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PKI > SEC Filings for PKI > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for PERKINELMER INC


6-May-2013

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 products, services and solutions to the diagnostics, research, environmental, 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.
We realigned our organization at the beginning of fiscal year 2013. Our field service for products previously sold by our former Bio-discovery business, as well as our Informatics business, were moved from our Environmental Health segment into our Human Health segment. The results reported for this quarter reflect this new alignment of our operating segments. Financial information in this report relating to the first quarter of 2012 has been retrospectively adjusted to reflect the changes in our operating segments. The principal products and services of our two operating segments are:

•         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.

As a result of the realignment, the Company reallocated goodwill from the Environmental Health segment to the Human Health segment based on the relative fair value, determined using the income approach, of the businesses within the historical Environmental Health segment. The change resulted in $215.7 million of goodwill being allocated from the Environmental Health segment to the Human Health segment as of December 30, 2012.
Overview of the First Quarter of Fiscal Year 2013 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 2013 and 2012 fiscal years include 52 weeks.
Our overall revenue in the first quarter of fiscal year 2013 decreased $5.5 million, or 1%, as compared to the first quarter of fiscal year 2012, reflecting a decrease of $6.1 million, or 3%, in our Environmental Health segment revenue, which was partially offset by an increase of $0.6 million, or 0.2%, in our Human Health segment revenue. The increase in our Human Health segment revenue during the three months ended March 31, 2013 was due to growth generated from both our screening and our medical imaging businesses within the diagnostics market, partially offset by declines in our in-vivo and radiometric detection businesses in the research market. The decrease in our Environmental Health segment revenue during the three months ended March 31, 2013 was due to decreased demand for our products primarily in the industrial market.


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In our Human Health segment during the first quarter of fiscal year 2013 as compared to the first quarter of fiscal year 2012, we experienced growth in the diagnostics market as birth rates in the United States increased 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. We are encouraged by the progress we have made in the first quarter of fiscal year 2013 with our newly announced partnership with Verinata Health, Inc. and its verifi® non-invasive prenatal test. In our medical imaging business, we also had continued growth from our traditional diagnostic imaging offerings, as well as increased demand for our complementary metal-oxide-semiconductor imaging technology, including industrial non-destructive testing applications. In the research market we experienced declines in our in-vivo and radiometric detection businesses. These declines were a result of sequestration concerns in the United States, European austerity and weakening research markets in Asia, particularly in Japan, which all contributed to unexpected delays in orders late in the first quarter of fiscal year 2013. 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 create 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 first quarter of fiscal year 2013, we continued to grow our laboratory services business by the addition of new customers to our OneSource multivendor service offering. In the first quarter of fiscal year 2013, as compared to the first quarter of fiscal year 2012, we had decreased demand across most of our products in the environmental and safety and industrial markets, with the most notable decline in the European and Japanese industrial markets. We anticipate that the continued development of contaminant regulations and corresponding testing protocols will result in increased demand for efficient, analytically sensitive and information rich testing solutions. Our consolidated gross margins decreased 92 basis points in the first quarter of fiscal year 2013, as compared to the first quarter of fiscal year 2012, due to decreased sales volume, pricing pressure, and unfavorable changes in product mix with a decline in sales of higher gross margin product offerings, which were slightly offset by productivity improvements. Our consolidated operating margins were flat in the first quarter of fiscal year 2013, as compared to the first quarter of fiscal year 2012, primarily as a result cost containment and productivity initiatives, offset by lower gross margins and increased costs related to growth and productivity investments.
We believe we are still well positioned to continue to take advantage of the 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 foundation for 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 December 30, 2012 (our "2012 Form 10-K"), as filed with the Securities and Exchange Commission. There have been no significant changes in our critical accounting policies and estimates during the three months ended March 31, 2013.


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Consolidated Results of Continuing Operations Revenue
Revenue for the three months ended March 31, 2013 was $505.4 million, as compared to $510.9 million for the three months ended April 1, 2012, a decrease of $5.5 million, or 1%, which includes an approximate 1% decrease in revenue attributable to unfavorable changes in foreign exchange rates and an approximate 0.1% increase from acquisitions. The analysis in the remainder of this paragraph compares segment revenue for the three months ended March 31, 2013 as compared to the three months ended April 1, 2012 and includes the effect of foreign exchange rate fluctuations and acquisitions. Our Human Health segment revenue increased $0.6 million, or 0.2%, due to an increase in diagnostics market revenue of $7.3 million, partially offset by a decrease in research market revenue of $6.7 million. Our Environmental Health segment revenue decreased $6.1 million, or 3%, due to decreases in environmental and safety and industrial markets revenue of $10.0 million, partially offset by an increase in laboratory services market revenue of $3.9 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $1.9 million of revenue for the three months ended March 31, 2013 and $6.5 million for the three months ended April 1, 2012 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 March 31, 2013 was $280.5 million, as compared to $278.9 million for the three months ended April 1, 2012, an increase of $1.6 million, or 1%. As a percentage of revenue, cost of revenue increased to 55.5% for the three months ended March 31, 2013, from 54.6% for the three months ended April 1, 2012, resulting in a decrease in gross margin of 92 basis points to 44.5% for the three months ended March 31, 2013, from 45.4% for the three months ended April 1, 2012. Amortization of intangible assets decreased and was $12.9 million for the three months ended March 31, 2013, as compared to $13.0 million for the three months ended April 1, 2012. Stock-based compensation expense was $0.3 million for each of the three months ended March 31, 2013 and April 1, 2012. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions was $0.1 million for the three months ended March 31, 2013, as compared to $4.5 million for the three months ended April 1, 2012. In addition to the above, the overall decrease in gross margin was primarily the result of lower sales volume and changes in product mix with a decline in sales of higher gross margin product offerings, partially offset by productivity improvements.
Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended March 31, 2013 were $151.5 million, as compared to $156.8 million for the three months ended April 1, 2012, a decrease of $5.4 million, or 3%. As a percentage of revenue, selling, general and administrative expenses decreased and were 30.0% for the three months ended March 31, 2013, as compared to 30.7% for the three months ended April 1, 2012. Amortization of intangible assets decreased and was $9.6 million for the three months ended March 31, 2013, as compared to $10.3 million for the three months ended April 1, 2012. Stock-based compensation expense decreased and was $3.9 million for the three months ended March 31, 2013, as compared to $5.0 million for the three months ended April 1, 2012. Acquisition related costs for contingent consideration and other acquisition costs related to certain acquisitions provided income of $0.01 million for the three months ended March 31, 2013, as compared to an expense of $0.8 million for the three months ended April 1, 2012. In addition to the above, the decrease in selling, general and administrative expenses was primarily the result of cost containment initiatives.
Research and Development Expenses
Research and development expenses for the three months ended March 31, 2013 were $34.2 million, as compared to $32.6 million for the three months ended April 1, 2012, an increase of $1.6 million, or 5%. As a percentage of revenue, research and development expenses increased and were 6.8% for the three months ended March 31, 2013, as compared to 6.4% for the three months ended April 1, 2012. Amortization of intangible assets was $0.1 million for each of the three months ended March 31, 2013 and April 1, 2012. Stock-based compensation expense was $0.2 million for each of the three months ended March 31, 2013 and April 1, 2012. We primarily directed research and development efforts during fiscal years 2013 and 2012 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.


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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, is recorded in accrued restructuring and contract termination charges, and the long-term portion of restructuring and contract termination charges, 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 three months ended March 31, 2013 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 the 2012 Form 10-K.
The restructuring plan for the first quarter of fiscal year 2013 was principally intended to focus resources on higher growth end markets. The restructuring plan for the fourth quarter of fiscal year 2012 was principally intended to shift resources to higher growth geographic regions and end markets. The restructuring plan for the third quarter of fiscal year 2012 was principally 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 principally intended to realign operations, research and development resources, and production resources as a result of recent acquisitions. 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.

Q1 2013 Restructuring Plan
During the first quarter of fiscal year 2013, our management approved a plan to focus resources on higher growth end markets (the "Q1 2013 Plan"). As a result of the Q1 2013 Plan, we recognized a $2.3 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. As part of the Q1 2013 Plan, we reduced headcount by 62 employees. All employees were notified of termination under the Q1 2013 Plan by March 31, 2013.

The following table summarizes the Q1 2013 Plan activity for the three months ended March 31, 2013:

                                                 Severance
                                               (In thousands)
Provision                                     $        2,585
Amounts paid and foreign currency translation           (857 )
Balance at March 31, 2013                     $        1,728

We anticipate that the remaining severance payments of $1.7 million for workforce reductions will be completed by the end of the fourth quarter of 2014. Q4 2012 Restructuring Plan
During the fourth quarter of fiscal year 2012, our management approved a plan to shift resources to higher growth geographic regions and end markets (the "Q4 2012 Plan"). As a result of the Q4 2012 Plan, and during fiscal year 2012, we recognized a $0.6 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities and recognized a $2.4 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities. As part of the Q4 2012 Plan, we reduced headcount by 54 employees. All employees were notified of termination under the Q4 2012 Plan by December 30, 2012.


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The following table summarizes the Q4 2012 Plan activity for the three months ended March 31, 2013:

                                                 Severance
                                               (In thousands)
Balance at December 30, 2012                  $        2,682
Amounts paid and foreign currency translation         (1,419 )
Balance at March 31, 2013                     $        1,263

We anticipate that the remaining severance payments of $1.3 million for workforce reductions will be completed by the end of the second quarter of fiscal year 2014.
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 fiscal year 2012, we recognized $3.9 million pre-tax restructuring charges in each of the Human Health and Environmental Health segments related to a workforce reduction from reorganization activities. During the three months ended March 31, 2013, we recorded a pre-tax restructuring reversal of $0.2 million in the Human Health and Environmental Health segments due to lower than expected costs associated with remaining severance payments. As part of the Q3 2012 Plan, we reduced headcount by 66 employees. All employees were notified of termination under the Q3 2012 Plan by September 30, 2012.

The following table summarizes the Q3 2012 Plan activity for the three months ended March 31, 2013:

                                                 Severance
                                               (In thousands)
Balance at December 30, 2012                  $        7,553
Change in estimates                                     (248 )
Amounts paid and foreign currency translation         (1,460 )
Balance at March 31, 2013                     $        5,845

We anticipate that the remaining severance payments of $5.8 million for workforce reductions will be completed by the end of the fourth quarter of fiscal year 2015.
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 fiscal year 2012, we recognized a $7.2 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. During the three months ended March 31, 2013, we recognized a restructuring charge of $1.1 million in the Human Health segment related to a workforce reduction from reorganization activities. We expect to recognize an additional $1.2 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. Such benefits will be recognized ratably over the required service period. As part of the Q2 2012 Plan, we will reduce headcount by 205 employees. All employees were notified of termination under the Q2 2012 Plan by July 1, 2012.


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The following table summarizes the Q2 2012 Plan activity for the three months ended March 31, 2013:

                                                 Severance
                                               (In thousands)
Balance at December 30, 2012                  $        4,586
Provision                                              1,074
Amounts paid and foreign currency translation         (2,151 )
Balance at March 31, 2013                     $        3,509

We anticipate that the remaining severance payments of $3.5 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 fiscal year 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 the closure of excess facility space and recognized a $1.0 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities. We expect to recognize no additional incremental restructuring expense in future periods as all services were provided for one-time termination benefits in which the employee was required to render service until termination in order to receive the benefits. As part of the Q1 2012 Plan, we reduced headcount by 112 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 three months ended March 31, 2013:

                                                 Severance
                                               (In thousands)
Balance at December 30, 2012                  $        1,281
Change in estimates                                       21
Amounts paid and foreign currency translation           (294 )
Balance at March 31, 2013                     $        1,008

We anticipate that the remaining severance payments of $1.0 million for workforce reductions will be completed by the end of the fourth quarter of fiscal year 2013. The closure of the excess facility space will not require any additional payments.
Previous Restructuring and Integration Plans The principal actions of the restructuring and integration plans from fiscal years 2001 through 2011 were workforce reductions related to the integration of our businesses in order to reduce costs and achieve operational efficiencies as well as workforce reductions in both the Human Health and Environmental Health segments by shifting resources into geographic regions and end markets that are more consistent with our growth strategy. During the three months ended March 31, 2013, we paid $0.8 million related to these plans and recorded a reversal of $0.3 million primarily related to lower than expected costs associated with workforce reductions within the Environmental Health segment. As of March 31, 2013, we had $9.9 million of remaining liabilities associated with these restructuring and integration plans, primarily for residual lease obligations related to closed facilities and remaining severance payments for workforce reductions in both the Human Health and Environmental Health segments. We expect to make payments for these leases, the terms of which vary in length, through fiscal year 2022.
Contract Termination Charges
We have terminated various contractual commitments in connection with certain disposal activities and have recorded charges, to the extent applicable, for the costs of terminating these contracts before the end of their terms and the costs that will continue to be incurred for the remaining terms without economic benefit to us. We recorded an additional pre-tax charge of $0.2 million and made payments for these obligations of $0.4 million in the first three months of fiscal year 2013. The remaining balance of these accruals as of March 31, 2013 was $0.4 million.


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Interest and Other Expense, Net
Interest and other expense, net, consisted of the following:

                                         Three Months Ended
                                       March 31,     April 1,
                                         2013          2012
                                           (In thousands)
Interest income                       $    (105 )   $   (210 )
Interest expense                         11,693       11,437
Other expense, net                          452        1,603
Total interest and other expense, net $  12,040     $ 12,830
. . .
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