<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported) November 23, 1999
PerkinElmer, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 1-5075 04-2052042
(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification No.)
incorporation)
45 William Street, Wellesley, Massachusetts 02481
(Address of principal executive offices) (Zip Code)
(781) 237-5100
(Registrant's telephone number, including area code)
Not applicable
(Former name or former address, if changed since last report)
<PAGE> 2
Item 5. OTHER EVENTS
On August 20, 1999, PerkinElmer, Inc. (formerly EG&G, Inc. and hereinafter
referred to as "the Company") sold the assets of its Technical Services segment
(the "Technical Services Business"), including the outstanding capital stock of
EG&G Defense Materials, Inc., a subsidiary of the Company, to EG&G Technical
Services, Inc., an affiliate of The Carlyle Group L.P. (the "Buyer"), for
approximately $250 million in cash and the assumption by the Buyer of certain
liabilities of the Technical Services Business. Approximately $2.1 million of
the cash purchase price will be paid by the Buyer to the Company on the seventh
anniversary of the closing of this transaction. The purchase price is subject to
a post-closing adjustment currently in negotiation related to the working
capital, as defined in the Purchase and Sale Agreement dated July 19, 1999 by
and between the Company and the Buyer, as amended (the "TS Purchase Agreement"),
of the Technical Services Business as of the closing date.
The Company accounted for the sale of its Technical Services Business as a
discontinued operation in accordance with Accounting Principles Board (APB)
Opinion No. 30, Reporting the Results of Operations, for the fiscal 1999 second
and third quarters ended July 4, 1999 and October 3, 1999, respectively and,
accordingly, prior periods have been restated. Accordingly, the results of
operations of the Technical Services Business have been segregated from
continuing operations and reported as a separate line item on the Company's
consolidated income statements. The Company contracted to sell the EG&G name,
trademark and related rights in connection with this divestiture. Effective
October 26, 1999, the Company began trading as PerkinElmer, Inc. (NYSE:PKI). The
Company reported a net gain on disposition of discontinued operations of $106
million net of income taxes, transaction and related costs during the third
quarter of fiscal 1999. The gain was reported separately from the results of the
Company's continuing operations. The following statements and other information
are included in this filing and have been restated to reflect the Technical
Services Business as a discontinued operation:
PERKINELMER, INC.
ANNUAL FINANCIAL STATEMENTS:
Consolidated Income Statements for the three years ended
January 3, 1999
Consolidated Balance Sheets as of January 3, 1999 and
December 28, 1997
Consolidated Statements of Stockholders' Equity for
the three years ended January 3, 1999
Consolidated Statements of Cash Flows for the three years ended
January 3, 1999
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
OTHER ANNUAL INFORMATION:
Sales and Operating Profit by Operating Segment for the five
years ended January 3, 1999
Selected Financial Information for the five years ended
January 3, 1999
Management's Discussion and Analysis of Results of Operations
and Financial Condition
INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Condensed Consolidated Income Statements for the three months
ended April 4, 1999 and March 29, 1998
Condensed Consolidated Balance Sheets as of April 4, 1999 and
January 3, 1999
Condensed Consolidated Statements of Cash Flows for the
three months ended April 4, 1999 and March 29, 1998
Notes to Consolidated Financial Statements
OTHER INTERIM INFORMATION:
Management's Discussion and Analysis of Results of Operations
and Financial Condition
2
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired
Not applicable
(b) Pro Forma Financial Information
Not applicable
(c) Exhibits
Exhibit 23.1 - Consent of Independent Public Accountants
Exhibit 27 - Financial Data Schedule
3
<PAGE> 4
PERKINELMER, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
FOR THE THREE YEARS ENDED JANUARY 3, 1999
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997 1996
- -------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Sales.............................................. $ 854,382 $ 927,482 $ 928,287
Cost of Sales...................................... 550,987 606,746 603,361
Research and Development Expenses.................. 46,026 44,541 41,903
Selling, General and Administrative Expenses....... 203,740 220,976 226,758
In-Process Research and Development Charge (Note
2)............................................... 2,300 -- --
Restructuring Charges (Note 3)..................... 50,027 -- --
Asset Impairment Charges (Note 4).................. 7,400 28,200 --
Gains on Dispositions (Note 5)..................... (125,822) -- --
---------- ---------- ----------
OPERATING INCOME FROM CONTINUING OPERATIONS........ 119,724 27,019 56,265
Other Income (Expense), Net (Note 6)............... (1,397) (7,555) (9,052)
---------- ---------- ----------
Income From Continuing Operations Before Income
Taxes............................................ 118,327 19,464 47,213
Provision for Income Taxes (Note 7)................ 39,326 9,902 12,949
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS.................. 79,001 9,562 34,264
Income From Discontinued Operations, Net of Income
Taxes (Note 8)................................... 23,001 24,130 25,892
---------- ---------- ----------
NET INCOME......................................... $ 102,002 $ 33,692 $ 60,156
========== ========== ==========
BASIC EARNINGS PER SHARE (NOTE 9):
CONTINUING OPERATIONS............................ $ 1.74 $ .21 $ .72
Discontinued Operations.......................... .51 .53 .55
---------- ---------- ----------
NET INCOME......................................... $ 2.25 $ .74 $ 1.27
========== ========== ==========
DILUTED EARNINGS PER SHARE (NOTE 9):
CONTINUING OPERATIONS............................ $ 1.72 $ .21 $ .72
Discontinued Operations.......................... .50 .53 .55
---------- ---------- ----------
NET INCOME......................................... $ 2.22 $ .74 $ 1.27
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 5
PERKINELMER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 3, 1999 AND DECEMBER 28, 1997
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997
- -------------------------------------------- ---------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 95,565 $ 57,934
Accounts receivable (Note 10)............................. 170,171 174,592
Inventories (Note 11)..................................... 123,568 110,020
Other current assets (Note 7)............................. 110,954 69,496
Net assets of discontinued operations (Note 8)............ 32,087 35,531
---------- ---------
TOTAL CURRENT ASSETS.............................. 532,345 447,573
---------- ---------
Property, Plant and Equipment:
At cost (Notes 4 and 12).................................. 491,647 464,144
Accumulated depreciation and amortization................. (272,967) (285,905)
---------- ---------
Net Property, Plant and Equipment........................... 218,680 178,239
---------- ---------
Investments (Note 13)....................................... 13,506 13,391
Intangible Assets (Notes 4 and 14).......................... 317,611 78,567
Other Assets (Notes 7 and 17)............................... 56,636 59,967
---------- ---------
TOTAL ASSETS...................................... $1,138,778 $ 777,737
========== =========
Current Liabilities:
Short-term debt (Note 15)................................. $ 157,888 $ 46,167
Accounts payable.......................................... 73,420 60,898
Accrued restructuring costs (Note 3)...................... 34,569 3,025
Accrued expenses (Note 16)................................ 218,600 128,456
---------- ---------
TOTAL CURRENT LIABILITIES......................... 484,477 238,546
---------- ---------
Long-Term Debt (Note 15).................................... 129,835 114,863
Long-Term Liabilities (Notes 7, 17 and 18).................. 124,799 95,940
Contingencies (Note 19)
Stockholders' Equity (Note 21):
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 in 1998 and 1997...... 60,102 60,102
Retained earnings......................................... 623,591 540,379
Accumulated other comprehensive income (loss)............. 3,729 (3,857)
Cost of shares held in treasury; 15,355,000 shares in
1998 and 14,769,000 shares in 1997..................... (287,755) (268,236)
---------- ---------
Total Stockholders' Equity........................ 399,667 328,388
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $1,138,778 $ 777,737
========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 6
PERKINELMER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JANUARY 3, 1999
<TABLE>
<CAPTION>
ACCUMULATED
OTHER COST OF TOTAL
COMPREHENSIVE COMMON RETAINED COMPREHENSIVE SHARES HELD STOCKHOLDERS'
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) INCOME STOCK EARNINGS INCOME (LOSS) IN TREASURY EQUITY
- -------------------------------------------- ------------- ------- -------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995..................... $60,102 $498,181 $ 28,923 $(220,260) $366,946
Comprehensive income:
Net income................................... $ 60,156 -- 60,156 -- -- 60,156
--------
Other comprehensive income (loss), net of
tax:
Foreign currency translation adjustments... (10,451) -- -- (10,451) -- (10,451)
Unrealized gains on securities:
Gains arising during the period............ 1,202
Reclassification adjustment................ (242)
--------
Net unrealized gains........................... 960 -- -- 960 -- 960
--------
Other comprehensive income (loss).............. (9,491)
--------
Comprehensive income........................... $ 50,665
========
Cash dividends ($.56 per share)................ -- (26,589) -- -- (26,589)
Exercise of employee stock options and related
income tax benefits.......................... -- 295 -- 4,549 4,844
Purchase of common stock for treasury.......... -- -- -- (30,760) (30,760)
------- -------- -------- --------- --------
BALANCE, DECEMBER 29, 1996..................... 60,102 532,043 19,432 (246,471) 365,106
Comprehensive income:
Net income................................... $ 33,692 -- 33,692 -- -- 33,692
--------
Other comprehensive income (loss), net of
tax:
Foreign currency translation adjustments... (22,608) -- -- (22,608) -- (22,608)
Unrealized losses on securities:
Losses arising during the period........... (655)
Reclassification adjustment................ (26)
--------
Net unrealized losses.......................... (681) -- -- (681) -- (681)
--------
Other comprehensive income (loss).............. (23,289)
--------
Comprehensive income........................... $ 10,403
========
Cash dividends ($.56 per share)................ -- (25,684) -- -- (25,684)
Exercise of employee stock options and related
income tax benefits.......................... -- 328 -- 6,339 6,667
Purchase of common stock for treasury.......... -- -- -- (28,104) (28,104)
------- -------- -------- --------- --------
BALANCE, DECEMBER 28, 1997..................... 60,102 540,379 (3,857) (268,236) 328,388
Comprehensive income:
Net income................................... $102,002 -- 102,002 -- -- 102,002
--------
Other comprehensive income, net of tax:
Gross foreign currency translation
adjustments.............................. 4,608 -- -- 4,608 -- 4,608
Reclassification adjustment for translation
losses realized upon sale of Sealol
Industrial Seals......................... 3,115 -- -- 3,115 -- 3,115
Unrealized losses on securities arising
during the period........................ (137) -- -- (137) -- (137)
--------
Other comprehensive income................. 7,586
--------
Comprehensive income........................... $109,588
========
Cash dividends ($.56 per share)................ -- (25,408) -- -- (25,408)
Exercise of employee stock options and related
income tax benefits.......................... -- 6,618 -- 21,698 28,316
Purchase of common stock for treasury.......... -- -- -- (41,217) (41,217)
------- -------- -------- --------- --------
BALANCE, JANUARY 3, 1999....................... $60,102 $623,591 $ 3,729 $(287,755) $399,667
======= ======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE> 7
PERKINELMER, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED JANUARY 3, 1999
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ---------------------- -------- ------- -------
<S> <C> <C> <C>
Operating Activities:
Net income................................................ $102,002 $33,692 $60,156
Deduct net income from discontinued operations............ (23,001) (24,130) (25,892)
-------- ------- -------
Income from continuing operations......................... 79,001 9,562 34,264
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...... 29,569 3,025 --
Asset impairment charges................................ 7,400 28,200 --
Depreciation and amortization........................... 48,510 42,698 38,861
Deferred taxes.......................................... 11,330 1,385 7,326
Gains on dispositions and sales of investments, net..... (130,545) (11,713) (1,714)
Changes in assets and liabilities which provided (used)
cash, excluding effects from companies purchased and
divested:
Accounts receivable..................................... 7,830 (24,507) (12,473)
Inventories............................................. 3,265 (2,475) (5,711)
Accounts payable and accrued expenses................... 13,797 291 (6,764)
Noncurrent prepaid pension.............................. -- (10,040) (2,876)
Prepaid taxes........................................... (23,689) (5,700) 1,467
Prepaid expenses and other.............................. (17,635) (19,321) (4,089)
-------- ------- -------
Net Cash Provided by Continuing Operations.................. 40,853 11,405 48,291
Net Cash Provided by Discontinued Operations................ 28,702 23,433 31,867
-------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 69,555 34,838 80,158
-------- ------- -------
Investing Activities:
Capital expenditures...................................... (44,489) (47,642) (78,796)
Reimbursement of invested capital (Note 18)............... -- 27,000 --
Proceeds from dispositions of businesses and sales of
property, plant and equipment........................... 210,505 24,287 1,744
Cost of acquisitions, net of cash and cash equivalents
acquired................................................ (217,937) (3,611) --
Proceeds from sales of investments........................ 7,623 4,129 9,447
Other..................................................... (160) (1,156) (2,000)
-------- ------- -------
Net Cash Provided by (Used in) Continuing Operations........ (44,458) 3,007 (69,605)
Net Cash Used in Discontinued Operations.................... (2,033) (1,087) (1,694)
-------- ------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......... (46,491) 1,920 (71,299)
-------- ------- -------
Financing Activities:
Increase in commercial paper borrowings................... 104,156 27,879 17,965
Payment of acquired Lumen revolving credit borrowings..... (59,090) -- --
Other debt increases (decreases).......................... 7,270 (3,443) (1,959)
Proceeds from issuance of common stock for options
exercised............................................... 28,316 6,667 4,844
Purchases of common stock................................. (41,217) (28,104) (30,760)
Cash dividends............................................ (25,408) (25,684) (26,589)
-------- ------- -------
Net Cash Provided by (Used in) Continuing Operations........ 14,027 (22,685) (36,499)
-------- ------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......... 14,027 (22,685) (36,499)
-------- ------- -------
Effect of Exchange Rate Changes on Cash and Cash
Equivalents............................................... 540 (3,985) (718)
-------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 37,631 10,088 (28,358)
Cash and Cash Equivalents at Beginning of Year.............. 57,934 47,846 76,204
-------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 95,565 $57,934 $47,846
======== ======= =======
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest................................................ $ 12,367 $12,351 $13,526
Income taxes............................................ 59,029 26,683 35,678
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE> 8
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of PerkinElmer, Inc. (formerly EG&G, Inc.) and its subsidiaries
(the Company). All material intercompany balances and transactions have been
eliminated in consolidation.
Nature of Operations: PerkinElmer, Inc. is a global technology company
which provides products and systems to the medical, pharmaceutical,
telecommunications, semi-conductor, aerospace, photographic and other markets.
The Company's operating segments are Life Sciences, Optoelectronics, Instruments
and Fluid Sciences. In August 1999, the Company divested its Technical Services
segment, which is presented as discontinued operations in accordance with
Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations (see Note 8).
Use of Estimates: 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. Actual results could differ from those estimates.
Sales: Product sales are recorded at the time of shipment. Other service
sales are generally recorded as the services are rendered or, in the case of
certain contracts, as milestones are achieved. If a loss is anticipated on any
contract, provision for the entire loss is made immediately. The former
Technical Services segment had cost-reimbursement contracts with governmental
agencies. These contracts included both cost plus fixed fee contracts and cost
plus award fee contracts based on performance. Sales under cost-reimbursement
contracts were recorded as costs were incurred and included applicable income in
the proportion that costs incurred bear to total estimated costs.
Inventories: Inventories, which include material, labor and manufacturing
overhead, are valued at the lower of cost or market. The majority of inventories
is accounted for using the first-in, first-out method; remaining inventories are
accounted for using the last-in, first-out (LIFO) method.
Property, Plant and Equipment: For financial statement purposes, the
Company depreciates plant and equipment using the straight-line method over
their estimated useful lives, which generally fall within the following ranges:
buildings and special-purpose structures -- 10 to 25 years; leasehold
improvements -- estimated useful life or remaining term of lease, whichever is
shorter; machinery and equipment -- 3 to 7 years; special-purpose equipment --
expensed or depreciated over the life of the initial related contract.
Nonrecurring tooling costs are capitalized, while recurring costs are expensed.
For income tax purposes, the Company depreciates plant and equipment over their
estimated useful lives using accelerated methods.
Pension Plans: The Company's funding policy provides that payments to the
U.S. pension trusts shall at least be equal to the minimum funding requirements
of the Employee Retirement Income Security Act of 1974. Non-U.S. plans are
accrued for, but generally not funded, and benefits are paid from operating
funds.
Translation of Foreign Currencies: The balance sheet accounts of non-U.S.
operations, exclusive of stockholders' equity, are translated at year-end
exchange rates, and income statement accounts are translated at weighted-average
rates in effect during the year; any translation
8
<PAGE> 9
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adjustments are made directly to a component of stockholders' equity. The net
transaction gains (losses) were not material for the years presented.
Intangible Assets: In accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of, and APB Opinion No. 17, Intangible
Assets, the Company reviews long-lived assets and all intangible assets
(including goodwill) for impairment whenever events or changes in circumstances
indicate the carrying amount of such assets may not be recoverable.
Recoverability of these assets is determined by comparing the forecasted
undiscounted net cash flows of the operation to which the assets relate, to the
carrying amount including associated intangible assets of such operation. If the
operation is determined to be unable to recover the carrying amount of its
assets, then intangible assets are written down first, followed by the other
long-lived assets of the operation, to fair value. Fair value is determined
based on discounted cash flows or appraised values, depending upon the nature of
the assets. (See Note 4 for further discussion of asset impairment charges.)
Stock-Based Compensation: In accordance with SFAS No. 123, Accounting for
Stock-Based Compensation, the Company has elected to continue to account for
stock options at intrinsic value with disclosure of the effects of fair value
accounting on net income and earnings per share on a pro forma basis.
Cash Flows: For purposes of the Consolidated Statements of Cash Flows, the
Company considers all highly liquid instruments with a purchased maturity of
three months or less to be cash equivalents. The carrying amount of cash and
cash equivalents approximates fair value due to the short maturities.
Environmental Matters: The Company accrues for costs associated with the
remediation of environmental pollution when it is probable that a liability has
been incurred and the Company's proportionate share of the amount can be
reasonably estimated. Any recorded liabilities have not been discounted.
Earnings Per Share: In the fourth quarter of 1997, the Company adopted the
provisions of SFAS No. 128, Earnings Per Share, which is effective for financial
statements for periods ending after December 15, 1997. SFAS No. 128 requires
replacement of primary earnings per share (EPS) with basic EPS, which is
computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding. Diluted EPS, which gives
effect to all dilutive potential common shares outstanding, is also required.
While all prior-period EPS data presented are required to be restated, there was
no impact on previously reported EPS from the adoption of SFAS No. 128.
Comprehensive Income: In the first quarter of 1998, the Company adopted
the provisions of SFAS No. 130, Reporting Comprehensive Income, which
established standards for reporting and display of comprehensive income and its
components. Comprehensive income is the total of net income and all other
nonowner changes in stockholders' equity.
Segments and Related Information: In the fourth quarter of 1998, the
Company adopted the provisions of SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. The statement established 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.
Derivative Instruments and Hedging: The Financial Accounting Standards
Board issued SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the Effective Date of SFAS No. 133, in June 1999. SFAS
No. 133 is now effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000; earlier adoption is allowed. The statement requires
companies to record derivatives on the balance sheet as assets or liabilities,
9
<PAGE> 10
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 relatively 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.
Start-up Activities: During 1998, the American Institute of Certified
Public Accountants issued Statement of Position 98-5, Reporting on the Costs of
Start-up Activities (SOP 98-5). This Statement requires a change in the method
of accounting for start-up costs on major projects to expense these costs as
incurred. Prior to this accounting change, these costs could be capitalized. The
impact of this accounting change does not have a material effect on the
Company's results of operations or financial position.
Reclassifications: Certain amounts from prior years have been reclassified
to conform to the 1998 financial statement presentation.
Reference is made to Notes 27 and 28 to the accompanying financial
statements which disclose certain events which occurred subsequent to the
balance sheet date of January 3, 1999.
2. ACQUISITIONS
On December 16, 1998, the Company acquired substantially all of the
outstanding common stock and options of Lumen Technologies, Inc. (Lumen), a
maker of high-technology specialty light sources. The purchase price of
approximately $253 million, which included $75 million of assumed debt, was
funded with existing cash and commercial paper borrowings. The acquisition was
accounted for as a purchase under APB Opinion No. 16, Business Combinations. In
accordance with APB Opinion No. 16, the Company allocated the purchase price of
Lumen based on the fair value of the assets acquired and liabilities assumed.
Portions of the purchase price, including intangible assets, were identified by
independent appraisers utilizing proven valuation procedures and techniques.
These intangible assets include approximately $2.3 million for acquired
in-process research and development (in-process R&D) for projects that did not
have future alternative uses. This allocation represents the estimated fair
value based on risk-adjusted cash flows related to the in-process R&D projects.
At the date of the acquisition, the development of these projects had not yet
reached technological feasibility, and the R&D in progress had no alternative
future uses. Accordingly, these costs were expensed in the fourth quarter of
1998. Acquired intangibles totaling $11.8 million included the fair value of
trade names, trademarks and patents. These intangibles are being amortized over
their estimated useful life of ten years. Goodwill resulting from the Lumen
acquisition is being amortized over 30 years. Approximately $5 million has been
recorded as accrued restructuring charges in connection with the acquisition.
The restructuring plans include initiatives to integrate the operations of the
Company and Lumen, and reduce overhead. The primary components of these plans
relate to: (a) the transfer of certain manufacturing activities to lower cost
facilities, (b) integration of the sales and marketing organization and (c) the
termination of certain contractual obligations. The Company expects that these
actions will result in a reduction in workforce of approximately 200
individuals. Management is in the process of finalizing its restructuring plans
related to Lumen, and accordingly, the amounts recorded are based on
management's current estimates of those costs. The majority of the restructuring
actions are expected to occur through fiscal 2000.
10
<PAGE> 11
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the purchase price and preliminary allocation are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Consideration and acquisition costs:
Cash paid for stock and options............. $162,050
Debt assumed................................ 74,388
Fair value of options exchanged............. 6,500
Deferred purchase price for subsidiary
minority interest........................ 6,000
Acquisition costs........................... 3,925
--------
$252,863
========
Preliminary allocation of purchase price:
Current assets.............................. $ 66,829
Property, plant and equipment............... 52,525
Acquired intangibles........................ 11,800
In-process R&D.............................. 2,300
Goodwill.................................... 175,446
Liabilities assumed and other............... (56,037)
--------
$252,863
========
</TABLE>
As indicated earlier, some allocations are based on studies and valuations
which are currently being finalized. Management does not believe that the final
purchase price allocation will produce materially different results than those
reflected herein.
In December 1998, the Company acquired Life Science Resources Limited
(LSR), a U.K.-based developer and supplier of biotechnology, biomedical and
clinical research instrumentation, for $11 million. In April 1998, in connection
with the divestiture of the Sealol Industrial Seals division, the Company
purchased Belfab, the advanced metal bellows division of John Crane, Inc. for
$45 million in cash. In February 1998, the Company acquired Isolab, Inc., a
supplier of systems for clinical diagnostic screening, for $10 million. These
acquisitions were accounted for using the purchase method. The excess of the
cost over the fair market value of the net assets acquired of $33 million is
being amortized over 20 years using a straight-line method. The results of
operations of the acquisitions are included in the consolidated results of the
Company from the date of each respective acquisition.
Unaudited pro forma operating results for the Company, assuming the
acquisition of Lumen occurred on December 29, 1996, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT PER SHARE DATA) 1998 1997
- ------------------------------------ -------- ----------
<S> <C> <C>
Sales................................ $997,437 $1,031,128
Income (loss) from continuing
operations......................... 57,175 (1,980)
Basic earnings (loss) per share.... 1.26 (.04)
Diluted earnings (loss) per share.. 1.25 (.04)
Net income........................... 80,176 22,150
Basic earnings per share........... 1.77 .48
Diluted earnings per share......... 1.75 .48
</TABLE>
The pro forma amounts in the table above exclude the $2.3 million
in-process R&D charge. Pro forma amounts for the other 1998 acquisitions are not
included as their effect is not material to the Company's financial statements.
11
<PAGE> 12
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. RESTRUCTURING AND INTEGRATION CHARGES
The Company developed restructuring plans during 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 $30.5 million. The principal actions in the restructuring plan
include close-down or consolidation of a number of offices and facilities,
transfer of assembly activities to lower cost geographic locations, disposal of
underutilized assets, withdrawal from certain product lines and general cost
reductions. The restructuring charges related to continuing operations were
broken down as follows by operating segment:
<TABLE>
<CAPTION>
TERMINATION OF
DISPOSAL OF LEASES AND OTHER
EMPLOYEE CERTAIN PRODUCT CONTRACTUAL
($ IN MILLIONS) SEPARATION COSTS LINES AND ASSETS OBLIGATIONS TOTAL
- --------------- ---------------- ---------------- ---------------- -----
<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
Fluid Sciences..................... 4.8 1.9 1.8 8.5
Corporate and Other................ 3.0 -- -- 3.0
----- ---- ---- -----
Total.................... $19.6 $5.8 $5.1 $30.5
===== ==== ==== =====
Amounts incurred through 1/3/99.... $ 6.5 $5.8 $ .7 $13.0
Ending accrual at 1/3/99........... $13.1 -- $4.4 $17.5
</TABLE>
The headcount reduction, by function, resulting in the Employee Separation
Costs detailed above is as follows:
<TABLE>
<CAPTION>
HEADCOUNT REDUCTION
-------------------
<S> <C> <C> <C> <C>
Sales & Marketing............... 34
Production...................... 480
General & Administrative........ 58
---
Total................. 572
===
</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 Fluid Sciences 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 Fluid Sciences and Optoelectronics segments.
12
<PAGE> 13
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $19.5 million. The
principal actions in this restructuring plan included the integration of current
continuing operating divisions into four strategic business units, close-down or
consolidation of a number of production facilities and general cost reductions.
Details are provided following the table presented below.
The restructuring charges related to continuing operations were broken down
as follows by operating segment:
<TABLE>
<CAPTION>
TERMINATION OF
DISPOSAL OF LEASES AND OTHER
EMPLOYEE CERTAIN PRODUCT CONTRACTUAL
($ IN MILLIONS) SEPARATION COSTS LINES AND ASSETS OBLIGATIONS TOTAL
- --------------- ---------------- ---------------- ---------------- -----
<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
Fluid Sciences..................... 1.4 -- -- 1.4
Corporate and Other................ .8 -- .1 .9
----- ---- ---- -----
Total.................... $ 8.9 $5.8 $4.8 $19.5
===== ==== ==== =====
Amounts incurred through 1/3/99.... $ 1.6 $5.8 $ .3 $ 7.7
Ending accrual at 1/3/99........... $ 7.3 -- $4.5 $11.8
</TABLE>
The headcount reduction, by function, resulting in the Employee Separation
Costs detailed above is as follows:
<TABLE>
<CAPTION>
HEADCOUNT REDUCTION
-------------------
<S> <C> <C> <C> <C>
Sales & Marketing............... 41
Production...................... 137
General & Administrative........ 84
---
Total................. 262
===
</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 continuing operating divisions into four 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 segments of the Company. 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 1998 include $9.9 million for
termination of leases and other contractual obligations. This amount included
approximately $6.5 million for termination of facility
13
<PAGE> 14
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
leases and other lease-related costs, $1.5 million for termination of
distributor arrangements and $1.9 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 300 employees of the total of 800 employees expected to be
terminated as part of the two restructuring plans have been severed as of
January 3, 1999. The plans will be mainly implemented by the segments through
fiscal 1999. Cash outlays, primarily for employee separation costs, were $9.1
million in 1998. The Company expects to incur approximately $30 million to $35
million of cash outlays in connection with its restructuring plans throughout
1999. These funds will come primarily from operating cash flows or borrowings
from existing credit facilities.
Also included as part of the Company's 1998 restructuring plans were
pre-tax charges for its Technical Services segment of $0.9 million and $3.6
million for the first and second quarters of 1998, respectively. These amounts
have been included in net income from discontinued operations in the
accompanying consolidated income statements. Of the total of $4.5 million, $0.4
million was non-cash charges. Approximately $3.7 million of the total 1998
Technical Services segment charges were for employee separation costs related to
approximately 75 people. A majority of the remaining charge was for the
termination of leases. As of January 3, 1999, approximately 21 of the 75
employees expected to be terminated have been severed. Cash outlays, primarily
for employee separation costs, were approximately $1.2 million.
In 1997, as part of a plan to reposition its operations, the Company
recorded $7.8 million of integration costs which included $4.4 million related
to employee separation costs and $3.4 million related to its consolidation
effort. These costs were included in selling, general and administrative
expenses.
The components of the restructuring charges met the criteria set forth in
Emerging Issues Task Force (EITF) Issue 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.
The following table summarizes restructuring activity from continuing
operations for the two years ended January 3, 1999:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- -------------- ---- ----
<S> <C> <C>
Accrued restructuring costs at beginning of year............ $ 3,025 $ --
Provisions.................................................. 50,027 4,433
Charges/write-offs.......................................... (23,483) (1,408)
Accrued restructuring charges related to Lumen
acquisition............................................... 5,000 --
------- ------
Accrued restructuring costs at end of year.................. $34,569 $3,025
======= ======
</TABLE>
Refer to Note 28 for additional information on restructuring charges.
4. ASSET IMPAIRMENT CHARGES
During the second quarter of 1998, the Company recorded a $7.4 million
noncash impairment charge related to an automotive testing facility in the
Instruments 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 in
the Optoelectronics segment and $1.5 million related to the goodwill of an
environmental services business in Other. 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
14
<PAGE> 15
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The components of the revised operating plan included hiring a
new general manager, transferring assembly and test operations to a lower cost
environment (Batam, Indonesia), introducing new products and reviewing
manufacturing processes to improve production yields. All of these components
were implemented during 1997 and 1998.
5. GAINS ON DISPOSITIONS
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 Industrial Seals, which manufactured mechanical seals, had
1997 sales of $88 million and operating income of $11.4 million ($.21 diluted
earnings per share). 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. The after-tax gain of
these divestitures was $45.2 million, or $.99 diluted earnings per share.
Rotron, which manufactured fans, blowers and motors, had 1997 sales of $70
million and operating income of $11.9 million ($.16 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.
In 1997, the Company sold its Chandler, Flow and Birtcher divisions for $23
million, resulting in pre-tax gains of $10.6 million. These gains were recorded
in selling, general and administrative expenses.
Refer to Note 28 for additional information on gains on dispositions.
6. OTHER INCOME (EXPENSE)
Other income (expense), net, consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------- -------- -------- --------
<S> <C> <C> <C>
Interest income......................... $ 6,873 $ 1,969 $ 3,879
Interest expense........................ (11,391) (12,482) (13,427)
Gains on sales of investments, net...... 4,465 711 1,714
Other................................... (1,344) 2,247 (1,218)
-------- -------- --------
$ (1,397) $ (7,555) $ (9,052)
======== ======== ========
</TABLE>
Other consists mainly of foreign exchange losses and, in 1997, a $3.4
million cost of capital reimbursement relating to a joint development program.
(See Note 18.)
7. INCOME TAXES
The components of income from continuing operations before income taxes for
financial reporting purposes were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------- -------- ------- -------
<S> <C> <C> <C>
U.S. ...................................... $ 26,664 $(22,483) $ 3,094
Non-U.S. .................................. 91,663 41,947 44,119
-------- -------- -------
$118,327 $ 19,464 $47,213
======== ======== =======
</TABLE>
15
<PAGE> 16
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the provision for income taxes for continuing operations
were as follows:
<TABLE>
<CAPTION>
DEFERRED
(IN THOUSANDS) CURRENT (PREPAID) TOTAL
- -------------- ------- --------- -------
<S> <C> <C> <C>
1998
Federal.................................. $32,067 $ (7,538) $24,529
State.................................... 3,802 (977) 2,825
Non-U.S. ................................ 15,951 (3,979) 11,972
------- -------- -------
$51,820 $(12,494) $39,326
======= ======== =======
1997
Federal.................................. $ 4,460 $ (5,805) $(1,345)
State.................................... 2,168 (144) 2,024
Non-U.S. ................................ 7,028 2,195 9,223
------- -------- -------
$13,656 $ (3,754) $ 9,902
======= ======== =======
1996
Federal.................................. $(6,898) $ 9,981 $ 3,083
State.................................... 2,383 79 2,462
Non-U.S. ................................ 8,545 (1,141) 7,404
------- -------- -------
$ 4,030 $ 8,919 $12,949
======= ======== =======
</TABLE>
The total provision for income taxes included in the consolidated financial
statements was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------- ------- ------- -------
<S> <C> <C> <C>
Continuing operations....................... $39,326 $ 9,902 $12,949
Discontinued operations..................... 14,706 15,119 15,981
------- ------- -------
$54,032 $25,021 $28,930
======= ======= =======
</TABLE>
The major differences between the Company's effective tax rate for
continuing operations and the federal statutory rate were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate............................. 35.0% 35.0% 35.0%
Non-U.S. rate differential, net.................... (19.0) (39.4) (17.2)
Future remittance of non-U.S. earnings............. 8.4 -- --
State income taxes, net............................ 1.6 4.1 2.5
Goodwill amortization.............................. .6 9.2 4.1
Goodwill write-downs............................... -- 27.0 --
Increase (decrease) in valuation allowance......... 2.0 15.3 (1.9)
Other, net......................................... 4.6 (0.3) 4.9
----- ----- -----
Effective tax rate................................. 33.2% 50.9% 27.4%
===== ===== =====
</TABLE>
The 1997 tax provision and effective rate for continuing operations were
significantly impacted by non-deductible goodwill write-downs. Excluding the
impairment charge and its related tax effect, the effective tax rate was 30.6%
in 1997.
16
<PAGE> 17
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences and carryforwards related to
continuing operations which gave rise to prepaid (deferred) income taxes as of
January 3, 1999 and December 28, 1997 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- -------------- -------- --------
<S> <C> <C>
Deferred tax assets:
Inventory reserves......................... $ 7,510 $ 5,555
Other reserves............................. 17,828 10,388
Reimbursement of invested capital.......... 5,286 7,401
Vacation pay............................... 1,760 4,135
Net operating loss......................... 35,349 32,113
Postretirement health benefits............. 4,420 4,531
Restructuring reserve...................... 16,600 161
All other, net............................. 38,797 28,523
-------- --------
Total deferred tax assets.................... 127,550 92,807
-------- --------
Deferred tax liabilities:
Award and holdback fees.................... 939 (538)
Pension contribution....................... (12,555) (12,821)
Amortization............................... (11,084) (7,379)
Depreciation............................... (3,988) 2,982
All other, net............................. (23,401) (14,357)
-------- --------
Total deferred tax liabilities............... (50,089) (32,113)
-------- --------
Valuation allowance.......................... (32,628) (31,145)
-------- --------
Net prepaid taxes............................ $ 44,833 $ 29,549
======== ========
</TABLE>
At January 3, 1999, the Company had non-U.S. (primarily from Germany) net
operating loss carryforwards of $68.1 million, substantially all of which carry
forward indefinitely. The $32.6 million valuation allowance results primarily
from these carryforwards, for which the Company currently believes it is more
likely than not that they will not be realized.
Current prepaid income taxes of $82.3 million and $44.3 million were
included in other current assets at January 3, 1999 and December 28, 1997,
respectively. Long-term deferred income taxes of $32.5 million and $11.1 million
were included in long-term liabilities at January 3, 1999 and December 28, 1997,
respectively. These amounts include approximately $8.3 million and $4.9 million
of current prepaid income taxes and $3.3 million and $1.2 million of long-term
deferred income taxes related to the discontinued operations of the Technical
Services segment at January 3, 1999 and December 28, 1997, respectively.
In general, it is the practice and intention of the Company to reinvest the
earnings of its non-U.S. subsidiaries in those operations. Repatriation of
retained earnings is done only when it is advantageous. Applicable federal taxes
are provided only on amounts planned to be remitted. In connection with current
year divestitures, certain proceeds will not be permanently reinvested in those
operations, and, accordingly, federal taxes in the amount of $10 million have
been provided in connection with those earnings. Accumulated net earnings of
non-U.S. subsidiaries for which no federal taxes have been provided as of
January 3, 1999 were $94.5 million, which does not include amounts that, if
remitted, would result in little or no additional tax because of the
availability of U.S. tax credits for non-U.S. taxes. Federal taxes that would be
payable upon remittance of these earnings are estimated to be $30.1 million at
January 3, 1999.
8. DISCONTINUED OPERATIONS
On August 20, 1999, the Company sold the assets of its Technical Services
segment, including the outstanding capital stock of EG&G Defense Materials,
Inc., a subsidiary of the Company, to EG&G Technical Services, Inc., an
affiliate of The Carlyle Group L.P. (the "Buyer"), for approximately $250
million in cash and the assumption by the Buyer of certain liabilities of the
Technical Services segment. Approximately $2.1 million of the cash purchase
price will be paid by the Buyer to the Company on the seventh anniversary of the
closing of this transaction. The purchase price is subject to a post-closing
adjustment currently in negotiation related to the working capital, as defined
in the Purchase and Sale Agreement dated July 19, 1999 by and between the
Company and the Buyer, as amended (the "TS Purchase Agreement"), of the
Technical Services segment.
The results of operations of the Technical Services segment were previously
reported as one of five business segments of the Company. The Company accounted
for the sale of its Technical Services segment as a discontinued operation in
accordance with APB Opinion No. 30 and, accordingly, the results of operations
of the Technical Services segment have been segregated from continuing
operations and reported as a separate line item on the Company's accompanying
consolidated income statements. The Company recorded a gain on disposition of
discontinued operations of $106 million net of taxes, transaction and related
costs during the third quarter of fiscal 1999. The gain was reported separately
from the results of the Company's continuing operations.
Summary operating results of the discontinued operations were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------- ------- -------- ---------
<S> <C> <C> <C>
Sales................................................ $553,514 $613,118 $640,146
Costs and expenses................................... 517,762 575,852 600,049
-------- -------- --------
Operating income from discontinued operations........ 35,752 37,266 40,097
Other income ........................................ 1,955 1,983 1,776
-------- -------- --------
Income from discontinued operations before
income taxes....................................... 37,707 39,249 41,873
Provision for income taxes........................... 14,706 15,119 15,981
-------- -------- --------
Income from discontinued operations, net of income
taxes.............................................. $ 23,001 $ 24,130 $ 25,892
======== ======== ========
</TABLE>
Net assets of discontinued operations as of January 3, 1999 and December
28, 1997 consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- -------------- -------- --------
<S> <C> <C>
Accounts receivable ......................... $ 59,784 $ 69,371
Other current operating assets............... 5,340 6,773
Property, plant and equipment, net........... 3,146 2,904
Other assets................................. 9,959 10,849
Current operating liabilities................ (39,621) (47,069)
Other liabilities............................ (6,521) (7,297)
-------- --------
$ 32,087 $ 35,531
======== ========
</TABLE>
Income from discontinued operations, net of income taxes, of $23.0 million
in 1998 reflected the results of the Company's Technical Services segment.
Income from discontinued operations, net of income taxes, of $24.1 million in
1997 reflected $21.1 million from the Company's Technical Services segment and
$3 million related to the Company's former Department of Energy (DOE) segment,
which was discontinued in 1994 and for which the final contract expired in 1997.
Income from discontinued operations, net of income taxes, of $25.9 million in
1996 reflected $20.2 million from the Company's Technical Services segment and
$5.7 million related to the Company's DOE segment. Sales for the Technical
Services segment for fiscal 1998, 1997 and 1996 were $553.5 million, $533.3
million and $499.0 million, respectively. The remainder of the sales for 1997
and 1996 in the preceding chart relate to the DOE segment.
Accounts receivable as of January 3, 1999 and December 28, 1997 included
unbilled receivables of $37 million and $44 million, respectively, which were
due primarily from U.S. government agencies.
The former DOE segment is also presented as discontinued operations in
accordance with APB Opinion No. 30. The Company's last DOE
17
<PAGE> 18
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
9. EARNINGS PER SHARE
Basic earnings per share was computed by dividing net income by the
weighted-average number of common shares outstanding during the year. Diluted
earnings per share was computed by dividing net income by the weighted-average
number of common shares outstanding plus all potentially dilutive common shares
outstanding, primarily shares issuable upon the exercise of stock options using
the treasury stock method. The following table reconciles the number of shares
utilized in the earnings per share calculations:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------- ------ ------ ------
<S> <C> <C> <C>
Number of common shares-basic.................. 45,322 45,757 47,298
Effect of dilutive securities:
Stock options................................ 516 141 174
Other........................................ 46 -- --
------ ------ ------
Number of common shares-diluted................ 45,884 45,898 47,472
====== ====== ======
</TABLE>
Options to purchase 92,000, 1,477,000 and 1,724,000 shares of common stock
were not included in the computation of diluted earnings per share for 1998,
1997 and 1996, respectively, because the options' exercise prices were greater
than the average market price of the common shares and their effect would have
been antidilutive.
10. ACCOUNTS RECEIVABLE
Accounts receivable were net of reserves for doubtful accounts of $4.4
million and $4.7 million as of January 3, 1999 and December 28, 1997,
respectively.
11. INVENTORIES
Inventories as of January 3, 1999 and December 28, 1997 consisted of the
following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- -------------- -------- --------
<S> <C> <C>
Finished goods............................... $ 36,552 $ 31,570
Work in process.............................. 22,124 21,955
Raw materials................................ 64,892 56,495
-------- --------
$123,568 $110,020
======== ========
</TABLE>
18
<PAGE> 19
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Due to the divestitures in 1998, the portion of total inventories accounted
for using the LIFO method of determining inventory costs dropped from 25% in
1997 to 12% in 1998. The excess of current cost of inventories over the LIFO
value was approximately $5 million as of January 3, 1999 and $8 million as of
December 28, 1997.
12. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, at cost, as of January 3, 1999 and December
28, 1997 consisted of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- -------------- -------- --------
<S> <C> <C>
Land......................................... $ 23,884 $ 12,712
Buildings and leasehold improvements......... 128,900 113,868
Machinery and equipment...................... 338,863 337,564
-------- --------
$491,647 $464,144
======== ========
</TABLE>
The increase in property, plant and equipment was primarily due to the
acquisition of Lumen ($53 million) and capital expenditures ($44.5 million) in
1998. These increases were partially offset by the Rotron and Sealol Industrial
Seals divestitures ($50 million).
13. INVESTMENTS
Investments as of January 3, 1999 and December 28, 1997 consisted of the
following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- -------------- ------- -------
<S> <C> <C>
Marketable investments......................... $10,695 $11,142
Joint venture investments...................... 2,811 2,249
------- -------
$13,506 $13,391
======= =======
</TABLE>
Joint venture investments are accounted for using the equity method.
Marketable investments consisted of common stocks and trust assets which were
primarily invested in common stocks and fixed-income securities to meet the
supplemental executive retirement plan obligation. The market values were based
on quoted market prices. As of January 3, 1999, the fixed-income securities, on
average, had maturities of approximately nine years. The net unrealized holding
gain on marketable investments, net of deferred income taxes, reported as a
component of accumulated other comprehensive income (loss) in stockholders'
equity, was $0.4 million at January 3, 1999 and $0.5 million at December 28,
1997.
19
<PAGE> 20
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Marketable investments classified as available for sale as of January 3,
1999 and December 28, 1997 consisted of the following:
<TABLE>
<CAPTION>
GROSS UNREALIZED
HOLDING
MARKET ------------------
(IN THOUSANDS) VALUE COST GAINS (LOSSES)
- -------------- ------- ------- ------ --------
<S> <C> <C> <C> <C>
1998
Common stocks.......................... $ 6,838 $ 6,367 $ 633 $(162)
Fixed-income securities................ 3,549 3,506 43 --
Other.................................. 308 281 27 --
------- ------- ------ -----
$10,695 $10,154 $ 703 $(162)
======= ======= ====== =====
1997
Common stocks.......................... $ 7,466 $ 6,665 $1,003 $(202)
Fixed-income securities................ 3,543 3,495 48 --
Other.................................. 133 132 1 --
------- ------- ------ -----
$11,142 $10,292 $1,052 $(202)
======= ======= ====== =====
</TABLE>
14. 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 market 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 will be amortized over
ten years. Intangible assets were shown net of accumulated amortization of $51.4
million and $43.4 million as of January 3, 1999 and December 28, 1997,
respectively. The increase resulted primarily from goodwill and other
intangibles related to the Lumen, Belfab, LSR and Isolab acquisitions in 1998.
15. DEBT
Short-term debt at January 3, 1999 and December 28, 1997 consisted
primarily of commercial paper borrowings of $150 million and $45.8 million,
respectively, that had maturities of 60 days or less. The weighted-average
interest rate on commercial paper borrowings was 5.4% at January 3, 1999 and
6.1% at December 28, 1997. Commercial paper borrowings averaged $23 million
during 1998 at an average interest rate of 5.5%, compared to average borrowings
of $47 million during 1997 at an average interest rate of 5.6%. At January 3,
1999, short-term debt also included $6.2 million outstanding under a revolving
credit agreement, bearing interest at 9%, assumed by the Company in connection
with the Lumen acquisition.
In November 1998, the Company entered into a $100 million credit facility
which expires in March 1999. The Company has two additional revolving credit
agreements, each for $100 million, which expire in March 1999 and March 2002,
respectively. These agreements serve as backup facilities for the commercial
paper borrowings. During 1998, the Company did not draw down its credit
facilities; there are no significant commitment fees. Refer to Note 27 for
additional information on the Company's credit facilities.
At January 3, 1999 and December 28, 1997, long-term debt included $115
million of unsecured ten-year notes issued in October 1995 at an interest rate
of 6.8%, which mature in 2005. The carrying amount approximated the estimated
fair value at January 3, 1999 and December 28, 1997 based on a quoted market
price. The total notes authorized were $150 million, and the unissued notes of
$35 million are covered by a shelf registration statement. At January 3, 1999,
long-term
20
<PAGE> 21
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
debt also included $14.8 million assumed by the Company in connection with the
Lumen acquisition. This debt consisted of unsecured notes of $12.4 million at 8%
due in 2002, which were retired at a premium in February 1999, and a $2.4
million term loan at prime plus 1.75% due in 2000.
16. ACCRUED EXPENSES
Accrued expenses as of January 3, 1999 and December 28, 1997 consisted of
the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- -------------- -------- --------
<S> <C> <C>
Payroll and incentives............................... $ 22,463 $ 15,407
Employee benefits.................................... 31,171 31,573
Federal, non-U.S. and state income taxes............. 36,211 22,352
Other accrued operating expenses..................... 128,755 59,124
-------- --------
$218,600 $128,456
======== ========
</TABLE>
The increase in other accrued operating expenses resulted primarily from
accruals related to the Lumen acquisition ($47 million) and deferred gain
recognition related to dispositions ($16 million).
17. EMPLOYEE BENEFIT PLANS
The following employee benefit plan disclosures include amounts and
information, on a combined basis, for both the continuing and discontinued
operations of the Company.
Savings Plan: The Company has a savings plan for the benefit of qualified
U.S. employees. Under this plan, the Company contributes an amount equal to the
lesser of 55% of the amount of the employee's voluntary contribution or 3.3% of
the employee's annual compensation. Savings plan expense was $6.2 million in
1998, $6.5 million in 1997 and $5.8 million in 1996.
Pension Plans: The Company has defined benefit pension plans covering
substantially all U.S. employees and non-U.S. pension plans for non-U.S.
employees. The plans provide benefits that are based on an employee's years of
service and compensation near retirement. Assets of the U.S. plan are composed
primarily of equity and debt securities.
Net periodic pension cost included the following components:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------- -------- -------- --------
<S> <C> <C> <C>
Service cost............................ $ 9,356 $ 9,081 $ 9,248
Interest cost........................... 18,300 18,126 17,335
Expected return on plan assets.......... (23,360) (21,288) (19,770)
Net amortization and deferral........... (816) (743) 599
-------- -------- --------
$ 3,480 $ 5,176 $ 7,412
======== ======== ========
</TABLE>
21
<PAGE> 22
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the changes in the funded status of the
principal U.S. pension plan and the principal non-U.S. pension plans and the
amounts recognized in the Company's Consolidated Balance Sheets as of January 3,
1999 and December 28, 1997:
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
(IN THOUSANDS) NON-U.S. U.S. NON-U.S. U.S.
- -------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Actuarial present value of benefit
obligations:
Accumulated benefit obligations..... $29,387 $232,978 $23,706 $212,659
======= ======== ======= ========
Projected benefit obligations at
beginning of year................... $27,912 $240,176 $31,663 $213,146
Service cost.......................... 886 8,470 961 8,120
Interest cost......................... 1,860 16,440 1,876 16,249
Benefits paid......................... (948) (11,734) (1,133) (10,602)
Actuarial loss (gain)................. 1,182 23,318 (1,573) 12,574
Plan amendments....................... -- -- -- 689
Effect of exchange rate changes....... 1,679 -- (3,882) --
Dispositions.......................... -- (17,202) -- --
------- -------- ------- --------
Projected benefit obligations at end
of year............................. 32,571 259,468 27,912 240,176
------- -------- ------- --------
Fair value of plan assets at beginning
of year............................. -- 294,790 -- 249,431
Actual return on plan assets.......... -- 26,968 -- 43,630
Employer contributions................ -- -- -- 12,331
Benefits paid......................... -- (11,734) -- (10,602)
------- -------- ------- --------
Fair value of plan assets at end of
year................................ -- 310,024 -- 294,790
------- -------- ------- --------
Plan assets less (greater) than
projected benefit obligations....... 32,571 (50,556) 27,912 (54,614)
Unrecognized net transition asset..... -- 2,254 -- 3,005
Unrecognized prior service costs...... (1,146) (77) (1,162) (38)
Unrecognized net gain................. 2,619 7,779 3,758 10,287
------- -------- ------- --------
Accrued pension liability (asset)..... $34,044 $(40,600) $30,508 $(41,360)
======= ======== ======= ========
Actuarial assumptions as of the
year-end measurement date:
Discount rate....................... 6.5% 6.5% 6.5% 7.0%
Rate of compensation increase....... 4.0% 4.5% 4.0% 4.5%
Expected rate of return on assets... -- 9.0% -- 9.0%
</TABLE>
The non-U.S. accrued pension liability included $33.8 million and $30.2
million classified as long-term liabilities as of January 3, 1999 and December
28, 1997, respectively. The U.S. pension asset was classified as other
noncurrent assets.
The Company also sponsors a supplemental executive retirement plan to
provide senior management with benefits in excess of normal pension benefits. At
January 3, 1999 and December 28, 1997, the projected benefit obligations were
$13.8 million and $11.9 million, respectively. Assets with a fair value of $10.1
million and $10.2 million, segregated in a trust, were available to meet this
obligation as of January 3, 1999 and December 28, 1997, respectively.
22
<PAGE> 23
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pension expense for this plan was approximately $1.4 million in 1998, $1.3
million in 1997 and $1.5 million in 1996.
Postretirement Medical Plans: The Company provides health care benefits
for eligible retired U.S. employees under a comprehensive major medical plan or
under health maintenance organizations where available. The majority of the
Company's U.S. employees become eligible for retiree health benefits if they
retire directly from the Company and have at least ten years of service.
Generally, the major medical plan pays stated percentages of covered expenses
after a deductible is met and takes into consideration payments by other group
coverages and by Medicare. The plan requires retiree contributions under most
circumstances and has provisions for cost-sharing changes. For employees
retiring after 1991, the Company has capped its medical premium contribution
based on employees' years of service. The Company funds the amount allowable
under a 401(h) provision in the Company's defined benefit pension plan. Assets
of the plan are composed primarily of equity and debt securities.
Net periodic postretirement medical benefit cost (credit) included the
following components:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
- -------------- ------- ------- ------
<S> <C> <C> <C>
Service cost................................. $ 360 $ 317 $ 349
Interest cost................................ 1,250 1,237 1,459
Expected return on plan assets............... (1,245) (804) (698)
Net amortization and deferral................ (402) (1,148) (134)
------- ------- ------
$ (37) $ (398) $ 976
======= ======= ======
</TABLE>
The following table sets forth the changes in the postretirement medical
plan's funded status and the amounts recognized in the Company's Consolidated
Balance Sheets at January 3, 1999 and December 28, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- -------------- ---- ----
<S> <C> <C>
Actuarial present value of accumulated benefit obligations:
Retirees.................................................. $11,448 $15,699
Active employees eligible to retire....................... 565 563
Other active employees.................................... 5,032 4,848
------- -------
Projected benefit obligations at beginning of year.......... 17,045 21,110
------- -------
Service cost................................................ 360 317
Interest cost............................................... 1,250 1,237
Benefits paid............................................... (1,394) (1,160)
Actuarial loss (gain)....................................... 2,467 (4,459)
------- -------
Change in projected benefit obligations during the year..... 2,683 (4,065)
------- -------
Retirees.................................................... 13,672 11,448
Active employees eligible to retire......................... 800 565
Other active employees...................................... 5,256 5,032
------- -------
Projected benefit obligations at end of year................ 19,728 17,045
------- -------
Fair value of plan assets at beginning of year.............. 13,839 8,470
Actual return on plan assets................................ 1,416 1,592
Employer contributions...................................... -- 3,777
------- -------
Fair value of plan assets at end of year.................... 15,255 13,839
------- -------
</TABLE>
23
<PAGE> 24
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
- -------------- ---- ----
<S> <C> <C>
Fair value of plan assets less than projected benefit
obligations............................................... 4,473 3,206
Unrecognized net gain....................................... 7,483 9,123
------- -------
Accrued postretirement medical liability.................... $11,956 $12,329
======= =======
Actuarial assumptions as of the year-end measurement date:
Discount rate............................................... 6.5% 7.0%
Expected rate of return on assets........................... 9.0% 9.0%
Health care cost trend rate:
First year................................................ 9.0% 10.0%
Ultimate.................................................. 5.5% 5.5%
Time to reach ultimate...................................... 5 years 6 years
</TABLE>
The accrued postretirement medical liability included $11 million and $11.3
million classified as long-term liabilities as of January 3, 1999 and December
28, 1997, respectively.
If the health care cost trend rate was increased 1%, the accumulated
postretirement benefit obligations would have increased by approximately $1
million at January 3, 1999. The effect of this increase on the annual cost for
1998 would have been approximately $0.1 million. If the health care cost trend
rate was decreased 1%, the accumulated postretirement benefit obligations would
have decreased by approximately $0.8 million at January 3, 1999. The effect of
this decrease on the annual cost for 1998 would have been approximately $0.1
million.
Deferred Compensation Plans: During 1998, the Company implemented certain
nonqualified deferred compensation programs that provide benefits payable to
officers and certain key employees or their designated beneficiaries at
specified future dates, upon retirement or death. Benefit payments under these
plans are funded by a combination of contributions from participants and the
Company.
Employee Stock Purchase Plan: In May 1998, the Company's Board of
Directors adopted an Employee Stock Purchase Plan (ESPP), whereby the Company is
authorized to issue up to 2.5 million shares of its common stock to its
employees who participate in the ESPP. Under the Plan, participating employees
will have the right to purchase common stock at a price equal to the lesser of
90% of the closing price on either the first day of the offering period or the
last day of the offering period. The first offering period began on September 1,
1998 and ended on June 30, 1999. The number of shares which an employee may
purchase, subject to certain aggregate limits, is determined by the employee's
voluntary contribution which may not exceed 10% of base compensation.
Other: The Company has an EVA(R) Incentive Compensation Plan, the purpose
of which is to provide incentive compensation to certain key employees,
including all officers, in a form that relates the financial rewards to an
increase in the value of the Company to its shareholders. Awards under this plan
are approved annually by the Board of Directors. (EVA(R) is a registered
trademark of Stern Stewart & Co.)
The preceding information does not include amounts related to benefit plans
applicable to employees associated with the NASA contract because the Company is
not responsible for the current or future funded status of these plans.
The Company incurred a $2.8 million charge in 1997 related to a cash
deficit in an employee benefit plan.
24
<PAGE> 25
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. REIMBURSEMENT OF INVESTED CAPITAL
In 1997, the Company received a $30.4 million payment as part of the
negotiation of a joint development contract. This payment represented a $27
million reimbursement of previously invested capital, which will be amortized to
income over the estimated life of the related assets, and a $3.4 million
reimbursement of cost of capital, which was included in other income. The
reimbursement, net of accumulated amortization, included in long-term
liabilities was $20.4 million as of January 3, 1999 and $24.7 million as of
December 28, 1997.
19. CONTINGENCIES
The Company is subject to various claims, legal proceedings and
investigations covering a wide range of matters that arise in the ordinary
course of its business activities. Each of these matters is subject to various
uncertainties, and it is possible that some of these matters may be resolved
unfavorably to the Company. The Company has established accruals for matters
that are probable and reasonably estimable. Management believes that any
liability that may ultimately result from the resolution of these matters in
excess of amounts provided will not have a material adverse effect on the
financial position or results of operations of the Company.
In addition, the Company is conducting a number of environmental
investigations and remedial actions at current and former Company locations and,
along with other companies, has been named a potentially responsible party (PRP)
for certain waste disposal sites. The Company accrues for environmental issues
in the accounting period that the Company's responsibility is established and
when the cost can be reasonably estimated. The Company has accrued $9.5 million
as of January 3, 1999, representing management's estimate of the total cost of
ultimate disposition of known environmental matters. Such amount is not
discounted and does not reflect any recovery of any amounts through insurance or
indemnification arrangements. These cost estimates are subject to a number of
variables, including the stage of the environmental investigations, the
magnitude of the possible contamination, the nature of the potential remedies,
possible joint and several liability, the timeframe over which remediation may
occur and the possible effects of changing laws and regulations. For sites where
the Company has been named a PRP, management does not currently anticipate any
additional liability to result from the inability of other significant named
parties to contribute. The Company expects that such accrued amounts could be
paid out over a period of up to five years. As assessments and remediation
activities progress at each individual site, these liabilities are reviewed and
adjusted to reflect additional information as it becomes available. There have
been no environmental problems to date that have had or are expected to have a
material effect on the Company's financial position or results of operations.
While it is reasonably possible that a material loss exceeding the amounts
recorded may have been incurred, the preliminary stages of the investigations
make it impossible for the Company to reasonably estimate the range of potential
exposure. The Company adopted the provisions of Statement of Position 96-1,
Environmental Remediation Liabilities, in 1997. Its adoption did not have a
material effect on results of operations.
The Company has received notices from the Internal Revenue Service (IRS)
asserting deficiencies in federal corporate income taxes for the Company's 1985
to 1994 tax years. The total additional tax proposed by the IRS amounts to $74
million plus interest. The Company has filed petitions in the United States Tax
Court to challenge most of the deficiencies asserted by the IRS. The Company
believes that it has meritorious legal defenses to those deficiencies and
believes that the ultimate outcome of the case will not result in a material
impact on the Company's consolidated results of operations or financial
position.
25
<PAGE> 26
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
20. RISKS AND UNCERTAINTIES
During 1998, demand for certain products was adversely affected by problems
in Asia. In addition, the Asian economic problems have weakened the currencies
of some Asian countries, making products of competitors located in Asia more
price competitive.
Optoelectronics' and Instruments' future results are dependent on
integration of acquisitions. Optoelectronics' future results are also dependent
on completion of the development of amorphous silicon technology and successful
market introduction of products based on this technology. In the IC Sensors
business, new product development and shifting production to lower cost
locations will be required in order to compete more effectively.
Costs incurred under cost-reimbursable government contracts, primarily in
the former Technical Services segment, which is presented as discontinued
operations, are subject to audit by the government. The results of prior audits,
completed through 1993, have not had a material effect on the Company.
The Company's management and operations contracts with the DOE are
presented as discontinued operations. 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.
For information concerning various investigations, claims, legal
proceedings, environmental investigations and remedial actions, and notices from
the IRS, see Note 19. For information concerning factors affecting future
performance, see Management's Discussion and Analysis.
21. STOCKHOLDERS' EQUITY
At January 3, 1999, 8.7 million shares of the Company's common stock were
reserved for employee benefit plans.
In 1998, the Company awarded 65,000 shares of common stock to two officers.
Sale of 35,000 shares is restricted for one year from the date of grant, and
sale of the remaining 30,000 shares is restricted for two years.
The Company has nonqualified and incentive stock option plans for officers
and key employees. Under these plans, options may be granted at prices not less
than 100% of the fair market value on the date of grant. All options expire 10
years from the date of grant. Options granted since 1994 become exercisable, in
ratable installments, over periods of 3-5 years from the date of grant. The
Stock Option Committee of the Board of Directors, at its sole discretion, may
also include stock appreciation rights in any option granted. There are no stock
appreciation rights outstanding under these plans.
26
<PAGE> 27
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of certain stock option information is as follows:
<TABLE>
<CAPTION>
(SHARES IN THOUSANDS) 1998 1997 1996
--------------------- --------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year..... 4,187 $19.64 4,161 $19.56 3,276 $18.81
Granted.............................. 568 22.82 927 19.19 1,392 20.67
Exercised............................ (1,209) 19.87 (363) 16.74 (266) 17.00
Lapsed............................... (246) 20.29 (538) 20.23 (241) 18.57
------ ----- -----
Outstanding at end of year........... 3,300 20.05 4,187 19.64 4,161 19.56
====== ===== =====
Exercisable at end of year........... 1,540 19.46 2,195 19.85 2,477 19.67
====== ===== =====
Available for grant at end of year... 2,866 2,290 1,831
====== ===== =====
</TABLE>
In January 1998, the Board of Directors granted 400,000 options to an
officer at an exercise price of $21.19 per share; 200,000 options were granted
pursuant to the 1992 Stock Option Plan, and 200,000 options were granted
pursuant to a plan other than the 1992 Stock Option Plan. In addition, 167,500
options were granted pursuant to the 1992 Plan at various dates in 1998 at
exercise prices ranging from $23.13 per share to $30.25 per share. In December
1997, 927,000 options were granted at an exercise price of $19.19 per share. In
1996, the Board of Directors granted 650,000 options in January and 728,000
options in December at exercise prices of $21.75 and $19.75 per share,
respectively.
The following table summarizes information about stock options outstanding
at January 3, 1999:
<TABLE>
<CAPTION>
(SHARES IN THOUSANDS) OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------- -------------------------------------- ----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES SHARES LIFE (YEARS) PRICE SHARES PRICE
- --------------- --------- ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$14.25-21.19............ 2,363 7.1 $18.96 984 $17.99
21.63-30.25............ 937 5.4 22.77 556 22.06
----- -----
14.25-30.25............ 3,300 6.6 20.05 1,540 19.46
===== =====
</TABLE>
In connection with the acquisition of Lumen Technologies, Lumen options
were converted into 429,000 Company stock options, effective January 5, 1999.
These options have an average exercise price of $14.47 per share and are fully
vested. Also in January 1999, the Board of Directors granted 1,235,000 options
at an exercise price of $27.25 per share. These options have not been reflected
in the preceding tables.
During 1996, the Company adopted the provisions of SFAS No. 123, Accounting
for Stock-Based Compensation. The Company has elected to continue to account for
stock options at intrinsic value with disclosure of the effects of fair value
accounting on net income and earnings per share on a pro forma basis.
27
<PAGE> 28
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reflects pro forma net income from continuing
operations and diluted earnings per share had the Company elected to adopt the
fair value approach of SFAS No. 123:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA) 1998 1997 1996
- ---------------------- -------- ------- -------
<S> <C> <C> <C>
Net income:
As reported.............................. $102,002 $33,692 $60,156
Pro forma................................ 100,000 32,891 59,662
Diluted earnings per share:
As reported.............................. 2.22 .74 1.27
Pro forma................................ 2.18 .72 1.26
</TABLE>
Pro forma compensation cost may not be representative of that to be
expected in future years since the estimated fair value of stock options is
amortized to expense over the vesting period, and additional options may be
granted in future years.
The weighted-average fair value of options at their grant dates during 1998
was $6.83. The fair value of each option was $6.14 for options granted in 1997,
$6.20 for the options granted in December 1996 and $6.68 for the options granted
in January 1996. The values were estimated on the date of grant using the
Black-Scholes option pricing model. The following weighted-average assumptions
were used in the model:
<TABLE>
<CAPTION>
DECEMBER DECEMBER JANUARY
1998 1997 1996 1996
------- -------- -------- -------
<S> <C> <C> <C> <C>
Risk-free interest rate......... 5.4% 5.9% 6.3% 5.5%
Expected dividend yield......... 2% 2% 2% 2%
Expected lives.................. 6 years 7 years 7 years 7 years
Expected stock volatility....... 27% 26% 24% 25%
</TABLE>
Under a Shareholder Rights Plan, preferred stock purchase rights were
distributed on February 8, 1995 as a dividend at the rate of one right for each
share of common stock outstanding. Each right, when exercisable, entitles a
stockholder to purchase one one-thousandth of a share of a new series of junior
participating preferred stock at a price of $60. The rights become exercisable
only if a person or group acquires 20% or more or announces a tender or exchange
offer for 30% or more of the Company's common stock. This preferred stock is
nonredeemable and will have 1,000 votes per share. The rights are nonvoting,
expire in 2005 and may be redeemed prior to becoming exercisable. The Company
has reserved 70,000 shares of preferred stock, designated as Series C Junior
Participating Preferred Stock, for issuance upon exercise of such rights. If a
person (an Acquiring Person) acquires or obtains the right to acquire 20% or
more of the Company's outstanding common stock (other than pursuant to certain
approved offers), each right (other than rights held by the Acquiring Person)
will entitle the holder to purchase shares of common stock of the Company at
one-half of the current market price at the date of occurrence of the event. In
addition, in the event that the Company is involved in a merger or other
business combination in which it is not the surviving corporation or in
connection with which the Company's common stock is changed or converted, or it
sells or transfers 50% or more of its assets or earning power to another person,
each right that has not previously been exercised will entitle its holder to
purchase shares of common stock of such other person at one-half of the current
market price of such common stock at the date of the occurrence of the event.
28
<PAGE> 29
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of accumulated other comprehensive income (loss) were as
follows:
<TABLE>
<CAPTION>
FOREIGN CURRENCY ACCUMULATED OTHER
TRANSLATION UNREALIZED GAINS COMPREHENSIVE
(IN THOUSANDS) ADJUSTMENTS ON SECURITIES INCOME (LOSS)
- -------------- ---------------- ---------------- -----------------
<S> <C> <C> <C>
Balance, December 31, 1995........... $ 28,679 $ 244 $ 28,923
Current year change.................. (10,451) 960 (9,491)
Balance, December 29, 1996........... 18,228 1,204 19,432
Current Year change.................. (22,608) (681) (23,289)
Balance, December 28, 1997........... (4,380) 523 (3,857)
Current year change.................. 7,723 (137) 7,586
-------- ------ --------
Balance, January 3, 1999............. $ 3,343 $ 386 $ 3,729
======== ====== ========
</TABLE>
The tax effects related to each component of other comprehensive income
(loss) were as follows:
<TABLE>
<CAPTION>
BEFORE-TAX TAX (PROVISION) AFTER-TAX
(IN THOUSANDS) AMOUNT BENEFIT AMOUNT
- -------------- ---------- --------------- ---------
<S> <C> <C> <C>
1998
Gross foreign currency translation adjustments... $ 4,608 $ -- $ 4,608
Reclassification adjustment for translation
losses realized upon sale of Sealol Industrial
Seals.......................................... 3,115 -- 3,115
Unrealized losses on securities arising during
the period..................................... (211) 74 (137)
-------- ----- --------
Other comprehensive income....................... $ 7,512 $ 74 $ 7,586
======== ===== ========
1997
Foreign currency translation adjustments......... $(22,608) $ -- $(22,608)
Unrealized losses on securities:
Losses arising during the period................. (1,008) 353 (655)
Reclassification adjustment...................... (40) 14 (26)
-------- ----- --------
Net unrealized losses............................ (1,048) 367 (681)
-------- ----- --------
Other comprehensive income (loss)................ $(23,656) $ 367 $(23,289)
======== ===== ========
1996
Foreign currency translation adjustments......... $(10,451) $ -- $(10,451)
Unrealized gains on securities:
Gains arising during the period.................. 1,849 (647) 1,202
Reclassification adjustment...................... (372) 130 (242)
-------- ----- --------
Net unrealized gains............................. 1,477 (517) 960
-------- ----- --------
Other comprehensive income (loss)................ $ (8,974) $(517) $ (9,491)
======== ===== ========
</TABLE>
22. FINANCIAL INSTRUMENTS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and accounts receivable. The Company had no significant concentrations of credit
risk as of January 3, 1999.
The Company has limited involvement with derivative financial instruments.
In the ordinary course of business, the Company enters into foreign exchange
forward contracts for periods consistent with its committed exposures to
mitigate the effect of foreign currency movements on
29
<PAGE> 30
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transactions denominated in foreign currencies. Transactions covered by hedge
contracts include intercompany and third-party receivables and payables. The
contracts are primarily in European currencies, generally have maturities that
do not exceed one month and have no cash requirements until maturity. Credit
risk and market risk are minimal because the forward contracts are with very
large banks and gains and losses are offset against foreign exchange gains and
losses on the underlying hedged transactions. The notional amount of outstanding
forward contracts was $41.6 million as of January 3, 1999 and $75.8 million as
of December 28, 1997. The carrying value as of January 3, 1999 and December 28,
1997, which approximated fair value, was not significant.
See Notes 1, 13 and 15 for disclosures about fair values, including methods
and assumptions, of other financial instruments.
23. LEASES
The Company leases certain property and equipment under operating leases.
Rental expense charged to continuing operations for 1998, 1997 and 1996
amounted to $10.1 million, $10.1 million and $12.0 million, respectively.
Minimum rental commitments under noncancelable operating leases are as follows:
$10.5 million in 1999, $8.9 million in 2000, $7.4 million in 2001, $6.2 million
in 2002, $3.2 million in 2003 and $10.0 million after 2003.
Rental expense charged to discontinued operations for 1998, 1997 and 1996
amounted to $9.3 million, $5.5 million and $5.2 million, respectively. Minimum
rental commitments under noncancelable operating leases are as follows: $7.3
million in 1999, $6.7 million in 2000, $3.7 million in 2001, $1.4 million in
2002, $0.5 million 2003 and $1.5 million after 2003.
The above information does not include amounts related to leases covered by
certain government contracts because costs, including future commitments, are
reimbursable under the terms of the contracts, even if the contracts are
terminated.
24. INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION
In 1998, the Company adopted SFAS No. 131, Disclosures about Segments 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 four reportable segments which reflect the Company's management
and structure under four SBUs.
The accounting policies of the reportable segments are the same as those
described in Note 1. 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 light sources, silicon-based
sensor products, imaging technology and specially designed component
assemblies. Products include micromachined detectors, amorphous silicon
detector panels, flashlamps, specialty lighting, CCDs, X-ray tubes,
detectors, photodiodes and high-intensity specialty discharge lamps.
Instruments: Hardware and associated software for applications in
medical diagnostics, biochemical and medical research, materials analyses,
environmental monitoring, industrial process measurement, food monitoring
and airport and industrial security. The Company also conducts testing
simulations for the transportation industry.
Fluid Sciences: Static and dynamic seals, sealing systems, bellows
devices, solenoid valves, advanced pneumatic components, systems and valves
and sheet-metal formed products for use in the aerospace, power generation
and semiconductor industries.
30
<PAGE> 31
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Sales and operating profit by segment are shown in the Sales and Operating
Profit by Operating Segment section of this report; such information with
respect to 1998, 1997 and 1996 is considered an integral part of this note.
Sales to U.S. government agencies, which were predominantly to the
Department of Defense and NASA in the former Technical Services segment, which
is reflected as discontinued operations in the accompanying financial statements
(see Note 8), were $524 million, $537 million and $527 million in 1998, 1997 and
1996, respectively. 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 Air Force at Florida's Kennedy Space Center, Cape Canaveral Air
Station and Patrick Air Force Base. The NASA contract at the Kennedy Space
Center contributed sales of $134 million in 1998, $168 million in 1997 and $172
million in 1996.
Sales from continuing operations are comprised of the following:
1998 1997 1996
-------- -------- --------
Products $784,520 $860,598 $867,623
Services 69,862 66,884 60,664
-------- -------- --------
$854,382 $927,482 $928,287
======== ======== ========
Additional information relating to the Company's operations in the various
operating segments is as follows:
<TABLE>
<CAPTION>
DEPRECIATION AND
AMORTIZATION EXPENSE CAPITAL EXPENDITURES
--------------------------- ---------------------------
(IN THOUSANDS) 1998 1997 1996 1998 1997 1996
- -------------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Life Sciences............... $ 5,059 $ 4,091 $ 4,835 $ 5,415 $ 3,352 $ 1,642
Optoelectronics............. 25,615 19,528 14,880 17,256 21,312 47,327
Instruments................. 10,573 11,688 10,767 8,382 7,616 17,585
Fluid Sciences.............. 6,042 3,090 2,736 10,325 9,488 4,739
Other....................... 1,221 4,301 5,643 3,111 5,874 7,503
------- ------- ------- ------- ------- -------
Continuing operations..... $48,510 $42,698 $38,861 $44,489 $47,642 $78,796
======= ======= ======= ======= ======= =======
Discontinued operations... $ 1,869 $ 1,914 $ 2,075 $ 2,033 $ 1,087 $ 1,694
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
TOTAL ASSETS
----------------------
(IN THOUSANDS) 1998 1997
- -------------- ---------- --------
<S> <C> <C>
Life Sciences.............................. $ 128,970 $102,705
Optoelectronics............................ 479,818 216,096
Instruments................................ 183,590 157,716
Fluid Sciences............................. 112,898 60,619
Other...................................... 233,502 240,601
---------- --------
$1,138,778 $777,737
========== ========
</TABLE>
Other total assets consisted primarily of cash and cash equivalents,
prepaid pension, prepaid taxes, net assets of discontinued operations and, in
1997, receivables and inventories of operations divested in 1998.
31
<PAGE> 32
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following geographic area information for continuing operations
includes sales based on location of external customer and net property, plant
and equipment based on physical location:
<TABLE>
<CAPTION>
SALES
--------------------------------
(IN THOUSANDS) 1998 1997 1996
- -------------- -------- -------- --------
<S> <C> <C> <C>
U.S................................ $447,793 $512,503 $504,661
Germany............................ 67,647 71,390 62,947
United Kingdom..................... 47,794 65,462 48,971
Other Non-U.S...................... 291,148 278,127 311,708
-------- -------- --------
$854,382 $927,482 $928,287
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
NET PROPERTY, PLANT AND
EQUIPMENT
------------------------
(IN THOUSANDS) 1998 1997
- -------------- ---------- ----------
<S> <C> <C>
U.S.................................. $133,550 $105,511
Germany.............................. 21,923 16,351
Finland.............................. 15,431 13,181
Other Non-U.S........................ 47,776 43,196
-------- --------
$218,680 $178,239
======== ========
</TABLE>
Effectively all of the sales and net property, plant and equipment of the
discontinued operations (consisting of the Technical Services segment and former
DOE segment) were U.S. based.
25. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial information follows:
<TABLE>
<CAPTION>
QUARTERS
----------------------------------------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH YEAR
- ------------------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1998
Sales................................. $219,642 $209,424 $191,503 $233,813 $854,382
Operating income from continuing
operations.......................... 46,398 40,006 10,153 23,167 119,724
Income from continuing operations
before income taxes................. 44,484 38,913 13,661 21,269 118,327
Income from continuing operations..... 28,588 27,753 8,743 13,917 79,001
Net income............................ 34,483 31,614 15,437 20,468 102,002
Basic earnings per share:
Continuing operations............... .63 .61 .19 .31 1.74
Net income.......................... .76 .69 .34 .46 2.25
Diluted earnings per share:
Continuing operations............... .62 .60 .19 .31 1.72
Net income.......................... .75 .68 .33 .45 2.22
Cash dividends per common share..... .14 .14 .14 .14 .56
Market price of common stock:
High................................ 28.50 33.75 30.13 29.44 33.75
Low................................. 19.44 27.13 18.88 20.50 18.88
Close............................... 27.75 29.69 22.63 27.81 27.81
1997
Sales................................. $217,146 $227,905 $226,048 $256,383 $927,482
Operating income (loss) from
continuing operations............... 9,363 (18,499) 11,562 24,593 27,019
</TABLE>
32
<PAGE> 33
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
QUARTERS
----------------------------------------- ----------
(IN THOUSANDS EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH YEAR
- ------------------------------------ -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Income (loss) from continuing
operations before income taxes...... 6,687 (21,453) 11,804 22,426 19,464
Income (loss) from continuing
operations.......................... 4,804 (18,637) 8,251 15,144 9,562
Net income (loss)..................... 10,026 (11,845) 14,590 20,921 33,692
Basic and diluted earnings (loss) per
share:
Continuing operations............... .10 (.41) .18 .34 .21
Net income (loss)................... .22 (.26) .32 .46 .74
Cash dividends per common share..... .14 .14 .14 .14 .56
Market price of common stock:
High................................ 24.63 21.13 22.63 23.00 24.63
Low................................. 19.63 18.13 18.75 18.00 18.00
Close............................... 21.38 20.81 20.81 20.06 20.06
</TABLE>
26. SHELF REGISTRATION
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 $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 contacts 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 our funding requirements as well as the
availability and cost of other funds.
27. SUBSEQUENT EVENTS
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.
On May 28, 1999, the Company completed its acquisition of the analytical
instruments division of PE Corp. ("PEAI") for an aggregate purchase price of
approximately $425 million. The purchase price is subject to a post-closing
adjustment equal to the amount by which the net assets of PEAI as of the closing
date are greater or less than, as the case may be, certain target amounts set
forth in the Purchase Agreement dated March 8, 1999 between the Company and PE
Corp. (the "PEAI Purchase Agreement"). In addition, under the terms of the PEAI
Purchase Agreement, the Company assumed a long-term German pension liability of
approximately $65 million. This German pension liability was historically funded
on a pay-as-you-go basis, and the funding going forward is expected to remain
consistent. PEAI, a leading producer of high-quality analytical testing
instruments and consumables, generated 1998 fiscal year sales of $569 million.
The Company recorded a $23 million charge for acquired in-process R&D in the
second quarter of 1999.
The purchase price was based upon the Company's determination of the fair
value of PEAI, and the terms of the PEAI Purchase Agreement were determined by
arms-length negotiation among the parties. The Company funded the acquisition
through a combination of available cash, commercial paper borrowings, money
market loans and one-year secured promissory notes in the aggregate principal
amount of $150 million issued by the Company to PE Corp. (the seller). The
acquisition was accounted for as a purchase in accordance with APB Opinion No.
16.
28. EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF AUDITORS' REPORT
Name Change
At a special meeting of shareholders held on September 10, 1999,
shareholders approved a change to the corporate name of the Company from "EG&G,
Inc." to "PerkinElmer, Inc." The name change became effective on October 26,
1999, at which time the Company began trading under a new ticker symbol
(NYSE:PKI). The new name reflects the Company's focus on commercial technology
markets and is part of an overall effort to build product and service strategy
under one strong brand.
Acquisition Agreement
On October 5, 1999 the Company announced that it had entered into an
agreement to acquire Vivid Technologies, Inc. ("Vivid"). Vivid is a leading
supplier of automated explosive detection systems utilized in airports and
high-security facilities worldwide. The transaction will be a stock merger
whereby, when consummated, the shareholders of Vivid will receive one share of
the Company's common stock for each 6.2 shares of Vivid common stock. The
transaction is expected to be valued at approximately $63 million, or $6.25 per
Common Share of Vivid and is expected to close during the first quarter of
fiscal 2000. Vivid generated sales of $17.6 million, and after-tax operating
loss of $2.6 million for the fiscal year ended September 30, 1999. The
transaction, which has been approved by the boards of directors of both
companies, is subject to the approval of Vivid's shareholders, regulatory
approval, and other customary closing conditions as well as provisions relating
to fluctuations in the market price of the Company's common stock. The
transaction will be accounted for as a purchase in accordance with APB Opinion
No. 16.
Restructuring and Other Nonrecurring Items
During the third quarter of 1999 due to the substantial completion of the
actions of the 1998 restructuring plans, the Company reevaluated its
restructuring plans. As a result of this review, costs associated with the
previously planned shutdown of two businesses were no longer required due to
actions taken by the Company to improve performance. As a result of these recent
developments, the Company recognized a restructuring credit of $12 million
during the third quarter of fiscal 1999 which affected the Fluid Sciences and
Optoelectronics segments.
The acquisitions by the Company in 1998 and 1999 and the Company's
divestiture during the third quarter of 1999 of its Technical Services segment
were strategic milestones in the Company's transition to a commercial
high-technology company. Consistent with the strategic direction of the Company
and concurrent with the reevaluation of existing restructuring plans during the
third quarter of 1999, the Company developed additional plans during the third
quarter of 1999 to restructure certain businesses to continue to improve the
Company's performance. These plans resulted in pre-tax restructuring charges of
$23.5 million recorded in the third quarter of 1999. The principal actions in
these restructuring plans include close-down or consolidation of a number of
offices and facilities, transfer of assembly activities to lower-cost geographic
locations, disposal of under-utilized assets, withdrawal from certain product
lines and general cost reductions.
During the third quarter of 1999, in connection with its ongoing review of
its portfolio of businesses, the Company conducted a strategic review of certain
units within its business segments. The strategic review triggered an impairment
review of long-lived assets. The Company calculated the present value of
expected cash flows of certain business units to determine the fair value of
those assets. Accordingly, in the third quarter of 1999, the Company recorded an
impairment charge of $18 million in the Instruments and Optoelectronics segments
for the write-down of goodwill.
In connection with the disposition of the Company's Rotron and Sealol
Industrial Seals divisions in 1998, during the second and third quarters of
1999, the Company recognized approximately $11.5 million of pre-tax gains from
the previously deferred sales proceeds as a result of the favorable resolution
of certain events and contingencies during 1999.
33
<PAGE> 34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of PerkinElmer, Inc.:
We have audited the accompanying consolidated balance sheets of
PerkinElmer, Inc. (a Massachusetts corporation) and subsidiaries as of January
3, 1999 and December 28, 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for the years ended January 3, 1999,
December 28, 1997 and December 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of PerkinElmer,
Inc. and subsidiaries as of January 3, 1999 and December 28, 1997, and the
results of their operations and their cash flows for the years ended January 3,
1999, December 28, 1997 and December 29, 1996 in conformity with generally
accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
- ------------------------------------------------------
Arthur Andersen LLP
Boston, Massachusetts
January 23, 1999 (except with
respect to the matters discussed
in Notes 8 and 27, for which
the date is November 19, 1999)
34
<PAGE> 35
PERKINELMER, INC. AND SUBSIDIARIES
SALES AND OPERATING PROFIT BY OPERATING SEGMENT
FOR THE FIVE YEARS ENDED JANUARY 3, 1999
ACQUISITIONS AND DIVESTITURES
Acquisitions in early 1998 included Isolab in the Company's Life Sciences
segment and Belfab in the Company's Fluid Sciences (formerly named 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 the Company's Optoelectronics segment with the
photolithography business of Lumen reported within the Company's Instruments
segment. LSR is reported in the Company's Life Sciences segment.
Summarized financial information covering the Company's reportable segments
is shown in the table below. A detailed discussion of nonrecurring items as
defined herein is presented in the Management's Discussion and Analysis section
of this document. The Company's Technical Services segment and former DOE
segment are presented as discontinued operations and, therefore, are not
included in the table below.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996 1995 1994
- -------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
LIFE SCIENCES
Sales.................. $ 148,124 $ 125,380 $ 111,759 $ 105,959 $ 93,162
Operating Profit
(Loss)............... 9,046 10,108 6,678 2,255 (657)
OPTOELECTRONICS
Sales.................. 268,558 261,291 269,530 259,357 213,380
Operating Profit
(Loss)............... (5,454) (23,128) 7,190 14,935 4,992
INSTRUMENTS
Sales.................. 247,388 236,839 243,562 238,112 230,508
Operating Profit
(Loss)............... 6,659 17,966 25,920 22,368 (35,643)
FLUID SCIENCES
Sales.................. 167,646 127,087 112,798 97,447 93,522
Operating Profit....... 5,194 8,846 5,203 7,858 4,843
OTHER
Sales.................. 22,666 176,885 190,638 186,438 193,264
Operating Profit
(Loss)............... 104,279 13,227 11,274 3,212 (11,191)
CONTINUING OPERATIONS
Sales.................. 854,382 927,482 928,287 887,313 823,836
Operating Profit
(Loss)............... 119,724 27,019 56,265 50,628 (37,656)
</TABLE>
35
<PAGE> 36
The results for the periods presented in the preceding table included certain
nonrecurring items which are discussed herein in the sections entitled:
"Discussion of Consolidated Results of Operations", "Segment Results of
Operations", and "Restructuring and Integration Charges" and "Asset Impairment
Charges."
36
<PAGE> 37
PERKINELMER, INC. AND SUBSIDIARIES
SELECTED FINANCIAL INFORMATION
FOR THE FIVE YEARS ENDED JANUARY 3, 1999
<TABLE>
<CAPTION>
(IN THOUSANDS WHERE APPLICABLE) 1998 1997 1996 1995 1994
- ------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Sales......................................... $ 854,382 $ 927,482 $ 928,287 $ 887,313 $ 823,836
Operating income (loss) from continuing
operations.................................. 119,724 27,019 56,265 50,628 (37,656)
Income (loss) from continuing operations...... 79,001(1) 9,562(3) 34,264 33,340 (49,471)(5)
Income from discontinued operations, net of
income taxes................................ 23,001(1) 24,130 25,892 34,700 43,816(5)
Net income (loss)............................. 102,002(1) 33,692(3) 60,156 68,040 (5,655)(5)
Return on equity.............................. 28.0%(2) 9.7%(4) 16.4% 16.8% (1.2)%(6)
Basic earnings (loss) per share:
Continuing operations....................... 1.74(1) .21(3) .72 .64 (.89)(5)
Discontinued operations..................... .51(1) .53 .55 .68 .79(5)
Net income (loss)........................... 2.25(1) .74(3) 1.27 1.32 (.10)(5)
Diluted earnings (loss) per share:
Continuing operations....................... 1.72(1) .21(3) .72 .64 (.89)(5)
Discontinued operations..................... .50(1) .53 .55 .68 .79(5)
Net income (loss)........................... 2.22(1) .74(3) 1.27 1.32 (.10)(5)
Weighted-average common shares outstanding:
Basic....................................... 45,322 45,757 47,298 51,483 55,271
Diluted..................................... 45,884 45,898 47,472 51,573 55,324
FINANCIAL POSITION:
Working capital............................... $ 47,868 $ 209,027 $ 201,478 $ 228,441 $ 213,769
Current ratio................................. 1.10:1 1.88:1 1.92:1 2.08:1 1.89:1
Total assets.................................. 1,138,778 777,737 774,761 757,927 746,379
Short-term debt............................... 157,888 46,167 21,499 5,275 59,988
Long-term debt................................ 129,835 114,863 115,104 115,222 812
Long-term liabilities......................... 124,799 95,940 76,087 63,816 60,153
Stockholders' equity.......................... 399,667 328,388 365,106 366,946 445,366
- -- Per share.................................. 8.93 7.24 7.88 7.71 8.08
Total debt/total capital...................... 42% 33% 27% 25% 12%
Common shares outstanding..................... 44,746 45,333 46,309 47,610 55,124
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
(IN THOUSANDS WHERE APPLICABLE) 1998 1997 1996 1995 1994
- ------------------------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS:
Cash flows from continuing operations......... $ 40,853 $ 11,405 $ 48,291 $ 80,868 $ 44,364
Cash flows from discontinued operations....... 28,702 23,433 31,867 69,297 51,519
Cash flows from operating activities.......... 69,555 34,838 80,158 150,165 95,883
Depreciation and amortization................. 48,510 42,698 38,861 37,432 34,546
Capital expenditures.......................... 44,489 47,642 78,796 60,689 34,804
Cost of acquisitions.......................... 217,937 3,611 -- -- 32,841
Proceeds from dispositions.................... 210,505 24,287 1,744 15,238 2,872
Purchases of common stock..................... 41,217 28,104 30,760 135,079 19,139
Cash dividends per common share............... .56 .56 .56 .56 .56
</TABLE>
- ---------------
(1) Continuing operations includes net nonrecurring income items totaling
$66.7 million pre-tax, $44.7 million after-tax ($0.99 basic earnings per
share, $.97 diluted earnings per share); nonrecurring items are more fully
discussed in PerkinElmer's consolidated financial statements and related
footnotes and the Management's Discussion and Analysis sections of its
Current Report on Form 8-K filed with the Securities and Exchange Commission
on November 23, 1999. Included in the $66.7 million of nonrecurring items is
an investment gain of $4.3 million, $2.7 million after-tax ($.06 basic and
diluted per share). Approximately $6.8 million pre-tax of nonrecurring
charges related to restructuring and other nonrecurring items are included
in discontinued operations.
(2) Return on equity before effects of nonrecurring items was 17.9%.
(3) Reflected an asset impairment charge of $28.2 million and a cost of capital
reimbursement of $3.4 million, $21.2 million after-tax ($0.46 basic and
diluted loss per share).
(4) Return on equity before effects of nonrecurring items was 15.4%.
(5) Continuing operations included a goodwill write-down of $40.3 million,
restructuring charges of $29.4 million, and an investment write-down of $2.1
million pre-tax, $64.8 million after-tax in the aggregate ($1.18 basic and
diluted loss per share). Approximately $1.0 million pre-tax of nonrecurring
charges related to restructuring were included in discontinued operations.
(6) Return on equity before effects of nonrecurring items was 12.1%.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
During 1998, the Company implemented various initiatives for sustainable
profitability and earnings per share growth. The Company achieved important
milestones to restructure and rebalance its portfolio into 1999 and beyond. The
Company divested certain non-core operations during the year and utilized the
proceeds to accelerate certain consolidation programs, and completed four
strategic acquisitions.
Acquisitions in early 1998 included Isolab in our Life Sciences segment and
Belfab in our Fluid Sciences segment. The Company accelerated its growth
initiative with fourth quarter 1998 acquisitions of Lumen Technologies, Inc.
(Lumen) and Life Sciences Resources, Ltd. (LSR) in our Optoelectronics and Life
Sciences segments, respectively. On December 16, 1998, the Company completed its
acquisition of Lumen, a maker of high-technology specialty light sources, at a
purchase price of approximately $253 million, including approximately $75
million of assumed debt. Lumen will be reported primarily as a component of the
Company's Optoelectronics segment. Also in December, 1998, the Company acquired
LSR, a developer of biotechnology, biomedical and clinical research
instrumentation, at a purchase price of approximately $11 million. LSR will be
reported in the Life Sciences segment of the Company. Due to the timing of the
transactions, the financial results of Lumen and LSR were not material to the
Company's consolidated results of operations for 1998.
38
<PAGE> 39
Base operations operating income excludes certain nonrecurring items
which are presented in the table below. Reference to nonrecurring items herein
relates to the items presented below.
A reconciliation of reported operating income to base operations operating
income results for 1998 compared to 1997 is as follows:
<TABLE>
<CAPTION>
OPERATING INCOME
---------------------
(IN THOUSANDS) 1998 1997
- -------------- --------- --------
<S> <C> <C>
As reported...................................... $ 119,724 $ 27,019
Gains on dispositions............................ (125,822) (10,646)
In-process R&D charge............................ 2,300 --
Restructuring charges............................ 50,027 4,900
Integration costs & other........................ 600 3,382
Asset impairment charge.......................... 7,400 28,200
Charitable contribution (SG&A)................... 3,000 --
Employee benefit plan charge..................... -- 2,800
Results of divested operations................... (2,127) (26,590)
--------- --------
Base operations.................................. $ 55,102 $ 29,065
========= ========
</TABLE>
39
<PAGE> 40
DISCUSSION OF CONSOLIDATED RESULTS OF OPERATIONS -- 1998 COMPARED TO 1997
Sales, excluding the effect of divested operations of $22.7 million and
$176.9 million in 1998 and 1997, respectively, increased 11% in 1998 versus
1997. Reported sales decreased $73.1 million, or 8%, in 1998 compared to 1997
due primarily to the absence of revenues from divested operations, partially
offset by increases in base sales and inclusion of revenues from 1998
acquisitions.
1998 results included an in-process research and development charge of $2.3
million related to the fourth quarter acquisitions of Lumen and LSR.
Restructuring charges recorded during the first and second quarters of 1998 were
$50 million. The impact of these charges on each segment was as follows: Life
Sciences-$4.6 million, Optoelectronics-$20.3 million, Instruments-$11.3 million,
Fluid Sciences-$9.9 million and Other-$3.9 million. Also included in 1998
operating income was a $7.4 million asset impairment charge related to the
Instruments segment and a $3 million charitable contribution recorded in
selling, general and administrative expenses. Gains of $125.8 million on
dispositions of businesses were included in 1998 operating income in Other.
Beginning in 1998, the Company began reporting on its four continuing operations
business segments in accordance with the requirements of SFAS No. 131. The prior
period results herein have been reclassed between segments for comparability and
the basis of presentation has been revised to conform to the 1998 format.
The operating income from continuing operations in 1997 included an asset
impairment charge of $28.2 million. The impact of this charge was $26.7 million
in the Optoelectronics segment and $1.5 million in Other.
Base operating income excludes certain nonrecurring items which are
discussed herein and a summary of the respective 1998 nonrecurring items is as
follows:
<TABLE>
<CAPTION>
DILUTED
EARNINGS (LOSS)
(IN THOUSANDS) BEFORE-TAX AFTER-TAX PER SHARE
- -------------- ---------- --------- ---------------
<S> <C> <C> <C>
Gains on dispositions.................. $125,822 $87,833 $1.91
Integrations costs..................... (600) (384) (.01)
Restructuring charges.................. (50,027) (36,802) (.80)
Asset impairment charge................ (7,400) (4,425) (.10)
Charitable contribution (SG&A)......... (3,000) (1,920) (.04)
In-process R&D charge.................. (2,300) (2,300) (.05)
-------- ------- -----
Subtotal............................... 62,495 42,002 .91
Gain on investment..................... 4,254 2,723 .06
-------- ------- -----
Total.................................. $ 66,749 $44,725 $ .97
======== ======= =====
</TABLE>
Reported operating income from continuing operations for 1998 was $119.7
million, an increase of $92.7 million from 1997. Base operating income of $55
million increased 90% compared to 1997 due primarily to higher gross profit
across most businesses. A reconciliation of reported operating income in 1998
and 1997 versus base operating income is presented in the preceding table in the
Overview section of Management's Discussion and Analysis. Discussion of segment
results of operations during 1997 versus 1996 is presented below.
DISCUSSION OF CONSOLIDATED RESULTS OF OPERATIONS -- 1997 COMPARED TO 1996
Sales from continuing operations in 1997 were flat compared to 1996.
Excluding the effects of currency translation and results of divested
operations, sales increased slightly. Operating income from continuing
operations was $27 million in 1997 and included a $28.2 million non-cash asset
impairment charge, primarily associated with the IC Sensors business. The
after-tax effect of this charge was $23.5 million ($.51 loss per share).
Excluding the asset impairment charge, operating income in 1997 was $55.2
million, a 2% decrease from the prior year. The 1997 operating income included
gains of $10.6 million from the divestitures of businesses. These gains were
offset by $8 million of costs incurred in connection with the consolidation,
integration and restructuring initiatives and a charge of $2.8 million resulting
from a cash deficit in an employee benefit plan. The gains and costs were
included in selling, general and administrative expenses. Research and
development expenses increased slightly in 1997 over 1996.
40
<PAGE> 41
DISCONTINUED OPERATIONS
Income from discontinued operations, net of income taxes, of $23.0 million
in 1998 reflected the results of the Company's Technical Services segment.
Income from discontinued operations, net of income taxes, of $24.1 million in
1997 reflected $21.1 million from the Company's Technical Services segment and
$3 million related to the Company's last remaining contract for the Department
of Energy (DOE) segment, which expired in September, 1997. All contracts with
the DOE are now completed. Income from discontinued operations, net of income
taxes, of $25.9 million in 1996 reflected $20.2 million from the Company's
Technical Services segment and $5.7 million related to the Company's DOE
segment. Sales for the Technical Services segment for fiscal 1998, 1997 and
1996 were $553.5 million, $533.3 million and $499.0 million, respectively. The
1998 increase in sales versus 1997 was due primarily to privatization sector
contributions and increased sales for the Defense Materials and Services units,
offset by lower sales in the fourth quarter of 1998 from the Company's NASA
services unit. The 1997 increase in sales versus 1996 was due primarily to
higher communications systems revenues and certain new government contract wins
in 1997 versus 1996. Operating profit for the Technical Services segment for
fiscal 1998, 1997 and 1996 was $35.8 million, $32.6 million and $31.4 million,
respectively. The increases in operating profit for 1998 and 1997 were due
primarily to the higher revenues discussed above.
41
<PAGE> 42
SEGMENT RESULTS OF OPERATIONS
The Company's continuing operations businesses are reported as four
reportable segments, which reflect the Company's management methodology and
structure under four strategic business units (SBUs) as discussed above. A brief
summary of each of the Company's four business segments is presented in Note 24
in the footnotes to the accompanying consolidated financial statements. The
accounting policies of the segments are the same as those described in the
footnotes to the accompanying consolidated financial statements. 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 1998 versus 1997 and 1997 versus 1996.
Life Sciences
1998 Compared to 1997
Sales for 1998 were $148.1 million compared to $125.4 million for 1997,
which represents a $22.7 million, or 18%, increase. Higher sales volumes from
certain base businesses, revenues from recently developed products and the
Isolab acquisition revenues of $6.5 million were the primary reasons for the
increase during 1998. The higher volumes during 1998 primarily related to the
diagnostic and bioanalytical business.
Reported operating profit for 1998 was $9.0 million compared to $10.1
million for 1997 which represents a $1.1 million, or 11%, decrease.
Restructuring charges of $4.6 million recorded in the first half of fiscal 1998
contributed to this decrease. 1998 base operating profit was $13.7 million
compared to $10.3 million for 1997, which represents a $3.4 million, or 33%,
increase. The increase was due primarily to the higher revenues discussed above
and improved gross margins from most businesses resulting from a more favorable
product mix.
1997 Compared to 1996
Sales for 1997 were $125.4 million which represented a $13.6 million, or
12%, increase compared to the prior year. The increase was mainly due to sales
of a new medical research instrument and consumables related to the placement of
an increasing number of diagnostic instruments. These increases were partially
offset by government funded research revenue decreases and delays in certain
product improvements.
Base operating income increased 54% versus the prior year to $10.3 million
for 1997. Higher sales discussed above contributed to the increase combined with
the effects of increased profitability from an enhanced product offering and an
improved sales mix.
Optoelectronics
1998 Compared to 1997
Sales for 1998 were $268.6 million compared to $261.3 million for 1997,
which represents a $7.3 million, or 3%, increase. Slight increases in sales
across most businesses were partially offset by lower 1998 printer circuit board
assembly sales versus 1997.
Reported operating loss for 1998 was $5.5 million compared to a loss of
$23.1 million for 1997 which represents an increase of $17.6 million, or 76%.
Restructuring charges of $20.3 million were recorded in the first half of fiscal
1998 and a fourth quarter charge of $2.3 million was recorded for an in-process
research and development charge related to the Lumen acquisition; each
contributed to the 1998 operating loss. 1998 base operating profit was $17.2
million compared to $5.3 million for 1997, which represents an $11.9 million, or
225%, increase. Higher gross margins across most businesses, favorable product
mix, and various operational improvement initiatives to lower production costs
were the primary contributors to this increase.
1997 Compared to 1996
Sales decreased $8.2 million due to loss of market share to a competitor's
lower cost automotive accelerometers, the effects of currency translation and
the completion of contracts in 1996 in the camera and power supplies businesses.
These decreases were partially offset by the sales resulting from the
introduction of new thermopile products. The $30.3 million decrease in reported
income resulted primarily from the noncash asset impairment charge of $26.7
million.
42
<PAGE> 43
Excluding the impairment charge, operating income decreased $3.6 million as a
result of lower sales, higher operating losses at IC Sensors and higher
development costs for the advanced micromachined sensors technology. The 1997
cost of the development effort for the amorphous silicon project continued at
the $4.5 million level, while the development effort for the advanced
micromachined sensor technology cost $5.3 million.
Instruments
1998 Compared to 1997
Sales for 1998 were $247.4 million compared to $236.8 million for 1997,
which represents a $10.6 million, or 4%, increase. This was due primarily to the
effects of a $4.5 million increase in automotive business revenues and $4
million of royalty and licensing fees from a multi-year agreement consummated in
the fourth quarter of 1998. These increases were partially offset by a 6%
decrease in 1998 X-Ray revenues due to an overall softening in the security
markets. Delays of certain international shipments during the fourth quarter of
1998 also contributed to lower 1998 sales.
Reported operating profit for 1998 was $6.7 million compared to $18.0
million for 1997, which represents a decrease of $11.3 million, or 63%.
Restructuring charges of $11.3 million and an asset impairment charge of $7.4
million were recorded in the first half of 1998 and contributed to this
decrease. 1998 base operating profit was $25.3 million compared to $20.6 million
for 1997 which represents a $4.7 million, or 23%, increase. Base operating
income in 1998 increased versus 1997 due primarily to the royalty and licensing
fees, which contributed $3.1 million to operating income, and a $2 million
refund of sales and use taxes which were offset in part by customer contract
provisions.
1997 Compared to 1996
Instruments sales decreased $6.7 million, and operating income decreased $8
million. The Instruments results included a $3.4 million net reduction in patent
infringement costs. This increase was offset by restructuring and integration
costs of $2.7 million and the absence of income ($1.1 million) from the
expiration of a grant liability in 1996, start-up costs, price reductions due to
continued competitive pressure on conventional explosives-detection systems and
lower sales experienced by some businesses.
Fluid Sciences
1998 Compared to 1997
Sales for 1998 were $167.6 million compared to $127.1 million for 1997,
which represents a $40.5 million, or 32%, increase. Modest strength in the
Company's aerospace business partially contributed to the increase and was
offset in part by continued declining sales from the semiconductor business. The
Belfab acquisition completed in the second quarter contributed $17.2 million
while most other segment businesses recorded higher 1998 sales compared to 1997.
Excluding the acquisition, revenues in 1998 increased approximately 18% compared
to 1997.
Reported operating profit for 1998 was $5.2 million compared to $8.8
million for 1997 which represents a decrease of $3.6 million, or 41%.
Restructuring charges of $9.9 million recorded in the first half of 1998 and
$0.6 million of integration costs recorded in the third quarter of 1998
contributed to this decrease. 1998 base operating profit was $15.7 million
compared to $9.3 million for 1997, which represents an increase of $6.4 million,
or 69%. Higher gross margins driven primarily by higher sales levels and certain
manufacturing cost improvements across most businesses within the segment
contributed to this increase. Belfab did not contribute to operating profit
during 1998.
43
<PAGE> 44
1997 Compared to 1996
Sales increased $14.3 million, or 13%, due to higher demand for aerospace
products, reflecting continued strength in that market. Operating income
increased $3.6 million as the result of income on higher sales and improved
contract margins. These increases were partially offset by costs associated with
the consolidation and relocation of manufacturing facilities and warranty costs.
RESTRUCTURING AND INTEGRATION CHARGES
The Company developed restructuring plans during 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 $30.5 million. The principal actions in the restructuring plan
include close-down or consolidation of a number of offices and facilities,
transfer of assembly activities to lower cost geographic locations, disposal of
underutilized assets, withdrawal from
44
<PAGE> 45
certain product lines and general cost reductions. The restructuring charges
related to continuing operations were broken down as follows by operating
segment:
<TABLE>
<CAPTION>
TERMINATION OF
DISPOSAL OF LEASES AND OTHER
EMPLOYEE CERTAIN PRODUCT CONTRACTUAL
($ IN MILLIONS) SEPARATION COSTS LINES AND ASSETS OBLIGATIONS TOTAL
- --------------- ---------------- ---------------- ---------------- -----
<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
Fluid Sciences........... 4.8 1.9 1.8 8.5
Corporate and Other...... 3.0 -- -- 3.0
----- ---- ---- -----
Total.......... $19.6 $5.8 $5.1 $30.5
===== ==== ==== =====
Amounts incurred through
1/3/99................. $ 6.5 $5.8 $ .7 $13.0
Ending accrual at
1/3/99................. $13.1 -- $4.4 $17.5
</TABLE>
The headcount reduction, by function, resulting in the Employee Separation
Costs detailed above is as follows:
<TABLE>
<CAPTION>
HEADCOUNT
REDUCTION
---------
<S> <C> <C> <C> <C>
Sales & Marketing............ 34
Production................... 480
General & Administrative..... 58
---
Total.............. 572
===
</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 Fluid Sciences 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 Fluid Sciences 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 $19.5 million. The
principal actions in this restructuring plan included the
45
<PAGE> 46
integration of current operating divisions into four strategic business units,
close-down or consolidation of a number of production facilities and general
cost reductions. Details are provided following the table presented below.
The restructuring charges related to continuing operations were broken down
as follows by operating segment:
<TABLE>
<CAPTION>
TERMINATION OF
DISPOSAL OF LEASES AND OTHER
EMPLOYEE CERTAIN PRODUCT CONTRACTUAL
($ IN MILLIONS) SEPARATION COSTS LINES AND ASSETS OBLIGATIONS TOTAL
- --------------- ---------------- ---------------- ---------------- -----
<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
Fluid Sciences........... 1.4 -- -- 1.4
Corporate and Other...... .8 -- .1 .9
----- ---- ---- -----
Total.......... $ 8.9 $5.8 $4.8 $19.5
===== ==== ==== =====
Amounts incurred through
1/3/99................. $ 1.6 $5.8 $ .3 $ 7.7
Ending accrual at
1/3/99................. $ 7.3 -- $4.5 $11.8
</TABLE>
The headcount reduction, by function, resulting in the Employee Separation
Costs detailed above is as follows:
<TABLE>
<CAPTION>
HEADCOUNT REDUCTION
-------------------
<S> <C> <C> <C> <C>
Sales & Marketing............. 41
Production.................... 137
General & Administrative...... 84
---
Total............... 262
===
</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 continuing operating divisions into four 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 segments of the Company. 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 1998 included $9.9 million for
termination of leases and other contractual obligations. This amount includes
approximately $6.5 million for termination of facility leases and other
lease-related costs, $1.5 million for termination of distributor arrangements
and $1.9 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 300 employees of the total of 800 employees expected to be
terminated as part of the two restructuring plans had been severed as of January
3, 1999. The plans will be mainly implemented by the segments through fiscal
1999. Cash outlays, primarily for employee separation costs, were $9.1 million
in 1998. The Company expects to incur approximately $30 million to $35 million
of cash outlays in connection with its restructuring plans throughout 1999.
These funds will come primarily from operating cash flows or borrowings from
existing credit facilities.
Also included as part of the Company's 1998 restructuring plans were
pre-tax charges for its Technical Services segment of $0.9 million and $3.6
million for the first and second quarters of 1998, respectively. These amounts
have been included in net income from discontinued operations in the
accompanying consolidated income statements. Of the total of $4.5 million, $0.4
million was non-cash charges. Approximately $3.7 million of the total 1998
Technical Services segment charges were for employee separation costs related to
approximately 75 people. A majority of the remaining charge was for the
termination of leases. As of January 3, 1999, approximately 21 of the 75
employees expected to be terminated have been severed. Cash outlays, primarily
for employee separation costs, were approximately $1.2 million.
In 1997, as part of a plan to reposition its operations, the Company
recorded $7.8 million of integration costs which included $4.4 million related
to employee separation costs and $3.4 million
46
<PAGE> 47
related to its consolidation effort. These costs were included in selling,
general and administrative expenses.
The components of the restructuring charges met the criteria set forth in
Emerging Issues Task Force (EITF) Issue 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.
ASSET IMPAIRMENT CHARGES
During the second quarter of 1998, the Company recorded a $7.4 million
noncash impairment charge related to an automotive testing facility in the
Instruments 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 in
the Optoelectronics segment and $1.5 million related to the goodwill of an
environmental services business in Other. 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. The components of the revised operating plan included hiring a new
general manager, transferring assembly and test operations to a lower cost
environment (Batam, Indonesia), introducing new products and reviewing
manufacturing processes to improve production yields. All of these components
were implemented during 1997 and 1998.
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
1998 Compared to 1997
Other expense was $1.4 million for 1998 versus $7.6 million for 1997. This
net decrease of $6.2 million in other expense in 1998 was due primarily to the
impact of higher interest income on increased cash balances resulting from the
1998 dispositions and lower interest expense on reduced debt levels during most
of 1998. Included in 1998 other income was a $4.3 million gain on investment.
Other expense in 1997 included income of $3.4 million for a cost of
47
<PAGE> 48
capital reimbursement. The 1998 effective tax rate of 33.2% was impacted by the
tax consequences of the gains on dispositions and restructuring charges.
Excluding these items and their related tax effects, the 1998 effective tax
rate was higher than the 1997 base effective rate of 30.6% due primarily to the
changes in the geographical distribution of income resulting from the
divestiture of the Sealol Industrial Seals business unit.
1997 Compared to 1996
The $1.5 million net decrease in other expense was mainly due to a $3.4
million reimbursement relating to a joint development program, which was
partially offset by lower interest income. Excluding the impairment charge, the
effective tax rate for 1997 was 30.6% compared to 22.4% in 1996. The increase in
the rate was primarily due to changes in the geographical distribution of
income.
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. The Company had no borrowings outstanding under its
credit facilities at the end of fiscal 1998. These facilities are used primarily
as back up 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 year end 1998 consisted of $150 million of short-term debt which
represents commercial paper borrowings, $115 million of unsecured long-term
notes and approximately $22 million of debt assumed in connection with the Lumen
acquisition.
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 to approximately $22 million by year-end.
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 $29.5 million and were $95.6 million
at 1998 year-end. Net cash provided by continuing operations was $40.9 million
in 1998 versus $11.4 million in 1997. This increase was due primarily to the
collection of receivables offset in part by lower base operations' accounts
payable and accrued expenses and the effects of certain deferred tax assets
which increased prepaid expenses and other assets. Capital expenditures were
$44.5 million for 1998, slightly below 1997 levels. Capital expenditures for
1999 are not expected to exceed $40.0 million. The Company realized gross
proceeds of over $200 million from divestitures of non-
48
<PAGE> 49
core operations during 1998 and $28.3 million of cash was realized from issuance
of common stock for options exercised. The proceeds were utilized to accelerate
certain consolidation programs, to fund a portion of the purchase price for four
1998 strategic acquisitions, to fund share repurchases during 1998 and fund
domestic and international operations, as required.
The Company acquired PE Corp.'s analytical instruments division ("PEAI"),
effective May 28, 1999, for a purchase price of approximately $425 million. The
Company financed the transaction with a combination of existing cash and
equivalents, borrowings under its existing credit facilities and other
financing. In addition, under the terms of the PEAI Purchase Agreement, the
Company assumed a long-term German pension liability of approximately $65
million. This German pension liability was historically funded on a pay-as-you
go basis, and the funding going forward is expected to remain consistent. PEAI
is a leading producer of high-quality analytical testing instruments and
consumables, and generated 1998 fiscal year sales of $569 million.
On August 20, 1999, the Company sold its Technical Services segment,
including the outstanding capital stock of EG&G Defense Materials, Inc., a
subsidiary of the Company, to EG&G Technical Services, Inc., an affiliate of The
Carlyle Group L.P. (the "Buyer"), for approximately $250 million in cash and the
assumption by the Buyer of certain liabilities of the Technical Services
segment. Approximately $2.1 million of the cash purchase price will be paid by
the Buyer to the Company on the seventh anniversary of the closing of this
transaction. The purchase price is subject to a post-closing adjustment
currently in negotiation related to the working capital of the Technical
Services segment.
The Company accounted for the sale of its Technical Services segment as a
discontinued operation in accordance with APB No. 30 and, accordingly, the
results of operations of the Technical Services segment have been segregated
from continuing operations, reported as a separate line item on the Company's
consolidated statements of operations and prior periods have been restated. The
Company contracted to sell the EG&G name, trademark and related rights in
connection with this divestiture. Effective October 26, 1999 the Company began
trading as PerkinElmer, Inc. (NYSE: PKI). The Company recorded a net gain on
disposition of discontinued operations of $106 million net of income taxes,
transaction and related costs during the third quarter of fiscal 1999. The gain
was reported separately from the results of the Company's continuing operations.
During 1998, the Company purchased 1.8 million shares of its common stock
through periodic purchases on the open market at a cost of $41.2 million. As of
January 3, 1999, the Company had authorization to purchase 5.9 million
additional shares.
The Company has limited involvement with derivative financial instruments
and uses forward contracts to mitigate the effect of foreign currency movements
on transactions denominated in foreign currencies. The contracts generally have
maturities that do not exceed one month and have no cash requirements until
maturity. Credit risk and market risk are minimal because the contracts are with
large banks and gains and losses are offset against foreign exchange gains and
losses on the underlying hedged transactions. The notional amount of outstanding
forward contracts was $41.6 million as of January 3, 1999.
Demand for certain of our products has been adversely affected by the
economic problems in Asia and Brazil. In addition, the Asian economic problems
have weakened the currencies of some Asian countries, making products of our
competitors who are located in Asia more price competitive. However, during
1998, the economic and financial crisis in portions of Asia and Brazil did not
have a material effect on the Company's results of operations or financial
position.
DIVIDENDS
In January 1999, the Company's Board of Directors declared a regular
quarterly cash dividend of 14 cents per share, resulting in an annual rate of 56
cents per share for 1999. The Company has paid cash dividends, without
interruption, for 34 years and continues to retain what management believes to
be sufficient earnings to support the funding requirements of the Company's
planned growth.
ENVIRONMENTAL
The Company is conducting a number of environmental investigations and
remedial actions at current and former Company locations and, along with other
companies, has been named a potentially responsible party (PRP) for certain
waste disposal sites. The Company accrues for environmental issues in the
accounting period that the Company's responsibility is established and when the
cost can be reasonably estimated. The Company has accrued $9.5 million as of
January 3, 1999, representing management's estimate of the total cost of
ultimate disposition of known environmental matters. Such amount is not
discounted and does not reflect any recovery of any amounts through insurance or
indemnification arrangements. These cost estimates are subject to a number of
variables, including the stage of the environmental investigations, the
magnitude of the possible contamination, the nature of the potential remedies,
possible joint and several liability, the timeframe over which remediation may
occur and the possible effects of changing laws and regulations. For sites where
the Company has been named a PRP, management does not currently anticipate any
additional liability to result from the inability of other significant named
parties to contribute. The Company expects that such accrued amounts could be
paid out over a period of up to five years. As assessments and remediation
activities progress at each individual site, these liabilities are reviewed and
adjusted to reflect additional information as it becomes available. There have
been no environmental problems to date that have had or are expected to have a
material effect on the Company's financial position or results of operations.
While it is reasonably possible that a material loss exceeding the amounts
recorded may have been incurred, the preliminary stages of the investigations
make it impossible for the Company to reasonably estimate the range of potential
49
<PAGE> 50
exposure. The Company adopted the provisions of Statement of Position 96-1,
Environmental Remediation Liabilities, in 1997. Its adoption did not have a
material effect on results of operations.
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 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 shopfloor 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
50
<PAGE> 51
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 non-compliant.
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.
Phase 5 -- Final Testing
The purpose of this phase is to perform follow-up testing of
previously non-compliant 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 January 3, 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% 70% (a)
Facilities..................... 100% 100% 100% 75% (a)
Applications................... 100% 100% 100% 80% (a)
Products....................... 100% 100% 100% 95% (a)
Suppliers, Vendors & 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 in Q2 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, Fluid Sciences 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, and
51
<PAGE> 52
- 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 segment 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 Fluid
Sciences 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 mid-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, 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 non-compliant. A complete discussion of the Company's contingency plans for
critical areas is discussed in this Year 2000 discussion and follows below. The
Company plans to send 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 non-compliance, 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
52
<PAGE> 53
timely manner and cannot guarantee that it will not experience a material
adverse effect as a result of such non-compliance.
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
January 3, 1999 to address the Y2K issue. The costs include those incurred by
the Company's Technical Services segment, which was divested in August, 1999.
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>
HISTORICAL/PLANNING REMEDIATION/IMPLEMENTATION
---------------------- --------------------------
REPLACE/
REMEDIATION UPGRADE/ TOTAL AS OF
(IN THOUSANDS) INVENTORY ASSESSMENT PLANNING REPAIR 1/3/99
- -------------- --------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C>
Factory/plant........................... $ 37 $162 $ 69 $ 559 $ 827
Facilities.............................. 25 135 27 196 383
IT...................................... 85 192 135 2,923 3,335
Products................................ 32 98 79 182 391
Suppliers/vendors....................... 46 89 -- -- 135
Key customers........................... 1 24 -- -- 25
---- ---- ---- ------ ------
Totals........................ $226 $700 $310 $3,860 $5,096
==== ==== ==== ====== ======
</TABLE>
Amounts expended for remediation activities during 1998 were outside of and
incremental to the Company's IT budget for ongoing operational projects. With
the exception of new hardware or software which 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 million and
have been incorporated into the Company's 1999 capital and 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.
53
<PAGE> 54
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 whom 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 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, eleven of the fifteen 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
54
<PAGE> 55
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 report contains "forward-looking statements." For this purpose, any
statements contained in this 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 PerkinElmer, Inc. to differ materially from
those indicated by these forward-looking statements including among others, the
factors set forth below.
The following important factors affect our business and operations
generally or affect multiple segments of our business and operations:
- We face strong competition in many of the markets that we serve, which
affects our ability to sell our products and services and the prices that
we obtain. Certain of our competitors are larger than we are and have
greater financial and other resources.
- We need to successfully implement the restructuring plans that we have
adopted. If we are unable to do so, we will not be able to achieve
anticipated cost savings, our ability to produce and deliver the products
and services may be adversely affected and we may lose key personnel.
- Our business plan depends on our ability to continue to innovate, to
develop new products and services based on such innovations and to
introduce these new products and services successfully into the market. If
we are unable to successfully implement this business plan, it could have a
material adverse effect on the Company's results of operations, financial
condition and liquidity.
- Our business plan depends on our ability to acquire attractive
businesses on favorable terms and integrate these businesses into our other
operations. We have begun the process of integrating Lumen Technologies,
which we acquired in December 1998. In addition, in March 1999, we entered
into an agreement to acquire the analytical instruments division of
PE Corp. The acquisition is subject to customary closing conditions,
including regulatory approval. If we are unable to successfully implement
this business plan or integrate these acquisitions, it could have a
material adverse effect on the Company's results of operations, financial
condition and liquidity.
- In many of our segments, we serve as a supplier of components to other
businesses. As a result, our success depends on the business success of our
customers.
- We need to be able to continue to access the capital markets to fund our
growth.
- Our product businesses can be affected by currency risks.
- We need to achieve satisfactory results in connection with certain
litigation to which we are a party, particularly the tax litigation with
the Internal Revenue Service.
- We need to attract and retain key management, operational and technical
personnel.
- We are affected by general economic conditions. In particular, demand
for certain of our products has been adversely affected by the economic
problems in Asia. In addition, the Asian economic problems have weakened
the currencies of some Asian countries, making products of our competitors
who are located in Asia more price competitive.
- We could be impacted by unanticipated issues associated with Year 2000
software problems.
55
<PAGE> 56
- 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 carryforwards, repatriation costs, resolution of outstanding tax audit
issued and changes in the portfolio of businesses.
There are certain important factors that affect our particular business
segments, including the following:
Life Sciences
- We will implement a new enterprise software system for this business
segment in early 1999. We need this implementation to be effected in a
manner that does not disrupt operations.
- Our business plan for this segment is significantly dependent upon the
successful introduction of products currently under development as well as
the expansion of the geographic markets for this segment's products.
- Many of our products in this segment are subject to regulation by the
Food and Drug Administration and other regulatory bodies.
Optoelectronics
- We need to complete the development of our amorphous silicon technology
and successfully introduce products based on this technology to the market.
- In our IC Sensors business, we need to develop new products for both
existing customers and new markets that we desire to access. We also need
to successfully shift the production of certain products of this business
to our manufacturing facilities that are in lower cost locations in order
to compete more effectively.
Instruments
- Our ability to obtain Federal Aviation Administration certification of
our Z scan system for screening of checked baggage on a timely basis will
affect this segment's success.
- We need to successfully complete construction/installation and obtain
customer acceptance of certain major cargo screening projects that are in
process.
Fluid Sciences
- A key market for certain of this segment's products is manufacturers of
equipment used in semiconductor production. As a result, the success of
this segment's operations is dependent in part upon a recovery of economic
conditions in the semiconductor industry.
- We are in the process of implementing new lower cost manufacturing
processes for certain of this segment's products. The success of this
segment's operations depends in part upon our successfully implementing
these new manufacturing processes.
- A key market for the products that we produce in this segment is
manufacturers of air frames and engines for regional and business jets. As
a result, the success of this segment is dependent in part on the growth of
the regional and business jet market.
- The success of our operations in this segment depends in part on
entering into long-term contracts for the sale of seals to major engine
manufacturers on favorable terms.
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<PAGE> 57
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.
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<PAGE> 58
PERKINELMER, 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....................................................... $243,217 $219,642
Cost of Sales............................................... 160,701 144,247
Research and Development Expenses........................... 13,397 11,042
Selling, General and Administrative Expenses................ 52,091 54,933
Restructuring Charges (Note 2).............................. -- 30,500
Gains on Dispositions (Note 3).............................. -- (67,478)
-------- --------
OPERATING INCOME FROM CONTINUING OPERATIONS................. 17,028 46,398
Other Expense, Net (Note 4)................................. (4,632) (1,914)
-------- --------
Income From Continuing Operations Before Income Taxes....... 12,396 44,484
Provision for Income Taxes.................................. 4,354 15,896
-------- --------
INCOME FROM CONTINUING OPERATIONS .......................... 8,042 28,588
Income From Discontinued Operations, Net of Income Taxes
(Note 13)................................................. 6,045 5,895
-------- --------
NET INCOME.................................................. $ 14,087 $ 34,483
======== ========
Basic Earnings Per Share:
CONTINUING OPERATIONS ................................. $ .18 $ .63
Discontinued Operations ............................... .13 .13
-------- --------
NET INCOME ............................................ $ .31 $ .76
======== ========
Diluted Earnings Per Share:
CONTINUING OPERATIONS ................................. $ .18 $ .62
Discontinued Operations ............................... .13 .13
-------- --------
NET INCOME ............................................ $ .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.
58
<PAGE> 59
PERKINELMER, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 4, JANUARY 3,
1999 1999
---------- ----------
(IN THOUSANDS EXCEPT SHARE
AND PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and Cash Equivalents.............................. $ 106,285 $ 95,565
Accounts Receivable (Note 5)........................... 163,015 170,171
Inventories (Note 6)................................... 118,707 123,568
Other Current Assets................................... 108,601 110,954
Net Assets of Discontinued Operations (Note 13 )....... 25,979 32,087
---------- ----------
TOTAL CURRENT ASSETS.............................. 522,587 532,345
---------- ----------
Property, Plant and Equipment:
At Cost (Note 7)....................................... 484,325 491,647
Accumulated Depreciation and Amortization.............. (275,948) (272,967)
---------- ----------
Net Property, Plant and Equipment........................... 208,377 218,680
---------- ----------
Investments................................................. 13,813 13,506
Intangible Assets (Note 8).................................. 306,998 317,611
Other Assets................................................ 58,748 56,636
---------- ----------
TOTAL ASSETS...................................... $1,110,523 $1,138,778
========== ==========
Current Liabilities:
Short-Term Debt........................................ 184,124 $ 157,888
Accounts Payable....................................... 66,853 73,420
Accrued Restructuring Costs (Note 2)................... 30,956 34,569
Accrued Expenses (Note 9).............................. 193,691 218,600
---------- ----------
TOTAL CURRENT LIABILITIES......................... 475,624 484,477
---------- ----------
Long-Term Debt.............................................. 117,331 129,835
Long-Term Liabilities....................................... 117,410 124,799
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........ $1,110,523 $1,138,778
========== ==========
</TABLE>
The accompanying unaudited notes are an integral part of these consolidated
financial statements.
59
<PAGE> 60
PERKINELMER, 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
Deduct net income from discontinued operations ........ (6,045) (5,895)
-------- --------
Income from continuing operations ..................... 8,042 28,588
Adjustments to reconcile income from continuing
operations to net cash used in continuing operations:
Noncash portion of restructuring charges.......... -- 6,209
Depreciation and amortization..................... 15,401 11,709
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............................... 3,819 493
Inventories....................................... 2,600 (8,796)
Accounts payable and accrued expenses............. (24,446) 11,989
Accrued restructuring costs....................... (3,613) 24,291
Prepaid expenses and other........................ (5,396) (8,106)
-------- --------
Net Cash Used in Continuing Operations...................... (2,856) (3,376)
Net Cash Provided by Discontinued Operations................ 13,072 13,347
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 10,216 9,971
-------- --------
INVESTING ACTIVITIES:
Capital expenditures................................... (8,256) (8,681)
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 Continuing Operations ....... (9,519) 92,296
Net Cash Used in Discontinued Operations ................... (238) (565)
-------- --------
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) Continuing Operations ....... 11,797 (56,450)
-------- --------
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.
60
<PAGE> 61
PERKINELMER, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
As discussed in Note 13, the Company changed its name from EG&G, Inc. to
PerkinElmer, Inc.
The interim condensed consolidated financial statements presented herein
have been prepared by the Company without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair presentation. Interim results are not necessarily indicative of results for
a full year. The information set forth in these statements may be subject to
normal year-end adjustments. 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 condensed consolidated balance sheet presented as of January 3, 1999
has been derived from the consolidated financial statements that have been
audited by the Company's independent public accountants. The unaudited
condensed consolidated financial statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in the annual financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to those rules and regulations, but the Company
believes that the disclosures are adequate to make the information presented
not misleading. The condensed consolidated financial statements and notes
included herein should be read in conjunction with the consolidated financial
statements and notes included elsewhere in this Current Report on Form 8-K for
the year ended January 3, 1999.
On August 20, 1999, the Company sold the assets of its Technical Services
segment, including the outstanding capital stock of EG&G Defense Materials,
Inc., a subsidiary of the Company, to EG&G Technical Services, Inc., an
affiliate of The Carlyle Group L.P. (the "Buyer"), for approximately $250
million in cash and the assumption by the Buyer of certain liabilities of the
Technical Services segment. Approximately $2.1 million of the cash purchase
price will be paid by the Buyer to the Company on the seventh anniversary of the
closing of this transaction. The purchase price is subject to a post-closing
adjustment currently in negotiation related to the working capital, as defined
in the Purchase and Sale Agreement dated July 19, 1999 by and between the
Company and the Buyer, as amended (the "TS Purchase Agreement"), of the
Technical Services segment.
The results of operations of the Technical Services segment were previously
reported as one of five continuing business segments of the Company. The Company
accounted for the sale of its Technical Services segment as a discontinued
operation in accordance with APB Opinion No. 30 and, accordingly, the results of
operations of the Technical Services segment have been segregated from
continuing operations and reported as a separate line item on the Company's
accompanying consolidated income statements. The Company recorded a gain on
disposition of discontinued operations of $106 million net of taxes, transaction
and related costs during the third quarter of fiscal 1999. The gain was reported
separately from the results of the Company's continuing operations.
The Financial Accounting Standards Board issued SFAS No. 137, ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES-DEFERRAL OF THE EFFECTIVE DATE
OF SFAS NO. 133, in June 1999. SFAS No. 133 is now effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000; 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 herein.
Approximately 375 employees of the total of 800 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 through
fiscal 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 $25 million to $30
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 (EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit
61
<PAGE> 62
PERKINELMER, 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. (See Note 13 for additional information on
restructuring charges.)
(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. The after-tax gain of these
divestitures was $45.2 million, or $.99 diluted earnings per share. 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 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. (See Note 13 for
additional information on gains on dispositions.)
(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.......................................... 321 (268)
------- -------
$(4,632) $(1,914)
======= =======
</TABLE>
(5) ACCOUNTS RECEIVABLE
Accounts receivable were net of reserves for doubtful accounts of $4.1
million and $4.4 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.................................... 21,824 22,124
Raw materials...................................... 64,426 64,892
-------- --------
$118,707 $123,568
======== ========
</TABLE>
62
<PAGE> 63
PERKINELMER, 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............... 125,775 128,900
Machinery and equipment............................ 334,911 338,863
-------- --------
$484,325 $491,647
======== ========
</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 $300.6 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............................. $ 9,389 $ 22,463
Employee benefits.................................. 33,112 31,171
Federal, non-U.S. and state income taxes........... 44,431 36,211
Other accrued operating expenses................... 106,759 128,755
-------- --------
$193,691 $218,600
======== ========
</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>
63
<PAGE> 64
PERKINELMER, 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
The Company's continuing businesses are reported as four reportable
segments which reflect the Company's management and structure under its four
SBUs. The Company's Technical Services segment has been classified as
discontinued operations due to the divestiture as discussed in Note 13.
The accounting policies of the reportable segments are the same as those
described in Note 1 to the consolidated financial statements included elsewhere
in this Current Report on Form 8-K for the year ended January 3, 1999. 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 light sources, silicon-based
sensor products, imaging technology and specially designed component
assemblies. Products include micromachined detectors, amorphous silicon
detector panels, flashlamps, specialty lighting, CCDs, X-ray tubes,
detectors, photodiodes and high-intensity specialty discharge lamps.
Instruments: Hardware and associated software for applications in
medical diagnostics, biochemical and medical research, materials analyses,
environmental monitoring, industrial process measurement, food monitoring,
and airport and industrial security. The Company also conducts testing
simulations for the transportation industry.
Fluid Sciences: Static and dynamic seals, sealing systems, bellows
devices, solenoid valves, advanced pneumatic components, systems and valves
and sheet metal-formed products for use in the aerospace, power generation
and semiconductor industries.
Unaudited sales and operating profit information by segment for the first
quarter of 1999 and 1998 are shown in Management's Discussion and Analysis
included elsewhere in this Current Report on Form 8-K and are considered an
integral part of this note.
(12) SHELF REGISTRATION
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 $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 our funding requirements as well as the
availability and cost of other funds.
(13) SUBSEQUENT EVENTS
Acquisition
On May 28, 1999, the Company completed its acquisition of the analytical
instruments division of PE Corp. ("PEAI") for an aggregate purchase price of
approximately $425 million. The purchase price is subject to a post closing
adjustment equal to the amount by which the net assets of PEAI as of the closing
date are greater or less than, as the case may be, certain target amounts set
forth in the Purchase Agreement dated March 8, 1999 between the Company and PE
Corp. (the "PEAI Purchase Agreement"). In addition, under the terms of the PEAI
Purchase Agreement, the Company assumed a long-term German pension liability of
approximately $65 million. This German pension liability was historically funded
on a pay-as-you-go basis, and the funding going forward is expected to remain
consistent. PEAI, a leading producer of high-quality analytical testing
instruments and consumables, generated 1998 fiscal year sales of $569 million.
The Company recorded a $23 million charge for acquired in-process R&D in the
second quarter of 1999.
The purchase price was based upon the Company's determination of the fair
value of PEAI, and the terms of the PEAI Purchase Agreement were determined by
arms-length negotiation among the parties. The Company funded the acquisition
through a combination of available cash, commercial paper borrowings, money
market loans and one-year secured promissory notes in the aggregate principal
amount of $150 million issued by the Company to PE Corp. (the Seller). The
acquisition was accounted for as a purchase in accordance with APB Opinion No.
16.
Divestiture
On August 20, 1999, the Company sold the assets of its Technical Services
segment, including the outstanding capital stock of EG&G Defense Materials,
Inc., a subsidiary of the Company, to EG&G Technical Services, Inc., an
affiliate of The Carlyle Group L.P. (the "Buyer"), for approximately $250
million in cash and the assumption by the Buyer of certain liabilities of the
Technical Services segment. Approximately $2.1 million of the cash purchase
price will be paid by the Buyer to the Company on the seventh anniversary of the
closing of this transaction. The purchase price is subject to a post-closing
adjustment currently in negotiation related to the working capital, as defined
in the Purchase and Sale Agreement dated July 19, 1999 by and between the
Company and the Buyer, as amended (the "TS Purchase Agreement"), of the
Technical Services segment. The Technical Services segment provides services to
the United States Government and other customers for projects in the areas of
base and range operations, sciences and engineering, logistics, asset management
and chemical demilitarization.
The purchase price was based upon the Buyer's determination of the fair
value of the Technical Services segment, and the terms of the TS Purchase
Agreement were determined by arms-length negotiation among the parties.
The results of operations of the Technical Services segment were previously
reported as one of five business segments of the Company. The Company accounted
for the sale of its Technical Services segment as a discontinued operation in
accordance with APB Opinion No. 30 and, accordingly, the results of operations
of the Technical Services segment have been segregated from continuing
operations and reported as a separate line item on the Company's accompanying
consolidated income statements. The Company recorded a gain on disposition of
discontinued operations of $106 million net of taxes, transaction and related
costs during the third quarter of fiscal 1999. The gain was reported separately
from the results of the Company's continuing operations.
Summary operating results of the discontinued operations of the Technical
Service segment were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------
APRIL 4, MARCH 29,
1999 1998
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Sales................................. $114,270 $136,294
Costs and expenses.................... 105,480 127,795
-------- --------
Operating income from discontinued
operations.......................... 8,790 8,499
Other income.......................... 656 712
-------- --------
Income from discontinued operations
before income taxes................. 9,446 9,211
Provision for income taxes............ 3,401 3,316
-------- --------
Income from discontinued operations,
net of income taxes................. $ 6,045 $ 5,895
======== ========
</TABLE>
Net assets of discontinued operations consisted of the following:
<TABLE>
<CAPTION>
April 4, January 3,
(IN THOUSANDS) 1999 1999
- -------------- -------- ----------
<S> <C> <C>
Accounts receivable, primarily unbilled...... $ 62,753 $ 59,784
Other current operating assets............... 6,223 5,340
Property, plant and equipment, net........... 3,044 3,146
Other assets................................. 10,513 9,959
Current operating liabilities................ (50,088) (39,621)
Other liabilities............................ (6,466) (6,521)
-------- --------
$ 25,979 $ 32,087
======== ========
</TABLE>
Name Change
At a special meeting of shareholders held on September 10, 1999,
shareholders approved a change to the corporate name of the Company from "EG&G,
Inc." to "PerkinElmer, Inc." The name change became effective on October 26,
1999, at which time the Company began trading under a new ticker symbol
(NYSE:PKI). The new name reflects the Company's focus on commercial technology
markets and is part of an overall effort to build product and service strategy
under one strong brand.
Acquisition Agreement
In October 1999, the Company announced that it had entered into an
agreement to acquire Vivid Technologies, Inc. ("Vivid"), a leading supplier of
automated explosive detection systems used in airports and high-security
facilities around the world. The transaction will take the form of a stock
merger in which shareholders of Vivid will receive one share of the Company's
common stock for each 6.2 shares of Vivid common stock. At current prices this
transaction would be valued at approximately $62.5 million or $6.25 per share,
representing $42.5 million for the business and the $20 million cash on Vivid's
balance sheet.
The transaction, which has been approved by the boards of directors of both
companies, is subject to the approval of Vivid's shareholders, regulatory
approval, and other customary closing conditions, as well as provisions relating
to fluctuations in the market price of the Company's common stock. Closing is
expected in the first quarter of 2000. The acquisition will be accounted for as
a purchase in accordance with APB Opinion No. 16.
Restructuring and Other Nonrecurring Items
During the third quarter of 1999 due to the substantial completion of the
actions of the 1998 restructuring plans, the Company reevaluated its
restructuring plans. As a result of this review, costs associated with the
previously planned shutdown of two businesses were no longer required due to
actions taken by the Company to improve performance. As a result of these recent
developments, the Company recognized a restructuring credit of $12 million
during the third quarter of fiscal 1999 which affected the Fluid Sciences and
Optoelectronics segments.
The acquisitions by the Company in 1998 and 1999 and the Company's
divestiture during the third quarter of 1999 of its Technical Services segment
were strategic milestones in the Company's transition to a commercial
high-technology company. Consistent with the strategic direction of the Company
and concurrent with the reevaluation of existing restructuring plans during the
third quarter of 1999, the Company developed additional plans during the third
quarter of 1999 to restructure certain businesses to continue to improve the
Company's performance. These plans resulted in pre-tax restructuring charges of
$23.5 million recorded in the third quarter of 1999. The principal actions in
these restructuring plans include close-down or consolidation of a number of
offices and facilities, transfer of assembly activities to lower-cost geographic
locations, disposal of under-utilized assets, withdrawal from certain product
lines and general cost reductions.
During the third quarter of 1999, in connection with its ongoing review of
its portfolio of businesses, the Company conducted a strategic review of certain
units within its business segments. The strategic review triggered an impairment
review of long-lived assets. The Company calculated the present value of
expected cash flows of certain business units to determine the fair value of
those assets. Accordingly, in the third quarter of 1999, the Company recorded an
impairment charge of $18 million in the Instruments and Optoelectronics segments
for the write-down of goodwill.
In connection with the disposition of the Company's Rotron and Sealol
Industrial Seals divisions in 1998, during the second and third quarters of
1999, the Company recognized approximately $11.5 million of pre-tax gains from
the previously deferred sales proceeds as a result of the favorable resolution
of certain events and contingencies during 1999.
64
<PAGE> 65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
PERKINELMER, 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
FLUID SCIENCES
Sales......................................... $ 41,194 $ 37,189 $ 4,005
Operating Profit (Loss)....................... 4,028 (5,858) 9,886
OTHER
Sales......................................... $ -- $ 22,666 $(22,666)
Operating Profit (Loss)....................... (3,788) 62,941 (66,729)
CONTINUING OPERATIONS
Sales......................................... $243,217 $219,642 $ 23,575
Operating Profit.............................. 17,028 46,398 (29,370)
</TABLE>
65
<PAGE> 66
DISCUSSION OF CONSOLIDATED RESULTS OF OPERATIONS -- FIRST QUARTER 1999 COMPARED
TO FIRST QUARTER 1998
Sales from continuing operations for the first quarter of 1999 were $243.2
million which increased by $23.6 million over the comparable 1998 level.
Acquisitions completed in 1998 contributed approximately $60 million of revenues
during the first quarter of 1999. Excluding divestitures, first quarter 1999
sales including 1998 acquisitions increased approximately 24% over the first
quarter of 1998. Revenues for acquisitions during the quarter were offset by
declines in certain base revenues, particularly the security and automotive
units. Discussion of sales by segment during the first quarter of 1999 versus
the respective 1998 period is presented in the section to follow herein.
Reported operating income from continuing operations was $17.0 million in
the first quarter of 1999 versus $46.4 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 $30.5 million. Excluding these
1998 net nonrecurring items, 1999 operating income for the first quarter
increased by approximately $7.6 million, or 81%. The higher revenues discussed
above were the primary reasons for this increase. 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 for the first
quarter of 1999 were slightly higher than 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 continuing operations are reported as four reportable
segments, which reflect the Company's management methodology and structure under
four 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 first quarter of 1998 operating income included
66
<PAGE> 67
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 profit 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 7.8% 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.
Fluid Sciences
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 profit 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
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<PAGE> 68
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.
RESTRUCTURING AND INTEGRATION 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 $30.5 million. The principal actions in the restructuring plan
include close-down or consolidation of a number of offices and facilities,
transfer of assembly activities to lower-cost geographic locations, disposal of
underutilized assets, withdrawal from certain product lines and general cost
reductions.
The restructuring charges related to continuing operations were broken down
as follows by operating segment:
<TABLE>
<CAPTION>
TERMINATION OF
DISPOSAL OF LEASES AND OTHER
EMPLOYEE CERTAIN PRODUCT CONTRACTUAL
SEPARATION COSTS LINES AND ASSETS OBLIGATIONS TOTAL
---------------- ---------------- ---------------- -----
($ 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
Fluid Sciences..................... 4.8 1.9 1.8 8.5
Corporate and Other................ 3.0 -- -- 3.0
----- ---- ---- -----
Total.................... $19.6 $5.8 $5.1 $30.5
===== ==== ==== =====
Amounts incurred through
April 4, 1999.................... $ 8.4 $5.8 $ .9 $15.1
Ending accrual at April 4, 1999.... $11.2 $ -- $4.2 $15.4
</TABLE>
The headcount reduction, by function, resulting in the Employee Separation
Costs detailed above is as follows:
HEADCOUNT REDUCTION
-------------------
Sales & Marketing............. 34
Production.................... 480
General & Administrative...... 58
---
Total............... 572
===
Further details of the actions are presented below. Specific businesses
within each segment which were affected by the restructuring actions are as
follows: The Fluid Sciences 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 Fluid Sciences and Optoelectronics segments.
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<PAGE> 69
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 $19.5 million. The
principal actions in this restructuring plan included the integration of current
continuing operating divisions into four Strategic Business Units, close-down or
consolidation of a number of production facilities and general cost reductions.
Details are provided following the table presented below.
The restructuring charges related to continuing operations were broken down
as follows by operating segment:
<TABLE>
<CAPTION>
TERMINATION OF
DISPOSAL OF LEASES AND OTHER
EMPLOYEE CERTAIN PRODUCT CONTRACTUAL
($ IN MILLIONS) SEPARATION COSTS LINES AND ASSETS OBLIGATIONS TOTAL
- --------------- ---------------- ---------------- ---------------- -----
<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
Fluid Sciences..................... 1.4 -- -- 1.4
Corporate and Other................ .8 -- .1 .9
----- ---- ---- -----
Total.................... $ 8.9 $5.8 $4.8 $19.5
===== ==== ==== =====
Amounts incurred through
April 4, 1999.................... $ 2.7 $5.8 $ .7 $ 9.2
Ending accrual at April 4, 1999.... $ 6.2 $ -- $4.1 $10.3
</TABLE>
The headcount reduction, by function, resulting in the Employee Separation
Costs detailed above is as follows:
HEADCOUNT REDUCTION
-------------------
Sales & Marketing............. 41
Production.................... 137
General & Administrative...... 84
---
Total............... 262
===
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 continuing operating divisions into four 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 segments of the Company. 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 1998 included $9.9 million for
termination of leases and other contractual obligations. This amount included
approximately $6.5 million for termination of facility
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<PAGE> 70
leases and other lease-related costs, $1.5 million for termination of
distributor arrangements and $1.9 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 800 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 $25 to $30 million of cash outlays in
connection with its restructuring plans throughout the remainder of 1999. These
funds are expected to come primarily from operating cash flows or borrowings
from existing credit facilities.
Also included as part of the Company's 1998 restructuring plans were
pre-tax charges for its Technical Services segment of $0.9 million and $3.6
million for the first and second quarters of 1998, respectively. These amounts
have been included in net income from discontinued operations in the
accompanying consolidated income statements. Of the total of $4.5 million, $0.4
million was non-cash charges. Approximately $3.7 million of the total 1998
Technical Services segment charges were for employee separation costs related
to approximately 75 people. A majority of the remaining charge was for the
termination of leases. As of April 4, 1999, approximately 22 of the 75
employees expected to be terminated have been severed. Cash outlays, primarily
for employee separation costs, were approximately $1.2 million.
The components of the restructuring charges met the criteria set forth in
Emerging Issues Task Force (EITF) Issue 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 pre-tax gains of $125.8 million on
the dispositions.
OTHER
1999 Compared to 1998
Other expense was $4.6 million for 1999 versus $1.9 million reported in
1998. This net increase of $2.7 million in other expense in 1999 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 from continuing operations for the first quarter of 1999
decreased to 35.1% from 35.7% for the comparable period in 1998.
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<PAGE> 71
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
operations was $10.2 million for the three months ended April 4, 1999. Cash
used by continuing operations during the quarter was $2.9 million and was
comprised of net income before depreciation, amortization and other non-cash
items of $24.2 million offset by a $27.0 million net change in certain other
assets and liabilities during the 1999 quarter. The primary net changes
consisted primarily of a $2.6 million decrease in inventory and a $3.8 million
decrease in accounts receivable offset by decreases in base operations'
accounts payable and accrued expenses of $24.4 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 $8.3 million for the three months ended April 4,
1999. Capital expenditures for fiscal 1999 are not expected to exceed $40
million.
On May 28, 1999, the Company completed its acquisition of the analytical
instruments division of PE Corp. ("PEAI") for an aggregate purchase price of
approximately $425 million. In addition, under the terms of the Purchase
Agreement dated March 8, 1999 between the Company and PE Corp. (the "PEAI
Purchase Agreement"), the Company assumed a long-term German pension liability
of approximately $65 million. This German pension liability was historically
funded on a pay-as-you go basis, and the funding going forward is expected to
remain consistent. The acquisition was accounted for as a purchase under APB
Opinion No. 16. In accordance with APB Opinion No. 16, the Company allocated
the purchase price of PEAI based on the fair values of the net assets acquired
and liabilities assumed. The purchase price is subject to a post-closing
adjustment currently in negotiation which will be equal to the amount by which
the net assets of PEAI as of the closing date are greater or less than, as the
case may be, certain target amounts set forth in the PEAI Purchase Agreement.
PEAI produces high-quality analytical testing instruments and consumables, and
generated 1998 fiscal year sales of $569 million. PEAI is reported in the
Company's Instruments segment.
On August 20, 1999, the Company sold the assets of its Technical Services
segment, including the outstanding capital stock of EG&G Defense Materials,
Inc., a subsidiary of the Company, to EG&G Technical Services, Inc., an
affiliate of the Carlyle Group L.P. (the "Buyer"), for approximately $250
million in cash and the assumption by the Buyer of certain liabilities of the
Technical Services segment. Approximately $2.1 million of the cash purchase
price will be paid by the Buyer to the Company on the seventh anniversary of the
closing of this transaction. The purchase price is subject to a post-closing
adjustment currently in negotiation related to the working capital, as defined
in the TS Purchase Agreement, of the Technical Services segment.
The Company accounted for the sale of its Technical Services segment as a
discontinued operation in accordance with APB Opinion No. 30 and, accordingly,
the results of operations of the Technical Services segment have been segregated
from continuing operations and reported as a separate line item on the Company's
consolidated income statements. The Company recorded a gain on disposition of
discontinued operations of $106 million net of taxes, transaction and related
costs during the third quarter of fiscal 1999. The gain was reported separately
from the results of the Company's continuing operations.
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 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.
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<PAGE> 72
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.
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<PAGE> 73
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
On an SBU basis, the Life Sciences, Optoelectronics and Fluid Sciences 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 an operational unit within the Instruments
SBU. 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. Further remediation for this unit 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,
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<PAGE> 74
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 30% of the Company's key vendors and
suppliers. The responses received comprised approximately an 80% response rate.
Approximately 90% 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. The costs include those expended in its
Technical Services SBU which was reported as discontinued operations in the
first quarter of 1999. 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
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<PAGE> 75
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
75
<PAGE> 76
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 report contains "forward-looking statements." For this purpose, any
statements contained in this 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 PerkinElmer, Inc. to differ materially from
those indicated by these forward-looking statements. These factors include,
without limitation, those set forth elsewhere in this report.
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.
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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 hereunto duly authorized.
EG&G, Inc.
By /s/ Gregory D. Perry
-----------------------------
Vice President,
Control and Treasury
Date: November 23, 1999
77
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report dated January 23, 1999 (except with respect to matters discussed
in Notes 8 and 27, for which the date is November 19, 1999), included in this
Form 8-K into Registration Statements previously filed by PerkinElmer, Inc. on,
respectively, Form S-8, File No. 2-98168; Form S-8, File No. 33-36082; Form S-8,
File No. 33-35379; Form S-8, File No. 33-49898; Form S-8, File No. 33-57606;
Form S-8, File No. 33-54785; Form S-8, File No. 33-62805; Form S-8, File No.
333-8811; Form S-8, File No. 333-32059; Form S-8, File No. 333-32463; Form S-8,
File No. 33-59675; Form S-8, File No. 333-50953; Form S-8, File No. 333-56921;
Form S-8, File No. 333-58517; Form S-8, File No. 333-61615; Form S-8, File No.
333-65367; Form S-8, File No. 333-69115; Form S-8, File No. 333-70977; Form S-3,
File No. 333-71069 and Form S-8, File No. 333-81759.
/s/ ARTHUR ANDERSEN LLP
- ------------------------------
Arthur Andersen LLP
Boston, Massachusetts
November 23, 1999
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