FORM 10-K
Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

Form 10-K

 

for Annual and Transition Reports Pursuant to

Sections 13 or 15(d) of the Securities Exchange Act of 1934

 

(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 2, 2005

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                              to

 

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 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 an accelerated filer (as defined in Exchange Act Rule 12b-2).        Yes þ        No ¨

 

The aggregate market value of the common stock, $1 par value per share, held by nonaffiliates of the registrant on June 25, 2004, was $2,442,803,134 based upon the last reported sale of the common stock on that date.

 

As of March 7, 2005, there were outstanding 129,539,923 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 26, 2005 are incorporated by reference into Part III of this Form 10-K

 



Table of Contents

TABLE OF CONTENT S

 

          Page

PART I

Item 1.

  

Business

   1

Item 2.

  

Properties

   11

Item 3.

  

Legal Proceedings

   12

Item 4.

  

Submission of Matters to a Vote of Security Holders

   13

Executive Officers of the Registrant

   14
PART II

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    16

Item 6.

  

Selected Financial Data

   16

Item 7.

  

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

   18

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

   41

Item 8.

  

Financial Statements and Supplementary Data

   44

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   90

Item 9A.

  

Controls and Procedures

   90

Item 9B.

  

Other Information

   92
PART III

Item 10.

  

Directors and Executive Officers of the Registrant

   92

Item 11.

  

Executive Compensation

   93

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    93

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

   100

Exhibit Index

   102


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 industrial sciences markets. We design, manufacture, market and service products and systems within three businesses, each constituting one reporting segment:

 

    Life and Analytical Sciences. We are a leading provider of drug discovery, genetic screening and environmental and chemical analysis tools, including instruments, reagents, consumables and services.

 

    Optoelectronics. We provide a broad range of digital imaging, sensor and specialty lighting components used in biomedical, consumer products and other specialty end markets.

 

    Fluid Sciences. We provide a variety of precision valves, seals, bellows and pneumatic joints for critical fluid control and containment systems for highly demanding environments such as turbine engines and semiconductor fabrication equipment.

 

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

 

In fiscal 2004, we had $1,687.2 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 2, 2005, we had approximately 10,000 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.

 

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. 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.

 

American Job Creation Act. The homeland investment provisions of the American Jobs Creation Act enacted October 22, 2004, provides us with the opportunity to repatriate earnings from our foreign subsidiaries in a more tax and cash flow efficient manner.

 

Computer-To-Plate Business. In September 2004, our Board of Directors approved a plan to shut down our Computer-To-Plate business as part of our continued efforts to focus on higher growth opportunities. We reflected this business as a discontinued operation for all periods presented in this annual report on Form 10-K. The abandonment of this business resulted in a $1.0 million pre-tax loss related to a write-down of fixed assets and inventory. We recognized this loss during fiscal 2004 as a loss on the disposition of discontinued operations.

 

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Electroformed Products and Ultraviolet Lighting Businesses. In June 2004, our Board of Directors approved, and we executed, separate plans to shut down our Electroformed Products business and sell our Ultraviolet Lighting business as part of our continued efforts to focus on higher growth opportunities. We reflect these businesses as discontinued operations for all periods presented in this annual report on Form 10-K. The net assets of the Electroformed Products business were written off, resulting in a $1.6 million pre-tax loss in fiscal 2004. We sold the fixed assets and inventory of the Ultraviolet Lighting business in July 2004 for their approximate book value.

 

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 2004. These include our Telecommunications Component and Entertainment Lighting businesses which were approved for shut down 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 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 drug discovery, genetic screening and environmental and chemical analysis tools, including instruments, reagents, consumables, 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 testing applications that are critical to the development of many of our customers’ new products.

 

Our Life and Analytical Sciences business helps our customers solve complex analytical problems encountered in drug discovery, genetic screening and environmental and chemical analysis laboratories. In fiscal 2004, our Life and Analytical Sciences business generated sales of $1,062.8 million.

 

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

 

For genetic screening and clinical laboratories, we provide instrumentation, software, reagents and analysis 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.

 

For 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 bio-molecular 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 preventive 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 LANCETM and AlphaScreen assay technologies, fluorescent labeled probes and cloned receptors, 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.

 

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    DELFIA® Xpress. Our random access platform for maternal health clinics and laboratories has been expanded for use in 2nd trimester risk assessment. The introduction of two new analytes in 2004 enables the more efficient triple test screening of human alphafetoprotein, or AFP, Free hCGbeta and Estriol.

 

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

 

    LABWORKS ES 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.

 

    EnVision. This high throughput screening plate reader combines luminescence homogeneous assay technology with a high capacity high throughput screening plate reader to provide excellent results, versatility and ease-of-use with high sensitivity and wide dynamic range.

 

    UltraVIEW. This fully automated, high-resolution, live cell imaging system allows for the observation and measurement of cellular and molecular processes in proteomics applications.

 

    Spectrum Spotlight 300 FT-IR Imaging System. This system enables rapid extraction and analysis of data on molecular composition from a wide range of materials. The 300’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 industries such as environmental, petrochemical, forensics, food, pharmaceutical and semiconductor.

 

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

 

    CellLux. This is a flexible system for cellular assay development and screening, offering high performance in intracellular calcium, membrane potential and ion channel assays. The CellLux can be either a standalone workstation or integrated into a robotic system.

 

    TruPoint Beta-Secretase assay kits. These kits enable the detection of enzymes in biological samples, as well as screening for enzyme inhibitors in high-throughput screening. They consist of four components: a betasecretase, or BACE1, substrate, BACE1 reaction buffers, BACE1 stop solutions and four 384-well OptiPlates. The reagents are enough for 1536 assays when using 384-well plates.

 

    FlashBlue GPCR. These scintillating beads are used in receptor binding for all phases of screening – assay development through high throughput screening, or HTS, through profiling studies. The beads provide platforms for all applications, including enzyme, protein and functional assays, and receptor binding assays.

 

    Optima 2100/5000 Series ICP-OES. These inductively coupled plasma systems offer updated and new features to further increase laboratory analytical capability and productivity.

 

    ProScanArray and ScanArray GX.    This series of microarray scanners for supporting both proteomic and genomic array-based applications, is designed to integrate image acquisition and analysis for proteomic and genomic applications through our exclusive ProScanArray Express software.

 

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    ProEXPRESSION Protein Fractionation Kits.    These kits deliver efficient, reproducible, microscale fractionation protocols for complex protein mixtures using patented membrane adsorber, or MA, chromatography technology from Vivascience AG combined with PerkinElmer’s proprietary buffers and elution chemistries.

 

    MultiPROBE® II Forensic Workstation.    This is an automated system to deliver DNA processing procedures including isolation, quantification setup, or QPCR, normalization and dilution, and typing polymerase chain reaction, or PCR, setup. The workstation offers onboard liquid handling with the added benefit of bundled forensic application options to provide complete walk-away automation of forensic DNA analysis.

 

Brand Names.    Our Life and Analytical Sciences reporting segment offers its products under various brand names, including Wallac, Packard, NEN®, AAnalyst, Clarus®, OneSource®, LABWORKS, Pyris, Spectrum, Optima, DELFIA®, ImageTrak, UltraView, prOTOF, Victor, LANCE, ELAN®, and ViewLux

 

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 2004, our Optoelectronics business unit generated sales of $380.6 million.

 

We are a leading supplier of amorphous silicon digital x-ray detectors, a technology for 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 nondestructive testing, or NDT, for areas such as homeland security.

 

We have significant expertise in optical sensor technologies, with products used in a variety of applications. Examples 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.

 

Our specialty lighting technologies include xenon flashtubes, ceramic xenon light sources, intense pulsed light and laser pump sources. These products are used in a variety of applications, including digital and analog cameras, mobile phones, medical endoscopy equipment, aesthetic applications including hair removal and skin rejuvenation, laser machine tools and home theater projectors.

 

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.

 

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  Thermopile temperature sensors used in digital ear thermometers.

 

    Industrial Sciences

 

  Xenon flashtubes for use in 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 are 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.

 

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

 

    XL3000 Fiber Optic Illumination System, a new high-intensity xenon fiber optic illumination system which, using PerkinElmer’s patented Cermax® Xenon lighting technology, is used for integration into medical OEMs’ endoscopy equipment.

 

    Higher performance amorphous silicon flat panel detectors for medical oncology and industrial imaging applications. Our new 1620 and 1640 AN detectors 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.

 

    MultiBlue: The new MultiBlue Biotech CCD camera system with its convenient plug-and-play interface and multipurpose functionality is being targeted for instrumentation for gene research and therapy, genomic/proteomic sequencing and expression, gel documentation and drug discovery.

 

    PMY 151 Smart Natural Gas Sensor, a new “smart” sensor for use in detecting/monitoring natural gas in homes, and representing a technology platform to further develop CO2 sensors for automotive applications. The sensor is based on non-dispersive infrared absorption, or NDIR, technology.

 

    Miniaturized photoflash technology: High quality, compact xenon flash lamps and modules used in mobile phone and other digital cameras, providing significant improvements over light emitting diodes, or LEDs, in increased light output and brightness levels, improved color temperature, reduced shutter speeds and lower cost.

 

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

 

Fluid Sciences

 

Our Fluid Sciences business provides a variety of precision valves, seals, bellows and pneumatic joints for critical fluid control and containment systems for highly demanding environments such as turbine engines and semiconductor fabrication facilities. This business has an extensive network of strategic alliances with major original equipment manufacturers worldwide. For fiscal 2004, our Fluid Sciences business generated sales of $243.8 million.

 

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In the aerospace market, we are a leading provider of sealing and pneumatic systems for large commercial transport aircraft, military, business and regional jets. Most major aircraft and turbine engine manufacturers use our products to reduce leakage and improve reliability. For example, we design and produce high-pressure accumulators used to moderate pressure in hydraulic systems that provide additional hydraulic power when heavy demands are placed on the system. New fleet orders and maintenance on existing aircraft generally create demand for our aerospace products and services.

 

In the semiconductor equipment market, we provide components, sub-assembly integration and processing services to many of the world’s leading semiconductor equipment manufacturers. Our bellows sealing and linear motion devices are used on wafer-processing equipment manufactured by the world’s leading semiconductor equipment manufacturers. Building upon our understanding of our customers’ needs, we have expanded our product offerings to include a broad range of assemblies and related after-market services used in semiconductor wafer-processing equipment and maintenance.

 

We also provide static and dynamic seals that reduce emissions and improve efficiency on many new power generation equipment platforms. Our fluid testing business has been providing fuel and lubricant testing services for almost 50 years to the gasoline refining and petrochemical industries.

 

Principal Products. The principal products of our Fluid Sciences business include:

 

    Rigid E-Seal Joints form the basis for the industry standard as connectors that enable easier installation and removal of pneumatic ducting, values and engine accessory equipment.

 

    Flexible joints and ducting systems used in aircraft environmental control systems and for other engine bleed air system applications such as anti-icing and air starters.

 

    Dynamic seals and aftermarket repair services, including pressure-balanced face seals, circumferential segmented seals, controlled gap clearance seals, hydrodynamic seals, swivel seals, brush seals and welded metal bellows seals.

 

    A broad range of static seals, including C-Seals, E-Seals and U-Plex Seals that increase system efficiencies, minimize leakage and decrease the cost of sealing interfaces.

 

    Bellows seals, devices and assemblies used as accumulators and aneroids and for a variety of sensing, lifting, storage and compensating applications in aerospace, power generation and semiconductor equipment.

 

    Solenoid valves and next-higher level assemblies that provide actuation or control on aircraft pneumatic, fuel and hydraulic systems.

 

    Surface treatment processes for semiconductor wafer process equipment that reduce process variability and increase yield.

 

    Patented, high-pressure, maintenance-free accumulator technology for new higher-pressure systems, which improves the life and reliability of aircraft accumulators and is less sensitive to fluid contamination and aging effects than piston or bladders accumulators.

 

    Sealing solutions including swivel seals for fossil fuel drilling applications designed to reduce equipment downtime.

 

    Valves for emerging fuel cell technology programs that enable customers to use higher pressures and control temperatures to improve fuel cell system performance.

 

In addition, our Fluid Sciences business is experiencing increased opportunities to supply higher value, vertically integrated assemblies and after-market services to the general aerospace end markets as well as semiconductor wafer-processing equipment manufacturers.

 

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New Products. New product releases by our Fluid Sciences business include:

 

    Advanced Brush Seals—Brush seals improve thrust and reduce specific fuel consumption in the secondary flow paths of aircraft engines. In addition, they are under evaluation for use by airlines and repair stations in the direct end user market. Advanced brush seals offer even further reduced fuel consumption.

 

    Semiconductor Uniformity Testing services—Semiconductor processing requires the deposition of very thin films on the wafer. The thin film thickness is tightly controlled in production, requiring temperature uniformity over the wafer surface. Our testing services measure this critical temperature uniformity in production heaters in the semiconductor industry.

 

    Fully-Instrumented Maintenance-Free Accumulator, or FIMFA—A design used on production aircraft that is capable of monitoring gas pressure throughout the aircraft’s service life. The accumulator sends electronic data to the cockpit regarding the accumulator’s operational condition, minimizing or eliminating the need for periodic or routine pressure-check inspections and therefore reducing maintenance costs.

 

Brand Names. Our Fluid Sciences business offers its products under various brand names, including Belfab®, Callisto, Centurion, U-Plex Seals, E-Seals, Rigid E-Seal Joints and PressureScience.

 

Marketing

 

All of our businesses market their products and services directly through their own specialized sales forces. As of January 2, 2005, we had approximately 2,600 internally employed sales and service representatives operating in approximately 40 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 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 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, registered 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 each 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 each 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

 

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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 commercial product or require us to license the disputed property from third parties. We are currently one of several parties defending litigation brought by Enzo Biochem, Inc. and Enzo Life Sciences, Inc. alleging that our Life and Analytical Sciences business breached our distributorship and settlement agreements with the plaintiffs, infringed the plaintiffs’ patents, engaged in unfair competition and fraud and committed torts against the plaintiffs by, among other things, engaging in commercial development and exploitation of the plaintiffs’ patented products and technology, separately and together with the other defendants. See “Item 3. Legal Proceedings” for a discussion of this matter.

 

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.

 

Competition in our Fluid Sciences reporting segment is typically based on product performance and innovation, quality, service and price. In a few markets, competitors are large, diversified engineering and manufacturing concerns. Most of our competitors, however, are small specialized manufacturing companies offering limited product lines for narrow market segments. Competition for lubricant testing services is primarily from one large non-profit institute and some customer-owned laboratories, and is mainly based on quality and price.

 

We believe we compete effectively in each of the areas in which our businesses experience competition.

 

Research and Development

 

PerkinElmer-sponsored research and development expenditures were approximately $87.1 million during fiscal 2004, approximately $81.4 million during fiscal 2003 and approximately $85.0 million during fiscal 2002.

 

We directed our research and development efforts in both 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.

 

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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 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 $3.8 million as of January 2, 2005, 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. 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 possible that we may incur a material loss exceeding the amounts recorded, we do not expect the potential exposure 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 2, 2005, we employed approximately 10,000 employees. Several of our subsidiaries are parties to contracts with labor unions and workers’ councils. As of January 2, 2005, we employed an aggregate of approximately 2,100 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 2004, 2003 and 2002 fiscal years:

 

     2004

    2003

    2002

 
     (In thousands)  
Life and Analytical Sciences                   

Sales

   $ 1,062,767     $ 1,003,711     $ 991,712  

Operating profit

     103,609       94,745       27,431  
Optoelectronics                         

Sales

     380,637       348,669       319,797  

Operating profit (loss)

     57,403       46,778       (459 )
Fluid Sciences                         

Sales

     243,827       179,670       189,485  

Operating profit

     38,221       17,922       17,476  
Other                         

Operating loss

     (22,163 )     (17,604 )     (16,591 )
Continuing operations                         

Sales

     1,687,231       1,532,050       1,500,994  

Operating profit

   $ 177,070     $ 141,841     $ 27,857  

 

Our Security and Detection Systems, formerly included in the Life and Analytical Sciences reporting segment, Telecommunications Components, Entertainment Lighting, Electroformed Products, Ultraviolet Lighting and Computer-To-Plate businesses, all formerly included in the Optoelectronics reporting segment, are discontinued operations and therefore have not been included in the preceding table.

 

Additional information relating to our reporting segments for the 2004, 2003, and 2002 fiscal years is as follows:

 

    

Depreciation and

Amortization Expense


   Capital Expenditures

     2004

   2003

   2002

   2004

   2003

   2002

     (In thousands)

Life and Analytical Sciences

   $ 47,645    $ 47,938    $ 44,723    $ 6,747    $ 9,841    $ 25,014

Optoelectronics

     19,633      21,818      19,813      7,677      5,398      38,271

Fluid Sciences

     7,726      8,403      9,632      3,022      919      3,754

Other

     1,237      1,335      1,665      1,515      430      780
    

  

  

  

  

  

Continuing operations

   $ 76,241    $ 79,494    $ 75,833    $ 18,961    $ 16,588    $ 67,819
    

  

  

  

  

  

Discontinued operations

   $ 864    $ 656    $ 2,262    $    $ 384    $ 3,053

 

     Total Assets

    

January 2,

2005


  

December 28,

2003


  

December 29,

2002


     (In thousands)

Life and Analytical Sciences

   $ 2,112,322    $ 2,080,916    $ 2,076,213

Optoelectronics

     292,500      291,746      283,228

Fluid Sciences

     126,603      119,966      128,193

Other

     43,786      110,211      320,475

Net current and long-term assets of discontinued operations

     296      4,888      17,373
    

  

  

     $ 2,575,507    $ 2,607,727    $ 2,825,482
    

  

  

 

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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 property, plant and equipment based on physical location:

 

     Sales

     2004

   2003

   2002

     (In thousands)

U.S

   $ 784,153    $ 714,451    $ 718,566

Non-U.S.:

                    

United Kingdom

     108,198      107,006      93,386

Germany

     105,779      92,820      86,729

France

     101,390      82,805      68,431

Japan

     93,085      88,931      87,394

Italy

     80,386      65,275      59,117

Other non-U.S

     414,240      380,762      387,371
    

  

  

Total non-U.S.

     903,078      817,599      782,428
    

  

  

     $ 1,687,231    $ 1,532,050    $ 1,500,994
    

  

  

 

     Net Long-Lived Assets

    

January 2,

2005


  

December 28,

2003


  

December 29,

2002


     (In thousands)

U.S

   $ 1,389,202    $ 1,420,006    $ 1,461,683

Non-U.S.:

                    

Singapore

     175,935      40,413      43,407

Germany

     85,039      79,812      67,604

Netherlands

     42,270      39,263      32,603

United Kingdom

     36,575      43,142      39,656

Canada

     31,817      34,037      34,752

Finland

     22,506      23,502      20,628

Other non-U.S

     24,075      141,744      126,968
    

  

  

Total non-U.S

     418,217      401,913      365,618
    

  

  

     $ 1,807,419    $ 1,821,919    $ 1,827,301
    

  

  

 

Each of our reporting segments conducts business in, and derives substantial revenue from, various countries outside the United States. During fiscal 2004, we had $903.1 million in sales from our international operations, representing approximately 54% of our total sales. During fiscal 2004, we derived approximately 76% of our international sales from our Life and Analytical Sciences reporting segment, approximately 20% of our international sales from our Optoelectronics reporting segment and approximately 4% of our international sales from our Fluid Sciences 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.

 

Item 2.     Properties

 

As of January 2, 2005, our continuing operations occupied approximately 3,207,000 square feet. We own approximately 1,154,000 square feet of this space and lease the balance. Our headquarters occupies 53,000

 

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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 12 states and 36 foreign countries.

 

Facilities outside of the United States account for approximately 1,481,000 square feet of our owned and leased property, or approximately 46% 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 2, 2005, 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

   463,000    1,096,000    1,559,000

Optoelectronics

   479,000    557,000    1,036,000

Fluid Sciences

   212,000    347,000    559,000

Corporate offices

      53,000    53,000
    
  
  

Continuing operations

   1,154,000    2,053,000    3,207,000
    
  
  

 

Item 3.     Legal Proceedings

 

We are subject to various 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 various uncertainties, and it is possible that some of these matters may be resolved in a manner that is unfavorable to us. In addition:

 

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. Further appeals are possible.

 

In papers dated July 1, 2002, Kevin Hatch filed a purported class action lawsuit in the United States District Court for the District of Massachusetts, Civil Action No. 02-11314 GAO, against PerkinElmer, Inc. and certain of our senior officers, on behalf of himself and purchasers of our common stock between July 15, 2001 and April 11, 2002. The lawsuit seeks an unspecified amount of damages and claims violations of Sections 10(b) and 20(a) of, and Rule 10b-5 under, the Securities Exchange Act of 1934, alleging various statements made during the putative class period by PerkinElmer and its management were misleading with respect to our prospects and future operating results. At least eleven virtually identical lawsuits subsequently have been filed in the United States District Court for the District of Massachusetts against PerkinElmer. The Court granted the plaintiffs’ motion to consolidate these matters, and on January 13, 2003, the plaintiffs filed an amended complaint. On February 25, 2003, we and the other defendants filed a motion to dismiss the lawsuit. The motion was opposed by the plaintiffs, and oral arguments concerning the motion took place on May 5, 2003. On September 30, 2003, the Court issued a memorandum and order denying the motion to dismiss. On October 10, 2003, we and the other defendants filed a motion for reconsideration or, in the alternative, for an order allowing immediate appeal of several issues of law to the appellate court. On October 23, 2003, the plaintiffs filed an opposition to the motion for reconsideration. Our and the other defendants’ answers to the amended complaint were filed on November 6, 2003. On September 7, 2004, the Court issued a memorandum and order denying the defendants’ motion for reconsideration or, in the alternative, for an order allowing immediate appeal of several issues of law to the appellate court.

 

In papers dated June 28, 2004, David Jaroslawicz filed a purported derivative action in the United States District Court for the District of Massachusetts against certain of our senior officers and four of our directors, and nominal defendant PerkinElmer seeking unspecified damages and purporting to make claims of breach of fiduciary duty, gross negligence, breach of contract, breach of duty of loyalty and unjust enrichment. At least one

 

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virtually identical derivative action was subsequently filed in the United States District Court for the District of Massachusetts. On August 24, 2004, the plaintiffs filed a motion to consolidate the cases. The derivative complaints contain allegations similar to those included in the Hatch matter described above, in addition to claims that certain defendants engaged in insider trading and that members of our audit committee breached their duties to us by failing to establish and maintain an adequate system of internal controls to assure that proper revenue recognition practices were being followed. On January 28, 2005, the parties to the derivative actions filed a joint stipulation and proposed pretrial order, agreeing to consolidate the cases and proposing a schedule for filing a consolidated derivative complaint and responsive pleadings.

 

In papers dated October 23, 2002, Enzo Biochem, Inc. and Enzo Life Sciences, Inc. 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 six count 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 Life Sciences to serve individual complaints against the five defendants. Enzo Life Sciences 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.

 

On October 17, 2003, Amersham Biosciences Corp. filed a complaint, which was subsequently amended, in the United States District Court for New Jersey, Civil Action No. 03-4901, against our subsidiary, PerkinElmer LAS, Inc., alleging that our ViewLux and certain of our Image FlashPlates infringe three of Amersham’s patents related to high-throughput screening. On August 18, 2004, Amersham Plc filed a complaint against two of our United Kingdom based subsidiaries, PerkinElmer Life Sciences (UK) Ltd. and PerkinElmer LAS (UK) Ltd., in the Patent Court of the English High Court of Justice, Case No. 04C02688, alleging that the same PerkinElmer products infringe Amersham’s European (United Kingdom) patent granted in August 2004. Amersham seeks injunctive and monetary relief in both cases. We subsequently filed an answer in both cases denying the substantive allegations and including affirmative defenses and counterclaims. On October 29, 2003, PerkinElmer LAS, Inc. 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. We seek injunctive and monetary relief. Amersham subsequently filed an answer denying the substantive allegations and including affirmative defenses and counterclaims.

 

On June 14, 2002, we sold our Security and Detection Systems business to L-3 Communications Corporation. L-3 and several of its affiliates have been named as defendants in litigation arising out of the terrorist attacks on September 11, 2001. Among the claims in that litigation are allegations that there were defects in the products of the Security and Detection Systems business that we sold to L-3. L-3 has asserted that we are contractually obligated to indemnify L-3 for any liability it may incur as a result of that litigation. By letter dated January 20, 2005, L-3 has agreed to release us from any and all claims relating to the events of September 11, 2001. L-3 also agreed to irrevocably withdraw its claim for indemnification. In exchange for this release and withdrawal of indemnification, we have agreed to join as a plaintiff in a lawsuit filed by L-3 in the Superior Court of the Commonwealth of Massachusetts, Civil Action No. 03-05810-BLS1 against Reveal Imaging Technologies and former employees of PerkinElmer. The lawsuit alleges that the defendants breached their obligations under agreements with PerkinElmer, including their obligations to assign to our Security and Detection Systems business (now owned by L-3) the inventions they made while employed by such business.

 

We intend to defend ourselves vigorously in all of the above matters. We are currently unable, however, to determine whether resolution of any or all of these matters will have a material adverse impact on our financial position or consolidated results of operations.

 

Item 4.     Submission of Matters to A Vote of Security Holders

 

Not applicable.

 

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EXECUTIVE OFFICERS OF THE REGISTRANT

 

Listed below are our executive officers as of March 11, 2005. 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    48
     and President     

Robert F. Friel

   Executive Vice President and Chief Financial Officer    49

John P. Murphy

   Executive Vice President and Chief Operating Officer    38

Robert A. Barrett

   Senior Vice President, President — Fluid Sciences    61

Peter B. Coggins

   Senior Vice President, President — Life and Analytical    56
     Sciences     

Richard F. Walsh

   Senior Vice President, Human Resources    52

Jeffrey D. Capello

   Vice President — Finance, Treasurer and    40
     Chief Accounting Officer     

John A. Roush

   Vice President, President — Optoelectronics    39

 

Gregory L. Summe, 48.    Mr. Summe was named Chief Executive Officer of PerkinElmer 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.

 

Robert F. Friel, 49.    Mr. Friel joined us in February 1999 as our Senior Vice President and Chief Financial Officer. Since November 2004, he has served as our Executive Vice President and Chief Financial Officer, with responsibility for business development and information technology in addition to his oversight of the finance functions. 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. Mr. Friel is a director of Fairchild Semiconductor Corp.

 

John P. Murphy, 38.    Mr. Murphy joined us in August 2001 as our Senior Vice President and President of our Optoelectronics business. Since November 2004, he has served as Executive Vice President and Chief Operating Officer of PerkinElmer, Inc. From July 2000 to August 2001, Mr. Murphy served as Vice President and General Manager of the Business Regional and General Aviation Unit of Honeywell International. From July 1993 to June 2000, Mr. Murphy served at AlliedSignal, Inc., now Honeywell International, a diversified technology and manufacturing company, in various capacities, most recently as Vice President and General Manager of Business and General Aviation.

 

Robert A. Barrett, 61.    Mr. Barrett has served as President of our Fluid Sciences business since May 1998 and was appointed Senior Vice President in October 2002. From 1990 to 1998, he served as President and General Manager of our Pressure Science division.

 

Peter B. Coggins, 56.    Dr. Coggins joined us in July 2002 as our Senior Vice President and President of our Life Sciences business. He currently serves as President of our Life and Analytical Sciences business. From 1994 to June 2002, Dr. Coggins served in various capacities at Amersham BioSciences, a developer of systems for medical research, drug discovery and manufacture, most recently as Executive Vice President, Global Sales and Marketing, Chairman of the Board of Amersham Japan KK and a member of the Amersham BioScience Executive Committee.

 

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Richard F. Walsh, 52.    Mr. Walsh joined us in July 1998 as our Senior Vice President of Human Resources. 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.

 

Jeffrey D. Capello, 40.    Mr. Capello joined us in June 2001 as our Vice President of Finance and was named Chief Accounting Officer in April 2002. From 1997 to June 2001, he served as a partner at PricewaterhouseCoopers LLP, a public accounting firm, initially in the United States and later in the Netherlands.

 

John A. Roush, 39.    Mr. Roush was named Vice President of PerkinElmer and President of the Optoelectronics business in November 2004. Mr. Roush joined us in 1999 as the General Manager of a specialty lighting division within our Optoelectronics business and subsequently held several additional roles with Optoelectronics. From 2001 to 2002, he served as Vice President & General Manager of our Sensors business, and from 2002 to 2004, he held the role of Vice President of Sales & Product Management. Before joining the Company, Mr. Roush held leadership positions with General Electric, Allied Signal, Inc., now Honeywell International, and McKinsey & Company.

 

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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 2004 and 2003.

 

     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
     2003 Fiscal Quarters

     First

   Second

   Third

   Fourth

High

   $ 9.21    $ 13.99    $ 17.05    $ 18.67

Low

     7.41      8.81      13.65      15.31

 

As of March 7, 2005, we had approximately 8,304 holders of record of our common stock.

 

Dividends

 

During the 2004 and 2003 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. Our senior credit facility and the indenture governing our outstanding 8 7/8% senior subordinated notes contain restrictions that may limit our ability to pay our regular quarterly cash dividends in the future if we are unable to comply with certain financial covenants that primarily relate to cash flow.

 

     2004 Fiscal Quarters

   2004 Total

     First

   Second

   Third

   Fourth

   $.28

Cash dividends per common share

   $ .07    $ .07    $ .07    $ .07   
     2003 Fiscal Quarters

   2003 Total

     First

   Second

   Third

   Fourth

   $.28

Cash dividends per common share

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

 

For further information related to our stockholders’ equity, refer to Note 18 included in our notes to consolidated financial statements.

 

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 2, 2005. We derived the selected historical financial information as of and for each of the fiscal years in the three-year period ended January 2, 2005 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 30, 2001 and December 31, 2000 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 end January 2, 2005, December 28, 2003 and December 29, 2002, we adjusted the information in the financial statements for the fiscal years ended December 30, 2001 and December 31, 2000, where appropriate, to account for the discontinuance of our Telecommunications Components, Entertainment Lighting, Technical Services, Security and Detection Systems, Electroformed Products, Ultraviolet Lighting and Computer-To-Plate businesses.

 

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Our historical financial information may not be indicative of our results of operations or financial position that you should expect in the future.

 

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 2,

2005


   

December 28,

2003


   

December 29,

2002


   

December 30,

2001


   

December 31,

2000


 
     (In thousands)  

Income Statement Data:

                                        

Sales

   $ 1,687,231     $ 1,532,050     $ 1,500,994     $ 1,519,090     $ 1,534,196  

Operating income

     177,070       141,841       27,857       130,065       179,482  

Other expense, net

     40,323       56,396       32,860       28,885       33,085  

Income (loss) from continuing operations before taxes

     136,747       85,445       (5,003 )     101,180       146,397  

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

     98,252       57,933       (1,516 )     41,884       90,155  

(Loss) income from discontinued operations, net of income taxes

     (1,714 )     (4,526 )     (19,162 )     (9,746 )     (4,088 )

(Loss) gain on dispositions of discontinued operations, net of income taxes

     (495 )     (448 )     (13,460 )     2,367       4,453  
    


 


 


 


 


Net income (loss) before effect of accounting change

     96,043       52,959       (34,138 )     34,505       90,520  

Effect of accounting change, net of income tax

                 (117,800 )            
    


 


 


 


 


Net income (loss)

   $ 96,043     $ 52,959     $ (151,938 )   $ 34,505     $ 90,520  
    


 


 


 


 


Basic earnings (loss) per share:

                                        

Continuing operations

   $ 0.77     $ 0.46     $ (0.01 )   $ 0.40     $ 0.92  

Discontinued operations

     (0.02 )     (0.04 )     (0.26 )     (0.07 )     0.00  

Effect of accounting change, net of income tax

                 (0.94 )            
    


 


 


 


 


Net income (loss)

   $ 0.75     $ 0.42     $ (1.21 )   $ 0.33     $ 0.92  
    


 


 


 


 


Diluted earnings (loss) per share:

                                        

Continuing operations

   $ 0.76     $ 0.45     $ (0.01 )   $ 0.39     $ 0.88  

Discontinued operations

     (0.02 )     (0.04 )     (0.26 )     (0.07 )     0.00  

Effect of accounting change, net of income tax

                 (0.94 )            
    


 


 


 


 


Net income (loss)

   $ 0.74     $ 0.41     $ (1.21 )   $ 0.32     $ 0.89  
    


 


 


 


 


Weighted-average common shares outstanding:

                                        

Basic:

     127,345       126,363       125,439       103,687       98,212  

Diluted:

     129,429       127,741       125,439       107,259       102,278  

Cash dividends per common share

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

 
    

January 2,

2005


   

December 28,

2003


   

December 29,

2002


   

December 30,

2001


   

December 31,

2000


 

Balance Sheet Data:

                                        

Total assets

   $ 2,575,507     $ 2,607,727     $ 2,825,482     $ 2,969,938     $ 2,260,760  

Short-term debt

     9,714       5,167       191,491       125,984       185,411  

Long-term debt

     364,874       544,307       614,053       598,125       583,337  

Stockholders’ equity

     1,460,085       1,349,050       1,252,344       1,363,557       728,389  

Common shares outstanding

     129,059       126,909       125,854       124,188       99,548  

 

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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 “Forward-Looking Information and Factors Affecting Future Performance” 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 three businesses, each constituting one reporting segment:

 

    Life and Analytical Sciences. We are a leading provider of drug discovery, genetic screening and environmental and chemical analysis tools, including instruments, reagents, consumables and services.

 

    Optoelectronics. We provide a broad range of digital imaging, sensor and specialty lighting components used in the biomedical, consumer products and other specialty end markets.

 

    Fluid Sciences. We provide a variety of precision valves, seals, bellows and pneumatic joints for critical control and containment systems for highly demanding environments such as turbine engines and semiconductor fabrication equipment.

 

Formation of our Life and Analytical Sciences Business Unit

 

We combined our Life Sciences and Analytical Instruments businesses to form our Life and Analytical Sciences business in the fourth quarter of 2002 to improve our operational scale, which we believe is enabling us to better serve our customers and more fully capitalize on the strengths of the combined businesses’ sales, service and research and development organizations. In the second quarter of 2003, we completed many of the changes involved in combining the two businesses, including the integration of facilities and management reporting and other systems.

 

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 2, 2005 included 53 weeks. The fiscal years ended December 28, 2003 and December 29, 2002 included 52 weeks. We believe that this additional week of operations had a $2.9 million beneficial impact on revenue and an immaterial impact on operating profit.

 

Consolidated Results of Continuing Operations

 

Sales

 

2004 Compared to 2003.    Sales for 2004 were $1,687.2 million, versus $1,532.1 million during 2003, an increase of $155.1 million, or 10%. Changes in foreign exchange rates, primarily the Euro, increased sales by approximately $47.1 million in 2004, as compared to 2003. 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

 

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$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 $31.9 million, or 9%, from $348.7 million in 2003 to $380.6 million in 2004, including approximately $6.5 million in sales attributable to favorable changes in foreign exchange rates, as compared to 2003. The Fluid Sciences segment grew sales by $64.1 million, or 36%, from $179.7 million in 2003 to $243.8 million in 2004, including approximately $1.4 attributable to favorable changes in foreign exchange rates, as compared to 2003.

 

2003 Compared to 2002.    Sales for 2003 were $1,532.1 million, versus $1,501.0 million during 2002, an increase of $31.1 million, or 2%. Changes in foreign exchange rates, primarily the Euro, increased sales by approximately $73.0 million in 2003, as compared to 2002. The overall increase in sales reflects a $12.0 million, or 1%, increase in our Life and Analytical Sciences segment sales, which grew from $991.7 million in 2002 to $1,003.7 in 2003, and includes approximately $61.0 million in sales attributable to favorable changes in foreign exchange rates, as compared to 2002. Our Optoelectronics segment sales grew $28.9 million, or 9%, from $319.8 million in 2002 to $348.7 million in 2003, including approximately $10.0 million in sales attributable to favorable changes in foreign exchange rates, as compared to 2002. The increased sales in our Life and Analytical Sciences and Optoelectronics segments were offset by a decrease in sales of $9.8 million, or 5%, in our Fluid Sciences segment, which declined from $189.5 million in 2002 to $179.7 million in 2003. Changes in foreign exchange rates increased Fluid Sciences segment sales by approximately $2.4 million in 2003, as compared to 2002.

 

Cost of Sales

 

2004 Compared to 2003.    Cost of sales for 2004 was $1,006.7 million, versus $900.8 million for 2003, an increase of $105.9 million, or 11.8%. As a percentage of sales, cost of sales increased to 59.7% in 2004 from 58.8% in 2003, resulting in a decrease in gross margin of 90 basis points from 41.2% in 2003 to 40.3% in 2004. The decrease in gross margin was largely attributable to greater revenue contribution, as a percentage of overall sales, from Optoelectronics and Fluid Sciences versus Life and Analytical Sciences. Although our Optoelectronics and Fluid Sciences segments have lower gross margins than our Life and Analytical Sciences segment, they also have lower operating expenses as a percentage of sales.

 

2003 Compared to 2002.    Cost of sales for 2003 was $900.8 million, versus $898.5 million for 2002, an increase of $2.3 million, or 0.2%. As a percentage of sales, cost of sales decreased to 58.8% in 2003 from 59.9% in 2002, resulting in an increase in gross margin of 110 basis points from 40.1% in 2002 to 41.2% in 2003. The 110 basis point increase in gross margin was primarily attributable to a 2002 $17.2 million inventory adjustment charge recorded within our Optoelectronics segment. We did not record a similar charge in 2003.

 

Research and Development Expenses

 

2004 Compared to 2003.    Research and development expenses for 2004 were $87.1 million versus $81.4 million in 2003, an increase of $5.7 million, or 7%. As a percentage of sales, research and development expenses decreased to 5.2% in 2004 from 5.3% in 2003, due to the increase in sales. 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. We expect our research and development spending to increase in 2005 and to continue to emphasize the health sciences end markets.

 

2003 Compared to 2002.    Research and development expenses for 2003 were $81.4 million versus $85.0 million in 2002, a decrease of $3.6 million, or 4%. As a percentage of sales, research and development expenses decreased to 5.3% in 2003 from 5.7% in 2002, primarily due to our consolidation of research and development activities to take advantage of increased synergies and corresponding cost savings as a result of fewer sites. We directed research and development efforts during 2003 and 2002 primarily toward genetic screening and biopharmaceutical end markets within our Life and Analytical Sciences reporting segment, and medical digital imaging and industrial sensors within our Optoelectronics reporting segment.

 

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Selling, General and Administrative Expenses

 

2004 Compared to 2003.    Selling, general and administrative expenses for 2004 were $387.5 million, versus $386.0 million for 2003, an increase of $1.5 million, or 0.4%. As a percentage of sales, selling, general and administrative expenses decreased 220 basis points to 23.0% in 2004 from 25.2% in 2003. The decrease as a percentage of sales of 220 basis points in 2004 was predominately due to net productivity improvements and cost reductions in our Life and Analytical Sciences reporting segment.

 

2003 Compared to 2002.    Selling, general and administrative expenses for 2003 were $386.0 million, versus $430.8 million for 2002, a decrease of $44.8 million, or 10%. As a percentage of sales, selling, general and administrative expenses decreased 350 basis points to 25.2% in 2003 from 28.7% in 2002. Proportionately, the decrease as a percentage of sales of 350 basis points in 2003 was due to a 200 basis point decrease attributable to reduced expenses in Life and Analytical Sciences, a 100 basis point decrease in Optoelectronics and a 50 basis point decrease in Fluid Sciences. The overall decrease in selling, general and administrative expenses was primarily due to productivity improvements throughout our company, including cost savings we derived from restructuring actions.

 

Restructuring (Reversals) Charges, Net

 

2004 Compared to 2003.    Restructuring charges for 2004 were zero versus $3.5 million of net reversals for 2003. The 2003 reversals comprised a combination of our 2003 changes in estimates of $5.8 million and our 2003 charges of $2.3 million. The following table summarizes our restructuring accrual balances and related activity by restructuring plan during 2004, 2003 and 2002:

 

   

Balance at

12/31/2001


 

2002

Charges


 

2002

Amounts
paid and
incurred


   

2002

Changes in

Estimates


   

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


    (In thousands)

Pre-2001 plans

  $ 1,951   $   $ (1,022 )   $ (929 )   $   $   $     $     $   $     $

Q4 2001 plan

    7,586         (4,891 )     1,380       4,075         (3,434 )     1,830       2,471     (965 )     1,506

Q1 2002 plan

        9,198     (8,046 )           1,152         (52 )     (1,000 )     100     (100 )    

Q4 2002 plan

        26,049     (1,697 )           24,352         (13,813 )     (6,239 )     4,300     (3,330 )     970

Q2 2003 plan

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

 

 


 


 

 

 


 


 

 


 

Total

  $ 9,537   $ 35,247   $ (15,656 )   $ 451     $ 29,579   $ 2,251   $ (18,881 )   $ (5,790 )   $ 7,159   $ (4,481 )   $ 2,678
   

 

 


 


 

 

 


 


 

 


 

 

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

 

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 146, 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

 

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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.

 

During 2004, we completed all actions under the Q2 2003 Plan, with the exception of a headcount reduction of one person that we expect to complete by the second quarter of 2005.

 

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 $13.8 million to execute these actions. In addition, we recorded a reversal of $6.2 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. The remaining liability associated with the Q4 2002 Plan represents severance related to 11 employees and ongoing lease commitments. We expect to settle the remaining severance liability by the end of the first quarter of 2005. Our current estimate is that our lease commitments on unoccupied buildings vary in length but primarily extend until mid-2005.

 

Q1 2002 Plan:

 

During the first quarter of 2002, our management developed a plan to restructure several businesses. We refer to these activities as our Q1 2002 Plan. The plan resulted in pre-tax restructuring charges totaling $9.2 million. 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.

 

Q1 2002 Plan charges in our Life and Analytical Sciences segment totaled $5.5 million. These charges comprised $4.4 million in severance costs, $1.0 million in asset impairments and $0.1 million in lease commitments. The charges were a result of actions we took as a response to decreased sales of components in our Life and Analytical Sciences business. These actions under the charges primarily included the downsizing of an additional manufacturing location and streamlining of the global sales and research and development organizations, primarily in Europe, Japan and the Pacific Rim. We took these actions to reduce the number of employees in components of our business that had experienced declining demand.

 

Q1 2002 Plan charges in our Optoelectronics segment totaled $3.7 million, comprising $3.5 million in severance costs and $0.2 million in asset write-offs. This charge was primarily due to the removal of a layer of management structure within our Optoelectronics reporting segment which led to a flatter and less expensive organization structure.

 

Total headcount was reduced by 276.

 

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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.

 

During 2004, we expended $0.1 million to complete the remaining actions associated with the Q1 2002 Plan.

 

Q4 2001 Plan:

 

During the fourth quarter of 2001, in connection with the integration of Packard and a restructuring of our sales offices in Europe, we recorded a restructuring charge of $9.2 million in our Life and 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 will pay the remaining balance in 2005 for previously identified employees associated with the closure of our European manufacturing facility in the Life and Analytical Sciences segment.

 

(Losses) Gains on Dispositions

 

2004 Compared to 2003.    Dispositions resulted in a net loss of $0.4 million in 2004 versus a net gain of $2.7 million in 2003. 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. Gains on dispositions in 2003 included $2.2 million from sales of facilities and $0.5 million from post closing adjustments relating to the resolution of contingencies related to the sale of our Instruments for Research and Applied Sciences business, which we refer to as IRAS.

 

2003 Compared to 2002.    Dispositions resulted in a net gain of $2.7 million in 2003 versus a net gain of $5.2 million in 2002. Gains on dispositions in 2002 included $4.4 million from the sale of facilities and $0.8 million from post closing entries relating to our sale of our IRAS business, which was formerly part of our Life and Analytical Sciences segment.

 

Amortization of Intangible Assets

 

2004 Compared to 2003.    Amortization of intangible assets was $28.5 million in 2004 and $28.3 million in 2003. Slight increases in the Life and Analytical Sciences amortization due to the effect of foreign exchange were partially offset by slight decreases in Fluid Sciences amortization.

 

2003 Compared to 2002.    Amortization of intangible assets was $28.3 million for both 2003 and 2002. Slight increases in the Life and Analytical Sciences amortization due to the effect of foreign exchange were offset by slight decreases in Optoelectronics and Fluid Sciences amortization.

 

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Interest and Other Expense, Net

 

Interest and other expense, net consisted of the following:

 

     2004

    2003

    2002

 
     (In thousands)  

Interest income

   $ (2,394 )   $ (2,488 )   $ (3,161 )

Interest expense

     37,952       52,586       32,096  

Losses on sale of investments, net

     300       2,391       1,987  

Extinguishment of debt

     4,143       1,953       353  

Other

     322       1,954       1,585  
    


 


 


     $ 40,323     $ 56,396     $ 32,860  
    


 


 


 

2004 Compared to 2003.    Interest and other expense, net for 2004 was $40.3 million versus $56.4 million for 2003, a decrease of $16.1 million or 29%. The decrease in interest and other expense, net in 2004 as compared to 2003, was due primarily to approximately $100.0 million of lower average outstanding term loan balances combined with lower interest rates applicable to our term loan due to an amendment of our credit facility in the fourth quarter of 2003. A more complete discussion of our liquidity is set forth below under the heading, “Liquidity and Capital Resources.” The remaining decrease in interest and other expense was the result of (i) swapping $100 million of our 8.875% 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. We expect interest expense in 2005 to decrease due to lower outstanding debt balances and the expected benefit derived from the January 2005 swapping of an additional $100 million of our 8.875% Notes from fixed rate debt to a floating rate based on six-month USD Libor.

 

2003 Compared to 2002.    Interest and other expense, net for 2003 was $56.4 million versus $32.9 million for 2002, an increase of $23.5 million or 71%. The increase in interest and other expense, net in 2003 as compared to 2002, was due primarily to higher average borrowing rates resulting from our financing completed in December 2002. The remaining increase in interest and other expense, net of $3.0 million was due primarily to our increased acceleration of the amortization of debt issuance costs of $1.9 million resulting from partial prepayments of our term debt during 2003 versus $0.4 million in 2002 and $0.6 million of transaction costs we incurred in the fourth quarter of 2003 in connection with amending our credit facility to reduce the margin applicable to our term loan.

 

Provision/Benefit for Income Taxes

 

2004 Compared to 2003.    The 2004 provision for income taxes was $38.5 million, versus a provision of $27.5 million in 2003. The 2004 effective tax rate was 28.2% as compared to the 2003 effective tax rate of 32.2%. The change in the effective tax rate was primarily due to $10.4 million of benefit associated with the resolution of our successful appeal in 2004 of an Internal Revenue Service audit finding with respect to our 1997 and 1998 taxes, additional benefits resulting from the conclusion of Canadian and U.K. tax audits, reduction in state tax expense and our use of existing, and our reduced generation of new, 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 under the homeland investment provisions of the American Jobs Creation Act of 2004.

 

2003 Compared to 2002.    The 2003 provision for income taxes was $27.5 million, versus a benefit of $3.5 million in 2002. Our 2003 effective tax rate was 32.2% as compared to our 2002 effective tax rate of 69.7%. The change in our effective tax rate was primarily due to a relatively high ratio in 2002 of permanent tax differences to loss from continuing operations before income taxes.

 

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Discontinued Operations

 

We recorded the following gains and losses, which we report as the loss on dispositions of discontinued operations, during the years ended January 2, 2005 and December 28, 2003:

 

     2004

    2003

 
     (in thousands)  

Loss on Electroformed Products business

   $ (1,606 )   $  

Loss on Computer-To-Plate business

     (951 )      

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

     1,487       6,535  

Loss on the sale of the Security and Detection Systems business

           (2,414 )

Loss on Entertainment Lighting business

     255       (1,957 )

Loss on Telecommunications Component business

     (1 )     (2,383 )
    


 


Net loss on disposition of discontinued operations before income taxes

     (816 )     (219 )

Benefit (provision) for income taxes

     321       (229 )
    


 


Loss on disposition of discontinued operations, net of income taxes

   $ (495 )   $ (448 )
    


 


 

As part of our continued efforts to focus on higher growth opportunities, in June 2004, we approved a plan to shut down our Electroformed Products business and sell our Ultraviolet Lighting business. In September 2004, we 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. We have accounted for these businesses as discontinued operations in accordance with SFAS No. 144 and, accordingly, have presented the results of operations and related cash flows as part of discontinued operations for all periods presented. The assets and liabilities of these businesses have been presented separately and are reflected within the assets and liabilities from discontinued operations in the accompanying balance sheets as of January 2, 2005 and December 28, 2003. 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 which we recognized in our loss on dispositions for the year ended January 2, 2005.

 

During 2004 and 2003, we settled various claims under certain long-term contracts and transition services with our Technical Services business, which we sold in August 1999. The net settlement and the reversal of certain previously established contingencies resulted in pre-tax gains of $1.5 million in 2004 and $6.5 million in 2003 that are included in gain (loss) on dispositions of discontinued operations. We reversed contingencies in the period in which the related issues were resolved. We may increase or reverse remaining contingencies in the future, pending resolution of the underlying matters.

 

In June 2002, we completed the sale of our Security and Detection Systems business for cash consideration of approximately $100.0 million and a net working capital adjustment. We recorded a net pre-tax gain of approximately $15.0 million pursuant to this transaction in 2002 as a gain on the disposition of discontinued operations. We accounted for our Security and Detection Systems business as a discontinued operation in accordance with APB No. 30, and accordingly, the results of operations and related cash flows of this business through the disposal date were segregated from continuing operations and reported as a separate line on our consolidated income statements. We have presented the resulting gain from the sale as a component of net income within dispositions of discontinued operations, net of income tax on our 2002 consolidated income statement. Adjustments relating to this sale resulted in a pre-tax loss from discontinued operations of $2.4 million in 2003, primarily due to revised estimates of the working capital adjustment.

 

In June 2002, our Board of Directors approved a plan to shut down our Telecommunications Components business as of June 30, 2002 and a plan to sell our Entertainment Lighting business as part of our continued efforts to focus on higher growth opportunities. We have reflected both businesses as discontinued operations in

 

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our consolidated financial statements. As of June 29, 2003, we had exited our Entertainment Lighting business, completing the sale of a substantial portion of that business for cash consideration of $1.4 million and abandoning the remaining assets. We recorded a gain of $0.3 million in fiscal 2004 and a net loss of $2.0 million in fiscal 2003 pursuant to this transaction.

 

Summary operating results of the discontinued operations of the Security and Detection Systems, Telecommunications Component, Entertainment Lighting, Electroformed Products, Ultraviolet Lighting and Computer-To-Plate businesses for the periods prior to disposition were as follows:

 

     2004

    2003

 
     (In thousands)  

Sales

   $ 3,394     $ 7,388  

Costs and expenses

     6,298       14,650  
    


 


Operating loss from discontinued operations

     (2,904 )     (7,262 )

Other expense

     (214 )     (283 )
    


 


Loss from discontinued operations before income taxes

     (2,690 )     (6,979 )

Benefit from income taxes

     (976 )     (2,453 )
    


 


Loss from discontinued operations, net of income taxes

   $ (1,714 )   $ (4,526 )
    


 


 

Effect of Accounting Change

 

As required by SFAS 142, we completed the transitional impairment analysis of our recorded goodwill as of January 1, 2002. In connection with the adoption of this standard, we reviewed our forecasts and projections of all of our reporting units and determined that, based on decreased demand for certain specialty lamps resulting from a downturn in the printed circuit board production worldwide and other smaller markets, the fair value of the lighting reporting unit was less than its carrying value. With the assistance of valuation specialists and using a discounted cash flow model, we determined that the carrying value of the recorded goodwill was in excess of the fair value of that goodwill. As a result, we recorded an impairment charge totaling $117.8 million as a cumulative effect of an accounting change. The entire transition adjustment related to our lighting reporting unit within our Optoelectronics reporting segment. In addition, as part of our ongoing compliance with SFAS No. 142, we completed our annual assessment of goodwill using a measurement date of January 3, 2005. This annual assessment did not result in an impairment charge.

 

Acquisitions and Divestitures

 

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. Consideration for the transaction was approximately $15.1 million in cash at the time of closing with additional consideration of approximately $1.4 million due through fiscal 2007. In addition, potential earn out payments of up to approximately $8.2 million may be made based on the future performance of the business.

 

In November 2001, we completed our acquisition of Packard BioScience Company. The integration activities are complete with the exception of $0.4 million in remaining payments due on leased facilities exited in 2001 that will be paid through 2005. These integration activities are linked to the Q4 2001 Plan and are disclosed in Note 3 to our consolidated financial statements included in this annual report on Form 10-K.

 

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The following table summarizes integration reserve activity during 2004, 2003 and 2002 related to the acquisition of Packard:

 

     Severance

   

Abandonment

of Excess

Facilities


   

Total

Cash
Charges


    Asset
Impairment


   Total

 
     (In millions)  

Packard Integration Plan

                                       

Balance at December 29, 2002

     0.8       3.2       4.0            4.0  

Amounts paid

     (0.8 )     (2.3 )     (3.1 )          (3.1 )
    


 


 


 

  


Balance at December 28, 2003

   $     $ 0.9     $ 0.9     $    $ 0.9  
    


 


 


 

  


Amounts paid

           (0.5 )     (0.5 )          (0.5 )
    


 


 


 

  


Balance at January 2, 2005

   $     $ 0.4     $ 0.4     $    $ 0.4  
    


 


 


 

  


 

Contingencies

 

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 $3.8 million as of January 2, 2005, 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.

 

We and certain of our officers have been named as defendants in a class action lawsuit filed in July 2002, and we and certain officers and directors have been named as defendants in purported derivative lawsuits filed in June and July 2004. The plaintiffs in all of these suits have alleged, among other things, various statements made by the Company and management, during the same time period for all three suits, were misleading with respect to our prospects and future operating results. Further information with respect to these lawsuits is contained in Part I, Item 3. Legal Proceedings of this annual report. We believe we have meritorious defenses to these lawsuits and are contesting the actions vigorously. We are currently unable, however, to reasonably estimate the amount of the loss, if any, that may result from the resolution of these matters.

 

We previously received a notice from the Internal Revenue Service asserting federal income tax deficiencies for 1997 and 1998. The Company and the Internal Revenue Service resolved these matters in 2004. As a result of the settlement, we have reversed the reserves of $10.4 million that had been established in accordance with FAS 5 based on our previous assessment of the resolution of these matters, which assessment was less favorable than the ultimate outcome.

 

We are under regular examination by the Internal Revenue Service and other tax authorities in the United States and other countries, such as Canada, Finland, and 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

 

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jurisdiction; for example, the IRS is currently examining 1999 through 2002. Assuming current progress, we expect the IRS examination to be completed in fiscal 2005. 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 tax matters will not have a material effect on our consolidated financial condition, although such settlement could have a material impact on our effective tax rate and consolidated statement of income for a particular future period.

 

Reporting Segment Results of Continuing Operations

 

Life and Analytical Sciences

 

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, primarily the Euro, increased sales by approximately $39.2 million in 2004, as compared to 2003. 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. 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. Service revenue included approximately $2.9 million for the additional week in the 2004 fiscal year. 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.

 

Operating profit for 2004 was $103.6 million, versus $94.7 million in 2003, an increase of $8.9 million. 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.

 

2003 Compared to 2002.    Sales for 2003 were $1,003.7 million, versus $991.7 million in 2002, an increase of $12.0 million, or 1%. Changes in foreign exchange rates, primarily the Euro, increased sales by approximately $61.0 million in 2003, as compared to 2002. The favorable effect of foreign exchange rate fluctuations was offset in part by reduced unit sales volume. The following analysis compares significant sales by market and product type for 2003, as compared to 2002, and includes the effect of foreign exchange rate fluctuations. Sales to environmental and chemical analysis customers increased $22.7 million, sales to genetic screening customers increased $6.3 million and our OneSource laboratory service sales increased by $14.8 million. These increases were offset by a $31.8 million decrease in sales to biopharmaceutical customers, primarily in sales of liquid handling instruments and radiochemical reagents, as general biopharmaceutical market demand remained weak throughout 2003. Sales by type of product included increases in sales of consumables of $23.5 million, and service of $14.8 million, partially offset by decreases in sales of instruments of $26.3 million.

 

Operating profit for 2003 was $94.7 million, versus $27.4 million in 2002, an increase of $67.3 million. The increase in 2003 as compared to 2002, was primarily the result of approximately $43.0 million of overall cost savings in 2003 associated with restructuring and integration activities, mainly due to a reduction of employees and the elimination of excess facilities. The increase in operating profit in 2003, as compared to 2002, was also due to approximately $31.5 million of net restructuring charges included in our results for 2002, compared to a net restructuring credit of $1.9 million in 2003. Amortization of intangibles was $26.0 million for the year ended December 28, 2003, versus $25.5 million for the year ended December 29, 2002.

 

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Optoelectronics

 

2004 Compared to 2003.    Sales for 2004 were $380.6 million, versus $348.7 million for 2003, an increase of $31.9 million, or 9%. Changes in foreign exchange rates increased sales by approximately $6.5 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. 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, lithography, and fiber optic test product lines increased $15.0 million. Sales of specialty lighting products decreased by $4.5 million due to lower photoflash sales into single-use cameras.

 

Operating profit for 2004 was $57.4 million, versus $46.8 million for 2003, an increase of $10.6 million. The increase in operating profit was primarily the result of increased sales volume, which increased operating profit by approximately $11.5 million, and net productivity improvements and cost reduction actions of $14.0 million, both offset in part by pricing reductions of approximately $14.9 million. Amortization of intangible assets was $1.2 million for 2004 and 2003.

 

2003 Compared to 2002.    Sales for 2003 were $348.7 million, versus $319.8 million for 2002, an increase of $28.9 million, or 9%. Changes in foreign exchange rates increased sales by approximately $10.0 million. The following analysis of significant sales by product line for 2003, as compared to 2002, includes the effects of changes in foreign exchange rates. Sales of specialty lighting products increased by $18.5 million due to growth in sales of flash products, and sales of digital imaging products increased by $18.9 million due to increased sales of diagnostic and radiotherapy digital x-ray products. These increases were offset in part by sales decreases totaling $8.5 million in our sensors, lithography, and fiber optic test product lines due to limited demand in these end markets.

 

Operating profit for 2003 was $46.8 million, versus an operating loss of $0.5 million for 2002, an increase of $47.3 million. The operating loss for 2002 includes a charge of $17.2 million for an inventory write down which was not repeated in 2003. Fiscal 2003 included a net restructuring reversal of $1.8 million compared to a net restructuring charge of $3.7 million in 2002. Increased sales and productivity improvements, including improved manufacturing performance and reduced operating expenses, and a headcount reduction of more than 200, reduced expenses by a total of approximately $20.0 million in 2003 compared to 2002. Amortization of intangible assets was $1.2 million for 2003 and $1.3 million for 2002.

 

Fluid Sciences

 

2004 Compared to 2003.    Sales for 2004 were $243.8 million, versus $179.7 million for 2003, an increase of $64.1 million, or 36%. Changes in foreign exchange rates increased sales by approximately $1.4 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. Sales increased $30.5 million in our semiconductor products due to increased demand, $28.9 million in aerospace products, and $4.7 million in fluid testing and energy technology products.

 

Operating profit for 2004 was $38.2 million, versus $17.9 million for 2003, an increase of $20.3 million, or 113%. The increase in operating profit resulted primarily from increased sales, shifting production to lower cost locations in Asia, other productivity improvements resulting from Six Sigma and lean manufacturing initiatives. Amortization of intangible assets was $.9 million for 2004 and $1.1 million for 2003.

 

2003 Compared to 2002.    Sales for 2003 were $179.7 million, versus $189.5 million for 2002, a decrease of $9.8 million, or 5%. Changes in foreign exchange rates increased sales by approximately $2.4 million. The following analysis of significant sales by product line for 2003, as compared to 2002, includes the effects of changes in foreign exchange rates. Sales decreased $4.4 million in our semiconductor products due to declining demand, and $2.7 million in our energy technology products. In addition, sales to our aerospace and fluid testing customers declined modestly by $1.7 million and $1.0 million, respectively, in two difficult markets.

 

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Operating profit for 2003 was $17.9 million, versus $17.5 million for 2002, an increase of $0.4 million, or 2%. The increase in operating profit resulted primarily from shifting production to lower cost locations in Asia, cost controls, cost reduction actions and other productivity improvements resulting from Six Sigma and lean manufacturing initiatives that more than offset an operating profit decrease due to reduced sales. Amortization of intangible assets was $1.1 million for 2003 and $1.5 million for 2002.

 

Liquidity and Capital Resources

 

We require cash to pay our operating expenses, make capital expenditures, service our debt and other long-term liabilities and pay dividends on our common stock. Our principal sources of funds are from our operations and the capital markets, particularly the debt markets. In the near term, we anticipate that our operations will generate sufficient cash to fund our operating expenses, capital expenditures, interest payments on our debt and dividends on our common stock. In the long-term, we expect to use internally generated funds and external sources to satisfy our debt and other long-term liabilities.

 

Principal factors that could affect the availability of our internally generated funds include:

 

    deterioration of sales due to weakness in markets in which we sell our products and services,

 

    changes in our working capital requirements, and

 

    our ability to successfully repatriate cash balances from our foreign subsidiaries for use in settling domestic obligations.

 

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 2004

 

Operating Activities.    Net cash generated by continuing operations operating activities was $199.5 million in 2004. Contributing to the generation of cash from operating activities during 2004 was net income from continuing operations of $98.3 million, depreciation and amortization of $76.2 million, and a decrease in working capital accounts of $4.9 million. Contributing to the decrease in working capital in 2004 were decreases in accounts receivable of $14.6 million and inventory of $1.9 million, offset by decreases in accounts payable of $11.6 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. The outstanding amount under this facility totaled $45.0 million at both January 2, 2005 and December 28, 2003. As discussed under “Off-Balance Sheet Arrangements”, we had approximately $20 million of undrawn capacity available under the facility at January 2, 2005.

 

Investing Activities.    Investing activities related to continuing operations used $12.3 million in 2004. In 2004, we made capital expenditures of $19.0 million, mainly for tooling and productivity improvements and for

 

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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 $195.9 million of net cash in financing activities. Debt reductions during 2004 totaled $175.2 million, primarily comprising $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.

 

Fiscal Year 2003

 

Operating Activities.    Net cash generated by continuing operations operating activities was $163.7 million in 2003. Contributing to the generation of cash from operating activities during 2003 was net income from continuing operations of $57.9 million, depreciation and amortization of $79.5 million and a decrease in working capital accounts of $70.9 million. Contributing to the decrease in working capital in 2003 were reductions in accounts receivable of $43.4 million and inventory of $28.2 million. In general, accounts receivable and inventory levels declined due to our focus on customer payment terms as well as enhanced inventory management. Accounts receivable also decreased as a result of increased use of our accounts receivable securitization facility, which increased $16 million, from $29 million at December 29, 2002 to $45 million at January 2, 2005. Cash outlays for accrued expenses, restructuring and other assets and liabilities totaled $46.0 million during 2003, primarily as a result of payments toward restructuring plans and other obligations. We expect our restructuring expenditures to be reduced in 2004.

 

Investing Activities.    In 2003, we withdrew $187.5 million of cash held in escrow to retire substantially all of our remaining outstanding indebtedness under our zero coupon convertible debentures. In 2003, we made capital expenditures of $16.6 million mainly in the areas of tooling and productivity improvements along with system and facility costs related to integration activities. Net proceeds from the dispositions of businesses and fixed assets during 2003 were $4.4 million. We derived $4.9 million of these proceeds from the sale of a building made redundant due to integration activities.

 

Financing Activities.    In 2003, we used $298.4 million of net cash in financing activities. We expended $187.5 million of cash withdrawn from our designated escrow account along with approximately $2.4 million of available cash to redeem our outstanding zero coupon convertible debentures. Debt reductions during 2003 also included $70.0 million of cash used to repay a portion of our term loan. In December 2003, we amended our credit facility to, among other things, reduce the interest rate applicable to our term loan. We paid $4.4 million transaction in fees during 2003 in connection with that amendment. We also paid $35.4 million in dividends and received net cash proceeds from the exercise of employee stock options of $3.6 million in 2003.

 

Borrowing Arrangements

 

Senior Secured Credit Facility.    In December 2002, we entered into a senior credit facility. This facility comprises a six-year term loan in the amount of $315.0 million and a $100.0 million five-year revolving credit facility. In 2004, we made $175.0 million of principal payments on the term loan. Accordingly, at January 2, 2005 we had $70.0 million outstanding under our term loan and no outstanding principal balance under our revolving credit facility at January 2, 2005 or at any other time.

 

Interest rates under the senior credit facility applicable to the term loan and to the revolving credit facility are determined as a margin over either the Eurodollar rate or the base rate. 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. The applicable margins for the term loan and the revolving credit facility vary based upon our leverage ratio at the end of the prior quarter. The applicable margin as of January 2, 2005 was 200 basis points for the Eurodollar rate and 100 basis points for the base rate. We may allocate all or a portion of our indebtedness under the senior credit facility to interest based upon the margin over the Eurodollar rate or the base rate. At

 

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January 2, 2005, the Eurodollar rate was approximately 247 basis points and the base rate was 525 basis points resulting in a Eurodollar interest rate on the senior credit facility of 447 basis points.

 

In October 2004, we amended our senior credit facility to allow greater flexibility regarding acquisitions, stock repurchases, debt reduction and cash repatriation. The amount of permitted acquisitions and any related indebtedness was raised from $125 million to $250 million. The amount of indebtedness related to acquisitions is subject to compliance with all financial covenants.

 

The term loan is repayable in mandatory nominal quarterly installments of $0.8 million of the outstanding balance until December 2007, and thereafter in four equal quarterly installments of 25% of the then outstanding balance until December 2008. Additionally, annual principal payments as a percentage of excess cash flow, defined as a ratio based on our cash flow and leverage ratio in the credit agreement, are payable six months following the end of each fiscal year. We are not required to make any such principal payment in 2005, with respect to our 2004 excess cash flow. In 2004, we made $175 million in principal payments on the term loan. The revolving credit facility is available to us through December 2007 for our working capital needs. At no point in fiscal 2004 nor at any other time, did we have any outstanding principal balance under the revolving credit facility.

 

Our senior credit facility contains covenants that require us to maintain specific financial ratios, including:

 

    a minimum interest coverage ratio,

 

    a minimum fixed charge coverage ratio,

 

    a maximum senior leverage ratio, and

 

    a maximum total leverage ratio.

 

As of January 2, 2005, and at all other times during fiscal 2004, we were in compliance with all applicable covenants.

 

8 7/8% Notes.    In December 2002, we issued and sold ten-year senior subordinated notes at a rate of 8 7/8% with a face value of $300.0 million. We received $297.5 million in gross proceeds from the issuance. We recorded deferred issuance costs of $7.0 million as a non-current asset. The debt, which matures in January 2013, is unsecured but is guaranteed by substantially all of our domestic subsidiaries. Interest on our 8 7/8% notes is payable semi-annually on January 15 and July 15. In January 2004, we swapped the fixed rate on $100 million of these 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 now pay the applicable six-month USD LIBOR rate, plus the applicable spread, on $200 million of our obligations represented by the notes.

 

If a change of control of our company occurs, each holder of 8 7/8% notes may require us to repurchase some or all of its notes at a purchase price equal to 101% of the principal amount of the notes, plus accrued interest. Before January 15, 2006, we may redeem up to 35% of the aggregate principal amount with the net proceeds of specified public equity offerings at 108.875% of the principal amount of the notes, plus accrued interest, if at least 65% of the aggregate principal amount of the notes remains outstanding after the redemption. We may redeem some or all of our 8 7/8% notes at any time on or after January 15, 2008, at a redemption price of 104.438%. The redemption price decreases to 102.958% on January 15, 2009, to 101.479% on January 15, 2010 and to 100% on January 15, 2011. The debt is subordinated to our senior credit facility. These notes contain financial and other covenants. Most of these covenants terminate if the notes obtain an investment grade rating by Standard & Poor’s Rating Services and Moody’s Investors Service. At January 2, 2005, and at all times during fiscal 2004, we were in compliance with all applicable covenants.

 

Zero Coupon Convertible Debentures.    Through the first quarter of 2003, we repurchased $344.7 million in accreted amount of our zero coupon convertible debentures due 2020 in open market purchases and through a

 

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December 2002 tender offer. We redeemed the remaining $157.4 million of accreted value of zero coupon debentures on August 7, 2003 in accordance with their terms. We used approximately $155.0 million held in escrow pursuant to the terms of our senior secured credit facility along with available cash of approximately $2.4 million, to redeem the zero coupon convertible debentures. As of December 28, 2003 the zero coupon convertible debentures had been fully retired.

 

6.8% Notes.    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. We paid consent payments pursuant to a consent solicitation we made concurrently with the tender offer. The consent solicitation eliminated substantially all of the restrictive covenants contained in the indenture governing our 6.8% notes as of December 29, 2002. We may from time to time repurchase outstanding 6.8% notes through open market purchases, privately negotiated transactions or otherwise. The remaining $4.7 million in notes are due to be paid in October 2005.

 

Off-Balance Sheet Arrangements

 

Receivables Securitization Facility

 

In December 2001, we established a wholly owned consolidated subsidiary to 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. In September 2003, we amended the facility to increase total funding capacity from $50.0 million to $65.0 million to expand our sources of liquidity. Amounts funded under this facility were $45.0 million at both January 2, 2005 and December 28, 2003. As of January 2, 2005, we had approximately $20 million of undrawn capacity available under the facility. The facility had an effective interest rate of approximately LIBOR plus 74 basis points as of January 2, 2005. 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 2, 2005, we had a senior unsecured credit rating of BB+ with a stable outlook from Standard & Poor’s Rating Services, and of Ba2 with a positive outlook from Moody’s Investors Service. The facility expires on January 27, 2006.

 

Dividends

 

Our Board of Directors declared regular quarterly cash dividends of seven cents per share in each quarter of 2004 and 2003, resulting in an annual dividend rate of 28 cents per share. Our senior credit facility and the indenture governing our outstanding 8 7/8% senior subordinated notes contain restrictions that may limit our ability to pay our regular quarterly cash dividend in the future if we are unable to comply with certain financial covenants that primarily relate to cash flow.

 

Contractual Obligations

 

The following table summarizes our contractual obligations at January 2, 2005:

 

    

Operating

Leases


  

6.8%

Unsecured

Notes due
2005


   Term
Note


  

8.875% Sr.

Subordinated

Notes due
2013


   Other
Revolving
Debt
Facilities


   Total

     (In thousands)

2005

   $ 30,496    $ 4,681    $ 3,150         $ 1,883    $ 40,210

2006

     25,541           3,150           7      28,698

2007

     17,099           3,150                20,249

2008

     13,798           60,550                74,348

2009

     12,461                          12,461

2010 and beyond

     122,176              $ 298,017           420,193
    

  

  

  

  

  

Total

   $ 221,571    $ 4,681    $ 70,000    $ 298,017    $ 1,890    $ 596,159
    

  

  

  

  

  

 

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Capital Expenditures

 

During 2005, we expect to make capital expenditures of approximately $25 million to $35 million primarily to introduce new products, to improve our operating processes, to shift the production capacity to lower cost locations, 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.

 

Future Accounting Pronouncements

 

In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB No. 123R, Share-Based Payment. This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion, or APB, No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards, with limited exceptions. SFAS No. 123R is effective for the first interim or annual reporting period that begins after June 15, 2005.

 

We expect to adopt SFAS No. 123R using the Statement’s modified prospective application method. We expect our adoption of SFAS No. 123R to increase stock compensation expense. We are currently evaluating the impact that the adoption of SFAS No. 123R will have on our financial results.

 

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 during fiscal years beginning after June 15, 2005. We are evaluating the potential impact, if any, the adoption of Statement 151 will have on our consolidated financial position, results of operations or cash flows.

 

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

 

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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 product returns or 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. The 2002 initial assessment of goodwill recoverability under SFAS No. 142 resulted in a $117.8 million charge to our earnings. This charge, relating to goodwill in our lighting reporting unit within our Optoelectronics business segment, was caused by expected declines in profitability and cash flows as a result of softness in key end-markets. We completed the annual impairment tests of goodwill for 2003 and 2004 and concluded that there was no impairment. 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 intangible assets that are not being amortized at least annually to determine whether events or circumstances continue to support an indefinite useful life. If events or circumstances indicate that the useful life of nonamortizing intangible assets are no longer indefinite, the assets will be tested for impairment in accordance with SFAS 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 $9.1 million in 2004, $6.2 million in 2003 and $3.9 million in 2002 for our retirement and post retirement plans. We expect expenses of approximately $12.8 million in 2005 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 to arrive at pension income or

 

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expense for the year. As of January 2, 2005, we estimated the expected long-term rate of return of assets in our pension portfolios in the United States was 8.5% percent, and was 7.5% percent 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 assumption 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 percent decrease in the estimated return on plan assets would increase our pre-tax pension expense by $2.1 million for 2005 in the United States and by $0.7 million for 2005 for all plans outside the United States. We have reduced the volatility in our health care costs provided to our retirees by adopting a defined dollar plan feature. Under the defined dollar plan feature, our total annual liability for health care costs to any one retiree is limited to a fixed dollar amount, regardless of the nature or cost of the health care needs of that retiree. Our maximum future liability therefore, cannot be increased by future changes in the cost of health care.

 

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”.

 

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 2, 2005, we recognized $0.4 million in losses from disposition of a business and excess facilities. We also recorded $0.5 million in losses from the disposition of discontinued operations comprised of gains from the final disposition of our Telecommunications Components and Technical Services businesses. These gains were offset by losses associated with the disposition of our Electroformed Products and Computer-To-Plate 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 more than 40 countries. 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 in effect to determine both our current and deferred tax position. 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.

 

Our tax positions are consistently subject to challenge by taxing authorities throughout the world. Where appropriate, we reserve for tax matters where we believe that there is a significant likelihood of an

 

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incremental liability being incurred. Any significant changes as a result of changes in underlying facts, law, tax rates, tax audit or review could lead to adjustments in our effective tax rate or cash flow.

 

In addition, we have established valuation allowances against a variety of deferred tax assets, including net operating loss carryforwards, foreign tax credits and other credits. Valuation allowances take into consideration our ability to ultimately use these deferred tax assets and reduce the value of such items to the amount that is deemed 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.

 

The FASB also issued FASB Staff Position, or FSP, No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004. The American Jobs Creation Act introduces a special one-time dividends received deduction on the repatriation of specified foreign earnings to a U.S. taxpayer, provided criteria are met. FSP 109-2 provides accounting and disclosure guidance for the repatriation provision. Until the Treasury Department or Congress provides additional clarifying language on key elements of the repatriation provision, the total amount of foreign earnings to be repatriated by us cannot be determined and the presumption that such unremitted earnings will not be repatriated cannot be overcome. FSP 109-2 grants an enterprise additional time beyond the year ended December 31, 2004, in which the Act was enacted, to evaluate the effects of the Act on its plan for reinvestment or repatriation of unremitted earnings. FSP 109-2 calls for enhanced disclosures of, among other items, the status of a company’s evaluations, the effects of completed evaluations, and the potential range of income tax effects of repatriations. Such disclosures are included in Note 5 to our consolidated financial statements.

 

Forward-Looking Information and Factors Affecting Future Performance

 

The following important factors affect our business and operations generally or affect multiple segments of our business and operations:

 

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 more than 50% of our total sales in the fiscal year ended January 2, 2005. 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 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.

 

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If we do not introduce new products in a timely manner, our products could become obsolete and our operating results would suffer.

 

We sell many of our products in industries characterized by rapid technological change, frequent new product and service introductions, and evolving industry standards. Without the timely introduction of new products and enhancements, our products could become technologically obsolete over time, in which case our sales and operating results would suffer. 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.

 

Our debt may adversely affect our cash flow and may restrict our investment opportunities.

 

As of January 2, 2005, we had approximately $374.6 million in outstanding indebtedness.

 

We have $100.0 million in additional borrowing capacity available to us under our revolving credit facility and $20 million under our receivable securitization program. We may also obtain additional long-term debt and working capital lines of credit to meet future financing needs, which would have the effect of increasing our total leverage.

 

Our leverage could have negative consequences, including:

 

    increasing our vulnerability to adverse economic and industry conditions,

 

    limiting our ability to obtain additional financing,

 

    limiting our ability to acquire new products and technologies through acquisitions or licensing, and

 

    limiting our flexibility in planning for, or reacting to, changes in our business and the industries in which we compete.

 

Approximately $70 million of our indebtedness bears interest at floating rates pursuant to the terms of the original agreements. However, after giving effect to the interest rate swaps entered into in January 2004 and January 2005, approximately $270 million of our indebtedness now bears interest at floating rates. As a result, our interest payment obligations on this indebtedness will increase if interest rates increase.

 

Our ability to satisfy our obligations and to reduce our total debt depends on our future operating performance and on economic, financial, competitive and other factors beyond our control. Our business may not

 

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generate sufficient cash flow to meet these obligations or to successfully execute our business strategy. If we are unable to service our debt and fund our business, we may be forced to reduce or delay capital expenditures or research and development expenditures, seek additional financing or equity capital, restructure or refinance our debt or sell assets. We may not be able to obtain additional financing or refinance existing debt or sell assets on terms acceptable to us or at all.

 

Restrictions in our senior credit facility and the indenture governing our 8 7/8% notes may limit our activities.

 

Our senior credit facility and the indenture relating to our 8 7/8% notes contain, 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, including restrictions on our ability and the ability of our subsidiaries to:

 

    incur additional indebtedness,

 

    pay dividends on, redeem or repurchase our capital stock,

 

    make investments,

 

    create liens,

 

    sell assets,

 

    in the case of our restricted subsidiaries, incur obligations that restrict their ability to make dividend or other payments to us,

 

    in the case of our restricted subsidiaries, guarantee or secure indebtedness,

 

    enter into transactions with affiliates,

 

    create unrestricted subsidiaries, and

 

    consolidate, merge or transfer all or substantially all of our assets and the assets of our subsidiaries on a consolidated basis.

 

We are also required to meet specified financial ratios under the terms of our senior 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 or covenants may result in an event of default under the applicable debt instrument, which could permit acceleration of the debt under that instrument and require us to prepay that debt before its scheduled due date. Also, an acceleration of the debt under our senior credit facility would trigger an event of default under our 8 7/8% notes, and a default under our 8 7/8% notes would trigger an event of default under the senior credit facility and possibly other debt.

 

If an event of default occurs, we may not have sufficient funds available to make the required payments under our indebtedness. If we are unable to repay amounts owed under our senior credit facility, those lenders may be entitled to foreclose on and sell the collateral that secures our borrowings under that agreement. Our inability to repay amounts owed under our senior credit facility may also cause a default under other of our obligations including our accounts receivable securitization facility.

 

Our operating results may could be harmed by cyclical downturns affecting several of the industries into which we sell our products.

 

Some of the industries and markets into which we sell our products are cyclical. Industry downturns are often characterized by reduced product demand, excess manufacturing capacity and erosion of average selling

 

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prices and profits. In the past, significant downturns in our customers’ markets and in general economic conditions have resulted in a reduced demand for several of our products and have hurt our operating results. For example, during 2002, our operating results were reduced by downturns in many of the markets we serve, including the pharmaceutical, biomedical, semiconductor and aerospace markets.

 

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 significant sales, 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, biomedical, semiconductors and aerospace, 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.

 

 

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, complete promising acquisitions or license transactions for many reasons, including:

 

    competition among buyers and licensees,

 

    the need for regulatory and other approvals,

 

    our inability to raise capital to fund these acquisitions,

 

    the high valuations of businesses and technologies, and

 

    restrictions in the instruments governing our indebtedness, including the indenture governing our 8  7/8% notes and our new senior credit facility.

 

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.

 

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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.

 

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.

 

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 business unit are subject to regulation by the United States Food and Drug Administration and similar international agencies. In addition, some of the activities of our Fluid Sciences business unit are subject to regulation by the United States Federal Aviation Administration. 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 and cease their manufacture and distribution. We had to do this on a temporary basis in 2004 in response to an FDA directive at one of our Life and Analytical Sciences locations until we were able to resolve the matter by implementing additional testing and labeling conditions on the relevant product. In addition, we could 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.

 

Obtaining and enforcing patent protection for our proprietary products, processes and technologies may be difficult and expensive; we may infringe intellectual property rights of third parties.

 

Patent and trade secret protection is important to us because developing and marketing new technologies and products is time-consuming and expensive. We own many United States and foreign patents and intend to

 

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apply for additional patents to cover our products. We may not obtain issued patents from any pending or future patent applications owned by or licensed to us. The claims allowed under any issued patents may not be broad enough to protect our technology.

 

Third parties may seek to challenge, invalidate or circumvent issued patents owned by or licensed to us or claim that our products and operations infringe their patent or other intellectual property rights.

 

In addition to our patents, we possess an array of unpatented proprietary technology and know-how and we license intellectual property rights to and from third parties. The measures that we employ to protect this technology and these rights may not be adequate. Moreover, in some cases, the licensor can terminate a license or convert it to a non-exclusive arrangement if we fail to meet specified performance targets.

 

We may incur significant expense in any legal proceedings to protect our proprietary rights or to defend infringement claims by third parties. In addition, claims of third parties against us, such as the pending actions by, respectively, Enzo Biochem, Inc. and Enzo Life Sciences, Inc., and by Amersham Biosciences Corp. and Amersham Plc, could result in awards of substantial damages or court orders that could effectively prevent us from manufacturing, using, importing or selling our products in the United States or abroad.

 

Our results of operations will be adversely affected if we fail to realize the full value of our intangible assets.

 

As of January 2, 2005, our total assets included $1.5 billion of net intangible assets. Net intangible assets consist principally of goodwill associated with acquisitions and costs associated with securing patent rights, trademark rights and technology licenses, net of accumulated amortization. We test these items 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.

 

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 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 2, 2005.

 

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 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 2, 2005, we did not engage in any designated cash flow hedges. The notional amount of the outstanding foreign currency contracts was approximately $166.8 million at January 2, 2005 and $168.5 million as of December 28, 2003, 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 2004.

 

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Market Risk

 

Market Risk.    We are exposed to market risk, including changes in interest rates and currency exchange rates. To manage the volatility relating to these exposures, we enter into various derivative transactions pursuant to our policies to hedge against known or forecasted market exposures.

 

Foreign Exchange Risk.    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 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 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 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 2, 2005, this computation estimated that there is a 5% chance that the market value of the

 

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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 2004, the Value-At-Risk ranged between $0.1 million and $0.3 million, and averaged approximately $0.2 million.

 

Interest Rate Risk.    As described above, our debt portfolio includes both fixed rate and 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 have been designated as fair value hedges. These swaps are marked to market in our consolidated financial statements. The fair value movements in these swaps are offset by the fair value movement in the debt.

 

Interest Rate Risk—Sensitivity—As of January 2, 2005, our debt portfolio was comprised of $304.6 million fixed rate debt and $70.0 million of variable rate debt. After giving effect to the interest rate swaps entered into in January 2004 and January 2005, $104.6 million of our debt portfolio is fixed and $270.0 million is variable. In addition, our cash and cash equivalents, for which we receive interest at variable rates, were $197.5 million at January 2, 2005. 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 comprised of $70 million of term loan and $200 million of swapped 8 7/8% notes to fluctuate. A 10% increase, or approximately 64 basis points, in current interest rates would cause an additional pre-tax charge to our earnings of $1.7 million for fiscal year 2005.

 

(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 64 basis points, in current interest rates would cause our cash outflows to increase by $1.7 million for fiscal year 2005.

 

(3) changes in interest rates can cause our cash flows relative to interest received to fluctuate.

 

(4) changes in interest rates can cause the value of our fixed rate debt to change. However, such a value change has no impact on either our earnings or our cash flows unless we determine that we wish to retire this debt in the open market.

 

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Item 8.     Financial Statements and Supplemental Data

 

TABLE OF CONTENTS

 

Report of Independent Registered Public Accounting Firm

   45

Consolidated Statements of Operations for the Three Years Ended January 2, 2005

   46

Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003

   47

Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Three Years Ended January 2, 2005

   48

Consolidated Statements of Cash Flows for the Three Years Ended January 2, 2005

   50

Notes to Consolidated Financial Statements

   51

 

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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 2, 2005 and December 28, 2003, 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 2, 2005. 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 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 2, 2005 and December 28, 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 2005, 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 2, 2005, 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 10, 2005 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.

 

As discussed in Note 12 to the consolidated financial statements, the Company changed its method of accounting for goodwill and intangible assets in 2002 to conform to Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

 

/s/ DELOITTE & TOUCHE LLP

 

Boston, Massachusetts

March 10, 2005

 

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CONSOLIDATED STATEMENTS OF OPERATIONS

 

For the Years Ended

 

     January 2,
2005


    December 28,
2003


    December 29,
2002


 
     (In thousands, except per share data)  

Sales:

                        

Products

   $ 1,430,133     $ 1,297,371     $ 1,284,108  

Services

     257,098       234,679       216,886  
    


 


 


Total sales

     1,687,231       1,532,050       1,500,994  
    


 


 


Cost of sales:

                        

Products

     853,282       762,780       768,710  

Services

     153,396       137,978       129,836  
    


 


 


Total cost of sales

     1,006,678       900,758       898,546  

Selling, general and administrative expenses

     387,543       385,975       430,847  

Research and development expenses

     87,050       81,366       84,958  

Restructuring (reversals), net

           (3,539 )     35,698  

Losses (gains) on dispositions, net

     409       (2,674 )     (5,216 )

Amortization of intangible assets

     28,481       28,323       28,304  
    


 


 


Operating income from continuing operations

     177,070       141,841       27,857  

Interest and other expense, net

     40,323       56,396       32,860  
    


 


 


Income (loss) from continuing operations before income taxes

     136,747       85,445       (5,003 )

Provision (benefit) for income taxes

     38,495       27,512       (3,487 )
    


 


 


Income (loss) from continuing operations

     98,252       57,933       (1,516 )

Loss from discontinued operations, net of income taxes

     (1,714 )     (4,526 )     (19,162 )

Loss on disposition of discontinued operations,

net of income taxes

     (495 )     (448 )     (13,460 )
    


 


 


Income (loss) before effect of accounting change

     96,043       52,959       (34,138 )

Effect of accounting change, net of income taxes

                 (117,800 )
    


 


 


Net income (loss)

   $ 96,043     $ 52,959     $ (151,938 )
    


 


 


Basic earnings (loss) per share:

                        

Continuing operations

   $ 0.77     $ 0.46     $ (0.01 )

Discontinued operations

     (0.02 )     (0.04 )     (0.26 )
    


 


 


Income (loss) before effect of accounting change

     0.75       0.42       (0.27 )

Effect of accounting change, net of income taxes

                 (0.94 )
    


 


 


Net income (loss)

   $ 0.75     $ 0.42     $ (1.21 )
    


 


 


Diluted earnings (loss) per share:

                        

Continued operations

   $ 0.76     $ 0.45     $ (0.01 )

Discontinued operations

     (0.02 )     (0.04 )     (0.26 )
    


 


 


Net income (loss) before effect of accounting change

     0.74       0.41       (0.27 )

Effect of accounting change, net of income taxes

                 (0.94 )
    


 


 


Net income (loss)

   $ 0.74     $ 0.41     $ (1.21 )
    


 


 


 

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

 

46


Table of Contents

CONSOLIDATED BALANCE SHEETS

 

As of and For the Years Ended

 

     January 2,
2005


    December 28,
2003


 
     (In thousands except share
and per share data)
 

Current assets:

                

Cash and cash equivalents

   $ 197,513     $ 191,499  

Accounts receivable, net

     287,299       288,027  

Inventories

     193,556       188,602  

Other current assets

     69,119       95,204  

Current assets of discontinued operations

     143       2,968  
    


 


Total current assets

     747,630       766,300  
    


 


Property, plant and equipment:

                

At cost

     631,693       618,651  

Accumulated depreciation

     (395,777 )     (352,290 )
    


 


Property, plant and equipment, net

     235,916       266,361  

Marketable securities and investments

     10,479       10,874  

Intangible assets, net

     397,445       424,703  

Goodwill

     1,073,869       1,034,911  

Other assets

     110,016       102,658  

Long-term assets of discontinued operations

     152       1,920  
    


 


Total assets

   $ 2,575,507     $ 2,607,727  
    


 


Current liabilities:

                

Short-term debt

   $ 9,714     $ 5,167  

Accounts payable

     146,630       154,260  

Accrued restructuring and integration costs

     3,045       8,055  

Accrued expenses

     286,460       283,695  

Current liabilities of discontinued operations

     118       846  
    


 


Total current liabilities

     445,967       452,023  

Long-term debt

     364,874       544,307  

Long-term liabilities

     304,581       262,347  

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 129,059,000 and 145,101,000 shares at January 2, 2005 and December 28, 2003, respectively; and outstanding 129,059,000 and 126,909,000 shares at January 2, 2005 and December 28, 2003, respectively

     129,059       145,101  

Capital in excess of par value

     545,000       681,550  

Unearned compensation

     (4,202 )     (3,494 )

Retained earnings

     732,878       672,616  

Accumulated other comprehensive income

     57,350       30,908  

Cost of shares held in treasury — 18,192,000 shares at December 28, 2003

           (177,631 )
    


 


Total stockholders’ equity

     1,460,085       1,349,050  
    


 


Total liabilities and stockholders’ equity

   $ 2,575,507     $ 2,607,727  
    


 


 

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

 

47


Table of Contents

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

 

For the Three Years Ended January 2, 2005

 

   

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 31, 2001

          $ 145,101   $ 641,091   $ (3,827 )   $ 842,283     $ (60,940 )   $ (200,151 )   $ 1,363,557  
           

 

 


 


 


 


 


Comprehensive income

                                                           

Net loss

  $ (151,938 )                   (151,938 )                 (151,938 )

Other comprehensive income (loss), net of tax:

                                                           

Foreign currency translation adjustments

    34,350                           34,350             34,350  

Change in minimum liability of pension

    (3,928 )                         (3,928 )           (3,928 )

Unrealized losses on derivative instruments

    (1,407 )                         (1,407 )           (1,407 )

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

    60                           60             60  

Reclassification adjustment

    (417 )                                                    
   


                                                   

Other comprehensive income

    28,658                                                      
   


                                                   

Comprehensive loss

  $ (123,280 )                                                    
   


                                                   

Cash dividends ($.28 per share)

                          (35,279 )                 (35,279 )

Exercise of employee stock options

                2,173                       6,114       8,287  

Issuance of common stock for employee benefit plans

                8,661     (2,063 )                 9,965       16,563  

Purchase of common stock for treasury

                                      (5,925 )     (5,925 )

Acquisition of Packard

                28,004                             28,004  
           

 

 


 


 


 


 


Balance, December 29, 2002

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

 

 


 


 


 


 


 

48


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

  $ 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

    (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  
           


 


 


 


 


 


 


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

    (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  
           


 


 


 


 


 


 


 

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

 

49


Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

For the Three Years Ended

 

     January 2,
2005


    December 28,
2003


    December 29,
2002


 
     (In thousands)  

Operating activities:

                        

Net income (loss)

   $ 96,043     $ 52,959     $ (151,938 )

Add net loss from discontinued operations

     1,714       4,526       19,162  

Add net loss on disposition of discontinued operations

     495       448       13,460  

Add effect of accounting change

                 117,800  
    


 


 


Income (loss) from continuing operations

     98,252       57,933       (1,516 )

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

                        

Non-cash restructuring actions

           (3,539 )     3,150  

Depreciation and amortization

     76,241       79,494       75,833  

Stock-based compensation

     9,290       8,880       8,813  

Deferred taxes

     21,932       (11,842 )     (35,369 )

Amortization of deferred debt issuance cost, accretion of discounts and net gains from extinguishment of debt

     8,099       9,631       19,531  

Gains on dispositions net of losses on investments

     409       (283 )     (3,229 )

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

                        

Accounts receivable, net

     14,596       43,359       35,278  

Inventories

     1,853       28,163       48,231  

Accounts payable

     (11,575 )     725       13,846  

Tax benefit from exercise of common stock options

           2,070       912  

Accrued expenses and other

     (19,607 )     (50,878 )     (49,159 )
    


 


 


Net cash provided by continuing operations operating activities

     199,490       163,713       116,321  

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

     1,267       3,762       (8,617 )
    


 


 


Net cash provided by operating activities

     200,757       167,475       107,704  
    


 


 


Investing activities:

                        

Cash held in escrow

           187,477       (186,483 )

Purchase of Fremont, CA facility

                 (30,000 )

Capital expenditures

     (18,961 )     (16,588 )     (37,819 )

Proceeds from (settlement of) dispositions of businesses, net

     425       (959 )     96,194  

Proceeds from dispositions of property, plant and equipment, net

     3,442       5,363       29,782  

Proceeds of acquisitions and investments, net of cash and cash equivalents acquired

     2,765       534       (22,511 )
    


 


 


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

     (12,329 )     175,827       (150,837 )

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

     646       1,400       (5,200 )
    


 


 


Net cash (used in) provided by investing activities

     (11,683 )     177,227       (156,037 )
    


 


 


Financing activities:

                        

Prepayment of short-term debt

                 (123,683 )

Prepayment of 2005 notes

                 (110,288 )

Prepayment of term loan debt

     (175,000 )     (70,000 )      

Prepayment of zero coupon convertible notes

           (189,901 )     (304,322 )

Proceeds from sale of senior subordinated notes

                 297,500  

Proceeds from term loan

                 315,000  

Payment of debt issuance costs

           (4,385 )     (15,841 )

Other debt decreases

     (198 )     (2,273 )     (5,540 )

Proceeds from exercise of stock options

     15,041       3,617       12,851  

Purchases of common stock for treasury

                 (5,925 )

Cash dividends

     (35,781 )     (35,409 )     (35,279 )
    


 


 


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

     (195,938 )     (298,351 )     24,473  
    


 


 


Effect of exchange rate changes on cash and cash equivalents

     12,878       14,533       16,225  
    


 


 


Net increase (decrease) in cash and cash equivalents

     6,014       60,884       (7,635 )
    


 


 


Cash and cash equivalents at beginning of year

     191,499       130,615       138,250  
    


 


 


Cash and cash equivalents at end of year

   $ 197,513     $ 191,499     $ 130,615  
    


 


 


Supplemental disclosures of cash flow information

                        

(see also Note 2):

                        

Cash paid during the year for:

                        

Interest

   $ 32,491     $ 33,631     $ 11,789  

Income taxes

   $ 36,448     $ 43,526     $ 42,845  

Non-cash investing and financing activities:

                        

Fair value of stock and options issued to Packard shareholders

   $     $     $ 28,004  

 

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

 

50


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 three reporting segments: Life and Analytical Sciences, Optoelectronics and Fluid Sciences.

 

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 2, 2005 included 53 weeks. The fiscal years ended December 28, 2003 and December 29, 2002 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.

 

On December 17, 2003, the Staff of the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition, which supersedes SAB 101, Revenue Recognition in Financial Statements. SAB 104’s primary purpose is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superseded as a result of the issuance of EITF No. 00-21. The adoption of SAB 104 did not materially affect the Company’s revenue recognition policies, or the Company’s results of operations, financial position or cash flows.

 

51


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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, handling costs and wasted material. Statement 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is evaluating the potential impact, if any, the adoption of Statement 151 will have 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.

 

The FASB also issued FASB Staff Position No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (FSP 109-2). The AJCA introduces a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided certain criteria are met. FSP 109-2 provides accounting and disclosure guidance for the repatriation provision. Until the Treasury Department or Congress provides additional clarifying language on key elements of the repatriation provision, the total amount of foreign earnings to be repatriated by the Company cannot be determined and the presumption that such unremitted earnings will not be repatriated cannot be overcome. FSP 109-2 grants an enterprise additional time beyond the year ended December 31, 2004, in which the AJCA was enacted, to evaluate the effects of the AJCA on its plan for reinvestment or repatriation of unremitted earnings. FSP 109-2 calls for enhanced disclosures of, among other items, the status of a company’s evaluations, the effects of completed evaluations, and the potential range of income tax effects of repatriations.

 

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.

 

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

 

52


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 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.

 

Note 12 describes the impact of accounting for the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Intangible Assets, and the annual impairment methodology that the Company employs on the later of January 1 or the first day of each fiscal year in calculating the recoverability of goodwill. 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 challenged. 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:    At January 2, 2005, the Company had two 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, 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 2,

2005


   

December 28,

2003


   

December 29,

2002


 
     (In thousands, except per share data)  

Net income (loss)

   $ 96,043     $ 52,959     $ (151,938 )

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

     1,481       1,792       1,568  

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

     (19,501 )     (20,158 )     (21,438 )
    


 


 


Pro forma net income (loss)

   $ 78,023     $ 34,593     $ (171,808 )
    


 


 


Earnings (loss) per share:

                        

Basic — as reported

   $ 0.75     $ 0.42     $ (1.21 )

Basic — pro forma

   $ 0.61     $ 0.27     $ (1.37 )

Diluted — as reported

   $ 0.74     $ 0.41     $ (1.21 )

Diluted — pro forma

   $ 0.60     $ 0.27     $ (1.37 )

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“SFAS No. 123R”). This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the first interim or annual reporting period that begins after June 15, 2005.

 

The Company expects to adopt SFAS No. 123R using the Statement’s modified prospective application method. Adoption of SFAS No. 123R is expected to increase stock compensation expense. We are currently evaluating the impact that the adoption of SFAS No. 123R will have on our financial results.

 

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.

 

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.

 

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:    Certain financial statement amounts from prior years have been reclassified to conform with current year presentation.

 

Note 2: Acquisitions and Divestitures

 

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 $15.1 million in cash at the time of closing with additional consideration of approximately $1.4 million due through fiscal 2007. In addition, potential earn out payments of up to approximately $8.2 million may be made based on the future performance of the business.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Integration activity

 

The Company has undertaken integration actions in connection with acquired businesses. These activities, which were accounted for in accordance with EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination, have primarily included employee separation costs, the abandonment of excess facilities and the termination of leases and other contractual obligations. In connection with these integration activities, as part of the cost of acquisitions, the Company established reserves as detailed below. All changes in estimates within one year of the integration plan inception have been recorded as an adjustment of the cost of the acquired company (usually as a change in goodwill). Any incremental charges incurred more than twelve months after the commencement of the integration activities are charged to the income statement. Any incremental credits were reversed against the existing goodwill balance.

 

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 $0.4 million in remaining payments due on leased facilities exited in 2001 that will be paid through 2005.

 

The following table summarizes integration reserve activity during 2004, 2003 and 2002 related to the acquisition of Packard:

 

     Severance

   

Abandonment

of Excess

Facilities


   

Total

Cash
Charges


 
     (In millions)  

Packard BioScience Integration Plan

                        

Balance at December 29, 2002

   $ 0.8     $ 3.2     $ 4.0  

Amounts paid

     (0.8 )     (2.3 )     (3.1 )
    


 


 


Balance at December 28, 2003

           0.9       0.9  

Amounts paid

           (0.5 )     (0.5 )
    


 


 


Balance at January 2, 2005

   $     $ 0.4     $ 0.4  

 

Divestitures

 

Losses on dispositions in 2004 included $0.8 in losses from the sale of facilities and $0.4 millions in gains related to the sale of machinery and equipment.

 

Gains on dispositions in 2003 included $2.2 million from sale of facilities and $0.5 million from the final resolution of contingencies related to the 2001 sale of the Instruments for Research and Applied Sciences (IRAS) business.

 

Gains on dispositions in 2002 included $4.4 million from the sale of facilities and approximately $0.8 million from the resolution of certain contingencies related to the sale of the IRAS business.

 

All of the gains and losses described above are reported in losses (gains) on dispositions, net in the consolidated income statements.

 

Note 3: Restructuring Charges

 

The Company has undertaken three separate restructuring actions over the past three years and had continuing activity on one restructuring action initiated in 2001. Restructuring actions initiated in 2001 and 2002 were recorded in accordance with EITF 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring) (EITF 94-03). Restructuring actions taken after 2002 were recorded in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146).

 

55


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

A description of each of the four restructuring plans is as follows:

 

Q2 2003 Plan:

 

During 2003, the Company incurred 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 purpose of the restructuring was to further improve performance and take advantage of synergies between the Company’s former Life Sciences and Analytical Instruments businesses. 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 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.

 

This restructuring charge was primarily recorded in the second quarter, but additional charges were recorded in the third and fourth quarters as required by SFAS 146, as people were notified in the second quarter but were required to work for a period of time prior to receiving their severance. In addition, the Company recorded a restructuring reversal of $0.4 million due to higher than expected employee attrition rates prior to planned termination and, accordingly, lower severance costs. The following table summarizes the restructuring plan activity for the year ended January 2, 2004:

 

     Headcount

    Severance and
Separation


 
           (In thousands)  

Q2 2003 Restructuring Plans

              

Restructuring recorded

   120     $ 2,251  

Amounts paid or incurred

   (81 )     (1,582 )

Changes in estimates

   (30 )     (381 )
    

 


Balance at December 28, 2003

   9     $ 288  

Amounts paid or incurred

   (8 )     (86 )
    

 


Balance at January 2, 2005

   1     $ 202  
    

 


 

Actions under the plan were completed by January 2, 2005 with the exception of a headcount reduction of one person that will be completed by the second quarter of 2005.

 

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. The following table summarizes the components of the Company’s Q4 2002 Plan and related accrual activity:

 

     Headcount

    Severance

    Abandonment
of Excess Facilities


    Asset
Impairment


    Total

 
           (In thousands)  

Restructuring recorded

   546     $ 20,840     $ 3,512     $ 1,697     $ 26,049  

Amounts incurred

                     (1,697 )     (1,697 )
    

 


 


 


 


Balance at December 29, 2002

   546       20,840       3,512             24,352  

Amounts paid

   (299 )     (13,470 )     (343 )           (13,813 )

Changes in estimates

   (182 )     (4,600 )     (1,639 )           (6,239 )
    

 


 


 


 


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  
    

 


 


 


 


 

56


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

During 2003, the Company expended $13.8 million to execute these actions. In addition, the Company recorded a reversal of $6.2 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.

 

During 2004, the Company expended $3.3 million to execute these actions. The remaining liability represents severance and lease commitments. The Company expects to settle the remaining severance liability by the first quarter of 2005. The Company’s current estimate of its lease commitments on unoccupied buildings is that they vary in length but primarily extend until mid-2005.

 

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 plan resulted in pre-tax restructuring charges totaling $9.2 million. 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

    Abandonment
of Excess
Facilities


    Asset
Writedowns


    Total

 
     (In thousands)  

Restructuring recorded

   $ 7,678     $ 310     $ 1,210     $ 9,198  

Amounts paid or incurred

     (6,526 )     (310 )     (1,210 )     (8,046 )
    


 


 


 


Balance at December 29, 2002

     1,152                   1,152  

Amounts paid or incurred

     (52 )                 (52 )

Changes in estimates

     (1,000 )                 (1,000 )
    


 


 


 


Balance at December 28, 2003

     100                   100  

Amounts paid or incurred

     (100 )                 (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 business. 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 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.

 

During 2004, the Company completed the actions associated with the Q1 2002 Plan with the charges of $0.1 million that were incurred during the year.

 

Q4 2001 Plan:

 

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

 

57


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

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 30, 2001

   $ 6,086     $ 1,500     $     $ 7,586  

Changes in estimates

     1,137             243       1,380  

Amounts paid or incurred

     (3,248 )     (1,400 )     (243 )     (4,891 )
    


 


 


 


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  
    


 


 


 


 

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 will be paid in 2005.

 

Note 4: Other Expense

 

Other expense, net consisted of the following:

 

     2004

    2003

    2002

 
     (In thousands)  

Interest income

   $ (2,394 )   $ (2,488 )   $ (3,161 )

Interest expense

     37,952       52,586       32,096  

Losses on disposition of investments, net

     300       2,391       1,987  

Extinguishment of debt

     4,143       1,953       353