Summary of Significant Accounting Policies (Policies) | 12 Months Ended |
Sep. 27, 2014 |
Accounting Policies [Abstract] | ' |
Principles of Consolidation | ' |
Principles of Consolidation |
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company’s fiscal year ends on the last Saturday in September. Fiscal 2014, 2013 and 2012 ended on September 27, 2014, September 28, 2013 and September 29, 2012, respectively. Fiscal 2014 and 2013 were 52 week periods and fiscal 2012 was a 53 week period. |
Management's Estimates | ' |
Management’s Estimates and Uncertainties |
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make significant estimates and assumptions that affect the reported amounts 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 periods. Significant estimates and assumptions by management affect the Company’s revenue recognition for multiple element arrangements, allowance for doubtful accounts, the net realizable value of inventory, estimated fair value of cost-method equity investments, valuations, purchase price allocations and contingent consideration related to business combinations, expected future cash flows including growth rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of intangible assets and goodwill, amortization methods and periods, warranty reserves, certain accrued expenses, restructuring and other related charges, stock-based compensation, contingent liabilities, tax reserves, deferred tax rates and recoverability of the Company’s net deferred tax assets and related valuation allowances. |
Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. |
The Company is subject to a number of risks similar to those of other companies of similar size in its industry, including dependence on third-party reimbursements to support the markets of the Company’s products, early stage of development of certain products, rapid technological changes, recoverability of long-lived assets (including intangible assets and goodwill), competition, stability of world financial markets, ability to obtain regulatory approvals, changes in the regulatory environment, limited number of suppliers, customer concentration, integration of acquisitions, substantial indebtedness, government regulations, future sales or issuances of its common stock, management of international activities, protection of proprietary rights, patent and other litigation and dependence on key individuals. |
Cash Equivalents | ' |
Cash Equivalents |
Cash equivalents are highly liquid investments with insignificant interest rate risk and maturities of three months or less at the time of acquisition. At September 27, 2014 and September 28, 2013, the Company’s cash equivalents consisted of money market accounts. |
Marketable Securities | ' |
Marketable Securities |
The Company’s marketable securities are comprised of equity securities and mutual funds. The equity securities are investments in the common stock of publicly traded companies, and the mutual funds are used to fund a portion of the Company's deferred compensation plan. The equity securities are classified as available-for-sale and are recorded at fair value with the unrealized gains or losses, net of tax, within accumulated other comprehensive income (loss), which is a component of stockholders’ equity. The mutual funds are classified as trading and are recorded at fair value with unrealized gains and losses recorded in other income (expense), net in the Consolidated Statements of Operations. |
The Company periodically reviews its marketable equity securities classified as available-for-sale for other-than-temporary declines in fair value below cost basis, or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. The determination that a decline is other-than-temporary is, in part, subjective and influenced by many factors. When assessing marketable equity securities for other-than-temporary declines in value, the Company considers factors including: the significance of the decline in value compared to the cost basis; the underlying factors contributing to a decline in the price of the security; how long the market value of the investment has been less than its cost basis; any market conditions that impact liquidity; the views of external investment analysts; the financial condition and near-term prospects of the investee; any news or financial information that has been released specific to the investee; and the outlook for the overall industry in which the investee operates. The Company concluded there was not an other-than-temporary impairment at September 27, 2014. |
The following reconciles cost basis to fair market value. |
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| | Cost | | Gross Unrealized | | Gross Unrealized | | Fair Value | | | |
Gains | Losses | | | |
As of September 27, 2014 | | $ | 15.5 | | | $ | 10.2 | | | $ | (1.3 | ) | | $ | 24.4 | | | | |
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As of September 28, 2013 | | $ | 5.9 | | | $ | 12.2 | | | $ | — | | | $ | 18.1 | | | | |
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As of September 29, 2012 | | $ | 5.9 | | | $ | 0.1 | | | $ | — | | | $ | 6 | | | | |
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Concentrations of Credit Risk | ' |
Concentrations of Credit Risk |
Financial instruments that subject the Company to credit risk primarily consist of cash and cash equivalents, cost-method equity investments, and trade accounts receivable. The Company invests its cash and cash equivalents with high credit quality financial institutions. |
The Company’s customers are principally located in the United States, Europe and Asia. The Company performs ongoing credit evaluations of the financial condition of its customers and generally does not require collateral. Although the Company is directly affected by the overall financial condition of the healthcare industry, as well as global economic conditions, management does not believe significant credit risk exists as of September 27, 2014. The Company generally has not experienced any material losses related to receivables from individual customers or groups of customers in the healthcare industry. The Company maintains an allowance for doubtful accounts based on accounts past due and historical collection experience. |
There were no customers with balances greater than 10% of accounts receivable as of September 27, 2014 and September 28, 2013, or any customers that represented greater than 10% of consolidated revenues for fiscal years 2014, 2013 and 2012. |
Supplemental Cash Flow Statement Information | ' |
Supplemental Cash Flow Statement Information |
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| | Years ended | | | | | | | |
27-Sep-14 | | 28-Sep-13 | | 29-Sep-12 | | | | | | | |
Cash paid during the period for income taxes | | $ | 231.8 | | | $ | 79.9 | | | $ | 166.6 | | | | | | | | |
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Cash paid during the period for interest | | $ | 155.7 | | | $ | 192.8 | | | $ | 55 | | | | | | | | |
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Non-Cash Investing Activities: | | | | | | | | | | | | | |
Fair value of stock options assumed in the Gen-Probe acquisition | | $ | — | | | $ | — | | | $ | 2.7 | | | | | | | | |
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Non-Cash Financing Activities: | | | | | | | | | | | | | |
Fair value of contingent consideration at acquisition | | $ | — | | | $ | 0.5 | | | $ | — | | | | | | | | |
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Deferred payments for acquisitions | | $ | — | | | $ | — | | | $ | 1.7 | | | | | | | | |
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Inventories | ' |
Inventories |
Inventories are valued at the lower of cost or market on a first in, first out basis. Work-in-process and finished goods inventories consist of materials, labor and manufacturing overhead. The valuation of inventory requires management to estimate excess and obsolete inventory. The Company employs a variety of methodologies to determine the net realizable value of its inventory. Provisions for excess and obsolete inventory are primarily based on management’s estimates of forecasted sales, usage levels and expiration dates, as applicable for disposable products. A significant change in the timing or level of demand for the Company’s products compared to forecasted amounts may result in recording additional charges for excess and obsolete inventory in the future. The Company records charges for excess and obsolete inventory within cost of product revenues. |
Inventories consisted of the following: |
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| | 27-Sep-14 | | 28-Sep-13 | | | | | | | | | | | |
Raw materials | | $ | 115.6 | | | $ | 115.6 | | | | | | | | | | | | |
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Work-in-process | | 57.1 | | | 51.2 | | | | | | | | | | | | |
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Finished goods | | 157.9 | | | 122.6 | | | | | | | | | | | | |
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| | $ | 330.6 | | | $ | 289.4 | | | | | | | | | | | | |
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Property, Plant and Equipment | ' |
Property, Plant and Equipment |
Property, plant and equipment is recorded at cost less allowances for depreciation. The straight-line method of depreciation is used for all property and equipment. |
Property, plant and equipment consisted of the following as of: |
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| | 27-Sep-14 | | 28-Sep-13 | | | | | | | | | | | |
Equipment and software | | $ | 342.5 | | | $ | 318.5 | | | | | | | | | | | | |
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Equipment under customer usage agreements | | 285.2 | | | 275.7 | | | | | | | | | | | | |
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Buildings and improvements | | 176.9 | | | 171.5 | | | | | | | | | | | | |
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Leasehold improvements | | 63.2 | | | 68.1 | | | | | | | | | | | | |
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Land | | 51.6 | | | 51.6 | | | | | | | | | | | | |
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Furniture and fixtures | | 16.3 | | | 22.6 | | | | | | | | | | | | |
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| | 935.7 | | | 908 | | | | | | | | | | | | |
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Less - accumulated depreciation and amortization | | (473.8 | ) | | (416.5 | ) | | | | | | | | | | | |
| | $ | 461.9 | | | $ | 491.5 | | | | | | | | | | | | |
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Property, plant and equipment are depreciated over the following estimated useful lives: |
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Asset Classification | | Estimated Useful Life | | | | | | | | | | | | | | | | | |
Building and improvements | | 35–40 years | | | | | | | | | | | | | | | | | |
Equipment and software | | 3–10 years | | | | | | | | | | | | | | | | | |
Equipment under customer usage agreements | | 3–8 years | | | | | | | | | | | | | | | | | |
Furniture and fixtures | | 5–7 years | | | | | | | | | | | | | | | | | |
Leasehold improvements | | Shorter of the Original Term of Lease | | | | | | | | | | | | | | | | | |
or Estimated Useful Life | | | | | | | | | | | | | | | | | |
Equipment under customer usage agreements primarily consists of diagnostic instrumentation and medical imaging equipment located at customer sites but owned by the Company. Generally, the customer has the right to use it for a period of time provided they meet certain agreed to conditions. The Company recovers the cost of providing the equipment from the sale of disposables. The depreciation costs associated with equipment under customer usage agreements are charged to cost of product revenues over the estimated useful life of the equipment. The costs to maintain the equipment in the field are charged to cost of product revenue as incurred. |
Long-Lived Assets | ' |
Long-Lived Assets |
The Company reviews its long-lived assets, which includes property, plant and equipment and identifiable intangible assets (see below for discussion of intangible assets), for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360-10-35-15, Property, Plant and Equipment—Impairment or Disposal of Long-Lived Assets (ASC 360). Recoverability of these assets is evaluated by comparing the carrying value of the assets to the undiscounted cash flows estimated to be generated by those assets over their remaining economic life. If the undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are considered impaired. The impairment loss is measured by comparing the fair value of the assets to their carrying value. Fair value is determined by either a quoted market price, if any, or a value determined by a discounted cash flow technique. |
In the second quarter of fiscal 2014, the Company evaluated its MRI breast coils product line asset group, which is within its Breast Health segment, for impairment due to the Company’s expectation that it would be sold or disposed of significantly before the end of its previously estimated useful life. At this time, the undiscounted cash flows expected to be generated by this asset group over its estimated remaining useful life were not sufficient to recover its carrying value. The Company estimated the fair value of the asset group using market participant assumptions, which were based on underlying cash flow estimates, resulting in an impairment charge of $28.6 million. Pursuant to ASC 360, Property, Plant, and Equipment-Other, subtopic 10-35-28, the impairment charge was allocated to the long-lived assets, with $27.1 million to intangible assets and $1.5 million to property and equipment. The property and equipment charge was recorded to cost of product revenues and general and administrative expenses in the amounts of $0.3 million and $1.2 million, respectively. The Company believes this adjustment falls within Level 3 of the fair value hierarchy. The Company completed the sale of this product line in the fourth quarter of fiscal 2014 (see Note 4). |
In the first quarter of fiscal 2014, the Company recorded a $3.1 million impairment charge to record certain of its buildings at fair value related to the shutdown of its Hitec Imaging organic photoconductor manufacturing line (see Note 4). |
At the end of the fourth quarter of fiscal 2013, the Company decided to transition certain of its placed equipment at customer sites to its Panther instrument, and as a result, the Company recorded a charge of $6.3 million to cost of product revenues of which $3.7 million related to recording certain equipment at its fair value. |
At the end of the second quarter of fiscal 2012, the Company decided to cease manufacturing, marketing and selling its Adiana system, which was a product line within the Company’s GYN Surgical segment, determining that the product was not financially viable and would not become so in the foreseeable future. As a result, in fiscal 2012, the Company recorded charges of $19.5 million of which $6.5 million was recorded within cost of product revenues to write down certain manufacturing equipment and equipment placed at customer sites to its fair value that had no further utility. |
Business Combinations and Acquisition of Intangible Assets | ' |
Business Combinations and Acquisition of Intangible Assets |
The Company records tangible and intangible assets acquired in business combinations under the purchase method of accounting. The Company accounts for acquisitions in accordance with ASC 805, Business Combinations (ASC 805). Amounts paid for each acquisition are allocated to the assets acquired and liabilities assumed based on their fair values at the dates of acquisition. The Company allocates the purchase price in excess of the fair value of the net tangible assets acquired to identifiable intangible assets, including purchased research and development, based on detailed valuations that use certain information and assumptions provided by management. The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill. The use of alternative valuation assumptions, including estimated cash flows and discount rates, and alternative useful life assumptions could result in different purchase price allocations and intangible asset amortization expense in current and future periods. |
The Company uses the income approach to determine the fair value of developed technology and in-process research and development ("IPR&D") acquired in a business combination. This approach determines fair value by estimating the after-tax cash flows attributable to the respective asset over its useful life and then discounting these after-tax cash flows back to a present value. The Company bases its revenue assumptions on estimates of relevant market sizes, expected market growth rates, expected trends in technology and expected product introductions by competitors. Developed technology represents patented and unpatented technology and know-how. Regarding the value of the in-process projects, the Company considers, among other factors, the in-process projects’ stage of completion, the complexity of the work completed as of the acquisition date, the projected costs to complete, the contribution of core technologies and other acquired assets, the expected introduction date and the estimated useful life of the technology. The Company believes that the estimated developed technology and IPR&D amounts represent the fair value at the date of acquisition and do not exceed the amount a third-party would pay for the assets. |
The Company also uses the income approach, as described above, to determine the estimated fair value of certain other identifiable intangible assets including customer relationships, trade names and business licenses. Customer relationships represent established relationships with customers, which provide a ready channel for the sale of additional products and services. Trade names represent acquired company and product names. |
Intangible Assets and Goodwill | ' |
Intangible Assets and Goodwill |
Intangible Assets |
Intangible assets are initially recorded at fair value and stated net of accumulated amortization and impairments. The Company amortizes its intangible assets that have finite lives using either the straight-line method, or if reliably determinable, based on the pattern in which the economic benefit of the asset is expected to be utilized. Amortization is recorded over the estimated useful lives ranging from 2 to 30 years. The Company evaluates the realizability of its definite lived intangible assets whenever events or changes in circumstances or business conditions indicate that the carrying value of these assets may not be recoverable based on expectations of future undiscounted cash flows for each asset group. If the carrying value of an asset or asset group exceeds its undiscounted cash flows, the Company estimates the fair value of the assets, generally utilizing a discounted cash flow analysis based on the present value of estimated future cash flows to be generated by the assets using a risk-adjusted discount rate. To estimate the fair value of the assets, the Company uses market participant assumptions pursuant to ASC 820, Fair Value Measurements. |
Indefinite lived intangible assets, such as IPR&D assets, are required to be tested for impairment annually, or more frequently if indicators of impairment are present. The Company’s annual impairment test date is as of the first day of its fourth quarter. The Company tested its IPR&D assets utilizing the discounted cash flow ("DCF") model. |
During the fourth quarter of fiscal 2014, the Company recorded impairment charges of $5.1 million for a reduction in fair value of its remaining IPR&D assets. The reduction in fair value was primarily due to lower revenue projections of the respective products compared to those estimated at the time of the Gen-Probe acquisition. |
During the second quarter of fiscal 2014, the Company recorded impairment charges of $26.6 million and $0.5 million to developed technology and trade names, respectively, related to its MRI breast coils product line discussed above. In addition, the Company periodically re-evaluates the lives of its definite-lived intangible assets, and in the second quarter of fiscal 2014 shortened the life of certain corporate trade names, which will be phased out. |
During the fourth quarter of fiscal 2013, as a result of the Company’s conclusion that its Molecular Diagnostics reporting unit was impaired (as discussed below), the Company performed an impairment test of this reporting unit’s long-lived assets as of the first day of the fourth quarter. The impairment evaluation was based on expectations of future undiscounted cash flows compared to the carrying value of the long-lived assets. The Company’s cash flow estimates were based upon future projected net cash flows derived from the Company-wide annual planning process, which were used for the annual goodwill impairment test discussed below. Based on this analysis, the Molecular Diagnostics long-lived assets were deemed to not be impaired. The Company believes its procedures for estimating future cash flows were reasonable and consistent with market conditions at the time of estimation. |
During the third quarter of fiscal 2013, the Company determined that a certain developed technology asset was impaired and recorded a $1.7 million charge to cost of product revenues to record the asset at its estimated fair value. |
During the fourth quarter of fiscal 2012, the Company acquired certain IPR&D assets that were not part of a business acquisition. Since these assets had no alternative future use, the Company recorded IPR&D charges of $4.5 million in fiscal 2012. |
Intangible assets consisted of the following: |
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| | 27-Sep-14 | | 28-Sep-13 | | | |
Description | | Gross | | Accumulated | | Gross | | Accumulated | | | |
Carrying | Amortization | Carrying | Amortization | | | |
Value | | Value | | | | |
Developed technology | | $ | 3,951.10 | | | $ | 1,390.50 | | | $ | 4,009.00 | | | $ | 1,094.50 | | | | |
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In-process research and development | | 17.9 | | | — | | | 24 | | | — | | | | |
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Customer relationships and contracts | | 1,102.40 | | | 384.7 | | | 1,101.90 | | | 296.5 | | | | |
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Trade names | | 236.5 | | | 105.3 | | | 238.1 | | | 81.8 | | | | |
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Patents | | 14.5 | | | 8.9 | | | 13 | | | 8.5 | | | | |
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Business licenses | | 2.6 | | | 2 | | | 2.6 | | | 0.6 | | | | |
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| | $ | 5,325.00 | | | $ | 1,891.40 | | | $ | 5,388.60 | | | $ | 1,481.90 | | | | |
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In fiscal 2012, as a result of its acquisition of Gen-Probe, the Company recorded $1.57 billion of developed technology assets and $227.0 million of IPR&D assets related to six projects. In fiscal 2013, management revised its valuation analysis for a correction of projected revenues expected from certain of the development projects which increased the value of the developed technology assets to $1.7 billion and reduced the IPR&D assets to $117.0 million. The Company recorded this adjustment in fiscal 2013 and determined it was immaterial to its financial statements. |
Subsequent to the acquisition and through September 2014, the Company has received United States Food and Drug Administration ("FDA") approval for four projects with an aggregate value of $94.0 million. Amortization of these assets begins once FDA approval is received. The other projects are expected to be completed over the next three years. Given the uncertainties inherent with product development and commercial introduction, there can be no assurance that any of the Company’s product development efforts will be successful, completed on a timely basis or within budget, if at all. |
Amortization expense related to developed technology and patents is classified as a component of cost of product revenues—amortization of intangible assets. Amortization expense related to customer relationships and contracts, trade names, business licenses and non-competes is classified as a component of amortization of intangible assets within operating expenses. |
The estimated amortization expense at September 27, 2014 for each of the five succeeding fiscal years was as follows: |
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Fiscal 2015 | $ | 403.3 | | | | | | | | | | | | | | | | | |
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Fiscal 2016 | $ | 374.5 | | | | | | | | | | | | | | | | | |
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Fiscal 2017 | $ | 365.4 | | | | | | | | | | | | | | | | | |
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Fiscal 2018 | $ | 354.9 | | | | | | | | | | | | | | | | | |
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Fiscal 2019 | $ | 343.1 | | | | | | | | | | | | | | | | | |
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Goodwill |
In accordance with ASC 350, Intangibles—Goodwill and Other (ASC 350), the Company tests goodwill for impairment at the reporting unit level on an annual basis and between annual tests if events and circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. Events that could indicate impairment and trigger an interim impairment assessment include, but are not limited to, current economic and market conditions, including a decline in market capitalization, a significant adverse change in legal factors, business climate, operational performance of the business or key personnel, and an adverse action or assessment by a regulator. |
In performing the impairment test, the Company utilizes the two-step approach prescribed under ASC 350. The first step requires a comparison of the carrying value of each reporting unit to its estimated fair value. To estimate the fair value of its reporting units for Step 1, the Company primarily utilizes the income approach. The income approach is based on a DCF analysis and calculates the fair value by estimating the after-tax cash flows attributable to a reporting unit and then discounting the after-tax cash flows to a present value using a risk-adjusted discount rate. Assumptions used in the DCF require significant judgment, including judgment about appropriate discount rates and terminal values, growth rates, and the amount and timing of expected future cash flows. The forecasted cash flows are based on the Company’s most recent budget and strategic plan and for years beyond this period, the Company’s estimates are based on assumed growth rates expected as of the measurement date. The Company believes its assumptions are consistent with the plans and estimates used to manage the underlying businesses. The discount rates used are intended to reflect the risks inherent in future cash flow projections and are based on estimates of the weighted-average cost of capital (“WACC”) of market participants relative to each respective reporting unit. The market approach considers comparable market data based on multiples of revenue or earnings before interest, taxes, depreciation and amortization (“EBITDA”) and is primarily used as a corroborative analysis to the results of the DCF analysis. The Company believes its assumptions used to determine the fair value of its reporting units are reasonable. If different assumptions were used, particularly with respect to forecasted cash flows, terminal values, WACCs, or market multiples, different estimates of fair value may result and there could be the potential that an impairment charge could result. Actual operating results and the related cash flows of the reporting units could differ from the estimated operating results and related cash flows. |
If the carrying value of a reporting unit exceeds its estimated fair value, the Company is required to perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of a reporting unit’s goodwill to its carrying value. The implied fair value of goodwill is derived by performing a hypothetical purchase price allocation for each reporting unit as of the measurement date and allocating the reporting unit’s estimated fair value to its assets and liabilities. The residual amount from performing this allocation represents the implied fair value of goodwill. To the extent this amount is below the carrying value of goodwill, an impairment charge is recorded. |
The Company conducted its fiscal 2014 annual impairment test on the first day of the fourth quarter, and as noted above used DCF and market approaches to estimate the fair value of its reporting units as of June 29, 2014, and ultimately used the fair value determined by the DCF approach in making its impairment test conclusions. The Company believes it used reasonable estimates and assumptions about future revenue, cost projections, cash flows, market multiples and discount rates as of the measurement date. As a result of completing Step 1, all of the Company’s reporting units had fair values exceeding their carrying values, and as such, Step 2 of the impairment test was not required. For illustrative purposes, had the fair value of each of the reporting units that passed Step 1 been lower by 10%, all of the reporting units, except for one, would have still passed Step 1 of the goodwill impairment test. The one reporting unit that was at risk of failing Step 1 is within the Diagnostics segment and had a goodwill balance of $202.8 million at September 27, 2014. |
At September 27, 2014, the Company believes that each reporting unit, except for one within its Diagnostics segment as noted above, with goodwill aggregating $2.61 billion, was not at risk of failing Step 1 of the goodwill impairment test based on the current forecasts. |
The Company conducted its fiscal 2013 annual impairment test on the first day of the fourth quarter, and as noted above used a DCF analysis to estimate the fair value of its reporting units as of June 30, 2013. The Company believes it used reasonable estimates and assumptions about future revenue, cost projections, cash flows, market multiples and discount rates as of the measurement date. As a result of completing Step 1, all of the Company’s reporting units, except for its Molecular Diagnostics reporting unit, which is within the Company’s Diagnostics segment, had fair values exceeding their carrying values, and as such, Step 2 of the impairment test was not required for those reporting units. In connection with its company-wide annual budgeting and strategic planning process performed in the fourth quarter of fiscal 2013, the Company performed a full re-evaluation of its existing product development efforts and cost structure. As a result, the Company reduced its short term and long term revenue forecasts and determined that indicators of impairment existed in its Molecular Diagnostics reporting unit. The Molecular Diagnostics reporting unit is primarily comprised of the Company’s Aptima business acquired in the Gen-Probe acquisition and the molecular diagnostics business acquired in the Third Wave acquisition. The updated forecast of revenue and profitability, which reflected recent pricing pressures at that time, were lower than those expected at the time of the Gen-Probe acquisition. As a result, the fair value of this reporting unit was below its carrying value. The Company performed Step 2 of the impairment test, consistent with the procedures described above, and recorded a goodwill impairment charge of $1.1 billion. The basis of fair value for Molecular Diagnostics assumed the reporting unit would be purchased or sold in a taxable transaction, and the discount rate of 10% applied to the after-tax cash flows was relatively consistent with that used in the Company’s purchase accounting for the Gen-Probe acquisition. For illustrative purposes, had the fair value of Molecular Diagnostics been lower by 10%, the Company would have recorded an additional impairment charge of $195.4 million. In addition, for illustrative purposes, had the fair value of each of the reporting units that passed Step 1 been lower by 10%, all of the remaining reporting units would have still passed Step 1 of the goodwill impairment test. |
The Company conducted its fiscal 2012 annual impairment test on the first day of the fourth quarter and utilized the DCF analysis to estimate the fair value of its reporting units as of June 24, 2012. The Company believes it used reasonable estimates and assumptions about future revenue, cost projections, cash flows, market multiples and discount rates as of the measurement date. As a result of completing Step 1, all of the Company’s reporting units, except MammoSite, which is within the Company’s Breast Health segment, had fair values exceeding their carrying values, and as such, Step 2 of the impairment test was not required for those reporting units. MammoSite’s fair value declined from fiscal 2011 primarily due to a reduction in the Company’s revenue projections and long-term growth rates. The changes in MammoSite’s financial projections were a result of the continuing deterioration of the brachytherapy market, and competition from existing technologies. The Company performed the Step 2 analysis for MammoSite, consistent with the procedures described above, and recorded a $5.8 million goodwill impairment charge, resulting in no remaining goodwill for this reporting unit. For the Company’s other reporting units, if their respective fair values had been lower by 10%, each reporting unit would have still passed Step 1 of the goodwill impairment test. |
The Company believes that the procedures performed and the estimates and assumptions used in its Step 1 and Step 2 analyses for each reporting unit were reasonable and in accordance with U.S. GAAP. The estimate of fair value requires significant judgment. The impairment testing process is subjective and requires judgment at many points throughout the analysis. If these estimates or their related assumptions change in the future, the Company may be required to record impairment charges for these assets not previously recorded. |
A rollforward of goodwill activity by reportable segment from September 28, 2013 to September 27, 2014 is as follows: |
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| Diagnostics | | Breast Health | | GYN Surgical | | Skeletal Health | | Total |
Balance at September 28, 2013 | $ | 1,153.50 | | | $ | 636.4 | | | $ | 1,016.40 | | | $ | 8.2 | | | $ | 2,814.50 | |
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Disposition of a portion of a reporting unit | (0.2 | ) | | (0.7 | ) | | — | | | — | | | (0.9 | ) |
|
Tax adjustments | (0.7 | ) | | — | | | — | | | — | | | (0.7 | ) |
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Foreign currency and other | 1.5 | | | (4.0 | ) | | 0.4 | | | — | | | (2.1 | ) |
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Balance at September 27, 2014 | $ | 1,154.10 | | | $ | 631.7 | | | $ | 1,016.80 | | | $ | 8.2 | | | $ | 2,810.80 | |
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A rollforward of accumulated goodwill impairment losses by reportable segment from September 28, 2013 to September 27, 2014 is as follows: |
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| | Diagnostics | | Breast Health | | GYN Surgical | | Total | | | |
Balance at September 28, 2013 | | $ | 2,025.70 | | | $ | 348.4 | | | $ | 1,165.80 | | | $ | 3,539.90 | | | | |
| | |
Impairment charge | | — | | | — | | | — | | | — | | | | |
| | |
Balance at September 27, 2014 | | $ | 2,025.70 | | | $ | 348.4 | | | $ | 1,165.80 | | | $ | 3,539.90 | | | | |
| | |
Other Assets | ' |
Other Assets |
Other assets consisted of the following: |
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| | 27-Sep-14 | | 28-Sep-13 | | | | | | | | | | | |
Other Assets | | | | | | | | | | | | | | | |
Deferred financing costs | | $ | 44.9 | | | $ | 60.6 | | | | | | | | | | | | |
| | | | | | | | | | |
Life insurance contracts | | 22.4 | | | 33.9 | | | | | | | | | | | | |
| | | | | | | | | | |
Mutual funds | | 15.4 | | | 6.9 | | | | | | | | | | | | |
| | | | | | | | | | |
Marketable securities | | 24.4 | | | 18.1 | | | | | | | | | | | | |
| | | | | | | | | | |
Manufacturing access fees | | 14.1 | | | 16 | | | | | | | | | | | | |
| | | | | | | | | | |
Cost-method equity investments | | 5.2 | | | 12.6 | | | | | | | | | | | | |
| | | | | | | | | | |
Other | | 16.2 | | | 15.8 | | | | | | | | | | | | |
| | | | | | | | | | |
| | $ | 142.6 | | | $ | 163.9 | | | | | | | | | | | | |
| | | | | | | | | | |
Deferred financing costs are related to the Company’s Convertible Notes, Credit Agreement and Senior Notes (see Note 5 for further discussion). The Company amortizes amounts related to each debt issuance using the effective interest rate method over the period of earliest redemption or the term of such debt. Life insurance contracts were purchased in connection with the Company’s Nonqualified Deferred Compensation Plan (“DCP”) and are recorded at their cash surrender value (see Note 11 for further discussion). The manufacturing access fees are related to a manufacturing supply and purchase agreement for our Aptima HPV products and are being amortized over the term of the agreement. |
The Company’s cost-method equity investments are carried at cost as the Company owns less than 20% of the voting equity and does not have the ability to exercise significant influence over these companies. The Company regularly evaluates the carrying value of its cost-method equity investments for impairment and whether any events or circumstances are identified that would significantly harm the fair value of the investment. The primary indicators the Company utilizes to identify these events and circumstances are the investee’s ability to remain in business, such as the investee’s liquidity and rate of cash use, and the investee’s ability to secure additional funding and the value of that additional funding. In the event a decline in fair value is judged to be other-than-temporary, the Company will record an other-than-temporary impairment charge in other income (expense), net in the Consolidated Statements of Operations. During fiscal 2014 and 2013, the Company recorded other-than-temporary impairment charges of $6.9 million and $6.4 million, respectively, related to certain of its cost-method equity investments to adjust their carrying amounts to fair value. No such charges were recorded in fiscal 2012. In the third quarter of fiscal 2013, the Company sold one of its investments and recorded a gain of $2.0 million. |
Research and Software Development Costs | ' |
Research and Software Development Costs |
Costs incurred for the research and development of the Company’s products are expensed as incurred. Nonrefundable advance payments for goods or services to be received in the future by the Company for use in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are performed. |
The Company accounts for the development costs of software embedded in the Company’s products in accordance with ASC 985, Software. Costs incurred in the research, design and development of software embedded in products to be sold to customers are charged to expense until technological feasibility of the ultimate product to be sold is established. The Company’s policy is that technological feasibility is achieved when a working model, with the key features and functions of the product, is available for customer testing. Software development costs incurred after the establishment of technological feasibility and until the product is available for general release are capitalized, provided recoverability is reasonably assured. Software development costs eligible for capitalization have not been significant to date. |
Foreign Currency Translation | ' |
Foreign Currency Translation |
The financial statements of the Company’s foreign subsidiaries are translated in accordance with ASC 830, Foreign Currency Matters. The reporting currency for the Company is the U.S. dollar. With the exception of its Costa Rica subsidiary, whose functional currency is the U.S. dollar, the functional currency of the Company’s foreign subsidiaries is their local currency. Accordingly, assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each balance sheet date. Before translation, the Company re-measures foreign currency denominated assets and liabilities, including inter-company accounts receivable and payable, into the functional currency of the respective entity, resulting in unrealized gains or losses recorded in other income (expense), net in the Consolidated Statements of Operations. Revenues and expenses are translated using average exchange rates during the respective period. Foreign currency translation adjustments are accumulated as a component of other comprehensive income (loss) as a separate component of stockholders’ equity. Gains and losses arising from transactions denominated in foreign currencies are included in other income (expense), net in the Consolidated Statements of Operations and were not significant in any of the reporting periods presented. |
Accumulated Other Comprehensive Income | ' |
Accumulated Other Comprehensive Income |
Other comprehensive income includes certain transactions that have generally been reported in the statement of stockholders’ equity. The components of accumulated other comprehensive income consisted of the following: |
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| | 27-Sep-14 | | 28-Sep-13 | | | | | | | | | | | |
Foreign currency translation adjustment | | $ | (4.7 | ) | | $ | 8.6 | | | | | | | | | | | | |
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Unrealized gains on available-for-sale securities | | 8.9 | | | 12.1 | | | | | | | | | | | | |
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Minimum pension liability, net of tax of $0.2 and $0.2, respectively | | (1.6 | ) | | (0.3 | ) | | | | | | | | | | | |
| | $ | 2.6 | | | $ | 20.4 | | | | | | | | | | | | |
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Revenue Recognition | ' |
Revenue Recognition |
The Company generates revenue from the sale of its products, primarily medical imaging systems and diagnostic and surgical disposable products, and related services, which are primarily support and maintenance services on its medical imaging systems. |
The Company recognizes product revenue upon shipment provided that there is persuasive evidence of an arrangement, there are no uncertainties regarding acceptance, the sales price is fixed or determinable, no right of return exists and collection of the resulting receivable is reasonably assured. Generally, the Company’s product arrangements for capital equipment sales, primarily in its Breast Health and Skeletal Health reporting segments, are multiple-element arrangements, including services, such as installation and training, and multiple products. Based on the terms and conditions of the product arrangements, the Company believes that these services and undelivered products can be accounted for separately from the delivered product element as the Company’s delivered products have value to its customers on a stand-alone basis. Accordingly, revenue for services not yet performed at the time of product shipment are deferred and recognized as such services are performed. The relative selling price of any undelivered products is also deferred at the time of shipment and recognized as revenue when these products are delivered. There is no customer right of return in the Company’s sales agreements. |
Service revenues primarily consist of amounts recorded under service and maintenance contracts and repairs not covered under warranty, installation and training, and shipping and handling costs billed to customers. Service and maintenance contract revenues are recognized ratably over the term of the contract. Other service revenues are recognized as the services are performed. |
For revenue arrangements with multiple deliverables, the Company records revenue as separate units of accounting if the delivered items have value to the customer on a stand-alone basis, and if the arrangement includes a general right of return relative to the delivered items, the delivery or performance of the undelivered items is considered probable and substantially within the Company’s control. Some of the Company’s products have both software and non-software components that function together to deliver the product’s essential functionality. The Company determined that except for its computer-aided detection (“CAD”) products and C-View product, the software element in its other products is incidental and not within the scope of the software revenue recognition rules, ASC 985-605, Software—Revenue Recognition. The Company determined that given the significance of the software component’s functionality to its CAD and C-View systems, which are sold by its Breast Health segment, these products are within the scope of the software revenue recognition rules. The Company evaluated the appropriate revenue recognition treatment of its other hardware products, including its Dimensions digital mammography systems, which have both software and non-software components that function together to deliver the products’ essential functionality (i.e., it is a tangible product), and determined they are not within the scope of ASC 985-605. |
The Company is required to allocate revenue to its multiple element arrangements based on the relative fair value of each element’s selling price. The Company typically determines the selling price of its products based on its best estimate of selling prices (“ESP”) and services based on vendor-specific objective evidence of selling price (“VSOE”). The Company determines VSOE based on its normal pricing and discounting practices for the specific product or service when sold on a stand-alone basis. In determining VSOE, the Company’s policy requires a substantial majority of selling prices for a product or service to be within a reasonably narrow range. The Company also considers the class of customer, method of distribution, and the geographies into which its products and services are sold when determining VSOE. If VSOE cannot be established, which may occur in instances when a product or service has not been sold separately, stand-alone sales are too infrequent, or product pricing is not within a narrow range, the Company attempts to establish the selling price based on third-party evidence of selling price (“TPE”). TPE is determined based on competitor prices for similar deliverables when sold separately. When the Company cannot determine VSOE or TPE, it uses ESP in its allocation of arrangement consideration. The objective of ESP is to determine the price at which the Company would typically transact a stand-alone sale of the product or service. ESP is determined by considering a number of factors including Company pricing policies, internal costs and gross margin objectives, method of distribution, information gathered from experience in customer negotiations, market research and information, recent technological trends, competitive landscape and geographies. |
For those arrangements accounted for under the software revenue recognition rules, ASC 985-605 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on their relative VSOE of fair value. If VSOE does not exist for a delivered element, the residual method is applied in which the arrangement consideration is allocated to the undelivered elements based on their VSOE with the remaining consideration recognized as revenue for the delivered elements. For multiple-element software arrangements where VSOE of fair value of Post-Contract Customer Support (“PCS”) has been established, the Company recognizes revenue using the residual method at the time all other revenue recognition criteria have been met. |
Within its Diagnostics segment, the Company manufactures blood screening products according to demand schedules provided by its collaboration partner, Grifols, S.A. (“Grifols”). The Company’s agreement provides that it shares a portion of Grifols’s revenue from screening blood donations. Upon shipment to Grifols, the Company recognizes product revenue at an agreed upon fixed transfer price, which is not refundable, and records the related cost of products sold. Based on the terms of the Company’s collaboration agreement with Grifols, the Company’s ultimate share of the net revenue from sales to the end user in excess of the transfer price is not known until it is reported to the Company by Grifols. On a monthly basis, Grifols reports net revenue generated during the prior month and remits an additional corresponding net payment to the Company, which is recorded as revenue at that time. This payment combined with the transfer price revenues previously recognized represents the Company’s ultimate share of net revenue under the agreement. |
While the majority of its instruments are placed at customer sites, in certain instances the Company sells instruments to its clinical diagnostics customers and records sales of these instruments upon delivery and customer acceptance. For certain customers with non-standard payment terms, instrument sales are recorded based upon expected cash collection. Prior to delivery, each instrument is tested to meet the Company’s specifications and the specifications of the FDA, and is shipped fully assembled. Customer acceptance of the Company’s clinical diagnostic instrument systems requires installation and training by the Company’s technical service personnel. Installation is a standard process consisting principally of uncrating, calibrating and testing the instrumentation. The Company sells its instruments to Grifols for use in blood screening and records these instrument sales upon delivery since Grifols is responsible for the placement, maintenance and repair of the units with its customers. |
Within its Diagnostics business, and to a lesser extent, its GYN Surgical business, the Company provides its instrumentation (for example, the ThinPrep Processor, ThinPrep Imaging System, and the Panther and Tigris systems) and certain other hardware to customers without requiring them to purchase the equipment or enter into |
a lease. The Company installs the instrumentation or equipment at the customer’s site and recovers the cost of providing the instrumentation or equipment in the amount it charges for its diagnostic tests, assays and other disposables. Customers enter into a customer usage agreement and typically commit to purchasing minimum quantities of disposable products at a stated price over a defined contract term, which is typically between three and five years. Revenue is recognized over the term of the customer usage agreement as tests, assays and other disposable products are shipped or delivered, depending on the customer's arrangement. |
Accounts Receivable and Reserves | ' |
Accounts Receivable and Reserves |
The Company records reserves for doubtful accounts based upon a specific review of all outstanding invoices, known collection issues and historical experience. The Company regularly evaluates the collectability of its trade accounts receivables and performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and its assessment of the customer’s current credit worthiness. |
Accounts receivable reserve activity for fiscal 2014, 2013 and 2012 was as follows: |
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| | Balance at | | Charged to | | Write- | | Balance at | | | |
Beginning | Costs and | offs and | End of | | | |
of Period | Expenses | Payments | Period | | | |
Period Ended: | | | | | | | | | | | |
27-Sep-14 | | $ | 8.8 | | | $ | 4.4 | | | $ | (1.2 | ) | | $ | 12 | | | | |
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28-Sep-13 | | $ | 6.4 | | | $ | 4.3 | | | $ | (1.9 | ) | | $ | 8.8 | | | | |
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29-Sep-12 | | $ | 6.5 | | | $ | 3.3 | | | $ | (3.4 | ) | | $ | 6.4 | | | | |
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Cost of Service and Other Revenues | ' |
Cost of Service and Other Revenues |
Cost of service and other revenues primarily represents payroll and related costs associated with the Company’s professional services’ employees, consultants, infrastructure costs and overhead allocations, including depreciation, rent and materials consumed in providing the service. |
Stock-Based Compensation | ' |
Stock-Based Compensation |
The Company accounts for share-based payments in accordance with ASC 718, Stock Compensation (ASC 718). As such, all share-based payments to employees, including grants of stock options, restricted stock units, performance stock units and market stock units and shares issued under the Company’s employee stock purchase plan, are recognized in the Consolidated Statements of Operations based on their fair values on the date of grant. |
Net Income (Loss) Per Share | ' |
Net Income (Loss) Per Share |
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares and the dilutive effect of potential future issuances of common stock from outstanding stock options, restricted stock units and convertible debt determined by applying the treasury stock method. In accordance with ASC 718, the assumed proceeds under the treasury stock method include the average unrecognized compensation expense of in-the-money stock options and restricted stock units. This results in the assumed buyback of additional shares, thereby reducing the dilutive impact of equity awards. |
The Company applies the provisions of ASC 260, Earnings Per Share, Subsection 10-45-44, to determine the diluted weighted average shares outstanding as it relates to its convertible notes, and due to the type of debt instrument issued and its accounting policy, the Company applies the treasury stock method and not the if-converted method. The dilutive impact of the Company’s convertible notes is based on the difference between the Company’s current period average stock price and the conversion price of the convertible notes, provided there is a premium. As such, dilution related to the conversion premium on the 2010 Notes is included in the calculation of diluted weighted-average shares outstanding in fiscal 2014. |
A reconciliation of basic and diluted share amounts for fiscal 2014, 2013, and 2012 was as follows: |
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| | 27-Sep-14 | | 28-Sep-13 | | 29-Sep-12 | | | | | | | | | | |
Basic weighted average common shares outstanding | | 275,499 | | | 268,704 | | | 264,041 | | | | | | | | | | | |
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Weighted average common stock equivalents from assumed exercise of stock options and restricted stock units | | 2,368 | | | — | | | — | | | | | | | | | | | |
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Incremental shares from assumed conversion of the Convertible Notes premium | | 493 | | | — | | | — | | | | | | | | | | | |
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Diluted weighted average common shares outstanding | | 278,360 | | | 268,704 | | | 264,041 | | | | | | | | | | | |
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Weighted-average anti-dilutive shares related to: | | | | | | | | | | | | | | | | |
Outstanding stock options | | 5,033 | | | 8,445 | | | 10,491 | | | | | | | | | | | |
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Restricted stock units | | 20 | | | 1,109 | | | 1,378 | | | | | | | | | | | |
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In those reporting periods in which the Company has reported net income, anti-dilutive shares generally are comprised of those stock options that either have an exercise price above the average stock price for the period or the stock options’ combined exercise price, average unrecognized stock compensation expense and assumed tax benefits upon exercise is greater than the average stock price for the period. In those reporting periods in which the Company has a net loss, anti-dilutive shares are comprised of the impact of those number of shares that would have been dilutive had the Company had net income plus the number of common stock equivalents that would be anti-dilutive had the Company had net income. |
Product Warranties | ' |
Product Warranties |
The Company generally offers a one-year warranty for its products. The Company provides for the estimated cost of product warranties at the time product revenue is recognized. Factors that affect the Company’s warranty reserves include the number of units sold, historical and anticipated rates of warranty repairs and the cost per repair. The Company periodically assesses the adequacy of the warranty reserve and adjusts the amount as necessary. |
Product warranty activity for fiscal 2014 and 2013 was as follows: |
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| | Balance at | | Provisions | | Settlements/ | | Balance at End | | | |
Beginning of | Adjustments | of Period | | | |
Period | | | | | |
Period ended: | | | | | | | | | | | |
27-Sep-14 | | $ | 9.3 | | | $ | 7.1 | | | $ | (10.1 | ) | | $ | 6.3 | | | | |
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28-Sep-13 | | $ | 6.2 | | | $ | 12.8 | | | $ | (9.7 | ) | | $ | 9.3 | | | | |
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Advertising Costs | ' |
Advertising Costs |
Advertising costs are charged to operations as incurred. The Company does not have any direct-response advertising. Advertising costs, which include trade shows and conventions, were approximately $14.1 million, $14.1 million and $29.8 million for fiscal 2014, 2013 and 2012, respectively, and were included in selling and marketing expense in the Consolidated Statements of Operations. |
Recently Issued Accounting Pronouncements | ' |
Recently Issued Accounting Pronouncements |
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. ASU 2014-15 requires management to evaluate, at each annual or interim reporting period, whether there are conditions or events that exists that raise substantial doubt about an entity's ability to continue as a going concern within one year after the date the financial statements are issued and provide related disclosures. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and earlier application is permitted. The adoption of ASU 2014-15 is not expected to have a material effect on the Company's condensed consolidated financial statements or disclosures. |
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 660), which provides guidance for revenue recognition. This ASU is applicable to any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-09 will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled to receive in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under current U.S. GAAP. These judgments may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016, which is fiscal 2018 for the Company. The Company is currently evaluating the impact of the adoption of ASU 2014-09 on its consolidated financial position and results of operations. |
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In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist. ASU 2013-11 amends the presentation requirements of ASC 740 and requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, similar tax loss, or a tax credit carryforward. To the extent the tax benefit is not available at the reporting date under the governing tax law or if the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability and not combined with deferred tax assets. The ASU is effective for annual periods, and interim periods within those years, beginning after December 15, 2013, which is fiscal 2015 for the Company. The amendments are to be applied to all unrecognized tax benefits that exist as of the effective date and may be applied retrospectively to each prior reporting period presented. The Company is currently evaluating the impact of the adoption of ASU 2013-11 on its consolidated financial position. |
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In March 2013, FASB issued ASU 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. ASU 2013-05 addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The guidance outlines the events when cumulative translation adjustments should be released into net income. The ASU is effective for annual periods, and interim periods within those years, beginning after December 15, 2013, which is fiscal 2015 for the Company. The Company will apply the guidance prospectively to any derecognition events that may occur after the effective date and does not expect the adoption of ASU 2013-05 to have a material impact on its consolidated financial position or results of operations. |