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| PKI > SEC Filings for PKI > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-2009
Quarterly Report
This quarterly report on Form 10-Q, including the following management's discussion and analysis, contains forward-looking information that you should read in conjunction with the condensed consolidated financial statements and notes to condensed consolidated financial statements that we have included elsewhere in this report. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Words such as "believes," "plans," "anticipates," "intends," "expects," "will" and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from the plans, intentions or expectations we disclose in the forward-looking statements we make. We have included important factors below under the heading "Risk Factors" in Part II, Item 1A. that we believe could cause actual results to differ materially from the forward-looking statements we make. We are not obligated to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
We are a leading provider of technology, services and solutions to the diagnostics, research, environmental monitoring, safety and security, and laboratory services markets. Through our advanced technologies, applications, and services, we address critical issues that help to improve the health and safety of people and their environment.
We announced a new alignment of our businesses to allow us to prioritize our capabilities on two key strategic operating areas - Human Health and Environmental Health. We reorganized into these two new operating segments to align our resources to meet the demands of the markets we serve and to focus on the important outcomes enabled by our technologies. This new alignment became effective at the start of our fiscal year 2009. The results reported for the three and six months ended July 5, 2009 reflect this new alignment of our operating segments. Financial information in this report relating to the three and six months ended June 29, 2008 has been retrospectively adjusted to reflect the changes in our operating segments. In conjunction with the realignment of our operating segments, we also redefined the reporting units we use to test for the impairment of goodwill related to our businesses. We performed our annual impairment testing as of January 1, 2009, our annual impairment date for our reporting units, and based on the first step of the process we concluded that there was no goodwill impairment.
Human Health
Our new Human Health segment concentrates on developing diagnostics, tools and applications to help detect disease earlier and more accurately and to accelerate the discovery and development of critical new therapies. Within the Human Health segment, we serve both the diagnostics and research markets. The Human Health segment includes our products and services that address the genetic screening and bio-discovery markets, formerly in our Life and Analytical Sciences segment, and our technology serving the medical imaging market, formerly in our Optoelectronics segment. Our Human Health segment generated sales of $184.9 million in the second quarter of fiscal year 2009 and $362.1 million in the first six months of fiscal year 2009.
Diagnostics Market:
We provide early detection for genetic disorders from pre-conception to early childhood as well as medical imaging for the diagnostics market. We provide early and accurate insights into the health of expectant mothers during pregnancy and their newborns. Our instruments, reagents and software test and screen for disorders and diseases, including Down syndrome, infertility, anemia and diabetes. Our medical imaging detectors are used to enable doctors to make faster and more accurate diagnosis of conditions ranging from broken bones to reduced blood flow in vascular systems. In addition, our detectors improve oncology treatments by focusing radiation directly at the tumors.
Research Market:
In the research market, we provide a broad suite of solutions including reagents, liquid handling and detection technologies that enable researchers to improve the drug discovery process. These applications, solutions and services enable pharmaceutical companies to create better therapeutics by helping to bring such therapeutics to market faster and more efficiently. The portfolio includes a wide range of systems consisting of instrumentation for automation and detection solutions, cellular imaging and analysis hardware and software, and a portfolio of consumables products, including drug discovery and research reagents. We sell our research solutions to pharmaceutical, biotechnology and academic research customers globally.
Environmental Health
Our new Environmental Health segment provides technologies and applications to facilitate the creation of safer food and consumer products, more secure surroundings and efficient energy resources. The Environmental Health segment serves the environmental, safety and security, industrial and laboratory services markets. The Environmental Health segment includes our products and services that address the analytical sciences and laboratory service and support markets, formerly in our Life and Analytical Sciences segment, and our technology designed for the sensors and specialty lighting markets, formerly in our Optoelectronics segment. Our Environmental Health segment generated sales of $249.7 million in the second quarter of fiscal year 2009 and $504.0 million in the first six months of fiscal year 2009.
Environmental and Safety and Security Markets:
For the environmental and safety and security markets, we provide analytical technologies that address the quality of our environment, sustainable energy development, and ensure safer food and consumer products as well as sensor and detection solutions that contribute to safer homes, offices and buildings.
We take an active part in minimizing the impact of products and industrial processes on our environment, including our water quality solutions to detect harmful substances, such as trace metal, organic, pesticide, chemical and radioactive contaminants, in the world's water supply. Through our EcoAnalytixTM initiative, we deliver systems that combine applications, methodologies, standard operating procedures and training required for the specific analyses required.
We also develop the sensors and detectors that maintain safe and sustainable environments. To help ensure safety, our motion detectors turn lights on and off automatically and our gas sensors detect harmful levels of carbon dioxide in the air to help maintain optimal air quality. In addition, our sensors are integral to security systems, helping to ensure the safety of an environment from intruders.
Industrial Market:
We provide analytical instrumentation, detectors, and sensors for the industrial market which includes the semiconductor, chemical, lubricants, construction, office equipment and quality assurance industries.
Laboratory Services Market:
We have over 1,300 service engineers to support our customers throughout the world and to help them improve the productivity of their labs. Our OneSource service business strategy is aligned with customer needs to consolidate laboratory services and improve efficiencies within their labs.
Overview of the Second Quarter of Fiscal Year 2009
Our fiscal year ends on the Sunday nearest December 31. We report fiscal years under a 52/53 week format, and as a result certain fiscal years will contain 53 weeks. Our 2009 fiscal year will include 53 weeks, whereas our 2008 fiscal year included 52 weeks. This additional week has been reflected in the first quarter of fiscal year 2009.
The widespread nature of the current global economic contraction has continued the deterioration for a few of our end markets during the second quarter of fiscal year 2009; however, several of our end markets performed better than we anticipated. Our overall sales in the second quarter of fiscal year 2009 declined $70.4 million, or 14%, as compared to the second quarter of fiscal year 2008, reflecting a decline of $19.1 million, or 9%, in our Human Health segment sales and a decline of $51.3 million, or 17%, in our Environmental Health segment sales. The decline in our Human Health segment sales during the three months ended July 5, 2009 was due primarily to the decreased demand for our medical imaging products, which has resulted from constraints on medical providers' capital budgets and a lack of financing availability, as well as government stimulus related order delays in the academic research market as many of our academic customers are redirecting their budgets in hopes of obtaining grants for larger instrument purchases. The decline in our Environmental Health segment sales during the three months ended July 5, 2009 was due primarily to private testing labs and traditional chemical and semiconductor markets reducing capital purchases in response to tight capital budgets and difficulty accessing credit markets.
These declines have been offset in part by certain of our businesses operating in markets which are more isolated from current economic trends, or where our businesses have benefited from a push for more efficient spending, new opportunities from government regulations or possible future research spending. In our Human Health segment, we experienced strong growth in sales to the diagnostics market related to our genetic screening business during the second quarter of fiscal year 2009 as compared to that market in the second quarter of fiscal year 2008. The genetic screening business was driven by continued expansion of neonatal screening, particularly in Asia, as well as strong growth in prenatal screening. Our cord blood business also contributed to the growth of our genetic screening business during the second quarter of fiscal year 2009. As the rising cost of healthcare continues to be one of the critical issues contributing to the economic downturn, we anticipate that while there is continued pressure on lab budgets, we may continue to see growth in our newborn screening business later this fiscal year as the benefits of providing earlier detection of disease, which can result in savings of long-term health care cost as well as creating better outcomes for patients, are increasingly valued.
In our Environmental Health segment, our laboratory services business enables our customers to drive efficiencies, increase production time and reduce maintenance costs, all of which are increasingly critical in this weakened economic environment. During the second quarter of fiscal year 2009, we added a number of new customers to our OneSource multivendor service and continued to gain good momentum for that program in markets beyond our traditional customer base. The growth from OneSource was partially offset by maintenance deferrals and lower pull-through services related to instrument sales, such as qualification and training. The increase in sales to the laboratory service market partially offset decreased sales to the environmental, safety and security and industrial markets. While overall sales to the safety and security market was driven down by the decline in spending in the pharmaceutical market, sales of consumer and food testing products grew in the second quarter of fiscal year 2009 due to increased demand for the production and analysis of renewable energy development and new testing requirements for consumer product safety applications.
Our gross margins increased by 50 basis points in the second quarter of fiscal year 2009 as compared to the second quarter of fiscal year 2008. This increase was driven primarily by productivity improvements and product mix, especially growth in higher gross margin product offerings. However, our consolidated operating margin declined approximately 10 basis points in the second quarter of fiscal year 2009 as compared to the second quarter of fiscal year 2008, primarily the result of increased sales and marketing expenses, particularly in emerging territories, increased pension expenses and foreign exchange, partially offset by cost saving initiatives.
We believe we are well positioned to continue to take advantage of our end markets where spending trends have countered the prevailing downturn, and to promote our efficiencies in markets where current conditions may increase demand for certain services. Overall, we believe that our strategic focus on Human Health and Environmental Health coupled with our breadth of end markets, deep portfolio of technologies and applications, leading market positions, global scale and financial strength will provide us with a strong foundation to weather the current economic climate.
Recent Developments
Acquisitions:
Acquisition of Analytica of Branford, Inc. In May 2009, we acquired the outstanding stock of Analytica of Branford, Inc. ("Analytica"). Analytica is a leading developer of mass spectrometry and ion source technology. We expect this acquisition to allow us to offer our customers access to critical technologies such as time-of-flight and quadrupole mass spectrometers and new ion sources that provide more complete information as well as better throughput. We will also gain significant intellectual property in the field of mass spectrometry and ion source technology. The excess of the purchase price over the fair value of the acquired net assets represents cost and revenue synergies specific to us as well as non-capitalizable intangible assets, such as the employee workforce acquired. We paid the shareholders of Analytica approximately $21.7 million in cash for this acquisition plus up to $1.3 million in additional consideration, which we expect to pay during fiscal year 2009. The excess of the purchase price over the fair value of the acquired net assets has been allocated to goodwill, which may be tax deductible if elected by us. We report the operations for this acquisition within the results of our Environmental Health segment from the acquisition date.
Acquisition of Opto Technology Inc. In January 2009, we acquired the outstanding stock of Opto Technology Inc. ("Opto Technology"). Opto Technology is a supplier of light-emitting diode ("LED") based lighting components and subsystems. We expect this acquisition to expand our portfolio of high brightness LED components by adding optical subsystems to provide energy efficient solid state lighting solutions to original equipment manufacturers. The excess of the purchase price over the fair value of the acquired net assets represents cost and revenue synergies specific to us as well as non-capitalizable intangible assets, such as the customer base acquired. We paid the shareholders of Opto Technology approximately $20.6 million in cash for this acquisition plus up to $8.0 million in potential additional contingent consideration, of which we recorded $4.9 million as the fair value at the acquisition date. During the first six months of fiscal year 2009, we recorded a decrease of $0.3 million to the potential additional contingent consideration as a fair value adjustment. During the first six months of fiscal year 2009, we received approximately $0.2 million from the former shareholders of Opto Technology for net working capital adjustments. The excess of the purchase price over the fair value of the acquired net assets has been allocated to goodwill, none of which is tax deductible. We report the operations for this acquisition within the results of our Environmental Health segment from the acquisition date.
Critical Accounting Policies and Estimates
The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, income taxes, restructuring, pensions and other post-retirement benefits, stock-based compensation, warranty costs, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are those policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. We believe our critical accounting policies include our policies regarding revenue recognition, allowances for doubtful accounts, inventory valuation, business combinations, value of long-lived assets, including intangibles, employee compensation and benefits, restructuring activities, gains or losses on dispositions and income taxes.
For a more detailed discussion of our critical accounting policies, please refer to our Annual Report on Form 10-K for the fiscal year ended December 28, 2008, as filed with the Securities and Exchange Commission (the "SEC") (the "2008 Form 10-K").
Consolidated Results of Continuing Operations
Sales
Sales for the three months ended July 5, 2009 were $434.6 million, as compared to $505.0 million for the three months ended June 29, 2008, a decrease of $70.4 million, or 14%, which includes an approximate 6% decrease in sales attributable to unfavorable changes in foreign exchange rates and an approximate 1% increase from acquisitions. The analysis in the remainder of this paragraph compares segment sales for the three months ended July 5, 2009 as compared to the three months ended June 29, 2008 and includes the effect of foreign exchange rate fluctuations and acquisitions. The total decrease in sales reflects a $19.1 million, or 9%, decrease in our Human Health segment sales, due to a decrease in research market sales of $9.7 million and a decrease in diagnostics market sales of $9.4 million. Our Environmental Health segment sales decreased $51.3 million, or 17%, due to decreases in environmental, safety and security and industrial markets sales of $46.6 million and a decrease in laboratory services market sales of $4.7 million.
Sales for the six months ended July 5, 2009 were $866.1 million, as compared to $963.7 million for the six months ended June 29, 2008, a decrease of $97.5 million, or 10%, which includes an approximate 6% decrease in sales attributable to unfavorable changes in foreign exchange rates and an approximate 1% increase from acquisitions. The analysis in the remainder of this paragraph compares segment sales for the six months ended July 5, 2009 as compared to the six months ended June 29, 2008 and includes the effect of foreign exchange rate fluctuations and acquisitions. The total decrease in sales reflects a $21.9 million, or 6%, decrease in our Human Health segment sales, due to a decrease in diagnostics market sales of $15.3 million and a decrease in research market sales of $6.6 million. Our Environmental Health segment sales decreased $75.6 million, or 13%, due to decreases in the environmental, safety and security and industrial markets sales of $73.0 million and a decrease in laboratory services market sales of $2.6 million.
Cost of Sales
Cost of sales for the three months ended July 5, 2009 was $247.1 million, as compared to $289.9 million for the three months ended June 29, 2008, a decrease of approximately $42.8 million, or 15%. As a percentage of sales, cost of sales decreased to 56.9% for the three months ended July 5, 2009, from 57.4% for the three months ended June 29, 2008, resulting in an increase in gross margin of 50 basis points to 43.1% for the three months ended July 5, 2009, from 42.6% for the three months ended June 29, 2008. Amortization of intangible assets decreased and was $9.2 million for the three months ended July 5, 2009, as compared to $9.6 million for the three months ended June 29, 2008. Stock option expense was $0.3 million for each of the three month periods ended July 5, 2009 and June 29, 2008. The increase in gross margin was primarily the result of the combined favorable impact of productivity improvements and product mix, especially growth in higher gross margin products.
Cost of sales for the six months ended July 5, 2009 was $490.7 million, as compared to $556.5 million for the six months ended June 29, 2008, a decrease of approximately $65.8 million, or 12%. As a percentage of sales, cost of sales decreased to 56.7% for the six months ended July 5, 2009, from 57.8% for the six months ended June 29, 2008, resulting in an increase in gross margin of 110 basis points to 43.3% for the six months ended July 5, 2009, from 42.2% for the six months ended June 29, 2008. Amortization of intangible assets decreased and was $17.9 million for the six months ended July 5, 2009, as compared to $18.8 million for the six months ended June 29, 2008. Stock option expense was $0.6 million for each of the six month periods ended July 5, 2009 and June 29, 2008. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions completed in fiscal year 2009 was approximately $0.2 million for the six months ended July 5, 2009. The increase in gross margin was primarily the result of the combined favorable impact of productivity improvements and product mix, especially growth in higher gross margin products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended July 5, 2009 were $124.0 million, as compared to $141.8 million for the three months ended June 29, 2008, a decrease of approximately $17.8
million, or 13%. As a percentage of sales, selling, general and administrative expenses were 28.5% for the three months ended July 5, 2009 as compared to 28.1% for the three months ended June 29, 2008. Amortization of intangible assets increased and was $4.3 million for the three months ended July 5, 2009, as compared to $4.2 million for the three months ended June 29, 2008. Stock option expense decreased and was $1.3 million for the three months ended July 5, 2009, as compared to $1.4 million for the three months ended June 29, 2008. Purchase accounting adjustments for contingent consideration and other acquisition costs related to certain acquisitions completed in fiscal year 2009 were an expense of approximately $0.1 million for the three months ended July 5, 2009. The decrease in selling, general and administrative expenses was primarily the result of cost saving initiatives, partially offset by increased sales and marketing expenses, particularly in emerging territories, increased pension expenses and foreign exchange.
Selling, general and administrative expenses for the six months ended July 5, 2009 were $252.4 million, as compared to $272.6 million for the six months ended June 29, 2008, a decrease of approximately $20.2 million, or 7%. As a percentage of sales, selling, general and administrative expenses were 29.1% for the six months ended July 5, 2009, as compared to 28.3% for the six months ended June 29, 2008. Amortization of intangible assets increased and was $8.5 million for the six months ended July 5, 2009, as compared to $8.0 million for the six months ended June 29, 2008. Stock option expense increased and was $3.0 million for the six months ended July 5, 2009, as compared to $2.9 million for the six months ended June 29, 2008. Purchase accounting adjustments for contingent consideration and other acquisition costs related to certain acquisitions completed in fiscal year 2009 were an expense of approximately $1.1 million for the six months ended July 5, 2009. The decrease in selling, general and administrative expenses was primarily the result of cost saving initiatives, partially offset by increased sales and marketing expenses, particularly in emerging territories, increased pension expenses and foreign exchange.
Research and Development Expenses
Research and development expenses for the three months ended July 5, 2009 were $25.6 million, as compared to $28.9 million for the three months ended June 29, 2008, a decrease of $3.4 million, or 12%. As a percentage of sales, research and development expenses increased to 5.9% for the three months ended July 5, 2009, as compared to 5.7% for the three months ended June 29, 2008. Amortization of intangible assets decreased and was $0.5 million for the three months ended July 5, 2009, as compared to $0.6 million for the three months ended June 29, 2008. Research and development expenses also included stock option expense of $0.1 million for each of the three month periods ended July 5, 2009 and June 29, 2008. We directed research and development efforts similarly during fiscal years 2009 and 2008, primarily toward the diagnostics and research markets within our Human Health segment, and the environmental and safety and security markets within our Environmental Health segment, in order to help accelerate our growth initiatives.
Research and development expenses for the six months ended July 5, 2009 were $51.5 million, as compared to $56.8 million for the six months ended June 29, 2008, a decrease of $5.2 million, or 9%. As a percentage of sales, research and development expenses increased to 6.0% for the six months ended July 5, 2009, as compared to 5.9% for the six months ended June 29, 2008. Amortization of intangible assets decreased and was $1.0 million for the six months ended July 5, 2009, as compared to $1.1 million for the six months ended June 29, 2008. Research and development expenses also included stock option expense of $0.2 million for each of the six month periods ended July 5, 2009 and June 29, 2008.
Restructuring and Lease (Reversals) Charges, Net
We have undertaken a series of restructuring actions related to the impact of acquisitions, divestitures and the integration of our business units.
A description of the restructuring plans and the activity recorded for the six months ended July 5, 2009 is listed below. Details of the plans initiated in previous years, particularly those listed under "Previous Restructuring and Integration Plans," are discussed more fully in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2008 Form 10-K.
The restructuring plan for the first quarter of fiscal year 2009 was principally to reduce resources in anticipation of decreasing demand in certain end markets. The restructuring plan for the third quarter of fiscal year 2008 was principally to shift resources into geographic regions and product lines that are more consistent with our growth strategy. The activities associated with these plans have been reported as restructuring expenses as a component of operating expenses from continuing operations. We expect the impact of immediate cost savings from the restructuring plan in the first quarter of fiscal year 2009 on operating results and cash flows to approximately offset the decline in revenue. We expect the impact of future cost savings from these restructuring activities on operating results and cash flows to be negligible, as we will incur offsetting costs.
Q1 2009 Plan
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