12.

Commitments and Contingencies

Contingent Earn-Out Payments

In connection with its acquisitions, the Company has incurred the obligation to make contingent earn-out payments tied to performance criteria, principally revenue growth of the acquired businesses over a specified period. In certain circumstances, such as a change of control, a portion of these obligations may be accelerated. In addition, contractual provisions relating to these contingent earn-out obligations may include covenants to operate the acquired businesses in a manner that may not otherwise be most advantageous to the Company.

These contingent consideration arrangements are recorded as either additional purchase price or compensation expense if continuing employment is required to receive such payments. Pursuant to ASC 805, contingent consideration that is deemed to be part of the purchase price is recorded as a liability based on the estimated fair value of the consideration the Company expects to pay to the former shareholders of the acquired business as of the acquisition date. This liability is re-measured each reporting period with the changes in fair value recorded through a separate line item within the Company’s Consolidated Statements of Operations. Increases or decreases in the fair value of contingent consideration liabilities can result from accretion of the liability for the passage of time, changes in discount rates, and changes in the timing, probabilities and amount of revenue estimates. Contingent consideration arrangements from acquisitions completed prior to the adoption of ASC 805 (effective in fiscal 2010 for the Company) that are deemed to be part of the purchase price of the acquisition are not subject to the fair value measurement requirements of ASC 805 and are recorded as additional purchase price to goodwill.

In connection with the acquisition of Adiana, Inc., the Company was obligated to the former Adiana shareholders to make contingent payments tied to the achievement of milestones. The milestone payments included potential contingent payments of up to $155.0 million based on worldwide sales of the Adiana Permanent Contraception System in the first year following FDA approval and on annual incremental sales growth thereafter through December 31, 2012. FDA approval of the Adiana system occurred on July 6, 2009, and the Company began accruing contingent consideration in the fourth quarter of fiscal 2009 based on the defined percentage of worldwide sales of the product. Since this contingent consideration obligation arose from an acquisition prior to the adoption of ASC 805, the amounts accrued were recorded as additional purchase price to goodwill. The purchase agreement included an indemnification provision that provided for the reimbursement of qualifying legal expenses and liabilities associated with legal claims against the Adiana products and intellectual property, and the Company had the right to offset contingent consideration payments to the Adiana shareholders with these qualifying legal costs. The Company made payments of $16.8 million, $8.8 million and $19.7 million in fiscal 2013, 2012 and 2011, respectively, to the former Adiana shareholders, net of amounts withheld for the legal indemnification provision. No additional amounts are due to the former shareholders of Adiana. The Company had been in litigation with Conceptus regarding certain intellectual property matters related to the Adiana system, and to the extent available, the Company has been recording legal fees related to the Conceptus litigation matter as a reduction to the accrued contingent consideration payments. On October 17, 2011, the jury returned a verdict in the Conceptus litigation matter (see below) in favor of Conceptus awarding damages in the amount of $18.8 million. On April 29, 2012, the Company entered into a license and settlement agreement with Conceptus in which Conceptus agreed to forgo the $18.8 million jury award in consideration of the Company agreeing to a permanent injunction against the manufacture, sale and distribution of the Adiana product. As of the end of the second quarter of fiscal 2012, the Company decided to discontinue the manufacture, marketing and sales of the Adiana system.

The Company also had contingent consideration obligations related to its Sentinelle Medical and Interlace acquisitions. Pursuant to ASC 805, contingent consideration pertaining to Sentinelle Medical and Interlace was required to be recorded as a liability at fair value and all amounts pertaining to these obligations had been paid as of September 28, 2013, excluding certain amounts withheld for legal indemnification provisions. Contingent consideration pertaining to TCT and Healthcome was contingent upon future employment and was being recorded as compensation expense as it is earned. As of September 28, 2013, the Company had accrued $31.7 million and $3.4 million, respectively, for these obligations. For additional information pertaining to the Interlace, TCT and Healthcome acquisitions, contingent consideration terms and the assumptions used to fair value contingent consideration, refer to Note 3.

A summary of amounts recorded to the Consolidated Statement of Operations is as follows:


Statement of Operations Line Item – Fiscal 2013	Interlace		TCT		Total
Contingent consideration—compensation expense	$	—	$	80,010	$	80,010
Contingent consideration—fair value adjustments		11,310		—		11,310

	$	11,310	$	80,010	$	91,320


Statement of Operations Line Item – Fiscal 2012	Sentinelle Medical			Interlace		TCT		Healthcome		Total
Contingent consideration—compensation expense	$	—		$	—	$	75,459	$	5,572	$	81,031
Contingent consideration—fair value adjustments		(3,364	)		41,830		—		—		38,466

	$	(3,364	)	$	41,830	$	75,459	$	5,572	$	119,497


Statement of Operations Line Item – Fiscal 2011	Sentinelle Medical			Interlace		TCT		Healthcome		Total
Contingent consideration—compensation expense	$	—		$	2,102	$	17,581	$	319	$	20,002
Contingent consideration—fair value adjustments		(14,328	)		6,312		—		—		(8,016	)

	$	(14,328	)	$	8,414	$	17,581	$	319	$	11,986

Finance Lease Obligations

The Company has two non-cancelable lease agreements for buildings that are primarily used for manufacturing. The Company was responsible for a significant portion of the construction costs, and in accordance with ASC 840, Leases, Subsection 40-15-5, the Company was deemed to be the owner of the respective buildings during the construction period. The Company has recorded the fair market value of the buildings and land aggregating $28.3 million within property and equipment on its Consolidated Balance Sheets. At September 28, 2013, the Company has recorded $2.8 million in accrued expenses and $33.5 million in other long-term liabilities related to these obligations. The term of the leases is for a period of approximately 10 and 12 years, respectively, with the option to extend for two consecutive 5-year terms. At the completion of the construction period, the Company reviewed the lease for potential sale-leaseback treatment in accordance with ASC 840, Subsection 40, Sale-Leaseback Transactions. Based on its analysis, the Company determined that the lease did not qualify for sale-leaseback treatment. Therefore, the building, leasehold improvements and associated liabilities remain on the Company’s financial statements throughout the lease term, and the building and leasehold improvements are being depreciated on a straight line basis over their estimated useful lives of 35 years.

Future minimum lease payments, including principal and interest, under these leases were as follows at September 28, 2013:


Fiscal 2014	$	2,822
Fiscal 2015		2,883
Fiscal 2016		3,054
Fiscal 2017		3,119
Fiscal 2018		2,925
Thereafter		300

Total minimum payments		15,103
Less-amount representing interest		(3,607	)

Total	$	11,496

Non-cancelable Purchase and Royalty Commitments

The Company has certain non-cancelable purchase obligations primarily related to inventory purchases and Diagnostics instruments, primarily the Tigris and Panther systems, and to a lesser extent other operating expense commitments. These obligations are not recorded in the Consolidated Balance Sheet. For reasons of quality assurance, sole source availability or cost effectiveness, certain key components and raw materials and instruments are available only from a sole supplier and the Company has certain long-term supply contracts to assure continuity of supply. At September 28, 2013, purchase commitments were as follows:


Fiscal 2014	$	55,935
Fiscal 2015		12,684
Fiscal 2016		3,000
Fiscal 2017		3,000
Fiscal 2018		750
Thereafter		—

Total	$	75,369

In addition, as part of its R&D efforts assumed from the Gen-Probe acquisition, the Company has various license agreements with unrelated parties that provide the Company with rights to develop and market products using certain technology and patent rights. Terms of the various license agreements require the Company to pay royalties ranging from less than 1% up to 35% of future sales on products using the specified technology. Such agreements generally provide for a term that commences upon execution and continues until expiration of the last patent covering the licensed technology. Under certain of these agreements, the Company is required to pay minimum annual royalty payments. In addition, the Company has commitments for minimum payments under certain collaboration agreements. At September 28, 2013, minimum commitments for these agreements were as follows:


Fiscal 2014	$	1,301
Fiscal 2015		810
Fiscal 2016		1,426
Fiscal 2017		745
Fiscal 2018		560
Thereafter		4,450

Total	$	9,292

Concentration of Suppliers

The Company purchases certain components of its products from a single or small number of suppliers. A change in or loss of these suppliers could cause a delay in filling customer orders and a possible loss of sales, which could adversely affect results of operations; however, management believes that suitable replacement suppliers could be obtained in such an event.

Operating Leases

The Company conducts its operations in leased facilities under operating lease agreements that expire through fiscal 2035. Substantially all of the Company’s lease agreements require the Company to maintain the facilities during the term of the lease and to pay all taxes, insurance, utilities and other costs associated with those facilities. The Company makes customary representations and warranties and agrees to certain financial covenants and indemnities. In the event the Company defaults on a lease, typically the landlord may terminate the lease, accelerate payments and collect liquidated damages. As of September 28, 2013, the Company was not in default of any covenants contained in its lease agreements. Certain of the Company’s lease agreements provide for renewal options. Such renewal options are at rates similar to the current rates under the agreements.

Future minimum lease payments under all of the Company’s operating leases at September 28, 2013 are as follows:


Fiscal 2014	$	20,689
Fiscal 2015		16,192
Fiscal 2016		13,600
Fiscal 2017		12,249
Fiscal 2018		10,830
Thereafter		32,712

Total	$	106,272

Rent expense, net of sublease income, was $19.9 million, $18.3 million, and $19.3 million for fiscal 2013, 2012 and 2011, respectively.

The Company subleases a portion of a building it owns and some of its facilities and has received aggregate rental income of $1.9 million, $3.2 million and $3.5 million in fiscal 2013, 2012 and 2011, respectively, which has been recorded as an offset to rent expense. The future minimum annual rental income payments under these sublease agreements at September 28, 2013 are as follows:


Fiscal 2014	$	1,551
Fiscal 2015		913
Fiscal 2016		20
Fiscal 2017		15

Total	$	2,499

Workforce Subject to Collective Bargaining Agreements

Approximately 164 of Hitec Imaging’s German employees are represented by a Worker’s Council and are subject to collective bargaining agreements. None of the Company’s other employees are subject to a collective bargaining agreement.