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PKI > SEC Filings for PKI > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for PERKINELMER INC

Form 10-Q for PERKINELMER INC


6-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations

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 the 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 and safety, industrial and laboratory
services markets. Through our advanced technologies, solutions and services, we
address critical issues that help to improve the health and safety of people and
their environment in two reporting segments:
•         Human Health.  Develops diagnostics, tools and applications to help
          detect diseases earlier and more accurately and to accelerate the
          discovery and development of critical new therapies. The Human Health
          segment serves both the diagnostics and research markets.


•         Environmental Health.  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, industrial and laboratory
          services markets.

Overview of the Third Quarter of Fiscal Year 2012 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. Both our 2012 and 2011 fiscal years include 52 weeks. During the third quarter of fiscal year 2012, we continued to see good performance from acquisitions, investments in our ongoing technology and sales and marketing initiatives. Our overall revenue in the third quarter of fiscal year 2012 increased $56.7 million, or 13%, as compared to the third quarter of fiscal year 2011, reflecting an increase of $50.6 million, or 25%, in our Human Health segment revenue and an increase of $6.0 million, or 2%, in our Environmental Health segment revenue. The increase in our Human Health segment revenue during the three months ended September 30, 2012 was due to growth in the research market, including the addition of Caliper Life Sciences, Inc. ("Caliper"), as well as growth generated from both our screening and our medical imaging businesses within the diagnostics market. The increase in our Environmental Health segment revenue during the three months ended September 30, 2012 was due to growth in our informatics offerings within the laboratory services market, partially offset by decreased demand for our applications in the industrial markets.
In our Human Health segment during the third quarter of fiscal year 2012 as compared to the third quarter of fiscal year 2011, we experienced growth in the research market due to continued demand for our in-vivo imaging systems with the addition of Caliper imaging systems, as well as increased demand for our JANUS® automation tools, our Operetta® cellular imaging systems, and our EnVision® and EnSpire™ multi-mode plate readers. The growth in the research market was partially offset by a decline in demand for our suite of radioactive reagents. We also experienced growth in the diagnostics market as birth rates in the United States continue to stabilize and from continued expansion of our prenatal, newborn and infectious disease screening solutions in key regions outside the United States, particularly in emerging markets such as China. In our medical imaging business, we had continued growth from our traditional diagnostic imaging offerings, as well as increased demand for our complementary metal-oxide-semiconductor ("CMOS") imaging technology, particularly in the fields of mammography, dental and orthopedics. As the rising cost of healthcare continues to be one of the critical issues facing our customers, we anticipate that the benefits of providing earlier detection of disease, which can result in savings of long-term health care costs as well as creating better outcomes for patients, are increasingly valued and we expect to see continued growth in these markets.
In our Environmental Health segment, our laboratory services business offers services designed to enable our customers to increase efficiencies and production time, while reducing maintenance costs, all of which continue to be critical for our customers. During the third quarter of fiscal year 2012, we had increased demand for our informatics offerings, and we continued to grow our laboratory services business by adding new customers to our OneSource multivendor service offering. Sales of our products in the industrial markets declined slightly in the third quarter of fiscal year 2012, as compared to the third quarter of fiscal year 2011. This decline was partially offset by continued strength in our inorganic analysis solutions, as trace


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metals identification remains a critical component of contaminant detection for environmental, as well as food and consumer safety, applications. We anticipate that the continued development of contaminant testing protocols and corresponding regulations will result in increased demand for efficient, analytically sensitive and information rich testing solutions.
Our consolidated gross margins increased 126 basis points in the third quarter of fiscal year 2012, as compared to the third quarter of fiscal year 2011, due to increased sales volume, changes in product mix with growth in sales of higher gross margin product offerings and productivity improvements. Our consolidated operating margin increased 50 basis points in the third quarter of fiscal year 2012, as compared to the third quarter of fiscal year 2011, primarily as a result of higher gross margins, cost containment and productivity initiatives, partially offset by increased costs related to growth and productivity investments.
We believe we are well positioned to continue to take advantage of the stable spending trends in our end markets 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 for continued growth.

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 revenue recognition, warranty costs, bad debts, inventories, accounting for business combinations and dispositions, long-lived assets, income taxes, restructuring, pensions and other postretirement benefits, 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, warranty costs, allowances for doubtful accounts, inventory valuation, business combinations, value of long-lived assets, including goodwill and other 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 and estimates, please refer to the Notes to our Audited Consolidated Financial Statements and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the fiscal year ended January 1, 2012 (our "2011 Form 10-K"), as filed with the Securities and Exchange Commission.

Consolidated Results of Continuing Operations Revenue
Revenue for the three months ended September 30, 2012 was $509.6 million, as compared to $452.9 million for the three months ended October 2, 2011, an increase of $56.7 million, or 13%, which includes an approximate 3% decrease in revenue attributable to unfavorable changes in foreign exchange rates and an approximate 9% increase from acquisitions. The analysis in the remainder of this paragraph compares segment revenue for the three months ended September 30, 2012 as compared to the three months ended October 2, 2011 and includes the effect of foreign exchange rate fluctuations and acquisitions. The total increase in revenue reflects an increase of $50.6 million, or 25%, in our Human Health segment revenue due to an increase in research market revenue of $39.1 million and an increase in diagnostics market revenue of $11.5 million. Our Environmental Health segment revenue increased $6.0 million, or 2%, due to an increase in laboratory services market revenue of $9.5 million, partially offset by decreases in environmental and safety and industrial markets revenue of $3.5 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $5.2 million of revenue for the three months ended September 30, 2012 and $9.9 million for the three months ended October 2, 2011 that otherwise would have been recorded by the acquired businesses during each of the respective periods.


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Revenue for the nine months ended September 30, 2012 was $1,542.3 million, as compared to $1,379.2 million for the nine months ended October 2, 2011, an increase of $163.1 million, or 12%, which includes an approximate 3% decrease in revenue attributable to unfavorable changes in foreign exchange rates and an approximate 9% increase from acquisitions. The analysis in the remainder of this paragraph compares segment revenue for the nine months ended September 30, 2012 as compared to the nine months ended October 2, 2011 and includes the effect of foreign exchange rate fluctuations and acquisitions. The total increase in revenue reflects an increase of $142.9 million, or 23%, in our Human Health segment revenue due to an increase in research market revenue of $100.8 million, and an increase in diagnostics market revenue of $42.1 million. Our Environmental Health segment revenue increased $20.2 million, or 3%, due to an increase in laboratory services market revenue of $25.1 million, partially offset by decreases in environmental and safety and industrial markets revenue of $4.9 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $22.2 million of revenue for the nine months ended September 30, 2012 and $16.3 million for the nine months ended October 2, 2011 that otherwise would have been recorded by the acquired businesses during each of the respective periods.
Cost of Revenue
Cost of revenue for the three months ended September 30, 2012 was $278.9 million, as compared to $253.6 million for the three months ended October 2, 2011, an increase of $25.3 million, or 10%. As a percentage of revenue, cost of revenue decreased to 54.7% for the three months ended September 30, 2012, from 56.0% for the three months ended October 2, 2011, resulting in an increase in gross margin of 126 basis points to 45.3% for the three months ended September 30, 2012, from 44.0% for the three months ended October 2, 2011. Amortization of intangible assets decreased and was $12.7 million for the three months ended September 30, 2012, as compared to $13.9 million for the three months ended October 2, 2011. Stock-based compensation expense increased and was $0.3 million for the three months ended September 30, 2012, as compared to $0.2 million for the three months ended October 2, 2011. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions completed in fiscal year 2011 was $0.1 million for the three months ended October 2, 2011. The increase in gross margin was primarily the result of increased sales volume, changes in product mix with growth in sales of higher gross margin product offerings and productivity improvements.
Cost of revenue for the nine months ended September 30, 2012 was $840.7 million, as compared to $770.3 million for the nine months ended October 2, 2011, an increase of $70.4 million, or 9%. As a percentage of revenue, cost of revenue decreased to 54.5% for the nine months ended September 30, 2012, from 55.9% for the nine months ended October 2, 2011, resulting in a increase in gross margin of 134 basis points to 45.5% for the nine months ended September 30, 2012, from 44.1% for the nine months ended October 2, 2011. Amortization of intangible assets was $38.7 million for both the nine months ended September 30, 2012 and October 2, 2011. Stock-based compensation expense increased and was $0.9 million for the nine months ended September 30, 2012, as compared to $0.8 million for the nine months ended October 2, 2011. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions completed in fiscal year 2011 was $4.8 million for the nine months ended September 30, 2012, as compared to $0.4 million for the nine months ended October 2, 2011. The increase in gross margin was primarily the result of increased sales volume, changes in product mix with growth in sales of higher gross margin product offerings and productivity improvements, partially offset by increased costs related to acquisitions.
Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended September 30, 2012 were $145.4 million, as compared to $133.1 million for the three months ended October 2, 2011, an increase of $12.3 million, or 9%. As a percentage of revenue, selling, general and administrative expenses decreased and were 28.5% for the three months ended September 30, 2012, as compared to 29.4% for the three months ended October 2, 2011. Amortization of intangible assets increased and was $9.2 million for the three months ended September 30, 2012, as compared to $6.3 million for the three months ended October 2, 2011. Stock-based compensation expense increased and was $4.6 million for the three months ended September 30, 2012, as compared to $1.1 million for the three months ended October 2, 2011. Acquisition related costs for integration, contingent consideration and other acquisition costs related to certain acquisitions provided income of $1.8 million for the three months ended September 30, 2012, as compared to an expense of $1.2 million for the three months ended October 2, 2011. The increase in selling, general and administrative expenses was primarily the result of costs related to growth and productivity investments, partially offset by cost containment initiatives. Selling, general and administrative expenses for the nine months ended September 30, 2012 were $452.0 million, as compared to $404.2 million for the nine months ended October 2, 2011, an increase of $47.8 million, or 12%. As a percentage of revenue, selling, general and administrative expenses were 29.3% for both the nine months ended September 30, 2012 and October 2, 2011. Amortization of intangible assets increased and was $29.6 million for the nine months ended September 30, 2012, as compared to $16.6 million for the nine months ended October 2, 2011. Stock-based compensation expense increased and was $13.9 million for the nine months ended September 30, 2012, as compared to $8.2 million for the nine months ended


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October 2, 2011. Acquisition related costs for integration, contingent consideration and other acquisition costs related to certain acquisitions provided income of $0.3 million for the nine months ended September 30, 2012, as compared to an expense of $6.1 million for the nine months ended October 2, 2011. The increase in selling, general and administrative expenses was primarily the result of costs related to acquisitions and growth and productivity investments, particularly in emerging territories, partially offset by cost containment initiatives.
Research and Development Expenses
Research and development expenses for the three months ended September 30, 2012 were $32.4 million, as compared to $30.1 million for the three months ended October 2, 2011, an increase of $2.3 million, or 8%. As a percentage of revenue, research and development expenses decreased and were 6.4% for the three months ended September 30, 2012, as compared to 6.6% for the three months ended October 2, 2011. Amortization of intangible assets was $0.1 million for both the three months ended September 30, 2012 and October 2, 2011. Stock-based compensation expense increased and was $0.2 million for the three months ended September 30, 2012, as compared to $0.1 million for the three months ended October 2, 2011. We primarily directed research and development efforts during fiscal years 2012 and 2011 toward the diagnostics and research markets within our Human Health segment, and the environmental, and laboratory service and support markets within our Environmental Health segment, in order to help accelerate our growth initiatives.
Research and development expenses for the nine months ended September 30, 2012 were $99.1 million, as compared to $84.3 million for the nine months ended October 2, 2011, an increase of $14.8 million, or 18%. As a percentage of revenue, research and development expenses increased and were 6.4% for the nine months ended September 30, 2012, as compared to 6.1% for the nine months ended October 2, 2011. Amortization of intangible assets decreased and was $0.4 million for the nine months ended September 30, 2012, as compared to $0.6 million for the nine months ended October 2, 2011. Stock-based compensation expense increased and was $0.5 million for the nine months ended September 30, 2012, as compared to $0.4 million for the nine months ended October 2, 2011. Restructuring and Contract Termination Charges, Net We have undertaken a series of restructuring actions related to the impact of acquisitions and divestitures, alignment with our growth strategy and the integration of our business units. The current portion of restructuring and contract termination charges, net, is recorded in accrued restructuring costs, and the long-term portion of restructuring and contract termination charges, net, is recorded in long-term liabilities. The activities associated with these plans have been reported as restructuring and contract termination charges, net, and are included as a component of operating expenses from continuing operations.
A description of the restructuring plans and the activity recorded for the nine months ended September 30, 2012 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 Note 4 to the audited consolidated financial statements in our 2011 Form 10-K.
The restructuring plan for the third quarter of fiscal year 2012 was intended to shift certain of our operations into a newly established shared service center. The restructuring plans for the first and second quarters of fiscal year 2012 were intended principally to realign operations, research and development resources, and production resources as a result of recent acquisitions. We expect the impact of immediate cost savings from the restructuring plans on operating results and cash flows to approximately offset the increased spending required to realign operations. We expect the impact of future cost savings from these restructuring activities on operating results and cash flows will exceed $11.0 million on an annual basis beginning in fiscal year 2014, primarily as a decrease to cost of revenue and a decrease to selling, general and administrative expenses.
The restructuring plans for the second and fourth quarters of fiscal year 2011 were intended principally to shift resources to higher growth geographic regions and end markets. We expect the impact of immediate cost savings from the restructuring plans on operating results and cash flows to approximately offset the increased spending required in higher growth geographic regions. 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 by shifting such resources.
Q3 2012 Restructuring Plan
During the third quarter of fiscal year 2012, our management approved a plan to shift certain of our operations into a newly established shared service center (the "Q3 2012 Plan"). As a result of the Q3 2012 Plan, and during the three months ended September 30, 2012, we recognized $3.7 million in pre-tax restructuring charges in both the Human Health and Environmental Health segments related to a workforce reduction from reorganization activities. As part of the Q3 2012 Plan, we will reduce headcount by 66 employees. All employees were notified of termination under the Q3 2012 Plan by September 30, 2012.


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The following table summarizes the Q3 2012 Plan activity for the nine months ended September 30, 2012:

                                                 Severance
                                               (In thousands)
Provision                                     $        7,446
Amounts paid and foreign currency translation            (30 )
Balance at September 30, 2012                 $        7,416

We anticipate that the remaining severance payments of $7.4 million for workforce reductions will be completed by the end of the fourth quarter of fiscal year 2014.
Q2 2012 Restructuring Plan
During the second quarter of fiscal year 2012, our management approved a plan to realign operations, research and development resources, and production resources as a result of recent acquisitions (the "Q2 2012 Plan"). As a result of the Q2 2012 Plan, and during the nine months ended September 30, 2012, we recognized a $5.6 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities and recognized a $0.2 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities. We expect to recognize an additional $4.1 million of incremental restructuring expense in future periods as services are provided for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits, and will be recognized ratably over the future service period. As part of the Q2 2012 Plan, we will reduce headcount by 215 employees. All employees were notified of termination under the Q2 2012 Plan by July 1, 2012. The following table summarizes the Q2 2012 Plan activity for the nine months ended September 30, 2012:

                                                 Severance
                                               (In thousands)
Provision                                     $        5,890
Amounts paid and foreign currency translation         (2,244 )
Balance at September 30, 2012                 $        3,646

We anticipate that the remaining severance payments of $3.6 million for workforce reductions will be completed by the end of the second quarter of fiscal year 2014.
Q1 2012 Restructuring Plan
During the first quarter of fiscal year 2012, our management approved a plan to realign operations and production resources as a result of recent acquisitions (the "Q1 2012 Plan"). As a result of the Q1 2012 Plan, and during the nine months ended September 30, 2012, we recognized a $5.4 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities and recognized a $1.0 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. We expect to recognize an additional $0.1 million of incremental restructuring expense in future periods as services are provided for one-time termination benefits in which the employee is required to render service until termination in order to receive the benefits, and will be recognized ratably over the future service period. As part of the Q1 2012 Plan, we will reduce headcount by 121 employees. All employees were notified of termination and we completed all actions related to the closure of excess facility space under the Q1 2012 Plan by April 1, 2012.

The following table summarizes the Q1 2012 Plan activity for the nine months ended September 30, 2012:

                                                                   Closure of
                                                                 Excess Facility
                                                Severance             Space              Total
                                                                 (In thousands)
Provision                                     $      6,336     $           79        $     6,415
Amounts paid and foreign currency translation       (4,326 )              (79 )           (4,405 )
Balance at September 30, 2012                 $      2,010     $            -        $     2,010


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We anticipate that the remaining severance payments of $2.0 million for workforce reductions will be completed by the end of the fourth quarter of fiscal year 2013.
Q4 2011 Restructuring Plan
During the fourth quarter of fiscal year 2011, our management approved a plan to shift resources to higher growth geographic regions and end markets (the "Q4 2011 Plan"). As a result of the Q4 2011 Plan, we recognized a $2.3 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities. We also recognized a $4.6 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. During the first nine months of fiscal year 2012, we recorded a pre-tax restructuring reversal of $0.1 million relating to the Q4 2011 Plan due to a reduction in the estimated costs associated with the closure of an excess . . .

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