SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
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 333-24001
Packard BioScience Company
(Exact name of registrant as specified in its charter)
Delaware 06-0676652
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 Research Parkway, Meriden, Connecticut 06450
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 203-238-2351
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 [ X ] NO [ ]
Shares of Common Stock Outstanding at August 13, 1999:
9,152,632
PACKARD BIOSCIENCE COMPANY AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1999 and December 31, 1998 2
Condensed Consolidated Statements of Income and
Comprehensive Income for the Three and Six Months
Ended June 30, 1999 and 1998 3
Condensed Consolidated Statements of Cash Flows
for the Six Months Ended June 30, 1999 and 1998 4
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PACKARD BIOSCIENCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 and DECEMBER 31, 1998
(Dollars in thousands)
ASSETS June 30, 1999 December 31, 1998
------ ------------- -----------------
CURRENT ASSETS:
Cash and cash equivalents $ 11,813 $ 7,929
Accounts receivable, net 49,031 48,218
Inventories, net 40,113 30,633
Deferred income taxes 4,697 4,423
Other current assets 6,340 6,268
-------- --------
Total current assets 111,994 97,471
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost 47,670 43,469
Less - accumulated depreciation (19,688) (17,902)
-------- --------
27,982 25,567
-------- --------
OTHER ASSETS:
Goodwill, net 33,859 24,030
Deferred financing costs, net 7,573 8,346
Other 13,508 13,720
-------- --------
54,940 46,096
-------- --------
TOTAL ASSETS $194,916 $169,134
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Notes payable $ 3,464 $ 3,221
Current portion of long-term obligations 2,001 3,496
Accounts payable and accrued liabilities 41,986 53,635
Deferred income 12,987 12,372
-------- --------
Total current liabilities 60,438 72,724
-------- --------
LONG-TERM OBLIGATIONS, net of current portion:
Notes and other long-term obligations 5,578 9,564
Term loan and credit facility 79,146 37,365
Senior subordinated notes 150,000 150,000
-------- --------
Total long-term obligations, net 234,724 196,929
-------- --------
DEFERRED INCOME TAXES 5,090 5,489
-------- --------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN EQUITY OF SUBSIDIARY 2,427 2,555
-------- --------
STOCKHOLDERS' DEFICIT:
Cumulative translation adjustment (665) 1,448
-------- --------
Accumulated other comprehensive income (665) 1,448
Common stock 137 137
Accumulated deficit (6,632) (10,012)
-------- --------
(7,160) (8,427)
Less: Treasury stock, at cost (99,880) (99,341)
Deferred compensation (723) (795)
-------- --------
Total stockholders' deficit (107,763) (108,563)
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $194,916 $169,134
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
PACKARD BIOSCIENCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands, except per share amounts)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
NET SALES $ 62,479 $ 53,995 $121,180 $102,551
-------- -------- -------- --------
COST OF SALES 32,058 25,778 61,698 48,620
AMORTIZATION OF ACQUIRED
INVENTORY STEP-UP (Note 3) 1,000 1,000 1,000 1,000
-------- -------- -------- --------
GROSS PROFIT 29,421 27,217 58,482 52,931
RESEARCH AND DEVELOPMENT EXPENSES 7,534 5,659 14,809 12,554
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 14,658 13,412 29,191 24,802
ACQUIRED IN-PROCESS RESEARCH AND
DEVELOPMENT CHARGE (Note 3) -- -- -- 2,680
-------- -------- -------- --------
OPERATING PROFIT 7,229 8,146 14,482 12,895
INTEREST EXPENSE, NET (4,233) (4,928) (9,500) (9,855)
REALIZED INVESTMENT GAINS -- 960 -- 3,133
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 2,996 4,178 4,982 6,173
PROVISION FOR INCOME TAXES 764 1,150 1,827 1,923
MINORITY INTEREST 121 -- (128) --
-------- -------- -------- --------
NET INCOME $ 2,111 $ 3,028 $ 3,283 $ 4,250
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, EXCLUDING COMMON
SHARE EQUIVALENTS (SEE NOTE 4) 9,150,223 9,137,887 9,150,382 9,082,439
========= ========= ========= =========
BASIC EARNINGS PER SHARE $ 0.23 $ 0.33 $ 0.36 $ 0.47
========= ========= ========= =========
DILUTED EARNINGS PER SHARE $ 0.22 $ 0.32 $ 0.34 $ 0.45
========= ========= ========= =========
Net income $ 2,111 $ 3,028 $ 3,283 $ 4,250
Other comprehensive loss:
Unrealized investment loss, net -- (470) -- (1,018)
Foreign currency translation adjustments (1,372) 42 (2,113) (435)
--------- --------- --------- ---------
Other comprehensive loss (1,372) ( 428) (2,113) (1,453)
--------- --------- --------- ---------
COMPREHENSIVE INCOME $ 739 $ 2,600 $ 1,170 $ 2,797
========= ========= ========= =========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
PACKARD BIOSCIENCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(Dollars in thousands)
For the Six Months Ended
June 30,
-----------------------------------
1999 1998
---- ----
CASH FLOWS (USED FOR) FROM OPERATING ACTIVITIES:
Net income $ 3,283 $ 4,250
Adjustments to reconcile net income to net cash
from (used for) operating activities:
Depreciation and amortization of intangibles 4,672 4,079
Amortization of deferred financing costs 773 773
Acquired in-process research and development charges -- 2,680
Amortization of acquired inventory step-up 1,000 1,000
Realized investment gains -- (3,133)
Minority interest in net loss of subsidiary (128) --
Other non-cash charges, net (269) (194)
Changes in operating assets and liabilities (10,622) (3,544)
-------- --------
Net cash (used for) from operating activities (1,291) 5,911
-------- --------
CASH FLOWS (USED FOR) FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired (28,198) (4,505)
Investments in equity securities and ventures -- (487)
Proceeds from sale of investments -- 4,137
Capital expenditures, net (4,912) (2,390)
Product lines, patent rights and licenses acquired (267) (3,041)
-------- --------
Net cash used for investing activities (33,377) (6,286)
-------- --------
CASH FLOWS (USED FOR) FROM FINANCING ACTIVITIES:
Borrowings under long-term obligations 44,687 16,500
Repayments of long-term obligations (3,366) (15,747)
Purchase of treasury stock (120) (11)
Proceeds from exercise of stock options 13
35
Sale of stock 42 461
-------- --------
Net cash from investing activities 41,256 1,238
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,704) (364)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,884 499
CASH AND CASH EQUIVALENTS, beginning of period 7,929 10,575
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 11,813 $ 11,074
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
PACKARD BIOSCIENCE COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements and related notes included
herein have been prepared by Packard BioScience Company (the "Company") without
audit, except for the December 31, 1998, condensed consolidated balance sheet
which was derived from the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (the "Company's 1998 Form 10-K"), pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures which normally accompany financial statements prepared
in accordance with generally accepted accounting principles have been omitted
from the accompanying condensed consolidated financial statements, as permitted
by the Securities and Exchange Commission's rules and regulations. The Company
believes that the accompanying disclosures and notes are adequate to make the
financial statements not misleading. Such financial statements reflect all
adjustments which are normal and recurring and, in the opinion of management,
necessary for a fair presentation of the results of operations and financial
position of the Company for the periods reported herein. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 1998 Form 10-K.
Note 1. Basis of Presentation and Significant Accounting Policies:
General -
The accompanying financial statements have been prepared in accordance with the
accounting policies described in Note 1 to the consolidated financial statements
included in the Company's 1998 Form 10-K. The Company's practices of recognizing
assets, liabilities, revenues, expenses and other transactions which impact the
accompanying financial information are consistent with such note.
New Accounting Standard -
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133") which establishes the accounting and
reporting standards for derivative instruments and for hedging activities. The
Company purchases forward contracts to cover foreign exchange fluctuation risks
on intercompany sales to certain of its foreign operations. Such contracts
qualify as foreign currency cash flow hedges under SFAS No. 133 and, as such,
require that gains and losses on such contracts be presented as a component of
comprehensive income. The effective date of SFAS No. 133 (which was deferred
through the issuance of SFAS No. 137) is the Company's calendar year commencing
January 1, 2001. This statement is not expected to have a material effect on the
Company's consolidated operating results or financial position.
Note 2. Inventories:
Inventories consisted of the following at June 30, 1999, and December 31, 1998
(in thousands):
June 30, 1999 December 31, 1998
------------- -----------------
Raw materials and parts $18,060 $15,963
Work in process 5,154 4,189
Finished goods 21,705 14,210
------- -------
44,919 34,362
Excess and obsolete reserves (4,806) (3,729)
------- -------
$40,113 $30,633
======= =======
Note 3. Acquisitions:
On March 31, 1998, the Company acquired all of the outstanding common stock of
Carl Creative Systems, Inc. (now known as CCS Packard, Inc.) ("CCS"), a
developer, manufacturer and distributor of high throughput liquid handling
systems used in the life science, in-vitro diagnostics and pharmaceutical drug
discovery markets. The Company issued 108,883 common shares of the Company
(valued at $13.96 per share) and paid $6.3 million in cash, including costs
incurred in connection with the acquisition. The acquisition resulted in a
charge of $2.68 million during the three months ended March 31, 1998, to
writeoff the value assigned to acquired in-process research and development
which had not reached technological feasibility and had no probable alternative
future uses. In addition, the acquisition resulted in a one-time charge of $1.0
million during the three months ended June 30, 1998, associated with the
writeoff of the step-up in acquired inventory which was recorded at fair value
at the date of acquisition. Additional contingent payments, up to a maximum of
$18.7 million, may be made through the year 2002, contingent upon CCS achieving
certain post-acquisition operating performance levels through calendar 2001.
During the period since acquisition through December 31, 1998, an additional
$4.5 million of such contingent payments have been earned and reflected in the
accompanying condensed consolidated financial statements.
On July 7, 1998, the Company acquired 100% of the outstanding common stock of
BioSignal, Inc. ("BioSignal"), a biotechnology company located in Canada. Prior
to the July acquisition, the Company owned a 19% interest in BioSignal. The
Company acquired the remaining 81% ownership interest for approximately $8.6
million in cash and 7,163 shares of the Company's common stock valued at
$100,000. In connection with the acquisition, the Company recognized a charge of
$3.44 million in July 1998 to writeoff the value assigned to acquired in-process
research and development. In addition, the acquisition resulted in the
recognition of a $0.5 million writeoff, during the three months ended September
30, 1998, associated with the step-up in inventory acquired which was recorded
at fair value at the date of acquisition.
On January 7, 1999, the Company acquired Harwell Instruments from AEA
Technologies plc, located in the United Kingdom. A new subsidiary called Harwell
Instruments, Ltd. ("Harwell") was formed to execute the acquisition. Harwell
manufactures and distributes nuclear instrumentation used in waste assay,
safeguards, and decommissioning and decontamination. The Company paid 6.0
million British pounds sterling (approximately $10.0 million, including
acquisition costs, based upon foreign exchange rates in effect at time of
acquisition) to acquire Harwell.
On April 1, 1999, the Company acquired the net operating assets of
Tennelec/Nucleus, Inc. and formed a new subsidiary, Tennelec, Inc. ("Tennelec")
to effect the purchase. Tennelec manufactures and distributes nuclear
instrumentation and high-purity germanium crystals. The Company paid
approximately $10.7 million, including acquisition costs, for the net operating
assets received. The acquisition resulted in a $1.0 million charge during the
three months ended June 30, 1999, to writeoff the step-up in inventory acquired
which was recorded at fair value at the date of acquisition.
All of the above acquisitions have been accounted for using the purchase method
of accounting and, accordingly, the purchase prices have been allocated to the
assets purchased and the liabilities assumed based upon the estimated fair
values at the dates of acquisition. The excess of the purchase prices, in the
aggregate, over the fair values of the net assets acquired has been reflected as
goodwill in the accompanying condensed consolidated balance sheets. Gross
goodwill totals approximately $35.4 million as of June 30, 1999, including
goodwill resulting from the Company's 1997 acquisitions of Aquila Technologies
Group, Inc. and the minority ownership in the Company's Japanese subsidiary,
Packard Japan KK. The goodwill amount includes contingent payments earned
through December 31, 1998, and will increase to the extent future contingent
payments are earned. The goodwill is being amortized on a straight-line basis
over 20 to 40 years from the initial acquisition dates.
The operating results of CCS, BioSignal, Harwell and Tennelec have been
reflected in the accompanying condensed consolidated statements of income since
their dates of acquisition. The following unaudited consolidated information is
presented on a pro forma basis, as if the acquisitions had occurred as of the
beginning of the periods presented. In the opinion of management, the pro forma
information reflects all adjustments necessary for a fair presentation. The pro
forma adjustments primarily consist of: addback of nonrecurring charges taken in
connection with the acquisitions associated with in-process research and
development costs and acquired inventory step-up writeoff, amortization of
goodwill associated with the acquisitions, adjustments to certain historical
compensation and personnel levels to be more indicative of post-acquisition
levels, adjustments to reflect additional interest expense relating to the
financing of the acquisitions, and adjustments to reflect the related income tax
effects, if any, of the above.
(Dollars in thousands, except per share amounts)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net sales $62,479 $60,423 $124,484 $119,031
Operating profit $ 8,353 $ 9,420 $ 16,507 $ 18,696
Net income $ 2,792 $ 4,126* $ 4,247 $ 8,754*
Basic earnings per share $ 0.31 $ 0.45 $ 0.46 $ 0.96
*Includes realized investment gain of $960 and $3,133 during the three and six
month periods ended June 30, 1998, respectively.
Note 4. Earnings Per Share:
Basic earnings per share is computed based upon the weighted average shares
outstanding during each of the periods presented. Diluted earnings per share is
computed based upon the weighted average shares outstanding during each of the
periods presented, including the impact of outstanding options, determined under
the treasury stock method, to the extent their inclusion is not anti-dilutive.
Basic and diluted weighted average shares outstanding during the three and six
months ended June 30, 1999 and 1998 are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
1999 1998 1999 1998
---- ---- ---- ----
Basic weighted average shares outstanding 9,150,223 9,137,887 9,150,382 9,082,439
Dilutive effect of outstanding stock options 424,582 314,574 426,100 314,881
--------- --------- --------- ---------
Diluted weighted average shares outstanding 9,574,805 9,452,461 9,576,482 9,397,320
========= ========= ========= =========
Note 5. Segment Information:
Refer to Management's Discussion and Analysis of Financial Condition and Results
of Operations included in Item 2. of this Form 10-Q for a discussion of segment
operating performance for the three and six months ended June 30, 1999. The
Company's total identifiable assets, by industry segment, as of June 30, 1999,
and December 31, 1998, are as follows:
June 30, 1999 December 31, 1998
------------- -----------------
Packard $100,271 $100,214
Canberra 94,645 68,920
-------- --------
Total $194,916 $169,134
======== ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This report contains statements which constitute "forward-looking" statements
and are prospective. In addition, the Company may occasionally make
forward-looking statements and estimates such as forecasts and projections of
the Company's future performance and statements of managements' plans and
objectives. These forward-looking statements may be contained in, among other
things, filings with the Securities and Exchange Commission and press releases
made by the Company, and oral and written statements made by officers of the
Company. Many factors could cause actual results to differ materially from these
statements. These factors include, but are not limited to, (1) loss of market
share through competition; (2) dependence on customers' capital spending
policies and government funding; (3) limited supply of key raw materials; (4)
reliance on, and ability to protect, key patents and intellectual property; (5)
complexity and technological feasibility of research and development and new
product introductions; (6) decline in utilization of products and technology;
(7) stability of economies overseas and fluctuating foreign currencies; (8)
changes in environmental laws and regulations; (9) loss of key employees; (10)
the factors incorporated under the subheading "Year 2000" below; and (11) other
factors which might be described from time to time in the Company's filings with
the Securities and Exchange Commission. As a result, there can be no assurances
that the forward-looking statements will be achieved.
General
- -------
The Company is a leading developer, manufacturer and marketer of analytical
instruments and related products and services for use in the drug discovery and
molecular biology segments of the life sciences industry and in nuclear
research, safeguarding and environmental remediation. Through Packard Instrument
Company, Inc. and several other wholly owned subsidiaries (collectively,
"Packard"), the Company supplies bioanalytical instruments, and related
biochemical supplies and services, to the drug discovery, genomics and molecular
biology markets, and through certain divisions and wholly owned subsidiaries
comprising Canberra Industries ("Canberra"), the Company manufactures analytical
instruments used to detect, identify and quantify radioactive materials for the
nuclear industry and related markets.
Results of Operations (dollars in millions)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ---------------------------
% Inc. % Inc.
1999 1998 (Dec.) 1999 1998 (Dec.)
---- ---- ------ ---- ---- ------
Total revenues:
Packard $37.3 $35.6 4.8% $75.5 $65.3 15.6%
Canberra 25.2 18.4 37.0% 45.7 37.3 22.5%
----- ----- ----- ----- ----- -----
62.5 54.0 15.7% 121.2 102.6 18.1%
----- ----- ----- ----- ----- -----
Gross profit:
Packard 19.6 18.3 7.1% 40.4 34.5 17.1%
Canberra 9.8 8.9 10.1% 18.1 18.4 (1.6%)
----- ----- ----- ----- ----- -----
29.4 27.2 8.1% 58.5 52.9 10.6%
----- ----- ----- ----- ----- -----
Operating expenses:
Research and development 7.5 5.7 31.6% 14.8 12.5 18.4%
Selling, general and administrative 14.7 13.4 9.7% 29.2 24.8 17.7%
In-process research and development 0.0 0.0 N/A 0.0 2.7 N/A
----- ----- ----- ----- ----- -----
Operating profit 7.2 8.1 (11.1%) 14.5 12.9 12.4%
Interest expense, net (4.2) (4.9) (14.3%) (9.5) (9.9) (4.0%)
Realized investment gains 0.0 1.0 N/A 0.0 3.1 N/A
----- ----- ----- ----- ----- -----
Income before income taxes and
minority interest 3.0 4.2 (28.6%) 5.0 6.1 (18.0%)
Provision for income taxes 0.8 1.2 (33.3%) 1.8 1.9 (5.3%)
Minority interest 0.1 0.0 N/A (0.1) 0.0 N/A
----- ----- ----- ----- ----- -----
Net income $ 2.1 $ 3.0 (30.0%) $ 3.3 $ 4.2 (21.4%)
----- ----- ----- ----- ----- -----
Excluding the impact of changes in foreign currency exchange rates, consolidated
total revenues would have been $0.1 million and $0.7 million lower during the
three and six months ended June 30, 1999, respectively. The accompanying results
of operations reflect the Company's acquisitions during 1999 and 1998 since the
dates such companies were acquired. The acquired companies and their acquisition
dates are as follows: Carl Creative Systems, Inc. (now known as CCS Packard,
Inc.) ("CCS") - March 31, 1998; BioSignal Inc. ("BioSignal") - July 1, 1998;
Harwell Instruments, Ltd. ("Harwell") - January 1, 1999; and Tennelec, Inc.
("Tennelec") - April 1, 1999. Refer to Note 3 to the accompanying condensed
consolidated financial statements included in Item 1 of this Form 10-Q for
pro-forma results reflecting the above-mentioned acquisitions.
Packard's revenues increased approximately $1.7 million and $10.2 million in the
three and six months ended June 30, 1999, in comparison with the prior-year
period. The increase was due to (1) the inclusion of CCS and BioSignal in 1999,
contributing total sales of $7.3 million, on a combined basis, during the six
months ended June 30, 1999, as compared to $4.5 million in the comparable 1998
period; and (2) increased sales at most overseas distribution operations,
particularly Japan and France. The U.S. dollar caused Packard's revenues during
the three and six months ended June 30, 1999, to be $0.3 million and $0.8
million higher, respectively, than they would have been had exchange rates been
the same as the comparable 1998 periods.
Canberra's increased revenues in 1999 are due to the inclusion of Harwell and
Tennelec in 1999 which added approximately $8.7 million in revenues to the
six-month period ended June 30, 1999. Such increases were partially offset by
reduced revenues from Canberra's U.S. detectors operations and the Company's
subsidiary, Aquila Technologies Group, Inc. ("Aquila"). Exchange rate
fluctuations served to reduce Canberra's net sales by approximately $0.2 million
during the six months ended June 30, 1999, due primarily to the U.S. dollar
strengthening against the British pound sterling.
The Company's gross profit increased 8.1% and 10.6% during the three and six
months ended June 30, 1999, respectively, as compared to the corresponding 1998
periods. These increases are attributable primarily to the acquisitions and
sales growth discussed above. These increases were partially offset by the
Company's mobile characterization business which has generated very little
revenue, yet still incurred certain fixed operating costs. During the three
months ended June 30, 1999, the Company recognized a $1 million charge to
writeoff the step-up in inventory acquired from Tennelec. A similar charge, also
totaling $1.0 million, was recognized during the three months ended June 30,
1998, in connection with the CCS acquisition.
Research and development spending, as a percentage of net sales, was relatively
consistent between the six months ended June 30, 1999 and 1998 (approximately
12%). Research and development spending, in terms of total dollars, has
increased in 1999 in comparison with 1998, reflecting the Company's commitment
to new product development and enhancement of its existing product lines as well
as the acquisitions referred to above.
Selling, general and administrative expenses increased during the six months
ended June 30, 1999, as compared to the comparable 1998 period, due primarily to
the inclusion of the above-mentioned acquisitions. As a percentage of net sales,
such expenses are comparable between the periods presented.
During the first quarter of 1998, the Company recorded a $2.68 million charge
associated with the writeoff of in-process research and development ("R&D")
acquired in connection with the Company's purchase of CCS. The charge represents
that portion of the purchase price which was assigned to the acquired R&D
through purchase accounting as determined utilizing guidance put forth by the
Securities and Exchange Commission.
Consolidated operating profit of $7.2 million and $14.5 million for the three
and six months ended June 30, 1999, respectively, compares with $8.1 million and
$12.9 million during the corresponding 1998 periods. Excluding the effects of
the one-time charges associated with the writeoff of in-process research and
development and inventory step-up discussed above, operating profit decreased
approximately $1.1 million during the six months ended June 30, 1999, when
compared to the corresponding 1998 period. The operating profit growth
attributable to the acquisitions discussed above was offset by unfavorable
performances by certain Canberra operations, particularly Aquila and the mobile
characterization business, as well as the Company's increased spending on
research and development.
.........
The decrease in net interest expense during 1999 is due to a foreign currency
translation gain realized in connection with the repayment of debt denominated
in Euros during the three months ended June 30, 1999. The debt repayment, which
was incurred in connection with the Company's acquisition of Harwell, resulted
in a gain of approximately $1.1 million which is reflected as a reduction in
interest expense in the accompanying condensed consolidated statements of income
and comprehensive income. Excluding this gain, net interest expense would have
increased during 1999, as compared to 1998, as a result of increased
indebtedness associated with the Company's 1998 and 1999 acquisitions, including
contingent earnout payments, mentioned above.
During the three and six months ended June 30, 1998, the Company realized gains
totaling $1.0 million and $3.1 million, respectively, from the sale of
marketable equity securities.
The Company's consolidated effective tax rate was 35.8% and 31.2% during the six
months ending June 30, 1999 and 1998, respectively. The Company's average
statutory effective rate (consisting of federal, state and foreign components)
would be approximately 42.5%, assuming certain profit levels at the various
worldwide locations and considering the tax rates in effect at the various
foreign locations which the Company operates. As compared to this average
statutory effective rate, the 35.8% rate in effect during the first six months
of 1999 was due primarily to the incurrence of a year-to-date domestic loss
which is tax-effected at a rate higher than statutory due to the effect of
non-deductible goodwill amortization. The 1998 effective rate was due to (1)
taxable income generated in lower tax rate countries; and (2) no provision for
income taxes being provided on domestically-generated taxable income in light of
the Company's net operating loss position generated in 1997.
Financial Condition - Liquidity and Capital Resources
- -----------------------------------------------------
General -
The Company expects to generate adequate cash from operations to meet most of
its working capital needs as well as to provide for necessary debt service
requirements during the next several years. The Company can and will borrow
monies from the revolving credit facility in order to meet temporary or seasonal
shortfalls which may arise in the level of cash generated from operations and to
fund the contingent payments existing under certain of the Company's
acquisitions. The Company expects that, should the generation of excess
available operating cash flow be insufficient, it will also utilize the
revolving credit facility to fund a significant portion of its strategic
acquisition program and new product development initiatives, as well as a
portion of capital expenditures for machinery, equipment and facility
expansions, and the litigation settlement discussed below.
Operating Activities -
Operating activities used $1.3 million of cash during the six months ended June
30, 1999, compared to $5.9 million of cash generated in the comparable 1998
period. The use of cash during the first half of 1999, as compared to the cash
generated in the comparable 1998 period, is due primarily to a significant
amount of accrued obligations as of December 31, 1998, being paid out in the
first half of 1999, including $3 million associated with a litigation settlement
(refer to the Company's 1998 Form 10-K), as well as cash required to fund the
working capital requirements of Harwell.
Investing Activities -
In January 1999, the Company acquired Harwell. The Company paid 6.0 million
British pounds sterling (approximately $10.0 million, including acquisition
costs, based upon the foreign exchange rates in effect at the time of
acquisition) for the acquisition, all of which was funded through the use of the
Company's available revolving credit facility.
During the first quarter of 1999, the Company paid out amounts owed under
contingent payment arrangements associated with the CCS and Aquila acquisitions
which were consummated in 1998 and 1997, respectively (refer to the Company's
1998 Form 10-K). The amount paid was $7.3 million which was funded through a
combination of available cash and use of the revolving credit facility.
Contingent payments made in connection with acquisitions are reflected as
additional goodwill in the accompanying condensed consolidated balance sheets.
On April 1, 1999, the Company acquired the net operating assets of Tennelec,
paying approximately $10.7 million, including acquisition-related costs. This
acquisition was funded through use of the Company's revolving credit facility.
Significant investing activities during the first half of 1998 included the
March 31, 1998, acquisition of CCS which was effected in exchange for $6.3
million in cash and 108,883 common shares of the Company. This acquisition was
funded through the use of the revolving credit facility. In addition, during the
first half of 1998, the Company sold equity securities it held in a
publicly-traded company, realizing gross proceeds totaling $4.1 million and a
pre-tax gain of $3.1 million.
Financing Activities -
During the six months ended June 30, 1999, the Company borrowed under its
revolving credit facility primarily for the following reasons: (1) to fund the
acquisitions of Harwell and Tennelec; (2) payment of the contingent payments
required in connection with the CCS and Aquila acquisitions discussed above; (3)
payment of the semi-annual interest due on the $150 million senior subordinated
notes; and (4) to fund operations as needed, including the $3 million litigation
settlement payment made in January 1999 (refer to the Company's 1998 Form 10-K).
The Company's borrowings during the first quarter of 1998 were used primarily in
connection with the CCS acquisition and to fund the semi-annual senior
subordinated notes interest payment. Repayments of borrowings during the first
half of 1998 were funded through cash flow generated from operations as well as
proceeds from the sale of equity securities discussed above.
Backlog -
As of June 30, 1999 and 1998, the Company's gross third-party order backlog was
approximately $47.8 million and $40.6 million, respectively. The Company
includes in backlog only those orders for which it has received purchase orders
and does not include in backlog orders for service. The Company's backlog as of
any particular date may not be representative of actual sales for any succeeding
period.
Year 2000
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The Company has been engaged in a concerted effort to ready its business systems
and products in anticipation of the year 2000 ("Y2K") issue as it affects the
Company's business operations. The term "Y2K issue" is used to refer to all
difficulties the turn of the century may introduce to users of computers and
other electronic equipment. In general terms, the Y2K issue arises from the fact
that many existing computer systems and other equipment containing
date-sensitive embedded technology (including non-information technology
equipment and systems) use only two digits to identify a year in the date field,
with the assumption that the first two digits of the year are always "19." This,
as well as certain other common date-related programming errors, may result in
miscalculations, other malfunctions or the total failure of such systems. Some
of the Company's products contain date-sensitive technology, and the Company's
business operations are dependent upon the proper functioning of computer
systems and other equipment containing date-sensitive technology. A failure of
such products, systems or equipment to be Y2K compliant could have a material
adverse effect on the Company. If not remedied, potential risks include business
interruption or shutdown, loss of customers, harm to the Company's reputation,
financial loss and legal liability.
The Company's assessment of the Y2K issue is organized to address the three
major affected areas: 1) products and services which the Company provides to its
customers; 2) supplier implications; and 3) administrative and management
information systems used by the Company. The assessment and resulting action
plans are in various stages of completion. Areas which require corrective action
have been identified as a result of the work performed to date and a significant
amount of such corrective action has already been successfully completed.
However, additional assessments need to be performed by the Company in order to
minimize the risks and exposures associated with Y2K. The following is an
overview of the Company's current state of readiness as it relates to Y2K along
with a summary of the process the Company plans to follow to address Y2K issues,
including the related potential risks and costs:
Products and Services -
Within the products and services area, the Company has been divided into its
major business segments, Canberra and Packard. Certain management personnel
within each segment have been assigned primary responsibility to perform the Y2K
product assessments, and Y2K committees have been formed to supervise and
coordinate the Company's Y2K efforts. Both Canberra and Packard have completed
testing of all of their active products to identify Y2K-related problems, and
each has disclosed the results of those tests on the Company's internet web
pages. Ad hoc reviews have been, and will continue to be, performed on inactive
product lines to assess the likelihood of Y2K problems occurring and the
corrective action, if any, that will be taken. The Company is in the process of
completing its evaluation of the Y2K status of products and services offered by
the Company's subsidiaries.
Both Canberra and Packard have developed and tested upgrades for each of its
active products. The Company believes that these upgrades will remedy known Y2K
problems.
The Company has implemented a policy of notifying all of its customers of the
Y2K status of the product purchased by such customers, either through direct
mailing or through direct telephone contact with the customer. Current customers
of the Company are asked to review the Company's internet web page for the most
up-to-date information with respect to the Company's products. While it is the
Company's objective to notify all of its customers of potential Y2K issues, and
to implement corrective actions in a timely manner where feasible, there can be
no assurance that the Company will accomplish this objective or adequately
address all Y2K issues or problems which may arise.
Vendors/Suppliers -
The Company has gathered information about the significant vendors and service
providers for Packard and Canberra to determine whether the vendors/service
providers have remediated their own Y2K issues, and what risks non-compliance
poses to the Company. The Company continues to monitor the Y2K compliance status
of such third parties, and no significant issues with third parties' systems
have been identified to date. However, there can be no assurance that Y2K
problems will be identified in a timely fashion or that, if identified, the
Company will have viable alternatives. The Company is in the process of
evaluating the Y2K status of vendors and service providers utilized by its
subsidiaries in order to assess what impact those vendors and service providers
may have on the business of the Company. If the third parties with which the
Company or its subsidiaries interact have Y2K problems that are not remedied,
resulting problems could include, among other things, the inability to obtain
crucial supplies or services, the loss of telecommunications and electrical
service, the receipt of inaccurate financial and billing-related information,
and the disruption of capital flow potentially resulting in liquidity stress.
These could have a material impact on the financial position and results of
operations of the Company.
As part of the assessment in this area, contingency plans are being developed in
order to minimize the effect of Y2K considerations. Such contingency plans may
include identification of acceptable, alternative suppliers and vendors where
such Y2K exposures appear not to exist or advance purchasing of required
supplies or materials at levels necessary to sustain business operations for an
extended period of time if a Y2K problem were expected to arise. However, there
can be no assurances that the Company's contingency plans will be effective.
Administration -
The Company has completed an internal audit of all hardware and system software
utilized internally by the Company, and is in the process of completing an audit
of hardware and system software utilized by each of the Company's subsidiaries.
The Company believes it has identified all hardware and software that is not Y2K
compliant, and is in the process of replacing such non-compliant hardware and
software where deemed appropriate. All required modifications and conversions of
existing software and certain hardware at Canberra and Packard are expected to
be completed by August 31, 1999. The Company believes that, with relatively
minor modifications and conversions of existing systems, the Y2K issue will not
pose significant operational issues for its internal systems. Testing will be
on-going as items are replaced. All other administrative systems are expected to
be Y2K compliant by the end of the third quarter of 1999. The Company does not
expect this portion of the Y2K compliance program to be material to the
consolidated financial position or results of operations.
The Company is continuing to assess other Y2K administrative implications such
as facility security systems, HVAC requirements, production machinery and power
needs, etc. The Company expects to complete such assessments by September 30,
1999. Many of the Y2K exposures identified associated with administrative
technology can be addressed through manual versus automated means or other
acceptable contingency plans. As part of management's assessment, such
contingency plans are being identified.
Subsidiaries -
The Company is in the process of completing its evaluation of the Y2K status of
each of its wholly-owned subsidiaries, including an assessment of the internal
systems, products and services, and suppliers and vendors. The Company expects
to have completed this assessment by September 30, 1999. The Company does not
believe that Y2K issues at any one subsidiary will have a material adverse
effect on the Company's consolidated financial position or results of
operations. However, if a number of the Company's subsidiaries have significant
Y2K issues which are not remediated effectively, such Y2K issues could have a
material impact on the consolidated financial position or results of operations
of the Company.
Costs -
The Company estimates the total cost associated with required modifications to
become Y2K compliant to be $2.2 million. The total amount expended through June
30, 1999, was approximately $1.9 million, of which $0.2 million related to the
cost to repair or replace software and related hardware problems, and
approximately $1.7 million related to the cost of replacing, upgrading or
remediating non-compliant product and to the cost of identifying and
communicating with customers and other third parties. The estimated future cost
of completing the Company's Y2K compliance efforts is expected to be
approximately $0.3 million, of which $0.1 million relates to the cost to repair
or replace software and related hardware problems, approximately $0.2 million
relates to the cost of replacing, upgrading or remediating non-compliant
product, and an immaterial amount associated with identifying and communicating
with customers and other third parties. The Company has funded, and expects to
continue to fund, the costs of its Y2K efforts through operating cash flow, and
to expense such costs as incurred.
Risk -
This description of matters relating to the Y2K problem contains a number of
forward-looking statements. The Company's assessment of the costs of its Y2K
program and the timetable for completing its Y2K preparations are based on
current estimates, which reflect numerous assumptions about future events,
including the continued availability of certain resources, the timing and
effectiveness of third-party remediation plans and other factors. The Company
can give no assurance that these estimates will be achieved, and actual results
could differ materially from those currently anticipated. In addition, there can
be no assurance that he Company's Y2K program will be effective or that its
contingency plans will be sufficient. Specific factors that might cause material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct relevant
computer software codes and embedded technology, the results of internal and
external testing, the timeliness and effectiveness of remediation efforts of
third parties, and the ability of the Company to complete its assessment of
known Y2K risks both internally, among its subsidiaries, and among third parties
on which the company depends.
Due to the general uncertainty in the Y2K problem, resulting in part from the
uncertainty as to the Y2K readiness of third-party suppliers and customers, the
Company is unable to determine at this time whether the consequences of Y2K
failures will have a material impact on the Company's results of operations,
liquidity or financial condition. The Company believes that with the completion
of its Y2K compliance plans as scheduled, the possibility of significant
interruptions of normal operations should be reduced.
The information contained herein constitutes a Year 2000 Readiness Disclosure
under the Year 2000 Information and Readiness Disclosure Act.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no significant change in this area since the filing of the
Company's 1998 Form 10-K.
PART II. OTHER INFORMATION
PACKARD BIOSCIENCE COMPANY
Item 1. Legal Proceedings
Certain legal proceedings and related developments were disclosed in the
Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31,
1999, as well as in the Company's 1998 Form 10-K. There have been no material
developments or changes with respect to these matters since the March 31, 1999,
Form 10-Q.
The Company has received a Demand for Arbitration filed by Instrumentation
Development, Inc. ("IDI") with the American Arbitration Association in Hartford,
Connecticut. The Demand alleges breach of contract, and requests damages in the
range of $1 to $3 million. The Company is in the process of evaluating the
merits of the claim, if any, and intends to vigorously defend this action.
Management believes that this matter will not have a material adverse effect on
the consolidated results of operations or financial position of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description
----------- -----------------------------------
27 Financial data schedule pursuant to
Article 5 of Regulation S-X
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Meriden, State of
Connecticut, on August 13, 1999.
PACKARD BIOSCIENCE COMPANY
By: /s/ Emery G. Olcott
--------------------------------------------------
Emery G. Olcott
Chairman of the Board, Chief
Executive Officer and President
By: /s/ Ben D. Kaplan
--------------------------------------------------
Ben D. Kaplan
Vice President and Chief
Financial Officer
By: /s/ David M. Dean
--------------------------------------------------
David M. Dean
Corporate Controller