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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 December 30, 2018 ("fiscal year 2018"), December 31, 2017 ("fiscal year 2017") and January 1, 2017 ("fiscal year 2016") included 52 weeks. The fiscal year ending December 29, 2019 will include 52 weeks.
Overview of Fiscal Year 2018
During fiscal year 2018, we continued to see good performance from acquisitions, investments in our ongoing technology and sales and marketing initiatives. Our overall revenue in fiscal year 2018 increased $521.0 million, or 23%, as compared to fiscal year 2017, reflecting an increase of $114.8 million, or 7%, in our Discovery & Analytical Solutions segment revenue and an increase of $406.3 million, or 60%, in our Diagnostics segment revenue. The increase in our Discovery & Analytical Solutions segment during fiscal year 2018 was due to an increase of $73.5 million from our applied markets revenue and an increase of $41.3 million from our life sciences market revenue. The increase in our Diagnostics segment revenue during fiscal year 2018 was primarily due to our acquisition of EUROIMMUN, which contributed $359.4 million in revenue during fiscal year 2018, as well as continued expansion in our reproductive health, genetic testing, applied genomics and immuno-diagnostics solutions.
In our Discovery & Analytical Solutions segment, we experienced growth during fiscal year 2018 driven by successful new product introductions and an improving macro-environment. We also experienced strong demand for industrial, environmental and food offerings. In the life sciences market, we experienced strength in our drug discovery sales and strong performance in our Informatics business.
In our Diagnostics segment, we experienced growth from our acquisition of EUROIMMUN and continued expansion in our reproductive health, genetic testing, applied genomics, and immuno-diagnostics solutions, particularly in the Americas and emerging markets, such as China and India. We saw strong growth in newborn screening as an increased number of offerings helped to offset the effect of decreased birthrates. During fiscal year 2018, we expanded both the extent and reach of our capabilities to enable earlier treatments and better outcomes, both in terms of diseases and geographies. The acquisition of EUROIMMUN has increased our reagent mix, expanded our technical capabilities and positioned us in more attractive markets.
Our consolidated gross margins increased 70 basis points in fiscal year 2018, as compared to fiscal year 2017, primarily due to favorable shift in product mix and continued productivity initiatives to improve our supply chain. Our consolidated operating margin decreased 144 basis points in fiscal year 2018, as compared to fiscal year 2017 primarily due to increased amortization of intangible assets and acquired inventory revaluation, increased costs related to investments in new product development partially offset by lower costs as a result of cost containment and productivity initiatives.
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
2018 Compared to 2017. Revenue for fiscal year 2018 was $2,778.0 million, as compared to $2,257.0 million for fiscal year 2017, an increase of $521.0 million, or 23%, which includes an approximate 14% increase in revenue attributable to acquisitions and divestitures and a 1% increase in revenue attributable to changes in foreign exchange rates. The analysis in the remainder of this paragraph compares segment revenue for fiscal year 2018 as compared to fiscal year 2017 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 $406.3 million, or 60%, primarily due to our acquisition of EUROIMMUN, which contributed $359.4 million in revenues during fiscal year 2018, and continued expansion in our reproductive health, genetic testing, applied genomics and immuno-diagnostics solutions. Our Discovery & Analytical Solutions segment revenue increased by $114.8 million, or 7%, due to an increase of $73.5 million from our applied markets revenue and an increase of $41.3 million from our life sciences market revenue. 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 Diagnostics segment for fiscal year 2018 and $0.7 million for fiscal year 2017 that otherwise would have been recorded by the acquired businesses during each of the respective periods.
2017 Compared to 2016. Revenue for fiscal year 2017 was $2,257.0 million, as compared to $2,115.5 million for fiscal year 2016, an increase of $141.5 million, or 7%, which includes an approximate 2% increase in revenue attributable to acquisitions and divestitures and a minimal increase in revenue attributable to changes in foreign exchange rates. The analysis in the remainder of this paragraph compares segment revenue for fiscal year 2017 as compared to fiscal year 2016 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 $76.0 million, or 13%, due to continued expansion in our newborn and infectious disease screening solutions and strong growth in applied genomics. Our new acquisitions, EUROIMMUN and Tulip, contributed $13.5 million and $38.5 million, respectively, in revenues during fiscal year 2017. Our Discovery & Analytical Solutions segment revenue increased by $65.5 million, or 4%, due to an increase of $36.2 million from our life sciences market revenue and an increase of $29.3 million from our applied markets revenue. 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 each of the fiscal years 2017 and 2016 that otherwise would have been recorded by the acquired businesses during each of the respective periods.
Cost of Revenue
2018 Compared to 2017. Cost of revenue for fiscal year 2018 was $1,437.1 million, as compared to $1,183.2 million for fiscal year 2017, an increase of approximately $253.8 million, or 21%. As a percentage of revenue, cost of revenue decreased to 51.7% in fiscal year 2018 from 52.4% in fiscal year 2017, resulting in an increase in gross margin of approximately 70 basis points to 48.3% in fiscal year 2018 from 47.6% in fiscal year 2017. Amortization of intangible assets increased and was $46.2 million for fiscal year 2018, as compared to $29.3 million for fiscal year 2017. Stock-based compensation expense was $1.5 million for fiscal year 2018, as compared to $1.3 million for fiscal year 2017. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an incremental expense of $19.3 million for fiscal year 2018, as compared to $6.2 million for fiscal year 2017. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $0.1 million for each of fiscal years 2018 and 2017. In addition to the factors noted above, the increase in gross margin was primarily the result of a favorable shift in product mix and benefits from our initiatives to improve our supply chain.
2017 Compared to 2016. Cost of revenue for fiscal year 2017 was $1,183.2 million, as compared to $1,101.2 million for fiscal year 2016, an increase of approximately $82.1 million, or 7%. As a percentage of revenue, cost of revenue increased to 52.4% in fiscal year 2017 from 52.1% in fiscal year 2016, resulting in a decrease in gross margin of approximately 37 basis points to 47.6% in fiscal year 2017 from 47.9% in fiscal year 2016. Amortization of intangible assets decreased and was $29.3 million for fiscal year 2017, as compared to $30.3 million for fiscal year 2016. Stock-based compensation expense was $1.3 million for fiscal year 2017, as compared to $1.0 million for fiscal year 2016. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was $6.2 million for fiscal year 2017, as compared to $0.4 million for fiscal year 2016. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $0.1 million for each of fiscal years 2017 and 2016. In addition to the factors noted above, the decrease in gross margin was primarily the result of an unfavorable shift in product mix partially offset by benefits from our initiatives to improve our supply chain.
Selling, General and Administrative Expenses
2018 Compared to 2017. Selling, general and administrative expenses for fiscal year 2018 were $811.9 million, as compared to $626.0 million for fiscal year 2017, an increase of approximately $185.9 million, or 30%. As a percentage of revenue, selling, general and administrative expenses increased to 29.2% in fiscal year 2018 from 27.7% in fiscal year 2017. Amortization of intangible assets increased to $81.8 million for fiscal year 2018, as compared to $44.1 million for fiscal year 2017. Stock-based compensation expense increased to $25.9 million for fiscal year 2018, as compared to $22.8 million for fiscal year 2017. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $30.5 million for fiscal year 2018 as compared to $29.0 million for fiscal year 2017. During fiscal year 2018, legal costs for significant litigation matters were $5.5 million, as compared to $2.7 million for fiscal year 2017. In addition to the above items, the increase in selling, general and administrative expenses was primarily due to our acquisition of EUROIMMUN, which was partially offset by lower costs as a result of cost containment and productivity initiatives.
2017 Compared to 2016. Selling, general and administrative expenses for fiscal year 2017 were $626.0 million, as compared to $590.5 million for fiscal year 2016, an increase of approximately $35.5 million, or 6%. As a percentage of revenue, selling, general and administrative expenses decreased to 27.7% in fiscal year 2017, compared to 27.9% in fiscal year 2016. Amortization of intangible assets increased and was $44.1 million for fiscal year 2017, as compared to $40.7 million for fiscal year 2016. Stock-based compensation expense increased and was $22.8 million for fiscal year 2017, as compared to $15.2 million for fiscal year 2016. During fiscal year 2017, we recorded $2.7 million in legal costs for a particular case. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $29.0 million for fiscal year 2017 as compared to $17.5 million for fiscal year 2016. 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.
Research and Development Expenses
2018 Compared to 2017. Research and development expenses for fiscal year 2018 were $194.0 million, as compared to $139.5 million for fiscal year 2017, an increase of $54.5 million, or 39%. As a percentage of revenue, research and development expenses increased to 7.0% in fiscal year 2018, as compared to 6.2% in fiscal year 2017. Amortization of intangible assets was $7.9 million in fiscal year 2018, as compared to $0.3 million in fiscal year 2017. Stock-based compensation expense was $1.4 million in each of fiscal years 2018 and 2017. In addition to the above items, the increase in research and development expenses was primarily the result of investments in new product development and our acquisition of EUROIMMUN, which were partially offset by lower costs as a result of cost containment and productivity initiatives.
2017 Compared to 2016. Research and development expenses for fiscal year 2017 were $139.5 million, as compared to $124.2 million for fiscal year 2016, an increase of $15.3 million, or 12%. As a percentage of revenue, research and development expenses increased to 6.2% in fiscal year 2017, as compared to 5.9% in fiscal year 2016. Amortization of intangible assets was $0.3 million for each of fiscal years 2017 and 2016. Stock-based compensation expense increased and was $1.4 million for fiscal year 2017, as compared to $0.9 million for fiscal year 2016. In addition to the above items, the increase in research and development expenses was in large part the result of investments in new product development, primarily our investments in Vanadis' non-invasive prenatal screening and ionics mass spectrometry's food and environmental safety applications. This was partially offset by lower costs as a result of cost containment and productivity initiatives.
Restructuring and Contract Termination Charges, Net
We have undertaken a series of restructuring actions related to the impact of acquisitions and divestitures, the alignment of our operations with our growth strategy, the integration of our business units and productivity initiatives. Restructuring and contract termination charges for fiscal year 2018 were $11.1 million, as compared to $12.7 million for fiscal year 2017 and $5.1 million for fiscal year 2016.
We implemented a restructuring plan in each of the first, third and fourth quarters of fiscal year 2018 consisting of workforce reductions principally intended to realign resources to emphasize growth initiatives (the "Q1 2018 Plan", "Q3 2018 Plan" and "Q4 2018 Plan", respectively). We implemented a restructuring plan in each of the fourth and third quarters of fiscal year 2017 consisting of workforce reductions principally intended to realign resources to emphasize growth initiatives (the "Q4 2017 Plan and "Q3 2017 Plan", respectively). We implemented a restructuring plan in the first quarter of fiscal year 2017 consisting of workforce reductions and the closure of excess facility space principally intended to focus resources on higher growth end markets (the "Q1 2017 Plan"). 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"). 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 2018, 2017 and 2016 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) | ||||||||||||||||||||||||||
| Q4 2018 Plan | 1 | $ | — | $ | 348 | $ | — | $ | — | $ | 348 | Q1 FY2019 | — | |||||||||||||
| Q3 2018 Plan | 61 | 618 | 1,146 | — | — | 1,764 | Q2 FY2019 | — | ||||||||||||||||||
| Q1 2018 Plan | 47 | 902 | 5,096 | — | — | 5,998 | Q2 FY2019 | — | ||||||||||||||||||
| Q4 2017 Plan | 29 | 255 | 1,680 | — | — | 1,935 | Q1 FY2019 | — | ||||||||||||||||||
| Q3 2017 Plan | 27 | 1,021 | 1,321 | — | — | 2,342 | Q4 FY2018 | — | ||||||||||||||||||
| Q1 2017 Plan | 90 | 1,631 | 5,000 | 33 | 33 | 6,697 | Q2 FY2018 | Q2 FY2018 | ||||||||||||||||||
| Q3 2016 Plan | 22 | 41 | 1,779 | — | — | 1,820 | Q4 FY2017 | — | ||||||||||||||||||
| Q2 2016 Plan | 72 | 561 | 4,106 | — | — | 4,667 | Q3 FY2017 | — |
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 $5.0 million, $3.6 million and $0.1 million in the Discovery & Analytical Solutions segment during fiscal years 2018, 2017 and 2016, respectively, and $0.5 million during fiscal year 2017 in the Diagnostics segment as a result of these contract terminations.
At December 30, 2018, we had $6.2 million recorded for accrued restructuring and contract termination charges, of which $4.8 million was recorded in short-term accrued restructuring and $1.4 million was recorded in long-term liabilities. At December 31, 2017, we had $14.0 million recorded for accrued restructuring and contract termination charges, of which $8.8 million was recorded in short-term accrued restructuring, $2.3 million was recorded in long-term liabilities and $2.9 million was recorded in other reserves. 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 2018, 2017 and 2016 in continuing operations:
| Balance at January 3, 2016 | 2016 Charges and Changes in Estimates, Net | 2016 Amounts Paid | Balance at January 1, 2017 | 2017 Charges and Changes in Estimates, Net | 2017 Amounts Paid | Balance at December 31, 2017 | 2018 Charges and Changes in Estimates, Net | 2018 Amounts Paid | Balance at December 30, 2018 | ||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||
| Severance: | |||||||||||||||||||||||||||||||||||||||||
| Q4 2018 Plan | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 348 | $ | — | $ | 348 | |||||||||||||||||||||
| Q3 2018 Plan | — | — | — | — | — | — | — | 2,054 | (639 | ) | 1,415 | ||||||||||||||||||||||||||||||
| Q1 2018 Plan | — | — | — | — | — | — | — | 5,998 | (4,389 | ) | 1,609 | ||||||||||||||||||||||||||||||
| Q4 2017 Plan(1) | — | — | — | — | 1,935 | (16 | ) | 1,919 | (381 | ) | (1,538 | ) | — | ||||||||||||||||||||||||||||
| Q3 2017 Plan(2) | — | — | — | — | 2,342 | (270 | ) | 2,072 | (1,204 | ) | (868 | ) | — | ||||||||||||||||||||||||||||
| Q1 2017 Plan(3) | — | — | — | — | 6,631 | (4,133 | ) | 2,498 | (983 | ) | (1,232 | ) | 283 | ||||||||||||||||||||||||||||
| Q3 2016 Plan | — | 1,820 | (612 | ) | 1,208 | (202 | ) | (1,006 | ) | — | — | — | — | ||||||||||||||||||||||||||||
| Q2 2016 Plan | — | 4,667 | (3,231 | ) | 1,436 | (829 | ) | (607 | ) | — | 232 | (156 | ) | 76 | |||||||||||||||||||||||||||
| Facility: | |||||||||||||||||||||||||||||||||||||||||
| Q1 2017 Plan | — | — | — | — | 66 | (33 | ) | 33 | — | (33 | ) | — | |||||||||||||||||||||||||||||
| Previous Plans | 22,018 | (1,451 | ) | (12,787 | ) | 7,780 | (537 | ) | (2,844 | ) | 4,399 | 338 | (2,425 | ) | 2,312 | ||||||||||||||||||||||||||
| Restructuring | 22,018 | 5,036 | (16,630 | ) | 10,424 | 9,406 | (8,909 | ) | 10,921 | 6,402 | (11,280 | ) | 6,043 | ||||||||||||||||||||||||||||
| Contract Termination | 132 | 88 | (103 | ) | 117 | 3,251 | (320 | ) | 3,048 | 4,742 | (7,653 | ) | 137 | ||||||||||||||||||||||||||||
| Total Restructuring and Contract Termination | $ | 22,150 | $ | 5,124 | $ | (16,733 | ) | $ | 10,541 | $ | 12,657 | $ | (9,229 | ) | $ | 13,969 | $ | 11,144 | $ | (18,933 | ) | $ | 6,180 |
| (1) | During fiscal year 2018, we recognized pre-tax restructuring reversals of $0.2 million each in the Discovery & Analytical Solutions and Diagnostics segments, related to lower than expected costs associated with workforce reductions for the Q4 2017 Plan. |
| (2) | During fiscal year 2018, we recognized pre-tax restructuring reversals of $0.8 million in the Discovery & Analytical Solutions segment and $0.4 million in the Diagnostics segment, related to lower than expected costs associated with workforce reductions for the Q3 2017 Plan. |
| (3) | During fiscal year 2018, 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 Q1 2017 Plan. |
Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
| December 30, 2018 | December 31, 2017 | January 1, 2017 | |||||||||
| (In thousands) | |||||||||||
| Interest income | $ | (1,141 | ) | $ | (2,571 | ) | $ | (702 | ) | ||
| Interest expense | 66,976 | 43,940 | 41,528 | ||||||||
| (Gain) loss on disposition of businesses and assets, net | (12,844 | ) | 309 | (5,562 | ) | ||||||
| Other expense (income) , net | 13,210 | (42,781 | ) | 15,250 | |||||||
| Total interest and other expense, net | $ | 66,201 | $ | (1,103 | ) | $ | 50,514 |
2018 Compared to 2017. Interest and other expense, net, for fiscal year 2018 was an expense of $66.2 million, as compared to income of $1.1 million for fiscal year 2017, an increase of $67.3 million. The increase in interest and other expense, net, in fiscal year 2018 as compared to fiscal year 2017 was largely due to an increase in other expense, net of $56.0 million resulting from a one-time non-recurring net foreign exchange gain of $36.5 million in fiscal year 2017 related to remeasurement and settlement of EUROIMMUN pre-acquisition hedges, combined with an increase in pension-related expenses of $20.7 million in fiscal year 2018 as compared to fiscal year 2017. Interest expense increased by $23.0 million in fiscal year 2018 as compared to fiscal year 2017 primarily due to a higher outstanding total debt balance, beginning in the fourth quarter of fiscal year 2017, related to financing for the EUROIMMUN acquisition. Gain on disposition of businesses and assets, net increased $13.2 million in fiscal year 2018 as compared to fiscal year 2017 primarily due to sale of our multi-spectral imaging business in fiscal year 2018. Interest income decreased $1.4 million in fiscal year 2018 as compared to fiscal year 2017 due to the deployment of the cash proceeds realized from the sale of our Medical Imaging business in the second quarter of fiscal year 2017 that were initially invested, and subsequently utilized in the fourth quarter of fiscal year 2017 to support the settlement of the EUROIMMUN acquisition. A more complete discussion of our liquidity is set forth below under the heading “Liquidity and Capital Resources.”
2017 Compared to 2016. Interest and other expense, net, for fiscal year 2017 was income of $1.1 million, as compared to an expense of $50.5 million for fiscal year 2016, a decrease of $51.6 million. The decrease in interest and other expense, net, in fiscal year 2017 as compared to fiscal year 2016 was largely due to a decrease in other expense, net by $58.0 million, which consists primarily of net foreign exchange gain of $36.5 million in fiscal year 2017 related to remeasurement and settlement of the EUROIMMUN pre-acquisition hedges, combined with a decrease in pension-related expenses of $20.7 million in fiscal year 2017 as compared to fiscal year 2016, and an increase in interest income of $1.9 million in fiscal year 2017 as compared to fiscal year 2016. Interest income increased primarily due to investing the proceeds from the sale of our Medical Imaging business in money market mutual funds. This was partially offset by a net loss on disposition of businesses and assets, net of $0.3 million in fiscal year 2017 as compared to a net gain of $5.6 million in fiscal year 2016 and an increase in interest expense of $2.4 million in fiscal year 2017 as compared to fiscal year 2016 due to the issuance of the 2026 Notes, the proceeds of which were deployed to paydown our lower cost debt outstanding on our previous senior unsecured revolving credit facility.
Provision for Income Taxes
The effective tax rates on continuing operations were 7.8%, 47.1% and 11.6% for fiscal years 2018, 2017 and 2016, 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:
| December 30, 2018 | December 31, 2017 | January 1, 2017 | |||||||||
| (In thousands) | |||||||||||
| Tax at statutory rate | $ | 54,114 | $ | 103,851 | $ | 85,424 | |||||
| Non-U.S. rate differential, net | (27,281 | ) | (65,836 | ) | (52,648 | ) | |||||
| U.S. taxation of multinational operations | 7,047 | 5,408 | 6,941 | ||||||||
| State income taxes, net | 2,028 | 1,810 | 1,509 | ||||||||
| Prior year tax matters | (6,034 | ) | (7,955 | ) | (9,621 | ) | |||||
| Federal tax credits | (3,738 | ) | (8,249 | ) | (7,189 | ) | |||||
| Change in valuation allowance | (759 | ) | 1,951 | (2,755 | ) | ||||||
| Non-deductible acquisition expense | — | — | 5,701 | ||||||||
| Impact of federal tax reform | (2,025 | ) | 106,538 | — | |||||||
| Others, net | (3,144 | ) | 2,310 | 1,000 | |||||||
| Total | $ | 20,208 | $ | 139,828 | $ | 28,362 |
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 The Netherlands, which are taxed at rates lower than the U.S. federal statutory rate, resulting in a benefit from income taxes of $18.7 million in fiscal year 2018, $55.9 million in fiscal year 2017 and $48.2 million in fiscal year 2016. These amounts include $10.3 million in fiscal year 2018, $10.1 million in fiscal year 2017 and $11.4 million in fiscal year 2016 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 2018 was $0.09 and $0.09, respectively, for fiscal year 2017 was $0.09 and $0.09, respectively, and for fiscal year 2016 was $0.10 and $0.10, respectively. The tax holiday in one of our subsidiaries in China expired in 2017 and the tax holiday in one other subsidiary in China is scheduled to expire in fiscal year 2019. The tax holiday in one of our subsidiaries in Singapore is scheduled to expire in fiscal year 2023.
On December 22, 2017, the President of the United States signed into law tax reform legislation, known as the Tax Cuts and Jobs Act (the "Tax Act"), which makes broad and complex changes to the U.S. Internal Revenue Code. Changes include, but are not limited to: (1) the lowering of the U.S. corporate tax rate from 35% to 21%; (2) the transition of U.S. international taxation from a worldwide tax system to a modified territorial system with a one-time transition tax on the deemed repatriation of cumulative foreign earnings as of December 31, 2017; (3) a new provision designed to tax global intangible low-taxed income (GILTI); (4) the creation of the base erosion anti-abuse tax (BEAT), which is effectively a new minimum tax; (5) the deduction for foreign-derived intangible income (FDII); (6) a new limitation on deductible interest expense; (7) the repeal of the domestic production activity deduction; and (8) limitations on the deductibility of certain executive compensation. The impacts of the Tax Act have been recorded in tax expense from continuing operations, and the details are discussed more fully in Note 8, Income Taxes, in the Notes to Consolidated Financial Statements.
Disposition of Businesses and Assets
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, 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 consolidated balance sheets as of December 30, 2018 and December 31, 2017.
We recorded the following pre-tax gains and losses, which have been reported as a net gain or loss on disposition of discontinued operations during the three fiscal years included below:
| December 30, 2018 | December 31, 2017 | January 1, 2017 | |||||||||
| (In thousands) | |||||||||||
| (Loss) gain on disposition of the Medical Imaging business | $ | (793 | ) | $ | 179,615 | $ | — | ||||
| Gain on disposition of Technical Services business | — | — | 1,753 | ||||||||
| Loss on disposition of Fluid Sciences Segment | (66 | ) | — | (1,134 | ) | ||||||
| (Loss) gain on disposition of discontinued operations before income taxes | $ | (859 | ) | $ | 179,615 | $ | 619 |
On May 1, 2017 (the "Closing Date"), we completed the sale of our Medical Imaging business to Varex Imaging Corporation ("Varex") pursuant to the terms of the Master Purchase and Sale Agreement, dated December 21, 2016 (the “Agreement”), by and between us and Varian Medical Systems, Inc. ("Varian") and the subsequent Assignment and Assumption Agreement, dated January 27, 2017, between Varian and Varex, pursuant to which Varian assigned its rights under the Agreement to Varex. On the Closing Date, we received consideration of approximately $277.4 million for the sale of the Medical Imaging business. During fiscal year 2017, we paid Varex $4.2 million to settle a post-closing working capital adjustment. During fiscal year 2017, we recorded a pre-tax gain of $179.6 million and income tax expense of $43.1 million related to the sale of the Medical Imaging business in discontinued operations and dispositions. The corresponding tax liability was recorded within the other tax liabilities in the consolidated balance sheet, and we expect to utilize tax attributes to minimize the tax liability. Following the closing, we provided certain customary transitional services during a period of up to 12 months. Commercial transactions between the parties following the closing of the transaction were not significant.
During the third quarter of fiscal year 2018, we completed the sale of substantially all of the assets and liabilities related to our multispectral imaging business for aggregate consideration of $37.3 million, recognizing a pre-tax gain of $13.0 million. The pre-tax gain is included in interest and other expense, net in the consolidated statement of operations. The multispectral imaging business was a component of our Discovery & Analytical Solutions segment. The divestiture of the multispectral imaging business 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 2017, we sold Suzhou PerkinElmer Medical Laboratory Co., Ltd. for aggregate consideration of $2.3 million, recognizing a pre-tax loss of $1.1 million. The pre-tax loss recognized in fiscal year 2017 is included in interest and other expense, net in the consolidated statement of operations. Suzhou PerkinElmer Medical Laboratory Co., Ltd. was a component of our Diagnostics segment. The divestiture of Suzhou PerkinElmer Medical Laboratory Co., Ltd. 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 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. During fiscal year 2017, we recognized an additional pre-tax gain of $1.1 million relating to the earn-out consideration received from the buyer. PerkinElmer Labs, Inc. was a component of our Diagnostics segment. The pre-tax gain recognized in fiscal years 2017 and 2016 is included in interest and other expense, net in the consolidated statements 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.
In August 1999, we sold the assets of our Technical Service business. We recorded a pre-tax gain of $1.8 million in fiscal year 2016 for a contingency related to this business. This was recognized as a gain on disposition of discontinued operations before income taxes.
The summary pre-tax operating results of the discontinued operations were as follows during the three fiscal years ended:
| December 30, 2018 | December 31, 2017 | January 1, 2017 | |||||||||
| (In thousands) | |||||||||||
| Revenue | $ | — | $ | 44,343 | $ | 146,217 | |||||
| Cost of revenue | — | 32,933 | 95,395 | ||||||||
| Selling, general and administrative expenses | — | 5,869 | 13,657 | ||||||||
| Research and development expenses | — | 4,891 | 14,368 | ||||||||
| Restructuring and contract termination charges, net | — | — | 568 | ||||||||
| Income from discontinued operations before income taxes | $ | — | $ | 650 | $ | 22,229 |
We recorded a (benefit from) provision for income taxes of $(1.3) million, $44.5 million and $4.3 million on discontinued operations and dispositions in fiscal years 2018, 2017 and 2016.
Business Combinations
Acquisitions in fiscal year 2018
During fiscal year 2018, we completed the acquisition of four businesses for aggregate consideration of $106.0 million. The excess of the purchase price over the fair value 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 workforces acquired, and has been allocated to goodwill, which is not tax deductible. We reported the operations for these acquisitions within the results of our Diagnostics and Discovery & Analytical Solutions segments, as applicable, 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 11.2 years.
Acquisitions in fiscal year 2017
Acquisition of EUROIMMUN Medizinische Labordiagnostika AG. During fiscal year 2017, we completed the acquisition of 99.98% of the outstanding stock of EUROIMMUN Medizinische Labordiagnostika AG (“EUROIMMUN”) for aggregate consideration of €1.2 billion (equivalent to $1.4 billion at December 19, 2017, the time of closing). The purchase price was funded by borrowings from our senior unsecured revolving credit facility and senior unsecured term loan credit facility of $710.0 million and $200.0 million, respectively, and available cash on hand of $503.1 million. 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. As a result of the acquisition, we recorded goodwill of $591.3 million, which is not tax deductible, and intangible assets of $907.4 million. We reported the operations for this acquisition within the results of our Diagnostics segment from the acquisition date. Identifiable definite-lived intangible assets, such as core technology, trade names and customer relationships, acquired as part of this acquisition had a weighted average amortization period of 16.1 years.
Other acquisitions in 2017. During fiscal year 2017, we also completed the acquisition of two other businesses for aggregate consideration of $142.0 million. The acquired businesses were Tulip Diagnostics Private Limited (“Tulip”), which was acquired for total consideration of $127.3 million in cash and one other business acquired for total consideration of $14.7 million in cash. At the time of closing, we had a potential obligation to pay the former shareholders of Tulip up to INR1.6 billion in additional consideration over a two year period, equivalent to $25.2 million, and is accounted for as compensation expense in our financial statements over a two year period and is excluded from the purchase price allocation shown below. The excess of the purchase prices over the fair values of the acquired businesses' net assets represents cost and revenue synergies specific to us, as well as non-capitalizable intangible assets, such as the employee workforces acquired, and has been allocated to goodwill, which is not tax deductible. We reported the operations of Tulip within the results of our Diagnostics segment and the other acquired business within the results of our Discovery & Analytical Solutions segment from the acquisition date. Identifiable definite-lived intangible assets, such as core technology, trade names and customer relationships, acquired as part of these acquisitions had a weighted average amortization period of 11.8 years.
During fiscal year 2018, we paid the former shareholders of Tulip a portion of the additional consideration amounting to INR716.3 million (equivalent to $11.3 million). As of December 30, 2018, we may have to pay the former shareholders of Tulip additional consideration of up to INR803.6 million (currently equivalent to $11.4 million) in the first quarter of fiscal year 2019.
Acquisitions in fiscal year 2016
During fiscal year 2016, we completed the acquisition of two businesses for total consideration of $72.3 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 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 workforces acquired. As a result of the acquisitions, we recorded goodwill of $43.1 million, which is not tax deductible, and intangible assets of $22.1 million. We have 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 9.4 years.
We do not consider the acquisitions completed during fiscal years 2018, 2017 and 2016, with the exception of the EUROIMMUN acquisition, to be material to our consolidated results of operations; therefore, we are only presenting pro forma financial information of operations for the EUROIMMUN acquisition. The aggregate revenue and the results of operations for the acquisitions completed during fiscal year 2018 for the period from their acquisition dates to December 30, 2018 were not material. The aggregate revenue for the acquisitions, with the exception of EUROIMMUN, completed during fiscal year 2017 for the period from their acquisition dates to December 31, 2017 was $38.5 million and the results of operations were not material. The aggregate revenue and results of operations for the acquisitions completed during fiscal year 2016 for the period from their respective acquisition dates to January 1, 2017 were minimal. We also determined that the presentation of the results of operations for each of those acquisitions, from the date of acquisition, is impracticable due to the integration of the operations upon acquisition.
As of December 30, 2018, the allocations of purchase prices for acquisitions completed in fiscal years 2017 and 2016 were final. The preliminary allocations of the purchase prices for acquisitions completed in fiscal year 2018 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. 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 2018, we obtained information relevant to determining the fair values of certain tangible and intangible assets acquired, and liabilities assumed, related to recent acquisitions and adjusted our purchase price allocations. Based on this information, for the EUROIMMUN acquisition, we recognized an increase in intangible assets of $10.0 million, an increase in other assets of $21.7 million, an increase in liabilities assumed of $12.3 million, a decrease in property and equipment of $20.1 million, a decrease in deferred tax liabilities of $23.6 million, and a decrease in goodwill of $23.5 million.
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 December 30, 2018, we may have to pay contingent consideration, related to acquisitions with open contingency periods, of up to $76.5 million. As of December 30, 2018, we have recorded contingent consideration obligations of $69.7 million, of which $67.0 million was recorded in accrued expenses and other current liabilities, and $2.7 million was recorded in long-term liabilities. As of December 31, 2017, we have recorded contingent consideration obligations of $65.3 million, of which $52.2 million was recorded in accrued expenses and other current liabilities, and $13.1 million was recorded in long-
term liabilities. The expected maximum earnout period for acquisitions with open contingency periods does not exceed 1.78 years from December 30, 2018, and the remaining weighted average expected earnout period at December 30, 2018 was 5 months. 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 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 $7.9 million and $9.4 million as of December 30, 2018 and December 31, 2017, 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. 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 December 30, 2018 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
Discovery & Analytical Solutions
2018 Compared to 2017. Revenue for fiscal year 2018 was $1,693.2 million, as compared to $1,578.5 million for fiscal year 2017, an increase of $114.8 million, or 7%, which includes an approximate 1% increase in revenue attributable to changes in foreign exchange rates. The analysis in the remainder of this paragraph compares revenue by end-market for fiscal year 2018, as compared to fiscal year 2017, 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 of $73.5 million from our applied markets revenue, and an increase of $41.3 million from our life sciences market revenue. The increase in our applied markets revenue was driven by strength in sales of industrial, environmental and food offerings. The increase in our life sciences market revenue was driven by strength in our drug discovery sales and strong performance in our Informatics business.
Operating income from continuing operations for fiscal year 2018 was $230.5 million, as compared to $205.3 million for fiscal year 2017, an increase of $25.2 million, or 12%. Amortization of intangible assets decreased to $46.1 million for fiscal year 2018 as compared to $50.7 million for fiscal year 2017. Restructuring and contract termination charges, net decreased to $10.0 million for fiscal year 2018 as compared to $10.4 million for fiscal year 2017. Acquisition and divestiture-related costs, contingent consideration and other costs added an incremental expense of $3.1 million for fiscal year 2018, as compared to $0.4 million for fiscal year 2017. Legal costs for significant litigation matters were $5.3 million for fiscal year 2018, as compared to $2.7 million for fiscal year 2017. In addition to the factors noted above, operating income increased for fiscal year 2018 as compared to fiscal year 2017, as we continued to realize the benefits from our cost containment initiatives partially offset by higher costs in research and development expenses.
2017 Compared to 2016. Revenue for fiscal year 2017 was $1,578.5 million, as compared to $1,513.0 million for fiscal year 2016, an increase of $65.5 million, or 4%, which includes an approximate 0.3% increase in revenue attributable to favorable changes in foreign exchange rates with minimal impact from acquisitions and divestitures. The analysis in the remainder of this paragraph compares revenue by end-market for fiscal year 2017, as compared to fiscal year 2016, and includes the effect of foreign exchange fluctuations and acquisitions and divestitures. The increase in revenue in our Discovery & Analytical Solutions segment was due to an increase of $36.2 million from our life sciences market revenue, and an increase of $29.3 million from our applied markets revenue. The increase in our life sciences market revenue was primarily driven by increased demand for our OneSource laboratory service business, partially offset by continued decline in sales of radioactive reagents in our radio-nucleotide business. In our applied markets, we experienced higher growth in our industrial, environmental and food offerings, as a result of increased government regulation of soil and water and increased focus on food safety laws.
Operating income from continuing operations for fiscal year 2017 was $205.3 million, as compared to $196.5 million for fiscal year 2016, an increase of $8.8 million, or 4%. Amortization of intangible assets decreased and was $50.7 million for fiscal year 2017 as compared to $53.3 million for fiscal year 2016. Restructuring and contract termination charges, net increased and were $10.4 million for fiscal year 2017 as compared to $4.7 million for fiscal year 2016. Acquisition and divestiture-related costs, contingent consideration and other costs added an incremental expense of $0.4 million for fiscal year 2017, as compared to $0.6 million for fiscal year 2016. 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. Legal costs for significant litigation matters were $2.7 million for fiscal year 2017. In addition to the factors noted above, operating income increased for fiscal year 2017 as compared to fiscal year 2016, as we continued to see the benefits from our cost containment initiatives partially offset by higher costs in research and development expenses and a shift in product mix, with an increase in sales of lower gross margin product offerings.
Diagnostics
2018 Compared to 2017. Revenue for fiscal year 2018 was $1,084.8 million, as compared to $678.5 million for fiscal year 2017, an increase of $406.3 million, or 60%, which includes an approximate 49% increase in revenue attributable to acquisitions. 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 Diagnostics segment for fiscal year 2018 and $0.7 million for fiscal year 2017. In our diagnostics market, we experienced growth primarily due to our acquisition of EUROIMMUN, which contributed $359.4 million in revenues during fiscal year 2018, and continued expansion of our reproductive health, applied genomics, genetic testing and immuno-diagnostics solutions, particularly in the Americas and emerging markets, such as China and India.
Operating income from continuing operations for fiscal year 2018 was $153.2 million, as compared to $146.9 million for fiscal year 2017, an increase of $6.3 million, or 4%. Amortization of intangible assets increased and was $89.8 million for fiscal year 2018 as compared to $23.0 million for fiscal year 2017. Restructuring and contract termination charges, net decreased and were $1.2 million for fiscal year 2018 as compared to $2.2 million for fiscal year 2017. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $28.2 million in fiscal year 2018, as compared to an incremental expense of $29.4 million for fiscal year 2017. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an incremental expense of $19.3 million in fiscal year 2018, as compared to $6.2 million for fiscal year 2017. Legal costs for significant litigation matters were $0.2 million for fiscal
year 2018. In addition to the factors noted above, operating income increased during fiscal year 2018, as compared to fiscal year 2017, primarily the result of higher sales volume, strong reproductive health sales and benefits from our initiatives to improve our supply chain.
2017 Compared to 2016. Revenue for fiscal year 2017 was $678.5 million, as compared to $602.5 million for fiscal year 2016, an increase of $76.0 million or 13%, which includes an approximate 6% increase in revenue attributable to acquisitions and divestitures and 0.5% increase in revenue attributable to changes in foreign exchange rates. 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 each of the fiscal years 2017 and 2016 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 and India, and strong growth in applied genomics. EUROIMMUN and Tulip contributed $13.5 million and $38.5 million, respectively, in revenues during fiscal year 2017.
Operating income from continuing operations for fiscal year 2017 was $146.9 million, as compared to $148.0 million for fiscal year 2016, a decrease of $1.1 million, or 1%. Amortization of intangible assets increased and was $23.0 million for fiscal year 2017 as compared to $18.1 million for fiscal year 2016. Restructuring and contract termination charges, net increased and were $2.2 million for fiscal year 2017 as compared to $0.4 million for fiscal year 2016. Acquisition and divestiture-related expenses and other costs added an incremental expense of $29.4 million in fiscal year 2017, as compared to decreasing expenses by $17.7 million for fiscal year 2016. Excluding the impact of the above items, operating income increased during fiscal year 2017, as compared to fiscal year 2016 primarily due to strong reproductive health sales and benefits from our initiatives to improve our supply chain.
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 2018
Operating Activities. Net cash provided by continuing operations was $311.2 million for fiscal year 2018, as compared to net cash provided by continuing operations of $292.2 million for fiscal year 2017, an increase of $19.1 million. The cash provided by operating activities for fiscal year 2018 was principally a result of income from continuing operations of $237.5
million, and non-cash charges, including depreciation and amortization of $180.6 million, stock based compensation expense of $28.8 million, change in fair value of contingent consideration of $14.6 million, a non-cash expense of $11.9 million related to our postretirement benefit plans, including the mark-to-market adjustment in the fourth quarter of fiscal year 2018, restructuring and contract termination charges, net, of $11.1 million, and amortization of deferred debt issuance costs and accretion of discounts of $3.3 million. These amounts were partially offset by a net increase in working capital of $115.8 million, deferred tax benefit of $51.1 million, a net increase of $3.7 million in accrued expenses, other assets and liabilities and other items, a gain from disposition of businesses and assets, net of $12.8 million, and a gain on sale of investments, net of $0.6 million. The change in accrued expenses, other assets and liabilities and other items increased cash provided by operating activities by $3.7 million for fiscal year 2018, primarily related to the timing of payments for pension, taxes, restructuring, royalties and salary and benefits. During fiscal year 2018, we made contributions of $8.5 million, in the aggregate, to pension plans outside of the United States and $15.0 million to our defined benefit pension plan in the United States for the plan year 2017. Contributing to the net increase in working capital for fiscal year 2018, excluding the effect of foreign exchange rate fluctuations, was an increase in accounts receivable of $94.5 million and an increase in inventory of $30.2 million, which were partially offset by an increase in accounts payable of $8.9 million. The increase in accounts receivable was a result of higher sales volume late in the fourth quarter of fiscal year 2018. The increase in inventory was primarily a result of overseas production moves to further increase our manufacturing localization and added inventory needed for our distribution center strategy. The increase in accounts payable was primarily a result of the timing of disbursements during the fourth quarter of fiscal year 2018.
Investing Activities. Net cash used in the investing activities of our continuing operations was $159.9 million for fiscal year 2018, as compared to net cash used in the investing activities of our continuing operations of $1,539.4 million for fiscal year 2017, a decrease of $1,379.5 million. For fiscal year 2018, we used $97.7 million of net cash for acquisitions, as compared to $1,527.2 million used in fiscal year 2017. Capital expenditures for fiscal year 2018 were $93.3 million, primarily for manufacturing equipment and other capital equipment purchases, as compared to $39.1 million for fiscal year 2017. During fiscal year 2018, we made equity investments that are accounted for using the cost method of accounting, amounting to $7.0 million as compared to $10.8 million in fiscal year 2017. These items were partially offset by $38.0 million in proceeds from disposition of investments and $0.1 million in proceeds from the surrender of life insurance policies in fiscal year 2018.
Financing Activities. Net cash used in the financing activities of our continuing operations was $179.2 million for fiscal year 2018, as compared to net cash provided by the financing activities of our continuing operations of $782.8 million for fiscal year 2017, an increase of $962.0 million. The cash used in financing activities in fiscal year 2018 was as a result of payments on borrowings, repurchases of our common stock, settlement of forward foreign exchange contracts, payments of dividends, net payments on other credit facilities, and payments for acquisition-related contingent consideration. During fiscal year 2018, payments on our senior unsecured revolving credit facility totaled $1,264.0 million, which was partially offset by proceeds from our senior unsecured revolving credit facility of $857.0 million and proceeds from the sale of our 0.6% senior unsecured notes due in 2021 of $369.3 million offset by debt issuance costs totaling $2.6 million. This compares to borrowings from our senior unsecured revolving credit facility of $1,061.0 million, which was partially offset by debt payments of $236.0 million in fiscal year 2017. During fiscal year 2018, we repurchased 650,000 shares of our common stock, in addition to repurchasing 66,506 shares of our common stock pursuant to our equity incentive plans, for a total cost of $57.4 million, including commissions. This compares to repurchases of 78,644 shares of our common stock pursuant to our equity incentive plans, for a total cost of $3.8 million during fiscal year 2017. During fiscal year 2018, we paid $34.1 million for the settlement of forward foreign exchange contracts, as compared to $13.8 million in fiscal year 2017. During each of the fiscal years 2018 and 2017, we paid $31.0 million in dividends. We had net payments on other credit facilities of $28.4 million during fiscal year 2018, as compared to $2.8 million during fiscal year 2017. We made $12.8 million in payments during fiscal year 2018 for acquisition-related contingent consideration, as compared to $8.9 million in fiscal year 2017. Cash used in financing activities in fiscal year 2018 was partially offset by proceeds from the issuance of common stock under stock plans of $24.8 million, as compared to proceeds from the issuance of common stock under stock plans of $18.0 million in fiscal year 2017.
Fiscal Year 2017
Operating Activities. Net cash provided by continuing operations was $292.2 million for fiscal year 2017, as compared to net cash provided by continuing operations of $323.8 million for fiscal year 2016, a decrease of $31.6 million. The cash provided by operating activities for fiscal year 2017 was principally a result of income from continuing operations of $156.9 million, and non-cash charges, including depreciation and amortization of $105.0 million, deferred taxes expense of $28.9 million, stock based compensation expense of $25.4 million, restructuring and contract termination charges, net, of $12.7 million, amortization of deferred debt issuance costs and accretion of discounts of $2.6 million, change in fair value of contingent consideration of $2.2 million, and a loss from disposition of businesses and assets, net of $0.3 million. These amounts were partially offset by a net decrease of $11.1 million in accrued expenses, other assets and liabilities and other items, a net increase in working capital of $20.2 million, and a non-cash gain related to our postretirement benefit plans, including the
mark-to-market adjustment in the fourth quarter of fiscal year 2017, of $10.4 million. The change in accrued expenses, other assets and liabilities and other items decreased cash provided by operating activities by $11.1 million for fiscal year 2017, primarily related to the timing of payments for taxes, defined benefit pension plans, royalties, restructuring, and salary and benefits. During fiscal year 2017, we made contributions of $8.4 million, in the aggregate, to pension plans outside of the United States. Contributing to the net increase in working capital for fiscal year 2017, excluding the effect of foreign exchange rate fluctuations, was an increase in accounts receivable of $36.6 million and an increase in inventory of $17.9 million, which were partially offset by an increase in accounts payable of $34.3 million. The increase in accounts receivable was a result of higher sales volume late in the fourth quarter of fiscal year 2017. The increase in inventory was primarily a result of expanding the amount of inventory held at sales locations within our Discovery & Analytical Solutions and Diagnostics segments to improve responsiveness to customer requirements and to facilitate the introduction of new products. The increase in accounts payable was primarily a result of the timing of disbursements during the fourth quarter of fiscal year 2017.
Investing Activities. Net cash used in the investing activities of our continuing operations was $1,539.4 million for fiscal year 2017, as compared to net cash used in the investing activities of our continuing operations of $82.6 million for fiscal year 2016, an increase of $1,456.8 million. For fiscal year 2017, we used $1,527.2 million of net cash for acquisitions, as compared to $71.9 million used in fiscal year 2016. The increase of $1,455.3 million in net cash for acquisitions primarily related to the acquisition of EUROIMMUN and Tulip during fiscal year 2017. Capital expenditures for fiscal year 2017 were $39.1 million, primarily for manufacturing equipment and other capital equipment purchases, as compared to $31.7 million for fiscal year 2016. During fiscal year 2017, we made an equity investment that is accounted for using the cost method of accounting, amounting to $10.8 million. In addition, we received $36.5 million from the settlement of acquisition-related foreign currency forward contracts, and $1.1 million from disposition of businesses in fiscal year 2017.
Financing Activities. Net cash provided by the financing activities of our continuing operations was $782.8 million for fiscal year 2017, as compared to net cash used in the financing activities of our continuing operations of $115.0 million for fiscal year 2016, an increase of $897.8 million. During fiscal year 2017, borrowings from our senior unsecured revolving credit facility totaled $1,061.0 million, which was partially offset by debt payments of $236.0 million. This compares to borrowings from our senior unsecured revolving credit facility of $420.5 million, which was more than offset by debt payments of $902.5 million in fiscal year 2016. During fiscal year 2017, proceeds from the issuance of common stock under stock plans was $18.0 million. This compares to proceeds from the issuance of common stock under stock plans of $14.4 million in fiscal year 2016. This cash provided by financing activities in fiscal year 2017 was partially offset by payments of dividends, settlement of forward foreign exchange contracts, payments for acquisition-related contingent consideration, repurchases of our common stock, and net payments on other credit facilities. During each of the fiscal years 2017 and 2016, we paid $30.8 million in dividends. During fiscal year 2017, we paid $13.8 million for the settlement of forward foreign exchange contracts, as compared to $1.9 million in fiscal year 2016. During fiscal year 2017, we made $8.9 million in payments for acquisition-related contingent consideration, as compared to $0.2 million in fiscal year 2016. During fiscal year 2017, we repurchased 78,644 shares of our common stock pursuant to our equity incentive plans, for a total cost of $3.8 million. This compares to repurchases of 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, during fiscal year 2016. We had net payments on other credit facilities of $2.8 million during fiscal year 2017, as compared to $1.1 million during fiscal year 2016.
Borrowing Arrangements
Senior Unsecured Revolving Credit Facility. Our senior unsecured revolving credit facility provides for $1.0 billion of revolving loans and has an initial maturity of August 11, 2021. As of December 30, 2018, undrawn letters of credit in the aggregate amount of $11.4 million were treated as issued and outstanding when calculating the borrowing availability under the senior unsecured revolving credit facility. As of December 30, 2018, we had $570.6 million available for additional borrowing under the facility. We use the senior unsecured revolving credit facility for general corporate purposes, which may include working capital, refinancing existing indebtedness, capital expenditures, share repurchases, acquisitions and strategic alliances. The interest rates under the senior unsecured revolving credit facility are based on the Eurocurrency rate or the base rate at the time of borrowing, plus a margin. The base rate is the higher of (i) the rate of interest in effect for such day as publicly announced from time to time by JP Morgan Chase Bank, N.A. as its "prime rate," (ii) the Federal Funds rate plus 50 basis points or (iii) an adjusted one-month Libor plus 1.00%. The Eurocurrency margin as of December 30, 2018 was 110 basis points. The weighted average Eurocurrency interest rate as of December 30, 2018 was 2.51%, resulting in a weighted average effective Eurocurrency rate, including the margin, of 3.61%, which was the interest applicable to the borrowings outstanding under the Eurocurrency rate as of December 30, 2018. As of December 30, 2018, the senior unsecured revolving credit facility had outstanding borrowings of $418.0 million, and $2.4 million of unamortized debt issuance costs. As of December 31, 2017, the senior unsecured revolving credit facility had $625.0 million outstanding borrowings, and $3.3 million of unamortized debt issuance costs. The credit agreement for the facility contains affirmative, negative and financial covenants and events of default. The financial covenants include a debt-to-capital ratio that remains applicable for so long as 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 December 30, 2018.
Senior Unsecured Term Loan Credit Facility. We entered into a senior unsecured term loan credit facility on August 11, 2017 that provided for $200.0 million of term loans and had an initial maturity of twelve months from December 19, 2017, the date of the initial draw. We utilized the senior unsecured term loan facility for the acquisition of EUROIMMUN. The interest rates under the senior unsecured term loan credit facility were based on the Eurocurrency rate or the base rate at the time of the borrowing, plus a margin. The base rate was the higher of (i) the rate of interest in effect for such day as publicly announced from time to time by JP Morgan Chase Bank, N.A. as its "prime rate," (ii) the Federal Funds rate plus 50 basis points or (iii) an adjusted one-month Libor plus 1.00%. In April 2018, we paid in full the outstanding balance of $200.0 million on our senior unsecured term loan credit facility, from the proceeds of the 0.6% senior unsecured notes due in 2021 that were issued in April 2018.
5% Senior Unsecured Notes due in 2021. On October 25, 2011, we issued $500.0 million aggregate principal amount of senior unsecured notes due in 2021 (the “November 2021 Notes”) in a registered public offering and received $493.6 million of net proceeds from the issuance. The November 2021 Notes were issued at 99.4% of the principal amount, which resulted in a discount of $3.1 million. As of December 30, 2018, the November 2021 Notes had an aggregate carrying value of $497.4 million, net of $1.1 million of unamortized original issue discount and $1.6 million of unamortized debt issuance costs. As of December 31, 2017, the November 2021 Notes had an aggregate carrying value of $496.6 million, net of $1.4 million of unamortized original issue discount and $2.0 million of unamortized debt issuance costs. The November 2021 Notes mature in November 2021 and bear interest at an annual rate of 5%. Interest on the November 2021 Notes is payable semi-annually on May 15th and November 15th each year. Prior to August 15, 2021 (three months prior to their maturity date), we may redeem the November 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 November 2021 Notes to be redeemed, plus accrued and unpaid interest, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the November 2021 Notes being redeemed, discounted on a semi-annual basis, at the Treasury Rate plus 45 basis points, plus accrued and unpaid interest. At any time on or after August 15, 2021 (three months prior to their maturity date), we may redeem the November 2021 Notes, at our option, at a redemption price equal to 100% of the principal amount of the November 2021 Notes to be redeemed plus accrued and unpaid interest. Upon a change of control (as defined in the indenture governing the November 2021 Notes) and a contemporaneous downgrade of the November 2021 Notes below investment grade, each holder of November 2021 Notes will have the right to require us to repurchase such holder's November 2021 Notes for 101% of their principal amount, plus accrued and unpaid interest.
1.875% Senior Unsecured Notes due 2026. On July 19, 2016, 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 December 30, 2018, the 2026 Notes had an aggregate carrying value of $564.5 million, net of $4.0 million of unamortized original issue discount and $3.8 million of unamortized debt issuance costs. As of December 31, 2017, the 2026 Notes had an aggregate carrying value of $591.7 million, net of $4.7 million of unamortized original issue discount and $4.3 million of unamortized debt issuance costs.
Prior to April 19, 2026 (three months prior to their maturity date), 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.
0.6% Senior Unsecured Notes due in 2021. On April 11, 2018, we issued €300.0 million aggregate principal amount of senior unsecured notes due in 2021 (the “April 2021 Notes”) in a registered public offering and received approximately €298.7 million of net proceeds from the issuance. The April 2021 Notes were issued at 99.95% of the principal amount, which resulted in a discount of €0.2 million. As of December 30, 2018, the April 2021 Notes had an aggregate carrying value of $341.3 million, net of $0.1 million of unamortized original issue discount and $2.0 million of unamortized debt issuance costs. The
April 2021 Notes mature in April 2021 and bear interest at an annual rate of 0.6%. Interest on the April 2021 Notes is payable annually on April 9th each year. The proceeds from the April 2021 Notes were used to pay in full the outstanding balance of our senior unsecured term loan credit facility, and a portion of the outstanding senior unsecured revolving credit facility, and in each case the borrowings were incurred to pay a portion of the purchase price for our acquisition of EUROIMMUN, which closed on December 19, 2017. Prior to the maturity date of the April 2021 Notes, we may redeem them 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 April 2021 Notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the April 2021 Notes being redeemed, discounted on an annual basis, at the applicable Comparable Government Bond Rate (as defined in the indenture governing the April 2021 Notes) plus 15 basis points; plus, in each case, accrued and unpaid interest. Upon a change of control (as defined in the indenture governing the April 2021 Notes) and a contemporaneous downgrade of the April 2021 Notes below investment grade, we will, in certain circumstances, make an offer to purchase the April 2021 Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest.
Other Debt Facilities. Our other debt facilities include Euro-denominated bank loans with an aggregate carrying value of $32.1 million (or €28.0 million) and $57.2 million (or €47.6 million) as of December 30, 2018 and December 31, 2017, respectively. These bank loans are primarily utilized for financing fixed assets and are repaid in monthly or quarterly installments with maturity dates extending to 2028. Of these bank loans, loans in the aggregate amount of $31.9 million bear fixed interest rates between 1.1% and 5.5% and a loan in the amount of $0.2 million bears a variable interest rate based on the Euribor rate plus a margin of 1.5%. An aggregate amount of $4.8 million of the bank loans are secured by mortgages on real property and the remaining $27.3 million are unsecured. Certain credit agreements for the unsecured bank loans include financial covenants which are based on an equity ratio or an equity ratio and minimum interest coverage ratio. We were in compliance with all applicable covenants as of December 30, 2018.
In addition, we had other unsecured revolving credit facilities and a secured bank loan in the amount of $5.8 million and $0.3 million, respectively, as of December 30, 2018 and $2.7 million and $0.3 million, respectively, as of December 31, 2017. The unsecured revolving debt facilities bear fixed interest rates between 2.3% and 17.6%. The secured bank loan of $0.3 million bears a fixed annual interest rate of 2.0% and is repaid in monthly installments until 2027.
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 December 30, 2018, we had $34.5 million recorded for these financing lease obligations, of which $1.5 million was recorded as short-term debt and $33.0 million was recorded as long-term debt. At December 31, 2017, we had $35.9 million recorded for these financing lease obligations, of which $1.4 million was recorded as short-term debt and $34.5 million was recorded as long-term debt. The buildings are being depreciated on a straight-line basis over the terms of the leases to their estimated residual values, which will equal the remaining financing obligation at the end of the lease term. At the end of the lease term, the remaining balances in property, plant and equipment, net and debt will be reversed against each other.
Dividends
Our Board declared a regular quarterly cash dividend of $0.07 per share in each quarter of fiscal years 2018 and 2017, resulting in an annual dividend rate of $0.28 per share. At December 30, 2018, we had accrued $7.7 million for a dividend declared on October 24, 2018 for the fourth quarter of fiscal year 2018 that was paid in February 2019. On January 24, 2019, we announced that our Board had declared a quarterly dividend of $0.07 per share for the first quarter of fiscal year 2019 that will be payable in May 2019. 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 December 30, 2018 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) | November 2021 Notes(2) | April 2021 Notes(3) | 2026 Notes(4) | Other Debt Facilities(5) | Financing Lease Obligations(6) | Employee Benefit Payments(7) | Unrecognized Tax Benefits(8) | Total | ||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||
| 2019 | $ | 56,430 | $ | — | $ | 25,000 | $ | 2,060 | $ | 10,732 | $ | 13,763 | $ | 1,532 | $ | 30,223 | $ | — | $ | 139,740 | |||||||||||||||||||
| 2020 | 46,621 | — | 25,000 | 2,060 | 10,732 | 8,818 | 1,597 | 30,751 | — | 125,579 | |||||||||||||||||||||||||||||
| 2021 | 33,490 | 418,000 | 521,772 | 343,981 | 10,732 | 8,388 | 1,665 | 31,544 | — | 1,369,572 | |||||||||||||||||||||||||||||
| 2022 | 22,129 | — | — | — | 10,732 | 4,027 | 1,657 | 31,804 | — | 70,349 | |||||||||||||||||||||||||||||
| 2023 | 15,591 | — | — | — | 10,732 | 2,729 | 1,681 | 32,207 | — | 62,940 | |||||||||||||||||||||||||||||
| 2024 and thereafter | 67,582 | — | — | — | 599,622 | 1,475 | 4,698 | 163,910 | — | 837,287 | |||||||||||||||||||||||||||||
| Total | $ | 241,843 | $ | 418,000 | $ | 571,772 | $ | 348,101 | $ | 653,282 | $ | 39,200 | $ | 12,830 | $ | 320,439 | $ | — | $ | 2,605,467 |
| (1) | The credit facility borrowings carry variable interest rates. As of December 30, 2018, the senior unsecured revolving credit facility had a carrying value of $415.6 million. |
| (2) | The November 2021 Notes include interest obligations of $71.8 million. As of December 30, 2018, the November 2021 Notes had a carrying value of $497.4 million. |
| (3) | The April 2021 Notes include interest obligations of $4.7 million. As of December 30, 2018, the April 2021 Notes had a carrying value of $341.3 million. |
| (4) | The 2026 Notes include interest obligations of $80.9 million. As of December 30, 2018, the 2026 Notes had a carrying value of $564.5 million. |
| (5) | The other debt facilities include interest obligations of $1.0 million. As of December 30, 2018, the other debt facilities had a carrying value of $38.2 million. |
| (6) | The financing lease obligations do not include interest obligations. |
| (7) | Employee benefit payments only include obligations through fiscal year 2028. |
| (8) | We do not expect to cash settle any uncertain positions during fiscal year 2019. We have excluded $1.0 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 December 30, 2018, we may have to pay the former shareholders of certain of our acquisitions contingent consideration of up to $76.5 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 23 to our consolidated financial statements included in this annual report on Form 10-K.
Capital Expenditures
During fiscal year 2019, we expect to invest an amount for capital expenditures similar to that in fiscal year 2018, 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 December 30, 2018, we had cash and cash equivalents of $163.1 million, of which $149.4 million was held by our non-U.S. subsidiaries, and we had $570.6 million of additional borrowing capacity available under a senior unsecured revolving credit facility. We had no other liquid investments at December 30, 2018.
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. The Tax Act requires us to pay a one-time transition tax on the unremitted earnings of foreign subsidiaries. Based on available information, we estimated the tax on the deemed repatriation of our foreign earnings and recorded a tax expense of $85.0 million in continuing operations at December 31, 2017. During the fiscal year ended December 30, 2018, we refined our calculations of the one-time transition tax based on newly issued guidance from the Internal Revenue Service. As a result, we recorded a benefit of $4.6 million in continuing operations related to the one-time transition
tax. In addition, during fiscal year 2018, we determined that previously undistributed earnings of certain international subsidiaries no longer met the requirements of indefinite reinvestment and therefore recognized $2.9 million of income tax expense during the year. Our intent is to continue to reinvest the remaining undistributed earnings of our international subsidiaries indefinitely. No additional income tax expense has been provided for any remaining undistributed foreign earnings not subject to the transition tax, or any additional outside basis difference inherent in these entities, as these amounts continue to be indefinitely reinvested in foreign operations.
On July 27, 2016, 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 23, 2018, our Board authorized us to immediately terminate the Repurchase Program and further authorized us to repurchase shares of common stock for an aggregate amount up to $250.0 million under a new stock repurchase program (the "New Repurchase Program"). The New Repurchase Program will expire on July 23, 2020 unless terminated earlier by our Board and may be suspended or discontinued at any time. During fiscal year 2018, we had no stock repurchases under the Repurchase Program. No shares remain available for repurchase under the Repurchase Program due to its cancellation. During the fourth quarter of fiscal year 2018, we repurchased 650,000 shares of common stock under the New Repurchase Program at an aggregate cost of $52.2 million. As of December 30, 2018, $197.8 million remained available for aggregate repurchases of shares 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 the fiscal year 2018, we repurchased 66,506 shares of common stock for this purpose at an aggregate cost of $5.2 million. During fiscal year 2017, we repurchased 78,644 shares of common stock for this purpose at an aggregate cost of $4.4 million. 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 $8.3 million in the aggregate during fiscal year 2019. During fiscal year 2018, we contributed $8.5 million, in the aggregate, to pension plans outside of the United States and $15.0 million to our defined benefit pension plan in the United States for plan year 2017. During fiscal year 2017, we made contributions of $8.4 million, in the aggregate, to plans outside of the United States. During fiscal year 2016, we contributed $9.6 million, in the aggregate, to plans outside of the United States. We could potentially have to make additional funding payments in future periods for all pension plans. We expect to use existing cash and external sources to satisfy future contributions to our pension plans.
Effects of Recently Issued and Adopted Accounting Pronouncements
See Note 1, Nature of Operations and Accounting Policies, in the Notes to Consolidated Financial Statements for a summary of recently adopted and issued accounting pronouncements.
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, pensions and other postretirement benefits,
restructuring, income taxes, 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 enter into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. We recognize revenue in an amount that reflects the consideration we expect to receive in exchange for the promised products or services when a performance obligation is satisfied by transferring control of those products or services to customers.
Taxes that are collected by us from a customer and assessed by a governmental authority, that are both imposed on and concurrent with a specific revenue-producing transaction, are excluded from revenue.
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 test consists of the comparison of the fair value to the carrying value of the reporting unit to determine if the carrying value exceeds the fair value. If the carrying value of the reporting unit exceeds its fair value, an impairment loss in an amount equal to that excess is recognized up to the amount of goodwill. 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 a measurement date of January 1, 2018, and concluded that there was no goodwill impairment. At January 1, 2018, the fair value exceeded the carrying value by more than 20.0% for each reporting unit, except for our Informatics reporting unit. The range of the long-term terminal growth rates for the reporting units was 3.0% to 5.0% for the fiscal year 2018 impairment analysis. The range for the discount rates for the reporting units was 9.0% to 15.0%. Keeping all other variables constant, a 10.0% change in any one of these input assumptions for the various reporting units, except for our Informatics reporting unit, would still allow us to conclude that there was no impairment of goodwill.
We consistently employed the income approach to estimate the current fair value when testing for impairment of goodwill. A number of significant assumptions and estimates are involved in the application of the income approach to forecast operating cash flows, including markets and market share, sales volumes and prices, costs to produce, tax rates, capital spending, discount rates and working capital changes. Cash flow forecasts are based on approved business unit operating plans for the early years’ cash flows and historical relationships in later years. The income approach is sensitive to changes in long-term terminal growth rates and the discount rates. The long-term terminal growth rates are consistent with our historical long-term terminal growth rates, as the current economic trends are not expected to affect our long-term terminal growth rates. We corroborate the income approach with a market approach.
Our Informatics reporting unit, which had a goodwill balance of $217.2 million at January 1, 2018, 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. We consistently employed the relief from royalty model to estimate the current fair value when testing for impairment of non-amortizing intangible asset. 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 up to the amount of the amortizing intangible asset. In addition, we 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.
We performed our annual impairment testing as of January 1, 2018, and concluded that there was no impairment of non-amortizing intangible asset. An assessment of the recoverability of amortizing intangible assets takes place when events have occurred that may give rise to an impairment. No such events occurred during fiscal year 2018.
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 $11.9 million in fiscal year 2018, income of $10.4 million in fiscal year 2017 and a loss of $14.5 million in fiscal year 2016 for our retirement and postretirement benefit plans, which includes the charge or benefit 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 $21.4 million in fiscal year 2018, a pre-tax gain of $2.1 million in fiscal year 2017 and a pre-tax loss of $15.3 million in fiscal year 2016. We expect income of approximately $1.2 million in fiscal year 2019 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 2019. 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 2019. 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 2019. 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-U.S. 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 December 30, 2018, we estimate the expected long-term rate of return on assets in our pension and other postretirement benefit plans in the United States to be 7.25% and to be 5.30% for all plans outside the United States. In addition, as of December 30, 2018, we estimate the discount rate for our pension and other postretirement benefit plans in the United States to be 4.05% and to be 2.07% for all plans outside the United States. During fiscal year 2016, for the plans in the United States, 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 adopted a further updated projection scale, MP-2017, as of December 31, 2017. The adoption of MP-2017 resulted in a $2.6 million decrease to the projected benefit obligation at December 31, 2017. During fiscal year 2018, the Society of Actuaries issued MP-2018 mortality improvement rates to replace MP-2017 rates for use with the RP-2014 mortality table, which incorporates an additional year (2016) of U.S. population. We adopted MP-2018 as of December 30, 2018. The adoption of MP-2018 resulted in a $1.0 million decrease to the projected benefit obligation at December 30, 2018. 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 December 30, 2018, our pension plan expenses would also change.
| Increase (Decrease) at December 30, 2018 | |||||||
| Percentage Point Change | Non-U.S. | U.S. | |||||
| Pension plans discount rate | +0.25 | (11,836 | ) | (6,969 | ) | ||
| -0.25 | 12,591 | 7,278 | |||||
| Rate of return on pension plan assets | +1.00 | (1,592 | ) | (2,343 | ) | ||
| -1.00 | 1,592 | 2,343 | |||||
| Postretirement medical plans discount rate | +0.25 | N/A | (81 | ) | |||
| -0.25 | N/A | 85 | |||||
| Rate of return on postretirement medical plan assets | +1.00 | N/A | (163 | ) | |||
| -1.00 | N/A | 163 |
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. Any such changes decrease or increase current earnings. During the fiscal year ended December 30, 2018, we had no disposition of discontinued operations.
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.
The Tax Act makes broad and complex changes to the U.S. Internal Revenue Code, which include reducing the corporate income tax rate from 35% to 21% and implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. The end of the measurement period for purposes of Staff Accounting Bulletin No. 118 was December 22, 2018. We have completed the analysis based on legislative updates relating to the Tax Act currently available and has recorded the impact in tax expense from continuing operations. The details are discussed more fully in Note 8, Income Taxes, in the Notes to Consolidated Financial Statements.
We will be subject to the new Global Intangible Low Tax Income ("GILTI") tax rules that are part of the modified territorial tax system imposed by the Tax Act. Under U.S. GAAP, we are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into our measurement of deferred taxes (the “deferred method”). We decided to adopt the period cost method and thus have not recorded any potential deferred tax effects related to GILTI and FDII in our financial statements for the fiscal year ended December 30, 2018.
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.
Historically, deferred income tax expense has not been provided on the cumulative undistributed earnings of our international subsidiaries. During fiscal year 2018, we determined that previously undistributed earnings of certain international subsidiaries of approximately $1.0 billion no longer met the requirements of indefinite reinvestment and therefore we recognized $2.9 million of income tax expense in fiscal year 2018. Our intent is to continue to reinvest the remaining undistributed earnings of our international subsidiaries indefinitely. While federal income tax expense has been recognized as a result of the Tax Act, we have not provided any additional deferred taxes with respect to items such as foreign withholding taxes, state income tax or foreign exchange gain or loss. As of December 30, 2018, the amount of foreign earnings that we have the intent and ability to keep invested outside the U.S. indefinitely and for which no additional incremental U.S. tax cost has been provided, other than the $80.4 million from the one-time transition tax on deemed repatriation, was approximately $652.1 million. It is not practicable to calculate the unrecognized deferred tax liability related to such incremental tax costs on those earnings.
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