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Financials
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FINANCIALS
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Notes to Consolidated Financial Statements - ContinuedNote
8: Guarantor Subsidiaries
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Note 8: Guarantor Subsidiaries We present below the supplemental condensed financial information of the Company, Guarantor Subsidiaries and Non-Guarantor Subsidiaries. Please note that in this footnote, we used the equity method of accounting for our investments in subsidiaries and the Guarantor Subsidiaries’ investments in Non-Guarantor Subsidiaries. This supplemental financial information should be read in conjunction with the Consolidated Financial Statements.
We use derivative financial instruments to hedge foreign currency and interest rate exposures of underlying assets, liabilities and other obligations. We do not speculate in derivative instruments in order to profit from foreign currency exchange or interest rate fluctuations; nor do we enter into trades for which there are no underlying exposures. Instruments used as hedges must be effective at reducing the risk associated with the exposure being hedged and are designated as a hedge at the inception of the contract. Accordingly, changes in market values of hedge instruments are highly correlated with changes in market values of underlying hedged items both at the inception of the hedge and over the life of the hedge contract. We manufacture our products principally in the United States, but we generate approximately half of our revenues from sales made outside the U.S. by our international subsidiaries. Sales generated by the international subsidiaries generally are denom-inated in the subsidiary’s local currency, thereby exposing us to the risk of foreign currency fluctuations. Additionally, as a net borrower, we are exposed to the risk of fluctuating interest rates. Various foreign currency contracts are used to hedge firm commitments denominated in foreign currencies and to mitigate the impact of changes in foreign currency exchange rates on our operations. Foreign currency contracts used include forward contracts, purchased option contracts, and complex option contracts, consisting of purchased and sold options. The hedge instruments mature at various dates approximating the transaction dates. The table below summarizes the notional amounts of contracts afforded hedge accounting treatment at December 31:
When we use foreign currency contracts and the dollar strengthens against foreign currencies, the decline in the value of future foreign currency cash flows is partially offset by the recognition of gains in the value of the foreign currency contracts designated as hedges of the transactions. Conversely, when the dollar weakens, the increase in the value of future foreign currency cash flows is reduced by:
We also use foreign currency swap contracts to hedge loans between subsidiaries. At December 31, 1999, we had foreign currency swap contracts totaling $125.8 million expiring at various dates through February 2000. At December 31, 1998, the Company had foreign currency swap contracts totaling $138.8 million. As monetary assets and liabilities are marked to market and recorded in earnings, foreign currency swap contracts designated as hedges of the monetary assets and liabilities are also marked to market with the resulting gains and losses similarly recognized in earnings. Gains and losses on foreign currency swap contracts are included in “Other, net nonoperating expense” and offset losses and gains on the hedged monetary assets and liabilities. The carrying value of foreign currency swap contracts is reported in current assets and current liabilities. We occasionally use foreign currency contracts to hedge the market risk of a subsidiary’s net asset position. At December 31, 1999,and 1998, we had $22.5 million foreign currency contracts related to net asset positions. Foreign currency contracts resulted in favorable foreign currency translation adjustments of $3.9 million and $2.5 million at December 31, 1999 and 1998, respectively. Market value gains and losses on foreign currency contracts used to hedge the market risk of a subsidiary’s net asset position are recognized in “Accumulated Other Comprehensive Income” as translation gains and losses. The foreign currency translation adjustments are only recognized in “Other, net nonoperating expense” upon liquidation of the subsidiary. We use interest rate derivative contracts on certain borrowing transactions to hedge fluctuating interest rates. Interest rate derivative contracts are intended to be an integral part of borrowing transactions and, therefore, are not recognized at fair value. Interest differentials paid or received under these contracts are recognized as adjustments to the effective yield of the underlying financial instruments hedged. Interest rate derivative contracts would only be recognized at fair value if the hedged relationship were terminated. Gains or losses accumulated prior to termination of the hedged relationship are amortized as a yield adjustment over the shorter of the remaining life of the contract or the remaining period to maturity of the underlying instrument hedged. If the contract remained outstanding after termination of the hedged relationship, subsequent changes in market value of the contract would be recognized in interest expense. In March 1998, we entered into reverse interest rate swap contracts associated with the issuance of the $400.0 million Senior Notes. Specifically, we entered into $300.0 million in reverse interest rate swap agreements in which we receive an average fixed interest rate of 6.4% and pay an average floating interest rate (6.1% at December 31, 1999). In October 1997, we entered into $500.0 million in interest rate swap contracts associated with our $1,100.0 million in borrowing arising from the acquisition of Coulter. In July 1998, we terminated a $150.0 million interest rate swap agreement when the related Credit Facility debt was paid with proceeds from the sale-leaseback of real estate. The termination cost was $2.3 million. See Note 6 “Sale-leaseback of Real Estate.” At December 31, 1999, we have $350.0 million in interest rate swap agreements in which we receive an average floating interest rate (6.2% at December 31, 1999) and pay an average fixed interest rate of 6.2%. The interest rate swaps are accounted for as hedges. In October 1997, we also entered into $400.0 million in treasury rate lock agreements to hedge the U.S. Treasury Note rate underlying an expected refinancing. In March 1998, in conjunction with the issuance of the $400.0 million Senior Notes, we paid $9.2 million to settle the treasury rate lock agreements. The counterparties to our foreign currency and interest rate swap contracts are major financial institutions. Our company is exposed to credit risk in the event of non-performance of these counterparties, an event which we believe is remote. Nevertheless, we monitor our counterparty credit risk and utilize netting agreements and internal policies to mitigate this risk. The disclosed derivatives are indicative of the volume and types of instruments used throughout the year after giving consideration to the increase in volume arising from the acquisition of Coulter. The market value of all derivative instruments amounted to an unrecognized loss of $11.3 million and $22.0 million at December 31, 1999, and 1998, respectively. The components of earnings (loss) before income taxes were:
The provision (benefit) for income taxes consisted of the following:
The reconciliation of the U.S. federal statutory tax rate to the consolidated effective tax rate is as follows:
Certain income of subsidiaries operating in Puerto Rico and Ireland is taxed at substantially lower income tax rates than the U.S. federal statutory tax rate. The lower rates reduced expected income taxes by approximately $5.5 million in 1999, $6.9 million in 1998, and $5.1 million in 1997. Since April 1990, earnings from manufacturing operations in Ireland are subject to a 10% tax. Although the lower Puerto Rico income tax rate was not scheduled to expire until July 2003, the closure of the Puerto Rico manufacturing operations on October 29, 1999, (as part of our restructuring plan) shortened the period of benefit. The components of the provision (benefit) for deferred income taxes are:
Net operating loss carryforwards expire at varying dates through 2019. The tax effect of temporary differences which give rise to significant portions of deferred tax assets and liabilities consists of the following at December 31:
Based upon our historical pretax earnings, adjusted for significant items such as non-recurring charges, our management believes it is more likely than not that we will realize the benefit of the deferred tax assets existing at December 31, 1999. We believe the existing net deductible temporary differences will reverse during periods in which we generate net taxable income. Certain tax planning or other strategies will be implemented, if necessary, to supplement income from operations to fully realize recorded tax benefits. At December 31, 1999 and 1998 we recorded a valuation allowance of $59.2 million, for certain deductible temporary differences for which it is more likely than not that we will not receive future benefits. The change in the valuation allowance was $16.8 million during 1998 and was related to the acquisition of Coulter. Non-U.S. withholding taxes and U.S. taxes have not been provided on approximately $213.9 million of unremitted earnings of certain non-U.S. subsidiaries because such earnings are or will be reinvested in operations or will be offset by credits for foreign income taxes. We had been authorized, through 1997, to acquire our common stock to meet the needs of our existing stock-related employee benefit plans. Under this program, we repurchased 1.0 million shares of our common stock during 1997. We elected to discontinue this stock repurchase program in connection with the Coulter acquisition, since the Credit Agreement generally prohibits market repurchase of the Company’s stock. Therefore, in 1999 and 1998, we did not repurchase any shares under this program. Treasury shares have been reissued to satisfy our obligations under existing stock-related employee benefit plans. We expect to issue new shares to satisfy such obligations when treasury shares are no longer available. In January 1993 we created the Benefit Equity Fund (“BEF”), a trust for pre-funding future stock-related obligations of employee benefit plans. The BEF does not change these plans or the amounts of stock expected to be issued for these plans. The BEFis funded by existing shares in treasury as well as from additional shares the Company purchases on the open market over time. While shares in the BEF are not considered outstanding for the calculation of earnings per share, the participants of the Employee Stock Purchase Plan exercise the related voting rights. At December 31, 1999, 0.2 million shares remain in treasury of which 0.1 million are held by the BEF. Incentive Compensation Plans In 1988, we adopted an Incentive Compensation Plan for our officers and key employees, which provided for stock-based incentive awards based upon several factors including Company performance. This plan expired on December 31, 1990, but options outstanding on that date were not affected by such termination. Pursuant to this plan, we granted options to purchase approximately 0.8 million shares, with an expiration date of ten years from the date of grant. We have also adopted the Incentive Compensation Plan of 1990 (“1990 Plan”). This 1990 Plan reserved shares of our common stock for grants of options and restricted stock. In 1998, we adopted the 1998 Incentive Compensation Plan (“1998 Plan”), which replaced the 1990 Plan. An initial 2.0 million shares have been reserved under the 1998 Plan. Granted options typically vest over three years and expire ten years from the date of grant. Each year, commencing January 1, 1999, the number of shares available under the plan will increase by 1.5% of the number for voting purposes of common stock issued and outstanding as of the prior December 31. As of January 1, 2000, 2.8 million shares remain available for grant under this plan. The following is a summary of the option activity, including weighted average option information (in thousands, except per option information):
We continue to follow the guidance of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Consequently, compensation related to stock options granted to employees is the difference between the grant price and the fair market value of the underlying common shares at the grant date. Generally, we issue options to employees with a grant price equal to the market value of our common stock on the grant date. Accordingly, we have recognized no compensation expense on our stock option plans. We also do not recognize compensation expense on stock issued to employees under our stock purchase plan, where the discount from the market value is not material. The following represents pro forma information as if the Company recorded compensation cost using the fair value of the issued compensation instrument under Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” (the results may not be indicative of the actual effect on net earnings in future years):
We use the Black-Scholes valuation model for estimating the fair value of the options. The following represents the estimated fair value of options granted and the assumptions used for calculation:
Stock Purchase Plan Our stock purchase plan allows all U.S. employees and employees of certain subsidiaries outside the U.S. to purchase the Company’s common stock at favorable prices and favorable terms. Employee purchases are settled at six-month intervals as of June 30 and December 31. The difference between the purchase price and fair value is not material. Employees purchased 0.2 million shares during 1999 and 1.5 million shares remain available for use in the plan at December 31, 1999. Stock Appreciation Rights In 1998 we awarded stock appreciation rights to certain employees of our international subsidiaries. These rights vest over three years. Compensation expense for these rights is based on changes between the grant price and the fair market value of the rights. Post-employment Benefits Effective January 1, 1994 the Company adopted Statement of Financial Accounting Standards No. 112, “Employers’ Accounting for Post-employment Benefits” (“SFAS 112”). This statement required the Company to recognize an obligation for post-employment benefits provided to former or inactive employees, their beneficiaries and covered dependents after employment but before retirement. Additional accruals for post-employment benefits, subse- quent to adopting SFAS 112, were approximately $2.0 million in 1999, $1.7 million in 1998, and $0.9 million in 1997. Defined Benefit Pension Plans We provide pension benefits covering the majority of our employees. Consolidated pension expense was $22.0 million in 1999, $16.3 million in 1998, and $11.3 million in 1997. Pension benefits for Beckman Coulter’s domestic employees are based on age, years of service and compensation rates. Our funding policy is to provide currently for accumulated benefits, subject to federal regulations. Assets of the plans consist principally of government fixed income securities and corporate stocks and bonds. Certain of our international subsidiaries have separate pension plan arrangements, which include both funded and unfunded plans. Unfunded foreign pension obligations are recorded as a liability on our consolidated balance sheets. Pension expense for international plans was $4.7 million in 1999, $6.6 million in 1998, and $4.9 million in 1997. Healthcare and Life Insurance Benefits We presently provide certain healthcare and life insurance benefits for retired U.S. employees and their dependents. Eligibility for the plan and participant cost sharing is dependent upon the participant’s age at retirement, years of service and retirement date. The following represents required disclosures regarding benefit obligations and plan assets of the Pension and Post-Retirement Plans determined by independent actuarial valuations:
The total benefit obligation for unfunded pension plans included in the above table was $15.1 million, and $13.8 million in 1999 and 1998, respectively. The following table lists the components of the net periodic benefit cost of the plans and the weighted-average assumptions as of December 31 for the periods indicated:
An assumed 1% increase in the healthcare cost trend rate for each year would have resulted in an increase in the net periodic pension cost by $1.9 million in 1999, $1.4 million in 1998, and $0.7 million in 1997, and in the accumulated post-retirement benefit obligation by $13.1 million in 1999, and $13.7 million in 1998. The ongoing post-retirement plan had been amended to provide for the inclusion of Coulter employees and to conform benefit provisions. Employees outside the U.S. generally receive similar benefits from government-sponsored plans. Defined Contribution Benefit Plan We have a defined contribution plan available to our domestic employees. Under the plan, eligible employees may contribute a portion of their compensation. Employer contributions are primarily based on a percentage of employee contributions and vest immediately. However, certain former Coulter employees are eligible for additional employer contributions based on their age and salary levels, which become fully vested after five years of service. We contributed $13.2 million in 1999, $14.9 million in 1998, and $6.8 million in 1997. Note 14: Commitments and Contingencies Environmental Matters We are subject to federal, state, local and foreign environmental laws and regulations. Although we continue to make expenditures for environmental protection, we do not anticipate any significant expenditure in order to comply with such laws and regulations, which would have a material impact on our operations, financial position or liquidity. We believe that our operations comply in all material respects with applicable federal, state, local and foreign environmental laws and regulations. To address contingent environmental costs, we establish reserves when the costs are probable and can be reasonably estimated. We believe, based on current information and regulatory requirements (and taking third party indemnities into consid-eration), the reserves established for environmental expenditures are adequate. Based on current knowledge, to the extent that additional costs may be incurred that exceed the reserves, the amounts are not expected to have a material adverse effect on our operations, financial position, or liquidity, although no assurance can be given in this regard. In 1983, we discovered organic chemicals in the groundwater near a waste storage pond at our manufacturing facility in Porterville, California. Soil and groundwater remediation have been underway at the site since 1983. In 1989, the U.S. Environmental Protection Agency issued a final Record of Decision specifying the soil and groundwater remediation activities to be conducted at the site. We believe we have completed substantially all of the required work and have initiated discussions with the EPA regarding the criteria to be used in making this determination. SmithKline Beckman, our former controlling stockholder, agreed to indemnify us with respect to this matter for any costs incurred in excess of applicable insurance, eliminating any impact on our results of operations, financial position, or liquidity. SmithKline Beecham p.l.c., the surviving entity of the 1989 merger between SmithKline Beckman and Beecham, assumed the obligation of SmithKline Beckman in this respect. In 1987, soil and groundwater contamination was discovered on property in Irvine, California (the “property”) formerly owned by us. In 1988 The Prudential Insurance Company of America (“Prudential”), which purchased the property from us, filed suit against us in U.S. District Court in California for recovery of costs and other alleged damages with respect to the soil and groundwater contamination. In 1990 we entered into an agreement with Prudential for settlement of the lawsuit and for sharing current and future costs of investigation, remediation and other claims. Soil and groundwater remediation of the property has been in process since 1988. During 1994 the County agency overseeing the site soil remediation formally acknowledged completion of remediation of a major portion of the soil, although there remain other areas of soil contamination that may require further remediation. During 1998, two additional areas of soil requiring remediation were identified. Work on one area was completed in 1998. Work on the second area was completed in 1999. In July 1997 the California Regional Water Quality Control Board, the agency overseeing the site groundwater remediation, issued a closure letter for the upper water-bearing unit. The Company and Prudential continued to operate a groundwater treatment system throughout most of 1999. In October 1999, the Regional Water Quality Control Board agreed that the system could be shut down. Continued monitoring will be necessary for a period of time to verify that groundwater conditions remain acceptable. We believe that additional remediation costs, if any, beyond those already provided for the contamination discovered by the current investigation will not have a material adverse effect on our results of operations, financial position or liquidity. However, we give no assurance that further investigation will not reveal additional soil or groundwater contamination or result in additional costs. Litigation We are involved in a number of lawsuits, which we consider ordinary and routine in view of our size and the nature of our business. We do not believe that any ultimate liability resulting from any such lawsuits will have a material adverse effect on our results of operations, financial position, or liquidity. However, we do not give any assurance to the ultimate outcome with respect to such lawsuits. The resolution of such lawsuits could be material to our operating results for any particular period, depending upon the level of income for such period. Also, see environmental discussion above. In December 1999, Streck Laboratories, Inc. served Beckman Coulter and Coulter Corporation with a complaint filed in the United States District Court for the District of Nebraska. The complaint alleges that control products sold by Beckman Coulter and/or Coulter Corporation infringe each of five patents owned by Streck, and seeks injunctive relief, damages, attorneys’ fees and costs. We, on behalf of ourselves and on behalf of Coulter Corporation intend to answer the complaint, denying infringement and raising all appropriate affirmative defenses and/or counterclaims. At this early stage of this matter, there is no reasonable basis for us to conclude that this litigation could lead to an outcome that would have a material adverse effect on our results of operations, financial position or liquidity. Lease Commitments We lease certain facilities, equipment and automobiles. Certain of the leases provide for payment of taxes, insurance and other charges by the lessee. Rent expense was $78.1 million in 1999, $59.8 million in 1998, and $35.4 million in 1997. As of December 31, 1999, minimum annual rentals payable under non-cancelable operat- ing leases aggregate $545.3 million, which is payable $66.2 million in 2000, $58.6 million in 2001, $47.9 million in 2002, $36.4 million in 2003, $33.4 million in 2004, and $302.8 million thereafter. Other Under our dividend policy, we pay a regular quarterly dividend to our stockholders, which amounted to $18.4 million in 1999, and $17.1 million in 1998. On February 3, 2000, the Board of Directors declared a quarterly dividend of $0.16 per share, which approximates $4.6 million in total. This dividend is payable March 9, 2000 to stockholders of record on February 18, 2000. The Credit Facility restricts (but does not prohibit) our ability to pay dividends. |
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Annual
Report 1999
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©
1999 Beckman Coulter, Inc. - www.beckmancoulter.com
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