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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 April 2, 2017
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
ý
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
Emerging growth company
 
¨ 
 
 
 
If an emerging growth company, indicate by check mark whether the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of May 4, 2017, there were outstanding 110,039,013 shares of common stock, $1 par value per share.


Table of Contents

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.
 
 
 
 



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PART I. FINANCIAL INFORMATION

Item 1.
Unaudited Financial Statements

PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) 
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
 
(In thousands, except per share data)
Product revenue
$
333,714

 
$
324,353

Service revenue
180,401

 
173,663

Total revenue
514,115

 
498,016

Cost of product revenue
163,169

 
154,828

Cost of service revenue
111,335

 
108,102

Total cost of revenue
274,504

 
262,930

Selling, general and administrative expenses
145,093

 
144,538

Research and development expenses
33,288

 
29,971

Restructuring and contract termination charges, net
9,651

 

Operating income from continuing operations
51,579

 
60,577

Interest and other expense, net
11,596

 
11,086

Income from continuing operations before income taxes
39,983

 
49,491

Provision for income taxes
3,921

 
7,747

Income from continuing operations
36,062

 
41,744

Income from discontinued operations before income taxes
3,759

 
8,190

Loss on disposition of discontinued operations before income taxes

 
(3
)
Provision for income taxes on discontinued operations and dispositions
1,218

 
2,465

Income from discontinued operations and dispositions
2,541

 
5,722

Net income
$
38,603

 
$
47,466

Basic earnings per share:
 
 
 
Income from continuing operations
$
0.33

 
$
0.38

Income from discontinued operations and dispositions
0.02

 
0.05

Net income
$
0.35

 
$
0.43

Diluted earnings per share:
 
 
 
Income from continuing operations
$
0.33

 
$
0.38

Income from discontinued operations and dispositions
0.02

 
0.05

Net income
$
0.35

 
$
0.43

Weighted average shares of common stock outstanding:
 
 
 
Basic
109,468

 
110,409

Diluted
110,204

 
111,195

Cash dividends declared per common share
$
0.07

 
$
0.07

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

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PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
 
(In thousands)
Net income
$
38,603

 
$
47,466

Other comprehensive income:
 
 
 
Foreign currency translation adjustments
19,208

 
31,567

Unrealized gains on securities, net of tax
23

 
32

Other comprehensive income
19,231

 
31,599

Comprehensive income
$
57,834

 
$
79,065











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

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PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
April 2,
2017
 
January 1,
2017
 
(In thousands, except share and per share data)
Current assets:
 
 
 
Cash and cash equivalents
$
288,329

 
$
359,265

Accounts receivable, net
411,084

 
425,588

Inventories
264,633

 
246,847

Other current assets
96,796

 
99,246

Current assets of discontinued operations
55,737

 
58,985

Total current assets
1,116,579

 
1,189,931

Property, plant and equipment:
 
 
 
At cost
449,306

 
427,903

Accumulated depreciation
(295,369
)
 
(282,409
)
Property, plant and equipment, net
153,937

 
145,494

Intangible assets, net
455,128

 
420,224

Goodwill
2,332,533

 
2,247,966

Other assets, net
215,996

 
204,679

Long-term assets of discontinued operations
66,328

 
68,389

Total assets
$
4,340,501

 
$
4,276,683

Current liabilities:
 
 
 
Current portion of long-term debt
$
2,187

 
$
1,172

Accounts payable
158,118

 
168,033

Accrued restructuring and contract termination charges
11,530

 
7,479

Accrued expenses and other current liabilities
397,814

 
399,700

Current liabilities of discontinued operations
30,959

 
26,971

Total current liabilities
600,608

 
603,355

Long-term debt
1,052,677

 
1,045,254

Long-term liabilities
462,965

 
459,544

Long-term liabilities of discontinued operations
15,264

 
14,960

Total liabilities
2,131,514

 
2,123,113

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 109,859,000 shares and 109,617,000 shares at April 2, 2017 and at January 1, 2017, respectively
109,859

 
109,617

Capital in excess of par value
31,148

 
26,130

Retained earnings
2,149,610

 
2,118,684

Accumulated other comprehensive loss
(81,630
)
 
(100,861
)
Total stockholders’ equity
2,208,987

 
2,153,570

Total liabilities and stockholders’ equity
$
4,340,501

 
$
4,276,683

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

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PERKINELMER, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
 
(In thousands)
Operating activities:
 
 
 
Net income
$
38,603

 
$
47,466

Income from discontinued operations and dispositions, net of income taxes
(2,541
)
 
(5,722
)
Income from continuing operations
36,062

 
41,744

Adjustments to reconcile income from continuing operations to net cash provided by continuing operations:
 
 
 
Restructuring and contract termination charges, net
9,651

 

Depreciation and amortization
24,747

 
25,395

Stock-based compensation
4,926

 
3,846

Change in fair value of contingent consideration
811

 
1,322

Amortization of deferred debt financing costs and accretion of discount
585

 
356

Amortization of acquired inventory revaluation
2,176

 
131

Changes in assets and liabilities which provided (used) cash, excluding effects from companies acquired:
 
 
 
Accounts receivable, net
25,093

 
16,747

Inventories
(6,837
)
 
(16,959
)
Accounts payable
(13,883
)
 
1,613

Accrued expenses and other
(42,129
)
 
(47,908
)
Net cash provided by operating activities of continuing operations
41,202

 
26,287

Net cash provided by operating activities of discontinued operations
12,534

 
5,753

Net cash provided by operating activities
53,736

 
32,040

Investing activities:
 
 
 
Capital expenditures
(5,981
)
 
(7,659
)
Proceeds from disposition of businesses

 
1,000

Changes in restricted cash balances
15,153

 

Activity related to acquisitions, net of cash and cash equivalents acquired
(123,578
)
 
(10,484
)
Net cash used in investing activities of continuing operations
(114,406
)
 
(17,143
)
Net cash used in investing activities of discontinued operations
(280
)
 
(149
)
Net cash used in investing activities
(114,686
)
 
(17,292
)
Financing activities:
 
 
 
Payments on borrowings
(145,950
)
 
(75,000
)
Proceeds from borrowings
146,952

 
183,000

Settlement of cash flow hedges
(1,569
)
 
2,630

Net payments on other credit facilities
(287
)
 
(275
)
Payments for acquisition-related contingent consideration
(8,940
)
 
(93
)
Proceeds from issuance of common stock under stock plans
4,627

 
1,238

Purchases of common stock
(3,127
)
 
(151,159
)
Dividends paid
(7,673
)
 
(7,843
)
Net cash used in financing activities of continuing operations
(15,967
)
 
(47,502
)
Net cash used in financing activities of discontinued operations
(214
)
 
(193
)
Net cash used in financing activities
(16,181
)
 
(47,695
)
Effect of exchange rate changes on cash and cash equivalents
6,195

 
5,746

Net increase in cash and cash equivalents
(70,936
)
 
(27,201
)
Cash and cash equivalents at beginning of period
359,265

 
237,932

Cash and cash equivalents at end of period
$
288,329

 
$
210,731

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

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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 1, 2017, filed with the SEC (the “2016 Form 10-K”). The balance sheet amounts at January 1, 2017 in this report were derived from the Company’s audited 2016 consolidated financial statements included in the 2016 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 months ended April 2, 2017 and April 3, 2016, respectively, are not necessarily indicative of the results for the entire fiscal year or any future period.

The Company’s fiscal year ends on the Sunday nearest December 31. The Company reports fiscal years under a 52/53 week format and as a result, certain fiscal years will contain 53 weeks. The fiscal year ending December 31, 2017 ("fiscal year 2017") will include 52 weeks, and the fiscal year ended January 1, 2017 ("fiscal year 2016") included 52 weeks.

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

In March 2017, the FASB issued Accounting Standards Update No. 2017-07, Compensation - Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"), which amends the requirements in Topic 715 related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. ASU 2017-07 requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present it with other current employee compensation costs in the income statement and (2) present the other components elsewhere in the income statement and outside of income from operations, and disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. Additionally, the standard requires that only the service-cost component of net benefit cost is eligible for capitalization (e.g., as part of inventory or property, plant, and equipment). The change in income statement presentation requires retrospective application, while the change in capitalized benefit cost is to be applied prospectively. ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The standard provides a practical expedient that permits entities to use the components of cost disclosed in prior years as a basis for the retrospective application of the new income statement presentation. Entities need to disclose the use of the practical expedient. The Company 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 January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles-Goodwill and Other Topic (Topic 350), Simplifying the Test for Goodwill Impairment ("ASU 2017-04"), which amends Topic 350 to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 requires that an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize the impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider the income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The provisions of this guidance are to be applied on a prospective basis. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on

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testing dates after January 1, 2017. The Company will early adopt ASU 2017-04 and will apply the provisions of this standard in its interim or annual goodwill impairment tests subsequent to January 2, 2017.

In January 2017, the FASB issued Accounting Standards Update No. 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business ("ASU 2017-01"), which amends Topic 805 to provide a screen to determine when a set of assets and liabilities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. If the screen is not met, the standard (1) requires that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) removes the evaluation of whether a market participant could replace missing elements. The standard provides a framework to assist entities in evaluating whether both an input and a substantive process are present. The standard also provides a framework that includes two sets of criteria to consider that depend on whether a set has outputs and a more stringent criteria for sets without outputs. Lastly, the standard narrows the definition of the term "output" so that the term is consistent with how outputs are described in Topic 606, Revenue from Contracts with Customers. The provisions of this guidance are to be applied prospectively. ASU 2017-01 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted in limited circumstances. The Company 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 November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash ("ASU 2016-18"), which amends Topic 230 to add or clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The standard requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The provisions of this guidance are to be applied using a retrospective transition method to each period presented. ASU 2016-18 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company 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 October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740), Intra-entity Transfer of Assets Other than Inventory ("ASU 2016-16"). ASU 2016-16 removes the prohibition in ASC 740 against the immediate recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The standard requires entities to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The provisions of this guidance are to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. ASU 2016-16 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. 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 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

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the impairment model for available-for-sale (“AFS”) debt securities and requires entities to determine whether all or a portion of the unrealized loss on an AFS debt security is a credit loss. An entity will recognize an allowance for credit losses on an AFS debt security as a contra-account to the amortized cost basis rather than as a direct reduction of the amortized cost basis of the investment. The provisions of this guidance are to be applied using a modified-retrospective approach. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, and interim periods within those years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. The Company is evaluating the requirements of this guidance and has not yet determined the impact of its adoption on the Company's consolidated financial position, results of operations and cash flows.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. 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. The Company does not intend to early adopt the provisions of this standard.

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 adopted ASU 2015-11 at the beginning of the first quarter of fiscal year 2017. The adoption did not 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 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.

While the Company is currently evaluating the impact of the new revenue standard, the Company believes the key changes in the standard that impact revenue recognition relate to the accounting for certain transactions with multiple elements or “bundled” arrangements (for example, sales of software subscriptions or sales of licenses and maintenance for which the Company does not have vendor-specific objective evidence ("VSOE") for maintenance and/or support) because the requirement to have VSOE for undelivered elements under current accounting standards is eliminated under the new standard. Accordingly, the Company may be required to recognize as revenue a portion of the sales price upon delivery of the applicable software, as compared to the current requirement of recognizing the entire sales price ratably over the maintenance period.



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Note 2: Business Combinations
Acquisition in fiscal year 2017
During fiscal year 2017, the Company completed the acquisition of Tulip Diagnostics Private Limited (“Tulip”), a company based in Goa, India, for a total consideration of $127.3 million. The Company has a potential obligation to pay the shareholders of Tulip up to INR 1.6 billion, currently equivalent to $25.0 million, that will be accounted for as compensation expense in the Company's financial statements over a two year period and is excluded from the purchase price allocation shown below. The excess of the purchase price over the fair value of the acquired business' net assets represents cost and revenue synergies specific to the Company, as well as non-capitalizable intangible assets, such as the employee workforce acquired, and has been allocated to goodwill, which is not tax deductible. The Company has reported the operations for this acquisition within the results of the Company's Diagnostics segment from the acquisition date. Identifiable definite-lived intangible assets, such as core technology, trade names and customer relationships, acquired as part of this acquisition had a weighted average amortization period of 11.4 years.

The total purchase price for the acquisition in fiscal year 2017 has been allocated to the estimated fair values of assets acquired and liabilities assumed as follows:
 
2017 Acquisition
 
(In thousands)
Fair value of business combination:
 
Cash payments
$
126,007

Other liability
1,273

Less: cash acquired
(2,429
)
Total
$
124,851

Identifiable assets acquired and liabilities assumed:
 
Current assets
$
15,863

Property, plant and equipment
9,643

Other assets
1,084

Identifiable intangible assets:
 
Core technology
3,500

Trade names
3,000

Customer relationships
38,500

Goodwill
76,499

Deferred taxes
(14,997
)
Liabilities assumed
(8,241
)
Total
$
124,851


Acquisitions in fiscal year 2016
During fiscal year 2016, the Company completed the acquisition of two businesses for a total consideration of $72.3 million in cash. The acquired businesses were Bioo Scientific Corporation, which was acquired for total consideration of $63.5 million in cash, and one other business acquired for 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 $43.6 million, which is not tax deductible, and intangible assets of $22.1 million. The Company has reported the operations for these acquisitions within the results of the Company's Diagnostics and Discovery & Analytical Solutions segments from the acquisition dates. Identifiable definite-lived intangible assets, such as core technology, trade names and customer relationships, acquired as part of these acquisitions had a weighted average amortization period of 9.4 years.



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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
(261
)
Less: cash acquired
(2,152
)
Total
$
70,084

Identifiable assets acquired and liabilities assumed:
 
Current assets
$
7,153

Property, plant and equipment
7,542

Identifiable intangible assets:
 
Core technology
6,600

Trade names
570

Customer relationships
14,900

Goodwill
43,588

Deferred taxes
(8,284
)
Liabilities assumed
(1,985
)
Total
$
70,084


The preliminary allocations of the purchase prices for acquisitions are based upon initial valuations. The Company's estimates and assumptions underlying the initial valuations are subject to the collection of information necessary to complete its valuations within the measurement periods, which are up to one year from the respective acquisition dates. The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired and liabilities assumed, assets and liabilities related to income taxes and related valuation allowances, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair values of the net assets acquired at the acquisition dates during the measurement periods. During the measurement periods, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition dates that, if known, would have resulted in the recognition of those assets and liabilities as of those dates. These adjustments will be made in the periods in which the amounts are determined and the cumulative effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition dates. All changes that do not qualify as adjustments made during the measurement periods are also included in current period earnings.
Allocations of the purchase price for acquisitions are based on estimates of the fair value of the net assets acquired and are subject to adjustment upon finalization of the purchase price allocations. The accounting for business combinations requires estimates and judgments as to expectations for future cash flows of the acquired business, and the allocation of those cash flows to identifiable intangible assets, in determining the estimated fair values for assets acquired and liabilities assumed. The fair values assigned to tangible and intangible assets acquired and liabilities assumed, including contingent consideration, are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. Contingent consideration is measured at fair value at the acquisition date, based on the probability that revenue thresholds or product development milestones will be achieved during the earnout period, with changes in the fair value after the acquisition date affecting earnings to the extent it is to be settled in cash. Increases or decreases in the fair value of contingent consideration liabilities primarily result from changes in the estimated probabilities of achieving revenue thresholds, changes in discount rates or product development milestones during the earnout period.
As of April 2, 2017, the Company may have to pay contingent consideration related to an acquisition with an open contingency period of up to $83.0 million. As of April 2, 2017, the Company has recorded contingent consideration obligations with an estimated fair value of $64.0 million, of which $15.4 million was recorded in accrued expenses and other current liabilities, and $48.6 million was recorded in long-term liabilities. As of January 1, 2017, the Company had recorded contingent consideration obligations with an estimated fair value of $63.2 million, of which $15.4 million was recorded in accrued expenses and other current liabilities, and $47.8 million was recorded in long-term liabilities. The expected maximum earnout

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period for the acquisition with an open contingency period does not exceed 2.5 years from the acquisition date, and the remaining weighted average expected earnout period at April 2, 2017 was 1.6 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 months ended April 2, 2017 and April 3, 2016 were $2.6 million and $0.4 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 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of An Entity, continues to be reported as a discontinued operation, and the results of operations and related cash flows are presented as discontinued operations for all periods presented. Any remaining assets and liabilities of these businesses have been presented separately, and are reflected within assets and liabilities of discontinued operations in the accompanying condensed consolidated balance sheets as of April 2, 2017 and January 1, 2017.
In December 2016, the Company entered into a Master Purchase and Sale Agreement (the “Agreement”) with Varian Medical Systems, Inc., which subsequently assigned its rights under the Agreement to Varex Imaging Corporation (“Varex”), under which the Company agreed to sell to Varex all of the outstanding equity interests in the Company’s wholly owned indirect subsidiaries PerkinElmer Medical Holdings, Inc. and Dexela Limited, together with certain assets of the Company and its direct and indirect subsidiaries relating to the Company’s business of designing, manufacturing and marketing flat panel x-ray detectors, and related software, accessories and ancillary products, to x-ray system manufacturers (the “Medical Imaging Business”), for cash consideration of approximately $276.0 million and Varex’s assumption of specified liabilities relating to the Medical Imaging Business (collectively, the “Transaction”). The Medical Imaging Business had been reported in the Diagnostics segment. The Transaction closed on May 1, 2017. The sale of the Medical Imaging Business represents a strategic shift that will have a major effect on the Company's operations and financial statements. Accordingly, the Company has classified the assets and liabilities related to the Medical Imaging Business as assets and liabilities of discontinued operations in the Company's consolidated balance sheets and its results of operations are classified as income from discontinued operations in the Company's consolidated statements of operations. Financial information in this report relating to the first quarter of 2016 has been retrospectively adjusted to reflect this discontinued operation.
The summary pre-tax operating results of the discontinued operations, were as follows for the three months ended:
 
April 2,
2017
 
April 3,
2016
 
(In thousands)
Revenue
$
36,094

 
$
40,766

Cost of revenue
24,795

 
25,755

Selling, general and administrative expenses
3,943

 
3,007

Research and development expenses
3,597

 
3,814

Income from discontinued operations before income taxes
$
3,759

 
$
8,190


The carrying amounts of the major classes of assets and liabilities included in discontinued operations as of April 2, 2017 and January 1, 2017 consisted of the following:

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April 2,
2017
 
January 1,
2017
 
(In thousands)
Current assets of discontinued operations:
 
 
 
Accounts receivable
$
23,794

 
$
28,400

Inventories
28,764

 
26,977

Prepaid income taxes


 
425

Other current assets
3,179

 
3,183

Total current assets of discontinued operations
55,737

 
58,985

Property, plant and equipment, net
24,310

 
25,219

Intangible assets
3,012

 
3,292

Goodwill
38,974

 
38,794

Other assets, net
32

 
1,084

Long-term assets of discontinued operations
66,328

 
68,389

Total assets of discontinued operations
$
122,065

 
$
127,374

 
 
 
 
Current liabilities of discontinued operations:
 
 
 
Accounts payable
$
19,906

 
$
16,770

Accrued restructuring and contract termination charges

 
209

Accrued expenses and other current liabilities
11,053

 
9,992

Total current liabilities of discontinued operations

30,959

 
26,971

Deferred income taxes
8,429

 
7,851

Long-term liabilities
6,835

 
7,109

Total long-term liabilities
15,264

 
14,960

Total liabilities of discontinued operations
$
46,223

 
$
41,931


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 income from continuing operations.

The Company implemented a restructuring plan in the first quarter of fiscal year 2017 consisting of workforce reductions principally intended to realign resources to emphasize growth initiatives (the "Q1 2017 Plan"). 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"). 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 2016 Form 10-K.


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The following table summarizes the reductions in headcount, the initial restructuring or contract termination charges by operating segment, and the dates by which payments were substantially completed, or the dates by which payments are expected to be substantially completed, for restructuring actions implemented during fiscal years 2017 and 2016 in continuing operations:
 
Workforce Reductions
 
Closure of Excess Facility
 
Total
 
(Expected) Date Payments Substantially Completed by
 
Headcount Reduction
 
Discovery & Analytical Solutions
 
Diagnostics
 
Discovery & Analytical Solutions
 
Diagnostics
 
 
Severance
 
Excess Facility
 
 
 
 
 
 
 
 
(In thousands, except headcount data)
 
 
 
 
Q1 2017 Plan
90
 
$
5,000

 
$
1,631

 
$
33

 
$
33

 
$
6,697

 
Q2 FY2018
 
Q2 FY2018
Q3 2016 Plan
22
 
1,779

 
41

 

 

 
1,820

 
Q4 FY2017
 
Q2 2016 Plan
72
 
4,106

 
561

 

 

 
4,667

 
Q3 FY2017
 
The Company does not currently expect to incur any future charges for these plans. The Company expects to make payments under the Previous Plans for remaining residual lease obligations, with terms varying in length, through fiscal year 2022.

In connection with the termination of various contractual commitments, the Company recorded additional pre-tax charges of $2.9 million during the three months ended April 2, 2017 in the Discovery & Analytical Solutions segment.

At April 2, 2017, the Company had $17.4 million recorded for accrued restructuring and contract termination charges, of which $11.5 million was recorded in short-term accrued restructuring and contract termination charges, $3.0 million was recorded in long-term liabilities, and $2.9 million was recorded in other reserves. At January 1, 2017, the Company had $10.5 million recorded for accrued restructuring and contract termination charges, of which $7.5 million was recorded in short-term accrued restructuring and contract termination charges and $3.1 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 three months ended April 2, 2017:
 
Balance at January 1, 2017
 
2017 Charges
 
2017 Changes in Estimates, Net
 
2017 Amounts Paid
 
Balance at April 2, 2017
 
(In thousands)
Severance:
 
 
 
 
 
 
 
 
 
Q1 2017 Plan
$

 
$
6,631

 
$

 
$
(383
)
 
$
6,248

Q3 2016 Plan
1,208

 

 

 
(547
)
 
661

Q2 2016 Plan
1,436

 

 

 
(446
)
 
990

 
 
 
 
 
 
 
 
 
 
Facility:
 
 
 
 
 
 
 
 
 
Q1 2017 Plan

 
66

 

 

 
66

 
 
 
 
 
 
 
 
 
 
Previous Plans
7,780

 

 

 
(1,440
)
 
6,340

Restructuring
10,424

 
6,697

 

 
(2,816
)
 
14,305

Contract Termination
117

 
2,909

 
45

 
(25
)
 
3,046

Total Restructuring and Contract Termination
$
10,541

 
$
9,606

 
$
45

 
$
(2,841
)
 
$
17,351



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Note 5: Interest and Other Expense, Net

Interest and other expense, net, consisted of the following:
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
 
(In thousands)
Interest income
$
(220
)
 
$
(110
)
Interest expense
10,864

 
9,841

Other expense, net
952

 
1,355

Total interest and other expense, net
$
11,596

 
$
11,086

During the three months ended April 2, 2017 and April 3, 2016, foreign currency transaction (gains) losses were $(1.4) million and $4.2 million, respectively. Net losses (gains) from forward currency hedge contracts were $2.4 million and $(2.8) million for the three months ended April 2, 2017 and April 3, 2016, respectively. These amounts were included in other expense, net.

Note 6: Inventories

Inventories as of April 2, 2017 and January 1, 2017 consisted of the following:
 
April 2,
2017
 
January 1,
2017
 
(In thousands)
Raw materials
$
87,674

 
$
79,189

Work in progress
8,273

 
6,561

Finished goods
168,686

 
161,097

Total inventories
$
264,633

 
$
246,847


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.
The total provision for income taxes included in the consolidated financial statements consisted of the following:
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
 
(In thousands)
Continuing operations
$
3,921

 
$
7,747

Discontinued operations
1,218

 
2,465

Total
$
5,139

 
$
10,212


At April 2, 2017, the Company had gross tax effected unrecognized tax benefits of $29.4 million, of which $27.7 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 $4.6 million of its uncertain tax positions at April 2, 2017, including accrued interest and penalties, and net of tax benefits, may be resolved over the next twelve months as a result of lapses in applicable statutes of limitations and potential settlements. Various tax years after 2010 remain open to examination by certain jurisdictions in which the Company has significant business operations, such as Finland, Germany, Italy, Netherlands, Singapore, the United Kingdom and the United States. The tax years under examination vary by jurisdiction.

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During the first three months of fiscal years 2017 and 2016, the Company recorded net discrete income tax benefits of $2.5 million and $0.8 million, respectively. The discrete tax benefit in the first three months of fiscal year 2017 includes the recognition of excess tax benefits on stock compensation of $1.1 million.

Note 8: Debt

Senior Unsecured Revolving Credit Facility.  The Company's senior unsecured revolving credit facility provides for $1.0 billion of revolving loans and has an initial maturity of August 11, 2021. As of April 2, 2017, undrawn letters of credit in the aggregate amount of $11.4 million were treated as issued and outstanding when calculating the borrowing availability under the senior unsecured revolving credit facility. As of April 2, 2017, the Company had $988.6 million available for additional borrowing under the facility. The Company uses the senior unsecured revolving credit facility for general corporate purposes, which may include working capital, refinancing existing indebtedness, capital expenditures, share repurchases, acquisitions and strategic alliances. The interest rates under the senior unsecured revolving credit facility are based on the Eurocurrency rate or the base rate at the time of borrowing, plus a margin. The base rate is the higher of (i) the rate of interest in effect for such day as publicly announced from time to time by JP Morgan Chase Bank, N.A. as its "prime rate," (ii) the Federal Funds rate plus 50 basis points or (iii) an adjusted one-month Libor plus 1.00%. As of April 2, 2017, the senior unsecured revolving credit facility had no outstanding borrowings, and $4.0 million of unamortized debt issuance costs. As of January 1, 2017, the senior unsecured revolving credit facility had no outstanding borrowings, and $4.3 million of unamortized debt issuance costs. The credit agreement for the facility contains affirmative, negative and financial covenants and events of default. The financial covenants include a debt-to-capital ratio that remains applicable for so long as the Company's debt is rated as investment grade. In the event that the Company's debt is not rated as investment grade, the debt-to-capital ratio covenant is replaced with a maximum consolidated leverage ratio covenant and a minimum consolidated interest coverage ratio covenant.
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 April 2, 2017, the 2021 Notes had an aggregate carrying value of $496.0 million, net of $1.7 million of unamortized original issue discount and $2.4 million of unamortized debt issuance costs. As of January 1, 2017, the 2021 Notes had an aggregate carrying value of $495.8 million, net of $1.7 million of unamortized original issue discount and $2.5 million of unamortized debt issuance costs. 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 April 2, 2017, the 2026 Notes had an aggregate carrying value of $525.1 million, net of $4.4 million of unamortized original issue discount and $4.7 million of unamortized debt issuance costs. As of January 1, 2017, the 2026 Notes had an aggregate carrying value of $517.8 million, net of $4.5 million of unamortized original issue discount and $4.8 million of unamortized debt issuance costs.
Prior to April 19, 2026 (three months prior to their maturity date), 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.

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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 April 2, 2017, the Company had $36.8 million recorded for these financing lease obligations, of which $1.2 million was recorded as short-term debt and $35.6 million was recorded as long-term debt. At January 1, 2017, the Company had $37.1 million recorded for these financing lease obligations, of which $1.2 million was recorded as short-term debt and $35.9 million was recorded as long-term debt. The buildings are being depreciated on a straight-line basis over the terms of the leases to their estimated residual values, which will equal the remaining financing obligation at the end of the lease term. At the end of the lease term, the remaining balances in property, plant and equipment, net and debt will be reversed against each other.

Note 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
 
April 2,
2017
 
April 3,
2016
 
(In thousands)
Number of common shares—basic
109,468

 
110,409

Effect of dilutive securities:
 
 
 
Stock options
602

 
661

Restricted stock awards
134

 
125

Number of common shares—diluted
110,204

 
111,195

Number of potentially dilutive securities excluded from calculation due to antidilutive impact
659

 
1,098

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

Note 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 accounting policies of the operating segments are the same as those described in Note 1 to the audited consolidated financial statements in the 2016 Form 10-K.

Effective October 3, 2016, the Company realigned its businesses to better organize around customer requirements, positioning the Company to grow in attractive end markets and expand share with the Company's core product offerings. Diagnostics became a standalone operating segment and the Company formed a new operating segment, Discovery & Analytical Solutions. The results reported for the three months ended April 2, 2017 reflect this new alignment of the Company's

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operating segments. Financial information in this report relating to the three months ended April 3, 2016 has been retrospectively adjusted to reflect this change to the Company's operating segments.

The principal products and services of the Company's two operating segments are:
Discovery & Analytical Solutions. Provides products and services targeted towards the environmental, industrial, food, life sciences research and laboratory services markets.
Diagnostics. Develops diagnostics, tools and applications focused on clinically-oriented customers, especially within the reproductive health, emerging market diagnostics and applied genomics markets. The Diagnostics segment serves the diagnostics market.
The Company has included the expenses for its corporate headquarters, such as legal, tax, audit, human resources, information technology, and other management and compliance costs, as well as the activity related to the mark-to-market adjustment on postretirement benefit plans, as “Corporate” below. The Company has a process to allocate and recharge expenses to the reportable segments when these costs are administered or paid by the corporate headquarters based on the extent to which the segment benefited from the expenses. These amounts have been calculated in a consistent manner and are included in the Company’s calculations of segment results to internally plan and assess the performance of each segment for all purposes, including determining the compensation of the business leaders for each of the Company’s operating segments. During the first quarter of fiscal year 2017, the Company changed the manner in which certain shared functional costs are allocated to the operating segments. Segment financial information relating to the three months ended April 3, 2016 has been retrospectively adjusted to reflect this change to the cost allocation methodology. Accordingly, for the three months ended April 3, 2016, operating income from continuing operations from the Discovery & Analytical Solutions segment decreased by $3.7 million with a corresponding increase in operating income from continuing operations of the Diagnostics segment.
Revenue and operating income (loss) from continuing operations by operating segment are shown in the table below: 
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
 
(In thousands)
Discovery & Analytical Solutions
 
 
 
Product revenue
$
215,160

 
$
219,406

Service revenue
146,600

 
137,041

Total revenue
361,760

 
356,447

Operating income from continuing operations
30,579

 
39,469

Diagnostics
 
 
 
Product revenue
118,554

 
104,947

Service revenue
33,801

 
36,622

Total revenue
152,355

 
141,569

Operating income from continuing operations
33,410

 
33,774

Corporate
 
 
 
Operating loss from continuing operations
(12,410
)
 
(12,666
)
Continuing Operations
 
 
 
Product revenue
333,714

 
324,353

Service revenue
180,401

 
173,663

Total revenue
514,115

 
498,016

Operating income from continuing operations
51,579

 
60,577

Interest and other expense, net (see Note 5)
11,596

 
11,086

Income from continuing operations before income taxes
$
39,983

 
$
49,491




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Note 11: Stockholders’ Equity
Comprehensive Income:
The components of accumulated other comprehensive loss consisted of the following:
 
April 2,
2017
 
January 1,
2017
 
(In thousands)
Foreign currency translation adjustments
$
(81,715
)
 
$
(100,923
)
Unrecognized prior service costs, net of income taxes
399

 
399

Unrealized net losses on securities, net of income taxes
(314
)
 
(337
)
Accumulated other comprehensive loss
$
(81,630
)
 
$
(100,861
)

Stock Repurchases:
On July 27, 2016, the Board of Directors (the "Board") authorized the Company to repurchase up to 8.0 million shares of common stock under a stock repurchase program (the "Repurchase Program"). The 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 three months ended April 2, 2017, the Company had no stock repurchases under the Repurchase Program. As of April 2, 2017, 8.0 million shares remained available for repurchase under the 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 three months ended April 2, 2017, the Company repurchased 62,949 shares of common stock for this purpose at an aggregate cost of $3.3 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 quarter of fiscal year 2017 and in each quarter of fiscal year 2016. At April 2, 2017, the Company has accrued $7.7 million for dividends declared on January 27, 2017 for the first quarter of fiscal year 2017 that will be payable on May 10, 2017. On April 28, 2017, the Company announced that the Board had declared a quarterly dividend of $0.07 per share for the second quarter of fiscal year 2017 that will be payable on August 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.
The following table summarizes total pre-tax compensation expense recognized related to the Company’s stock options, restricted stock, performance restricted stock units, performance units and stock awards, included in the Company’s condensed consolidated statements of operations for the three months ended April 2, 2017 and April 3, 2016:
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
 
(In thousands)
Cost of product and service revenue
$
260

 
$
190

Research and development expenses
327

 
169

Selling, general and administrative expenses
4,339

 
3,487

Total stock-based compensation expense
$
4,926

 
$
3,846


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The total income tax benefit recognized in the condensed consolidated statements of operations for stock-based compensation was $2.9 million and $1.9 million for the three months ended April 2, 2017 and April 3, 2016, respectively. Stock-based compensation costs capitalized as part of inventory was $0.3 million each as of April 2, 2017 and April 3, 2016, 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 Months Ended
 
April 2,
2017
 
April 3,
2016
Risk-free interest rate
1.9
%
 
1.4
%
Expected dividend yield
0.5
%
 
0.6
%
Expected term
5 years

 
5 years

Expected stock volatility
22.4
%
 
25.2
%
The following table summarizes stock option activity for the three months ended April 2, 2017:
 
Number
of
Shares
 
Weighted-
Average Exercise
Price
 
Weighted-Average
Remaining
Contractual Term
 
Total
Intrinsic
Value
 
(In thousands)
 
 
 
(In years)
 
(In millions)
Outstanding at January 1, 2017
2,287

 
$
37.64

 
 
 
 
Granted
446

 
53.45

 
 
 
 
Exercised
(140
)
 
33.09

 
 
 
 
Outstanding at April 2, 2017
2,593

 
$
40.60

 
4.2
 
$
36.1

Exercisable at April 2, 2017
1,611

 
$
35.48

 
3.1
 
$
30.7

The weighted-average per-share grant-date fair value of options granted during the three months ended April 2, 2017 and April 3, 2016 was $11.72 and $10.10, respectively. The total intrinsic value of options exercised during the three months ended April 2, 2017 and April 3, 2016 was $3.0 million and $1.7 million, respectively. Cash received from option exercises for the three months ended April 2, 2017 and April 3, 2016 was $4.6 million and $1.2 million, respectively.
The total compensation expense recognized related to the Company’s outstanding options was $1.2 million and $1.1 million for the three months ended April 2, 2017 and April 3, 2016, respectively.
There was $9.7 million of total unrecognized compensation cost related to nonvested stock options granted as of April 2, 2017. This cost is expected to be recognized over a weighted-average period of 2.3 years.
Restricted Stock Awards: The following table summarizes restricted stock award activity for the three months ended April 2, 2017:
 
Number of
Shares
 
Weighted-
Average
Grant-
Date Fair
Value
 
(In thousands)
 
 
Nonvested at January 1, 2017
521

 
$
46.48

Granted
204

 
53.44

Vested
(174
)
 
44.76

Forfeited
(7
)
 
47.78

Nonvested at April 2, 2017
544

 
$
49.62

The fair value of restricted stock awards vested during the three months ended April 2, 2017 and April 3, 2016 was $7.8 million and $6.9 million, respectively. The total compensation expense recognized related to the Company’s outstanding restricted stock awards was $2.5 million for the three months ended April 2, 2017, and $2.2 million for the three months ended April 3, 2016.

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As of April 2, 2017, there was $20.5 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 2.0 years.
Performance Restricted Stock Units: As part of the Company's executive compensation program, the Company granted 54,337 performance restricted stock units during the three months ended April 2, 2017, that will vest based on performance of the Company. The weighted-average per-share grant date fair value of performance restricted stock units granted during the three months ended April 2, 2017 was $52.78. During the three months ended April 2, 2017, no performance restricted stock units were forfeited. The total compensation expense recognized related to the performance restricted stock units was $0.2 million. As of April 2, 2017, there were 54,337 performance restricted stock units outstanding.
Performance Units: As part of the Company's executive compensation program, the Company granted 49,845 and 77,453 performance units during the three months ended April 2, 2017 and April 3, 2016, respectively. The weighted-average per-share grant-date fair value of performance units granted during the three months ended April 2, 2017 and April 3, 2016 was $52.69 and $42.47, respectively. During the three months ended April 2, 2017 and April 3, 2016, no performance units were forfeited. The total compensation expense recognized related to performance units was $1.1 million and $0.6 million for the three months ended April 2, 2017 and April 3, 2016, respectively. As of April 2, 2017, there were 179,620 performance units outstanding and subject to forfeiture, with a corresponding liability of $4.0 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. During the three months ended April 2, 2017 and April 3, 2016, the Company did not grant any stock awards.
Employee Stock Purchase Plan: During the three months ended April 2, 2017 and April 3, 2016, the Company did not issue shares of common stock under the Company's Employee Stock Purchase Plan. At April 2, 2017, 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 for its reporting units as of January 2, 2017, its annual impairment date for fiscal year 2017. 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, except for the Company's Informatics reporting unit which had a fair value that was less than 20% but greater than 10% more than its carrying value. The range of the long-term terminal growth rates for the Company’s reporting units was 0.0% to 3.00% for the fiscal year 2017 impairment analysis. The range for the discount rates for the reporting units was 9.0% to 13.5%. Keeping all other variables constant, a 10.0% change in any one of these input assumptions for the various reporting units, except for the Informatics reporting unit, would still allow the Company to conclude, based on the first step of the process, that there was no impairment of goodwill. As of January 2, 2017, the Company's Informatics reporting unit, which had a goodwill balance of $211.0 million, was at increased risk of an impairment charge given its ongoing weakness due to a highly competitive industry. Despite the increased risk associated with this reporting unit, the Company does not currently expect a significant change in the key estimates or assumptions driving the fair value of this reporting unit that would lead to a material impairment charge.
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-

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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 2, 2017, 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 three months of fiscal year 2017.
The changes in the carrying amount of goodwill for the three months ended April 2, 2017 were as follows:
 
Discovery & Analytical Solutions

 
Diagnostics
 
Consolidated
 
(In thousands)
Balance at January 1, 2017
$
1,303,936

 
$
944,030

 
$
2,247,966

        Foreign currency translation
5,956

 
4,312

 
10,268

        Acquisitions and other
(1,800
)
 
76,099

 
74,299

Balance at April 2, 2017
$
1,308,092

 
$
1,024,441

 
$
2,332,533

Identifiable intangible asset balances at April 2, 2017 and January 1, 2017 by category were as follows:
 
April 2,
2017
 
January 1,
2017
 
(In thousands)
Patents
$
39,906

 
$
39,901

Less: Accumulated amortization
(33,071
)
 
(32,408
)
Net patents
6,835

 
7,493

Trade names and trademarks
43,371

 
40,086

Less: Accumulated amortization
(24,990
)
 
(24,017
)
Net trade names and trademarks
18,381

 
16,069

Licenses
50,804

 
57,767

Less: Accumulated amortization
(40,279
)
 
(46,507
)
Net licenses
10,525

 
11,260

Core technology
292,252

 
304,187

Less: Accumulated amortization
(222,371
)
 
(233,720
)
Net core technology
69,881

 
70,467

Customer relationships
411,165

 
383,303

Less: Accumulated amortization
(207,297
)
 
(213,062
)
Net customer relationships
203,868

 
170,241

IPR&D
79,698

 
78,515

Less: Accumulated amortization
(4,644
)
 
(4,405
)
Net IPR&D
75,054

 
74,110

Net amortizable intangible assets
384,544

 
349,640

Non-amortizing intangible assets:
 
 
 
Trade name
70,584

 
70,584

Total
$
455,128

 
$
420,224

Total amortization expense related to definite-lived intangible assets was $17.0 million and $18.6 million for the three months ended April 2, 2017 and April 3, 2016, respectively. Estimated amortization expense related to definite-lived intangible assets for each of the next five years is $51.2 million for the remainder of fiscal year 2017, $66.5 million for fiscal year 2018, $54.9 million for fiscal year 2019, $46.7 million for fiscal year 2020, and $34.0 million for fiscal year 2021.

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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.
A summary of warranty reserve activity for the three months ended April 2, 2017 and April 3, 2016 is as follows:
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
 
(In thousands)
Balance at beginning of period
$
9,012

 
$
9,843

Provision charged to income
2,989

 
3,659

Payments
(3,725
)
 
(3,915
)
Adjustments to previously provided warranties, net
539

 
(67
)
Foreign currency translation and acquisitions
122

 
231

Balance at end of period
$
8,937

 
$
9,751


Note 15: Employee Postretirement Benefit Plans

The following table summarizes the components of net periodic pension credit for the Company’s various defined benefit employee pension and postretirement plans for the three months ended April 2, 2017 and April 3, 2016:
 
Defined Benefit
Pension Benefits
 
Postretirement
Medical Benefits
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
 
April 2,
2017
 
April 3,
2016
 
(In thousands)
Service cost
$
1,214

 
$
1,092

 
$
23

 
$
25

Interest cost
4,127

 
4,730

 
31

 
36

Expected return on plan assets
(6,500
)
 
(6,188
)
 
(279
)
 
(259
)
Amortization of prior service costs
(47
)
 
(54
)
 

 

Net periodic pension credit
$
(1,206
)
 
$
(420
)
 
$
(225
)
 
$
(198
)
During the three months ended April 2, 2017 and April 3, 2016, the Company contributed $2.0 million and $2.3 million, respectively, in the aggregate, to pension plans outside of 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 2016 Form 10-K. Such adjustments for gains and losses are primarily driven by events and 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.

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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, Swedish Krona, Japanese Yen and Singapore Dollar. The Company held forward foreign exchange contracts, designated as economic hedges, with U.S. dollar equivalent notional amounts totaling $131.7 million, $137.5 million and $140.2 million at April 2, 2017, January 1, 2017 and April 3, 2016, 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 three months ended April 2, 2017 and April 3, 2016.

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.

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 €19.7 million and combined U.S. Dollar notional amounts of $125.1 million as of April 2, 2017, combined Euro notional amounts of €58.6 million and combined Swedish Krona notional amounts of kr969.5 million as of January 1, 2017, and combined Euro notional amounts of €106.7 million as of April 3, 2016. 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 months ended April 2, 2017 and April 3, 2016. The Company paid $1.6 million and received $2.6 million during the three months ended April 2, 2017 and April 3, 2016, respectively, from the settlement of these hedges.
In connection with the issuance of the 2026 Notes during the fiscal year 2016, the Company designated the 2026 Notes to hedge its investments in certain foreign subsidiaries. Realized and unrealized translation adjustments from these hedges were included in the foreign currency translation component of accumulated other comprehensive income ("AOCI"), which offsets 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 April 2, 2017, the total notional amount of foreign currency denominated debt designated to hedge investments in foreign subsidiaries was €495.8 million. The unrealized foreign exchange loss recorded in AOCI related to the net investment hedge was $7.1 million for the three months ended April 2, 2017.

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 April 2, 2017.
The Company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during the three months ended April 2, 2017. 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

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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 April 2, 2017 and January 1, 2017 classified in one of the three classifications described above:
 
 
 
Fair Value Measurements at April 2, 2017 Using:
 
Total Carrying Value at April 2, 2017
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(In thousands)
Marketable securities
$
1,794

 
$
1,794

 
$

 
$

Foreign exchange derivative assets
1,316

 

 
1,316

 

Foreign exchange derivative liabilities
(615
)
 

 
(615
)
 

Contingent consideration
(63,978
)
 

 

 
(63,978
)
 
 
 
 
Fair Value Measurements at January 1, 2017 Using:
 
Total Carrying Value at January 1, 2017
 
Quoted Prices in
Active Markets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable 
Inputs
(Level 3)
 
(In thousands)
Marketable securities
$
1,678

 
$
1,678

 
$

 
$

Foreign exchange derivative assets
1,208

 

 
1,208

 

Foreign exchange derivative liabilities
(1,370
)
 

 
(1,370
)
 

Contingent consideration
(63,201
)
 

 

 
(63,201
)
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 April 2, 2017 and January 1, 2017, 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 Diagnostics AB. Under the terms of the acquisition, the initial purchase consideration was $32.0 million, net of cash and the Company will

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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 first quarter of fiscal year 2017, the Company updated the fair value of the contingent consideration and recorded a liability of $64.0 million as of April 2, 2017. The key assumptions used to determine the fair value of the contingent consideration as of April 2, 2017 included projected milestone dates of 2017 to 2019, discount rates ranging from 2.2% to 7.0%, conditional probabilities of success of each individual milestone ranging from 90% to 95% and cumulative probabilities of success for each individual milestone ranging from 65.8% to 95%. 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 April 2, 2017, the Company may have to pay contingent consideration related to an acquisition with open contingency period of up to $83.0 million. The expected maximum earnout period for the acquisition with an open contingency period does not exceed 2.5 years from the acquisition date, and the remaining weighted average earnout period at April 2, 2017 was 1.6 years.
A reconciliation of the beginning and ending Level 3 net liabilities for contingent consideration is as follows:
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
 
(In thousands)
Balance at beginning of period
$
(63,201
)
 
$
(57,350
)
Amounts paid and foreign currency translation
34

 
94

Change in fair value (included within selling, general and administrative expenses)
(811
)
 
(1,323
)
Balance at end of period
$
(63,978
)
 
$
(58,579
)
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 April 2, 2017 and January 1, 2017 , the Company’s senior unsecured revolving credit facility, which provides for $1.0 billion of revolving loans, had no outstanding borrowings. The interest rate on the Company’s 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 three months of fiscal year 2017.
The Company's 2021 Notes, with a face value of $500.0 million, had an aggregate carrying value of $496.0 million, net of $1.7 million of unamortized original issue discount and $2.4 million of unamortized debt issuance costs as of April 2, 2017. The 2021 Notes had an aggregate carrying value of $495.8 million, net of $1.7 million of unamortized original issue discount and $2.5 million of unamortized debt issuance costs as of January 1, 2017. The 2021 Notes had a fair value of $541.3 million and $539.2 million as of April 2, 2017 and January 1, 2017, 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 $525.1 million, net of $4.4 million of unamortized original issue discount and $4.7 million of unamortized debt issuance costs as of April 2, 2017. The 2026 Notes had a fair value of €500.9 million and €507.5 million as of April 2, 2017 and January 1, 2017, respectively. The fair value of the 2026 Notes is estimated using market quotes from brokers and is based on current rates offered for similar debt.

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The Company's financing lease obligations had an aggregate carrying value of $36.8 million and $37.1 million as of April 2, 2017 and January 1, 2017, 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 April 2, 2017, the 2021 Notes, 2026 Notes and financing lease obligations were classified as Level 2.
As of April 2, 2017, 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 $10.4 million and $9.9 million as of April 2, 2017 and January 1, 2017, 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 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 April 2, 2017 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.

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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 for the diagnostics, food, environmental, industrial, life sciences research and laboratory services markets. Through our advanced technologies and differentiated solutions, we address critical issues that help to improve lives and the world around us.
We realigned our businesses at the beginning of the fourth quarter of fiscal year 2016 to better organize around customer requirements, positioning us to grow in attractive end markets and expand share with our core product offerings. Diagnostics became a standalone operating segment and we formed a new operating segment, Discovery & Analytical Solutions. The results reported for the three months ended April 2, 2017 reflect this new alignment of our operating segments. Financial information in this report relating to the three months ended April 3, 2016 has been retrospectively adjusted to reflect the change in our operating segments.
The principal products and services of our two operating segments are:
Discovery & Analytical Solutions. Provides products and services targeted towards the environmental, industrial, food, life sciences research and laboratory services markets.
Diagnostics. Develops diagnostics, tools and applications focused on clinically-oriented customers, especially within the reproductive health, emerging market diagnostics and applied genomics markets. The Diagnostics segment serves the diagnostics market.
Overview of the First Quarter of Fiscal Year 2017
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 December 31, 2017 ("fiscal year 2017") will include 52 weeks, and the fiscal year ended January 1, 2017 ("fiscal year 2016") included 52 weeks.
Our overall revenue in the first quarter of fiscal year 2017 was $514.1 million and increased $16.1 million, or 3%, as compared to the first quarter of fiscal year 2016, reflecting an increase of $5.3 million, or 1%, in our Discovery & Analytical Solutions segment revenue and an increase of $10.8 million, or 8%, in our Diagnostics segment revenue. The increase in our Discovery & Analytical Solutions segment revenue for the first quarter of fiscal year 2017 was primarily due to an increase in our environmental and food businesses due to higher growth in our food and inorganic product offerings and an increased demand in our laboratory services business. The increase in our Diagnostics segment revenue for the first quarter of fiscal year 2017 was primarily due to strong performance of our newborn, maternal fetal health and infectious disease screening solutions in emerging markets such as China, as well as in Europe.
In our Discovery & Analytical Solutions segment, we had an increase in revenue for the first quarter of fiscal year 2017 as compared to the first quarter of fiscal year 2016. During the first quarter of fiscal year 2017, revenue increased in our environmental and food business as a result of increased government regulation of soil and water and increased focus on food safety laws and mandatory testing, particularly in the emerging markets such as China and India, as well as in Americas. We anticipate that the continued development of contaminant regulations and corresponding testing protocols will result in increased demand for efficient, analytically sensitive and information rich testing solutions. In addition, we experienced increased demand for our OneSource laboratory service business, which 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. The growth in our Discovery & Analytical Solutions segment was partially offset by unfavorable impacts from foreign currency as the U.S. dollar strengthened, as well as a decline in revenues in our academic and government offerings.
In our Diagnostics segment, we experienced growth from continued expansion in our newborn, maternal fetal health and infectious disease screening businesses. Birth rates in the United States continue to stabilize and demand for greater access to

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newborn screening in rural areas outside the United States is also increasing, as evidenced by prenatal trends we saw during the first quarter of fiscal year 2017. The growth in our Diagnostics segment was partially offset by unfavorable impacts from foreign currency as the U.S. dollar strengthened. As the rising cost of healthcare continues to be one of the critical issues facing our customers, we anticipate that the benefits of providing earlier detection of disease, which can result in a reduction of long-term health care costs as well as create better outcomes for patients, are increasingly valued and we expect to see continued growth in these markets.
Our consolidated gross margins decreased 60 basis points in the first quarter of fiscal year 2017, as compared to the first quarter of fiscal year 2016, primarily due to shift in product mix, with an increase in sales of lower gross margin product offerings, offset by benefits from our initiatives to improve our supply chain. Our consolidated operating margins decreased 213 basis points in the first quarter of fiscal year 2017, as compared to the first quarter of fiscal year 2016, primarily due to increased costs related to investments in new product development, which were partially offset by lower costs as a result of our cost containment and productivity initiatives.
We continue to believe that we are well positioned to take advantage of the spending trends in our end markets and to promote efficiencies in markets where current conditions may increase demand for certain services. Overall, we believe that our strategic focus on diagnostics and discovery and analytical solutions markets, coupled with our deep portfolio of technologies and applications, leading market positions, global scale and financial strength will provide us with a foundation for growth.

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 1, 2017 (our “2016 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 three months ended April 2, 2017.

Consolidated Results of Continuing Operations
Revenue
Revenue for the three months ended April 2, 2017 was $514.1 million, as compared to $498.0 million for the three months ended April 3, 2016, an increase of $16.1 million, or 3%, which includes an approximate 1% decrease in revenue attributable to unfavorable changes in foreign exchange rates. The analysis in the remainder of this paragraph compares segment revenue for the three months ended April 2, 2017 as compared to the three months ended April 3, 2016 and includes the effect of foreign exchange rate fluctuations, acquisitions and divestitures. Our Discovery & Analytical Solutions segment revenue was $361.8 million for the three months ended April 2, 2017, as compared to $356.4 million for the three months ended April 3, 2016, an increase of $5.3 million, or 1%, primarily due to an increase of $8.8 million from our laboratory services market revenue and an increase of $1.9 million from our environmental, food and industrial markets revenue, partially offset by a decrease of $5.3 million from our life sciences market revenue. Our Diagnostics segment revenue was $152.4 million for the three months ended April 2, 2017, as compared to $141.6 million for the three months ended April 3, 2016, an increase of $10.8 million, or 8%, due to continued expansion in our newborn, maternal fetal health and infectious disease screening solutions. 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 for each of the three months ended April 2, 2017 and April 3, 2016 that otherwise would have been recorded by the acquired businesses during each of the respective periods.

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Cost of Revenue
Cost of revenue for the three months ended April 2, 2017 was $274.5 million, as compared to $262.9 million for the three months ended April 3, 2016, an increase of $11.6 million, or 4%. As a percentage of revenue, cost of revenue increased to 53.4% for the three months ended April 2, 2017, from 52.8% for the three months ended April 3, 2016, resulting in a decrease in gross margin of 60 basis points to 46.6% for the three months ended April 2, 2017, from 47.2% for the three months ended April 3, 2016. Amortization of intangible assets decreased and was $7.0 million for the three months ended April 2, 2017, as compared to $8.2 million for the three months ended April 3, 2016. Stock-based compensation expense was $0.3 million for the three months ended April 2, 2017, as compared to $0.2 million for the three months ended April 3, 2016. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an incremental expense of $2.2 million for the three months ended April 2, 2017 as compared to $0.1 million for the three months ended April 3, 2016. In addition to the above items, the overall decrease in gross margin was primarily the result of shift in product mix, with an increase in sales of lower gross margin product offerings and lower sales of higher gross margin products, partially offset by benefits from our initiatives to improve our supply chain.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended April 2, 2017 were $145.1 million, as compared to $144.5 million for the three months ended April 3, 2016, an increase of $0.6 million, or 0.4%. As a percentage of revenue, selling, general and administrative expenses decreased and were 28.2% for the three months ended April 2, 2017, as compared to 29.0% for the three months ended April 3, 2016. Amortization of intangible assets decreased and was $10.0 million for the three months ended April 2, 2017, as compared to $10.2 million for the three months ended April 3, 2016. Stock-based compensation expense was $4.3 million for the three months ended April 2, 2017 as compared to $3.5 million for the three months ended April 3, 2016. Other purchase accounting adjustments added an incremental expense of $0.8 million for the three months ended April 2, 2017, as compared to $1.3 million for the three months ended April 3, 2016. Acquisition and divestiture-related expenses added an incremental expense of $2.6 million for the three months ended April 2, 2017 as compared to $0.4 million for the three months ended April 3, 2016. In addition to the above items, the increase in selling, general and administrative expenses was primarily the result of costs related to growth investments, which was partially offset by lower costs as a result of cost containment and productivity initiatives.
Research and Development Expenses
Research and development expenses for the three months ended April 2, 2017 were $33.3 million, as compared to $30.0 million for the three months ended April 3, 2016, an increase of $3.3 million, or 11%. As a percentage of revenue, research and development expenses increased and were 6.5% for the three months ended April 2, 2017, as compared to 6.0% for the three months ended April 3, 2016. Amortization of intangible assets was minimal for the three months ended April 2, 2017 as compared to $0.2 million for the three months ended April 3, 2016. Stock-based compensation expense was $0.3 million for the three months ended April 2, 2017 as compared to $0.2 million for the three months ended April 3, 2016. 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.

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 income from continuing operations.

We implemented a restructuring plan in the first quarter of fiscal year 2017 consisting of workforce reductions principally intended to realign resources to emphasize growth initiatives (the "Q1 2017 Plan"). We implemented a restructuring plan in the third quarter of fiscal year 2016 consisting of workforce reductions principally intended to focus resources on higher growth product lines (the "Q3 2016 Plan"). We implemented a restructuring plan in the second quarter of fiscal year 2016 consisting of workforce reductions principally intended to focus resources on higher growth end markets (the "Q2 2016 Plan"). 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 2016 Form 10-K.


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The following table summarizes the reductions in headcount, the initial restructuring or contract termination charges by operating segment, and the dates by which payments were substantially completed, or the dates by which payments are expected to be substantially completed, for restructuring actions implemented during fiscal years 2017 and 2016 in continuing operations:
 
Workforce Reductions
 
Closure of Excess Facility
 
Total
 
(Expected) Date Payments Substantially Completed by
 
Headcount Reduction
 
Discovery & Analytical Solutions
 
Diagnostics
 
Discovery & Analytical Solutions
 
Diagnostics
 
 
Severance
 
Excess Facility
 
 
 
 
 
 
 
 
(In thousands, except headcount data)
 
 
 
 
Q1 2017 Plan
90
 
$
5,000

 
$
1,631

 
$
33

 
$
33

 
$
6,697

 
Q2 FY2018
 
Q2 FY2018
Q3 2016 Plan
22
 
1,779

 
41

 

 

 
1,820

 
Q4 FY2017
 
Q2 2016 Plan
72
 
4,106

 
561

 

 

 
4,667

 
Q3 FY2017
 

We do not currently expect to incur any future charges for these plans. We expect to make payments under the Previous Plans for remaining residual lease obligations, with terms varying in length, through fiscal year 2022.

In connection with the termination of various contractual commitments, we recorded additional pre-tax charges of $2.9 million during the three months ended April 2, 2017 in the Discovery & Analytical Solutions segment.

At April 2, 2017, we had $17.4 million recorded for accrued restructuring and contract termination charges, of which $11.5 million was recorded in short-term accrued restructuring and contract termination charges, $3.0 million was recorded in long-term liabilities and $2.9 million was recorded in other reserves. At January 1, 2017, we had $10.5 million recorded for accrued restructuring and contract termination charges, of which $7.5 million was recorded in short-term accrued restructuring and contract termination charges and $3.1 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 three months ended April 2, 2017:

 
Balance at January 1, 2017
 
2017 Charges
 
2017 Changes in Estimates, Net
 
2017 Amounts Paid
 
Balance at April 2, 2017
 
(In thousands)
Severance:
 
 
 
 
 
 
 
 
 
Q1 2017 Plan
$

 
$
6,631

 
$

 
$
(383
)
 
$
6,248

Q3 2016 Plan
1,208

 

 

 
(547
)
 
661

Q2 2016 Plan
1,436

 

 

 
(446
)
 
990

 
 
 
 
 
 
 
 
 
 
Facility:
 
 
 
 
 
 
 
 
 
Q1 2017 Plan

 
66

 

 

 
66

 
 
 
 
 
 
 
 
 
 
Previous Plans
7,780

 

 

 
(1,440
)
 
6,340

Restructuring
10,424

 
6,697

 

 
(2,816
)
 
14,305

Contract Termination
117

 
2,909

 
45

 
(25
)
 
3,046

Total Restructuring and Contract Termination
$
10,541

 
$
9,606

 
$
45

 
$
(2,841
)
 
$
17,351




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Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:
 
Three Months Ended
 
April 2,
2017
 
April 3,
2016
 
(In thousands)
Interest income
$
(220
)
 
$
(110
)
Interest expense
10,864

 
9,841

Other expense, net
952

 
1,355

Total interest and other expense, net
$
11,596

 
$
11,086

Interest and other expense, net, for the three months ended April 2, 2017 was an expense of $11.6 million, as compared to an expense of $11.1 million for the three months ended April 3, 2016, an increase of $0.5 million. The increase in interest and other expense, net, for the three months ended April 2, 2017, as compared to the three months ended April 3, 2016, was primarily due to an increase in interest expense by $1.0 million due to higher interest rates and an increase in debt issuance costs. This was partially offset by a decrease in other expenses, net by $0.4 million which consisted primarily of expenses related to foreign currency transactions and translation of non-functional currency assets and liabilities. During the three months ended April 2, 2017, we recognized $0.2 million of interest expense and $0.6 million of foreign exchange loss related to acquisitions. A more complete discussion of our liquidity is set forth below under the heading “Liquidity and Capital Resources.”
Provision for Income Taxes
For the three months ended April 2, 2017, the provision for income taxes from continuing operations was $3.9 million, as compared to $7.7 million for the three months ended April 3, 2016.
The effective tax rate from continuing operations was 9.8% for the three months ended April 2, 2017, as compared to 15.7% for the three months ended April 3, 2016. The lower effective tax rate during the first three months of fiscal year 2017, as compared to the first three months of fiscal year 2016, was due to certain lower tax rate jurisdictions projected to have higher income in fiscal year 2017 as compared to fiscal year 2016 and higher tax benefits related to discrete items, which were $2.5 million in the first three months of fiscal year 2017, as compared to $0.8 million in the first three months of fiscal year 2016.

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, have presented the results of operations and related cash flows as discontinued operations. Any business deemed to be a discontinued operation prior to the adoption of ASU 2014-08, 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 of discontinued operations in the accompanying condensed consolidated balance sheets as of April 2, 2017 and January 1, 2017.
In December 2016, we entered into a Master Purchase and Sale Agreement (the “Agreement”) with Varian Medical Systems, Inc., which subsequently assigned its rights under the Agreement to Varex Imaging Corporation (“Varex”), under which we agreed to sell to Varex all of the outstanding equity interests in our wholly owned indirect subsidiaries PerkinElmer Medical Holdings, Inc. and Dexela Limited, together with certain of our assets and certain assets of our direct and indirect subsidiaries relating to our business of designing, manufacturing and marketing flat panel x-ray detectors, and related software, accessories and ancillary products, to x-ray system manufacturers (the “Medical Imaging Business”), for cash consideration of approximately $276.0 million and Varex’s assumption of specified liabilities relating to the Medical Imaging Business (collectively, the “Transaction”). The Medical Imaging Business had been reported in the Diagnostics segment. The Transaction closed on May 1, 2017. The sale of the Medical Imaging Business represents a strategic shift that will have a major effect on our operations and financial statements. Accordingly, we have classified the assets and liabilities related to the Medical Imaging Business as assets and liabilities of discontinued operations in our consolidated balance sheets and its results of operations are classified as income from discontinued operations in our consolidated statements of operations.

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The summary pre-tax operating results of the discontinued operations, were as follows for the three months ended:
 
April 2,
2017
 
April 3,
2016
 
(In thousands)
Revenue
$
36,094

 
$
40,766

Cost of revenue
24,795

 
25,755

Selling, general and administrative expenses
3,943

 
3,007

Research and development expenses
3,597

 
3,814

Income from discontinued operations before income taxes
$
3,759

 
$
8,190

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 $10.4 million and $9.9 million as of April 2, 2017 and January 1, 2017, 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 2010 remain open to examination by certain jurisdictions in which we have significant business operations, such as Finland, Germany, Italy, Netherlands, Singapore, the United Kingdom and the United States. The tax years under examination vary by jurisdiction. We regularly review our tax positions in each significant taxing jurisdiction in the process of evaluating our unrecognized tax benefits. We make adjustments to our unrecognized tax benefits when: (i) facts and circumstances regarding a tax position change, causing a change in management’s judgment regarding that tax position; (ii) a tax position is effectively settled with a tax authority; and/or (iii) the statute of limitations expires regarding a tax position.
We are subject to various claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities. Although we have established accruals for potential losses that we believe are probable and reasonably estimable, in our opinion, based on our review of the information available at this time, the total cost of resolving these contingencies at April 2, 2017 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
Discovery & Analytical Solutions
Revenue for the three months ended April 2, 2017 was $361.8 million, as compared to $356.4 million for the three months ended April 3, 2016, an increase of $5.3 million, or 1%, which includes an approximate 1% decrease in revenue attributable to unfavorable changes in foreign exchange rates. The analysis in the remainder of this paragraph compares selected revenue by product type for the three months ended April 2, 2017, as compared to the three months ended April 3, 2016, and includes the effect of foreign exchange fluctuations, acquisitions and divestitures. The increase in revenue in our Discovery & Analytical Solutions segment was a result of an increase of $8.8 million in our laboratory services market revenue and an increase in environmental, food and industrial markets revenue of $1.9 million, partially offset by a decrease in life sciences market revenue of $5.3 million. In our laboratory services market, we had higher growth in our core environmental services. In our environmental, food and industrial markets, we experienced higher growth in our food and inorganic product

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offerings as a result of increased government regulation of soil and water and increased focus on food safety laws and mandatory testing, particularly in the emerging markets such as China and India, as well as in Americas. However, in our life sciences market, we experienced a decline in government and academic revenues while industrial revenues were flat with modest order improvements.
Operating income from continuing operations for the three months ended April 2, 2017 was $30.6 million, as compared to $39.5 million for the three months ended April 3, 2016, a decrease of $8.9 million, or 23%. Amortization of intangible assets was $12.3 million for the three months ended April 2, 2017, as compared to $14.1 million for the three months ended April 3, 2016. Restructuring and contract termination charges, net, were $8.0 million for the three months ended April 2, 2017. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $0.3 million for the three months ended April 2, 2017, as compared to $0.2 million for the three months ended April 3, 2016. The Amortization of purchase accounting adjustments to record the inventory from certain acquisitions was $0.1 million for the three months ended April 3, 2016. In addition to the above items, operating income decreased for the three months ended April 2, 2017, as compared to the three months ended April 3, 2016, due to higher costs in research and development expenses and shift in product mix, with an increase in sales of lower gross margin product offerings, partially offset by lower costs as a result of our cost containment initiatives.
Diagnostics
Revenue for the three months ended April 2, 2017 was $152.4 million, as compared to $141.6 million for the three months ended April 3, 2016, an increase of $10.8 million, or 8%, which includes an approximate 1% decrease in revenue attributable to unfavorable changes in foreign exchange rates. 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 Diagnostics segment for each of the three months ended April 2, 2017 and April 3, 2016 that otherwise would have been recorded by the acquired businesses during each of the respective periods. In our diagnostics market, we experienced growth from continued expansion of our newborn, maternal fetal health and infectious disease screening solutions in key regions outside the United States, particularly in emerging markets such as China, as well as in Europe. Birth rates in the United States continue to stabilize and demand for greater access to newborn screening in rural areas outside the United States is also increasing, as evidenced by prenatal trends we saw during the three months ended April 2, 2017.
Operating income from continuing operations for the three months ended April 2, 2017 was $33.4 million, as compared to $33.8 million for the three months ended April 3, 2016, a decrease of $0.4 million, or 1%. Amortization of intangible assets increased and was $4.8 million for the three months ended April 2, 2017, as compared to $4.5 million for the three months ended April 3, 2016. Restructuring and contract termination charges, net, were $1.7 million for the three months ended April 2, 2017. Acquisition and divestiture-related expenses, contingent consideration and other costs added an incremental expense of $3.4 million for the three months ended April 2, 2017, as compared to $1.7 million for the three months ended April 3, 2016. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was $2.2 million for the three months ended April 2, 2017. Excluding the impact of the above items, operating income increased for the three months ended April 2, 2017, as compared to the three months ended April 3, 2016, primarily due to higher sales volume and strong reproductive health sales, improvement in gross margin and benefits from our initiatives to improve our supply chain.

Liquidity and Capital Resources
We require cash to pay our operating expenses, make capital expenditures, make strategic acquisitions, service our debt and other long-term liabilities, repurchase shares of our common stock and pay dividends on our common stock. Our principal sources of funds are from our operations and the capital markets, particularly the debt markets. We anticipate that our internal operations will generate sufficient cash to fund our operating expenses, capital expenditures, smaller acquisitions, interest payments on our debt and dividends on our common stock. However, we expect to use external sources to satisfy the balance of our debt when due, fund any larger acquisitions and other long-term liabilities, such as contributions to our postretirement benefit plans.
Principal factors that could affect the availability of our internally generated funds include:
changes in sales due to weakness in markets in which we sell our products and services, and
changes in our working capital requirements.
Principal factors that could affect our ability to obtain cash from external sources include:
financial covenants contained in the financial instruments controlling our borrowings that limit our total borrowing capacity,
increases in interest rates applicable to our outstanding variable rate debt,

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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 April 2, 2017, we had cash and cash equivalents of $288.3 million, of which $249.5 million was held by our non-U.S. subsidiaries, and we had $988.6 million of additional borrowing capacity available under our senior unsecured revolving credit facility. We had no other liquid investments at April 2, 2017.
We utilize a variety of tax planning and financing strategies to ensure that our worldwide cash is available in the locations in which it is needed. Of the $249.5 million of cash and cash equivalents held by our non-U.S. subsidiaries at April 2, 2017, we would incur U.S. taxes on approximately $210.4 million if transferred to the U.S. without proper planning. We expect the accumulated non-U.S. cash balances, which may not be transferred to the U.S. without incurring U.S. taxes, will remain outside of the U.S. and that we will meet U.S. liquidity needs through future cash flows, use of U.S. cash balances, external borrowings, or some combination of these sources.
On July 27, 2016, 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"). The 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 three months ended April 2, 2017, we had no stock repurchases under the Repurchase Program. As of April 2, 2017, 8.0 million shares remained available for repurchase under the Repurchase Program.
In addition, our Board has authorized us to repurchase shares of common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards and restricted stock unit awards granted pursuant to our equity incentive plans and to satisfy obligations related to the exercise of stock options made pursuant to our equity incentive plans. During the three months ended April 2, 2017, we repurchased 62,949 shares of common stock for this purpose at an aggregate cost of $3.3 million.
The repurchased shares have been reflected as additional authorized but unissued shares, with the payments reflected in common stock and capital in excess of par value. Any repurchased shares will be available for use in connection with corporate programs. If we continue to repurchase shares, the Repurchase Program will be funded using our existing financial resources, including cash and cash equivalents, and our 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 three months of fiscal year 2017, we contributed $2.0 million, in the aggregate, to our defined benefit pension plans outside of the United States, and expect to contribute an additional $4.1 million by the end of fiscal year 2017. 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.
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 2017. 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 2017. 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 2017.
Cash Flows

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Operating Activities. Net cash provided by continuing operations was $41.2 million for the three months ended April 2, 2017, as compared to $26.3 million for the three months ended April 3, 2016, an increase in cash provided by operating activities of $14.9 million. The cash provided by operating activities for the three months ended April 2, 2017 was principally a result of income from continuing operations of $36.1 million adjusted for depreciation and amortization of $24.7 million, stock-based compensation expense of $4.9 million, restructuring and contract termination charges, net of $9.7 million, and change in fair value of contingent consideration of $0.8 million. These items were partially offset by a net cash decrease in accrued expenses, other assets and liabilities and other items of $39.4 million and a net cash increase in working capital of $4.4 million. Contributing to the net cash increase in working capital for the three months ended April 2, 2017, excluding the effect of foreign exchange rate fluctuations, was a decrease in accounts receivable of $25.1 million, which was partially offset by a decrease in accounts payable of $13.9 million, and an increase in inventory of $6.8 million. The decrease in accounts receivable was a result of accounts receivable collections during the first three months of fiscal year 2017. The decrease in accounts payable was primarily a result of the timing of disbursements during the first three months of fiscal year 2017. The increase in inventory was primarily a result of expanding the amount of inventory held at sales locations within our Discovery & Analytical Solutions and Diagnostics segments to improve responsiveness to customer requirements and to facilitate the introduction of new products. Changes in accrued expenses, other assets and liabilities and other items decreased cash provided by operating activities by $39.4 million for the three months ended April 2, 2017, as compared to $47.4 million for the three months ended April 3, 2016. 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 $114.4 million for the three months ended April 2, 2017, as compared to $17.1 million for the three months ended April 3, 2016, an increase of $97.3 million. For the three months ended April 2, 2017, the net cash used in investing activities of our continuing operations was principally a result of $123.6 million of cash used for acquisitions and capital expenditures of $6.0 million. These items were partially offset by a decrease of $15.2 million in restricted cash, primarily related to the release of cash that was placed in escrow during the fourth quarter of fiscal year 2016 related to our acquisition of Tulip that was completed during the first quarter of fiscal year 2017. Net cash used for capital expenditures was $7.7 million for the three months ended April 3, 2016. The capital expenditures in each period were primarily for manufacturing and other capital equipment purchases. In addition, during the three months ended April 3, 2016, we used $10.5 million in cash for acquisitions and investments.
Financing Activities. Net cash used in financing activities was $16.0 million for the three months ended April 2, 2017, as compared to $47.5 million for the three months ended April 3, 2016, a decrease of $31.5 million. For the three months ended April 2, 2017, we repurchased 62,949 shares of our common stock pursuant to our equity incentive plans, for a total cost of $3.1 million. This compares to repurchases of 1.6 million shares of common stock, which includes 66,658 shares of our common stock pursuant to our equity incentive plans for the three months ended April 3, 2016, for a total cost of $151.2 million, including commissions. Proceeds from the issuance of common stock under stock plans was $4.6 million for the three months ended April 2, 2017 as compared to $1.2 million for the three months ended April 3, 2016. During the three months ended April 2, 2017, our debt borrowings totaled $147.0 million, which were partially offset by debt payments of $146.0 million. During the three months ended April 3, 2016, our debt payments totaled $75.0 million, which were offset by debt borrowings of $183.0 million. We paid $7.7 million and $7.8 million in dividends during the three months ended April 2, 2017 and April 3, 2016, respectively. We had net payments on other credit facilities of $0.3 million during each of the three months ended April 2, 2017 and April 3, 2016. During the three months ended April 2, 2017, we paid $1.6 million as compared to $2.6 million of cash received for settlement of forward foreign exchange contracts for the three months ended April 3, 2016. During the three months ended April 2, 2017, we made $8.9 million in payments for acquisition-related contingent consideration.
Borrowing Arrangements
Senior Unsecured Revolving Credit Facility.  Our senior unsecured revolving credit facility provides for $1.0 billion of revolving loans and has an initial maturity of August 11, 2021. As of April 2, 2017, undrawn letters of credit in the aggregate amount of $11.4 million were treated as issued and outstanding when calculating the borrowing availability under the senior unsecured revolving credit facility. As of April 2, 2017, we had $988.6 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%. As of April 2, 2017, the senior unsecured revolving credit facility had no outstanding borrowings, and $4.0 million of unamortized debt issuance costs. As of January 1, 2017, the senior unsecured revolving credit facility had no outstanding borrowings, and $4.3 million of unamortized debt issuance costs. The credit agreement for the facility contains affirmative, negative and financial covenants and events of default. The financial covenants include a debt-to-capital ratio that remains applicable for so long as our debt is rated as investment grade. In the event that our debt is not rated as

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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 April 2, 2017.
5% Senior Unsecured Notes due in 2021. On October 25, 2011, we issued $500.0 million aggregate principal amount of senior unsecured notes due in 2021 (the “2021 Notes”) in a registered public offering and received $496.9 million of net proceeds from the issuance. The 2021 Notes were issued at 99.372% of the principal amount, which resulted in a discount of $3.1 million. As of April 2, 2017, the 2021 Notes had an aggregate carrying value of $496.0 million, net of $1.7 million of unamortized original issue discount and $2.4 million of unamortized debt issuance costs. As of January 1, 2017, the 2021 Notes had an aggregate carrying value of $495.8 million, net of $1.7 million of unamortized original issue discount and $2.5 million of unamortized debt issuance costs. The 2021 Notes mature in November 2021 and bear interest at an annual rate of 5%. Interest on the 2021 Notes is payable semi-annually on May 15th and November 15th each year. Prior to August 15, 2021 (three months prior to their maturity date), we may redeem the 2021 Notes in whole or in part, at our option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2021 Notes to be redeemed, plus accrued and unpaid interest, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2021 Notes being redeemed, discounted on a semi-annual basis, at the Treasury Rate plus 45 basis points, plus accrued and unpaid interest. At any time on or after August 15, 2021 (three months prior to their maturity date), we may redeem the 2021 Notes, at our option, at a redemption price equal to 100% of the principal amount of the 2021 Notes to be redeemed plus accrued and unpaid interest. Upon a change of control (as defined in the indenture governing the 2021 Notes) and a contemporaneous downgrade of the 2021 Notes below investment grade, each holder of 2021 Notes will have the right to require us to repurchase such holder's 2021 Notes for 101% of their principal amount, plus accrued and unpaid interest.
1.875% Senior Unsecured Notes due 2026. On July 19, 2016, we issued €500.0 million aggregate principal amount of senior unsecured notes due in 2026 (the “2026 Notes”) in a registered public offering and received approximately €492.3 million of net proceeds from the issuance. The 2026 Notes were issued at 99.118% of the principal amount, which resulted in a discount of €4.4 million. The 2026 Notes mature in July 2026 and bear interest at an annual rate of 1.875%. Interest on the 2026 Notes is payable annually on July 19th each year. The proceeds from the 2026 Notes were used to pay in full the outstanding balance of our previous senior unsecured revolving credit facility. As of April 2, 2017, the 2026 Notes had an aggregate carrying value of $525.1 million, net of $4.4 million of unamortized original issue discount and $4.7 million of unamortized debt issuance costs. As of January 1, 2017, the 2026 Notes had an aggregate carrying value of $517.8 million, net of $4.5 million of unamortized original issue discount and $4.8 million of unamortized debt issuance costs.
Prior to April 19, 2026 (three months prior to their maturity date), our may redeem the 2026 Notes in whole at any time or in part from time to time, at our option, at a redemption price equal to the greater of (i) 100% of the principal amount of the 2026 Notes to be redeemed, or (ii) the sum of the present values of the remaining scheduled payments of principal and interest in respect to the 2026 Notes being redeemed, discounted on an annual basis, at the applicable Comparable Government Bond Rate (as defined in the indenture governing the 2026 Notes) plus 35 basis points; plus, in each case, accrued and unpaid interest. In addition, at any time on or after April 19, 2026 (three months prior to their maturity date), we may redeem the 2026 Notes, at our option, at a redemption price equal to 100% of the principal amount of the 2026 Notes due to be redeemed plus accrued and unpaid interest.
Upon a change of control (as defined in the indenture governing the 2026 Notes) and a contemporaneous downgrade of the 2026 Notes below investment grade, we will, in certain circumstances, make an offer to purchase the 2026 Notes at a price equal to 101% of their principal amount plus any accrued and unpaid interest.
Financing Lease Obligations. In fiscal year 2012, we entered into agreements with the lessors of certain buildings that we are currently occupying and leasing to expand those buildings. We provided a portion of the funds needed for the construction of the additions to the buildings, and as a result we were considered the owner of the buildings during the construction period. At the end of the construction period, we were not reimbursed by the lessors for all of the construction costs. We are therefore deemed to have continuing involvement and the leases qualify as financing leases under sale-leaseback accounting guidance, representing debt obligations for us and non-cash investing and financing activities. As a result, we capitalized $29.3 million in property, plant and equipment, net, representing the fair value of the buildings with a corresponding increase to debt. We have also capitalized $11.5 million in additional construction costs necessary to complete the renovations to the buildings, which were funded by the lessors, with a corresponding increase to debt. At April 2, 2017, we had $36.8 million recorded for these financing lease obligations, of which $1.2 million was recorded as short-term debt and $35.6 million was recorded as long-term debt. At January 1, 2017, we had $37.1 million recorded for these financing lease obligations, of which $1.2 million was recorded as short-term debt and $35.9 million was recorded as long-term debt. 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 the first quarter of fiscal year 2017 and in each quarter of fiscal year 2016. At April 2, 2017, we had accrued $7.7 million for dividends declared on January 27, 2017 for the first quarter of fiscal year 2017 that will be payable on May 10, 2017. On April 28, 2017, we announced that our Board had declared a quarterly dividend of $0.07 per share for the second quarter of fiscal year 2017 that will be payable on August 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 1, 2017 have changed due to new lease agreements for certain operating facilities.
During the three months ended April 2, 2017, we entered into new lease agreements for certain operating facilities. Our total rental payments to the lessors are now expected to be $38.9 million for the remainder of fiscal year 2017, $35.6 million for fiscal year 2018, $27.5 million for fiscal year 2019, $22.3 million for fiscal year 2020, $17.7 million for fiscal year 2021 and $53.4 million in the aggregate thereafter. There have not been any other material changes during the first three months of fiscal year 2017.

Effects of Recently Adopted and Issued Accounting Pronouncements

See Note 1 - Basis of Presentation in the Notes to Condensed Consolidated Financial Statements for a summary of recently adopted and issued accounting pronouncements.



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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. 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 2016 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, Swedish Krona, Japanese Yen and Singapore Dollar. We held forward foreign exchange contracts, designated as economic hedges, with U.S. dollar equivalent notional amounts totaling $131.7 million, $137.5 million and $140.2 million at April 2, 2017, January 1, 2017 and April 3, 2016, 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 three months ended April 2, 2017 and April 3, 2016.

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.

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 €19.7 million and combined U.S. Dollar notional amounts of $125.1 million as of April 2, 2017, combined Euro notional amounts of €58.6 million and combined Swedish Krona notional amounts of kr969.5 million as of January 1, 2017, and combined Euro notional amounts of €106.7 million as of April 3, 2016. 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 months ended April 2, 2017 and April 3, 2016. We paid $1.6 million and received $2.6 million during the three months ended April 2, 2017 and April 3, 2016, respectively, from the settlement of these hedges.

In connection with the issuance of the 2026 Notes during the fiscal year 2016, we designated the 2026 Notes to hedge our investments in certain foreign subsidiaries. Realized and unrealized translation adjustments from these hedges were included in the foreign currency translation component of accumulated other comprehensive income ("AOCI"), which offsets translation

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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 April 2, 2017, the total notional amount of foreign currency denominated debt designated to hedge investments in foreign subs