Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This annual report on Form 10-K, including the following management’s discussion and analysis, contains forward-looking information that you should read in conjunction with the consolidated financial statements and notes to consolidated financial statements that we have included elsewhere in this annual report on Form 10-K. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Words such as “believes,” “plans,” “anticipates,” “expects,” “will” and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from the plans, intentions or expectations we disclose in the forward-looking statements we make. We have included important factors above under the heading “Risk Factors” in Item 1A above that we believe could cause actual results to differ materially from the forward-looking statements we make. We are not obligated to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
Accounting Period
Our fiscal year ends on the Sunday nearest December 31. We report fiscal years under a 52/53-week format and as a result, certain fiscal years will contain 53 weeks. Each of the fiscal years ended December 29, 2024 (“fiscal year 2024”), December 31, 2023 (“fiscal year 2023”) and January 1, 2023 (“fiscal year 2022”) included 52 weeks. The fiscal year ending December 28, 2025 (“fiscal year 2025”) will include 52 weeks.
Overview of Fiscal Year 2024
During fiscal year 2024, we again delivered differentiated financial performance despite market headwinds, demonstrating the strength of our product portfolio and innovation. Our overall revenue in fiscal year 2024 increased by $4.5 million, or less than 1%, as compared to fiscal year 2023, reflecting an increase of $42.7 million, or 3%, in Diagnostics segment revenue and a decrease of $38.2 million, or 3%, in Life Sciences segment revenue. The increase in Diagnostics segment revenue was primarily driven by increased demand in our immunodiagnostics and reproductive health businesses, partially offset by a decrease in revenue from our applied genomics business. The decrease in Life Sciences segment revenue was driven by a decrease in instruments and reagents revenue due to pharmaceutical and biotechnology market headwinds, partially offset by an increase in software revenue from the timing of contract renewals and new orders.
Our consolidated gross margin decreased 16 basis points in fiscal year 2024, as compared to fiscal year 2023, primarily due to an unfavorable shift in product mix and higher product costs, partially offset by pricing actions and productivity initiatives. Our consolidated operating margin increased 166 basis points in fiscal year 2024, as compared to fiscal year 2023, due to productivity initiatives and cost containment.
Overall, we believe that our range of product offerings, leading market positions, global scale and financial strength provides us with a foundation for continued long-term growth, margin expansion and robust cash flow generation.
Consolidated Results of Operations
Fiscal Year 2024 Compared to Fiscal Year 2023
Revenue
Revenue for fiscal year 2024 was $2,755.0 million, as compared to $2,750.6 million for fiscal year 2023, an increase of $4.5 million, or less than 1%. The analysis in the remainder of this paragraph compares segment revenue for fiscal year 2024 as compared to fiscal year 2023 and includes the effect of foreign exchange rate fluctuations. Life Sciences segment revenue was $1,254.1 million for fiscal year 2024, as compared to $1,292.3 million for fiscal year 2023, a decrease of $38.2 million, or 3%, driven by a decrease of $47.2 million in instruments revenue and a decrease of $13.5 million in reagents revenue, partially offset by an increase of $22.5 million in software revenue. Diagnostics segment revenue for fiscal year 2024 was $1,500.9 million, as compared to $1,458.2 million for fiscal year 2023, an increase of $42.7 million, or 3%, due to an increase of $43.7 million in immunodiagnostics revenue and an increase of $22.6 million in reproductive health revenue, partially offset by a decrease of $23.7 million in applied genomics revenue. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination accounting rules, we did not recognize $0.8 million of revenue for each of the fiscal years 2024 and 2023 that otherwise would have been recorded by the acquired businesses during each of the respective periods.
28
Table of Contents
Cost of Revenue
Cost of revenue for fiscal year 2024 was $1,217.4 million, as compared to $1,210.9 million for fiscal year 2023, an increase of approximately $6.5 million, or 1%. As a percentage of revenue, cost of revenue increased to 44.2% in fiscal year 2024 from 44.0% in fiscal year 2023, resulting in a decrease in gross margin of approximately 16 basis points to 55.8% in fiscal year 2024 from 56.0% in fiscal year 2023 due to an unfavorable shift in product mix and higher product costs, partially offset by pricing actions and productivity initiatives. Rebranding costs were $6.2 million for fiscal year 2024. Stock compensation expense related to awards given to BioLegend employees post-acquisition added an incremental expense of $0.6 million for fiscal year 2024, as compared to $2.8 million for fiscal year 2023. Amortization of intangible assets was $144.4 million for fiscal year 2024, as compared to $147.6 million for fiscal year 2023.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for fiscal year 2024 were $994.1 million, as compared to $1,022.6 million for fiscal year 2023, a decrease of $28.5 million, or 3%. As a percentage of revenue, selling, general and administrative expenses decreased to 36.1% in fiscal year 2024 from 37.2% in fiscal year 2023. Amortization of intangible assets decreased and was $215.0 million for fiscal year 2024, as compared to $217.5 million for fiscal year 2023. Restructuring and other costs, net, decreased and were $17.5 million for fiscal year 2024, as compared to $26.6 million for fiscal year 2023. Acquisition and divestiture-related expenses, which primarily consisted of legal and integration costs, and stock compensation expense related to the awards given to BioLegend employees post-acquisition, added an incremental expense of $16.3 million for fiscal year 2024, as compared to $62.0 million for fiscal year 2023. Purchase accounting adjustments decreased expenses by $1.7 million for fiscal year 2024, which primarily consisted of a change in fair value of contingent consideration, as compared to increasing expenses by $4.3 million for fiscal year 2023. Costs for significant environmental matters also added an incremental expense of $2.5 million for fiscal year 2023. The above decreases were partially offset by an increase in asset impairments, which added an incremental expense of $22.8 million for fiscal year 2024. Significant litigation matters and settlements added an incremental expense of $7.8 million for fiscal year 2024 and were minimal for fiscal year 2023. Excluding the factors above, the net decrease in selling, general and administrative expenses was the result of productivity initiatives and cost containment.
Research and Development Expenses
Research and development expenses for fiscal year 2024 were $196.8 million, as compared to $216.6 million for fiscal year 2023, a decrease of $19.7 million, or 9%. As a percentage of revenue, research and development expenses decreased to 7.1% in fiscal year 2024 from 7.9% in fiscal year 2023. The decrease in research and development expenses was primarily driven by productivity initiatives and cost containment, as well as a decrease in stock compensation expense related to awards given to BioLegend employees post-acquisition, which added an incremental expense of $2.2 million in fiscal year 2024, as compared to $4.3 million for fiscal year 2023.
Interest and Other Expense, Net
Interest and other expense, net, consisted of the following for the fiscal years ended:
December 29,
2024 December 31,
2023
(In thousands)
Interest income $ (73,190) $ (72,131)
Interest expense 96,278 98,813
Change in fair value of investments (7,958) 33,921
Other components of net periodic pension cost 8,508 19,006
Foreign exchange losses and other expense, net 6,977 37,977
Total interest and other expense, net $ 30,615 $ 117,586
Interest income increased due to an increase in short-term investments and higher interest rates. Interest expense decreased primarily due to lower debt balance as a result of the repayment of senior unsecured notes that matured in September 2023 and September 2024. Change in fair value of investments resulted in income of $8.0 million in fiscal year 2024 as compared to expense of $33.9 million in fiscal year 2023 primarily due to the fluctuation in share price of investments in marketable securities, partially offset by fair value changes in notes receivables and other investments. Other components of net periodic pension cost decreased primarily due to increases in applicable discount rates. Foreign exchange losses and other expense, net, was lower during fiscal year 2024 as compared to the same period in the prior year primarily due to a foreign exchange loss of $24.0 million that was recognized in fiscal year 2023 related to the cash proceeds from the sale of the Business
29
Table of Contents
that were held offs hore. A more complete discussion of our liquidity is set forth below under the heading “Liquidity and Capital Resources.”
Provision for Income Taxes
The effective tax rates were 10.5% and 1.9% for fiscal years 2024 and 2023, respectively. A reconciliation of income tax expense at the U.S. federal statutory income tax rate to the recorded tax provision is as follows for the fiscal years ended:
December 29,
2024 December 31,
2023
(In thousands)
Tax at statutory rate $ 66,386 $ 38,346
Non-U.S. rate differential, net (13,332) (18,479)
U.S. taxation of multinational operations (28,879) (4,594)
State income taxes, net 2,174 (265)
Impact of rate changes — (12,795)
Prior year tax matters (9,389) 3,971
Effect of stock compensation 2,960 2,225
General business tax credits (17,634) (4,718)
Transfer pricing matters (2,391) (6,725)
Change in valuation allowance 29,781 6,772
Effect of foreign repatriations 5,329 (4,737)
Other, net (1,950) 4,472
Total $ 33,055 $ 3,473
The variation in our effective tax rate from the statutory rate for fiscal year 2024 was primarily the result of general business tax credits of $17.6 million, a prior year true-up related to the tax on foreign earnings of approximately $9.4 million, and favorability in our U.S. taxation of multinational operations of $28.9 million, which were partially offset by an increase in valuation allowance of $29.8 million. The variation in our effective tax rate from the statutory tax rate for fiscal year 2023 was primarily the result of a favorable ruling from a foreign tax authority of approximately $15.2 million, a prior year true-up related to the tax on foreign earnings of approximately $7.0 million, and a benefit for the state tax rate change on deferred taxes of $12.8 million, which were partially offset by an increase in tax reserves of approximately $33.2 million in respect of unfavorable developments with respect to an uncertain tax position with a foreign tax authority that was partially related to continuing operations.
Fiscal Year 2023 Compared to Fiscal Year 2022
For a discussion of our results of operations for fiscal year 2023 as compared to fiscal year 2022, see 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 December 31, 2023 filed with the Securities and Exchange Commission on February 27, 2024.
30
Table of Contents
Reporting Segment Results
Life Sciences
Fiscal Year 2024 Compared to Fiscal Year 2023
Revenue for fiscal year 2024 was $1,254.1 million, as compared to $1,292.3 million for fiscal year 2023, a decrease of $38.2 million, or 3% . The decrease in our Life Sciences segment revenue was driven by a decrease of $47.2 million in instruments revenue and a decrease of $13.5 million in reagents revenue, partially offset by an increase of $22.5 million in software revenue.
Segment operating income for fiscal year 2024 was $448.0 million, as compared to $489.3 million for fiscal year 2023, a decrease of $41.3 million , or 8%. Segment operating margin decreased 214 basis points in fiscal year 2024, as compared to fiscal year 2023, primarily due to lower volume and continued investments in new product development, digital capabilities and growth initiatives, partially offset by pricing actions and productivity initiatives.
Fiscal Year 2023 Compared to Fiscal Year 2022
For a discussion of our results of operations for fiscal year 2023 as compared to fiscal year 2022, see 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 December 31, 2023 filed with the Securities and Exchange Commission on February 27, 2024.
Diagnostics
Fiscal Year 2024 Compared to Fiscal Year 2023
Revenue for fiscal year 2024 was $1,500.9 million, as compared to $1,458.2 million for fiscal year 2023, an increase of $42.7 million, or 3%, which includes an approximate 1% decrease in revenue attributable to unfavorable changes in foreign exchange rates. T he increase in our Diagnostics segment revenue during fiscal year 2024 was due to an increase of $43.7 million in immunodiagnostics revenue and an increase of $22.6 million in reproductive health revenue, partially offset by a decrease of $23.7 million in applied genomics revenue.
Segment operating income for fiscal year 2024 was $372.4 million, as compared to $320.1 million for fiscal year 2023, an increase of $52.3 million, or 16%. Segment operating margin increased 286 basis points in fiscal year 2024, as compared to fiscal year 2023, primarily due to higher v olume, productivity initiatives, and cost containment.
Fiscal Year 2023 Compared to Fiscal Year 2022
For a discussion of our results of operations for fiscal year 2023 as compared to fiscal year 2022, see 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 December 31, 2023 filed with the Securities and Exchange Commission on February 27, 2024.
Discontinued Operations
On March 13, 2023, we completed the sale (the “Closing”) of certain assets and the equity interests of certain entities constituting our Applied, Food and Enterprise Services businesses (the “Business”) to PerkinElmer Topco, L.P. (formerly known as Polaris Purchaser, L.P.) (the “Purchaser”), a Delaware limited partnership owned by funds managed by affiliates of New Mountain Capital L.L.C. (the “Sponsor”), for an aggregate purchase price of up to $2.45 billion . We received approximately $2.27 billion in cash proceeds before transaction costs. At the Closing, we were entitled to an additional $75.0 million in proceeds payable in installments to commence upon our ceasing the use of the PerkinElmer brand and related trademarks and transferring them to the Purchaser (the “Brand Fee”). The discounted value of the $75.0 million was measured as $65.2 million and was included in the proceeds at Closing. During the fiscal year 2024, we received $18.8 million of the Brand Fee. We expect to receive the remaining balance of the Brand Fee i n installments in 2025. In addition, we are entitled to additional consideration of up to $150.0 million that is contingent on the exit valuation the Sponsor and its affiliated funds receive on a sale or other capital events related to the Business. The fair value of this element of consideration was determined to be $15.9 million and was included in the proceeds at Closing. During fiscal year 2024, we received approximately $138.5 million of cash from the Purchaser and recognized a loss of $19.8 million primarily related to post-closing adjustments.
The Business is reported for all pe riods as discontinued operations in our consolidated financial statements. The following table summarizes the results of discontinued operations which are presented as income from discontinued operations in our consolidated statements of operations:
31
Table of Contents
December 29, 2024 December 31, 2023 January 1, 2023
(In thousands)
Revenue $ — $ 176,324 $ 1,298,376
Cost of revenue — 125,219 859,330
Selling, general and administrative expenses — 78,613 306,032
Research and development expenses — 10,434 64,605
Operating (loss) income — (37,942) 68,409
Other (loss) income:
(Loss) gain on sale (25,448) 811,472 —
Other (expense) income, net — (49) 5,195
Total other (loss) income (25,448) 811,423 5,195
(Loss) income from discontinued operations before income taxes (25,448) 773,481 73,604
(Benefit from) provision for income tax (12,762) 259,890 17,101
(Loss) income from discontinued operations $ (12,686) $ 513,591 $ 56,503
The results of discontinued operations during fiscal year 2023 include the results of the Business through March 13, 2023. During fiscal year 2024, we recognized $25.4 million of other expense primarily due to the adjustment to the receivable related to the post-closing adjustment and divestiture-related costs in gain on sale. During fiscal year 2023 we recognized $37.1 million of divestiture-related costs incurred after the Closing in gain on sale and $36.0 million of d ivestiture-related costs incurred prior to Closing in selling, general and administrative expenses in discontinued operations.
For a discussion of our discontinued operations for fiscal year 2023 as compared to fiscal year 2022, see 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 December 31, 2023 filed with the Securities and Exchange Commission on February 27, 2024.
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 our internal operations, borrowing capacity available under our senior unsecured revolving credit facility and access to debt markets. We anticipate that our internal operations will generate sufficient cash to fund our operating expenses, capital expenditures, acquisitions, interest payments on our debt and dividends on our common stock, for the foreseeable future, including at least the next 12 mo nths. The sale of the Business generated approximately $2.27 billion in cash proceeds. We expect to continue to use these proceeds for a combination of debt retirement, opportunistic share r epurchases and continued strategic and value creating acquisitions.
Cash Flows
Fiscal Year 2024 Compared to Fiscal Year 2023
Operating Activities. Net cash provided by continuing operations was $665.0 million for fiscal year 2024, as compared to $279.4 million for fiscal year 2023, an increase of $385.6 million, primarily due to higher income from continuing operations and less cash used to fund working capital during fiscal year 2024 as compared to fiscal year 2023. The cash provided by operating activities for fiscal year 2024 was principally a result of income from continuing operations of $283.1 million, adjustments for non-cash charges aggregating to $400.2 million, including depreciation and amortization of $427.8 million, and a net cash decrease in working capital of $18.3 million. The cash provided by operating activities for fiscal year 2023 was principally a result of income from continuing operations of $179.5 million, adjustments for non-cash charges aggregating to $491.2 million, including depreciation and amortization of $431.8 million, and a net cash decrease in working capital of $391.3 million. Contingent consideration payments of $6.1 million during fiscal year 2024 as compared to $0.6 million during fiscal year 2023 were included in cash flows from operating activities.
Investing Activities. Net cash provided by the investing activities of our continuing operations was $619.3 million for fiscal year 2024, as compared to a $761.2 million net cash usage for fiscal year 2023, an increase of $1,380.5 million. During fiscal year 2024, proceeds from maturity of U.S. treasury securities were $710.0 million and proceeds from investments and notes receivables were $2.5 million. The cash provided by investing activities during fiscal year 2024 was partially offset by net
32
Table of Contents
cash used for capital expenditures of $86.6 million, as compared to $81.4 million for fiscal year 2023. During fiscal year 2024 , purchases of investments and notes receivables were $6.6 million , as compared to $6.3 million for fiscal year 2023 . During fiscal year 2023, purchases of investments in U.S. treasury securities amounted to $1.2 billion, and net cash used for acquisitions was $2.1 million, which were partially offset by proceeds from maturity of U.S. treasury securities totaling $550.0 million.
Financing Activities. Net cash used in financing activities was $1,128.2 million for fiscal year 2024, as compared to $947.1 million for fiscal year 2023, an increase of $181.1 million. During fiscal year 2024, we made net payments of $723.1 million on debts, as compared to $517.5 million during fiscal year 2023. During fiscal year 2024, we repurchased shares of our common stock for a total cost of $369.6 million, as compared to $388.9 million in fiscal year 2023. We paid $34.5 million in dividends for fiscal year 2024, as compared to $35.0 million in fiscal year 2023. We paid $8.8 million for acquisition-related contingent consideration during fiscal year 2024, as compared to $10.1 million in the prior year period. The cash used in financing activities during fiscal year 2024 was partially offset by proceeds from the issuance of common stock under our stock plans of $7.7 million during fiscal year 2024, as compared to $4.3 million in fiscal year 2023.
Fiscal Year 2023 Compared to Fiscal Year 2022
For a discussion of our results of operations for fiscal year 2023 as compared to fiscal year 2022, see 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 December 31, 2023 filed with the Securities and Exchange Commission on February 27, 2024.
Borrowing Arrangements
During fiscal year 2024, we paid in full $711.5 million of outstanding 0.850% Senior Unsecured Notes that became due in September 2024 (the “ 2024 Notes ” ). During fiscal year 2024, we received proceeds of $710.0 million upon the maturity of all our outstanding U.S. Treasury securities and utilized those proceeds to partially repay the outstanding 2024 Notes. In addition, o n January 7, 2025, our prior senior unsecured revolving credit facility was cancelled and replaced with a new senior unsecured revolving credit facility with a five-year term and a borrowing capacity of $1.5 billion available through January 7, 2030. See Note 12, Debt, in the Notes to Consolidated Financial Statements for a detailed discussion of our borrowing arrangements.
Dividends
Our Board of Directors (our “Board”) declared a regular quarterly cash dividend of $0.07 per share in each quarter of fiscal years 2024, 2023 and 2022, resulting in an annual dividend rate of $0.28 per share. At December 29, 2024, we had accrued $8.6 million for a dividend declared in October 2024 for the fourth quarter of fiscal year 2024 that was paid in February 2025. On January 23, 2025, we announced that our Board had declared a quarterly dividend of $0.07 per share for the first quarter of fiscal year 2025 that will be payable in May 2025. 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 conser ve capital resources.
Capital Expenditures
We project an increase in capital expenditures in fiscal year 2025 relative to fiscal year 2024. This planned increase reflects our strategic commitment to enhancing our digital capabilities, product innovations, and realigning our production infrastructure. We anticipate funding these initiatives through a combination of our existing cash reserves and internally generated funds from our continuing operations, ensuring a prudent approach to financial management while pursuing these critical growth and optimization strategies.
Other Potential Liquidity Considerations
At December 29, 2024, we had cash and cash equivalents of $1,163.4 million, of which $562.6 million was held by our non-U.S. subsidiaries, and we had $1.5 billion of borrowing capacity available under our senior unsecured revolving credit facility. We use a variety of cash redeployment and financing strategies to ensure that our worldwide cash is available in the locations in which it is neede d. We recorded the applicable taxes associated with the future remittance of undistributed foreign earnings previously taxed at the U.S. federal level and/or that would be claimed for a dividend received deduction if repatriated.
33
Table of Contents
In connection with the sale of the Business, we expect to receive the remaining balance related to the Brand Fee of $56.3 million as of December 29, 2024, in installments through fiscal year 2025.
On April 27, 2023, our Board authorized us to repurchase shares of common stock for an aggregate amount up to $600.0 million under a stock repurchase program (the “Repurchase Program”). On October 24, 2024, the Repurchase Program was terminated by our Board and our Board authorized us to repurchase shares of common stock for an aggregate amount up to $1.0 billion under a new stock repurchase program (the “New Repurchase Program”). No shares remain available for repurchase under the Repurchase Program due to its termination. The New Repurchase Program will expire on October 23, 2026, unless terminated earlier by our Board and may be suspended or discontinued at any time. During fiscal year 2024, we repurchased 1,820,296 shares of common stock under the Repurchase Program for an aggregate cost of $213.6 million. During fiscal year 2024, we repurchased 1,238,755 shares of common stock under the New Repurchase Program for an aggregate cost of $142.8 million. As of December 29, 2024, $857.2 million remained available for aggregate repurchases of shares under the New Repurchase Program. If we continue to repurchase shares, the New Repurchase Program will be funded using our existing financial resources, including cash and cash equivalents, and our existing senior unsecured revolving credit facility.
As of December 29, 2024, we may have to pay contingent consideration, related to acquisitions with open contingency periods, of up to $75.9 million. As of December 29, 2024, we have recorded contingent consideration obligations of $21.8 million, of which $4.3 million was recorded in accrued expenses and other current liabilities, and $17.4 million was recorded in long-term liabilities. The maximum earnout period for acquisitions with open contingency periods is 6.9 years from December 29, 2024, and the remaining weighted average expected earnout period at December 29, 2024 was 4.3 years.
We and our subsidiaries may from time to time, in our sole discretion, purchase, repay, redeem or retire any of our outstanding debt securities (including any publicly issued debt securities), in privately negotiated or open market transactions, by tender offer or otherwise, or extend or refinance any of our outstanding indebtedness.
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 and capital expenditures.
Principal factors that could affect our ability to obtain cash from external sources include:
• financial covenants contained in the financial instruments controlling our borrowings that limit our total borrowing capacity,
• increases in interest rates applicable to our outstanding variable rate debt,
• a ratings downgrade that could limit the amount we can borrow under our senior unsecured revolving credit facility and our overall access to the corporate debt market,
• increases in interest rates or credit spreads, as well as limitations on the availability of credit, that affect our ability to borrow under future potential facilities on a secured or unsecured basis,
• a decrease in the market price for our common stock, and
• volatility in the public debt and equity markets.
Effects of Recently Issued and Adopted Accounting Pronouncements
See Note 1, Nature of Operations and Accounting Policies, in the Notes to Consolidated Financial Statements for a summary of recently issued accounting pronouncements. We adopted Accounting Standards Update 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”) during fiscal year 2024 and have included the additional disclosures related to the reportable segments in Note 21, Industry Segment and Geographic Area Information, in the Notes to Consolidated Financial Statements . We are in the process of determining the impact of the recently issued accounting pronouncements that have not yet been adopted in our consolidated financial statements.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. 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.
34
Table of Contents
We believe the following critical accounting policies affect our more significant judgments and estimates used in preparation of our consolidated financial statements.
Divestitures: As part of our continuing efforts to focus on higher growth opportunities, we have disposed of or sold certain businesses. In accounting for such transactions, we apply the applicable accounting guidance under U.S. GAAP pertaining to discontinued operations and disposals of components of an entity. When the discontinued operations represented a strategic shift that will have a major effect on our operations and financial statements, we accounted for these businesses as discontinued operations. We recognize divestiture-related costs that are not part of divestiture consideration as general and administrative expense as they are incurred. These costs typically include transaction and disposal costs, such as legal, accounting, and other professional fees. The accounting for divestiture requires estimates and judgment as to the determination of the gain or loss on sale and the fair value of the different elements of consideration received. We received cash proceeds of $2.27 billion and we are entitled to two elements of additional consideration that become payable upon the resolution of certain events. First, we are entitled to proceeds of $75.0 million as consideration for our ceasing the use of the PerkinElmer brand and related trademarks and transferring them to the Purchaser (“Brand Sale”). During the fiscal year 2024, we received $18.8 million of the Brand Fee. The remaining consideration is expected to be received in installments through fiscal year 2025. We are also entitled to proceeds of up to $150.0 million that is contingent on the proceeds that the Purchaser and its affiliates receive on a subsequent sale or other capital event related to the Business (“Contingent Gain”).
The recognition of the future payment related to the Brand Sale and Contingent Gain to the gain on sale and the fair value assigned to the Contingent Gain, 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. In deriving the fair value of the Contingent Gain, we utilized a lattice model, which incorporates one or more of the following key assumptions: (1) simulated equity value from the valuation date through the expected liquidity event, (2) volatility based on guideline public companies, (3) expected term to a liquidity event, and (4) risk-free rates. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in the recognition of additional consideration which would increase the gain on sale or impairment of the receivable from the Purchaser. The fair value of contingent consideration is remeasured each period based on relevant information and changes to the fair value are included in the operating results from continuing operations for the period.
Goodwill: We periodically review the carrying value of our goodwill, based, in part, upon current estimates of fair values and our projections of anticipated future cash flows. We undertake this review (i) on an annual basis, and (ii) on a periodic basis when facts and circumstances indicate that goodwill may not be recoverable. Any impairment charge that we record reduces our earnings.
The goodwill impairment test consists of the comparison of the fair value to the carrying value of the reporting unit to determine if the carrying value exceeds the fair value. If the carrying value of the reporting unit exceeds its fair value, an impairment loss in an amount equal to that excess is recognized up to the amount of goodwill. During the fourth quarter of fiscal year 2024, we voluntarily changed our annual goodwill impairment testing date from the later of January 1 or the first day of each fiscal year to the later of November 1 or the first day of our eleventh fiscal month of each fiscal year. We changed the measurement date to more closely align the annual impairment testing date with the most current information from the budgeting and strategic planning process. We believe the change in goodwill impairment testing date does not represent a material change to our method of applying the accounting principle in light of our internal controls and requirements to assess goodwill impairment upon certain triggering events. This change was applied prospectively and therefore, we performed our annual impairment testing for our reporting units for fiscal year 2024 as of January 1, 2024 and November 1, 2024. We have identified six reporting units and consistently emplo y the income approach to estimate the current fair value when testing for impairment of goodwill. We corroborate the income approach with a market approach.
A number of significant estimates are involved in the application of the income approach to arrive at forecasted cash flows. Cash flow forecasts are based on approved business unit operating plans for the early years’ cash flows and on our long-range plan in later years. The income approach is sensitive to changes in revenue growth rates and the discount rates.
As of the November 1, 2024 impairment testing, the fair value of each of our reporting units substantially exceeded the respective carrying value of each reporting unit with the exception of the Life Sciences reporting unit. The Life Sciences reporting unit, which had a goodwill balance of $4,332.5 million at December 29, 2024, had a fair value that exceeded its carrying value by more than 10% but less than 20% as of the November 1, 2024 impairment testing date. While we believe that our estimates used in measuring fair value are reasonable, if actual results differ from the estimates and judgments used, including estimates of future revenue growth and volatility in discount rate, impairment charges may be incurred in the future.
Post-retirement benefits: We sponsor both funded and unfunded U.S. and non-U.S. defined benefit pension plans and other post-retirement benefits. Retirement and post-retirement benefit plans are a significant cost of doing business, and
35
Table of Contents
represent obligations that will be ultimately settled far in the future, and therefore are subject to estimation. Retirement and post-retirement benefit plan expenses are allocated to cost of revenue, research and development, and selling, general and administrative expenses, in our consolidated statements of operations. We immediately recognize actuarial gains and losses in operating results in the year in which the gains and losses occur. Actuarial gains and losses are measured annually as of the calendar month-end that is closest to our fiscal year end and accordingly will be recorded in the fourth quarter, unless we are required to perform an interim remeasurement.
We recognized total costs of $9.3 million in fiscal year 2024 and $20.2 million in fiscal year 2023, for our retirement and post-retirement benefit plans, which include the charge for the mark-to-market adjustment for the benefit plans. The loss related to the mark-to-market adjustment on benefit plans was $1.0 million in fiscal year 2024 and $9.9 million in fiscal year 2023. It is difficult to reliably calculate and predict whether there will be a mark-to-market adjustment in fiscal year 2025. Mark-to-market adjustments are often driven by events and circumstances beyond our control, but primarily relate to changes in interest rates and actual return on investments on plan assets. To the extent the discount rates decrease or the value of our plan assets decrease, mark-to market losses will be recognized. Conversely, to the extent the discount rates increase or the value of our plan assets increase more than expected, mark-to market gains will be recognized.
If the discount rate used to measure the pension obligations were to change as of December 29, 2024, our pension plan expenses would also change as follows:
Increase (Decrease) at
December 29, 2024
Percentage Point Change Non-U.S. U.S.
Pension plans discount rate +0.25 $(5,986) $(1,686)
-0.25 6,280 1,747