[August 10, 2011] PERKINELMER INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations Tweet (Edgar Glimpses Via Acquire Media NewsEdge) This quarterly report on Form 10-Q, including the following management's discussion and analysis, contains forward-looking information that you should read in conjunction with the condensed consolidated financial statements and notes to the condensed consolidated financial statements that we have included elsewhere in this report. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Words such as "believes," "plans," "anticipates," "intends," "expects," "will" and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from the plans, intentions or expectations we disclose in the forward-looking statements we make. We have included important factors below under the heading "Risk Factors" in Part II, Item 1A. that we believe could cause actual results to differ materially from the forward-looking statements we make. We are not obligated to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Overview We are a leading provider of technology, services and solutions to the diagnostics, research, environmental and safety, industrial and laboratory services markets. Through our advanced technologies, solutions and services, we address critical issues that help to improve the health and safety of people and their environment in two reporting segments: • Human Health. Develops diagnostics, tools and applications to help detect diseases earlier and more accurately and to accelerate the discovery and development of critical new therapies. Within the Human Health segment, we serve both the diagnostics and research markets. • Environmental Health. Provides technologies and applications to facilitate the creation of safer food and consumer products, more secure surroundings and efficient energy resources. Within the Environmental Health segment, we serve the environmental and safety, industrial and laboratory services markets. Overview of the Second Quarter of Fiscal Year 2011 Our fiscal year ends on the Sunday nearest December 31. We report fiscal years under a 52/53 week format, and as a result certain fiscal years will contain 53 weeks. Both our 2011 and 2010 fiscal years include 52 weeks. During the second quarter of fiscal year 2011, we continued to see good performance from acquisitions, investments in our ongoing technology and sales and marketing initiatives. Our overall sales in the second quarter of fiscal year 2011 increased $57.9 million, or 14%, as compared to the second quarter of fiscal year 2010, reflecting an increase of $21.8 million, or 11%, in our Human Health segment sales and an increase of $36.1 million, or 16%, in our Environmental Health segment sales. The increase in our Human Health segment sales during the three months ended July 3, 2011 was due primarily to increased growth in the academic sector for both instruments and reagents in the research market and continued growth from industrial and veterinary applications in our medical imaging business, partially offset by decreased demand in our screening business. The increase in our Environmental Health segment sales during the three months ended July 3, 2011 was due primarily to growth in our environmental, food and consumer safety and testing products, as well as growth in industrial markets primarily related to chemical processing and energy applications supported by our molecular spectroscopy and chromatography platforms. We also experienced continued growth in our OneSource ® multivendor service offering. In our Human Health segment, we experienced strong growth in sales in the research market as demand for our instrumentation and reagents grew in the academic sector as early stage therapeutic researchers continue their efforts to optimize compound screening efficiencies in the lab. In particular, we saw strong demand for our Operetta ® cellular imaging systems and JANUS® automation tools, as well as our EnVision® and EnSpire™ 30-------------------------------------------------------------------------------- Table of Contents multi-mode plate readers. The growth in the research market was offset in part by reduced sales to pharmaceutical companies resulting from continued customer consolidations in the pharmaceutical market. Despite this decline, we are encouraged by some early indicators of positive trends in the pharmaceutical market as we began to experience growth in Asia as demand from internal pharmaceutical research is migrating to lower cost regions and increased demand as our customers make investments in pre-clinical research. In the diagnostics market, we had continued growth from industrial and veterinary applications in our medical imaging business and increased demand for our neonatal and infectious disease screening offerings, particularly in the emerging markets such as China, India and South America, during the second quarter of fiscal year 2011 as compared to the second quarter of fiscal year 2010. This increase was partially offset by the impact of lower birth rates in the United States and tight inventory management in state and national labs for neonatal screening. We completed the strategic acquisition of Dexela Limited that is intended to add complementary imaging technology that should expand our medical imaging business and diversify our customer base. As the rising cost of healthcare continues to be one of the critical issues facing our customers, we anticipate that even with continued pressure on lab budgets and credit availability, the benefits of providing earlier detection of disease, which can result in savings of long-term health care costs as well as creating better outcomes for patients, are increasingly valued and we expect to see continued growth in these markets. In our Environmental Health segment, sales of environmental, food and consumer safety and testing products grew in the second quarter of fiscal year 2011 as increased regulations in environmental and food safety markets continue to drive strong demand for our analytical technologies. We saw continued strength in our inorganic analysis solutions, such as our recently launched NexION® mass spectrometer, used for detecting trace metal contaminants in food and environmental applications. Our chromatography business performed well in the period, driven by ongoing concerns around food additives and adulterants, as well as pesticide contaminants in both food and water, and we also had continued growth in industrial markets primarily related to chemical processing and energy applications supported by our molecular spectroscopy and chromatography platforms. We believe that the need for increased inspection, testing and tracking of contaminants will continue to drive increased demand for our products. We also continued to grow by adding new customers to our OneSource® multivendor service offering, as well as through continued growth of our comprehensive services with our key customers. Our laboratory services business offers services designed to enable our customers to increase efficiencies and production time, while reducing maintenance costs, all of which continue to be critical for our customers. During the second quarter of fiscal year 2011, we completed the strategic acquisition of CambridgeSoft Corporation, a provider of scientific databases and professional services. This acquisition is intended to expand our software offerings to provide customers with solutions that help them create, analyze and communicate scientific data while improving the speed, quality, efficiency and predictability of their research and development investments. Our consolidated gross margins decreased 130 basis points in the second quarter of fiscal year 2011 as compared to the second quarter of fiscal year 2010 due to changes in product mix with growth in sales of lower gross margin product offerings, partially offset by increased sales volume and productivity improvements. Our consolidated operating margin was flat in the second quarter of fiscal year 2011, as compared to the second quarter of fiscal year 2010, primarily the result of cost containment and productivity initiatives, partially offset by increased sales and marketing expenses, particularly in emerging territories and costs related to acquisition integration. We believe we are well positioned to continue to take advantage of the improved spending trends in our end markets and to promote our efficiencies in markets where current conditions may increase demand for certain services. Overall, we believe that our strategic focus on Human Health and Environmental Health coupled with our breadth of end markets, deep portfolio of technologies and applications, leading market positions, global scale and financial strength will provide us with a strong foundation for continued growth. 31-------------------------------------------------------------------------------- Table of Contents Recent Developments Business Combinations Acquisition of Dexela Limited. In June 2011, we acquired all of the outstanding stock of Dexela Limited. ("Dexela"). Dexela is a provider of flat panel complementary metal-oxide-semiconductor ("CMOS") x-ray detection technologies and services. We expect this acquisition to expand our current medical imaging portfolio in key areas including surgery, dental, cardiology and mammography, as well as non-destructive testing. With the addition of the CMOS technology to our imaging portfolio customers will now be able to choose between two complementary X-ray detector technologies to optimize their system performance and meet their specific application needs. We paid the shareholders of Dexela $26.1 million in cash for the stock of Dexela. We may pay additional contingent consideration of up to $12.2 million, with an estimated fair value of $4.6 million as of the closing date. The purchase price is also subject to potential adjustments for indemnification obligations of Dexela's shareholders. We have reported the operations for this acquisition within the results of our Human Health segment from the acquisition date. Acquisition of Labtronics, Inc. In May 2011, we acquired all of the outstanding stock of Labtronics Inc. ("Labtronics"). Labtronics is a provider of procedures-based Electronic Laboratory Notebook ("ELN") solutions for laboratories performing routine analysis in multiple industries. We expect this acquisition to extend our ELN and data integration software offerings into laboratories following strict routine procedures, late stage product or method development laboratories and environmental and food testing laboratories. Labtronics tools can be applied to procedure-based problems, including laboratory analysis, equipment calibration and validation, cleaning validation and others. We paid the shareholders of Labtronics $11.4 million in cash at the closing for the stock of Labtronics. The purchase price is also subject to potential adjustments for Labtronics' working capital as of the closing date and indemnification obligations of Labtronics' shareholders. We have reported the operations for this acquisition within the results of our Environmental Health segment from the acquisition date. Acquisition of Geospiza, Inc. In May 2011, we acquired all of the outstanding stock of Geospiza, Inc. ("Geospiza"). Geospiza is a developer of software systems for the management of genetic analysis and laboratory workflows. Geospiza primarily services biotechnology and pharmaceutical companies, universities, researchers, contract core and diagnostic laboratories involved in genetic testing and manufacturing bio-therapeutics by meeting their combined laboratory, data management and analytical needs. We expect this acquisition to enhance our software offerings, which will enable researchers to explore the genomic origins of disease effectively, and help address customers' growing needs to manage knowledge and improve scientific productivity. We paid the shareholders of Geospiza $13.3 million in cash at the closing for the stock of Geospiza. The purchase price is also subject to potential adjustments for Geospiza's working capital as of the closing date and indemnification obligations of Geospiza's shareholders. We have reported the operations for this acquisition within the results of our Human Health segment from the acquisition date. Acquisition of CambridgeSoft Corporation. In April 2011, we acquired all of the outstanding stock of CambridgeSoft Corporation ("CambridgeSoft"). CambridgeSoft is a provider of discovery, collaboration and knowledge enterprise solutions, scientific databases and professional services. CambridgeSoft primarily services pharmaceutical, biotechnology and chemical industries with solutions that help customers create, analyze and communicate scientific data while improving the speed, quality, efficiency and predictability of research and development investments. We expect this acquisition to enhance our focus on knowledge management in laboratory settings by expanding our software offerings, enabling customers to share data used for scientific decisions. We paid the shareholders of CambridgeSoft $227.4 million in cash at the closing for the stock of CambridgeSoft. The purchase price is also subject to potential adjustments for indemnification obligations of CambridgeSoft's shareholders. We have reported the operations for this acquisition within the results of our Environmental Health segment from the acquisition date. Acquisition of ID Biological Systems, Inc. In March 2011, we acquired specified assets and assumed specified liabilities of ID Biological Systems, Inc. ("IDB"). IDB is a manufacturer of filter paper-based sample 32-------------------------------------------------------------------------------- Table of Contents collection devices for neonatal screening and prenatal diagnostics. We expect this acquisition to enhance our market position in the prenatal and neonatal markets. We paid $7.7 million in cash at the closing for this transaction. We may pay additional contingent consideration of up to $3.3 million, with an estimated fair value of $0.3 million as of the closing date. The purchase price is also subject to potential adjustments for IDB's working capital as of the closing date and indemnification obligations of IDB's shareholders. We have reported the operations for this acquisition within the results of our Human Health segment from the acquisition date. Acquisition of ArtusLabs, Inc. In March 2011, we acquired all of the outstanding stock of ArtusLabs, Inc. ("ArtusLabs"). ArtusLabs offers the Ensemble® scientific knowledge platform, to accelerate research and development in the pharmaceutical, chemical, petrochemical and related industries. Ensemble® integrates disparate data from customers' ELNs and informatics systems and databases. We expect this acquisition to enhance our focus on knowledge management in laboratory settings by expanding our informatics offerings, enabling customers to rapidly access enterprise-wide data. We paid the shareholders of ArtusLabs $15.2 million in cash at the closing for the stock of ArtusLabs. We may pay additional contingent consideration of up to $15.0 million, with an estimated fair value of $7.5 million as of the closing date. The purchase price is also subject to potential adjustments for indemnification obligations of ArtusLabs' shareholders. We have reported the operations for this acquisition within the results of our Environmental Health segment from the acquisition date. Acquisition of chemagen Biopolymer-Technologie AG. In February 2011, we acquired all of the outstanding stock of chemagen Biopolymer-Technologie AG ("chemagen"). chemagen manufactures and sells nucleic acid sample preparation systems and reagents utilizing magnetic bead technology. We expect this acquisition to enhance our genetic screening business by expanding our product offerings to diagnostics, academic and industrial end markets. We paid the shareholders of chemagen $34.6 million in cash for the stock of chemagen. We may pay additional contingent consideration of up to $20.3 million, with an estimated fair value of $7.7 million as of the closing date. The purchase price is also subject to potential adjustments for indemnification obligations of chemagen's shareholders. We have reported the operations for this acquisition within the results of our Human Health segment from the acquisition date. Critical Accounting Policies and Estimates The preparation of condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to bad debts, inventories, intangible assets, income taxes, restructuring, pensions and other postretirement benefits, stock-based compensation, warranty costs, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are those policies that affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements. We believe our critical accounting policies include our policies regarding revenue recognition, allowances for doubtful accounts, inventory valuation, business combinations, value of long-lived assets, including intangibles, employee compensation and benefits, restructuring activities, gains or losses on dispositions and income taxes. For a more detailed discussion of our critical accounting policies and estimates, please refer to the Notes to our Audited Consolidated Financial Statements and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the fiscal year ended January 2, 2011 (the "2010 Form 10-K"), as filed with the Securities and Exchange Commission (the "SEC"). 33-------------------------------------------------------------------------------- Table of Contents Consolidated Results of Continuing Operations Sales Sales for the three months ended July 3, 2011 were $479.5 million, as compared to $421.6 million for the three months ended July 4, 2010, an increase of $57.9 million, or 14%, which includes an approximate 6% increase in sales attributable to favorable changes in foreign exchange rates and an approximate 4% increase from acquisitions. The analysis in the remainder of this paragraph compares segment sales for the three months ended July 3, 2011 as compared to the three months ended July 4, 2010 and includes the effect of foreign exchange rate fluctuations and acquisitions. The total increase in sales reflects an increase of $21.8 million, or 11%, in our Human Health segment sales due to an increase in diagnostics market sales of $11.2 million, and an increase in research market sales of $10.6 million. Our Environmental Health segment sales increased $36.1 million, or 16%, due to increases in environmental and safety and industrial markets sales of $24.3 million, and an increase in laboratory services market sales of $11.8 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $6.2 million of revenue for the three months ended July 3, 2011 and $0.2 million for the three months ended July 4, 2010 that otherwise would have been recorded by the acquired businesses during each of the respective periods. Sales for the six months ended July 3, 2011 were $927.4 million, as compared to $815.2 million for the six months ended July 4, 2010, an increase of $112.1 million, or 14%, which includes an approximate 4% increase in sales attributable to favorable changes in foreign exchange rates and an approximate 3% increase from acquisitions. The analysis in the remainder of this paragraph compares segment sales for the six months ended July 3, 2011 as compared to the six months ended July 4, 2010 and includes the effect of foreign exchange rate fluctuations and acquisitions. The total increase in sales reflects an increase of $35.2 million, or 9%, in our Human Health segment sales due to an increase in diagnostics market sales of $22.6 million, and an increase in research market sales of $12.6 million. Our Environmental Health segment sales increased $76.9 million, or 18%, due to increases in environmental and safety and industrial markets sales of $51.2 million, and an increase in laboratory services market sales of $25.7 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $6.4 million of revenue for the six months ended July 3, 2011 and $0.4 million for the six months ended July 4, 2010 that otherwise would have been recorded by the acquired businesses during each of the respective periods. Cost of Sales Cost of sales for the three months ended July 3, 2011 was $270.5 million, as compared to $232.4 million for the three months ended July 4, 2010, an increase of $38.1 million, or 16%. As a percentage of sales, cost of sales increased to 56.4% for the three months ended July 3, 2011, from 55.1% for the three months ended July 4, 2010, resulting in a decrease in gross margin of 130 basis points to 43.6% for the three months ended July 3, 2011, from 44.9% for the three months ended July 4, 2010. Amortization of intangible assets increased and was $13.4 million for the three months ended July 3, 2011, as compared to $10.5 million for the three months ended July 4, 2010. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions completed in fiscal year 2011 was $0.3 million for the three months ended July 3, 2011. Stock compensation expense was $0.2 million for each of the three months ended July 3, 2011 and July 4, 2010. The decrease in gross margin was primarily the result of changes in product mix with growth in sales of lower gross margin product offerings, partially offset by increased sales volume and productivity improvements. Cost of sales for the six months ended July 3, 2011 was $518.1 million, as compared to $450.7 million for the six months ended July 4, 2010, an increase of $67.4 million, or 15%. As a percentage of sales, cost of sales increased to 55.9% for the six months ended July 3, 2011, from 55.3% for the six months ended July 4, 2010, resulting in a decrease in gross margin of 60 basis points to 44.1% for the six months ended July 3, 2011, from 44.7% for the six months ended July 4, 2010. Amortization of intangible assets increased and was $24.8 million for the six months ended July 3, 2011, as compared to $20.2 million for the six months ended July 4, 2010. Stock 34-------------------------------------------------------------------------------- Table of Contents compensation expense was $0.5 million for each of the six months ended July 3, 2011 and July 4, 2010. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions completed in fiscal year 2011 was $0.4 million for the six months ended July 3, 2011. The decrease in gross margin was primarily the result of changes in product mix with growth in sales of lower gross margin product offerings, partially offset by increased sales volume, productivity improvements and cost containment initiatives. Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended July 3, 2011 were $140.0 million, as compared to $123.3 million for the three months ended July 4, 2010, an increase of $16.8 million, or 14%. As a percentage of sales, selling, general and administrative expenses were 29.2% in each of the three months ended July 3, 2011 and July 4, 2010. Amortization of intangible assets increased and was $5.7 million for the three months ended July 3, 2011, as compared to $4.0 million for the three months ended July 4, 2010. Stock compensation expense increased and was $4.5 million for the three months ended July 3, 2011, as compared to $3.0 million for the three months ended July 4, 2010. Purchase accounting adjustments for contingent consideration and other acquisition costs related to certain acquisitions added expense of $1.8 million for the three months ended July 3, 2011 and $1.1 million for the three months ended July 4, 2010. In addition, $3.4 million from the gain on the sale of a facility in Boston, Massachusetts that was damaged in a fire in March 2005 partially offset selling, general and administrative expense in the three months ended July 4, 2010. The increase in selling, general and administrative expenses was primarily the result of costs related to acquisition integration, partially offset by productivity initiatives. Selling, general and administrative expenses for the six months ended July 3, 2011 were $274.6 million, as compared to $244.8 million for the six months ended July 4, 2010, an increase of $29.7 million, or 12%. As a percentage of sales, selling, general and administrative expenses decreased and were 29.6% for the six months ended July 3, 2011, as compared to 30.0% for the six months ended July 4, 2010. Amortization of intangible assets increased and was $10.3 million for the six months ended July 3, 2011, as compared to $8.1 million for the six months ended July 4, 2010. Stock compensation expense increased and was $7.2 million for the six months ended July 3, 2011, as compared to $6.5 million for the six months ended July 4, 2010. Purchase accounting adjustments for contingent consideration and other acquisition costs related to certain acquisitions added an expense of $5.0 million for the six months ended July 3, 2011 and $1.9 million for the six months ended July 4, 2010. In addition, $3.4 million from the gain on the sale of a facility in Boston, Massachusetts that was damaged in a fire in March 2005 partially offset selling, general and administrative expense in the six months ended July 4, 2010. The increase in selling, general and administrative expenses was primarily the result of increased sales and marketing expenses, particularly in emerging territories, and costs related to acquisition integration, partially offset by cost containment and productivity initiatives. Research and Development Expenses Research and development expenses for the three months ended July 3, 2011 were $28.2 million, as compared to $22.9 million for the three months ended July 4, 2010, an increase of $5.2 million, or 23%. As a percentage of sales, research and development expenses was 5.9% for the three months ended July 3, 2011, as compared to 5.4% for the three months ended July 4, 2010. Amortization of intangible assets decreased and was $0.2 million for the three months ended July 3, 2011, as compared to $0.4 million for the three months ended July 4, 2010. Stock compensation expense was $0.1 million for each of the three months ended July 3, 2011 and July 4, 2010. Research and development expenses for the six months ended July 3, 2011 were $54.5 million, as compared to $46.0 million for the six months ended July 4, 2010, an increase of $8.5 million, or 18%. As a percentage of sales, research and development expenses was 5.9% for the six months ended July 3, 2011, as compared to 5.6% for the six months ended July 4, 2010. Amortization of intangible assets decreased and was $0.5 million for the 35-------------------------------------------------------------------------------- Table of Contents six months ended July 3, 2011, as compared to $0.8 million for the six months ended July 4, 2010. Stock compensation expense increased and was $0.3 million for the six months ended July 3, 2011, as compared to $0.2 million for the six months ended July 4, 2010. Restructuring and Lease Charges, Net We have undertaken a series of restructuring actions related to the impact of acquisitions and divestitures, alignment with our growth strategy and the integration of our business units. A description of the restructuring plans and the activity recorded for the six months ended July 3, 2011 is listed below. Details of the plans initiated in previous years, particularly those listed under "Previous Restructuring and Integration Plans," are discussed more fully in Note 4 to the audited consolidated financial statements in the 2010 Form 10-K. The restructuring plans for the second quarter of fiscal year 2011 and fourth quarter of fiscal year 2010 were intended principally to shift resources to higher growth geographic regions and end markets. The restructuring plan for the second quarter of fiscal year 2010 was intended principally to reduce resources in response to the continued economic downturn and its impact on demand in certain end markets and to shift resources to higher growth geographic regions and end markets. The activities associated with these plans have been reported as restructuring expenses and are included as a component of operating expenses from continuing operations. We expect the impact of immediate cost savings from the restructuring plans on operating results and cash flows to approximately offset the increased spending in higher growth regions and the decline in revenue from certain products, respectively. We expect the impact of future cost savings from these restructuring activities on operating results and cash flows to be negligible, as we will incur offsetting costs by shifting resources to higher growth geographic regions and end markets. Q2 2011 Restructuring Plan During the second quarter of fiscal year 2011, our management approved a plan to shift resources to higher growth geographic regions and end markets (the "Q2 2011 Plan"). As a result of the Q2 2011 Plan, we recognized a $2.2 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. We also recognized a $3.4 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. As part of the Q2 2011 Plan, we reduced headcount by 72 employees. All employee notifications and actions related to the closure of excess facility space for the Q2 2011 Plan were completed by July 3, 2011. The following table summarizes the Q2 2011 Plan activity for the six months ended July 3, 2011: Closure of Excess Facility Severance Space Total (In thousands) Provision $ 4,927 $ 659 $ 5,586 Amounts paid and foreign currency translation (143 ) (659 ) (802 ) Balance at July 3, 2011 $ 4,784 $ - $ 4,784 All employees have been notified of termination and we anticipate that the remaining severance payments of $4.8 million for workforce reductions will be completed by the end of the fourth quarter of fiscal year 2012. 36-------------------------------------------------------------------------------- Table of Contents Q4 2010 Restructuring Plan During the fourth quarter of fiscal year 2010, our management approved a plan to shift resources to higher growth geographic regions and end markets (the "Q4 2010 Plan"). As a result of the Q4 2010 Plan, we recognized a $5.6 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. We also recognized a $7.6 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. The restructuring costs for the closure of excess facility space was offset by the recognition of a $2.8 million gain that had been deferred from a previous sale-leaseback transaction on this facility. During the second quarter of fiscal year 2011, we recorded an additional pre-tax restructuring accrual of $0.2 million relating to the Q4 2010 Plan due to a reduction in the estimated sublease rental payments reasonably expected to be obtained for our excess facility space in the Environmental Health segment. As part of the Q4 2010 Plan, we reduced headcount by 113 employees. All employee notifications and actions related to the closure of excess facility space for the Q4 2010 Plan were completed by January 2, 2011. The following table summarizes the Q4 2010 Plan activity for the six months ended July 3, 2011: Closure of Excess Facility Severance Space Total (In thousands) Balance at January 2, 2011 $ 7,852 $ 4,070 $ 11,922 Change in estimates - 168 168 Amounts paid and foreign currency translation (5,909 ) (78 ) (5,987 ) Balance at July 3, 2011 $ 1,943 $ 4,160 $ 6,103 All employees have been notified of termination and we anticipate that the remaining severance payments of $1.9 million for workforce reductions will be completed by the end of the fourth quarter of fiscal year 2012. We also anticipate that the remaining payments of $4.2 million for the closure of excess facility space will be paid through fiscal year 2022, in accordance with the terms of the applicable lease. Q2 2010 Restructuring Plan During the second quarter of fiscal year 2010, our management approved a plan to reduce resources in response to the continued economic downturn and its impact on demand in certain end markets and to shift resources to higher growth geographic regions and end markets (the "Q2 2010 Plan"). As a result of the Q2 2010 Plan, we recognized a $7.0 million pre-tax restructuring charge in the Human Health segment related to a workforce reduction from reorganization activities and the closure of excess facility space. The restructuring costs for the closure of excess facility space were partially offset by the recognition of a $0.1 million gain that had been deferred from a previous sale-leaseback transaction on this facility. We also recognized a $3.9 million pre-tax restructuring charge in the Environmental Health segment related to a workforce reduction from reorganization activities. During the second quarter of fiscal year 2011, we recorded a pre-tax restructuring reversal of $0.7 million relating to the Q2 2010 Plan due to lower than expected costs associated with the workforce reductions in Europe within both the Human Health and Environmental Health segments. As part of the Q2 2010 Plan, we reduced headcount by 115 employees. All employee notifications and actions related to the closure of excess facility space for the Q2 2010 Plan were completed by July 4, 2010. 37-------------------------------------------------------------------------------- Table of Contents The following table summarizes the Q2 2010 Plan activity for the six months ended July 3, 2011: Closure of Excess Facility Severance Space Total (In thousands) Balance at January 2, 2011 $ 2,193 $ 2,059 $ 4,252 Change in estimates (746 ) - (746 ) Amounts paid and foreign currency translation (1,208 ) (131 ) (1,339 ) Balance at July 3, 2011 $ 239 $ 1,928 $ 2,167 All employees have been notified of termination and we anticipate that the remaining severance payments of $0.2 million for workforce reductions will be completed by the end of the second quarter of fiscal year 2012. We also anticipate that the remaining payments of $1.9 million for the closure of excess facility space will be paid through fiscal year 2022, in accordance with the terms of the applicable lease. Previous Restructuring and Integration Plans The principal actions of the restructuring and integration plans from fiscal years 2001 through 2009 were workforce reductions related to the integration of our businesses in order to reduce costs and achieve operational efficiencies as well as workforce reductions in both the Human Health and Environmental Health segments by shifting resources into geographic regions and product lines that are more consistent with our growth strategy. During the six months ended July 3, 2011, we paid $0.4 million related to these plans and recorded a reversal of $1.7 million related to lower than expected costs associated with the workforce reductions in Europe within both the Human Health and Environmental Health segments. As of July 3, 2011, we had $4.3 million of remaining liabilities associated with these restructuring and integration plans, primarily for residual lease obligations related to closed facilities and remaining severance payments for workforce reductions in both the Human Health and Environmental Health segments. We expect to make payments for these leases, the terms of which vary in length, through fiscal year 2022. Interest and Other Expense (Income), Net Interest and other expense (income), net, consisted of the following: Three Months Ended Six Months Ended July 3, July 4, July 3, July 4, 2011 2010 2011 2010 (In thousands) Interest income $ (483 ) $ (169 ) $ (805 ) $ (350 ) Interest expense 4,213 3,949 8,129 7,752 Gain on step acquisition - (25,586 ) - (25,586 ) Other expense (income), net 541 153 2,703 (347 ) Total interest and other expense (income), net $ 4,271 $ (21,653 ) $ 10,027 $ (18,531 ) Interest and other expense (income), net, for the three months ended July 3, 2011 was an expense of $4.3 million, as compared to income of $21.7 million for the three months ended July 4, 2010, a decrease of $25.9 million. The decrease in interest and other expense (income), net, for the three months ended July 3, 2011 as compared to the three months ended July 4, 2010 was primarily due to the pre-tax gain of $25.6 million recognized during the three months ended July 4, 2010 related to the required re-measurement to fair value of our previously held equity interest in a joint venture with the company previously known as MDS, Inc. for the development and manufacturing of its Inductively Coupled Plasma Mass Spectrometry product line and other 38-------------------------------------------------------------------------------- Table of Contents related tangible assets (the "ICP-MS Joint Venture"). Interest expense increased by $0.3 million, and interest income increased by $0.3 million for the three months ended July 3, 2011, as compared to the three months ended July 4, 2010, primarily due to higher revolving debt balances and higher cash balances, respectively. Other expense (income), net, for the three months ended July 3, 2011 as compared to the three months ended July 4, 2010 increased by $0.4 million, and consisted primarily of expenses related to foreign currency transactions and foreign currency translation. A more complete discussion of our liquidity is set forth below under the heading "Liquidity and Capital Resources." Interest and other expense, net, for the six months ended July 3, 2011 was an expense of $10.0 million, as compared to income of $18.5 million for the six months ended July 4, 2010, a decrease of $28.6 million. The decrease in interest and other expense, net, for the six months ended July 3, 2011 as compared to the six months ended July 4, 2010 was primarily due to the pre-tax gain of $25.6 million recognized during the six months ended July 4, 2010 related to the required re-measurement to fair value of our previously held equity interest in the ICP-MS Joint Venture. Interest expense increased by $0.5 million and interest income increased by $0.4 million for the six months ended July 3, 2011, as compared to the six months ended July 4, 2010, primarily due to higher revolving debt balances and higher cash balances, respectively. Other expense (income), net, for the six months ended July 3, 2011 as compared to the six months ended July 4, 2010 increased by $3.1 million, and consisted primarily of expenses related to foreign currency transactions and foreign currency translation. Provision for Income Taxes For the three months ended July 3, 2011, the provision for income taxes from continuing operations was $5.3 million, as compared to $7.7 million for the three months ended July 4, 2010. For the six months ended July 3, 2011, the provision for income taxes from continuing operations was $13.0 million, as compared to $15.6 million for the six months ended July 4, 2010. The effective tax rate from continuing operations was 16.0% and 19.5% for the three and six months ended July 3, 2011, respectively, as compared to 14.1% and 18.9% for the three and six months ended July 4, 2010, respectively. The higher effective tax rates in fiscal year 2011 as compared to fiscal year 2010 were primarily due to the favorable impact related to the gain on the previously held equity interest in the ICP-MS Joint Venture during the three and six months ended July 4, 2010. Discontinued Operations As part of our continuing efforts to focus on higher growth opportunities, we have discontinued certain businesses. We have accounted for these businesses as discontinued operations and, accordingly, have presented the results of operations and related cash flows 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 condensed consolidated balance sheets as of July 3, 2011 and January 2, 2011. We recorded the following gains and losses, which have been reported as loss on disposition of discontinued operations: Three Months Ended Six Months Ended July 3, July 4, July 3, July 4, 2011 2010 2011 2010 (In thousands) Loss on disposition of Illumination and Detection Solutions business $ (111 ) $ - $ (1,696 ) $ - (Loss) gain on disposition of Photoflash business (13 ) 4,617 (9 ) 4,617 Net loss on disposition of other discontinued operations (33 ) (1,327 ) (36 ) (1,549 ) Net (loss) gain on disposition of discontinued operations before income taxes $ (157 ) $ 3,290 $ (1,741 ) $ 3,068 39 -------------------------------------------------------------------------------- Table of Contents In November 2010, we sold our Illumination and Detection Solutions ("IDS") business, which was included in the Environmental Health segment, for $510.3 million, including an adjustment for net working capital. We expect the divestiture of our IDS business to reduce the complexity of our product offerings and organizational structure, and to provide capital to reinvest in other Human Health and Environmental Health end markets. The buyer acquired our IDS business through the purchase of all outstanding stock of certain of our subsidiaries located in Germany, Canada, China, Indonesia, the Philippines, the United Kingdom and the United States as well as the purchase of related assets and the assumption of liabilities held by us and certain of our subsidiaries located in Singapore and Germany. We recognized a pre-tax gain of $315.3 million, inclusive of the net working capital adjustment, in the fourth quarter of fiscal year 2010 as a result of the sale of our IDS business. During the first six months of fiscal year 2011, we updated the net working capital adjustment associated with the sale of this business and other potential contingencies, which resulted in the recognition of a pre-tax loss of $1.7 million. These gains and losses were recognized as gain (loss) on the disposition of discontinued operations. As part of our strategic business alignment into the Human Health and Environmental Health segments, completed at the beginning of fiscal year 2009, and our continuing efforts to focus on higher growth opportunities, in December 2008, our management approved a plan to divest our Photoflash business within the Environmental Health segment. In June 2010, we sold our Photoflash business for $13.5 million, including an adjustment for net working capital, plus potential additional contingent consideration. We recognized a pre-tax gain of $4.6 million, inclusive of the net working capital adjustment, in the second quarter of fiscal year 2010 as a result of the sale. This gain was recognized as a gain on the disposition of discontinued operations. During the first six months of both fiscal years 2011 and 2010, we settled various commitments related to the divestiture of other discontinued operations. We recognized a pre-tax loss of $1.5 million in the first six months of fiscal year 2010 in connection with the settlement of those commitments. Summary operating results of the discontinued operations for the periods prior to disposition were as follows: Three Months Ended Six Months Ended July 3, July 4, July 3, July 4, 2011 2010 2011 2010 (In thousands) Sales $ - $ 88,562 $ - $ 165,067 Costs and expenses - 78,136 - 147,059 Operating income from discontinued operations - 10,426 - 18,008 Other expense, net - 281 - 549 Income from discontinued operations before income taxes $ - $ 10,145 $ - $ 17,459 We recognized a tax benefit of $0.8 million and $0.02 million on discontinued operations for the three and six months ended July 3, 2011, respectively. We recorded a tax provision of $3.0 million and $5.3 million on discontinued operations for the three and six months ended July 4, 2010, respectively. 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 $6.5 million as of July 3, 2011, which represents our management's estimate of the total cost of ultimate disposition of known environmental 40-------------------------------------------------------------------------------- Table of Contents matters. This amount is not discounted and does not reflect the 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 condensed consolidated financial statements. While it is possible that a loss exceeding the amounts recorded in the condensed consolidated financial statements may be incurred, the potential exposure is not expected to be materially different from those amounts recorded. Enzo Biochem, Inc. and Enzo Life Sciences, Inc. (collectively, "Enzo") filed a complaint dated October 23, 2002 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 "New York Case"). The complaint alleges that we have breached our distributorship and settlement agreements with Enzo, infringed Enzo's patents, engaged in unfair competition and fraud, and committed torts against Enzo by, among other things, engaging in commercial development and exploitation of Enzo's 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 Enzo's patents are invalid. In July 2006, the court issued a decision regarding the construction of the claims in Enzo's patents that effectively limited the coverage of certain of those claims and, we believe, excludes certain of our products from the coverage of Enzo's patents. Summary judgment motions were filed by the defendants in January 2007, and a hearing with oral argument on those motions took place in July 2007. In January 2009, the case was assigned to a new district court judge and in March 2009, the new judge denied the pending summary judgment motions without prejudice and ordered a stay of the case until the federal appellate court decides Enzo's appeal of the judgment of the United States District Court for the District of Connecticut in Enzo Biochem vs. Applera Corp. and Tropix, Inc. (the "Connecticut Case"), which involves a number of the same patents and which could materially affect the scope of Enzo's case against us. On March 26, 2010, the United States Court of Appeals for the Federal Circuit affirmed-in-part and reversed-in-part the judgment in the Connecticut Case. Pending further disposition of the Connecticut Case, the New York Case against us and other defendants remains stayed. We believe we have meritorious defenses to the matter described above, and we are contesting the action vigorously. While this matter is subject to uncertainty, in the opinion of our management, based on its review of the information available at this time, the resolution of this matter will not have a material adverse effect on our condensed consolidated financial statements. Tax years ranging from 2001 through 2010 remain open to examination by various tax jurisdictions in which we have significant business operations, such as Singapore, Canada, Germany, the United Kingdom and the United States. The tax years under examination vary by jurisdiction. We regularly review our tax positions in each significant taxing jurisdiction in the process of evaluating our unrecognized tax benefits. We make adjustments to our unrecognized tax benefits when: (i) facts and circumstances regarding a tax position change, causing a change in management's judgment regarding that tax position; (ii) a tax position is effectively settled with a tax authority; and/or (iii) the statute of limitations expires regarding a tax position. 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. Although we have established accruals for potential losses that we believe are probable and reasonably estimable, in the opinion of our management, based 41-------------------------------------------------------------------------------- Table of Contents on its review of the information available at this time, the total cost of resolving these other contingencies at July 3, 2011 should not have a material adverse effect on our condensed consolidated financial statements. However, each of these matters is subject to uncertainties, and it is possible that some of these matters may be resolved unfavorably to us. Reporting Segment Results of Continuing Operations Human Health Sales for the three months ended July 3, 2011 were $219.2 million, as compared to $197.5 million for the three months ended July 4, 2010, an increase of $21.8 million, or 11%, which includes an approximate 6% increase in sales attributable to favorable changes in foreign exchange rates and an approximate 4% increase from acquisitions. The analysis in the remainder of this paragraph compares selected sales by product type for the three months ended July 3, 2011, as compared to the three months ended July 4, 2010, and includes the effect of foreign exchange fluctuations and acquisitions. The increase in sales in our Human Health segment reflects an increase in diagnostics market sales of $11.2 million, and an increase in research market sales of $10.6 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $0.4 million of revenue in our Human Health segment for the three months ended July 3, 2011 and $0.2 million for the three months ended July 4, 2010 that otherwise would have been recorded by the acquired businesses during each of the respective periods. The increase in our Human Health segment sales during the three months ended July 3, 2011 was due primarily to increased growth in the academic sector for both instruments and reagents in the research market, continued growth from industrial and veterinary applications in our medical imaging business, and increased demand from the adoption of our neonatal and infectious disease screening offerings in the diagnostics market. The increased growth in the academic sector for both instruments and reagents in the research market continued as early stage therapeutic researchers continue their efforts to optimize compound screening efficiencies in the lab. These increases were partially offset by the impact of lower birth rates in the United States and tight inventory management in state and national labs for neonatal screening in the diagnostics market, as well as reduced sales to pharmaceutical companies resulting from continued customer consolidations in the pharmaceutical market. Sales for the six months ended July 3, 2011 were $421.3 million, as compared to $386.1 million for the six months ended July 4, 2010, an increase of $35.2 million, or 9%, which includes an approximate 4% increase in sales attributable to favorable changes in foreign exchange rates and an approximate 3% increase from acquisitions. The analysis in the remainder of this paragraph compares selected sales by product type for the six months ended July 3, 2011, as compared to the six months ended July 4, 2010, and includes the effect of foreign exchange fluctuations and acquisitions. The increase in sales in our Human Health segment reflects an increase in diagnostics market sales of $22.6 million, and an increase in research market sales of $12.6 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $0.6 million of revenue in our Human Health segment for the six months ended July 3, 2011 and $0.4 million for the six months ended July 4, 2010 that otherwise would have been recorded by the acquired businesses during each of the respective periods. The increase in our Human Health segment sales during the six months ended July 3, 2011 was due primarily to increased demand from the adoption of our neonatal and infectious disease screening offerings in the diagnostics market, increased growth in the academic sector for both instruments and reagents in the research market, and continued growth from industrial and veterinary applications in our medical imaging business. The increased growth in the academic sector for both instruments and reagents in the research market continued as early stage therapeutic researchers continue their efforts to optimize compound screening efficiencies in the lab. These increases were partially offset by the impact of lower birth rates in the United States and tight inventory management in state and national labs for neonatal screening in the diagnostics market, as well as reduced sales to pharmaceutical companies resulting from continued customer consolidations in the pharmaceutical market and reduced demand for our legacy radioisotope portfolio in the research market. 42-------------------------------------------------------------------------------- Table of Contents Operating income from continuing operations for the three months ended July 3, 2011 was $27.6 million, as compared to $25.8 million for the three months ended July 4, 2010, an increase of $1.8 million, or 7%. Amortization of intangible assets increased and was $12.3 million for the three months ended July 3, 2011, as compared to $11.4 million for the three months ended July 4, 2010. Restructuring and lease charges, net, were $1.8 million for the three months ended July 3, 2011 due primarily to the Q2 2011 Plan, as compared to $5.9 million for the three months ended July 4, 2010 due primarily to the Q2 2010 Plan. Purchase accounting adjustments for contingent consideration and other acquisition costs related to certain acquisitions added an expense of $1.2 million for the three months ended July 3, 2011, as compared to an expense of $0.7 million for the three months ended July 4, 2010. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions completed in fiscal year 2011 was $0.3 million for the three months ended July 3, 2011. In addition, operating income from continuing operations for the three months ended July 4, 2010 included $3.4 million from the gain on the sale of a facility in Boston, Massachusetts that was damaged in a fire in March 2005. Increased sales volume and productivity initiatives increased operating income for the three months ended July 3, 2011, which was partially offset by changes in product mix with growth in sales of lower gross margin product offerings and costs related to acquisition integration. Operating income from continuing operations for the six months ended July 3, 2011 was $48.3 million, as compared to $47.6 million for the six months ended July 4, 2010, an increase of $0.7 million, or 1%. Amortization of intangible assets increased and was $24.9 million for the six months ended July 3, 2011, as compared to $22.4 million for the six months ended July 4, 2010. Restructuring and lease charges, net, were $1.8 million for the six months ended July 3, 2011 due primarily to the Q2 2011 Plan, as compared to $5.9 million for the six months ended July 4, 2010 due primarily to the Q2 2010 Plan. Purchase accounting adjustments for contingent consideration and other acquisition costs related to certain acquisitions added an expense of $3.7 million for the six months ended July 3, 2011, as compared to an expense of $0.7 million for the six months ended July 4, 2010. The amortization of purchase accounting adjustments to record the inventory from certain acquisitions completed in fiscal year 2011 was $0.4 million for the six months ended July 3, 2011. In addition, operating income from continuing operations for the six months ended July 4, 2010 included $3.4 million from the gain on the sale of a facility in Boston, Massachusetts that was damaged in a fire in March 2005. Increased sales volume and cost containment and productivity initiatives increased operating income for the six months ended July 3, 2011, which was partially offset by changes in product mix with growth in sales of lower gross margin product offerings, increased sales and marketing expenses, particularly in emerging territories, and costs related to acquisition integration. Environmental Health Sales for the three months ended July 3, 2011 were $260.2 million, as compared to $224.1 million for the three months ended July 4, 2010, an increase of $36.1 million, or 16%, which includes an approximate 6% increase in sales attributable to favorable changes in foreign exchange rates and an approximate 4% increase from acquisitions. The analysis in the remainder of this paragraph compares selected sales by market and product type for the three months ended July 3, 2011, as compared to the three months ended July 4, 2010, and includes the effect of foreign exchange fluctuations and acquisitions. The increase in sales in our Environmental Health segment reflects increases in environmental and safety and industrial markets sales of $24.3 million, and an increase in laboratory services market sales of $11.8 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $5.8 million of revenue in our Environmental Health segment for the three months ended July 3, 2011 that otherwise would have been recorded by the acquired businesses during that period. The increase in our Environmental Health segment sales during the three months ended July 3, 2011 was due primarily to continued growth in our environmental, food and consumer safety and testing products, as well as, growth in industrial markets primarily related to chemical processing and energy applications supported by our molecular spectroscopy and chromatography platforms. We also experienced growth in our OneSource® multivendor service offering as our comprehensive services continue to grow with our key customers. 43 -------------------------------------------------------------------------------- Table of Contents Sales for the six months ended July 3, 2011 were $506.1 million, as compared to $429.2 million for the six months ended July 4, 2010, an increase of $76.9 million, or 18%, which includes an approximate 5% increase in sales attributable to favorable changes in foreign exchange rates and an approximate 2% increase from acquisitions. The analysis in the remainder of this paragraph compares selected sales by market and product type for the six months ended July 3, 2011, as compared to the six months ended July 4, 2010, and includes the effect of foreign exchange fluctuations and acquisitions. The increase in sales in our Environmental Health segment reflects increases in environmental and safety and industrial markets sales of $51.2 million, and an increase in laboratory services market sales of $25.7 million. As a result of adjustments to deferred revenue related to certain acquisitions required by business combination rules, we did not recognize $5.8 million of revenue in our Environmental Health segment for the six months ended July 3, 2011 that otherwise would have been recorded by the acquired businesses during that period. The increase in our Environmental Health segment sales during the six months ended July 3, 2011 was due primarily to growth in our environmental, food and consumer safety and testing products, as well as growth in our OneSource® multivendor service offering as our comprehensive services continue to grow with our key customers. We also experienced continued growth in industrial markets with the reduction of constraints on capital purchases primarily related to chemical processing and energy applications supported by our molecular spectroscopy and chromatography platforms. Operating income from continuing operations for the three months ended July 3, 2011 was $20.7 million, as compared to $16.7 million for the three months ended July 4, 2010, an increase of $4.0 million, or 24%. Amortization of intangible assets increased and was $7.0 million for the three months ended July 3, 2011, as compared to $3.5 million for the three months ended July 4, 2010. Restructuring and lease charges, net, were $1.5 million for the three months ended July 3, 2011 due primarily to the Q2 2011 Plan, as compared to $4.0 million for the three months ended July 4, 2010 due primarily to the Q2 2010 Plan. Purchase accounting adjustments for contingent consideration and other acquisition costs related to certain acquisitions was an expense of $0.6 million for the three months ended July 3, 2011, as compared to an expense of $0.4 million for the three months ended July 4, 2010. Increased sales volume and productivity initiatives increased operating income for the three months ended July 3, 2011, which was partially offset by costs related to acquisition integration. Operating income from continuing operations for the six months ended July 3, 2011 was $49.8 million, as compared to $35.7 million for the six months ended July 4, 2010, an increase of $14.1 million, or 40%. Amortization of intangible assets increased and was $10.8 million for the six months ended July 3, 2011, as compared to $6.8 million for the six months ended July 4, 2010. Restructuring and lease charges, net, were $1.5 million for the six months ended July 3, 2011 as a result of the Q2 2011 Plan, as compared to $4.0 million for the six months ended July 4, 2010 as a result of the Q2 2010 Plan. Purchase accounting adjustments for contingent consideration and other acquisition costs related to certain acquisitions was an expense of $1.2 million for the six months ended July 3, 2011, as compared to an expense of $1.1 million for the six months ended July 4, 2010. Increased sales volume and cost containment and productivity initiatives increased operating income for the six months ended July 3, 2011, which was partially offset by increased sales and marketing expenses, particularly in emerging territories, and costs related to acquisition integration. Liquidity and Capital Resources We require cash to pay our operating expenses, make capital expenditures, make strategic acquisitions, service our debt and other long-term liabilities, repurchase shares of our common stock and pay dividends on our common stock. Our principal sources of funds are from our operations and the capital markets, particularly the debt markets. We anticipate that our internal operations will generate sufficient cash to fund our operating expenses, capital expenditures, smaller acquisitions, interest payments on our debt and dividends on our common stock. However, we expect to use external sources to satisfy the balance of our debt when due, any larger acquisitions and other long-term liabilities. 44-------------------------------------------------------------------------------- Table of Contents Principal factors that could affect the availability of our internally generated funds include: • changes in 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 amended and restated senior unsecured revolving credit facility and our overall access to the corporate debt market, • increases in interest rates or credit spreads, as well as limitations on the availability of credit, that affect our ability to borrow under future potential facilities on a secured or unsecured basis, • a decrease in the market price for our common stock, and • volatility in the public debt and equity markets. At July 3, 2011, we had cash and cash equivalents of $395.2 million and an amended senior unsecured revolving credit facility with $116.0 million available for additional borrowing. On October 23, 2008, we announced that our Board of Directors (our "Board") authorized us to repurchase up to 10.0 million shares of common stock under a stock repurchase program (the "Repurchase Program"). On August 31, 2010, we announced that our Board had authorized us to repurchase an additional 5.0 million shares of common stock under the Repurchase Program. The Repurchase Program will expire on October 22, 2012 unless terminated earlier by our Board, and may be suspended or discontinued at any time. During the first six months of fiscal year 2011, we repurchased 4.0 million shares of common stock in the open market at an aggregate cost of $107.8 million, including commissions, under the Repurchase Program. As of July 3, 2011, 6.0 million shares of our common stock remained available for repurchase from the 15.0 million shares authorized by our Board under the Repurchase Program. Our Board has authorized us to repurchase shares of common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards and restricted stock unit awards granted pursuant to our equity incentive plans. During the first six months of fiscal year 2011, we repurchased 83,878 shares of common stock for this purpose. The repurchased shares have been reflected as a reduction in shares outstanding, but remain available to be reissued with the payments reflected in common stock and capital in excess of par value. 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 amended senior unsecured revolving credit facility. As a result of the sale of the IDS and Photoflash businesses, we concluded that the remaining operations within those foreign subsidiaries previously containing IDS and Photoflash operations did not require the same level of capital as previously required, and therefore we plan to repatriate approximately $250.0 million of previously unremitted earnings and have provided for the taxes on those earnings. Taxes have not been provided for unremitted earnings that we continue to consider permanently reinvested, which is based on our future operational and capital requirements. The impact of this tax provision in fiscal year 2010 was an increase to our tax provision of $65.8 million in discontinued operations. We expect to utilize existing tax attributes to repatriate these earnings and expect the taxes to be paid to repatriate these earnings will be minimal. As of July 3, 2011, we had repatriated $70.2 million in foreign earnings and previously taxed earnings. 45-------------------------------------------------------------------------------- Table of Contents Distressed global financial markets could adversely impact general economic conditions by reducing liquidity and credit availability, creating increased volatility in security prices, widening credit spreads and decreasing valuations of certain investments. The widening of credit spreads may create a less favorable environment for certain of our businesses and may affect the fair value of financial instruments that we issue or hold. Increases in credit spreads, as well as limitations on the availability of credit at rates we consider to be reasonable, could affect our ability to borrow under future potential facilities on a secured or unsecured basis, which may adversely affect our liquidity and results of operations. In difficult global financial markets, we may be forced to fund our operations at a higher cost, or we may be unable to raise as much funding as we need to support our business activities. Our pension plans have not experienced any material impact on liquidity or counterparty exposure due to the volatility in the credit markets. We could experience increased pension costs in future periods for all pension plans. We may be required to fund our international pension plans with contributions of up to $11.0 million by the end of fiscal year 2011, and we could potentially have to make additional funding payments in future periods for all of our pension plans. Cash Flows Operating Activities. Net cash provided by continuing operations was $102.2 million for the six months ended July 3, 2011, as compared to net cash provided by continuing operations of $114.0 million for the six months ended July 4, 2010, a decrease of $11.9 million. The cash provided by operating activities for the six months ended July 3, 2011 was principally a result of income from continuing operations of $53.8 million, depreciation and amortization of $50.6 million, stock based compensation expense of $8.0 million and restructuring and lease charges, net, of $3.3 million. These amounts were partially offset by a net decrease in working capital of $19.3 million. Contributing to the net decrease in working capital for the six months ended July 3, 2011, excluding the effect of foreign exchange rate fluctuations, was a decrease in accounts payable of $19.8 million and an increase in inventory of $3.4 million, partially offset by a decrease in accounts receivable of $3.9 million. The decrease in accounts payable was primarily a result of the timing of disbursements during the first six months of fiscal year 2011. The increase in inventory overall was primarily a result of expanding the amount of inventory held at sales locations within our Environmental Health and Human Health segments to improve responsiveness to customer requirements and for the introduction of new products. The decrease in accounts receivable was a result of strong performance in accounts receivable collections during the first six months of fiscal year 2011. Changes in accrued expenses, other assets and liabilities and other items, net, increased cash provided by operating activities by $5.8 million for the six months ended July 3, 2011, and primarily related to the timing of payments for tax, restructuring, and salary and benefits. Investing Activities. Net cash used in the investing activities of our continuing operations was $325.9 million for the six months ended July 3, 2011, as compared to net cash used in the investing activities of our continuing operations of $130.7 million for the six months ended July 4, 2010, an increase of $195.2 million. For the six months ended July 3, 2011, we used $310.4 million of net cash for acquisitions, core technology purchases, acquired licenses and other costs in connection with these and other transactions. Capital expenditures for the six months ended July 3, 2011 were $16.0 million, primarily in the areas of tooling and other capital equipment purchases. Restricted cash balances decreased for the six months ended July 3, 2011 by $0.4 million. Financing Activities. Net cash provided by the financing activities of our continuing operations was $150.7 million for the six months ended July 3, 2011, as compared to net cash provided by the financing activities of our continuing operations of $54.8 million for the six months ended July 4, 2010, an increase of $95.9 million. For the six months ended July 3, 2011, we repurchased 4.0 million shares of our common stock, including 83,878 shares of our common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards, for a total cost of $110.0 million, including commissions. This compares to repurchases of 46,572 shares of our common stock to satisfy minimum statutory tax withholding obligations in connection with the vesting of restricted stock awards for the six months ended July 4, 2010, for a total cost of 46-------------------------------------------------------------------------------- Table of Contents $1.0 million, including commissions. This use of cash was offset by proceeds from common stock option exercises of $32.1 million, including the related excess tax benefit, for the six months ended July 3, 2011. This compares to the proceeds from common stock option exercises of $13.1 million, including the related excess tax benefit, for the six months ended July 4, 2010. During the six months ended July 3, 2011, debt borrowings from our amended senior unsecured revolving credit facility totaled $494.0 million, which was partially offset by debt reductions of $247.0 million. This compares to debt borrowings from our amended senior unsecured revolving credit facility of $171.0 million, which was offset by debt reductions of $111.5 million during the six months ended July 4, 2010. We paid $16.0 million and $16.4 million in dividends during the six months ended July 3, 2011 and July 4, 2010, respectively. In addition, we settled $0.1 million in contingent consideration recorded at the acquisition date fair value for acquisitions completed subsequent to fiscal year 2008 during both of the six months ended July 3, 2011 and July 4, 2010. Borrowing Arrangements Amended Senior Unsecured Revolving Credit Facility. We have a senior unsecured revolving credit facility which provides for a $650.0 million facility through August 13, 2012. Letters of credit in the aggregate amount of $13.0 million are treated as issued under this amended facility. We use the amended 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 amended 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 (i) the corporate base rate announced from time to time by Bank of America, N.A. or (ii) the Federal Funds rate plus 50 basis points. We may allocate all or a portion of our indebtedness under the amended senior unsecured revolving credit facility to interest based upon the Eurocurrency rate plus a margin, or the base rate. The Eurocurrency margin as of July 3, 2011 was 40 basis points. The weighted average Eurocurrency interest rate as of July 3, 2011 was 0.19%, resulting in a weighted average effective Eurocurrency rate, including the margin, of 0.59%. We had drawn down $521.0 million of borrowings in U.S. Dollars under the facility as of July 3, 2011, with interest based on the above described Eurocurrency rate. The agreement for the facility contains affirmative, negative and financial covenants and events of default customary for financings of this type. The financial covenants in our amended and restated senior unsecured revolving credit facility include debt-to-capital ratios and a contingent maximum total leverage ratio, applicable if our credit rating is down-graded below investment grade. We were in compliance with all applicable covenants as of July 3, 2011, and anticipate being in compliance for the duration of the term of the credit facility. 6% Senior Unsecured Notes. On May 30, 2008, we issued and sold seven-year senior notes at a rate of 6% with a face value of $150.0 million and received $150.0 million in gross proceeds from the issuance. The debt, which matures in May 2015, is unsecured. Interest on the 6% senior notes is payable semi-annually on May 30th and November 30th. We may redeem some or all of our 6% senior notes at any time in an amount not less than 10% of the original aggregate principal amount, plus accrued and unpaid interest, plus the applicable make-whole amount. The financial covenants in our 6% senior notes include debt-to-capital ratios which, if our credit rating is down-graded below investment grade, would be replaced by a contingent maximum total leverage ratio. We were in compliance with all applicable covenants as of July 3, 2011, and anticipate being in compliance for the duration of the term of the notes. Dividends Our Board declared a regular quarterly cash dividend of $0.07 per share in each of the first two quarters of fiscal year 2011 and in each quarter of fiscal year 2010. In the future, our Board may determine to reduce or eliminate our common stock dividend in order to fund investments for growth, repurchase shares or conserve capital resources. 47 -------------------------------------------------------------------------------- Table of Contents Effects of Recently Adopted Accounting Pronouncements In October 2009, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance on multiple-deliverable revenue arrangements. This guidance establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities. This guidance provides amendments to the criteria for separating and measuring deliverables and allocating arrangement consideration to one or more units of accounting. The amendments in this guidance also establish a selling price hierarchy for determining the selling price of a deliverable. The amendments also require a company to provide information about the significant judgments made and changes to those judgments and about the way the application of the relative selling-price method affects the timing or amount of revenue recognition. We adopted this authoritative guidance on multiple-deliverable revenue arrangements in the first quarter of fiscal year 2011. The adoption of this guidance did not have a significant impact on our condensed consolidated financial statements. In October 2009, the FASB issued authoritative guidance on certain revenue arrangements that include software elements. This guidance changes the accounting model for revenue arrangements that include both tangible products and software elements that are "essential to the functionality" of the product. Products for which software elements are not essential to the functionality of the product are excluded from current software revenue guidance. The guidance includes factors to help companies determine what software elements are considered "essential to the functionality" of the product. The amendments subject software-enabled products to other revenue guidance and disclosure requirements, such as guidance surrounding revenue arrangements with multiple deliverables. We adopted this authoritative guidance on revenue arrangements that include software elements in the first quarter of fiscal year 2011. The adoption of this guidance did not have a significant impact on our condensed consolidated financial statements. In March 2010, the FASB issued authoritative guidance on the milestone method of revenue recognition. This guidance allows the milestone method as an acceptable revenue recognition methodology when an arrangement includes substantive milestones. This guidance provides a definition of a substantive milestone that should be applied regardless of whether the arrangement includes single or multiple deliverables or units of accounting. The scope of the applicability of this definition is limited to transactions involving milestones relating to research and development deliverables. This guidance also includes enhanced disclosure requirements about each arrangement, individual milestones and related contingent consideration, information about substantive milestones and factors considered in the determination of whether this methodology is appropriate. We adopted this authoritative guidance on the milestone method of revenue recognition on a prospective basis in the first quarter of fiscal year 2011. The adoption of this guidance did not have a significant impact on our condensed consolidated financial statements. Effects of Recently Issued Accounting Pronouncements From time to time, new accounting pronouncements are issued by the FASB and are adopted by us as of the specified effective dates. Unless otherwise discussed, we believe that such recently issued pronouncements will not have a significant impact on our condensed consolidated financial position, results of operations and cash flows or do not apply to our operations. [ Back To TMCnet.com's Homepage ]