filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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. Each of the fiscal years ended January 1, 2017 ("fiscal year 2016") and December 28, 2014 ("fiscal year 2014") included 52 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. The fiscal year ending December 31, 2017 will include 52 weeks.
Overview of Fiscal Year 2016
We realigned our businesses at the beginning of the fourth quarter of fiscal year 2016 to better organize around customer requirements, positioning us to grow in attractive end markets and expand share with our core product offerings. We created two new reporting segments, Discovery & Analytical Solutions and Diagnostics, which will enable us to deliver improved customer focus, more value-add collaboration and breakthrough innovations. Microfluidics and automation products within our former research business were moved to a new applied genomics group within the Diagnostics segment. In addition, we also moved our Medical Imaging business into discontinued operations due to its pending sale. The results reported for fiscal year 2016 reflect our new segment structure and the exclusion of our Medical Imaging business from continuing operations. Financial information in this report relating to fiscal years 2015 and 2014 has been retrospectively adjusted to reflect these changes.
During fiscal year 2016, we continued to see good performance from acquisitions, investments in our ongoing technology and sales and marketing initiatives. Our overall revenue in fiscal year 2016 increased $10.7 million, or 1%, as compared to fiscal year 2015, reflecting an increase of $26.1 million, or 5%, in our Diagnostics segment revenue, which was partially offset by a decrease of $15.4 million, or 1%, in our Discovery & Analytical Solutions segment revenue. The decrease in our Discovery & Analytical Solutions segment was primarily driven by decreases in revenue in our academic and government product offerings within our life sciences research market and a decrease in our environmental and food businesses due to weak harvest conditions, which were partially offset by increased demand in our laboratory services business. The increase in our Diagnostics segment revenue during fiscal year 2016 was primarily due to strong performance of our newborn and infectious disease screening solutions in emerging markets such as China, as well as in Europe.
In our Discovery & Analytical Solutions segment, excluding the unfavorable impact of foreign currency exchange, we experienced flat growth during fiscal year 2016 in several of our products within our life science research end market, as compared to fiscal year 2015. During fiscal year 2016, we experienced increased demand for our OneSource laboratory service and informatics businesses. 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. This was offset by decreases in revenue in our environmental and food business due to weak harvest conditions as well as in our academic and government product offerings due to reduced government funding. 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.
In our Diagnostics segment, we experienced growth from continued expansion in our newborn screening, blood banking and screening businesses. 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 2016. The growth in our Diagnostics segment was partially offset by unfavorable impacts from foreign currency as the U.S. dollar strengthened. 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.
Our consolidated gross margins increased 209 basis points in fiscal year 2016, as compared to fiscal year 2015, primarily due to favorable changes in product mix, with an increase in sales of higher gross margin product offerings, and benefits from our initiatives to improve our supply chain. Our consolidated operating margin increased 146 basis points in fiscal year 2016, as compared to fiscal year 2015 primarily due to 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 continue to believe that we are well positioned to take advantage of the spending trends in our end markets and to promote efficiencies in markets where current conditions may increase demand for certain services. Overall, we believe that our strategic focus on diagnostics and discovery and analytical solutions markets, coupled with our deep portfolio of technologies and applications, leading market positions, global scale and financial strength will provide us with a foundation for growth.
Consolidated Results of Continuing Operations
Revenue
2016 Compared to 2015. Revenue for fiscal year 2016 was $2,115.5 million, as compared to $2,104.8 million for fiscal year 2015, an increase of $10.7 million, or 1%, which includes an approximate 1% decrease in revenue attributable to changes in foreign exchange rates with minimal impact from acquisitions and divestitures. In addition, our fiscal year 2015 had an additional week, which consisted of 53 weeks, as compared to fiscal year 2016, which consisted of 52 weeks. The analysis in the remainder of this paragraph compares segment revenue for fiscal year 2016 as compared to fiscal year 2015 and includes the effect of foreign exchange rate fluctuations and acquisitions and divestitures. The total increase in revenue reflects an increase in our Diagnostics segment revenue of $26.1 million, or 5%, due to continued expansion in our newborn screening, blood banking and screening businesses. Our Discovery & Analytical Solutions segment revenue decreased by $15.4 million, or 1%, due to a decrease in environmental, food and industrial markets revenue of $20.8 million and life sciences research market revenue of $0.6 million, which was partially offset by an increase in laboratory services market revenue of $6.0 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $0.7 million of revenue primarily related to our Diagnostics segment for fiscal year 2016 and $0.8 million for fiscal year 2015 that otherwise would have been recorded by the acquired businesses during each of the respective periods.
2015 Compared to 2014. Revenue for fiscal year 2015 was $2,104.8 million, as compared to $2,069.9 million for fiscal year 2014, an increase of $34.9 million, or 2%, which includes an approximate 3% increase in revenue attributable to acquisitions and divestitures and an approximate 6% decrease in revenue attributable to changes in foreign exchange rates. 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 and divestitures. The total increase in revenue reflects a $44.3 million, or 3%, increase in our Discovery & Analytical Solutions segment revenue, due to an increase in environmental, food and industrial markets revenue of $44.9 million and life sciences research market revenue of $11.6 million partially offset by a decrease in laboratory services market revenue of $12.2 million. Our Diagnostics segment revenue decreased by $9.3 million, or 2%. 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 informatics business in our Diagnostics 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.
Cost of Revenue
2016 Compared to 2015. Cost of revenue for fiscal year 2016 was $1,102.2 million, as compared to $1,140.6 million for fiscal year 2015, a decrease of approximately $38.4 million, or 3%. As a percentage of revenue, cost of revenue decreased to 52.1% in fiscal year 2016 from 54.2% in fiscal year 2015, resulting in an increase in gross margin of approximately 209 basis points to 47.9% in fiscal year 2016 from 45.8% in fiscal year 2015. Amortization of intangible assets decreased and was $30.3 million for fiscal year 2016, as compared to $42.4 million for fiscal year 2015. The mark-to-market adjustment for postretirement benefit plans was a loss of $0.4 million for fiscal year 2016, as compared to a loss of $1.2 million for fiscal year 2015. Stock-based compensation expense was $1.0 million for fiscal year 2016, as compared to $1.3 million for fiscal year 2015. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an incremental expense of $0.4 million for fiscal year 2016, as compared to $7.3 million for fiscal year 2015. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $0.1 million for each of fiscal years 2016 and 2015. In addition to the factors noted above, the increase in gross margin was primarily the result of favorable changes in product mix, with an increase in sales of higher gross margin product offerings and benefits from our initiatives to improve our supply chain.
2015 Compared to 2014. Cost of revenue for fiscal year 2015 was $1,140.6 million, as compared to $1,135.3 million for fiscal year 2014, an increase of approximately $5.3 million, or 0.5%. As a percentage of revenue, cost of revenue decreased to
54.2% in fiscal year 2015 from 54.8% in fiscal year 2014, resulting in an increase in gross margin of approximately 66 basis points to 45.8% in fiscal year 2015 from 45.2% in fiscal year 2014. Amortization of intangible assets decreased and was $42.4 million for fiscal year 2015, as compared to $48.7 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 $8.2 million for fiscal year 2014. Stock-based compensation expense was $1.3 million for fiscal year 2015, as compared to $1.4 million for fiscal year 2014. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was $7.3 million for fiscal year 2015, as compared to $2.4 million for fiscal year 2014. Acquisition and divestiture-related expenses, 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 exchange rates.
Selling, General and Administrative Expenses
2016 Compared to 2015. Selling, general and administrative expenses for fiscal year 2016 were $600.9 million, as compared to $587.2 million for fiscal year 2015, an increase of approximately $13.7 million, or 2%. As a percentage of revenue, selling, general and administrative expenses increased to 28.4% in fiscal year 2016 from 27.9% in fiscal year 2015. Amortization of intangible assets increased and was $40.7 million for fiscal year 2016, as compared to $33.8 million for fiscal year 2015. The mark-to-market adjustment for postretirement benefit plans was a loss of $14.9 million for fiscal year 2016, as compared to a loss of $11.1 million for fiscal year 2015. Stock-based compensation expense decreased and was $15.2 million for fiscal year 2016, as compared to $15.5 million for fiscal year 2015. During fiscal year 2015, we recorded $0.8 million in legal costs for a particular case. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $17.5 million for fiscal year 2016 as compared to $0.7 million for fiscal year 2015. In addition to the above items, the increase in selling, general and administrative expenses was primarily the result of costs related to growth investments, which was partially offset by the result of lower costs as a result of cost containment and productivity initiatives.
2015 Compared to 2014. Selling, general and administrative expenses for fiscal year 2015 were $587.2 million, as compared to $648.2 million for fiscal year 2014, a decrease of approximately $61.0 million, or 9%. As a percentage of revenue, selling, general and administrative expenses decreased to 27.9% in fiscal year 2015, compared to 31.3% in fiscal year 2014. Amortization of intangible assets increased and was $33.8 million for fiscal year 2015, as compared to $32.2 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 loss of $67.0 million for fiscal year 2014. Stock-based compensation expense increased and was $15.5 million for fiscal year 2015, as compared to $12.2 million for fiscal year 2014. During fiscal year 2015, we recorded $0.8 million in legal costs for a particular case compared to $6.6 million for fiscal year 2014. 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 and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $0.7 million for fiscal year 2015 and $3.1 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.
Research and Development Expenses
2016 Compared to 2015. Research and development expenses for fiscal year 2016 were $124.3 million, as compared to $112.5 million for fiscal year 2015, an increase of $11.7 million, or 10%. As a percentage of revenue, research and development expenses increased to 5.9% in fiscal year 2016, as compared to 5.3% in fiscal year 2015. Amortization of intangible assets was $0.5 million for each of fiscal years 2016 and 2015. The mark-to-market adjustment for postretirement benefit plans was a loss of $0.1 million for fiscal year 2015. Stock-based compensation expense increased and was $0.9 million for fiscal year 2016, as compared to $0.5 million for fiscal year 2015. In addition to the above items, the increase in research and development expenses was primarily the result of investments in new product development, primarily the results of our investments in Vanadis focused on non-invasive prenatal screening and ionics mass spectrometry focused on food and environmental safety applications. This was partially offset by lower costs as a result of cost containment and productivity initiatives. We directed research and development efforts similarly during fiscal years 2016 and 2015, primarily towards the diagnostics, environmental, food, life sciences research and laboratory services markets in order to help accelerate our growth initiatives. We have a broad product base, and we do not expect any single research and development project to have significant costs.
2015 Compared to 2014. Research and development expenses for fiscal year 2015 were $112.5 million, as compared to $108.1 million for fiscal year 2014, an increase of $4.5 million, or 4%. As a percentage of revenue, research and development expenses increased to 5.3% in fiscal year 2015, as compared to 5.2% 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 $0.2 million for fiscal year 2014. Stock-based compensation expense was $0.5 million for each of fiscal years 2015 and 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.
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 2016 were $5.1 million, as compared to $13.5 million for fiscal year 2015 and $13.3 million for fiscal year 2014.
We implemented a restructuring plan in the third quarter of fiscal year 2016 consisting of workforce reductions principally intended to focus resources on higher growth product lines (the "Q3 2016 Plan"). We implemented a restructuring plan in the second quarter of fiscal year 2016 consisting of workforce reductions principally intended to focus resources on higher growth end markets (the "Q2 2016 Plan"). We implemented restructuring plans in the fourth quarter of fiscal year 2015, and the second and first quarters of fiscal year 2014 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", and "Q1 2014 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). 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").
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 2016, 2015 and 2014 in continuing operations:
| Workforce Reductions | Closure of Excess Facility | Total | (Expected) Date Payments Substantially Completed by | |||||||||||||||||||||||
| Headcount Reduction | Diagnostics | Discovery & Analytical Solutions | Diagnostics | Discovery & Analytical Solutions | Severance | Excess Facility | ||||||||||||||||||||
| (In thousands, except headcount data) | ||||||||||||||||||||||||||
| Q3 2016 Plan | 22 | $ | 41 | $ | 1,779 | $ | — | $ | — | $ | 1,820 | Q4 FY2017 | — | |||||||||||||
| Q2 2016 Plan | 72 | 561 | 4,106 | — | — | 4,667 | Q3 FY2017 | — | ||||||||||||||||||
| Q4 2015 Plan | 174 | 1,315 | 9,980 | — | 285 | 11,580 | Q1 FY2017 | Q4 FY2017 | ||||||||||||||||||
| Q2 2015 Plan | 95 | 673 | 5,290 | — | — | 5,963 | Q2 FY2016 | — | ||||||||||||||||||
| Q3 2014 Plan | 152 | 2,885 | 10,166 | — | — | 13,051 | Q4 FY2015 | — | ||||||||||||||||||
| Q2 2014 Plan | 21 | 235 | 435 | — | — | 670 | Q2 FY2015 | — | ||||||||||||||||||
| Q1 2014 Plan | 17 | 281 | 286 | — | — | 567 | Q4 FY2014 | — |
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, $0.1 million and $1.5 million in the Discovery & Analytical Solutions segment during fiscal years 2016, 2015 and 2014, respectively, as a result of these contract terminations.
At January 1, 2017, we had $10.5 million recorded for accrued restructuring and contract termination charges, of which $7.5 million was recorded in short-term accrued restructuring and $3.1 million was recorded in long-term liabilities. At January 3, 2016, we had $22.2 million recorded for accrued restructuring and contract termination charges, of which $17.0 million was recorded in short-term accrued restructuring and $5.1 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 2016, 2015 and 2014 in continuing operations:
| 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 | 2016 Charges and Changes in Estimates, Net | 2016 Amounts Paid | Balance at January 1, 2017 | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||
| Severance: | |||||||||||||||||||||||||||||||||||||||
| Q3 2016 Plan | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,820 | $ | (612 | ) | $ | 1,208 | |||||||||||||||||||
| Q2 2016 Plan | — | — | — | — | — | — | — | 4,667 | (3,231 | ) | 1,436 | ||||||||||||||||||||||||||||
| Q4 2015 Plan(1) | — | — | — | — | 11,295 | (925 | ) | 10,370 | (953 | ) | (8,198 | ) | 1,219 | ||||||||||||||||||||||||||
| Q2 2015 Plan(2) | — | — | — | — | 5,423 | (4,322 | ) | 1,101 | (533 | ) | (370 | ) | 198 | ||||||||||||||||||||||||||
| Q3 2014 Plan | — | 13,051 | (2,992 | ) | 10,059 | (3,064 | ) | (5,460 | ) | 1,535 | — | (672 | ) | 863 | |||||||||||||||||||||||||
| Q2 2014 Plan | — | 670 | (419 | ) | 251 | (179 | ) | (13 | ) | 59 | — | — | 59 | ||||||||||||||||||||||||||
| Q1 2014 Plan | — | 567 | (475 | ) | 92 | (92 | ) | — | — | — | — | — | |||||||||||||||||||||||||||
| Facility: | |||||||||||||||||||||||||||||||||||||||
| Q4 2015 Plan | — | — | — | — | 285 | (26 | ) | 259 | — | (248 | ) | 11 | |||||||||||||||||||||||||||
| Previous Plans including 2013 plans | 35,200 | (2,508 | ) | (19,572 | ) | 13,120 | (204 | ) | (4,222 | ) | 8,694 | 35 | (3,299 | ) | 5,430 | ||||||||||||||||||||||||
| Restructuring | 35,200 | 11,780 | (23,458 | ) | 23,522 | 13,464 | (14,968 | ) | 22,018 | 5,036 | (16,630 | ) | 10,424 | ||||||||||||||||||||||||||
| Contract Termination | 300 | 1,545 | (1,541 | ) | 304 | 83 | (255 | ) | 132 | 88 | (103 | ) | 117 | ||||||||||||||||||||||||||
| Total Restructuring and Contract Termination | $ | 35,500 | $ | 13,325 | $ | (24,999 | ) | $ | 23,826 | $ | 13,547 | $ | (15,223 | ) | $ | 22,150 | $ | 5,124 | $ | (16,733 | ) | $ | 10,541 |
| (1) | During fiscal year 2016, we recognized pre-tax restructuring reversals of $1.0 million in the Discovery & Analytical Solutions segment related to lower than expected costs associated with workforce reductions for the Q4 2015 Plan. |
| (2) | During fiscal year 2016, we recognized pre-tax restructuring reversals of $0.1 million in the Diagnostics segments and $0.5 million in the Discovery & Analytical Solutions segments related to lower than expected costs associated with workforce reductions for the Q2 2015 Plan. |
Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
| January 1, 2017 | January 3, 2016 | December 28, 2014 | |||||||||
| (In thousands) | |||||||||||
| Interest income | $ | (702 | ) | $ | (673 | ) | $ | (667 | ) | ||
| Interest expense | 41,528 | 37,997 | 36,270 | ||||||||
| Gain on disposition of businesses and assets, net | (5,562 | ) | — | — | |||||||
| Other expense, net | 3,734 | 4,795 | 5,536 | ||||||||
| Total interest and other expense, net | $ | 38,998 | $ | 42,119 | $ | 41,139 |
2016 Compared to 2015. Interest and other expense, net, for fiscal year 2016 was an expense of $39.0 million, as compared to an expense of $42.1 million for fiscal year 2015, a decrease of $3.1 million. The decrease in interest and other
expense, net, in fiscal year 2016 as compared to fiscal year 2015 was primarily due to a gain on disposition of businesses and assets, net recognized in fiscal year 2016 which was partially offset by an increase in interest expense of $3.5 million for fiscal year 2016 as compared to fiscal year 2015 due to the issuance of the new higher interest rate 2026 Notes, which replaced our lower cost debt outstanding on our previous senior unsecured revolving credit facility. Other expenses for fiscal year 2016 decreased by $1.1 million as compared to fiscal year 2015, 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.”
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 previous 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.
Provision for (Benefit from) Income Taxes
The effective tax rates on continuing operations were 11.6%, 9.6% and (5.1)% for fiscal years 2016, 2015 and 2014, respectively. Certain of our subsidiaries have, at various times, been granted tax relief in their respective countries, resulting in lower income taxes than would otherwise be the case under ordinary tax rates. A reconciliation of income tax expense at the U.S. federal statutory income tax rate to the recorded tax provision is as follows for the fiscal years ended:
| January 1, 2017 | January 3, 2016 | December 28, 2014 | |||||||||
| (In thousands) | |||||||||||
| Tax at statutory rate | $ | 85,424 | $ | 73,082 | $ | 43,354 | |||||
| Non-U.S. rate differential, net | (52,648 | ) | (47,994 | ) | (34,845 | ) | |||||
| U.S. taxation of multinational operations | 6,941 | 1,732 | 2,367 | ||||||||
| State income taxes, net | 1,509 | 80 | 1,352 | ||||||||
| Prior year tax matters | (9,621 | ) | (6,387 | ) | (7,146 | ) | |||||
| Federal tax credits | (7,189 | ) | (2,096 | ) | (3,399 | ) | |||||
| Change in valuation allowance | (2,755 | ) | 2,593 | (7,679 | ) | ||||||
| Non-deductible acquisition expense | 5,701 | — | — | ||||||||
| Other, net | 1,000 | (988 | ) | (275 | ) | ||||||
| Total | $ | 28,362 | $ | 20,022 | $ | (6,271 | ) |
The variation in our effective tax rate for each year is primarily a result of the recognition of earnings in foreign jurisdictions, predominantly Singapore, Finland, and China, which are taxed at rates lower than the U.S. federal statutory rate, resulting in a benefit from income taxes of $45.8 million in fiscal year 2016, $34.2 million in fiscal year 2015 and $29.1 million in fiscal year 2014. These amounts include $11.4 million in fiscal year 2016, $8.3 million in fiscal year 2015 and $7.1 million in fiscal year 2014 of benefits derived from tax holidays in China and Singapore. The effect of these benefits derived from tax holidays on basic and diluted earnings per share for fiscal year 2016 was $0.10 and $0.10, respectively, for fiscal year 2015 was $0.07 and $0.07, respectively, and for fiscal year 2014 was $0.06 and $0.06, respectively. The tax holiday in China is scheduled to expire in fiscal year 2017 and the tax holiday in Singapore is scheduled to expire in fiscal year 2018.
Discontinued Operations
As part of our continuing efforts to focus on higher growth opportunities, we have discontinued certain businesses. When the discontinued operations represented a strategic shift that will have a major effect on our operations and financial statements, we accounted for these businesses as discontinued operations and accordingly, have presented the results of operations and related cash flows as discontinued operations. Any business deemed to be a discontinued operation prior to the adoption of Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of An Entity ("ASU 2014-08"), continues to be reported as a discontinued operation, and the results of operations and related cash flows are presented as discontinued operations for all periods presented. Any remaining assets and liabilities of these businesses have been presented separately, and are reflected within assets and liabilities from discontinued operations in the accompanying condensed consolidated balance sheets as of January 1, 2017 and January 3, 2016.
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 Diagnostics 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 gain 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 $1.8 million in fiscal year 2016, $0.03 million in fiscal year 2015 and $0.2 million in fiscal year 2014 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 2016, we settled various commitments related to the divestiture of other discontinued operations and recognized a pre-tax loss of $1.1 million. This loss was recognized as a loss on disposition of discontinued operations before income taxes.
During fiscal year 2016, we sold PerkinElmer Labs, Inc. for cash consideration of $20.0 million, recognizing a pre-tax gain of $7.1 million. The sale generated a capital loss for tax purposes of $7.3 million, which resulted in an income tax benefit of $2.5 million that was recognized as a discrete benefit during the second quarter of 2016. PerkinElmer Labs, Inc. was a component of our Diagnostics segment. The pre-tax gain recognized in fiscal year 2016 is included in interest and other expense, net in the condensed consolidated statement of operations. The divestiture of PerkinElmer Labs, Inc. has not been classified as a discontinued operation in this Form 10-K because the disposition does not represent a strategic shift that will have a major effect on our operations and financial statements.
During fiscal year 2016, we entered into a letter of intent to contribute certain assets to an academic institution in the United Kingdom. We recognized a pre-tax loss of $1.6 million related to the write-off of assets in the second quarter of 2016 which is included in interest and other expense, net in the condensed consolidated statement of operations.
In December 2016, we entered into a Master Purchase and Sale Agreement (the “Agreement”) with Varian Medical Systems, Inc. (the “Purchaser”), under which we agreed to sell to the Purchaser all of the outstanding equity interests in our wholly owned indirect subsidiaries PerkinElmer Medical Holdings, Inc. and Dexela Limited, together with certain assets relating to the business of designing, manufacturing and marketing flat panel x-ray detectors, and related software, accessories and ancillary products, to x-ray system manufacturers (the “Medical Imaging Business”), for cash consideration of approximately $276.0 million and the Purchaser’s assumption of specified liabilities relating to the Medical Imaging Business (collectively, the “Transaction”). The Medical Imaging Business has been reported in the Diagnostics segment. The Agreement contemplates that the Purchaser will finance the Transaction through a debt financing and that, except as determined otherwise by the Purchaser, the closing will occur no earlier than April 2017. However, the closing of the Transaction is not conditioned upon the receipt of any such financing. The Transaction is subject to customary closing conditions, including the expiration of specified antitrust waiting periods. The Agreement contains certain termination rights and provides that under specified circumstances, upon termination of the Agreement, the Purchaser will be required to pay us a termination fee of up to $22.1 million. The sale of the Medical Imaging Business represents a strategic shift that will have a major effect on our operations and financial statements. Accordingly, we classified the assets and liabilities related to the Medical Imaging Business as assets and liabilities of discontinued operations in our consolidated balance sheets and its results of operations are classified as income from discontinued operations in our consolidated statements of operations.
The 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 1, 2017 | January 3, 2016 | December 28, 2014 | |||||||||
| (In thousands) | |||||||||||
| Revenue | $ | 146,217 | $ | 158,128 | $ | 168,124 | |||||
| Cost of revenue | 95,395 | 97,777 | 100,512 | ||||||||
| Selling, general and administrative expenses | 13,657 | 11,712 | 12,503 | ||||||||
| Research and development expenses | 14,368 | 13,391 | 13,222 | ||||||||
| Restructuring and contract termination charges, net | 568 | 43 | 1,111 | ||||||||
| Income from discontinued operations before income taxes | $ | 22,229 | $ | 35,205 | $ | 40,776 |
We recorded a tax provision of $4.3 million, $11.5 million and $12.9 million on discontinued operations and dispositions in fiscal years 2016, 2015 and 2014.
Business Combinations
Acquisitions in fiscal year 2016
During the fiscal year 2016, we completed the acquisition of two businesses for a total consideration of $72.2 million in cash. The acquired businesses were Bioo Scientific Corporation, which was acquired for total consideration of $63.5 million in cash and one other business acquired for a total consideration of $8.8 million in cash. 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. As a result of the acquisitions, we recorded goodwill of $45.6 million, which is not tax deductible, and intangible assets of $19.9 million. We reported the operations for these acquisitions within the results of our Diagnostics and Discovery & Analytical Solutions segments from the acquisition dates. Identifiable definite-lived intangible assets, such as core technology, trade names and customer relationships, acquired as part of these acquisitions had a weighted average amortization period of 9.5 years.
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 Diagnostics AB ("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 Diagnostics and Discovery & Analytical Solutions 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 Instruments Group AB ("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 Discovery & Analytical Solutions 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 Diagnostics and Discovery & Analytical Solutions segments from the acquisition dates.
We do not consider the acquisitions completed during fiscal years 2016, 2015 and 2014, to be material to our consolidated results of operations; therefore, we are not presenting pro forma financial information of operations. During fiscal years 2016 and 2015, we recognized $80.7 million and $65.7 million, respectively, 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 1, 2017, the allocations of purchase prices for acquisitions completed in fiscal years 2015 and 2014 were final. The preliminary allocations of the purchase prices for acquisitions completed in fiscal year 2016 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. All changes that do not qualify as adjustments made during the measurement periods are also included in current period earnings.
During fiscal year 2016, 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 an increase in deferred taxes of $1.8 million, with a corresponding increase in goodwill.
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 1, 2017, we may have to pay contingent consideration, related to acquisitions with open contingency periods, of up to $84.6 million. As of January 1, 2017, we have recorded contingent consideration obligations of $63.2 million, of which $15.4 million was recorded in accrued expenses and other current liabilities, and $47.8 million was recorded in long-term liabilities. 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. The expected maximum earnout period for acquisitions with open contingency periods does not exceed 3 years from the respective acquisition dates, and the remaining weighted average expected earnout period at January 1, 2017 was 1.75 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 $9.9 million and $11.8 million as of January 1, 2017 and January 3, 2016, respectively, in accrued expenses and other current liabilities, 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. 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 2010 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 1, 2017 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
Beginning in the fourth quarter of fiscal year 2016, we realigned our businesses to better position us to grow in attractive end markets and expand share with our core product offerings. Diagnostics became a standalone operating segment and we formed a new operating segment, Discovery & Analytical Solutions. In addition, we moved our Medical Imaging Business into discontinued operations due to its pending sale. The results reported for fiscal year 2016 reflect our new segment structure and the exclusion of our Medical Imaging Business from continuing operations. Financial information in this report relating to fiscal years 2015 and 2014 has been retrospectively adjusted to reflect these changes.
Discovery & Analytical Solutions
2016 Compared to 2015. Revenue for fiscal year 2016 was $1,513.0 million, as compared to $1,528.4 million for fiscal year 2015, a decrease of $15.4 million, or 1%, which includes an approximate 1.0% decrease in revenue attributable to unfavorable changes in foreign exchange rates with minimal impact from acquisitions and divestitures. In addition, the fiscal year 2016 consisted of 52 weeks as compared to fiscal year 2015 which consisted of 53 weeks. The analysis in the remainder of this paragraph compares selected revenue by product type for fiscal year 2016, as compared to fiscal year 2015, and includes the effect of foreign exchange fluctuations and acquisitions and divestitures. The decrease in revenue in our Discovery & Analytical Solutions segment was a result of a decrease in environmental, food and industrial revenue of $20.8 million and a decrease in life sciences market revenue of $0.6 million, which was partially offset by an increase in laboratory services market revenue of $6.0 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $27 thousand of revenue in our Discovery & Analytical Solutions segment for fiscal year 2015 that otherwise would have been recorded by the acquired businesses during each of the respective periods. In our environmental, food and industrial markets, revenue decreased due to weak harvest conditions. In our life sciences research market, we experienced decreases in revenue from our academic and government product offerings due to reduced government funding. In our laboratory services market, we had increased demand for our OneSource service offerings. 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.
Operating income from continuing operations for fiscal year 2016 was $207.5 million, as compared to $173.7 million for fiscal year 2015, an increase of $33.8 million, or 19%. Amortization of intangible assets decreased and was $53.3 million for fiscal year 2016 as compared to $54.6 million for fiscal year 2015. Restructuring and contract termination charges, net decreased and were $4.7 million for fiscal year 2016 as compared to $11.4 million for fiscal year 2015. Acquisition and divestiture-related costs, contingent consideration and other costs added an incremental expense of $0.6 million for fiscal year 2016, as compared to $0.4 million for fiscal year 2015. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an incremental expense of $0.4 million in fiscal year 2016 as compared to $7.3 million in fiscal year 2015. In addition to the factors noted above, increased operating income for fiscal year 2016, was primarily due to favorable changes in product mix, with an increase in sales in higher gross margin product offerings, early
benefits from our initiatives to improve our supply chain, and lower costs related to cost containment initiatives partially offset by increased costs related to investments in new product development and unfavorable impacts from foreign currency.
2015 Compared to 2014. Revenue for fiscal year 2015 was $1,528.4 million, as compared to $1,484.1 million for fiscal year 2014, an increase of $44.3 million, or 3%, which includes an approximate 5.0% increase in revenue attributable to the impact of acquisitions and divestitures and an approximate 7.0% decrease in revenue attributable to changes in foreign exchange rates. In addition, fiscal year 2015 consisted of 53 weeks as compared to fiscal year 2014 which consisted of 52 weeks. 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 and divestitures. The increase in revenue in our Discovery & Analytical Solutions segment was a result of an increase in environmental, food and industrial markets revenue of $44.9 million and an increase in life sciences research market revenue of $11.6 million, 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. In our life sciences research market, we experienced increased demand for our informatics business, as well as an increase in revenue from new product introductions, such as the Opera Phenix. In our laboratory services market, we had increased demand for our OneSource service offerings. The growth in our Discovery & Analytical Solutions 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 $173.7 million, as compared to $162.1 million for fiscal year 2014, an increase of $11.6 million, or 7%. Amortization of intangible assets increased and was $54.6 million for fiscal year 2015 as compared to $52.9 million for fiscal year 2014. Restructuring and contract termination charges, net increased and were $11.4 million for fiscal year 2015 as compared to $10.9 million for fiscal year 2014. Legal costs for a particular case were $0.8 million in fiscal year 2015. Acquisition and divestiture-related expenses, contingent consideration and other costs increased expenses by $0.4 million for fiscal year 2015, as compared to $4.2 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 in fiscal year 2014. In addition to the factors noted above, the increase in operating income for fiscal year 2015 was primarily due to increased sales volume in the environmental, food, industrial and life sciences research markets and lower costs as a result of cost containment and productivity initiatives, which was partially offset by unfavorable impacts from foreign currency.
Diagnostics
2016 Compared to 2015. Revenue for fiscal year 2016 was $602.5 million, as compared to $576.4 million for fiscal year 2015, an increase of $26.1 million, or 5%, which includes an approximate 1% decrease in revenue attributable to changes in foreign exchange rates, and an approximate 2.0% decrease in revenue attributable to the impact of prior year acquisitions and divestitures. In addition, the fiscal year 2016 consisted of 52 weeks as compared to fiscal year 2015 which consisted of 53 weeks. As a result of adjustments to deferred revenue related to certain acquisitions as required by business combination rules, we did not recognize $0.7 million of revenue for fiscal year 2016 and $0.8 million for fiscal year 2015 that otherwise would have been recorded by the acquired businesses during each of the respective periods. In our diagnostics market, we experienced growth from continued expansion of our newborn and infectious disease screening solutions in key regions outside the United States, particularly in emerging markets such as China, as well as in Europe. 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 2016.
Operating income from continuing operations for fiscal year 2016 was $138.9 million, as compared to $135.6 million for fiscal year 2015, an increase of $3.3 million, or 2%. Amortization of intangible assets decreased and was $18.1 million for fiscal year 2016 as compared to $22.0 million for fiscal year 2015. Restructuring and contract termination charges, net decreased and were $0.4 million for fiscal year 2016 as compared to $2.1 million for fiscal year 2015. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $17.7 million in fiscal year 2016, as compared to an incremental expense of $1.1 million for fiscal year 2015. In addition to the factors noted above, increased operating income for fiscal year 2016, as compared to fiscal year 2015 was primarily due to pricing initiatives and lower costs as a result of cost containment initiatives and benefits from our initiatives to improve our supply chain, which were partially offset by increased costs related to investments in new product development.
2015 Compared to 2014. Revenue for fiscal year 2015 was $576.4 million, as compared to $585.7 million for fiscal year 2014, a decrease of $9.3 million or 2%, which includes an approximate 4% decrease in revenue attributable to changes in foreign exchange rates and with minimal impact from acquisitions. In addition, fiscal year 2015 consisted of 53 weeks as compared to fiscal year 2014 which consisted of 52 weeks. The decrease in revenue in our Diagnostics segment was a result of unfavorable impacts from foreign currency which more than offset the growth we experienced in our diagnostics business. 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 for fiscal year 2015 and $1.0 million for fiscal year 2014 that otherwise would have been recorded by the acquired businesses during each of the respective periods. Excluding the impact of unfavorable foreign currency, we experienced growth in our diagnostics business from continued expansion of our newborn and infectious disease screening solutions in emerging markets such as China.
Operating income from continuing operations for fiscal year 2015 was $135.6 million, as compared to $124.6 million for fiscal year 2014, an increase of $11.0 million, or 9%. Amortization of intangible assets decreased and was $22.0 million for fiscal year 2015 as compared to $28.5 million for fiscal year 2014. Restructuring and contract termination charges, net decreased and were $2.1 million for fiscal year 2015 as compared to $2.4 million for fiscal year 2014. Acquisition and divestiture-related expenses and other costs added an incremental expense of $1.1 million in fiscal year 2015, as compared to decreasing expenses by $0.8 million for fiscal year 2014. In addition to the factors noted above, the increased operating income for fiscal year 2015 was primarily the result of increased sales volume and lower costs as a result of cost containment and productivity initiatives, which were partially offset by unfavorable impacts of foreign currency.
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 2016
Operating Activities. Net cash provided by continuing operations was $323.8 million for fiscal year 2016, as compared to net cash provided by continuing operations of $263.8 million for fiscal year 2015, an increase of $59.9 million. The cash provided by operating activities for fiscal year 2016 was principally a result of income from continuing operations of $215.7 million, and non-cash charges, including depreciation and amortization of $100.0 million, stock based compensation expense of $17.2 million, restructuring and contract termination charges, net, of $5.1 million, change in fair value of contingent consideration of $16.2 million, gain from disposition of businesses and assets, net of $5.6 million, and a loss related to our postretirement benefit plans, including the mark-to-market adjustment, in the fourth quarter of fiscal year 2016, of $14.5 million. These amounts were partially offset by a net decrease of $57.8 million in accrued expenses, other assets and liabilities and other items, and a net decrease in working capital of $18.5 million. The change in accrued expenses, other assets and liabilities and other items decreased cash provided by operating activities by $57.8 million for fiscal year 2016, primarily related to the timing of payments for taxes, defined benefit pension plans, royalties, restructuring, and salary and benefits.
During fiscal year 2016, we made contributions of $9.6 million, in the aggregate, to pension plans outside of the United States. Contributing to the net decrease in working capital for fiscal year 2016, excluding the effect of foreign exchange rate fluctuations, was a decrease in inventory of $6.8 million and an increase in accounts payable of $30.7 million, which were partially offset by an increase in accounts receivable of $19.0 million. The decrease in inventory was primarily a result of higher sales volume late in the fourth quarter of the fiscal year, partially offset by the result of realigning operations, research and development resources, and production resources within our Discovery & Analytical Solutions and Diagnostics segments to ensure responsiveness to customer requirements as this realignment occurs. The increase in accounts payable was primarily a result of the timing of disbursements during the fourth quarter of fiscal year 2016. The increase in accounts receivable was a result of higher sales volume late in the fourth quarter of fiscal year 2016.
Investing Activities. Net cash used in the investing activities of our continuing operations was $99.5 million for fiscal year 2016, as compared to net cash used in the investing activities of our continuing operations of $99.4 million for fiscal year 2015, an increase of $0.1 million. For fiscal year 2016, we used $71.9 million of net cash for acquisitions, as compared to $72.0 million used in fiscal year 2015. Capital expenditures for fiscal year 2016 were $31.7 million, primarily for manufacturing equipment and other capital equipment purchases, as compared to $28.2 million for fiscal year 2015. These items were partially offset by cash proceeds of $21.0 million, net of $2.0 million in restricted cash from the sale of businesses in fiscal year 2016. An additional increase in restricted cash of $15.0 million in fiscal year 2016 further contributed to net cash used in investing activities, primarily related to the cash that was placed in escrow to facilitate our acquisition of Tulip Diagnostics Private Limited. That acquisition was completed subsequent to January 1, 2017.
Financing Activities. Net cash used in the financing activities of our continuing operations was $115.0 million for fiscal year 2016, as compared to $107.1 million for fiscal year 2015, an increase of $7.9 million. For fiscal year 2016, we repurchased 3.2 million shares of our common stock, including 75,198 shares of our common stock pursuant to our equity incentive plans, for a total cost of $151.8 million, including commissions. This compares to repurchases of 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, for fiscal year 2015. This use of cash in fiscal year 2016 was partially offset by proceeds from the issuance of common stock under stock plans of $14.4 million. This compares to proceeds from the issuance of common stock under stock plans of $14.9 million in fiscal year 2015. During fiscal year 2016, borrowings from our senior unsecured revolving credit facility totaled $420.5 million, which was more than offset by debt payments of $902.5 million. This compares to borrowings from our senior unsecured revolving credit facility of $451.0 million, which was more than offset by debt payments of $485.0 million in fiscal year 2015. During fiscal year 2016, proceeds from the sale of our senior unsecured debt was $546.2 million, and we paid $7.9 million for debt issuance costs. We paid $30.8 million and $31.6 million in dividends during fiscal years 2016 and 2015, respectively. We had net payments on other credit facilities of $1.1 million during fiscal years 2016 and 2015. During fiscal year 2016, we also received $1.9 million for the settlement of forward foreign exchange contracts, as compared to payments of $18.7 million in fiscal year 2015, and made $0.2 million in payments for acquisition-related contingent consideration, as compared to $0.1 million in fiscal year 2015.
Fiscal Year 2015
Operating Activities. Net cash provided by continuing operations was $263.8 million for fiscal year 2015, as compared to net cash provided by continuing operations of $247.9 million for fiscal year 2014, an increase of $15.9 million. The cash provided by operating activities for fiscal year 2015 was principally a result of income from continuing operations of $188.8 million, and non-cash charges, including depreciation and amortization of $105.4 million, stock based compensation expense of $17.3 million, restructuring and contract termination charges, net, of $13.5 million and 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 $35.8 million in accrued expenses, other assets and liabilities and other items, and a net increase in working capital of $34.8 million. The change in accrued expenses, other assets and liabilities and other items that decreased cash provided by operating activities by $35.8 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 $27.9 million and a decrease in accounts payable of $10.9 million, which were partially offset by a decrease in accounts receivable of $4.1 million. The increase in inventory was primarily a result of realigning operations, research and development resources and production resources within our Discovery & Analytical Solutions and Diagnostics 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 receivables collections during the fourth quarter of fiscal year 2015.
Investing Activities. Net cash used in the investing activities of our continuing operations was $99.4 million for fiscal year 2015, as compared to net cash used in the investing activities of our continuing operations of $295.6 million for fiscal year 2014, a decrease of $196.2 million. For fiscal year 2015, we used $72.0 million of net cash for acquisitions, as compared to $271.5 million used in fiscal year 2014. Capital expenditures for fiscal year 2015 were $28.2 million, primarily for manufacturing equipment and other capital equipment purchases, as compared to $27.2 million in fiscal year 2014. These cash outflows were partially offset by proceeds from the settlement of life insurance policies of $0.8 million in fiscal year 2015, as compared to $0.5 million in fiscal year 2014.
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. 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 in fiscal year 2014. 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, as compared to $12.7 million 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. We also made $0.1 million in payments for acquisition-related contingent consideration during fiscal year 2015, as compared to $0.9 million during fiscal year 2014.
Borrowing Arrangements
Senior Unsecured Revolving Credit Facility. On August 11, 2016, we terminated our previous senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with a five year term and an expansion of borrowing capacity from $700.0 million to $1.0 billion. The new senior unsecured revolving credit facility provides for $1.0 billion of revolving loans and has an initial maturity of August 11, 2021. As of January 1, 2017, undrawn letters of credit in the aggregate amount of $11.4 million were treated as issued and outstanding when calculating the borrowing availability under the new senior unsecured revolving credit facility. As of January 1, 2017, we had $988.6 million available for additional borrowing under the facility. We use the new senior unsecured revolving credit facility for general corporate purposes, which may include working capital, refinancing existing indebtedness, capital expenditures, share repurchases, acquisitions and strategic alliances. The interest rates under the senior unsecured revolving credit facility are based on the Eurocurrency rate or the base rate at the time of borrowing, plus a margin. The base rate is the higher of (i) the rate of interest in effect for such day as publicly announced from time to time by JP Morgan Chase Bank, N.A. as its "prime rate," (ii) the Federal Funds rate plus 50 basis points or (iii) an adjusted one-month Libor plus 1.00%. As of January 1, 2017, the new senior unsecured revolving credit facility had no outstanding borrowings, and $4.3 million of unamortized debt issuance costs. As of January 3, 2016, the previous senior unsecured revolving credit facility had an aggregate carrying value of $479.6 million, which was net of $2.4 million of unamortized debt issuance costs. The credit agreement for the facility contains affirmative, negative and financial covenants and events of default. The financial covenants include a debt-to-capital ratio that remains applicable for so long as our debt is rated as investment grade. In the event that our debt is not rated as investment grade, the debt-to-capital ratio covenant is replaced with a maximum consolidated leverage ratio covenant and a minimum consolidated interest coverage ratio covenant. We were in compliance with all applicable covenants as of January 1, 2017.
5% Senior Unsecured Notes due in 2021. On October 25, 2011, we issued $500.0 million aggregate principal amount of senior unsecured notes due in 2021 (the “2021 Notes”) in a registered public offering and received $496.9 million of net proceeds from the issuance. The 2021 Notes were issued at 99.372% of the principal amount, which resulted in a discount of $3.1 million. As of January 1, 2017, the 2021 Notes had an aggregate carrying value of $495.8 million, net of $1.7 million of unamortized original issue discount and $2.5 million of unamortized debt issuance costs. 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. 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.
1.875% Senior Unsecured Notes due 2026. On July 19, 2016, we issued €500.0 million aggregate principal amount of senior unsecured notes due in 2026 (the “2026 Notes”) in a registered public offering and received approximately €492.3 million of net proceeds from the issuance. The 2026 Notes were issued at 99.118% of the principal amount, which resulted in a discount of €4.4 million. The 2026 Notes mature in July 2026 and bear interest at an annual rate of 1.875%. Interest on the 2026 Notes is payable annually on July 19th each year. The proceeds from the 2026 Notes were used to pay in full the outstanding balance of our previous senior unsecured revolving credit facility. As of January 1, 2017, the 2026 Notes had an aggregate carrying value of $517.8 million, net of $4.5 million of unamortized original issue discount and $4.8 million of unamortized debt issuance costs.
Prior to April 19, 2026 (three months prior to their maturity date), we may redeem the 2026 Notes in whole at any time or in part from time to time, at our option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2026 Notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2026 Notes being redeemed, discounted on an annual basis, at the applicable Comparable Government Bond Rate (as defined in the indenture governing the 2026 Notes) plus 35 basis points; plus, in each case, accrued and unpaid interest. In addition, at any time on or after April 19, 2026 (three months prior to their maturity date), we may redeem the 2026 Notes, at our option, at a redemption price equal to 100% of the principal amount of the 2026 Notes due to be redeemed plus accrued and unpaid interest.
Upon a change of control (as defined in the indenture governing the 2026 Notes) and a contemporaneous downgrade of the 2026 Notes below investment grade, we will, in certain circumstances, make an offer to purchase the 2026 Notes at a price equal to 101% of their principal amount plus any accrued and unpaid interest.
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 were 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 1, 2017, we had $37.1 million recorded for these financing lease obligations, of which $1.2 million was recorded as short-term debt and $35.9 million was recorded as long-term 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. 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 2016 and 2015, resulting in an annual dividend rate of $0.28 per share. At January 1, 2017, we had accrued $7.7 million for dividends declared on October 26, 2016 for the fourth quarter of fiscal year 2016 that was paid in February 2017. On January 27, 2017, we announced that our Board had declared a quarterly dividend of $0.07 per share for the first quarter of fiscal year 2017 that will be payable in May 2017. 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 1, 2017 for continuing and discontinued operations. Purchase commitments are minimal and have been excluded from this table:
| Operating Leases | Sr. Unsecured Revolving Credit Facility Maturing 2021(1) | 5.0% Sr. Notes Maturing 2021(2) | 1.875% Sr. Notes Maturing 2026(3) | Financing Lease Obligations(4) | Employee Benefit Payments(5) | Unrecognized Tax Benefits(6) | Total | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| 2017 | $ | 49,788 | $ | — | $ | 25,000 | $ | 9,882 | $ | 1,172 | $ | 28,705 | $ | — | $ | 114,547 | ||||||||||||||||
| 2018 | 33,944 | — | 25,000 | 9,882 | 1,367 | 29,192 | — | 99,385 | ||||||||||||||||||||||||
| 2019 | 25,966 | — | 25,000 | 9,882 | 1,532 | 29,656 | — | 92,036 | ||||||||||||||||||||||||
| 2020 | 20,806 | — | 25,000 | 9,882 | 1,597 | 30,180 | — | 87,465 | ||||||||||||||||||||||||
| 2021 | 16,259 | — | 521,772 | 9,882 | 1,664 | 31,036 | — | 580,613 | ||||||||||||||||||||||||
| 2022 and thereafter | 52,111 | — | — | 571,927 | 29,742 | 160,073 | — | 813,853 | ||||||||||||||||||||||||
| Total | $ | 198,874 | $ | — | $ | 621,772 | $ | 621,337 | $ | 37,074 | $ | 308,842 | $ | — | $ | 1,787,899 |
| (1) | The credit facility borrowings carry variable interest rates. As of January 1, 2017, we had no outstanding borrowings in our senior unsecured revolving credit facility. |
| (2) | The 2021 Notes include interest obligations. As of January 1, 2017, the 2021 Notes had a carrying value of $495.8 million. |
| (3) | The 2026 Notes include interest obligations. As of January 1, 2017, the 2026 Notes had a carrying value of $517.8 million. |
| (4) | The financing lease obligations do not include interest obligations. |
| (5) | Employee benefit payments only include obligations through fiscal year 2026. |
| (6) | We have excluded $1.3 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 1, 2017, we may have to pay the shareholders of our acquisitions contingent consideration of up to $84.6 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 2017, we expect to invest an amount for capital expenditures similar to that in fiscal year 2016, 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 1, 2017, we had cash and cash equivalents of $359.3 million, of which $348.5 million was held by our non-U.S. subsidiaries, and we had $988.6 million of additional borrowing capacity available under a senior unsecured revolving credit facility. We had no other liquid investments at January 1, 2017.
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 $348.5 million of cash and cash equivalents held by our non-U.S. subsidiaries at January 1, 2017, we would incur U.S. taxes on approximately $322.5 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"). On July 27, 2016, the Board authorized us to immediately terminate the Repurchase Program and further authorized us to repurchase up to 8.0 million shares of common stock under a new stock repurchase program (the "New Repurchase Program"). The New Repurchase Program will expire on July 26, 2018 unless terminated earlier by our Board, and may be suspended or discontinued at any time. During the fiscal year 2016, we
repurchased 3.2 million shares of common stock in the open market at an aggregate cost of $148.2 million, including commissions, under the Repurchase Program. No shares remain available for repurchase under the Repurchase Program due to its cancellation. As of January 1, 2017, 8.0 million shares remained available for repurchase under the New 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 2016, we repurchased 75,198 shares of common stock for this purpose at an aggregate cost of $3.6 million.
The repurchased shares have been reflected as additional authorized but unissued shares, with the payments reflected in common stock and capital in excess of par value. Any repurchased shares will be available for use in connection with corporate programs. If we continue to repurchase shares, the New 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 $7.6 million in the aggregate during fiscal year 2017. During fiscal year 2016, we contributed $9.6 million, in the aggregate, to pension plans outside of the United States. We could potentially have to make additional funding payments in future periods for all pension plans. During fiscal year 2015, we made contributions of $14.9 million, in the aggregate, to plans outside of the United States and $20.0 million to our defined benefit pension plan in the United States. During fiscal year 2014, we contributed $11.2 million, in the aggregate, to plans outside of the United States. 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 January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles-Goodwill and Other Topic (Topic 350), Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), which amends Topic 350 to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 requires that an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize the impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider the income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The provisions of this guidance are to be applied on a prospective basis. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We intend to early adopt ASU 2017-04 and will apply the provisions of this standard in our interim or annual goodwill impairment tests subsequent to January 1, 2017.
In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business ("ASU 2017-01"), which amends Topic 805 to provide a screen to determine when a set is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the standard (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly
contribute to the ability to create output and (2) removes the evaluation of whether a market participant could replace missing elements. The standard provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The standard also provides a framework that includes two sets of criteria to consider that depend on whether a set has outputs and a more stringent criteria for sets without outputs. Lastly, the standard narrows the definition of the term "output" so that the term is consistent with how outputs are described in Topic 606. The provisions of this guidance are to be applied prospectively. ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted in limited circumstances. We are still 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 November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash ("ASU 2016-18"), which amends Topic 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The provisions of this guidance are to be applied using a retrospective transition method to each period presented. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. 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 October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740), Intra-entity Transfer of Assets Other than Inventory ("ASU 2016-16"). ASU 2016-16 removes the prohibition in ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The standard requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The provisions of this guidance are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. We are evaluating the requirements of this guidance and have not yet determined the impact of adoption on our consolidated financial position, results of operations and cash flows.
In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other topics. The provisions of this guidance are to be applied using a retrospective transition method to each period presented, and if it is impracticable to apply the amendments retrospectively for some of the issues, ASU 2016-15 allows the amendments for those issues to be applied prospectively as of the earliest date practicable. ASU 2015-16 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, 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 June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard requires entities to use the expected loss impairment model and will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance sheet credit exposures. Entities are required to estimate the lifetime “expected credit loss” for each applicable financial asset and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The standard also amends the impairment model for available-for-sale (“AFS”) debt securities and requires entities to determine whether all or a portion of the unrealized loss on an AFS debt security is a credit loss. An entity will recognize an allowance for credit losses on an AFS debt security as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment. The provisions of this guidance are to be applied using a modified-retrospective approach. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We are evaluating the requirements of this guidance and have not yet determined the impact of adoption on our consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting ("ASU No. 2016-09"). The new standard simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory withholding requirements, as well as the related classification in the statement of cash flows. The new standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The standard requires an entity to recognize all excess tax benefits and tax deficiencies as income tax benefit or expense in the income statement as discrete items in the reporting period in which they occur, and such tax benefits and tax deficiencies are not included in the estimate of an entity’s annual effective tax rate, applied on a prospective basis. Further, the standard eliminates the requirement to defer the recognition of excess tax benefits until the benefit is realized through a reduction to taxes payable. All excess tax benefits previously unrecognized, along with any valuation allowance, should be recognized on a modified retrospective basis as a cumulative adjustment to retained earnings as of the date of adoption. Under ASU No. 2016-09, an entity that applies the treasury stock method in calculating diluted earnings per share is required to exclude excess tax benefits and deficiencies from the calculation of assumed proceeds since such amounts are recognized in the income statement. Excess tax benefits should also be classified as operating activities in the same manner as other cash flows related to income taxes on the statement of cash flows, as such excess tax benefits no longer represent financing activities since they are recognized in the income statement, and should be applied prospectively or retrospectively to all periods presented. We adopted ASU No. 2016-09 at the beginning of the first quarter of fiscal year 2016. We recorded a cumulative increase of $14.2 million in the beginning of the first quarter of fiscal year 2016 retained earnings with a corresponding increase in deferred tax assets related to the prior years' unrecognized excess tax benefits. Excess tax benefits related to exercised options and vested restricted stock and restricted stock units during the fiscal year 2016 have been recognized in the current period’s income statement. We also excluded the excess tax benefits from the calculation of diluted earnings per share for fiscal year 2016. We applied the cash flow presentation section of the guidance on a prospective basis, and the prior period statement of cash flows was not adjusted. ASU No. 2016-09 also allows an entity to elect as an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures for service based awards as they occur. An entity that elects to account for forfeitures as they occur should apply the accounting change on a modified retrospective basis as a cumulative effect adjustment to retained earnings as of the date of adoption. We elected to account for forfeitures as they occur. The adoption of this accounting policy did not have a material impact on our consolidated financial position, results of operations and cash flows.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. ASU 2016-02 also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The provisions of this guidance are effective for annual periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. ASU 2016-02 is to be applied using a modified retrospective approach. 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 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 May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). Under this new guidance, an entity should use a five-step process to recognize revenue, depicting the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires new disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Subsequent to the issuance of the standard, the FASB decided to defer the effective date for one year to annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. In May 2016, the FASB also issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients ("ASU 2016-12"), which amended its revenue recognition guidance in ASU 2014-09 on transition, collectibility, non-cash consideration, contract modifications and completed contracts at transition and the presentation of sales and other similar taxes collected from customers. In April 2016, the FASB also issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and
Licensing ("ASU 2016-10"), which amended its revenue recognition guidance in ASU 2014-09 on identifying performance obligations to allow entities to disregard items that are immaterial in the context of the contract, clarify when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow an entity to elect to account for the cost of shipping and handling performed after control of a good has been transferred to the customer as a fulfillment cost (i.e., an expense). ASU 2016-10 also clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property ("IP") and requires entities to classify IP in one of two categories: functional IP or symbolic IP, which will determine whether it recognizes revenue over time or at a point in time. ASU 2016-10 also address how entities should consider license renewals and restrictions and apply the exception for sales- and usage-based royalties received in exchange for licenses of IP. In March 2016, the FASB also issued Accounting Standards Update No. 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue Gross versus Net) ("ASU 2016-08"), which amended the principal-versus-agent implementation guidance and illustrations in ASU 2014-09. ASU 2016-08 clarifies that an entity should evaluate when it is the principal or agent for each specified good or service promised in a contract with a customer. ASU 2016-12, ASU 2016-10, ASU 2016-08 and ASU 2014-09 may be adopted either using a full retrospective approach or a modified retrospective approach. We are evaluating the requirements of the foregoing standards and have not yet determined the impact of their adoption on our consolidated financial position, results of operations and cash flows. We intend to adopt these standards using the modified retrospective approach, and we do not intend to early adopt these standards. While we are currently evaluating the impact of the new revenue standard, we believe the key changes in the standard that impact revenue recognition relate to the accounting for certain transactions with multiple elements or “bundled” arrangements (for example, sales of software subscriptions for which we do not have VSOE for maintenance and/or support) because the requirement to have VSOE for undelivered elements under current accounting standards is eliminated under the new standard. Accordingly, we may be required to recognize as revenue a portion of the sales price upon delivery of the software, as compared to the current requirement of recognizing the entire sales price ratably over the maintenance period.
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 2016, 2015 and 2014. 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 stated renewal rate method. We determine VSOE for consulting services by reference to the amount charged for similar engagements on a stand-alone basis.
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. We completed the annual goodwill impairment test using measurement dates of January 4, 2016 and January 1, 2015, and concluded based on the first step of the process that there was no goodwill impairment. At January 4, 2016, the fair value exceeded the carrying value by more than 20.0% for each reporting unit. At the beginning of the fourth quarter of fiscal year 2016, we realigned our organization into two new operating segments. In conjunction with the realignment of our operating segments, we also redefined our reporting units based on our operating segments. We determined that the reporting units that should be used to test goodwill for impairment are environmental health excluding food, food, life sciences and technology, informatics, OneSource, diagnostics excluding cord blood, cord blood and medical imaging. As a result of the realignment, we reallocated goodwill from our life sciences and technology reporting unit to our diagnostics excluding cord blood reporting unit based on the relative fair value, determined using the income approach, of the applied genomics business which resulted in $125.8 million of goodwill being reallocated from our life sciences and technology reporting unit to our diagnostics excluding food reporting unit as of October 3, 2016. As of January 2, 2017, our Informatics reporting unit, which had a goodwill balance of $211.0 million, had a fair value that was less than 20% but greater than 10% more than its carrying value. Informatics is at increased risk of an impairment charge given its ongoing weakness due to a highly competitive industry. Despite the increased risk associated with this reporting unit, we do not believe there will be a significant change in the key estimates or assumptions driving the fair value of this reporting unit that would lead to a material impairment charge. 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 asset at least annually to determine whether events or circumstances continue to support an indefinite useful life. If events or circumstances indicate that the useful life of our non-amortizing intangible asset is no longer indefinite, the asset will be tested for impairment. This intangible asset 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.
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 $14.5 million in fiscal year 2016, a loss of $9.4 million in fiscal year 2015 and a loss of $77.2 million in fiscal year 2014 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 $15.3 million in fiscal year 2016, a pre-tax loss of $12.4 million in fiscal year 2015 and pre-tax loss of $75.4 million in fiscal year 2014. We expect income of approximately $4.5 million in fiscal year 2017 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 2017. 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 2017. 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 2017. 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 non-US benefit plans was 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.
As of January 1, 2017, 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 6.00% for all plans outside the United States. In addition, as of January 1, 2017, we estimate the discount rate for our pension and other postretirement benefit plans in the United States to be 4.05% and to be 2.06% for all plans outside the United States. For the plans in the United States, we adopted the updated projection scale, MP-2015, that was published by the Society of Actuaries in 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 as of January 3, 2016. During fiscal year 2016, the Society of Actuaries issued an updated projection scale, MP-2016, which reduced the life expectancy used to determine the projected benefit obligation. We adopted MP-2016, as of January 1, 2017. The adoption of the updated projection scale resulted in a $5.5 million decrease to the projected benefit obligation at January 1, 2017. 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 1, 2017, our pension plan expenses would also change.
| Increase (Decrease) at January 1, 2017 | |||||||
| Percentage Point Change | Non-U.S. | U.S. | |||||
| Pension plans discount rate | +0.25 | (10,229 | ) | (7,944 | ) | ||
| -0.25 | 10,850 | 8,317 | |||||
| Rate of return on pension plan assets | +1.00 | (1,533 | ) | (2,438 | ) | ||
| -1.00 | 1,533 | 2,438 | |||||
| Postretirement medical plans discount rate | +0.25 | N/A | (92 | ) | |||
| -0.25 | N/A | 96 | |||||
| Rate of return on postretirement medical plan assets | +1.00 | N/A | (155 | ) | |||
| -1.00 | N/A | 155 |
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 1, 2017, pre-tax gains 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 our current tax provision as well as enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled to determine our deferred tax provision. 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 1, 2017, 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 $1.1 billion. It is not practical to calculate the unrecognized deferred tax liability on those earnings.
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