PerkinElmer, Inc. — Q3 2016 Form 10-Q
Issuer identification: The filing is for PerkinElmer, Inc., the company’s name in 2016; it is not filed under the name Revvity, Inc. The quarter ended October 2, 2016. Unless noted, amounts are U.S. dollars. The prior-year quarter had 14 weeks versus 13 weeks in 2016, limiting direct comparisons.
Business context and reporting period
PerkinElmer reported two operating segments: Human Health, serving diagnostics and research markets, and Environmental Health, serving environmental, industrial, and laboratory-services markets. Effective October 3, 2016, the company reorganized its businesses into Diagnostics and Discovery & Analytical Solutions segments.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $548.1 million | $563.4 million | $1,659.4 million | $1,654.2 million |
| Operating income | $81.2 million | $75.9 million | $221.2 million | $201.4 million |
| Income from continuing operations | $57.7 million | $54.9 million | $166.5 million | $144.2 million |
| Net income | $58.1 million | $54.9 million | $169.5 million | $144.2 million |
| Diluted EPS, continuing operations | $0.52 | $0.48 | $1.51 | $1.27 |
| Gross margin | 47.6% | 45.2% | 46.8% | 44.9% |
Q3 revenue declined 3%; nine-month revenue rose 0.3%. Operating margin was approximately 14.8% in Q3 versus 13.5% a year earlier, and 13.3% for the first nine months versus 12.2%. Management attributed margin improvement principally to favorable product mix, supply-chain improvements, and cost controls, partly offset by spending on product development and growth initiatives.
- Segments: Q3 Human Health revenue was $338.2 million, down 2%; Environmental Health revenue was $209.8 million, down 5%. Nine-month segment revenue was $1,024.2 million for Human Health, up 1%, and $635.2 million for Environmental Health, down 1%.
- Segment operating income: Q3 Human Health was $64.6 million versus $63.1 million; Environmental Health was $27.7 million versus $22.8 million. Nine-month Human Health was $176.9 million versus $179.6 million; Environmental Health was $78.9 million versus $53.6 million.
- Cash flow: Nine-month operating cash flow was $201.9 million, including $198.9 million from continuing operations, compared with $161.9 million total in the prior period. Investing used $78.2 million, including $71.9 million for acquisitions and investments; financing used $52.6 million. Cash increased $73.7 million to $311.7 million.
- Liquidity and debt: Current assets were $1.154 billion and current liabilities $548.0 million. Total debt on the balance sheet was approximately $1.133 billion; cash less debt was approximately $821 million net debt. The company had $935.6 million of additional availability under its new $1.0 billion revolving facility. The balance sheet’s revolver carrying value was $48.5 million, while the filing separately reports $53.0 million of borrowings before unamortized issuance costs.
- Other metrics: Capital expenditures were $25.3 million for the nine months. The quarterly dividend was $0.07 per share. The company repurchased 3.2 million shares for $148.2 million under its prior program and authorized a new program for up to 8.0 million shares.
Material changes and unusual items
- Q3 Human Health weakness reflected reduced academic and government demand, weaker medical-imaging orders, and timing of service renewals; newborn and infectious-disease screening showed strength. Environmental Health revenue was pressured by weak harvest conditions.
- Comparability also reflects the prior-year extra quarter week, foreign exchange, and acquisition and divestiture effects. Management cited unfavorable foreign-exchange effects of about 0.4% on Q3 revenue and about 1% on nine-month revenue.
- The company issued €500 million of 1.875% senior notes due 2026; proceeds were used to repay the previous revolving-credit balance. It replaced its $700 million revolver with a $1.0 billion facility maturing in 2021.
- Acquisitions during the first nine months totaled $72.4 million in cash consideration, including Bioo Scientific. The company recorded $9.7 million of nine-month expense from changes in contingent-consideration fair value; total recorded contingent consideration was $66.9 million, with potential payments on open earnouts of up to $94.6 million.
- The sale of PerkinElmer Labs generated a $7.1 million pretax gain and a $2.5 million discrete tax benefit. The sale was not classified as discontinued operations. Nine-month income tax results also included $7.1 million of net discrete tax benefits.
- Restructuring charges were $5.7 million for the nine months; plans included workforce reductions. Accrued restructuring and contract-termination liabilities were $12.9 million at quarter-end.
Outlook, risks, and contingencies
The filing provides no specific numeric revenue or earnings guidance. Management said internal cash generation is expected to fund operating expenses, capital expenditures, smaller acquisitions, interest, and dividends; larger acquisitions and debt maturities may require external financing. It expected an additional $1.7 million of pension contributions by fiscal year-end. Management cited potential demand from contaminant regulations and testing protocols, while cautioning that end-market spending and customer orders can vary.
Key disclosed risks include reduced government or industrial funding, weak end markets, foreign-exchange volatility, Brexit-related uncertainty, execution and commercialization of new products, acquisition integration and contingent consideration, competition, regulatory compliance, supply-chain disruption, and debt, interest-rate, covenant, and refinancing risks. Approximately 60% of the business was conducted outside the U.S.; $303.3 million of cash was held by non-U.S. subsidiaries, and transferring approximately $287.2 million to the U.S. without tax planning could incur U.S. taxes. The company accrued $10.3 million for environmental remediation; it said existing legal and environmental contingencies were not expected to have a material adverse effect, while acknowledging outcomes remain uncertain. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Assess underlying revenue trends after adjusting for the extra prior-year week, foreign exchange, and acquisitions or divestitures.
- Track whether Environmental Health demand recovers and whether Human Health screening growth offsets research and medical-imaging weakness.
- Review cash conversion, working-capital movements, and the effect of acquisitions, buybacks, and future pension contributions on liquidity.
- Monitor debt balances, variable-rate exposure, facility covenants, and the euro-denominated 2026 notes and related foreign-currency hedge.
- Evaluate the assumptions and potential cash impact of contingent consideration, particularly the Vanadis-related milestones and earnouts.
- Consider the execution and comparability implications of the October 2016 segment realignment, as well as unresolved legal, tax, and environmental matters.