PERKINELMER INC - FORM 10-Q - November 8, 2016

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EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - PERKINELMER INCpki-10022016xex_321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - PERKINELMER INCpki-10022016xex_312.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - PERKINELMER INCpki-10022016xex_311.htm
EX-10.2 - EMPLOYMENT AGREEMENT BETWEEN DEBORAH A. BUTTERS AND PERKINELMER - PERKINELMER INCpki-10022016xex_102.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________ 
FORM 10-Q
_______________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 2, 2016
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 001-5075
_______________________________________ 
PerkinElmer, Inc.
(Exact name of Registrant as specified in its Charter)
_______________________________________  
Massachusetts
 
04-2052042
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
940 Winter Street
Waltham, Massachusetts 02451
(Address of principal executive offices) (Zip code)
(781) 663-6900
(Registrant’s telephone number, including area code)
_______________________________________ 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
ý
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of November 4, 2016, there were outstanding 109,545,379 shares of common stock, $1 par value per share.


TABLE OF CONTENTS
 
 
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
 
 
 
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II. OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 
 



2

PART I. FINANCIAL INFORMATION

Item 1.
Unaudited Financial Statements

PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) 
 
Three Months Ended
 
Nine Months Ended
 
October 2,
2016
 
October 4,
2015
 
October 2,
2016
 
October 4,
2015
 
(In thousands, except per share data)
Product revenue
$
368,459

 
$
378,325

 
$
1,126,879

 
$
1,126,356

Service revenue
179,595

 
185,111

 
532,526

 
527,887

Total revenue
548,054

 
563,436

 
1,659,405

 
1,654,243

Cost of product revenue
177,077

 
193,375

 
555,153

 
579,659

Cost of service revenue
110,178

 
115,458

 
328,073

 
332,095

Total cost of revenue
287,255

 
308,833

 
883,226

 
911,754

Selling, general and administrative expenses
145,793

 
147,728

 
447,332

 
440,343

Research and development expenses
33,175

 
31,095

 
101,967

 
95,898

Restructuring and contract termination charges, net
603

 
(118
)
 
5,692

 
4,838

Operating income from continuing operations
81,228

 
75,898

 
221,188

 
201,410

Interest and other expense, net
11,263

 
11,944

 
27,742

 
32,208

Income from continuing operations before income taxes
69,965

 
63,954

 
193,446

 
169,202

Provision for income taxes
12,216

 
9,057

 
26,970

 
24,998

Income from continuing operations
57,749

 
54,897

 
166,476

 
144,204

Gain on discontinued operations before income taxes
—

 
8

 
—

 
6

Gain on (loss from) disposition of discontinued operations before income taxes
630

 
(3
)
 
619

 
(26
)
Provision for (benefit from) income taxes on discontinued operations
252

 
39

 
(2,355
)
 
13

Gain on (loss from) discontinued operations
378

 
(34
)
 
2,974

 
(33
)
Net income
$
58,127

 
$
54,863

 
$
169,450

 
$
144,171

Basic earnings per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.53

 
$
0.49

 
$
1.52

 
$
1.28

Gain on (loss from) discontinued operations
0.00

 
(0.00
)
 
0.03

 
(0.00
)
Net income
$
0.53

 
$
0.49

 
$
1.55

 
$
1.28

Diluted earnings per share:
 
 
 
 
 
 
 
Income from continuing operations
$
0.52

 
$
0.48

 
$
1.51

 
$
1.27

Gain on (loss from) discontinued operations
0.00

 
(0.00
)
 
0.03

 
(0.00
)
Net income
$
0.53

 
$
0.48

 
$
1.54

 
$
1.27

Weighted average shares of common stock outstanding:
 
 
 
 
 
 
 
Basic
109,192

 
112,632

 
109,524

 
112,763

Diluted
110,078

 
113,422

 
110,372

 
113,565

Cash dividends per common share
$
0.07

 
$
0.07

 
$
0.21

 
$
0.21

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
October 2,
2016
 
October 4,
2015
 
October 2,
2016
 
October 4,
2015
 
(In thousands)
Net income
$
58,127

 
$
54,863

 
$
169,450

 
$
144,171

Other comprehensive loss:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(9,441
)
 
(46,629
)
 
(8,868
)
 
(58,055
)
Unrealized gains (losses) on securities, net of tax
9

 
(80
)
 
39

 
(143
)
Other comprehensive loss
(9,432
)
 
(46,709
)
 
(8,829
)
 
(58,198
)
Comprehensive income
$
48,695

 
$
8,154

 
$
160,621

 
$
85,973











The accompanying notes are an integral part of these condensed consolidated financial statements.

4

PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
October 2,
2016
 
January 3,
2016
 
(In thousands, except share and per share data)
Current assets:
 
 
 
Cash and cash equivalents
$
311,663

 
$
237,932

Accounts receivable, net
443,275

 
439,015

Inventories
306,041

 
288,028

Other current assets
92,587

 
68,186

Total current assets
1,153,566

 
1,033,161

Property, plant and equipment:
 
 
 
At cost
525,396

 
494,956

Accumulated depreciation
(350,170
)
 
(327,927
)
Property, plant and equipment, net
175,226

 
167,029

Marketable securities and investments
1,539

 
1,586

Intangible assets, net
452,458

 
490,811

Goodwill
2,313,900

 
2,276,149

Other assets, net
207,867

 
197,559

Total assets
$
4,304,556

 
$
4,166,295

Current liabilities:
 
 
 
Current portion of long-term debt
$
1,160

 
$
1,123

Accounts payable
162,321

 
152,726

Accrued restructuring and contract termination charges
9,133

 
17,090

Accrued expenses and other current liabilities
373,207

 
388,446

Current liabilities of discontinued operations
2,170

 
2,100

Total current liabilities
547,991

 
561,485

Long-term debt
1,131,925

 
1,011,762

Long-term liabilities
489,218

 
482,607

Total liabilities
2,169,134

 
2,055,854

Commitments and contingencies (see Note 18)

 

Stockholders’ equity:
 
 
 
Preferred stock—$1 par value per share, authorized 1,000,000 shares; none issued or outstanding
—

 
—

Common stock—$1 par value per share, authorized 300,000,000 shares; issued and outstanding 109,511,000 shares and 112,034,000 shares at October 2, 2016 and at January 3, 2016, respectively
109,511

 
112,034

Capital in excess of par value
19,209

 
52,932

Retained earnings
2,061,487

 
1,991,431

Accumulated other comprehensive loss
(54,785
)
 
(45,956
)
Total stockholders’ equity
2,135,422

 
2,110,441

Total liabilities and stockholders’ equity
$
4,304,556

 
$
4,166,295

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) 
 
Nine Months Ended
 
October 2,
2016
 
October 4,
2015
 
(In thousands)
Operating activities:
 
 
 
Net income
$
169,450

 
$
144,171

(Gain on) loss from discontinued operations, net of income taxes
(2,974
)
 
33

Income from continuing operations
166,476

 
144,204

Adjustments to reconcile income from continuing operations to net cash provided by continuing operations:
 
 
 
Restructuring and contract termination charges, net
5,692

 
4,838

Depreciation and amortization
79,287

 
83,757

Gain on disposition of businesses and assets, net
(5,562
)
 
—

Stock-based compensation
13,819

 
12,483

Change in fair value of contingent consideration
9,678

 
—

Amortization of deferred debt financing costs and accretion of discount
1,507

 
1,112

Amortization of acquired inventory revaluation
396

 
7,275

Changes in assets and liabilities which provided (used) cash, excluding effects from companies purchased and divested:
 
 
 
Accounts receivable, net
1,848

 
36,361

Inventories
(12,350
)
 
(50,824
)
Accounts payable
8,986

 
(19,916
)
Accrued expenses and other
(70,859
)
 
(57,361
)
Net cash provided by operating activities of continuing operations
198,918

 
161,929

Net cash provided by (used in) operating activities of discontinued operations
2,974

 
(70
)
Net cash provided by operating activities
201,892

 
161,859

Investing activities:
 
 
 
Capital expenditures
(25,311
)
 
(17,814
)
Proceeds from disposition of businesses
21,000

 
—

Proceeds from surrender of life insurance policies
44

 
757

Changes in restricted cash balances
(2,000
)
 
59

Activity related to acquisitions and investments, net of cash and cash equivalents acquired
(71,924
)
 
(18,735
)
Net cash used in investing activities
(78,191
)
 
(35,733
)
Financing activities:
 
 
 
Payments on revolving credit facility
(804,507
)
 
(371,000
)
Proceeds from revolving credit facility
375,507

 
347,000

Proceeds from sale of senior debt
546,190

 
—

Payments of debt financing costs
(7,868
)
 
—

Settlement of cash flow hedges
1,674

 
19,210

Net payments on other credit facilities
(835
)
 
(800
)
Payments for acquisition-related contingent consideration
(113
)
 
(26
)
Proceeds from issuance of common stock under stock plans
12,081

 
13,081

Purchases of common stock
(151,640
)
 
(76,158
)
Dividends paid
(23,131
)
 
(23,737
)
Net cash used in financing activities
(52,642
)
 
(92,430
)
Effect of exchange rate changes on cash and cash equivalents
2,672

 
(13,451
)
Net increase in cash and cash equivalents
73,731

 
20,245

Cash and cash equivalents at beginning of period
237,932

 
174,821

Cash and cash equivalents at end of period
$
311,663

 
$
195,066

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1: Basis of Presentation
 
The condensed consolidated financial statements included herein have been prepared by PerkinElmer, Inc. (the “Company”), in accordance with accounting principles generally accepted in the United States of America (the “U.S.” or the "United States") and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information in the footnote disclosures of the financial statements has been condensed or omitted where it substantially duplicates information provided in the Company’s latest audited consolidated financial statements, in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes included in its Annual Report on Form 10-K for the fiscal year ended January 3, 2016, filed with the SEC (the “2015 Form 10-K”). The balance sheet amounts at January 3, 2016 in this report were derived from the Company’s audited 2015 consolidated financial statements included in the 2015 Form 10-K. The condensed consolidated financial statements reflect all adjustments that, in the opinion of management, are necessary to present fairly the Company’s financial position, results of operations and cash flows for the periods indicated. The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts and classifications of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for the three and nine months ended October 2, 2016 and October 4, 2015, respectively, are not necessarily indicative of the results for the entire fiscal year or any future period.

The Company’s fiscal year ends on the Sunday nearest December 31. The Company reports fiscal years under a 52/53 week format and as a result, certain fiscal years will contain 53 weeks. The fiscal year ending January 1, 2017 ("fiscal year 2016") will include 52 weeks, while the fiscal year ended January 3, 2016 ("fiscal year 2015") included 53 weeks. The additional week in fiscal year 2015 was reflected in the Company's third quarter, which consisted of 14 weeks as compared to the Company's third quarter of fiscal year 2016, which consisted of 13 weeks.

Recently Adopted and Issued Accounting Pronouncements: From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the "FASB") and are adopted by the Company as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on the Company’s condensed consolidated financial position, results of operations and cash flows or do not apply to the Company’s operations.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other topics. The provisions of this guidance are to be applied using a retrospective transition method to each period presented, and if it is impracticable to apply the amendments retrospectively for some of the issues, ASU 2016-15 allows the amendments for those issues to be applied prospectively as of the earliest date practicable. ASU 2015-16 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company is evaluating the requirements of this guidance and has not yet determined the impact of its adoption on the Company's consolidated financial position, results of operations and cash flows.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard requires entities to use the expected loss impairment model and will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance sheet credit exposures. Entities are required to estimate the lifetime “expected credit loss” for each applicable financial asset and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The standard also amends the impairment model for available-for-sale (“AFS”) debt securities and requires entities to determine whether all or a portion of the unrealized loss on an AFS debt security is a credit loss. An entity will recognize an allowance for credit losses on an AFS debt security as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment. The provisions of this guidance are to be applied using a modified-retrospective approach. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for

7

annual periods beginning after December 15, 2018, and interim periods therein. The Company is evaluating the requirements of this guidance and has not yet determined the impact of its adoption on the Company's consolidated financial position, results of operations and cash flows.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting ("ASU No. 2016-09"). The new standard simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory withholding requirements, as well as the related classification in the statement of cash flows. The new standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The standard requires an entity to recognize all excess tax benefits and tax deficiencies as income tax benefit or expense in the income statement as discrete items in the reporting period in which they occur, and such tax benefits and tax deficiencies are not included in the estimate of an entity’s annual effective tax rate, applied on a prospective basis. Further, the standard eliminates the requirement to defer the recognition of excess tax benefits until the benefit is realized through a reduction to taxes payable. All excess tax benefits previously unrecognized, along with any valuation allowance, should be recognized on a modified retrospective basis as a cumulative adjustment to retained earnings as of the date of adoption. Under ASU No. 2016-09, an entity that applies the treasury stock method in calculating diluted earnings per share is required to exclude excess tax benefits and deficiencies from the calculation of assumed proceeds since such amounts are recognized in the income statement. Excess tax benefits should also be classified as operating activities in the same manner as other cash flows related to income taxes on the statement of cash flows, as such excess tax benefits no longer represent financing activities since they are recognized in the income statement, and should be applied prospectively or retrospectively to all periods presented. The Company adopted ASU No. 2016-09 at the beginning of the first quarter of fiscal year 2016. The Company recorded a cumulative increase of $14.2 million in the beginning of the first quarter of fiscal year 2016 retained earnings with a corresponding increase in deferred tax assets related to the prior years' unrecognized excess tax benefits. Excess tax benefits related to exercised options and vested restricted stock and restricted stock units during the nine months ended October 2, 2016 have been recognized in the current period’s income statement. The Company also excluded the excess tax benefits from the calculation of diluted earnings per share for the three and nine months ended October 2, 2016. The Company applied the cash flow presentation section of the guidance on a prospective basis, and the prior period statement of cash flows was not adjusted. ASU No. 2016-09 also allows an entity to elect as an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures for service based awards as they occur. An entity that elects to account for forfeitures as they occur should apply the accounting change on a modified retrospective basis as a cumulative effect adjustment to retained earnings as of the date of adoption. The Company has elected to account for forfeitures as they occur. The adoption of this accounting policy did not have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new guidance requires lessees to recognize a lease liability and right-of-use asset on the balance sheet for financing and operating leases. The provisions of this guidance are to be applied using a modified retrospective approach and are effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company is evaluating the requirements of this guidance and has not yet determined the impact of its adoption on the Company's consolidated financial position, results of operations and cash flows.

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory. Under this new guidance, companies that use inventory measurement methods other than last-in, first-out or the retail inventory method should measure inventory at the lower of cost and net realizable value. The provisions of this guidance are to be applied prospectively and are effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company is evaluating the requirements of this guidance. The adoption is not expected to have a material impact on the Company’s consolidated financial position, results of operations and cash flows.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). Under this new guidance, an entity should use a five-step process to recognize revenue, depicting the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires new disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Subsequent to the issuance of the standard, the FASB decided to defer the effective date for one year to annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. In May 2016, the FASB also issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients ("ASU 2016-12"), which amended its revenue recognition guidance in ASU 2014-09 on transition, collectibility, non-cash consideration and the presentation of sales and other similar taxes. In April 2016, the FASB also issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying

8

Performance Obligations and Licensing ("ASU 2016-10"), which amended its revenue recognition guidance in ASU 2014-09 on identifying performance obligations to allow entities to disregard items that are immaterial in the context of the contract, clarify when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow an entity to elect to account for the cost of shipping and handling performed after control of a good has been transferred to the customer as a fulfillment cost (i.e., an expense). ASU 2016-10 also clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property ("IP") and requires entities to classify IP in one of two categories: functional IP or symbolic IP, which will determine whether it recognizes revenue over time or at a point in time. ASU 2016-10 also address how entities should consider license renewals and restrictions and apply the exception for sales- and usage-based royalties received in exchange for licenses of IP. ASU 2016-12, ASU 2016-10 and ASU 2014-09 may be adopted either using a full retrospective approach or a modified retrospective approach. The Company is evaluating the requirements of the foregoing standards and has not yet determined the impact of their adoption on the Company’s consolidated financial position, results of operations and cash flows. The Company intends to adopt these standards using the modified retrospective approach, and the Company does not intend to early adopt these standards.

Note 2: Business Combinations
Acquisitions in fiscal year 2016
During the first nine months of fiscal year 2016, the Company completed the acquisition of two businesses for a total consideration of $72.4 million in cash. The acquired businesses included Bioo Scientific Corporation, which was acquired for total consideration of $63.6 million in cash and one other business acquired for a total consideration of $8.8 million in cash. The excess of the purchase prices over the fair values of each of the acquired businesses' net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired. As a result of the acquisitions, the Company recorded goodwill of $45.8 million, which is not tax deductible, and intangible assets of $19.9 million. The Company has reported the operations for these acquisitions within the results of the Company's Human Health and Environmental Health 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 weighted average amortization periods of 9.5 years.

The total purchase price for the acquisitions in fiscal year 2016 has been allocated to the estimated fair values of assets acquired and liabilities assumed as follows:
 
2016 Acquisitions
 
(In thousands)
Fair value of business combination:
 
Cash payments
$
72,497

Working capital and other adjustments
(122
)
Less: cash acquired
(2,152
)
Total
$
70,223

Identifiable assets acquired and liabilities assumed:
 
Current assets
$
7,293

Property, plant and equipment
7,542

Identifiable intangible assets:
 
Core technology
5,500

Trade names
570

Customer relationships
13,800

Goodwill
45,787

Deferred taxes
(8,284
)
Liabilities assumed
(1,985
)
Total
$
70,223

Acquisitions in fiscal year 2015
During fiscal year 2015, the Company completed the acquisition of five businesses for a total consideration of $77.1 million in cash. The acquired businesses included Vanadis Diagnostics AB (“Vanadis”), which was acquired for total consideration of $35.1 million in cash, as further described in Note 17 below, and other acquisitions for aggregate consideration

9

of $42.0 million in cash. The Company has a potential obligation to pay the shareholders of Vanadis additional contingent consideration of up to $93.0 million, which at closing had an estimated fair value of $56.9 million. The excess of the purchase prices over the fair values of each of the acquired businesses' net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and has been allocated to goodwill, of which $9.2 million is tax deductible. The Company has reported the operations for these acquisitions within the results of the Company’s Human Health and Environmental Health segments from the acquisition dates. Identifiable definite-lived intangible assets, such as core technology and trade names, acquired as part of these acquisitions had weighted average amortization periods of nine years.

The total purchase price for the acquisitions in fiscal year 2015 has been allocated to the estimated fair values of assets acquired and liabilities assumed as follows:
 
2015 Acquisitions
 
(In thousands)
Fair value of business combination:
 
Cash payments
$
75,285

Contingent consideration
56,878

Working capital and other adjustments
1,832

Less: cash acquired
(3,864
)
Total
$
130,131

Identifiable assets acquired and liabilities assumed:
 
Current assets
$
2,551

Property, plant and equipment
998

Identifiable intangible assets:
 
Core technology
15,759

Trade names
200

Licenses
116

Customer relationships
3,073

In-process research and development ("IPR&D")
75,700

Goodwill
52,221

Deferred taxes
(17,637
)
Liabilities assumed
(2,850
)
Total
$
130,131

The preliminary allocations of the purchase prices for acquisitions are based upon initial valuations. The Company's estimates and assumptions underlying the initial valuations are subject to the collection of information necessary to complete its valuations within the measurement periods, which are up to one year from the respective acquisition dates. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired and liabilities assumed, assets and liabilities related to income taxes and related valuation allowances, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair values of the net assets acquired at the acquisition dates during the measurement periods. During the measurement periods, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition dates that, if known, would have resulted in the recognition of those assets and liabilities as of those dates. These adjustments will be made in the periods in which the amounts are determined and the cumulative effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition dates. All changes that do not qualify as adjustments made during the measurement periods are also included in current period earnings.
Allocations of the purchase price for acquisitions are based on estimates of the fair value of the net assets acquired and are subject to adjustment upon finalization of the purchase price allocations. The accounting for business combinations requires estimates and judgments as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair values for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed, including contingent consideration, are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. Contingent consideration is measured at fair value at the acquisition

10

date, based on the probability that revenue thresholds or product development milestones will be achieved during the earnout period, with changes in the fair value after the acquisition date affecting earnings to the extent it is to be settled in cash. Increases or decreases in the fair value of contingent consideration liabilities primarily result from changes in the estimated probabilities of achieving revenue thresholds, changes in discount rates or product development milestones during the earnout period.
As of October 2, 2016, the Company may have to pay contingent consideration related to acquisitions with open contingency periods of up to $94.6 million. As of October 2, 2016, the Company has recorded contingent consideration obligations with an estimated fair value of $66.9 million, of which $10.2 million was recorded in accrued expenses and other current liabilities, and $56.7 million was recorded in long-term liabilities. As of January 3, 2016, the Company had recorded contingent consideration obligations with an estimated fair value of $57.4 million, of which $9.4 million was recorded in accrued expenses and other current liabilities, and $48.0 million was recorded in long-term liabilities. The expected maximum earnout period for acquisitions with open contingency periods does not exceed five years from the respective acquisition dates, and the remaining weighted average expected earnout period at October 2, 2016 was two years. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the condensed consolidated financial statements could result in a possible impairment of the intangible assets and goodwill, require acceleration of the amortization expense of definite-lived intangible assets or the recognition of additional contingent consideration which would be recognized as a component of operating expenses from continuing operations.
Total transaction costs related to acquisition and divestiture activities for the three and nine months ended October 2, 2016 were $0.4 million and $1.0 million, respectively. Total transaction costs related to acquisition and divestiture activities for the three and nine months ended October 4, 2015 were $0.1 million and $0.5 million, respectively. These transaction costs were expensed as incurred and recorded in selling, general and administrative expenses in the Company's condensed consolidated statements of operations.

Note 3: Disposition of Businesses and Assets

As part of the Company’s continuing efforts to focus on higher growth opportunities, the Company has discontinued certain businesses. When the discontinued operations represent a strategic shift that will have a major effect on the Company's operations and financial statements, the Company has accounted for these businesses as discontinued operations and accordingly, has presented the results of operations and related cash flows as discontinued operations. Any business deemed to be a discontinued operation prior to the adoption of ASU 2016-08, 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 condensed consolidated balance sheets as of October 2, 2016 and January 3, 2016.
During fiscal years 2016 and 2015, the Company settled various commitments related to the divestiture of discontinued operations and recognized net pre-tax gain of $0.6 million and a net pre-tax loss of $0.03 million for the nine months ended October 2, 2016 and October 4, 2015, respectively, and a net pre-tax gain of $0.6 million for the three months ended October 2, 2016. The Company recorded a tax provision of $0.3 million and a tax benefit of $2.4 million on discontinued operations and dispositions for the three and nine months ended October 2, 2016, respectively. The Company recorded a tax provision of $0.04 million and $0.01 million on discontinued operations and dispositions for the three and nine months ended October 4, 2015, respectively.
During the second quarter of 2016, the Company completed the sale of its investment in PerkinElmer Labs, Inc., recognizing a pre-tax gain of $7.1 million. The sale generated a capital loss for tax purposes of $7.3 million, which resulted in an income tax benefit of $2.5 million that was recognized as a discrete benefit during the second quarter of 2016. PerkinElmer Labs, Inc. was a component of the Company's Human Health segment. The pre-tax gain recognized in the second quarter of 2016 is included in interest and other expense, net in the condensed consolidated statement of operations. The divestiture of PerkinElmer Labs, Inc. has not been classified as a discontinued operation in this Form 10-Q because the disposition does not represent a strategic shift that will have a major effect on the Company's operations and financial statements.
During the second quarter of 2016, the Company entered into a letter of intent to contribute certain assets to an academic institution in the United Kingdom. The Company recognized a pre-tax loss of $1.6 million related to the write-off of assets in the second quarter of 2016 which is included in interest and other expense, net in the condensed consolidated statement of operations.


11

Note 4: Restructuring and Contract Termination Charges, Net

The Company has undertaken a series of restructuring actions related to the impact of acquisitions and divestitures, the alignment of the Company's operations with its growth strategy, the integration of its business units and its productivity initiatives. The current portion of restructuring and contract termination charges is recorded in accrued restructuring and contract termination charges and the long-term portion of restructuring and contract termination charges is recorded in long-term liabilities. The activities associated with these plans have been reported as restructuring and contract termination charges, net, as applicable, and are included as a component of operating expenses from continuing operations.

The Company 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"). The Company 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"). The Company implemented a restructuring plan in the fourth quarter of fiscal year 2015 consisting of workforce reductions and closure of excess facility space principally intended to focus resources on higher growth end markets (the "Q4 2015 Plan"). The Company implemented a restructuring plan in the second quarter of fiscal year 2015 consisting of workforce reductions principally intended to realign resources to emphasize growth initiatives (the "Q2 2015 Plan"). Details of the plans initiated in previous years (“Previous Plans”) are discussed more fully in Note 4 to the audited consolidated financial statements in the 2015 Form 10-K.

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 that were implemented during fiscal years 2016 and 2015:
 
Workforce Reductions
 
Closure of Excess Facility
 
Total
 
(Expected) Date Payments Substantially Completed by
 
Headcount Reduction
 
Human Health
 
Environmental Health
 
Human Health
 
Environmental Health
 
 
Severance
 
Excess Facility
 
 
 
 
 
 
 
 
 
(In thousands, except headcount data)
 
 
 
 
Q3 2016 Plan
22
 
$
727

 
$
1,093

 
$
—

 
$
—

 
$
1,820

 
Q4 FY2017
 
—
Q2 2016 Plan
90
 
4,049

 
1,239

 
—

 
—

 
5,288

 
Q3 FY2017
 
—
Q4 2015 Plan
174
 
2,230

 
9,065

 
285

 
—

 
11,580

 
Q1 FY2017
 
Q4 FY2017
Q2 2015 Plan
97
 
1,850

 
4,160

 
—

 
—

 
6,010

 
Q2 FY2016
 
—
The Company expects to make payments under the Previous Plans for remaining residual lease obligations, with terms varying in length, through fiscal year 2022.

The Company also terminated various contractual commitments in connection with certain disposal activities and recorded charges, to the extent applicable, for the costs of terminating these contracts before the end of their terms and the costs that will continue to be incurred for the remaining terms without economic benefit to the Company. The Company recorded additional pre-tax charges of $0.1 million during fiscal year 2015 in the Environmental Health segment as a result of these contract terminations.


12

At October 2, 2016, the Company had $12.9 million recorded for accrued restructuring and contract termination charges, of which $9.1 million was recorded in short-term accrued restructuring and contract termination charges and $3.8 million was recorded in long-term liabilities. At January 3, 2016, the Company had $22.2 million recorded for accrued restructuring and contract termination charges, of which $17.1 million was recorded in short-term accrued restructuring and contract termination charges and $5.1 million was recorded in long-term liabilities. The following table summarizes the Company's restructuring and contract termination accrual balances and related activity by restructuring plan, as well as contract termination accrual balances and related activity, during the nine months ended October 2, 2016:
 
Balance at January 3, 2016
 
2016 Charges
 
2016 Changes in Estimates, Net
 
2016 Amounts Paid
 
Balance at October 2, 2016
 
(In thousands)
Severance:
 
 
 
 
 
 
 
 
 
Q3 2016 Plan
$
—

 
$
1,820

 
$
—

 
$
(104
)
 
$
1,716

Q2 2016 Plan
—

 
5,288

 
(43
)
 
(3,095
)
 
2,150

Q4 2015 Plan
10,370

 
—

 
(953
)
 
(8,052
)
 
1,365

Q2 2015 Plan
1,149

 
—

 
(543
)
 
(408
)
 
198

 
 
 
 
 
 
 
 
 
 
Facility:
 
 
 
 
 
 
 
 
 
Q4 2015 Plan
259

 
—

 
—

 
(248
)
 
11

 
 
 
 
 
 
 
 
 
 
Previous Plans
10,287

 
—

 
35

 
(3,029
)
 
7,293

Restructuring
22,065

 
7,108

 
(1,504
)
 
(14,936
)
 
12,733

Contract Termination
132

 
—

 
88

 
(76
)
 
144

Total Restructuring and Contract Termination
$
22,197

 
$
7,108

 
$
(1,416
)
 
$
(15,012
)
 
$
12,877


Note 5: Interest and Other Expense, Net

Interest and other expense, net, consisted of the following:
 
Three Months Ended
 
Nine Months Ended
 
October 2,
2016
 
October 4,
2015
 
October 2,
2016
 
October 4,
2015
 
(In thousands)
Interest income
$
(124
)
 
$
(147
)
 
$
(361
)
 
$
(488
)
Interest expense
10,998

 
9,874

 
30,778

 
28,564

Gain on disposition of businesses and assets, net (see Note 3)
—

 
—

 
(5,562
)
 
—

Other expense, net
389

 
2,217

 
2,887

 
4,132

Total interest and other expense, net
$
11,263

 
$
11,944

 
$
27,742

 
$
32,208

During the three and nine months ended October 2, 2016, foreign currency transaction (gains) losses were $(1.6) million and $2.0 million, respectively. During the three and nine months ended October 4, 2015, foreign currency transaction (gains) losses were $(1.3) million and $23.9 million, respectively. Net losses from forward currency hedge contracts were $2.1 million and $1.1 million for the three and nine months ended October 2, 2016, respectively. During the three and nine months ended October 4, 2015, net losses (gains) from forward currency hedge contracts were $3.5 million and $(19.9) million, respectively. These amounts were included in other expense, net.


13

Note 6: Inventories

Inventories as of October 2, 2016 and January 3, 2016 consisted of the following:
 
October 2,
2016
 
January 3,
2016
 
(In thousands)
Raw materials
$
101,815

 
$
98,984

Work in progress
20,446

 
17,858

Finished goods
183,780

 
171,186

Total inventories
$
306,041

 
$
288,028


Note 7: Income Taxes

The Company regularly reviews its tax positions in each significant taxing jurisdiction in the process of evaluating its unrecognized tax benefits. The Company makes adjustments to its unrecognized tax benefits when: (i) facts and circumstances regarding a tax position change, causing a change in management’s judgment regarding that tax position; (ii) a tax position is effectively settled with a tax authority at a differing amount; and/or (iii) the statute of limitations expires regarding a tax position.
At October 2, 2016, the Company had gross tax effected unrecognized tax benefits of $27.6 million, of which $25.9 million, if recognized, would affect the continuing operations effective tax rate. The remaining amount, if recognized, would affect discontinued operations.
The Company believes that it is reasonably possible that approximately $2.6 million of its uncertain tax positions at October 2, 2016, including accrued interest and penalties, and net of tax benefits, may be resolved over the next twelve months as a result of lapses in applicable statutes of limitations and potential settlements. Various tax years after 2009 remain open to examination by certain jurisdictions in which the Company has significant business operations, such as Finland, Germany, Italy, Netherlands, Singapore, the United Kingdom and the United States. The tax years under examination vary by jurisdiction.
During the first nine months of fiscal years 2016 and 2015, the Company recorded net discrete income tax benefits of $7.1 million and $5.2 million, respectively. The discrete tax benefit in the first nine months of fiscal year 2016 includes the tax benefits from the sale of a subsidiary amounting to $2.5 million.

Note 8: Debt

Senior Unsecured Revolving Credit Facility.  On August 11, 2016, the Company terminated its previous senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with a five year term and an expansion of borrowing capacity from $700.0 million to $1.0 billion. The new senior unsecured revolving credit facility provides for $1.0 billion of revolving loans and has an initial maturity of August 11, 2021. As of October 2, 2016, undrawn letters of credit in the aggregate amount of $11.4 million were treated as issued and outstanding when calculating the borrowing availability under the new senior unsecured revolving credit facility. As of October 2, 2016, the Company had $935.6 million available for additional borrowing under the facility. The Company uses the new senior unsecured revolving credit facility for general corporate purposes, which may include working capital, refinancing existing indebtedness, capital expenditures, share repurchases, acquisitions and strategic alliances. The interest rates under the senior unsecured revolving credit facility are based on the Eurocurrency rate 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%. At October 2, 2016, borrowings under the new senior unsecured revolving credit facility were accruing interest primarily based on the Eurocurrency rate. The Eurocurrency margin as of October 2, 2016 was 110 basis points. The weighted average Eurocurrency interest rate as of October 2, 2016 was 0.56%, resulting in a weighted average effective Eurocurrency rate, including the margin, of 1.66%. As of October 2, 2016, the new senior unsecured revolving credit facility had an aggregate carrying value of $48.5 million, which was net of $4.5 million of unamortized debt issuance costs. As of January 3, 2016, the previous senior unsecured revolving credit facility had an aggregate carrying value of $479.6 million, which was net of $2.4 million of unamortized debt issuance costs. The credit agreement for the facility contains affirmative, negative and financial covenants and events of default. The financial covenants include a debt-to-capital ratio that remains applicable for so long as the Company's debt is rated as investment grade. In the event that the Company's debt is not rated as investment grade, the debt-to-capital ratio covenant is replaced with a maximum consolidated leverage ratio covenant and a minimum consolidated interest coverage ratio covenant.
5% Senior Unsecured Notes due in 2021. On October 25, 2011, the Company issued $500.0 million aggregate principal amount of senior unsecured notes due in 2021 (the “2021 Notes”) in a registered public offering and received $496.9 million of net proceeds from the issuance. The 2021 Notes were issued at 99.372% of the principal amount, which resulted in a discount of $3.1 million. As of October 2, 2016, the 2021 Notes had an aggregate carrying value of $495.7 million, net of $1.8 million of unamortized original issue discount and $2.6 million of unamortized debt issuance costs. As of January 3, 2016, the 2021 Notes had an aggregate carrying value of $495.1 million, net of $2.0 million of unamortized original issue discount and $2.9 million of unamortized debt issuance costs. The 2021 Notes mature in November 2021 and bear interest at an annual rate of 5%. Interest on the 2021 Notes is payable semi-annually on May 15th and November 15th each year. Prior to August 15, 2021 (three months prior to their maturity date), the Company may redeem the 2021 Notes in whole or in part, at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2021 Notes being redeemed, discounted on a semi-annual basis, at the Treasury Rate plus 45 basis points, plus accrued and unpaid interest. At any time on or after August 15, 2021 (three months prior to their maturity date), the Company may redeem the 2021 Notes, at its option, at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed plus accrued and unpaid interest. Upon a change of control (as defined in the indenture governing the 2021 Notes) and a contemporaneous downgrade of the 2021 Notes below investment grade, each holder of 2021 Notes will have the right to require the Company to repurchase such holder's 2021 Notes for 101% of their principal amount, plus accrued and unpaid interest.
1.875% Senior Unsecured Notes due 2026. On July 19, 2016, the Company issued €500.0 million aggregate principal amount of senior unsecured notes due in 2026 (the “2026 Notes”) in a registered public offering and received approximately €492.3 million of net proceeds from the issuance. The 2026 Notes were issued at 99.118% of the principal amount, which resulted in a discount of €4.4 million. The 2026 Notes mature in July 2026 and bear interest at an annual rate of 1.875%. Interest on the 2026 Notes is payable annually on July 19th each year. The proceeds from the 2026 Notes were used to pay in full the outstanding balance of the Company's previous senior unsecured revolving credit facility. As of October 2, 2016, the 2026 Notes had an aggregate carrying value of $551.6 million, net of $4.9 million of unamortized original issue discount and $4.9 million of unamortized debt issuance costs.
Prior to April 19, 2026 (three months prior to their maturity date), the Company may redeem the 2026 Notes in whole at any time or in part from time to time, at its option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2026 Notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2026 Notes being redeemed, discounted on an annual basis, at the applicable Comparable Government Bond Rate (as defined in the indenture governing the 2026 Notes) plus 35 basis points; plus, in each case, accrued and unpaid interest. In addition, at any time on or after April 19, 2026 (three months prior to their maturity date), the Company may redeem the 2026 Notes, at its option, at a redemption price equal to 100% of the principal amount of the 2026 Notes due to be redeemed plus accrued and unpaid interest.
Upon a change of control (as defined in the indenture governing the 2026 Notes) and a contemporaneous downgrade of the 2026 Notes below investment grade, the Company will, in certain circumstances, make an offer to purchase the 2026 Notes at a price equal to 101% of their principal amount plus any accrued and unpaid interest.
Financing Lease Obligations. In fiscal year 2012, the Company entered into agreements with the lessors of certain buildings that the Company is currently occupying and leasing to expand those buildings. The Company provided a portion of the funds needed for the construction of the additions to the buildings, and as a result the Company was considered the owner of the buildings during the construction period. At the end of the construction period, the Company was not reimbursed by the lessors for all of the construction costs. The Company is therefore deemed to have continuing involvement and the leases qualify as financing leases under sale-leaseback accounting guidance, representing debt obligations for the Company and non-cash investing and financing activities. As a result, the Company capitalized $29.3 million in property, plant and equipment, net, representing the fair value of the buildings with a corresponding increase to debt. The Company has also capitalized $11.5 million in additional construction costs necessary to complete the renovations to the buildings, which were funded by the lessors, with a corresponding increase to debt. At October 2, 2016, the Company had $37.4 million recorded for these financing lease obligations, of which $1.2 million was recorded as short-term debt and $36.2 million was recorded as long-term debt. At January 3, 2016, the Company had $38.2 million recorded for these financing lease obligations, of which $1.1 million was recorded as short-term debt and $37.1 million was recorded as long-term debt. The buildings are being depreciated on a straight-line basis over the terms of the leases to their estimated residual values, which will equal the remaining financing obligation at the end of the lease term. At the end of the lease term, the remaining balances in property, plant and equipment, net and debt will be reversed against each other.


14

Note 9: Earnings Per Share

Basic earnings per share was computed by dividing net income by the weighted-average number of common shares outstanding during the period less restricted unvested shares. Diluted earnings per share was computed by dividing net income by the weighted-average number of common shares outstanding plus all potentially dilutive common stock equivalents, primarily shares issuable upon the exercise of stock options using the treasury stock method. The following table reconciles the number of shares utilized in the earnings per share calculations:
 
Three Months Ended
 
Nine Months Ended
 
October 2,
2016
 
October 4,
2015
 
October 2,
2016
 
October 4,
2015
 
(In thousands)
Number of common shares—basic
109,192

 
112,632

 
109,524

 
112,763

Effect of dilutive securities:
 
 
 
 
 
 
 
Stock options
663

 
580

 
670

 
633

Restricted stock awards
223

 
210

 
178

 
169

Number of common shares—diluted
110,078

 
113,422

 
110,372

 
113,565

Number of potentially dilutive securities excluded from calculation due to antidilutive impact
220

 
521

 
522

 
649

Antidilutive securities include outstanding stock options with exercise prices and average unrecognized compensation cost in excess of the average fair market value of common stock for the related period. Antidilutive options were excluded from the calculation of diluted net income per share and could become dilutive in the future.


15

Note 10: Industry Segment Information

The Company discloses information about its operating segments based on the way that management organizes the segments within the Company for making operating decisions and assessing financial performance. The Company evaluates the performance of its operating segments based on revenue and operating income. Intersegment revenue and transfers are not significant. The Company’s management reviews the results of the Company’s operations by the Human Health and Environmental Health operating segments. The accounting policies of the operating segments are the same as those described in Note 1 to the audited consolidated financial statements in the 2015 Form 10-K. The principal products and services of the Company's two operating segments are:
•
Human Health.    Develops diagnostics, tools and applications to help detect diseases earlier and more accurately and to accelerate the discovery and development of critical new therapies. The Human Health segment serves both the diagnostics and research markets.
•
Environmental Health.    Provides products, services and solutions to facilitate the creation of safer food and consumer products, more secure surroundings and efficient energy resources. The Environmental Health segment serves the environmental, industrial and laboratory services markets.
The Company has included the expenses for its corporate headquarters, such as legal, tax, audit, human resources, information technology, and other management and compliance costs, as well as the activity related to the mark-to-market adjustment on postretirement benefit plans, as “Corporate” below. The Company has a process to allocate and recharge expenses to the reportable segments when these costs are administered or paid by the corporate headquarters based on the extent to which the segment benefited from the expenses. These amounts have been calculated in a consistent manner and are included in the Company’s calculations of segment results to internally plan and assess the performance of each segment for all purposes, including determining the compensation of the business leaders for each of the Company’s operating segments.
Revenue and operating income (loss) from continuing operations by operating segment are shown in the table below: 
 
Three Months Ended
 
Nine Months Ended
 
October 2,
2016
 
October 4,
2015
 
October 2,
2016
 
October 4,
2015
 
(In thousands)
Human Health
 
 
 
 
 
 
 
Product revenue
$
238,895

 
$
238,553

 
$
728,668

 
$
712,207

Service revenue
99,346

 
105,083

 
295,492

 
298,970

Total revenue
338,241

 
343,636

 
1,024,160

 
1,011,177

Operating income from continuing operations
64,562

 
63,147

 
176,881

 
179,560

Environmental Health
 
 
 
 
 
 
 
Product revenue
129,564

 
139,772

 
398,211

 
414,149

Service revenue
80,249

 
80,028

 
237,034

 
228,917

Total revenue
209,813

 
219,800

 
635,245

 
643,066

Operating income from continuing operations
27,662

 
22,838

 
78,855

 
53,606

Corporate
 
 
 
 
 
 
 
Operating loss from continuing operations
(10,996
)
 
(10,087
)
 
(34,548
)
 
(31,756
)
Continuing Operations
 
 
 
 
 
 
 
Product revenue
368,459

 
378,325

 
1,126,879

 
1,126,356

Service revenue
179,595

 
185,111

 
532,526

 
527,887

Total revenue
548,054

 
563,436

 
1,659,405

 
1,654,243

Operating income from continuing operations
81,228

 
75,898

 
221,188

 
201,410

Interest and other expense, net (see Note 5)
11,263

 
11,944

 
27,742

 
32,208

Income from continuing operations before income taxes
$
69,965

 
$
63,954

 
$
193,446

 
$
169,202


The Company recently announced a new alignment of its businesses effective October 3, 2016 to better position the Company to grow in attractive end markets and expand share with the Company's core product offerings through an improved customer focus, more value-add collaboration and breakthrough innovations. The Company's diagnostics business, focused on reproductive health, emerging market diagnostic solutions and applied genomics, will become a standalone business segment

16

seeking to better meet the needs of clinically oriented customers in regulated markets. Microfluidics and automation products within the research market were combined with the existing diagnostics business to form the Diagnostics segment. The remaining products within the research market were combined with the existing Environmental Health business to form the Discovery & Analytical Solutions segment. This combination is intended to advance the Company's success in serving and innovating for its applications-oriented customers in the food, environmental, industrial, and life sciences markets.


Note 11: Stockholders’ Equity
Comprehensive Income:
The components of accumulated other comprehensive loss consisted of the following:
 
October 2,
2016
 
January 3,
2016
 
(In thousands)
Foreign currency translation adjustments
$
(55,714
)
 
$
(46,846
)
Unrecognized prior service costs, net of income taxes
1,259

 
1,259

Unrealized net losses on securities, net of income taxes
(330
)
 
(369
)
Accumulated other comprehensive loss
$
(54,785
)
 
$
(45,956
)

Stock Repurchases:
On October 23, 2014, the Board of Directors (the "Board") authorized the Company to repurchase up to 8.0 million shares of common stock under a stock repurchase program (the "Repurchase Program"). On July 27, 2016, the Board authorized the Company to immediately terminate the Repurchase Program and further authorized the Company to repurchase up to 8.0 million shares of common stock under a new stock repurchase program (the "New Repurchase Program"). The New Repurchase Program will expire on July 26, 2018 unless terminated earlier by the Board, and may be suspended or discontinued at any time. During the nine months ended October 2, 2016, the Company repurchased 3.2 million shares of common stock in the open market at an aggregate cost of $148.2 million, including commissions, under the Repurchase Program. No shares remain available for repurchase under the Repurchase Program due to its cancellation. As of October 2, 2016, 8.0 million shares remained available for repurchase under the New Repurchase Program.
In addition, the Board has authorized the Company to repurchase shares of common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards and restricted stock unit awards granted pursuant to the Company’s equity incentive plans and to satisfy obligations related to the exercise of stock options made pursuant to the Company's equity incentive plans. During the nine months ended October 2, 2016, the Company repurchased 72,058 shares of common stock for this purpose at an aggregate cost of $3.4 million. The repurchased shares have been reflected as additional authorized but unissued shares, with the payments reflected in common stock and capital in excess of par value.

Dividends:
The Board declared a regular quarterly cash dividend of $0.07 per share for the first three quarters of fiscal year 2016 and in each quarter of fiscal year 2015. At October 2, 2016, the Company has accrued $7.7 million for dividends declared on July 27, 2016 for the third quarter of fiscal year 2016 that will be payable on November 10, 2016. On October 26, 2016, the Company announced that the Board had declared a quarterly dividend of $0.07 per share for the fourth quarter of fiscal year 2016 that will be payable on February 10, 2017. In the future, the Board may determine to reduce or eliminate the Company’s common stock dividend in order to fund investments for growth, repurchase shares or conserve capital resources.

Note 12: Stock Plans

In addition to the Company's Employee Stock Purchase Plan, the Company utilizes one stock-based compensation plan, the 2009 Incentive Plan (the “2009 Plan”). Under the 2009 Plan, 10.0 million shares of the Company's common stock are authorized for stock option grants, restricted stock awards, performance units and stock grants as part of the Company’s compensation programs. In addition to shares of the Company’s common stock originally authorized for issuance under the 2009 Plan, the 2009 Plan includes shares of the Company’s common stock previously granted under the Amended and Restated 2001 Incentive Plan and the 2005 Incentive Plan that were canceled or forfeited without the shares being issued.

17

The following table summarizes total pre-tax compensation expense recognized related to the Company’s stock options, restricted stock, restricted stock units, performance units and stock grants, included in the Company’s condensed consolidated statements of operations for the three and nine months ended October 2, 2016 and October 4, 2015:
 
Three Months Ended
 
Nine Months Ended
 
October 2,
2016
 
October 4,
2015
 
October 2,
2016
 
October 4,
2015
 
(In thousands)
Cost of product and service revenue
$
304

 
$
323

 
$
826

 
$
964

Research and development expenses
220

 
119

 
655

 
419

Selling, general and administrative expenses
3,384

 
3,848

 
12,338

 
11,100

Total stock-based compensation expense
$
3,908

 
$
4,290

 
$
13,819

 
$
12,483

The total income tax benefit recognized in the condensed consolidated statements of operations for stock-based compensation was $2.3 million and $9.2 million for the three and nine months ended October 2, 2016, respectively. The total income tax benefit recognized in the condensed consolidated statements of operations for stock-based compensation was $1.4 million and $4.1 million for the three and nine months ended October 4, 2015, respectively. Stock-based compensation costs capitalized as part of inventory were $0.3 million and $0.4 million as of October 2, 2016 and October 4, 2015, respectively.
Stock Options: The fair value of each option grant is estimated using the Black-Scholes option pricing model. The Company’s weighted-average assumptions used in the Black-Scholes option pricing model were as follows:
 
Three and Nine Months Ended
 
October 2,
2016
 
October 4,
2015
Risk-free interest rate
1.2
%
 
1.3
%
Expected dividend yield
0.6
%
 
0.6
%
Expected term
5 years

 
5 years

Expected stock volatility
25.2
%
 
26.5
%
The following table summarizes stock option activity for the nine months ended October 2, 2016:
 
Number
of
Shares
 
Weighted-
Average Exercise
Price
 
Weighted-Average
Remaining
Contractual Term
 
Total
Intrinsic
Value
 
(In thousands)
 
 
 
(In years)
 
(In millions)
Outstanding at January 3, 2016
2,372

 
$
33.12

 
 
 
 
Granted
594

 
44.65

 
 
 
 
Exercised
(512
)
 
23.58

 
 
 
 
Canceled
(1
)
 
12.95

 
 
 
 
Forfeited
(93
)
 
45.03

 
 
 
 
Outstanding at October 2, 2016
2,360

 
$
37.64

 
4.0
 
$
40.0

Exercisable at October 2, 2016
1,401

 
$
32.61

 
2.8
 
$
30.8

The weighted-average per-share grant-date fair value of options granted during the three and nine months ended October 2, 2016 was $12.24 and $10.16, respectively. The weighted-average per-share grant-date fair value of options granted during the three and nine months ended October 4, 2015 was $11.44 and $11.00. The total intrinsic value of options exercised during the three and nine months ended October 2, 2016 was $3.6 million and $15.6 million, respectively. The total intrinsic value of options exercised during the three and nine months ended October 4, 2015 was $0.7 million and $22.6 million, respectively. Cash received from option exercises for the nine months ended October 2, 2016 and October 4, 2015 was $12.1 million and $13.1 million, respectively.
The total compensation expense recognized related to the Company’s outstanding options was $1.1 million and $3.5 million for the three and nine months ended October 2, 2016, respectively, and $1.2 million and $3.2 million for the three and nine months ended October 4, 2015, respectively.
There was $7.1 million of total unrecognized compensation cost related to nonvested stock options granted as of October 2, 2016. This cost is expected to be recognized over a weighted-average period of 1.9 years.

18

Restricted Stock Awards: The following table summarizes restricted stock award activity for the nine months ended October 2, 2016:
 
Number of
Shares
 
Weighted-
Average
Grant-
Date Fair
Value
 
(In thousands)
 
 
Nonvested at January 3, 2016
502

 
$
42.61

Granted
278

 
47.34

Vested
(206
)
 
38.94

Forfeited
(53
)
 
45.21

Nonvested at October 2, 2016
521

 
$
46.31

The fair value of restricted stock awards vested during the three and nine months ended October 2, 2016 was $0.2 million and $8.0 million, respectively. The fair value of restricted stock awards vested during the three and nine months ended October 4, 2015 was $0.2 million and $7.1 million, respectively. The total compensation expense recognized related to the Company’s outstanding restricted stock awards was $2.0 million and $7.1 million for the three and nine months ended October 2, 2016, respectively, and $2.2 million and $6.5 million for the three and nine months ended October 4, 2015, respectively.
As of October 2, 2016, there was $14.8 million of total unrecognized compensation cost related to nonvested restricted stock awards. That cost is expected to be recognized over a weighted-average period of 1.60 years.
Performance Units: The Company granted 72,164 and 66,509 performance units during the nine months ended October 2, 2016 and October 4, 2015, respectively, as part of the Company’s executive incentive program. The weighted-average per-share grant-date fair value of performance units granted during the nine months ended October 2, 2016 and October 4, 2015 was $42.79 and $46.83, respectively. During the nine months ended October 2, 2016 and October 4, 2015, 19,584 and 8,860 performance units were forfeited, respectively. The total compensation expense recognized related to performance units was $0.7 million and $2.4 million for the three and nine months ended October 2, 2016, respectively, and $0.8 million and $2.1 million for the three and nine months ended October 4, 2015, respectively. As of October 2, 2016, there were 190,700 performance units outstanding and subject to forfeiture, with a corresponding liability of $5.9 million recorded in accrued expenses and other current liabilities.
Stock Awards: The Company’s stock award program provides non-employee directors an annual equity award. The Company granted 1,821 shares and 1,953 shares to each continuing non-employee member of the Board during the nine months ended October 2, 2016 and October 4, 2015, respectively. In addition, the Company granted 1,526 shares to a new non-employee member of the Board during the three months ended October 2, 2016. The per-share grant-date fair value of the stock award granted during the three months ended October 2, 2016 was $54.61. The weighted-average per-share grant-date fair value of the stock awards granted during the nine months ended October 2, 2016 and October 4, 2015 was $54.88 and $51.01, respectively. The total compensation expense recognized related to these stock awards was $0.8 million and $0.7 million for the nine months ended October 2, 2016 and October 4, 2015, respectively, and $0.1 million for the three months ended October 2, 2016.
Employee Stock Purchase Plan: During the nine months ended October 2, 2016, the Company issued 23,898 shares of common stock under the Company's Employee Stock Purchase Plan at a weighted-average price of $49.80 per share. During the nine months ended October 4, 2015, the Company issued 54,374 shares of common stock under the Company's Employee Stock Purchase Plan at a weighted-average price of $45.41 per share. At October 2, 2016, an aggregate of 0.9 million shares of the Company’s common stock remained available for sale to employees out of the 5.0 million shares authorized by shareholders for issuance under this plan.

Note 13: Goodwill and Intangible Assets, Net
 
The Company tests goodwill and non-amortizing intangible assets at least annually for possible impairment. Accordingly, the Company completes the annual testing of impairment for goodwill and non-amortizing intangible assets on the later of January 1 or the first day of each fiscal year. In addition to its annual test, the Company regularly evaluates whether events or circumstances have occurred that may indicate a potential impairment of goodwill or non-amortizing intangible assets.
The process of testing goodwill for impairment involves the determination of the fair value of the applicable reporting units. The test consists of a two-step process. The first step is the comparison of the fair value to the carrying value of the reporting unit to determine if the carrying value exceeds the fair value. The second step measures the amount of an impairment loss, and is only performed if the carrying value exceeds the fair value of the reporting unit. The Company performed its annual impairment testing

19

for its reporting units as of January 4, 2016, its annual impairment date for fiscal year 2016. The Company concluded based on the first step of the process that there was no goodwill impairment, and the fair value exceeded the carrying value by more than 20.0% for each reporting unit. The long-term terminal growth rate for the Company’s reporting units was 3.0% for the fiscal year 2016 impairment analysis. The range for the discount rates for the reporting units was 9.5% to 12.5%. Keeping all other variables constant, a 10.0% change in any one of these input assumptions for the various reporting units would still allow the Company to conclude, based on the first step of the process, that there was no impairment of goodwill.
The Company has consistently employed the 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 the Company’s historical long-term terminal growth rates, as the current economic trends are not expected to affect the long-term terminal growth rates of the Company. The Company corroborates the income approach with a market approach.
The Company has consistently employed the relief from royalty model to estimate the current fair value when testing for impairment of non-amortizing intangible assets. The impairment test consists of a comparison of the fair value of the non-amortizing intangible asset with its carrying amount. If the carrying amount of a non-amortizing intangible asset exceeds its fair value, an impairment loss in an amount equal to that excess is recognized. In addition, the Company evaluates the remaining useful lives of its non-amortizing intangible assets at least annually to determine whether events or circumstances continue to support an indefinite useful life. If events or circumstances indicate that the useful lives of non-amortizing intangible assets are no longer indefinite, the assets will be tested for impairment. These intangible assets will then be amortized prospectively over their estimated remaining useful lives and accounted for in the same manner as other intangible assets that are subject to amortization. The Company performed its annual impairment testing as of January 4, 2016, and concluded that there was no impairment of non-amortizing intangible assets. An assessment of the recoverability of amortizing intangible assets takes place when events have occurred that may give rise to an impairment. No such events occurred during the first nine months of fiscal year 2016.
The changes in the carrying amount of goodwill for the nine months ended October 2, 2016 were as follows:
 
Human
Health
 
Environmental
Health
 
Consolidated
 
(In thousands)
Balance at January 3, 2016
$
1,672,491

 
$
603,658

 
$
2,276,149

Foreign currency translation
(664
)
 
(274
)
 
(938
)
Disposition of businesses
(7,923
)
 
—

 
(7,923
)
Acquisitions and other
21,888

 
24,724

 
46,612

Balance at October 2, 2016
$
1,685,792

 
$
628,108

 
$
2,313,900


20

Identifiable intangible asset balances at October 2, 2016 and January 3, 2016 by category were as follows:
 
October 2,
2016
 
January 3,
2016
 
(In thousands)
Patents
$
39,923

 
$
39,911

Less: Accumulated amortization
(31,772
)
 
(29,788
)
Net patents
8,151

 
10,123

Trade names and trademarks
40,619

 
40,249

Less: Accumulated amortization
(23,181
)
 
(20,686
)
Net trade names and trademarks
17,438

 
19,563

Licenses
60,221

 
58,969

Less: Accumulated amortization
(48,396
)
 
(45,286
)
Net licenses
11,825

 
13,683

Core technology
313,254

 
307,242

Less: Accumulated amortization
(232,729
)
 
(211,829
)
Net core technology
80,525

 
95,413

Customer relationships
396,148

 
391,566

Less: Accumulated amortization
(210,884
)
 
(191,655
)
Net customer relationships
185,264

 
199,911

IPR&D
82,922

 
85,679

Less: Accumulated amortization
(4,251
)
 
(4,145
)
Net IPR&D
78,671

 
81,534

Net amortizable intangible assets
381,874

 
420,227

Non-amortizing intangible assets:
 
 
 
Trade names
70,584

 
70,584

Total
$
452,458

 
$
490,811

Total amortization expense related to definite-lived intangible assets was $17.3 million and $55.3 million for the three and nine months ended October 2, 2016, respectively, and $18.8 million and $58.5 million for the three and nine months October 4, 2015, respectively. Estimated amortization expense related to definite-lived intangible assets for each of the next five years is $17.4 million for the remainder of fiscal year 2016, $65.7 million for fiscal year 2017, $63.7 million for fiscal year 2018, $51.5 million for fiscal year 2019, and $42.3 million for fiscal year 2020.

Note 14: Warranty Reserves

The Company provides warranty protection for certain products usually for a period of one year beyond the date of sale. The majority of costs associated with warranty obligations include the replacement of parts and the time for service personnel to respond to repair and replacement requests. A warranty reserve is recorded based upon historical results, supplemented by management’s expectations of future costs. Warranty reserves are included in “Accrued expenses and other current liabilities” on the condensed consolidated balance sheets.

21

A summary of warranty reserve activity for the three and nine months ended October 2, 2016 and October 4, 2015 is as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 2,
2016
 
October 4,
2015
 
October 2,
2016
 
October 4,
2015
 
(In thousands)
Balance at beginning of period
$
10,396

 
$
10,810

 
$
10,922

 
$
10,783

Provision charged to income
4,038

 
4,240

 
11,890

 
12,728

Payments
(3,905
)
 
(4,412
)
 
(12,189
)
 
(12,158
)
Adjustments to previously provided warranties, net
(459
)
 
129

 
(740
)
 
(342
)
Foreign currency translation and acquisitions
30

 
(155
)
 
217

 
(399
)
Balance at end of period
$
10,100

 
$
10,612

 
$
10,100

 
$
10,612


Note 15: Employee Postretirement Benefit Plans

The following table summarizes the components of net periodic credit for the Company’s various defined benefit employee pension and postretirement plans for the three and nine months ended October 2, 2016 and October 4, 2015:
 
Defined Benefit
Pension Benefits
 
Postretirement
Medical Benefits
 
Three Months Ended
 
October 2,
2016
 
October 4,
2015
 
October 2,
2016
 
October 4,
2015
 
(In thousands)
Service cost
$
1,094

 
$
1,083

 
$
25

 
$
27

Interest cost
4,701

 
5,176

 
35

 
36

Expected return on plan assets
(6,126
)
 
(6,513
)
 
(258
)
 
(265
)
Curtailment gain
—

 
—

 
—

 
—

Actuarial loss
—

 
—

 
—

 
—

Amortization of prior service costs
(54
)
 
(59
)
 
—

 
—

Net periodic benefit credit
$
(385
)
 
$
(313
)
 
$
(198
)
 
$
(202
)
 
 
 
 
 
 
 
 
 
Defined Benefit
Pension Benefits
 
Postretirement
Medical Benefits
 
Nine Months Ended
 
October 2,
2016
 
October 4,
2015
 
October 2,
2016
 
October 4,
2015
 
(In thousands)
Service cost
$
3,282

 
$
3,274

 
$
75

 
$
81

Interest cost
14,158

 
15,602

 
107

 
108

Expected return on plan assets
(18,488
)
 
(19,535
)
 
(776
)
 
(797
)
Curtailment gain
—

 
(816
)
 
—

 
—

Actuarial loss
—

 
821

 
—

 
—

Amortization of prior service costs
(163
)
 
(182
)
 
—

 
—

Net periodic benefit credit
$
(1,211
)
 
$
(836
)
 
$
(594
)
 
$
(608
)
During the nine months ended October 2, 2016 and October 4, 2015, the Company contributed $7.6 million and $6.5 million, respectively, in the aggregate, to pension plans outside of the United States. During the nine months ended October 2, 2016, the Company did not make contributions to its defined benefit pension plan in the United States. During the nine months ended October 4, 2015, the Company contributed $20.0 million to its defined benefit pension plan in the United States.
The Company recognizes actuarial gains and losses, unless an interim remeasurement is required, in operating results in the fourth quarter of the year in which the gains and losses occur, in accordance with the Company's accounting method for defined benefit pension plans and other postretirement benefits as described in Note 1 of the Company's audited consolidated financial statements and notes included in its 2015 Form 10-K. Such adjustments for gains and losses are primarily driven by events and

22

circumstances beyond the Company's control, including changes in interest rates, the performance of the financial markets and mortality assumptions.


Note 16: Derivatives and Hedging Activities

The Company uses derivative instruments as part of its risk management strategy only, and includes derivatives utilized as economic hedges that are not designated as hedging instruments. By nature, all financial instruments involve market and credit risks. The Company enters into derivative instruments with major investment grade financial institutions and has policies to monitor the credit risk of those counterparties. The Company does not enter into derivative contracts for trading or other speculative purposes, nor does the Company use leveraged financial instruments. Approximately 60% of the Company’s business is conducted outside of the United States, generally in foreign currencies. As a result, fluctuations in foreign currency exchange rates can increase the costs of financing, investing and operating the business.

In the ordinary course of business, the Company enters into foreign exchange contracts for periods consistent with its committed exposures to mitigate the effect of foreign currency movements on transactions denominated in foreign currencies. The intent of these economic hedges is to offset gains and losses that occur on the underlying exposures from these currencies, with gains and losses resulting from the forward currency contracts that hedge these exposures. Transactions covered by hedge contracts include intercompany and third-party receivables and payables. The contracts are primarily in European and Asian currencies, have maturities that do not exceed 12 months, have no cash requirements until maturity, and are recorded at fair value on the Company’s condensed consolidated balance sheets. The unrealized gains and losses on the Company’s foreign currency contracts are recognized immediately in interest and other expense, net. The cash flows related to the settlement of these hedges are included in cash flows from operating activities within the Company’s condensed consolidated statement of cash flows.

Principal hedged currencies include the British Pound, Euro, Japanese Yen and Singapore Dollar. The Company held forward foreign exchange contracts, designated as economic hedges, with U.S. dollar equivalent notional amounts totaling $128.5 million, $127.3 million and $104.7 million at October 2, 2016, January 3, 2016 and October 4, 2015, respectively, and the fair value of these foreign currency derivative contracts was insignificant. The gains and losses realized on these foreign currency derivative contracts are not material. The duration of these contracts was generally 30 days or less during each of the nine months ended October 2, 2016 and October 4, 2015.

In addition, in connection with certain intercompany loan agreements utilized to finance its acquisitions and stock repurchase program, the Company enters into forward foreign exchange contracts intended to hedge movements in foreign exchange rates prior to settlement of such intercompany loans denominated in foreign currencies. The Company records these hedges at fair value on the Company’s condensed consolidated balance sheets. The unrealized gains and losses on these hedges, as well as the gains and losses associated with the remeasurement of the intercompany loans, are recognized immediately in interest and other expense, net. The cash flows related to the settlement of these hedges are included in cash flows from financing activities within the Company’s condensed consolidated statement of cash flows.

As of October 2, 2016, the outstanding forward exchange contracts designated as economic hedges, that were intended to hedge movements in foreign exchange rates prior to the settlement of certain intercompany loan agreements included combined Euro notional amounts of €50.7 million and combined U.S. Dollar notional amounts of $9.2 million. The combined Euro notional amounts of these outstanding hedges was €107.4 million and €108.7 million as of January 3, 2016 and October 4, 2015, respectively. The net gains and losses on these derivatives, combined with the gains and losses on the remeasurement of the hedged intercompany loans were not material for each of the three and nine months ended October 2, 2016 and October 4, 2015. The Company paid $0.1 million and received $19.2 million during the nine months ended October 2, 2016 and October 4, 2015, respectively, from the settlement of these hedges.

During the third quarter of 2016, the Company entered into a series of foreign currency forward contracts with a notional amount of €492.3 million to hedge its investments in certain foreign subsidiaries. Realized and unrealized translation adjustments from these hedges will be included in the foreign currency translation component of accumulated other comprehensive income ("AOCI"), as well as to offset translation adjustments on the underlying net assets of foreign subsidiaries. The cumulative translation gains or losses will remain in AOCI until the foreign subsidiaries are liquidated or sold. The foreign currency forward contracts were settled during the third quarter of 2016 and the Company recorded a net realized foreign exchange gain in AOCI amounting to $1.8 million during the three and nine months ended October 2, 2016.

During the third quarter of 2016, in connection with the issuance of the 2026 Notes, the Company designated the 2026 Notes to hedge its investments in certain foreign subsidiaries. Realized and unrealized translation adjustments from these hedges will be included in the foreign currency translation component of AOCI, as well as to offset translation adjustments on the underlying

23

net assets of foreign subsidiaries. The cumulative translation gains or losses will remain in AOCI until the foreign subsidiaries are liquidated or sold. As of October 2, 2016, the total notional amount of foreign currency denominated debt designated to hedge investments in foreign subsidiaries was €495.7 million. The unrealized foreign exchange loss recorded in AOCI related to the net investment hedge was $10.2 million for the three and nine months ended October 2, 2016.

The Company does not expect any material net pre-tax gains or losses to be reclassified from accumulated other comprehensive loss into interest and other expense, net within the next twelve months.

Note 17: Fair Value Measurements

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, derivatives, marketable securities and accounts receivable. The Company believes it had no significant concentrations of credit risk as of October 2, 2016.
The Company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during the nine months ended October 2, 2016. The Company’s financial assets and liabilities carried at fair value are primarily comprised of marketable securities, derivative contracts used to hedge the Company’s currency risk, and acquisition-related contingent consideration. The Company has not elected to measure any additional financial instruments or other items at fair value.
Valuation Hierarchy: The following summarizes the three levels of inputs required to measure fair value. For Level 1 inputs, the Company utilizes quoted market prices as these instruments have active markets. For Level 2 inputs, the Company utilizes quoted market prices in markets that are not active, broker or dealer quotations, or utilizes alternative pricing sources with reasonable levels of price transparency. For Level 3 inputs, the Company utilizes unobservable inputs based on the best information available, including estimates by management primarily based on information provided by third-party fund managers, independent brokerage firms and insurance companies. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible.
The following tables show the assets and liabilities carried at fair value measured on a recurring basis as of October 2, 2016 and January 3, 2016 classified in one of the three classifications described above:
 
 
 
Fair Value Measurements at October 2, 2016 Using:
 
Total Carrying Value at October 2, 2016
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(In thousands)
Marketable securities
$
1,539

 
$
1,539

 
$
—

 
$
—

Foreign exchange derivative assets
1,148

 
—

 
1,148

 
—

Foreign exchange derivative liabilities
(124
)
 
—

 
(124
)
 
—

Contingent consideration
(66,915
)
 
—

 
—

 
(66,915
)
 
 
 
 
Fair Value Measurements at January 3, 2016 Using:
 
Total Carrying Value at January 3, 2016
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable 
Inputs
(Level 3)
 
(In thousands)
Marketable securities
$
1,586

 
$
1,586

 
$
—

 
$
—

Foreign exchange derivative assets
2,659

 
—

 
2,659

 
—

Foreign exchange derivative liabilities
(442
)
 
—

 
(442
)
 
—

Contingent consideration
(57,350
)
 
—

 
—

 
(57,350
)

24

Level 1 and Level 2 Valuation Techniques:    The Company’s Level 1 and Level 2 assets and liabilities are comprised of investments in equity and fixed-income securities as well as derivative contracts. For financial assets and liabilities that utilize Level 1 and Level 2 inputs, the Company utilizes both direct and indirect observable price quotes, including common stock price quotes, foreign exchange forward prices and bank price quotes. Below is a summary of valuation techniques for Level 1 and Level 2 financial assets and liabilities.
Marketable securities:    Include equity and fixed-income securities measured at fair value using the quoted market prices in active markets at the reporting date.
Foreign exchange derivative assets and liabilities:    Include foreign exchange derivative contracts that are valued using quoted forward foreign exchange prices at the reporting date. The Company’s foreign exchange derivative contracts are subject to master netting arrangements that allow the Company and its counterparties to net settle amounts owed to each other. Derivative assets and liabilities that can be net settled under these arrangements have been presented in the Company's condensed consolidated balance sheet on a net basis and are recorded in other assets. As of both October 2, 2016 and January 3, 2016, none of the master netting arrangements involved collateral.
Level 3 Valuation Techniques:    The Company’s Level 3 liabilities are comprised of contingent consideration related to acquisitions. For liabilities that utilize Level 3 inputs, the Company uses significant unobservable inputs. Below is a summary of valuation techniques for Level 3 liabilities.
Contingent consideration:    Contingent consideration is measured at fair value at the acquisition date using projected milestone dates, discount rates, probabilities of success and projected revenues (for revenue-based considerations). Projected risk-adjusted contingent payments are discounted back to the current period using a discounted cash flow model.
During fiscal year 2015, the Company acquired certain assets and assumed certain liabilities from Vanadis. Under the terms of the acquisition, the initial purchase consideration was $32.0 million, net of cash and the Company will be obligated to make potential future milestone payments, based on completion of a proof of concept, regulatory approvals and product sales, of up to $93.0 million ranging from 2016 to 2019. The fair value of the contingent consideration as of the acquisition date was estimated at $56.9 million. During the third quarter of fiscal year 2016, the Company updated the fair value of the contingent consideration and recorded a liability of $66.7 million as of October 2, 2016. The key assumptions used to determine the fair value of the contingent consideration as of October 2, 2016 included projected milestone dates of 2016 to 2019, discount rates ranging from 2.0% to 9.6%, conditional probabilities of success of each individual milestone ranging from 85% to 100% and cumulative probabilities of success for each individual milestone ranging from 59% to 100%. A significant delay in the product development (including projected regulatory milestone) achievement date in isolation could result in a significantly lower fair value measurement; a significant acceleration in the product development (including projected regulatory milestone) achievement date in isolation would not have a material impact on the fair value measurement; a significant change in the discount rate in isolation would not have a material impact on the fair value measurement; and a significant change in the probabilities of success in isolation could result in a significant change in fair value measurement.
The fair values of contingent consideration are calculated on a quarterly basis based on a collaborative effort of the Company’s regulatory, research and development, operations, finance and accounting groups, as appropriate. Potential valuation adjustments are made as additional information becomes available, including the progress towards completion of a proof of concept, regulatory approvals and product sales as compared to initial projections, the impact of market competition and market landscape shifts from non-invasive prenatal testing products, with the impact of such adjustments being recorded in the Company's consolidated statements of operations.
As of October 2, 2016, the Company may have to pay contingent consideration related to acquisitions with open contingency periods of up to $94.6 million. The expected maximum earnout period for acquisitions with open contingency periods does not exceed five years from the respective acquisition dates, and the remaining weighted average earnout period at October 2, 2016 was two years.

25

A reconciliation of the beginning and ending Level 3 net liabilities for contingent consideration is as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 2,
2016
 
October 4,
2015
 
October 2,
2016
 
October 4,
2015
 
(In thousands)
Balance at beginning of period
$
(62,878
)
 
$
(475
)
 
$
(57,350
)
 
$
(91
)
Additions
—

 
—

 
—

 
(475
)
Amounts paid and foreign currency translation
14

 
26

 
113

 
36

Change in fair value (included within selling, general and administrative expenses)
(4,051
)
 
(70
)
 
(9,678
)
 
11

Balance at end of period
$
(66,915
)
 
$
(519
)
 
$
(66,915
)
 
$
(519
)
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturities of these assets and liabilities. If measured at fair value, cash and cash equivalents would be classified as Level 1.
As of October 2, 2016, the Company’s new senior unsecured revolving credit facility, which provides for $1.0 billion of revolving loans, had borrowings outstanding of $53.0 million, which excluded $4.5 million of unamortized debt issuance costs and letters of credit. As of January 3, 2016, the Company's previous senior unsecured revolving credit facility had $482.0 million of borrowings outstanding, which excluded $2.4 million of unamortized debt issuance costs and letters of credit. The interest rate on the Company’s new senior unsecured revolving credit facility is reset at least monthly to correspond to variable rates that reflect currently available terms and conditions for similar debt. The Company had no change in credit standing during the first nine months of fiscal year 2016. Consequently, the borrowing value of the current year and prior year credit facilities approximate fair value and would be classified as Level 2.
The Company's 2021 Notes, with a face value of $500.0 million, had an aggregate carrying value of $495.7 million, net of $1.8 million of unamortized original issue discount and $2.6 million of unamortized debt issuance costs as of October 2, 2016. The 2021 Notes had an aggregate carrying value of $495.1 million, net of $2.0 million of unamortized original issue discount and $2.9 million of unamortized debt issuance costs as of January 3, 2016. The 2021 Notes had a fair value of $552.2 million and $518.9 million as of October 2, 2016 and January 3, 2016, respectively. The fair value of the 2021 Notes is estimated using market quotes from brokers and is based on current rates offered for similar debt.
The Company's 2026 Notes, with a face value of €500 million, had an aggregate carrying value of $551.6 million, net of $4.9 million of unamortized original issue discount and $4.9 million of unamortized debt issuance costs as of October 2, 2016. The 2026 Notes had a fair value of €523.7 million as of October 2, 2016. The fair value of the 2026 Notes is estimated using market quotes from brokers and is based on current rates offered for similar debt.
The Company's financing lease obligations had an aggregate carrying value of $37.4 million and $38.2 million as of October 2, 2016 and January 3, 2016, respectively. The carrying values of the Company's financing lease obligations approximated their fair value as there has been minimal change in the Company's incremental borrowing rate.
As of October 2, 2016, the 2021 Notes, 2026 Notes and financing lease obligations were classified as Level 2.
As of October 2, 2016, there has not been any significant impact to the fair value of the Company’s derivative liabilities due to credit risk. Similarly, there has not been any significant adverse impact to the Company’s derivative assets based on the evaluation of its counterparties’ credit risks.

Note 18: Contingencies

The Company is conducting a number of environmental investigations and remedial actions at current and former locations of the Company and, along with other companies, has been named a potentially responsible party (“PRP”) for certain waste disposal sites. The Company accrues for environmental issues in the accounting period that the Company’s responsibility is established and when the cost can be reasonably estimated. The Company has accrued $10.3 million and $11.8 million as of October 2, 2016 and January 3, 2016, respectively, which represents its 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. These amounts were included in accrued expenses and other current liabilities. The Company's environmental accrual is not discounted

26

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 the Company has been named a PRP, management does not currently anticipate any additional liability to result from the inability of other significant named parties to contribute. The Company expects that the majority of such accrued amounts could be paid out over a period of up to ten years. As assessment and remediation activities progress at each individual site, these liabilities are reviewed and adjusted to reflect additional information as it becomes available. There have been no environmental problems to date that have had, or are expected to have, a material adverse effect on the Company’s condensed consolidated financial statements. While it is possible that a loss exceeding the amounts recorded in the condensed consolidated financial statements may be incurred, the potential exposure is not expected to be materially different from those amounts recorded.
The Company is subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of its business activities. Although the Company has established accruals for potential losses that it believes are probable and reasonably estimable, in the opinion of the Company’s management, based on its review of the information available at this time, the total cost of resolving these contingencies at October 2, 2016 would not have a material adverse effect on the Company’s condensed consolidated financial statements. However, each of these matters is subject to uncertainties, and it is possible that some of these matters may be resolved unfavorably to the Company.

27

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q, including the following management’s discussion and analysis, contains forward-looking information that you should read in conjunction with the condensed consolidated financial statements and notes to the condensed consolidated financial statements that we have included elsewhere in this report. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Words such as “believes,” “plans,” “anticipates,” “intends,” “expects,” “will” and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from the plans, intentions or expectations we disclose in the forward-looking statements we make. We have included important factors below under the heading “Risk Factors” in Part II, Item 1A. that we believe could cause actual results to differ materially from the forward-looking statements we make. We are not obligated to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview
We are a leading provider of products, services and solutions to the diagnostics, research, environmental, industrial and laboratory services markets. Through our advanced technologies, solutions, and services, we address critical issues that help to improve the health and safety of people and the environment. The principal products and services of our two operating segments are:
•
Human Health.  Concentrates on developing diagnostics, tools and applications to help detect diseases earlier and more accurately and to accelerate the discovery and development of critical new therapies. Within our Human Health segment, we serve both the diagnostics and research markets.
•
Environmental Health.  Provides products, services and solutions to facilitate a cleaner and safer environment, including the creation of secure food and consumer products. Our Environmental Health segment serves the environmental, industrial and laboratory services market.
We recently announced a new alignment of our businesses effective October 3, 2016 to better position us to grow in attractive end markets and expand share with our core product offerings through an improved customer focus, more value-add collaboration and breakthrough innovations. Our diagnostics business, focused on reproductive health, emerging market diagnostic solutions and applied genomics, will become a standalone business segment seeking to better meet the needs of clinically oriented customers in regulated markets. Microfluidics and automation products within the research market were combined with the existing diagnostics business to form the Diagnostics segment. The remaining products within the research market were combined with the existing Environmental Health business to form the Discovery & Analytical Solutions segment. This combination is intended to advance our success in serving and innovating for our applications-oriented customers in the food, environmental, industrial and life sciences markets.
Overview of the Third Quarter of Fiscal Year 2016
Our fiscal year ends on the Sunday nearest December 31. We report fiscal years under a 52/53 week format and as a result, certain fiscal years will contain 53 weeks. The fiscal year ending January 1, 2017 ("fiscal year 2016") will include 52 weeks, while the fiscal year ended January 3, 2016 ("fiscal year 2015") included 53 weeks. The additional week in fiscal year 2015 was reflected in our third quarter, which consisted of 14 weeks as compared to our third quarter of fiscal year 2016, which consisted of 13 weeks.
Our overall revenue in the third quarter of fiscal year 2016 was $548.1 million and decreased $15.4 million, or 3%, as compared to the third quarter of fiscal year 2015, reflecting a decrease of $5.4 million, or 2%, in our Human Health segment revenue and a decrease of $10.0 million, or 5%, in our Environmental Health segment revenue. The decrease in our Human Health segment revenue during the third quarter of fiscal year 2016 was primarily driven by decreases in revenue in our academic and government product offerings within our research market due to reduced government funding and weaker demand in our medical imaging business, which was partially offset by the strong performance of our newborn and infectious disease screening solutions in emerging markets such as China, as well as Europe. The decrease in our Environmental Health segment revenue during the third quarter of fiscal year 2016 was primarily due to a decrease in our food and environmental business due to weak harvest conditions.
In our Human Health segment, we experienced growth during the third quarter of fiscal year 2016 in several of our products within our end markets, as compared to the third quarter of fiscal year 2015. In our diagnostics market, we experienced growth from continued expansion of our newborn screening, blood banking and screening businesses. Birth rates in the United States continue to stabilize and demand for greater access to newborn screening in rural areas outside the United States is also increasing, as evidenced by prenatal trends during the third quarter of fiscal year 2016. This was offset by weaker demand in our medical imaging business due to a change in customer ordering patterns. In our research market, we experienced

28

decreases in revenue in our academic and government product offerings due to reduced government funding and a slight decrease in revenue in our OneSource service offerings due to the timing of renewals. Our OneSource business offers services designed to enable our customers to increase efficiencies and production time while reducing maintenance costs, all of which continue to be critical for them.
In our Environmental Health segment, we had a decrease in revenue for the third quarter of fiscal year 2016 as compared to the third quarter of fiscal year 2015. The decrease in revenue was due to lower sales in our food and environmental business within our environmental and industrial markets due to weak harvest conditions. We nevertheless anticipate that the continued development of contaminant regulations and corresponding testing protocols will result in increased demand for efficient, analytically sensitive and information rich testing solutions.
Our consolidated gross margins increased 240 basis points in the third quarter of fiscal year 2016, as compared to the third quarter of fiscal year 2015, primarily due to favorable changes in product mix, with an increase in sales of higher gross margin product offerings. Our consolidated operating margins increased 135 basis points in the third quarter of fiscal year 2016, as compared to the third quarter of fiscal year 2015, primarily due to higher gross margins and lower costs as a result of cost containment and productivity initiatives, which were partially offset by increased costs related to investments in new product development.
We continue to believe that we are well positioned to take advantage of the spending trends in our end markets and to promote our 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.

Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, warranty costs, bad debts, inventories, accounting for business combinations and dispositions, long-lived assets, income taxes, restructuring, pensions and other postretirement benefits, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are those policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. We believe our critical accounting policies include our policies regarding revenue recognition, warranty costs, allowances for doubtful accounts, inventory valuation, business combinations, value of long-lived assets, including goodwill and other intangibles, employee compensation and benefits, restructuring activities, gains or losses on dispositions and income taxes.
For a more detailed discussion of our critical accounting policies and estimates, please refer to the Notes to our audited consolidated financial statements and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the fiscal year ended January 3, 2016 (our “2015 Form 10-K”), as filed with the Securities and Exchange Commission (the "SEC"). There have been no significant changes in our critical accounting policies and estimates during the nine months ended October 2, 2016.

Consolidated Results of Continuing Operations
Revenue
Revenue for the three months ended October 2, 2016 was $548.1 million, as compared to $563.5 million for the three months ended October 4, 2015, a decrease of $15.4 million, or 3%, which includes an approximate 0.4% decrease in revenue attributable to unfavorable changes in foreign exchange rates and an approximate 1% net increase in revenue attributable to the impact of prior year acquisitions and divestitures. In addition, the third quarter of fiscal year 2016 consisted of 13 weeks as compared to the third quarter of fiscal year 2015, which consisted of 14 weeks. The analysis in the remainder of this paragraph compares segment revenue for the three months ended October 2, 2016 as compared to the three months ended October 4, 2015 and includes the effect of foreign exchange rate fluctuations, acquisitions and divestitures. Our Human Health segment revenue was $338.2 million for the three months ended October 2, 2016, as compared to $343.6 million for the three months ended October 4, 2015, a decrease of $5.4 million, or 2%, due to a decrease of $5.6 million from our research market revenue and an increase of $0.2 million from our diagnostics market revenue. Our Environmental Health segment revenue was $209.8 million for the three months ended October 2, 2016, as compared to $219.8 million for the three months ended October 4, 2015, a decrease of $10.0 million, or 5%, due to a decrease of $9.6 million from our environmental and industrial markets revenue and a decrease of $0.4 million from our laboratory services market revenue. As a result of adjustments to deferred revenue related

29

to certain acquisitions required by business combination accounting rules, we did not recognize $0.2 million of revenue for each of the three months ended October 2, 2016 and October 4, 2015 that otherwise would have been recorded by the acquired businesses during each of the respective periods.
Revenue for the nine months ended October 2, 2016 was $1,659.4 million, as compared to $1,654.2 million for the nine months ended October 4, 2015, an increase of $5.2 million, or 0.3%, which includes an approximate 1% decrease in revenue attributable to unfavorable changes in foreign exchange rates and an approximate 0.3% decrease in revenue attributable to prior year acquisitions and divestitures. In addition, the additional week in fiscal year 2015 was reflected in our third quarter, which consisted of 14 weeks as compared to our third quarter of fiscal year 2016, which consisted of 13 weeks. The analysis in the remainder of this paragraph compares segment revenue for the nine months ended October 2, 2016 as compared to the nine months ended October 4, 2015 and includes the effect of foreign exchange rate fluctuations and acquisitions. Our Human Health segment revenue increased $13.0 million, or 1%, due to an increase in diagnostics market revenue of $10.7 million and an increase in research market revenue of $2.3 million. Our Environmental Health segment revenue decreased $7.9 million, or 1%, due to a decrease in environmental and industrial markets revenue of $13.4 million partially offset by an increase in laboratory services market revenue of $5.6 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination accounting rules, we did not recognize $0.5 million of revenue for the nine months ended October 2, 2016 and $0.6 million for the nine months ended October 4, 2015 that otherwise would have been recorded by the acquired businesses during each of the respective periods.
Cost of Revenue
Cost of revenue for the three months ended October 2, 2016 was $287.3 million, as compared to $308.8 million for the three months ended October 4, 2015, a decrease of $21.5 million, or 7%. As a percentage of revenue, cost of revenue decreased to 52.4% for the three months ended October 2, 2016 from 54.8% for the three months ended October 4, 2015, resulting in an increase in gross margin of 240 basis points from 45.2% for the three months ended October 4, 2015 to 47.6% for the three months ended October 2, 2016. Amortization of intangible assets decreased to $7.3 million for the three months ended October 2, 2016, as compared to $10.7 million for the three months ended October 4, 2015. Stock-based compensation expense was $0.3 million for each of the three months ended October 2, 2016 and October 4, 2015. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was $0.8 million for the three months ended October 4, 2015. Other purchase accounting adjustments added an incremental expense of $0.02 million for each of the three months ended October 2, 2016 and October 4, 2015. In addition to the above items, the overall increase in gross margin was primarily the result of favorable changes in product mix, with an increase in sales of higher gross margin product offerings and benefits from our initiatives to improve our supply chain.
Cost of revenue for the nine months ended October 2, 2016 was $883.2 million, as compared to $911.8 million for the nine months ended October 4, 2015, a decrease of $28.6 million, or 3%. As a percentage of revenue, cost of revenue decreased to 53.2% for the nine months ended October 2, 2016, from 55.1% for the nine months ended October 4, 2015, resulting in an increase in gross margin of 189 basis points to 46.8% for the nine months ended October 2, 2016, from 44.9% for the nine months ended October 4, 2015. Amortization of intangible assets decreased and was $24.1 million for the nine months ended October 2, 2016, as compared to $32.2 million for the nine months ended October 4, 2015. Stock-based compensation expense was $0.8 million for the nine months ended October 2, 2016, as compared to $1.0 million for the nine months ended October 4, 2015. The mark-to-market adjustment for postretirement benefit plans was a loss of $0.2 million for the nine months ended October 4, 2015. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an incremental expense of $0.4 million for the nine months ended October 2, 2016 as compared to $7.3 million for the nine months ended October 4, 2015. Other purchase accounting adjustments added an incremental expense of $0.05 million for each of the nine months ended October 2, 2016 and October 4, 2015. In addition to the above items, the overall increase in gross margin was primarily the result of favorable changes in product mix, with an increase in sales of higher gross margin product offerings and benefits from our initiatives to improve our supply chain.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended October 2, 2016 were $145.8 million, as compared to $147.7 million for the three months ended October 4, 2015, a decrease of $1.9 million, or 1%. As a percentage of revenue, selling, general and administrative expenses increased and were 26.6% for the three months ended October 2, 2016, as compared to 26.2% for the three months ended October 4, 2015. Amortization of intangible assets increased and was $10.0 million for the three months ended October 2, 2016, as compared to $8.0 million for the three months ended October 4, 2015. Stock-based compensation expense was $3.4 million for the three months ended October 2, 2016 as compared to $3.8 million for the three months ended October 4, 2015. Other purchase accounting adjustments added an incremental expense of $4.1 million for the three months ended October 2, 2016, as compared to $0.02 million for the three months ended October 4, 2015. Acquisition and divestiture-related expenses added an incremental expense of $0.4 million for the three months ended

30

October 2, 2016 as compared to $0.1 million for the three months ended October 4, 2015. In addition to the above items, the decrease in selling, general and administrative expenses was primarily the result of lower costs as a result of cost containment and productivity initiatives, which was partially offset by costs related to growth investments.
Selling, general and administrative expenses for the nine months ended October 2, 2016 were $447.3 million, as compared to $440.3 million for the nine months ended October 4, 2015, an increase of $7.0 million, or 2%. As a percentage of revenue, selling, general and administrative expenses increased and were 27.0% for the nine months ended October 2, 2016, as compared to 26.6% for the nine months ended October 4, 2015. Amortization of intangible assets increased and was $30.7 million for the nine months ended October 2, 2016, as compared to $26.0 million for the nine months ended October 4, 2015. Stock-based compensation expense increased and was $12.3 million for the nine months ended October 2, 2016, as compared to $11.1 million for the nine months ended October 4, 2015. The mark-to-market adjustment for postretirement benefit plans was a loss of $0.8 million for the nine months ended October 4, 2015. Other purchase accounting adjustments added an incremental expense of $9.7 million for the nine months ended October 2, 2016, as compared to $46 thousand for the nine months ended October 4, 2015. Acquisition and divestiture-related expenses added an incremental expense of $1.0 million for the nine months ended October 2, 2016, as compared to an incremental expense of $0.5 million for the nine months ended October 4, 2015. In addition to the above items, the increase in selling, general and administrative expenses was primarily the result of costs related to growth investments, which was partially offset by lower costs as a result of cost containment and productivity initiatives.
Research and Development Expenses
Research and development expenses for the three months ended October 2, 2016 were $33.2 million, as compared to $31.1 million for the three months ended October 4, 2015, an increase of $2.1 million, or 7%. As a percentage of revenue, research and development expenses increased and were 6.1% for the three months ended October 2, 2016, as compared to 5.5% for the three months ended October 4, 2015. Amortization of intangible assets was $0.1 million for each of the three months ended October 2, 2016 and October 4, 2015. Stock-based compensation expense was $0.2 million for the three months ended October 2, 2016 as compared to $0.1 million for the three months ended October 4, 2015. The increase in research and development expenses was primarily the result of investments in new product development, which was partially offset by lower costs as a result of cost containment and productivity initiatives.
Research and development expenses for the nine months ended October 2, 2016 were $102.0 million, as compared to $95.9 million for the nine months ended October 4, 2015, an increase of $6.1 million, or 6%. As a percentage of revenue, research and development expenses increased and were 6.1% for the nine months ended October 2, 2016, as compared to 5.8% for the nine months ended October 4, 2015. Amortization of intangible assets increased and was $0.5 million for the nine months ended October 2, 2016, as compared to $0.4 million for the nine months ended October 4, 2015. Stock-based compensation expense was $0.7 million for the nine months ended October 2, 2016, as compared to $0.4 million for the nine months ended October 4, 2015. In addition to the above items, the increase in research and development expenses was primarily the result of new product releases and investments in new product development, which was partially offset by cost containment and productivity initiatives. During the first nine months of each of fiscal years 2016 and 2015, we directed research and development efforts towards the diagnostics and research markets within our Human Health segment, and the environmental, industrial and laboratory service markets within our Environmental Health segment, in order to help accelerate our growth initiatives.

Restructuring and Contract Termination Charges, Net

We have undertaken a series of restructuring actions related to the impact of acquisitions and divestitures, the alignment of our operations with our growth strategy, the integration of our business units and our productivity initiatives. The current portion of restructuring and contract termination charges is recorded in accrued restructuring and contract termination charges and the long-term portion of restructuring and contract termination charges is recorded in long-term liabilities. The activities associated with these plans have been reported as restructuring and contract termination charges, net, as applicable, and are included as a component of operating expenses from continuing operations.

We implemented a restructuring plan in the third quarter of fiscal year 2016 consisting of workforce reductions principally intended to focus resources on higher growth product lines (the "Q3 2016 Plan"). We implemented a restructuring plan in the second quarter of fiscal year 2016 consisting of workforce reductions principally intended to focus resources on higher growth end markets (the "Q2 2016 Plan").We implemented a restructuring plan in the fourth quarter of fiscal year 2015 consisting of workforce reductions and closure of excess facility space principally intended to focus resources on higher growth end markets (the "Q4 2015 Plan"). We implemented a restructuring plan in the second quarter of fiscal year 2015 consisting of workforce reductions principally intended to realign resources to emphasize growth initiatives (the "Q2 2015 Plan"). Details of

31

the plans initiated in previous years (“Previous Plans”) are discussed more fully in Note 4 to the audited consolidated financial statements in the 2015 Form 10-K.

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 that were implemented during fiscal years 2016 and 2015:
 
Workforce Reductions
 
Closure of Excess Facility
 
Total
 
(Expected) Date Payments Substantially Completed by
 
Headcount Reduction
 
Human Health
 
Environmental Health
 
Human Health
 
Environmental Health
 
 
Severance
 
Excess Facility
 
 
 
 
 
 
 
 
 
(In thousands, except headcount data)
 
 
 
 
Q3 2016 Plan
22
 
$
727

 
$
1,093

 
$
—

 
$
—

 
$
1,820

 
Q4 FY2017
 
—
Q2 2016 Plan
90
 
4,049

 
1,239

 
—

 
—

 
5,288

 
Q3 FY2017
 
—
Q4 2015 Plan
174
 
2,230

 
9,065

 
285

 
—

 
11,580

 
Q1 FY2017
 
Q4 FY2017
Q2 2015 Plan
97
 
1,850

 
4,160

 
—

 
—

 
6,010

 
Q2 FY2016
 
—

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 terminated various contractual commitments in connection with certain disposal activities and recorded charges, to the extent applicable, for the costs of terminating these contracts before the end of their terms and the costs that will continue to be incurred for the remaining terms without economic benefit to us. We recorded additional pre-tax charges of $0.1 million during fiscal year 2015 in our Environmental Health segment as a result of these contract terminations.

At October 2, 2016, we had $12.9 million recorded for accrued restructuring and contract termination charges, of which $9.1 million was recorded in short-term accrued restructuring and contract termination charges and $3.8 million was recorded in long-term liabilities. At January 3, 2016, we had $22.2 million recorded for accrued restructuring and contract termination charges, of which $17.1 million was recorded in short-term accrued restructuring and contract termination charges and $5.1 million was recorded in long-term liabilities. The following table summarizes our restructuring and contract termination accrual balances and related activity by restructuring plan, as well as contract termination accrual balances and related activity, during the nine months ended October 2, 2016:

 
Balance at January 3, 2016
 
2016 Charges
 
2016 Changes in Estimates, Net
 
2016 Amounts Paid
 
Balance at October 2, 2016
 
(In thousands)
Severance:
 
 
 
 
 
 
 
 
 
Q3 2016 Plan
$
—

 
$
1,820

 
$
—

 
$
(104
)
 
$
1,716

Q2 2016 Plan
—

 
5,288

 
(43
)
 
(3,095
)
 
2,150

Q4 2015 Plan
10,370

 
—

 
(953
)
 
(8,052
)
 
1,365

Q2 2015 Plan
1,149

 
—

 
(543
)
 
(408
)
 
198

 
 
 
 
 
 
 
 
 
 
Facility:
 
 
 
 
 
 
 
 
 
Q4 2015 Plan
259

 
—

 
—

 
(248
)
 
11

 
 
 
 
 
 
 
 
 
 
Previous Plans
10,287

 
—

 
35

 
(3,029
)
 
7,293

Restructuring
22,065

 
7,108

 
(1,504
)
 
(14,936
)
 
12,733

Contract Termination
132

 
—

 
88

 
(76
)
 
144

Total Restructuring and Contract Termination
$
22,197

 
$
7,108

 
$
(1,416
)
 
$
(15,012
)
 
$
12,877




32

Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
 
Three Months Ended
 
Nine Months Ended
 
October 2,
2016
 
October 4,
2015
 
October 2,
2016
 
October 4,
2015
 
(In thousands)
Interest income
$
(124
)
 
$
(147
)
 
$
(361
)
 
$
(488
)
Interest expense
10,998

 
9,874

 
30,778

 
28,564

Gain on disposition of businesses and assets, net
—

 
—

 
(5,562
)
 
—

Other expense, net
389

 
2,217

 
2,887

 
4,132

Total interest and other expense, net
$
11,263

 
$
11,944

 
$
27,742

 
$
32,208

Interest and other expense, net, for the three months ended October 2, 2016 was an expense of $11.3 million, as compared to an expense of $11.9 million for the three months ended October 4, 2015, a decrease of $0.6 million. The decrease in interest and other expense, net, for the three months ended October 2, 2016, as compared to the three months ended October 4, 2015, was primarily due to a net decrease in other expenses, net by $1.8 million which consisted primarily of expenses related to foreign currency transactions and translation of non-functional currency assets and liabilities. This was partially offset by an increase in interest expense by $1.1 million due to the issuance of the new higher interest rate 2026 notes, and a concurrent paydown of the lower variable rate previous senior unsecured revolving credit facility. A more complete discussion of our liquidity is set forth below under the heading “Liquidity and Capital Resources.”
Interest and other expense, net, for the nine months ended October 2, 2016 was an expense of $27.7 million, as compared to an expense of $32.2 million for the nine months ended October 4, 2015, a decrease of $4.5 million. The decrease was primarily due to a gain on disposition of businesses and assets, net recognized during the nine months ended October 2, 2016 which was partially offset by an increase in interest expense of $2.2 million due to the issuance of the new higher interest rate 2026 notes as well as an increase in borrowings under our previous and new senior unsecured revolving credit facilities partially offset by a decrease in other expense, net of $1.2 million, consisting primarily of expenses related to foreign currency transactions and translation of non-functional currency assets and liabilities.
Provision for Income Taxes
For the three months ended October 2, 2016, the provision for income taxes from continuing operations was $12.2 million, as compared to $9.1 million for the three months ended October 4, 2015. For the nine months ended October 2, 2016, the provision for income taxes from continuing operations was $27.0 million, as compared to $25.0 million for the nine months ended October 4, 2015.
The effective tax rate from continuing operations was 17.5% and 13.9% for the three and nine months ended October 2, 2016, respectively, as compared to 14.2% and 14.8% for the three and nine months ended October 4, 2015, respectively. The lower effective tax rate during the first nine months of fiscal year 2016, as compared to the first nine months of fiscal year 2015, was due to certain lower tax rate jurisdictions projected to have higher income in fiscal year 2016 as compared to fiscal year 2015 and higher tax benefits related to discrete items, which were $7.1 million in the first nine months of fiscal year 2016, as compared to $5.2 million in the first nine months of fiscal year 2015.

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 represent 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, has presented the results of operations and related cash flows as discontinued operations. Any business deemed to be a discontinued operation prior to the adoption of ASU 2016-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of An Entity, continues to be reported as a discontinued operations, and the results of operations and related cash flows are presented as discontinued operations for all periods presented. Any remaining assets and liabilities of these businesses have been presented separately, and are reflected within assets and liabilities from discontinued operations in the accompanying condensed consolidated balance sheets as of October 2, 2016 and January 3, 2016.
During fiscal years 2016 and 2015, we settled various commitments related to the divestiture of discontinued operations and recognized a net pre-tax gain of $0.6 million and a net pre-tax loss of $0.03 million for the nine months ended October 2, 2016 and October 4, 2015, respectively, and a net pre-tax gain of $0.6 million for the three months ended October 2, 2016. We

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recorded a tax provision of $0.3 million and a tax benefit of $2.4 million on discontinued operations and dispositions for the three and nine months ended October 2, 2016, respectively. We recorded a tax provision of $0.04 million and $0.01 million on discontinued operations and dispositions for the three and nine months ended October 4, 2015, respectively.
During the second quarter of 2016, we completed the sale of our investment in PerkinElmer Labs, Inc., recognizing a pre-tax gain of $7.1 million. The sale generated a capital loss for tax purposes of $7.3 million, which resulted in an income tax benefit of $2.5 million that was recognized as a discrete benefit during the second quarter of 2016. PerkinElmer Labs, Inc. was a component of our Human Health segment. The pre-tax gain recognized in the second quarter of 2016 is included in interest and other expense, net in the condensed consolidated statement of operations. The divestiture of PerkinElmer Labs, Inc. has not been classified as a discontinued operation in this Form 10-Q because the disposition does not represent a strategic shift that will have a major effect on our operations and financial statements.
During the second quarter of 2016, we entered into a letter of intent to contribute certain assets to an academic institution in the United Kingdom. We recognized a pre-tax loss of $1.6 million related to the write-off of assets in the second quarter of 2016 which is included in interest and other expense, net in the condensed consolidated statement of operations.
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 $10.3 million and $11.8 million as of October 2, 2016 and January 3, 2016, respectively, which represents our management’s estimate of the cost of the remediation of known environmental matters, and does not include any potential liability for related personal injury or property damage claims. These amounts were included in accrued expenses and other current liabilities. 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 condensed consolidated financial statements. While it is possible that a loss exceeding the amounts recorded in the condensed consolidated financial statements may be incurred, the potential exposure is not expected to be materially different from those amounts recorded.
Various tax years after 2009 remain open to examination by certain jurisdictions in which we have significant business operations, such as Finland, Germany, Italy, Netherlands, Singapore, the United Kingdom and the United States. The tax years under examination vary by jurisdiction. We regularly review our tax positions in each significant taxing jurisdiction in the process of evaluating our unrecognized tax benefits. We make adjustments to our unrecognized tax benefits when: (i) facts and circumstances regarding a tax position change, causing a change in management’s judgment regarding that tax position; (ii) a tax position is effectively settled with a tax authority; and/or (iii) the statute of limitations expires regarding a tax position.
We are subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities. Although we have established accruals for potential losses that we believe are probable and reasonably estimable, in our opinion, based on our review of the information available at this time, the total cost of resolving these contingencies at October 2, 2016 would not have a material adverse effect on our condensed consolidated financial statements. However, each of these matters is subject to uncertainties, and it is possible that some of these matters may be resolved unfavorably to us.

Reporting Segment Results of Continuing Operations
Human Health
Revenue for the three months ended October 2, 2016 was $338.2 million, as compared to $343.6 million for the three months ended October 4, 2015, a decrease of $5.4 million, or 2%, which includes a 2% net decrease in revenue attributable to the impact of prior year acquisitions and divestitures. In addition, the third quarter of fiscal year 2016 consisted of 13 weeks as compared to the third quarter of fiscal year 2015, which consisted of 14 weeks. The analysis in the remainder of this paragraph compares selected revenue by market and product type for the three months ended October 2, 2016, as compared to the three months ended October 4, 2015, and includes the effect of foreign exchange fluctuations, acquisitions and divestitures. The decrease in revenue in our Human Health segment reflects a decrease of $5.6 million from our research market revenue

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partially offset by an increase of $0.2 million from our diagnostics market revenue. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination accounting rules, we did not recognize $0.2 million of revenue in our Human Health segment for each of the three months ended October 2, 2016 and October 4, 2015 that otherwise would have been recorded by the acquired businesses during each of the respective periods. In our Human Health segment, we experienced growth during the third quarter of fiscal year 2016 in several of our products within our end markets, as compared to the third quarter of fiscal year 2015. In our diagnostics market, we experienced growth from continued expansion of our newborn screening, blood banking and screening businesses. Birth rates in the United States continue to stabilize and demand for greater access to newborn screening in rural areas outside the United States is also increasing, as evidenced by prenatal trends during the third quarter of fiscal year 2016. This was offset by weaker demand in our medical imaging business due to a change in customer ordering patterns. In our research market, we experienced decreases in revenue in our academic and government product offerings and a slight decrease in revenue in our OneSource service offerings. Decreases in revenue in our academic and government product offerings was primarily a result of reduced government funding. The slight decreases in revenue in our OneSource service offering is primarily due to the timing of renewals. Our OneSource business offers services designed to enable our customers to increase efficiencies and production time while reducing maintenance costs, all of which continue to be critical for them.
Revenue for the nine months ended October 2, 2016 was $1,024.2 million, as compared to $1,011.2 million for the nine months ended October 4, 2015, an increase of $13.0 million, or 1%, which includes an approximate 1% decrease in revenue attributable to prior year acquisitions and divestitures. In addition, the additional week in fiscal year 2015 was reflected in our third quarter, which consisted of 14 weeks as compared to our third quarter of fiscal year 2016, which consisted of 13 weeks. The analysis in the remainder of this paragraph compares selected revenue by market and product type for the nine months ended October 2, 2016, as compared to the nine months ended October 4, 2015, and includes the effect of foreign exchange fluctuations and acquisitions. The increase in revenue in our Human Health segment reflects an increase in diagnostics market revenue of $10.7 million and an increase in research market revenue of $2.3 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $0.5 million of revenue in our Human Health segment for the nine months ended October 2, 2016 and $0.6 million for the nine months ended October 4, 2015 that otherwise would have been recorded by the acquired businesses during each of the respective periods. In our diagnostics market, we experienced growth from continued expansion of our newborn and infectious disease screening solutions in key regions outside the United States, particularly in emerging markets such as China. Birth rates in the United States continue to stabilize and demand for greater access to newborn screening in rural areas outside the United States is also increasing, as evidenced by prenatal trends during the third quarter of fiscal year 2016. Demand in our medical imaging business declined slightly due to a change in customer ordering patterns. In our research market, we experienced growth in our OneSource service offerings, which was primarily offset by decreases in revenue from our academic and government product offerings due to reduced government funding.
Operating income from continuing operations for the three months ended October 2, 2016 was $64.6 million, as compared to $63.1 million for the three months ended October 4, 2015, an increase of $1.5 million, or 2%. Amortization of intangible assets decreased and was $13.7 million for the three months ended October 2, 2016, as compared to $15.3 million for the three months ended October 4, 2015. Restructuring and contract termination charges, net, were $0.4 million for the three months ended October 2, 2016, as compared to $0.2 million for the three months ended October 4, 2015. Other purchase accounting adjustments added an incremental expense of $4.1 million for the three months ended October 2, 2016, as compared to $0.03 million for the three months ended October 4, 2015. Acquisition and divestiture-related expenses added an incremental expense of $0.4 million for the three months ended October 2, 2016, as compared to $0.1 million for the three months ended October 4, 2015. In addition to the above items, increased operating income for the three months ended October 2, 2016, as compared to the three months ended October 4, 2015, was primarily the result of favorable changes in product mix, with an increase in sales of higher gross margin product offerings and benefits from our initiatives to improve our supply chain.
Operating income from continuing operations for the nine months ended October 2, 2016 was $176.9 million, as compared to $179.6 million for the nine months ended October 4, 2015, a decrease of $2.7 million, or 1%. Amortization of intangible assets decreased and was $41.1 million for the nine months ended October 2, 2016, as compared to $46.0 million for the nine months ended October 4, 2015. Restructuring and contract termination charges, net, were $4.7 million for the nine months ended October 2, 2016, as compared to $2.0 million for the nine months ended October 4, 2015. Other purchase accounting adjustments added an incremental expense of $9.8 million for the nine months ended October 2, 2016, as compared to $0.1 million for the nine months ended October 4, 2015. Acquisition and divestiture-related expenses added an incremental expense of $0.9 million for the nine months ended October 2, 2016, as compared to an incremental expense of $0.3 million for the nine months ended October 4, 2015. In addition to the above items, decreased operating income for the nine months ended October 2, 2016, as compared to the nine months ended October 4, 2015, was primarily the result of increased costs related to investments in new product development, which were partially offset by pricing initiatives and lower costs related to cost containment and productivity initiatives.

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Environmental Health
Revenue for the three months ended October 2, 2016 was $209.8 million, as compared to $219.8 million for the three months ended October 4, 2015, a decrease of $10.0 million, or 5%, which includes an approximate 1% decrease in revenue attributable to unfavorable changes in foreign exchange rates and an approximate 1% net increase in revenue attributable to the impact of prior year acquisitions and divestitures. In addition, the third quarter of fiscal year 2016 consisted of 13 weeks as compared to the third quarter of fiscal year 2015, which consisted of 14 weeks. The analysis in the remainder of this paragraph compares selected revenue by market and product type for the three months ended October 2, 2016, as compared to the three months ended October 4, 2015, and includes the effect of foreign exchange fluctuations, acquisitions and divestitures. The decrease in revenue in our Environmental Health segment reflects a decrease of $9.6 million from our environmental and industrial revenue due to weak harvest conditions and a decrease of $0.4 million from our laboratory services market revenue.
Revenue for the nine months ended October 2, 2016 was $635.2 million, as compared to $643.1 million for the nine months ended October 4, 2015, a decrease of $7.9 million, or 1%, which includes an approximate 2% decrease in revenue attributable to unfavorable changes in foreign exchange rates and an approximate 1% increase in revenue attributable to acquisitions. In addition, the additional week in fiscal year 2015 was reflected in our third quarter, which consisted of 14 weeks as compared to our third quarter of fiscal year 2016, which consisted of 13 weeks. The analysis in the remainder of this paragraph compares selected revenue by market and product type for the nine months ended October 2, 2016, as compared to the nine months ended October 4, 2015, and includes the effect of foreign exchange fluctuations and acquisitions. The decrease in revenue in our Environmental Health segment reflects a decrease in environmental and industrial markets revenue of $13.4 million partially offset by an increase in laboratory services market revenue of $5.6 million.
Operating income from continuing operations for the three months ended October 2, 2016 was $27.7 million, as compared to $22.8 million for the three months ended October 4, 2015, an increase of $4.9 million, or 21%. Amortization of intangible assets was $3.6 million for each of the three months ended October 2, 2016 and October 4, 2015. Restructuring and contract termination charges, net, were $0.2 million for the three months ended October 2, 2016, as compared to $0.3 million for the three months ended October 4, 2015. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was $0.8 million for the three months ended October 4, 2015. In addition to the above items, operating income increased for the three months ended October 2, 2016, as compared to the three months ended October 4, 2015, due to favorable changes in product mix, with an increase in sales of higher gross margin product offerings and lower costs as a result of cost containment initiatives.
Operating income from continuing operations for the nine months ended October 2, 2016 was $78.9 million, as compared to $53.6 million for the nine months ended October 4, 2015, an increase of $25.3 million, or 47%. Amortization of intangible assets increased and was $14.1 million for the nine months ended October 2, 2016, as compared to $12.5 million for the nine months ended October 4, 2015. Restructuring and contract termination charges, net, were $1.0 million for the nine months ended October 2, 2016, as compared to $2.8 million for the nine months ended October 4, 2015. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was $0.4 million for the nine months ended October 2, 2016, as compared to $7.3 million for the nine months ended October 4, 2015. In addition to the above items, increased operating income for the nine months ended October 2, 2016, as compared to the nine months ended October 4, 2015, was primarily due to favorable changes in product mix, with an increase in sales of higher gross margin product offerings, early benefits from our initiatives to improve our supply chain, and lower costs related to cost containment initiatives partially offset by increased costs related to investments in new product development and unfavorable impacts from foreign currency.


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.

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Principal factors that could affect our ability to obtain cash from external sources include:
•
financial covenants contained in the financial instruments controlling our borrowings that limit our total borrowing capacity,
•
increases in interest rates applicable to our outstanding variable rate debt,
•
a ratings downgrade that could limit the amount we can borrow under our senior unsecured revolving credit facility and our overall access to the corporate debt market,
•
increases in interest rates or credit spreads, as well as limitations on the availability of credit, that affect our ability to borrow under future potential facilities on a secured or unsecured basis,
•
a decrease in the market price for our common stock, and
•
volatility in the public debt and equity markets.
At October 2, 2016, we had cash and cash equivalents of $311.7 million, of which $303.3 million was held by our non-U.S. subsidiaries, and we had $935.6 million of additional borrowing capacity available under our new senior unsecured revolving credit facility. We had no other liquid investments at October 2, 2016.
We utilize a variety of tax planning and financing strategies to ensure that our worldwide cash is available in the locations in which it is needed. Of the $303.3 million of cash and cash equivalents held by our non-U.S. subsidiaries at October 2, 2016, we would incur U.S. taxes on approximately $287.2 million if transferred to the U.S. without proper planning. We expect the accumulated non-U.S. cash balances, which may not be transferred to the U.S. without incurring U.S. taxes, will remain outside of the U.S. and that we will meet U.S. liquidity needs through future cash flows, use of U.S. cash balances, external borrowings, or some combination of these sources.
On October 23, 2014, our Board of Directors (our "Board") authorized us to repurchase up to 8.0 million shares of common stock under a stock repurchase program (the "Repurchase Program"). On July 27, 2016, our Board authorized us to immediately terminate the Repurchase Program and further authorized us to repurchase up to 8.0 million shares of common stock under a new stock repurchase program (the "New Repurchase Program"). The New Repurchase Program will expire on July 26, 2018 unless terminated earlier by our Board, and may be suspended or discontinued at any time. During the nine months ended October 2, 2016, we repurchased 3.2 million shares of common stock in the open market at an aggregate cost of $148.2 million, including commissions, under the Repurchase Program. No shares remain available for repurchase under the Repurchase Program due to its cancellation. As of October 2, 2016, 8.0 million shares remained available for repurchase under the New Repurchase Program.
In addition, our Board has authorized us to repurchase shares of common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards and restricted stock unit awards granted pursuant to our equity incentive plans and to satisfy obligations related to the exercise of stock options made pursuant to our equity incentive plans. During the nine months ended October 2, 2016, we repurchased 72,058 shares of common stock for this purpose at an aggregate cost of $3.4 million.
The repurchased shares have been reflected as additional authorized but unissued shares, with the payments reflected in common stock and capital in excess of par value. Any repurchased shares will be available for use in connection with corporate programs. If we continue to repurchase shares, the New Repurchase Program will be funded using our existing financial resources, including cash and cash equivalents, and our new 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.
During the first nine months of fiscal year 2016, we contributed $7.6 million, in the aggregate, to our defined benefit pension plans outside of the United States, and expect to contribute an additional $1.7 million by the end of fiscal year 2016. We could potentially have to make additional contributions in future periods for all pension plans. We expect to use existing cash and external sources to satisfy future contributions to our pension plans.

37

Our pension plans have not experienced a material impact on liquidity or counterparty exposure due to the volatility and uncertainty in the credit markets. We recognize actuarial gains and losses in operating results in the fourth quarter of the year in which the gains and losses occur, unless there is an interim remeasurement required for one of our plans. It is difficult to reliably predict the magnitude of such adjustments for gains and losses in fiscal year 2016. These 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, a loss to operations will be recorded in fiscal year 2016. Conversely, to the extent the discount rates increase or the value of our pension and postretirement investments increase more than expected, a gain will be recorded in fiscal year 2016.
Cash Flows
Operating Activities. Net cash provided by continuing operations was $198.9 million for the nine months ended October 2, 2016, as compared to $161.9 million for the nine months ended October 4, 2015, an increase in cash provided by operating activities of $37.0 million. The cash provided by operating activities for the nine months ended October 2, 2016 was principally a result of income from continuing operations of $166.5 million adjusted for depreciation and amortization of $79.3 million, stock-based compensation expense of $13.8 million, restructuring and contract termination charges, net of $5.7 million, change in fair value of contingent consideration of $9.7 million and gain from disposition of businesses and assets, net of $5.6 million. These items were partially offset by a net cash decrease in accrued expenses, other assets and liabilities and other items of $69.0 million and a net cash decrease in working capital of $1.5 million. Contributing to the net cash decrease in working capital for the nine months ended October 2, 2016, excluding the effect of foreign exchange rate fluctuations, was an increase in inventory of $12.4 million, which was partially offset by a decrease in accounts receivable of $1.8 million and an increase in accounts payable of $9.0 million. The increase in inventory was primarily a result of expanding the amount of inventory held at sales locations within our Environmental Health and Human Health segments to improve responsiveness to customer requirements and for the introduction of new products. The decrease in accounts receivable was a result of accounts receivable collections during the first nine months of fiscal year 2016. The increase in accounts payable was primarily a result of the timing of disbursements during the first nine months of fiscal year 2016. Changes in accrued expenses, other assets and liabilities and other items decreased cash provided by operating activities by $69.0 million for the nine months ended October 2, 2016, as compared to $49.0 million for the nine months ended October 4, 2015. These changes primarily related to the timing of payments for pensions, taxes, restructuring, and salary and benefits.
Investing Activities. Net cash used in the investing activities of our continuing operations was $78.2 million for the nine months ended October 2, 2016, as compared to $35.7 million for the nine months ended October 4, 2015, an increase of $42.5 million. For the nine months ended October 2, 2016, the net cash used in investing activities of our continuing operations was principally a result of capital expenditures of $25.3 million and $71.9 million of cash used for acquisitions and investments. These items were partially offset by cash proceeds of $21.0 million, net of $2.0 million in restricted cash from the sale of businesses. Net cash used for capital expenditures was $17.8 million for the nine months ended October 4, 2015. The capital expenditures in each period were primarily for manufacturing and other capital equipment purchases. In addition, during the nine months ended October 4, 2015, we used $18.7 million in cash for acquisitions and investments.
Financing Activities. Net cash used in financing activities was $52.6 million for the nine months ended October 2, 2016, as compared to $92.4 million for the nine months ended October 4, 2015, a decrease of $39.8 million. For the nine months ended October 2, 2016, we repurchased 3.3 million shares of our common stock, which includes 72,058 shares of our common stock pursuant to our equity incentive plans, for a total cost of $151.6 million, including commissions. This compares to repurchases of 1.6 million shares of common stock, which includes 89,558 shares of our common stock pursuant to our equity incentive plans for the nine months ended October 4, 2015, for a total cost of $76.2 million, including commissions. Proceeds from the issuance of common stock under stock plans was $12.1 million for the nine months ended October 2, 2016 as compared to $13.1 million for the nine months ended October 4, 2015. During the nine months ended October 2, 2016, debt borrowings on our previous and new senior unsecured revolving credit facilities totaled $375.5 million, which were offset by debt payments of $804.5 million. During the nine months ended October 4, 2015, debt payments on our previous senior unsecured revolving credit facility totaled $371.0 million, which were offset by debt borrowings of $347.0 million. During the nine months ended October 2, 2016, proceeds from the sale of our senior unsecured debt was $546.2 million, and we paid $7.9 million for debt issuance costs. We paid $23.1 million and $23.7 million in dividends during the nine months ended October 2, 2016 and October 4, 2015, respectively. We had net payments on other credit facilities of $0.8 million during each of the nine months ended October 2, 2016 and October 4, 2015, respectively. During the nine months ended October 2, 2016, we received $1.7 million for settlement of forward foreign exchange contracts, as compared to $19.2 million received for the nine months ended October 4, 2015. During the nine months ended October 2, 2016, we made $0.1 million in payments for acquisition-related contingent consideration.

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Borrowing Arrangements
Senior Unsecured Revolving Credit Facility. On August 11, 2016, we terminated our previous senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with a five year term and an expansion of borrowing capacity from $700.0 million to $1.0 billion. The new senior unsecured revolving credit facility provides for $1.0 billion of revolving loans and has an initial maturity of August 11, 2021. As of October 2, 2016, undrawn letters of credit in the aggregate amount of $11.4 million were treated as issued and outstanding when calculating the borrowing availability under the new senior unsecured revolving credit facility. As of October 2, 2016, we had $935.6 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%. At October 2, 2016, borrowings under the new senior unsecured revolving credit facility were accruing interest primarily based on the Eurocurrency rate. The Eurocurrency margin as of October 2, 2016 was 110 basis points. The weighted average Eurocurrency interest rate as of October 2, 2016 was 0.56%, resulting in a weighted average effective Eurocurrency rate, including the margin, of 1.66%. As of October 2, 2016, the new senior unsecured revolving credit facility had an aggregate carrying value of $48.5 million, which was net of $4.5 million of unamortized debt issuance costs. As of January 3, 2016, the previous senior unsecured revolving credit facility had an aggregate carrying value of $479.6 million, which was net of $2.4 million of unamortized debt issuance costs. The credit agreement for the facility contains affirmative, negative and financial covenants and events of default. The financial covenants include a debt-to-capital ratio that remains applicable for so long as our debt is rated as investment grade. In the event that our debt is not rated as investment grade, the debt-to-capital ratio covenant is replaced with a maximum consolidated leverage ratio covenant and a minimum consolidated interest coverage ratio covenant. We were in compliance with all applicable covenants as of October 2, 2016.
5% Senior Unsecured Notes due in 2021. On October 25, 2011, we issued $500.0 million aggregate principal amount of senior unsecured notes due in 2021 (the "2021 Notes") in a registered public offering and received $496.9 million of net proceeds from the issuance. The 2021 Notes were issued at 99.372% of the principal amount, which resulted in a discount of $3.1 million. As of October 2, 2016, the 2021 Notes had an aggregate carrying value of $495.7 million, net of $1.8 million of unamortized original issue discount and $2.6 million of unamortized debt issuance costs. As of January 3, 2016, the 2021 Notes had an aggregate carrying value of $495.1 million, net of $2.0 million of unamortized original issue discount and $2.9 million of unamortized debt issuance costs. The 2021 Notes mature in November 2021 and bear interest at an annual rate of 5%. Interest on the 2021 Notes is payable semi-annually on May 15th and November 15th each year. Prior to August 15, 2021 (three months prior to their maturity date), we may redeem the 2021 Notes in whole or in part, at our option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2021 Notes being redeemed, discounted on a semi-annual basis, at the Treasury Rate plus 45 basis points, plus accrued and unpaid interest. At any time on or after August 15, 2021 (three months prior to their maturity date), we may redeem the 2021 Notes, at our option, at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed plus accrued and unpaid interest. Upon a change of control (as defined in the indenture governing the 2021 Notes) and a contemporaneous downgrade of the 2021 Notes below investment grade, each holder of 2021 Notes will have the right to require us to repurchase such holder's 2021 Notes for 101% of their principal amount, plus accrued and unpaid interest. We were in compliance with all applicable covenants as of October 2, 2016.
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 senior unsecured revolving credit facility. As of October 2, 2016, the 2026 Notes had an aggregate carrying value of $551.6 million, net of $4.9 million of unamortized original issue discount and $4.9 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

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Notes, at our option, at a redemption price equal to 100% of the principal amount of the 2026 Notes due to be redeemed plus accrued and unpaid interest.
Upon a change of control (as defined in the indenture governing the 2026 Notes) and a contemporaneous downgrade of the 2026 Notes below investment grade, we will, in certain circumstances, make an offer to purchase the 2026 Notes at a price equal to 101% of their principal amount plus any accrued and unpaid interest.
Financing Lease Obligations. In fiscal year 2012, we entered into agreements with the lessors of certain buildings that we are currently occupying and leasing to expand those buildings. We provided a portion of the funds needed for the construction of the additions to the buildings, and as a result we were considered the owner of the buildings during the construction period. At the end of the construction period, we were not reimbursed by the lessors for all of the construction costs. We are therefore deemed to have continuing involvement and the leases qualify as financing leases under sale-leaseback accounting guidance, representing debt obligations for us and non-cash investing and financing activities. As a result, we capitalized $29.3 million in property, plant and equipment, net, representing the fair value of the buildings with a corresponding increase to debt. We have also capitalized $11.5 million in additional construction costs necessary to complete the renovations to the buildings, which were funded by the lessors, with a corresponding increase to debt. At October 2, 2016, we had $37.4 million recorded for these financing lease obligations, of which $1.2 million was recorded as short-term debt and $36.2 million was recorded as long-term debt. At January 3, 2016, we had $38.2 million recorded for these financing lease obligations, of which $1.1 million was recorded as short-term debt and $37.1 million was recorded as long-term debt. The buildings are being depreciated on a straight-line basis over the terms of the leases to their estimated residual values, which will equal the remaining financing obligation at the end of the lease term. At the end of the lease term, the remaining balances in property, plant and equipment, net and debt will be reversed against each other.


Dividends
Our Board declared a regular quarterly cash dividend of $0.07 per share for each of the first three quarters of fiscal year 2016 and for each quarter of fiscal year 2015. At October 2, 2016, we had accrued $7.7 million for dividends declared on July 27, 2016 for the third quarter of fiscal year 2016 that will be payable on November 10, 2016. On October 26, 2016, we announced that our Board had declared a quarterly dividend of $0.07 per share for the fourth quarter of fiscal year 2016 that will be payable on February 10, 2017. In the future, our Board may determine to reduce or eliminate our common stock dividend in order to fund investments for growth, repurchase shares or conserve capital resources.

Contractual Obligations
Our contractual obligations, as described in the contractual obligations table contained in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended January 3, 2016 have changed due to new lease agreements for certain operating facilities, changes to our senior unsecured revolving credit facility and issuance of senior unsecured notes.
During the nine months ended October 2, 2016, we entered into new lease agreements for certain operating facilities. Our total rental payments to the lessors are now expected to be $14.0 million for the remainder of fiscal year 2016, $44.1 million for fiscal year 2017, $31.6 million for fiscal year 2018, $24.8 million for fiscal year 2019, $20.6 million for fiscal year 2020 and $70.0 million in the aggregate thereafter.
On August 11, 2016, we terminated our previous senior unsecured revolving credit facility and entered into a new senior unsecured revolving credit facility with a five year term and an expansion of borrowing capacity from $700.0 million to $1.0 billion. As of October 2, 2016, our new senior unsecured revolving credit facility with an initial maturity of August 11, 2021 had an aggregate outstanding amount of $53.0 million. As of October 2, 2016, we had no outstanding obligation in our previous senior unsecured revolving credit facility. The new senior unsecured revolving credit facility borrowings carry variable interest rates and the outstanding amount of $53.0 million does not include interest obligations.
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. 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. Our total debt payments under the 2026 Notes are expected to be €9.375 million for fiscal year 2017, €9.375 million for fiscal year 2018, €9.375 million for fiscal year 2019, €9.375 million for fiscal year 2020, €9.375 million for fiscal year 2021 and €546.875 million in the aggregate thereafter. These payments include interest obligations. As of October 2, 2016, the 2026 Notes had a carrying value of $551.6 million, net of $4.9 million of unamortized original issue discount and $4.9 million of unamortized debt issuance costs.
There have not been any other material changes during the first nine months of fiscal year 2016.




Effects of Recently Adopted and Issued Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (the "FASB") and are adopted by us as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on our condensed consolidated financial position, results of operations and cash flows or do not apply to our operations.

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under Topic 230 and other topics. The provisions of this guidance are to be applied using a retrospective transition method to each period presented, and if it is impracticable to apply the amendments retrospectively for some of the issues, ASU 2016-15 allows the amendments for those issues to be applied prospectively as of the earliest date practicable. ASU 2015-16 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. We are evaluating the requirements of this guidance and have not yet determined the impact of its adoption on our consolidated financial position, results of operations and cash flows.


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In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard requires entities to use the expected loss impairment model and will apply to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables, loans, held-to-maturity debt securities, net investments in leases and off-balance sheet credit exposures. Entities are required to estimate the lifetime “expected credit loss” for each applicable financial asset and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The standard also amends the impairment model for available-for-sale (“AFS”) debt securities and requires entities to determine whether all or a portion of the unrealized loss on an AFS debt security is a credit loss. An entity will recognize an allowance for credit losses on an AFS debt security as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment. The provisions of this guidance are to be applied using a modified-retrospective approach. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We are evaluating the requirements of this guidance and have not yet determined the impact of its adoption on our consolidated financial position, results of operations and cash flows.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting ("ASU No. 2016-09"). The new standard simplifies the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory withholding requirements, as well as the related classification in the statement of cash flows. The new standard is effective for annual reporting periods beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. The standard requires an entity to recognize all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement as discrete items in the reporting period in which they occur, and such tax benefits and tax deficiencies are not included in the estimate of an entity’s annual effective tax rate, applied on a prospective basis. Further, the standard eliminates the requirement to defer the recognition of excess tax benefits until the benefit is realized through a reduction to taxes payable. All excess tax benefits previously unrecognized, along with any valuation allowance, should be recognized on a modified retrospective basis as a cumulative adjustment to retained earnings as of the date of adoption. Under ASU No. 2016-09, an entity that applies the treasury stock method in calculating diluted earnings per share is required to exclude excess tax benefits and deficiencies from the calculation of assumed proceeds since such amounts are recognized in the income statement. Excess tax benefits should also be classified as operating activities in the same manner as other cash flows related to income taxes on the statement of cash flows, as such excess tax benefits no longer represent financing activities since they are recognized in the income statement, and should be applied prospectively or retrospectively to all periods presented. We adopted ASU No. 2016-09 at the beginning of the first quarter of fiscal year 2016. We recorded a cumulative increase of $14.2 million in the beginning of the first quarter of fiscal year 2016 retained earnings with a corresponding increase in deferred tax assets related to the prior years' unrecognized excess tax benefits. Excess tax benefits related to exercised options and vested restricted stock and restricted stock units during the nine months ended October 2, 2016 have been recognized in the current period’s income statement. We also excluded the excess tax benefits from the calculation of diluted earnings per share for the three and nine months ended October 2, 2016. We applied the cash flow presentation section of the guidance on a prospective basis, and the prior period statement of cash flows was not adjusted. ASU No. 2016-09 also allows an entity to elect as an accounting policy either to continue to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures for service based awards as they occur. An entity that elects to account for forfeitures as they occur should apply the accounting change on a modified retrospective basis as a cumulative effect adjustment to retained earnings as of the date of adoption. We have elected to account for forfeitures as they occur. The adoption of this accounting policy did not have a material impact on our consolidated financial position, results of operations or cash flows.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. The new guidance requires lessees to recognize a lease liability and right-of-use asset on the balance sheet for financing and operating leases. The provisions of this guidance are to be applied using a modified retrospective approach and are effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. We are evaluating the requirements of this guidance and have not yet determined the impact of its adoption on our consolidated financial position, results of operations and cash flows.

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, Simplifying the Measurement of Inventory. Under this new guidance, companies that use inventory measurement methods other than last-in, first-out or the retail inventory method should measure inventory at the lower of cost and net realizable value. The provisions of this guidance are to be applied prospectively and are effective for interim and annual reporting periods beginning after December 15, 2016, with early

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adoption permitted. We are evaluating the requirements of this guidance. The adoption is not expected to have a material impact on our consolidated financial position, results of operations and cash flows.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. Under this new guidance, an entity should use a five-step process to recognize revenue, depicting the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires new disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Subsequent to the issuance of the standard, the FASB decided to defer the effective date for one year to annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting periods beginning after December 15, 2016. In May 2016, the FASB also issued Accounting Standards Update No. 2016-12, Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients ("ASU 2016-12"), which amended its revenue recognition guidance in ASU 2014-09 on transition, collectibility, non-cash consideration and the presentation of sales and other similar taxes. In April 2016, the FASB also issued Accounting Standards Update No. 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing ("ASU 2016-10"), which amended its revenue recognition guidance in ASU 2014-09 on identifying performance obligations to allow entities to disregard items that are immaterial in the context of the contract, clarify when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow an entity to elect to account for the cost of shipping and handling performed after control of a good has been transferred to the customer as a fulfillment cost (i.e., an expense). ASU 2016-10 also clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property ("IP") and requires entities to classify IP in one of two categories: functional IP or symbolic IP, which will determine whether it recognizes revenue over time or at a point in time. ASU 2016-10 also address how entities should consider license renewals and restrictions and apply the exception for sales- and usage-based royalties received in exchange for licenses of IP. ASU 2016-12, ASU 2016-10 and ASU 2014-09 may be adopted either using a full retrospective approach or a modified retrospective approach. We are evaluating the requirements of the foregoing standards and has not yet determined the impact of their adoption on our consolidated financial position, results of operations and cash flows. We intend to adopt these standards using the modified retrospective approach, and we do not intend to early adopt these standards.


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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Market Risk. We are exposed to market risk, including changes in interest rates and currency exchange rates. To manage the volatility relating to these exposures, we enter into various derivative transactions pursuant to our policies to hedge against known or forecasted market exposures. We briefly describe several of the market risks we face below. Except for the net investment hedge on foreign operations that we entered into during the third quarter of fiscal year 2016, the following disclosure is not materially different from the disclosure provided under the heading, Item 7A. “Quantitative and Qualitative Disclosure About Market Risk,” in our 2015 Form 10-K.
Foreign Exchange Risk. The potential change in foreign currency exchange rates offers a substantial risk to us, as approximately 60% of our business is conducted outside of the United States, generally in foreign currencies. Our risk management strategy currently uses forward contracts to mitigate certain balance sheet foreign currency transaction exposures. The intent of these economic hedges is to offset gains and losses that occur on the underlying exposures, with gains and losses resulting from the forward contracts that hedge these exposures. Moreover, we are able to partially mitigate the impact that fluctuations in currencies have on our net income as a result of our manufacturing facilities located in countries outside the United States, material sourcing and other spending which occur in countries outside the United States, resulting in natural hedges.

We do not enter into derivative contracts for trading or other speculative purposes, nor do we use leveraged financial instruments. Although we attempt to manage our foreign exchange risk through the above activities, when the U.S. dollar weakens against other currencies in which we transact business, sales and net income generally will be positively but not proportionately impacted. Conversely, when the U.S. dollar strengthens against other currencies in which we transact business, sales and net income will generally be negatively but not proportionately impacted.

In the ordinary course of business, we enter into foreign exchange contracts for periods consistent with our committed exposures to mitigate the effect of foreign currency movements on transactions denominated in foreign currencies. The intent of these economic hedges is to offset gains and losses that occur on the underlying exposures from these currencies, with gains and losses resulting from the forward currency contracts that hedge these exposures. Transactions covered by hedge contracts include intercompany and third-party receivables and payables. The contracts are primarily in European and Asian currencies, have maturities that do not exceed 12 months, have no cash requirements until maturity, and are recorded at fair value on our condensed consolidated balance sheets. The unrealized gains and losses on our foreign currency contracts are recognized immediately in interest and other expense, net. The cash flows related to the settlement of these hedges are included in cash flows from operating activities within our condensed consolidated statement of cash flows.

Principal hedged currencies include the British Pound, Euro, Japanese Yen and Singapore Dollar. We held forward foreign exchange contracts, designated as economic hedges, with U.S. dollar equivalent notional amounts totaling $128.5 million, $127.3 million and $104.7 million at October 2, 2016, January 3, 2016 and October 4, 2015, respectively, and the fair value of these foreign currency derivative contracts was insignificant. The gains and losses realized on these foreign currency derivative contracts are not material. The duration of these contracts was generally 30 days or less during each of the nine months ended October 2, 2016 and October 4, 2015.

In addition, in connection with certain intercompany loan agreements utilized to finance our acquisitions and stock repurchase program, we enter into forward foreign exchange contracts intended to hedge movements in foreign exchange rates prior to settlement of such intercompany loans denominated in foreign currencies. We record these hedges at fair value on our condensed consolidated balance sheets. The unrealized gains and losses on these hedges, as well as the gains and losses associated with the remeasurement of the intercompany loans, are recognized immediately in interest and other expense, net. The cash flows related to the settlement of these hedges are included in cash flows from financing activities within our condensed consolidated statement of cash flows.

As of October 2, 2016, the outstanding forward exchange contracts designated as economic hedges, that were intended to hedge movements in foreign exchange rates prior to the settlement of certain intercompany loan agreements included combined Euro notional amounts of €50.7 million and combined U.S. Dollar notional amounts of $9.2 million. The combined Euro notional amounts of these outstanding hedges was €107.4 million and €108.7 million as of January 3, 2016 and October 4, 2015, respectively. The net gains and losses on these derivatives, combined with the gains and losses on the remeasurement of the hedged intercompany loans were not material for each of the nine months ending October 2, 2016 and October 4, 2015. We paid $0.1 million and received $19.2 million during the nine months ended October 2, 2016 and October 4, 2015, respectively, from the settlement of these hedges.

During the third quarter of 2016, we entered into a series of foreign currency forward contracts with a notional amount of €492.3 million to hedge our investments in certain foreign subsidiaries. Realized and unrealized translation adjustments from these hedges will be included in the foreign currency translation component of accumulated other comprehensive income ("AOCI"), as

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well as to offset translation adjustments on the underlying net assets of foreign subsidiaries. The cumulative translation gains or losses will remain in AOCI until the foreign subsidiaries are liquidated or sold. The foreign currency forward contracts were settled during the third quarter of 2016 and we recorded a net realized foreign exchange gain in AOCI amounting to $1.8 million during the three and nine months ended October 2, 2016.

During the third quarter of 2016, in connection with the issuance of the 2026 Notes, we designated the 2026 Notes to hedge our investments in certain foreign subsidiaries. Realized and unrealized translation adjustments from these hedges will be included in the foreign currency translation component of AOCI, as well as to offset translation adjustments on the underlying net assets of foreign subsidiaries. The cumulative translation gains or losses will remain in AOCI until the foreign subsidiaries are liquidated or sold. As of October 2, 2016, the total notional amount of foreign currency denominated debt designated to hedge investments in foreign subsidiaries was €495.7 million. The unrealized foreign exchange loss recorded in AOCI related to the net investment hedge was $10.2 million for the three and nine months ended October 2, 2016.

Foreign Currency Exchange Risk—Value-at-Risk Disclosure. We continue to measure foreign currency risk using the Value-at-Risk model described in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk,” in our 2015 Form 10-K. The measures for our Value-at-Risk analysis have not changed materially.
Interest Rate Risk. As described above, our debt portfolio includes variable rate instruments. Fluctuations in interest rates can therefore have a direct impact on both our short-term cash flows, as they relate to interest, and our earnings. To manage the volatility relating to these exposures, we periodically enter into various derivative transactions pursuant to our policies to hedge against known or forecasted interest rate exposures.
Interest Rate Risk—Sensitivity. Our 2015 Form 10-K presents sensitivity measures for our interest rate risk. The measures for our sensitivity analysis have not changed materially. More information is available in Item 7A. “Quantitative and Qualitative Disclosure About Market Risk,” in our 2015 Form 10-K for our sensitivity disclosure.

Item 4.
Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of our fiscal quarter ended October 2, 2016. The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of the end of our fiscal quarter ended October 2, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended October 2, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION

Item 1.
Legal Proceedings
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 the opinion of our management, based on its review of the information available at this time, the total cost of resolving these contingencies at October 2, 2016 should not have a material adverse effect on our condensed consolidated financial statements. However, each of these matters is subject to uncertainties, and it is possible that some of these matters may be resolved unfavorably to us.

Item 1A.
Risk Factors
The following important factors affect our business and operations generally or affect multiple segments of our business and operations:
If the markets into which we sell our products decline or do not grow as anticipated due to a decline in general economic conditions, or there are uncertainties surrounding the approval of government or industrial funding proposals, or there are unfavorable changes in government regulations, we may see an adverse effect on the results of our business operations.
Our customers include pharmaceutical and biotechnology companies, laboratories, academic and research institutions, public health authorities, private healthcare organizations, doctors and government agencies. Our quarterly revenue and results of operations are highly dependent on the volume and timing of orders received during the quarter. In addition, our revenues and earnings forecasts for future quarters are often based on the expected trends in our markets. However, the markets we serve do not always experience the trends that we may expect. Negative fluctuations in our customers’ markets, the inability of our customers to secure credit or funding, restrictions in capital expenditures, general economic conditions, cuts in government funding or unfavorable changes in government regulations would likely result in a reduction in demand for our products and services. In addition, government funding is subject to economic conditions and the political process, which is inherently fluid and unpredictable. Our revenues may be adversely affected if our customers delay or reduce purchases as a result of uncertainties surrounding the approval of government or industrial funding proposals. Such declines could harm our consolidated financial position, results of operations, cash flows and trading price of our common stock, and could limit our ability to sustain profitability.
Our growth is subject to global economic and political conditions, and operational disruptions at our facilities.
Our business is affected by global economic conditions and the state of the financial markets, particularly as the United States and other countries balance concerns around debt, inflation, growth and budget allocations in their policy initiatives. There can be no assurance that global economic conditions and financial markets will not worsen and that we will not experience any adverse effects that may be material to our consolidated cash flows, results of operations, financial position or our ability to access capital, such as the adverse effects resulting from a prolonged shutdown in government operations both in the United States and internationally. Our business is also affected by local economic environments, including inflation, recession, financial liquidity and currency volatility or devaluation. Political changes, some of which may be disruptive, could interfere with our supply chain, our customers and all of our activities in a particular location.
While we take precautions to prevent production or service interruptions at our global facilities, a major earthquake, fire, flood, power loss or other catastrophic event that results in the destruction or delay of any of our critical business operations could result in our incurring significant liability to customers or other third parties, cause significant reputational damage or have a material adverse effect on our business, operating results or financial condition.
Certain of these risks can be hedged to a limited degree using financial instruments, or other measures, and some of these risks are insurable, but any such mitigation efforts are costly and may not always be fully successful. Our ability to engage in such mitigation efforts has decreased or become even more costly as a result of recent market developments.
If we do not introduce new products in a timely manner, we may lose market share and be unable to achieve revenue growth targets.
We sell many of our products in industries characterized by rapid technological change, frequent new product and service introductions, and evolving customer needs and industry standards. Many of the businesses competing with us in these industries have significant financial and other resources to invest in new technologies, substantial intellectual property portfolios, substantial experience in new product development, regulatory expertise, manufacturing capabilities, and established distribution channels to deliver products to customers. Our products could become technologically obsolete over time, or we may invest in technology that does not lead to revenue growth or continue to sell products for which the demand from our

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customers is declining, in which case we may lose market share or not achieve our revenue growth targets. The success of our new product offerings will depend upon several factors, including our ability to:
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accurately anticipate customer needs,
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innovate and develop new reliable technologies and applications,
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successfully commercialize new technologies in a timely manner,
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price our products competitively, and manufacture and deliver our products in sufficient volumes and on time, and
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differentiate our offerings from our competitors’ offerings.
Many of our products are used by our customers to develop, test and manufacture their products. We must anticipate industry trends and consistently develop new products to meet our customers’ expectations. In developing new products, we may be required to make significant investments before we can determine the commercial viability of the new product. If we fail to accurately foresee our customers’ needs and future activities, we may invest heavily in research and development of products that do not lead to significant revenue. We may also suffer a loss in market share and potential revenue if we are unable to commercialize our technology in a timely and efficient manner.
In addition, some of our licensed technology is subject to contractual restrictions, which may limit our ability to develop or commercialize products for some applications.
We may not be able to successfully execute acquisitions or license technologies, integrate acquired businesses or licensed technologies into our existing businesses, make acquired businesses or licensed technologies profitable, or successfully divest businesses.
We have in the past supplemented, and may in the future supplement, our internal growth by acquiring businesses and licensing technologies that complement or augment our existing product lines, such as our acquisition of Vanadis Diagnostics AB in the fourth quarter of fiscal year 2015. However, we may be unable to identify or complete promising acquisitions or license transactions for many reasons, such as:
•
competition among buyers and licensees,
•
the high valuations of businesses and technologies,
•
the need for regulatory and other approval, and
•
our inability to raise capital to fund these acquisitions.
Some of the businesses we acquire may be unprofitable or marginally profitable, or may increase the variability of our revenue recognition. If, for example, we are unable to successfully commercialize products and services related to significant in-process research and development that we have capitalized, we may have to impair the value of such assets. Accordingly, the earnings or losses of acquired businesses may dilute our earnings. For these acquired businesses to achieve acceptable levels of profitability, we would have to improve their management, operations, products and market penetration. We may not be successful in this regard and may encounter other difficulties in integrating acquired businesses into our existing operations, such as incompatible management, information or other systems, cultural differences, loss of key personnel, unforeseen regulatory requirements, previously undisclosed liabilities or difficulties in predicting financial results. Additionally, if we are not successful in selling businesses we seek to divest, the activity of such businesses may dilute our earnings and we may not be able to achieve the expected benefits of such divestitures. As a result, our financial results may differ from our forecasts or the expectations of the investment community in a given quarter or over the long term.
To finance our acquisitions, we may have to raise additional funds, either through public or private financings. We may be unable to obtain such funds or may be able to do so only on terms unacceptable to us. We may also incur expenses related to completing acquisitions or licensing technologies, or in evaluating potential acquisitions or technologies, which may adversely impact our profitability.
We may not be successful in adequately protecting our intellectual property.
Patent and trade secret protection is important to us because developing new products, processes and technologies gives us a competitive advantage, although it is time-consuming and expensive. We own many United States and foreign patents and intend to apply for additional patents. Patent applications we file, however, may not result in issued patents or, if they do, the claims allowed in the patents may be narrower than what is needed to protect fully our products, processes and technologies. The expiration of our previously issued patents may cause us to lose a competitive advantage in certain of the products and services we provide. Similarly, applications to register our trademarks may not be granted in all countries in which they are

46

filed. For our intellectual property that is protected by keeping it secret, such as trade secrets and know-how, we may not use adequate measures to protect this intellectual property.
Third parties may also challenge the validity of our issued patents, may circumvent or “design around” our patents and patent applications, or may claim that our products, processes or technologies infringe their patents. In addition, third parties may assert that our product names infringe their trademarks. We may incur significant expense in legal proceedings to protect our intellectual property against infringement by third parties or to defend against claims of infringement by third parties. Claims by third parties in pending or future lawsuits could result in awards of substantial damages against us or court orders that could effectively prevent us from manufacturing, using, importing or selling our products in the United States or other countries.
If we are unable to renew our licenses or otherwise lose our licensed rights, we may have to stop selling products or we may lose competitive advantage.
We may not be able to renew our existing licenses, or licenses we may obtain in the future, on terms acceptable to us, or at all. If we lose the rights to a patented or other proprietary technology, we may need to stop selling products incorporating that technology and possibly other products, redesign our products or lose a competitive advantage. Potential competitors could in-license technologies that we fail to license and potentially erode our market share.
Our licenses typically subject us to various economic and commercialization obligations. If we fail to comply with these obligations, we could lose important rights under a license, such as the right to exclusivity in a market. In some cases, we could lose all rights under the license. In addition, rights granted under the license could be lost for reasons out of our control. For example, the licensor could lose patent protection for a number of reasons, including invalidity of the licensed patent, or a third-party could obtain a patent that curtails our freedom to operate under one or more licenses.
If we do not compete effectively, our business will be harmed.
We encounter aggressive competition from numerous competitors in many areas of our business. We may not be able to compete effectively with all of these competitors. To remain competitive, we must develop new products and periodically enhance our existing products. We anticipate that we may also have to adjust the prices of many of our products to stay competitive. In addition, new competitors, technologies or market trends may emerge to threaten or reduce the value of entire product lines.
Our quarterly operating results could be subject to significant fluctuation, and we may not be able to adjust our operations to effectively address changes we do not anticipate, which could increase the volatility of our stock price and potentially cause losses to our shareholders.
Given the nature of the markets in which we participate, we cannot reliably predict future revenue and profitability. Changes in competitive, market and economic conditions may require us to adjust our operations, and we may not be able to make those adjustments or make them quickly enough to adapt to changing conditions. A high proportion of our costs are fixed, due in part to our research and development and manufacturing costs. As a result, small declines in sales could disproportionately affect our operating results in a quarter. Factors that may affect our quarterly operating results include:
•
demand for and market acceptance of our products,
•
competitive pressures resulting in lower selling prices,
•
changes in the level of economic activity in regions in which we do business,
•
changes in general economic conditions or government funding,
•
settlements of income tax audits,
•
expenses incurred in connection with claims related to environmental conditions at locations where we conduct or formerly conducted operations,
•
differing tax laws and changes in those laws, or changes in the countries in which we are subject to taxation,
•
changes in our effective tax rate,
•
changes in industries, such as pharmaceutical and biomedical,
•
changes in the portions of our revenue represented by our various products and customers,
•
our ability to introduce new products,
•
our competitors’ announcement or introduction of new products, services or technological innovations,

47

•
costs of raw materials, energy or supplies,
•
changes in healthcare or other reimbursement rates paid by government agencies and other third parties for certain of our products and services,
•
our ability to realize the benefit of ongoing productivity initiatives,
•
changes in the volume or timing of product orders,
•
fluctuation in the expense related to the mark-to-market adjustment on postretirement benefit plans,
•
changes in our assumptions underlying future funding of pension obligations,
•
changes in assumptions used to determine contingent consideration in acquisitions, and
•
changes in foreign currency exchange rates.
A significant disruption in third-party package delivery and import/export services, or significant increases in prices for those services, could interfere with our ability to ship products, increase our costs and lower our profitability.
We ship a significant portion of our products to our customers through independent package delivery and import/export companies, including UPS and Federal Express in the United States; TNT, UPS and DHL in Europe; and UPS in Asia. We also ship our products through other carriers, including national trucking firms, overnight carrier services and the United States Postal Service. If one or more of the package delivery or import/export providers experiences a significant disruption in services or institutes a significant price increase, we may have to seek alternative providers and the delivery of our products could be prevented or delayed. Such events could cause us to incur increased shipping costs that could not be passed on to our customers, negatively impacting our profitability and our relationships with certain of our customers.
Disruptions in the supply of raw materials, certain key components and other goods from our limited or single source suppliers could have an adverse effect on the results of our business operations, and could damage our relationships with customers.
The production of our products requires a wide variety of raw materials, key components and other goods that are generally available from alternate sources of supply. However, certain critical raw materials, key components and other goods required for the production and sale of some of our principal products are available from limited or single sources of supply. We generally have multi-year contracts with no minimum purchase requirements with these suppliers, but those contracts may not fully protect us from a failure by certain suppliers to supply critical materials or from the delays inherent in being required to change suppliers and, in some cases, validate new raw materials. Such raw materials, key components and other goods can usually be obtained from alternative sources with the potential for an increase in price, decline in quality or delay in delivery. A prolonged inability to obtain certain raw materials, key components or other goods is possible and could have an adverse effect on our business operations, and could damage our relationships with customers.
We are subject to the rules of the Securities and Exchange Commission requiring disclosure as to whether certain materials known as conflict minerals (tantalum, tin, gold, tungsten and their derivatives), which may be contained in our products are mined from the Democratic Republic of the Congo and adjoining countries. As a result of these rules, we may incur additional costs in complying with the disclosure requirements and in satisfying those customers who require that the components used in our products be certified as conflict-free, and the potential lack of availability of these materials at competitive prices could increase our production costs.
The manufacture and sale of products and services may expose us to product liability claims for which we could have substantial liability.
We face an inherent business risk of exposure to product liability claims if our products, services or product candidates are alleged or found to have caused injury, damage or loss. We may in the future be unable to obtain insurance with adequate levels of coverage for potential liability on acceptable terms or claims of this nature may be excluded from coverage under the terms of any insurance policy that we can obtain. If we are unable to obtain such insurance or the amounts of any claims successfully brought against us substantially exceed our coverage, then our business could be adversely impacted.
If we fail to maintain satisfactory compliance with the regulations of the United States Food and Drug Administration and other governmental agencies in the United States and abroad, we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil, criminal or monetary penalties.
Our operations are subject to regulation by different state and federal government agencies in the United States and other countries, as well as to the standards established by international standards bodies. If we fail to comply with those regulations

48

or standards, we could be subject to fines, penalties, criminal prosecution or other sanctions. Some of the products produced by our Human Health segment are subject to regulation by the United States Food and Drug Administration and similar foreign and domestic agencies. These regulations govern a wide variety of product activities, from design and development to labeling, manufacturing, promotion, sales and distribution. If we fail to comply with those regulations or standards, we may have to recall products, cease their manufacture and distribution, and may be subject to fines or criminal prosecution.
We are also subject to a variety of laws, regulations and standards that govern, among other things, the importation and exportation of products, the handling, transportation and manufacture of toxic or hazardous substances, and our business practices in the United States and abroad such as anti-bribery, anti-corruption and competition laws. This requires that we devote substantial resources to maintaining our compliance with those laws, regulations and standards. A failure to do so could result in the imposition of civil, criminal or monetary penalties having a material adverse effect on our operations.
Changes in governmental regulations may reduce demand for our products or increase our expenses.
We compete in markets in which we or our customers must comply with federal, state, local and foreign regulations, such as environmental, health and safety, and food and drug regulations. We develop, configure and market our products to meet customer needs created by these regulations. Any significant change in these regulations could reduce demand for our products or increase our costs of producing these products.
The healthcare industry is highly regulated and if we fail to comply with its extensive system of laws and regulations, we could suffer fines and penalties or be required to make significant changes to our operations which could have a significant adverse effect on the results of our business operations.
The healthcare industry, including the genetic screening market, is subject to extensive and frequently changing international and United States federal, state and local laws and regulations. In addition, legislative provisions relating to healthcare fraud and abuse, patient privacy violations and misconduct involving government insurance programs provide federal enforcement personnel with substantial powers and remedies to pursue suspected violations. We believe that our business will continue to be subject to increasing regulation as the federal government continues to strengthen its position on healthcare matters, the scope and effect of which we cannot predict. If we fail to comply with applicable laws and regulations, we could suffer civil and criminal damages, fines and penalties, exclusion from participation in governmental healthcare programs, and the loss of various licenses, certificates and authorizations necessary to operate our business, as well as incur liabilities from third-party claims, all of which could have a significant adverse effect on our business.
Economic, political and other risks associated with foreign operations could adversely affect our international sales and profitability.
Because we sell our products worldwide, our businesses are subject to risks associated with doing business internationally. Our sales originating outside the United States represented the majority of our total revenue in the nine months ended October 2, 2016. We anticipate that sales from international operations will continue to represent a substantial portion of our total revenue. In addition, many of our manufacturing facilities, employees and suppliers are located outside the United States. Accordingly, our future results of operations could be harmed by a variety of factors, including:
•
changes in actual, or from projected, foreign currency exchange rates,
•
changes in a country’s or region’s political or economic conditions, particularly in developing or emerging markets,
•
longer payment cycles of foreign customers and timing of collections in foreign jurisdictions,
•
embargoes, trade protection measures and import or export licensing requirements,
•
policies in foreign countries benefiting domestic manufacturers or other policies detrimental to companies headquartered in the United States,
•
differing tax laws and changes in those laws, or changes in the countries in which we are subject to tax,
•
adverse income tax audit settlements or loss of previously negotiated tax incentives,
•
differing business practices associated with foreign operations,
•
difficulty in transferring cash between international operations and the United States,
•
difficulty in staffing and managing widespread operations,
•
differing labor laws and changes in those laws,

49

•
differing protection of intellectual property and changes in that protection,
•
increasing global enforcement of anti-bribery and anti-corruption laws, and
•
differing regulatory requirements and changes in those requirements.
If we do not retain our key personnel, our ability to execute our business strategy will be limited.
Our success depends to a significant extent upon the continued service of our executive officers and key management and technical personnel, particularly our experienced engineers and scientists, and on our ability to continue to attract, retain, and motivate qualified personnel. The competition for these employees is intense. The loss of the services of key personnel could have a material adverse effect on our operating results. In addition, there could be a material adverse effect on us should the turnover rates for key personnel increase significantly or if we are unable to continue to attract qualified personnel. We do not maintain any key person life insurance policies on any of our officers or employees.
Our success also depends on our ability to execute leadership succession plans. The inability to successfully transition key management roles could have a material adverse effect on our operating results.
If we experience a significant disruption in, or breach in security of, our information technology systems, or inadvertent transfer of information, or if we fail to implement new systems, software and technologies successfully, our business could be adversely affected.
We rely on several centralized information technology systems throughout our company to develop, manufacture and provide products and services, keep financial records, process orders, manage inventory, process shipments to customers and operate other critical functions. Our information technology systems may be susceptible to damage, disruptions or shutdowns due to power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors, catastrophes or other unforeseen events. If we were to experience a prolonged system disruption in the information technology systems that involve our interactions with customers or suppliers, it could result in the loss of sales and customers and significant incremental costs, which could adversely affect our business. In addition, security breaches of our information technology systems or inadvertent transfer of information could result in the misappropriation or unauthorized disclosure of confidential information belonging to us or to our employees, partners, customers or suppliers, which could result in our suffering significant financial or reputational damage.
We have a substantial amount of outstanding debt, which could impact our ability to obtain future financing and limit our ability to make other expenditures in the conduct of our business.
    
We have a substantial amount of debt and other financial obligations. Our debt level and related debt service obligations could have negative consequences, including:
•
requiring us to dedicate significant cash flow from operations to the payment of principal and interest on our debt, which reduces the funds we have available for other purposes, such as acquisitions and stock repurchases;
•
reducing our flexibility in planning for or reacting to changes in our business and market conditions; and
•
exposing us to interest rate risk since a portion of our debt obligations are at variable rates.
In addition, we may incur additional indebtedness in the future to meet future financing needs. If we add new debt, the risks described above could increase.
Restrictions in our new senior unsecured revolving credit facility and other debt instruments may limit our activities.
Our new senior unsecured revolving credit facility, 2021 Notes and 2026 Notes include restrictive covenants that limit our ability to engage in activities that could otherwise benefit our company. These include restrictions on our ability and the ability of our subsidiaries to:
•
pay dividends on, redeem or repurchase our capital stock,
•
sell assets,
•
incur obligations that restrict our subsidiaries’ ability to make dividend or other payments to us,
•
guarantee or secure indebtedness,
•
enter into transactions with affiliates, and

50

•
consolidate, merge or transfer all, or substantially all, of our assets and the assets of our subsidiaries on a consolidated basis.
We are also required to meet specified financial ratios under the terms of certain of our existing debt instruments. Our ability to comply with these financial restrictions and covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control, such as foreign exchange rates, interest rates, changes in technology and changes in the level of competition. In addition, if we are unable to maintain our investment grade credit rating, our borrowing costs would increase and we would be subject to different and potentially more restrictive financial covenants under some of our existing debt instruments.
Any future indebtedness that we incur may include similar or more restrictive covenants. Our failure to comply with any of the restrictions in our new senior unsecured revolving credit facility, 2021 Notes, 2026 Notes or any future indebtedness may result in an event of default under those debt instruments, which could permit acceleration of the debt under those debt instruments, and require us to prepay that debt before its scheduled due date under certain circumstances.
The approval of the Brexit Referendum in the U.K may have an adverse impact on our results of operations.
In a referendum vote held on June 23, 2016, the United Kingdom voted to leave the European Union. Nearly 5% of our net sales in 2015 came from the U.K. At this time, we are not able to predict the impact that this vote will have on the economy in Europe, including in the U.K., or on the Great Britain Pound (the “GBP”) or other European exchange rates. Weakening of economic conditions or economic uncertainties tend to harm our business, and if such conditions emerge in the U.K. or in the rest of Europe, it may have a material adverse effect on our sales. In addition, any significant weakening of the GBP to the U.S. dollar will have an adverse impact on our European revenues due to the importance of U.K. sales.
Our results of operations will be adversely affected if we fail to realize the full value of our intangible assets.
As of October 2, 2016, our total assets included $2.8 billion of net intangible assets. Net intangible assets consist principally of goodwill associated with acquisitions and costs associated with securing patent rights, trademark rights, customer relationships, core technology and technology licenses, net of accumulated amortization. We test certain of these items—specifically all of those that are considered “non-amortizing”—at least annually for potential impairment by comparing the carrying value to the fair market value of the reporting unit to which they are assigned. All of our amortizing intangible assets are also evaluated for impairment should events occur that call into question the value of the intangible assets.
Adverse changes in our business, adverse changes in the assumptions used to determine the fair value of our reporting units, or the failure to grow our Human Health and Environmental Health segments may result in impairment of our intangible assets, which could adversely affect our results of operations.
Our share price will fluctuate.
Over the last several years, stock markets in general and our common stock in particular have experienced significant price and volume volatility. Both the market price and the daily trading volume of our common stock may continue to be subject to significant fluctuations due not only to general stock market conditions but also to a change in sentiment in the market regarding our operations and business prospects. In addition to the risk factors discussed above, the price and volume volatility of our common stock may be affected by:
•
operating results that vary from our financial guidance or the expectations of securities analysts and investors,
•
the financial performance of the major end markets that we target,
•
the operating and securities price performance of companies that investors consider to be comparable to us,
•
announcements of strategic developments, acquisitions and other material events by us or our competitors, and
•
changes in global financial markets and global economies and general market conditions, such as interest or foreign exchange rates, commodity and equity prices and the value of financial assets.
Dividends on our common stock could be reduced or eliminated in the future.
On July 27, 2016, we announced that our Board had declared a quarterly dividend of $0.07 per share for the third quarter of fiscal year 2016 that will be payable on November 10, 2016. On October 26, 2016, we announced that our Board had declared a quarterly dividend of $0.07 per share for the fourth quarter of fiscal year 2016 that will be payable on February 10, 2017. In the future, our Board may determine to reduce or eliminate our common stock dividend in order to fund investments for growth, repurchase shares or conserve capital resources.


51

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

We did not repurchase any of our common stock under our share repurchase program during the third quarter of fiscal year 2016.


52

Item 6.
Exhibits
 
Exhibit
Number
  
Exhibit Name
 
 
3.1
 
By-laws of the Company, Amended and Restated as of July 27, 2016 (incorporated herein by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed with the SEC on July 27, 2016 (File No. 001-05075)).
 
 
 
4.1
 
Third Supplemental Indenture, dated as of July 19, 2016, among the Company, U.S. Bank National Association, as trustee, and Elavon Financial Services DAC, UK Branch, as paying agent (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the SEC on July 19, 2016 (File No. 001-05075)).
 
 
 
4.2
 
Paying Agency Agreement, dated July 19, 2016, between the Company, U.S. Bank National Association, as trustee, Elavon Financial Services DAC, UK Branch, as paying agent, and Elavon Financial Services DAC, as transfer agent and registrar (incorporated herein by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed with the SEC on July 19, 2016 (File No. 001-05075)).
 
 
 
10.1
 
Credit Agreement, dated as of August 11, 2016, among the Company, Wallac Oy, and PerkinElmer Health Sciences, Inc. as Borrowers, JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A. and Barclays Bank PLC as Co-Syndication Agents, Citibank, N.A., Mizuho Bank, Ltd., TD Bank, N.A., U.S. Bank National Association and Wells Fargo Bank, National Association as Co-Documentation Agents, and J.P. Morgan Chase Bank, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Barclays Bank PLC as Joint Bookrunners and Joint Lead Arrangers, and the other Lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 12, 2016 (File No. 001-05075)).

 
 
 
10.2
 
Employment Agreement between Deborah A. Butters and PerkinElmer, Inc. dated July 11, 2016, attached hereto as Exhibit 10.2(9).

 
 
 
31.1
  
Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
  
Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
  
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
  
XBRL Instance Document.
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB
  
XBRL Taxonomy Extension Labels Linkbase Document.
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document.
____________________________
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language):  
(i) Condensed Consolidated Statements of Operations for the three and nine months ended October 2, 2016 and October 4, 2015, (ii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 2, 2016 and October 4, 2015, (iii) Condensed Consolidated Balance Sheets at October 2, 2016 and January 3, 2016, (iv) Condensed Consolidated Statement of Cash Flows for the nine months ended October 2, 2016 and October 4, 2015, and (v) Notes to Condensed Consolidated Financial Statements.



53

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
PERKINELMER, INC.
 
 
 
November 8, 2016
By:
 
/s/    FRANK A. WILSON
 
 
 
Frank A. Wilson
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
 
 
PERKINELMER, INC.
 
 
 
November 8, 2016
By:
 
/s/    ANDREW OKUN
 
 
 
Andrew Okun
Vice President and Chief Accounting Officer
(Principal Accounting Officer)


54

EXHIBIT INDEX
  
Exhibit
Number
  
Exhibit Name
 
 
3.1
 
By-laws of the Company, Amended and Restated as of July 27, 2016 (incorporated herein by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed with the SEC on July 27, 2016 (File No. 001-05075)).
 
 
 
4.1
 
Third Supplemental Indenture, dated as of July 19, 2016, among the Company, U.S. Bank National Association, as trustee, and Elavon Financial Services DAC, UK Branch, as paying agent (incorporated herein by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K filed with the SEC on July 19, 2016 (File No. 001-05075)).
 
 
 
4.2
 
Paying Agency Agreement, dated July 19, 2016, between the Company, U.S. Bank National Association, as trustee, Elavon Financial Services DAC, UK Branch, as paying agent, and Elavon Financial Services DAC, as transfer agent and registrar (incorporated herein by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K filed with the SEC on July 19, 2016 (File No. 001-05075)).
 
 
 
10.1
 
Credit Agreement, dated as of August 11, 2016, among the Company, Wallac Oy, and PerkinElmer Health Sciences, Inc. as Borrowers, JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A. and Barclays Bank PLC as Co-Syndication Agents, Citibank, N.A., Mizuho Bank, Ltd., TD Bank, N.A., U.S. Bank National Association and Wells Fargo Bank, National Association as Co-Documentation Agents, and J.P. Morgan Chase Bank, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Barclays Bank PLC as Joint Bookrunners and Joint Lead Arrangers, and the other Lenders party thereto (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 12, 2016 (File No. 001-05075)).

 
 
 
10.2
 
Employment Agreement between Deborah A. Butters and PerkinElmer, Inc. dated July 11, 2016, attached hereto as Exhibit 10.2(9).

 
 
 
31.1
  
Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
  
Certification of Chief Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
  
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS
  
XBRL Instance Document.
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB
  
XBRL Taxonomy Extension Labels Linkbase Document.
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document.
____________________________
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language):  
(i) Condensed Consolidated Statements of Operations for the three and nine months ended October 2, 2016 and October 4, 2015, (ii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended October 2, 2016 and October 4, 2015, (iii) Condensed Consolidated Balance Sheets at October 2, 2016 and January 3, 2016, (iv) Condensed Consolidated Statement of Cash Flows for the nine months ended October 2, 2016 and October 4, 2015, and (v) Notes to Condensed Consolidated Financial Statements.


55

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