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PKI > SEC Filings for PKI > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for PERKINELMER INC

Form 10-K for PERKINELMER INC


25-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

This annual report on Form 10-K, including the following management's discussion and analysis, contains forward-looking information that you should read in conjunction with the consolidated financial statements and notes to consolidated financial statements that we have included elsewhere in this annual report on Form 10-K. 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," "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 above under the heading "Risk Factors" in Item 1A above 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.

Accounting Period
Our fiscal year ends on the Sunday nearest December 31. We report fiscal years under a 52/53 week format. Under this method, certain years will contain 53 weeks. Each of the fiscal years ended December 29, 2013, December 30, 2012 and January 1, 2012 included 52 weeks. The fiscal year ending December 28, 2014 will also include 52 weeks.

Overview of Fiscal Year 2013
We realigned our organization at the beginning of fiscal year 2013, to allow us to implement our strategy and propel our vision to improve global health by innovating technologies that help make healthcare more effective, affordable and accessible around the world. Our Informatics business, as well as our field service on products previously sold by our former Bio-discovery business, were moved from our Environmental Health segment into our Human Health segment. The results reported for fiscal year 2013 reflect this new alignment of our operating segments. Financial information relating to fiscal years 2012 and 2011 has been retrospectively adjusted to reflect the changes to the 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 products, services and solutions 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, we 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.
During fiscal year 2013, we continued to see good performance from acquisitions, investments in our ongoing technology and sales and marketing initiatives. Our overall revenue in fiscal year 2013 increased $51.0 million, or 2%, as compared to fiscal year 2012, reflecting an increase of $35.1 million, or 3%, in our Human Health segment revenue and an increase of $15.9 million, or 2%, in our Environmental Health segment revenue. The increase in our Human Health segment revenue during fiscal year 2013 was due to growth in our diagnostics business from continued expansion of our prenatal, newborn and infectious disease screening solutions, as well as increased demand for our informatics offerings and in-vivo imaging systems in the research market. The increase in our Environmental Health segment revenue during fiscal year 2013 was due to growth in our laboratory services business, partially offset by decreased demand for some of our products in the environmental and industrial markets.
In our Human Health segment during fiscal year 2013 as compared to 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, the Middle East and Africa and Korea, as well as increased demand for our informatics offerings and in-vivo imaging systems in the research market. This growth was partially offset by slight declines in our medical imaging business despite continued growth in our complementary metal-oxide-semiconductor imaging technology, as well as declines in our radiometric detection businesses within the research market, as a result of sequestration concerns in the United States, European austerity and weakening research markets in Asia, particularly in Japan. 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.


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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 fiscal year 2013, we continued to experience growth in our laboratory services business by the addition of new customers to our OneSource multivendor service offering, partially offset by decreased demand across some of our products in the environmental and 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 44 basis points in fiscal year 2013, as compared to fiscal year 2012, due to pricing pressure and unfavorable changes in product mix with an increase in sales of lower gross margin product offerings, partially offset by the fiscal year 2013 mark-to-market income for our postretirement benefit plans, as compared to the mark-to-market loss in fiscal year 2012, and productivity improvements. Our consolidated operating margin increased 538 basis points in fiscal year 2013, as compared to fiscal year 2012, primarily due to lower pre-tax impairment charges of $6.7 million in fiscal year 2013 as compared to $74.2 million in fiscal year 2012, a pre-tax gain of $17.6 million in fiscal year 2013 as compared to a pre-tax loss of $31.8 million in fiscal year 2012 for the mark-to-market adjustments for our postretirement plans and cost containment and productivity initiatives, which were partially offset by higher restructuring costs and lower gross margins.
We believe we are 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.

Consolidated Results of Continuing Operations

Revenue
2013 Compared to 2012. Revenue for fiscal year 2013 was $2,166.2 million, as compared to $2,115.2 million for fiscal year 2012, an increase of $51.0 million, or 2%, which includes an approximate 1% increase in revenue attributable to acquisitions and an approximate 0.4% decrease in revenue attributable to changes in foreign exchange rates. The analysis in the remainder of this paragraph compares segment revenue for fiscal year 2013 as compared to fiscal year 2012 and includes the effect of foreign exchange rate fluctuations and acquisitions. The total increase in revenue reflects a $35.1 million, or 3%, increase in our Human Health segment revenue, due to an increase in diagnostics market revenue of $22.0 million and an increase in research market revenue of $13.1 million. Our Environmental Health segment revenue increased $15.9 million, or 2%, due to an increase in laboratory services market revenue of $23.2 million, partially offset by decreases in environmental and industrial markets revenue of $7.3 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $7.3 million of revenue primarily related to our informatics business in our Human Health segment for fiscal year 2013 and $26.2 million for fiscal year 2012 that otherwise would have been recorded by the acquired businesses during each of the respective periods.

2012 Compared to 2011. Revenue for fiscal year 2012 was $2,115.2 million, as compared to $1,918.5 million for fiscal year 2011, an increase of $196.7 million, or 10%, which includes an approximate 7% increase in revenue attributable to acquisitions and an approximate 2% decrease in revenue attributable to changes in foreign exchange rates. The analysis in the remainder of this paragraph compares segment revenue for fiscal year 2012 as compared to fiscal year 2011 and includes the effect of foreign exchange rate fluctuations and acquisitions. The total increase in revenue reflects a $196.8 million, or 20%, increase in our Human Health segment revenue, due to an increase in research market revenue of $148.1 million and an increase in diagnostics market revenue of $48.7 million. Our Environmental Health segment revenue for fiscal year 2012 as compared to fiscal year 2011 included an increase in revenue of $10.3 million from the laboratory services market, which was almost completely offset by decreases in revenue of $10.3 million from the environmental and industrial markets. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $26.2 million of revenue primarily related to our informatics business in our Human Health segment for fiscal year 2012 and $30.8 million for fiscal year 2011 that otherwise would have been recorded by the acquired businesses during each of the respective periods.

Cost of Revenue
2013 Compared to 2012. Cost of revenue for fiscal year 2013 was $1,189.3 million, as compared to $1,152.0 million for fiscal year 2012, an increase of approximately $37.3 million, or 3%. As a percentage of revenue, cost of revenue increased to 54.9% in fiscal year 2013 from 54.5% in fiscal year 2012, resulting in a decrease in gross margin of approximately 44 basis points to 45.1% in fiscal year 2013 from 45.5% in fiscal year 2012. Amortization of intangible assets increased and was $53.1 million for fiscal year 2013, as compared to $51.8 million for fiscal year 2012. The mark-to-market adjustment for


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postretirement benefit plans was a loss of $0.8 million for fiscal year 2013, as compared to a loss of $3.7 million for fiscal year 2012. Stock-based compensation expense was $1.3 million for both fiscal years 2013 and 2012. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an expense of approximately $0.2 million for fiscal year 2013, as compared to $5.2 million for fiscal year 2012. Acquisition related costs for integration, contingent consideration and other costs added an expense of $0.2 million for fiscal year 2013. In addition to the factors noted above, the decrease in gross margin was primarily the result of pricing pressure and unfavorable changes in product mix with an increase in sales of lower gross margin product offerings, partially offset by productivity improvements.

2012 Compared to 2011. Cost of revenue for fiscal year 2012 was $1,152.0 million, as compared to $1,070.7 million for fiscal year 2011, an increase of approximately $81.3 million, or 8%. As a percentage of revenue, cost of revenue decreased to 54.5% in fiscal year 2012 from 55.8% in fiscal year 2011, resulting in an increase in gross margin of approximately 135 basis points to 45.5% in fiscal year 2012 from 44.2% in fiscal year 2011. Amortization of intangible assets decreased and was $51.8 million for fiscal year 2012, as compared to $53.4 million for fiscal year 2011. The mark-to-market adjustment for postretirement benefit plans was a loss of $3.7 million for fiscal year 2012, as compared to a loss of $4.2 million for fiscal year 2011. Stock-based compensation expense increased and was $1.3 million for fiscal year 2012, as compared to $1.1 million for fiscal year 2011. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an expense of approximately $5.2 million for fiscal year 2012, as compared to $4.1 million for fiscal year 2011. In addition to the factors noted above, 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 2013 Compared to 2012. Selling, general and administrative expenses for fiscal year 2013 were $585.9 million, as compared to $632.7 million for fiscal year 2012, a decrease of approximately $46.9 million, or 7%. As a percentage of revenue, selling, general and administrative expenses decreased and were 27.0% in fiscal year 2013, compared to 29.9% in fiscal year 2012. Amortization of intangible assets decreased and was $36.9 million for fiscal year 2013, as compared to $38.9 million for fiscal year 2012. The mark-to-market adjustment for postretirement benefit plans was income of $18.1 million for fiscal year 2013, as compared to a loss of $27.9 million for fiscal year 2012. Stock-based compensation expense decreased and was $11.9 million for fiscal year 2013, as compared to $19.0 million for fiscal year 2012. Environmental charges related to a particular site for increased monitoring and mitigation activities were $4.6 million during the fourth quarter of fiscal year 2013. Acquisition related costs for integration, contingent consideration and other costs added an expense of $1.1 million for fiscal year 2013 and $0.3 million for fiscal year 2012. In addition to the factors noted above, the decrease in selling, general and administrative expenses was primarily the result of cost containment and productivity initiatives.

2012 Compared to 2011. Selling, general and administrative expenses for fiscal year 2012 were $632.7 million, as compared to $624.4 million for fiscal year 2011, an increase of approximately $8.3 million, or 1%. As a percentage of revenue, selling, general and administrative expenses decreased and were 29.9% in fiscal year 2012, compared to 32.5% in fiscal year 2011. Amortization of intangible assets increased and was $38.9 million for fiscal year 2012, as compared to $25.9 million for fiscal year 2011. The mark-to-market adjustment for postretirement benefit plans was a loss of $27.9 million for fiscal year 2012, as compared to a loss of $62.9 million for fiscal year 2011. Stock-based compensation expense increased and was $19.0 million for fiscal year 2012, as compared to $13.8 million for fiscal year 2011. Acquisition related costs for integration, contingent consideration and other costs added an expense of $0.3 million for fiscal year 2012 and $11.2 million for fiscal year 2011. In addition to the factors noted above, 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, offset by cost containment initiatives.

Research and Development Expenses
2013 Compared to 2012. Research and development expenses for fiscal year 2013 were $133.0 million, as compared to $132.6 million for fiscal year 2012, an increase of $0.4 million, or 0.3%. As a percentage of revenue, research and development expenses decreased to 6.1% in fiscal year 2013, as compared to 6.3% in fiscal year 2012. Amortization of intangible assets decreased and was $0.3 million for fiscal year 2013, as compared to $0.5 million for fiscal year 2012. The mark-to-market adjustment for postretirement benefit plans was income of $0.3 million for fiscal year 2013, as compared to a loss of $0.2 million for fiscal year 2012. Stock-based compensation expense increased and was $0.9 million for fiscal year 2013, as compared to $0.8 million for fiscal year 2012. Acquisition related costs added an expense of $0.2 million for fiscal year 2013. We have a broad product base, and we do not expect any single research and development project to have significant costs. We directed research and development efforts similarly during fiscal years 2013 and 2012, primarily toward the diagnostics and research markets within our Human Health segment, and the environmental, industrial and laboratory services markets within our Environmental Health segment, in order to help accelerate our growth initiatives.


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2012 Compared to 2011. Research and development expenses for fiscal year 2012 were $132.6 million, as compared to $115.8 million for fiscal year 2011, an increase of $16.8 million, or 15%. As a percentage of revenue, research and development expenses increased to 6.3% in fiscal year 2012, as compared to 6.0% in fiscal year 2011. Amortization of intangible assets decreased and was $0.5 million for fiscal year 2012, as compared to $0.7 million for fiscal year 2011. The mark-to-market adjustment for postretirement benefit plans was a loss of $0.2 million for fiscal year 2012, as compared to a loss of $0.8 million for fiscal year 2011. Stock-based compensation expense increased and was $0.8 million for fiscal year 2012, as compared to $0.6 million for fiscal year 2011. We directed research and development efforts similarly during fiscal years 2012 and 2011, primarily toward the diagnostics and research markets within our Human Health segment, and the environmental, industrial and laboratory services markets within our Environmental Health segment, in order to help accelerate our growth initiatives.

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. Restructuring and contract termination charges for fiscal year 2013 were a $33.9 million charge, as compared to a $25.1 million charge for fiscal year 2012 and an $13.5 million charge for fiscal year 2011.

The following table summarizes our restructuring and contract termination accrual balances and related activity by restructuring plan, as well as contract termination, during fiscal years 2013, 2012, and 2011:

                                         2011                                                           2012                                           2013
                                       Charges                                                         Charges                                        Charges
                                         and                                                             and                                            and
                                       Changes                                                         Changes                                        Changes
                      Balance             in            2011           2011           Balance            in            2012          Balance            in            2013          Balance
                         at           Estimates,       Amounts       Acquired            at          Estimates,       Amounts           at          Estimates,       Amounts           at
                     01/02/2011          net            paid         Accruals        01/01/2012          net           paid         12/30/2012          net           paid         12/29/2013
Previous Plans     $     22,611     $     11,480     $ (17,100 )   $     3,829     $     20,820     $      (857 )   $  (8,911 )   $     11,052     $    (1,145 )   $  (2,420 )   $      7,487
Q1 2012 Plan                  -                -             -               -                -           6,394        (5,113 )          1,281            (537 )        (619 )            125
Q2 2012 Plan                  -                -             -               -                -           7,422        (2,836 )          4,586           1,821        (5,072 )          1,335
Q3 2012 Plan                  -                -             -               -                -           7,772          (219 )          7,553            (524 )      (3,271 )          3,758
Q4 2012 Plan                  -                -             -               -                -           2,936          (254 )          2,682               -        (2,089 )            593
Q1 2013 Plan                  -                -             -               -                -               -             -                -           2,585        (2,377 )            208
Q2 2013 Plan                  -                -             -               -                -               -             -                -          19,318        (6,568 )         12,750
Q3 2013 Plan                  -                -             -               -                -               -             -                -             532          (395 )            137
Q4 2013 Plan                  -                -             -               -                -               -             -                -          11,183        (2,341 )          8,842
Restructuring            22,611           11,480       (17,100 )         3,829           20,820          23,667       (17,333 )         27,154          33,233       (25,152 )         35,235
Contract
termination
charges                     486            1,972          (391 )             -            2,067           1,470        (2,941 )            596             695          (991 )            300
Total
restructuring
and termination
charges            $     23,097     $     13,452     $ (17,491 )   $     3,829     $     22,887     $    25,137     $ (20,274 )   $     27,750     $    33,928     $ (26,143 )   $     35,535

The restructuring plans for the fourth and third quarters of fiscal year 2013 were principally intended to shift certain of our research and development resources into a newly opened Center for Innovation. The restructuring plan for the second quarter of fiscal year 2013 was principally intended to shift certain of our operations into a newly established shared service center as well as realign operations, research and development resources and production resources as a result of previous acquisitions. 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 previous acquisitions. We expect the impact of future cost savings on operating results and cash flows from restructuring activities executed in fiscal year 2013 will exceed $9.0 million annually beginning in fiscal year 2015. We expect the impact of future cost savings on operating results and cash flows from restructuring activities executed in fiscal year 2012 will exceed $11.0 million annually beginning in fiscal year 2014. These future cost savings will be primarily a decrease to cost of revenue and a decrease to selling, general and administrative expenses.

Q4 2013 Restructuring Plan

During the fourth quarter of fiscal year 2013, our management approved a plan principally intended to shift certain of our research and development resources into a newly opened Center for Innovation (the "Q4 2013 Plan"). As a result of the Q4


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2013 Plan, we recognized a $8.2 million pre-tax restructuring charge in our Human Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space and recognized a $3.0 million pre-tax restructuring charge in our Environmental Health segment related to a workforce reduction from reorganization activities.

As part of the Q4 2013 Plan, we reduced headcount by 74 employees. All employees were notified of termination under the Q4 2013 Plan by December 29, 2013, and we anticipate that the remaining severance payments of $2.0 million for workforce reductions will be substantially completed by the end of the second quarter of fiscal year 2014. We also anticipate that the remaining payments of $6.9 million, net of estimated sublease income, for the closure of the excess facility space will be paid through fiscal year 2019, in accordance with the terms of the applicable leases.

The following table summarizes the components of our Q4 2013 Plan activity recognized by segment:

                                                   Environmental
                                  Human Health         Health          Total
                                                (In thousands)
Severance                        $         906    $         3,006    $  3,912
Closure of excess facility space         7,271                  -       7,271
Total                            $       8,177    $         3,006    $ 11,183

Q3 2013 Restructuring Plan

During the third quarter of fiscal year 2013, our management approved a plan principally intended to shift certain of our research and development resources into a newly opened Center for Innovation (the "Q3 2013 Plan"). As a result of the Q3 2013 Plan, we recognized a $0.5 million pre-tax restructuring charge in our Human Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space.

As part of the Q3 2013 Plan, we reduced headcount by 30 employees. All employees were notified of termination under the Q3 2013 Plan by September 29, 2013. We anticipate that the remaining severance payments of $0.1 million for workforce reductions will be completed by the end of the second quarter of fiscal year 2014. The closure of the facility space will not require any additional payments.

The following table summarizes the components of our Q3 2013 Plan activity recognized by segment:

                                   Human Health
                                  (In thousands)
Severance                        $            394
Closure of excess facility space              138
Total                            $            532

Q2 2013 Restructuring Plan

During the second quarter of fiscal year 2013, our management approved a plan principally intended to shift certain of our operations into a newly established . . .

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