UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q
Commission file number 1-5075
PerkinElmer, Inc.
(781) 237-5100
NONE
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 þ No o
Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o
Number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PERKINELMER, INC. AND SUBSIDIARIES
CONSOLIDATED INCOME STATEMENTS
The accompanying unaudited notes are an integral part of these consolidated financial statements.
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CONSOLIDATED BALANCE SHEETS
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(1) Basis of Presentation
The consolidated financial statements included herein have been prepared by PerkinElmer, Inc. (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information in footnote disclosures normally included in financial statements has been condensed or omitted in accordance with the rules and regulations of the SEC. These statements should be read in conjunction with the Company’s Annual Report for the fiscal year ended December 29, 2002, filed on Form 10-K with the SEC (the “2002 Form 10-K”). The balance sheet amounts at December 29, 2002 in this report were extracted from the Company’s audited 2002 financial statements included in the 2002 Form 10-K. Certain prior period amounts have been reclassified to conform to the current-year financial statement presentation. The information reflects all adjustments that, in the opinion of management, are necessary to present fairly the Company’s results of operations, financial position and cash flows for the periods indicated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The results of operations for the three months ended March 30, 2003 and March 31, 2002 are not necessarily indicative of the results for the entire fiscal year.
(2) Gains on Dispositions
During the first quarter of 2003, the Company recognized a $0.3 million net gain from the sale of a building, and a previously deferred $0.3 million gain from the sale of a business. During the first quarter of 2002, the Company sold three buildings that resulted in a net gain of $4.4 million on proceeds received of approximately $19.5 million and recognized $0.8 million in gains from a sale that was previously deferred.
(3) Restructuring Charges
As discussed more fully in the Company’s 2002 Form 10-K, the Company has undertaken a series of restructuring actions. The principal actions associated with these plans related to a workforce reduction and overhead reductions resulting from continued reorganization activities, including the closure of certain manufacturing and selling facilities. Details of these plans are discussed more fully in the Company’s 2002 Form 10-K.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the components of the Company’s restructuring plans and related accrual activity recorded for the quarter ended March 30, 2003.
The majority of the actions remaining at March 30, 2003 are expected to be settled in 2003, with the exception of European pension and severance obligations as well as lease obligations which may extend beyond 2003.
In addition, as discussed in the Company’s 2002 Form 10-K, there have been integration reserves established relating primarily to the acquisition of Packard BioScience. The following table summarizes the activity in this reserve for the first quarter of 2003:
The Company expects these amounts to be paid during the remainder of 2003.
(4) Inventories
Inventories consisted of the following:
(5) Debt
Zero Coupon Convertible Debentures.In 2002, the Company completed a tender offer to purchase any and all of the outstanding zero coupon convertible debentures. The Company repurchased $205.6 million in
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aggregate accreted amount of its zero coupon convertible debentures in the tender offer. In the first quarter of 2003, the Company repurchased an additional $32.5 million of accreted value of its outstanding zero coupon convertible debentures in open market transactions. Under the terms of the Company’s senior secured credit facility, the Company is required to redeem all of the zero coupon convertible debentures remaining outstanding in August 2003. The Company intends to repurchase all of the remaining $155 million in aggregate accreted amount at March 30, 2003 of its zero coupon convertible debentures through either or both of (1) open-market purchases, privately negotiated transactions and other repurchases and (2) redemption in accordance with the terms of the zero coupon convertible debentures in August 2003. An amount approximately equal to the accreted value of the outstanding debentures, totaling approximately $155 million, was held in escrow for this purpose as of March 30, 2003. Accordingly, the zero coupon convertible debentures have been reported as a current liability in the consolidated balance sheet at March 30, 2003.
(6) Earnings Per Share
Basic earnings per share was computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share was computed by dividing net income (loss) 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. For the three months ended March 31, 2002, potentially dilutive securities were excluded from the calculation of weighted-average shares outstanding because of their anti-dilutive effect due to the net loss during the period. The following table reconciles the number of shares utilized in the earnings per share calculations:
(7) Comprehensive Income (Loss)
Comprehensive income (loss) consisted of the following:
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The components of accumulated other comprehensive loss were as follows:
(8) Industry Segment Information
The Company’s continuing operations are classified into four reportable segments which reflect the Company’s management and structure under three strategic business units. The four reportable segments are Life Sciences, Analytical Instruments, Optoelectronics and Fluid Sciences. The accounting policies of the reportable segments are the same as those described in Note 1 of the 2002 Form 10-K. The Company evaluates the performance of its reportable segments based on operating profit. Intersegment sales and transfers are not significant.
Sales and operating profit (loss) by segment for the three months ended March 30, 2003 and March 31, 2002 are shown in the table below:
(9) Discontinued Operations
During June 2002, the Company approved separate plans to shut down its Telecommunications Component business and sell its Entertainment Lighting business as part of its continued efforts to focus on higher growth opportunities. The results of these businesses were previously reported as part of the
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Optoelectronics reporting segment. The Company has accounted for these businesses as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long Lived Assets (“SFAS No. 144”) and, accordingly, has presented the results of operations and related cash flows of these businesses as discontinued operations for all periods presented. The assets and liabilities of these disposal groups have been presented separately and are reflected within the assets and liabilities from discontinued operations in the accompanying Consolidated Balance Sheets.
During June 2002, the Company completed the sale of its Security and Detection Systems business. In the first quarter of 2002 the Company accounted for its Security and Detection Systems business as a discontinued operation in accordance with APB 30.
Summary operating results of the discontinued operations of the Entertainment Lighting business for the three months ended March 30, 2003 and the Security and Detection Systems and the Telecommunications Component businesses for the three months ended March 31, 2002, were as follows:
(10) Stock-Based Compensation
The Company has issued restricted stock to certain employees and has reflected the fair value of these awards as unearned compensation until the restrictions are released and the compensation is earned.
As allowed by SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to account for stock-based compensation at intrinsic value with disclosure of the effects of fair value accounting on net income and earnings per share on a pro forma basis. At March 30, 2003, the Company had three stock-based compensation plans. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost related to stock options is reflected in net income, as all options granted under those plans had an exercise price at least equal to the market value of the underlying common
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stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123.
(11) Goodwill and Intangible Assets
In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and other Intangible Assets (“SFAS No. 142”), the Company is required to test goodwill for impairment at the reporting unit level upon initial adoption and at least annually thereafter. As part of the Company’s on-going compliance with SFAS No. 142, the Company, assisted by independent valuation consultants, completed its annual assessment of goodwill using a measurement date of January 1, 2003. The results of this annual assessment did not result in an impairment charge.
Intangible asset balances at March 30, 2003 and December 29, 2002 were as follows:
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(12) Warranty Reserves
The Company provides warranty protection for certain products for periods ranging from one to three years beyond the date of sale. The majority of costs associated with warranty obligations include the replacement of parts and the time of service personnel to respond to repair and replacement requests. A warranty reserve is recorded based upon historical results, supplemented by management’s expectations of future costs. A summary of warranty reserve activity for the quarter ended March 30, 2003 is as follows:
(13) Guarantor Financial Information
On December 26, 2002, the Company issued $300 million in aggregate principal amount of 8 7/8% Notes (the “8 7/8 Notes”) due 2013 by means of an offering memorandum to qualified institutional buyers under Rule 144A promulgated under the Securities Act of 1933, as amended. The Company’s payment obligations under the 8 7/8% Notes are guaranteed by some of the Company’s domestic subsidiaries (the “Guarantor Subsidiaries”). Such guarantee is full and unconditional. Separate financial statements of the Guarantor Subsidiaries are not presented because the Company’s management has determined that they would not be material to investors. The following supplemental financial information sets forth, on an unconsolidated basis, income statement, balance sheet and statements of cash flow information for the Company (“Parent Company Only”), for the Guarantor Subsidiaries and for the Company’s other subsidiaries (the “Non-Guarantor Subsidiaries”). The supplemental financial information reflects the investments of the Company
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and the Guarantor Subsidiaries in the Guarantor and Non-Guarantor Subsidiaries using the equity method of accounting.
Consolidating Income Statement
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Consolidating Balance Sheet
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Consolidating Cash Flow Statement
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(14) Recently Issued Accounting Pronouncements
In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on Issue No. 00-21,Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights
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to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company is currently evaluating, but has not yet determined the effect that the adoption of EITF Issue No. 00-21 will have on its results of operations and financial condition.
In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”),Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company has considered the requirements of FIN 46 in respect of its accounts receivable securitization facility and does not believe that the adoption of FIN 46 will have a material effect on its results of operations or financial condition.
(15) 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, results of operations or cash flows of the Company.
The Company and certain officers have been named as defendants in a class action lawsuit in which the plaintiffs have alleged various statements made by the Company and management were misleading with respect to the Company’s prospects and future operating results. The Company believes it has meritorious defenses to the lawsuits and intends to contest the actions vigorously. The Company is currently unable, however, to reasonably estimate the amount of the loss, if any, that may result from resolution of these matters.
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 $7.0 million as of March 30, 2003, representing management’s estimate of the total cost of ultimate disposition of known environmental matters. Such amount is not discounted and does not reflect the 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 ten 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 potential exposure is not expected to be materially different than the amounts recorded.
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Acquisitions and Divestitures
In June 2002, our Board of Directors approved a plan to shut down our Telecommunications Component business and a plan to sell our Entertainment Lighting business as part of our continued efforts to focus on higher growth opportunities. Both businesses have been reflected as discontinued operations in our consolidated financial statements in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment of Long-Lived Assets,” which we adopted as of the beginning of 2002.
Formation of Our Life and Analytical Sciences Business
During the fourth quarter of 2002, we combined our Life Sciences and Analytical Instruments business units into a new integrated business named Life and Analytical Sciences. We combined our Life Sciences and Analytical Instruments businesses to improve our operational scale, which we believe will enable us to better serve our customers and more fully capitalize on the strengths of the businesses’ sales, service and research and development organizations. Our Life and Analytical Sciences business unit continues to comprise two reporting segments for the periods presented in this quarterly report on Form 10-Q. In connection with the formation of our Life and Analytical Sciences business unit and expected near-term pressure on capital expenditures within certain key end markets, we recorded in 2002 a $26.0 million restructuring charge to reflect workforce reductions, facility closures and contract terminations that we expect to make. We expect many of these actions to occur over the remainder of 2003. The combination of these businesses will require changes to our organizational structure, processes and systems during 2003. We are targeting annualized pre-tax cost savings from the combination of between $30.0 million and $45.0 million beginning in 2004, with interim pre-tax cost savings of between $12.0 million and $25.0 million in 2003. We cannot assure you that we will achieve any of these cost savings.
Discussion of Consolidated Results of Continuing Operations
Sales for the first quarter of 2003 were $358.5 million versus $346.3 million for the first quarter of 2002, an increase of $12.2 million or 4%. The increase in first quarter of 2003 over the first quarter of 2002 was due primarily to the increase in sales within certain key end markets and favorable changes in foreign exchange rates related primarily to the European currencies. Key end markets contributing to the quarter over quarter increase included the digital imaging, sensors and ultra-specialty lighting markets within our Optoelectronics reporting segment, environmental applications and pharmaceutical QA/ QC served by our Analytical Instruments reporting segment and genetic screening within our Life Sciences reporting segment. These increases were partially offset by decreased sales within the pharmaceutical research and development markets within our Life Sciences reporting segment and decreased sales to the aerospace market within our Fluid Sciences reporting segment.
Cost of sales for the first quarter of 2003 was $219.3 million versus $220.6 million for the first quarter 2002, a decrease of $1.3 million or 0.6%. As a percentage of sales, cost of sales decreased to 61% in 2003 from 64% in the 2002. The first quarter of 2002 included a $17.0 million inventory adjustment within our Optoelectronics business and $1.5 million related to the amortization of the write-up associated with Packard inventory. Factors that adversely affected first quarter of 2003 margins in comparison with to the first quarter of 2002 include unfavorable changes in product mix from the sale of lower margin instruments and decreased production and lower capacity utilization as a result of lower sales volume in our Life Sciences business leading to unabsorbed manufacturing overhead expenses during the quarter.
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Research and development expenses for the first quarter of 2003 were $20.9 million versus $21.8 million in the first quarter 2002, a decrease of approximately $1.0 million or 4%. As a percentage of sales, research and development expenses remained unchanged at approximately 6% in the first quarter of 2003 from the first quarter of 2002. We directed research and development efforts during both periods primarily toward drug discovery tools and genetic screening applications as well as biopharmaceutical end markets within the Life Sciences and Analytical Instruments reporting segments and biomedical end markets within the Optoelectronics reporting segment. We expect to continue to direct our research and development effort towards the health sciences end markets.
Selling, general and administrative expenses for the first quarter of 2003 were $92.9 million versus $107.7 million for the first quarter of 2002, a decrease of $14.8 million or 14%. As a percentage of sales, selling, general and administrative expenses decreased to 26% in the first quarter of 2003 from 31% in the first quarter of 2002. The decrease was primarily driven by headcount reductions and increased focus on cost controls in fiscal 2003. First quarter of 2002 also included approximately $3.2 million in integration charges related to the Packard acquisition.
Gains on dispositions resulted in a net gain of $0.6 million in the first quarter of 2003 versus a net gain of $5.2 million in the first quarter of 2002. Gains on dispositions in the first quarter of 2003 included a $0.3 million net gain from the sale of a building, and a $0.3 million gain from the sale of a business previously deferred. Gains on dispositions in the first quarter of 2002 included $4.4 million from sales of facilities and $0.8 million from post closing adjustments relating to the sale of our Instruments for Research and Applied Sciences business, formerly part of our Analytical Instruments reporting segment.
Other expense, net for the first quarter 2003 was $14.3 million versus $13.6 million for the first quarter 2002, an increase of $0.7 million or 5%. The increase in other expense, net was due to increased interest expense related primarily to higher interest rates associated with our debt restructuring in December 2002, offset by expenses in the first quarter of 2002 associated with our early redemption of the $118 million in aggregate principal amount of senior subordinated notes we assumed in our acquisition of Packard BioScience Company. Other expense primarily includes our financing related costs.
The provision for income taxes was $1.6 million for the first quarter of 2003 versus a benefit of $7.9 million for the first quarter of 2002. The effective tax rate was 32.5% during the first quarter or 2003 compared to a rate or 28% in the first quarter of 2002. The difference in the effective tax rate is primarily attributable to changes in taxable income recognized in the various tax jurisdictions in which we operate.
Effect of Accounting Change
We adopted SFAS No. 142 as of the beginning of fiscal 2002 and have accordingly ceased the amortization of goodwill and indefinite-lived intangible assets. During the second quarter of 2002, we completed our transitional implementation of the impairment of testing provisions of SFAS No. 142, which resulted in a $117.8 million after-tax charge for goodwill associated with the lighting reporting unit within our Optoelectronics business unit. In accordance with the provisions of SFAS No. 142, we have taken this charge as the effect of an accounting change as of the beginning of fiscal 2002. In addition, as part of our on-going compliance with SFAS No. 142, we, assisted by our independent valuation consultants, completed our annual assessment of goodwill using a measurement date of January 1, 2003. The results of this annual assessment did not result in an impairment charge.
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Reporting Segment Results of Continuing Operations
We report our continuing operations as four reporting segments, reflecting our management methodology and structure. Our Security and Detection Systems business previously reported as part of our Analytical Instruments reporting segment, and our Telecommunications Component business, have been reflected as a discontinued operation in our consolidated financial statements for the first quarter of 2002, prior to their sale and abandonment in June 2002, and Entertainment Lighting business, previously reported as part of our Optoelectronics reporting segment, has been reflected as discontinued operations in our consolidated financial statements for the first quarter of 2003 and the first quarter of 2002. The accounting policies of our reporting segments are the same as those described in our 2002 Form 10-K. We evaluate performance based on profitability of the respective reporting segments. The discussion that follows is a summary analysis of the material changes in operating results by reporting segment for the three months ended March 30, 2003 versus the three months ended March 31, 2002.
Sales for the first quarter of 2003 were $103.9 million versus $116.8 million for the first quarter of 2002, a decrease of $12.9 million or 11%. Revenue for the first quarter decreased compared to the first quarter last year primarily due to the decline in sales of drug discovery instruments due to softness within the pharmaceutical research and development end markets. This decline was partially offset by the continued strength in our genetic screening business, growth in our reagents sales and favorable changes in the foreign exchange rates, related primarily to the European currencies.
Operating loss for the first quarter 2003 was $0.4 million versus a loss of $1.0 million for the first quarter 2002. The quarter over quarter decrease in operating loss was attributable to lower selling, general and administrative expense in the first quarter of 2003 due to current and prior year restructuring, integration and reorganization-related activities, offset to some extent by reduced profits on lower sales and lower margin products in 2003. Amortization of intangibles was $5.3 million and $5.5 million in the first quarter of 2003 and 2002, respectively.
Sales for the first quarter 2003 were $128.3 million versus $115.5 million for the first quarter 2002, an increase of $12.8 million or 11%. Sales for the first quarter of 2003 increased compared to the first quarter last year primarily due to an increase in product sales for environmental applications and pharmaceutical QA/ QC and favorable changes in foreign exchange rates related primarily to the European currencies.
Operating profit for the first quarter of 2003 was $12.0 million versus $8.8 million for the first quarter 2002, an increase of $3.2 million or 36%. The quarter over quarter increase reflects increased profit from higher sales volume, favorable changes in foreign exchange rates and lower selling, general and administrative expense in the first quarter of 2003 due to current and prior year restructuring, integration and reorganization-related activities. Amortization of intangibles was $1.1 million in both the first quarter of 2003 and 2002.
Sales for the first quarter 2003 were $83.3 million versus $69.3 million for the first quarter 2002, an increase of $14.0 million or 20%. The increase in sales in the first quarter 2003 was due primarily to increased sales to the biomedical and industrial end markets of digital imaging, sensors, and lighting products.
Operating profit for the first quarter of 2003 was $8.7 million versus an operating loss of $22.6 million for first quarter of 2002, an increase of $31.3 million or 139%. The increase in operating profit was due primarily to higher capacity utilization, the impact of headcount reductions and a $17.0 million inventory adjustment taken in the first quarter 2002. Amortization of intangibles was $0.3 million in both the first quarter of 2003 and 2002.
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Sales for the first quarter of 2003 were $ 42.9 million versus $44.6 million for the first quarter of 2002, a decrease of $1.7 million or 4%. The decrease in sales was primarily due to declines in sales to the aerospace end and lubricant testing markets, offset by growth in the semiconductor assembly business.
Operating profit for the first quarter of 2003 was $2.4 million versus $3.4 million for the first quarter of 2002, a decrease of $1.0 million or 30%. The decrease in operating profit was due primarily to the decline in sales and a lower product margin mix in the semiconductor assembly business offset by start up costs associated with our operations in Asia in the first quarter of 2002. Amortization of intangibles was $0.4 million and $0.2 million in the first quarter of 2003 and 2002, respectively.
Liquidity and Capital Resources
We require cash to pay our operating expenses, make capital expenditures and service our debt and other long-term liabilities. Our principal sources of funds are from our operations and the capital markets, particularly the debt markets. In the near term, we anticipate that our operations will generate sufficient cash to fund our operating expenses, capital expenditures and interest payments on our debt. In the long-term, we expect to use internally generated funds and external sources to satisfy our debt and other long-term liabilities.
Principal factors that could affect the availability of our internally generated funds include:
Principal factors that could affect our ability to obtain cash from external sources include:
Operating Activities.Net cash generated by continuing operations operating activities was $22.9 million in the first quarter of 2003 versus net cash used of $34.1 million in the first quarter of 2002. The quarter over quarter increase was primarily attributable to our net income from operations coupled with significant incremental collections of accounts receivable and lower accrued restructuring costs and other expenses.
Contributing to the generation of cash from operating activities in the first quarter was a decrease in working capital, which includes accounts receivable, inventory and accounts payable, of $24 million, including our obligations under our accounts receivable securitization facility and the favorable change in foreign exchange rates. Non-cash items contributing to the net cash generated during the quarter primarily consisted of $18.8 million in depreciation and amortization charges and $2.4 million in amortization of deferred debt discount and issuance costs. Cash outlays for accrued expenses and restructuring costs totaled $25.7 million during the first quarter of 2003, primarily as the result of payments toward restructuring plans, the timing of tax payments and payroll and other obligations.
Investing Activities.In the first quarter of 2003, our investing activities provided $30.6 million of cash, including $32.5 million of cash withdrawn from escrow to repay debt to retire a portion of our outstanding zero coupon convertible debentures. In the first quarter of 2003, we made capital expenditures of $3.5 million mainly in the areas of tooling and process improvement for the drug discovery tools business and other products for biopharmaceutical applications. We also received $2.1 million of net proceeds associated with acquisitions related primarily to a tax refund in connection with our 2001 acquisition of Packard.
Financing Activities.In the first quarter of 2003, our financing activities used $57.5 million of cash. Included in this amount is $32.5 million of cash used to prepay a portion of our outstanding zero coupon convertible debentures for which we have approximately $155 million of cash remaining in escrow at March 30, 2003. Debt reductions in the first quarter of 2003 also included $15.0 million of cash used to repay a
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Senior Secured Credit Facility.In 2002, we entered into a new senior credit facility. This facility comprises a six-year term loan in the amount of $315.0 million and a $100.0 million five-year revolving credit facility. This credit facility is secured primarily by a substantial portion of our and our subsidiaries’ domestic assets.
The interest rates under the senior credit facility applicable to the term loan and to the revolving credit facility are determined as a margin over either the Eurodollar rate or the base rate. The base rate is the higher of (1) the corporate base rate announced from time to time by Bank of America, N.A. and (2) the Federal Funds rate plus 50 basis points. The applicable margin for the term loan is 400 basis points for the Eurodollar rate and 300 basis points for the base rate. The applicable margin for the revolving credit facility is determined based upon our leverage ratio for the prior quarter. We may allocate all or a portion of our indebtedness under the senior credit facility to interest based upon the margin over the Eurodollar rate or the base rate. At March 30, 2003, the Eurodollar rate was approximately 130 basis points and the base rate was 425 basis points. The term loan is repayable in nominal quarterly installments until December 2007, and thereafter in four equal quarterly installments until December 2008. The revolving credit facility is available to us through December 2007 for our working capital needs. At March 30, 2003 we had no outstanding principal balance under the revolving credit facility.
Our senior credit facility contains covenants that require us to maintain specific financial ratios, including:
As of March 2003, we amended the financial definitions in our senior credit facility to more accurately reflect our understanding with the lenders. As of March 30, 2003, we were in compliance with all applicable covenants.
8 7/8% Notes.In 2002, we issued and sold ten-year senior subordinated notes at a rate of 8 7/8% with a face value of $300.0 million. We received $297.5 million in gross proceeds from the issuance. The debt, which matures in January 2013, is unsecured, but is guaranteed by substantially all of our domestic subsidiaries. Interest on our 8 7/8% notes is payable semi-annually on January 15 and July 15, beginning July 15, 2003. If a change of control occurs, each holder of 8 7/8% notes may require us to repurchase some or all of its notes at a purchase price equal to 101% of the principal amount of the notes, plus accrued interest. Before January 15, 2006, we may redeem up to 35% of the aggregate principal amount of our 8 7/8% notes with the net proceeds of specified public equity offerings at 108.875% of the principal amount of the notes, plus accrued interest, if at least 65% of the aggregate principal amount of the notes remains outstanding after the redemption. We may redeem some or all of our 8 7/8% notes at any time on or after January 15, 2008, at a redemption price of 104.438%. The redemption price decreases to 102.958% on January 15, 2009, to 101.479% on January 15, 2010 and to 100% on January 15, 2011. The debt is subordinated to our new senior credit facility and other existing and future senior subordinated indebtedness. Our 8 7/8% notes contain financial and other covenants. Most of these covenants terminate if the notes obtain an investment grade rating by Standard & Poor’s Rating Services and Moody’s Investors Service. At March 30, 2003, we were in compliance with all applicable covenants.
Zero Coupon Convertible Debentures.During 2002, we repurchased $106.5 million of our zero coupon convertible debentures in open market transactions, recognizing a gain of $8.4 million in the process. As part of our December 2002 debt refinancing transactions, we commenced an offer to purchase any and all of our existing zero coupon convertible debentures. In December 2002, we completed the tender offer and repurchased $205.6 million in aggregate accreted amount of the issue. In the first quarter of 2003, the
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6.8% Notes. As part of our 2002 debt refinancing transactions, we initiated a tender offer for all of the outstanding 6.8% notes. In December 2002, we had completed the tender offer and repurchased all but $4.7 million of these notes. We paid consent payments pursuant to a consent solicitation we made concurrently with the tender offer. The consent solicitation eliminated substantially all of the restrictive covenants contained in the indenture governing our 6.8% notes. We may from time to time repurchase outstanding 6.8% notes through open market purchases, privately negotiated transactions or otherwise.
In December 2001, we established a wholly owned consolidated subsidiary to purchase, on a revolving basis, certain of our accounts receivable balances and simultaneously sell an undivided interest in this pool of receivables to a financial institution. Amounts funded by the counterparty under this facility were $40.0 million at March 30, 2003 and $29.0 million at December 29, 2002. The facility includes conditions that require us to maintain a senior unsecured credit rating of BB or above, as defined by Standard & Poor’s Rating Services, and Ba2 or above, as defined by Moody’s Investors Service. At March 30, 2003, we had a senior unsecured credit rating of BB+ with a stable outlook from Standard & Poor’s Rating Services, and of Ba2 with a stable outlook from Moody’s Investors Service. In January 2003, we entered into an agreement to extend the term of our accounts receivable securitization facility to January 31, 2004.
Our Board of Directors declared regular quarterly cash dividends of seven cents per share in the first quarter of 2003 and 2002. Our senior credit facility and the indenture governing our outstanding 8 7/8% senior subordinated notes contain restrictions that may limit our ability to pay our regular cash dividend.
Critical Accounting Policies, Commitments and Certain Other Matters
In our 2002 Form 10-K, we identify our most critical accounting policies and estimates upon which our financial status depends as those relating to revenue recognition, loss provisions on doubtful accounts, valuation of long-lived assets, intangibles, including assets and goodwill, employee compensation and benefits, restructuring activities, gains or losses on dispositions and income taxes. We considered the disclosure requirements of Financial Release (“FR”) 60 regarding critical accounting policies and concluded that nothing materially changed during the quarter March 30, 2003 that would warrant further disclosure under this release. We considered the disclosure requirements of FR-61 regarding liquidity and capital resources, trading activities and related party/certain other disclosures and concluded that nothing materially changed during the quarter ended March 30, 2003, outside of the repurchase of a portion of the Company’s zero coupon convertible debentures discussed in Note 5 to the Financial Statements, that would warrant further disclosure under this release.
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Forward-Looking Information and Factors Affecting Future Performance
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. For this purpose, any statements contained in this report that are not statements of historical fact are deemed to be forward-looking statements. Words such as “believes,” “anticipates,” “plans,” “expects,” “will” and similar expressions are intended to identify forward-looking statements. While we may elect to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change. You should not rely on our forward-looking statements as representing our views as of any date subsequent to the date of this report. There are a number of important factors that could cause our actual results to differ materially from those indicated by our 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:
Some of the industries and markets into which we sell our products are cyclical. Industry downturns often are characterized by reduced product demand, excess manufacturing capacity and erosion of average selling prices and profits. Significant downturns in our customers’ markets and in general economic conditions have resulted in a reduced demand for several of our products and have hurt our operating results. For example, during 2002, our operating results were adversely affected by downturns in many of the markets we serve, including the pharmaceutical, biomedical, semiconductor and aerospace markets. Current economic conditions have caused a decrease in capital spending by many of our customers, which in turn has adversely affected our sales and business. These trends are continuing in 2003.
We sell many of our products in industries characterized by rapid technological changes, frequent new product and service introductions and evolving industry standards. Without the timely introduction of new products and enhancements, our products could become technologically obsolete over time, in which case our sales and operating results would suffer. The success of our new product offerings will depend upon several factors, including our ability to:
Many of our products are used by our customers to develop, test and manufacture their products. Therefore, we must anticipate industry trends and develop products in advance of the commercialization of our customers’ products. In developing new products, we may be required to make significant investments before we can determine the commercial viability of the new product. If we fail to accurately foresee our customers’ needs and future activities, we may invest heavily in research, and development of products that do not lead to significant sales.
In addition, some of our licensed technology is subject to contractual restrictions, which may limit our ability to develop or commercialize products for some applications. For example, some of our license agreements are limited to the field of life sciences research, and exclude clinical diagnostics applications.
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We have a substantial amount of outstanding indebtedness. As of March 30, 2003, we had approximately $760.3 million in outstanding indebtedness including $155 million in outstanding zero coupon debentures, excluding obligations under our accounts receivable securitization facility. In addition, we have $100 million revolving credit facility. As of March 30, 2003 we had no outstanding principal balance under this revolving credit facility.
Our substantial level of indebtedness increases the possibility that we may be unable to generate sufficient cash to pay the principal or interest in respect of our indebtedness. We may also obtain additional long-term debt and working capital lines of credit to meet future financing needs, which would have the effect of increasing our total leverage.
Our substantial leverage could have significant negative consequences, including:
A significant portion of our indebtedness bears interest at floating rates. As a result, our interest payment obligations on this indebtedness will increase if interest rates increase.
Our ability to satisfy our obligations, and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors beyond our control. Our business may not generate sufficient cash flow to meet these obligations or to successfully execute our business strategy. If we are unable to service our debt and fund our business, we may be forced to reduce or delay capital expenditures, seek additional financing or equity capital, restructure or refinance our debt or sell assets. We may not be able to obtain additional financing or to refinance existing debt or to sell assets on terms acceptable to us or at all.
Our senior credit facility and the indenture relating to our 8 7/8% notes contain, and future debt instruments to which we may become subject may contain, restrictive covenants that limit our ability to engage in activities that could otherwise benefit our company, including restrictions on our ability and the ability of our subsidiaries to:
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We are also required to meet specified financial ratios under the terms of our senior credit facility. Our ability to comply with these financial restrictions and covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control such as foreign exchange rates, interest rates, changes in technology and changes in the level of competition.
Our failure to comply with any of these restrictions or covenants may result in an event of default under the applicable debt instrument, which could permit acceleration of the debt under that instrument and require us to prepay that debt before its scheduled due date. Also, an acceleration of the debt under our senior credit facility would trigger an event of default under our 8 7/8% notes, and a default under our 8 7/8% notes would trigger an event of default under the senior credit facility and possibly other debt.
If an event of default occurs, we may not have sufficient funds available to make the required payments under our indebtedness. If we are unable to repay amounts owed under our senior credit facility, those lenders may be entitled to foreclose on and sell the collateral that secures our borrowings under that agreement. Our inability to repay amounts owed under our senior credit facility may also cause a default under other of our obligations including our accounts receivable securitization facility.
Because we sell our products worldwide, our businesses are subject to risks associated with doing business internationally. Our sales originating outside the United States represented 64% of our total sales for the quarter ended March 30, 2003 and 66% of our total sales in the fiscal year ended December 29, 2002. We anticipate that sales from international operations will continue to represent a substantial portion of our total sales. In addition, many of our manufacturing facilities, employees and suppliers are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including:
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Given the nature of the markets in which we participate, we cannot reliably predict future sales and profitability. Changes in competitive, market and economic conditions may require us to adjust our operations, and we can offer no assurance of our ability to make such adjustments or to make them quickly enough to adapt to changing conditions. A high proportion of our costs are fixed, due in part to our significant sales, research and development and manufacturing costs. Thus, small declines in sales could disproportionately affect our operating results in a quarter. Factors that may affect our quarterly operating results include:
We have in the past, and may in the future, supplement our internal growth by acquiring businesses and licensing technologies that complement or augment our existing product lines, such as our acquisition of Packard BioScience Company in November 2001. We may be unable to identify or complete promising acquisitions or license transactions for many reasons, including:
Some of the businesses we may seek to acquire may be unprofitable or marginally profitable. Accordingly, the earnings or losses of acquired businesses may dilute our earnings. For these acquired businesses to achieve acceptable levels of profitability, we must improve their management, operations, products and market penetration. We may not be successful in this regard and may encounter other difficulties in integrating acquired businesses into our existing operations.
To finance our acquisitions, we may have to raise additional funds, either through public or private financings. We may be unable to obtain such funds or may be able to do so only on terms unacceptable to us.
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In the fourth quarter of 2002, we announced the combination of our Life Sciences and Analytical Instruments business units into a new integrated business named Life and Analytical Sciences, representing 66% of our total sales for 2002. This combination is subject to various integration risks, and the integration of these two business units may not achieve the benefits we anticipate it will achieve. As a result of the combination, we may experience a loss of productivity, sales and key personnel. If any of these potential difficulties were to occur and persist, the business results of our Life Sciences and Analytical Instruments reporting segments could suffer.
We are targeting annualized cost savings from the combination of our Life Sciences and Analytical Instruments businesses of between $30.0 million and $45.0 million. Because we anticipate that the benefits of the combination of these businesses will not be fully realized until 2004, we are targeting cost savings of between $12.0 million and $25.0 million in 2003. While we believe these cost savings to be reasonable, they are estimates that are inherently difficult to predict and are necessarily speculative in nature. In addition, unforeseen factors may offset some or all of the estimated cost savings or other benefits from the integration. As a result, our actual cost savings, if any, could differ or be delayed, compared to our estimates.
We may not be able to renew our existing licenses or licenses we may obtain in the future on terms acceptable to us, or at all. If we lose the rights to a patented or other proprietary technology, we may need to stop selling products incorporating that technology and possibly other products, redesign our products or lose a competitive advantage. Potential competitors could in-license technologies that we fail to license and potentially erode our market share.
Our licenses typically subject us to various economic and commercial obligations. If we fail to comply with these obligations we could lose important rights under a license, such as the right to exclusivity in a market. In some cases, we could lose all rights under the license. In addition, rights granted under the license could be lost for reasons out of our control. For example, the licensor could lose patent protection for a number of reasons, including invalidity of the licensed patent, or a third party could obtain a patent that curtails our freedom to operate under one or more licenses.
We encounter aggressive competition from numerous competitors in many areas of our business. We may not be able to compete effectively with all of these competitors. To remain competitive, we must develop new products and periodically enhance our existing products. We anticipate that we may also have to adjust the prices of many of our products to stay competitive. In addition, new competitors, technologies or market trends may emerge to threaten or reduce the value of entire product lines.
Some of the products produced by our Life and Analytical Sciences business unit are subject to regulation by the United States Food and Drug Administration and similar international agencies. In addition, some of the activities of our Fluid Sciences business unit are subject to regulation by the United States Federal Aviation Administration. These regulations govern a wide variety of product activities, from design and development to labeling, manufacturing, promotion, sales, resales and distribution. If we fail to comply with those regulations or those of similar international agencies, we may have to recall products and cease their manufacture and distribution. In addition, we could be subject to fines or criminal prosecution.
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We compete in markets in which we or our customers must comply with federal, state, local and foreign regulations, such as environmental, health and safety and food and drug regulations. We develop, configure and market our products to meet customer needs created by these regulations. Any significant change in these regulations could reduce demand for our products or increase our costs of producing these products.
Patent and trade secret protection is important to us because developing and marketing new technologies and products is time-consuming and expensive. We own many United States and foreign patents and intend to apply for additional patents to cover our products. We may not obtain issued patents from any pending or future patent applications owned by or licensed to us. The claims allowed under any issued patents may not be broad enough to protect our technology.
In addition to our patents, we possess an array of unpatented proprietary technology and know-how and we license intellectual property rights to and from third parties. The measures that we employ to protect this technology and these rights may not be adequate. Moreover, in some cases, the licensor can terminate a license or convert it to a non-exclusive arrangement if we fail to meet specified performance targets.
We may incur significant expense in any legal proceedings to protect our proprietary rights or to defend infringement claims by third parties. In addition, claims of third parties against us could result in awards of substantial damages or court orders that could effectively prevent us from manufacturing, using, importing or selling our products in the United States or abroad.
As of March 30, 2003, our total assets included $1.4 billion of net intangible assets. Net intangible assets consist principally of goodwill associated with acquisitions and costs associated with securing patent rights, trademark rights and technology licenses, net of accumulated amortization. These assets have historically been amortized on a straight-line basis over their estimated useful lives. In connection with our adoption of SFAS No. 142, we discontinued the amortization of goodwill and indefinite lived intangible assets beginning in fiscal 2002. Instead, we will test these items, at a minimum, on an annual basis for potential impairment by comparing the carrying value to the fair market value of the reporting unit to which they are assigned.
During the second quarter of 2002, we completed our transitional implementation of the impairment testing provisions of SFAS No. 142, which resulted in a $117.8 million before-and-after-tax charge for goodwill associated with our lighting business. In accordance with the provisions of SFAS No. 142, we took this charge as the effect of an accounting change as of the beginning of fiscal 2002. In addition, as part of our ongoing compliance with SFAS No. 142, the Company, assisted by independent valuation consultants, completed our annual assessment of goodwill using a measurement date of January 1, 2003. The results of this annual assessment did not result in an impairment charge.
Future impairment testing may result in additional intangible asset write-offs, which could adversely affect our results of operations.
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Quantitative and Qualitative Disclosures about Market Risks
Financial Instruments:Financial instruments that potentially subject us to concentrations of credit risk consist principally of temporary cash investments, marketable securities and accounts receivable. We believe we had no significant concentrations of credit risk as of March 30, 2003.
In the ordinary course of business, we enter into foreign exchange contracts for periods consistent with our committed exposures to mitigate the effect of foreign currency movements on transactions denominated in foreign currencies. Transactions covered by hedge contracts include inter-company and third-party receivables and payables. The contracts are primarily in European and Asian currencies, have maturities that do not exceed 12 months, have no cash requirements until maturity and are recorded at fair value on the consolidated balance sheet. Credit risk is minimal as the foreign exchange instruments are contracted with major banking institutions. Unrealized gains and losses on our foreign currency contracts are recognized immediately in earnings for hedges designated as fair value and, for hedges designated as cash flow, the related unrealized gains or losses are deferred as a component of other comprehensive income in the accompanying consolidated balance sheet. These deferred gains and losses are recognized in income in the period in which the underlying anticipated transaction occurs. Effectiveness of these cash flow hedges is measured utilizing the cumulative dollar offset method and is reviewed quarterly. For the three month period ended March 30, 2003, we did not enter into any cash flow hedges. The notional amount of the outstanding foreign currency contracts was approximately $122 million at March 30, 2003. At March 30, 2003 approximate fair value for foreign currency derivative instruments designated as fair value hedges was zero.
Market Risk: The Company is exposed to market risk, including changes in interest rates and currency exchange rates. To manage the volatility relating to these exposures, the Company enters into various derivative transactions pursuant to the Company’s policies to hedge against known or forecasted market exposures.
Foreign Exchange Risk Management:As a multinational corporation, the Company is exposed to changes in foreign exchange rates. As the Company’s international sales grow, exposure to volatility in exchange rates could have a material adverse impact on the Company’s financial results. The Company’s risk from exchange rate changes is primarily related to non-dollar denominated sales in Europe and Asia. The Company uses foreign currency forward and option contracts to manage the risk of exchange rate fluctuations. The Company uses these derivative instruments to reduce its foreign exchange risk by essentially creating offsetting market exposures. The instruments held by the Company are not leveraged and are not held for trading purposes. The success of the hedging program depends on forecasts of transaction activity in the various currencies. To the extent that these forecasts are overstated or understated during periods of currency volatility, the Company could experience unanticipated currency gains or losses. The principal currencies hedged are the British Pound, Canadian Dollar, Euro, Japanese Yen and Singapore Dollar.
Interest Rate Risk:The Company maintains an investment portfolio consisting of securities of various issuers, types and maturities. The investments are classified as available for sale. These securities are recorded on the balance sheet at market value, with any unrealized gain or loss recorded in comprehensive income. These instruments are not leveraged, and are not held for trading purposes.
Value-At-Risk: The Company utilizes a Value-at-Risk (“VAR”) model to determine the maximum potential loss in the fair value of its interest rate and foreign exchange sensitive derivative financial instruments within a 95% confidence interval. The Company’s computation was based on the interrelationships between movements in interest rates and foreign currencies. These interrelationships were determined by observing historical interest rate and foreign currency market changes over corresponding periods. The assets and liabilities, firm commitments and anticipated transactions, which are hedged by derivative financial instruments, were excluded from the model. The VAR model estimates were made assuming normal market conditions and a 95% confidence level. There are various modeling techniques that can be used in the VAR computation. The Company’s computations are based on the Monte Carlo simulation. The VAR model is a risk analysis tool and does not purport to represent actual gains or losses in fair value that will be incurred by
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Management periodically reviews its interest rate and foreign currency exposures and evaluates strategies to manage such exposures in the near future. The Company implements changes, when deemed necessary, in the management of hedging instruments which mitigate its exposure.
Since the Company utilizes interest rate and foreign currency sensitive derivative instruments for hedging, a loss in fair value for those instruments is generally offset by increases in the value of the underlying transaction.
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.
(a) Evaluation of disclosure controls and procedures. Based on their evaluations as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Company’s chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and are operating in an effective manner.
(b) Changes in internal controls.There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
There were no matters submitted to a vote of security holders during the fiscal quarter ended March 30, 2003. The sole matter submitted to a vote of the stockholders at the 2003 Annual Meeting of Stockholders of the Company held on April 22, 2003 was the election of the eight nominees for director named below. Each nominee was elected for a term of one year by the requisite vote of the stockholders. The number of shares of common stock outstanding and eligible to vote as of the record date for the meeting, February 21, 2003, was 126,089,364. Set forth below is the number of votes cast for or withheld with respect to each nominee for director.
Proposal #1 — To elect a Board of Directors for the ensuing year.
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(a) Exhibits
(b) Reports on Form 8-K
We reported the sole Current Report on Form 8-K that we filed during the quarter ended March 30, 2003 in our Annual Report on Form 10-K for the fiscal year ended December 29, 2002.
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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 thereunto duly authorized.
May 14, 2003
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CERTIFICATIONS
I, Gregory L. Summe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of PerkinElmer, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
6. The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: May 14, 2003
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I, Robert F. Friel, certify that:
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
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EXHIBIT INDEX
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