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PKI > SEC Filings for PKI > Form 10-Q on 6-May-2014All Recent SEC Filings

Show all filings for PERKINELMER INC

Form 10-Q for PERKINELMER INC


6-May-2014

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. 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. Our 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. Our Environmental
          Health segment serves the environmental, industrial and laboratory
          services markets.

Overview of the First Quarter of Fiscal Year 2014 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 2014 and 2013 fiscal years include 52 weeks.
Our overall revenue in the first quarter of fiscal year 2014 was $531.9 million and increased $26.5 million, or 5%, as compared to the first quarter of fiscal year 2013, reflecting an increase of $18.2 million, or 6%, in our Human Health segment revenue and an increase of $8.4 million, or 4%, in our Environmental Health segment revenue. The increase in our Human Health segment revenue during the first quarter of fiscal year 2014 was primarily due to growth generated from our newborn screening business within the diagnostics market and our informatics offerings within the research market. The increase in our Environmental Health segment revenue during the first quarter of fiscal year 2014 was due to an increase in our service revenue, which included our OneSource multivendor service offerings within our laboratory service market.
In our Human Health segment during the first quarter of fiscal year 2014 as compared to the first quarter of fiscal year 2013, we experienced growth in the diagnostics market 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. Birth rates are beginning to rebound in China, as evidenced by prenatal trends we saw during the first quarter of fiscal year 2014, and demand for greater access to newborn screening in rural areas is also increasing. In the research market we experienced growth as demand increased for our informatics, microfluidics, radiometric detection, and high-content screening offerings. Our medical imaging business was flat during the first quarter of fiscal year 2014 as compared to the first quarter of fiscal year 2013, despite growth in our advanced medical diagnostic imaging products. 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 2014, we continued to grow our laboratory services business, which included the addition of new customers to our OneSource multivendor service offering, while revenue across our products in the environmental and industrial markets was approximately flat. 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.


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Our consolidated gross margins decreased 22 basis points in the first quarter of fiscal year 2014, as compared to the first quarter of fiscal year 2013, due to unfavorable changes in product mix, with an increase in sales of lower gross margin product offerings, which were partially offset by increased sales volume and cost containment and productivity initiatives. Our consolidated operating margins increased 243 basis points in the first quarter of fiscal year 2014, as compared to the first quarter of fiscal year 2013, primarily due to cost containment and productivity initiatives, which were partially offset by 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.

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, revenue 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 29, 2013 (our "2013 Form 10-K"), as filed with the Securities and Exchange Commission (the "SEC"). There have been no significant changes in our critical accounting policies and estimates during the three months ended March 30, 2014.

Consolidated Results of Continuing Operations Revenue
Revenue for the three months ended March 30, 2014 was $531.9 million, as compared to $505.4 million for the three months ended March 31, 2013, an increase of $26.5 million, or 5%, which includes an approximate 0.1% decrease in revenue attributable to unfavorable changes in foreign exchange rates and an approximate 0.2% increase from acquisitions. The analysis in the remainder of this paragraph compares segment revenue for the three months ended March 30, 2014 as compared to the three months ended March 31, 2013 and includes the effect of foreign exchange rate fluctuations and acquisitions. Our Human Health segment revenue increased $18.2 million, or 6%, due to an increase in diagnostics market revenue of $10.5 million and an increase in research market revenue of $7.7 million. Our Environmental Health segment revenue increased $8.4 million, or 4%, due to an increase in laboratory services market revenue of $9.5 million, partially offset by decreases in environmental and industrial markets revenue of $1.1 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $1.5 million of revenue for the three months ended March 30, 2014 and $1.9 million for the three months ended March 31, 2013 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 30, 2014 was $296.4 million, as compared to $280.5 million for the three months ended March 31, 2013, an increase of $15.9 million, or 6%. As a percentage of revenue, cost of revenue increased to 55.7% for the three months ended March 30, 2014, from 55.5% for the three months ended March 31, 2013, resulting in a decrease in gross margin of 22 basis points to 44.3% for the three months ended March 30, 2014, from 44.5% for the three months ended March 31, 2013. Amortization of intangible assets decreased and was $12.7 million for the three months ended March 30, 2014, as compared to $12.9 million for the three months ended March 31, 2013. Stock-based compensation expense was $0.3 million for each of the three months ended March 30, 2014 and March 31, 2013. The mark-to-market adjustment for


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postretirement benefit plans was a gain of $0.1 million for the three months ended March 30, 2014, as compared to a gain of $0.05 million for the three months ended March 31, 2013. Acquisition related costs for contingent consideration and other costs added an expense of $0.02 million for the three months ended March 30, 2014. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions added an expense of $0.1 million for the three months ended March 31, 2013. In addition to the above, the overall decrease in gross margin was primarily the result of unfavorable changes in product mix, with an increase in sales of lower gross margin product offerings, which were partially offset by increased sales volume and cost containment and productivity initiatives. Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended March 30, 2014 were $153.2 million, as compared to $151.5 million for the three months ended March 31, 2013, an increase of $1.7 million, or 1%. As a percentage of revenue, selling, general and administrative expenses decreased and were 28.8% for the three months ended March 30, 2014, as compared to 30.0% for the three months ended March 31, 2013. Amortization of intangible assets decreased and was $7.8 million for the three months ended March 30, 2014, as compared to $9.6 million for the three months ended March 31, 2013. Stock-based compensation expense increased and was $4.0 million for the three months ended March 30, 2014, as compared to $3.9 million for the three months ended March 31, 2013. Significant legal expenses related to preparation for the trial of a particular case were $3.2 million for the three months ended March 30, 2014. Acquisition related costs for contingent consideration and other acquisition costs increased and was an expense of $0.2 million for the three months ended March 30, 2014, as compared to providing income of $0.01 million for the three months ended March 31, 2013. In addition to the above, the increase in selling, general and administrative expenses was primarily the result of costs related to 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 March 30, 2014 were $29.4 million, as compared to $34.2 million for the three months ended March 31, 2013, a decrease of $4.7 million, or 14%. As a percentage of revenue, research and development expenses decreased and were 5.5% for the three months ended March 30, 2014, as compared to 6.8% for the three months ended March 31, 2013. Amortization of intangible assets increased and was $0.2 million for the three months ended March 30, 2014, as compared to $0.1 million for the three months ended March 31, 2013. Stock-based compensation expense decreased and was $0.1 million for the three months ended March 30, 2014, as compared to $0.2 million for the three months ended March 31, 2013. In addition to the above, the decrease in research and development expenses was primarily the result of the consolidation of research and development activities into our newly opened Center for Innovation. During the first three months of both fiscal year 2014 and fiscal year 2013, we directed research and development efforts toward the diagnostics and research markets within our Human Health segment, and the environmental, industrial and laboratory service 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. 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 30, 2014 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 2013 Form 10-K.
The restructuring plans for the first quarter of fiscal year 2014 and the first quarter of fiscal year 2013 were principally intended to focus resources on higher growth end markets. 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. We expect the impact of future cost savings on operating results and cash flows from the restructuring activities executed in fiscal year 2013 will exceed $9.0 million annually beginning in fiscal year 2015. The future cost savings will be primarily a decrease to research and development expenses.


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A description of the restructuring plans and the activity recorded are as follows:

Q1 2014 Restructuring Plan
During the first quarter of fiscal year 2014, our management approved a plan principally intended to focus resources on higher growth end markets (the "Q1 2014 Plan"). As a result of the Q1 2014 Plan, we recognized a $0.4 million pre-tax restructuring charge in our Human Health segment related to a workforce reduction from reorganization activities and recognized a $0.2 million pre-tax restructuring charge in our Environmental Health segment related to a workforce reduction from reorganization activities. As part of the Q1 2014 Plan, we reduced headcount by 17 employees. All employees were notified of termination under the Q1 2014 Plan by March 30, 2014.

The following table summarizes the Q1 2014 Plan activity for the three months ended March 30, 2014:

                                                  Severance
                                               (In thousands)
Provision                                     $           567
Amounts paid and foreign currency translation            (120 )
Balance at March 30, 2014                     $           447

We anticipate that the remaining severance payments of $0.4 million for workforce reductions will be substantially completed by the end of the fourth quarter of fiscal year 2015.

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 2013 Plan, we recognized an $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.

The following table summarizes the Q4 2013 Plan activity for the three months ended March 30, 2014:

                                                                Closure of
                                                              Excess Facility
                                               Severance           Space           Total
                                                             (In thousands)
Balance at December 29, 2013                  $    1,988     $         6,854     $ 8,842
Amounts paid and foreign currency translation       (995 )              (249 )    (1,244 )
Balance at March 30, 2014                     $      993     $         6,605     $ 7,598

We anticipate that the remaining severance payments of $1.0 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 $6.6 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.

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.


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The following table summarizes the Q3 2013 Plan activity for the three months ended March 30, 2014:

                                                  Severance
                                               (In thousands)
Balance at December 29, 2013                  $           137
Amounts paid and foreign currency translation            (113 )
Balance at March 30, 2014                     $            24

We anticipate that the remaining severance payments of $0.02 million for workforce reductions will be substantially completed by the end of the second quarter of fiscal year 2014.

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 shared service center as well as realign operations, research and development resources, and production resources as a result of previous acquisitions (the "Q2 2013 Plan"). As a result of the Q2 2013 Plan, we initially recognized a $9.9 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 $8.8 million pre-tax restructuring charge in our Environmental Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. Subsequent to the initial charge, during fiscal year 2013, we recorded an additional $0.6 million pre-tax restructuring charge in our Human Health segment for services that were provided for one-time benefits in which the employee was required to render service beyond the legal notification period. During the three months ended March 30, 2014, we recorded additional pre-tax restructuring charges of $0.1 million in each of our Human Health and Environmental Health segments due to higher than expected costs associated with the closure of the excess facility space. As part of the Q2 2013 Plan, we reduced headcount by 265 employees. All employees were notified of termination under the Q2 2013 Plan by June 30, 2013.

The following table summarizes the Q2 2013 Plan activity for the three months ended March 30, 2014:

                                                               Closure of
                                                             Excess Facility
                                               Severance          Space           Total
                                                             (In thousands)
Balance at December 29, 2013                  $  12,750     $           -       $ 12,750
Change in estimates                                   -               184            184
Amounts paid and foreign currency translation    (3,981 )             (38 )       (4,019 )
Balance at March 30, 2014                     $   8,769     $         146       $  8,915

We anticipate that the remaining severance payments of $8.8 million for workforce reductions will be substantially completed by the end of the fourth quarter of fiscal year 2014, as local law requires some severance to be paid in monthly installments through the fourth quarter of fiscal year 2014. We also anticipate that the remaining payments of $0.1 million for the closure of the excess facility space will be paid through the third quarter of 2014, in accordance with the terms of the applicable lease.

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 our Human Health segment related to a workforce reduction from reorganization activities and recognized a $0.2 million pre-tax restructuring charge in our 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.


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The following table summarizes the Q1 2013 Plan activity for the three months ended March 30, 2014:

                                                  Severance
                                               (In thousands)
Balance at December 29, 2013                  $            208
Amounts paid and foreign currency translation                -
Balance at March 30, 2014                     $            208

We anticipate that the remaining severance payments of $0.2 million for workforce reductions will be substantially completed by the end of the fourth quarter of fiscal year 2014.

Previous Restructuring and Integration Plans The principal actions of the restructuring and integration plans from fiscal year 2001 through fiscal year 2012 were workforce reductions and the closure of excess facility space related to the integration of our businesses in order to realign operations, reduce costs, achieve operational efficiencies and shift resources into geographic regions and end markets that are more consistent with our growth strategy. During the three months ended March 30, 2014, we paid $3.0 million related to these plans. As of March 30, 2014, we had $10.3 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 our 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. We anticipate the remaining severance payments for workforce reductions will be substantially completed by the end of the fourth quarter of fiscal year 2014, as local law requires some severance to be paid in monthly installments through the fourth quarter of fiscal year 2014.

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 $1.4 million, primarily as a result of terminating various contractual commitments in the Environmental Health segment. We made payments for these obligations of $1.1 million in the first three months of fiscal year 2014. The remaining balance of these accruals as of March 30, 2014 was $0.6 million.

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

                                         Three Months Ended
                                       March 30,     March 31,
. . .
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