other costs added an incremental expense of $0.1 million for each of fiscal years 2015 and 2014. In addition to the factors noted above, the increase in gross margin was primarily the result of benefits from our initiatives to improve our supply chain, which was partially offset by unfavorable changes in product mix, with an increase in sales of lower gross margin product offerings, and negative impacts from foreign currency exchange rates. The effect of foreign currency changes from prior year period on cost of revenue is approximately $66.0 million in fiscal year 2015.
2014 Compared to 2013. Cost of revenue for fiscal year 2014 was $1,232.6 million, as compared to $1,181.4 million for fiscal year 2013, an increase of approximately $51.2 million, or 4%. As a percentage of revenue, cost of revenue increased to 55.1% in fiscal year 2014 from 54.8% in fiscal year 2013, resulting in a decrease in gross margin of approximately 34 basis points to 44.9% in fiscal year 2014 from 45.2% in fiscal year 2013. Amortization of intangible assets decreased and was $49.7 million for fiscal year 2014, as compared to $52.0 million for fiscal year 2013. The mark-to-market adjustment for postretirement benefit plans was a loss of $8.4 million for fiscal year 2014, as compared to a loss of $0.8 million for fiscal year 2013. Stock-based compensation expense was $1.5 million for fiscal year 2014, as compared to $1.3 million for fiscal year 2013. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was $2.4 million for fiscal year 2014, as compared to $0.2 million for fiscal year 2013. Acquisition related costs for integration, contingent consideration and other costs added an incremental expense of $0.1 million for fiscal year 2014, as compared to $0.2 million for fiscal year 2013. In addition to the factors noted above, the decrease in gross margin was primarily the result of unfavorable changes in product mix, with an increase in sales of lower gross margin product offerings, pricing pressure, and negative impacts from foreign exchange rates. These items were partially offset by increased sales volume and lower costs as a result of cost containment and productivity initiatives.
Selling, General and Administrative Expenses
2015 Compared to 2014. Selling, general and administrative expenses for fiscal year 2015 were $598.8 million, as compared to $659.3 million for fiscal year 2014, a decrease of approximately $60.5 million, or 9%. As a percentage of revenue, selling, general and administrative expenses decreased and were 26.5% in fiscal year 2015, compared to 29.5% in fiscal year 2014. Amortization of intangible assets increased and was $34.6 million for fiscal year 2015, as compared to $33.1 million for fiscal year 2014. The mark-to-market adjustment for postretirement benefit plans was a loss of $11.1 million for fiscal year 2015, as compared to a loss of $67.1 million for fiscal year 2014. Stock-based compensation expense increased and was $15.8 million for fiscal year 2015, as compared to $12.5 million for fiscal year 2014. During fiscal year 2015 we recorded $0.8 million in legal costs for a particular case. During fiscal year 2014, we recorded a benefit of $2.3 million for cost reimbursements related to a particular site, of which $1.2 million was for future monitoring and mitigation activities. Acquisition related costs for integration, contingent consideration and other costs added an incremental expense of $0.8 million for fiscal year 2015 and $0.4 million for fiscal year 2014. In addition to the above items, the decrease in selling, general and administrative expenses was primarily the result of lower costs as a result of cost containment and productivity initiatives, which was partially offset by the impact from foreign currency exchange rates, and the impact of an additional week during fiscal year 2015. The effect of foreign currency changes from prior year period on selling, general and administrative expense is approximately $31.6 million in fiscal year 2015.
2014 Compared to 2013. Selling, general and administrative expenses for fiscal year 2014 were $659.3 million, as compared to $581.9 million for fiscal year 2013, an increase of approximately $77.4 million, or 13%. As a percentage of revenue, selling, general and administrative expenses increased and were 29.5% in fiscal year 2014, compared to 27.0% in fiscal year 2013. Amortization of intangible assets decreased and was $33.1 million for fiscal year 2014, as compared to $36.9 million for fiscal year 2013. The mark-to-market adjustment for postretirement benefit plans was a loss of $67.1 million for fiscal year 2014, as compared to income of $18.1 million for fiscal year 2013. Stock-based compensation expense increased and was $12.5 million for fiscal year 2014, as compared to $11.9 million for fiscal year 2013. During fiscal year 2014, we recorded a benefit of $2.3 million for cost reimbursements related to a particular site, of which $1.2 million was for future monitoring and mitigation activities, as compared to expense of $4.6 million for environmental costs for fiscal year 2013. Acquisition related costs for integration, contingent consideration and other costs added an incremental expense of $0.4 million for fiscal year 2014 and $1.1 million for fiscal year 2013. In addition to the above items, the increase in selling, general and administrative expenses was primarily the result of costs related to growth investments, particularly in emerging territories, partially offset by lower costs as a result of cost containment and productivity initiatives.
Research and Development Expenses
2015 Compared to 2014. Research and development expenses for fiscal year 2015 were $125.9 million, as compared to $121.1 million for fiscal year 2014, an increase of $4.8 million, or 4%. As a percentage of revenue, research and development expenses increased to 5.6% in fiscal year 2015, as compared to 5.4% in fiscal year 2014. Amortization of intangible assets decreased and was $0.5 million for fiscal year 2015, as compared to $0.6 million for fiscal year 2014. The mark-to-market adjustment for postretirement benefit plans was a loss of $0.1 million for fiscal year 2015, as compared to a loss of $0.4 million for fiscal year 2014. Stock-based compensation expense increased and was $0.6 million for fiscal year 2015, as compared to $0.5 million for fiscal year 2014. In addition to the above items, the increase in research and development expenses was primarily due to investments in new product development, the impact from foreign currency exchange rates and the impact of an additional week in fiscal year 2015. We directed research and development efforts similarly during fiscal years 2015 and 2014, primarily toward the diagnostics and research markets within our Human Health segment, and the environmental, industrial and laboratory services markets within our Environmental Health segment, in order to help accelerate our growth initiatives. The effect of foreign currency changes from prior year period on research and development expenses is approximately $8.6 million in fiscal year 2015. We have a broad product base, and we do not expect any single research and development project to have significant costs.
2014 Compared to 2013. Research and development expenses for fiscal year 2014 were $121.1 million, as compared to $132.4 million for fiscal year 2013, a decrease of $11.3 million, or 9%. As a percentage of revenue, research and development expenses decreased to 5.4% in fiscal year 2014, as compared to 6.1% in fiscal year 2013. Amortization of intangible assets increased and was $0.6 million for fiscal year 2014, as compared to $0.3 million for fiscal year 2013. The mark-to-market adjustment for postretirement benefit plans was a loss of $0.4 million for fiscal year 2014, as compared to income of $0.3 million for fiscal year 2013. Stock-based compensation expense decreased and was $0.5 million for fiscal year 2014, as compared to $0.9 million for fiscal year 2013. Acquisition related costs added an incremental expense of $0.2 million for fiscal year 2013. In addition to the above items, the decrease in research and development expenses was primarily the result of the consolidation of research and development activities into our newly opened Center for Innovation. We directed research and development efforts similarly during fiscal years 2014 and 2013, primarily toward the diagnostics and research markets within our Human Health segment, and the environmental, industrial and laboratory services markets within our Environmental Health segment, in order to help accelerate our growth initiatives.
Restructuring and Contract Termination Charges, Net
We have undertaken a series of restructuring actions related to the impact of acquisitions and divestitures, the alignment of our operations with our growth strategy, the integration of our business units and productivity initiatives. Restructuring and contract termination charges for fiscal year 2015 were $13.6 million, as compared to $13.4 million for fiscal year 2014 and $33.9 million for fiscal year 2013.
We implemented restructuring plans in the fourth quarter of fiscal year 2015, the second and first quarters of fiscal year 2014, and the first quarter of fiscal year 2013 consisting of workforce reductions and the closure of excess facility space principally intended to focus resources on higher growth end markets (the "Q4 2015 Plan", "Q2 2014 Plan", "Q1 2014 Plan" and "Q1 2013 Plan", respectively). We implemented restructuring plans in the second quarter of fiscal year 2015 and the third quarter of fiscal year 2014 consisting of workforce reductions principally intended to realign resources to emphasize growth initiatives (the "Q2 2015 Plan" and "Q3 2014 Plan", respectively). We implemented restructuring plans in the fourth and third quarters of fiscal year 2013 consisting of workforce reductions and the closure of excess facility space principally intended to shift certain of our research and development resources into our newly opened Center for Innovation (the "Q4 2013 Plan" and "Q3 2013 Plan", respectively). We implemented a restructuring plan in the second quarter of fiscal year 2013 consisting of workforce reductions and the closure of excess facility space principally intended to shift certain of our operations into a newly established shared service center, as well as realign operations, research and development resources, and production resources as a result of previous acquisitions (the "Q2 2013 Plan"). All other previous restructuring plans were workforce reductions or the closure of excess facility space principally intended to integrate our businesses in order to realign operations, reduce costs, achieve operational efficiencies and shift resources into geographic regions and end markets that are more consistent with our growth strategy (the "Previous Plans"). We expect no significant impact on future operating results or cash flows from the restructuring activities executed in fiscal year 2015.
The following table summarizes the number of employees reduced, the initial restructuring or contract termination charges by operating segment, and the dates by which payments were substantially completed, or the expected dates by which payments will be substantially completed, for restructuring actions implemented during fiscal years 2015, 2014 and 2013:
| Workforce Reductions | Closure of Excess Facility | Total | (Expected) Date Payments Substantially Completed by | |||||||||||||||||||||||
| Headcount Reduction | Human Health | Environmental Health | Human Health | Environmental Health | Severance | Excess Facility | ||||||||||||||||||||
| (In thousands, except headcount data) | ||||||||||||||||||||||||||
| Q4 2015 Plan | 174 | $ | 2,230 | $ | 9,065 | $ | 285 | $ | — | $ | 11,580 | Q1 FY2017 | Q4 FY2017 | |||||||||||||
| Q2 2015 Plan | 97 | 1,850 | 4,160 | — | — | 6,010 | Q2 FY2016 | — | ||||||||||||||||||
| Q3 2014 Plan | 152 | 7,126 | 5,925 | — | — | 13,051 | Q4 FY2015 | — | ||||||||||||||||||
| Q2 2014 Plan | 22 | 545 | 190 | — | — | 735 | Q2 FY2015 | — | ||||||||||||||||||
| Q1 2014 Plan | 17 | 370 | 197 | — | — | 567 | Q4 FY2014 | — | ||||||||||||||||||
| Q4 2013 Plan | 73 | 955 | 2,953 | 7,271 | — | 11,179 | Q4 FY2014 | Q1 FY2019 | ||||||||||||||||||
| Q3 2013 Plan | 29 | 394 | — | 138 | — | 532 | Q1 FY2014 | Q4 FY2013 | ||||||||||||||||||
| Q2 2013 Plan(1) | 264 | 9,523 | 8,609 | 522 | 50 | 18,704 | Q4 FY2014 | Q3 FY2014 | ||||||||||||||||||
| Q1 2013 Plan | 62 | 2,340 | 245 | — | — | 2,585 | Q3 FY2013 | — |
| (1) | Subsequent to the initial charge, during fiscal year 2013, we recorded an additional $0.6 million pre-tax restructuring charge in our Human Health segment for the Q2 2013 Plan for services that were provided for one-time termination benefits in which the employee was required to render service beyond the legal notification period. |
We expect to make payments under the Previous Plans for remaining residual lease obligations, with terms varying in length, through fiscal year 2022.
We also have terminated various contractual commitments in connection with certain disposal activities and have recorded charges, to the extent applicable, for the costs of terminating these contracts before the end of their terms and the costs that will continue to be incurred for the remaining terms without economic benefit to us. We recorded additional pre-tax charges of $0.1 million, $1.5 million and $0.7 million in our Environmental Health segment during fiscal years 2015, 2014 and 2013, respectively, as a result of these contract terminations.
At January 3, 2016, we had $22.2 million recorded for accrued restructuring and contract termination charges, of which $17.1 million was recorded in short-term accrued restructuring and $5.1 million was recorded in long-term liabilities. At December 28, 2014, we had $23.8 million recorded for accrued restructuring and contract termination charges, of which $17.1 million was recorded in short-term accrued restructuring and $6.7 million was recorded in long-term liabilities. The following table summarizes our restructuring accrual balances and related activity by restructuring plan, as well as contract termination accrual balances and related activity, during fiscal years 2015, 2014 and 2013:
| Balance at December 30, 2012 | 2013 Charges and Changes in Estimates, Net | 2013 Amounts Paid | Balance at December 29, 2013 | 2014 Charges and Changes in Estimates, Net | 2014 Amounts Paid | Balance at December 28, 2014 | 2015 Charges and Changes in Estimates, Net | 2015 Amounts Paid | Balance at January 3, 2016 | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||
| Severance: | |||||||||||||||||||||||||||||||||||||||
| Q4 2015 Plan | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 11,295 | $ | (925 | ) | $ | 10,370 | ||||||||||||||||||
| Q2 2015 Plan(1) | — | — | — | — | — | — | — | 5,471 | (4,322 | ) | 1,149 | ||||||||||||||||||||||||||||
| Q3 2014 Plan(2) | — | — | — | — | 13,051 | (2,992 | ) | 10,059 | (3,064 | ) | (5,460 | ) | 1,535 | ||||||||||||||||||||||||||
| Q2 2014 Plan(3) | — | — | — | — | 735 | (484 | ) | 251 | (179 | ) | (13 | ) | 59 | ||||||||||||||||||||||||||
| Q1 2014 Plan(4) | — | — | — | — | 567 | (475 | ) | 92 | (92 | ) | — | — | |||||||||||||||||||||||||||
| Facility: | |||||||||||||||||||||||||||||||||||||||
| Q4 2015 Plan | — | — | — | — | — | — | — | 285 | (26 | ) | 259 | ||||||||||||||||||||||||||||
| Previous Plans including 2013 plans(5) | 27,151 | 33,196 | (25,112 | ) | 35,235 | (2,508 | ) | (19,603 | ) | 13,124 | (209 | ) | (4,222 | ) | 8,693 | ||||||||||||||||||||||||
| Restructuring | 27,151 | 33,196 | (25,112 | ) | 35,235 | 11,845 | (23,554 | ) | 23,526 | 13,507 | (14,968 | ) | 22,065 | ||||||||||||||||||||||||||
| Contract Termination | 596 | 696 | (992 | ) | 300 | 1,545 | (1,541 | ) | 304 | 83 | (255 | ) | 132 | ||||||||||||||||||||||||||
| Total Restructuring and Contract Termination | $ | 27,747 | $ | 33,892 | $ | (26,104 | ) | $ | 35,535 | $ | 13,390 | $ | (25,095 | ) | $ | 23,830 | $ | 13,590 | $ | (15,223 | ) | $ | 22,197 |
| (1) | During fiscal year 2015, we recognized pre-tax restructuring reversals of $0.2 million in our Human Health segment and $0.3 million in our Environmental Health segment related to lower than expected costs associated with workforce reductions for the Q2 2015 Plan. |
| (2) | During fiscal year 2015, we recognized pre-tax restructuring reversals of $1.2 million in our Human Health segment and $1.9 million in our Environmental Health segment related to lower than expected costs associated with workforce reductions for the Q3 2014 Plan. |
| (3) | During fiscal year 2015, we recognized pre-tax restructuring reversals of $0.1 million in each of our Human Health and Environmental Health segments related to lower than expected costs associated with workforce reductions for the Q2 2014 Plan. |
| (4) | During fiscal year 2015, we recognized a pre-tax restructuring reversal of $0.1 million in our Human Health segment related to lower than expected costs associated with workforce reductions for the Q1 2014 Plan. |
| (5) | During fiscal year 2015, we recognized a pre-tax restructuring charge of $1.4 million in our Human Health segment primarily related to higher than expected costs associated with the closure of the excess facility space, which was offset by a pre-tax restructuring reversal of $1.6 million in our Environmental Health segment primarily related to lower than expected costs associated with workforce reductions for the previous restructuring plans. During fiscal year 2014, we recognized pre-tax restructuring reversals of $0.8 million in our Human Health segment and $1.7 million in our Environmental Health segment primarily related to lower than expected costs associated with workforce reductions, which was partially offset by higher than expected costs associated with the closure of the excess facility space for the previous restructuring plans. |
Impairment of Assets
2015 Compared to 2014. We had no impairment of assets in either fiscal year 2015 or fiscal year 2014.
2014 Compared to 2013. Impairment of assets was zero in fiscal year 2014, as compared to $0.2 million in fiscal year 2013. The fiscal year 2013 pre-tax impairment charge was $0.2 million for the impairment of certain long-lived assets within our Human Health segment as the carrying amounts of the long-lived assets were not recoverable and exceeded their fair value. Additional information regarding impairment of assets is discussed in Note 12 to our consolidated financial statements included in this annual report on Form 10-K.
Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
| January 3, 2016 | December 28, 2014 | December 29, 2013 | |||||||||
| (In thousands) | |||||||||||
| Interest income | $ | (673 | ) | $ | (667 | ) | $ | (650 | ) | ||
| Interest expense | 37,997 | 36,270 | 49,924 | ||||||||
| Other expense, net | 4,795 | 5,536 | 14,836 | ||||||||
| Total interest and other expense, net | $ | 42,119 | $ | 41,139 | $ | 64,110 |
2015 Compared to 2014. Interest and other expense, net, for fiscal year 2015 was an expense of $42.1 million, as compared to an expense of $41.1 million for fiscal year 2014, an increase of $1.0 million. The increase in interest and other expense, net, in fiscal year 2015 as compared to fiscal year 2014 was primarily due to an increase in interest expense. Interest expense increased by $1.7 million in fiscal year 2015 as compared to fiscal year 2014, primarily due to increased debt outstanding on our senior unsecured revolving credit facility and higher variable interest rates, as well as an additional week during fiscal year 2015. Other expenses for fiscal year 2015 decreased by $0.7 million as compared to fiscal year 2014, primarily due to expenses related to foreign currency transactions and translation of non-functional currency assets and liabilities. A more complete discussion of our liquidity is set forth below under the heading “Liquidity and Capital Resources.”
2014 Compared to 2013. Interest and other expense, net, for fiscal year 2014 was an expense of $41.1 million, as compared to an expense of $64.1 million for fiscal year 2013, a decrease of $23.0 million. The decrease in interest and other expense, net, in fiscal year 2014 as compared to fiscal year 2013 was primarily due to a decrease in interest expense. Interest expense decreased by $13.7 million in fiscal year 2014 as compared to fiscal year 2013, primarily due to the redemption of our fixed rate 2015 Notes in fiscal year 2013, resulting in lower debt outstanding and an increased mix of variable rate debt with lower interest rates during fiscal year 2014. In addition, during fiscal year 2013, we wrote-off $2.8 million for the remaining unamortized derivative losses for previously settled cash flow hedges and wrote-off $0.2 million for the remaining deferred debt issuance costs related to the prepayment of our 2015 Notes. Other expenses for fiscal year 2014 decreased by $9.3 million as compared to fiscal year 2013, primarily due to a prepayment premium of $11.1 million for the redemption of our 2015 Notes in fiscal year 2013, which was partially offset by expenses related to foreign currency transactions and translation of non-functional currency assets and liabilities.
Provision for (Benefit from) Income Taxes
2015 Compared to 2014. The fiscal year 2015 provision for income taxes on continuing operations was $31.3 million, as compared to $8.4 million for fiscal year 2014. The effective tax rate on continuing operations was 12.8% for fiscal year 2015 as compared to 5.0% for fiscal year 2014. The higher provision for income taxes in fiscal year 2015 was primarily due to higher income in higher tax rate jurisdictions, as compared to fiscal year 2014.
2014 Compared to 2013. The fiscal year 2014 provision for income taxes on continuing operations was $8.4 million, as compared to a benefit of $10.6 million for fiscal year 2013. The effective tax rate on continuing operations was a provision of 5.0% for fiscal year 2014 as compared to a benefit of 6.5% for fiscal year 2013. The provision for income taxes in fiscal year 2014 was primarily due to income in lower tax rate jurisdictions, partially offset by losses in higher rate jurisdictions and a tax benefit of $7.0 million related to discrete items. The benefit from income taxes in fiscal year 2013 was primarily due to a tax benefit of $24.0 million related to discrete items and losses in higher tax rate jurisdictions, partially offset by a provision from income taxes related to profits in lower tax rate jurisdictions. The $24.0 million of discrete items includes $9.4 million for lapses in statutes of limitations during the first quarter of fiscal year 2013 and $9.2 million primarily for lapses in statutes of limitations and audit settlements in the fourth quarter of fiscal year 2013.
Discontinued Operations
As part of our continuing efforts to focus on higher growth opportunities, we have discontinued certain businesses. We have accounted for these businesses as discontinued operations and, accordingly, have presented the results of operations and related cash flows as discontinued operations for all periods presented. Any remaining assets and liabilities of these businesses
have been presented separately, and are reflected within assets and liabilities from discontinued operations in the accompanying consolidated balance sheets as of January 3, 2016 and December 28, 2014.
In May 2014, our management approved the shutdown of our microarray-based diagnostic testing laboratory in the United States, which had been reported within our Human Health segment. We determined that, with the lack of adequate reimbursement from health care payers, the microarray-based diagnostic testing laboratory in the United States would need significant investment in its operations to reduce costs in order to effectively compete in the market. The shutdown of the microarray-based diagnostic testing laboratory in the United States resulted in a $0.1 million net pre-tax loss primarily related to the disposal of fixed assets, which was partially offset by the sale of a building in fiscal year 2014.
In August 1999, we sold the assets of our Technical Service business. We recorded pre-tax losses of $0.03 million in fiscal year 2015, $0.2 million in fiscal year 2014 and $2.1 million in fiscal year 2013 for a contingency related to this business. These losses were recognized as a loss on disposition of discontinued operations before income taxes.
During fiscal year 2013, we settled various commitments related to the divestiture of other discontinued operations and recognized a pre-tax gain of $0.3 million. This gain was recognized as a gain on disposition of discontinued operations before income taxes.
Summary pre-tax operating results of the discontinued operations, which include the periods prior to disposition and a $1.0 million pre-tax restructuring charge related to workforce reductions in the microarray-based diagnostic testing laboratory in the United States during fiscal year 2014, were as follows during the three fiscal years ended:
| January 3, 2016 | December 28, 2014 | December 29, 2013 | |||||||||
| (In thousands) | |||||||||||
| Revenue | $ | 98 | $ | 348 | $ | 8,646 | |||||
| Costs and expenses | 101 | 5,307 | 18,998 | ||||||||
| Loss from discontinued operations before income taxes | $ | (3 | ) | $ | (4,959 | ) | $ | (10,352 | ) |
We recorded a tax provision of $0.2 million on discontinued operations and dispositions in fiscal year 2015, a tax benefit of $1.8 million on discontinued operations and dispositions in fiscal year 2014 and a tax benefit of $5.1 million on discontinued operations and dispositions in fiscal year 2013.
Business Combinations
Acquisitions in fiscal year 2015
During fiscal year 2015, we completed the acquisition of five businesses for a total consideration of $77.1 million in cash. The acquired businesses included Vanadis, which was acquired for total consideration of $35.1 million in cash, as further described in Note 21 to our consolidated financial statements included in this annual report on Form 10-K, and other acquisitions for an aggregate consideration of $42.0 million in cash. We have a potential obligation to pay the shareholders of Vanadis additional contingent consideration of up to $93.0 million, which at closing had an estimated fair value of $56.9 million. The excess of the purchase prices over the fair values of each of the acquired businesses' net assets represents cost and revenue synergies specific to us, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and has been allocated to goodwill, of which $9.2 million is tax deductible. We reported the operations for all of these acquisitions within the results of our Human Health and Environmental Health segments from the acquisition dates.
Acquisitions in fiscal year 2014
Acquisition of Perten Instruments Group AB. In December 2014, we acquired all of the outstanding stock of Perten. Perten is a provider of analytical instruments and services for quality control of food, grain, flour and feed. We expect this acquisition to enhance our industrial, environmental and safety business by expanding our product offerings to the academic and industrial end markets. We paid the shareholders of Perten $269.9 million in cash for the stock of Perten. The excess of the purchase price over the fair value of the acquired net assets represents cost and revenue synergies specific to us, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and has been allocated to goodwill, none of which is tax deductible. We have reported the operations for this acquisition within the results of our Environmental Health segment from the acquisition date.
Other acquisitions in fiscal year 2014. In addition to the Perten acquisition, we completed the acquisition of two businesses in fiscal year 2014 for total consideration of $17.6 million in cash and $4.3 million of assumed debt. The excess of the purchase price over the fair value of each of the acquired businesses' net assets represents cost and revenue synergies specific to us, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and has been allocated
to goodwill, none of which is tax deductible. We reported the operations for these acquisitions within the results of our Human Health and Environmental Health segments from the acquisition dates.
Acquisitions in fiscal year 2013
During fiscal year 2013, we completed the acquisition of four businesses for total consideration of $11.4 million, in cash. As of the closing dates, we potentially had to pay additional contingent consideration for the four acquired businesses of up to $2.2 million, which at closing had an estimated fair value of $1.1 million. During fiscal year 2014, we paid $0.4 million in additional deferred consideration for one of these acquisitions. The excess of the purchase price over the fair value of each of the acquired businesses' net assets represents cost and revenue synergies specific to us, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and has been allocated to goodwill, none of which is tax deductible. We reported the operations for these acquisitions within the results of our Human Health and Environmental Health segments from the acquisition dates.
We do not consider the acquisitions completed during fiscal years 2015, 2014 and 2013, to be material to our consolidated results of operations; therefore, we are not presenting pro forma financial information of operations. During fiscal year 2015, we recognized $65.7 million of revenue for Perten. We have determined that the presentation of the results of operations for each of the other acquisitions, from the date of acquisition, is impracticable due to the integration of the operations upon acquisition.
As of January 3, 2016, the allocations of purchase prices for acquisitions completed in fiscal years 2014 and 2013 were final. The preliminary allocations of the purchase prices for acquisitions completed in fiscal year 2015 were based upon initial valuations. Our estimates and assumptions underlying the initial valuations are subject to the collection of information necessary to complete our valuations within the measurement periods, which are up to one year from the respective acquisition dates. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired and liabilities assumed, assets and liabilities related to income taxes and related valuation allowances, and residual goodwill. We expect to continue to obtain information to assist in determining the fair values of the net assets acquired at the acquisition dates during the measurement periods. During the measurement periods, we will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition dates that, if known, would have resulted in the recognition of those assets and liabilities as of those dates. With our adoption of Accounting Standards Update No. 2015-16, Simplifying the Accounting for Measurement-Period Adjustments ("ASU No. 2015-16") during 2015, 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. The portion of the adjustment which relates to a prior period should either be presented separately on the consolidated statement of operations or disclosed in the notes to the consolidated financial statements. All changes that do not qualify as adjustments made during the measurement periods are also included in current period earnings.
During fiscal year 2015, we obtained information to assist in determining the fair values of certain tangible and intangible assets acquired and liabilities assumed as part of our acquisitions and adjusted our purchase price allocations. Based on this information, for acquisitions completed during fiscal year 2015, we recognized a decrease in deferred taxes of $0.5 million, with a corresponding decrease in goodwill. For the Perten acquisition, we recognized increases in intangible assets of $2.0 million and liabilities assumed of $1.2 million, which were offset by a decrease in goodwill of $3.4 million, deferred taxes of $2.8 million, and other current assets of $0.2 million. For other acquisitions completed during fiscal year 2014, we recognized a decrease in working capital and other adjustments of $0.5 million with a corresponding decrease in goodwill. In addition, during the third quarter of fiscal year 2015, in connection with updating the provisional purchase accounting for the Perten acquisition, we adjusted goodwill and intangible assets which had been preliminarily recorded in U.S. dollars to Swedish Krona. This resulted in a decrease in intangible assets and goodwill of $21.4 million and a corresponding increase in other comprehensive loss through increased foreign currency translation adjustments as a result of the change in the exchange rate between the acquisition date and June 28, 2015. Of the $21.4 million decrease, $8.2 million related to changes in the exchange rate from the acquisition date through December 28, 2014. During fiscal year 2015, there was an immaterial impact on the current period net income as a result of the change to the provisional amounts for items that would have been recognized in previous periods if the adjustments to provisional amounts had been recognized as of the acquisition date.
Allocations of the purchase price for acquisitions are based on estimates of the fair value of the net assets acquired and are subject to adjustment upon finalization of the purchase price allocations. The accounting for business combinations requires estimates and judgments as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair values for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed, including contingent consideration, are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. Contingent consideration is measured at fair value at the acquisition
date, based on the probability that revenue thresholds or product development milestones will be achieved during the earnout period, with changes in the fair value after the acquisition date affecting earnings to the extent it is to be settled in cash. Increases or decreases in the fair value of contingent consideration liabilities primarily result from changes in the estimated probabilities of achieving revenue thresholds or product development milestones during the earnout period.
As of January 3, 2016, we may have to pay contingent consideration, related to acquisitions with open contingency periods, of up to $95.4 million. As of January 3, 2016, we have recorded contingent consideration obligations of $57.4 million, of which $9.4 million was recorded in accrued expenses and other current liabilities, and $48.0 million was recorded in long-term liabilities. As of December 28, 2014, we have recorded contingent consideration obligations of $0.1 million, which was recorded in accrued expenses and other current liabilities. The expected maximum earnout period for acquisitions with open contingency periods does not exceed 6 years from the respective acquisition dates, and the remaining weighted average expected earnout period at January 3, 2016 was 2 years. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the consolidated financial statements could result in a possible impairment of the intangible assets and goodwill, require acceleration of the amortization expense of definite-lived intangible assets or the recognition of additional contingent consideration which would be recognized as a component of operating expenses from continuing operations.
In connection with the purchase price allocations for acquisitions, we estimate the fair value of deferred revenue assumed with our acquisitions. The estimated fair value of deferred revenue is determined by the legal performance obligation at the date of acquisition, and is generally based on the nature of the activities to be performed and the related costs to be incurred after the acquisition date. The fair value of an assumed liability related to deferred revenue is estimated based on the current market cost of fulfilling the obligation, plus a normal profit margin thereon. The estimated costs to fulfill the deferred revenue are based on the historical direct costs related to providing the services. We do not include any costs associated with selling effort, research and development, or the related fulfillment margins on these costs. In most acquisitions, profit associated with selling effort is excluded because the acquired businesses would have concluded the selling effort on the support contracts prior to the acquisition date. The estimated research and development costs are not included in the fair value determination, as these costs are not deemed to represent a legal obligation at the time of acquisition. The sum of the costs and operating income approximates, in theory, the amount that we would be required to pay a third-party to assume the obligation.
Contingencies, Including Tax Matters
We are conducting a number of environmental investigations and remedial actions at our current and former locations and, along with other companies, have been named a potentially responsible party (“PRP”) for certain waste disposal sites. We accrue for environmental issues in the accounting period that our responsibility is established and when the cost can be reasonably estimated. We have accrued $11.8 million and $12.3 million as of January 3, 2016 and December 28, 2014, respectively, which represents our management’s estimate of the cost of the remediation of known environmental matters, and does not include any potential liability for related personal injury or property damage claims. During fiscal year 2014, we recorded a benefit of $2.3 million for cost reimbursements related to a particular site, of which $1.2 million was for future monitoring and mitigation activities. During fiscal year 2013, we accrued an additional $5.7 million related to a particular site for increased monitoring and mitigation activities, of which $4.6 million was recorded in the fourth quarter of fiscal year 2013. Our environmental accrual is not discounted and does not reflect the recovery of any material amounts through insurance or indemnification arrangements. The cost estimates are subject to a number of variables, including the stage of the environmental investigations, the magnitude of the possible contamination, the nature of the potential remedies, possible joint and several liability, the time period over which remediation may occur, and the possible effects of changing laws and regulations. For sites where we have been named a PRP, our management does not currently anticipate any additional liability to result from the inability of other significant named parties to contribute. We expect that the majority of such accrued amounts could be paid out over a period of up to ten years. As assessment and remediation activities progress at each individual site, these liabilities are reviewed and adjusted to reflect additional information as it becomes available. There have been no environmental problems to date that have had, or are expected to have, a material adverse effect on our consolidated financial statements. While it is possible that a loss exceeding the amounts recorded in the consolidated financial statements may be incurred, the potential exposure is not expected to be materially different from those amounts recorded.
Various tax years after 2009 remain open to examination by certain jurisdictions in which we have significant business operations, such as Finland, Germany, Italy, Netherlands, Singapore, the United Kingdom and the United States. The tax years under examination vary by jurisdiction. We regularly review our tax positions in each significant taxing jurisdiction in the process of evaluating our unrecognized tax benefits. We make adjustments to our unrecognized tax benefits when: (i) facts and circumstances regarding a tax position change, causing a change in management’s judgment regarding that tax position; (ii) a tax position is effectively settled with a tax authority; and/or (iii) the statute of limitations expires regarding a tax position.
We are subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities. Although we have established accruals for potential losses that we believe are probable and reasonably estimable, in our opinion, based on our review of the information available at this time, the total cost of resolving these contingencies at January 3, 2016 should not have a material adverse effect on our consolidated financial statements included in this annual report on Form 10-K. However, each of these matters is subject to uncertainties, and it is possible that some of these matters may be resolved unfavorably to us.
Reporting Segment Results of Continuing Operations
We realigned our organization at the beginning of fiscal year 2015 to enable us to both deliver complete solutions targeted towards certain end markets and develop value-added applications and solutions to foster further expansion of those markets. OneSource, our multivendor laboratory service business that serves the life sciences end market, was moved from our Environmental Health segment into our Human Health segment. The results reported for fiscal year 2015 reflect this new alignment of our operating segments. Financial information in this report relating to fiscal years 2014 and 2013 has been retrospectively adjusted to reflect this change to our operating segments.
Human Health
2015 Compared to 2014. Revenue for fiscal year 2015 was $1,376.6 million, as compared to $1,384.2 million for fiscal year 2014, a decrease of $7.6 million, or 1%, which includes an approximate 0.4% increase in revenue attributable to acquisitions, an approximate 5% decrease in revenue attributable to changes in foreign exchange rates and revenue attributable to an additional week in fiscal year 2015. The analysis in the remainder of this paragraph compares selected revenue by product type for fiscal year 2015, as compared to fiscal year 2014, and includes the effect of foreign exchange fluctuations and acquisitions. The decrease in revenue in our Human Health segment was a result of a decrease in research market revenue of $4.0 million and a decrease in diagnostics market revenue of $3.6 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $0.8 million of revenue in our Human Health segment for fiscal year 2015 and $2.9 million of revenue in our Human Health segment for fiscal year 2014 that otherwise would have been recorded by the acquired businesses during each of the respective periods. In our research market, we experienced increased demand for our OneSource laboratory service and informatics businesses, as well as an increase in revenue from new product introductions, such as the Opera Phenix. Our OneSource laboratory service business offers services designed to enable our customers to increase efficiencies and production time while reducing maintenance costs, all of which continue to be critical for our customers. In our diagnostics market, we continued to expand our newborn and infectious disease screening solutions in emerging markets such as China. Birth rates in the United States continue to stabilize and demand for greater access to newborn screening in rural areas outside the United States is also increasing, as evidenced by prenatal trends we saw during fiscal year 2015. Our medical imaging business experienced slight growth due to increased demand for our CMOS and cassette panels, which was partially offset by a decrease in demand in our radiography and radiation oncology end markets. The growth in our Human Health segment was more than offset by unfavorable impacts from foreign currency as the U.S. dollar strengthened, particularly versus the Euro.
Operating income from continuing operations for fiscal year 2015 was $251.7 million, as compared to $233.7 million for fiscal year 2014, an increase of $18.1 million, or 8%. Amortization of intangible assets decreased and was $61.9 million for fiscal year 2015 as compared to $73.2 million for fiscal year 2014. Restructuring and contract termination charges, net decreased and were $4.2 million for fiscal year 2015 as compared to $7.2 million for fiscal year 2014. Acquisition related costs for integration, contingent consideration and other costs added an incremental expense of $0.5 million for fiscal year 2015, as compared to decreasing expenses by $1.7 million for fiscal year 2014. Legal costs for a particular case were $0.8 million for fiscal year 2015. In addition to the factors noted above, increased operating income for fiscal year 2015, was primarily the result of increased sales volume in the diagnostics and research markets and lower costs as a result of cost containment and productivity initiatives, which was partially offset by unfavorable changes in product mix, with an increase in sales of lower gross margin product offerings and unfavorable impacts from foreign currency.
2014 Compared to 2013. Revenue for fiscal year 2014 was $1,384.2 million, as compared to $1,325.9 million for fiscal year 2013, an increase of $58.3 million, or 4%, which includes an approximate 0.5% increase in revenue attributable to acquisitions and an approximate 0.5% decrease in revenue attributable to changes in foreign exchange rates. The analysis in the remainder of this paragraph compares selected revenue by product type for fiscal year 2014, as compared to fiscal year 2013, and includes the effect of foreign exchange fluctuations and acquisitions. The increase in revenue in our Human Health segment was a result of an increase in diagnostics market revenue of $39.8 million and an increase in research market revenue of $18.5 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $2.9 million of revenue in our Human Health segment for fiscal year 2014 and $7.3 million of revenue in our Human Health segment for fiscal year 2013 that otherwise would have been recorded by the acquired businesses during each of the respective periods. This increase in our Human Health segment revenue during fiscal year 2014 was primarily due to growth in our diagnostics business as birth rates increased and from continued expansion of our prenatal,
newborn and infectious disease screening solutions in emerging markets such as China and Brazil, as well as from increased demand for our medical imaging business' new wireless cassette detector used in diagnostic imaging and veterinary applications. In the research market we experienced growth related to our OneSource laboratory service, informatics, radiometric detection, and high-content screening offerings, as well as our microfluidics technology licensing program. This growth in the research market was partially offset by declines in some products in our research market due to weakness in the global academic end market, specifically in Europe, as well as the expiration of certain patents in our licensing portfolio.
Operating income from continuing operations for fiscal year 2014 was $233.7 million, as compared to $168.8 million for fiscal year 2013, an increase of $64.9 million, or 38%. Amortization of intangible assets decreased and was $73.2 million for fiscal year 2014 as compared to $79.5 million for fiscal year 2013. Restructuring and contract termination charges, net decreased and were $7.2 million for fiscal year 2014 as compared to $22.3 million for fiscal year 2013. Impairment of assets was a charge of $0.2 million for fiscal year 2013 as the carrying amounts of certain long-lived assets were not recoverable and exceeded their fair value. Acquisition related costs for integration, contingent consideration and other costs decreased expenses by $1.7 million for fiscal year 2014, as compared to adding an incremental expense of $1.4 million for fiscal year 2013. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was $0.2 million for fiscal year 2013. In addition to the factors noted above, increased sales volume in the diagnostics and research markets and lower costs as a result of cost containment and productivity initiatives increased operating income for fiscal year 2014.
Environmental Health
2015 Compared to 2014. Revenue for fiscal year 2015 was $885.7 million, as compared to $853.0 million for fiscal year 2014, an increase of $32.7 million, or 4%, which includes an approximate 8% decrease in revenue attributable to changes in foreign exchange rates, an approximate 8% increase in revenue attributable to acquisitions and revenue attributable to an additional week in fiscal year 2015. The analysis in the remainder of this paragraph compares selected revenue by product type for fiscal year 2015, as compared to fiscal year 2014, and includes the effect of foreign exchange fluctuations and acquisitions. The increase in revenue in our Environmental Health segment was a result of an increase in revenue of $44.9 million from the environmental and industrial markets, which was partially offset by a decrease in revenue of $12.2 million from the laboratory services market. The increase in revenue was primarily due to revenue from our acquisition of Perten in December 2014, as well as growth in our materials characterization product family within our environmental and industrial markets, which was partially offset by unfavorable impacts from foreign currency. In addition, we had an increased demand in our laboratory services business, despite unfavorable impacts from foreign currency.
Operating income from continuing operations for fiscal year 2015 was $89.5 million, as compared to $95.6 million for fiscal year 2014, a decrease of $6.1 million, or 6%. Amortization of intangible assets increased and was $16.7 million for fiscal year 2015 as compared to $10.2 million for fiscal year 2014. Restructuring and contract termination charges, net increased and were $9.4 million for fiscal year 2015 as compared to $6.2 million for fiscal year 2014. Acquisition related costs for contingent consideration and other costs added an incremental expense of $0.3 million in fiscal year 2015, as compared to an incremental expense of $2.1 million for fiscal year 2014. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an incremental expense of $7.3 million in fiscal year 2015, as compared to $2.4 million for fiscal year 2014. In addition to the factors noted above, decreased operating income for fiscal year 2015, as compared to fiscal year 2014 was primarily due to increased costs related to investments in new product development, which was partially offset by lower costs as a result of cost containment initiatives and benefits from our initiatives to improve our supply chain.
2014 Compared to 2013. Revenue for fiscal year 2014 was $853.0 million, as compared to $831.7 million for fiscal year 2013, an increase of $21.3 million or 3%, which includes an approximate 1% decrease in revenue attributable to changes in foreign exchange rates and an approximate 1% increase in revenue attributable to acquisitions. The analysis in the remainder of this paragraph compares selected revenue by product type for fiscal year 2014, as compared to fiscal year 2013, and includes the effect of foreign exchange fluctuations and acquisitions. The increase in revenue in our Environmental Health segment was a result of an increase in revenue of $17.8 million from the laboratory services market and an increase in revenue of $3.5 million from the environmental and industrial markets. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $0.01 million of revenue for fiscal year 2013 that otherwise would have been recorded by the acquired businesses during each of the respective periods. This increase in our Environmental Health segment revenue during fiscal year 2014 was primarily due to continued growth in our laboratory services business. This growth was partially offset by decreased demand across some of our products in the environmental and industrial markets, primarily in the Asian industrial end markets.
Operating income from continuing operations for fiscal year 2014 was $95.6 million, as compared to $84.7 million for fiscal year 2013, an increase of $10.9 million, or 13%. Amortization of intangible assets increased and was $10.2 million for fiscal year 2014 as compared to $9.8 million for fiscal year 2013. Restructuring and contract termination charges, net decreased and were $6.2 million for fiscal year 2014 as compared to $11.6 million for fiscal year 2013. Acquisition related costs for
contingent consideration and other costs added an incremental expense of $2.1 million in fiscal year 2014, as compared to an incremental expense of $0.2 million for fiscal year 2013. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was $2.4 million for fiscal year 2014 and zero in fiscal year 2013. In addition to the factors noted above, savings related to cost containment initiatives increased operating income for fiscal year 2014, which was partially offset by unfavorable changes in product mix, with an increase in sales of lower gross margin product offerings, and pricing pressure.
Liquidity and Capital Resources
We require cash to pay our operating expenses, make capital expenditures, make strategic acquisitions, service our debt and other long-term liabilities, repurchase shares of our common stock and pay dividends on our common stock. Our principal sources of funds are from our operations and the capital markets, particularly the debt markets. We anticipate that our internal operations will generate sufficient cash to fund our operating expenses, capital expenditures, smaller acquisitions, interest payments on our debt and dividends on our common stock. However, we expect to use external sources to satisfy the balance of our debt when due, any larger acquisitions and other long-term liabilities, such as contributions to our postretirement benefit plans.
Principal factors that could affect the availability of our internally generated funds include:
| • | changes in sales due to weakness in markets in which we sell our products and services, and |
| • | changes in our working capital requirements. |
Principal factors that could affect our ability to obtain cash from external sources include:
| • | financial covenants contained in the financial instruments controlling our borrowings that limit our total borrowing capacity, |
| • | increases in interest rates applicable to our outstanding variable rate debt, |
| • | a ratings downgrade that could limit the amount we can borrow under our senior unsecured revolving credit facility and our overall access to the corporate debt market, |
| • | increases in interest rates or credit spreads, as well as limitations on the availability of credit, that affect our ability to borrow under future potential facilities on a secured or unsecured basis, |
| • | a decrease in the market price for our common stock, and |
| • | volatility in the public debt and equity markets. |
Cash Flows
Fiscal Year 2015
Operating Activities. Net cash provided by continuing operations was $287.6 million for fiscal year 2015, as compared to net cash provided by continuing operations of $282.3 million for fiscal year 2014, an increase of $5.3 million. The cash provided by operating activities for fiscal year 2015 was principally a result of income from continuing operations of $212.7 million, and non-cash charges, including depreciation and amortization of $112.0 million, stock based compensation expense of $17.7 million, restructuring and contract termination charges, net, of $13.6 million and a loss related to our postretirement benefit plans, including the mark-to-market adjustment, in the fourth quarter of fiscal year 2015, of $9.4 million. These amounts were partially offset by a net decrease of $39.8 million in accrued expenses, other assets and liabilities and other items, and a net increase in working capital of $38.0 million. The change in accrued expenses, other assets and liabilities and other items decreased cash provided by operating activities by $39.8 million for fiscal year 2015, primarily related to the timing of payments for taxes, defined benefit pension plans, royalties, restructuring, and salary and benefits. During fiscal year 2015, we made contributions of $14.9 million, in the aggregate, to pension plans outside of the United States and $20.0 million to our defined benefit pension plan in the United States. Contributing to the net increase in working capital for fiscal year 2015, excluding the effect of foreign exchange rate fluctuations, was an increase in inventory of $28.7 million and a decrease in accounts payable of $16.1 million, which were partially offset by a decrease in accounts receivable of $6.8 million. The increase in inventory was primarily a result of realigning operations, research and development resources, and production resources within our Environmental Health and Human Health segments to ensure responsiveness to customer requirements as this realignment occurs. The decrease in accounts payable was primarily a result of the timing of disbursements during the fourth quarter of fiscal year 2015. The decrease in accounts receivable was a result of strong performance in accounts receivable collections during the fourth quarter of fiscal year 2015.
Investing Activities. Net cash used in the investing activities of our continuing operations was $100.9 million for fiscal year 2015, as compared to net cash used in the investing activities of our continuing operations of $297.5 million for fiscal year 2014, a decrease of $196.7 million. For fiscal year 2015, we used $72.0 million of net cash for acquisitions and investments, as compared to $271.5 million used in fiscal year 2014. Capital expenditures for fiscal year 2015 were $29.6 million, primarily for manufacturing equipment and other capital equipment purchases. These cash outflows were partially offset by proceeds from the settlement of life insurance policies of $0.8 million in fiscal year 2015.
Financing Activities. Net cash used in the financing activities of our continuing operations was $107.1 million for fiscal year 2015, as compared to net cash provided by the financing activities of our continuing operations of $30.9 million for fiscal year 2014, a change of $138.1 million. For fiscal year 2015, we repurchased 1.5 million shares of our common stock, including 95,129 shares of our common stock pursuant to our equity incentive plans, for a total cost of $76.4 million, including commissions. This compares to repurchases of 1.4 million shares of our common stock, including 98,269 shares of our common stock pursuant to our equity incentive plans, for a total cost of $65.5 million, including commissions, for fiscal year 2014. This use of cash in fiscal year 2015 was partially offset by proceeds from the issuance of common stock under stock plans of $14.9 million and $2.4 million of related excess tax benefit. This compares to proceeds from the issuance of common stock under stock plans of $24.5 million in fiscal year 2014. During fiscal year 2015, borrowings from our senior unsecured revolving credit facility totaled $451.0 million, which was more than offset by debt payments of $485.0 million. This compares to borrowings from our senior unsecured revolving credit facility of $475.0 million, which was partially offset by debt payments of $356.0 million. We paid $31.6 million in dividends during both fiscal years 2015 and 2014. During fiscal year 2015, we made net payments of $1.1 million on other credit facilities primarily for lease payments for our financing lease obligations, as described below under financing lease obligations. This compares to $12.7 million of payments on our other credit facilities primarily for debt that was acquired from our business acquisitions during fiscal year 2014. During fiscal year 2015, we also received $18.7 million for the settlement of forward foreign exchange contracts related to intercompany loans utilized to finance our acquisitions and made $0.1 million in payments for acquisition-related contingent consideration. During fiscal year 2014, we paid $1.8 million of debt financing costs for the refinancing of our debt held under a previous senior unsecured revolving credit facility and made $0.9 million in payments for acquisition-related contingent consideration.
Fiscal Year 2014
Operating Activities. Net cash provided by continuing operations was $282.3 million for fiscal year 2014, as compared to net cash provided by continuing operations of $157.2 million for fiscal year 2013, an increase of $125.0 million. The cash provided by operating activities for fiscal year 2014 was principally a result of income from continuing operations of $161.2 million, and non-cash charges, including depreciation and amortization of $116.7 million, stock based compensation expense of $14.5 million, restructuring and contract termination charges, net, of $13.4 million and loss related to our postretirement benefit plans, including the mark-to-market adjustment in the fourth quarter of fiscal year 2014, of $77.7 million. These amounts were partially offset by a net decrease of $67.6 million in accrued expenses, other assets and liabilities and other items, and a net increase in working capital of $33.5 million. The change in accrued expenses, other assets and liabilities and other items that decreased cash provided by operating activities by $67.6 million for fiscal year 2014, primarily related to the timing of payments for taxes, defined benefit pension plans, royalties, restructuring, and salary and benefits. During fiscal year 2014, we made contributions of $11.2 million, in the aggregate, to plans outside of the United States. Contributing to the net increase in working capital for fiscal year 2014, excluding the effect of foreign exchange rate fluctuations, was an increase in inventory of $24.6 million and an increase in accounts receivable of $17.0 million, which were partially offset by an increase in accounts payable of $8.1 million. The increase in inventory was primarily a result of realigning operations, research and development resources and production resources within our Environmental Health and Human Health segments to ensure responsiveness to customer requirements as this realignment occurs. The increase in accounts receivable was a result of higher sales volume in the fourth quarter of fiscal year 2014. The increase in accounts payable was primarily a result of the timing of disbursements during the fourth quarter of fiscal year 2014.
Investing Activities. Net cash used in the investing activities of our continuing operations was $297.5 million for fiscal year 2014, as compared to net cash used in the investing activities of our continuing operations of $1.7 million for fiscal year 2013, an increase of $295.8 million. For fiscal year 2014, we used $271.5 million of net cash for acquisitions and investments, as compared to $15.7 million used in fiscal year 2013. Capital expenditures for fiscal year 2014 were $29.1 million, primarily for manufacturing equipment and other capital equipment purchases, as compared to $39.0 million in fiscal year 2013. These cash outflows were partially offset by proceeds from dispositions of property, plant and equipment of $2.5 million, and the settlement of life insurance policies of $0.5 million in fiscal year 2014. Proceeds from dispositions of property, plant and equipment was $52.2 million for fiscal year 2013, primarily due to the sale of a building located in Boston, Massachusetts for net proceeds of $47.6 million. The settlement of life insurance policies provided proceeds of $0.8 million in fiscal year 2013.
Financing Activities. Net cash provided by the financing activities of our continuing operations was $30.9 million for fiscal year 2014, as compared to net cash used in the financing activities of our continuing operations of $154.2 million for
fiscal year 2013, a change of $185.1 million. For fiscal year 2014, we repurchased 1.4 million shares of our common stock, including 98,269 shares of our common stock pursuant to our equity incentive plans, for a total cost of $65.5 million, including commissions. This compares to repurchases of 3.6 million shares of our common stock, including 127,544 shares of our common stock pursuant to our equity incentive plans, for a total cost of $127.4 million, including commissions, for fiscal year 2013. This use of cash in fiscal year 2014 was partially offset by proceeds from the issuance of common stock under stock plans of $24.5 million. This compares to proceeds from the issuance of common stock under stock plans of $20.3 million in fiscal year 2013. During fiscal year 2014, borrowings from our senior unsecured revolving credit facility totaled $475.0 million, which was partially offset by debt payments of $356.0 million. This compares to borrowings from our senior unsecured revolving credit facility of $677.0 million, which was offset by debt payments of $538.0 million and the prepayment of our 2015 Notes of $150.0 million in fiscal year 2013. We paid $31.6 million in dividends during both fiscal years 2014 and 2013. During fiscal year 2014, we made net payments of $12.7 million on other credit facilities primarily for debt that was acquired from our business acquisitions. This compares to $5.3 million of proceeds from our other credit facilities primarily related to capital improvements to leased buildings, which have been funded by the lessor, as described below in our financing lease obligations. During fiscal year 2014, we paid $1.8 million of debt financing costs for the refinancing of our debt held under a previous senior unsecured revolving credit facility and made $0.9 million in payments for acquisition-related contingent consideration. In fiscal year 2013, we paid a prepayment premium of $11.1 million for the redemption of our 2015 Notes and also received $1.4 million for settlement of forward foreign exchange contracts.
Borrowing Arrangements
Senior Unsecured Revolving Credit Facility. On January 8, 2014, we refinanced our debt held under a previous senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility. The senior unsecured revolving credit facility provides for $700.0 million of revolving loans and has an initial maturity of January 8, 2019. As of January 3, 2016, undrawn letters of credit in the aggregate amount of $11.5 million were treated as issued and outstanding when calculating the borrowing availability under the senior unsecured revolving credit facility. As of January 3, 2016, we had $206.5 million available for additional borrowing under the facility. We use the senior unsecured revolving credit facility for general corporate purposes, which may include working capital, refinancing existing indebtedness, capital expenditures, share repurchases, acquisitions and strategic alliances. The interest rates under the senior unsecured revolving credit facility are based on the Eurocurrency rate or the base rate at the time of borrowing, plus a margin. The base rate is the higher of (i) the rate of interest in effect for such day as publicly announced from time to time by JP Morgan Chase Bank, N.A. as its "prime rate," (ii) the Federal Funds rate plus 50 basis points or (iii) one-month Libor plus 1.00%. At January 3, 2016, borrowings under the senior unsecured revolving credit facility were accruing interest primarily based on the Eurocurrency rate. The Eurocurrency margin as of January 3, 2016 was 108 basis points. The weighted average Eurocurrency interest rate as of January 3, 2016 was 0.36%, resulting in a weighted average effective Eurocurrency rate, including the margin, of 1.44%. As of January 3, 2016, the senior unsecured revolving credit facility had an aggregated carrying value of $479.6 million, which was net of $2.4 million unamortized debt issuance costs. As of December 28, 2014, the senior unsecured revolving credit facility had an aggregate carrying value of $512.8 million, which was net of $3.2 million unamortized debt issuance costs. The credit agreement for the facility contains affirmative, negative and financial covenants and events of default similar to those contained in the credit agreement for our previous facility. The financial covenants in our senior unsecured revolving credit facility include a debt-to-capital ratio, and two contingent covenants, a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio, applicable if our credit rating is downgraded below investment grade. We were in compliance with all applicable covenants as of January 3, 2016.
5% Senior Unsecured Notes due in 2021. On October 25, 2011, we issued $500.0 million aggregate principal amount of senior unsecured notes due in 2021 in a registered public offering and received $496.9 million of net proceeds from the issuance. The 2021 Notes were issued at 99.372% of the principal amount, which resulted in a discount of $3.1 million. As of January 3, 2016, the 2021 Notes had an aggregate carrying value of $495.1 million, net of $2.0 million of unamortized original issue discount and $2.9 million of unamortized debt issuance costs. As of December 28, 2014, the 2021 Notes had an aggregate carrying value of $494.4 million, net of $2.3 million of unamortized original issue discount and $3.3 million of unamortized debt issuance costs. The 2021 Notes mature in November 2021 and bear interest at an annual rate of 5%. Interest on the 2021 Notes is payable semi-annually on May 15th and November 15th each year. Prior to August 15, 2021 (three months prior to their maturity date), we may redeem the 2021 Notes in whole or in part, at our option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2021 Notes being redeemed, discounted on a semi-annual basis, at the Treasury Rate plus 45 basis points, plus accrued and unpaid interest. At any time on or after August 15, 2021 (three months prior to their maturity date), we may redeem the 2021 Notes, at our option, at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed plus accrued and unpaid interest. Upon a change of control (as defined in the indenture governing the 2021 Notes) and a contemporaneous downgrade of the 2021 Notes below investment grade, each holder of 2021 Notes will have the right to require us to repurchase such holder's 2021 Notes for 101%
of their principal amount, plus accrued and unpaid interest. We were in compliance with all applicable covenants as of January 3, 2016.
Financing Lease Obligations. In fiscal year 2012, we entered into agreements with the lessors of certain buildings that we are currently occupying and leasing to expand those buildings. We provided a portion of the funds needed for the construction of the additions to the buildings, and as a result we are considered the owner of the buildings during the construction period. At the end of the construction period, we were not reimbursed by the lessors for all of the construction costs. We are therefore deemed to have continuing involvement and the leases qualify as financing leases under sale-leaseback accounting guidance, representing debt obligations for us and non-cash investing and financing activities. As a result, we capitalized $29.3 million in property, plant and equipment, net, representing the fair value of the buildings with a corresponding increase to debt. We have also capitalized $11.5 million in additional construction costs necessary to complete the renovations to the buildings, which were funded by the lessors, with a corresponding increase to debt. At January 3, 2016, we had $38.2 million recorded for these financing lease obligations, of which $1.1 million was recorded as short-term debt and $37.1 million was recorded as long-term debt. At December 28, 2014, we had $39.3 million recorded for these financing lease obligations, of which $1.1 million was recorded as short-term debt and $38.2 million was recorded as long-term debt. The buildings are being depreciated on a straight-line basis over the terms of the leases to their estimated residual values, which will equal the remaining financing obligation at the end of the lease term. At the end of the lease term, the remaining balances in property, plant and equipment, net and debt will be reversed against each other.
Dividends
Our Board declared a regular quarterly cash dividend of $0.07 per share in each quarter of fiscal years 2015 and 2014, resulting in an annual dividend rate of $0.28 per share. At January 3, 2016, we had accrued $7.8 million for dividends declared on October 29, 2015 for the fourth quarter of fiscal year 2015 that was paid in February 2016. On January 28, 2016, we announced that our Board had declared a quarterly dividend of $0.07 per share for the first quarter of fiscal year 2016 that will be payable in May 2016. In the future, our Board may determine to reduce or eliminate our common stock dividend in order to fund investments for growth, repurchase shares or conserve capital resources.
Contractual Obligations
The following table summarizes our contractual obligations at January 3, 2016 for continuing and discontinued operations. Purchase commitments are minimal and have been excluded from this table:
| Operating Leases | Sr. Unsecured Revolving Credit Facility Maturing 2019(1) | 5.0% Sr. Notes Maturing 2021(2) | Financing Lease Obligations(3) | Employee Benefit Payments(4) | Unrecognized Tax Benefits(5) | Total | |||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||
| 2016 | $ | 51,025 | $ | — | $ | 25,000 | $ | 1,123 | $ | 28,602 | $ | — | $ | 105,750 | |||||||||||||
| 2017 | 34,100 | — | 25,000 | 1,169 | 29,240 | — | 89,509 | ||||||||||||||||||||
| 2018 | 25,931 | — | 25,000 | 1,367 | 29,934 | — | 82,232 | ||||||||||||||||||||
| 2019 | 20,161 | 482,000 | 25,000 | 1,532 | 30,513 | — | 559,206 | ||||||||||||||||||||
| 2020 | 16,442 | — | 25,000 | 1,597 | 31,353 | — | 74,392 | ||||||||||||||||||||
| 2021 and thereafter | 48,654 | — | 521,918 | 31,409 | 164,140 | — | 766,121 | ||||||||||||||||||||
| Total | $ | 196,313 | $ | 482,000 | $ | 646,918 | $ | 38,197 | $ | 313,782 | $ | — | $ | 1,677,210 |
| (1) | The credit facility borrowings carry variable interest rates; the amount included in this table does not include interest obligations. |
| (2) | The 2021 Notes include interest obligations. As of January 3, 2016 the 2021 Notes had a carrying value of $495.1 million. |
| (3) | The financing lease obligations do not include interest obligations. |
| (4) | Employee benefit payments only include obligations through fiscal year 2025. |
| (5) | We have excluded $10.8 million, including accrued interest, net of tax benefits, and penalties, from our uncertain tax positions as we cannot make a reasonably reliable estimate of the amount and period of related future payments. |
As of January 3, 2016, we may have to pay the shareholders of our acquisitions contingent consideration of up to $95.4 million. The table above does not reflect any of these obligations as the timing and amounts are uncertain. For further information related to our contingent consideration obligations, see Note 21 to our consolidated financial statements included in this annual report on Form 10-K.
Capital Expenditures
During fiscal year 2016, we expect to invest an amount for capital expenditures similar to that in fiscal year 2015, primarily to introduce new products, to improve our operating processes, to shift the production capacity to lower cost locations, and to develop information technology. We expect to use our available cash and internally generated funds to fund these expenditures.
Other Potential Liquidity Considerations
At January 3, 2016, we had cash and cash equivalents of $237.9 million, of which $234.0 million was held by our non-U.S. subsidiaries, and we had $206.5 million of additional borrowing capacity available under a senior unsecured revolving credit facility. We had no other liquid investments at January 3, 2016.
We utilize a variety of tax planning and financing strategies to ensure that our worldwide cash is available in the locations in which it is needed. Of the $234.0 million of cash and cash equivalents held by our non-U.S. subsidiaries at January 3, 2016, we would incur U.S. taxes on approximately $156.4 million if transferred to the U.S. without proper planning. We expect the accumulated non-U.S. cash balances, which may not be transferred to the U.S. without incurring U.S. taxes, will remain outside of the U.S. and that we will meet U.S. liquidity needs through future cash flows, use of U.S. cash balances, external borrowings, or some combination of these sources.
On October 23, 2014, our Board authorized us to repurchase up to 8.0 million shares of common stock under a stock repurchase program (the "Repurchase Program"). The Repurchase Program will expire on October 23, 2016 unless terminated earlier by our Board, and may be suspended or discontinued at any time. During fiscal year 2015, we repurchased 1.5 million shares of common stock in the open market at an aggregate cost of $72.0 million, including commissions, under the Repurchase Program. As of January 3, 2016, 5.9 million shares remained available for repurchase under the Repurchase Program. From January 4, 2016 through February 25, 2016, we repurchased 2.4 million shares of common stock in the open market at an aggregate cost of $109.7 million, including commissions, under the Repurchase Program.
In addition, our Board has authorized us to repurchase shares of common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards and restricted stock unit awards granted pursuant to our equity incentive plans and to satisfy obligations related to the exercise of stock options made pursuant to our equity incentive plans. During fiscal year 2015, we repurchased 95,129 shares of common stock for this purpose at an aggregate cost of $4.4 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. Any repurchased shares will be available for use in connection with corporate programs. If we continue to repurchase shares, the Repurchase Program will be funded using our existing financial resources, including cash and cash equivalents, and our existing senior unsecured revolving credit facility.
Distressed global financial markets could adversely impact general economic conditions by reducing liquidity and credit availability, creating increased volatility in security prices, widening credit spreads and decreasing valuations of certain investments. The widening of credit spreads may create a less favorable environment for certain of our businesses and may affect the fair value of financial instruments that we issue or hold. Increases in credit spreads, as well as limitations on the availability of credit at rates we consider to be reasonable, could affect our ability to borrow under future potential facilities on a secured or unsecured basis, which may adversely affect our liquidity and results of operations. In difficult global financial markets, we may be forced to fund our operations at a higher cost, or we may be unable to raise as much funding as we need to support our business activities.
Our pension plans have not experienced a material impact on liquidity or counterparty exposure due to the volatility and uncertainty in the credit markets. With respect to plans outside of the United States, we expect to contribute $9.3 million in the aggregate during fiscal year 2016. During fiscal year 2015, we contributed $14.9 million, in the aggregate, to pension plans outside of the United States and $20.0 million to our defined benefit pension plan in the United States. We could potentially have to make additional funding payments in future periods for all pension plans. During fiscal year 2014, we contributed $11.2 million, in the aggregate, to plans outside of the United States. During fiscal year 2013, we made contributions of $37.0 million for the 2012 plan year to our defined benefit pension plan in the United States. During fiscal year 2013, we contributed $20.2 million, in the aggregate, to plans outside of the United States, which includes an additional contribution of $10.0 million to our defined benefit pension plan in the United Kingdom. We expect to use existing cash and external sources to satisfy future contributions to our pension plans.
Effects of Recently Issued and Adopted Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board ("the FASB") and are adopted by us as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on our consolidated financial position, results of operations and cash flows or do not apply to our operations.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, 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. We are evaluating the requirements of this guidance and have not yet determined the impact of the adoption on our consolidated financial position, results of operations and cash flows.
In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Balance Sheet Classification of Deferred Taxes ("ASU No. 2015-17"). Under this new guidance, companies are required to present deferred tax assets and deferred tax liabilities, and any related valuation allowances, as noncurrent on our consolidated balance sheet. The provisions of this guidance can be applied prospectively or retrospectively and are effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. During fiscal year 2015, we early adopted the new guidance on a prospective basis and have presented all deferred tax assets and deferred tax liabilities as noncurrent in the consolidated balance sheet at January 3, 2016. If we elected to adopt the standard on a retrospective basis, current deferred tax assets of $62.0 million would have been classified as noncurrent at December 28, 2014.
In September 2015, the FASB issued ASU No. 2015-16. Under this new guidance, an acquirer should recognize adjustments to provisional amounts for items in a business combination that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The acquirer should record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The provisions of this guidance are to be applied prospectively and are effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. During the third quarter of fiscal year 2015, we early adopted the new guidance and adjusted the provisional amounts recorded for acquisitions in which the purchase accounting allocations were preliminary. During fiscal year 2015, there was an immaterial impact on the current period net income as a result of the change to the provisional amounts for items that would have been recognized in previous periods if the adjustments to provisional amounts had been recognized as of the acquisition date.
In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory. Under this new guidance, companies that use inventory measurement methods other than last-in, first-out or the retail inventory method should measure inventory at the lower of cost and net realizable value. The provisions of this guidance are to be applied prospectively and are effective for interim and annual periods beginning after December 15, 2016, with early adoption permitted. We are evaluating the requirements of this guidance. The adoption is not expected to have a material impact on our consolidated financial position, results of operations and cash flows.
In April 2015, the FASB issued Accounting Standards Update No. 2015-04, Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets. Under this new guidance, an entity with a fiscal year-end that does not coincide with a calendar month-end (for example an entity that has a 52/53 week fiscal year) has the ability, as a practical expedient, to measure its defined benefit retirement obligations and related plan assets as of the month-end that is closest to its fiscal year end. The provisions of this guidance should be applied prospectively. During fiscal year 2015, we early adopted the new guidance. The adoption did not have a material impact on our consolidated financial position, results of operations or cash flows.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs. Under this new guidance, debt issuance costs related to a recognized debt liability should be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The provisions of this guidance are to be applied retrospectively and are effective for interim and annual periods beginning after December 15, 2015, with early adoption permitted. We early adopted this guidance in the fourth quarter of fiscal year 2015. The consolidated balance sheet as of December 28, 2014, in our consolidated financial statements included in this annual report on Form 10-K, reflects a restatement to reclassify unamortized debt issuance costs of $6.5 million from other long-term assets to long-term debt. For debt issuance costs paid to secure revolving credit facilities, we made a policy election to present such costs as a direct deduction from the debt liability in the consolidated balance sheet.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. 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 periods beginning after December 15, 2017, with early adoption permitted for annual periods beginning after December 15, 2016. The standard may be adopted either using a full retrospective approach or a modified retrospective approach. We are evaluating the requirements of this guidance and have not yet determined the transition method to use or the impact of its adoption on our consolidated financial position, results of operations and cash flows. We do not intend to early adopt this standard.
Application of Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, warranty costs, bad debts, inventories, accounting for business combinations and dispositions, long-lived assets, income taxes, restructuring, pensions and other postretirement benefits, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in preparation of our consolidated financial statements.
Revenue recognition. We record product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable, and collectability is reasonably assured. For products that include installation, and if the installation meets the criteria to be considered a separate element, we recognize product revenue upon delivery, and recognition of installation revenue is recognized when the installation is complete. For revenue that includes customer-specified acceptance criteria, we recognize revenue after the acceptance criteria have been met. Certain of our products require specialized installation. Revenue for these products is deferred until installation is completed. We defer revenue from services and recognize it over the contractual period, or as services are rendered.
In limited circumstances, we have arrangements that include multiple elements that are delivered at different points of time, such as revenue from products and services with a remaining service or storage component, including cord blood processing and storage. For these arrangements, the revenue is allocated to each of the deliverables based upon their relative selling prices as determined by a selling-price hierarchy. A deliverable in an arrangement qualifies as a separate unit of accounting if the delivered item has value to the customer on a stand-alone basis. A delivered item that does not qualify as a separate unit of accounting is combined with the other undelivered items in the arrangement and revenue is recognized for those combined deliverables as a single unit of accounting. The selling price used for each deliverable is based upon vendor-specific objective evidence ("VSOE") if such evidence is available, third-party evidence ("TPE") if VSOE is not available, and management's best estimate of selling price ("BESP") if neither VSOE nor TPE are available. TPE is the price of our or any competitor's largely interchangeable products or services in stand-alone sales to similarly-situated customers. BESP is the price at which we would sell the deliverable if it were sold regularly on a stand-alone basis, considering market conditions and entity-specific factors.
Revenue from software licenses and services was 5% of our total revenue for each of fiscal years 2015, 2014 and 2013. We sell our software licenses with maintenance services and, in some cases, also with consulting services. For the undelivered elements, we determine VSOE of fair value to be the price charged when the undelivered element is sold separately. We determine VSOE for maintenance sold in connection with a software license based on the amount that was separately charged for the maintenance renewal period. We determine VSOE for consulting services by reference to the amount charged for similar engagements when a software license sale is not involved.
We recognize revenue from software licenses sold together with maintenance and/or consulting services upon shipment using the residual method, provided that the above criteria have been met. If VSOE of fair value for the undelivered elements cannot be established, we defer 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 only undelivered element is maintenance, then we recognize the entire fee ratably over the maintenance period.
The majority of our sales relate to specific manufactured products or units rather than long-term customized projects, therefore we generally do not experience significant changes in original estimates. Further, we have not experienced any significant refunds or promotional allowances that require significant estimation.
Warranty costs. We provide for estimated warranty costs for products at the time of their sale. Warranty liabilities are estimated using expected future repair costs based on historical labor and material costs incurred during the warranty period.
Allowances for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We generally compute our allowance for doubtful accounts by (i) applying specific percentage reserves on accounts that are past due and deemed uncollectible; and (ii) specifically reserving for customers known to be in financial difficulty. Therefore, if the financial condition of our customers were to deteriorate beyond our estimates, we may have to increase our allowance for doubtful accounts. This would reduce our earnings. Accounts are written-off only when all methods of recovery have been exhausted.
Inventory valuation. We value inventory at the lower of cost or market. Inventories are accounted for using the first-in, first-out method. We periodically review these values to ascertain that market value of the inventory continues to exceed its recorded cost. Generally, reductions in value of inventory below cost are caused by our maintenance of stocks of products in excess of demand, or technological obsolescence of the inventory. We regularly review inventory quantities on hand and, when necessary, record provisions for excess and obsolete inventory based on either our estimated forecast of product demand and production requirements, or historical trailing usage of the product. If our sales do not materialize as planned or at historic levels, we may have to increase our reserve for excess and obsolete inventory. This would reduce our earnings. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold, resulting in lower costs of sales and higher income from operations than expected in that period.
Business combinations. Business combinations are accounted for at fair value. Acquisition costs are expensed as incurred and recorded in selling, general and administrative expenses; previously held equity interests are valued at fair value upon the acquisition of a controlling interest; in-process research and development (“IPR&D”) is recorded at fair value as an intangible asset at the acquisition date; restructuring costs associated with a business combination are expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date affect income tax expense. Measurement period adjustments are made in the period in which the amounts are determined and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date. All changes that do not qualify as measurement period adjustments are also included in current period earnings. The accounting for business combinations requires estimates and judgment 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 value for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed, including contingent consideration, are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of the intangible assets and goodwill, require acceleration of the amortization expense of finite-lived intangible assets, or the recognition of additional consideration which would be expensed. The fair value of contingent consideration is remeasured each period based on relevant information and changes to the fair value are included in the operating results for the period.
Value of long-lived assets, including goodwill and other intangibles. We carry a variety of long-lived assets on our consolidated balance sheets including property and equipment, investments, identifiable intangible assets, and goodwill. We periodically review the carrying value of all of these assets based, in part, upon current estimated market values and our projections of anticipated future cash flows. We undertake this review (i) on an annual basis for assets such as goodwill and non-amortizing intangible assets and (ii) on a periodic basis for other long-lived assets when facts and circumstances suggest that cash flows related to those assets may be diminished. Any impairment charge that we record reduces our earnings. The goodwill impairment test consists of a two-step process. The first step is the comparison of the fair value to the carrying value of the reporting unit to determine if the carrying value exceeds the fair value. The second step measures the amount of an impairment loss, and is only performed if the carrying value exceeds the fair value of the reporting unit. We perform the annual impairment assessment on the later of January 1 or the first day of each fiscal year. This same impairment test will be performed at other times during the course of the year should an event occur which suggests that the recoverability of goodwill should be reconsidered. Through fiscal year 2015, we conducted annual goodwill impairment assessments for our reporting units. We completed the annual goodwill impairment test using measurement dates of January 1, 2015 and January 1, 2014, and concluded based on the first step of the process that there was no goodwill impairment. At January 1, 2015, the fair value exceeded the carrying value by more than 20.0% for each reporting unit, with the exception of the Perten reporting unit in which its fair value approximated carrying value, as expected based on the recent acquisition date. At the beginning of fiscal year 2015, we realigned our organization which resulted in a change in the composition of our reporting units within our Human Health and Environmental Health segments. OneSource, our multivendor laboratory service business that serves the life sciences end market, was moved from our Environmental Health segment into our Human Health segment. As of December 28, 2014, as a result of the new alignment, we reallocated $41.2 million of goodwill from our Environmental Health segment to our
Human Health segment based on the relative fair value, determined using the income approach, of the OneSource laboratory service business within our historical Environmental Health segment. While we believe that our estimates of current value are reasonable, if actual results differ from the estimates and judgments used including such items as future cash flows and the volatility inherent in markets which we serve, impairment charges against the carrying value of those assets could be required in the future.
Non-amortizing intangibles are also subject to an annual impairment test. The impairment test consists of a comparison of the fair value of the non-amortizing intangible asset with its carrying amount. If the carrying amount of a non-amortizing intangible asset exceeds its fair value, an impairment loss in an amount equal to that excess is recognized. In addition, we currently evaluate the remaining useful life of our non-amortizing intangible assets at least annually to determine whether events or circumstances continue to support an indefinite useful life. If events or circumstances indicate that the useful lives of non-amortizing intangible assets are no longer indefinite, the assets will be tested for impairment. These intangible assets will then be amortized prospectively over their estimated remaining useful life and accounted for in the same manner as other intangible assets that are subject to amortization. During fiscal year 2013, we recorded a charge of $0.2 million for the impairment of certain long-lived assets within our Human Health segment, as the carrying amounts of the long-lived assets were not recoverable and exceeded their fair value. The non-cash impairment of long-lived assets has been recorded as a separate component of operating expenses.
Employee compensation and benefits. We sponsor both funded and unfunded U.S. and non-U.S. defined benefit pension plans and other postretirement benefits. Retirement and postretirement benefit plans are a significant cost of doing business, and represent obligations that will be ultimately settled far in the future, and therefore are subject to estimation. Retirement and postretirement benefit plan expenses are allocated to cost of revenue, research and development, and selling, general and administrative expenses, in our consolidated statements of operations. We immediately recognize actuarial gains and losses in operating results in the year in which the gains and losses occur. Actuarial gains and losses are measured annually as of the calendar month-end that is closest to our fiscal year end and accordingly will be recorded in the fourth quarter, unless we are required to perform an interim remeasurement.
We recognized a loss of $9.4 million in fiscal year 2015, a loss of $77.7 million in fiscal year 2014 and income of $18.2 million in fiscal year 2013 for our retirement and postretirement benefit plans, which includes the charge for the mark-to-market adjustment for the postretirement benefit plans, which was recorded in the fourth quarter of each fiscal year. The loss or income related to the mark-to-market adjustment on postretirement benefit plans was a pre-tax loss of $12.4 million in fiscal year 2015, a pre-tax loss of $75.9 million in fiscal year 2014 and pre-tax income of $17.6 million in fiscal year 2013. We expect income of approximately $1.3 million in fiscal year 2016 for our retirement and postretirement benefit plans, excluding the charge for or benefit from the mark-to-market adjustment. It is difficult to reliably calculate and predict whether there will be a mark-to-market adjustment in fiscal year 2016. Mark-to-market adjustments are primarily driven by events and circumstances beyond our control, including changes in interest rates, the performance of the financial markets and mortality assumptions. To the extent the discount rates decrease or the value of our pension and postretirement investments decrease, mark-to market charges to operations will be recorded in fiscal year 2016. Conversely, to the extent the discount rates increase or the value of our pension and postretirement investments increase more than expected, mark-to market income will be recorded in fiscal year 2016. Pension accounting is intended to reflect the recognition of future benefit costs over the employee’s approximate service period based on the terms of the plans and the investment and funding decisions made. We are required to make assumptions regarding such variables as the expected long-term rate of return on assets, the discount rate applied and mortality assumptions, to determine service cost and interest cost, in order to arrive at expected pension income or expense for the year. Beginning in fiscal year 2016, the approach we use to calculate the service and interest components of net periodic benefit cost for certain benefit plans will be changed to provide a more precise measurement of service and interest costs. Prior to fiscal year 2016, we calculated these service and interest components utilizing a single weighted-average discount rate derived from a yield curve used to measure the benefit obligation at the beginning of the period. Beginning in fiscal year 2016, we have elected to utilize an approach that discounts the individual expected cash flows using the applicable spot rates derived from a yield curve over the projected cash flow period. Based on current economic conditions, we estimate that the service cost and interest cost for these certain plans will be reduced in fiscal year 2016. We will account for this as a change in accounting estimate.
As of January 3, 2016, we estimate the expected long-term rate of return on assets in our pension and other postretirement benefit plans in the United States to be 7.25% and to be 5.30% for all plans outside the United States. In addition, as of January 3, 2016 we estimate the discount rate for our pension and other postretirement benefit plans in the United States to be 4.24% and to be 2.88% for all plans outside the United States. For the plans in the United States, as of December 28, 2014 we adopted a new mortality base table, RP-2014, with projection scale, MP-2014, that was published by the Society of Actuaries in 2014. The adoption of the new mortality base table resulted in a $32.1 million increase to our projected benefit obligation as of December 28, 2014. During fiscal year 2015, the Society of Actuaries issued an updated mortality improvement scale that reflects smaller improvements in longevity than predicted by its MP-2014 scale. We adopted
the updated projection scale, MP-2015, as of January 3, 2016. The adoption of the updated projection scale resulted in a $6.8 million decrease to the projected benefit obligation at January 3, 2016. We have analyzed the rates of return on assets used and determined that these rates are reasonable based on the plans’ historical performance relative to the overall markets in the countries where we invest the assets, as well as our current expectations for long-term rates of returns for our pension and other postretirement benefit assets. Our management will continue to assess the expected long-term rate of return on plan assets assumptions for each plan based on relevant market conditions, and will make adjustments to the assumptions as appropriate. Discount rate assumptions have been, and continue to be, based on the prevailing market long-term interest rates corresponding with expected benefit payments at the measurement date.
If any of our assumptions were to change as of January 3, 2016, our pension plan expenses would also change.
| Increase (Decrease) at January 3, 2016 | |||||||
| Percentage Point Change | Non-U.S. | U.S. | |||||
| Pension plans discount rate | +0.25 | (9,857 | ) | (8,194 | ) | ||
| -0.25 | 10,439 | 8,587 | |||||
| Rate of return on pension plan assets | +1.00 | (1,509 | ) | (2,447 | ) | ||
| -1.00 | 1,509 | 2,447 | |||||
| Postretirement medical plans discount rate | +0.25 | N/A | (99 | ) | |||
| -0.25 | N/A | 104 | |||||
| Rate of return on postretirement medical plan assets | +1.00 | N/A | (144 | ) | |||
| -1.00 | N/A | 144 |
We have reduced the volatility in our healthcare costs provided to our retirees by adopting a defined dollar plan feature in fiscal year 2001. Under the defined dollar plan feature, our total annual liability for healthcare costs to any one retiree is limited to a fixed dollar amount, regardless of the nature or cost of the healthcare needs of that retiree. Our maximum future liability, therefore, cannot be increased by future changes in the cost of healthcare.
Restructuring activities. Our consolidated financial statements detail specific charges relating to restructuring activities as well as the actual spending that has occurred against the resulting accruals. Our pre-tax restructuring charges are estimates based on our preliminary assessments of (i) severance benefits to be granted to employees, based on known benefit formulas and contractual agreements, (ii) costs to abandon certain facilities based on known lease costs of sub-rental income and (iii) impairment of assets as discussed above under “Value of long-lived assets, including goodwill and other intangibles.” Because these accruals are estimates, they are subject to change as a result of deviations from initial restructuring plans or subsequent information that may come to our attention. For example, actual severance costs may be less than anticipated if employees voluntarily leave prior to the time at which they would be entitled to severance, or if anticipated legal hurdles in foreign jurisdictions prove to be less onerous than expected. In addition, unanticipated successes or difficulties in terminating leases and other contractual obligations may lead to changes in estimates. When such changes in estimates occur, they are reflected in our consolidated financial statements on our consolidated statements of operations line entitled “restructuring and contract termination charges, net.”
Dispositions. When we record the disposition of an asset or discontinuance of an operation, which meets the criteria to be reported as a discontinued operation, we make an estimate relative to the amount we expect to realize on the sale or disposition. This estimate is based on a variety of factors, including current interest in the market, alternative markets for the assets, and other relevant factors. If anticipated proceeds are less than the current carrying amount of the asset or operation, we record a loss. If anticipated proceeds are greater than the current carrying amount of the asset or operation, we recognize a gain net of expected contingencies when the transaction has been consummated. Accordingly, we may realize amounts different than were first estimated. During the fiscal year ended January 3, 2016, pre-tax losses from the disposition of discontinued operations was not material. Any such changes decrease or increase current earnings.
Income taxes. Our business operations are global in nature, and we are subject to taxes in numerous jurisdictions. Tax laws and tax rates vary substantially in these jurisdictions, and are subject to change given the political and economic climate in those countries. We report and pay income tax based on operational results and applicable law. Our tax provision contemplates tax rates currently in effect to determine both our current and deferred tax provisions. Any significant fluctuation in rates or changes in tax laws could cause our estimates of taxes we anticipate either paying or recovering in the future to change. Such changes could lead to either increases or decreases in our effective tax rate.
Significant judgment is required in determining our worldwide provision for income taxes and recording the related tax assets and liabilities. In the ordinary course of our business, there are operational decisions, transactions, facts and circumstances, and calculations for which the ultimate tax determination is not certain. Furthermore, our tax positions are periodically subject to challenge by taxing authorities throughout the world. Every quarter we review our tax positions in each significant taxing jurisdiction in the process of evaluating our unrecognized tax benefits. Adjustments are made to our unrecognized tax benefits when: (i) facts and circumstances regarding a tax position change, causing a change in our 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. Any significant impact as a result of changes in underlying facts, law, tax rates, tax audit, or review could lead to adjustments to our income tax expense, our effective tax rate, or our cash flow.
Additionally, we have established valuation allowances against a variety of deferred tax assets, including state net operating loss carryforwards, state income tax credit carryforwards, and certain foreign tax attributes. Valuation allowances take into consideration our ability to use these deferred tax assets and reduce the value of such items to the amount that is deemed more likely than not to be recoverable. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the future pretax operating income adjusted for items that do not have tax consequences. These assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying business. Changes in our assumptions regarding the appropriate amount for valuation allowances could result in the increase or decrease in the valuation allowance, with a corresponding charge or benefit to our tax provision.
Taxes have not been provided on unremitted earnings of international subsidiaries that we consider indefinitely reinvested because we plan to keep these amounts indefinitely reinvested overseas except for instances where we can remit such earnings to the U.S. without an associated net tax cost. Our indefinite reinvestment determination is based on the future operational and capital requirements of our U.S. and non-U.S. operations. As of January 3, 2016, the amount of foreign earnings that we have the intent and ability to keep invested outside the U.S. indefinitely and for which no U.S. tax cost has been provided was approximately $859.0 million. It is not practical to calculate the unrecognized deferred tax liability on those earnings.
Previous: Item 6. Selected Financial Data · Next: Item 7A. Quantitative and Qualitative Disclosures About Market Risk