<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 27, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-5075
EG&G, INC.
(Exact name of registrant as specified in its charter)
Massachusetts 04-2052042
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
45 William Street, Wellesley, Massachusetts 02481
(Address of principal executive offices) (Zip Code)
(781) 237-5100
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of each of the issuer's classes of common stock, as
of the latest practicable date:
<TABLE>
<CAPTION>
Class Outstanding at November 1, 1998
----- -------------------------------
<S> <C>
Common Stock, $1 par value 44,709,000
(Excluding treasury shares)
</TABLE>
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EG&G, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
<TABLE>
<CAPTION>
(In Thousands Except Per Share Amounts)
------------------------------------------------------
Three Months Ended Nine Months Ended
----------- ----------- ----------- -----------
SEP 27, SEP 28, SEP 27, SEP 28,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Sales:
Products $ 175,227 $ 207,443 $ 567,982 $ 622,371
Services 168,260 150,925 487,723 451,675
----------- ----------- ----------- -----------
TOTAL SALES 343,487 358,368 1,055,705 1,074,046
----------- ----------- ----------- -----------
Cost of Sales:
Products 114,002 132,473 363,736 402,530
Services 146,498 134,253 430,073 402,823
----------- ----------- ----------- -----------
Total Cost of Sales 260,500 266,726 793,809 805,353
Research and Development Expenses 10,400 10,744 32,383 33,817
Selling, General and Administrative Expenses 52,392 60,569 172,519 180,026
Restructuring Charges (Note 2) -- -- 54,500 --
Asset Impairment Charge (Note 3) -- -- 7,400 28,200
Gains on Dispositions (Note 4) -- -- (125,822) --
----------- ----------- ----------- -----------
OPERATING INCOME FROM
CONTINUING OPERATIONS 20,195 20,329 120,916 26,650
Other Income (Expense), Net (Note 5) 3,925 701 1,845 (3,975)
----------- ----------- ----------- -----------
Income From Continuing Operations
Before Income Taxes 24,120 21,030 122,761 22,675
Provision for Income Taxes 8,683 7,151 41,227 12,618
----------- ----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS 15,437 13,879 81,534 10,057
Income From Discontinued Operations,
Net of Income Taxes -- 711 -- 2,714
----------- ----------- ----------- -----------
NET INCOME $ 15,437 $ 14,590 $ 81,534 $ 12,771
=========== =========== =========== ===========
Basic Earnings Per Share:
CONTINUING OPERATIONS $ .34 $ .30 $ 1.79 $ .22
Discontinued Operations -- .02 -- .06
----------- ----------- ----------- -----------
NET INCOME $ .34 $ .32 $ 1.79 $ .28
=========== =========== =========== ===========
Diluted Earnings Per Share:
CONTINUING OPERATIONS $ .33 $ .30 $ 1.77 $ .22
Discontinued Operations -- .02 -- .06
----------- ----------- ----------- -----------
NET INCOME $ .33 $ .32 $ 1.77 $ .28
=========== =========== =========== ===========
Cash Dividends Per Common Share $ .14 $ .14 $ .42 $ .42
=========== =========== =========== ===========
Weighted Average Shares of
Common Stock Outstanding:
Basic 45,711 45,602 45,552 45,903
Diluted 46,218 45,790 46,089 46,072
</TABLE>
The accompanying unaudited notes are an integral part of these consolidated
financial statements.
<PAGE> 3
EG&G, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
SEP 27, DEC 28,
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 178,649 $ 57,934
Accounts receivable (Note 7) 210,449 243,963
Inventories (Note 8) 107,446 112,875
Other current assets 67,825 73,414
--------- ---------
TOTAL CURRENT ASSETS 564,369 488,186
--------- ---------
Property, Plant and Equipment:
At cost (Notes 3 and 9) 447,237 482,382
Accumulated depreciation and amortization (281,409) (301,239)
--------- ---------
Net Property, Plant and Equipment 165,828 181,143
--------- ---------
Investments 14,717 16,730
Intangible Assets (Notes 3 & 4) 114,974 79,257
Other Assets 64,529 66,787
--------- ---------
TOTAL ASSETS $ 924,417 $ 832,103
========= =========
Current Liabilities:
Short-term debt $ 22,962 $ 46,167
Accounts payable 73,233 73,360
Accrued restructuring costs (Note 2) 38,571 --
Accrued expenses (Note 10) 195,730 166,088
--------- ---------
TOTAL CURRENT LIABILITIES 330,496 285,615
--------- ---------
Long-Term Debt 114,867 114,863
Long-Term Liabilities 101,677 103,237
Contingencies
Stockholders' Equity:
Preferred stock - $1 par value, authorized
1,000,000 shares; none outstanding -- --
Common stock - $1 par value, authorized
100,000,000 shares; issued 60,102,000 60,102 60,102
shares
Retained earnings 605,286 540,379
Accumulated other comprehensive income (loss)(Note 11) 1,178 (3,857)
Cost of shares held in treasury;
15,434,000 shares at September 27, 1998 and
14,769,000 shares at December 28, 1997 (289,189) (268,236)
--------- ---------
Total Stockholders' Equity 377,377 328,388
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 924,417 $ 832,103
========= =========
</TABLE>
The accompanying unaudited notes are an integral part of these consolidated
financial statements.
<PAGE> 4
EG&G, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
(In Thousands)
----------------------
Nine Months Ended
----------------------
SEP 27, SEP 28,
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 81,534 $ 12,771
Deduct net income from discontinued operations -- (2,714)
--------- ---------
Income from continuing operations 81,534 10,057
Adjustments to reconcile income from continuing
operations to net cash provided by continuing
operations:
Noncash portion of restructuring charges 12,020 --
Restructuring charges to be paid in future
periods 38,571 --
Asset impairment charge 7,400 28,200
Depreciation and amortization 35,190 32,910
Deferred taxes (1,929) (4,417)
Gains on dispositions and investments, net (130,484) (6,806)
Changes in assets and liabilities which
provided (used) cash, excluding effects from
companies purchased and divested:
Accounts receivable 14,992 (6,620)
Inventories (8,401) (4,545)
Accounts payable and accrued expenses 10,870 (4,807)
Prepaid expenses and other (9,299) (20,696)
--------- ---------
Net Cash Provided by Continuing Operations 50,464 32,890
Net Cash Provided by (Used in) Discontinued
Operations (140) 3,012
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 50,324 35,902
--------- ---------
INVESTING ACTIVITIES:
Capital expenditures (33,089) (37,299)
Reimbursement of invested capital -- 27,000
Proceeds from dispositions of businesses and sales
of property, plant and equipment 209,607 14,971
Cost of acquisitions (54,647) (3,611)
Proceeds from sales of investment securities 7,603 2,733
Other -- (1,156)
--------- ---------
NET CASH PROVIDED BY INVESTING ACTIVITIES 129,474 2,638
--------- ---------
FINANCING ACTIVITIES:
Increase (decrease) in commercial paper borrowings (22,901) 19,955
Proceeds from issuance of common stock 22,937 4,550
Purchases of common stock (41,217) (28,104)
Cash dividends (19,160) (19,337)
Other (306) (3,129)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (60,647) (26,065)
--------- ---------
Effect of Exchange Rate Changes on Cash and
Cash Equivalents 1,564 (3,166)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 120,715 9,309
Cash and cash equivalents at beginning of period 57,934 47,846
--------- ---------
Cash and cash equivalents at end of period $ 178,649 $ 57,155
========= =========
</TABLE>
The accompanying unaudited notes are an integral part of these consolidated
financial statements.
<PAGE> 5
EG&G, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information in footnote disclosures normally
included in financial statements has been condensed or omitted in accordance
with the rules and regulations of the Securities and Exchange Commission. These
statements should be read in conjunction with the Company's Annual Report for
the year ended December 28, 1997, filed on Form 10-K with the Securities and
Exchange Commission. The balance sheet amounts at December 28, 1997 in this
report were extracted from the Company's audited 1997 financial statements
included in the Form 10-K. The information set forth in these statements may be
subject to normal year-end adjustments. The information reflects all adjustments
that, in the opinion of management, are necessary to present fairly the
Company's results of operations, financial position and cash flows for the
periods indicated. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make 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 period. The results of operations for the nine months ended September
27, 1998 are not necessarily indicative of the results for the entire year.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise
and Related Information, in June 1997. The statement establishes standards for
the way that public business enterprises report information and operating
segments in annual financial statements and requires reporting of selected
information in interim financial reports. The required disclosures for SFAS No.
131, which are effective for fiscal years beginning after December 15, 1997,
will be included in the Company's 1998 annual report on Form 10-K.
The Financial Accounting Standards Board issued SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, in June 1998. The new statement
is effective for fiscal years beginning after June 15, 1999; earlier adoption is
allowed. The statement requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company currently expects that, due to its limited use of
derivative instruments, the adoption of SFAS No. 133 will not have a material
effect on the Company's results of operations or financial position.
(2) RESTRUCTURING CHARGES
During the first six months of 1998, management developed plans to restructure
certain businesses to improve the Company's performance. The plans resulted in
pre-tax restructuring charges of $54.5 million, of which $31.4 million was
recorded in the first quarter and $23.1 million was recorded in the second
quarter. The principal actions in the restructuring plans include close-down or
consolidation of a number of offices and facilities, integration into five
strategic business units, transfer of assembly activities to lower-cost
geographic locations, disposal of under-utilized assets, withdrawal from certain
product lines and general cost reductions. The restructuring plans are expected
to result in the elimination of approximately 900 positions. The major
components of the restructuring charges were $33 million of employee separation
costs, $12 million of noncash charges to dispose of certain product lines and
assets through sale or abandonment and $10 million of charges to terminate lease
and other contractual obligations no longer required as a result of the
restructuring plans. The charges do not include additional costs associated with
the restructuring plans, such as training, consulting, purchase of equipment and
relocation of employees and equipment. These costs will be charged to operations
or capitalized, as appropriate, when incurred.
<PAGE> 6
EG&G, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(3) ASSET IMPAIRMENT CHARGE
During the second quarter of 1998, the Company recorded a $7.4 million noncash
impairment charge related to an automotive testing facility that is part of the
Technical Services segment. The impairment charge applied to fixed assets and
resulted from projected changes in the principal customer's demand for services.
The Company calculated the present value of expected cash flows of the testing
facility to determine the fair value of the assets.
During the second quarter of 1997, the Company recorded a noncash impairment
charge of $28.2 million, with $26.7 million related to IC Sensors and $1.5
million related to the goodwill of an environmental services business. As a
result of IC Sensors' inability to achieve the improvements specified in its
corrective action plan, it continued operating at a loss in the second quarter
of 1997, triggering an impairment review of its long-lived assets. A revised
operating plan was developed to restructure and stabilize the business. The
revised projections by product line provided the basis for measurement of the
asset impairment charge. The Company calculated the present value of expected
cash flows of IC Sensors' product lines to determine the fair value of the
assets. Accordingly, in the second quarter of 1997, the Company recorded an
impairment charge of $26.7 million, for a write-down of goodwill of $13.6
million and fixed assets of $13.1 million.
(4) GAINS ON DISPOSITIONS
In early January 1998, the Company sold its Rotron division for $103 million in
cash, resulting in a pre-tax gain of $64.4 million. During the first quarter of
1998, the Company also sold a small product line for $4 million in cash,
resulting in a pre-tax gain of $3.1 million. The after-tax gain on these
divestitures was $45.2 million, or $1.00 basic earnings per share. Rotron, which
manufactures fans, blowers and motors, had 1997 sales of $70 million and
operating income of $11.9 million ($.16 earnings per share).
In early April 1998, the Company sold its Sealol Industrial Seals division for
cash of $100 million, resulting in a pre-tax gain of $58.3 million. The
after-tax gain on this divestiture was $42.6 million, or $.93 basic earnings per
share. Sealol Industrial Seals, which manufactures mechanical seals, had 1997
sales of $88 million and operating income of $11.4 million ($.21 earnings per
share).
In connection with the above transaction, the Company purchased the Belfab
division of John Crane Inc., a unit of the TI Group, for $45 million in cash.
The acquisition was accounted for using the purchase method. While the Company
has not yet finalized the purchase price allocation, the excess of the cost over
the fair market value of the net assets acquired is estimated to be $32 million,
which is being amortized over 20 years using a straight-line method. Belfab's
results of operations, which were included in the consolidated results of the
Company from the date of the acquisition, are not material to the consolidated
results of operations.
(5) OTHER INCOME (EXPENSE)
Other income (expense), net, consisted of the following:
<TABLE>
<CAPTION>
(In Thousands)
-------------------------------------------
Three Months Ended Nine Months Ended
------------------- -------------------
SEP 27, SEP 28, SEP 27, SEP 28,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income $ 1,729 $ 174 $ 4,882 $ 1,153
Interest expense (2,450) (3,204) (7,540) (9,200)
Gains on investments, net 4,254 136 4,465 546
Other 392 3,595 38 3,526
------- ------- ------- -------
$ 3,925 $ 701 $ 1,845 $(3,975)
======= ======= ======= =======
</TABLE>
Higher interest income on increased cash and lower interest expense on reduced
debt levels resulted from the proceeds from dispositions of businesses in 1998.
A $3.4 million cost of capital reimbursement relating to a joint development
program was included in "Other" in 1997 in the table presented above.
<PAGE> 7
EG&G, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(6) DISCONTINUED OPERATIONS
The former Department of Energy (DOE) Support segment, which provided services
under management and operations contracts, is presented as discontinued
operations in accordance with Accounting Principles Board Opinion No. 30. The
Mound contract, which was the Company's last DOE management and operations
contract, expired on September 30, 1997. The Company is in the process of
negotiating contract closeouts and does not anticipate incurring any material
loss in excess of previously established reserves.
(7) ACCOUNTS RECEIVABLE
Accounts receivable as of September 27, 1998 and December 28, 1997 included
unbilled receivables of $46 million and $48 million, respectively, which were
due primarily from U.S. government agencies. Accounts receivable were net of
reserves for doubtful accounts of $6 million and $4.8 million as of September
27, 1998 and December 28, 1997, respectively.
(8) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
(In Thousands)
----------------------------
SEP 27, DEC 28,
1998 1997
-------- --------
<S> <C> <C>
Finished goods $ 28,071 $ 31,570
Work in-process 23,309 24,810
Raw materials 56,066 56,495
-------- --------
$107,446 $112,875
======== ========
</TABLE>
(9) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following:
<TABLE>
<CAPTION>
(In Thousands)
-----------------------
SEP 27, DEC 28,
1998 1997
-------- --------
<S> <C> <C>
Land $ 12,314 $ 12,712
Buildings and leasehold improvements 110,384 114,698
Machinery and equipment 324,539 354,972
-------- --------
$447,237 $482,382
======== ========
</TABLE>
The decrease in property, plant and equipment resulted primarily from the sales
of the Rotron and Sealol Industrial Seals divisions in 1998.
(10) ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
(In Thousands)
-----------------------
SEP 27, DEC 28,
1998 1997
-------- --------
<S> <C> <C>
Payroll and incentives $ 24,674 $ 24,473
Employee benefits 50,257 48,936
Federal, non-U.S. and state income taxes 25,025 22,352
Other accrued operating expenses 95,774 70,327
-------- --------
$195,730 $166,088
======== ========
</TABLE>
<PAGE> 8
EG&G, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
(11) COMPREHENSIVE INCOME
Comprehensive income (loss) presented in accordance with SFAS No. 130, Reporting
Comprehensive Income, consisted of the following:
<TABLE>
<CAPTION>
(In Thousands)
--------------------------------------------
Three Months Ended Nine Months Ended
-------------------- --------------------
SEP 27, SEP 28, SEP 27, SEP 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 15,437 $ 14,590 $ 81,534 $ 12,771
Other comprehensive income (loss), net of tax:
Gross foreign currency translation
adjustments 6,260 (5,256) 2,597 (18,183)
Reclassification adjustment for translation
losses realized upon sale of Sealol
Industrial Seals division -- -- 3,115 --
Unrealized gains (losses) on securities (439) 112 (677) (42)
-------- -------- -------- --------
Other comprehensive income (loss) 5,821 (5,144) 5,035 (18,225)
-------- -------- -------- --------
Comprehensive income (loss) $ 21,258 $ 9,446 $ 86,569 $ (5,454)
======== ======== ======== ========
</TABLE>
The components of accumulated other comprehensive income (loss) were as follows:
<TABLE>
<CAPTION>
(In Thousands)
--------------------
SEP 27, DEC 28,
1998 1997
------- -------
<S> <C> <C>
Foreign currency translation adjustments $ 1,332 $(4,380)
Unrealized gains (losses) on securities (154) 523
------- -------
Accumulated other comprehensive income (loss) $ 1,178 $(3,857)
======= =======
</TABLE>
(12) SUBSEQUENT EVENT
On October 21, 1998, the Company and Lumen Technologies, Inc. jointly announced
that they have entered into a definitive agreement for the Company to acquire
Lumen, a maker of high-technology specialty light sources, for cash and assumed
debt totaling approximately $250 million. Under the agreement, a wholly owned
subsidiary of the company will commence a tender offer to purchase all
outstanding shares of Lumen common stock for $7.75 per share in cash. The
offer will be conditioned upon the tender of at least a majority of the Lumen
common shares outstanding and certain other conditions. The Company filed a
report on Form 8-K on November 3, 1998, reporting on the entering into of the
agreement.
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
EG&G, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
The following industry segment information is presented as an aid to better
understand the Company's operating results:
<TABLE>
<CAPTION>
(In Thousands)
------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
--------------------------------------------- ---------------------------------------------
SEP 27, SEP 28, Increase SEP 27, SEP 28, Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
INSTRUMENTS
Sales $ 71,075 $ 70,714 $ 361 $ 227,411 $ 214,738 $ 12,673
Operating Income 5,849 3,976 1,873 6,722 15,891 (9,169)
MECHANICAL COMPONENTS
Sales 41,990 70,420 (28,430) 145,805 216,452 (70,647)
Operating Income 4,681 11,382 (6,701) 132,062 26,245 105,817
OPTOELECTRONICS
Sales 62,162 66,309 (4,147) 194,766 191,181 3,585
Operating Income (Loss) 5,540 2,928 2,612 (6,194) (22,073) 15,879
TECHNICAL SERVICES
Sales 168,260 150,925 17,335 487,723 451,675 36,048
Operating Income 11,371 9,198 2,173 19,634 25,853 (6,219)
GENERAL CORPORATE EXPENSES (7,246) (7,155) (91) (31,308) (19,266) (12,042)
CONTINUING OPERATIONS
Sales 343,487 358,368 (14,881) 1,055,705 1,074,046 (18,341)
Operating Income 20,195 20,329 (134) 120,916 26,650 94,266
</TABLE>
<PAGE> 10
EG&G, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
OVERVIEW
The Company continued its progress on certain previously announced initiatives
which focus on sustainable long-term growth and profitability: (i) consolidation
around five strategic business units, (ii) programs to reduce operating
expenses, (iii) steady base revenue and earnings growth in strategic industries,
(iv) improvement of operating processes and (v) development of a stronger
performance-based culture.
On October 21, 1998, the Company and Lumen Technologies, Inc. jointly announced
that they have entered into a definitive agreement for the Company to acquire
Lumen, a maker of high-technology specialty light sources, for cash and assumed
debt totaling approximately $250 million. Under the agreement, a wholly owned
subsidiary of the Company will commence a tender offer to purchase all
outstanding shares of Lumen common stock for $7.75 per share in cash. The offer
will be conditioned upon the tender of at least a majority of the Lumen common
shares outstanding and certain other conditions. The Company filed a report on
Form 8-K on November 3, 1998, reporting on the entering into of the agreement.
The operating income from continuing operations for the three and nine months
ended September 27, 1998 included integration costs of $0.6 million in
Mechanical Components and contract closeout costs of $2.3 million in Technical
Services. Operating income for the nine months ended September 27, 1998 included
restructuring charges of $54.5 million. The impact of these charges on each
segment was as follows: Instruments-$12.5 million, Mechanical Components-$9.9
million, Optoelectronics-$20.3 million, Technical Services-$7.9 million, and
General Corporate Expenses-$3.9 million. Operating income for the nine months
ended September 27, 1998 included a $7.4 million asset impairment charge in
Technical Services and a $3 million charitable contribution in General Corporate
Expenses. Operating income for the nine months ended September 27, 1998 also
included gains of $125.8 million on dispositions of businesses in the Mechanical
Components segment.
The operating income from continuing operations for the nine months ended
September 28, 1997 included an asset impairment charge of $28.2 million. The
impact of this charge was $26.7 million on the Optoelectronics segment and $1.5
million on the Technical Services segment.
A reconciliation of reported results of operations to base operations' results
for the third quarter of 1998 is as follows:
THIRD QUARTER
<TABLE>
<CAPTION>
Sales Operating Income
----------------------- -----------------------
(In Thousands) 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
As Reported $ 343,487 $ 358,368 $ 20,195 $ 20,329
Gains on Dispositions -- -- -- (4,233)
Integration Costs -- -- 600 4,504
Contract Closeout Costs -- -- 2,300 --
Results of Divested Operations -- (43,599) -- (6,972)
--------- --------- --------- ---------
Base Operations $ 343,487 $ 314,769 $ 23,095 $ 13,628
========= ========= ========= =========
</TABLE>
Reported sales from continuing operations decreased 4% in the third quarter of
1998 compared to 1997, while base operations sales (which exclude the results of
operations divested in 1997 and 1998) increased 9% to $343.5 million in the
third quarter of 1998. Reported operating income from continuing operations was
$20.2 million in the third quarter of 1998 and included nonrecurring charges of
$2.9 million or $.04 basic earnings per share (see detailed schedule below). The
reported operating income of $20.3 million for the third quarter of 1997
included pre-tax gains on dispositions of $4.2 million and integration costs of
$4.5 million. Fiscal 1998 results included an investment gain of $4.3 million,
or $.06 basic earnings per share. Fiscal 1997 results included a cost of
capital reimbursement of $3.4 million nonrecurring item which contributed $.05
basic earnings per share. Base operating income (which excludes nonrecurring
items and results of divested operations) was $23.1 million compared to $13.6
million in 1997, an increase of 69%. All four industry segments of the Company
contributed to the aggregate increase in base operations income in the third
quarter of 1998 versus the comparable 1997 period.
Summary of third quarter 1998 net nonrecurring items:
<TABLE>
<CAPTION>
Basic
Earnings
(In Thousands) (Loss)
Before-Tax After-Tax Per Share
---------- --------- ---------
<S> <C> <C> <C>
Integration Costs $ (600) $ (384) $(.01)
Contract Closeout Costs (2,300) (1,472) (.03)
------- ------- -----
Subtotal (2,900) (1,856) (.04)
Gain on Investment 4,254 2,723 .06
------- ------- -----
Total $ 1,354 $ 867 $ .02
======= ======= =====
</TABLE>
<PAGE> 11
EG&G, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
NINE MONTHS
<TABLE>
<CAPTION>
Sales Operating Income
---------------------------- ----------------------------
(In Thousands) 1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
As Reported $ 1,055,705 $ 1,074,046 $ 120,916 $ 26,650
Gains on Dispositions -- -- (125,822) (5,825)
Integration Costs -- -- 600 5,082
Restructuring Charges -- -- 54,500 --
Asset Impairment Charge -- -- 7,400 28,200
Charitable Contribution (included
in selling, general and
administrative expenses) -- -- 3,000 --
Contract Closeout Costs -- -- 2,300 --
Results of Divested Operations (22,666) (132,075) (2,127) (18,418)
----------- ----------- ----------- -----------
Base Operations $ 1,033,039 $ 941,971 $ 60,767 $ 35,689
=========== =========== =========== ===========
</TABLE>
Reported sales from continuing operations decreased slightly in 1998 compared to
1997, reflecting the absence of divested operations, while base operations
sales increased approximately 10%. Reported operating income from continuing
operations was $120.9 million in 1998 and included pre-tax net nonrecurring
items of $58.0 million or $.88 basic earnings per share (see detailed schedule
below). The reported operating income of $26.7 million for the nine months of
1997 included pre-tax gains on dispositions of $5.8 million and integration
costs of $5.1 million. The 1997 reported operating income of $26.7 million also
included an asset impairment charge of $28.2 million. The after-tax impairment
charge in 1997 was $23.5 million ($.51 basic earnings per share). Base operating
income increased 70% to $60.8 million from $35.7 million in 1997. All four
segments contributed to the increase in base operations sales and income.
Summary of nine months 1998 nonrecurring items:
<TABLE>
<CAPTION>
Basic
Earnings
(In Thousands) (Loss)
Before-Tax After-Tax Per Share
---------- --------- ---------
<S> <C> <C> <C>
Gains on Dispositions $ 125,822 $ 87,833 $1.93
Integration Costs (600) (384) (.01)
Restructuring Charges (54,500) (39,531) (.87)
Asset Impairment Charge (7,400) (4,425) (.10)
Charitable Contribution (3,000) (1,920) (.04)
Contract Closeout Costs (2,300) (1,472) (.03)
--------- --------- -----
Subtotal 58,022 40,101 .88
Gain on Investment 4,254 2,723 .06
--------- --------- -----
Total $ 62,276 $ 42,824 $ .94
========= ========= =====
</TABLE>
The discussion that follows is a summary analysis of the major changes in
operating results by industry segment of the Company that occurred for the three
and nine months ended September 27, 1998 compared to the three and nine months
ended September 27, 1997, respectively.
<PAGE> 12
EG&G, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
INSTRUMENTS
THIRD QUARTER
<TABLE>
<CAPTION>
SALES OPERATING INCOME
------------------- -------------------
(IN THOUSANDS) 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
As Reported $ 71,075 $ 70,714 $ 5,849 $ 3,976
Integration Costs -- -- -- 2,092
Results of Divested Operations -- (2,627) -- (337)
-------- -------- -------- --------
Base Operations $ 71,075 $ 68,087 $ 5,849 $ 5,731
======== ======== ======== ========
</TABLE>
Reported sales increased slightly while base operations sales (which exclude
results of divested operations) increased 4%. Higher sales of medical
diagnostics products of approximately $4 million were offset by lower sales of
$4 million in the x-ray technology operations due primarily to delays and
reductions of certain shipments to international customers. Also contributing
was the Isolab acquisition which was concluded late in the first quarter of
1998. Base operating income (which excludes nonrecurring items and results of
divested operations) increased slightly as the income earned on the higher sales
levels and favorable product mix in medical diagnostics was partially offset by
price reductions due to competitive pressures on conventional
explosives-detection systems and an unfavorable operating profit impact
resulting from lower x-ray technology sales.
INSTRUMENTS
NINE MONTHS
<TABLE>
<CAPTION>
SALES OPERATING INCOME
--------------------- ---------------------
(IN THOUSANDS) 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
As Reported $ 227,411 $ 214,738 $ 6,722 $ 15,891
Restructuring Charges -- -- 12,494
Integration Costs -- -- -- 2,670
Results of Divested Operations -- (7,912) -- (1,029)
Gains on Dispositions -- -- -- (1,602)
--------- --------- --------- ---------
Base Operations $ 227,411 $ 206,826 $ 19,216 $ 15,930
========= ========= ========= =========
</TABLE>
Reported sales increased 6% from last year and base operations sales increased
10% with most operations contributing to this increase. Higher sales of $11
million from medical diagnostic products and $4 million from the Isolab
acquisition were the main contributors to the increase. The year-to-date
restructuring charges recorded were $12.5 million, and the restructuring plans
are expected to result in annualized cost reductions of approximately $6.7
million in the year 2000. Base operating income was $19.2 million, an increase
of $3.3 million, or 21%, over the comparable period in 1997. This increase was
due to the income earned on the higher sales level partially offset by price
reductions due to competitive pressures and the x-ray sales decrease discussed
above.
<PAGE> 13
EG&G, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
MECHANICAL COMPONENTS
THIRD QUARTER
<TABLE>
<CAPTION>
SALES OPERATING INCOME
------------------- -------------------
(IN THOUSANDS) 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
As Reported $ 41,990 $ 70,420 $ 4,681 $ 11,382
Gains on Dispositions -- -- -- (4,223)
Integration Costs -- -- 600 139
Results of Divested Operations -- (40,972) -- (6,635)
-------- -------- -------- --------
Base Operations $ 41,990 $ 29,448 $ 5,281 $ 663
======== ======== ======== ========
</TABLE>
Reported sales decreased compared to last year due primarily to the absence of
the sales from the divested divisions. Base operations sales increased 43% to
$42 million in 1998. This base sales increase was due primarily to sales of $6
million from the Belfab acquisition early in the second quarter, and increased
revenues from the Company's aerospace business as strong demand continued during
the quarter. These increases were partially offset by a continued softness in
the semiconductor industry. Base operating income in 1998 increased
significantly to $5.3 million from $.7 million in the third quarter of 1997 as a
result of higher sales in the aerospace business and cost productivity
improvements.
MECHANICAL COMPONENTS
NINE MONTHS
<TABLE>
<CAPTION>
SALES OPERATING INCOME
---------------------- ----------------------
(IN THOUSANDS) 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
As Reported $ 145,805 $ 216,452 $ 132,062 $ 26,245
Gains on Dispositions -- -- (125,822) (4,223)
Restructuring Charges -- -- 9,870 --
Integration Costs -- -- 600 139
Results of Divested Operations (22,666) (124,163) (2,127) (17,389)
--------- --------- --------- ---------
Base Operations $ 123,139 $ 92,289 $ 14,583 $ 4,772
========= ========= ========= =========
</TABLE>
Compared to last year, reported sales decreased due to the absence in 1998 of
the sales of the divested divisions. Base operations sales increased 33% due to
higher demand for aerospace products and, to a lesser extent, approximately $12
million from the Belfab acquisition offset by softness in the semiconductor
business. Reported operating income of $132.1 million in 1998 included gains on
divestitures of $125.8 million and restructuring charges of $9.9 million. Base
operating income increased by $9.8 million from 1997 levels to $14.6 million for
the nine months of 1998 due mainly to income earned on the higher overall sales
level and cost productivity improvements.
The Company sold the Rotron division in January 1998 for proceeds of $103
million. In April 1998, the Company sold the Sealol Industrial Seals division to
TI Group, plc for proceeds of $100 million, while simultaneously purchasing TI
Group's Belfab division for $45 million. Belfab's 1997 annual sales were $30
million. The Company realized gains of $125.8 million on the dispositions.
<PAGE> 14
EG&G, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
OPTOELECTRONICS
THIRD QUARTER
<TABLE>
<CAPTION>
SALES OPERATING INCOME
-------------------- --------------------
(IN THOUSANDS) 1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
As Reported $62,162 $66,309 $ 5,540 $ 2,928
Integration Costs -- -- -- 1,117
------- ------- ------- -------
Base Operations $62,162 $66,309 $ 5,540 $ 4,045
======= ======= ======= =======
</TABLE>
Reported sales decreased 6% to $62.2 million due primarily to planned loss of
certain low margin printer circuit board assembly business. Excluding
integration costs in 1997, base operating income increased 37% mainly as a
result of the Company's success at implementing various operational improvements
at IC Sensors during 1998. Contributing to a lesser extent were operational
improvements in the Company's lighting and custom optoelectronics businesses and
modest growth in the Company's thermopile sensors unit. During the third quarter
of 1998, the Company spent $1.4 million on the amorphous silicon development
project and $1.1 million on the advanced micromachined sensor development
project, comparable to the spending levels as during the same period of 1997.
OPTOELECTRONICS
NINE MONTHS
<TABLE>
<CAPTION>
SALES OPERATING INCOME
-------------------- ---------------------
(IN THOUSANDS) 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
As Reported $194,766 $191,181 $ (6,194) $(22,073)
Restructuring Charges -- -- 20,316 --
Integration Costs -- -- -- 1,117
Asset Impairment Charge -- -- -- 26,700
-------- -------- -------- --------
Base Operations $194,766 $191,181 $ 14,122 $ 5,744
======== ======== ======== ========
</TABLE>
Reported sales for the nine months increased slightly to $194.8 million in 1998
compared to 1997. The increase resulted from higher sales in the custom
optoelectronic components, imaging and thermopile sensor businesses, offset by
the loss of sales from the Company's printer circuit board assembly business.
The reported operating loss in 1998 included restructuring charges of $20.3
million while the 1997 reported loss included a noncash asset impairment charge
of $26.7 million. When fully implemented in the year 2000, the restructuring
plans are expected to result in annualized cost reductions of $9 million. Base
operating income was $14.1 million in 1998, an increase of $8.4 million, or 146%
from 1997 levels. The increase resulted primarily from the gross margin
improvement across most segment businesses as well as the Company's success in
operating IC Sensors near break even compared to a higher operating loss in
1997 and income earned on higher sales discussed above. The printer circuit
board assembly business sales discussed above historically contributed
relatively low operating margins versus other businesses of the segment. The
1998 cost of the development effort for the amorphous silicon project was $3.8
million, while the development effort for the advanced micromachined sensor
project was $3.5 million, which are approximately the same spending levels as
1997.
<PAGE> 15
EG&G, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
TECHNICAL SERVICES
THIRD QUARTER
<TABLE>
<CAPTION>
SALES OPERATING INCOME
-------------------- --------------------
(IN THOUSANDS) 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
As Reported $168,260 $150,925 $ 11,371 $ 9,198
Contract Closeout Costs -- -- 2,300 --
Integration Costs -- -- -- 288
-------- -------- -------- --------
Base Operations $168,260 $150,925 $ 13,671 $ 9,486
======== ======== ======== ========
</TABLE>
During the third quarter of 1998, the Company announced that its joint venture
with Johnson Controls was unsuccessful in its bid to provide support services
to NASA and the U.S. Air Force at Florida's Kennedy Space Center, Cape
Canaveral and Patrick Air Force Base. In connection with this contract close
out, the Company recorded nonrecurring charges in the third quarter of 1998.
Reported sales increased 11% to $168.3 million compared with 1997 levels as a
result of higher award fees, the new Defense Logistics Agency ("DLA") contract
which commenced late in the first quarter of 1998, and billings under the new
attack submarine contract for the Navy. These increases were partially offset by
the effect of a communication systems development contract which concluded last
year and decreases in automotive sales resulting from a labor strike at General
Motors. 1998 reported operating income included $2.3 million of nonrecurring
charges related to contract closeout costs. Excluding the nonrecurring charges,
base operating income increased 44% to $13.7 million compared with 1997. This
increase was due to income earned on the higher sales, primarily the DLA
contract, partially offset by a decrease in the automotive testing business.
TECHNICAL SERVICES
NINE MONTHS
<TABLE>
<CAPTION>
SALES OPERATING INCOME
-------------------- --------------------
(IN THOUSANDS) 1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
As Reported $487,723 $451,675 $ 19,634 $ 25,853
Contract Closeout Costs -- -- 2,300 --
Restructuring Charges -- -- 7,913 --
Integration Costs -- -- -- 288
Asset Impairment Charge -- -- 7,400 1,500
-------- -------- -------- --------
Base Operations $487,723 $451,675 $ 37,247 $ 27,641
======== ======== ======== ========
</TABLE>
Reported sales of $487.7 million in 1998 increased 8% over 1997 levels. The main
contributors to the increase were the new DLA contract and billings under the
new attack submarine contract for the Navy. Partially offsetting these increases
were the effect of a communication systems development contract which concluded
last year and decreases in the Company's automotive testing business. Reported
operating income for 1998 included $2.3 million of contract closeout costs,
$7.9 million of restructuring charges, and a noncash asset impairment charge of
$7.4 million related to the automotive testing business. 1997 operating results
included a $1.5 million impairment charge related to an environmental services
business. The restructuring plan is expected to result in annualized cost
reductions of $3 million, which are expected to be fully realized in the year
2000. Excluding the nonrecurring charges, base operating income increased 35% to
$37.2 million. This increase resulted primarily from the higher sales discussed
above and improved grades on the chemical weapons disposal contract and the 1997
close-down of an environmental services business which incurred a loss last
year.
<PAGE> 16
EG&G, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
GENERAL CORPORATE EXPENSES
THIRD QUARTER
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
------- -------
<S> <C> <C>
As Reported $(7,246) $(7,155)
Integration Costs -- 868
------- -------
Base Operations $(7,246) $(6,287)
======= =======
</TABLE>
The base operations increase of $1 million during the third quarter of 1998
compared to 1997 consisted of management transition costs and increased
incentive costs, partially offset by reduced spending levels.
GENERAL CORPORATE EXPENSES
NINE MONTHS
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
-------- --------
<S> <C> <C>
As Reported $(31,308) $(19,266)
Restructuring Charges 3,907 --
Integration Costs -- 868
Charitable Contribution 3,000 --
-------- --------
Base Operations $(24,401) $(18,398)
======== ========
</TABLE>
1998 reported expenses included restructuring charges of $3.9 million and a
charitable contribution of $3 million. Base operations expenses increased by
approximately $6 million for the nine months of 1998 versus 1997. The increase
consisted of management transition costs and increased incentive costs,
partially offset by reduced spending levels.
OTHER
The net decrease in other expense for the third quarter and nine months of $3.2
million and $5.8 million, respectively, was mainly due to the impact of higher
interest income on increased cash resulting from the proceeds from the 1998
dispositions and lower interest expense on reduced debt levels. Included in
other income was a gain on investment of $4.3 million in 1998 and a $3.4
million cost of capital reimbursement in 1997. The 1998 effective tax rate for
the nine-month period was impacted by the tax consequences of the nonrecurring
items. Excluding the nonrecurring items and their related tax effects, the
effective tax rate for the third quarter and nine months of 1998 was 36%. This
rate is higher than the 1997 base effective tax rate of 34%, due primarily to
changes in the geographical distribution of income resulting from the
divestiture of the Sealol Industrial Seals division.
RESTRUCTURING CHARGES
During the first six months of 1998, management developed plans to restructure
certain businesses to improve the Company's performance. The plans resulted in
pre-tax restructuring charges of $54.5 million, of which $31.4 million was
recorded in the first quarter and $23.1 million was recorded in the second
quarter. The principal actions in the restructuring plans include close-down or
consolidation of a number of offices and facilities, integration into five
strategic business units, transfer of assembly activities to lower-cost
geographic locations, disposal of under-utilized assets, withdrawal from certain
product lines and general cost reductions. The nine months of 1998 included
pre-tax cost savings of approximately $3-$4 million resulting from consolidation
and restructuring initiatives. As the plan will be mainly implemented in 1999,
these actions are expected to result in pre-tax savings of $22-24 million in the
year 2000. The major components of the restructuring charges were $33 million of
employee separation costs ($3.9 million cash outlays for the nine months of
1998), $12 million of noncash charges to dispose of certain product lines and
assets through sale or abandonment and $10 million of charges to terminate lease
and other contractual obligations no longer required as a result of the
restructuring plans. The charges do not include additional costs associated with
the restructuring plans, such as training, consulting, purchase of equipment and
relocation of employees and equipment. These costs will be charged to operations
or capitalized, as appropriate, when incurred.
<PAGE> 17
EG&G, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
ASSET IMPAIRMENT CHARGE
During the second quarter of 1998, the Company recorded a $7.4 million noncash
impairment charge related to an automotive testing facility that is part of the
Technical Services segment. The impairment charge resulted from projected
changes in the principal customer's demand for services. The charge applied to
fixed assets and will reduce future depreciation by approximately $1.4 million
annually.
During the second quarter of 1997, the Company recorded a noncash impairment
charge of $28.2 million with $26.7 million related to IC Sensors and $1.5
million related to an environmental services business. As a result of IC
Sensors' inability to achieve the improvements specified in its corrective
action plan, it continued operating at a loss in the second quarter of 1997,
triggering an impairment review of its long-lived assets. A revised operating
plan was developed to restructure and stabilize the business. The revised
projections by product line provided the basis for measurement of the asset
impairment charge of $26.7 million in the second quarter for a write-down of
goodwill of $13.6 million and fixed assets of $13.1 million. The after-tax
effect of this charge was $22 million ($.48 loss per share). The impairment
charge reduces future depreciation and amortization by approximately $3 million
annually. For 1997, IC Sensors lost $7.5 million, excluding the asset impairment
charge. IC Sensors operated at a lower loss for the nine months of 1998 versus
1997. The Company continues to evaluate performance against the revised
operating plan and will continue to monitor the realizability of the remaining
assets if the operation fails to meet this plan.
DISCONTINUED OPERATIONS
Income from discontinued operations, net of income taxes, in 1997 reflected the
results of the Mound contract which expired in September 1997.
FINANCIAL CONDITION
The Company's cash and cash equivalents increased $121 million in 1998 versus
$9 million in 1997 while commercial paper borrowings of $46 million at year-end
1997 were reduced by $23 million due to the proceeds from the sale of two
divisions. Net cash provided by continuing operations during the first nine
months of 1998 was $50 million compared to $33 million in 1997. The favorable
change was mainly due to collection of receivables and the accrued taxes on the
higher income which will be paid in future quarters. Capital expenditures were
$33 million in the first nine months of 1998, a decrease of $4 million from the
1997 level and are expected to be at a level of $45-$50 million for the year
1998. The implementation of the restructuring plans is expected to result in
cash outlays of $39 million in the remainder of 1998 and into 1999. In 1998,
the Company realized gross proceeds of over $200 million from the sales of the
Rotron and Sealol Industrial Seals divisions and used $45 million to purchase
TI Group's Belfab division. The Company plans to use these proceeds to
accelerate certain consolidation programs, to invest in acquisitions in
strategic growth areas and to fund domestic and international operations, as
required. During the first nine months of 1998, the Company purchased 1,785,000
shares of its common stock through periodic purchases on the open market at a
cost of $41.2 million. The Company has two revolving credit agreements totaling
$200 million. During the first quarter of 1998, the Company's $100 million
364-day credit facility was extended to March 1999. The Company had $23 million
of borrowings outstanding from its credit facilities at the end of the third
quarter of 1998.
The Company plans to finance the Lumen acquisition with a combination of cash
and short-term debt. The Company is in the process of negotiating an additional
$100 million 364-day credit facility to provide further financing flexibility.
<PAGE> 18
OTHER MATTERS
The Company utilizes software and related technologies throughout its business
that will be affected by the "Year 2000" problem, which is common to most
corporations, and concerns the inability of information systems, primarily
computer software programs, to properly recognize and process date sensitive
information as the year 2000 approaches.
THE COMPANY'S STATE OF READINESS
The Company has completed a review of its computer systems to identify the
systems which could be affected by the Year 2000 problem and has developed an
implementation plan to resolve the issue. As a part of this plan, most
non-compliant systems will be replaced with new or enhanced systems that will
provide certain competitive benefits as well as ensure Year 2000 "compliance" in
time to minimize any disruptive effects on operations. The Company is currently
in the process of upgrading and testing these non-compliant systems. The Company
has inventoried and assessed potential problem areas in its non-information
technology systems that use embedded technology, such as microprocessors.
Supporting network and other sub-systems remediation is scheduled to be
completed by mid 1999. The Company will communicate with its key vendors and
other business partners seeking their assurances they will be Year 2000
compliant. Based on responses, the Company will develop contingency plans for
those areas which pose significant risk from the Year 2000 problem, however, the
Company could potentially experience disruptions to some aspects of its
operations from non-compliant systems utilized by unrelated third party
governmental and business entities.
THE COSTS TO ADDRESS THE YEAR 2000 ISSUE
While it is not possible at this time to predict the total cost of this effort,
the investment, whether leased, purchased, or expensed, in new software and
equipment needed to achieve Year 2000 compliance and enhance existing systems,
is not expected to have a material adverse impact on the Company's results of
operations or financial position. Funding requirements have been incorporated
into the Company's capital and operating plans and are not expected to have a
material adverse effect on the Company's financial condition or liquidity.
RISK ANALYSIS
Like most large business enterprises, the Company is dependent upon its own
internal computer technology and relies upon timely performance by its business
partners. As noted above, a large-scale Year 2000 failure could impact the
Company's ability to timely manufacture and deliver products to customers
resulting in potential lost sales opportunities and additional expenses. The
Company's Year 2000 program seeks to identify and minimize this risk and
includes testing of its own systems and purchased hardware and software, to
ensure, to the extent feasible, all such systems will function before and after
the Year 2000. The Company is continually refining its understanding of the
risk the Year 2000 poses to its significant business partners based upon
information obtained through its surveys and interviews. The refinement will
continue throughout 1998 and 1999.
CONTINGENCY PLANS
Following its risk analysis, the Company plans to design a contingency plan in
which appropriate backup plans will be made to attempt to minimize disruption
to the Company's operations in the event of a Year 2000 failure. The level of
planning required is a function of the risks ascertained through the Company's
investigative efforts. The Company anticipates that contingency planning across
the enterprise will be completed by mid-1999. Because of the Company's
extensive efforts to formulate and carry-out an effective Year 2000 program, the
Company believes its program will be completed an a timely basis and should
effectively minimize disruption to the Company's operations, however, there can
be no assurance that the Company will be successful in this respect.
<PAGE> 19
EG&G, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
On January 1, 1999, eleven of the fifteen member countries of the European Union
are scheduled to establish fixed conversion rates between their existing
sovereign currencies and the new common currency, the "euro". The participating
countries have agreed to adopt the euro as their common legal currency on that
date. There will be a transition period between January 1, 1999 and January 1,
2002, during which the euro will be adopted into the operations. The Company has
formed a cross-functional task force and has begun to assess the potential
impact to the Company that may result from the euro conversion. Areas of
assessment include the following: (1) cross-border price transparencies and the
resulting competitive impact; (2) adaptation of information technology and other
system requirements to accommodate euro transactions; (3) the impact on currency
exchange rate risk; (4) the impact on existing contracts; (5) taxation and
accounting. The Company's preliminary assessment is that the anticipated impact
of the euro conversion on the Company's operations will not be material.
FORWARD-LOOKING INFORMATION
All statements contained herein that refer to a time after September 27, 1998,
including the words will, will be, estimated to be, could be, expect, believe,
will continue, expected to, and plan, or statements referring to goals, the
future or future actions, continuing actions, trends, strategies, initiatives,
challenges or opportunities, or which otherwise are not purely historical, are
forward looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve risks and uncertainties. There are a
number of important factors that could cause actual results to differ materially
from those indicated by such forward-looking statements, including the factors
set forth below.
FACTORS AFFECTING FUTURE PERFORMANCE
In the Instruments, Mechanical Components, and Optoelectronics industry
segments, future performance will be highly dependent on the technological
success, market acceptance, competitive position of our businesses, product
performance and ability to reach cost targets of new and continuing program
initiatives. Improved operational efficiency will be required to offset
increasing price pressure in many of the Company's product offerings. Other
factors that may impact future earnings performance include the ability to
replace sales and earnings lost through divestitures, potential issues related
to economic and financial difficulties arising in Asia and other international
markets and industries, unanticipated issues associated with the Year 2000
dating problem, and difficulty in attracting and retaining key personnel in
certain areas. The future results of the Optoelectronics segment may be affected
by management's ability to maintain IC Sensors at break-even, the successful
introduction of new products, improvement in manufacturing yields and
implementation of cost reductions, including the successful transfer of assembly
activities to lower-cost geographic locations.
In the Technical Services segment, the Company operates in a highly competitive
procurement environment in the automotive testing and government services
businesses. The income generated by many of our government contracts is
dependent on meeting certain performance criteria. In accordance with government
regulations, all of the Company's government contracts are subject to
termination for the convenience of the government. In August 1998, the Company
announced that its joint venture with Johnson Controls was unsuccessful in its
bid to provide support services to NASA and the U.S. Air Force at Florida's
Kennedy Space Center, Cape Canaveral and Patrick Air Force Base. Future
performance will be affected by the Company's ability to replace sales and
earnings lost as a result of this event.
<PAGE> 20
EG&G, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Movements in foreign exchange rates could affect operating results. Effective
tax rates in the future could be affected by changes in the geographical
distribution of income, utilization of non-U.S. net operating loss
carry-forwards, repatriation costs, resolution of outstanding tax audit issues
and changes in the portfolio of businesses.
<PAGE> 21
EXHIBITS
EG&G, INC. AND SUBSIDIARIES
Exhibit 27 - Financial data schedule
<PAGE> 22
PART II. OTHER INFORMATION
EG&G, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits incorporated by reference from Part I herein
Exhibit 27 - Financial data schedule (submitted in electronic format only)
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on July 27, 1998, which included a
copy of a press release containing the Company's financial results for the
quarter ended June 28, 1998.
The Company filed a report on Form 8-K on August 28, 1998, reporting that
its joint venture with Johnson Controls was unsuccessful in its bid to
provide support services to NASA and the U.S. Air Force at Florida's
Kennedy Space Center, Cape Canaveral and Patrick Air Force Base.
The Company filed a report on Form 8-K on October 23, 1998, which
included a copy of a press release containing the Company's financial
results for the quarter ended September 27, 1998.
The Company filed a report on Form 8-K on November 4, 1998, reporting that
it had entered into a definitive agreement to purchase Lumen Technologies,
Inc. for cash and assumed debt totaling approximately $250 million.
The Company filed a report on Form 8-K on November 5, 1998, reporting
that it received authorization from its Board of Directors to purchase up
to five million shares of EG&G, Inc. Common Stock.
<PAGE> 23
EG&G, INC. AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EG&G, Inc.
By: /s/ John F. Alexander, II
-----------------------------
John F. Alexander, II
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date November 11, 1998
-----------------
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> SEP-27-1998
<EXCHANGE-RATE> 1
<CASH> 178,649
<SECURITIES> 0
<RECEIVABLES> 216,449
<ALLOWANCES> 6,000
<INVENTORY> 107,446
<CURRENT-ASSETS> 564,369
<PP&E> 447,237
<DEPRECIATION> 281,409
<TOTAL-ASSETS> 924,417
<CURRENT-LIABILITIES> 330,496
<BONDS> 114,867
0
0
<COMMON> 60,102
<OTHER-SE> 317,275
<TOTAL-LIABILITY-AND-EQUITY> 924,417
<SALES> 1,055,705
<TOTAL-REVENUES> 1,055,705
<CGS> 793,809
<TOTAL-COSTS> 793,809
<OTHER-EXPENSES> 131,595
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,540
<INCOME-PRETAX> 122,761
<INCOME-TAX> 41,227
<INCOME-CONTINUING> 81,534
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 81,534
<EPS-PRIMARY> 1.79
<EPS-DILUTED> 1.77
</TABLE>
