Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended July 4, 1999, for EG&G, Inc. (noting the company announced plans to change its name to PerkinElmer in Q4 1999). The filing reflects a strategic transformation involving significant acquisitions and the divestiture of the Technical Services segment (government services), which is now classified as discontinued operations.
Key Financial Metrics
| Metric | Q2 1999 | Q2 1998 | 6 Months 1999 | 6 Months 1998 |
|---|---|---|---|---|
| Total Sales (Continuing Ops) | $304.3 million | $209.4 million | $547.5 million | $429.1 million |
| Operating Income (Continuing Ops) | $1.9 million | $40.0 million | $19.0 million | $86.4 million |
| Net Income | $3.6 million | $31.6 million | $17.7 million | $66.1 million |
| Diluted EPS (Net Income) | $0.08 | $0.68 | $0.39 | $1.43 |
| Cash and Equivalents | $58.5 million | $95.6 million (Jan 3, 1999) | N/A | |
| Short-Term Debt | $530.9 million | $157.9 million (Jan 3, 1999) | N/A | |
| Long-Term Debt | $115.0 million | $129.8 million (Jan 3, 1999) | N/A | |
| Operating Cash Flow (6 Mo) | N/A | $38.6 million | $36.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Sales from continuing operations increased 45% in Q2 1999 and 28% for the six-month period, driven primarily by the acquisitions of Lumen Technologies, Life Sciences Resources (LSR), and the Analytical Instruments Division of Perkin-Elmer.
- Profitability Decline: Despite revenue growth, operating income dropped significantly due to one-time charges. Q2 1999 operating income included a $23 million charge for acquired in-process research and development (R&D) and a $2.5 million inventory revaluation charge related to the Perkin-Elmer acquisition.
- Debt Increase: Short-term debt surged from $157.9 million to $530.9 million to finance the Perkin-Elmer acquisition ($425 million purchase price) and Lumen acquisition. This included $150 million in secured promissory notes to Perkin-Elmer and increased commercial paper borrowings.
- Discontinued Operations: The Technical Services segment results are now reported as discontinued operations. The company announced a definitive agreement to sell this segment to the Carlyle Group for approximately $250 million, anticipating a pre-tax gain of $170-$190 million.
Guidance, Outlook, and Risks
- Strategic Outlook: Management is exiting the government services business to focus on high-growth commercial businesses (Life Sciences, Optoelectronics, Instruments, Engineered Products). The company plans to change its name to PerkinElmer in Q4 1999.
- Restructuring: The company expects to incur approximately $23 million in cash outlays for 1998 restructuring plans during the remainder of 1999. Annual pre-tax savings from these plans are anticipated to be approximately $20 million.
- Year 2000 (Y2K) Risk: The company is actively managing Y2K compliance. Estimated costs to address Y2K issues are approximately $9.9 million total, with $2.7 million remaining to be spent in the second half of 1999. Management believes there is no single worst-case scenario short of a national infrastructure catastrophe, but risks remain regarding third-party suppliers and customers.
- Contingencies: The Perkin-Elmer purchase price is subject to post-closing adjustments. The company also assumes a long-term German pension liability of approximately $65 million.
Investor Verification Checklist
- Acquisition Integration: Verify the timeline and cost realization for integrating the Perkin-Elmer Analytical Instruments Division and the associated $23 million R&D charge.
- Debt Servicing: Confirm the company's ability to service the increased short-term debt load ($531 million) and the specific terms of the $150 million promissory note to Perkin-Elmer.
- Divestiture Closing: Monitor the closing of the Technical Services segment sale to the Carlyle Group and the realization of the projected $170-$190 million pre-tax gain.
- Y2K Compliance: Review the status of third-party vendor and supplier Y2K compliance, as the company relies on external infrastructure and supply chains.
- Pro Forma Results: Compare reported results against the pro forma data provided (which assumes acquisitions occurred in late 1997) to assess the true organic performance of the combined entity.