SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-4389
THE PERKIN-ELMER CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
New York 06-0490270
(State or Other (I.R.S. Employer
Jurisdiction of Identification Number)
Incorporation or
Organization)
761 Main Avenue,
Norwalk, Connecticut 06859-0001
(Address of Principal Executive Offices, Including Zip Code)
(203) 762-1000
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No ____
Number of shares outstanding of Common Stock, par value $1 per share, as of
February 10, 1999: 50,502,086
<PAGE>
THE PERKIN-ELMER CORPORATION
INDEX
Part I. Financial Information Page
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended December 31, 1998 and 1997 1
Condensed Consolidated Statements of Financial Position
at December 31, 1998 and June 30, 1998 2
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended December 31, 1998 and 1997 3
Notes to Unaudited Condensed Consolidated
Financial Statements 4
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Part II. Other Information 28
<PAGE>
THE PERKIN-ELMER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net revenues $ 288,518 $ 216,550 $ 543,238 $ 411,246
Cost of sales 131,655 95,830 244,897 190,082
Gross margin 156,863 120,720 298,341 221,164
Selling, general and administrative 86,884 67,733 164,363 127,223
Research, development and engineering 39,609 25,425 75,170 47,390
Merger-related costs 1,041 1,979
Acquired research and development 28,850 28,850
Operating income (loss) 29,329 (1,288) 56,829 17,701
Gain on investment 845
Interest expense 1,338 1,426 2,140 2,701
Interest income 254 1,542 738 3,900
Other income (expense), net (2,251) 874 (539) 1,291
Income (loss) before income taxes 25,994 (298) 54,888 21,036
Provision for income taxes 2,683 7,138 10,581 10,923
Minority interest 5,104 8,212
Income (loss) from continuing operations 18,207 (7,436) 36,095 10,113
Income (loss) from discontinued
operations (net of income taxes) (3,158) 13,406 (4,037) 17,278
Net income $ 15,049 $ 5,970 $ 32,058 $ 27,391
Income (loss) per share
from continuing operations
Basic $ .36 $ (.15) $ .73 $ .21
Diluted $ .36 $ (.15) $ .71 $ .20
Income (loss) per share
from discontinued operations
Basic $ (.06) $ .27 $ (.08) $ .36
Diluted $ (.06) $ .27 $ (.08) $ .35
Net income per share
Basic $ .30 $ .12 $ .65 $ .57
Diluted $ .30 $ .12 $ .63 $ .55
Dividends per share $ .17 $ .17 $ .34 $ .34
</TABLE>
See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
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<PAGE>
THE PERKIN-ELMER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollar amounts in thousands)
At December 31, At June 30,
1998 1998
Assets (unaudited)
Current assets
Cash and cash equivalents $ 75,479 $ 82,865
Short-term investments 1,226
Accounts receivable, net 260,861 228,985
Inventories 160,179 137,015
Prepaid expenses and other current assets 68,929 61,973
Current net assets of discontinued operations 155,329 139,959
Total current assets 720,777 652,023
Property, plant and equipment, net 187,120 163,674
Other long-term assets 244,949 241,819
Long-term net assets of discontinued operations 88,205 77,760
Total assets $ 1,241,051 $ 1,135,276
Liabilities and Shareholders' Equity
Current liabilities
Loans payable $ 31,291 $ 12,099
Accounts payable 110,141 119,555
Accrued salaries and wages 27,715 30,036
Accrued taxes on income 79,257 79,860
Other accrued expenses 142,358 122,482
Total current liabilities 390,762 364,032
Long-term debt 35,548 33,726
Other long-term liabilities 137,739 129,513
Total liabilities 564,049 527,271
Minority interest 54,773 43,757
Shareholders' equity
Capital stock 50,259 50,148
Capital in excess of par value 381,305 379,974
Retained earnings 192,499 190,966
Accumulated other comprehensive income (loss) (1,834) (9,513)
Treasury stock, at cost (47,327)
Total shareholders' equity 622,229 564,248
Total liabilities and shareholders' equity $ 1,241,051 $ 1,135,276
See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
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<PAGE>
THE PERKIN-ELMER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollar amounts in thousands)
Six months ended
December 31,
1998 1997
Operating Activities from continuing operations
Income from continuing operations $ 36,095 $ 10,113
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 22,723 13,917
Long-term compensation programs 2,411 2,543
Deferred income taxes 1,600 (1,700)
Gain from the sale of assets (900)
Acquired research and development 28,850
Changes in operating assets and liabilities:
Increase in accounts receivable (27,138) (13,992)
Increase in inventories (17,854) (18,999)
Increase in prepaid expenses and other assets (13,537) (14,291)
Decrease in accounts payable and other liabilities 11,640 14,293
Net cash provided by operating activities 15,940 19,834
Investing Activities from continuing operations
Additions to property, plant and equipment
(net of disposals of $581 and $1,342, respectively) (49,403) (38,423)
Acquisitions/investments, net (90,633)
Proceeds from the sale of assets, net 14,301 6,532
Proceeds from the collection of note receivable 9,673
Net cash used by investing activities (35,102) (112,851)
Net cash from continuing
operations before financing activities (19,162) (93,017)
Discontinued operations
Net cash used by operating activities (4,778) (6,119)
Net cash used by investing activities (21,595) (17,520)
Net cash used from discontinued operations
before financing activities (26,373) (23,639)
Financing Activities
Net change in loans payable 15,579 2,875
Principal payments on long-term debt (5,297)
Proceeds from long-term debt 803
Dividends (8,396) (14,992)
Proceeds from stock issued for stock plans 37,890 6,311
Net cash provided (used) by financing activities 40,579 (5,806)
Elimination of PerSeptive results from
July 1, 1997 to September 30, 1997 2,590
Effect of exchange rate changes on cash (2,430) 631
Net change in cash and cash equivalents (7,386) (119,241)
Cash and cash equivalents beginning of period 82,865 213,028
Cash and cash equivalents end of period $ 75,479 $ 93,787
See accompanying Notes to Unaudited Condensed
Consolidated Financial Statements.
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<PAGE>
THE PERKIN-ELMER CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The interim condensed consolidated financial statements should be
read in conjunction with the financial statements presented in The
Perkin-Elmer Corporation's (the Company's) 1998 Annual Report to
Shareholders. Significant accounting policies disclosed therein
have not changed.
The unaudited condensed consolidated financial statements reflect,
in the opinion of the Company's management, all adjustments which
are necessary for a fair statement of the results for the interim
periods. All such adjustments are of a normal recurring nature.
These results are, however, not necessarily indicative of the
results to be expected for a full year. 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, disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates. Certain amounts in the condensed
consolidated financial statements have been reclassified for
comparative purposes.
The interim condensed consolidated financial statements have been
restated to reflect the net assets and operating results of the
Analytical Instruments business as discontinued operations pending
disposition for all periods presented (see Note 11). The net assets
have been reclassified in both the current and long-term asset
sections of the Condensed Consolidated Statements of Financial
Position for all periods presented. The operating results are
reflected in the Condensed Consolidated Statements of Operations as
income (loss) from discontinued operations for all periods
presented. The accompanying notes, except Note 11, relate only to
continuing operations.
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLES
During the first quarter of fiscal 1999, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income." The provisions of this statement
require disclosure of total comprehensive income within the
condensed financial statements of interim periods and additional
disclosures of the components of comprehensive income on an annual
basis. Total comprehensive income includes net income, foreign
currency translation adjustments, unrealized gains and losses on
available-for-sale investments, and minimum pension liability
adjustment.
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The provisions of the statement require the
recognition of all derivatives as either assets or liabilities in
the statement of financial position and the measurement of those
instruments at fair value. The accounting for changes in the fair
value of a derivative depends on the intended use of the derivative
and the resulting designation. The Company is required to implement
the statement in the first quarter of fiscal 2000. The Company is
currently analyzing the statement to determine the impact, if any,
on the consolidated financial statements.
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<PAGE>
NOTE 3 - ACQUISITIONS AND DISPOSITIONS
ACQUISITIONS
PerSeptive Biosystems, Inc. The merger (the Merger) of Seven
Acquisition Corp., a wholly-owned subsidiary of the Company into
PerSeptive Biosystems, Inc., a Delaware corporation (PerSeptive),
was consummated on January 22, 1998, and PerSeptive became a wholly-
owned subsidiary of the Company on that date. PerSeptive develops,
manufactures, and markets an integrated line of proprietary
consumable products and advanced instrumentation systems for the
purification, analysis, and synthesis of biomolecules. The Merger
qualified as a tax free reorganization and has been accounted for as
a pooling of interests. Accordingly, the Company's financial results
have been restated to include the combined operations.
Tecan AG. The Company acquired a 14.5% interest and approximately
52% of the voting rights in Tecan AG (Tecan) in December 1997.
Tecan is a world leader in the development and manufacturing of
automated sample processors, liquid handling systems, and microplate
photometry. Used in research, industrial, and clinical markets,
these products provide automated solutions for pharmaceutical drug
discovery, molecular biology, genomic testing, and clinical
diagnostics.
Molecular Informatics, Inc. During the second quarter of fiscal
1998, the Company acquired Molecular Informatics, Inc. (Molecular
Informatics), a leader in the development of infrastructure software
for the pharmaceutical, biotechnology, and agrochemical industries,
as well as for applied markets such as forensics and human
identification.
Biometric Imaging, Inc. During the second quarter of fiscal
1998, the Company increased its minority equity interest in
Biometric Imaging, Inc. (Biometric Imaging) by $1.0 million.
Hyseq, Inc. During the first quarter of fiscal 1998, the Company
increased its investment in Hyseq, Inc. by $5.0 million.
DISPOSITIONS (SALE OF INVESTMENTS)
Millennium Pharmaceuticals, Inc. During the first quarter of fiscal
1998, the Company recorded a before-tax gain of $.8 million in
connection with the release of a previously existing contingency on
shares of Millennium Pharmaceuticals, Inc. common stock.
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<PAGE>
NOTE 4 - COMPREHENSIVE INCOME
Accumulated other comprehensive income on the statements of
financial position consists of foreign currency translation
adjustments, unrealized gains and losses on available-for-sale
investments, and minimum pension liability adjustments. Total
comprehensive income for the three and six month periods ended
December 31, 1998 and 1997 is presented in the following table:
(Dollar amounts in millions) Three months ended Six months ended
December 31, December 31,
1998 1997 1998 1997
Net income $ 15.0 $ 6.0 $ 32.1 $ 27.4
Other comprehensive income (loss):
Foreign currency translation
adjustment (1.2) .3 5.0 (2.4)
Unrealized gain (loss) on
investments, net 6.7 (3.0) 2.6 (3.0)
Other comprehensive income (loss) 5.5 (2.7) 7.6 (5.4)
Comprehensive income $ 20.5 $ 3.3 $ 39.7 $ 22.0
NOTE 5 - EARNINGS PER SHARE
The following table presents a reconciliation of basic and diluted
earnings per share from continuing operations for the three and six
month periods ended December 31, 1998 and 1997:
(Amounts in thousands Three months ended Six months ended
except per share amounts) December 31, December 31,
1998 1997 1998 1997
Weighted average number of
common shares used in the
calculation of basic earnings
(loss) per share from
continuing operations 49,884 48,304 49,631 48,185
Common stock equivalents 1,126 1,107 1,840
Shares used in the
calculation of diluted
earnings (loss) per
share from continuing
operations 51,010 48,304 50,738 50,025
Income (loss) used in the
calculation of basic
and diluted earnings
(loss) per share from
continuing operations $ 18,207 $ (7,436) $ 36,095 $ 10,113
Income (loss) per share
from continuing operations
Basic $ .36 $ (0.15) $ .73 $ .21
Diluted $ .36 $ (0.15) $ .71 $ .20
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<PAGE>
Options and warrants to purchase 2.8 million shares of the Company's
common stock were outstanding for the three month period ended
December 31, 1997, and options and warrants to purchase .9 million
shares of the Company's common stock were outstanding for the six
month period ended December 31, 1997. These shares were not included
in the computation of diluted earnings (loss) per share from
continuing operations because their effect was antidilutive.
Antidilutive options and warrants outstanding at December 31, 1998
were not material.
NOTE 6 - INVENTORIES
Inventories are stated at the lower of cost (on a first-in, first-
out basis) or market. Inventories included the following components:
(Dollar amounts in millions) December 31, June 30,
1998 1998
Raw materials and supplies $ 52.8 $ 45.2
Work-in-process 9.8 7.3
Finished products 97.6 84.5
Total inventories $ 160.2 $ 137.0
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes and significant non-cash
investing and financing activities were as follows:
(Dollar amounts in millions) Six months ended
December 31,
1998 1997
Interest $ 1.4 $ 2.2
Income taxes $12.2 $26.3
Unrealized gains (loss) on investments $ 2.6 $(3.0)
Dividends declared not paid $ 8.5 $ 7.5
Minority interest assumed $41.3
NOTE 8 - FINANCIAL INSTRUMENTS
The Company utilizes foreign exchange forward, option, and synthetic
forward contracts and an interest rate swap agreement to manage
foreign currency and interest rate exposures. The principal
objective of these contracts is to minimize the risks and/or costs
associated with global financial and operating activities. The
Company does not use derivative financial instruments for trading or
other speculative purposes, nor is the Company a party to leveraged
derivatives.
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<PAGE>
At December 31, 1998 and June 30, 1998, the Company had forward,
option, and synthetic forward contracts outstanding for the sale and
purchase of foreign currencies at fixed rates as summarized in the
table below:
(Dollar amounts in millions) December 31, 1998 June 30, 1998
Sale Purchase Sale Purchase
Japanese Yen $ 82.0 $ - $ 99.4 $ -
French Francs 8.7 16.9 .2
Australian Dollars 6.8 7.5
German Marks 22.4 1.4 17.2
Italian Lira 14.2 21.4 .8
British Pounds 25.6 21.1 27.0 12.6
Swiss Francs 5.8 10.5 8.2 4.0
Swedish Krona 6.5 .2 6.1
Danish Krona 5.2 .2 5.3
Other 19.6 3.3 21.5 .2
Total $ 196.8 $ 36.7 $ 230.5 $ 17.8
NOTE 9 - RESTRUCTURING AND OTHER MERGER COSTS
Fiscal 1998. During the third quarter of fiscal 1998, the Company
recorded a $48.1 million before-tax charge for restructuring and
other merger costs to integrate PerSeptive into the Company
following the acquisition. The objectives of this plan are to lower
PerSeptive's cost structure by reducing excess manufacturing
capacity, achieve broader worldwide distribution of PerSeptive's
products, and combine sales, marketing, and administrative
functions. This charge included: $33.9 million for restructuring
the combined operations; $8.6 million for transaction costs; and
$4.1 million of inventory-related write-offs, recorded in cost of
sales, associated with the rationalization of certain product lines.
Additional non-recurring acquisition costs of $1.5 million for
training, relocation, and communication were recognized as period
expenses in the third and fourth quarters of fiscal 1998, and
classified as other merger-related costs. During fiscal 1999, the
Company recorded $2.0 million of additional merger-related costs as
part of this plan. The Company expects to incur approximately $3.0
million to $5.0 million of additional merger-related costs for
training, relocation, and communication over the remaining quarters
of fiscal 1999. These costs will be recognized as period expenses
when incurred and will be classified as merger-related costs.
The $33.9 million restructuring charge includes $13.8 million for
severance related costs and workforce reductions of approximately
170 employees, consisting of 114 employees in production labor and
56 employees in sales and administrative support. The remaining
$20.1 million represents facility consolidation and asset related
write-offs and includes: $11.7 million for contract and lease
terminations and facility related expenses in connection with the
reduction of excess manufacturing capacity; $3.2 million for dealer
termination payments, sales office consolidations, and consolidation
of sales and administrative support functions; and $5.2 million for
the write-off of certain tangible and intangible assets and the
termination of certain contractual obligations. These restructuring
actions are expected to be substantially completed by the end of
fiscal 1999. Transaction costs of $8.6 million include acquisition-
related investment banking and professional fees. As of December
31, 1998 approximately 120 employees were separated under the plan,
and the actions are proceeding as planned.
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<PAGE>
The following table details the major components of the fiscal 1998
restructuring plan:
Facility
Consolidation
and Asset
Related
(Dollar amounts in millions) Personnel Write-offs Total
Provision
Reduction of excess
European manufacturing capacity $ 5.1 $ 11.7 $ 16.8
Consolidation of sales
And administrative support 8.7 3.2 11.9
Other acquisition costs 5.2 5.2
Total provision $ 13.8 $ 20.1 $ 33.9
Fiscal 1998 activity
Reduction of excess
European manufacturing capacity $ - $ .4 $ .4
Consolidation of sales
And administrative support .3 1.2 1.5
Other acquisition costs 5.1 5.1
Total fiscal 1998 activity $ .3 $ 6.7 $ 7.0
Fiscal 1999 activity
Reduction of excess
European manufacturing capacity $ .1 $ 5.2 $ 5.3
Consolidation of sales
And administrative support 2.1 .5 2.6
Other acquisition costs
Total fiscal 1999 activity $ 2.2 $ 5.7 $ 7.9
Balance at December 31, 1998
Reduction of excess
European manufacturing capacity $ 5.0 $ 6.1 $ 11.1
Consolidation of sales
And administrative support 6.3 1.5 7.8
Other acquisition costs .1 .1
Balance at December 31, 1998 $ 11.3 $ 7.7 $ 19.0
NOTE 10 - GOODWILL
At December 31, 1998 and June 30, 1998, other long-term assets
included goodwill, net of accumulated amortization, of $67.3 million
and $69.8 million, respectively. Accumulated amortization of
goodwill was $8.6 million and $6.1 million at December 31, 1998 and
June 30, 1998, respectively.
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<PAGE>
NOTE 11 - DISCONTINUED OPERATIONS
On January 21, 1999, the Company announced a plan to sell its
Analytical Instruments business. The plan is expected to be
completed within a year, although there can be no assurance in this
regard. Accordingly, the results of this business have been
reclassified from amounts previously reported and are stated
separately in the condensed consolidated financial statements as
discontinued operations pending disposition. The Company expects to
recognize a gain on disposal. However, actual results could differ
significantly depending on the transaction costs incurred and the
amount realized the sale of the business. Summary results for the
business were as follows:
(Dollar amounts in millions) For the Six Months Ended
December 31,
1998 1997
Net revenues $ 261.1 $ 280.6
Costs and expenses 263.0 256.7
Provision for income taxes 2.1 6.6
Income (loss) from discontinued operations $ (4.0) $ 17.3
The components of net assets of discontinued operations included in
the Condensed Consolidated Statements of Financial Position are as
follows:
(Dollar amounts in millions) At At
December 31, June 30,
1998 1998
Current assets:
Accounts receivable, net $ 155.1 $ 145.9
Inventories 100.1 103.0
Prepaid expenses and other current assets 39.6 35.2
Current liabilities:
Accounts payable 46.4 45.7
Accrued expenses 93.1 98.4
Current net assets 155.3 140.0
Long-term assets:
Property, plant and equipment, net 109.4 95.1
Other long-term assets 39.9 37.7
Long-term liabilities:
Other long-term liabilities 61.1 55.1
Long-term net assets 88.2 77.7
Net assets $ 243.5 $ 217.7
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<PAGE>
The cash flow used by discontinued operations was as follows:
(Dollar amounts in millions) For the Six Months Ended
December 31,
1998 1997
Income (loss) from discontinued operations $ (4.0) $ 17.3
Adjustments to reconcile income (loss)
from discontinued operations to net
cash used by operating activities from
discontinued operations:
Depreciation and amortization 9.5 9.3
Long-term compensations programs .6 .5
Deferred income taxes (.3) .4
Net change in assets and liabilities (10.6) (33.6)
Net cash used by operating activities
from discontinued operations (4.8) (6.1)
Net cash used by investing activities
from discontinued operations (21.6) (17.5)
Net cash used by discontinued
operations before effect of exchange
rate changes on cash (26.4) (23.6)
Effect of exchange rate changes on cash (3.5) 2.8
Cash flow used by discontinued operations $(29.9) $(20.8)
Fiscal 1997. During the fourth quarter of fiscal 1997, the Company
announced a follow-on phase to the Analytical Instrument Division's
profit improvement program begun by the Company in fiscal 1996. The
restructuring cost for this action was $24.2 million before-tax and
included $19.4 million for costs focused on further improving the
operating efficiency of manufacturing facilities in the United
States, Germany, and the United Kingdom. These actions were
designed to help transition the Analytical Instruments Division from
a highly vertical manufacturing operation to one that relies more on
outsourcing functions not considered core competencies. The
restructuring charge also included $4.8 million to finalize the
consolidation of sales and administrative support, primarily in
Europe, where seventeen facilities were closed.
The workforce reductions under this plan totaled approximately 285
employees in production labor and 25 employees in sales and
administrative support. The charge included $11.9 million for
severance-related costs. The $12.3 million provided for facility
consolidation and asset-related write-offs included $1.2 million for
lease termination payments and $11.1 million for the write-off of
machinery, equipment, and tooling associated with those functions to
be outsourced.
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<PAGE>
The following table details the major components of the fiscal 1997
restructuring provision:
Facility
Consolidation
and Asset
Related
(Dollar amounts in millions) Personnel Write-offs Total
Provision
Changes in manufacturing operations $ 9.6 $ 9.8 $ 19.4
Consolidation of sales and
administrative support 2.3 2.5 4.8
Total provision $ 11.9 $ 12.3 $ 24.2
Fiscal 1997 activity
Changes in manufacturing operations $ .1 $ 4.6 $ 4.7
Consolidation of sales and
administrative support
Total fiscal 1997 activity $ .1 $ 4.6 $ 4.7
Fiscal 1998 activity
Changes in manufacturing operations $ 7.8 $ 4.9 $ 12.7
Consolidation of sales and
administrative support 1.3 1.1 2.4
Total fiscal 1998 activity $ 9.1 $ 6.0 $ 15.1
Fiscal 1999 activity
Changes in manufacturing operations $ 1.6 $ .2 $ 1.8
Consolidation of sales and
administrative support .7 .3 1.0
Total fiscal 1999 activity $ 2.3 $ .5 $ 2.8
Balance at December 31, 1998
Changes in manufacturing operations $ .1 $ .1 $ .2
Consolidation of sales and
administrative support .3 1.1 1.4
Balance at December 31, 1998 $ .4 $ 1.2 $ 1.6
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<PAGE>
THE PERKIN-ELMER CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION OF CONTINUING OPERATIONS
You should read this discussion with our condensed consolidated
financial statements and related notes included on pages 1-12 of
this report and "Management's Discussion and Analysis" appearing on
pages 30-38 of our 1998 Annual Report to Shareholders. Historical
results and percentage relationships are not necessarily indicative
of operating results for any future periods.
Throughout the following discussion of operations we refer to the
impact on our reported results of the movement in foreign currency
exchange rates from one reporting period to another as "foreign
currency translation."
DISCONTINUED OPERATIONS
On January 21, 1999, we announced a plan to sell our Analytical
Instruments business. We expect to complete the plan within a year,
although we cannot assure you that the sale will occur within that
time period. Accordingly, we have reclassified amounts previously
reported and stated them as discontinued operations. We expect to
recognize a gain on disposal. However, actual results could differ
significantly depending on the transaction costs incurred and the
amount realized on the sale of the business. See Note 11 to the
condensed consolidated financial statements.
EVENTS IMPACTING COMPARABILITY
Acquisitions and Investments. On January 22, 1998, we acquired
PerSeptive Biosystems, Inc. The acquisition was accounted for as a
pooling of interests and, accordingly, our financial results have
been restated to include the combined operations.
We acquired Molecular Informatics, Inc. and a 14.5% interest, and
approximately 52% of the voting rights, in Tecan AG during the
second quarter of fiscal 1998. Each of these acquisitions was
accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition.
Merger-related costs. We incurred merger-related period costs of
$.9 million in the first quarter of fiscal 1999 and $1.1 million in
the second quarter of fiscal 1999 in connection with the integration
of PerSeptive into our company. See Note 9 to the condensed
consolidated financial statements.
Acquired Research and Development. In the second quarter of fiscal
1998, we recorded $28.9 million, or $.57 per diluted share after-
tax, of the Molecular Informatics acquisition cost as in-process
research and development.
Gain on investment. We incurred a before-tax gain of $.8 million,
or $.02 per diluted share after-tax, in the first quarter of fiscal
1998 related to the release of contingencies on a minority equity
investment.
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<PAGE>
RESULTS OF CONTINUING OPERATIONS FOR THE THREE MONTHS ENDED
DECEMBER 31, 1998 COMPARED WITH DECEMBER 31, 1997
We reported income from continuing operations of $18.2 million, or
$.36 per diluted share, for the second quarter of fiscal 1999
compared with a loss from continuing operations of $7.4 million, or
$.15 per diluted share, for the second quarter of fiscal 1998.
Excluding merger-related costs of $1.0 million incurred in the
second quarter of fiscal 1999 and acquired research and development
costs of $28.9 million recorded in the second quarter of fiscal
1998, income for the quarter decreased 11.2% compared with the prior
year.
Net revenues were $288.5 million for the second quarter of fiscal
1999 compared with $216.6 million for the second quarter of fiscal
1998, an increase of 33.2%. Excluding the results of Tecan, which
were not included in the second quarter of the prior year, revenues
increased 19.5%. The effects of foreign currency translation
increased net revenues by 1% in the quarter compared with the prior
year.
Geographically, excluding Tecan, we reported revenue growth of 24%
in the United States, 18% in the Far East, and 17% in Europe,
compared with the prior year. Shipments of the ABI PRISM(TM)3700 DNA
Analyzer to Celera Genomics and several participants in our early
access customer program, which includes leading genome laboratories,
pharmaceutical companies and academic research institutions, began
in the second quarter of fiscal 1999. Shipments of sequencing
chemistries rose 40 percent from the prior year, primarily on the
strength of BigDye(TM) chemistries, which we introduced in late 1997.
Revenues for sequence detection systems more than doubled compared
with last year's second quarter. Revenues for our liquid
chromatography/mass spectrometry (LC/MS) products rose 73 percent on
the basis of demand for their use in critical pharmacokinetic and
toxicology studies in drug development.
PE Biosystems increased its backlog this quarter by $98 million, on
the strength of orders that increased 59 percent. Excluding those
from Celera Genomics, orders increased 32 percent in the second
quarter. Mass spectrometry products from PerSeptive Biosystems,
significantly enhanced with the introduction of new sources and
software and rising demand for LC/MS products from the PE Sciex
joint venture, grew 63 percent this quarter. Orders for genetic
analysis systems grew more than 88 percent, reflecting demand for
new products and accelerated growth in several applied markets, such
as forensics. PE Biosystems recently began shipments of the ABI
PRISM (TM) 3700 DNA Analyzer to early-access customers. The division
has received more than 170 third-party orders for this system, in
addition to the 230 ordered by Celera Genomics. The 3700 provides
technology that enables the generation of sequencing data at a
new level of throughput.
Gross margin as a percentage of net revenues was 54.4% in the second
quarter of fiscal 1999 compared with 55.7% in the second quarter of
fiscal 1998. The decline was the result of increased volume of
lower margin instrument units and product line mix.
Selling, general and administrative expenses were $86.9 million in
the second quarter of fiscal 1999 compared with $67.7 million in the
second quarter of fiscal 1998. The 28.3% increase in expenses, or
14.2% excluding Tecan, was due to higher planned expenses for our PE
Biosystems business, expenses associated with establishing
facilities and staff for Celera Genomics, and $1.1 million
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relating to the proposed issuance of targeted stock. As a percentage
of net revenues, SG&A expenses declined to 30% in the second quarter
compared with 31% in the second quarter of fiscal 1998.
Research, development and engineering expenses of $39.6 million
increased 55.8% over the prior year from $25.4 million. Excluding
Tecan, R&D expenses increased 35% compared with the prior year. PE
Biosystems' investment in R&D increased by more than $6 million, or
26 percent, as it prepared to ship several new products during the
second quarter. Celera Genomics' R&D investments associated with
setting up the infrastructure for core sequencing operations and
information systems also contributed to the increase in R&D
expenses. As a percentage of net revenues, our R&D expenses
increased to 13.7% compared with 11.7% for the prior year.
We incurred merger-related costs of $1.1 million in the second
quarter of fiscal 1999 for training, relocation, and communication
costs in connection with the integration of PerSeptive. See Note 9
to the condensed consolidated financial statements. Additional
merger-related period costs of approximately $3.0 million to $5.0
million are expected to be incurred through the remaining quarters
of fiscal 1999.
Operating income increased to $29.3 million for the second quarter
of fiscal 1999 compared with an operating loss of $1.3 million for
the prior year. On a comparable basis excluding the results of
Tecan, merger-related costs of $1.1 million in fiscal 1999, and the
acquired research and development charge of $28.9 million recorded
in the second quarter of fiscal 1998, operating income declined 18%
compared with the prior year.
Including operating income derived from revenues of $9.4 million
from sales to Celera Genomics, operating income for PE Biosystems
grew 53 percent, and the division's operating profit margins rose to
20 percent of revenues, from 18 percent in last year's second
quarter, as we continue to successfully integrate businesses
acquired last year. Excluding Tecan and operating income on
revenues to Celera Genomics, PE Biosystems' operating profits grew
19.5% compared with the prior year. The effects of currency
translation were modestly positive to the division's operating
income.
The PE Biosystems increase in operating income was partially offset
by operating losses associated with Celera Genomics, as we
accelerated our efforts to establish operations for Celera Genomics
during the second quarter of fiscal 1999. Celera Genomics incurred
a second quarter operating loss of $11.2 million compared with a
loss of $1.9 million for the second quarter of fiscal 1998.
Interest expense was $1.3 million for the second quarter of fiscal
1999 compared with $1.4 million for the prior year. Interest income
was $.3 million for the second quarter of fiscal 1999 compared with
$1.5 million for the prior year, primarily because of lower cash
balances, as well as lower interest rates.
Other expense, net for the second quarter of fiscal 1999 was $2.3
million, primarily related to the revaluation of foreign exchange
contracts, compared with other income, net of $.9 million for the
prior year. The other income, net in the second quarter of fiscal
1998 resulted primarily from a gain on the sale of certain non-
operating assets.
Our effective income tax rate was 10% for the second quarter of
fiscal 1999. Excluding Tecan, the effective income tax rate was 8%
in the second quarter of fiscal 1999. Our effective income tax rate
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was 25% in the second quarter of fiscal 1998 excluding special
items. In fiscal 1999, our tax rate was favorably affected by
reduced income in the United States resulting from the operating
losses of Celera Genomics.
We recognized minority interest expense of $5.1 million in the
second quarter of fiscal 1999 relating to our 14.5% interest
in Tecan.
RESULTS OF CONTINUING OPERATIONS FOR THE SIX MONTHS ENDED
DECEMBER 31, 1998 COMPARED WITH DECEMBER 31, 1997
We reported income from continuing operations of $36.1 million, or
$.71 per diluted share, for the first six months of fiscal 1999
compared with income from continuing operations of $10.1 million, or
$.20 per diluted share, for the first six months of fiscal 1998.
Excluding merger-related costs of $2.0 million incurred in fiscal
1999, and acquired research and development costs of $28.9 million
recorded in fiscal 1998, income for the first six months of fiscal
1999 decreased 3.5% compared with the prior year.
Net revenues were $543.2 million for the first six months of fiscal
1999 compared with $411.2 million for the first six months of fiscal
1998, an increase of 32.1%. Excluding the results of Tecan, which
were not included in the prior year, revenues increased 18.2%. The
effects of foreign currency translation decreased net revenues by
approximately 1% compared with the prior year.
Geographically, excluding Tecan, we reported revenue growth in all
regions. Revenues increased 24% in the United States, 18% in
Europe, 5% in the Far East, and 10% in Latin America and other
markets, compared with the prior year. Demand for PE Biosystems'
new ABI PRISM (TM) 3700 DNA Analyzer, which began shipping in the
second quarter of fiscal 1999, was strong. Shipments for our
sequence detection systems and LC/MS products also contributed to
the growth.
Gross margin as a percentage of net revenues was 54.9% in the first
six months of fiscal 1999 compared with 53.8% in the first six
months of fiscal 1998. This was primarily the result of a change
in product mix for PE Biosystems which reported higher unit sales of
reagents to support genetic analysis systems and increased royalty
revenues. Continued growth in instrument sales of PE Biosystems'
higher margin genetic analysis product offerings and increased
Celera Genomics contract licensing revenues also contributed to the
growth.
SG&A expenses were $164.4 million in the first six months of fiscal
1999 compared with $127.2 million in fiscal 1998. Excluding Tecan,
SG&A expenses increased 15.2% in the first six months of fiscal 1999
compared with the prior year. This increase was due to higher
planned expenses for PE Biosystems and expenses associated with
establishing facilities and staff for Celera Genomics. As a
percentage of net revenues, SG&A expenses were 30% for fiscal 1999
compared with 31% for the prior year.
R&D expenses increased $27.8 million, or 58.6%, to $75.2 million
compared with $47.4 million in the prior year. Excluding Tecan, R&D
expenses increased 41% compared with the prior year. Spending by PE
Biosystems for R&D totaled $57 million, an increase of 35% over last
year in suport of new product launches and to accelerate product
development. Celera Genomics' R&D investments associated with
establishing the infrastructure for core sequencing operations and
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information systems contributed to the increase in R&D expense. As a
percentage of net revenues, our R&D expenses were 13.8% compared
with 11.5% for the prior year.
We incurred merger-related costs of $2.0 million in the first six
months of fiscal 1999 for training, relocation, and communication
costs in connection with the integration of PerSeptive. See Note 9
to the condensed consolidated financial statements. Additional
merger-related period costs of approximately $3.0 million to $5.0
million are expected to be incurred through the remaining quarters
of fiscal 1999.
Operating income increased to $56.8 million for the second quarter
of fiscal 1999 compared with operating income of $17.7 million for
the prior year. On a comparable basis excluding the results of
Tecan, merger-related costs of $2.0 million in fiscal 1999, and the
acquired research and development charge of $28.9 million recorded
in the second quarter of fiscal 1998, operating income increased 3%
compared with the prior year.
Including operating income derived from revenues of $9.8 million
from sales to Celera Genomics, PE Biosystems' operating income
increased 48.8% in the first six months of fiscal 1999. On a
comparable basis, excluding Tecan and operating income on revenues
to Celera Genomics, the division's operating income increased 22.5%
compared with the prior year. Excluding Tecan, operating income for
PE Biosystems rose to $89.4 million, or 18 percent of sales, for the
first six months of fiscal 1999, compared with $67.4 million, or 16
percent of sales, in fiscal 1998. PE Biosystems benefited from
higher gross margins and lower SG&A expenses as a percentage of net
revenues. The PE Biosystems increase was partially offset by
operating losses at Celera Genomics. Celera Genomics incurred
$15.7 million of operating losses for the first six months of fiscal
1999 compared with an operating loss of $3.2 million in the prior
year. The effects of currency translation for PE Biosystems
for the first six months of fiscal 1999 decreased operating income
by approximately $3 million compared with the prior year.
Interest expense was $2.1 million for the first six months of fiscal
1999 compared with $2.7 million for the prior year. This decrease
was primarily due to the refinancing of PerSeptive's 8 1/4%
Convertible Subordinated Notes and lower average interest rates.
Interest income was $.7 million for the first six months of fiscal
1999 compared with $3.9 million for the prior year, primarily because
of lower average cash balances.
Other expense, net in fiscal 1999 was $.5 million, compared with
other income, net of $1.3 million for the prior year. Other expense
recognized in the second quarter of fiscal 1999, primarily related
to the revaluation of foreign exchange contracts, more than offset
other income related to a legal settlement which was recognized in
the first quarter of fiscal 1999. The other income, net for fiscal
1998 resulted from a gain on the sale of certain non-operating assets.
Our effective income tax rate was 19% for the first six months of
fiscal 1999. Excluding Tecan, our effective income tax rate was 18%
for the first six months of fiscal 1999. Excluding special items in
fiscal 1998, our effective income tax rate was 25%. The fiscal 1999
tax rate was favorably affected by reduced income in the United
States resulting from the operating losses at Celera Genomics.
We recognized minority interest expense of $8.2 million in the first
six months of fiscal 1999 relating to our 14.5% interest in Tecan.
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MARKET RISK
We operate internationally, with manufacturing and distribution
facilities in various countries throughout the world. For the six
months ended December 31, 1998, we derived approximately 51% of our
revenues from countries outside of the United States. Our results
continue to be affected by market risk, including fluctuations in
foreign currency exchange rates and changes in economic conditions
in foreign markets.
As more fully described in Note 8 to the condensed consolidated
financial statements and our 1998 Annual Report to Shareholders, our
risk management strategy utilizes derivative financial instruments,
including forwards, swaps, purchased options, and synthetic forward
contracts to hedge certain foreign currency and interest rate
exposures. Our intent is to offset gains and losses that occur on
the underlying exposures with gains and losses on the derivatives.
We do not use derivative financial instruments for trading or other
speculative purposes, nor are we a party to leveraged derivatives.
We performed a sensitivity analysis as of December 31, 1998.
Assuming a hypothetical adverse change of 10% in current exchange
rates and a weakening of the U.S. dollar, we calculated a
hypothetical loss of $3.7 million in future cash flows by comparing
the difference between the change in market value of both the
foreign currency contracts outstanding and the underlying exposures
being hedged assuming the 10% adverse change in December 31, 1998
exchange rates. Actual gains and losses in the future could,
however, differ materially from this analysis, based on changes in
the timing and amount of foreign currency exchange rate movements
and our actual exposures and hedges.
Interest rate swaps are used to hedge underlying debt obligations.
In fiscal 1997, we executed an interest rate swap in conjunction
with a five-year Japanese Yen debt obligation. Under the terms of
the swap agreement, we pay a fixed rate of interest at 2.1% and
receive a floating LIBOR interest rate. At December 31, 1998 the
notional amount of indebtedness covered by the interest rate swap
was Yen 3.8 billion, which was $33.1 million at December 31, 1998.
The maturity date of the swap coincides with the maturity of the Yen
loan in March 2002.
A change in interest rates would have no impact on our reported
interest expense and related cash payments because the floating rate
debt and fixed rate swap contract have the same maturity and are
based on the same rate index.
FINANCIAL RESOURCES AND LIQUIDITY
Significant Changes in the Condensed Consolidated Statements of
Financial Position. Cash and cash equivalents were $75.5 million at
December 31, 1998 compared with $82.9 million at June 30, 1998.
Total debt was $66.8 million at December 31, 1998 compared with
$45.8 million at June 30, 1998. The increase in debt included $9.9
million of foreign currency translation. Working capital was $330.0
million at December 31, 1998 compared with $288.0 million at June 30,
1998. Debt to total capitalization increased to 10% at December 31,
1998 from 8% at June 30, 1998 as a result of an increase in loans
payable to fund current operating requirements.
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Accounts receivable and inventory balances increased by $31.9
million and $23.2 million from June 30, 1998 to December 31, 1998,
respectively, reflecting the growth in PE Biosystems' revenues and
orders.
Other accrued expenses increased $19.9 million to $142.4 million at
December 31, 1998 from $122.5 million at June 30, 1998 as a result
of higher warranty and installation accruals, reflecting the
increase in volume, and an increase in deferred revenues and benefit
accruals. Accounts payable decreased $9.5 million to $110.1 million
at December 31, 1998 from $119.6 million at June 30, 1998 as a
result of payments made for higher purchases incurred during the
fourth quarter of fiscal 1998 in support of increased production and
operating requirements.
We recognized minority interest expense of $54.8 million at December
31, 1998 and $43.8 million at June 30, 1998 relating to our 14.5%
interest in Tecan.
Condensed Consolidated Statements of Cash Flows. Net cash provided
by operating activities from continuing operations was $15.9 million
for the first six months of fiscal 1999 compared with $19.8 million
in fiscal 1998. Higher accounts receivable balances in support of
the increased volume contributed to the decrease.
Net cash used by investing activities from continuing operations was
$35.1 million for the first six months of fiscal 1999 compared with
$112.9 million for the first six months of fiscal 1998. In fiscal
1999, we generated $14.3 million in net cash proceeds from the sale
of certain non-operating assets, compared with $16.2 million in the
prior year from the sale of certain non-operating assets and the
collection of a note receivable. Capital expenditures for our
company totaled $50.0 million. Fiscal 1999 capital expenditures
included $24.9 million for PE Biosystems, which included $4.7
million related to improvement of our information technology
infrastructure, $7.6 million for Celera Genomics, and $17.5 million
for the acquisition of a corporate airplane. The fiscal 1998
capital expenditures were $39.8 million, primarily related to
improvement of our information technology infrastructure, and $90.6
million related to various investments and collaborations, primarily
Tecan and Molecular Informatics.
Net cash provided by financing activities was $40.6 million in the
first six months of fiscal 1999 compared with a net cash use of $5.8
million in the prior period. In the first six months of fiscal
1999, we received $37.9 million in proceeds from employee stock
option plan exercises compared with $6.3 million in fiscal 1998.
Loans payable and debt increased $11.1 million in the first six
months of fiscal 1999 to fund our current operating requirements.
YEAR 2000
In fiscal 1997, we initiated a worldwide program to assess the
expected impact of the Year 2000 date recognition problem on our
existing internal computer systems; our non-information technology
systems, including embedded and process-control systems; our product
offerings; and our significant suppliers. The purpose of this
program is to ensure the event does not have a material adverse
effect on our business operations.
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Regarding our existing internal computer systems, the program
involves a mix of purchasing new systems and modifying existing
systems, with the emphasis on replacement of applications developed
in-house. Replacement projects are currently underway, and are
anticipated to be substantially completed for all business-critical
systems worldwide by December 31, 1999. The program includes
replacement of applications that, for reasons other than Year 2000
noncompliance, had been previously selected for replacement. The
replacement projects, which began in fiscal 1997, are expected to
offer improved functionality and commonality over current systems,
while at the same time addressing the Year 2000 problem.
With respect to our current product offerings, the program involves
performing an inventory of current products, assessing their
compliance status, and constructing a remediation plan where
appropriate. Significant progress has been made in each of these
three phases and we expect our product offerings to be Year 2000
compliant by December 31, 1999. A substantial portion of our
product offerings are Year 2000 compliant.
The program also addresses the Year 2000 compliance efforts of our
significant suppliers, vendors, and third-party interface systems.
As part of this analysis, we are seeking written assurances from
these suppliers, vendors, and third parties that they will be Year
2000 compliant. While we have begun such efforts, there can be no
assurance that the systems of other companies with which we deal, or
on which our systems rely will be timely converted, or that any such
failure to convert by another company could not have a material
adverse effect on our company. We have not fully determined the
extent to which our interface systems may be impacted by third
parties' systems, which may not be Year 2000 compliant.
Our preliminary estimate of the total cost for this multi-year
program covering 3-4 years is approximately $150 million. This
includes amounts previously budgeted for information technology
infrastructure improvements and estimates of remediation costs on
components not yet fully assessed. Incremental spending has not
been and is not expected to be material because most Year 2000
compliance costs will be met with amounts that are normally budgeted
for procurement and maintenance of our information systems,
production and facilities equipment. The redirection of spending to
implement Year 2000 compliance plans may in some instances delay
productivity improvements.
We have also engaged a consulting firm to provide periodic
assessments of our company's Year 2000 project plans and progress.
Because of the importance of addressing the Year 2000 problem, we
have created a Year 2000 business continuity planning team to review
and develop, by April 1999, business contingency plans to address
any issues that may not be corrected by implementation of our Year
2000 compliance plan in a timely manner. If we are not successful
in implementing our Year 2000 compliance plan, or there are delays
in and/or increased costs associated with implementing such changes,
the Year 2000 problem could have a material effect on our
consolidated results of operations and financial condition.
At this stage of the process, we believe that it is difficult to
specifically identify the cause of the most reasonable worst case
Year 2000 scenario. A reasonable worst case Year 2000 scenario would
be the failure of significant suppliers and vendors to have
corrected their own Year 2000 issues which could cause disruption of
our operations and have a material adverse effect on our financial
condition. The impact of such disruption cannot be estimated
at this time. In the event we believe that any of our
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significant suppliers or vendors are unlikely to be able to resolve
their own Year 2000 issues, our contingency plan would include
seeking additional sources of supply.
EURO CONVERSION
A single currency called the euro was introduced in Europe on
January 1, 1999. Eleven of the fifteen member countries of the
European Union agreed to adopt the euro as their common legal
currency on that date. Fixed conversion rates between these
participating countries' existing currencies (the "legacy
currencies") and the euro were established as of that date. The
legacy currencies are scheduled to remain legal tender as
denominations of the euro until at least January 1, 2002, but not
later than July 1, 2002. During this transition period, parties may
settle transactions using either the euro or a participating
country's legal currency.
We are currently evaluating the impact of the euro conversion on our
computer and financial systems, business processes, market risk, and
price competition. We do not expect this conversion to have a
material impact on our results of operations, financial position, or
cash flows.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
The provisions of the statement require the recognition of all
derivatives as either assets or liabilities in the statement of
financial position and the measurement of those instruments at fair
value. The accounting for changes in the fair value of a derivative
depends on the intended use of the derivative and the resulting
designation. We are required to implement the statement in the
first quarter of fiscal 2000. We are currently analyzing the
statement to determine the impact, if any, on the consolidated
financial statements.
The FASB issued the following Statement of Financial Accounting
Standards, which will become effective for our fiscal 1999 annual
financial statements: SFAS No. 132, "Employers' Disclosures about
Pensions and other Postretirement Benefits," which requires
additional disclosures relating to a company's pension and
postretirement benefit plans; and SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," which requires
certain financial and descriptive information about a company's
reportable operating statements. The adoption of these new
accounting standards may require additional disclosures but should
not have a material effect, if any, on our consolidated financial
statements.
OUTLOOK
PE Biosystems is expected to continue to grow and maintain
profitability for fiscal 1999 on the strength of robust demand and
several new products. As previously indicated, PE Biosystems
received more than 70 third-party orders for the ABI PRISM (TM) 3700
DNA Analyzer, in addition to the 230 ordered by Celera Genomics. The
3700 provides technology that enables the generation of sequencing
data at a new level of throughput.
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We are on schedule in establishing operations at Celera Genomics.
Celera Genomics employed approximately 250 employees as of December
31, 1998, and its laboratories, data center, and related facilities
are coming on line. We have extended Celera Genomics' business to
include capabilities in functional genomics. This addition broadens
the products and services that Celera Genomics can offer its
customers and does so sooner than planned. In addition, Celera
Genomics announced that Amgen, Inc. had become the first customer
for Celera Genomics databases.
During the first quarter we announced that, subject to shareholder
and final Board approval, we plan to distribute a new class of
common stock intended to track the separate performance of Celera
Genomics. We have filed a registration statement with the Securities
and Exchange Commission. We believe this targeted stock structure
will provide a number of advantages including: allowing each
business autonomy while capitalizing on the synergies of its sister
business; accommodating investor interests by creating an equity
that closely monitors the performance of a focused business;
providing an efficient acquisition currency; and maintaining the
financial benefits of a single organization such as tax
consolidation and credit availability.
On January 21, 1999, we announced a decision to pursue a sale of our
Analytical Instruments business, which has been classified as
discontinued operations. We have retained an investment banker to
assist in this transaction and believe we will be successful in
reaching an agreement for the sale of this business at an
appropriate price.
We remain concerned about adverse currency effects because
approximately 51% of our revenues were derived from regions outside
the United States for the six months ended December 31, 1998.
Recently, the U.S. dollar has weakened, which should moderate the
effects of currency translation for fiscal 1999.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report, including the Outlook
section, are forward-looking and are subject to a variety of risks
and uncertainties. These statements may be identified by the use of
forward-looking words or phrases such as "believe," "expect,"
"anticipate," "should," "planned," "estimated," and "potential,"
among others. These forward-looking statements are based on our
current expectations. The Private Securities Litigation Reform Act
of 1995 provides a "safe harbor" for such forward-looking
statements. In order to comply with the terms of the safe harbor,
we note that a variety of factors could cause our actual results and
experience to differ materially from the anticipated results or
other expectations expressed in such forward-looking statements.
The risks and uncertainties that may affect the operations,
performance, development, and results of our businesses include, but
are not limited to:
FACTORS RELATING TO PE BIOSYSTEMS
Significant overseas operations. Approximately 51% of our net
revenues for the six months ended December 31, 1998 were derived
from sales to customers outside of the United States. The majority
of these sales were based on the relevant customer's local currency.
As a result, our reported and anticipated operating results and cash
flows are subject to fluctuations due to material changes in foreign
currency exchange rates that are beyond our control. International
sales and operations may also be adversely affected by many factors,
including the imposition of governmental controls, export
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license requirements, restrictions on the export of critical
technology,political and economic instability, trade restrictions,
changes in tariffs and taxes, difficulties in staffing and
managing international operations, and general economic conditions.
Dependence on new products. A significant portion of the net
revenues for PE Biosystems each year is derived from products that
did not exist in the prior year. PE Biosystems' future success will
depend on its ability to continually improve its current products
and to develop and introduce, on a timely and cost effective basis,
new products that address the evolving needs of its customers. PE
Biosystems' products are based on complex technology which is
subject to rapid change as new technologies are developed and
introduced in the marketplace. Unanticipated difficulties or delays
in replacing existing products with new products could adversely
affect PE Biosystems' future operating results.
Sales dependent on customers' capital spending policies and
government sponsored research. A significant portion of PE
Biosystems' instrument products are capital purchases for its
customers. PE Biosystems' customers include pharmaceutical,
environmental, research, and chemical companies, and the capital
spending policies of these companies can have a significant effect
on the demand for PE Biosystems' products. These policies are based
on a wide variety of factors, including the resources available to
make purchases, the spending priorities among various types of
research equipment, and policies regarding capital expenditures
during recessionary periods. Any decrease in capital spending or
change in spending policies of these companies could significantly
reduce the demand for PE Biosystems' products.
In addition, a substantial portion of PE Biosystems' sales are to
customers at universities or research laboratories whose funding is
dependent on both the level and timing of funding from government
sources. As a result, the timing and amount of revenues from these
sources may vary significantly due to factors that can be difficult
to forecast. Although research funding has increased during the past
several years, grants have, in the past, been frozen for extended
periods or otherwise become unavailable to various institutions,
sometimes without advance notice. Budgetary pressures, particularly
in the United States and Japan, may result in reduced allocations to
government agencies that fund research and development activities.
If government funding necessary to purchase PE Biosystems' products
were to become unavailable to researchers for any extended period of
time or if overall research funding were to decrease, PE
Biosystems' business could be adversely affected.
Claims for patent infringement. PE Biosystems' products are based on
complex, rapidly-developing technologies. These products could be
developed without knowledge of previously filed but unpublished
patent applications that cover some aspect of these technologies. In
addition, there are relatively few decided court cases interpreting
the scope of patent claims in these technologies. There can be no
assurance that PE Biosystems will not be made a party to litigation
regarding intellectual property matters in the future. PE Biosystems
has from time to time been notified that it may be infringing
certain patents and other intellectual property rights of others. It
may be necessary or desirable in the future to obtain licenses
relating to one or more products or relating to current or future
technologies, and there can be no assurance that PE Biosystems will
be able to obtain these licenses or other rights on commercially
reasonable terms.
Future growth strategy. PE Biosystems' future growth depends in
part on its ability to acquire complementary technologies through
acquisitions and investments. Since January 1, 1996, PE
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Biosystems has acquired a number of companies, including PerSeptive
Biosystems, Inc., Molecular Informatics, Inc., and Tropix, Inc.,
and made investments in others. The consolidation of employees,
operations, and marketing and distribution methods presents
significant managerial challenges. For example, PE Biosystems may
encounter operational difficulties in the integration of
manufacturing or other facilities. In addition, technological
advances resulting from the integration of technologies may not be
achieved as successfully or rapidly as anticipated, if at all.
Earthquakes. A significant portion of PE Biosystems' operations is
located near major California earthquake faults. The ultimate impact
of earthquakes on PE Biosystems', significant suppliers, and the
general infrastructure is unknown, but operating results could be
materially affected in the event of a major earthquake.
FACTORS RELATING TO CELERA GENOMICS
Early stage of operations. Celera Genomics plans to begin
sequencing the Drosophilia (fruit fly) genome in early 1999 and does
not expect its sequencing operations to reach projected operational
levels until Spring 1999, when it expects to begin sequencing the
human genome. As a new business, Celera Genomics faces significant
challenges in simultaneously launching and integrating its
operations, pursuing key scientific goals, and attracting customers
for its information products and services.
No precedent for Celera Genomics' business plan. No organization
has ever attempted to combine in one business organization all of
the Celera Genomics' businesses. The creation of a genomics database
targeted at a wide variety of customers, from pharmaceutical
companies to university researchers, has a number of risks,
including pricing and volume issues, technology and access concerns,
computer security, pursuit of key scientific goals, and protection
of intellectual property. As a result, the creation of a business
that includes all of the Celera Genomics' businesses has unique
risks.
Need to manage rapid growth. Celera Genomics expects to grow
significantly, from approximately 250 employees at December 31, 1998
to over 370 in April 1999. This growth will require substantial
effort to hire new employees and train and integrate them in the
Celera Genomics' business and to develop and implement management
information systems, financial controls, and facility plans. In
addition, Celera Genomics will be required to create a sales and
marketing organization and develop customer support resources as
sales of its information products increase. Celera Genomics'
inability to manage growth effectively would have a material adverse
effect on its future operating results.
Uncertainty of successful integration of GenScope and AgGen. The
success of the Celera Genomics depends in part on its ability to
integrate the businesses of GenScope and AgGen, which were
previously operated by PE Biosystems. In particular, we believe that
coordinating the separate scientific research efforts will be a
challenge to Celera Genomics. In addition, integrating the
operations of geographically distant facilities may lead to
unexpected disruptions and costs.
Uncertainty of sequencing strategy. Some genomic scientists have
criticized Celera Genomics' sequencing strategy, known as "whole
genome shotgun sequencing," as having limitations when applied on a
large scale in sequencing the human genome. Others have stated that
the human genome cannot be sequenced using whole genome shotgun
sequencing. Although scientists at The Institute for
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<PAGE>
Genomic Research have used the whole genome shotgun strategy to
sequence the genomes of other organisms, the strategy has not
been used to sequence a genome with the size and complexity of
the human genome. Failure to sequence or assemble the human genome
in a timely manner may have a material adverse effect on Celera
Genomics' ability to satisfy customer requirements and achieve its
business goals.
Uncertainty of successful operation of new sequencers. Celera
Genomics' success is heavily dependent on the successful operation
of PE Biosystems' new DNA sequencer. Celera Genomics plans to use
more than 200 of the new DNA sequencers on a full-time basis, a
scale of operation never before attempted. Failure of the DNA
sequencers to perform at expected levels, or failure of Celera
Genomics to integrate successfully its DNA sequencers in its
laboratory, would materially adversely affect Celera Genomics'
ability to sequence at the rate required to complete the human
genome on a timely basis, to meet milestones in contracts with
customers, and to perform research services effectively.
Uncertainty of sequencing operations. The successful operation of
the Celera Genomics sequencing facility at the levels required for
successful business operations will also be dependent on the
integration of materials, technology, and operations necessary to
support sequencing at the rate and levels expected. Sequencing
requires a significant amount of laboratory preparation,
organization, and training of personnel, integration of technology,
and proper maintenance of the equipment. In addition, sequencing
requires that adequate quantities of materials are available on a
timely basis. Celera Genomics depends on PE Biosystems for several
critical materials required for sequencing. For certain of these
materials, PE Biosystems is the sole supplier, and for other
materials Celera Genomics believes that PE Biosystems provides the
highest quality materials available. Any interruption in the
availability of materials could adversely affect and, in some cases,
shut down sequencing operations.
Uncertainty of value of polymorphism data. Celera Genomics believes
that the polymorphisms it discovers will add considerable value to
its integrated information system. Polymorphism data reveals
information about genetic variability between individuals. Its use
in the testing of new drugs and the diagnosis of disease, however,
is largely untested. Although there has been some early success in
linking certain polymorphisms to susceptibility to disease and
outcomes of drug therapy, pharmaceutical companies are not yet
certain how polymorphism data can be used, or if it can be used on a
cost-effective basis, in clinical trials or in drug development.
Furthermore, public acceptance of the use of polymorphism data is
uncertain. Current and future patient privacy and health care laws
and regulations issued by the U.S. Food and Drug Administration may
also limit the use of this data.
The ability of Celera Genomics to protect its intellectual property
rights will affect its polymorphism program. Such protection is
uncertain due to the uncertainty of patent law relating to genomics
in general and the novelty of this particular aspect of genomics. In
addition, Celera Genomics will be dependent on new technology,
including technology provided by PE Biosystems, to make the use of
polymorphism information cost-effective so as to make it marketable
to the public. This technology is still in early stages of
development and its application to this area remains uncertain.
Initial reliance on pharmaceutical industry. Celera Genomics
believes that for the next few years it will derive a significant
portion of its revenues from fees paid by pharmaceutical companies
and larger biotechnology companies for its information
products and services. Celera Genomics has also
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had preliminary discussions with certain universities and similar
research organizations about becoming customers, but expects this
market to develop at a slower rate. The number of subscribers for
Celera Genomics' products during this period may be limited due
to their nature and price. Pharmaceutical and biotechnology
companies could decide not to subscribe to some or all of Celera
Genomics' information products or services, or could decide to
conduct their own polymorphism discovery and analysis or work with
Celera Genomics' competitors.
Anticipated future losses; uncertainty of operating results. Celera
Genomics has earned small amounts of revenues to date and expects
that it will continue to incur net operating losses at least through
2001. Celera Genomics has a small number of customers, the revenues
from which will offset only a small portion of its expenses. In
order to meet its business plan, Celera Genomics will require
additional customers in the next few years. In addition, even if
Celera Genomics is able to enter into contracts with additional
customers, those contracts may be subject to milestones that may not
be achieved. As a result, there is a high degree of uncertainty that
Celera Genomics will be able to achieve profitable operations.
Highly dependent on key employees. Celera Genomics is highly
dependent on the principal members of its scientific and management
staff, particularly Dr. J. Craig Venter, its President. For the
sequencing and assembly of the human genome, Celera Genomics
believes the following members of its staff are essential: Dr. J.
Craig Venter; Dr. Mark Adams, Vice President for Genome Programs;
and Drs. Eugene Myers and Granger Sutton, who are responsible for
assembling the genome. Additional members of its medical,
scientific, and bioinformatics staff are important to the
development of information, tools, and services required for
implementation of its business plan, including Dr. Sam Broder,
Executive Vice President and Chief Medical Officer.
Celera Genomics does not have employment agreements or non-compete
agreements with any of its employees. It also does not maintain key
man life insurance on any of them. The loss of any of these persons
could have a material adverse effect on Celera Genomics' ability to
achieve its goals, particularly the completion of its information
products.
Product development and commercialization will require additional
employees in such areas as software and bioinformatics development
and customer support. The inability to acquire such services or
develop such expertise could have a material adverse effect on
Celera Genomics.
Uncertain protection of intellectual property and proprietary
rights. Celera Genomics' ability to compete and to achieve
profitability may be affected by its ability to protect its
proprietary technology and intellectual property. While Celera
Genomics will be primarily dependent on revenues from access fees to
its discovery and information system, obtaining patent protection
may also be important to its business. Patent law affecting Celera
Genomics' business, particularly gene sequences and polymorphisms,
is uncertain.
Moreover, Celera Genomics may be dependent on protecting, through
copyright law or otherwise, its databases to prevent other
organizations from taking information from databases and copying and
reselling it. Copyright law currently provides uncertain protection
to organizations like Celera Genomics that seek to prevent others
from reselling their data. Changes in copyright and patent law could
expand or reduce the extent to which Celera Genomics and its
customers are able to protect their intellectual property.
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<PAGE>
Adverse effect of public disclosure of genomic sequence data.
Celera Genomics has committed to make available to the public basic
human sequence data. The release of sequence data could undermine
the ability of Celera Genomics and its customers to obtain
intellectual property protection. Customers may conclude that
uncertainties of such protection decrease the value of Celera
Genomics' information products and services and, as a result, it may
not be able to charge fees sufficient to allow it to achieve
profitability.
Highly competitive business. A number of companies, institutions
and government-financed entities are engaged in various genomics
initiatives. At least two other companies, Genset, S.A. and Incyte
Pharmaceuticals, Inc., have announced their intention to market to
the pharmaceutical industry products and services similar to those
being offered by Celera Genomics. Additional competitors may attempt
to compete with Celera Genomics in the future, including companies
that may seek to resell publicly available genomic data.
FACTORS RELATING TO BOTH PE BIOSYSTEMS AND CELERA GENOMICS
Year 2000. In fiscal 1997, we initiated a world-wide program to
assess the expected impact of the Year 2000 date recognition problem
on our existing computer systems; non-information technology
systems, including embedded and process-control systems; product
offerings; and significant suppliers. Portions of this program are
not expected to be completed before December 31, 1999. If we
are not successful in implementing our Year 2000 compliance plan, or
there are delays in and/or increased costs associated with
implementing those changes, the Year 2000 problem could have a
material adverse effect on our results of operations and financial
condition. In addition, we have not fully determined the likely
impact of third parties' compliance efforts on our interface systems
and business.
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<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
27. Financial Data Schedule.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for
which this report is being filed.
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<PAGE>
.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
THE PERKIN-ELMER CORPORATION
By: /s/ Dennis L. Winger
Dennis L. Winger
Senior Vice President and Chief
Financial Officer
By: /s/ Ugo D. DeBlasi
Ugo D. DeBlasi
Corporate Controller (Chief
Accounting Officer)
Dated: February 16, 1999
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<PAGE>
Exhibit No. Exhibit
27. Financial Data Schedule.
-30-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE
SIX MONTHS ENDED DECEMBER 31, 1998 AND THE CONDENSED CONSOLIDATED
STATEMENT OF FINANCIAL POSITION AT DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 75,479
<SECURITIES> 0
<RECEIVABLES> 265,891
<ALLOWANCES> (5,030)
<INVENTORY> 160,179
<CURRENT-ASSETS> 720,777
<PP&E> 325,505
<DEPRECIATION> (138,385)
<TOTAL-ASSETS> 1,241,051
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0
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<TOTAL-LIABILITY-AND-EQUITY> 1,241,051
<SALES> 543,238
<TOTAL-REVENUES> 543,238
<CGS> 244,897
<TOTAL-COSTS> 244,897
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