FORM 10-K
Table of Contents

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 January 1, 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.)

45 William Street, Wellesley, Massachusetts   02481
(Address of Principal Executive Offices)   (Zip Code)

 

Registrant’s telephone number, including area code:

(781) 237-5100

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 registrant’s 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.        þ

 

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.

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in 12b-2 of the Exchange Act).        Yes ¨        No þ

 

The aggregate market value of the common stock, $1 par value per share, held by nonaffiliates of the registrant on July 1, 2005, was $2,308,540,529 based upon the last reported sale of the common stock on that date.

 

As of March 14, 2006, there were outstanding 126,722,858 million 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 25, 2006 are incorporated by reference into Part III of this Form 10-K.

 



Table of Contents

TABLE OF CONTENTS

 

          Page

PART I

Item 1.

   Business    3

Item 1A.

   Risk Factors    14

Item 1B.

   Unresolved Staff Comments    18

Item 2.

   Properties    18

Item 3.

   Legal Proceedings    19

Item 4.

   Submission of Matters to a Vote of Security Holders    20
PART II

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    22

Item 6.

   Selected Financial Data    23

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    25

Item 7A.

   Quantitative and Qualitative Disclosures About Market Risk    44

Item 8.

   Financial Statements and Supplemental Data    47

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    89

Item 9A.

   Controls and Procedures    89

Item 9B.

   Other Information    91
PART III

Item 10.

   Directors and Executive Officers of the Registrant    92

Item 11.

   Executive Compensation    92

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    92

Item 13.

   Certain Relationships and Related Transactions    93

Item 14.

   Principal Accountant Fees and Services    93
PART IV

Item 15.

   Exhibits and Financial Statement Schedules    94

Signatures

   99


Table of Contents

PART I

 

Item 1.    Business

 

Overview

 

We are a leading provider of scientific instruments, consumables and services to the pharmaceutical, biomedical, 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 one reporting segment:

 

    Life and Analytical Sciences. We are a leading provider of drug discovery and development, 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 biomedical, consumer products and other specialty end markets.

 

The health sciences markets include all of the businesses in our Life and Analytical Sciences reporting segment and the medical imaging business, as well as elements of the medical sensors and lighting businesses in our Optoelectronics reporting segment. The photonics markets include the remaining businesses in our Optoelectronics reporting segment.

 

In fiscal 2005, we had $1,473.8 million in sales from continuing operations.

 

We are a Massachusetts corporation, founded in 1947. Our headquarters are in Wellesley, Massachusetts, and we market our products and systems in more than 125 countries. As of January 1, 2006, we had approximately 8,000 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 and 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.

 

Significant Developments

 

As part of our efforts to focus and grow our core businesses, we have taken the following significant measures in recent years:

 

Unsecured Credit Facility. In October 2005, we entered into a $350 million unsecured senior revolving credit facility with a term of five years. The facility replaced our previous $100 million facility and will be used for general corporate purposes which may include fulfilling working capital needs, refinancing existing indebtedness, making capital expenditures, repurchasing shares, or consummating acquisitions and strategic alliances.

 

Tender Offer. In October 2005, we commenced a cash tender offer and consent solicitation for any and all of our outstanding 8 7/8% senior subordinated notes due 2013 (the “Senior Subordinated Notes”). On November 14, 2005, as part of an initial settlement under the tender offer, we repurchased $269.9 million of the $270 million outstanding Senior Subordinated Notes.

 

Share 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

 

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(the “Program”). This Program will expire on October 21, 2008, unless it is earlier terminated by our Board of Directors. During the fourth quarter of 2005, we repurchased in the open market under this program 1,096,000 shares of our common stock at an aggregate cost of $24.4 million. We believe that the share repurchase program benefits our shareholders by increasing earnings per share by reducing the number of shares outstanding and that we are likely to have adequate financial flexibility to fund additional share repurchases given current cash and debt levels.

 

Acquisition of Elcos AG. In February 2005, we acquired Elcos AG, a leading European designer and manufacturer of custom light emitting diode, or LED, solutions for biomedical and industrial applications. Consideration for the transaction was approximately $15.4 million in cash at the time of closing, $0.3 million of additional payments in 2005 and approximately $1.1 million due through fiscal 2007. Also, we estimate that under an earn out provision in the acquisition agreement we will make an additional cash payment of approximately $3.1 million in 2006 to reflect the performance of the business in 2005, with the potential for additional earn out payments being made in 2007 and 2008 based on the performance of the business in 2006 and 2007, respectively.

 

American Jobs Creation Act. The homeland investment provisions of the American Jobs Creation Act of 2004, enacted on October 22, 2004, provided us with an opportunity during 2005 to repatriate earnings from our foreign subsidiaries at a substantially reduced tax cost and to increase the amount of cash available to fund our operations in the United States. During 2005, we repatriated cash of approximately $535 million of which over $470 million qualified as domestic reinvestment plan repatriations under the homeland investment provisions of the American Jobs Creation Act. While such repatriation carried with it reduced tax costs, it also required that we still recognize incremental tax obligations. It has been a general policy in the past to not provide for taxes on earnings that we did not intend to repatriate; accordingly, any incremental tax would have a negative impact on our current tax rates. In 2005, we recognized $15.5 million of tax expense for qualified repatriation. During 2006 and 2007, we will continue to invest the qualified earnings in permitted uses pursuant to the domestic reinvestment plans approved by our Board.

 

Tax Audit. We are under regular examination by tax authorities in jurisdictions 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 examinations. Tax reserves have been established, which we believe to be adequate in relation to the potential for additional assessments. Once established, we adjust these reserves as information becomes available and when an event occurs requiring a change to the reserves. We do not expect the examination process and resolution of tax matters to have a material effect on our consolidated financial position, although future adjustments or settlements could have a material impact on our income tax expense, effective tax rate, cash flow, and consolidated statement of income for a particular future period. As a result of concluding the federal, state and foreign audits during 2005, we recognized a benefit of $27.5 million.

 

Restructuring and Integration Charges. Total restructuring and integration charges for 2005 were $22.1 million. 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. Substantially all of this pre-tax restructuring charge will result in cash expenditures that we expect will be paid within the next 12 months. Also, as part of our planned effort to consolidate our Canadian operations, we closed one of our properties in the Montreal area. 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 the facility in Montreal. 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 Business Segment Divestiture. In September 2005, our Board of Directors approved a plan to divest our Fluid Sciences business segment to increase our strategic focus on higher growth markets within our

 

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Life and Analytical Sciences and Optoelectronics businesses. The Fluid Sciences business segment consisted of three businesses—Aerospace, 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 to Caleb Brett USA Inc. for approximately $34.5 million, resulting in a net pre-tax gain of $30.3 million. In December 2005, we sold the Aerospace business to Eaton Corporation for approximately $333 million, resulting in a net pre-tax gain of $250.6 million. We recognized these gains during fiscal 2005 as gains on the disposition of discontinued operations. We received total cash proceeds in these transactions of approximately $360 million. On February 27, 2006, we sold substantially all of the assets of our Semiconductor business to an entity affiliated with Tara Capital, Inc. for approximately $26.5 million (subject to a net working capital adjustment) plus additional contingent consideration that could bring the total proceeds received to more than $30 million. We are currently in the process of computing the gain on the transaction and will record such amount in the first quarter of 2006.

 

Lithography Divestiture and Fiber Optics Test Equipment Shutdown. In 2005, as part of our continued efforts to focus on higher growth opportunities, our Board of Directors also approved separate plans to sell our Lithography business and to shutdown our Fiber Optics Test Equipment businesses. We have reflected these businesses as discontinued operations for all periods presented in this annual report on Form 10-K. Upon the sale of the Lithography business in December 2005, we received proceeds of $0.5 million and recognized a pre-tax loss of $3.3 million as loss on the disposition of discontinued operations. The shutdown of the Fiber Optics Test Equipment business in June 2005 resulted in a $5.2 million loss related to lease and severance costs and the reduction of fixed assets and inventory to net realizable value. In August 2005, certain assets that were previously written down were subsequently sold resulting in a gain of $0.1 million. We recognized the pre-tax net loss of $5.2 million as a loss on the disposition of discontinued operations.

 

Other Operations Classified as Discontinued. Included in this Form 10-K are the financial results of other operations that were discontinued or sold prior to fiscal 2005. These include our Computer-To-Plate and Electroformed Products businesses which were approved for shutdown by our Board of Directors in September 2004 and June 2004, respectively, and our Ultraviolet Lighting business which was sold in June 2004. These also include our Telecommunications Component and Entertainment Lighting businesses which were approved for shutdown by our Board of Directors in June 2002, our Security and Detection Systems business which was sold in June 2002, and our Technical Services Business which was sold in August 1999. We have reflected these businesses as discontinued operations for all periods presented in this annual report on Form 10-K.

 

Life and Analytical Sciences

 

Our Life and Analytical Sciences business unit is a leading provider of biopharmaceutical, genetic screening and analytical 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 2005, our Life and Analytical Sciences business generated sales of $1,081.1 million.

 

For drug discovery and development, we offer a wide range of systems comprised of instrumentation, software and consumables, including reagents, based on our core expertise in proteomics and genomics, fluorescence, chemiluminescence, radioactive labeling and the detection of nucleic acids and proteins.

 

For genetic screening and clinical laboratories, we provide instrumentation, software, reagents and analytical tools to test for various inherited disorders in newborns and to monitor risk factors during pregnancy. These clinical screening programs help by identifying women at risk during pregnancy and newborn babies at risk from inherited metabolic or endocrinological disorders. We sell our genetic screening solutions to public health authorities and private health care organizations around the world.

 

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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 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, first-year warranties, training, and preventative maintenance. OneSource®, our managed maintenance service plan, helps customers consolidate the essential maintenance and equipment management needs of their laboratory(s).

 

Principal Products. The principal products of our Life and Analytical Sciences business include:

 

    Chemical and biological reagents, such as LANCE and AlphaScreen assay technologies, fluorescent labeled probes and cloned receptors. These reagents are used in and support a broad and flexible range of assays used in high throughput screening for drug discovery, functional genomics, proteomics, and genotyping.

 

    DELFIA® Xpress is a complete solution for prenatal screening. It has a continuous loading system supported by kits for both first and second trimester analytes, and clinically validated LifeCycle software.

 

    The prOTOF 2000 MALDI O-TOF mass spectrometer. This instrument features MALDI-TOF technology for the identification and characterization of proteins.

 

    The LABWORKS v5.9 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 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 readers, a high speed light source and adjustment of measurement height function. The instrument is fully configurable, accepting microplates from 96 to 1536 wells, and can be integrated into robotic systems.

 

    The UltraVIEW ERS confocal imaging system. This fully automated, high-resolution, live cell imaging system allows for the observation and measurement of cellular and molecular processes.

 

    The Spectrum Spotlight FT-IR imaging system. This system enables rapid extraction and analysis of data on molecular composition from a wide range of materials. The Spectrum’s speed and ability to complement other imaging techniques improves problem solving time and extends infrared, or IR, analysis to many applications.

 

    ViewLux. This ultra high throughput microplate imager offers high sensitivity and fast measurement of light from fluorescence polarization, fluorescence intensity, time-resolved fluorescence, luminescence and absorbance assays.

 

    The PerkinElmer® family of inorganic analysis instrumentation, including the AAnalyst series of atomic absorption spectrometers, the Optima family of inductively coupled plasma, or 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.

 

    The Clarus® 500 gas chromatograph, mass spectrometer and TurboMatrix family of sample-handling equipment. These instruments are used for compound identification and quantitation in applications such as environmental, petrochemical, forensics, food, pharmaceutical and semiconductor.

 

New Products. New product releases in 2005 by our Life and Analytical Sciences business include:

 

    The NeoGram MS/MS AAAC in vitro diagnostic kit to support detection of metabolic disorders in newborns by tandem mass spectrometry.

 

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    The AutoDELFIA® toxoplasma-screen kit for screening newborns for congenital toxoplasmosis, an infection that can be passed from mother to fetus through the bloodstream.

 

    Evolution precision pipetting platform with Modular Dispense Technology (MDT), a precision dispense and microplate handling system for liquid handling automation. This system provides the ability to automate assay protocols and sample preparation with high-precision pipetting and labware movement.

 

    The JANUS automated workstation, an automation and liquid handling system consisting of a modular platform that enables one pipetting arm with different tip configurations as well as a 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 BioXPRESSION biomarker discovery platform with Proteomic Signature Technology (PST). This platform gives researchers the ability to screen thousands of samples and obtain accurate results for population segmentation, pre-clinical trials and disease profiling.

 

    The LumiLux cellular screening platform, which enables luminescent ultra-high throughput cellular screening with all types of cells in 1536-well format, and features an integrated cell stirrer.

 

    The Spectrum 100 Series of infrared (IR) spectrometers, which includes a Universal Attenuated Total Reflectance (UATR) accessory, fiber optic near infrared (NIR) probe, and an enhanced version of PerkinElmer’s Spectrum and AssureID™ software packages.

 

    The new family of TurboMatrix thermal desorbers, which provide sample-handling solutions that simplify and speed a wide range of gas chromatography applications, including environmental, occupational health and safety, materials testing, and flavors and fragrances.

 

    Chromera, an application-specific software system that integrates all components of a speciation measurement system. Chromera software features a single-user interface that coordinates operation of an ICP mass spectrometer, control of a liquid chromatograph and quantitative measurements into a single software package.

 

Brand Names.    Our Life and Analytical Sciences reporting segment offers additional products under various brand names, including Wallac, Packard, NEN®, OneSource®, Pyris, CellLux, ProXPRESSION, MultiPROBE®, FlashBlue, ScanArray and Victor.

 

Optoelectronics

 

Our Optoelectronics business unit provides a broad range of digital imaging, sensor and specialty lighting components used in biomedical, consumer products, and other specialty end markets. For fiscal 2005, our Optoelectronics business unit generated sales of $392.7 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.

 

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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:

 

    Health Sciences

 

  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.

 

  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 additional product incorporated into the blood glucose meter is an LED-based reflective sensor to read out tracking information on the consumables.

 

  IR-absorption-based real-time gas analyzers for measuring anesthesia gases delivered in operating rooms; digital sidestream benches for measuring CO2 levels in neonatal, pediatric and adult respiration.

 

    Photonics

 

  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 and 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 and rear projection applications for home theater and larger venues such as conference rooms and auditoriums due to Cermax’s ability to deliver the required brightness while minimizing sacrifices in color performance.

 

  LED-based products used as light sources in various applications including film scanners, aircraft navigation lights, and specialty and architectural displays.

 

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New Products.    New product releases in 2005 by our Optoelectronics business include:

 

    1620 and 1640 AN amorphous silicon flat panel detectors, which offer improved imaging performance and higher frame rates without sacrificing image resolution. The amorphous flat panel detector is a digital x-ray detector using a glass substrate, and is used in image guided radiation therapy product lines and non-destructive industrial testing to deliver advanced, high-quality images.

 

    New amorphous silicon flat panel detectors for General Electric Health Care diagnostic X-Ray systems including the following products: a cardiac detector for improved sensitivity for low dose fluoroscopic applications; a portable radiography detector for bedside patient exams; and a new higher performance radiography detector to support applications such as tomographic 3-D imaging.

 

    CERMAX® “Gen 3”, a new generation of Cermax Xenon technology for video projection in home theater applications. Gen 3 offers an improved combination of thermal characteristics, lifetime, price and a higher efficacy for 6500o K color temperature video images.

 

    ACULED (All Color Ultrabright LED), a compact, high power light emitting diode that incorporates multi chip-on-board technology. The RGB platform is designed to provide high brightness for operation in a variety of specialty applications including medical lighting, mood lighting, and architectural lighting.

 

    EPI-Cavity Laser, a new single-chip high power pulse laser which provides reliable high power output from a small beam size in a compact package. The laser is suitable for integration into a variety of range finding applications.

 

    Next generation, further miniaturized photoflash technology—High quality and more compact xenon flash lamps and modules are being designed into mobile phones and other digital cameras. The xenon flash technology provides significant improvements over LEDs in increased light output and brightness levels, improved color temperature, reduced shutter speeds and lower cost.

 

    Custom high performance Avalanche Photodiode (APD) modules for use in OEM Molecular Imaging equipment. These optical detection modules are designed into unique Positron Emission Tomography (PET) scanners that generate high resolution images of living subjects for pre-clinical and medical applications.

 

Brand Names.    Our Optoelectronics business offers its products under various brand names, including Cermax®, Heimann, ColdBlue, MultiBlue, ACULED, Power Systems, Amorphous Silicon and Reticon®.

 

Marketing

 

All of our businesses market their products and services directly through their own specialized sales forces. As of January 1, 2006, we employed approximately 2,500 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 raw materials and supplies that are generally readily available in adequate quantities from domestic and foreign sources. We typically do not have long-term contracts with any of our suppliers. In some cases, we may rely on a single supplier for particular items, although we generally believe that we could obtain these items from alternative suppliers, if necessary.

 

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

 

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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 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 than we do, to small firms producing a limited number of goods or services for specialized market segments.

 

In our Life and Analytical Sciences reporting segment, we compete on the basis of service level, price, technological innovation, product differentiation, product availability, and 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 reporting segment across its full product range. However, we do compete with specialized manufacturing companies in the manufacturing and sale of specialty flashtubes and ultraspecialty lighting sources, photodetectors 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 $87.4 million during fiscal 2005, approximately $82.4 million during fiscal 2004, and approximately $76.8 million during fiscal 2003.

 

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We directed our research and development efforts in both 2005 and 2004 primarily toward genetic screening, biopharmaceutical, and environmental and chemical end markets within our Life and Analytical Sciences reporting segment, and medical digital imaging and Cermax Lighting within our Optoelectronics reporting segment. In 2003 we directed our research and development efforts toward genetic screening and biopharmaceutical end markets within our Life and Analytical Sciences reporting segment, and medical digital imaging and Cermax Lighting within our Optoelectronics reporting 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 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 current and former locations and, along with other companies, have been named a potentially responsible party (PRP) for specific waste disposal sites. We accrue for environmental issues in the accounting period in which our responsibility is established and when the cost can be reasonably estimated. We have accrued $3.7 million as of January 1, 2006, representing management’s estimate of the total cost for the ultimate disposition of known environmental matters. This amount is not discounted and does not reflect the potential 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 timeframe over which remediation may occur, and the possible effects of changing laws and regulations. For sites where we are named a PRP, management does not currently anticipate any additional liability to result from the inability of other significant named parties to contribute. We expect that these accrued amounts could be paid out over a period of up to ten years. As assessment and remediation activities progress at each individual site, we review these liabilities and adjust them to reflect additional information as it becomes available. There have been no environmental problems to date that have had or that we expect to have a material effect on our financial position, results of operations or cash flows. While it is reasonably possible that a material loss exceeding the amounts recorded may have been incurred, the potential exposure is not expected to be materially different than the 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 January 1, 2006, we employed approximately 8,000 employees. Several of our subsidiaries are parties to contracts with labor unions and workers’ councils. As of January 1, 2006, we employed an aggregate of approximately 1,800 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 2005, 2004 and 2003 fiscal years:

 

     2005

    2004

    2003

 
     (In thousands)  

Life and Analytical Sciences

                        

Sales

   $ 1,081,104     $ 1,062,767     $ 1,003,711  

Operating profit

     110,228       103,609       94,745  

Optoelectronics

                        

Sales

     392,727       366,322       340,829  

Operating profit

     58,405       59,096       52,671  

Other

                        

Operating loss

     (27,682 )     (25,029 )     (20,461 )

Continuing operations

                        

Sales

     1,473,831       1,429,089       1,344,540  

Operating profit

     140,951       137,676       126,955  

 

Discontinued operations have not been included in the preceding table.

 

Additional information relating to our reporting segments for the 2005, 2004, and 2003 fiscal years is as follows:

 

     Depreciation and
Amortization Expense


   Capital Expenditures

     2005

   2004

   2003

   2005

   2004

   2003

     (In thousands)

Life and Analytical Sciences

   $ 46,217    $ 47,645    $ 47,938    $ 12,650    $ 6,747    $ 9,841

Optoelectronics

     19,712      18,717      21,177      11,798      7,556      5,353

Other

     1,069      1,237      1,335      603      1,515      430
    

  

  

  

  

  

Continuing operations

   $ 66,998    $ 67,599    $ 70,450    $ 25,051    $ 15,818    $ 15,624
    

  

  

  

  

  

Discontinued operations

   $ 7,272    $ 9,506    $ 9,700    $ 3,065    $ 3,143    $ 1,348
    

  

  

  

  

  

 

     Total Assets

     January 1,
2006


   January 2,
2005


     (In thousands)

Life and Analytical Sciences

   $ 1,994,502    $ 2,112,322

Optoelectronics

     290,676      256,618

Other

     380,636      71,025

Net current and long-term assets of discontinued operations

     27,647      135,542
    

  

     $ 2,693,461    $ 2,575,507
    

  

 

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Financial Information About Geographic Areas

 

The following geographic area information for continuing operations includes sales based on location of external customer and net long-lived assets based on physical location:

 

     Sales

     2005

   2004

   2003

     (In thousands)

U.S.

   $ 569,906    $ 580,040    $ 543,741

International:

                    

United Kingdom

     98,419      99,767      98,603

Germany

     95,279      103,751      90,725

Japan

     81,568      92,089      88,079

France

     71,154      87,834      77,229

Italy

     66,065      76,589      46,165

Other International

     491,440      389,019      399,998
    

  

  

Total International

     903,925      849,049      800,799
    

  

  

     $ 1,473,831    $ 1,429,089    $ 1,344,540
    

  

  

 

     Net Long-Lived Assets

     January 1,
2006


   January 2,
2005


     (In thousands)

U.S.

   $ 1,291,444    $ 1,320,472

International:

             

Singapore

     154,317      175,935

Germany

     96,070      85,039

Netherlands

     37,276      42,270

United Kingdom

     32,004      36,575

Canada

     24,776      31,817

Finland

     20,757      22,506

Other International

     15,833      24,075
    

  

Total International

     381,033      418,217
    

  

     $ 1,672,477    $ 1,738,689
    

  

 

Each of our reporting segments conducts business in, and derives substantial revenue from, various countries outside the United States. During fiscal 2005, we had $903.9 million in sales from our international operations, representing approximately 61% of our total sales. During fiscal 2005, we derived approximately 77% of our international sales from our Life and Analytical Sciences reporting segment, and approximately 23% of our international sales from our Optoelectronics reporting segment. We anticipate that sales from international operations will continue to represent a substantial portion of our total sales in the future.

 

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.

 

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Item 1A.    Risk Factors

 

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. Therefore, we must anticipate industry trends and develop products in advance of the commercialization of our customers’ products. 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.

 

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 business, 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, such as our acquisition of Elcos AG in February 2005. However, we may be unable to identify or complete promising acquisitions or license transactions for many reasons, including:

 

    competition among buyers and licensees,

 

    the high valuations of businesses and technologies,

 

    The need for regulatory an other approval, and

 

    Our inability to raise capital to fund these acquisitions.

 

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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 that issue may be narrower that 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 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.

 

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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 to 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, particularly of our digital x-ray detectors, 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, particularly our Optoelectronics amorphous silicon facility in Santa Clara, California, 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 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.

 

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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 January 1, 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 country’s or region’s 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,

 

    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 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 new senior unsecured 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,

 

    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.

 

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We are also required to meet specified financial ratios under the terms of our senior unsecured 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 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 January 1, 2006, our total assets included $1.4 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 items—specifically all of those that are considered “non-amortizing”—on 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 business may result in impairment of our intangible assets which could adversely affect our results of operations.

 

Item 1B.    Unresolved Staff Comments

 

Not applicable.

 

Item 2.    Properties

 

As of January 1, 2006, our continuing operations occupied approximately 2,434,000 square feet. We own approximately 717,000 square feet of this space and lease the balance. Our headquarters occupies 53,000 square feet of leased space in Wellesley, Massachusetts. 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 1,322,000 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 January 1, 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    1,106,000    1,504,000

Optoelectronics

   319,000    558,000    877,000

Corporate offices

      53,000    53,000
    
  
  

Continuing operations

   717,000    1,717,000    2,434,000
    
  
  

 

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Item 3.    Legal Proceedings

 

In papers dated October 23, 2002, Enzo Biochem, Inc. and Enzo Life Sciences, Inc. (“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 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. On May 28, 2003, the Court severed the lawsuit and ordered Enzo to serve individual complaints against the five defendants. Enzo served its new complaint on July 16, 2003, and we subsequently filed an answer denying the substantive allegations and including a counterclaim alleging that several of Enzo’s patents are invalid. During the last half of 2005, fact discovery was largely completed and a Markman hearing was conducted regarding the construction of the claims in Enzo’s patents. The court has not yet issued its decision regarding claim construction or set a date for trial.

 

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 one of our subsidiaries alleging that our ViewLux and certain of our Image FlashPlates infringe three of Amersham’s 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 the same products infringe Amersham’s European (United Kingdom) patent granted in August 2004 (the “UK case”). Amersham seeks injunctive and monetary relief in both cases. We subsequently filed answers in both cases denying the substantive allegations and including affirmative defenses and counterclaims. On October 29, 2003, we filed a complaint, which was subsequently amended, against Amersham Biosciences Corp. in the United States District Court for Massachusetts, Civil Action No. 03-12098, alleging that Amersham’s IN Cell Analyzer, 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 denying the substantive allegations and including affirmative defenses and counterclaims. Trial in the UK case was completed in December 2005. In February 2006, the court ruled that Amersham’s patent in question was invalid in the United Kingdom and awarded costs to us. In the NJ case, discovery regarding issues of liability, which have been bifurcated from issues of damages, has largely been completed, and a Markman hearing on claim construction is anticipated in early 2006. No trial date has been set. In the MA case, discovery is ongoing.

 

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 theses matters may be resolved unfavorably to us. 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 January 1, 2006 should not have a material adverse effect on our consolidated financial statements included in this annual report on Form 10-K.

 

We and certain of our officers were named as defendants in a purported class action lawsuit filed in July 2002 in the United States District Court for the District of Massachusetts, In re PerkinElmer, Inc. Securities Litigation, Civil Action No. 02-11314 GAO, on behalf of purchasers of our common stock between July 15, 2001 and April 11, 2002. The lawsuit claimed violations of Sections 10(b) and 20(a) of, and Rule 10b-5 under, the

 

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Securities Exchange Act of 1934, alleging various statements made during the putative class period by us and our management were misleading with respect to our future operating results. A purported derivative action was filed in June 2004 in the United States District Court for the District of Massachusetts, Jaroslawicz v. Summe et al., Civil Action no. 04-cv-11469-GAO, against certain of our officers and four of our directors, and nominal defendant PerkinElmer, which purported to make claims of breach of fiduciary duty, gross negligence, breach of contract, breach of duty of loyalty and unjust enrichment, based in part on allegations similar to those in the purported class action lawsuit. On November 7, 2005, the plaintiffs in both actions filed, and the court approved, stipulations of dismissal with prejudice of all claims in both lawsuits. As part of these stipulations, the plaintiffs waived their right to appeal the dismissals. The resolution of these claims did not have a material impact on our financial statements.

 

Our subsidiary, EG&G Rocky Flats, Inc., and two other companies were served with a complaint in January 2000 naming EG&G Rocky Flats, Inc. as a defendant in a civil false claim action pending in the United States District Court for the District of Colorado, involving alleged false claims arising out of security issues at the United States Department of Energy’s Rocky Flats Plant. In response to a motion filed by the United States Department of Justice, the District Court dismissed the case. In February 2004, the United States Court of Appeals for the Tenth Circuit affirmed the District Court’s dismissal of the case. The United States Supreme Court declined to accept any further appeal of the case in October 2005.

 

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 17, 2006. 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    49

Robert F. Friel

   Vice Chairman and President—Life and Analytical Sciences    50

Jeffrey D. Capello

   Senior Vice President, Chief Financial Officer and Chief Accounting Officer    41

Katherine A. O’Hara

   Senior Vice President, General Counsel and Secretary    47

Richard F. Walsh

   Senior Vice President and Chief Administrative Officer    53

John A. Roush

   Senior Vice President, President—Optoelectronics    40

 

Gregory L. Summe, 49. Mr. Summe was named our Chief Executive Officer effective January 1, 1999 and Chairman effective April 27, 1999. He was appointed President and Chief Operating Officer and elected to our board of directors in February 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, 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 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, 50. Mr. Friel joined us in February 1999 as our Senior Vice President and Chief Financial Officer. In 2005 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

 

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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, 41. Mr. Capello joined us in June 2001 as our Vice President of Finance and was named Chief Accounting Officer in April 2002. In January 2006, he was named Senior Vice President and Chief Financial Officer. From 1991 to June 2001, he held various positions including that of partner 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. O’Hara, 47. Ms. O’Hara joined us in May 2005 as Senior Vice President, General Counsel and Secretary of PerkinElmer, Inc. Prior to joining PerkinElmer in May 2005, Ms. O’Hara 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. O’Hara had been an associate at Davis Polk & Wardwell, focusing on capital markets transactions for global clients. Previously, she had been Assistant Vice President at Morgan Guaranty Trust Company of New York, responsible for the Argentine business unit. Ms. O’Hara holds a Bachelor of Arts degree from Duke University and a J.D. from the Columbia University School of Law.

 

Richard F. Walsh, 53. 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 Art in counseling from Villanova University.

 

John Roush, 40. John 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.

 

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PART II

 

Item 5.    Market for Registrant’s 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 2005 and 2004.

 

     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
     2004 Fiscal Quarters

     First

   Second

   Third

   Fourth

High

   $ 21.74    $ 22.32    $ 20.04    $ 22.89

Low

     16.95      17.82      15.74      16.82

 

As of March 14, 2006, we had approximately 8,012 holders of record of our common stock.

 

Stock Repurchase Program

 

The following table provides information with respect to the shares of common stock repurchased by us for the periods indicated.

 

    Issuer Repurchases of Equity Securities

Period


  Total Number of
Shares
Purchased(1)


  Average Price
Paid Per
Share


  Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs


  Maximum Number of Shares
that May Yet Be Purchased
Under the Plans or Programs


October 3, 2005—October 30, 2005

  0   $ 0.00   0   10,000,000

October 31, 2005—November 27, 2005

  1,066,100     22.22   1,066,100   8,933,900

November 28, 2005—January 1, 2006

  29,900     22.50   29,900   8,904,000
   
       
   

Total

  1,096,000   $ 22.23   1,096,000   8,904,000
   
       
   

(1) 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”). This Program will expire on October 21, 2008, unless it is earlier terminated by our Board of Directors. 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.

 

Dividends

 

During the 2005 and 2004 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.

 

     2005 Fiscal Quarters

   2005 Total

     First

   Second

   Third

   Fourth

   $.28

Cash dividends per common share

   $ .07    $ .07    $ .07    $ .07   
     2004 Fiscal Quarters

   2004 Total

     First

   Second

   Third

   Fourth

  

$.28

Cash dividends per common share

   $ .07    $ .07    $ .07    $ .07   

 

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For further information related to our stockholders’ equity, refer to Note 18 included in our notes to consolidated financial statements included in this annual report on Form 10-K.

 

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 January 1, 2006. We derived the selected historical financial information as of and for each of the fiscal years in the three-year period ended January 1, 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 29, 2002 and December 30, 2001 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, January 2, 2005 and December 28, 2003, we adjusted the information in the financial statements for the fiscal years ended December 29, 2002 and December 30, 2001, 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.

 

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Table of Contents

You should read the following selected historical financial information together with our “Management’s 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

     January 1,
2006


   January 2,
2005


    December 28,
2003


    December 29,
2002


    December 30,
2001


     (In thousands, except per share data)

Income Statement Data:

                                     

Sales

   $ 1,473,831    $ 1,429,089     $ 1,344,540     $ 1,296,829     $ 1,256,116

Operating income

     140,951      137,676       126,955       10,998       60,831

Other expense, net(1)

     74,291      38,332       53,513       29,786       23,674

Income (loss) from continuing operations before taxes(2)(3)

     66,660      99,344       73,442       (18,788 )     37,157

Income (loss) from continuing operations, net of income taxes(4)

     66,532      75,879       50,755       (10,404 )     1,401

Income (loss) from discontinued operations, net of income taxes

     15,214      20,659       2,652       (10,274 )     30,737

Gain (loss) on dispositions of discontinued operations, net of income taxes(5)(6)

     186,362      (495 )     (448 )     (13,460 )     2,367
    

  


 


 


 

Net income (loss) before effect of accounting change

     268,108      96,043       52,959       (34,138 )     34,505

Effect of accounting change, net of income tax(7)

                      (117,800 )    
    

  


 


 


 

Net income (loss)

   $ 268,108    $ 96,043     $ 52,959     $ (151,938 )   $ 34,505
    

  


 


 


 

Basic earnings (loss) per share:

                                     

Continuing operations

   $ 0.51    $ 0.60     $ 0.40     $ (0.08 )   $ 0.01

Discontinued operations

     1.56      0.16       0.02       (0.19 )     0.32

Effect of accounting change, net of income tax

                      (0.94 )    
    

  


 


 


 

Net income (loss)

   $ 2.07    $ 0.75     $ 0.42     $ (1.21 )   $ 0.33
    

  


 


 


 

Diluted earnings (loss) per share:

                                     

Continuing operations

   $ 0.51    $ 0.59     $ 0.40     $ (0.08 )   $ 0.01

Discontinued operations

     1.54      0.16       0.02       (0.19 )     0.31

Effect of accounting change, net of income tax

                      (0.94 )    
    

  


 


 


 

Net income (loss)

   $ 2.04    $ 0.74     $ 0.41     $ (1.21 )   $ 0.32
    

  


 


 


 

Weighted-average common shares outstanding:

                                     

Basic:

     129,267      127,345       126,363       125,439       103,687

Diluted:

     131,140      129,429       127,741       125,439       107,259

Cash dividends per common share

   $ 0.28    $ 0.28     $ 0.28     $ 0.28     $ 0.28
     As of

     January 1,
2006


   January 2,
2005


    December 28,
2003


    December 29,
2002


    December 30,
2001


Balance Sheet Data:

                                     

Total assets

   $ 2,693,461    $ 2,575,507     $ 2,607,727     $ 2,825,482     $ 2,969,938

Short-term debt

     1,131      9,714       5,167       191,408       125,741

Long-term debt

     243,282      364,874       544,307       614,053       598,125

Stockholders’ equity

     1,650,513      1,460,085       1,349,050       1,252,344       1,363,557

Common shares outstanding

     130,109      129,059       126,909       125,854       124,188

 

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Table of Contents

(1) In 2005, we incurred $54.9 million in fees associated with the extinguishment of our Senior Subordinated Notes offset by gains on the sales of investments of $5.8 million.
(2) We incurred restructuring charges and (reversals), net of $22.1 million in 2005, $0 in 2004, $(2.8) million in 2003, $36.6 million in 2002 and $9.5 million in 2001. The 2002 restructuring charge primarily related to the combination of our Life Science and Analytical Instruments businesses into Life and Analytical Sciences.
(3) In 2001 we had an in-process R&D charge of $71.5 million primarily related to the Packard acquisition. This was partially offset by net gains on dispositions of $33.2 million, which resulted principally from the gain on the sale of the Instruments for Research and Applied Sciences business, previously part of 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.
(5) In 2005, we sold the Aerospace and Fluid Testing segments of our Fluid Sciences division 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.
(6) 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.
(7) We adopted 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 business unit.

 

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

 

This annual report on Form 10-K, including the following management’s discussion and analysis, contains forward-looking information that you should read in conjunction with the consolidated financial statements and notes to consolidated financial statements that we have included elsewhere in this annual report on Form 10-K. For this purpose, any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Words such as “believes,” “plans,” “anticipates,” “expects,” “will” and similar expressions are intended to identify forward-looking statements. Our actual results may differ materially from the plans, intentions or expectations we disclose in the forward-looking statements we make. We have included important factors below 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, environmental testing and general industrial markets. We design, manufacture, market, and service products and systems within two businesses, each constituting one reporting segment:

 

    Life and Analytical Sciences. We are a leading provider of drug discovery and development, 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.

 

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Table of Contents

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 year ended January 1, 2006 included 52 weeks. The fiscal year ended January 2, 2005 included 53 weeks. The fiscal year ended December 28, 2003 included 52 weeks. In fiscal 2004, the fourth quarter average weekly sales were approximately $29.4 million.

 

Consolidated Results of Continuing Operations

 

Sales

 

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 week’s sales represented $29.4 million. The following analysis 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 overall 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.

 

2004 Compared to 2003.    Sales for 2004 were $1,429.1 million, versus $1,344.5 million during 2003, an increase of $84.6 million, or 6%. Changes in foreign exchange rates increased sales by $45.7 million over 2003. Fiscal 2004 had 53 weeks compared to 52 weeks in fiscal 2003. In the fourth quarter of fiscal 2004, an average week’s sales represented $29.4 million. The following analysis compares significant sales for 2004 as compared to 2003 and includes the previously mentioned extra week during 2004. The overall increase in sales reflects a $59.1 million, or 6%, increase in our Life and Analytical Sciences segment sales, which grew from $1,003.7 million in 2003 to $1,062.8 in 2004, and reflects approximately $39.2 million in sales attributable to favorable changes in foreign exchange rates, as compared to 2003. Our Optoelectronics segment sales grew $25.5 million, or 7%, from $340.8 million in 2003 to $366.3 million in 2004, including approximately $6.5 million in sales attributable to favorable changes in foreign exchange rates, as compared to 2003.

 

Cost of Sales

 

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 from 40.8% in 2004 to 41.7% in 2005. The increase in gross margin was largely attributable to higher sales volume enabling better leveraging of fixed costs and increased manufacturing productivity, offset somewhat by a 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.

 

2004 Compared to 2003.    Cost of sales for 2004 was $846.3 million, versus $781.1 million for 2003, an increase of $65.2 million, or 8%. As a percentage of sales, cost of sales increased to 59.2% in 2004 from 58.1% in 2003, resulting in a decrease in gross margin of 110 basis points from 41.9% in 2003 to 40.8% in 2004. The decrease in gross margin was partially attributable to greater revenue contribution, as a percentage of overall sales, from Optoelectronics versus Life and Analytical Sciences.

 

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Table of Contents

Research and Development Expenses

 

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. We directed research and development efforts during 2005 and 2004 primarily toward genetic screening, biopharmaceutical, and environmental and chemical end markets within our Life and Analytical Sciences reporting segment, and medical digital imaging and Cermax lighting within our Optoelectronics reporting segment. We expect our research and development spending to increase on both an absolute and percentage of sales basis in 2006 and to continue to emphasize the health sciences end markets.

 

2004 Compared to 2003.    Research and development expenses for 2004 were $82.4 million versus $76.8 million in 2003, an increase of $5.6 million, or 7%. As a percentage of sales, research and development expenses increased to 5.8% in 2004 from 5.7% in 2003. We directed research and development efforts during 2004 and 2003 primarily toward genetic screening and biopharmaceutical end markets within our Life and Analytical Sciences reporting segment, and medical digital imaging and Cermax lighting within our Optoelectronics reporting segment.

 

Selling, General and Administrative Expenses

 

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 reporting segments.

 

2004 Compared to 2003.    Selling, general and administrative expenses for 2004 were $362.3 million, versus $365.0 million for 2003, a decrease of $2.7 million, or 1%. As a percentage of sales, selling, general and administrative expenses decreased 170 basis points to 25.4% in 2004 from 27.1% in 2003. The decrease as a percentage of sales of 170 basis points in 2004 was primarily due to net productivity improvements and cost reductions in our Life and Analytical Sciences reporting segment.

 

Restructuring (Reversals) and Integration Charges, Net

 

2005 Compared to 2004.    Restructuring and integration charges for 2005 were $22.1 million versus zero for 2004. The following table summarizes our restructuring accrual balances and related activity by restructuring plan during 2005, 2004 and 2003:

 

    Balance at
12/29/2002


  2003
Charges


  2003
Amounts
paid and
incurred


    2003
Changes in
Estimates


    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


    (In thousands)

Q4 2001 plan

  $ 4,075   $   $ (3,434 )   $ 1,830     $ 2,471   $ (965 )   $ 1,506   $   $ (401 )   $     $ 1,105

Q1 2002 plan

    1,152         (52 )     (1,000 )     100     (100 )                        

Q4 2002 plan

    22,662         (12,868 )     (5,494 )     4,300     (3,330 )     970         (1,543 )     5,632       5,059

Q2 2003 plan

        2,251     (1,582 )     (381 )     288     (86 )     202               (202 )    

Q2 2005 plan

                                      8,251     (5,510 )     (403 )     2,338

Q4 2005 plan

                                      8,223     (6,077 )           2,146
   

 

 


 


 

 


 

 

 


 


 

Restructuring

    27,889     2,251     (17,936 )     (5,045 )     7,159     (4,481 )     2,678     16,474     (13,531 )     5,027       10,648

Integration

    4,020         (3,146 )           874     (507 )     367     564     (337 )           594
   

 

 


 


 

 


 

 

 


 


 

Total Restructuring and Integration

  $ 31,909   $ 2,251   $ (21,082 )   $ (5,045 )   $ 8,033   $ (4,988 )   $ 3,045   $ 17,038   $ (13,868 )   $ 5,027     $ 11,242
   

 

 


 


 

 


 

 

 


 


 

 

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Table of Contents

Q4 2005 Plan:

 

During the fourth quarter of 2005, we incurred an $8.2 million restructuring charge in Life and Analytical Sciences and Optoelectronics, which we refer to as our “Q4 2005 Plan.” The principal actions in the Q4 2005 Plan included planned workforce reductions resulting from our resource shift towards 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.

 

As part of our Q4 2005 Plan, we reduced headcount by 44. We anticipate that all remaining Q4 2005 Plan actions will be completed by December 2006.

 

We recorded restructuring charges by segment for the Q4 2005 Plan as follows:

 

(In millions)

   Life and Analytical Sciences

   Optoelectronics

   Total

Severance

   $2.1    $0.1    $2.2

Abandonment of Excess Facilities

     0.2      5.8      6.0
    
  
  

Total

   $2.3    $5.9    $8.2
    
  
  

 

Q2 2005 Plan:

 

During the second quarter of 2005, we recognized an $8.2 million restructuring charge in Life and Analytical Sciences and Optoelectronics, which we refer to as our “Q2 2005 Plan.” The purpose of these restructuring actions was to shift resources into geographic regions and product lines that were more consistent with our growth strategy. The principal actions in the Q2 2005 Plan comprised headcount reductions resulting from reorganization activities. 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.

 

As part of our Q2 2005 Plan, we reduced headcount by 228. We anticipate that all remaining severance costs will be paid by the end of the second quarter in 2006.

 

The following table summarizes the Q2 2005 restructuring charges recognized in 2005 by segment:

 

(In millions)

   Life and Analytical Sciences

   Optoelectronics

   Total

Severance

   $5.3    $2.9    $8.2

 

Q2 2003 Plan:

 

During 2003, we incurred a $2.3 million restructuring charge in Life and Analytical Sciences and Optoelectronics, which we refer to as our “Q2 2003 Plan.” The purpose of the restructuring was to further improve performance and take advantage of synergies between our former Life Sciences and Analytical Instruments businesses which we began integrating in the fourth quarter of 2002. The principal actions in this restructuring plan included lower headcount due to the continued integration of the Life and Analytical Sciences business in a European manufacturing and customer care center, as well as headcount reduction at one of the Optoelectronics manufacturing facilities to reflect recent declining demand for several product lines. We planned to reduce headcount by 120. We recorded restructuring charges by segment for 2003 as follows:

 

(In millions)

   Life and Analytical Sciences

   Optoelectronics

   Total

Q2 2003 Plan

   $2.0    $0.3    $2.3

 

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This restructuring charge was primarily recorded in the second quarter of 2003. However, we recorded additional charges of $0.5 million and $0.1 million in the third and fourth quarters of 2003, as required by SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, as some employees who were notified of their employment termination in the second quarter were required to work for a period of time prior to receiving their severance. In addition, in the fourth quarter of 2003, we recorded a pre-tax restructuring reversal of $0.4 million due to 30 fewer employee terminations as a result of higher attrition rates in several countries prior to ultimate termination, and accordingly, lower severance costs.

 

Q4 2002 Plan:

 

In connection with our decision to combine our Life Sciences and Analytical Instruments businesses in order to reduce costs and achieve operational efficiencies, we recorded a pre-tax restructuring charge of $26.0 million during the fourth quarter of 2002, which we refer to as our “Q4 2002 Plan.” The Q4 2002 Plan allowed us to combine many business functions worldwide, with the intention to better serve our customers and more fully capitalize on the strengths of the businesses’ sales, service, and research and development organizations. The principal actions in the Q4 2002 Plan included planned workforce reductions of 546 people, closure of approximately 20 facilities, and disposal of underutilized assets.

 

The Q4 2002 Plan resulted in the integration of our United States Life and Analytical Sciences sales, service and customer care centers, the integration of European customer care and finance centers, the merging of a former Life Sciences European manufacturing facility with a former Analytical Instruments European manufacturing facility, and the merging of a portion of a former Life Sciences research and development facility in Europe with a former Analytical Instruments facility in Europe.

 

During 2003, we expended $12.9 million to execute these actions. In addition, we recorded a reversal of $5.5 million in the Q4 2002 Plan due to 182 fewer terminations as a result of higher than expected employee attrition rates in several countries prior to ultimate termination and lower severance costs for actual terminations.

 

During 2004, we expended an additional $3.3 million to execute these actions. During 2005, we expended $1.5 million to execute these actions. In addition, we recorded a restructuring charge of $5.6 million in the Q4 2002 Plan due to higher than expected costs associated with the closure of facilities, primarily in Europe. The remaining liability associated with the Q4 2002 Plan represents severance related to 2 employees and ongoing lease commitments. We expect to settle the remaining severance liability by the end of the first quarter of 2006. Our current estimate is that our lease commitments on unoccupied buildings extend until 2014.

 

Q1 2002 Plan:

 

During the first quarter of 2002, our management developed a plan to restructure several businesses and we recorded a restructuring charge of $9.2 million. We refer to these activities as our “Q1 2002 Plan.” The principal actions in the Q1 2002 Plan included planned workforce and overhead reductions resulting from reorganization activities, including the closure of a manufacturing facility, disposal of underutilized assets, and general cost reductions. Total headcount was reduced by 276.

 

During 2003, we recorded a restructuring reversal of $1.0 million in the Q1 2002 Plan primarily due to lower than expected employee separation costs associated with our Optoelectronics segment.

 

Q4 2001 Plan:

 

During the fourth quarter of 2001, in connection with the integration of Packard BioScience Company and a restructuring of our sales offices in Europe, we recorded a restructuring charge of $9.2 million in our Life and

 

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Table of Contents

Analytical Sciences segment and incurred $1.6 million in charges in 2002. We refer to these activities as our “Q4 2001 Plan.” The principal actions in the Q4 2001 Plan included the closing or consolidation of several leased sales and services offices in Europe, as well as costs associated with the closure of a manufacturing facility in Europe, the closure of leased manufacturing facilities in the United States, and the disposal of related assets.

 

In 2003, we recorded an additional pre-tax restructuring charge associated with the Q4 2001 Plan of $1.8 million. This charge was primarily due to additional severance and severance related benefits of the previously identified employees associated with the closure of our European manufacturing facility in the Life and Analytical Sciences segment.

 

In 2004, we expended $1.0 million to execute the actions associated with the Q4 2001 Plan. We expect to pay the remaining balance in 2006 for previously identified employees associated with the closure of our European manufacturing facility in the Life and Analytical Sciences segment.

 

Integration:

 

In November 2001, we completed our acquisition of Packard BioScience Company. The integration activities are complete with the exception of $0.6 million in remaining payments due on leased facilities exited in 2001 that will be paid through 2011.

 

The following table summarizes integration reserve activity during 2005 and 2004 related to the acquisition of Packard BioScience Company:

 

    

Abandonment

of Excess

Facilities


   

Total

Cash
Charges


 
     (In millions)  

Packard Integration Plan

                

Balance at December 28, 2003

   $ 874     $ 874  

Amounts paid

     (507 )     (507 )
    


 


Balance at January 2, 2005

   $ 367     $ 367  
    


 


Provision

     564       564  

Amounts paid

     (337 )     (337 )
    


 


Balance at January 1, 2006

   $ 594     $ 594  
    


 


 

Gains (Losses) on Dispositions

 

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. 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 facilities upgrade. 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.

 

2004 Compared to 2003.    Dispositions resulted in a net loss of $0.4 million in 2004 versus a net gain of $2.5 million in 2003. Gains on dispositions in 2003 included $2.2 million from sales of facilities and $0.5 million from post closing adjustments associated with the resolution of contingencies related to the sale of our Instruments for Research and Applied Sciences business, which we refer to as IRAS.

 

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Interest and Other Expense, Net

 

Interest and other expense, net consisted of the following:

 

     2005

    2004

    2003

 
     (In thousands)  

Interest income

   $ (3,321 )   $ (2,401 )   $ (2,479 )

Interest expense

     27,291       36,203       50,213  

(Gains) losses on sale of investments, net

     (5,844 )     300       2,391  

Extinguishment of debt

     54,886       4,143       1,953  

Other

     1,279       87       1,435  
    


 


 


     $ 74,291     $ 38,332     $ 53,513  
    


 


 


 

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 Notes, which included premium fees of $36.3 million, an $8.9 million accelerated amortization of term loan and Senior Subordinated Notes 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 Notes that were purchases 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. We anticipate that interest expense will decrease in 2006 as compared to 2005 due to the repayment of the Senior Subordinate Notes in 2005. A more complete discussion of our liquidity is set forth below under the heading, “Liquidity and Capital Resources.”

 

2004 Compared to 2003.    Interest and other expense, net for 2004 was $38.3 million versus $53.5 million for 2003, a decrease of $15.2 million or 28%. The decrease in interest and other expense, net in 2004 as compared to 2003, was due primarily to a lower average outstanding term loan balance, by about $100 million. Interest and other expense also declined as a result of lower interest rates applicable to our term loan which are attributable to an amendment of our credit facility in the fourth quarter of 2003. The remaining decrease in interest and other expense was the result of (i) swapping $100 million of our Senior Subordinated Notes from fixed rate debt to a floating rate based on six-month USD Libor in January 2004, resulting in a $2.2 million decrease in interest expense, and (ii) $2.3 million of net interest expense not incurred in 2004 as it was related to our zero coupon convertible debentures which we redeemed in 2003. The decrease in interest and other expense was partially offset by our increased acceleration of debt issuance costs of $4.1 million resulting from partial prepayments of our term debt during 2004, versus $1.9 million in 2003.

 

Provision/Benefit for Income Taxes

 

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 0.19% 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 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 Science’s business unit. 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.

 

2004 Compared to 2003.    The 2004 provision for income taxes was $23.5 million, versus a provision of $22.7 million in 2003. The 2004 effective tax rate was 23.6% as compared to the 2003 effective tax rate of

 

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30.9%. The reduction to the effective tax rate was primarily due to a $10.4 million benefit associated with the resolution of an appeal of Internal Revenue Service audit findings with respect to our 1997 and 1998 taxes; additional benefits resulting from the conclusion of tax audits in Canada and the U.K.; reduction of our state tax expense; and the use of existing foreign net operating losses. These benefits were partially offset by an accrual of $8.7 million for the estimated U.S. tax cost of repatriation calculated in accordance with the homeland investment provisions of the American Jobs Creation Act of 2004.

 

Discontinued Operations

 

We recorded the following gains and losses, which we report as the gain (loss) on dispositions of discontinued operations, during the years ended January 1, 2006 and January 2, 2005:

 

     2005

    2004

    2003

 
     (In thousands)  

Gain on the sale of Aerospace business

   $ 250,638     $     $  

Gain on the sale of Fluid Testing business

     30,281              

Loss on the sale of Fiber Optics Test Equipment business

     (5,184 )            

Loss on the sale of Lithography business

     (3,307 )            

Gain on the resolution of contingencies associated with the Technical Services business

     900       1,487       6,535  

Gain (loss) on other discontinued businesses

     497       (2,303 )     (6,757 )
    


 


 


Net gain (loss) on disposition of discontinued operations before income taxes

     273,825       (816 )     (222 )

Provision (benefit) for income taxes

     87,463       (321 )     226  
    


 


 


Gain (loss) on disposition of discontinued operations, net of income taxes

   $ 186,362     $ (495 )   $ (448 )
    


 


 


 

In September 2005, our Board of Directors approved a plan to divest our Fluid Sciences business segment to increase our strategic focus on our higher growth markets within the Life and Analytical Sciences and Optoelectronics businesses. The Fluid Sciences business segment consisted of three businesses—Aerospace, Fluid Testing and Semiconductor. In November 2005 we sold the Fluid Testing business to Caleb Brett USA Inc. for approximately $34.5 million, resulting in a net pre-tax gain of $30.3 million. In December 2005, we sold the Aerospace business to Eaton Corporation for approximately $333 million, resulting in a net pre-tax gain of $250.6 million. We recognized these gains during fiscal 2005. We received total cash proceeds in these transactions of approximately $360 million. On February 27, 2006, we sold substantially all of the assets of our Semiconductor business to an entity affiliated with Tara Capital, Inc. for approximately $26.5 million (subject to a net working capital adjustment) and additional contingent consideration that could bring the total proceeds received to more than $30 million. We are currently in the process of computing the gain on the transaction and will record such amount in the first quarter of 2006.

 

As part of our continued efforts to focus on higher growth markets, in December 2005, our Board of Directors also approved a plan to sell our Lithography business. We received proceeds of $0.5 million upon the sale of the business and recognized a pre-tax loss of $3.3 million. We previously had reported the results of this business as part of the Optoelectronics reporting segment.

 

In June 2005, our Board of Directors approved a plan to shut down our Fiber Optics Test Equipment business as part of our continued efforts to focus on higher growth opportunities. We previously had reported the results of this business as part of the Optoelectronics reporting segment. The shut down of this business resulted in a $5.2 million loss related to lease and severance costs and the reduction of fixed assets and inventory to net realizable value. In August 2005, certain assets that were previously written down were subsequently sold resulting in a gain of $0.1 million.

 

As part of our continued efforts to focus on higher growth opportunities, in June 2004, our Board of Directors approved a plan to shut down our Electroformed Products business and sell our Ultraviolet Lighting

 

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business. In September 2004, our Board of Directors approved a plan to shut down our Computer-To-Plate business. We previously had reported the results of all three of these businesses as part of the Optoelectronics reporting segment. The net assets of the Electroformed Products business were written off resulting in a $1.6 million pre-tax loss for the year ended January 2, 2005. We sold the fixed assets and inventory of the Ultraviolet Lighting business in July 2004 for their approximate book value. The abandonment of the Computer-To-Plate business resulted in a $1.0 million write-down of fixed assets and inventory.

 

During 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 $0.9 million in 2005 and $1.5 million in 2004.

 

Summary operating results of the discontinued operations were as follows:

 

     2005

   2004

   2003

     (In thousands)

Sales

   $ 223,997    $ 261,535    $ 194,899

Costs and expenses

     200,156      225,045      187,276
    

  

  

Operating income from discontinued operations

     23,841      36,490      7,623

Other expense

     1,314      1,778      2,600
    

  

  

Income from discontinued operations before income taxes

     22,527      34,712      5,023

Provision for income taxes

     7,313      14,053      2,371
    

  

  

Income from discontinued operations, net of income taxes

   $ 15,214    $ 20,659    $ 2,652
    

  

  

 

Acquisitions

 

In February 2005, we acquired Elcos AG, a leading European designer and manufacturer of custom light emitting diode, or LED, solutions for biomedical and industrial applications. Consideration for the transaction was approximately $15.4 million in cash at the time of closing, $0.3 million of additional payments in 2005 and approximately $1.1 million due through fiscal 2007. Also, we estimate that under an earn out provision in the acquisition agreement we will make an additional cash payment of approximately $3.1 million in 2006 to reflect the performance of the business in 2005, with the potential for additional earn out payments being made in 2007 and 2008 based on the performance of the business in 2006 and 2007, 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 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 $3.7 million as of January 1, 2006, representing our management’s 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 timeframe over which remediation may occur, and the possible effects of changing laws and regulations. For sites where we have been named a potentially responsible party, our management does not currently anticipate any additional liability to result from the inability of other significant named parties to contribute. We expect that 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 or results of operations. While it is possible that a material loss exceeding the amounts recorded may be incurred, we do not expect the potential exposure to be materially different from the amounts we recorded.

 

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In papers dated October 23, 2002, Enzo Biochem, Inc. and Enzo Life Sciences, Inc. (“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 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. On May 28, 2003, the Court severed the lawsuit and ordered Enzo to serve individual complaints against the five defendants. Enzo served its new complaint on July 16, 2003, and we subsequently filed an answer denying the substantive allegations and including a counterclaim alleging that several of Enzo’s patents are invalid. During the last half of 2005, fact discovery was largely completed and a Markman hearing was conducted regarding the construction of the claims in Enzo’s patents. The court has not yet issued its decision regarding claim construction or set a date for trial.

 

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 one of our subsidiaries alleging that our ViewLux and certain of our Image FlashPlates infringe three of Amersham’s 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 the same products infringe Amersham’s European (United Kingdom) patent granted in August 2004 (the “UK case”). Amersham seeks injunctive and monetary relief in both cases. We subsequently filed answers in both cases denying the substantive allegations and including affirmative defenses and counterclaims. On October 29, 2003, we filed a complaint, which was subsequently amended, against Amersham Biosciences Corp. in the United States District Court for Massachusetts, Civil Action No. 03-12098, alleging that Amersham’s IN Cell Analyzer, 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 denying the substantive allegations and including affirmative defenses and counterclaims. Trial in the UK case was completed in December 2005. In February 2006, the court ruled that Amersham’s patent in question was invalid in the United Kingdom and awarded costs to us. In the NJ case, discovery regarding issues of liability, which have been bifurcated from issues of damages, has largely been completed and a Markman hearing on claim construction is anticipated in early 2006. No trial date has been set. In the MA case, discovery is ongoing.

 

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.

 

In 2005, we resolved certain claims, including the securities litigation described in Part I of this annual report on Form 10-K under Item 3. Legal Proceedings. The resolution of these claims did not have a material impact on our 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 all matters with the exception of one, and have filed a single issue protest with the Appeals Division of the Internal Revenue Service, and expect to resolve the matter in 2006. Regardless of the outcome of this matter, we do not expect final resolution to significantly impact our financial position, results of operations or cash flows in 2006.

 

We are under regular examination by the Internal Revenue Service and other tax authorities in the United States and other countries, such as Germany, the United Kingdom, and states in which we have significant business operations, such as California and New York. The tax years under examination vary by jurisdiction; with the most significant one being that undertaken by the German tax authority for the years 1999 through 2003.

 

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During the year, in addition to the IRS audit described above, we concluded audits concerning income tax matters affecting certain of our subsidiaries with Texas, Illinois, the United Kingdom, Canada, and Belgium.

 

As a result of concluding the federal, state, and foreign audits during 2005, we recognized a benefit of $27.5 million.

 

We regularly assess the likelihood of additional assessments in each of the taxing jurisdictions resulting from these and subsequent years’ examinations. Tax reserves have been established, which we believe to be adequate in relation to the potential for additional assessments. Once established, reserves are adjusted as information becomes available and when an event occurs requiring a change to the reserves. The resolution of current tax audits is not expected to have a material effect on our consolidated financial condition, although adjustments related to the examination process or audit settlement could have a material impact on our income tax expense, cash flow, and consolidated statement of income for a particular future period.

 

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 theses matters may be resolved unfavorably to us. 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 January 1, 2006 should not have a material adverse effect on our consolidated financial statements.

 

Reporting Segment Results of Continuing Operations

 

Life and Analytical Sciences

 

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 week’s 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 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, productivity initiatives and restructuring activities were offset by a 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.

 

2004 Compared to 2003.    Sales for 2004 were $1,062.8 million, versus $1,003.7 million in 2003, an increase of $59.1 million, or 6%. Changes in foreign exchange rates increased sales by $39.2 million over 2003. Fiscal 2004 had 53 weeks compared to 52 weeks in fiscal 2003. In the fourth quarter of fiscal 2004, an average week’s sales represented $22.3 million. The following analysis compares significant sales by market and product type for 2004, as compared to 2003, and includes the effect of foreign exchange rate fluctuations and the previously mentioned extra week during 2004. Sales to environmental and chemical analysis customers increased $24.8 million, OneSource service sales increased by $20.4 million, sales to genetic screening customers increased $11.4 million, and sales to biopharmaceutical customers increased $2.5 million. Sales by type of product included increases in sales of instruments of $33.5 million, service of $20.4 million, and consumables of $5.2 million.

 

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Operating profit for 2004 was $103.6 million, versus $94.7 million in 2003, an increase of $8.9 million or 9%. Research and development increased $3.5 million in 2004, as compared to 2003. Contributing to the increase were net cost savings associated with various productivity initiatives, including our restructuring and integration activities which resulted in a reduction of employees and the elimination of excess facilities. Offsetting these net cost savings were a $1.9 million restructuring reversal in 2003 for which there was no similar reversal in 2004, and dispositions which created a $0.8 million loss in 2004 versus dispositions which created a $1.6 million gain in 2003. Amortization of intangibles was $26.4 million for the year ended January 2, 2005, versus $26.0 million for the year ended December 28, 2003.

 

Optoelectronics

 

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. 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 week’s 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 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.

 

2004 Compared to 2003.    Sales for 2004 were $366.3 million, versus $340.8 million for 2003, an increase of $25.5 million, or 7%. Changes in foreign exchange rates increased sales by $6.5 million over 2003. Fiscal 2004 had 53 weeks compared to 52 weeks in fiscal 2003. In the fourth quarter of fiscal 2004, an average week’s sales represented $7.1 million. The following analysis of significant sales by product line for 2004, as compared to 2003, includes the effects of changes in foreign exchange rates and the previously mentioned extra week during 2004. Sales of digital imaging products increased by $21.4 million due to increased sales of diagnostic and radiotherapy digital x-ray products. Sales of sensors increased $8.6 million, and sales of specialty lighting products decreased by $4.5 million due to lower photoflash sales into single-use cameras.

 

Operating profit for 2004 was $59.1 million, versus $52.7 million for 2003, an increase of $6.4 million or 12%. The increase in operating profit was primarily the result of increased sales volume and net productivity improvements and cost reduction actions, offset in part by pricing reductions. Amortization of intangible assets was $1.2 million for both 2004 and 2003.

 

Liquidity and Capital Resources

 

We require cash to pay our operating expenses-including funding our research and development, 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.

 

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Principal factors that could affect our ability to obtain cash from external sources include:

 

    financial covenants contained in 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 2005

 

Operating Activities.    Net cash generated by continuing operations operating activities was $193.4 million in 2005. Contributing to the generation of cash from operating activities during 2005 were 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, depreciation and amortization of $67.0 million, non-cash restructuring expense of $22.1 million, stock-based compensation of $9.8 million and a decrease in working capital accounts of $12.5 million, offset by $27.8 million from the resolution of prior year tax contingencies and $13.5 million from accrued expenses and other. Contributing to the decrease in working capital accounts in 2005 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. As discussed under “Off-Balance Sheet Arrangements”, we had approximately $20 million of undrawn capacity available under the facility at January 1, 2006.

 

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. Also in 2005, we made capital expenditures of $25.1 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 earn outs for $1.8 million.

 

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 and received $19.4 million from the exercise of employee stock options.

 

Fiscal Year 2004

 

Operating Activities.    Net cash generated by continuing operations operating activities was $173.0 million in 2004. Contributing to the generation of cash from operating activities during 2004 was net income from continuing operations of $75.9 million, depreciation and amortization of $67.6 million, a net change in deferred taxes of $21.9 million, stock-based compensation of $8.4 million, amortization of deferred debt issuance costs,

 

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accretion of discounts and extinguishment of debt of $8.1 million, and a decrease in working capital accounts of $9.1 million, offset by a decrease of $10.8 million in accrued expenses and other and a net change of $8.0 million from the resolution of prior year tax contingencies. Contributing to the decrease in working capital in 2004 were decreases in accounts receivable of $18.0 million and inventory of $5.6 million, offset by a decrease in accounts payable of $14.4 million. In general, accounts receivable collections increased due primarily to our focus on improved processes and collections, whereas inventory balances decreased primarily due to improved logistics and inventory management processes. Accounts payable decreased primarily due to timing of payments. There was no incremental use of our accounts receivable securitization facility during 2004.

 

Investing Activities.    Investing activities related to continuing operations used $9.2 million in 2004. In 2004, we made capital expenditures of $15.8 million, mainly for tooling and productivity improvements and for system and facility costs. We derived $3.4 million from sales of a building and equipment and $2.8 million from the settlement of an escrow related to an entity acquired in 2000.

 

Financing Activities.    In 2004, we used $195.7 million of net cash in financing activities related to continuing operations. Debt reductions during 2004 totaled $175.0 million, comprised of $175.0 million used to repay a portion of our term loan. We also paid $35.8 million in dividends and received net cash proceeds from the exercise of employee stock options of $15.0 million in 2004.

 

Current Borrowing Arrangements

 

Senior Unsecured Credit Facility.    On October 31, 2005, we entered into a new $350 million five-year senior unsecured revolving credit facility. This facility replaced our existing $100 million five-year revolving credit facility. Letters of credit in the aggregate amount of approximately $15 million, originally issued under our previous credit agreement, will be treated as issued under this new agreement. The new senior unsecured credit facility will be used for general corporate purposes which may include fulfilling working capital needs, refinancing existing indebtedness, making capital expenditures, repurchasing shares, or consummating acquisitions and strategic alliances. The interest rates under the senior unsecured 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 credit facility to interest based upon the Eurocurrency rate plus a margin or the base rate. The Eurocurrency margin as of January 1, 2006 was 60 basis points; the weighted average Eurocurrency rate was 2.51%. There were approximately $243 million of borrowings under the facility as of January 1, 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 January 1, 2006 were as follows: EUR: 3.04%; CAD: 3.97% and JPY: .67%.

 

Our senior 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 2005, we were in compliance with all applicable covenants.

 

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Prior to the fourth quarter of 2005, we had a number of borrowings from a number of different sources. These included our:

 

Senior Secured Credit Facility which was established in December 2002. This facility was the predecessor to the Senior Unsecured Credit Facility described above and was terminated in October 2005. This facility comprised a six-year term loan in the amount of $315.0 million and a $100.0 million five-year secured revolving credit facility. In 2005, prior to the above described refinancing, we made $70.0 million of principal payments on the term loan.

 

Interest rates under the senior credit facility applicable to the term loan and to the revolving credit facility were determined as a margin over either the Eurodollar rate or the base rate. The base rate was 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. The applicable margins for the term loan and the revolving credit facility varied based upon our leverage ratio at the end of the prior quarter. In October 2004, we amended the senior credit facility to allow greater flexibility regarding acquisitions, stock repurchases, debt reduction and cash repatriation.

 

Our prior revolving credit facility was available to us through December 2007 for our working capital needs. At no point in fiscal 2005, nor at any other time, did we have any outstanding principal balance under this prior revolving credit facility.

 

Our senior credit facility which terminated in October 2005 contained covenants that required us to maintain specific financial ratios, including:

 

    a minimum interest coverage ratio,

 

    a minimum fixed charge coverage ratio, and

 

    a maximum senior leverage ratio.

 

At all times during 2005, we were in compliance with all applicable covenants.

 

Senior Subordinated Notes issued in December 2002. These were ten-year senior subordinated notes issued at a rate of 8 7/8% with a face value of $300.0 million (the “Senior Subordinated Notes”). In the second quarter of 2005, we repurchased $30.0 million of this debt. The Senior Subordinated Notes had an outstanding balance as of October 2, 2005 of $270 million. In the fourth quarter of 2005, we commenced and substantially completed a cash tender offer and consent solicitation for any and all of our outstanding Senior Subordinated Notes. On November 14, 2005, as part of an initial settlement under the tender offer, we repurchased $269.9 million of the Senior Subordinated Notes. We completed the tender offer and repurchased all but $25 thousand of these notes as of November 23, 2005. The source of funds for the tender offer was comprised of proceeds from the sale of our Fluid Testing business, our cash and cash equivalents, and our new unsecured credit facility. 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.

 

In January 2004, we swapped the fixed rate on $100 million of the Senior Subordinated Notes to a floating rate using swap instruments which reset semi-annually in arrears based upon six-month USD LIBOR and an applicable spread as defined in the swap agreements. In January 2005, we swapped an additional $100 million of these notes from fixed rate to floating rate at similar terms to the January 2004 swap, and therefore we were obligated to pay the applicable six-month USD LIBOR rate, plus the applicable spread, on $200 million of our obligations represented by the notes. On November 10, 2005, we terminated the interest rate swaps in conjunction with our tender of the Senior Subordinated Notes at a cost of $8.5 million.

 

6.8% Notes issued by one of our acquired companies. In December 2002, we initiated a tender offer for all of our outstanding 6.8% notes. We completed the tender offer and repurchased all but $4.7 million of these notes as of December 26, 2002. The remaining principal balance of $4.7 million matured and was paid in the fourth quarter of 2005.

 

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Off-Balance Sheet Arrangements

 

Receivables Securitization Facility

 

Through a wholly owned consolidated subsidiary, we purchase, on a revolving basis, certain of our accounts receivable balances and simultaneously sell an undivided interest in this pool of receivables to a financial institution. The total funding capacity under this facility is $65.0 million. Amounts funded under this facility were $45.0 million at both January 1, 2006 and January 2, 2005. As of January 1, 2006, we had approximately $20 million of undrawn capacity available under the facility. The facility had an effective interest rate of approximately LIBOR plus 53 basis points as of January 1, 2006. The facility includes conditions that require us to maintain a senior unsecured credit rating of BB or above, as defined by Standard & Poor’s Rating Services, and Ba2 or above, as defined by Moody’s Investors Service. At January 1, 2006, we had a senior unsecured credit rating of BBB- with a stable outlook from Standard & Poor’s Rating Services, and of Baa3 with a stable outlook from Moody’s Investors Service. The facility expires on January 26, 2007.

 

Dividends

 

Our Board of Directors declared regular quarterly cash dividends of seven cents per share in each quarter of 2005 and 2004, resulting in an annual dividend rate of 28 cents per share.

 

Contractual Obligations

 

The following table summarizes our contractual obligations at January 1, 2006:

 

    

Operating

Leases


  

Sr. Unsecured

Credit Facility
Maturing 2010


  

8.875% Sr.

Subordinated

Notes due
2013


   Other
Revolving
Debt
Facilities


   Total

     (In thousands)

2006

   $ 30,568    $    $    $ 1,131    $ 31,699

2007

     22,399                     22,399

2008

     18,752                     18,752

2009

     15,652                     15,652

2010

     13,732      243,257                256,989

2011 and beyond

     61,637           25           61,662
    

  

  

  

  

Total

   $ 162,740    $ 243,257    $ 25    $ 1,131    $ 407,153
    

  

  

  

  

 

Because the credit facility borrowings are considered to carry variable interest rates, the above table does not contemplate interest obligations.

 

Capital Expenditures

 

During 2006, we expect to make capital expenditures of approximately $35 million to $45 million primarily to introduce new products, to improve our operating processes, to shift the production capacity to lower cost locations, to relocate certain administrative facilities, and to capitalize expenses related to internally developed information technology. We expect to use our available cash and internally generated funds to fund these expenditures.

 

Other Potential Liquidity Considerations

 

In February 2005, we acquired Elcos AG, a leading European designer and manufacturer of custom light emitting diode, or LED, solutions for biomedical and industrial applications. The transaction combines Elcos’ visible LED technology platform and strong customer and application base with our global sales, application and support organization, therefore expanding the sales growth opportunities for the Elcos technology. We paid

 

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approximately $15.4 million in cash at the time of closing, $0.3 million in additional payments in 2005, and are required to make future cash payments of approximately $1.1 million through fiscal 2007. Also, we estimate that under an earn out provision in the acquisition agreement we will make an additional cash payment of approximately $3.1 million in 2006 to reflect the performance of the business in 2005, with the potential for additional earn out payments being made in 2007 and 2008 based on the performance of the business in 2006 and 2007, respectively.

 

On October 21, 2005 our Board of Directors reaffirmed our authority to repurchase up to 10.0 million shares of our common stock, which we publicly disclosed on November 14, 2005 (the “Program”). This Program will expire on October 21, 2008, unless it is earlier terminated by our Board of Directors. During the fourth quarter of 2005, we repurchased 1.1 million shares of our common stock in the open market under the Program at an aggregate cost of $24.4 million. Subsequent to year end, we repurchased 5.0 million shares of our common stock in the open market under the Program at an average cost of $23.25 per share.

 

Recent Accounting Pronouncements

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” This statement addressed the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB Opinion No. 25. Instead, companies will be required to account for such transactions using a fair-value method and recognize the related expense associated with share-based payments in the statement of operations. SFAS 123R is effective for us as of January 1, 2006. We historically accounted for share-based payments to employees under APB Opinion No. 25’s intrinsic value method. As such, we have not recognized compensation expense for options granted to employees. We will adopt the provisions of SFAS 123R under the modified prospective method, in which compensation cost for all share-based payments granted or modified after the effective date is recognized based upon the requirements of SFAS 123R, and compensation cost for all awards granted to employees prior to the effective date that are unvested as of the effective date of SFAS 123R is recognized based on SFAS 123. Tax benefits will be 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 expense recorded in the statement of operations (to the extent not offset by prior tax credits for settlements where the tax deduction was greater than the fair value cost). Our current estimates associated with 2006 indicate that we will recognize stock option compensation expense of approximately 6 cents per share. This amount is subject to revisions as we finalize certain assumptions related to 2006, including the size and nature of awards and forfeiture rates. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financial cash flow rather than as operating cash flow as was required. We cannot estimate what the future tax benefits will be as the amounts depend on, among other factors, future employee stock option exercises.

 

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 regarding the Staff’s interpretation of SFAS 123R. This interpretation provides the Staff’s views regarding interactions between SFAS 123R and certain SEC rules and regulations, and provides interpretations of the valuation of share-based payments for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS 123R, and investors and users of the financial statements in analyzing the information provided. We will follow the guidance prescribed in SAB No. 107 in connection with our adoption of SFAS 123R.

 

On November 29, 2004, the FASB issued Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. Statement 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. Statement 151 is effective for inventory costs incurred beginning after January 1, 2006. We have evaluated the adoption of Statement 151 and have determined it will not have a material impact on our consolidated financial position, results of operations or cash flows.

 

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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 post-retirement 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.

 

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 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.

 

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

 

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for 2005 and 2004 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 post retirement 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 post retirement 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 $11.9 million in 2005, $9.1 million in 2004 and $6.2 million in 2003 for our retirement and post retirement plans. We expect expenses of approximately $11.7 million in 2006 for our retirement and post retirement plans. Pension accounting is intended to reflect the recognition of future benefit costs over the employee’s 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 January 1, 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 7.5% 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 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 $0.6 million for 2006 in the United States and by $0.2 million for 2006 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 $2.0 million for 2006 in the United States and by $0.8 million for 2006 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. Our 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 charges, net.”

 

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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 January 1, 2006, we recognized $1.5 million in gains from disposition of fixed assets. We also recorded $186.4 million in gains from the disposition of discontinued operations, which was comprised 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 in 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 FAS 5 and FAS 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 FAS 109 we have established valuation allowances against a variety of deferred tax assets, including net operating loss carryforwards, foreign tax credits, and other income tax credits. 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 January 1, 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 inter-company and third-party receivables and payables. The contracts are primarily in European and Asian currencies, have maturities that do not exceed

 

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12 months, have no cash requirements until maturity, and are recorded at fair value on the consolidated balance sheet. Credit risk is minimal 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 January 1, 2006, we did not engage in any designated cash flow hedges. The notional amount of the outstanding foreign currency contracts was approximately $197.6 million at January 1, 2006 and $166.8 million as of January 2, 2005, and the approximate fair value of these foreign currency derivative contracts was insignificant. The duration of the foreign currency derivative contracts was generally 30 days for 2005.

 

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.    As a multinational corporation, we are exposed to changes in foreign exchange rates. These exposures can take a variety of different forms:

 

(1) As our international sales grow, exposure to volatility in exchange rates could have a material impact on our financial results. Reported sales made in foreign currencies by our international subsidiaries, when translated into U.S. dollars for financial reporting purposes, can fluctuate due to exchange rate movements. While exchange rate fluctuations can impact reported revenues and earnings, this impact is purely a result of the translation effect and does not materially impact our short-term cash flows.

 

(2) In all parts of the world, our subsidiaries, on occasion, invoice third-party customers in foreign currencies other than the one in which they primarily do business. We refer to our subsidiaries’ primary business currencies as the “functional currencies.” Movements in the invoiced currency relative to the functional currency result in both realized and unrealized transaction gains or losses that directly impact our cash flows and our results of operations.

 

(3) Our manufacturing and distribution organization is worldwide. Accordingly, inventories may be manufactured in one location, stored in another, and distributed in a third location. This results in a wide array of intercompany transactions—transactions that are billed and paid in many different currencies. Our cash flows and our results of operations are therefore directly impacted by fluctuations in exchange rates of currencies involved.

 

(4) The cash flow needs of each of our foreign subsidiaries vary through time. Accordingly, there may be times when a subsidiary lends to or borrows from either the parent company or another affiliate. These advances, again being denominated in currencies other than a particular entity’s functional currency, can expose it to fluctuations in exchange rates that can impact both our cash flows and results of operations.

 

(5) In order to repay debt or satisfy operational needs, we may remit cash from our foreign locations to the United States. When this occurs, we are liquidating foreign currency net asset positions and converting them into United States dollars. Our cash flows and our results of operations are therefore also impacted by these transactions.

 

We may use foreign currency forward and option contracts to manage the risk of exchange rate fluctuations. The derivative instruments held by us are not leveraged and are not held for trading purposes. We specifically use forward contracts to hedge our foreign denominated assets and liabilities and may use a combination of forward and option contracts to hedge anticipated cash flows. Our hedging activity is intended to offset the impact of currency fluctuations on assets, liabilities and cash flows denominated in foreign currencies. The success of our hedging program depends on forecasts of transaction activity in various currencies. To the extent

 

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that these forecasts are overstated or understated during periods of currency volatility, we could experience unanticipated currency gains or losses. The principal currencies we hedge are the British Pound, Canadian Dollar, Euro, Japanese Yen, and Singapore Dollar. In those currencies where there is a liquid, cost-effective forward market, we maintain hedge coverage between our established minimum and maximum percentages of our anticipated transaction exposure for periods not to exceed one year. The gains and losses on these contracts offset changes in the value of the related exposure.

 

Foreign Currency Risk—Value-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 January 1, 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 2005, the Value-At-Risk ranged between $0.1 million and $0.7 million, and averaged approximately $0.3 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. In January 2005 and January 2004, we effected, for a portion of our fixed rate debt portfolio, interest rate swaps that in effect convert fixed rate debt to variable rate debt. These swaps were designated as fair value hedges, and were marked to market in our consolidated financial statements, while they remained outstanding. The fair value movements in these swaps were offset by the fair value movement in the debt.

 

Interest Rate Risk—Sensitivity.    As of January 1, 2006, our debt portfolio was comprised of $244.4 million of variable rate debt. In addition, our cash and cash equivalents, for which we receive interest at variable rates, were $502.3 million at January 1 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 $244.4 million of revolving debt facilities, to fluctuate. An increase of 10%, or approximately 31 basis points, in current interest rates would cause an additional pre-tax charge to our earnings of $.8 million for fiscal year 2006.

 

(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 31 basis points, in current interest rates would cause our cash outflows to increase by $.8 million for fiscal year 2006.

 

(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

 

TABLE OF CONTENTS

 

Report of Independent Registered Public Accounting Firm

   48

Consolidated Statements of Operations for Each of the Three Years in the Period Ended January 1, 2006

   49

Consolidated Balance Sheets as of January 1, 2006 and January 2, 2005

   50

Consolidated Statements of Stockholders’ Equity and Comprehensive Income for Each of the Three Years in the Period Ended January 1, 2006

   51

Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended January 1, 2006

   53

Notes to Consolidated Financial Statements

   54

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of PerkinElmer, Inc.

Wellesley, Massachusetts

 

We have audited the accompanying consolidated balance sheets of PerkinElmer, Inc. and subsidiaries (the “Company”) as of January 1, 2006 and January 2, 2005, 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 January 1, 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 Company’s 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 January 1, 2006 and January 2, 2005, and the results of their operations and their cash flows for each of the three years in the period ended January 1, 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.

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of January 1, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 17, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting, and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/ DELOITTE & TOUCHE LLP

 

Boston, Massachusetts

March 17, 2006

 

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CONSOLIDATED STATEMENTS OF OPERATIONS

 

For the Years Ended January 1, 2006

 

     January 1,
2006


    January 2,
2005


    December 28,
2003


 
     (In thousands, except per share data)  

Sales:

                        

Products

   $ 1,231,827     $ 1,201,842     $ 1,136,160  

Services

     242,004       227,247       208,380  
    


 


 


Total sales

     1,473,831       1,429,089       1,344,540  
    


 


 


Cost of sales:

                        

Products

     718,198       711,747       660,016  

Services

     141,097       134,579       121,052  
    


 


 


Total cost of sales

     859,295       846,326       781,068  

Selling, general and administrative expenses

     365,457       362,322       364,971  

Research and development expenses

     87,371       82,356       76,814  

Restructuring (reversals) and integration charges, net

     22,065             (2,794 )

(Gains) losses on dispositions, net

     (1,502 )     409       (2,474 )

In-process research and development charge

     194              
    


 


 


Operating income from continuing operations

     140,951       137,676       126,955  

Interest and other expense, net

     74,291       38,332       53,513  
    


 


 


Income from continuing operations before income taxes

     66,660       99,344       73,442  

Provision for income taxes

     128       23,465       22,687  
    


 


 


Income from continuing operations

     66,532       75,879       50,755  

Income from discontinued operations, net of income taxes

     15,214       20,659       2,652  

Gain (loss) on disposition of discontinued operations, net of income taxes

     186,362       (495 )     (448 )
    


 


 


Net income

   $ 268,108     $ 96,043     $ 52,959  
    


 


 


Basic earnings per share:

                        

Continuing operations

   $ 0.51     $ 0.60     $ 0.40  

Discontinued operations

     1.56       0.16       0.02  
    


 


 


Net income

   $ 2.07     $ 0.75     $ 0.42  
    


 


 


Diluted earnings per share:

                        

Continued operations

   $ 0.51     $ 0.59     $ 0.40  

Discontinued operations

     1.54       0.16       0.02  
    


 


 


Net income

   $ 2.04     $ 0.74     $ 0.41  
    


 


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

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CONSOLIDATED BALANCE SHEETS

 

As of the Years Ended

 

     January 1,
2006


    January 2,
2005


 
     (In thousands except share
and per share data)
 

Current assets:

                

Cash and cash equivalents

   $ 502,264     $ 197,513  

Accounts receivable, net

     250,844       256,741  

Inventories

     163,150       168,400  

Other current assets

     71,189       67,664  

Current assets of discontinued operations

     11,442       57,312  
    


 


Total current assets

     998,889       747,630  
    


 


Property, plant and equipment, net

     177,369       196,749  

Marketable securities and investments

     9,222       10,479  

Intangible assets, net

     375,419       391,836  

Goodwill

     1,026,201       1,043,009  

Other assets

     90,156       107,574  

Long-term assets of discontinued operations

     16,205       78,230  
    


 


Total assets

   $ 2,693,461     $ 2,575,507  
    


 


Current liabilities:

                

Short-term debt

   $ 1,131     $ 9,714  

Accounts payable

     146,971       127,195  

Accrued restructuring and integration costs

     11,242       3,045  

Accrued expenses

     324,954       272,783  

Current liabilities of discontinued operations

     10,241       33,230  
    


 


Total current liabilities

     494,539       445,967  

Long-term debt

     243,282       364,874  

Long-term liabilities

     303,687       292,344  

Long-term liabilities of discontinued operations

     1,440       12,237  

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 130,109,000 and 129,059,000 shares at January 1, 2006 and January 2, 2005, respectively; and outstanding 130,109,000 and 129,059,000 shares at January 1, 2006 and January 2, 2005, respectively

     130,109       129,059  

Capital in excess of par value

     556,728       545,000  

Unearned compensation

     (6,372 )     (4,202 )

Retained earnings

     964,690       732,878  

Accumulated other comprehensive income

     5,358       57,350  
    


 


Total stockholders’ equity

     1,650,513       1,460,085  
    


 


Total liabilities and stockholders’ equity

   $ 2,693,461     $ 2,575,507  
    


 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

50


Table of Contents

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

 

For the Three Years Ended January 1, 2006

 

   

Comprehensive

Income


   

Common

Stock

Amount


 

Capital in

Excess of
Par


   

Unearned

Compensation


   

Retained

Earnings


   

Accumulated

Other

Comprehensive

Income (Loss)


   

Cost of

Shares Held
in Treasury


   

Total

Stockholders’

Equity


 
    (In thousands)  

Balance, December 29, 2002

          $ 145,101   $ 679,929     $ (5,890 )   $ 655,066     $ (31,865 )   $ (189,997 )   $ 1,252,344  
           

 


 


 


 


 


 


Comprehensive income

                                                             

Net income

  $ 52,959                       52,959                   52,959  

Other comprehensive income (loss), net of tax:

                                                             

Foreign currency translation adjustments

    70,475                             70,475             70,475  

Change in minimum liability of pension, net of tax

    (9,110 )                           (9,110 )           (9,110 )

Unrealized gains on securities arising during the period, net of tax

    1,408                             1,408             1,408  
   


                                                     

Other comprehensive income

    62,773                                                        
   


                                                     

Comprehensive income

  $ 115,732                                                        
   


                                                     

Cash dividends ($.28 per share)

                            (35,409 )                 (35,409 )

Exercise of employee stock options and related income tax benefits

                2,057                         3,630       5,687  

Issuance of common stock for employee benefit plans

                (436 )     2,396                   8,736       10,696  
           

 


 


 


 


 


 


Balance, December 28, 2003

          $ 145,101   $ 681,550     $ (3,494 )   $ 672,616     $ 30,908     $ (177,631 )   $ 1,349,050  
           

 


 


 


 


 


 


 

51


Table of Contents
   

Comprehensive

Income


   

Common

Stock

Amount


   

Capital in

Excess of
Par


   

Unearned

Compensation


   

Retained

Earnings


   

Accumulated

Other

Comprehensive

Income (Loss)


   

Cost of

Shares Held
in Treasury


 

Total

Stockholders’

Equity


 
    (In thousands)  

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                                          
   


                                                     

Cash dividends ($.28 per share)

                            (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                                          
   


                                                     

Cash dividends ($.28 per share)

                            (36,296 )               (36,296 )

Exercise of employee stock options and related income tax benefits

          1,533       23,198                             24,731  

Issuance of common stock for employee benefit plans

          308       4,267       101                       4,676  

Buyback and cancellation of employee shares

            (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  
           


 


 


 


 


 

 


 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

For the Three Years Ended

 

     January 1,
2006


    January 2,
2005


    December 28,
2003


 
     (In thousands)  

Operating activities:

                        

Net income

   $ 268,108     $ 96,043     $ 52,959  

Add net income from discontinued operations

     (15,214 )     (20,659 )     (2,652 )

Add net (gain) loss on disposition of discontinued operations

     (186,362 )     495       448  
    


 


 


Income from continuing operations

     66,532       75,879       50,755  

Adjustments to reconcile income from continuing operations to net cash provided by continuing operations:

                        

Non-cash restructuring actions

     22,065             (3,539 )

Depreciation and amortization

     66,998       67,599       70,450  

Stock-based compensation

     9,824       8,402       8,880  

Deferred taxes

     1,421       21,932       (11,842 )

Resolution of prior year tax contingencies

     (27,772 )     (8,019 )     (4,366 )

Amortization of deferred debt issuance cost, accretion of discounts and extinguishment of debt

     57,385       8,099       9,631  

(Gains) losses on dispositions, net

     (1,502 )     409       (283 )

(Gains) losses on the sale of investments, net

     (5,844 )     300       2,391  

Changes in assets and liabilities which provided (used) cash, excluding effects from companies purchased and divested:

                        

Accounts receivable, net

     (10,434 )     17,951       42,018  

Inventories

     (323 )     5,625       23,367  

Accounts payable

     23,242       (14,443 )     1,829  

Tax benefit from exercise of common stock options

     5,343             2,070  

Accrued expenses and other

     (13,503 )     (10,758 )     (48,903 )
    


 


 


Net cash provided by continuing operations operating activities

     193,432       172,976       142,458  

Net cash provided by discontinued operations operating activities

     14,661       27,781       25,017  
    


 


 


Net cash provided by operating activities

     208,093       200,757       167,475  
    


 


 


Investing activities:

                        

Cash held in escrow

                 187,477  

Capital expenditures

     (25,051 )     (15,818 )     (15,624 )

Proceeds from (settlement of) dispositions of businesses, net

     366,578       425       (959 )

Proceeds from dispositions of property, plant and equipment, net

     9,393       3,442       5,363  

(Payments for) proceeds of acquisitions and investments, net of cash and cash equivalents acquired

     (17,571 )     2,765       534  
    


 


 


Net cash provided by (used in) continuing operations investing activities

     333,349       (9,186 )     176,791  

Net cash (used in) provided by discontinued operations investing activities

     (10,060 )     (2,497 )     436  
    


 


 


Net cash provided by (used in) investing activities

     323,289       (11,683 )     177,227  
    


 


 


Financing activities:

                        

Prepayment of senior subordinated debt

     (299,975 )            

Premium on prepayment of senior subordinated debt

     (36,321 )            

Prepayment of term loan debt

     (70,000 )     (175,000 )     (70,000 )

Prepayment of zero coupon convertible notes

                 (189,901 )

Settlement of interest rate swaps

     (8,480 )            

Proceeds from borrowings

     244,253              

Payment of 6.8% notes

     (4,681 )            

Payment of debt issuance costs

     (1,133 )           (4,385 )

Other debt increases (decreases)

     24       39       (2,273 )

Proceeds from exercise of stock options

     19,388       15,041       3,617  

Purchases of common stock for treasury

     (24,397 )            

Cash dividends

     (36,296 )     (35,781 )     (35,409 )
    


 


 


Net cash used in continuing operations financing activities

     (217,618 )     (195,701 )     (298,351 )

Net cash used in discontinued operations investing activities

     (233 )     (237 )      
    


 


 


Net cash used in financing activities

     (217,851 )     (195,938 )     (298,351 )
    


 


 


Effect of exchange rate changes on cash and cash equivalents

     (8,780 )     12,878       14,533  
    


 


 


Net increase in cash and cash equivalents

     304,751       6,014       60,884  
    


 


 


Cash and cash equivalents at beginning of year

     197,513       191,499       130,615  
    


 


 


Cash and cash equivalents at end of year

   $ 502,264     $ 197,513     $ 191,499  
    


 


 


Supplemental disclosures of cash flow information
(see also Note 2):

                        

Cash paid during the year for:

                        

Interest

   $ 37,361     $ 32,491     $ 33,631  

Income taxes

   $ 44,008     $ 36,448     $ 43,526  

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

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.

 

The Company’s 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 year ended January 1, 2006 included 52 weeks. The fiscal years ended January 2, 2005 included 53 weeks. The year ended December 28, 2003 included 52 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.

 

Sales:    The Company’s 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 Company’s 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 recognize revenue when the criteria for revenue recognition have been met for each element. Shipping and handling costs are reflected in both revenue and 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.

 

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 apply to revenue arrangements entered into in the third quarter of 2003 and thereafter. The adoption of EITF Issue No. 00-21 did not have a material effect on the Company’s results of operations or financial condition.

 

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 Company’s estimated forecast of product demand and production requirements.

 

On November 29, 2004, the FASB issued Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. Statement 151 clarifies the accounting for abnormal amounts of idle facility expense, freight,

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

handling costs and wasted material. Statement 151 is effective for inventory costs incurred beginning after January 1, 2006. The Company has evaluated the adoption of Statement 151 and determined that it will not have a material impact on its consolidated financial position, results of operations or cash flows.

 

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 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 Opinion No. 23, Accounting for Income Taxes—Special Areas (APB 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: buildings—10 to 40 years; leasehold improvements—estimated useful life or remaining term of lease, whichever is shorter; machinery and equipment—3 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 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 (“FIN 47”). 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. The Company provides for asset retirement obligations when such amounts can be reasonably estimated, regardless of whether the settlement is conditional on a future event.

 

Pension Plans:    The Company’s funding policy provides that payments to the 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. A minimum pension liability adjustment is recorded when the actuarial present value of accumulated benefits exceeds plan assets and accrued pension liabilities.

 

Translation of Foreign Currencies:    For foreign operations with functional currencies other than the U.S. dollar, 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 Company’s 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

 

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 (SFAS No. 144). 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 18. The Company accounts for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As allowed by SFAS No. 123, Accounting for Stock Based Compensation, no stock-based employee compensation cost related to stock options is reflected in net income for the Company’s 2005 fiscal year, as all options granted under those plans had an exercise price at least equal to the market value of the underlying common stock on the date of grant. The Company has also issued restricted stock to certain employees and has reflected the intrinsic value of these awards as unearned compensation until the restrictions are released and the compensation is earned. The Company has elected to account for disclosure of the effects of fair value accounting on net income and earnings per share on a pro forma basis, which is presented below. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123.

 

     Year Ended

 
    

January 1,

2006


   

January 2,

2005


   

December 28,

2003


 
     (In thousands, except per share data)  

Net income

   $ 268,108     $ 96,043     $ 52,959  

Add: Stock-based employee compensation expense included in net income, net of related tax effects

     3,408       1,481       1,792  

Deduct: Total stock-based employee compensation expense determined under fair market value method (see Note 18) for all awards, net of related tax effects

     (12,801 )     (19,501 )     (20,158 )
    


 


 


Pro forma net income

   $ 258,715     $ 78,023     $ 34,593  
    


 


 


Earnings per share:

                        

Basic — as reported

   $ 2.07     $ 0.75     $ 0.42  

Basic — pro forma

   $ 2.00     $ 0.61     $ 0.27  

Diluted — as reported

   $ 2.04     $ 0.74     $ 0.41  

Diluted — pro forma

   $ 1.97     $ 0.60     $ 0.27  

 

In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R supersedes Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to

 

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Employees,” and amends SFAS No. 95, “Statement of Cash Flows.” This statement addressed the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB Opinion No. 25. Instead, companies will be required to account for such transactions using a fair-value method and recognize the related expense associated with share-based payments in the statement of operations. SFAS 123R is effective for the Company as of January 1, 2006. The Company historically accounted for share-based payments to employees under APB Opinion No. 25’s intrinsic value method. As such, the Company has not recognized compensation expense for options granted to employees. The Company will adopt the provisions of SFAS 123R under the modified prospective method, in which compensation cost for all share-based payments granted or modified after the effective date is recognized based upon the requirements of SFAS 123R, and compensation cost for all awards granted to employees prior to the effective date that are unvested as of the effective date of SFAS 123R is recognized based on SFAS 123. Tax benefits will be 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 expense recorded in the statement of operations (to the extent not offset by prior tax credits for settlements where the tax deduction was greater than the fair value cost). The Company’s current estimates associated with 2006 indicate the Company will recognize stock option compensation expense of approximately 6 cents per share. This amount is subject to revisions as the Company finalizes certain assumptions related to 2006, including the size and nature of awards and forfeiture rates. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financial cash flow, rather than as operating cash flow as was required. The Company cannot estimate what the future tax benefits will be as the amounts depend on, among other factors, future employee stock option exercises.

 

In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107 regarding the Staff’s interpretation of SFAS 123R. This interpretation provides the Staff’s views regarding interactions between SFAS 123R and certain SEC rules and regulations, and provides interpretations of the valuation of share-based payments for public companies. The interpretive guidance is intended to assist companies in applying the provisions of SFAS 123R and investors and users of the financial statements in analyzing the information provided. We will follow the guidance prescribed in SAB No. 107 in connection with our adoption of SFAS 123R.

 

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. Should securities be 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 only for other-than-temporary declines in fair value or additional investments.

 

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.

 

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 Company’s proportionate share of the amount can be reasonably estimated. The recorded liabilities have not been discounted.

 

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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.

 

Reclassifications:    Amortization charges associated with long-lived intangibles are classified on the statement of income according to the function of the intangible asset. Generally, if such intangibles are a component of the activities that constitute a company’s ongoing major operations, amortization should be classified as part of cost of sales. The Company is following this guidance in the current year and has reclassified amounts totaling $27.6 million in 2004 and $27.2 million in 2003 from a separate line item in operations to cost of sales in the current year.

 

Note 2: Acquisitions

 

In February 2005, the Company acquired Elcos AG, a leading European designer and manufacturer of custom light emitting diode, or LED, solutions for biomedical and industrial applications. Consideration for the transaction was approximately $15.4 million in cash at the time of closing, $0.3 million of additional payments in 2005 and approximately $1.1 million due through fiscal 2007. Also, the Company estimates that under an earn out provision in the acquisition agreement we will make an additional cash payment of approximately $3.1 million in 2006 to reflect the performance of the business in 2005, with the potential for additional earn out payments being made in 2007 and 2008 based on the performance of the business in 2006 and 2007, respectively.

 

Elcos’ operations are reported within the results of the Company’s Optoelectronics reporting segment. The acquisition was accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, and the Company has accordingly allocated the purchase price of Elcos based upon the fair values of the assets acquired and liabilities assumed. In connection with the fair valuing of the assets acquired and liabilities assumed, management, assisted by valuation consultants, performed an assessment of intangible assets using customary valuation procedures and techniques. Identifiable intangible assets included $0.2 million in acquired in-process research and development for projects that had not yet reached technological feasibility as of the acquisition date and for which no future alternative use existed. These costs were expensed on the date of the acquisition.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The components of the preliminary purchase price and allocation are as follows (in thousands):

 

Consideration and acquisition costs:

        

Cash payments

   $ 15,757  

Deferred consideration

     1,116  

Earnout liability

     3,130  

Transaction costs

     402  
    


Total consideration and acquisition costs

   $ 20,405  
    


Allocation of purchase price

        

Current assets

   $ 5,769  

Property, plant and equipment

     2,094  

Other assets

     181  

Identifiable intangible assets:

        

Core and completed technologies

     2,836  

Customer contracts

     2,626  

Customer relationships

     1,838  

Distributor network

     880  

Supplier network

     552  

Trade names and other

     621  

In-process research and development

     194  

Goodwill

     8,393  

Deferred taxes on identified intangibles

     (3,640 )

Liabilities assumed

     (1,939 )
    


Total

   $ 20,405  
    


 

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 Emerging Issues Task Force (“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. The principal actions associated with these plans related to workforce reductions and overhead reductions resulting from reorganization activities, including the closure of certain manufacturing and selling facilities.

 

During 2005, the Company recorded a pre-tax restructuring charge of $6.1 million relating to its Q4 2002 restructuring and integration plans (each of which is further described below) due to higher than expected costs associated with the closure of facilities, primarily in Europe.

 

Also, on June 15, 2005, the Company’s management approved a plan to terminate employees in several locations as the Company shifts resources into geographic regions and product lines that are more consistent with the Company’s growth strategy. The Company completed notifying affected employees on July 1, 2005. As a result of this plan of termination, the Company recorded a pre-tax restructuring charge of $8.2 million during the second quarter of 2005 (the “Q2 2005 Plan”). During the fourth quarter of 2005, the Company recorded a pre-tax restructuring reversal of $0.4 million relating to this plan due to lower than expected employee separation costs

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

associated with the Life and Analytical Sciences segment. The principal actions within the Q2 2005 Plan related to a workforce reduction resulting from reorganization activities within the Life and Analytical Sciences and Optoelectronics businesses.

 

In addition, during the fourth quarter of 2005, the Company’s management approved a plan to terminate employees in several locations and to close certain manufacturing and administrative facilities as the Company continues to shift resources into product lines that are more consistent with the Company’s growth strategy. As a result of this plan of termination, the Company recorded a pre-tax restructuring charge of $8.2 million during the fourth quarter of 2005 (the “Q4 2005 Plan”). The principal actions within the Q4 2005 Plan related to a workforce reduction as well as a sale of underutilized assets from reorganization activities within the Life and Analytical Sciences and Optoelectronics businesses.

 

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

 

Q4 2005 Plan

 

During the fourth quarter of 2005, the Company recognized a $2.2 million restructuring charge in the Life and Analytical Sciences business and a $6.0 million restructuring charge in the Optoelectronics business. The purpose of these restructuring actions was to shift resources into geographic regions and product lines that were more consistent with the Company’s growth strategy. The principal actions in the Q4 2005 Plan were primarily due to headcount reductions and the closure of several facilities resulting from reorganization activities.

 

The following table summarizes the components of the Q4 2005 Plan activity for the year ended January 1, 2006:

 

     Headcount

    Severance

    Abandonment
of Excess Facilities


    Total

 
     (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  
    

 


 


 


 

The Company anticipates that all remaining Q4 2005 Plan action will be completed by December 2006.

 

Q2 2005 Plan

 

During the second quarter of 2005, the Company recognized a $5.3 million restructuring charge in the Life and Analytical Sciences business and a $2.9 million restructuring charge in the Optoelectronics business. During the fourth quarter of 2005, the Company recorded a $0.4 million restructuring reversal due to successful negotiation of certain severance costs, primarily related to terminations in Europe. The purpose of these restructuring actions was to shift resources into geographic regions and product lines that were more consistent with the Company’s growth strategy. The principal actions in the Q2 2005 Plan were primarily due to headcount reductions resulting from reorganization activities.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes the components of the Q2 2005 Plan activity for the year ended January 1, 2006:

 

     Headcount

    Severance

    Abandonment
of Excess Facilities


    Total

 
     (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  
    

 


 


 


 

The Company anticipates that all remaining severance costs will be paid by the end of the second quarter 2006.

 

Q2 2003 Plan

 

During the second quarter of 2003, the Company recognized a $2.0 million restructuring charge in the Life and Analytical Sciences business and a $0.3 million restructuring charge in the Optoelectronics business (the “Q2 2003 Plan”). The purpose of the restructuring was to further improve performance and take advantage of synergies between the Company’s former Life Sciences and Analytical Instruments segments. The principal actions in this restructuring plan included lower headcount due to the continued integration of the Life and Analytical Sciences segment in a European manufacturing facility and a customer care center, as well as a headcount reduction at one of the Optoelectronics manufacturing facilities to reflect recent declining demand for several product lines.

 

The following table summarizes the restructuring plan activity for the year ended January 1, 2006:

 

     Severance and
Separation


 
     (In thousands)  

Balance at January 2, 2005

   $ 202  

Change in estimate

     (202 )
    


Balance at January 1, 2006

   $ —    
    


 

During 2004, the Company completed all actions under the Q2 2003 Plan, with the exception of a headcount reduction of one person that will be completed by the end of 2006.

 

Q4 2002 Plan

 

In connection with the Company’s decision to combine the Life Sciences and Analytical Instruments businesses in order to reduce costs and achieve operational efficiencies, the Company recorded a pre-tax restructuring charge of $26.0 million during the fourth quarter of 2002 (the “Q4 2002 Plan”). This plan allowed the Company to combine many business functions worldwide, with the intention to better serve its customers and more fully capitalize on the strengths of the businesses’ sales, service, and research and development organizations. The principal actions in the restructuring plan included workforce reductions, closure of facilities and disposal of underutilized assets.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

During 2005, the Company recorded an additional provision of $5.6 million for additional costs related to closed facilities due to soft sublease markets, primarily in Europe. The following table summarizes the components of the Company’s Q4 2002 Plan and related accrual activity:

 

     Headcount

    Severance

    Abandonment
of Excess Facilities


    Total

 
     (In thousands)  

Balance at December 29, 2002

   546     $ 19,150     $ 3,512     $ 22,662  

Amounts paid

   (299 )     (12,525 )     (343 )     (12,868 )

Changes in estimates

   (182 )     (3,855 )     (1,639 )     (5,494 )
    

 


 


 


Balance at December 28, 2003

   65       2,770       1,530       4,300  

Amounts paid

   (54 )     (2,307 )     (1,023 )     (3,330 )
    

 


 


 


Balance at January 2, 2005

   11       463       507       970  

Provision

               5,632       5,632  

Amounts paid

   (9 )     (432 )     (1,111 )     (1,543 )
    

 


 


 


Balance at January 1, 2006

   2     $ 31     $ 5,028     $ 5,059  
    

 


 


 


 

In addition, the Company recorded a reversal of $5.5 million in the Q4 2002 Plan due to higher than expected employee attrition rates in several countries prior to planned termination, and accordingly lower severance costs, plus lower than expected lease termination costs in certain locations.

 

The remaining liability represents severance and lease commitments. The Company expects to settle the remaining severance liability during 2006. The Company’s current estimate of its lease commitments on unoccupied buildings is that they vary in length but extend until 2014.

 

Q1 2002 Plan

 

During the first quarter of 2002, the Company’s management developed a plan to restructure several businesses within its Life and Analytical Sciences and Optoelectronics segments. The principal actions in the restructuring plan included workforce and overhead reductions resulting from reorganization activities, including the closure of a manufacturing facility, disposal of underutilized assets and general cost reductions.

 

The following table summarizes the components of the Company’s Q1 2002 Plan and related accrual activity:

 

     Severance

 
     (In millions)  

Balance at December 29, 2002

   $ 1,152  

Amounts paid or incurred

     (52 )

Changes in estimates

     (1,000 )
    


Balance at December 28, 2003

     100  

Amounts paid or incurred

     (100 )
    


Balance at January 2, 2005

   $  
    


 

Q1 2002 Plan charges in the Company’s Life and Analytical Sciences segment totaled $5.5 million. The charges were a result of actions we took as a response to decreased sales of components in our Life and Analytical Sciences segment. These actions under the charges primarily included the downsizing of an additional manufacturing location and the streamlining of the global sales and research and development organizations, primarily in Europe, Japan and the Pacific Rim. These actions were undertaken to reduce the number of

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

employees in components of its business that had experienced declining demand. The Q1 2002 Plan charges in the Company’s Optoelectronics segment totaled $3.7 million. This charge was primarily due to the removal of a layer of management structure within Optoelectronics that led to a flatter and less expensive organization structure. Planned headcount reductions for Q1 2002 Plan totaled 276.

 

During 2003, the Company recorded a reversal of $1.0 million in the Q1 2002 Plan due to lower than expected headcount reductions and severance costs resulting from higher than expected attrition rates in several countries prior to ultimate termination.

 

Q4 2001 Plan

 

During the fourth quarter of 2001, in connection with the integration of acquired operations and a restructuring of its sales offices in Europe, the Company recorded a restructuring charge of $9.2 million in the Life and Analytical Sciences segment. The principal actions in the restructuring plan include the closing or consolidation of several leased sales and services offices in Europe, as well as costs associated with the closure of a manufacturing facility in Europe, the closure of leased manufacturing facilities in the United States, and the disposal of related assets.

 

The following table summarizes the original restructuring charge and subsequent activity of the Company’s Q4 2001 Plan:

 

     Severance

   

Abandonment

of Excess

Facilities


    Asset
Impairment


   Total

 
     (In thousands)  

Q4 2001 Plan

                               

Balance at December 29, 2002

   $ 3,975     $ 100          $ 4,075  

Amounts paid or incurred

     (3,334 )     (100 )          (3,434 )

Changes in estimates

     1,830                  1,830  
    


 


 

  


Balance at December 28, 2003

     2,471                  2,471  

Amounts paid

     (965 )                (965 )
    


 


 

  


Balance at January 2, 2005

     1,506                  1,506  

Amounts paid

     (401 )                (401 )
    


 


 

  


Balance at January 1, 2006

   $ 1,105     $     $    $ 1,105  
    


 


 

  


 

In 2003, the Company recorded an additional pre-tax restructuring charge associated with the Q4 2001 Plan of $1.8 million. This charge was primarily due to additional severance and severance related benefits of the previously identified employees associated with the closure of the Company’s European manufacturing facility in the Life and Analytical Sciences segment.

 

During 2004, the Company paid $1.0 million in relation to the headcount actions associated with the Q4 2001 plan. The remaining liability relates to European severance obligations and is expected to be paid during 2006.

 

Integration activity:

 

In November 2001, the Company completed its acquisition of Packard BioScience Company (“Packard”). The integration activities were completed in early 2003 with the exception of $0.6 million in remaining payments due on leased facilities exited in 2001 that will be paid through 2011.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes integration reserve activity during 2005 and 2004 related to the acquisition of Packard:

 

    

Abandonment

of Excess

Facilities


 
     (In millions)  

Packard BioScience Integration Plan

        

Balance at December 28, 2003

   $ 874  

Amounts paid

     (507 )
    


Balance at January 2, 2005

     367  

Provision

     564  

Amounts paid

     (337 )
    


Balance at January 1, 2006

   $ 594  
    


 

Note 4: Other Expense

 

Other expense, net consisted of the following:

 

     2005

    2004

    2003

 
     (In thousands)  

Interest income

   $ (3,321 )   $ (2,401 )   $ (2,479 )

Interest expense

     27,291       36,203       50,213  

(Gains) losses on disposition of investments, net

     (5,844 )     300       2,391  

Extinguishment of debt

     54,886       4,143       1,953  

Other

     1,279       87       1,435  
    


 


 


     $ 74,291     $ 38,332     $ 53,513  
    


 


 


 

Note 5: Income Taxes

 

The components of income (loss) from continuing operations before income taxes were as follows:

 

     2005

    2004

    2003

 
     (In thousands)  

U.S.

   $ (51,609 )   $ (48,057 )   $ (51,328 )

Non-U.S.

     118,269       147,401       124,770  
    


 


 


     $ 66,660     $ 99,344     $ 73,442  
    


 


 


 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The components of the provision (benefit) for income taxes for continuing operations were as follows:

 

     Current

   

Deferred Expense

(Benefit)


    Total

 
     (In thousands)  

2005

                        

Federal

   $ (36,893 )   $ 4,381     $ (32,512 )

State

     (662 )     511       (151 )

Non-U.S.

     36,262       (3,471 )     32,791