UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
or
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-5075
PerkinElmer, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts | 04-2052042 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
940 Winter Street, Waltham, Massachusetts | 02451 | |
(Address of Principal Executive Offices) | (Zip Code) |
(Registrants telephone number, including area code): (781) 663-6900
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class |
Name of Each Exchange on Which Registered | |
Common Stock, $1 Par Value |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Exchange Act of 1934. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The aggregate market value of the common stock, $1 par value per share, held by non-affiliates of the registrant on June 30, 2006, was $2,458,366,011, based upon the last reported sale of $20.90 per share of common stock on June 30, 2006.
As of February 23, 2007, there were outstanding 121,830,265 shares of common stock, $1 par value per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of PerkinElmer, Inc.s Definitive Proxy Statement for its Annual Meeting of Shareholders to be held on April 24, 2007 are incorporated by reference into Part III of this Form 10-K.
PART I
Overview
We are a leading provider of scientific instruments, consumables and services to the pharmaceutical, biomedical, academic research, environmental testing and general industrial markets, commonly referred to as the health sciences and photonics markets. We design, manufacture, market and service products and systems within two businesses, each constituting a separate reporting segment:
| Life and Analytical Sciences. We are a leading provider of drug discovery, genetic screening and environmental and chemical analysis tools, including instruments, reagents, consumables, and services. |
| Optoelectronics. We provide a broad range of digital imaging, sensor and specialty lighting components used in the biomedical, consumer products and other specialty end markets. |
The health sciences markets include all of the businesses in our Life and Analytical Sciences segment and our medical imaging business, as well as elements of the medical sensors and lighting businesses in our Optoelectronics segment. The photonics markets include the remaining businesses in our Optoelectronics segment.
In fiscal 2006, we had $1,546.4 million in sales from continuing operations.
We are a Massachusetts corporation, founded in 1947. Our headquarters are in Waltham, Massachusetts, and we market our products and systems in more than 125 countries. As of December 31, 2006, we had approximately 8,500 employees. Our common stock is listed on the New York Stock Exchange, and we are a component of the S&P 500 Index.
We maintain a website with the address http://www.perkinelmer.com/. We are not including the information contained in our website as part of, or incorporating it by reference into, this annual report on Form 10-K. We make available free of charge through our website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports, as soon as reasonably practicable after we electronically file these materials with, or otherwise furnish them to, the Securities and Exchange Commission.
Our Strategy
Our strategy is focused on providing products that drive productivity improvements in the genetic screening, biopharmaceutical, and environmental and chemical end markets within our Life and Analytical Sciences segment and medical digital imaging and photonics within our Optoelectronics segment. To execute on our strategy and drive higher revenue growth, we focus on broadening our product and service offerings through the acquisition of innovative technology and expenditures for research and development. Our strategy includes:
| Accelerating innovation through both internal research and development and pursuit of third-party collaborations and alliances; |
| Achieving significant growth in both of our segments through strategic acquisitions and licensing; |
| Strengthening our position within the genetic screening, biopharmaceutical, and environmental and chemical end markets by expanding our product and service offerings and maintaining superior product quality; |
| Utilizing our share repurchase programs to help drive shareholder value; and |
| Attracting, retaining and developing talented and motivated employees. |
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Recent Developments
As part of our strategy to grow our core businesses, we have taken the following actions in recent years:
Acquisitions:
Agilix Corporation. In February 2006, we acquired specified assets of Agilix Corporation (Agilix) for approximately $8.7 million in cash plus potential additional contingent consideration, which we expect to be immaterial to us. Assets acquired primarily relate to Agilixs core technology which centers around labeling technology using isobaric mass tags that allow for the simultaneous quantification of molecules, such as proteins, from multiple samples.
Spectral Genomics, Inc. In April 2006, we acquired specified assets and assumed specified liabilities of Spectral Genomics, Inc. (Spectral), a leader in molecular karyotyping technology used to evaluate chromosomal abnormalities. Consideration for the transaction was approximately $12.1 million in cash plus potential additional contingent consideration, which we expect to be immaterial to us. We will make a $1.9 million payment in the first quarter of 2007, as well as royalty payments based on future sales, to license additional intellectual property rights from a third party.
Clinical & Analytical Service Solutions Ltd. In June 2006, we acquired the stock of Clinical & Analytical Service Solutions Ltd. (C&A), a scientific equipment asset and managed maintenance company serving the pharmaceutical, biotechnology and healthcare markets. Consideration for the transaction was approximately $12.4 million in cash, net of cash acquired, plus potential additional contingent consideration, which we expect to be immaterial to us.
J.N. Macri Technologies LLC and NTD Laboratories, Inc. In July 2006, we acquired specified assets and assumed specified liabilities of J.N. Macri Technologies LLC (Macri) and acquired the stock of NTD Laboratories, Inc. (NTD). Macri holds and licenses global patents related to free beta Human Chorionic Gonadotropin (free Beta hCG). Free Beta hCG is a peptide hormone produced in the early stage of pregnancy that is widely recognized as an important biomarker for first-trimester prenatal risk assessment. NTD is a laboratory specializing in prenatal risk assessment and offers laboratory developed and validated testing under the brand name UltraScreen®, of which free Beta hCG is an important component. Aggregate consideration for these transactions was $55.2 million in cash, net of cash acquired.
Avalon Instruments Limited. In September 2006, we acquired the stock of Avalon Instruments Limited (Avalon). The acquisition of Avalon expands and complements our molecular spectroscopy product portfolio by adding a family of innovative bench-top dispersive Raman spectrometers. Raman spectroscopy identifies and characterizes the composition of both organic and inorganic materials in a wide range of applications. Consideration for this transaction was $5.4 million in cash, net of cash acquired, plus potential additional contingent consideration, which we expect to be immaterial to us.
Triton Technology Ltd. In December 2006, we acquired specified assets of Triton Technology Ltd (Triton). We acquired from Triton a line of Dynamic Mechanical Analysis (DMA) products. The DMA products offer a thermal analysis tool that is used by scientists in the polymers, pharmaceuticals and food industries for diverse applications ranging from simple quality control to advanced research. Consideration for this transaction was $2.3 million in cash at the closing, plus additional cash payments of $1.6 million in 2007.
Evotec Technologies GmbH. In January 2007, we acquired the stock of Evotec Technologies GmbH (Evotec). The acquisition is intended to allow us to provide our customers in the pharmaceutical, biotechnology and academic arenas with Evotecs high content screening (HCS) instruments and software. These analysis tools determine the composition of cells and cell structure, a critical step in moving potential drug targets quickly through the discovery process. Consideration for this transaction was approximately $33.0 million in cash, subject to a net working capital adjustment.
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Euroscreen Products S.A. In January 2007, we acquired the stock of Euroscreen Products S.A. (Euroscreen), a developer of the AequoScreen cellular assay platform. The AequoScreen platform from Euroscreen is based on an innovative luminescence technology that generates higher quality data, while reducing the number of false positives in G protein-coupled receptor (GPCR) screening applications. Consideration for this transaction was approximately $18.1 million in cash.
The operations for each of these acquisitions completed in 2006 are reported within the results of our Life and Analytical Sciences segment from the acquisition date. The operations subsequent to the acquisitions, individually and in the aggregate, did not have a material effect on our financial position, results of operations or cash flows.
Research and Development Expenses:
Research and development expenses were $99.7 million in 2006 and $87.4 million for 2005, an increase of $12.3 million, or 14%. We directed our research and development efforts during 2006 and 2005 primarily toward genetic screening, biopharmaceutical, and environmental and chemical end markets within our Life and Analytical Sciences segment and medical digital imaging and photonics within our Optoelectronics segment in order to help accelerate our growth initiatives. We expect our research and development spending to increase on both an absolute and percentage-of-sales basis in 2007 and to continue to emphasize these same markets.
Share Repurchase Program:
During 2006, we repurchased in the open market 8.9 million shares of our common stock at an aggregate cost of $190.1 million, including commissions. These repurchases were made pursuant to our stock repurchase program announced in November 2005 (the Program). The repurchased shares have been reflected as additional authorized but unissued shares, with the payments reflected in common stock and capital in excess of par value. On November 6, 2006, we announced that our Board of Directors authorized us to repurchase up to 10.0 million additional shares of our common stock under a new stock repurchase program (the New Program). The New Program will expire on October 25, 2010 unless this authorization is terminated earlier by our Board. The New Program may also be suspended or discontinued at any time. From January 1, 2007 through February 23, 2007, we repurchased 2.4 million shares of our common stock in the open market under the New Program at an aggregate cost of $57.0 million, including commissions. We are likely to have adequate financial flexibility to fund additional share repurchases given current cash and debt levels.
We have also taken the following actions in recent years to further focus our core businesses:
Restructuring:
During the second quarter of 2006, our management approved a plan for workforce reductions in two locations in the United States as we shift resources into product lines that are more consistent with our growth strategy. We refer to this plan as our Q2 2006 Plan. The actions within the Q2 2006 Plan related to workforce reductions resulting from reorganization activities within the Life and Analytical Sciences segment. We completed notifying affected employees on June 30, 2006. As a result of this plan for workforce reductions, we recorded a pre-tax restructuring charge of $0.8 million during the second quarter of 2006. In addition, during the fourth quarter of 2005, we had recognized a $2.2 million restructuring charge in the Life and Analytical Sciences segment and a $6.0 million restructuring charge in the Optoelectronics segment (the Q4 2005 Plan). The principal actions in the Q4 2005 Plan were workforce reductions and the closure of several facilities resulting from reorganization activities to shift resources into geographic regions and product lines that were more consistent with our growth strategy.
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During 2006, we recorded a pre-tax restructuring reversal, net, of $1.2 million relating to our Q4 2005 Plan due to the completion in June 2006 of the sale of a building previously reserved for as part of the Q4 2005 Plan, partially offset by higher than expected severance costs. The amount of the proceeds from the sale of the building in excess of the current book value of the building was recorded as a pre-tax restructuring reversal within our Optoelectronics segment. During 2006, we also recorded a pre-tax restructuring reversal of $0.6 million relating to our Q2 2005 plan due to lower than expected employee separation costs associated with both the Life and Analytical Sciences and Optoelectronics segments, and a pre-tax restructuring reversal of $2.7 million relating to the Q4 2002 Plan due to the completion in December 2006 of the sale of a building previously reserved for in the Q4 2002 Plan. The amount of the proceeds from this sale in excess of the current book value of the property was recorded as a pre-tax restructuring reversal within our Life and Analytical Sciences segment.
During 2005, we recorded $22.1 million in restructuring and integration charges. During the second and fourth quarters of 2005, our management approved separate plans to terminate employees in several locations as we shift into geographic regions and product lines that are more consistent with our growth strategy. As a result of these plans of termination, we incurred pre-tax restructuring charges of approximately $9.9 million. Also, as part of our planned effort to consolidate our operations, we closed one of our Optoelectronics properties. As a result, we recorded an additional pre-tax restructuring charge during fiscal 2005 of approximately $6.1 million which consisted primarily of an impairment charge related to this facility. In addition, due to a soft sublease market, we increased our reserves for our financial obligations under several leases associated with previous restructurings in 2001 and 2002. As a result, we recorded an additional pre-tax restructuring charge during fiscal 2005 of approximately $6.1 million which is expected to be paid through 2014.
Fluid Sciences Segment Divestiture:
In September 2005, our Board of Directors approved a plan to divest our Fluid Sciences segment to increase our strategic focus on higher growth markets within our Life and Analytical Sciences and Optoelectronics segments. The Fluid Sciences segment consisted of three businessesAerospace, Fluid Testing and Semiconductor. We have reflected this segment as a discontinued operation for all periods presented in this annual report on Form 10-K. In November 2005, we sold the Fluid Testing business for approximately $34.5 million, resulting in a net pre-tax gain of $30.3 million. In December 2005, we sold the Aerospace business for approximately $333.0 million, resulting in a net pre-tax gain of $250.6 million. In February 2006, we sold substantially all of the assets of our Fluid Sciences Semiconductor business for approximately $26.5 million, subject to a net working capital adjustment, plus potential additional contingent consideration. We recognized a pre-tax gain of $3.8 million, exclusive of additional contingent consideration, in 2006. We recognized these gains during fiscal 2006 and 2005 as gains on the disposition of discontinued operations. We received total cash proceeds for these transactions of approximately $390.0 million.
Life and Analytical Sciences
Our Life and Analytical Sciences segment is a leading provider of biopharmaceutical, genetic screening and environmental and chemical sciences solutions, including instruments, reagents, software, applications and services. Our instruments are used in daily applications for scientific research and clinical applications. Our research products provide the fundamental tools necessary for a variety of applications that are critical to the development of many of our customers new products and academic projects. In fiscal 2006, our Life and Analytical Sciences segment generated sales of $1,144.6 million.
For drug discovery and development, we offer a wide range of systems consisting of instrumentation, software and consumables, including reagents, based on our core expertise in cellular sciences, time resolved fluorescence, chemiluminescence, radioactive labeling and the detection of proteins and nucleic acids. We sell our drug discovery and development solutions to pharmaceutical, biotechnology and academic research customers around the world.
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For genetic screening and clinical laboratories, we provide instrumentation, software, reagents and analytical tools to test for various inherited metabolic or endocrinological disorders in newborns and to assess risk during pregnancy. Our product range includes both screening and confirmatory diagnostic products. We sell our genetic screening solutions to public health authorities, private health care organizations and doctors around the world.
For environmental and chemical analysis, we offer analytical tools employing technologies such as molecular and atomic spectroscopy, high performance liquid chromatography, gas chromatography and thermal analysis. Our instruments and related application solutions measure a range of substances from biomolecular matter to organic and inorganic chemicals. We sell these products to pharmaceutical manufacturers and customers in the forensics environmental, food and beverage, and chemical markets. These customers use our instruments in various applications to verify the identity, quality or composition of the materials they examine.
For service and support, we offer customers a range of products including service plans, preventive maintenance, qualification, training, and upgrades. OneSource®, our maintenance management platform, helps customers consolidate the essential maintenance and asset management needs of their laboratory(s). Through acquisitions, our services have expanded to include a broad range of multi-vendor maintenance solutions.
Principal Products. The principal products of our Life and Analytical Sciences business include:
| DELFIA® Xpress, a complete solution for prenatal screening is a fast, continuous loading system supported by kits for both first and second trimester analyses, and clinically validated LifeCycle software. |
| The NeoGram MS/MS AAAC in vitro diagnostic kit to support detection of metabolic disorders in newborns by tandem mass spectrometry. |
| The Clarus® 500 gas chromatograph, mass spectrometer and TurboMatrix family of sample-handling equipment. These instruments are used for compound identification and quantization in the environmental, petrochemical, forensics, food, pharmaceutical and semiconductor industries. |
| The Series 200 family of high performance liquid chromatography (HPLC) systems is used to identify and quantify compounds for applications in the environmental, food and beverage, and pharmaceutical industries. |
| The PerkinElmer family of inorganic analysis instrumentation, including the AAnalyst series of atomic absorption spectrometers, the Optima family of inductively coupled plasma (ICP) spectrometers and the ELAN® family of ICP mass spectrometers. These instruments are used in the environmental and chemical industries, among others, to determine the elemental content of a sample. |
| Spectrum 100 and 100N high performance Fourier Transform Infrared (FT-IR) and Fourier Transform Near-Infrared (FT-NIR) spectrometers provide a wide range of capabilities for infrared analysis in pharmaceuticals, fine chemicals, polymers, plastics and many other industries. |
| The LABWORKS laboratory information management system (LIMS). This robust information management system enables scientists to store, share and create reports on laboratory data in both small and large laboratory environments. |
| The LumiLux cellular screening platform enables ultra-high throughput flash and glow luminescence cellular screening with all types of cells in 1536-well format, and features an integrated cell stirrer. |
| Biochemical and cellular reagents, such as LANCE® and AlphaScreen® assay technologies, fluorescent labeled probes and GPCR cell lines and membranes. These reagents are used in and support a broad and flexible range of assays used for drug discovery, functional genomics, proteomics, and genotyping. |
| EnVision, a multilabel reader used in a wide range of high-throughput screening applications. It features two detectors enabling simultaneous dual wavelength reading, below emission reading, barcode |
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readers, a high speed light source and adjustment of measurement height function. The instrument is fully configurable, accepting microplates from 96 to 1,536 wells, and can be integrated into robotic systems. |
| The JANUS® Automated Workstation, an automation and liquid handling system consisting of a modular platform that enables one or two pipetting arms with different tip configurations as well as one-plate movement arm on a single workstation. JANUS is designed for the efficient automation of sample preparation procedures utilized in pharmaceutical, biotech, and research applications. |
| The UltraVIEW ERS Confocal Imaging System. This high-resolution, live cell imaging system allows for the observation and measurement of cellular and molecular processes. |
New Products. New product releases in 2006 by our Life and Analytical Sciences business include:
| The JANUS® Cellular Workstation, a fully automated liquid handling platform designed for cellular assays. |
| The FlexDrop PLUS Precision Reagent Dispenser for sample dispensing at nanoliter volumes. |
| LANCE® Ultra is a homogenous series of Time Resolved-Fluorescence Resonance Energy Transfer assays enabling higher sensitivity and productivity for GPCR and Kinase drug discovery applications. |
| The Geliance series is a new line of high-performance bio-imaging systems for DNA, RNA and protein chemiluminescent and fluorescent experiments. |
| The PhotoKinesis Accessory for the UltraVIEW Live Cell Imaging System improves the researchers ability to study fast-moving cells and rapid events in live cells using Fluorescence Recovery After Photobleaching (FRAP) and similar techniques. |
| ExacTag mass tags are a family of thiol and amine reactive isobaric mass tags for the quantification of protein expression and enable analysis of protein expression pharmacodynamics. Phos-tools, consisting of the Phos-trap and Phos-tag products, provide selectivity for the enrichment and detection of protein phosphorylation. |
| The Spectral Genomics Array Comparative Genomic Hybridization (CGH) Platform provides tools for improving gene expression validation, molecular karyotyping and genome profiling. |
| The CS Autoplex Workstation is designed to automate high content xMAP® technology assays utilizing the JANUS® Automated Workstation. |
| AlphaLISA is a homogeneous (all-in-one well) assay platform that provides an alternative to conventional Enzyme Linked ImmunoSorbent Assay (ELISA) techniques. Its high throughput capability and dynamic range enable researchers to miniaturize and automate ELISA-based assays used in drug discovery. |
| Ultra-Screen® is a first-trimester prenatal screening protocol combining ultrasound measurement of the fluid accumulation behind the neck of the fetus (nuchal translucency) with maternal serum markers. It is designed to provide patient specific risk for Down Syndrome, trisomy 18 and other chromosomal abnormalities. |
| The AutoPuncher automates the separation and handling of dried blood samples used in newborn screening. |
| The Optima 5000 Series of inductively coupled plasma optical emission spectroscopy (ICP-OES) instruments, enabling laboratories in the environmental, specialty metals, food, academic and governmental sectors to efficiently measure the composition of solutions. |
| The Clarus® 600 series Gas Chromatograph (GC) and Gas Chromatograph/Mass Spectrometers (GC/MS), which offer rapid heat-up and cool-down rates, allowing laboratories to reduce analytical cycle times. |
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| The Spotlight 400 Fourier Transform Infrared (FT-IR) and 400N Fourier Transform Near-Infrared (FT-NIR) Imaging Systems are used in product defect analysis, product performance, formulation, trace evidence testing and academic research. These systems serve a wide range of end markets, including polymers, chemicals and materials, academic research, pharmaceutical, cosmetics and forensics. |
| The Jade Differential Scanning Calorimeter (DSC) is a part of our complete line of thermal analysis tools used for a range of quality assurance/quality control applications, as well as for educational purposes. |
| The RamanStation 400 is a benchtop Raman spectrometer that provides labs with the ability to analyze solids, liquids, powders, gels, slurries and aqueous solutions in bulk or to address variation in sample distribution with imaging. The technology is applicable to a wide array of end markets, including pharmaceuticals, chemicals, forensics and academia. |
| The DMA 8000 is a thermal analysis system used by scientists in the polymers, composites, pharmaceuticals and food industries for applications ranging from simple quality control to advanced research. |
Brand Names. Our Life and Analytical Sciences segment offers additional products under various brand names, including Wallac®, Packard®, NEN®, OneSource®, AutoDELFIA®, Evolution, Chromera, MultiPROBE®, FlashBlue, ScanArray and Victor.
Optoelectronics
Our Optoelectronics segment provides a broad range of digital imaging, sensor and specialty lighting components used in biomedical, consumer products, and other specialty end markets. For fiscal 2006, our Optoelectronics segment generated sales of $401.8 million.
We are a leading supplier of amorphous silicon digital x-ray detectors, a technology for diagnostic medical imaging and radiation therapy. Amorphous silicon digital x-ray detectors replace film and produce improved image resolution and diagnostic capability for use in radiography, angiography, cardiac and cancer treatment. The amorphous silicon technology is important to medical imaging applications as well as to industrial nondestructive testing for defect recognition within automated manufacturing lines.
We have significant expertise in optical sensor technologies, with products used in a variety of applications. Some of the applications in which our optical sensors are used include sample detection in life sciences instruments, x-ray luggage screening, safety and security applications such as smoke detectors, HVAC controls, document handling/sorting, smart weaponry and non-contact temperature measurements for applications such as ear thermometers and consumer appliances.
Our specialty lighting technologies include xenon flashtubes, ceramic xenon light sources, intense pulsed light, laser pump sources, and LEDs. These products are used in a variety of applications including mobile phones, digital still and analog cameras, medical endoscopy equipment, home theater projectors, aesthetic applications including hair removal, skin rejuvenation and acne treatment, and laser machine tools.
Principal Products. The principal products of our Optoelectronics business include:
| Amorphous silicon digital x-ray detectors, an enabling technology for digital x-ray imaging that replaces film and produces improved image resolution and diagnostic capability in applications such as radiography, cardiology, angiography and cancer treatments. |
| Cermax® xenon short arc lamps and fiber optic light sources used in diagnostic and surgical endoscopes, surgical headlamps, microscopes and phototherapy systems. |
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| A wide range of optical detectors and light sources used in analytical instruments, drug discovery tools and clinical diagnostic systems. The detectors include charge coupled devices, avalanche photodiodes, photodiode arrays, channel photo multipliers, and our unique single photon counting module. The light sources include our Cermax® xenon short arc lamps described above as well as our line of guided arc xenon flash lamps. We also produce ultraviolet-visible range spectrometer sub-systems based on the above components. |
| Thermopile temperature sensors used in digital ear thermometers. |
| LED light sources coupled with photodiodes for signal detection, used in sensor modules for hand-held blood glucose meters. The sensing module represents the optical detection unit of the system. An LED-based reflective sensor is incorporated into the blood glucose meter to read out tracking information on the consumables. |
| Avalanche photodiode detectors for molecular imaging instrumentation, including pre-clinical Positron Emission Tomography (PET) scanners used by the medical research community to image molecular biology activity in small animals. |
| Xenon flashtubes for use in mobile phone cameras, digital still cameras, 35mm compact cameras and single use cameras. |
| Optical sensors used in a variety of safety and security applications, including x-ray luggage screening and smoke alarms, consumer applications such as laser printers, copiers, HVAC systems for monitoring of harmful gases in households, various automotive applications, and smart weaponry. |
| Linear xenon and argon flashlamps used in solid-state lasers in machine tools and other industrial applications. |
| Charge-coupled device cameras, which are used to detect defects in manufacturing processes, pilot vision systems and document sorting. |
| A range of products used in military and aerospace applications including lighting, detonators, power supplies and other specialty components. |
| Cermax® xenon lamps utilized in front projection applications for home theater and larger venues such as conference rooms and auditoriums which are able to deliver the required brightness while minimizing sacrifices in color performance. |
New Products. New product releases in 2006 by our Optoelectronics business include:
| New amorphous silicon flat panel detectors, which offer improved image quality, higher resolution, and speed and frame rates comparable to video and are used for digital acquisition of x-ray images for diagnostic medical and industrial inspection applications. |
| Trim Xe family of xenon flash products for digital still cameras and mobile phone camera applications. The Trim Xe delivers a 35% reduction in module size over prior generation xenon products, 1000x greater brightness than the brightest LEDs in consumer photography applications, and enables greater than 100x faster shutter speed and shorter exposure time than with LEDs. |
| DigiPyro, a dual-element pyroelectric infrared sensor for motion detection applications. The DigiPyro delivers performance advantages over analog pyrodetectors including significantly improved electromagnetic interference immunity, and space and cost savings from fewer components. |
| AesthetiPak, a water-cooled cartridge for use in intense pulsed light treatment systems. The new cartridge can be utilized in a broad range of light-based aesthetic and medical procedures including skin rejuvenation, dermatological treatments and hair removal. |
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| Pulsed EPI-Cavity Lasers, a compact pulsed laser chip series including both dual and triple EPI-Cavity Lasers, provides reliable, high output power in a small emitting area. The lasers are suitable for integration into a variety of range finding applications. |
| IR Natural Gas Sensor, a dual channel, digitally calibrated natural gas sensor module. |
| PAX-6, a new precision aligned 6-Watt xenon integrated light source for a variety of clinical diagnostics, life sciences, and analytical instrumentation applications. The fully integrated lamp module provides precision arc alignment and plug and play field replacement and ease of installation. |
| SmartBlue, a 2K pixel linear array camera incorporating high-end electronics, a digital communications interface and rugged industrial housing for applications including flat panel and web inspection, and machine vision. PerkinElmers SmartBlue camera incorporates the Reticon® photodiode arrays. |
| ACULED LHS-AL25 all color ultrabright LED lens holder system, a detachable lens collection system for specialty light applications such as medical, mood, and architectural lighting. The LHS-AL25, in combination with the ACULED, provides increased light intensity, high brightness, and brilliant color mixing. |
| VIGI-Lux 5770, a high intensity vision and illumination system for license plate recognition, infrared surveillance, and industrial machine vision applications. |
Brand Names. Our Optoelectronics business offers its products under various brand names, including Cermax®, Heimann, Reticon®, SmartBlue, MultiBlue, DigiPyro, ACULED, Trim Xe, AesthetiPak , VIGI-Lux , Power Systems, and Amorphous Silicon.
Marketing
All of our businesses market their products and services directly through their own specialized sales forces. As of December 31, 2006, we employed approximately 2,700 sales and service representatives operating in approximately 35 countries, and marketing products and services in approximately 125 countries. In addition, in geographic regions where we do not have a sales and service presence, we utilize distributors to sell our products.
Raw Materials and Supplies
Each of our businesses uses a wide variety of raw materials that are generally available from alternate sources of supply and in adequate quantities from domestic and foreign sources. We generally have two to five year contracts, with no minimum purchase requirements, with certain of our suppliers for these raw materials. For certain critical raw materials, we have qualified only a single source. We periodically purchase quantities of some of these critical raw materials in excess of current requirements, in anticipation of future manufacturing needs. With sufficient lead times, we believe we would be able to qualify alternative suppliers for each of these raw materials.
Intellectual Property
We own numerous United States and foreign patents and have patent applications pending in the United States and abroad. We also license intellectual property rights to and from third parties, some of which bear royalties and are terminable in specified circumstances. In addition to our patent portfolio, we possess a wide array of unpatented proprietary technology and know-how. We also own numerous United States and foreign trademarks and trade names for a variety of our product names, and have applications for the registration of trademarks and trade names pending in the United States and abroad. We believe that patents and other proprietary rights are important to the development of both of our reporting segments, but we also rely upon trade secrets, know-how, continuing technological innovations and licensing opportunities to develop and
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maintain the competitive position of both of our reporting segments. We do not believe that the loss of any one patent or other proprietary right would have a material adverse effect on our overall business or on any of our reporting segments.
In some cases, we may participate in litigation or other proceedings to defend against or assert claims of infringement, to enforce our patents or our licensors patents, to protect our trade secrets, know-how or other intellectual property rights, or to determine the scope and validity of our or third parties intellectual property rights. Litigation of this type could result in substantial cost to us and diversion of our resources. An adverse outcome in any litigation or proceeding could subject us to significant liabilities or expenses, require us to cease using disputed intellectual property or cease the sale of a product, or require us to license the disputed intellectual property from third parties. We are currently involved in several lawsuits involving claims of violation of intellectual property rights. See Item 3. Legal Proceedings for a discussion of these matters.
Backlog
We believe that backlog is not a meaningful indicator of future business prospects for any of our business units due to the short lead time required on a majority of our sales. Therefore, we believe that backlog information is not material to an understanding of our business.
Competition
Because of the wide range of our products and services, we face many different types of competition and competitors. This affects our ability to sell our products and services and the prices at which these products and services are sold. Our competitors range from large foreign and domestic organizations that produce a comprehensive array of goods and services and that may have greater financial and other resources, to small firms producing a limited number of goods or services for specialized market segments.
In our Life and Analytical Sciences segment, we compete on the basis of service level, price, technological innovation, product differentiation, product availability, quality and reliability. Competitors range from multinational organizations with a wide range of products to specialized firms that in some cases have well-established market niches. We expect the proportion of large competitors in this reporting segment to increase through the continued consolidation of competitors.
We do not believe any single competitor competes directly with our Optoelectronics segment across its full product range. However, we do compete with specialized manufacturing companies in the manufacturing and sale of specialty flashtubes and ultra specialty lighting sources, photo detectors and photodiodes, and switched power supplies. Competition is based on price, technological innovation, operational efficiency, and product reliability and quality.
We believe we compete effectively in each of the areas in which our businesses experience competition.
Research and Development
Research and development expenditures were approximately $99.7 million during fiscal 2006, approximately $87.4 million during fiscal 2005, and approximately $82.4 million during fiscal 2004.
We directed our research and development efforts in 2006, 2005 and 2004 primarily toward drug discovery, genetic screening, and environmental and chemical analysis tools within our Life and Analytical Sciences segment, and medical digital imaging, xenon flash and Cermax® lighting within our Optoelectronics segment.
Environmental Matters
Our operations are subject to various foreign, federal, state and local environmental and safety laws and regulations. These requirements include those governing emissions and discharges of hazardous substances, the
12
remediation of contaminated soil and groundwater, the regulation of radioactive materials, and the health and safety of our employees.
We may have liability under the Comprehensive Environmental Response Compensation and Liability Act, and comparable state statutes that impose liability for investigation and remediation of contamination without regard to fault, in connection with materials that we or our former businesses sent to various third-party sites. We have incurred, and expect to incur, costs pursuant to these statutes.
We are conducting a number of environmental investigations and remedial actions at our current and former locations and, along with other companies, have been named a potentially responsible party (PRP) for certain waste disposal sites. We accrue for environmental issues in the accounting period that our responsibility is established and when the cost can be reasonably estimated. We have accrued $3.5 million as of December 31, 2006, representing our managements estimate of the total cost of ultimate disposition of known environmental matters. This amount is not discounted and does not reflect any recovery of any amounts through insurance or indemnification arrangements. These cost estimates are subject to a number of variables, including the stage of the environmental investigations, the magnitude of the possible contamination, the nature of the potential remedies, possible joint and several liability, the time period over which remediation may occur, and the possible effects of changing laws and regulations. For sites where we have been named a PRP, our management does not currently anticipate any additional liability to result from the inability of other significant named parties to contribute. We expect that the majority of such accrued amounts could be paid out over a period of up to ten years. As assessment and remediation activities progress at each individual site, these liabilities are reviewed and adjusted to reflect additional information as it becomes available. There have been no environmental problems to date that have had or are expected to have a material adverse effect on our financial position, results of operations or cash flows. While it is possible that a loss exceeding the amounts recorded in the consolidated financial statements may be incurred, the potential exposure is not expected to be materially different from those amounts recorded.
We may become subject to new or unforeseen environmental costs or liabilities. Compliance with new or more stringent laws or regulations, stricter interpretations of existing laws, or the discovery of new contamination could cause us to incur additional costs.
Employees
As of December 31, 2006, we employed approximately 8,500 employees. Several of our subsidiaries are parties to contracts with labor unions and workers councils. As of December 31, 2006, we employed an aggregate of approximately 1,600 union and workers council employees. We consider our relations with employees to be satisfactory.
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Financial Information About Reporting Segments
The table below sets forth sales and operating profit (loss) by reporting segment for the 2006, 2005 and 2004 fiscal years:
2006 |
2005 |
2004 |
||||||||||
(In thousands) | ||||||||||||
Life and Analytical Sciences |
||||||||||||
Sales |
$ | 1,144,562 | $ | 1,081,104 | $ | 1,062,767 | ||||||
Operating profit |
115,372 | 110,228 | 103,609 | |||||||||
Optoelectronics |
||||||||||||
Sales |
401,796 | 392,727 | 366,322 | |||||||||
Operating profit |
70,021 | 58,405 | 59,096 | |||||||||
Other |
||||||||||||
Operating loss |
(31,991 | ) | (27,682 | ) | (25,029 | ) | ||||||
Continuing operations |
||||||||||||
Sales |
1,546,358 | 1,473,831 | 1,429,089 | |||||||||
Operating profit |
153,402 | 140,951 | 137,676 |
Discontinued operations have not been included in the preceding table.
Additional information relating to our reporting segments for the 2006, 2005 and 2004 fiscal years is as follows:
Depreciation and Amortization Expense |
Capital Expenditures | |||||||||||||||||
2006 |
2005 |
2004 |
2006 |
2005 |
2004 | |||||||||||||
(In thousands) | ||||||||||||||||||
Life and Analytical Sciences |
$ | 50,613 | $ | 46,217 | $ | 47,645 | $ | 25,973 | $ | 15,592 | $ | 6,747 | ||||||
Optoelectronics |
16,522 | 19,712 | 18,717 | 12,003 | 11,798 | 7,556 | ||||||||||||
Other |
2,049 | 1,069 | 1,237 | 6,497 | 603 | 1,515 | ||||||||||||
Continuing operations |
$ | 69,184 | $ | 66,998 | $ | 67,599 | $ | 44,473 | $ | 27,993 | $ | 15,818 | ||||||
Discontinued operations |
$ | 332 | $ | 7,272 | $ | 9,506 | $ | 109 | $ | 3,065 | $ | 3,143 | ||||||
Total Assets | ||||||
December 31, 2006 |
January 1, 2006 | |||||
(In thousands) | ||||||
Life and Analytical Sciences |
$ | 2,208,922 | $ | 1,994,502 | ||
Optoelectronics |
259,829 | 290,676 | ||||
Other |
39,489 | 380,636 | ||||
Net current and long-term assets of discontinued operations |
2,082 | 27,647 | ||||
$ | 2,510,322 | $ | 2,693,461 | |||
Financial Information About Geographic Areas
Each of our reporting segments conducts business in, and derives substantial revenue from, various countries outside the United States. During fiscal 2006, we had $956.0 million in sales from our international operations, representing approximately 62% of our total sales. During fiscal 2006, we derived approximately 78% of our international sales from our Life and Analytical Sciences segment, and approximately 22% of our international sales from our Optoelectronics segment. We anticipate that sales from international operations will continue to represent a substantial portion of our total sales in the future.
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We are exposed to the risks associated with international operations, including exchange rate fluctuations, regional and country-specific political and economic conditions, foreign receivables collection concerns, trade protection measures and import or export licensing requirements, tax risks, staffing and labor law concerns, intellectual property protection risks and differing regulatory requirements. Geographic information is discussed in Note 22 to our consolidated financial statements.
The following important factors affect our business and operations generally or affect multiple segments of our business and operations:
If we do not introduce new products in a timely manner, we may lose market share and be unable to achieve revenue growth targets.
We sell many of our products in industries characterized by rapid technological change, frequent new product and service introductions, and evolving customer needs and industry standards. Many of the businesses competing with us in these industries have significant financial and other resources to invest in new technologies, substantial intellectual property portfolios, substantial experience in new product development, regulatory expertise, manufacturing capabilities and the distribution channels to deliver products to customers. Our products could become technologically obsolete over time, or we may invest in technology that does not lead to revenue growth or continue to sell products for which the demand from our customers is declining, in which case we may lose market share or not achieve our revenue growth targets. The success of our new product offerings will depend upon several factors, including our ability to:
| accurately anticipate customer needs, |
| innovate and develop new technologies and applications, |
| successfully commercialize new technologies in a timely manner, |
| price our products competitively and manufacture and deliver our products in sufficient volumes and on time, and |
| differentiate our offerings from our competitors offerings. |
Many of our products are used by our customers to develop, test and manufacture their products. We must anticipate industry trends and consistently develop new products to meet our customers expectations. In developing new products, we may be required to make significant investments before we can determine the commercial viability of the new product. If we fail to accurately foresee our customers needs and future activities, we may invest heavily in research and development of products that do not lead to significant sales. We may also suffer a loss in market share and potential sales revenue if we are unable to commercialize our technology in a timely and efficient manner.
In addition, some of our licensed technology is subject to contractual restrictions, which may limit our ability to develop or commercialize products for some applications. For example, some of our license agreements are limited to the field of life sciences research, and exclude clinical diagnostics applications.
We may not be able to successfully execute acquisitions or license technologies, integrate acquired businesses or licensed technologies into our existing businesses, or make acquired businesses or licensed technologies profitable.
We have in the past, and may in the future, supplement our internal growth by acquiring businesses and licensing technologies that complement or augment our existing product lines. However, we may be unable to identify or complete promising acquisitions or license transactions for many reasons, including:
| competition among buyers and licensees, |
15
| the high valuations of businesses and technologies, |
| the need for regulatory and other approval, and |
| our inability to raise capital to fund these acquisitions. |
Some of the businesses we may seek to acquire may be unprofitable or marginally profitable. Accordingly, the earnings or losses of acquired businesses may dilute our earnings. For these acquired businesses to achieve acceptable levels of profitability, we must improve their management, operations, products and market penetration. We may not be successful in this regard and may encounter other difficulties in integrating acquired businesses into our existing operations, such as incompatible management, information or other systems, or cultural differences.
To finance our acquisitions, we may have to raise additional funds, either through public or private financings. We may be unable to obtain such funds or may be able to do so only on terms unacceptable to us.
We may not be successful in adequately protecting our intellectual property.
Patent and trade secret protection is important to us because developing new products, processes and technologies gives us a competitive advantage, although it is time-consuming and expensive. We own many United States and foreign patents and intend to apply for additional patents. Patent applications we file, however, may not result in issued patents or, if they do, the claims allowed in the patents may be narrower than what is needed to protect fully our products, processes and technologies. Similarly, applications to register our trademarks may not be granted in all countries in which they are filed. For our intellectual property that is protected by keeping it secret, such as trade secrets and know-how, we may not use adequate measures to protect this intellectual property.
Third parties may also challenge the validity of our issued patents, may circumvent or design around our patents and patent applications, or may claim that our products, processes or technologies infringe their patents. In addition, third parties may assert that our product names infringe their trademarks. We may incur significant expense in legal proceedings to protect our intellectual property against infringement by third parties or to defend against claims of infringement by third parties. Claims by third parties in pending or future lawsuits could result in awards of substantial damages against us or court orders that could effectively prevent us from manufacturing, using, importing or selling our products in the United States or other countries.
If we are unable to renew our licenses or otherwise lose our licensed rights, we may have to stop selling products or we may lose competitive advantage.
We may not be able to renew our existing licenses, or licenses we may obtain in the future, on terms acceptable to us, or at all. If we lose the rights to a patented or other proprietary technology, we may need to stop selling products incorporating that technology and possibly other products, redesign our products or lose a competitive advantage. Potential competitors could in-license technologies that we fail to license and potentially erode our market share.
Our licenses typically subject us to various economic and commercialization obligations. If we fail to comply with these obligations we could lose important rights under a license, such as the right to exclusivity in a market. In some cases, we could lose all rights under the license. In addition, rights granted under the license could be lost for reasons out of our control. For example, the licensor could lose patent protection for a number of reasons, including invalidity of the licensed patent, or a third party could obtain a patent that curtails our freedom to operate under one or more licenses.
If we do not compete effectively, our business will be harmed.
We encounter aggressive competition from numerous competitors in many areas of our business. We may not be able to compete effectively with all of these competitors. To remain competitive, we must develop new
16
products and periodically enhance our existing products. We anticipate that we may also have to adjust the prices of many of our products to stay competitive. In addition, new competitors, technologies or market trends may emerge to threaten or reduce the value of entire product lines.
Our quarterly operating results could be subject to significant fluctuation, and we may not be able to adjust our operations to effectively address changes we do not anticipate.
Given the nature of the markets in which we participate, we cannot reliably predict future sales and profitability. Changes in competitive, market and economic conditions may require us to adjust our operations, and we may not be able to make those adjustments or make them quickly enough to adapt to changing conditions. A high proportion of our costs are fixed, due in part to our research and development and manufacturing costs. Thus, small declines in sales could disproportionately affect our operating results in a quarter. Factors that may affect our quarterly operating results include:
| demand for and market acceptance of our products, |
| competitive pressures resulting in lower selling prices, |
| adverse changes in the level of economic activity in regions in which we do business, |
| adverse changes in industries, such as pharmaceutical and biomedical, on which we are particularly dependent, |
| changes in the portions of our sales represented by our various products and customers, |
| delays or problems in the introduction of new products, |
| our competitors announcement or introduction of new products, services or technological innovations, |
| increased costs of raw materials or supplies, and |
| changes in the volume or timing of product orders. |
If we are unable to produce an adequate quantity of products to meet our customers demands, our revenue growth may be adversely affected.
We have an established global manufacturing base with facilities in multiple locations around the world. Each of these facilities faces risks to its production capacity that may relate to natural disasters, labor relations or regulatory compliance. In addition, in any of these facilities, we may not manage the manufacturing or production processes at expected levels, we may fail to anticipate or act on the need to increase the production capacity, or we may be unable to quickly resolve technical manufacturing issues that arise from time to time. Any of these risks could cause our revenue growth to be adversely affected.
If we fail to maintain satisfactory compliance with the regulations of the United States Food and Drug Administration and other governmental agencies, we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil or criminal penalties.
Some of the products produced by our Life and Analytical Sciences segment are subject to regulation by the United States Food and Drug Administration (FDA) and similar international agencies. These regulations govern a wide variety of product activities, from design and development to labeling, manufacturing, promotion, sales, resales and distribution. If we fail to comply with those regulations or those of similar international agencies, we may have to recall products, cease their manufacture and distribution, and may be subject to fines or criminal prosecution.
Changes in governmental regulations may reduce demand for our products or increase our expenses.
We compete in markets in which we or our customers must comply with federal, state, local and foreign regulations, such as environmental, health and safety, and food and drug regulations. We develop, configure and
17
market our products to meet customer needs created by these regulations. Any significant change in these regulations could reduce demand for our products or increase our costs of producing these products.
Economic, political and other risks associated with foreign operations could adversely affect our international sales.
Because we sell our products worldwide, our businesses are subject to risks associated with doing business internationally. Our sales originating outside the United States represented the majority of our total sales in the fiscal year ended December 31, 2006. We anticipate that sales from international operations will continue to represent a substantial portion of our total sales. In addition, many of our manufacturing facilities, employees and suppliers are located outside the United States. Accordingly, our future results of operations could be harmed by a variety of factors, including:
| changes in foreign currency exchange rates, |
| changes in a countrys or regions political or economic conditions, particularly in developing or emerging markets, |
| longer payment cycles of foreign customers and difficulty of collecting receivables in foreign jurisdictions, |
| trade protection measures and import or export licensing requirements, |
| differing tax laws and changes in those laws, or changes in the countries in which we are subject to tax |
| differing business practices associated with foreign operations, |
| difficulty in staffing and managing widespread operations, |
| differing labor laws and changes in those laws, |
| differing protection of intellectual property and changes in that protection, and |
| differing regulatory requirements and changes in those requirements. |
If we do not retain our key personnel, our ability to execute our business strategy will be limited.
Our success depends to a significant extent upon the continued service of our executive officers and key management and technical personnel, particularly our experienced engineers, and on our ability to continue to attract, retain, and motivate qualified personnel. The competition for these employees is intense. The loss of the services of one or more of our key personnel could have a material adverse effect on our operating results. In addition, there could be a material adverse effect on us should the turnover rates for engineers and other key personnel increase significantly or if we are unable to continue to attract qualified personnel. We do not maintain any key person life insurance policy on any of our officers or employees.
Restrictions in our senior unsecured credit facility may limit our activities.
Our senior unsecured revolving credit facility contains, and future debt instruments to which we may become subject may contain, restrictive covenants that limit our ability to engage in activities that could otherwise benefit our company. Our senior unsecured revolving credit facility includes restrictions on our ability and the ability of our subsidiaries to:
| pay dividends on, redeem or repurchase our capital stock, |
| sell assets, |
| incur obligations that restrict their ability to make dividend or other payments to us, |
| guarantee or secure indebtedness, |
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| enter into transactions with affiliates, and |
| consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis. |
We are also required to meet specified financial ratios under the terms of our senior unsecured revolving credit facility. Our ability to comply with these financial restrictions and covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control such as foreign exchange rates, interest rates, changes in technology and changes in the level of competition.
Our failure to comply with any of these restrictions in our senior unsecured revolving credit facility may result in an event of default under that facility, which could permit acceleration of the debt under that facility, and require us to prepay that debt before its scheduled due date.
Our results of operations will be adversely affected if we fail to realize the full value of our intangible assets.
As of December 31, 2006, our total assets included $1.5 billion of net intangible assets. Net intangible assets consist principally of goodwill associated with acquisitions and costs associated with securing patent rights, trademark rights and technology licenses, net of accumulated amortization. We test certain of these itemsspecifically all of those that are considered non-amortizingon an annual basis for potential impairment by comparing the carrying value to the fair market value of the reporting unit to which they are assigned. All of our amortizing intangible assets are evaluated for impairment should discrete events occur that call into question the recoverability of the intangible.
Adverse changes in our business or the failure to grow our Life and Analytical Sciences segment may result in impairment of our intangible assets which could adversely affect our results of operations.
Item 1B. Unresolved Staff Comments
Not applicable.
As of December 31, 2006, our continuing operations occupied approximately 2,453,000 square feet. We own approximately 717,000 square feet of this space and lease the balance. We conduct our other operations in manufacturing and assembly plants, research laboratories, administrative offices and other facilities located in 6 states and 35 foreign countries.
Facilities outside of the United States account for approximately 1,325,000 square feet of our owned and leased property, or approximately 54% of our total occupied space.
Our real property leases are both short-term and long-term. We believe that our properties are well-maintained and are adequate for our present requirements.
The following table indicates, as of December 31, 2006, the approximate square footage of real property owned and leased attributable to the continuing operations of each of our reporting segments:
Owned |
Leased |
Total | ||||
(In square feet) | ||||||
Life and Analytical Sciences |
398,000 | 1,124,000 | 1,522,000 | |||
Optoelectronics |
319,000 | 559,000 | 878,000 | |||
Corporate offices |
| 53,000 | 53,000 | |||
Continuing operations |
717,000 | 1,736,000 | 2,453,000 | |||
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In papers dated October 23, 2002, Enzo Biochem, Inc. and Enzo Life Sciences, Inc. (collectively, Enzo) filed a complaint in the United States District Court for the Southern District of New York, Civil Action No. 02-8448, against Amersham plc, Amersham BioSciences, PerkinElmer, Inc., PerkinElmer Life Sciences, Inc., Sigma-Aldrich Corporation, Sigma Chemical Company, Inc., Molecular Probes, Inc., and Orchid BioSciences, Inc. The complaint alleges that we have breached our distributorship and settlement agreements with Enzo, infringed Enzos patents, engaged in unfair competition and fraud, and committed torts against Enzo by, among other things, engaging in commercial development and exploitation of Enzos patented products and technology, separately and together with the other defendants. Enzo seeks injunctive and monetary relief. In 2003, the court severed the lawsuit and ordered Enzo to serve individual complaints against the five defendants. We subsequently filed an answer and a counterclaim alleging that Enzos patents are invalid. In July 2006, the court issued a decision regarding the construction of the claims in Enzos patents that effectively limited the coverage of certain of those claims and, we believe, excludes certain of our products from the coverage of Enzos patents. Discovery is ongoing. No trial date has been set, but summary judgment motions were filed by the defendants in January 2007.
On October 17, 2003, Amersham Biosciences Corp. filed a complaint, which was subsequently amended, in the United States District Court for New Jersey, Civil Action No. 03-4901, against our subsidiary, alleging that our ViewLux and certain of our Image FlashPlate products infringe three of Amershams patents related to high-throughput screening (the NJ case). On August 18, 2004, Amersham plc filed a complaint against two of our United Kingdom-based subsidiaries in the Patent Court of the English High Court of Justice, Case No. 04C02688, alleging that our same products infringe one corresponding Amersham patent in the United Kingdom, which was granted in August 2004 (the UK case). Amersham seeks injunctive and monetary relief in both cases. We filed answers and counterclaims in both cases. On October 29, 2003, we filed a complaint, which was subsequently amended, against Amersham in the United States District Court for Massachusetts, Civil Action No. 03-12098, alleging that Amershams IN Cell Analyzer, and LEADseeker Multimodality Imaging system and certain Cyclic AMP and IP3 assays infringe two of our patents related to high-throughput screening (the MA case). We seek injunctive and monetary relief. Amersham subsequently filed an answer and counterclaims. After a trial in the UK case in December 2005, the court ruled in February 2006 that Amershams patent in question was invalid in the United Kingdom and awarded costs to us. Amersham initiated an appeal of the ruling in the UK case but withdrew that appeal in January 2007. In May 2006, the court in the NJ case issued a decision regarding the construction of the claims in Amershams patents that adopted many of Amershams claim construction positions. Our motion asking the court to reconsider that decision was denied. Discovery has not yet been completed in either the NJ or MA case, nor has a trial date been set in either case. A voluntary mediation occurred in September 2006, but did not result in a resolution of these matters. Fact discovery, which was stayed pending the mediation, has now resumed. At the suggestion of the court in the NJ case, additional mediation is being scheduled.
We believe we have meritorious defenses to these lawsuits and other proceedings, and we are contesting the actions vigorously in all of the above matters. We are currently unable, however, to reasonably estimate the amount of loss, if any, that may result from the resolution of these matters or to determine whether resolution of any of these matters will have a material adverse impact on our consolidated financial statements included in this annual report on Form 10-K.
We are also subject to various other claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities. Each of these matters is subject to uncertainties, and it is possible that some of these matters may be resolved unfavorably to us. We have established accruals for potential losses that we believe are probable and reasonably estimable. In the opinion of our management, based on its review of the information available at this time, the total cost of resolving these other contingencies at December 31, 2006 should not have a material adverse effect on our consolidated financial statements included in this annual report on Form 10-K.
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Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
Listed below are our executive officers as of March 1, 2007. No family relationship exists between any one of these officers and any of the other executive officers or directors.
Name |
Position |
Age | ||
Gregory L. Summe |
Chairman of the Board, Chief Executive Officer and President | 50 | ||
Robert F. Friel |
Vice Chairman and PresidentLife and Analytical Sciences | 51 | ||
Jeffrey D. Capello |
Senior Vice President, Chief Financial Officer | 42 | ||
Katherine A. OHara |
Senior Vice President, General Counsel and Secretary | 48 | ||
Richard F. Walsh |
Senior Vice President and Chief Administrative Officer | 54 | ||
John A. Roush |
Senior Vice President, PresidentOptoelectronics | 41 | ||
Michael L. Battles |
Vice President, Corporate Controller and Chief Accounting Officer | 38 |
Gregory L. Summe, 50. Mr. Summe was named our Chief Executive Officer effective January 1, 1999 and Chairman effective April 27, 1999. He joined us as President and Chief Operating Officer in January 1998. From 1993 to 1998, Mr. Summe held several management positions with AlliedSignal, Inc., now Honeywell International: President of the Automotive Products Group, President of Aerospace Engines, and President of General Aviation Avionics. Prior to joining AlliedSignal, Inc., he worked at General Electric, and was a partner at McKinsey & Company, where he worked from 1983 to 1992. Mr. Summe is a director of State Street Corporation. He holds a Bachelor of Science degree and a Master of Science degree in electrical engineering from the University of Kentucky and the University of Cincinnati, respectively, and a Master of Business Administration degree from the Wharton School at the University of Pennsylvania.
Robert F. Friel, 51. Mr. Friel joined us in February 1999 as our Senior Vice President and Chief Financial Officer. In 2004, he was named Executive Vice President and Chief Financial Officer with responsibility for business development and information technology, in addition to his oversight of the finance functions. In January 2006, he was named our Vice Chairman, President of Life and Analytical Sciences and elected to our Board of Directors. From 1980 to 1999, he held several positions at AlliedSignal, Inc., now Honeywell International, including Corporate Vice President and Treasurer from 1997 to 1999 and Vice President, Finance and Administration of Aerospace Engines from 1992 to 1996. He holds a Bachelor of Arts degree in economics from Lafayette College and a Master of Science degree in taxation from Fairleigh Dickinson University. Mr. Friel is a Director of Millennium Pharmaceuticals, Inc. and Fairchild Semiconductor, Inc.
Jeffrey D. Capello, 42. Mr. Capello joined us in June 2001 as our Vice President of Finance, Corporate Controller and Treasurer and was named Chief Accounting Officer in April 2002. In January 2006, he was named Senior Vice President and Chief Financial Officer with responsibilities for Business Development in addition to his oversight of the finance function. From 1991 to June 2001, he held various positions including that of partner from 1997 to 2001 at PricewaterhouseCoopers LLP, a public accounting firm, initially in the United States and later in the Netherlands. He holds a Bachelor of Science degree in business administration from the University of Vermont and a Master of Business Administration degree from the Harvard Business School.
Katherine A. OHara, 48. Ms. OHara joined us in May 2005 as Senior Vice President, General Counsel and Secretary of PerkinElmer, Inc. Prior to joining PerkinElmer in May 2005, Ms. OHara served as Vice President and Associate General Counsel for Avon Products, Inc. During her 11 years with Avon, she held responsibilities in the areas of legal and regulatory compliance, corporate finance and corporate governance. Before joining Avon, Ms. OHara had been an associate at Davis Polk & Wardwell, focusing on capital markets transactions for
21
global clients. Previously, she had been Assistant Vice President at Morgan Guaranty Trust Company of New York, responsible for the Argentine business unit. Ms. OHara holds a Bachelor of Arts degree from Duke University and a Juris Doctorate degree from the Columbia University School of Law.
Richard F. Walsh, 54. Mr. Walsh joined us in July 1998 as our Senior Vice President of Human Resources and in January 2006 was also named our Chief Administrative Officer. From 1995 to 1998, he served as Senior Vice President of Human Resources of ABB Americas, Inc., the United States subsidiary of an international engineering company. Prior to that, Mr. Walsh held a number of managerial positions in human resources with ABB starting in 1989. His prior employment was with Unilever where he spent nine years in human resource management. Mr. Walsh holds a Bachelor of Science degree in marketing and a Master of Business Administration degree from LaSalle University, and a Master of Arts in counseling from Villanova University.
John A. Roush, 41. Mr. Roush was named Vice President of PerkinElmer and President of our Optoelectronics business in November 2004. In January of 2006, Mr. Roush was named Senior Vice President of PerkinElmer and remains President of our Optoelectronics business. Mr. Roush first joined us in 1999 as General Manager of a specialty lighting division within our Optoelectronics business, and subsequently held several additional roles within Optoelectronics. From 2001 to 2002, he served as Vice President & General Manager of the Sensors business, and from 2002 to 2004, he held the role of Vice President of Sales & Product Management. Before joining PerkinElmer, Mr. Roush held leadership positions with General Electric, Allied Signal (now Honeywell International), and McKinsey & Company. Mr. Roush holds a Bachelor of Science degree in electrical engineering from Tufts University and a Master of Business Administration degree from the Harvard Business School.
Michael L. Battles, 38. Mr. Battles was named Chief Accounting Officer in November 2006. Mr. Battles joined PerkinElmer in November 2001 as Global Controller of our Analytical Instruments division. Beginning in 2003, he served as Director of Technical Accounting, Controls and Compliance and in October 2005 was appointed Vice President, Corporate Controller, a position he continues to hold. Prior to joining PerkinElmer, Mr. Battles held several positions at Deloitte & Touche LLP from 1990 until 2001, including senior manager, accounting and auditing from 1998 to 2001. Mr. Battles holds a Bachelor of Science degree in business administration with a concentration in accounting from the University of Vermont. Mr. Battles is also a certified public accountant.
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PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Price of Common Stock
Our common stock is listed and traded on the New York Stock Exchange. The following table sets forth the high and low per share sale prices for our common stock on that exchange for each fiscal quarter in 2006 and 2005.
2006 Fiscal Quarters | ||||||||||||
First |
Second |
Third |
Fourth | |||||||||
High |
$ | 24.08 | $ | 23.67 | $ | 21.31 | $ | 22.48 | ||||
Low |
21.80 | 20.10 | 17.89 | 18.83 | ||||||||
2005 Fiscal Quarters | ||||||||||||
First |
Second |
Third |
Fourth | |||||||||
High |
$ | 23.66 | $ | 20.80 | $ | 21.55 | $ | 23.86 | ||||
Low |
19.81 | 18.01 | 19.17 | 20.60 |
As of February 23, 2007, we had approximately 7,676 holders of record of our common stock.
Stock Repurchase Program
On October 21, 2005 our Board of Directors reaffirmed our authority to repurchase up to 10,000,000 shares of our common stock, which we publicly disclosed on November 14, 2005 (the Program). During the fourth quarter of 2005, we repurchased 1,096,000 shares of our common stock in the open market under the Program at an aggregate cost of $24.4 million, including commissions. During the first quarter of 2006, we repurchased 5,000,000 shares of our common stock in the open market under the Program at an aggregate cost of $116.4 million, including commissions. We did not repurchase any shares of our common stock in the second quarter of 2006. During the third quarter of 2006, we repurchased 3,904,000 shares of our common stock in the open market under the Program at an aggregate cost of $73.7 million, including commissions, completing the repurchase of 10,000,000 shares in the aggregate, the maximum authorized under the Program. We did not repurchase any shares of our common stock in the fourth quarter of 2006.
On November 6, 2006, we announced that our Board of Directors authorized us to repurchase up to 10,000,000 additional shares of our common stock under a new stock repurchase program (the New Program). The New Program will expire on October 25, 2010 unless this authorization is terminated earlier by our Board. The New Program may also be suspended or discontinued at any time. From January 1, 2007 through February 23, 2007, we repurchased 2,377,900 shares of our common stock in the open market under the New Program at an aggregate cost of $57.0 million, including commissions.
Dividends
During the 2006 and 2005 fiscal years, we declared regular quarterly cash dividends on our common stock. The table below sets forth the cash dividends per share that we declared on our common stock during each of those fiscal years, by quarter.
2006 Fiscal Quarters |
2006 Total | ||||||||||||||
First |
Second |
Third |
Fourth |
||||||||||||
Cash dividends per common share |
$ | 0.07 | $ | 0.07 | $ | 0.07 | $ | 0.07 | $ | 0.28 | |||||
2005 Fiscal Quarters |
2005 Total | ||||||||||||||
First |
Second |
Third |
Fourth |
||||||||||||
Cash dividends per common share |
$ | 0.07 | $ | 0.07 | $ | 0.07 | $ | 0.07 | $ | 0.28 |
23
While it is our current intention to pay regular quarterly cash dividends, any decision to pay future cash dividends will be made by our Board of Directors and will depend on our earnings, financial condition and other factors. For further information related to our stockholders equity, refer to Note 19 included in our notes to consolidated financial statements included in this annual report on Form 10-K.
Stock Performance Graphs
Set forth below are two line graphs comparing the cumulative total shareholder return on our common stock against the cumulative total return of the S&P Composite-500 Index and a Peer Group Index for (1) the five fiscal years from December 30, 2001 to December 31, 2006, and (2) the nine fiscal years from December 28, 1997 to December 31, 2006. Our Peer Group Index comprises the following companies: Affymetrix, Inc., Applied Biosystems, Beckman Coulter, Inc., Invitrogen Corporation, Millipore Corporation, Thermo Fisher Scientific Inc. (formerly known as Thermo Electron Corporation), Varian, Inc. and Waters Corporation.
Comparison of Five-Year Cumulative Total Return
PerkinElmer, Inc. Common Stock, S&P Composite-500 and
Peer Group Indices
TOTAL RETURN TO SHAREHOLDERS
(Includes reinvestment of dividends)
December 30, 2001 |
December 29, 2002 |
December 28, 2003 |
January 2, 2005 |
January 1, 2006 |
December 31, 2006 | |||||||||||||
PerkinElmer, Inc. |
$ | 100.00 | $ | 23.23 | $ | 49.78 | $ | 67.56 | $ | 71.74 | $ | 68.57 | ||||||
S&P 500 Index |
$ | 100.00 | $ | 76.65 | $ | 97.70 | $ | 109.92 | $ | 115.32 | $ | 133.53 | ||||||
Peer Group |
$ | 100.00 | $ | 58.99 | $ | 82.95 | $ | 99.51 | $ | 102.68 | $ | 116.40 |
24
Comparison of Nine-Year Cumulative Total Return
PerkinElmer, Inc. Common Stock, S&P Composite-500 and
Peer Group Indices
TOTAL RETURN TO SHAREHOLDERS
(Includes reinvestment of dividends)
Dec. 28, 1997 |
Jan. 3, 1999 |
Jan. 2, 2000 |
Dec. 31, 2000 |
Dec. 30, 2001 |
Dec. 29, 2002 |
Dec. 28, 2003 |
Jan. 2, 2005 |
Jan. 1, 2006 |
Dec. 31, 2006 | |||||||||||||||||||||
PerkinElmer, Inc. |
$ | 100.00 | $ | 141.79 | $ | 216.30 | $ | 549.78 | $ | 377.45 | $ | 87.68 | $ | 187.91 | $ | 255.00 | $ | 270.77 | $ | 258.83 | ||||||||||
S&P 500 Index |
$ | 100.00 | $ | 133.24 | $ | 161.28 | $ | 146.59 | $ | 130.63 | $ | 100.12 | $ | 127.62 | $ | 143.58 | $ | 150.64 | $ | 174.43 | ||||||||||
Peer Group |
$ | 100.00 | $ | 93.54 | $ | 170.84 | $ | 288.00 | $ | 170.75 | $ | 100.73 | $ | 141.64 | $ | 169.92 | $ | 175.32 | $ | 198.75 |
Item 6. Selected Financial Data
The following table sets forth selected historical financial information as of and for each of the fiscal years in the five-year period ended December 31, 2006. We derived the selected historical financial information as of and for each of the fiscal years in the three-year period ended December 31, 2006 from our audited consolidated financial statements which are included elsewhere in this annual report on Form 10-K. We derived the selected historical financial information as of and for the fiscal years ended December 28, 2003 and December 29, 2002 from our audited consolidated financial statements which are not included in this annual report on Form 10-K. As with our financial statements for the fiscal years ended January 1, 2006 and January 2, 2005, we adjusted the information in the financial statements for the fiscal years ended December 28, 2003 and December 29, 2002, where appropriate, to account for our discontinued operations.
Our historical financial information may not be indicative of our results of operations or financial position that you should expect in the future.
25
You should read the following selected historical financial information together with our Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements, including the related notes, included elsewhere in this annual report on Form 10-K.
Fiscal Year Ended |
|||||||||||||||||||
December 31, 2006 |
January 1, 2006 |
January 2, 2005 |
December 28, 2003 |
December 29, 2002 |
|||||||||||||||
(In thousands, except per share data) | |||||||||||||||||||
Income Statement Data: |
|||||||||||||||||||
Sales |
$ | 1,546,358 | $ | 1,473,831 | $ | 1,429,089 | $ | 1,344,540 | $ | 1,296,829 | |||||||||
Operating income(1) |
153,402 | 140,951 | 137,676 | 126,955 | 10,998 | ||||||||||||||
Other expense, net(2) |
2,666 | 74,291 | 38,332 | 53,513 | 29,786 | ||||||||||||||
Income (loss) from continuing operations before taxes(3) |
150,736 | 66,660 | 99,344 | 73,442 | (18,788 | ) | |||||||||||||
Income (loss) from continuing operations, net of income taxes(4) |
118,324 | 66,532 | 75,879 | 50,755 | (10,404 | ) | |||||||||||||
(Loss) income from discontinued operations, net of income taxes |
(1,174 | ) | 15,214 | 20,659 | 2,652 | (10,274 | ) | ||||||||||||
Gain (loss) on dispositions of discontinued operations, net of income taxes(7)(8)(9) |
2,433 | 186,362 | (495 | ) | (448 | ) | (13,460 | ) | |||||||||||
Net income (loss) before effect of accounting change |
119,583 | 268,108 | 96,043 | 52,959 | (34,138 | ) | |||||||||||||
Effect of accounting change, net of income tax(10) |
| | | | (117,800 | ) | |||||||||||||
Net income (loss) |
$ | 119,583 | $ | 268,108 | $ | 96,043 | $ | 52,959 | $ | (151,938 | ) | ||||||||
Basic earnings (loss) per share: |
|||||||||||||||||||
Continuing operations |
$ | 0.95 | $ | 0.51 | $ | 0.60 | $ | 0.40 | $ | (0.08 | ) | ||||||||
Discontinued operations |
0.01 | 1.56 | 0.16 | 0.02 | (0.19 | ) | |||||||||||||
Effect of accounting change, net of |
| | | | (0.94 | ) | |||||||||||||
Net income (loss) |
$ | 0.96 | $ | 2.07 | $ | 0.75 | $ | 0.42 | $ | (1.21 | ) | ||||||||
Diluted earnings (loss) per share: |
|||||||||||||||||||
Continuing operations |
$ | 0.94 | $ | 0.51 | $ | 0.59 | $ | 0.40 | $ | (0.08 | ) | ||||||||
Discontinued operations |
0.01 | 1.54 | 0.16 | 0.02 | (0.19 | ) | |||||||||||||
Effect of accounting change, net of |
| | | | (0.94 | ) | |||||||||||||
Net income (loss) |
$ | 0.95 | $ | 2.04 | $ | 0.74 | $ | 0.41 | $ | (1.21 | ) | ||||||||
Weighted-average common shares outstanding: |
|||||||||||||||||||
Basic: |
125,203 | 129,267 | 127,345 | 126,363 | 125,439 | ||||||||||||||
Diluted: |
126,512 | 131,140 | 129,429 | 127,741 | 125,439 | ||||||||||||||
Cash dividends per common share |
$ | 0.28 | $ | 0.28 | $ | 0.28 | $ | 0.28 | $ | 0.28 | |||||||||
As of |
|||||||||||||||||||
December 31, 2006 |
January 1, 2006 |
January 2, 2005 |
December 28, 2003 |
December 29, 2002 |
|||||||||||||||
Balance Sheet Data: |
|||||||||||||||||||
Total assets |
$ | 2,510,322 | $ | 2,693,461 | $ | 2,575,507 | $ | 2,607,727 | $ | 2,825,482 | |||||||||
Short-term debt |
1,153 | 1,131 | 9,714 | 5,167 | 191,408 | ||||||||||||||
Long-term debt |
151,781 | 243,282 | 364,874 | 544,307 | 614,053 | ||||||||||||||
Stockholders equity(5)(6) |
1,577,730 | 1,650,513 | 1,460,085 | 1,349,050 | 1,252,344 | ||||||||||||||
Common shares outstanding |
123,255 | 130,109 | 129,059 | 126,909 | 125,854 |
26
(1) | We adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment (SFAS No. 123(R)), on January 2, 2006. The total incremental pre-tax compensation related to stock options was $9.2 million in 2006. |
(2) |
In 2005, we incurred $54.9 million in fees associated with the extinguishment of our senior subordinated 8 7/8% notes due 2013 offset by gains on the sales of investments of $5.8 million. |
(3) | We incurred pre-tax restructuring (reversals) charges, net, of ($3.6) million in 2006, $22.1 million in 2005, ($2.8) million in 2003 and $36.6 million in 2002. The 2002 pre-tax restructuring charge primarily related to the combination of our Life Science and Analytical Instruments businesses into the Life and Analytical Sciences segment. |
(4) | The 2005 effective tax rate on continuing operations of 0.19% was largely due to a $27.5 million benefit related to the settlement of federal, state and foreign income tax audits and an additional accrual of $15.5 million related to the homeland investment provisions of the American Jobs Creation Act of 2004. |
(5) | In 2006, we adopted Statement of SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). The impact of adopting SFAS No. 158 was a reduction to accumulated other comprehensive income of $32.7 million, a reduction to other assets of $26.6 million, an increase to current liabilities of $7.3 million, an increase to current assets of $0.7 million and a reduction to long-term liabilities of $0.4 million, with no impact to our consolidated statements of operations or statements of cash flows. |
(6) | In 2006, we repurchased in the open market 8.9 million shares of our common stock at an aggregate cost of $190.1 million, including commissions. The repurchased shares have been reflected as additional authorized but unissued shares, with the payments reflected in common stock and capital in excess of par value. These repurchases were made pursuant to our stock repurchase program announced in November 2005 (the Program). |
(7) | In 2006, we sold substantially all of the assets of our Fluid Sciences Semiconductor business for approximately $26.5 million, subject to a net working capital adjustment, plus potential additional contingent consideration. We recognized a pre-tax gain of $3.8 million, exclusive of additional contingent consideration. |
(8) | In 2005, we sold the Aerospace and Fluid Testing businesses of our Fluid Sciences segment for a net pre-tax gain of $280.9 million. Net pre-tax losses of $8.5 million related to the sale of the Lithography Business and Fiber Optic Test Equipment Business were partially offset by other pre-tax gains of $1.4 million that related to multiple discontinued operations. |
(9) | In 2002, we sold the Security and Detection Systems business for a net pre-tax gain on the sale of $15.0 million. We also approved separate plans to shut down our Telecommunications Component and sell our Entertainment Lighting businesses with related losses recorded to reduce the assets to the amount estimated to be fair value less cost to sell Entertainment Lighting business of $2.1 million and Telecommunications Component business of $18.4 million. |
(10) | We adopted Statement of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142) in 2002. We completed our transitional implementation of the impairment of testing provisions of SFAS No. 142, which resulted in a $117.8 million after-tax charge for goodwill associated with the lighting reporting unit within the Optoelectronics segment. |
27
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
This annual report on Form 10-K, including the following managements 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.
Overview
We are a leading provider of scientific instruments, consumables and services to the pharmaceutical, biomedical, academic research, environmental testing and general industrial markets, commonly referred to as the health sciences and photonics markets. We design, manufacture, market and service products and systems within two businesses, each constituting a separate reporting segment:
| Life and Analytical Sciences. We are a leading provider of drug discovery, genetic screening and environmental and chemical analysis tools, including instruments, reagents, consumables, and services. |
| Optoelectronics. We provide a broad range of digital imaging, sensor and specialty lighting components used in the biomedical, consumer products and other specialty end markets. |
The health sciences markets include all of the businesses in our Life and Analytical Sciences segment and the medical imaging business, as well as elements of the medical sensors and lighting businesses in our Optoelectronics segment. The photonics markets include the remaining businesses in our Optoelectronics segment.
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. The fiscal years ended December 31, 2006 and January 1, 2006 included 52 weeks. The fiscal year ended January 2, 2005 included 53 weeks.
Consolidated Results of Continuing Operations
Sales
2006 Compared to 2005. Sales for 2006 were $1,546.4 million versus $1,473.8 million during 2005, an increase of $72.6 million, or 5%. Acquisitions increased 2006 sales by $21.6 million over 2005. Changes in foreign exchange rates increased sales by $9.8 million over 2005. The analysis in the remainder of this paragraph compares segment sales for 2006 as compared to 2005 and includes the effect of foreign exchange rate fluctuations and acquisitions. The total increase in sales includes a $63.5 million, or 6%, increase in our Life and Analytical Sciences segment sales, which grew from $1,081.1 million in 2005 to $1,144.6 in 2006 primarily due to increases in sales of service of $31.8 million, instruments of $29.8 and consumables and reagents of $1.9 million. Our Optoelectronics segment sales grew $9.1 million, or 2%, from $392.7 million in 2005 to $401.8 million in 2006 primarily due to sales of our digital imaging products increasing by $15.1 million, while sales within our sensors and specialty lighting product lines decreased $6.0 million.
28
2005 Compared to 2004. Sales for 2005 were $1,473.8 million, versus $1,429.1 million during 2004, an increase of $44.7 million, or 3%. Acquisitions increased 2005 sales by $12.1 million over 2004, whereas changes in foreign exchange rates had an immaterial impact on sales on a year-over-year basis. Fiscal 2005 had 52 weeks compared to 53 weeks in fiscal 2004. In the fourth quarter of fiscal 2004, an average weeks sales represented $29.4 million. The analysis in the remainder of this paragraph compares significant sales for 2005 as compared to 2004 and includes the effect of foreign exchange rate fluctuations and the previously mentioned extra week during 2004. The total increase in sales reflects an $18.3 million, or 2%, increase in our Life and Analytical Sciences segment sales, which grew from $1,062.8 million in 2004 to $1,081.1 in 2005. Our Optoelectronics segment sales grew $26.4 million, or 7%, from $366.3 million in 2004 to $392.7 million in 2005.
Cost of Sales
2006 Compared to 2005. Cost of sales for 2006 was $918.3 million, versus $859.3 million for 2005, an increase of $59.0 million, or 7%. As a percentage of sales, cost of sales increased to 59.4% in 2006 from 58.3% in 2005, resulting in a decrease in gross margin of 110 basis points to 40.6% in 2006 from 41.7% in 2005. This decrease was primarily attributable to unfavorable product and geography mix of sales, pricing pressures and inflation, including commodity costs during 2006. Partially offsetting these items were efficiencies gained through increased production volume and successful execution of productivity initiatives. Amortization of intangible assets was $29.2 million in 2006 as compared to $27.8 million in 2005. With the adoption of SFAS No. 123(R), cost of sales for 2006 also included stock option expense of $1.3 million. No stock option expense was recorded in 2005.
2005 Compared to 2004. Cost of sales for 2005 was $859.3 million, versus $846.3 million for 2004, an increase of $13.0 million, or 2%. As a percentage of sales, cost of sales decreased to 58.3% in 2005 from 59.2% in 2004, resulting in an increase in gross margin of 90 basis points to 41.7% in 2005 from 40.8% in 2004. The increase in gross margin was largely attributable to higher sales volume enabling better leveraging of fixed costs and increased manufacturing productivity, offset by pricing pressures and inflation, including commodity costs in 2005 and higher contribution of Optoelectronics revenue as a percentage of overall sales. While Optoelectronics does have lower gross margins than Life and Analytical Sciences, it also has lower operating expenses as a percentage of sales. Amortization of intangible assets was $27.8 million in 2005 as compared to $27.6 million in 2004.
Selling, General and Administrative Expenses
2006 Compared to 2005. Selling, general and administrative expenses for 2006 were $376.9 million, versus $365.5 million for 2005, an increase of $11.4 million, or 3%. As a percentage of sales, selling, general and administrative expenses decreased 40 basis points to 24.4% in 2006 from 24.8% in 2005. This decrease was the result of increased fixed cost leverage and cost controls, offset in part by increased investment in business development activities, stock option expense and an increase in the number of sales employees in emerging markets and higher growth product lines. Amortization of intangible assets was $3.0 million in 2006 as compared to $0.8 million in 2005. With the adoption of SFAS No. 123(R), selling, general and administrative expenses for 2006 also included $7.2 million of stock option expense whereas no stock option expense was recorded in 2005.
2005 Compared to 2004. Selling, general and administrative expenses for 2005 were $365.5 million, versus $362.3 million for 2004, an increase of $3.2 million, or 1%. As a percentage of sales, selling, general and administrative expenses decreased 60 basis points to 24.8% in 2005 from 25.4% in 2004. The decrease as a percentage of sales of 60 basis points in 2005 was primarily due to net productivity improvements and cost reductions in both our Life and Analytical Sciences and Optoelectronics segments. Amortization of intangible assets was $0.8 million in 2005.
29
Research and Development Expenses
2006 Compared to 2005. Research and development expenses for 2006 were $99.7 million versus $87.4 million in 2005, an increase of $12.3 million, or 14%. As a percentage of sales, research and development expenses increased to 6.4% in 2006 from 5.9% in 2005. Amortization of intangible assets was $1.6 million in 2006 as compared to $0.1 million in 2005. With the adoption of SFAS No. 123(R), research and development expenses for 2006 also included $0.7 million of stock option expense whereas no stock option expense was recorded in 2005. We directed research and development efforts during 2006 and 2005 primarily toward genetic screening, biopharmaceutical, and environmental and chemical end markets within our Life and Analytical Sciences segment and medical digital imaging within our Optoelectronics segment in order to help accelerate our growth initiatives. We expect our research and development spending to increase on both an absolute and percentage of sales basis in 2007, and to continue to emphasize these same markets.
2005 Compared to 2004. Research and development expenses for 2005 were $87.4 million versus $82.4 million in 2004, an increase of $5.0 million, or 6%. As a percentage of sales, research and development expenses increased to 5.9% in 2005 from 5.8% in 2004. Amortization of intangible assets was $0.1 million in 2005. We directed research and development efforts during 2005 and 2004 primarily toward drug discovery, genetic screening and environmental and chemical analysis tools within our Life and Analytical Sciences segment, and medical digital imaging and Cermax® lighting within our Optoelectronics segment.
Restructuring (Reversals) and Integration Charges, Net
2006 Compared to 2005. Restructuring and integration (reversals) and charges, net, for 2006 were ($3.6) million versus $22.1 million for 2005. The following table summarizes our restructuring accrual balances and related activity by restructuring plan during 2006, 2005 and 2004:
Balance at 12/28/2003 |
2004 Amounts paid |
Balance at 1/02/2005 |
2005 Charges |
2005 Amounts paid and incurred |
2005 Changes in Estimates |
Balance at 1/1/2006 |
2006 Charges |
2006 Amounts paid and incurred |
2006 Changes in Estimates |
Balance at 12/31/2006 | ||||||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||||||||
2001 to 2003 plans |
$ | 7,159 | $ | (4,481 | ) | $ | 2,678 | $ | | $ | (1,944 | ) | $ | 5,430 | $ | 6,164 | $ | | $ | (2,001 | ) | $ | (2,651 | ) | $ | 1,512 | ||||||||||||
Q2 2005 plan |
| | | 8,251 | (5,510 | ) | (403 | ) | 2,338 | | (1,358 | ) | (577 | ) | 403 | |||||||||||||||||||||||
Q4 2005 plan |
| | | 8,223 | (6,077 | ) | | 2,146 | | (789 | ) | (1,167 | ) | 190 | ||||||||||||||||||||||||
Q2 2006 plan |
| | | | | | | 755 | (650 | ) | | 105 | ||||||||||||||||||||||||||
Restructuring |
7,159 | (4,481 | ) | 2,678 | 16,474 | (13,531 | ) | 5,027 | 10,648 | 755 | (4,798 | ) | (4,395 | ) | 2,210 | |||||||||||||||||||||||
Integration |
874 | (507 | ) | 367 | 564 | (337 | ) | | 594 | | (73 | ) | | 521 | ||||||||||||||||||||||||
Total Restructuring and Integration |
$ | 8,033 | $ | (4,988 | ) | $ | 3,045 | $ | 17,038 | $ | (13,868 | ) | $ | 5,027 | $ | 11,242 | $ | 755 | $ | (4,871 | ) | $ | (4,395 | ) | $ | 2,731 | ||||||||||||
Q2 2006 Plan:
During the second quarter of 2006, we recognized a $0.8 million pre-tax restructuring charge in the Life and Analytical Sciences segment, which we refer to as the Q2 2006 Plan. The principal actions in the Q2 2006 Plan were workforce reductions resulting from reorganization activities to shift resources into product lines that were more consistent with our growth strategy.
As part of our Q2 2006 Plan, we reduced headcount by 23. All actions related to the Q2 2006 Plan were completed by the end of the second quarter of 2006, and we anticipate that the remaining payments of $0.1 million will be completed by the end of the second quarter of 2007.
30
The following table summarizes the components of the Q2 2006 Plan activity recognized in 2006 by segment:
Life and Analytical Sciences |
Optoelectronics |
Total | |||||||
(Dollars in thousands) | |||||||||
Severance |
$ | 755 | $ | | $ | 755 | |||
Q4 2005 Plan:
During the fourth quarter of 2005, we recognized an $8.2 million pre-tax restructuring charge in both Life and Analytical Sciences and Optoelectronics, which we refer to as the Q4 2005 Plan. The principal actions in the Q4 2005 Plan were workforce reductions resulting from our resource shift toward product lines that are more consistent with our growth strategy, as well the closure of manufacturing and administrative facilities in order to consolidate certain operations in our North American and European territories.
During 2006, we recorded a pre-tax restructuring reversal, net, of $1.2 million relating to our Q4 2005 Plan due to the completion in June 2006 of the sale of a building previously reserved for in the Q4 2005 Plan, partially offset by higher than expected severance costs. The amount of the proceeds from the sale of the building in excess of the current book value of the building was recorded as a pre-tax restructuring reversal within our Optoelectronics segment.
As part of the Q4 2005 Plan, we reduced headcount by 44. All actions related to the Q4 2005 Plan have been completed and we anticipate that the remaining payments of $0.2 million will be completed by the end of 2008.
The following table summarizes the Q4 2005 Plan pre-tax restructuring charges recognized in 2005 by segment:
Life and Analytical Sciences |
Optoelectronics |
Total | |||||||
(Dollars in thousands) | |||||||||
Severance |
$ | 2,029 | $ | 114 | $ | 2,143 | |||
Abandonment of Excess Facilities |
240 | 5,840 | 6,080 | ||||||
Total |
$ | 2,269 | $ | 5,954 | $ | 8,223 | |||
Q2 2005 Plan:
During the second quarter of 2005, we recognized an $8.2 million pre-tax restructuring charge in Life and Analytical Sciences and Optoelectronics, which we refer to as the Q2 2005 Plan. The principal actions in the Q2 2005 Plan were workforce reductions resulting from reorganization activities to shift resources into geographic regions and product lines that were more consistent with our growth strategy. During the fourth quarter of 2005, we recorded a pre-tax restructuring reversal of $0.4 million relating to this plan due to lower than expected employee separation costs associated with the Life and Analytical Sciences segment.
During 2006, we recorded a pre-tax restructuring reversal of $0.6 million relating to this plan due to lower than expected employee separation costs associated with both the Life and Analytical Sciences and Optoelectronics segments.
As part of the Q2 2005 Plan, we reduced headcount by 228. All actions related to the Q2 2005 Plan have been completed and we anticipate that the remaining payments of $0.4 million will be completed by the end of the first quarter of 2008.
31
The following table summarizes the Q2 2005 pre-tax restructuring charges recognized in 2005 by segment:
Life and Analytical Sciences |
Optoelectronics |
Total | |||||||
(Dollars in thousands) | |||||||||
Severance |
$ | 5,320 | $ | 2,791 | $ | 8,111 | |||
Abandonment of Excess Facilities |
| 140 | 140 | ||||||
Total |
$ | 5,320 | $ | 2,931 | $ | 8,251 | |||
2001 to 2003 Restructuring and Integration Plans:
The principal actions in these restructuring plans were workforce reductions related to the integration of our Life Sciences and Analytical Instruments businesses in order to reduce costs and achieve operational efficiencies as well as workforce reductions at one of the Optoelectronics manufacturing facilities to reflect declining demand for several product lines. We have approximately $2.0 million of remaining liabilities associated with 2001 to 2003 restructuring and integration plans, primarily relating to workforce severance benefits associated with the closure of our European manufacturing facility in the Life and Analytical Sciences segment and remaining lease obligations of closed facilities. The remaining terms of these leases vary in length and will be paid through 2014.
During 2006, we recorded a pre-tax restructuring reversal of $2.7 million relating to the Q4 2002 Plan due to the completion in December 2006 of the sale of a building previously reserved for in the Q4 2002 Plan. The amount of the proceeds from this sale in excess of the current book value of the property was recorded as a pre-tax restructuring reversal within our Life and Analytical Sciences segment.
Impairment of Assets
2006 Compared to 2005. Impairment of assets was $3.2 million in 2006 and zero in 2005. The 2006 impairment was recorded within the Life and Analytical Sciences segment, which included a $2.8 million loss related to a manufacturing facility, and a $0.4 million loss on impairment of a license agreement.
Gains (Losses) on Dispositions
2006 Compared to 2005. Dispositions resulted in a net gain of $1.5 million in 2006 and in 2005. Gain on dispositions in 2006 included a $0.6 million gain from an insurance reimbursement due to fire damage in a certain manufacturing facility and a $0.9 million gain on disposal of fixed assets. Gain on dispositions in 2005 included a $2.0 million gain from an insurance reimbursement due to fire damage in certain manufacturing facilities offset by a $0.5 million loss on disposal of fixed assets due to a facility upgrade.
2005 Compared to 2004. Dispositions resulted in a net gain of $1.5 million in 2005 versus a net loss of $0.4 million in 2004. Loss on dispositions in 2004 included a $0.7 million loss from the sale of a business and was partially offset by a $0.3 million gain from the sale of facilities.
32
Interest and Other Expense, Net
Interest and other expense, net consisted of the following:
2006 |
2005 |
2004 |
||||||||||
(In thousands) | ||||||||||||
Interest income |
$ | (9,390 | ) | $ | (3,321 | ) | $ | (2,401 | ) | |||
Interest expense |
9,157 | 27,291 | 36,203 | |||||||||
(Gains) losses on sale of investments, net |
(2,296 | ) | (5,844 | ) | 300 | |||||||
Extinguishment of debt |
| 54,886 | 4,143 | |||||||||
Other |
5,195 | 1,279 | 87 | |||||||||
$ | 2,666 | $ | 74,291 | $ | 38,332 | |||||||
2006 Compared to 2005. Interest and other (income) expense, net for 2006 was $2.7 million versus $74.3 million for 2005, a decrease of $71.6 million or 96%. The decrease in interest and other (income) expense, net in 2006 as compared to 2005, was due primarily to the overall reduction in outstanding debt, lower borrowing costs, an increase in outstanding cash balances and extinguishment of debt from 2005. Interest income increased $6.1 million due to higher cash balances and higher investment rates. In addition, interest expense decreased $18.1 million primarily due to the repurchase of our senior subordinated 8 7/8% notes due 2013, which we repurchased through a tender offer in the fourth quarter of 2005, and the repayment of the remainder of our term loan. The decrease in interest expense resulting from the debt reduction in 2005 was partially offset by $151.5 million in debt outstanding as of December 31, 2006 under our new senior unsecured revolving credit facility, which we also entered into during the fourth quarter of 2005. We also recognized a net gain on dispositions of investments of $2.3 million associated with the dissolution of certain investments. We incurred a nonrecurring charge of $54.9 million in 2005 to repay our senior subordinated 8 7/8% notes due 2013. Other expenses in 2006 and 2005 consisted primarily of expense related to foreign currency translation. A more complete discussion of our liquidity is set forth below under the heading, Liquidity and Capital Resources.
2005 Compared to 2004. Interest and other expense, net for 2005 was $74.3 million versus $38.3 million for 2004, an increase of $36.0 million or 94%. The increase in interest and other expense, net in 2005 as compared to 2004, was due primarily to the fees associated with the extinguishment of approximately $300 million of our senior subordinated 8 7/8% notes due 2013, which included premium fees of $36.3 million, an $8.9 million accelerated amortization of term loan and senior subordinated 8 7/8% notes due 2013 issuance fees, and $8.5 million in charges associated with terminating interest rate swaps. The increase was partially offset by a corresponding decrease in interest expense on our senior subordinated 8 7/8% notes due 2013 that were purchased pursuant to our tender offer in the fourth quarter of 2005, as well as a lower average outstanding term loan balance (which was approximately $120 million). In addition, we recognized a gain on sale of investments of $5.8 million associated with the liquidation of an investment.
Provision/Benefit for Income Taxes
2006 Compared to 2005. The 2006 provision for income taxes from continuing operations was $32.4 million, versus a provision of $0.1 million in 2005. The 2006 effective tax rate from continuing operations was 21.5% as compared to the 2005 effective tax rate of 0.2%. The lower effective tax rate in 2005 was primarily due to (i) a benefit from the settlement of income tax audits for prior years in 2005 offset by the tax cost of the domestic reinvestment plan repatriation calculated in accordance with the homeland investment provisions of the American Jobs Creation Act of 2004; and (ii) the use in 2005 of federal, state, and foreign tax attributes (current year state and foreign net operating losses, federal current year research and experimental credits, and state current year income tax credits) enabled by the sale of our Fluid Sciences segment.
Our effective tax rate, excluding one-time discrete items, for 2006 was 23.7% compared to 23.5% for 2005. The slight difference in the rates was due to differences in the geographical distribution of income in 2006 versus 2005.
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In December 2006, the Tax Relief and Health Care Act of 2006 (the Tax Act) was enacted. The Tax Act retroactively restored the expired research and experimental tax credit provisions of the law from January 1, 2006, and extended the credit through December 31, 2007. As a result of the Tax Act, we recorded a benefit for the research and experimental tax credit in 2006 in the amount of $1.6 million.
2005 Compared to 2004. The 2005 provision for income taxes from continuing operations was $0.1 million, versus a provision of $23.5 million in 2004. The 2005 effective tax rate from continuing operations was 0.2% as compared to the 2004 effective tax rate of 23.6%. The reduction in the effective tax rate between the years was due to (i) an incremental $17.0 million benefit associated with the conclusion of audits with the Internal Revenue Service and Revenue Canada with respect to the years 1999 through 2002; and (ii) the use in 2005 of federal, state, and foreign tax attributes (current year state and foreign net operating losses, federal current year research and experimental credits, and state current year income tax credits) enabled by the sale of our Fluid Sciences segment. These benefits were partially offset by an incremental accrual of $6.8 million for the tax cost of the domestic reinvestment plan repatriation calculated in accordance with the homeland investment provisions of the American Jobs Creation Act of 2004.
Discontinued Operations
As part of our continued efforts to focus on higher growth opportunities, we have discontinued certain businesses and accounted for them as discontinued operations in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly, the results of operations and related cash flows have been presented as discontinued operations for all periods presented. The assets and liabilities of these businesses have been presented separately and are reflected within the assets and liabilities from discontinued operations in the accompanying consolidated balance sheets as of December 31, 2006 and January 1, 2006. We recorded the following gains and losses, which we report as the gain (loss) on dispositions of discontinued operations, during the three years ended December 31, 2006:
2006 |
2005 |
2004 |
||||||||||
(In thousands) | ||||||||||||
Gain on the sale of Semiconductor business |
$ | 3,750 | $ | | $ | | ||||||
Gain on the sale of Aerospace business |
532 | 250,638 | | |||||||||
(Loss) gain on the sale of Fluid Testing business |
(234 | ) | 30,281 | | ||||||||
Loss on the sale of Lithography business |
(1,720 | ) | (3,307 | ) | | |||||||
Gain on contract settlements associated with the Technical Services business |
1,227 | 900 | 1,487 | |||||||||
Loss on the sale of Fiber Optics Test Equipment business |
(36 | ) | (5,184 | ) | | |||||||
Net (loss) gain on dispositions of other discontinued operations |
(197 | ) | 497 | (2,303 | ) | |||||||
Net (loss) gain on disposition of discontinued operations before income taxes |
3,322 | 273,825 | (816 | ) | ||||||||
Provision for (benefit from) income taxes |
889 | 87,463 | (321 | ) | ||||||||
Gain (loss) on disposition of discontinued operations, net of income taxes |
$ | 2,433 | $ | 186,362 | $ | (495 | ) | |||||
In September 2005, our Board of Directors approved a plan to divest our Fluid Sciences segment. The Fluid Sciences segment consisted of three businessesAerospace, Fluid Testing and Semiconductor. In November 2005, we sold the Fluid Testing division for approximately $34.5 million, resulting in a net pre-tax gain of $30.3 million. In December 2005, we sold the Aerospace division for approximately $333.0 million, resulting in a net pre-tax gain of $250.6 million. These gains were recognized during fiscal 2005 as gains on the dispositions of discontinued operations. We received total cash proceeds in these transactions of approximately $360.0 million. During 2006, we finalized the net working capital adjustments associated with the sales of these businesses, settled a claim related to an employee benefit program, and ceased future benefit accruals to a postretirement medical plan. In 2006, these actions resulted in the recognition of a gain of $0.5 million and a loss of $0.2 million relative to the Aerospace business and the Fluid Testing business, respectively. In February 2006, we sold
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substantially all of the assets of our Semiconductor business for approximately $26.5 million, subject to a net working capital adjustment, plus potential additional contingent consideration. We recognized a pre-tax gain of $3.8 million, exclusive of additional contingent consideration in 2006.
In December 2005, our Board of Directors approved a plan to sell our Lithography business. In June 2005, our Board of Directors approved a plan to shut down our Fiber Optics Test Equipment business. The results of these businesses were previously reported as part of the Optoelectronics segment. During the year ended December 31, 2006, we substantially completed the remediation of an environmental matter within the Lithography business, resulting in recognition of a pre-tax loss of $1.7 million. The completion of the shutdown of the Fiber Optics Test Equipment business resulted in a pre-tax loss of $5.2 million related to lease and severance costs and the reduction of fixed assets and inventory to net realizable value. We recognized the net loss during fiscal 2005.
In September 2004, our Board of Directors approved a plan to shut down our Computer-To-Plate business. In June 2004, our Board of Directors approved a plan to shut down our Electroformed Products business and sell our Ultraviolet Lighting business. The results of these businesses were previously reported as part of the Optoelectronics reporting segment. The abandonment of the Computer-To-Plate business resulted in a $1.0 million write-down of certain fixed assets and inventory for the year ended January 2, 2005. The net assets of the Electroformed Products business were written off resulting in a $1.6 million pre-tax loss in 2004. The fixed assets and inventory of the Ultraviolet Lighting business were sold in July 2004 for their approximate book value.
During 2006, 2005 and 2004, we settled various claims under certain long-term contracts and transition services with our Technical Services business, which we sold in August 1999. The net settlement and the reversal of certain previously established contingencies resulted in pre-tax gains of $1.2 million in 2006, $0.9 million in 2005 and $1.5 million in 2004.
Summary operating results of the discontinued operations for the periods prior to disposition were as follows:
2006 |
2005 |
2004 | ||||||||
(In thousands) | ||||||||||
Sales |
$ | 8,705 | $ | 223,997 | $ | 261,535 | ||||
Costs and expenses |
9,706 | 200,156 | 225,045 | |||||||
Operating (loss) income from discontinued operations |
(1,001 | ) | 23,841 | 36,490 | ||||||
Other expenses, net |
397 | 1,314 | 1,778 | |||||||
(Loss) income from discontinued operations before income taxes |
(1,398 | ) | 22,527 | 34,712 | ||||||
(Benefit from) provision for income taxes |
(224 | ) | 7,313 | 14,053 | ||||||
(Loss) income from discontinued operations, net of income taxes |
$ | (1,174 | ) | $ | 15,214 | $ | 20,659 | |||
Acquisitions
Acquisition of Agilix Corporation. In February 2006, we acquired specified assets of Agilix Corporation (Agilix) for approximately $8.7 million in cash plus potential additional contingent consideration, which we expect to be immaterial to us. Assets acquired primarily relate to Agilixs core technology which centers around labeling technology using isobaric mass tags that allow for the simultaneous quantification of molecules, such as proteins, from multiple samples.
Acquisition of Spectral Genomics, Inc. In April 2006, we acquired specified assets and assumed specified liabilities of Spectral Genomics, Inc. (Spectral), a leader in molecular karyotyping technology used to evaluate chromosomal abnormalities. Consideration for the transaction was approximately $12.1 million in cash plus
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potential additional contingent consideration, which we expect to be immaterial to us. We will make a $1.9 million payment in the first quarter of 2007, as well as royalty payments based on future sales, to license additional intellectual property rights from a third party.
Acquisition of Clinical & Analytical Service Solutions Ltd. In June 2006, we acquired the stock of Clinical & Analytical Service Solutions Ltd. (C&A), a scientific equipment asset and managed maintenance company serving the pharmaceutical, biotechnology and healthcare markets. Consideration for the transaction was approximately $12.4 million in cash, net of cash acquired, plus potential additional contingent consideration, which we expect to be immaterial to us.
Acquisition of J.N. Macri Technologies LLC and NTD Laboratories, Inc. In July 2006, we acquired specified assets and assumed specified liabilities of J.N. Macri Technologies LLC (Macri) and acquired the stock of NTD Laboratories, Inc. (NTD). Macri holds and licenses global patents related to free beta Human Chorionic Gonadotropin (free Beta hCG). Free Beta hCG is a peptide hormone produced in the early stage of pregnancy that is widely recognized as an important biomarker for first-trimester prenatal risk assessment. NTD is a laboratory specializing in prenatal risk assessment and offers laboratory developed and validated testing under the brand name UltraScreen®, of which free Beta hCG is an important component. Aggregate consideration for these transactions was $55.2 million in cash, net of cash acquired.
Acquisition of Avalon Instruments Limited. In September 2006, we acquired the stock of Avalon Instruments Limited (Avalon). The acquisition of Avalon expands and complements our molecular spectroscopy product portfolio by adding a family of innovative bench-top dispersive Raman spectrometers. Raman spectroscopy identifies and characterizes the composition of both organic and inorganic materials in a wide range of applications. Consideration for this transaction was $5.4 million in cash, net of cash acquired, plus potential additional contingent consideration, which we expect to be immaterial to us.
Acquisition of Triton Technology Ltd. In December 2006, we acquired specified assets of Triton Technology Ltd (Triton). We acquired from Triton a line of Dynamic Mechanical Analysis (DMA) products. The DMA products offer a thermal analysis tool that is used by scientists in the polymers, pharmaceuticals and food industries for diverse applications ranging from simple quality control to advanced research. Consideration for this transaction was $2.3 million in cash at the closing, plus additional cash payments of $1.6 million in 2007.
Acquisition of Evotec Technologies GmbH. In January 2007, we acquired the stock of Evotec Technologies GmbH (Evotec). The acquisition is intended to allow us to provide our customers in the pharmaceutical, biotechnology and academic arenas with Evotecs high content screening (HCS) instruments and software. These analysis tools determine the composition of cells and cell structure, a critical step in moving potential drug targets quickly through the discovery process. Consideration for this transaction was approximately $33.0 million in cash, subject to a net working capital adjustment.
Acquisition of Euroscreen Products S.A. In January 2007, we acquired the stock of Euroscreen Products S.A. (Euroscreen), a developer of the AequoScreen cellular assay platform. The AequoScreen platform from Euroscreen is based on an innovative luminescence technology that generates higher quality data, while reducing the number of false positives in G protein-coupled receptor (GPCR) screening applications. Consideration for this transaction was approximately $18.1 million in cash.
The operations for each of these acquisitions completed in 2006 are reported within the results of our Life and Analytical Sciences segment from the acquisition date. The operations subsequent to the acquisitions, individually and in the aggregate, did not have a material effect on our financial position, results of operations or cash flows.
These acquisitions were accounted for in accordance with SFAS No. 141, Business Combinations, and we have accordingly allocated the purchase prices of the acquisitions based upon the preliminary fair values of the
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assets acquired and liabilities assumed. The purchase prices and related allocations have not been finalized and may be revised as a result of adjustments made to the purchase prices, additional information regarding liabilities assumed, including contingent liabilities, and revisions of preliminary estimates of fair values made at the dates of purchase. In connection with the fair valuing of the assets acquired and liabilities assumed, we, assisted by valuation consultants, performed assessments of intangible assets using customary valuation procedures and techniques.
Contingencies, Including Tax Matters
We are conducting a number of environmental investigations and remedial actions at our current and former locations and, along with other companies, have been named a potentially responsible party (PRP) for certain waste disposal sites. We accrue for environmental issues in the accounting period that our responsibility is established and when the cost can be reasonably estimated. We have accrued $3.5 million as of December 31, 2006, representing our managements estimate of the total cost of ultimate disposition of known environmental matters. This amount is not discounted and does not reflect any recovery of any amounts through insurance or indemnification arrangements. These cost estimates are subject to a number of variables, including the stage of the environmental investigations, the magnitude of the possible contamination, the nature of the potential remedies, possible joint and several liability, the time period over which remediation may occur, and the possible effects of changing laws and regulations. For sites where we have been named a PRP, our management does not currently anticipate any additional liability to result from the inability of other significant named parties to contribute. We expect that the majority of such accrued amounts could be paid out over a period of up to ten years. As assessment and remediation activities progress at each individual site, these liabilities are reviewed and adjusted to reflect additional information as it becomes available. There have been no environmental problems to date that have had or are expected to have a material adverse effect on our financial position, results of operations or cash flows. While it is possible that a loss exceeding the amounts recorded in the consolidated financial statements may be incurred, the potential exposure is not expected to be materially different from those amounts recorded.
In papers dated October 23, 2002, Enzo Biochem, Inc. and Enzo Life Sciences, Inc. (collectively, Enzo) filed a complaint in the United States District Court for the Southern District of New York, Civil Action No. 02-8448, against Amersham plc, Amersham BioSciences, PerkinElmer, Inc., PerkinElmer Life Sciences, Inc., Sigma-Aldrich Corporation, Sigma Chemical Company, Inc., Molecular Probes, Inc., and Orchid BioSciences, Inc. The complaint alleges that we have breached our distributorship and settlement agreements with Enzo, infringed Enzos patents, engaged in unfair competition and fraud, and committed torts against Enzo by, among other things, engaging in commercial development and exploitation of Enzos patented products and technology, separately and together with the other defendants. Enzo seeks injunctive and monetary relief. In 2003, the court severed the lawsuit and ordered Enzo to serve individual complaints against the five defendants. We subsequently filed an answer and a counterclaim alleging that Enzos patents are invalid. In July 2006, the court issued a decision regarding the construction of the claims in Enzos patents that effectively limited the coverage of certain of those claims and, we believe, excludes certain of our products from the coverage of Enzos patents. Discovery is ongoing. No trial date has been set, but summary judgment motions were filed by the defendants in January 2007.
On October 17, 2003, Amersham Biosciences Corp. filed a complaint, which was subsequently amended, in the United States District Court for New Jersey, Civil Action No. 03-4901, against our subsidiary, alleging that our ViewLux and certain of its Image FlashPlate products infringe three of Amershams patents related to high-throughput screening (the NJ case). On August 18, 2004, Amersham plc filed a complaint against two of our United Kingdom-based subsidiaries in the Patent Court of the English High Court of Justice, Case No. 04C02688, alleging that our same products infringe one corresponding Amersham patent in the United Kingdom, which was granted in August 2004 (the UK case). Amersham seeks injunctive and monetary relief in both cases. We filed answers and counterclaims in both cases. On October 29, 2003, we filed a complaint, which was subsequently amended, against Amersham in the United States District Court for Massachusetts, Civil
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Action No. 03-12098, alleging that Amershams IN Cell Analyzer, and LEADseeker Multimodality Imaging system and certain Cyclic AMP and IP3 assays infringe two of our patents related to high-throughput screening (the MA case). We seek injunctive and monetary relief. Amersham subsequently filed an answer and counterclaims. After a trial in the UK case in December 2005, the court ruled in February 2006 that Amershams patent in question was invalid in the United Kingdom and awarded costs to us. Amersham initiated an appeal of the ruling in the UK case but withdrew that appeal in January 2007. In May 2006, the court in the NJ case issued a decision regarding the construction of the claims in Amershams patents that adopted many of Amershams claim construction positions. Our motion asking the court to reconsider that decision was denied. Discovery has not yet been completed in either the NJ or MA case, nor has a trial date been set in either case. A voluntary mediation occurred in September 2006, but did not result in a resolution of these matters. Fact discovery, which was stayed pending the mediation, has now resumed. At the suggestion of the court in the NJ case, additional mediation is being scheduled.
We believe we have meritorious defenses to these lawsuits and other proceedings, and we are contesting the actions vigorously in all of the above matters. We are currently unable, however, to reasonably estimate the amount of loss, if any, that may result from the resolution of these matters or to determine whether resolution of any of these matters will have a material adverse impact on our consolidated financial statements.
During 2005, the Internal Revenue Service concluded its audit of federal income taxes for the years 1999 through 2002. We have agreed to the conclusions of the Internal Revenue Service in all matters with the exception of one, and have filed a single issue protest with the Appeals Division of the Internal Revenue Service. We expect to resolve the matter in the first half of 2007. Regardless of the outcome of the protest, we do not expect the final resolution to significantly impact our financial position, results of operations or cash flows.
We are under regular examination by tax authorities in the United States and other countries (such as Germany and the United Kingdom) in which we have significant business operations. The tax years under examination vary by jurisdiction. We regularly assess the likelihood of additional assessments in each of the taxing jurisdictions resulting from these and subsequent years examinations. We have established income tax reserves which we believe to be adequate in relation to the potential for additional assessments. Once established, reserves are adjusted as additional information becomes available and when an event occurs requiring a change to the reserves. The resolution of tax matters is not expected to have a material effect on our consolidated financial condition.
We are also subject to various other claims, legal proceedings and investigations covering a wide range of matters that arise in the ordinary course of our business activities. Each of these matters is subject to uncertainties, and it is possible that some of these matters may be resolved unfavorably to us. We have established accruals for potential losses that we believe are probable and reasonably estimable. In the opinion of our management, based on our review of the information available at this time, the total cost of resolving these other contingencies at December 31, 2006, should not have a material adverse effect on our consolidated financial statements.
Reporting Segment Results of Continuing Operations
Life and Analytical Sciences
2006 Compared to 2005. Sales for 2006 were $1,144.6 million, versus $1,081.1 million in 2005, an increase of $63.5 million, or 6%. The effect of acquisitions increased our sales for 2006 by $21.6 million, as compared to 2005. Changes in foreign exchange rates increased sales by approximately $8.3 million in 2006, as compared to 2005. The following analysis in the remainder of this paragraph compares selected sales by market and product type for 2006, as compared to 2005, and includes the effect of foreign exchange rate fluctuations and acquisitions. Our OneSource laboratory service sales increased by $31.8 million, sales to genetic screening customers increased by $24.8 million, and sales to environmental and chemical analysis customers increased by
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$16.7 million, while sales to biopharmaceutical customers decreased by $9.9 million. Sales by type of product included increases in sales of service of $31.8 million, instruments of $29.8, and consumables and reagents of $1.9 million.
Operating profit for 2006 was $115.4 million, versus $110.2 million for 2005, an increase of $5.2 million, or 5%. The increase in operating profit in 2006 as compared to 2005 was primarily the result of increased sales volume and a decrease in pre-tax restructuring charges in 2005 partially offset by a decrease in gross margin and an increase in stock option, amortization, selling, general and administrative, and research and development expenses. Pre-tax restructuring charges decreased from a $12.9 million in 2005 to a reversal of $1.7 million in 2006. The decrease in gross margin is due to unfavorable product and geography mix of sales, pricing pressures and inflation, including commodity costs during 2006, partially offset by efficiencies gained through increased production volume and successful execution of productivity initiatives. Fiscal 2006 includes stock option expense of $3.2 million. Amortization of intangible assets was $31.3 million for 2006 and $26.2 million for 2005.
2005 Compared to 2004. Sales for 2005 were $1,081.1 million, versus $1,062.8 million in 2004, an increase of $18.3 million, or 2%. Changes in foreign exchange rates had an immaterial impact on sales and operating profit. Fiscal 2005 had 52 weeks compared to 53 weeks in fiscal 2004. In the fourth quarter of fiscal 2004, an average weeks sales represented $22.3 million. The following analysis compares significant sales by market and product type for 2005, as compared to 2004, and includes the effect of foreign exchange rate fluctuations and the previously mentioned extra week during 2004. Sales to genetic screening customers increased $17.1 million, OneSource service sales increased by $15.1 million, sales to environmental and chemical analysis customers increased $5.5 million, and sales to biopharmaceutical customers decreased $19.4 million. Sales by type of product included increases in sales of instruments of $9.0 million, service of $15.1 million, offset by decreases in reagent consumables of $5.8 million.
Operating profit for 2005 was $110.2 million, versus $103.6 million in 2004, an increase of $6.6 million or 6%. Increases in operating profit resulting from increased sales volume and productivity initiatives were offset by a pre-tax restructuring charge of $12.9 million and a $1.7 million increase in research and development spending. Amortization of intangibles was $26.2 million for the year ended January 1, 2006, versus $26.4 million for the year ended January 2, 2005.
Optoelectronics
2006 Compared to 2005. Sales for 2006 were $401.8 million, versus $392.7 million for 2005, an increase of $9.1 million, or 2%. Changes in foreign exchange rates increased sales by approximately $1.5 million in 2006, as compared to sales in 2005. The analysis in the remainder of this paragraph compares selected sales by product type for 2006, as compared to 2005, and includes the effect of foreign exchange fluctuations and acquisitions. Sales of our digital imaging products increased by $15.1 million while sales within our sensors and specialty lighting product lines decreased $6.1 million due to a decrease in Cermax® video and specific military platforms.
Operating profit for 2006 was $70.0 million, versus $58.4 million for 2005, an increase of $11.6 million, or 20%. The increase in operating profit in 2006, as compared to 2005, was primarily the result of a $1.9 million pre-tax restructuring reversal in 2006 as compared to the $9.2 million pre-tax restructuring charge in 2005, offset by a decrease in gross margin. The decrease in gross margin is due to an unfavorable product mix and pricing pressures, inflation, including commodity costs during 2006, and capacity issues within the amorphous silicon business, offset by successful execution of productivity initiatives. Fiscal 2006 includes stock option expense of $1.6 million. Amortization of intangible assets was $2.5 million for 2006 and $2.6 million for 2005. Fiscal 2005 also included a $0.2 million charge for in-process research and development related to the acquisition of the capital stock of Elcos AG, or Elcos, a leading European designer and manufacturer of custom light emitting diode, or LED, solutions for biomedical and industrial applications.
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2005 Compared to 2004. Sales for 2005 were $392.7 million, versus $366.3 million for 2004, an increase of $26.4 million, or 7%. Acquisitions increased 2005 sales by $12.1 million over 2004 sales. Changes in foreign exchange rates had an immaterial impact on sales and operating profit. Fiscal 2005 had 52 weeks compared to 53 weeks in fiscal 2004. In the fourth quarter of fiscal 2004, an average weeks sales represented $7.1 million. The following analysis of significant sales by product line for 2005, as compared to 2004, includes the effects of changes in foreign exchange rates and the previously mentioned extra week during 2004. Sales of specialty lighting products increased by $10.2 million, sales of digital imaging products increased by $9.4 million due to increased sales of diagnostic and radiotherapy digital x-ray products, and sales of sensors increased $6.8 million.
Operating profit for 2005 was $58.4 million, versus $59.1 million for 2004, a decrease of $0.7 million, or 1%. The decrease in operating profit was primarily the result of increases in operating profit from increased sales volume, net productivity improvements and cost reduction actions, which were more than offset by pricing reductions and a $9.2 million pre-tax restructuring charge. Amortization of intangible assets increased to $2.6 million in 2005 from $1.2 million in 2004 due to the acquisition of Elcos in the beginning of 2005.
Liquidity and Capital Resources
We require cash to pay our operating expenses, make capital expenditures, service our debt and other long-term liabilities and pay dividends on our common stock. Our principal sources of funds are from our operations and the capital markets, particularly the debt markets. In the near term, we anticipate that our operations will generate sufficient cash to fund our operating expenses, capital expenditures, interest payments on our debt and dividends on our common stock. In the long-term, we expect to use internally generated funds and external sources to satisfy our debt and other long-term liabilities.
Principal factors that could affect the availability of our internally generated funds include:
| deterioration of sales due to weakness in markets in which we sell our products and services, and |
| changes in our working capital requirements. |
Principal factors that could affect our ability to obtain cash from external sources include:
| financial covenants contained in the financial instruments controlling our borrowings that limit our total borrowing capacity, |
| increases in interest rates applicable to our outstanding variable rate debt, |
| a ratings downgrade that would limit our ability to borrow under our accounts receivable facility and our overall access to the corporate debt market, |
| volatility in the markets for corporate debt, |
| a decrease in the market price for our common stock, and |
| volatility in the public equity markets. |
Cash Flows
Fiscal Year 2006
Operating Activities. Net cash generated by continuing operations operating activities was $127.0 million in 2006, compared to net cash generated by continuing operations operating activities of $192.9 million in 2005. Principal contributors to the generation of cash from operating activities during 2006 were net income from continuing operations of $118.3 million and depreciation and amortization of $69.2 million. These amounts were offset in part by taxes paid on divestitures of $60.3 million and a net increase in working capital of $9.4 million. Contributing to the net increase in working capital in 2006, excluding the effect of foreign exchange rate
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fluctuations, was an increase in inventory of $11.1 million and a decrease in accounts payable of $1.7 million, offset in part by a decrease in accounts receivable of $3.3 million. Strong performance in accounts receivable collections in the Life and Analytical Sciences segment was partially offset by increased accounts payable disbursements in both the Life and Analytical Sciences and Optoelectronics segments. The increase in inventory is primarily the result of expanding the amount of inventory held at service locations within the Life and Analytical Sciences segment. There was no incremental use of our accounts receivable securitization facility during 2006, which totaled $45.0 million at both December 31, 2006 and January 1, 2006. Changes in accrued expenses, other assets and liabilities and other items totaled $9.2 million during 2006, and primarily relates to timing of payments for tax, restructuring and salary and benefits. Also included in the $9.2 million above are the net gain from dispositions of property, plant and equipment of $1.5 million and the net gain from settlement of investments of $2.3 million.
Investing Activities. Net cash used in continuing operations investing activities was $140.0 million in 2006, compared to $333.3 million of cash provided by continuing operations investing activities in 2005. Included in 2006 was $25.0 million of net proceeds received from the sale of our Semiconductor business unit and $6.6 million of net proceeds from the sale of investments. This was offset by approximately $129.0 million of net cash used for acquisitions. In addition, we incurred $12.1 million of business development transaction costs, earn-out payments and other costs in connection with these and previous transactions. Capital expenditures in 2006 were $44.5 million, mainly in the areas of tooling and other capital equipment purchases, in addition to facility improvements. These cash outflows were partially offset by $5.3 million from the advance and settlement of an insurance claim, $4.9 million received from the sale of property, plant and equipment, and $3.8 million from the settlement of life insurance policies.
Financing Activities. Net cash used in continuing operations financing activities was $313.5 million in 2006, compared to $217.6 million in 2005, an increase of $95.9 million, or 44%. In 2006, we repurchased in the open market 8.9 million shares of our common stock at a total cost of $190.1 million, including commissions. Debt reductions during 2006 totaled $110.7 million, compared to reductions in 2005 of $374.7 million. These uses of cash were offset by proceeds from common stock option exercises of $21.5 million and the related tax benefit of $2.2 million. In addition, we paid $35.5 million in dividends during 2006.
Fiscal Year 2005
Operating Activities. Net cash generated by continuing operations operating activities was $192.9 million in 2005. Contributing to the generation of cash from operating activities during 2005 were depreciation and amortization of $67.0 million, net income from continuing operations of $66.5 million, amortization of deferred debt issuance costs, accretion of discounts and extinguishment of debt of $57.4 million, , non-cash restructuring expense of $22.1 million, a decrease in working capital accounts of $12.5 million and stock-based compensation of $9.8 million, offset by $27.8 million from the resolution of prior year tax contingencies and $14.6 million from accrued expenses and other. Contributing to the decrease in working capital accounts in 2005, excluding the effect of foreign exchange rate fluctuations, was an increase in accounts payable of $23.2 million, offset by increases in accounts receivable of $10.4 million and inventory of $0.3 million. There was no incremental use of our accounts receivable securitization facility during 2005. The outstanding amount under this facility totaled $45.0 million at both January 1, 2006 and January 2, 2005.
Investing Activities. Investing activities related to continuing operations contributed $333.3 million in 2005. In 2005, we received $366.6 million from the disposition of businesses, primarily comprising Fluid Sciences proceeds of $359.1 million. We also received $9.4 million from dispositions of property, plant and equipment and $2.9 million from the advance and settlement of an insurance claim. In 2005, we also made capital expenditures of $28.0 million, mainly for tooling and productivity improvements and for system and facility costs. In addition, we used $17.6 million for acquisitions and investments, primarily for our acquisition of Elcos for $13.2 million and the settlement of earnouts for $1.8 million.
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Financing Activities. In 2005, we used $217.6 million of net cash in continuing operations financing activities. Debt reductions during 2005 totaled $374.7 million, primarily comprising $300.0 million used to repay our senior subordinated debt, and $70.0 million to repay our term loan. In addition, we paid $36.3 million of premium related to the prepayment of our senior subordinated debt and $8.5 million to settle interest rate swaps on this debt. We also paid $36.3 million in dividends and $24.4 million to purchase our common stock pursuant to a stock repurchase program we implemented in 2005. We borrowed $244.3 million related to the repatriation of funds under the American Jobs Creation Act of 2004 and received $19.4 million from the exercise of employee stock options.
Current Borrowing Arrangements
Senior Unsecured Credit Facility. On October 31, 2005, we entered into a $350.0 million five-year senior unsecured revolving credit facility. Letters of credit in the aggregate amount of approximately $15.0 million, originally issued under our previous credit agreement, are treated as issued under this agreement. We use the senior unsecured revolving credit facility for general corporate purposes which may include working capital, refinancing existing indebtedness, capital expenditures, share repurchases, acquisitions and strategic alliances. The interest rates under the senior unsecured revolving credit facility are based on the Eurocurrency rate at the time of borrowing plus a margin or the base rate from time to time. The base rate is the higher of (1) the corporate base rate announced from time to time by Bank of America, N.A. and (2) the Federal Funds rate plus 50 basis points. We may allocate all or a portion of our indebtedness under the senior unsecured revolving credit facility to interest based upon the Eurocurrency rate plus a margin or the base rate. The Eurocurrency margin as of December 31, 2006 was 60 basis points; the weighted average Eurocurrency rate was 3.62%. There were approximately $151.5 million of borrowings under the facility as of December 31, 2006 with interest based on the above described Eurocurrency rate. At year end, the borrowings were undertaken by certain foreign subsidiaries of ours and the funds were borrowed in the subsidiaries functional currencies of Euro (EUR), Canadian Dollars (CAD) and Japanese Yen (JPY). The effective rates of the borrowings as of December 31, 2006 were as follows: EUR: 4.27%; CAD: 4.88% and JPY: 1.09%.
Our senior unsecured revolving credit facility contains covenants that require us to maintain specific financial ratios, including:
| A minimum interest coverage ratio, and |
| A maximum total leverage ratio. |
At all times during 2006, we were in compliance with all applicable covenants.
Senior Subordinated Notes. In December 2002 we issued ten-year senior subordinated notes at a rate of 8 7/8% with a face value of $300.0 million (the Senior Subordinated Notes). In the fourth quarter of 2005, we commenced and substantially completed a tender offer and consent solicitation for any and all of the Senior Subordinated Notes. We repurchased all but $25 thousand of these notes as of November 23, 2005. In connection with the tender offer, we solicited consents to amend the indenture under which the Senior Subordinated Notes were issued and removed most of the restrictive covenants from the indenture.
Off-Balance Sheet Arrangements
Receivables Securitization Facility. During 2001, we established a wholly owned consolidated subsidiary to maintain a receivables purchase agreement with a third party financial institution. Under this arrangement, we sold, on a revolving basis, certain of our accounts receivable balances to the consolidated subsidiary which simultaneously sold an undivided percentage ownership interest in designated pools of receivables to a third party financial institution. As collections reduce the balance of sold accounts receivable, new receivables are sold. Our consolidated subsidiary retains the risk of credit loss on the receivables. Accordingly, the full amount
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of the allowance for doubtful accounts has been provided for on our balance sheet. The amount of receivables sold and outstanding with the third party financial institution may not exceed $65.0 million. Under the terms of this arrangement, our consolidated subsidiary retains collection and administrative responsibilities for the balances. The amount of receivables sold to the consolidated subsidiary was $67.8 million as of December 31, 2006 and $91.0 million as of January 1, 2006. At each of December 31, 2006 and January 1, 2006, an undivided interest of $45.0 million in the receivables had been sold to the third party financial institution under this arrangement. The remaining interest in receivables of $22.8 million and $46.0 million that were sold to and held by the consolidated subsidiary were included in accounts receivable in the consolidated financial statements at December 31, 2006 and January 1, 2006, respectively.
The agreement requires the third party financial institution to be paid interest during the period from the date the receivable is sold to its maturity date. At December 31, 2006, the effective interest rate was LIBOR plus approximately 50 basis points. The servicing fees received constitute adequate compensation for services performed. No servicing asset or liability is therefore recorded. The agreement also includes conditions that require us to maintain a senior unsecured credit rating of BB or above, as defined by Standard & Poors Rating Services, and Ba2 or above, as defined by Moodys Investors Service. At December 31, 2006, we had a senior unsecured credit rating of BBB- with a stable outlook from Standard & Poors Rating Services, and of Baa3 with a stable outlook from Moodys Investors Service. In January 2007, our consolidated subsidiary entered into an agreement to extend the term of the accounts receivable securitization facility to January 25, 2008.
Dividends
Our Board of Directors declared regular quarterly cash dividends of seven cents per share in each quarter of 2006 and 2005, resulting in an annual dividend rate of 28 cents per share.
Contractual Obligations
The following table summarizes our contractual obligations at December 31, 2006:
Operating Leases |
Sr. Unsecured Revolving Credit Facility Maturing 2010 |
8.875% Sr. Subordinated Notes due 2013 |
Other Revolving Debt Facilities |
Employee Benefit Plans |
Total | |||||||||||||
(In thousands) | ||||||||||||||||||
2007 |
$ | 31,883 | $ | | $ | | $ | 1,373 | $ | 22,434 | $ | 55,690 | ||||||
2008 |
23,240 | | | | 22,650 | 45,890 | ||||||||||||
2009 |
17,964 | | | | 23,166 | 41,130 | ||||||||||||
2010 |
14,000 | 151,536 | | | 23,661 | 189,197 | ||||||||||||
2011 |
11,474 | | | | 24,435 | 35,909 | ||||||||||||
Thereafter |
119,183 | | 25 | | 135,405 | 254,613 | ||||||||||||
Total |
$ | 217,744 | $ | 151,536 | $ | 25 | $ | 1,373 | $ | 251,751 | $ | 622,429 | ||||||
Because the credit facility borrowings carry variable interest rates, the above table does not contemplate interest obligations.
Capital Expenditures
During 2007, we expect to make capital expenditures of approximately $40.0 million to $45.0 million primarily to introduce new products, to improve our operating processes, to shift the production capacity to lower cost locations, to increase capacity in the amorphous silicon business and to develop information technology. We expect to use our available cash and internally generated funds to fund these expenditures.
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Other Potential Liquidity Considerations
During 2006, we repurchased in the open market 8.9 million shares of our common stock at an aggregate cost of $190.1 million, including commissions. These repurchases were made pursuant to our stock repurchase program announced in November 2005 (the Program). The repurchased shares have been reflected as additional authorized but unissued shares, with the payments reflected in common stock and capital in excess of par value. On November 6, 2006, we announced that our Board of Directors authorized us to repurchase up to 10.0 million additional shares of our common stock under a new stock repurchase program (the New Program). The New Program will expire on October 25, 2010 unless this authorization is terminated earlier by our Board. The New Program may also be suspended or discontinued at any time. From January 1, 2007 through February 23, 2007, we repurchased 2.4 million shares of our common stock in the open market under the New Program at an aggregate cost of $57.0 million, including commissions. Any repurchased shares will be available for use in connection with corporate programs. If we continue to repurchase shares, the repurchase program will be funded using our existing financial resources, including cash and cash equivalents and our existing senior unsecured revolving credit facility. At December 31, 2006, we had cash and cash equivalents of approximately $191.1 million.
During 2005 and 2006, we have received advance payments toward business interruption and building damage from an insurance claim for a chemical fire that occurred within our Life and Analytical Sciences facility in Boston, Massachusetts in early 2005. The incident occurred during non-business hours and no employee casualties or injuries were reported. We expect that we will reach final settlement with the insurer in 2007 and believe we have sufficient insurance so that any gain or loss incurred by us in connection with this fire and environmental clean-up should not have a material effect on our results of operations.
Effects of Recently Adopted Accounting Pronouncement
In December 2004, the FASB issued SFAS No. 123(R), which requires compensation costs related to stock-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. SFAS No. 123(R) revises SFAS No. 123, as amended, Accounting for Stock-Based Compensation (SFAS No. 123), and supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. We adopted SFAS No. 123(R) on January 2, 2006, and prior to adoption we applied the intrinsic value based method prescribed in APB Opinion No. 25, as permitted by SFAS No. 123, in accounting for employee stock-based compensation. We generally did not recognize compensation expense in connection with the grant of stock options because the options granted had an exercise price equal to the fair market value of the underlying common stock on the date of grant.
In transitioning from APB Opinion No. 25 to SFAS No. 123(R), we have applied the modified prospective method. Accordingly, periods prior to adoption have not been restated and are not directly comparable to periods after adoption. Under the modified prospective method, compensation cost recognized in periods after adoption includes (i) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 2, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, less estimated forfeitures, and (ii) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R), less estimated forfeitures.
The total pre-tax stock-based compensation expense for the cost of stock options, restricted stock, restricted stock units and performance units was $17.5 million in 2006. The total income tax benefit recognized in the consolidated statements of operations for stock-based compensation was $6.1 million in 2006, respectively. At December 31, 2006, total unrecognized stock-based compensation expense, expected to be recognized over a weighted average period of 1.6 fiscal years, amounted to $10.6 million. Total unrecognized stock-based compensation expense will be adjusted for future changes in estimated forfeitures, if any.
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Prior to the adoption of SFAS No. 123(R), we presented all excess tax benefits related to stock compensation as cash flows from operating activities in our consolidated statements of cash flows. SFAS No. 123(R) requires the cash flows resulting from these tax benefits to be classified as cash flows from financing activities. In 2006, the tax benefit from the exercise of stock options was $2.2 million, which was classified as cash flows from financing activities, as compared to $5.3 million in 2005, which was classified as cash flows from operating activities.
Prior to the adoption of SFAS No. 123(R), unearned compensation was recorded in a contra-equity account and established at the date restricted stock was granted, representing the amount of unrecognized restricted stock expense that would be reduced as expense is recognized. Under the provisions of SFAS No. 123(R), the recognition of unearned compensation at the date restricted stock is granted is no longer required. Therefore, in the first quarter of 2006, the $6.4 million of unrecognized restricted stock that had been recorded in Unearned compensation in the consolidated balance sheet as of January 1, 2006 was reclassified to Capital in excess of par value.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current years financial statements are materially misstated. We were required to adopt SAB 108 in 2006. The adoption of SAB 108 did not have a material impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158 which requires companies to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other postretirement benefit plans. Additionally, SFAS No. 158 requires companies to measure plan assets and obligations at their year-end balance sheet date. SFAS No. 158 requires prospective application and was effective for us as of the end of fiscal year 2006.
The impact of adopting SFAS No. 158 was a reduction to accumulated other comprehensive income of $32.7 million, a reduction to other assets of $26.6 million, an increase to current liabilities of $7.3 million, an increase to current assets of $0.7 million and a reduction to long-term liabilities of $0.4 million, with no impact to our consolidated statements of operations or statements of cash flows. There was also no impact from the adoption of SFAS No. 158 on our compliance with the financial covenants contained in our loan agreement, described in more detail in Note 16 of our consolidated financial statements.
Effects of Recently Issued Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return in accordance with SFAS No. 109, Accounting for Income Taxes. The new interpretation is effective for fiscal years beginning after December 15, 2006. We are required to adopt FIN No. 48 in the first quarter of fiscal year 2007. We are currently evaluating the requirements of FIN No. 48 and have not yet determined the impact on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. We will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. We are currently evaluating the requirements of SFAS No. 157 and have not yet determined the impact, if any, of its adoption on our consolidated financial statements.
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In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 provides entities with an option to report selected financial assets and liabilities at fair value, with the objective to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. We will be required to adopt SFAS No. 159 in the first quarter of fiscal year 2008. We are currently evaluating the requirements of SFAS No. 159 and have not yet determined the impact, if any, of its adoption on our consolidated financial statements.
Application of Critical Accounting Policies and Estimates
The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, income taxes, restructuring, pensions and other 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.
We believe the following critical accounting policies affect our more significant judgments and estimates used in preparation of our consolidated financial statements.
Revenue recognition. We record product sales when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable, and collectibility is reasonably assured. For products that include installation, if the installation meets the criteria to be considered a separate element, we recognize product revenue upon delivery, and we delay recognition of installation revenue until the installation is complete. For sales that include customer-specified acceptance criteria, we recognize revenue only after the acceptance criteria have been met. We defer revenue from services and recognize it over the contractual period or as we render services and the customer accepts them. When arrangements include multiple elements, we use objective evidence of fair value to allocate revenue to the elements and recognize revenue when the criteria for revenue recognition have been met for each element, all in accordance with Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. Because the majority of our sales relate to specific manufactured products or units rather than long-term customized projects, we generally do not experience significant changes in original estimates. Further, we have not experienced any significant refunds or promotional allowances that require significant estimation.
Warranty Costs. We provide for estimated warranty costs for products at the time of their sale. Warranty liabilities are based on estimated future repair costs using historical labor and material incurred in the warranty period.
Allowances for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We generally compute our allowance for doubtful accounts by (1) applying specific percentage reserves on accounts that are past due and deemed uncollectible; and (2) specifically reserving for customers known to be in financial difficulty. Therefore, if the financial condition of our customers were to deteriorate beyond our estimates, we may have to increase our allowance for doubtful accounts. This would reduce our earnings.
Inventory valuation. We initially value inventory at actual cost to purchase and/or manufacture. We periodically review these values to ascertain that market value of the inventory continues to exceed its recorded cost. Generally, reductions in value of inventory below cost are caused by our maintenance of stocks of products in excess of demand or technological obsolescence of the inventory. We regularly review inventory quantities on
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hand and, when necessary, record provisions for excess and obsolete inventory based on either our estimated forecast of product demand and production requirements or historical trailing usage of the product. If our sales do not materialize as planned or at historic levels, we may have to increase our reserve for excess and obsolete inventory. This would reduce our earnings. If actual market conditions are more favorable than anticipated, inventory previously written down may be sold, resulting in lower costs of sales and higher income from operations than expected in that period.
Business Combinations. The allocation of purchase price for business combinations requires estimates and judgment as to expectations for future cash flows of the acquired business and the allocation of those cash flows to identifiable intangible assets in determining the estimated fair value for purchase price allocation purposes. In connection with the fair valuing of the assets acquired and liabilities assumed, we are assisted by valuation consultants, and assessments of intangible assets using customary valuation procedures and techniques are performed. If the actual results differ from the estimates and judgments used in these estimates, the amounts recorded in the financial statements could result in a possible impairment of the intangible assets and goodwill or require acceleration of the amortization expense of finite-lived intangible assets.
Value of long-lived assets, including intangibles. We carry a variety of long-lived assets on our balance sheet including property and equipment, investments, identifiable intangible assets, and goodwill. We periodically review the carrying value of all of these assets based, in part, upon current estimated market values and our projections of anticipated future cash flows. We undertake this review (1) on an annual basis for assets such as goodwill and non-amortizing intangible assets and (2) on a periodic basis for other long-lived assets when facts and circumstances suggest that cash flows emanating from those assets may be diminished. Any impairment charge that we record reduces our earnings. We completed the annual impairment tests of goodwill for 2006 and 2005 and concluded that there were no impairments. While we believe that our estimates of current value are reasonable, different assumptions regarding items such as future cash flows and the volatility inherent in markets which we serve could affect our evaluations and result in impairment charges against the carrying value of those assets. In addition, we currently evaluate the remaining useful life of our non-amortizing intangible assets at least annually to determine whether events or circumstances continue to support an indefinite useful life. If events or circumstances indicate that the useful lives of non-amortizing intangible assets are no longer indefinite, the assets will be tested for impairment in accordance with SFAS No. 142. These intangible assets will then be amortized prospectively over their estimated remaining useful life and accounted for in the same manner as other intangible assets that are subject to amortization.
Employee compensation and benefits. Retirement and postretirement benefit plans are a significant cost of doing business and represent obligations that will be ultimately settled far in the future and therefore are subject to estimation. Retirement and postretirement benefit plan expenses are allocated to cost of sales, research and development, and selling, general and administrative expenses, in our consolidated statement of operations. We incurred expenses of $10.2 million in 2006, $11.9 million in 2005 and $9.1 million in 2004 for our retirement and postretirement plans. We expect expenses of approximately $12.0 million in 2007 for our retirement and postretirement plans. Pension accounting is intended to reflect the recognition of future benefit costs over the employees approximate service period based on the terms of the plans and the investment and funding decisions made. We are required to make assumptions regarding such variables as the expected long-term rate of return on assets and the discount rate applied, to determine service cost and interest cost, in order to arrive at pension income or expense for the year. As of December 31, 2006, we estimated the expected long-term rate of return of assets in our pension portfolios in the United States was 8.5%, and was 7.6% for plans outside the United States. We have analyzed the rates of return on assets used and determined that these rates are reasonable based on the plans historical performance relative to the overall markets in the countries where we invest the assets, as well as our current expectations for long-term rates of returns for our pension assets. Our management will continue to assess the expected long-term rate of return on plan assets assumptions for each plan based on relevant market conditions, and will make adjustments to the assumptions as appropriate. Discount rate assumptions have been, and continue to be, based on the prevailing market long-term interest rates at the measurement date. If any of our
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assumptions were to change, our pension plan expenses would also change. A one-quarter percent increase in the discount rate would decrease our net periodic benefit cost by $0.4 million for 2007 in the United States and by $0.1 million for 2007 for all plans outside the United States. A one percent decrease in the estimated return on plan assets would increase our pre-tax pension expense by $2.1 million for 2007 in the United States and by $1.0 million for 2007 for all plans outside the United States. We have reduced the volatility in our healthcare costs provided to our retirees by adopting a defined dollar plan feature. Under the defined dollar plan feature, our total annual liability for healthcare costs to any one retiree is limited to a fixed dollar amount, regardless of the nature or cost of the healthcare needs of that retiree. Our maximum future liability, therefore, cannot be increased by future changes in the cost of healthcare.
Restructuring activities. Our financial statements detail specific charges relating to restructuring activities as well as the actual spending that has occurred against the resulting accruals in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. Our pre-tax restructuring charges are estimates based on our preliminary assessments of (1) severance benefits to be granted to employees, based on known benefit formulas and identified job grades, (2) costs to abandon certain facilities based on known lease costs of sub-rental income and (3) asset impairments as discussed above under Value of Long-Lived Assets, Including Intangibles. Because these accruals are estimates, they are subject to change as a result of deviations from initial restructuring plans or subsequent information that may come to our attention. For example, actual severance costs may be less than anticipated if employees voluntarily leave prior to the time at which they would be entitled to severance, or if anticipated legal hurdles in foreign jurisdictions prove to be less onerous than expected. In addition, unanticipated successes or difficulties in terminating leases and other contractual obligations may lead to changes in estimates. When such changes in estimates occur, they are reflected in our financial statements on the income statement line entitled restructuring and integration (reversals) charges, net.
Gains or losses on dispositions. When we record the disposition of an asset or discontinuance of an operation, we make an estimate relative to the amount we expect to realize on the sale or disposition. This estimate is based on a variety of factors, including current interest in the market, alternative markets for the assets, and other relevant factors. If anticipated proceeds are less than the current carrying amount of the asset or operation, we record a loss. If anticipated proceeds are greater than the current carrying amount of the asset or operation, we recognize a gain net of expected contingencies when the transaction has been consummated. Accordingly, we may realize amounts different than were first estimated. During the year ended December 31, 2006, we recognized $1.5 million in gains from disposition of fixed assets. We also recorded $2.4 million in gains from the disposition of discontinued operations, which consisted of gains from the final disposition of our Aerospace, Fluid Testing, Telecommunications Components and Technical Services businesses, offset by losses associated with the disposition of our Fiber Optics Test Equipment and Lithography businesses. Any such changes decrease or increase current earnings, and are recorded either against the gains on disposition or discontinued operations line items appearing in our income statement.
Income taxes. Our business operations are global in nature, and we are subject to taxes in numerous jurisdictions. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change given the political and economic climate in those countries. We report and pay income tax based on operational results and applicable law. Our tax provision contemplates tax rates currently in effect to determine both our current and deferred tax provisions. Any significant fluctuation in rates or changes in tax laws could cause our estimates of taxes we anticipate either paying or recovering in the future to change. Such changes could lead to either increases or decreases in our effective tax rate.
Significant judgment is required in determining our worldwide provision for income taxes and recording the related tax assets and liabilities. In the ordinary course of our business, there are operational decisions, transactions, facts and circumstances, and calculations for which the ultimate tax determination is not certain. Furthermore, our tax positions are periodically subject to challenge by taxing authorities throughout the world. Where appropriate, we reserve for tax matters when we believe that the likelihood of an incremental liability being incurred is probable in accordance with the provisions of SFAS No. 5, Accounting for Contingencies,
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and SFAS No. 109, Accounting for Income Taxes (SFAS No. 109). Any significant impact as a result of changes in underlying facts, law, tax rates, tax audit, or review could lead to adjustments to our income tax expense, our effective tax rate, or our cash flow.
Additionally, in accordance with SFAS No. 109 we have established valuation allowances against a variety of deferred tax assets, including net operating loss carryforwards, foreign tax credits, other income tax credits and certain pension accruals. Valuation allowances take into consideration our ability to use these deferred tax assets and reduce the value of such items to the amount that is deemed more likely than not to be recoverable. Improvements or other changes in our operations, domestically and internationally, could increase our ability to utilize these tax attributes in the future. The release of valuation allowances in periods when these tax attributes become realizable would reduce our effective tax rate.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures about Market Risks
Financial Instruments
Financial instruments that potentially subject us to concentrations of credit risk consist principally of temporary cash investments, marketable securities and accounts receivable. We believe we had no significant concentrations of credit risk as of December 31, 2006.
In the ordinary course of business, we enter into foreign exchange contracts for periods consistent with our committed exposures to mitigate the effect of foreign currency movements on transactions denominated in foreign currencies. Transactions covered by hedge contracts include intercompany and third-party receivables and payables. The contracts are primarily in European and Asian currencies, have maturities that do not exceed 12 months, have no cash requirements until maturity, and are recorded at fair value on the consolidated balance sheet. Credit risk is insignificant as the foreign exchange instruments are contracted with major banking institutions. Unrealized gains and losses on our foreign currency contracts are recognized immediately in earnings for hedges designated as fair value and, for hedges designated as cash flow, the related unrealized gains or losses are deferred as a component of other comprehensive income in the accompanying consolidated balance sheet. Deferred gains and losses are recognized in income in the period in which the underlying anticipated transaction occurs. For the year ended December 31, 2006, we did not engage in any designated cash flow hedges. Principal hedged currencies include the British Pound (GBP), Canadian Dollar (CAD), Euro (EUR), Japanese Yen (JPY), and Singapore Dollar (SGD). We held forward foreign exchange contracts with U.S. equivalent notional amounts totaling $174.8 million at December 31, 2006 and $197.6 million as of January 1, 2006. The approximate fair value of these foreign currency derivative contracts was insignificant. The gains and losses realized on foreign currency derivative contracts are not material and the duration of these contracts was generally 30 days for 2006. We do not enter into derivatives for trading or other speculative purposes, nor do we use leveraged financial instruments.
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Market Risk
Market Risk. We are exposed to market risk, including changes in interest rates and currency exchange rates. To manage the volatility relating to these exposures, we enter into various derivative transactions pursuant to our policies to hedge against known or forecasted market exposures.
Foreign Exchange Risk. The potential change in foreign currency exchange rates offers a substantial risk to us, as approximately 62% of our business is conducted outside of the United States, generally in foreign currencies. Our risk management strategy currently uses forward contracts to mitigate certain balance sheet foreign currency transaction exposures. The intent is to offset gains and losses that occur on the underlying exposures, with gains and losses resulting from the forward contracts that hedge these exposures. Moreover, we are able to partially mitigate the impact that fluctuations in currencies have on our net income as a result of our manufacturing facilities located in countries outside the United States, material sourcing and other spending which occur in countries outside the U.S resulting in a natural hedge.
Although we attempt to manage our foreign currency exchange risk through the above activities, when the U.S. dollar weakens against other currencies in which we transact business, generally sales and net income will be positively but not proportionately impacted.
Foreign Currency RiskValue-at-Risk Disclosure. We utilize a Value-at-Risk model to determine the potential earning/fair value exposures presented by our foreign currency related financial instruments. As discussed above, we seek to minimize this exposure through our hedging program. Our Value-at-Risk computation is based on the Monte Carlo simulation, utilizing a 95% confidence interval and a holding period of 30 days. As of December 31, 2006, this computation estimated that there is a 5% chance that the market value of the underlying exposures and the corresponding derivative instruments either increase or decrease due to foreign currency fluctuations by more than $0.1 million. This Value-At-Risk measure is consistent with our financial statement disclosures relative to our foreign currency hedging program. Specifically, during each of the four quarters ended in fiscal 2006 the Value-At-Risk was $0.1 million, with an average of approximately $0.1 million.
Interest Rate Risk. As described above, our debt portfolio includes variable rate instruments. Fluctuations in interest rates can therefore have a direct impact on both our short-term cash flows, as they relate to interest, and our earnings.
Interest Rate RiskSensitivity. As of December 31, 2006, our debt portfolio consisted of $151.8 million of variable rate debt. In addition, our cash and cash equivalents, for which we receive interest at variable rates, were $191.1 million at December 31, 2006. Our current earnings exposure for changes in interest rates can be summarized as follows:
(1) Changes in interest rates can cause interest charges on our variable rate debt, consisting of $151.8 million of revolving debt facilities, to fluctuate. An increase of 10%, or approximately 42 basis points, in current interest rates would cause an additional pre-tax charge to our earnings of $0.6 million for fiscal year 2007.
(2) Changes in interest rates can cause our cash flows relative to interest payments on variable rate debt to fluctuate. As described above, an increase of 10%, or approximately 42 basis points, in current interest rates would cause our cash outflows to increase by $0.6 million for fiscal year 2007.
(3) Changes in interest rates can cause our cash flows relative to interest received to fluctuate.
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Item 8. | Financial Statements and Supplemental Data |
52 | ||
53 | ||
Consolidated Balance Sheets as of December 31, 2006 and January 1, 2006 |
54 | |
55 | ||
57 | ||
58 |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of PerkinElmer, Inc.
Waltham, Massachusetts
We have audited the accompanying consolidated balance sheets of PerkinElmer, Inc. and subsidiaries (the Company) as of December 31, 2006 and January 1, 2006, and the related consolidated statements of operations, stockholders equity and comprehensive income, and cash flows for each of the three years in the period ended December 31, 2006. Our audits also included the financial statement schedule listed in the Index at Item 15(a)2. These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of PerkinElmer, Inc. and subsidiaries as of December 31, 2006 and January 1, 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment and SFAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2007 expressed an unqualified opinion on managements assessment of the effectiveness of the Companys internal control over financial reporting, and an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
/S/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 1, 2007
52
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31, 2006 |
January 1, 2006 |
January 2, 2005 |
||||||||||
(In thousands, except per share data) | ||||||||||||
Sales |
$ | 1,546,358 | $ | 1,473,831 | $ | 1,429,089 | ||||||
Cost of sales |
918,287 | 859,295 | 846,326 | |||||||||
Selling, general and administrative expenses |
376,849 | 365,457 | 362,322 | |||||||||
Research and development expenses |
99,719 | 87,371 | 82,356 | |||||||||
Restructuring and integration (reversals) charges, net |
(3,640 | ) | 22,065 | | ||||||||
Impairment of assets |
3,246 | | | |||||||||
(Gains) losses on dispositions, net |
(1,505 | ) | (1,502 | ) | 409 | |||||||
In-process research and development charge |
| 194 | | |||||||||
Operating income from continuing operations |
153,402 | 140,951 | 137,676 | |||||||||
Interest and other expense, net |
2,666 | 74,291 | 38,332 | |||||||||
Income from continuing operations before income taxes |
150,736 | 66,660 | 99,344 | |||||||||
Provision for income taxes |
32,412 | 128 | 23,465 | |||||||||
Income from continuing operations |
118,324 | 66,532 | 75,879 | |||||||||
(Loss) income from discontinued operations, net of income taxes |
(1,174 | ) | 15,214 | 20,659 | ||||||||
Gain (loss) on disposition of discontinued operations, net of income taxes |
2,433 | 186,362 | (495 | ) | ||||||||
Net income |
$ | 119,583 | $ | 268,108 | $ | 96,043 | ||||||
Basic earnings per share: |
||||||||||||
Continuing operations |
$ | 0.95 | $ | 0.51 | $ | 0.60 | ||||||
Discontinued operations |
0.01 | 1.56 | 0.16 | |||||||||
Net income |
$ | 0.96 | $ | 2.07 | $ | 0.75 | ||||||
Diluted earnings per share: |
||||||||||||
Continued operations |
$ | 0.94 | $ | 0.51 | $ | 0.59 | ||||||
Discontinued operations |
0.01 | 1.54 | 0.16 | |||||||||
Net income |
$ | 0.95 | $ | 2.04 | $ | 0.74 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
53
As of the Years Ended
December 31, 2006 |
January 1, 2006 |
||||||
(In thousands except share and per share data) |
|||||||
Current assets: |
|||||||
Cash and cash equivalents |
$ | 191,059 | $ | 502,264 | |||
Accounts receivable, net |
268,459 | 250,844 | |||||
Inventories, net |
183,260 | 163,150 | |||||
Other current assets |
101,511 | 71,189 | |||||
Current assets of discontinued operations |
477 | 11,442 | |||||
Total current assets |
744,766 | 998,889 | |||||
Property, plant and equipment, net |
182,196 | 177,369 | |||||
Marketable securities and investments |
7,508 | 9,222 | |||||
Intangible assets, net |
404,021 | 375,419 | |||||
Goodwill |
1,117,724 | 1,026,201 | |||||
Other assets |
52,502 | 90,156 | |||||
Long-term assets of discontinued operations |
1,605 | 16,205 | |||||
Total assets |
$ | 2,510,322 | $ | 2,693,461 | |||
Current liabilities: |
|||||||
Short-term debt |
$ | 1,153 | $ | 1,131 | |||
Accounts payable |
152,836 | 146,971 | |||||
Accrued restructuring and integration costs |
2,731 | 11,242 | |||||
Accrued expenses |
318,987 | 324,954 | |||||
Current liabilities of discontinued operations |
826 | 10,241 | |||||
Total current liabilities |
476,533 | 494,539 | |||||
Long-term debt |
151,781 | 243,282 | |||||
Long-term liabilities |
304,278 | 303,687 | |||||
Long-term liabilities of discontinued operations |
| 1,440 | |||||
Total liabilities |
932,592 | 1,042,948 | |||||
Commitments and contingencies |
|||||||
Stockholders equity: |
|||||||
Preferred stock $1 par value per share, authorized 1,000,000 shares; none issued or outstanding |
| | |||||
Common stock $1 par value per share, authorized 300,000,000 shares; issued and outstanding 123,255,000 and 130,109,000 shares at December 31, 2006 and January 1, 2006, respectively |
123,255 | 130,109 | |||||
Capital in excess of par value |
407,345 | 556,728 | |||||
Unearned compensation |
| (6,372 | ) | ||||
Retained earnings |
1,040,190 | 964,690 | |||||
Accumulated other comprehensive income |
6,940 | 5,358 | |||||
Total stockholders equity |
1,577,730 | 1,650,513 | |||||
Total liabilities and stockholders equity |
$ | 2,510,322 | $ | 2,693,461 | |||
The accompanying notes are an integral part of these consolidated financial statements.
54
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
For the Three Years Ended December 31, 2006
Comprehensive Income |
Common Stock Amount |
Capital in Excess of |
Unearned Compensation |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Cost of Shares Held |
Total Stockholders Equity |
|||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Balance, December 28, 2003 |
$ | 145,101 | $ | 681,550 | $ | (3,494 | ) | $ | 672,616 | $ | 30,908 | $ | (177,631 | ) | $ | 1,349,050 | ||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||||||||||
Net income |
$ | 96,043 | | | | $ | 96,043 | | | $ | 96,043 | |||||||||||||||||||||
Other comprehensive income (loss), net of tax |
||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
38,354 | | | | | 38,354 | | 38,354 | ||||||||||||||||||||||||
Change in minimum liability of pension, net of tax |
(11,987 | ) | | | | | (11,987 | ) | | (11,987 | ) | |||||||||||||||||||||
Unrealized gains on securities arising during the period, net of tax |
75 | | | | | 75 | | 75 | ||||||||||||||||||||||||
Other comprehensive income |
26,442 | | | | | | | | ||||||||||||||||||||||||
Comprehensive income |
$ | 122,485 | | | | | | | | |||||||||||||||||||||||
Dividends |
| | | | (35,781 | ) | | | (35,781 | ) | ||||||||||||||||||||||
Exercise of employee stock options |
| 855 | 9,646 | | | | 4,540 | 15,041 | ||||||||||||||||||||||||
Issuance of common stock for employee benefit plans |
| 167 | 3,408 | 2,034 | | | 2,336 | 7,945 | ||||||||||||||||||||||||
Issuance (cancellation) of common stock for long-term incentive program |
| (16 | ) | 2,185 | (2,742 | ) | | | 1,918 | 1,345 | ||||||||||||||||||||||
Elimination of treasury stock |
| (17,048 | ) | (151,789 | ) | | | | 168,837 | | ||||||||||||||||||||||
Balance, January 2, 2005 |
$ | 129,059 | $ | 545,000 | $ | (4,202 | ) | $ | 732,878 | $ | 57,350 | $ | | $ | 1,460,085 | |||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||||||||||
Net income |
$ | 268,108 | | | | $ | 268,108 | | | $ | 268,108 | |||||||||||||||||||||
Other comprehensive income (loss), net of tax |
||||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
(44,626 | ) | | | | | (44,626 | ) | | (44,626 | ) | |||||||||||||||||||||
Change in minimum liability of pension, net of tax |
(7,376 | ) | | | | | (7,376 | ) | | (7,376 | ) | |||||||||||||||||||||
Unrealized gains on securities arising during the period, net of tax |
10 | | | | | 10 | | 10 | ||||||||||||||||||||||||
Other comprehensive loss |
(51,992 | ) | | | | | | | | |||||||||||||||||||||||
Comprehensive income |
$ | 216,116 | | | | | | | | |||||||||||||||||||||||
Dividends |
| | | | (36,296 | ) | | | (36,296 | ) | ||||||||||||||||||||||
Exercise of employee stock options and related income tax benefits |
| 1,533 | 23,198 | | | | | 24,731 |
The accompanying notes are an integral part of these consolidated financial statements.
55
Comprehensive Income |
Common Stock Amount |
Capital in Excess of |
Unearned Compensation |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Cost of Shares Held |
Total Stockholders Equity |
|||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||
Issuance of common stock for employee benefit plans |
| 308 | 4,267 | 101 | | | | 4,676 | ||||||||||||||||||||||
Buyback and cancellation of common stock |
(1,096 | ) | (23,301 | ) | | | | | (24,397 | ) | ||||||||||||||||||||
Issuance (cancellation) of common stock for long-term incentive program |
| 305 | 7,564 | (2,271 | ) | | | | 5,598 | |||||||||||||||||||||
Balance, January 1, 2006 |
$ | 130,109 | $ | 556,728 | $ | (6,372 | ) | $ | 964,690 | $ | 5,358 | $ | | $ | 1,650,513 | |||||||||||||||
Reclassification of unearned compensation to capital in excess of par upon the adoption of SFAS No. 123(R)See Note 19 |
| | (6,372 | ) | 6,372 | | | | | |||||||||||||||||||||
Comprehensive income |
||||||||||||||||||||||||||||||
Net income |
$ | 119,583 | | | | $ | 119,583 | | | $ | 119,583 | |||||||||||||||||||
Other comprehensive income (loss), net of tax |
||||||||||||||||||||||||||||||
Foreign currency translation adjustments |
33,431 | | | | | 33,431 | | 33,431 | ||||||||||||||||||||||
Change in minimum liability of pension, net of tax |
895 | | | | | 895 | | 895 | ||||||||||||||||||||||
Unrealized gains on securities arising during the period, net of tax |
2 | | | | | 2 | | 2 | ||||||||||||||||||||||
Other comprehensive income |
34,328 | | | | | | | | ||||||||||||||||||||||
Comprehensive income |
$ | 153,911 | | | | | | | | |||||||||||||||||||||
Adjustment to initially adopt SFAS No. 158, net of tax |
| | | | | (32,746 | ) | | (32,746 | ) | ||||||||||||||||||||
Dividends |
| | | | (44,083 | ) | | | (44,083 | ) | ||||||||||||||||||||
Exercise of employee stock options and related income tax benefits |
| 1,663 | 22,061 | | | | | 23,724 | ||||||||||||||||||||||
Issuance of common stock for employee benefit plans |
| 113 | 2,l83 | | | | | 2,296 | ||||||||||||||||||||||
Buyback and cancellation of common stock |
(8,904 | ) | (181,217 | ) | | | | | (190,121 | ) | ||||||||||||||||||||
Issuance (cancellation) of common stock for long-term incentive program |
| 274 | 4,572 | | | | | 4,846 | ||||||||||||||||||||||
Stock option compensation under SFAS No. 123(R) |
| | 9,390 | | | | | 9,390 | ||||||||||||||||||||||
Balance, December 31, 2006 |
$ | 123,255 | $ | 407,345 | $ | | $ | 1,040,190 | $ | 6,940 | $ | | $ | 1,577,730 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
56
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31, 2006 |
January 1, 2006 |
January 2, 2005 |
||||||||||
(In thousands) | ||||||||||||
Operating activities: |
||||||||||||
Net income |
$ | 119,583 | $ | 268,108 | $ | 96,043 | ||||||
Add net loss (income) from discontinued operations |
1,174 | (15,214 | ) | (20,659 | ) | |||||||
Add net (gain) loss on disposition of discontinued operations |
(2,433 | ) | (186,362 | ) | 495 | |||||||
Net income from continuing operations |
118,324 | 66,532 | 75,879 | |||||||||
Adjustments to reconcile income from continuing operations to net cash provided by continuing operations: |
||||||||||||
Restructuring and integration (reversals) charges, net |
(3,640 | ) | 22,065 | | ||||||||
Depreciation and amortization |
69,184 | 66,998 | 67,599 | |||||||||
Stock-based compensation |
16,144 | 9,824 | 8,402 | |||||||||
Deferred taxes |
(10,007 | ) | 1,421 | 21,932 | ||||||||
Contingencies and prior year tax matters |
(1,322 | ) | (27,772 | ) | (8,019 | ) | ||||||
Amortization of deferred debt issuance cost, accretion of discounts and extinguishment of debt |
292 | 57,385 | 8,099 | |||||||||
(Gains) losses on dispositions, net |
(3,801 | ) | (7,346 | ) | 709 | |||||||
Asset impairments |
3,246 | | | |||||||||
Changes in assets and liabilities which provided cash, excluding effects from companies purchased and divested: |
||||||||||||
Accounts receivable, net |
3,315 | (10,434 | ) | 17,951 | ||||||||
Inventories |
(11,067 | ) | (323 | ) | 5,625 | |||||||
Accounts payable |
(1,671 | ) | 23,242 | (14,443 | ) | |||||||
Tax benefit from exercise of common stock options |
| 5,343 | | |||||||||
Taxes paid on divestitures |
(60,297 | ) | | | ||||||||
Accrued expenses and other |
8,321 | (13,999 | ) | (10,758 | ) | |||||||
Net cash provided by continuing operations operating activities |
127,021 | 192,936 | 172,976 | |||||||||
Net cash provided by discontinued operations operating activities |
419 | 15,157 | 27,781 | |||||||||
Net cash provided by operating activities |
127,440 | 208,093 | 200,757 | |||||||||
Investing activities: |
||||||||||||
Capital expenditures |
(44,473 | ) | (27,993 | ) | (15,818 | ) | ||||||
Proceeds from advance and settlement of insurance claim |
5,309 | 2,942 | | |||||||||
Proceeds from dispositions of property, plant and equipment, net |
4,876 | 9,393 | 3,442 | |||||||||
Proceeds from surrender of life insurance policies |
3,826 | | | |||||||||
Proceeds from dispositions of investments, net |
23,627 | 366,578 | 425 | |||||||||
(Payments for) proceeds from acquisitions and investments, net of cash and cash equivalents acquired |
(133,128 | ) | (17,571 | ) | 2,765 | |||||||
Net cash (used in) provided by continuing operations investing activities |
(139,963 | ) | 333,349 | (9,186 | ) | |||||||
Net cash provided by (used in) discontinued operations investing activities |
467 | (10,060 | ) | (2,497 | ) | |||||||
Net cash (used in) provided by investing activities |
(139,496 | ) | 323,289 | (11,683 | ) | |||||||
Financing activities: |
||||||||||||
Payments on debt |
(110,748 | ) | (374,656 | ) | (175,000 | ) | ||||||
Premium on prepayment of debt |
| (36,321 | ) | | ||||||||
Settlement of interest rate swaps |
| (8,480 | ) | | ||||||||
Proceeds from borrowings |
| 244,253 | | |||||||||
Payment of debt issuance costs |
(741 | ) | (1,133 | ) | | |||||||
Decrease in other credit facilities |
(164 | ) | 24 | 39 | ||||||||
Tax benefit from exercise of common stock options |
2,203 | | | |||||||||
Proceeds from exercise of common stock options |
21,520 | 19,388 | 15,041 | |||||||||
Purchases of common stock |
(190,121 | ) | (24,397 | ) | | |||||||
Dividends paid |
(35,455 | ) | (36,296 | ) | (35,781 | ) | ||||||
Net cash used in continuing operations financing activities |
(313,506 | ) | (217,618 | ) | (195,701 | ) | ||||||
Net cash used in discontinued operations financing activities |
| (233 | ) | (237 | ) | |||||||
Net cash used in financing activities |
(313,506 | ) | (217,851 | ) | (195,938 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents |
14,357 | (8,780 | ) | 12,878 | ||||||||
Net (decrease) increase in cash and cash equivalents |
(311,205 | ) | 304,751 | 6,014 | ||||||||
Cash and cash equivalents at beginning of year |
502,264 | 197,513 | 191,499 | |||||||||
Cash and cash equivalents at end of year |
$ | 191,059 | $ | 502,264 | $ | 197,513 | ||||||
Supplemental disclosures of cash flow informationSee Note 2: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 7,368 | $ | 37,361 | $ | 32,491 | ||||||
Income taxes |
$ | 91,394 | $ | 44,008 | $ | 36,448 |
The accompanying notes are an integral part of these consolidated financial statements.
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: | Nature of Operations and Accounting Policies |
Nature of Operations: PerkinElmer, Inc. is a global high technology company which designs, manufactures, markets and supports products, systems and service offerings within two reporting segments: Life and Analytical Sciences and Optoelectronics.
The consolidated financial statements include the accounts of PerkinElmer, Inc. and its subsidiaries (the Company). All material intercompany balances and transactions have been eliminated in consolidation. Investments in business entities in which the Company does not have control, but has the ability to exercise significant influence over operating and financial policies, are accounted for by the equity method.
The Companys fiscal year ends on the Sunday nearest December 31. The Company reports fiscal years under a 52/53 week format. Under this method, certain years will contain 53 weeks. The fiscal years ended December 31, 2006 and January 1, 2006 included 52 weeks. The year ended January 2, 2005 included 53 weeks.
Accounting Policies and Estimates: The preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates. The Company bases its estimates on historical experience and on various other assumptions that are believed 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.
Revenue Recognition: The Companys product sales are recorded when persuasive evidence of an arrangement exists, delivery has occurred, the price to the buyer is fixed or determinable and collectibility is reasonably assured. For products that include installation, and if the installation meets the criteria to be considered a separate element, product revenue is recognized upon delivery, and installation revenue is recognized when the installation is complete. For sales that include customer-specified acceptance criteria, revenue is recognized after the acceptance criteria have been met. Certain of the Companys products require specialized installation. Revenue for these products is deferred until installation is completed. Revenue from services is deferred and recognized over the contractual period or as services are rendered and accepted by the customer. When arrangements include multiple elements, the Company uses objective evidence of fair value to allocate revenue to the elements and recognizes revenue when the criteria for revenue recognition have been met for each element.
Warranty Costs: The Company provides for estimated warranty costs for products at the time of their sale. Warranty liabilities are based on estimated future repair costs using historical labor and material costs incurred in the warranty period.
Shipping and Handling Costs: The Company reports shipping and handling costs in both sales and the related costs as cost of goods sold to the extent they are billed to customers. In all other instances they are reflected as a component of cost of goods sold.
Inventories: Inventories, which include material, labor and manufacturing overhead, are valued at the lower of cost or market. Substantially all inventories are accounted for using the first-in, first-out (FIFO) method of determining inventory costs. Inventory quantities on-hand are regularly reviewed, and where necessary, provisions for excess and obsolete inventory are recorded based primarily on the Companys estimated forecast of product demand and production requirements.
Income Taxes: The Company uses the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the estimated future tax
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. This method also requires the recognition of future tax benefits such as net operating loss carryforwards, to the extent that realization of such benefits is more likely than not. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. A valuation allowance is established for any deferred tax asset for which realization is not more likely than not. Pursuant to Accounting Principles Board (APB) Opinion No. 23, Accounting for Income TaxesSpecial Areas (APB Opinion No. 23), and related interpretations with respect to corporate earnings permanently reinvested offshore, the Company does not accrue tax for the repatriation of its foreign earnings that it considers to be permanently reinvested outside the United States.
Property, Plant and Equipment: The Company depreciates plant and equipment using the straight-line method over their estimated useful lives, which generally fall within the following ranges: buildings10 to 40 years; leasehold improvementsestimated useful life or remaining term of lease, whichever is shorter; machinery and equipment3 to 7 years. Certain tooling costs are capitalized and amortized over a 3 year life, while repairs and maintenance costs are expensed.
Asset Retirement Obligations: The Company records obligations associated with its lease obligations, the retirement of tangible long-lived assets and the associated asset-retirement costs in accordance with Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, and FASB Interpretation (FIN) No. 47, Accounting for Conditional Asset Retirement Obligations, an interpretation of SFAS No. 143. The Company reviews legal obligations associated with the retirement of long-lived assets that result from contractual obligations or the acquisition, construction, development and/or normal use of the assets. If it is determined that a legal obligation exists, regardless of whether the obligation is conditional on a future event, the fair value of the liability for an asset retirement obligation is recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset, and this additional carrying amount is depreciated over the life of the asset. The difference between the gross expected future cash flow and its present value is accreted over the life of the related lease as an operating expense.
Pension Plans: The Companys funding policy provides that payments to the United States (U.S.) pension trusts shall at least be equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Non-U.S. plans are accrued for, but generally not fully funded, and benefits are paid from operating funds. In future reporting periods, the difference between actual amounts and estimates based on actuarial assumptions will be recognized in other comprehensive income in the period in which they occur.
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). SFAS No. 158 requires companies to recognize a net liability or asset and an offsetting adjustment to accumulated other comprehensive income to report the funded status of defined benefit pension and other postretirement benefit plans. Additionally, SFAS No. 158 requires companies to measure plan assets and obligations at their year-end balance sheet date. SFAS No. 158 requires prospective application and was effective for the Company as of the end of fiscal year 2006.
The impact of adopting SFAS No. 158 was a reduction to accumulated other comprehensive income of $32.7 million, a reduction to other assets of $26.6 million, an increase to current liabilities of $7.3 million, an increase to current assets of $0.7 million and a reduction to long-term liabilities of $0.4 million, with no impact to the Companys consolidated statements of operations or statements of cash flows. There was also no impact from the adoption of SFAS No. 158 on the Companys compliance with the financial covenants contained in its loan agreement, described in more detail in Note 14, below.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Translation of Foreign Currencies: For foreign operations, asset and liability accounts are translated at current exchange rates; income and expenses are translated using weighted average exchange rates. Resulting translation adjustments, as well as gains and losses from certain intercompany transactions, are reported in accumulated other comprehensive income, a separate component of stockholders equity.
Intangible Assets: The Companys intangible assets consist of (1) goodwill, which is not being amortized; (2) indefinite lived intangibles, which consist of certain trademarks and trade names that are not subject to amortization; and (3) amortizing intangibles, which consist of patents and purchased technologies, which are being amortized over their useful lives. All intangible assets are subject to impairment tests on an annual or periodic basis.
The annual impairment assessment of goodwill is performed by the Company on the later of January 1 or the first day of each fiscal year. This same impairment test will be performed at other times during the course of the year should an event occur which suggests that the recoverability of goodwill should be reconsidered. Non-amortizing intangibles are also subject to an annual impairment test. The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss in an amount equal to that excess is recognized. Amortizing intangibles are currently evaluated for impairment using the methodology set forth in SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Recoverability of these assets is assessed only when events have occurred that may give rise to an impairment. When a potential impairment has been identified, forecasted undiscounted net cash flows of the operations to which the asset relates are compared to the current carrying value of the long-lived assets present in that operation. If such cash flows are less than such carrying amounts, long-lived assets, including such intangibles, are written down to their respective fair values.
Stock-Based Compensation: The Company has three stock-based compensation plans from which it makes grants, which are described more fully in Note 19. Effective January 2, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment (SFAS No. 123(R)), which requires compensation costs related to stock-based transactions, including employee stock options, to be recognized in the financial statements based on fair value. SFAS No. 123(R) revises SFAS No. 123, as amended, Accounting for Stock-Based Compensation (SFAS No. 123), and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion No. 25). Prior to January 2, 2006, the Company applied the intrinsic value based method prescribed in APB Opinion No. 25, as permitted by SFAS No. 123, in accounting for employee stock-based compensation. The Company generally did not recognize compensation expense in connection with the grant of stock options because the options granted had an exercise price equal to the fair market value of the underlying common stock on the date of grant.
In transitioning from APB Opinion No. 25 to SFAS No. 123(R), the Company applied the modified prospective method. Accordingly, periods prior to adoption have not been restated and are not directly comparable to periods after adoption. Under the modified prospective method, compensation cost recognized in periods after adoption includes (i) compensation cost for all stock-based payments granted prior to, but not yet vested as of January 2, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, less estimated forfeitures, and (ii) compensation cost for all stock-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R), less estimated forfeitures.
The FASB Staff Position ("FSP") No. 123R-3, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards." The FSP No. 123R-3 required an entity to follow either the transition guidance for the additional-paid-in-capital pool as prescribed in SFAS No. 123R or the alternative transition method described in FSP No. 123R-3. An entity that adopted SFAS No. 123R using the modified prospective
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
application may make a one-time election to adopt the transition method described in the FSP No. 123R-3, and may take up to one year from the latter of its initial adoption of SFAS No. 123R or the effective date of the FSP No. 123R-3 to evaluate the available transition alternatives and make its one-time election. The Company adopted the alternative transition method provided in the FSP No. 123R-3 for calculating the tax effects of stock-based compensation under SFAS No. 123R.
Prior to the adoption of SFAS No. 123(R), the Company presented all excess tax benefits related to stock compensation as cash flows from operating activities in the consolidated statements of cash flows. SFAS No. 123(R) requires the cash flows resulting from these tax benefits to be classified as cash flows from financing activities. Tax benefits are recognized related to the cost for share-based payments to the extent the equity instrument would ordinarily result in a future tax deduction under existing law. Tax expense will be recognized to write off excess deferred tax assets when the tax deduction upon settlement of a vested option is less than the cumulative compensation expense recorded in the statement of operations for that option, to the extent not offset by prior tax credits for settlements where the tax deduction was greater than the expense recognized based on the fair value at date of grant.
Prior to the adoption of SFAS No. 123(R), unearned compensation was recorded in a contra-equity account and established at the date restricted stock was granted representing the amount of unrecognized restricted stock expense. Under the provisions of SFAS No. 123(R), the recognition of unearned compensation at the date restricted stock is granted is no longer allowed. Therefore, in the first quarter of 2006, the unrecognized restricted stock that had been in Unearned compensation in the consolidated balance sheet as of January 1, 2006 was reclassified to Capital in excess of par value.
Marketable Securities and Investments: Marketable Securities and Investments, whether debt or equity, are accounted for in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The cost of securities sold is based on the specific identification method. If securities are classified as available for sale, the Company records these investments at their fair values with unrealized gains and losses included in accumulated other comprehensive income (loss). Under the cost method of accounting, equity investments in private companies are carried at cost and are adjusted for other-than-temporary declines in fair value, additional investments or distributions.
Cash Flows: For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid unrestricted instruments with a purchased maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value due to the short maturities.
Environmental Matters: The Company accrues for costs associated with the remediation of environmental pollution when it is probable that a liability has been incurred and the Companys proportionate share of the amount can be reasonably estimated. The recorded liabilities have not been discounted.
Comprehensive Income (Loss): Comprehensive income (loss) is defined as net income or loss and other changes in stockholders equity from transactions and other events from sources other than stockholders. Comprehensive income (loss) is reflected in the Consolidated Statements of Stockholders Equity and Comprehensive Income.
Derivative Instruments and Hedging: The Company records derivative instruments on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative instrument and whether it qualifies for hedge accounting.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reclassifications: Certain reclassifications have been made to prior years financial statements to conform to the 2006 presentation. These reclassifications have no material impact on previously reported net income or cash flows.
Recent Accounting Pronouncements: In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (SAB 108). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current years financial statements are materially misstated. The Company was required to adopt SAB 108 in 2006. The adoption of SAB 108 did not have a material impact on the Companys consolidated financial statements.
In July 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48). FIN No. 48 was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return in accordance with SFAS No. 109, Accounting for Income Taxes. The new interpretation is effective for fiscal years beginning after December 15, 2006. The Company is required to adopt FIN No. 48 in the first quarter of fiscal year 2007. The Company is currently evaluating the requirements of FIN No. 48 and has not yet determined the impact on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability, and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under the standard, fair value measurements would be separately disclosed by level within the fair value hierarchy. The Company will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008. The Company is currently evaluating the requirements of SFAS No. 157 and has not yet determined the impact, if any, of its adoption on its consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No. 159). SFAS No. 159 provides entities with an option to report selected financial assets and liabilities at fair value, with the objective to reduce both the complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. The Company will be required to adopt SFAS No. 159 in the first quarter of fiscal year 2008. The Company is currently evaluating the requirements of SFAS No. 159 and have not yet determined the impact, if any, of its adoption on its consolidated financial statements.
Note 2: | Acquisitions |
Acquisition of Agilix Corporation. In February 2006, the Company acquired specified assets of Agilix Corporation (Agilix) for approximately $8.7 million in cash plus potential additional contingent consideration, which management expects to be immaterial to the Company. Assets acquired primarily relate to Agilixs core technology which centers around labeling technology using isobaric mass tags that allow for the simultaneous quantification of molecules, such as proteins, from multiple samples.
Acquisition of Spectral Genomics, Inc. In April 2006, the Company acquired specified assets and assumed specified liabilities of Spectral Genomics, Inc. (Spectral), a leader in molecular karyotyping technology used to evaluate chromosomal abnormalities. Consideration for the transaction was approximately $12.1 million in cash plus potential additional contingent consideration, which management expects to be immaterial to the Company. The Company will make a $1.9 million payment in the first quarter of 2007, as well as royalty payments based on future sales, to license additional intellectual property rights from a third party.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Acquisition of Clinical & Analytical Service Solutions Ltd. In June 2006, the Company acquired the stock of Clinical & Analytical Service Solutions Ltd. (C&A), a scientific equipment asset and managed maintenance company serving the pharmaceutical, biotechnology and healthcare markets. Consideration for the transaction was approximately $12.4 million in cash, net of cash acquired, plus potential additional contingent consideration, which management expects to be immaterial to the Company.
Acquisition of J.N. Macri Technologies LLC and NTD Laboratories, Inc. In July 2006, the Company acquired specified assets and assumed specified liabilities of J.N. Macri Technologies LLC (Macri) and acquired the stock of NTD Laboratories, Inc. (NTD). Macri holds and licenses global patents related to free beta Human Chorionic Gonadotropin (free Beta hCG). Free Beta hCG is a peptide hormone produced in the early stage of pregnancy that is widely recognized as an important biomarker for first-trimester prenatal risk assessment. NTD is a laboratory specializing in prenatal risk assessment and offers laboratory developed and validated testing under the brand name UltraScreen®, of which free Beta hCG is an important component. Aggregate consideration for these transactions was $55.2 million in cash, net of cash acquired.
Acquisition of Avalon Instruments Limited. In September 2006, the Company acquired the stock of Avalon Instruments Limited (Avalon). The acquisition of Avalon expands and complements the Companys Molecular Spectroscopy product portfolio by adding a family of innovative bench-top dispersive Raman spectrometers. Raman spectroscopy identifies and characterizes the composition of both organic and inorganic materials in a wide range of applications. Consideration for this transaction was $5.4 million in cash, net of cash acquired, plus potential additional contingent consideration, which management expects to be immaterial to the Company.
Acquisition of Triton Technology Ltd. In December 2006, the Company acquired specified assets of Triton Technology Ltd (Triton). The Company acquired from Triton a line of Dynamic Mechanical Analysis (DMA) products. The DMA products offer a thermal analysis tool that is used by scientists in the polymers, pharmaceuticals and food industries for diverse applications ranging from simple quality control to advanced research. Consideration for this transaction was $2.3 million in cash at the closing, plus additional cash payments of $1.6 million in 2007.
Acquisition of Evotec Technologies GmbH. In January 2007, the Company acquired the stock of Evotec Technologies GmbH (Evotec). The acquisition is intended to allow the Company to provide its customers in the pharmaceutical, biotechnology and academic arenas with Evotecs high content screening (HCS) instruments and software. These analysis tools determine the composition of cells and cell structure, a critical step in moving potential drug targets quickly through the discovery process. Consideration for this transaction was approximately $33.0 million in cash, subject to a net working capital adjustment.
Acquisition of Euroscreen Products S.A. In January 2007, the Company acquired the stock of Euroscreen Products S.A. (Euroscreen), a developer of the AequoScreenTM cellular assay platform. The AequoScreenTM platform from Euroscreen is based on an innovative luminescence technology that generates higher quality data, while reducing the number of false positives in G protein-coupled receptor (GPCR) screening applications. Consideration for this transaction was approximately $18.1 million in cash.
The operations for each of these acquisitions completed in 2006 are reported within the results of the Companys Life and Analytical Sciences segment from the acquisition date. The operations subsequent to the acquisitions, individually and in the aggregate, did not have a material effect on the Companys financial position, results of operations or cash flows.
The acquisitions were accounted for in accordance with SFAS No. 141, Business Combinations, and the Company has accordingly allocated the purchase prices of the acquisitions based upon the preliminary fair values of the assets acquired and liabilities assumed. The purchase prices and related allocations have not been finalized
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and may be revised as a result of adjustments made to the purchase prices, additional information regarding liabilities assumed, including contingent liabilities, and revisions of preliminary estimates of fair values made at the dates of purchase. In connection with the fair valuing of the assets acquired and liabilities assumed, management, assisted by valuation consultants, performed assessments of intangible assets using customary valuation procedures and techniques.
The components of the preliminary purchase prices and allocations for the acquisitions completed in 2006 are as follows:
Agilix |
Spectral |
C&A |
Macri/ NTD |
Avalon |
Triton |
||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Consideration and acquisition costs: |
|||||||||||||||||||||||
Cash payments, net of cash acquired |
$ | 8,696 | $ | 12,100 | $ | 12,377 | $ | 55,222 | $ | 5,353 | $ | 2,343 | |||||||||||
Deferred consideration |
| 1,900 | | | | 1,570 | |||||||||||||||||
Transaction costs |
68 | 69 | 440 | 377 | 165 | 112 | |||||||||||||||||
Total consideration and acquisition costs |
$ | 8,764 | $ | 14,069 | $ | 12,817 | $ | 55,599 | $ | 5,518 | $ | 4,025 | |||||||||||
Allocation of purchase price |
|||||||||||||||||||||||
Current assets |
$ | | $ | 468 | $ | 2,468 | $ | 3,044 | $ | 512 | $ | 137 | |||||||||||
Property, plant and equipment |
646 | 388 | 533 | 384 | 8 | | |||||||||||||||||
Identifiable intangible assets |
7,300 | 9,900 | 4,186 | 32,600 | 1,600 | 770 | |||||||||||||||||
Goodwill |
818 | 5,427 | 10,753 | 31,811 | 4,111 | 3,143 | |||||||||||||||||
Other assets |
| | 184 | 40 | | | |||||||||||||||||
Deferred taxes |
| | (1,280 | ) | (8,388 | ) | (480 | ) | | ||||||||||||||
Liabilities assumed |
| (2,114 | ) | (4,027 | ) | (3,892 | ) | (233 | ) | (25 | ) | ||||||||||||
Total |
$ | 8,764 | $ | 14,069 | $ | 12,817 | $ | 55,599 | $ | 5,518 | $ | 4,025 | |||||||||||
Note 3: | Restructuring Charges |
The Company has undertaken a series of restructuring actions related to the impact of acquisitions, divestitures and the integration of its business units. Restructuring actions in 2001 and 2002 were recorded in accordance with EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Restructuring actions taken since 2002 were recorded in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). In certain instances, specifically when governmental authorities are involved in setting severance levels, SFAS No. 112, Employers Accounting for Postemployment Benefits, is applied.
A description of each of the restructuring plans and the activity recorded is as follows:
Q2 2006 Plan:
During the second quarter of 2006, the Companys management approved a plan for workforce reductions in two locations in the United States as the Company shifts resources into product lines that are more consistent with the Companys growth strategy. The Company completed notifying affected employees on June 30, 2006. As a result of this plan, the Company recorded a pre-tax restructuring charge of $0.8 million during the second quarter of 2006 (the Q2 2006 Plan). The principal actions within the Q2 2006 Plan related to a workforce reduction resulting from reorganization activities within the Life and Analytical Sciences segment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the components of the Q2 2006 Plan activity:
Headcount |
Severance |
||||||
(Dollars in thousands) | |||||||
Balance at January 1, 2006 |
| $ | | ||||
Provision |
23 | 755 | |||||
Amounts paid |
(23 | ) | (650 | ) | |||
Balance at December 31, 2006 |
| $ | 105 | ||||
All actions related to the Q2 2006 Plan have been completed and the Company anticipates that the remaining payments of $0.1 million will be completed by the end of the second quarter of 2007.
Q4 2005 Plan:
During the fourth quarter of 2005, the Company recognized a $2.2 million pre-tax restructuring charge in the Life and Analytical Sciences segment and a $6.0 million pre-tax restructuring charge in the Optoelectronics segment (the Q4 2005 Plan). The purpose of these restructuring actions was to shift resources into geographic regions and product lines that were more consistent with the Companys growth strategy. The principal actions in the Q4 2005 Plan were workforce reductions and the closure of several facilities resulting from reorganization activities.
During 2006, the Company recorded a pre-tax restructuring charge, net, of $0.2 million relating to its Q4 2005 Plan due to higher than expected costs associated with the workforce reductions in Europe within the Life and Analytical Sciences segment. The Company also recorded a pre-tax restructuring reversal of $1.4 million relating to its Q4 2005 Plan due to the completion in June 2006 of the sale of a building previously reserved for in the Q4 2005 Plan. The amount of the proceeds from this sale in excess of the current book value of the property was recorded as a pre-tax restructuring reversal within the Optoelectronics segment.
The following table summarizes the components of the Q4 2005 Plan activity:
Headcount |
Severance |
Abandonment of Excess Facilities |
Total |
||||||||||||
(Dollars in thousands) | |||||||||||||||
Balance at January 2, 2005 |
| $ | | $ | | $ | | ||||||||
Provision |
44 | 2,161 | 6,062 | 8,223 | |||||||||||
Amounts paid |
(20 | ) | (369 | ) | (5,708 | ) | (6,077 | ) | |||||||
Balance at January 1, 2006 |
24 | 1,792 | 354 | 2,146 | |||||||||||
Change in estimate |
| 236 | (1,403 | ) | (1,167 | ) | |||||||||
Amounts (paid) received |
(24 | ) | (1,965 | ) | 1,176 | (789 | ) | ||||||||
Balance at December 31, 2006 |
| $ | 63 | $ | 127 | $ | 190 | ||||||||
All actions related to the Q4 2005 Plan have been completed and the Company anticipates that the remaining payments of $0.2 million will be completed by the end of 2008.
Q2 2005 Plan:
During the second quarter of 2005, the Company recognized a $5.3 million pre-tax restructuring charge in the Life and Analytical Sciences segment and a $2.9 million pre-tax restructuring charge in the Optoelectronics segment (the Q2 2005 Plan). The purpose of these restructuring actions was to shift resources into geographic
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
regions and product lines that were more consistent with the Companys growth strategy. The principal actions in the Q2 2005 Plan were workforce reductions resulting from reorganization activities. All workforce reductions have been completed and the remaining payments relate to international severance contracts.
During 2006, the Company recorded a pre-tax restructuring reversal of $0.6 million relating to the Q2 2005 Plan due to lower than expected employee separation costs associated with both the Life and Analytical Sciences and Optoelectronics segments.
The following table summarizes the components of the Q2 2005 Plan activity:
Headcount |
Severance |
Abandonment of Excess Facilities |
Total |
||||||||||||
(Dollars in thousands) | |||||||||||||||
Balance at January 2, 2005 |
| $ | | $ | | $ | | ||||||||
Provision |
228 | 8,111 | 140 | 8,251 | |||||||||||
Change in estimate |
| (403 | ) | | (403 | ) | |||||||||
Amounts paid |
(228 | ) | (5,370 | ) | (140 | ) | (5,510 | ) | |||||||
Balance at January 1, 2006 |
| 2,338 | | 2,338 | |||||||||||
Change in estimate |
| (577 | ) | | (577 | ) | |||||||||
Amounts paid |
| (1,358 | ) | | (1,358 | ) | |||||||||
Balance at December 31, 2006 |
| $ | 403 | $ | | $ | 403 | ||||||||
All actions related to the Q2 2005 Plan have been completed and the Company anticipates that the remaining payments of $0.4 million will be completed by the end of the first quarter of 2008.
2001 to 2003 Restructuring and Integration Plans:
The principal actions in these restructuring plans were workforce reductions related to the integration of the Companys Life Sciences and Analytical Instruments businesses in order to reduce costs and achieve operational efficiencies as well as workforce reductions at one of the Optoelectronics manufacturing facilities to reflect declining demand for several product lines. The Company has approximately $2.0 million of remaining liabilities associated with 2001 to 2003 restructuring and integration plans, primarily relating to workforce severance benefits associated with the closure of our European manufacturing facility in the Life and Analytical Sciences segment and remaining lease obligations of closed facilities. The remaining terms of these leases vary in length and will be paid through 2014.
During 2006, the Company recorded a pre-tax restructuring reversal of $2.7 million relating to the Q4 2002 Plan due to the completion in December 2006 of the sale of a building previously reserved for in the Q4 2002 Plan. The amount of the proceeds from this sale in excess of the current book value of the property was recorded as a pre-tax restructuring reversal within the Life and Analytical Sciences segment.
Note 4: | Impairment of Assets |
The Company recorded a charge of $3.2 million for the impairment of assets during 2006 within the Life and Analytical Sciences segment. This impairment included a $2.8 million loss related to a manufacturing facility and a $0.4 million loss on impairment of a license agreement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5: | Interest and Other Expense, Net |
Interest and other expense, net consisted of the following:
2006 |
2005 |
2004 |
||||||||||
(In thousands) | ||||||||||||
Interest income |
$ | (9,390 | ) | $ | (3,321 | ) | $ | (2,401 | ) | |||
Interest expense |
9,157 | 27,291 | 36,203 | |||||||||
(Gains) losses on disposition of investments, net |
(2,296 | ) | (5,844 | ) | 300 | |||||||
Extinguishment of debt |
| 54,886 | 4,143 | |||||||||
Other |
5,195 | 1,279 | 87 | |||||||||
$ | 2,666 | $ | 74,291 | $ | 38,332 | |||||||
Note 6: | Income Taxes |
The components of income (loss) from continuing operations before income taxes were as follows:
2006 |
2005 |
2004 |
|||||||||
(In thousands) | |||||||||||
U.S. |
$ | 10,295 | $ | (51,609 | ) | $ | (48,057 | ) | |||
Non-U.S. |
140,441 | 118,269 | 147,401 | ||||||||
$ | 150,736 | $ | 66,660 | $ | 99,344 | ||||||
The components of the provision for (benefit from) income taxes for continuing operations were as follows:
Current |
Deferred Expense (Benefit) |
Total |
||||||||||
(In thousands) | ||||||||||||
2006 |
||||||||||||
Federal |
$ | 3,113 | $ | (10,941 | ) | $ | (7,828 | ) | ||||
State |
2,583 | (1,366 | ) | 1,217 | ||||||||
Non-U.S. |
36,723 | 2,300 | 39,023 | |||||||||
$ | 42,419 | $ | (10,007 | ) | $ | 32,412 | ||||||
2005 |
||||||||||||
Federal |
$ | (36,893 | ) | $ | 4,381 | $ | (32,512 | ) | ||||
State |
(662 | ) | 511 | (151 | ) | |||||||
Non-U.S. |
36,262 | (3,471 |