<PAGE> 1
------------------------------------------------------------------------
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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 APRIL 4, 1999
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)
<TABLE>
<S> <C>
MASSACHUSETTS 04-2052042
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
</TABLE>
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 MAY 2, 1999
----- --------------------------
<S> <C>
Common Stock, $1 par value 45,216,000
(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>
THREE MONTHS ENDED
-------------------------
APRIL 4, MARCH 29,
1999 1998
---------- -----------
(IN THOUSANDS EXCEPT PER
SHARE DATA)
<S> <C> <C>
Sales:
Products............................................... $230,406 $200,402
Services............................................... 127,081 155,534
-------- --------
TOTAL SALES....................................... 357,487 355,936
-------- --------
Cost of Sales:
Products............................................... 149,014 128,256
Services............................................... 112,136 136,504
-------- --------
Total Cost of Sales............................... 261,150 264,760
Research and Development Expenses........................... 13,502 11,042
Selling, General and Administrative Expenses................ 57,017 61,315
Restructuring Charges (Note 2).............................. -- 31,400
Gains on Dispositions (Note 3).............................. -- (67,478)
-------- --------
OPERATING INCOME FROM CONTINUING OPERATIONS................. 25,818 54,897
Other Expense, Net (Note 4)................................. (3,976) (1,202)
-------- --------
Income From Continuing Operations Before Income Taxes....... 21,842 53,695
Provision for Income Taxes.................................. 7,755 19,212
-------- --------
NET INCOME.................................................. $ 14,087 $ 34,483
======== ========
Earnings Per Share:
Basic.................................................. $ .31 $ .76
Diluted................................................ $ .31 $ .75
Cash Dividends Per Common Share............................. $ .14 $ .14
Weighted Average Shares of Common Stock Outstanding:
Basic.................................................. 44,910 45,262
Diluted................................................ 45,704 45,766
</TABLE>
The accompanying unaudited notes are an integral part of these consolidated
financial statements.
1
<PAGE> 3
EG&G, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1999 1999
---------- ----------
(IN THOUSANDS EXCEPT PER
SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents.............................. $ 106,285 $ 95,565
Accounts Receivable (Note 5)........................... 225,768 229,955
Inventories (Note 6)................................... 124,386 128,262
Other Current Assets................................... 109,145 111,600
---------- ----------
TOTAL CURRENT ASSETS.............................. 565,584 565,382
---------- ----------
Property, Plant and Equipment:
At Cost (Note 7)....................................... 502,803 510,107
Accumulated Depreciation and Amortization.............. (291,382) (288,281)
---------- ----------
Net Property, Plant and Equipment........................... 211,421 221,826
---------- ----------
Investments................................................. 17,643 16,650
Intangible Assets (Note 8).................................. 306,998 317,713
Other Assets................................................ 65,431 63,349
---------- ----------
TOTAL ASSETS...................................... $1,167,077 $1,184.920
========== ==========
Current Liabilities:
Short-Term Debt........................................ 184,124 $ 157,888
Accounts Payable....................................... 78,011 81,841
Accrued Restructuring Costs (Note 2)................... 33,881 37,522
Accrued Expenses (Note 9).............................. 229,696 246,847
---------- ----------
TOTAL CURRENT LIABILITIES......................... 525,712 524,098
---------- ----------
Long-Term Debt.............................................. 117,331 129,835
Long-Term Liabilities....................................... 123,876 131,320
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 shares...................... 60,102 60,102
Retained earnings...................................... 631,422 623,591
Accumulated Other Comprehensive Income (Loss)(Note
10)................................................... (7,922) 3,729
Cost of shares held in treasury; 15,106,000 shares at
April 4, 1999 and 15,355,000 shares at January 3,
1999.................................................. (283,444) (287,755)
---------- ----------
Total Stockholders' Equity.................................. 400,158 399,667
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,167,077 $1,184,920
========== ==========
</TABLE>
The accompanying unaudited notes are an integral part of these consolidated
financial statements.
2
<PAGE> 4
EG&G, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
APRIL 4, MARCH 29,
1999 1998
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income............................................. $ 14,087 $ 34,483
Adjustments to reconcile net income to net cash
provided by continuing operations:
Noncash portion of restructuring charges.......... -- 6,209
Depreciation and amortization..................... 11,790 12,160
Deferred taxes.................................... 790 (1,907)
Gains on dispositions and investments, net........ (53) (67,846)
Changes in assets and liabilities which provided
(used) cash, excluding effects from companies
purchased and divested:
Accounts receivable............................... 850 (1,742)
Inventories....................................... 1,615 (9,232)
Accounts payable and accrued expenses............. (13,951) 20,597
Accrued restructuring costs....................... (3,641) 25,191
Prepaid expenses and other........................ (1,271) (8,004)
-------- --------
Net Cash Provided by Continuing Operations.................. 10,216 9,909
Net Cash Provided by Discontinued Operations................ -- 62
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 10,216 9,971
INVESTING ACTIVITIES:
Capital expenditures................................... (8,494) (9,246)
Proceeds from dispositions of businesses and sales of
property, plant and equipment......................... 2,831 108,398
Cost of acquisitions................................... (3,843) (9,514)
Other.................................................. (251) 2,093
-------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES......... (9,757) 91,731
FINANCING ACTIVITIES:
Increase (decrease) in commercial paper borrowings..... 25,000 (45,844)
Decrease in other debt................................. (11,258) (346)
Proceeds from issuance of common stock................. 4,334 7,537
Purchases of common stock.............................. -- (11,446)
Cash dividends......................................... (6,279) (6,351)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... 11,797 (56,450)
Effect of Exchange Rate Changes on Cash and Cash
Equivalents............................................... (1,536) (291)
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 10,720 44,961
Cash and cash equivalents at beginning of period............ 95,565 57,934
-------- --------
Cash and cash equivalents at end of period.................. $106,285 $102,895
======== ========
</TABLE>
The accompanying unaudited notes are an integral part of these consolidated
financial statements.
3
<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 January 3, 1999, filed on Form 10-K with the
Securities and Exchange Commission. The balance sheet amounts at January 3, 1999
in this report were extracted from the Company's audited fiscal 1998 financial
statements included in the respective period's 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 three
months ended April 4, 1999 are not necessarily indicative of the results for the
entire year.
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 has not yet determined the effect that
adoption of SFAS No. 133 will have or when the provisions of the statement will
be adopted. However, 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
The Company developed two restructuring plans during the first and second
quarters of 1998 to integrate and consolidate its businesses. These
restructuring plans were points in the continuing transformation of the Company
that began in 1994 and continued into 1998 with the addition of new leadership
and new management, changes in the organization of the businesses and the
realignment and consolidation of operations. Further details of the actions are
discussed more fully in the Company's Annual Report for the year ended January
3, 1999, filed on Form 10-K with the Securities and Exchange Commission and in
the Management's Discussion and Analysis section of this quarterly report filed
on Form 10-Q for the quarter ended April 4, 1999.
Approximately 375 employees of the total of 900 employees expected to be
terminated as part of the two restructuring plans have been severed as of April
4, 1999. The plans are expected to be mainly implemented by the segments by
mid-1999, except for the SBU consolidation, the completion of which is
anticipated by the end of 1999. Cash outlays, primarily for employee separation
costs, were $3.6 million in the first quarter. Pre-tax cost savings under these
restructuring plans, due primarily to reduced depreciation and lower employment
costs, totaled approximately $3.9 million during the first quarter of 1999, or
$.05 earnings per diluted share. The Company expects to incur approximately
$28.5 million of cash outlays in connection with its two restructuring plans
throughout the remainder of 1999. These funds are expected to come primarily
from operating cash flows or borrowings from existing credit facilities.
The components of the restructuring charges met the criteria set forth in
Emerging Issues Task Force Issue (EITF) 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit
4
<PAGE> 6
EG&G, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
an Activity (including Certain Costs Incurred in a Restructuring). 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.
(3) GAINS ON DISPOSITIONS
In 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. In 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 of this divestiture was $42.6
million, or $.93 diluted earnings per share. Sealol's first quarter 1998 sales
were $23 million and its operating income was $2.1 million, or $.04 diluted
earnings per share. The after-tax gain of these divestitures was $45.2 million,
or $.99 diluted earnings per share. The Company has deferred gain recognition of
approximately $16 million of sales proceeds from these divestitures pending the
resolution in 1999 of certain events and contingencies related to the sales. The
Company currently anticipates recognition of a portion of the deferred gains in
subsequent quarters of 1999.
(4) OTHER INCOME (EXPENSE)
Other expense, net, consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
APRIL 4, MARCH 29,
1999 1998
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Interest income................................ $ 596 $ 995
Interest expense............................... (5,549) (2,641)
Other.......................................... 977 444
------- -------
$(3,976) $(1,202)
======= =======
</TABLE>
(5) ACCOUNTS RECEIVABLE
Accounts receivable at April 4, 1999 and January 3, 1999 included unbilled
receivables of $41 million and $38 million, respectively, which were due
primarily from U.S. government agencies. Accounts receivable were net of
reserves for doubtful accounts of $4.2 million and $4.6 million at April 4, 1999
and January 3, 1999, respectively.
(6) INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1999 1999
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Finished goods..................................... $ 32,457 $ 36,552
Work in process.................................... 27,503 26,818
Raw materials...................................... 64,426 64,892
-------- --------
$124,386 $128,262
======== ========
</TABLE>
5
<PAGE> 7
EG&G, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, consisted of the following:
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1999 1999
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Land............................................... $ 23,639 $ 23,884
Buildings and leasehold improvements............... 126,665 129,766
Machinery and equipment............................ 352,499 356,457
-------- --------
$502,803 $510,107
======== ========
</TABLE>
(8) INTANGIBLE ASSETS
Intangible assets consist mainly of goodwill from acquisitions accounted
for using the purchase method of accounting representing the excess of cost over
the fair value of the net assets of the acquired businesses. Goodwill is being
amortized over periods of 10-30 years. Other identifiable intangible assets from
acquisitions include patents, trademarks, trade names and developed technology.
Approximately $11.8 million was allocated to trade names, trademarks and patents
in connection with the Lumen acquisition and is being amortized over ten years.
Goodwill, reported as a component of net intangible assets in the
accompanying consolidated balance sheets was $290.6 million and $300.7 million
at April 4, 1999 and January 3, 1999, respectively, net of related accumulated
amortization.
(9) ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1999 1999
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Payroll and incentives............................. $ 16,169 $ 29,314
Employee benefits.................................. 48,031 44,566
Federal, non-U.S. and state income taxes........... 44,431 36,211
Other accrued operating expenses................... 121,065 136,756
-------- --------
$229,696 $246,847
======== ========
</TABLE>
(10) COMPREHENSIVE INCOME
Comprehensive income presented in accordance with SFAS No. 130, Reporting
Comprehensive Income, consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
APRIL 4, MARCH 29,
1999 1998
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net income........................................... $14,087 $34,483
Other comprehensive income (loss), net of tax:
Gross foreign currency translation adjustments....... (11,641) (3,178)
Unrealized gains (losses) on securities.............. (10) 213
------- -------
Other comprehensive income (loss).................... (11,651) (2,965)
------- -------
Comprehensive income................................. $ 2,436 $31,518
======= =======
</TABLE>
6
<PAGE> 8
EG&G, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of accumulated other comprehensive income (loss) were as
follows:
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1999 1999
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Foreign currency translation adjustments............. $(8,298) $3,343
Unrealized gains on securities....................... 376 386
------- ------
Accumulated other comprehensive income (loss)........ $(7,922) $3,729
======= ======
</TABLE>
(11) INDUSTRY SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, Disclosures about Segment of an
Enterprise and Related Information, which changes the way the Company reports
information about its operating segments. Information for prior years has been
restated in order to conform to the 1998 presentation. The Company's businesses
are reported as five reportable segments which reflect the Company's management
and structure under the five SBUs.
The accounting policies of the reportable segments are the same as those
described in Note 1 of the Company's Annual Report for the year ended January 3,
1999, filed on Form 10-K with the Securities and Exchange Commission. The
Company evaluates the performance of its operating segments based on operating
profit. Intersegment sales and transfers are not significant.
The operating segments and their principal products or service areas are:
Life Sciences: High-performance bioanalytic and diagnostic
instruments for use in hospitals, clinics and pharmaceutical and medical
research facilities. The Company also sells reagents and consumables for
use in connection with certain of these instruments.
Optoelectronics: A broad variety of components that emit and detect
light, including photocells, imaging systems, light sources with various
types of flashtubes and laser diodes, and devices for weapons' trigger
systems. Products included micromachined detectors, amorphous silicon
detector panels, flashlamps, specialty lighting CCDs, X-ray tubes,
detectors, photodiodes, and high-intensity specialty discharge lamps.
Instruments: Instruments and systems for X-ray imaging, security
screening, food screening, process measurement, nuclear, electro-chemical
and photolithography applications. The Company also conducts lubricant and
structural testing simulations for the transportation industry.
Engineered Products: Static and dynamic sealing, bellows devices,
advanced pneymatic components, systems and valves for use in the aerospace,
power generation and semiconductor industries.
Technical Services: Engineering, scientific, environmental,
management and technical support services for a broad range of governmental
and industrial customers.
Unaudited sales and operating profit information by segment for the first
quarter of 1999 and 1998 are shown in Item 2 of this Quarterly Report on Form
10-Q and are considered an integral part of this note.
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
EG&G, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
Summarized financial information covering the Company's reportable segments
is shown in the table below. The following unaudited industry segment
information is presented as an aid to better understand the Company's operating
results:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------
APRIL 4, MARCH 29, INCREASE
1999 1998 (DECREASE)
-------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
LIFE SCIENCES
Sales......................................... $ 36,855 $ 32,882 $ 3,973
Operating Profit.............................. 3,979 624 3,355
OPTOELECTRONICS
Sales......................................... $100,476 $ 63,665 $ 36,811
Operating Profit (Loss)....................... 7,804 (7,321) 15,125
INSTRUMENTS
Sales......................................... $ 64,692 $ 63,240 $ 1,452
Operating Profit (Loss)....................... 5,005 (3,988) 8,993
ENGINEERED PRODUCTS
Sales......................................... $ 41,194 $ 37,189 $ 4,005
Operating Profit (Loss)....................... 4,028 (5,858) 9,886
TECHNICAL SERVICES
Sales......................................... $114,270 $136,294 $(22,024)
Operating Profit.............................. 6,564 5,710 854
DIVESTITURES AND OTHER
Sales......................................... $ -- $ 22,666 $(22,666)
Operating Profit (Loss)....................... (1,562) 65,730 (67,292)
CONTINUING OPERATIONS
Sales......................................... $357,487 $355,936 $ 1,551
Operating Profit.............................. 25,818 54,897 (29,079)
</TABLE>
In connection with the Company's continued transformation of its portfolio
of companies, during the first quarter of 1998, management developed a plan to
restructure certain businesses. A discussion of the businesses affected within
each segment is presented in the Company's Annual Report for the year ended
January 3, 1999, filed on Form 10-K with the Securities and Exchange Commission.
The plan during the first quarter of 1998 resulted in pre-tax restructuring
charges totaling $31.4 million which were included in operating profit for the
three months ended March 29, 1998. The impact of these charges on each segment
was as follows: Life Sciences-$0.7 million, Optoelectronics-$8.6 million,
Instruments-$9.7 million, Engineered Products-$8.5 million, Technical
Services-$0.9 million and Divestitures and Other-$3 million. Operating profit
for the three months ended March 29, 1998 also included $67.5 million of gains
on dispositions of businesses presented as a component of Divestitures and Other
in the preceding table.
ACQUISITIONS
Acquisitions in early 1998 included IsoLab in our Life Sciences segment and
Belfab in our Engineered Products segment. In the fourth quarter of 1998, the
Company acquired Lumen Technologies, Inc. (Lumen) and Life Sciences Resources,
Ltd. (LSR). Lumen is primarily reported in our Optoelectronics segment with
8
<PAGE> 10
the photolithography business of Lumen reported within our Instruments segment.
LSR is reported in our Life Sciences segment.
In March 1999, the Company announced that it had entered into an agreement
to acquire Perkin-Elmer's Analytical Instruments Division, a leading producer of
high quality analytical testing instruments, for a purchase price of
approximately $425 million. The Company plans to finance the transaction with a
combination of existing cash and equivalents, borrowings under its existing
credit facilities and other financing, as required. Under the current terms of
the agreement, the Company will also assume a long-term pension liability of
approximately $65 million. The transaction is subject to certain customary
closing conditions and is expected to close late in the second quarter of 1999.
Perkin-Elmer Analytical Instruments generated 1998 fiscal sales of $569 million.
The Company also announced that it is exploring strategic alternatives for its
Technical Services segment and has engaged Goldman Sachs to conduct the review.
In 1999, the Company expects that its Technical Services segment will have sales
of approximately $450 million. The Technical Services segment reported sales of
$114.3 million and operating profit of $6.6 million for the first quarter of
1999.
DISCUSSION OF CONSOLIDATED RESULTS OF OPERATIONS -- 1999 COMPARED TO 1998
Sales from continuing operations for the first quarter of 1999 were $357.5
million which increased by $1.6 million over the comparable 1998 level. The
Company's contract, through its Technical Services segment, to provide support
services to NASA at Florida's Kennedy Space Center (Florida contract) expired at
the end of the third quarter of 1998. This contract contributed $40.2 million of
sales during the first quarter of 1998. Acquisitions completed in 1998
contributed approximately $60 million of revenues during the first quarter of
1999. Excluding divestitures and the Florida contract, first quarter 1999 sales
including 1998 acquisitions increased approximately 22% over the first quarter
of 1998. Discussion of sales by segment during the first quarter of 1999 versus
the respective 1998 period is presented in the section to follow herein.
Operating income from continuing operations was $25.8 million in the first
quarter of 1999 versus $54.9 million in the same period of 1998. The 1998
operating income included $67.5 million of gains from the divestiture of certain
businesses and restructuring charges of $31.4 million. Excluding these 1998
nonrecurring items, 1999 operating income for the first quarter increased by
approximately $6.7 million, or 37%, and was 7.2% of total consolidated sales for
the respective quarter. This represented a 190 basis point increase for the
first quarter over the comparable 1998 operating margin. Discussion of operating
income by segment during the first quarter of 1999 versus 1998 is presented in
the section to follow herein. Research and development expenses were $13.5
million in the first quarter of 1999, an increase of $2.5 million over
comparable 1998 levels. This increase was due primarily to expenditures for
Lumen and other investments across the organization, particularly Life Sciences
and Instruments, to support the overall product growth and development efforts.
SEGMENT RESULTS OF OPERATIONS
The Company's businesses are reported as five reportable segments, which
reflect the Company's management methodology and structure under five Strategic
Business Units (SBUs). The Company evaluates performance based on operating
profit of the respective segments. The discussion that follows is a summary
analysis of the primary changes in operating results by segment for the first
quarter of 1999 versus the same period of 1998.
Life Sciences
Sales for the first quarter of 1999 were $36.9 million compared to $32.9
million for the first quarter of 1998, which represents a $4 million, or 12%,
increase. Higher sales volumes from certain base businesses, revenues from
recently developed products and $1.6 million from the Isolab acquisition were
the primary reasons for the increase during the first quarter of 1999. The
higher volumes during the first quarter of 1999 primarily related to the
diagnostic and bioanalytical businesses.
Reported operating profit for the first quarter of 1999 was $4 million
compared to $.6 million for the first quarter of 1998, which represents a $3.4
million increase. The the first quarter of 1998 operating income
9
<PAGE> 11
included restructuring charges of $.7 million. Excluding this nonrecurring item,
operating profit for the first quarter of 1999 increased approximately $2.7
million, or 208%. The increase was due primarily to the higher revenues
discussed above, improved gross margins from most businesses resulting from a
more favorable product mix, and lower 1999 expense levels for the first quarter
of 1999 compared to the same period of 1998.
Optoelectronics
Sales for the first quarter of 1999 were $100.5 million compared to $63.7
million for the first quarter of 1998, which represents a $36.8 million, or 58%,
increase. The increase in revenues is due primarily to revenues from Lumen,
(acquired in December 1998) offset by slight declines in certain base business
sales volume during the first quarter of 1999 versus the first quarter of 1998.
Excluding Lumen, revenues for the first quarter of 1999 decreased approximately
6% compared to the first quarter of 1998 due primarily to the Company's planned
exit in late 1998 from the low-margin automotive sensors and printer circuit
board assembly businesses.
Reported operating income for the first quarter of 1999 was $7.8 million
compared to a loss of $7.3 million for the first quarter of 1998. The 1998
operating income included restructuring charges of $8.6 million. Excluding this
nonrecurring item, 1999 operating profit for the first quarter increased
approximately $6.5 million, and was 7.2% of total segment sales for the first
quarter of 1999 versus the 2.0% operating margin for the first quarter of 1998
before nonrecurring items. The 1999 increase was due primarily to higher
revenues discussed above, particularly certain higher-margin Lumen products, the
favorable impact of restructuring activities, including the relocation of
certain production to the Far East, higher gross margins across most businesses,
and a favorable product mix.
Instruments
Sales for the first quarter of 1999 were $64.7 million compared to $63.2
million for the first quarter of 1998, which represents a $1.5 million, or 2%,
increase. Volume growth in the Company's analytical instruments business during
the first quarter of 1999 and the inclusion of the Lumen photolithography
business offset the impact of continued declines in demand and competitive
market conditions in the Company's security and automotive businesses.
Reported operating profit for the first quarter of 1999 was $5 million
compared to a loss of $4 million for the first quarter of 1998. The 1998
operating income included restructuring charges of $9.7 million. Excluding this
nonrecurring item, 1999 operating income for the first quarter decreased
approximately $.7 million, and was 7.7% of total segment sales for the
respective period versus the 9.0% operating margin in the first quarter of 1998
before nonrecurring items. Lower sales, due to continued market softness in the
security and automotive testing businesses negatively impacted the first quarter
of 1999 operating income versus the first quarter of 1998. These factors offset
the Company's analytical instruments operating margin improvement, the inclusion
of Lumen photolithography operating income during the first quarter of 1999 and
higher royalty and licensing revenue in the first quarter of 1999 compared to
the first quarter of 1998.
Engineered Products
Sales for the first quarter of 1999 were $41.2 million compared to $37.2
million for the first quarter of 1998, which represents a $4 million, or 11%,
increase. The increase is due primarily to $7.2 million of revenues during the
first quarter of 1999 from the Belfab acquisition which partially offset
softness in the aerospace markets and the absence of revenues during the first
quarter of 1999 from certain low-margin sheet metal fabrication businesses,
which the Company exited in late 1998. Excluding the 1999 revenue during the
first quarter from Belfab and the effect of the businesses exited, revenue was
flat during the first quarter of 1999 compared to the first quarter of 1998.
Reported operating income for the first quarter of 1999 was $4 million
compared to a loss of $5.9 million for the first quarter of 1998. The 1998
operating income included restructuring charges of $8.5 million. Excluding this
nonrecurring item, 1999 operating income during the first quarter increased
approximately $1.4 million, and was 9.8% of total segment sales for the
respective period versus the 7.1% 1998 operating
10
<PAGE> 12
margin for the first quarter before nonrecurring items. Higher gross margins
driven primarily by higher 1999 sales levels during the first quarter versus the
comparable 1998 period and the benefits from certain productivity and
manufacturing cost programs within the segment contributed to this increase.
Technical Services
Sales for the first quarter of 1999 were $114.3 million compared to $136.3
million for the first quarter of 1998, which represents a $22 million, or 16%,
decrease. This decrease was due primarily to the loss of the Florida contract.
Excluding the first quarter of 1998 sales from the Florida contract, 1999
segment sales for the first quarter increased approximately 16% due primarily to
recent contract wins for government services and revenue increases in the
Company's privatization sector businesses.
Reported operating income for the first quarter of 1999 was $6.6 million
compared to $5.7 million for the first quarter of 1998, which represents a $.9
million, or 16%, increase. The 1998 operating income includes $.9 of
restructuring charges. Excluding this nonrecurring item, 1999 operating income
for the first quarter was flat nominally, and increased to 5.7% of total segment
sales for the first quarter versus the 4.8% operating margin for the first
quarter of 1998 before nonrecurring items.
RESTRUCTURING CHARGES
The Company developed two restructuring plans during the first and second
quarters of 1998 to integrate and consolidate its businesses. The Company
recorded restructuring charges in the first and second quarters of 1998, which
are discussed separately below. These restructuring plans were points in the
continuing transformation of the Company that began in 1994 and continued into
1998 with the addition of new leadership and new management, changes in the
organization of the businesses and the realignment and consolidation of
operations. Further details of the actions are presented below.
In connection with the Company's continued transformation of its portfolio
of companies, during the first quarter of 1998, management developed a plan to
restructure certain businesses. A discussion of the businesses affected within
each segment is presented below. The plan resulted in pre-tax restructuring
charges totaling $31.4 million. The principal actions in the restructuring plan
include close-down or consolidation of a number of offices and facilities,
transfer of assembly activities to lower-cost geographic locations, disposal of
underutilized assets, withdrawal from certain product lines and general cost
reductions.
The restructuring charges were broken down as follows by operating segment:
<TABLE>
<CAPTION>
TERMINATION OF
EMPLOYEE DISPOSAL OF LEASES AND OTHER
SEPARATION CERTAIN PRODUCT CONTRACTUAL
COSTS LINES AND ASSETS OBLIGATIONS TOTAL
---------- ---------------- ----------------- -----
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Life Sciences........................... $ .3 $ .2 $ .2 $ .7
Optoelectronics......................... 6.7 .8 1.1 8.6
Instruments............................. 4.8 2.9 2.0 9.7
Engineered Products..................... 4.8 1.9 1.8 8.5
Technical Services...................... .3 .4 .2 .9
Corporate and Other..................... 3.0 -- -- 3.0
----- ---- ---- -----
Total.............................. $19.9 $6.2 $5.3 $31.4
===== ==== ==== =====
Amounts incurred through April 4,
1999.................................. $ 8.7 $6.2 $ .9 $15.8
Ending accrual at April 4, 1999......... $11.2 $ -- $4.4 $15.6
</TABLE>
11
<PAGE> 13
The headcount reduction, by function, resulting in the Employee Separation
Costs detailed above is as follows:
<TABLE>
<CAPTION>
HEADCOUNT REDUCTION
-------------------
<S> <C>
Sales & Marketing.......................................... 38
Production................................................. 492
General & Administrative................................... 88
---
Total................................................. 618
===
</TABLE>
Further details of the actions are presented below. Specific businesses
within each segment which were affected by the restructuring actions are as
follows: The Engineered Products business affected primarily manufactures
mechanical components and systems. The Optoelectronics businesses affected
produce various lighting and sensor components and systems. The Instruments
restructuring relates primarily to its X-ray imaging business, which produces
security screening equipment, as well as its Instruments for Research and
Applied Science business, which produces particle detector equipment.
Close-down of certain facilities: Costs have been accrued for the closing
down of facilities. These costs relate to the affected businesses discussed
above within the Engineered Products and Optoelectronics segments.
Transfer of assembly activities: The Company plans to relocate certain
activities, primarily in its Optoelectronics segment, to lower-cost geographic
areas such as Indonesia and China. The costs included in the restructuring
charges related to costs associated with exiting the previous operations. Actual
costs to physically relocate are charged to operations as incurred.
Disposal of underutilized assets: The Company plans to dispose of
underutilized assets either through sale or abandonment, primarily in its
Instruments and Optoelectronics segments.
Withdrawal from certain product lines: The Company has made a strategic
decision to discontinue certain unprofitable product lines discussed above,
primarily in its Instruments and Optoelectronics segments.
During the second quarter of 1998, the Company expanded its continuing
effort to restructure certain businesses to further improve performance. The
plan resulted in additional pre-tax restructuring charges of $23.1 million. The
principal actions in this restructuring plan included the integration of current
operating divisions into five Strategic Business Units, close-down or
consolidation of a number of production facilities and general cost reductions.
Details are provided following the table presented below.
The restructuring charges were broken down as follows by operating segment:
<TABLE>
<CAPTION>
TERMINATION OF
EMPLOYEE DISPOSAL OF LEASES AND OTHER
SEPARATION CERTAIN PRODUCT CONTRACTUAL
COSTS LINES AND ASSETS OBLIGATIONS TOTAL
---------- ---------------- ----------------- -----
($ IN MILLIONS)
<S> <C> <C> <C> <C>
Life Sciences.......................... $ 3.3 $ .2 $ .4 $ 3.9
Optoelectronics........................ 1.8 5.6 4.3 11.7
Instruments............................ 1.6 -- -- 1.6
Engineered Products.................... 1.4 -- -- 1.4
Technical Services..................... 3.4 -- .2 3.6
Corporate and Other.................... .8 -- .1 .9
----- ---- ---- -----
Total............................. $12.3 $5.8 $5.0 $23.1
===== ==== ==== =====
Amounts incurred through April 4,
1999................................. $ 3.6 $5.8 $ .7 $10.1
Ending accrual at April 4, 1999........ $ 8.7 $ -- $4.3 $13.0
</TABLE>
12
<PAGE> 14
The headcount reduction, by function, resulting in the Employee Separation
Costs detailed above is as follows:
<TABLE>
<CAPTION>
HEADCOUNT REDUCTION
-------------------
<S> <C>
Sales & Marketing........................................... 44
Production.................................................. 137
General & Administrative.................................... 110
---
Total.................................................. 291
===
</TABLE>
Integration of Current Operating Divisions and Consolidation of Certain
Production Facilities
As part of the Company's second quarter restructuring plan, management
reorganized its current operating divisions into five Strategic Business Units
(SBUs). This resulted in termination of employees as well as the integration and
consolidation of certain facilities and product lines. This effort is
company-wide and affects all five SBUs. The major components within the
Optoelectronics plan consisted of the closing of two wafer fab production
facilities and a development program.
The total restructuring charges in the second quarter of 1998 included
$10.3 million for termination of leases and other contractual obligations. This
amount included approximately $7.0 million for termination of facility leases
and other lease-related costs, $1.5 million for termination of distributor
arrangements and $1.8 million for various other commitments. The facility leases
have remaining terms ranging from six months to five years. The amount accrued
reflects the Company's best estimate of actual costs to buy out the leases in
certain cases or the net cost to sublease the properties in other cases.
Approximately 375 employees of the total of 900 employees expected to be
terminated as part of the two restructuring plans have been severed as of April
4, 1999. The plans are expected to be mainly implemented by the segments by
mid-1999, except for the SBU consolidation, the completion of which is expected
to occur by the end of 1999. Cash outlays, primarily for employee separation
costs, were $3.6 million in the first quarter. Pre-tax cost savings under these
restructuring plans, due primarily to reduced depreciation and lower employment
costs, totaled approximately $3.9 million during the first quarter of 1999, or
$.05 earnings per diluted share. Fiscal year 2000 will reflect a full year's
savings from the restructuring plans and pre-tax annual savings are anticipated
to be approximately $24 million, or $.33 per diluted share. The Company expects
to incur approximately $28.5 million of cash outlays in connection with its
restructuring plans throughout 1999. These funds are expected to come primarily
from operating cash flows or borrowings from existing credit facilities.
The components of the restructuring charges met the criteria set forth in
Emerging Issues Task Force Issue (EITF) 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). 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.
DIVESTITURES AND OTHER
In January 1998, the Company sold its Rotron business unit for proceeds of
$103 million. In April 1998, the Company sold its Sealol Industrial Seals
operation for proceeds of $100 million, of which $45 million was utilized for
the Belfab acquisition. The Company realized gains of $125.8 million on the
dispositions.
OTHER
1999 Compared to 1998
Other expense was $4 million for 1999 versus $1.2 million reported in 1998.
This net increase of $2.8 million in other expense in 1998 was due primarily to
the impact of higher interest expense on increased debt levels resulting from
the Lumen acquisition. Income tax expense as a percent of pre-tax income held
constant at 36% for the first quarters of 1999 and 1998.
13
<PAGE> 15
FINANCIAL CONDITION
In March 1999, two of the Company's $100 million credit facilities were
renewed and increased to a $250 million credit facility that expires in March
2000. The Company has an additional revolving credit agreement for $100 million
that expires in March 2002. During the first quarter of 1999, the Company did
not draw down its credit facilities, which are used primarily as backup for the
Company's commercial paper program. In addition to financing ongoing operations,
the Company plans to utilize its commercial paper program to fund a portion of
anticipated acquisitions as they occur in 1999 and beyond. Debt at April 4, 1999
consisted of $184 million of short-term debt, primarily commercial paper
borrowings, and $117 million of long-term debt, primarily unsecured long-term
notes.
On December 16, 1998, Lighthouse Weston Corp. ("Lighthouse"), a wholly
owned subsidiary of the Company, completed its tender offer for shares of common
stock of Lumen for a purchase price of $253 million, including $75 million of
assumed debt. Lighthouse acquired approximately 92.3% of Lumen's common stock
pursuant to the tender offer. On January 4, 1999, Lumen became a wholly owned
subsidiary of the Company, as a result of the merger of Lighthouse with and into
Lumen. The acquisition of Lumen by the Company was accounted for as a purchase.
The Company financed the transaction with a combination of available cash and
short-term debt. Debt assumed in connection with the Lumen transaction was
approximately $75 million on the date of the acquisition. The Company paid down
this debt by the end of April 1999.
In January 1999, the Company filed a shelf registration statement with the
Securities and Exchange Commission (SEC) to register $465 million of securities.
This registration statement, together with the $35 million of securities covered
by a previously filed registration statement, will provide the Company with
financing flexibility to offer up to $500 million aggregate principal amount of
common stock, preferred stock, depository shares, debt securities, warrants,
stock purchase contracts and/or stock purchase units. The Company expects to use
the net proceeds from the sale of the securities for general corporate purposes,
which may include, among other things: the repayment of outstanding
indebtedness, working capital, capital expenditures, the repurchase of shares of
common stock and acquisitions. The precise amount and timing of the application
of such proceeds will depend upon the Company's funding requirements and the
availability and cost of other funds.
Cash and cash equivalents increased by $10.7 million and were $106.3
million at the end of the first quarter of 1999. Net cash provided by continuing
operations was $10.2 million for the three months ended April 4, 1999. This was
comprised of net income before depreciation, amortization and other non-cash
items of $26.6 million offset by a $16.4 million net change in certain other
assets and liabilities during the 1999 quarter. The primary net changes
consisted primarily of a $1.6 million decrease in inventory and a $.9 million
decrease in accounts receivable offset by decreases in base operations' accounts
payable and accrued expenses of $17.6 million, as well as $3.6 million of cash
outlays associated with the Company's 1998 restructuring programs. The decreases
in accrued expenses were attributable primarily to the Company's cash payments
during the quarter for employee benefit and incentive programs. Capital
expenditures were $8.5 million for the three months ended April 4, 1999. Capital
expenditures for fiscal 1999 are not expected to exceed $50 million.
The Company plans to fund the Perkin-Elmer transaction with a combination
of existing cash and equivalents, borrowings under its existing credit
facilities and other financing, as required.
THE YEAR 2000 ISSUE
The following Year 2000 statements constitute a Year 2000 Readiness
Disclosure within the meaning of the Year 2000 Readiness and Disclosure Act of
1998.
The operations of the Company rely on various computer technologies which,
as is common to most corporations, may be affected by what is commonly referred
to as the Year 2000 ("Y2K") issue. The Y2K issue is the result of computer
programs that were written using two digits rather than four to define the
applicable year. Computer equipment and software, as well as devices with
embedded technology that are
14
<PAGE> 16
time-sensitive, may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failure or miscalculations causing
disruption of operations and normal business activities.
THE COMPANY'S STATE OF READINESS
OVERVIEW
The Company has an extensive worldwide program in place to assess and
minimize its exposure to the Y2K issue. The Company began addressing the Y2K
issue on a Company-wide basis in late 1997. The Company's Y2K program is
designed to assess, prioritize, correct, monitor and report on certain key
elements of the Company's business and operations, which may be adversely
affected by the Y2K issue. This program is organized, structured and implemented
around six areas of potential risk related to the Y2K issue:
- Factory and shop floor control
- Facilities
- Information technology (IT) systems and related applications
- Products of the Company
- Suppliers, vendors and service providers
- Customers
PHASES OF THE COMPANY'S Y2K PROGRAM
The Company's Y2K program, which it implements Company-wide and at each of
its Strategic Business Units ("SBU") consists of five phases. A description of
each phase is presented below:
PHASE 1 -- INVENTORY
The purpose of this phase was to identify, collect, analyze and
prioritize Y2K compliance information on components, systems, software and
other devices containing program logic. As part of this process, a physical
inventory was conducted focusing on four areas of each SBU: factory/plant,
facilities, IT and products. Each inventoried item was assigned an internal
business risk rating of high, medium or low risk. The Company also
identified key and sole source suppliers to whom Y2K compliance
questionnaires and surveys were sent.
PHASE 2 -- ASSESSMENT
The purpose of this phase was to compile and review the inventoried
information gathered during Phase 1, assess potential Y2K risks and prepare
compliance initiatives. The Y2K status of each inventoried item was
determined through compliance statements, direct communication with vendors
and on-site item testing at each Company location.
PHASE 3 -- REMEDIATION PLANNING
The purpose of this phase was to develop remediation plans for
inventoried items that were identified in Phase 2 as Y2K noncompliant.
Remediation plans were developed for each non-compliant item including a
detailed timetable with completion milestones and target dates based on the
business risk priority rating of the item. The Remediation Planning Phase
also included the evaluation and development of contingency plans at the
SBU and operating unit level. Each Y2K segment team is developing a
contingency plan intended to mitigate potential adverse effects from the
Y2K issue in the event that the remediation plan for "high" business impact
items previously identified fails or is delayed beyond schedule.
PHASE 4 -- REMEDIATION PLAN EXECUTION
The purpose of this phase is to execute the remediation and
contingency plans developed in Phase 3. Each item in the remediation plan
is allotted a timeframe for completion, and percentage of completion is
monitored and discussed regularly. All SBUs of the Company have targeted
mid-1999 for the completion of all remediation activities.
15
<PAGE> 17
PHASE 5 -- FINAL TESTING
The purpose of this phase is to perform follow-up testing of
previously noncompliant items that have been corrected through the
implementation of Phase 4. This phase is scheduled to commence in mid-1999
and continue until completion later in the year.
A progress chart for the Company's Y2K program as of April 4, 1999 is
set forth below. Percentages in the table reflect the Company's best
estimate of progress completed to date in each risk area by phase as a
percentage of the total estimated time to complete the respective phase.
<TABLE>
<CAPTION>
REMEDIATION REMEDIATION FINAL
INVENTORY ASSESSMENT PLANNING PLAN EXECUTION TESTING
--------- ---------- ----------- -------------- -------
<S> <C> <C> <C> <C> <C>
Factory/plant....................... 100% 100% 100% 75% (a)
Facilities.......................... 100% 100% 100% 80% (a)
Applications........................ 100% 100% 100% 85% (a)
Products............................ 100% 100% 100% 95% (a)
Suppliers, vendors and service
providers......................... 100% 100% 100% (a) (a)
Customers........................... (b) (b) (b) (b) (a)
</TABLE>
- ---------------
(a) Scheduled to begin in mid-1999 and continue until completion later in
the year.
(b) Planned completion late in Q2 1999 or early Q3 1999.
State of Readiness by SBU
The Company has various worldwide operations. It has planned and continues
to execute its Y2K program utilizing a Strategic Business Unit and critical and
key operational unit focus. All of the SBUs have developed Y2K programs to
address the critical and primary risks assessed based on each SBU's Y2K risk
assessment and remediation processes. The primary areas of overall risk
assessment, including material third party risk, at the Life Sciences,
Optoelectronics, Engineered Products and Instruments SBUs of the Company include
but are not limited to:
- Raw materials availability and procurement
- Factory/plant manufacturing systems
- Continuity of heat, light, power and fuel sources for manufacturing and
office functionality
- IT for financial reporting and accounting
- Internal and external telecommunications and network systems to support
communication and business with vendors, suppliers and customers
Year 2000 risks for the Company's Technical Services SBU include risks
noted above, other than the risks associated with raw materials procurement and
purchase; this is not a major area of risk for this SBU based on the nature of
the business. On an SBU basis, the Life Sciences, Optoelectronics and Engineered
Products SBUs are making significant progress along the various phases of the
program, and the Company does not expect any significant Y2K exposures. The most
significant areas of risk identified relate to two operational units within the
Instruments and Technical Services SBUs. The Instruments SBU has developed an
aggressive remediation plan for its Automotive business unit and expects to
complete it and related contingency plans by Q3 1999. A governmental services
unit of the Company's Technical Services SBU is awaiting government direction on
how to proceed with remediation activities. This SBU has developed a contingency
plan which will ensure safe shutdowns of the facilities to minimize operational
and environmental exposures related to chemical weapons disposal operations.
Further remediation for these units will be developed and implemented as
necessary. A shutdown of this unit, if it occurs, is not anticipated to have a
material adverse effect on the Company's consolidated results of operations or
financial position.
Third Party Review
As part of its Y2K program, the Company has sought to assess the effect on
the Company of the Y2K compliance of its significant customers, vendors,
suppliers, raw materials suppliers, primary service suppliers, and financial
institutions. The Company has followed a strategy of identification of risks,
risk assessment,
16
<PAGE> 18
continuous material third party monitoring and evaluation, and contingency
planning. The Company did not use or engage outside firms for the purpose of
independent verification and validation of the reliability of third party risks
assessed and cost estimates related thereto under the Company's Y2K program.
The Company has identified critical third parties and performed risk
assessments using structured questionnaires and other procedures to estimate the
potential monetary and operational impact to the Company. Questionnaires and
surveys were sent out to approximately 6,000 key vendors and suppliers that
comprise approximately 30% of the Company's vendor/supplier population. The
responses received comprised approximately an 82% response rate. Approximately
92% of those who responded confirmed they were Y2K compliant. For those who were
not compliant or who did not respond, the Company developed or is in the process
of developing contingency plans in the event that these material third parties
are noncompliant. A complete discussion of the Company's contingency plans for
critical areas is discussed in this Year 2000 discussion and follows below. The
Company is in the process of sending out questionnaires and surveys to
approximately 1,000 key customers in Q2 1999. The Company also plans to perform
on-site readiness reviews for certain key customers.
Company Products
Although the Company has reviewed the Y2K compliance of a substantial
number of its material third parties, it is currently unable to predict the
final readiness of all of its material third parties. Certain of the Company's
products are used in conjunction with products of other companies in
applications that may be critical to the operations of its customers. Any
Company product's Y2K noncompliance, whether standing alone or used in
conjunction with the products of other companies, may expose the Company to
claims from its customers, material third parties or others, and could impair
market acceptance of the Company's products or services, increase service and
warranty costs, or result in payment of damages, which in turn could materially
adversely affect the results of operations and financial position of the
Company. While the Company expects such material third parties to address the
Y2K issue based on the representations made by such third parties to the
Company, it cannot guarantee that these systems will be made Y2K compliant in a
timely manner and cannot guarantee that it will not experience a material
adverse effect as a result of such noncompliance.
THE COSTS TO ADDRESS THE YEAR 2000 ISSUE
The Company has estimated costs for its Y2K program based on internal
estimates and independent quotes for IT and non-IT corrective actions, products
and services, as applicable, in each phase of the Company's Y2K program. The
following table sets forth the estimated costs incurred by the Company through
April 4, 1999 to address the Y2K issue. These amounts include the costs to
lease, purchase or expense new software and equipment needed to achieve Year
2000 compliance and enhance existing systems, as well as internal costs related
to this effort.
<TABLE>
<CAPTION>
REMEDIATION/IMPLEMENTATION
---------------------------
HISTORICAL/PLANNING REPLACE/
---------------------- REMEDIATION UPGRADE/ TOTAL AS OF
INVENTORY ASSESSMENT PLANNING REPAIR APRIL 4, 1999
--------- ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Factory/plant........................ $101 $371 $157 $1,405 $2,034
Facilities........................... 12 147 24 334 517
IT................................... 87 232 146 3,176 3,641
Products............................. 35 100 79 192 406
Suppliers/vendors.................... 46 78 -- -- 124
Key customers........................ 1 24 -- -- 25
---- ---- ---- ------ ------
Totals..................... $282 $952 $406 $5,107 $6,747
==== ==== ==== ====== ======
</TABLE>
Amounts expended for remediation activities were outside of and incremental
to the Company's IT budget for ongoing operational projects. With the exception
of new hardware or software that qualify for capitalization under generally
accepted accounting principles, the Company expenses all costs associated with
the Y2K program. Funding requirements for the Company's Y2K program activities
during 1999 are estimated to be approximately $3.4 million and have been
incorporated into the Company's 1999 capital and
17
<PAGE> 19
operating plans. The Company will utilize cash and equivalents and cash flows
from operations to fund remaining Y2K program costs during 1999. None of the
Company's other IT projects have been deferred due to its Y2K efforts.
RISK ANALYSIS
Reasonably Likely Worst Case Scenario
Although no reasonable assurance can be made, the Company believes that due
to the diversity of the Company's business portfolio, there is no single event
or one likely worst case scenario, short of a major national infrastructure
catastrophe, which would have a material adverse effect on the Company's results
of operations or financial condition. The most reasonably likely worst case
scenario is that a short-term disruption will occur with a small number of
customers or suppliers, requiring an appropriate response. In the event of an
internal system failure caused by a Y2K problem, the Company could have trouble
accessing accurate internal data, processing transactions and maintaining
accurate books and records. Accordingly, the Company might be unable to prepare
its financial statements for the fourth quarter of 1999 or periods thereafter.
Additionally, the Company's manufacturing operating systems and other
applications could be impaired resulting in the Company's inability to
manufacture and sell its products to customers.
The Company believes its current products, with any applicable updates, are
well prepared for Y2K date issues, and the Company plans to support these
products for date issues that may arise related to the Y2K issue. However, there
can be no guarantee that one or more of the Company's current products do not
contain Y2K date issues that may result in material costs to the Company. The
outcome of litigation, if any, resulting from the Company's products that are
proven to be noncompliant for Y2K cannot be determined at this time.
The Company could also experience a slowdown or reduction of sales if
customers are adversely affected by Y2K. If the vendors of the Company's most
important goods and services, or the suppliers of the Company's necessary
energy, telecommunications and transportation needs, fail to provide the Company
with (1) the materials and services necessary to produce, distribute and sell
its products, (2) the electrical power and other utilities necessary to sustain
its operations, or (3) reliable means of transporting products and supplies,
such failure could result in the Company's inability to manufacture and sell its
products to customers. The Company's contingency plans, when complete, will
include steps to pre-order and build up raw materials and finished goods as
appropriate to avoid stock-outs that would have a negative impact on the
Company's ability to manufacture and sell its products.
Additionally, the Company's operations are dependent on infrastructures
within all countries in which it operates and therefore a failure of any one of
those infrastructures related to Y2K could have a material adverse effect on the
Company's operations. The Company is not currently able to estimate the
financial impact of the Y2K failures addressed above as they relate to lost
revenues or additional resources that would be required to address such
failures.
CONTINGENCY PLANS
The Company believes that the IT and non-IT which support its critical
functions will be ready for the transition to the Year 2000. There can be no
assurance, however, that similar unforeseen issues for key commercial partners
(including utilities, financial services, building services and transportation
services) will not cause a material adverse effect on the Company. To address
these risks, and to address a risk that its own IT and non-IT will not perform
as expected during the Y2K transition, the Company has begun to develop
appropriate Y2K contingency plans. These plans will be established and revised
as necessary during the course of 1999. During the second quarter of 1999,
on-site readiness reviews will be conducted by the Company at its most critical
vendor and supplier locations. For the Company's material, key and sole source
vendors/suppliers who cannot be classified or certified as Y2K compliant,
contingency plans include, but are not limited to: (i) replacing the
vendor/supplier with one that is Y2K compliant, (ii) pre-ordering raw material
where applicable, (iii) pre-building product or products, or (iv) pre-shipping
product where practicable. These
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<PAGE> 20
contingency plans are expected to be finalized during the third quarter of 1999.
The Company believes that its contingency plans are sufficient to address any
material business disruption in a reasonable period of time to minimize the
effects of an adverse impact to the operations of the Company. If the
contingency plans fail, or if the Company is for some unforeseen reason "not
ready" for the Y2K issue at a key level of the operations of the business or a
contingency plan cannot be implemented in a timely manner, the Company will rely
on alternative means of communications, alternative power generation sources for
the manufacture of key products, and other manual or backup systems and
processes on an interim basis until the Y2K issues can be corrected.
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their existing sovereign currencies
and the new common legal currency, the "euro", which was adopted on that date.
There is a transition period between January 1, 1999 and January 1, 2002, during
which the euro will be adopted into the operations. During 1998, the Company
formed a cross-functional task force to assess the potential impact to the
Company that may result from the euro conversion. Areas of assessment include
the following: cross-border price transparencies and the resulting competitive
impact; adaptation of information technology and other system requirements to
accommodate euro transactions; the impact on currency exchange rate risk; the
impact on existing contracts; and taxation and accounting. The Company's
assessment is that the anticipated impact of the euro conversion on the
Company's operations will not be material.
FORWARD-LOOKING INFORMATION AND FACTORS AFFECTING FUTURE PERFORMANCE
This Quarterly Report contains "forward-looking statements." For this
purpose, any statements contained in this Annual Report that are not statements
of historical fact may be deemed to be forward-looking statements. Words such as
"believes," "anticipates," "plans," "expects," "will" and similar expressions
are intended to identify forward-looking statements. There are a number of
important factors that could cause the results of EG&G to differ materially from
those indicated by these forward-looking statements. These factors include,
without limitation, those set forth in "Item 7. Management's Discussions and
Analysis of Financial Condition and Results of Operations -- Forward-Looking
Information and Factors Affecting Future Performance" of the Company's Annual
Report on Form 10-K as of January 3, 1999, which are expressly incorporated by
reference herein.
MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign
currency fluctuations and changes in the market values of its investments.
In the normal course of business, the Company employs established policies
and procedures to manage its exposure to changes in interest rates and
fluctuations in the value of foreign currencies.
The Company's objective in managing the exposure to foreign currency
fluctuations is to reduce earnings and cash flow volatility associated with
foreign exchange rate changes to allow management to focus its attention on its
core business issues and challenges. Accordingly, the Company enters into
various forward contracts that change in value as foreign exchange rates change
to protect the value of its existing foreign currency assets, liabilities,
commitments and anticipated foreign currency revenues. The principal currencies
hedged are the Finnish marka, Singapore dollar, Canadian dollar, British pound,
German mark, French franc and Japanese yen. In those currencies where there is a
liquid, cost-effective forward market, the Company maintains hedge coverage
between minimum and maximum percentages of its anticipated transaction exposure
for periods not to exceed one year. The gains and losses on these contracts
offset changes in the value of the related exposure.
It is the Company's policy to enter into foreign currency and interest rate
transactions only to the extent considered necessary to meet its objectives as
stated above. The Company does not enter into foreign currency or interest rate
transactions for speculative purposes.
19
<PAGE> 21
PART II. OTHER INFORMATION
EG&G, INC. AND SUBSIDIARIES
ITEM 4. RESULTS OF VOTES OF SECURITY HOLDERS
(a) The Company's annual meeting of stockholders was held on April 27,
1999.
(b) Proxies for the meeting were solicited pursuant to Regulation 14A, and
there were no solicitations in opposition to management's nominees for
Directors. All of such nominees were elected for terms of one year
each, and the number of Directors was fixed at ten.
(c) The Stockholders voted 31,917,754 shares for and 2,150,461 shares
against, with 176,713 shares abstaining and 4,035,793 shares not
voting, on a proposal to approve the EG&G, Inc. 1998 employee stock
purchase plan.
(d) The Stockholders voted 23,216,691 shares for and 10,713,431 shares
against, with 214,804 shares abstaining and 4,035,795 shares not
voting, on a proposal to approve the EG&G, Inc. 1999 incentive plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits incorporated by reference from Part 1 herein.
Exhibit 27 -- Financial data schedule (submitted in electronic format
only)
Exhibit 99 -- Pages 33 through 35 of the Company's Annual Report on Form
10-K for the year ended January 3, 1999 as filed with the SEC (which is
not deemed filed except to the extent that portions thereof are
expressly incorporated by reference herein).
(b) Reports on Form 8-K
A report on Form 8-K was filed with the Securities and Exchange
Commission on January 25, 1999 regarding the filing of certain
cautionary statements and the appointment of Robert F. Friel as Senior
Vice President and Chief Financial Officer.
A report on Form 8-K was filed with the Securities and Exchange
Commission on March 5, 1999 regarding a press release issued on January
26, 1999 reporting on the Company's financial results for the fourth
quarter of 1998.
A report on Form 8-K was filed with the Securities and Exchange
Commission on March 15, 1999 regarding the Company's announcement that
it plans to acquire Perkin-Elmer's Analytical Instruments Division. The
Company also announced that it will explore strategic alternatives for
its Technical Services business unit.
Reports on Form 8-K/A were filed with the Securities and Exchange
Commission on February 26, March 10, and March 30, 1999 to amend and
restate item 7 of the report on Form 8-K filed on December 30, 1998 with
the Securities and Exchange Commission regarding the completion of the
Company's tender offer for shares of common stock of Lumen Technologies,
Inc.
20
<PAGE> 22
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/ ROBERT F. FRIEL
----------------------------------
ROBERT F. FRIEL
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Date May 18, 1999
21
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