SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 Quarter Ended October 3, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-14262
THERMOQUEST CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 77-0407461
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2215 Grand Avenue Parkway
Austin, Texas 78728-3812
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Class Outstanding at October 30, 1998
---------------------------- -------------------------------
Common Stock, $.01 par value 51,111,862
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMOQUEST CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
October 3, January 3,
(In thousands) 1998 1998
- -------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents (includes $103,132
and $60,376 under repurchase agreement
with affiliated company) $131,451 $ 91,898
Accounts receivable, less allowances of
$3,283 and $4,361 96,064 96,541
Inventories:
Raw materials and supplies 22,204 17,174
Work in process and finished goods 50,804 49,215
Prepaid expenses 3,012 2,490
Prepaid income taxes 12,638 12,542
Due from parent company and affiliated
companies - 750
-------- --------
316,173 270,610
-------- --------
Property, Plant, and Equipment, at Cost 88,443 89,316
Less: Accumulated depreciation and
amortization 26,014 22,580
-------- --------
62,429 66,736
-------- --------
Patents and Other Assets 3,220 2,845
-------- --------
Cost in Excess of Net Assets of Acquired
Companies 252,699 255,435
-------- --------
$634,521 $595,626
======== ========
2
<PAGE>
THERMOQUEST CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 3, January 3,
(In thousands except share amounts) 1998 1998
- -------------------------------------------------------------------------
Current Liabilities:
Notes payable and current maturities of
long-term obligations $ 9,899 $ 7,147
Accounts payable 23,272 24,151
Accrued payroll and employee benefits 13,796 19,541
Accrued installation and warranty expenses 9,479 9,991
Accrued income taxes 25,795 21,331
Deferred revenue 11,658 9,939
Customer deposits 5,706 5,193
Other accrued expenses (Note 4) 19,184 16,907
Due to parent company and affiliated companies 2,315 -
-------- --------
121,104 114,200
-------- --------
Deferred Income Taxes 7,503 7,503
-------- --------
Accrued Pension and Other Deferred Items 16,383 15,064
-------- --------
Long-term Obligations:
5% Subordinated convertible debentures 75,591 80,591
Other 6,594 7,489
-------- --------
82,185 88,080
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 100,000,000
shares authorized; 51,520,004 and
51,185,127 shares issued 515 512
Capital in excess of par value 308,237 302,881
Retained earnings 104,614 78,229
Treasury stock at cost, 67,542 and 340 shares (658) (6)
Accumulated other comprehensive items (Note 3) (5,362) (10,837)
-------- --------
407,346 370,779
-------- --------
$634,521 $595,626
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
THERMOQUEST CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $105,003 $109,303
-------- --------
Costs and Operating Expenses:
Cost of revenues 55,800 56,716
Selling, general, and administrative expenses 25,613 27,197
Research and development expenses 7,864 7,209
Restructuring costs (Note 4) 4,600 -
Gain on sale of property (254) -
-------- --------
93,623 91,122
-------- --------
Operating Income 11,380 18,181
Interest Income 1,606 2,592
Interest Expense (includes $1,484 to related
parties in 1997) (1,788) (3,242)
-------- --------
Income Before Provision for Income Taxes 11,198 17,531
Provision for Income Taxes 4,704 7,620
-------- --------
Net Income $ 6,494 $ 9,911
======== ========
Earnings per Share (Note 2):
Basic $ .13 $ .20
======== ========
Diluted $ .13 $ .19
======== ========
Weighted Average Shares (Note 2):
Basic 51,505 50,580
======== ========
Diluted 56,115 56,369
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMOQUEST CORPORATION
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $311,244 $315,198
-------- --------
Costs and Operating Expenses:
Cost of revenues 161,217 164,616
Selling, general, and administrative expenses 76,665 77,453
Research and development expenses 23,858 21,172
Restructuring costs (Note 4) 4,600 -
Gain on sale of property (1,307) -
-------- --------
265,033 263,241
-------- --------
Operating Income 46,211 51,957
Interest Income (includes $186 and $420 from
related parties) 4,483 8,547
Interest Expense (includes $3,126 to related
parties in 1997) (5,202) (8,405)
-------- --------
Income Before Provision for Income Taxes 45,492 52,099
Provision for Income Taxes 19,107 22,672
-------- --------
Net Income $ 26,385 $ 29,427
======== ========
Earnings per Share (Note 2):
Basic $ .51 $ .59
======== ========
Diluted $ .50 $ .57
======== ========
Weighted Average Shares (Note 2):
Basic 51,327 49,795
======== ========
Diluted 56,276 55,707
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMOQUEST CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Operating Activities:
Net income $ 26,385 $ 29,427
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 11,102 10,416
Gain on sale of property (1,307) -
Provision for losses on accounts
receivable (62) 716
Other noncash expenses 1,469 862
Changes in current accounts, excluding the
effects of acquisitions:
Accounts receivable 2,122 (19,827)
Inventories (3,461) (2,714)
Other current assets (531) (52)
Accounts payable (978) (1,908)
Due to parent company and affiliated
companies (3,088) 8,982
Other current liabilities 196 (526)
Other 1,178 760
--------- ---------
Net cash provided by operating activities 33,025 26,136
--------- ---------
Investing Activities:
Acquisitions, net of cash acquired (1,300) (154,304)
Refund from parent company for acquisitions 5,953 -
Proceeds from sale and maturities of
available-for-sale investments - 5,600
Purchases of property, plant, and equipment (3,570) (4,028)
Proceeds from sale of property, plant, and
equipment 3,325 2,516
Other - 164
--------- ---------
Net cash provided by (used in) investing
activities 4,408 (150,052)
--------- ---------
Financing Activities:
Net proceeds from issuance of Company common
stock 411 24,981
Increase (decrease) in short-term obligations 2,773 (2,049)
Repayment of long-term obligations (1,677) (1,465)
Other 115 -
--------- ---------
Net cash provided by financing activities $ 1,622 $ 21,467
--------- ---------
6
<PAGE>
THERMOQUEST CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Exchange Rate Effect on Cash $ 498 $ (2,471)
--------- ---------
Increase (Decrease) in Cash and Cash
Equivalents 39,553 (104,920)
Cash and Cash Equivalents at Beginning of
Period 91,898 174,978
--------- ---------
Cash and Cash Equivalents at End of Period $ 131,451 $ 70,058
========= =========
Noncash Activities:
Fair value of assets of acquired companies $ 1,300 $ 185,634
Cash paid for acquired companies (1,300) (160,411)
Stock issuable to parent company for
acquired companies - (16)
--------- ---------
Liabilities assumed of acquired companies $ - $ 25,207
========= =========
Conversions of convertible debentures $ 5,000 $ 12,000
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
THERMOQUEST CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by ThermoQuest Corporation (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at October 3, 1998, the results of
operations for the three- and nine-month periods ended October 3, 1998, and
September 27, 1997, and the cash flows for the nine-month periods ended October
3, 1998, and September 27, 1997. Interim results are not necessarily indicative
of results for a full year.
The consolidated balance sheet presented as of January 3, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1998,
filed with the Securities and Exchange Commission.
2. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Nine Months Ended
------------------ ------------------
(In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Basic
Net Income $ 6,494 $ 9,911 $26,385 $29,427
------- ------- ------- -------
Weighted Average Shares 51,505 50,580 51,327 49,795
------- ------- ------- -------
Basic Earnings per Share $ .13 $ .20 $ .51 $ .59
======= ======= ======= =======
Diluted
Net Income $ 6,494 $ 9,911 $26,385 $29,427
Effect of Convertible
Obligations 559 667 1,738 2,086
------- ------- ------- -------
Income Available to Common
Shareholders, as Adjusted $ 7,053 $10,578 $28,123 $31,513
------- ------- ------- -------
Weighted Average Shares 51,505 50,580 51,327 49,795
Effect of:
Convertible obligations 4,591 5,479 4,762 5,715
Stock options 19 310 187 197
------- ------- ------- -------
Weighted Average Shares,
as Adjusted 56,115 56,369 56,276 55,707
------- ------- ------- -------
Diluted Earnings per Share $ .13 $ .19 $ .50 $ .57
======= ======= ======= =======
8
<PAGE>
2. Earnings per Share (continued)
The computation of diluted earnings per share for certain periods excludes
the effect of assuming the exercise of certain outstanding stock options because
the effect would be antidilutive. As of October 3, 1998, there were 2,961,050 of
such options outstanding, with exercise prices ranging from $13.00 to $17.20 per
share.
3. Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income and "other comprehensive items," which
represents foreign currency translation adjustments, reported as a component of
shareholders' investment in the accompanying balance sheet. During the third
quarter of 1998 and 1997, the Company's comprehensive income totaled $12.8
million and $7.4 million, respectively. During the first nine months of 1998 and
1997, the Company's comprehensive income totaled $31.9 million and $19.8
million, respectively.
4. Restructuring Costs
During the third quarter of 1998, the Company recorded restructuring costs
of $4.6 million. The restructuring costs consist of $3.9 million related to
severance costs for approximately 85 employees across all functions and an asset
write-down of $0.7 million related to the closure and anticipated sale of a
facility. The Company plans to complete its restructuring plan by June 30, 1999.
As of October 3, 1998, the Company had terminated 18 employees and had expended
$0.2 million of the reserve established for severance. The remaining reserve for
severance of $3.7 million is included in other accrued expenses in the
accompanying balance sheet as of October 3, 1998.
5. Recently Released Accounting Pronouncements
During the fourth quarter of 1998, the Company will be required to
adopt SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
Effective in 2000, the Company will be required to adopt SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
The Company has not completed the analyses to assess the effects of the new
pronouncements on its financial statements, although the Company expects that
the effect, if any, from the adoption of SFAS No. 131 would represent additional
disclosure requirements to those that exist currently.
9
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
year ended January 3, 1998, filed with the Securities and Exchange Commission.
Overview
The Company's Analytical Products Group develops, manufactures, sells, and
services instruments, including mass spectrometers, liquid chromatographs, and
gas chromatographs. These analytical instruments are used in the quantitative
and qualitative chemical analysis of organic and inorganic compounds at
ultratrace levels of detection. The Company's Scientific Equipment Group
develops, manufactures, sells, and services systems for the preparation and
preservation of chemical and biological samples. In addition, the Company
develops, manufactures, and sells consumables for the chromatography industry.
The Company's products are used primarily by pharmaceutical companies for drug
development, testing, and quality control; by environmental laboratories for
testing water, air, and soil samples for compliance with environmental
regulations; by chemical companies for research and quality control; by
manufacturers for testing in certain industrial applications, such as the
manufacture of silicon chips, and for quality control; by food and beverage
companies for quality control and to test for product contamination; and in
forensic applications.
The Company sells its products worldwide. Although the Company seeks to
charge its customers in the same currency as its operating costs, the Company's
financial performance and competitive position can be affected by currency
exchange rate fluctuations. Where appropriate, the Company uses forward
contracts to reduce its exposure to currency fluctuations.
Results of Operations
Third Quarter 1998 Compared With Third Quarter 1997
Revenues decreased to $105.0 million in the third quarter of 1998 from
$109.3 million in the third quarter of 1997. Revenues from the Analytical
Products Group decreased by $1.8 million in 1998, primarily due to heightened
competition in two of the Company's product lines and, to a lesser extent, the
strengthening of the U.S. dollar relative to foreign currencies in countries in
which the Company operates, which
10
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
decreased revenues by $0.6 million. Revenues from the Scientific Equipment Group
decreased by $2.8 million, primarily due to a change in distribution channels of
an affiliated company, which began selling its products directly to third
parties and which no longer uses the Company's sales offices. Such sales had low
margins due to the Company's sole role as a distributor.
The gross profit margin decreased to 47% in the third quarter of 1998 from
48% in the third quarter of 1997, primarily due to heightened competition in two
of the Company's product lines, offset in part by increased margins due to
improved manufacturing efficiencies.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 24% in the third quarter of 1998 from 25% in the third quarter of
1997. Selling, general, and administrative expenses decreased to $25.6 million
in 1998 from $27.2 million in 1997, primarily due to a change in distribution
channels of an affiliated company as discussed above. Research and development
expenses increased to $7.9 million in 1998 from $7.2 million in 1997, primarily
due to higher spending within the Analytical Products Group. The increase is
consistent with the Company's objective to develop and market internally
developed new products.
In the third quarter of 1998, the Company recorded restructuring costs of
$4.6 million related to severance costs for approximately 85 employees and the
closure of a facility (Note 4).
In the third quarter of 1998, the Company recorded a gain of $0.3 million
primarily relating to the sale of a parcel of land at a manufacturing facility
in California.
Interest income decreased to $1.6 million in the third quarter of 1998 from
$2.6 million in the third quarter of 1997, primarily due to a reduction in cash
as a result of a payment of $160.4 million to Thermo Instrument Systems Inc. in
September 1997 for the acquisition of three business units within Life Sciences
International PLC's Laboratory Products Group, as well as Life Sciences'
Hypersil operation. Interest expense decreased to $1.8 million in 1998 from $3.2
million in 1997, primarily due to the repayment to Thermo Instrument in
September 1997 of debt assumed in connection with the acquisition of the
Laboratory Products businesses and, to a lesser extent, the conversion of a
portion of the Company's 5% subordinated convertible debentures into common
stock of the Company.
The effective tax rate was 42% in the third quarter of 1998, compared with
43% in the third quarter of 1997. The effective tax rates exceeded the statutory
federal income tax rate primarily due to the effect of state income taxes,
foreign tax rate and tax law differentials, and nondeductible amortization of
cost in excess of net assets of acquired companies.
11
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
Basic earnings per share was $.13 in the third quarter of 1998, compared
with $.20 in the third quarter of 1997. The decline was primarily due to
restructuring costs of $4.6 million recorded in the third quarter of 1998 (Note
4). Excluding the restructuring costs, basic earnings per share was $.18 in
1998.
First Nine Months 1998 Compared With First Nine Months 1997
Revenues decreased to $311.2 million in the first nine months of 1998 from
$315.2 million in the first nine months of 1997. Revenues from the Analytical
Products Group decreased by $22.1 million in 1998, primarily due to a decline in
revenues of $12.0 million from customers in Asia due to the unstable economic
conditions there and a decrease in revenues of $6.8 million due to the
strengthening of the U.S. dollar relative to foreign currencies in countries in
which the Company operates. Revenues from the Scientific Equipment Group
increased by $16.2 million, primarily due to the acquisition of the Laboratory
Products businesses from Thermo Instrument, effective March 12, 1997. The
acquisition of the Laboratory Products businesses added revenues of $23.4
million in 1998. This increase was offset in part by a change in distribution
channels of an affiliated company as discussed in the results of operations for
the third quarter.
The gross profit margin remained unchanged at 48% in the first nine months
of 1998 and 1997. A decrease in the gross profit margin resulting from
heightened competition in two of the Company's product lines was offset by
increased margins due to improved manufacturing efficiencies and, to a lesser
extent, the inclusion in the 1997 period of an adjustment to expense of $1.0
million relating to the sale of inventories revalued on the date the Laboratory
Products businesses were acquired.
Selling, general, and administrative expenses as a percentage of revenues
remained unchanged at 25% in the first nine months of 1998 and 1997. Selling,
general, and administrative expenses decreased to $76.7 million in 1998 from
$77.5 million in 1997. A decrease in selling, general, and administrative
expenses, primarily due to the implementation of expense control measures, was
offset in part by the inclusion of expenses from the Laboratory Products
businesses and Hypersil for a full period in 1998. Research and development
expenses increased to $23.9 million in 1998 from $21.2 million in 1997,
primarily due to higher spending within the Analytical Products Group and the
inclusion of expenses from Laboratory Products businesses and Hypersil for a
full period in 1998.
In the third quarter of 1998, the Company recorded restructuring costs of
$4.6 million related to severance costs for approximately 85 employees and the
closure of a facility (Note 4).
In the first nine months of 1998, the Company recorded gains of $1.3 million
primarily relating to the sale of a parcel of land at a manufacturing facility
in California and two buildings at a sales office facility in England.
12
<PAGE>
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
Interest income decreased to $4.5 million in the first nine months of 1998
from $8.5 million in the first nine months of 1997. Interest expense decreased
to $5.2 million in 1998 from $8.4 million in 1997. These decreases were due to
the reasons discussed in the results of operations for the third quarter.
The effective tax rate decreased to 42% in the first nine months of 1998
from 44% in the first nine months of 1997, primarily due to lower income from
the Company's Japanese subsidiary, which is taxed at a higher rate. The
effective tax rates exceeded the statutory federal income tax rate primarily due
to the effect of state income taxes, foreign tax rate and tax law differentials,
and nondeductible amortization of cost in excess of net assets of acquired
companies.
Basic earnings per share was $.51 in the first nine months of 1998, compared
with $.59 in the first nine months of 1998. The decline was primarily due to
restructuring costs of $4.6 million recorded in the third quarter of 1998.
Excluding the restructuring costs, basic earnings per share was $.57 in 1998.
Liquidity and Capital Resources
Consolidated working capital was $195.1 million at October 3, 1998, compared
with $156.4 million at January 3, 1998. Included in working capital are cash and
cash equivalents of $131.5 million at October 3, 1998, compared with $91.9
million at January 3, 1998. Cash provided by operating activities was $33.0
million in the first nine months of 1998. Cash of $3.5 million was used to fund
an increase in inventories, primarily due to replenishing year-end levels at the
Company's European sales offices and a build-up in inventory in preparation for
a new product release. Cash of $3.1 million was used to reduce amounts due to
parent company and affiliated companies, primarily due to the timing of trade
payments to affiliated companies.
At October 3, 1998, $23.5 million of the Company's cash and cash equivalents
was held by its foreign subsidiaries. While this cash can be used outside of the
United States, including for acquisitions, repatriation of this cash into the
United States would be subject to foreign withholding taxes and could also be
subject to a United States tax.
The Company's investing activities provided $4.4 million of cash in the
first nine months of 1998. The Company received an aggregate refund of $6.0
million from Thermo Instrument in connection with the acquisition of businesses
from Thermo Instrument in 1997 and 1996. The Company expended $1.3 million for
the acquisition of a product line and $3.6 million for purchases of property,
plant, and equipment. The Company received $3.3 million in proceeds from the
sale of property, plant, and equipment, primarily from the sale of a parcel of
land at a manufacturing facility in California and two buildings at a sales
office facility in England. During the remainder of 1998, the Company plans to
make capital expenditures of approximately $3.0 million.
13
<PAGE>
Liquidity and Capital Resources (continued)
The Company's financing activities provided $1.6 million of cash in the
first nine months of 1998. Cash of $2.8 million provided by an increase in
short-term borrowings was offset in part by $1.7 million of cash used for the
repayment of long-term obligations. In September 1998, the Company's Board of
Directors authorized the repurchase by the Company of up to $20.0 million of its
own securities, through September 25, 1999, in the open market, or in negotiated
transactions. Through October 3, 1998, the Company had committed $0.6 million
under this authorization which was payable as of October 3, 1998, in settlement
of trades executed prior to that date. Any such purchases are funded from
working capital.
Although the Company expects to have positive cash flow from its existing
operations, the Company anticipates it will require significant amounts of cash
to pursue the acquisition of complementary businesses. The Company expects that
it will finance acquisitions through a combination of internal funds and/or
short-term borrowings from Thermo Instrument or Thermo Electron Corporation,
although there is no agreement with these companies to ensure that funds will be
available on acceptable terms or at all. The Company believes that its existing
resources are sufficient to meet the capital requirements of its existing
businesses for the foreseeable future.
Year 2000
The Company continues to assess the potential impact of the year 2000 on the
Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading internal business
systems and facilities; (ii) testing and developing necessary upgrades for the
Company's current products and certain discontinued products; (iii) contacting
key suppliers, vendors, and customers to determine their year 2000 compliance
status; and (iv) developing contingency plans.
The Company's State of Readiness
The Company has tested and evaluated its critical information technology
systems for year 2000 compliance, including its significant computer systems,
software applications, and related equipment. The Company is currently in the
process of upgrading or replacing its noncompliant systems. In most cases, such
upgrades or replacements are being made in the ordinary course of business. The
Company expects that all of its material information technology systems will be
year 2000 compliant by the end of 1999. The Company is also evaluating the
potential year 2000 impact on its facilities, including its buildings and
utility systems. Any problems that are identified will be prioritized and
remediated based on their assigned priority. The Company will continue periodic
testing of its critical internal business systems and facilities in an effort to
minimize operating disruptions due to year 2000 issues.
14
<PAGE>
Year 2000 (continued)
The Company believes that all of the material products that it currently
manufactures and sells are year 2000 compliant. However, as many of the
Company's products are complex, interact with third-party products, and operate
on computer systems that are not under the Company's control, there can be no
assurance that the Company has identified all of the year 2000 problems with its
current products. The Company believes that certain of its older products, which
it no longer manufactures or sells, may not be year 2000 compliant. The Company
is continuing to test and evaluate such products and may offer upgrades or
alternative products where reasonably practicable.
The Company is in the process of identifying and contacting suppliers,
vendors, and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part of
this effort, the Company has developed and is distributing questionnaires
relating to year 2000 compliance to its significant suppliers, vendors, and
customers. The Company intends to follow-up and monitor the year 2000 compliant
progress of significant suppliers, vendors, and customers that indicate that
they are not year 2000 compliant or that do not respond to the Company's
questionnaires.
Contingency Plans
The Company intends to develop a contingency plan that will allow its
primary business operations to continue despite disruptions due to year 2000
problems. These plans may include identifying and securing other suppliers,
increasing inventories, and modifying production facilities and schedules. As
the Company continues to evaluate the year 2000 readiness of its business
systems and facilities, products and significant suppliers, vendors, and
customers, it will modify and adjust its contingency plan as may be required.
Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not been
material. The Company does not expect total year 2000 remediation costs to be
material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may
15
<PAGE>
Year 2000 (continued)
see an increase in warranty and other claims, especially those related to
Company products that incorporate, or operate using, third-party software or
hardware. In addition, certain of the Company's older products, which it no
longer manufactures or sells, may not be year 2000 compliant, which may expose
the Company to claims. If any of the Company's material suppliers, vendors, or
customers experience business disruptions due to year 2000 issues, the Company
might also be materially adversely affected. The Company's research and
development, production, distribution, financial, administrative, and
communications operations might be disrupted. There is expected to be a
significant amount of litigation relating to the year 2000 issue and there can
be no assurance that the Company will not incur material costs in defending or
bringing lawsuits. Any unexpected costs or delays arising from the year 2000
issue could have a significant adverse impact on the Company's business,
operations, and financial condition.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On July 22, 1998, the Company filed a Current Report on Form 8-K dated July
21, 1998, with respect to its expected operating income for the second quarter
of 1998.
On September 30, 1998, the Company filed a Current Report on Form 8-K dated
September 29, 1998, with respect to restructuring costs recorded during the
third quarter of 1998.
16
<PAGE>
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 as of the 6th day of November 1998.
THERMOQUEST CORPORATION
Paul F. Kelleher
----------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
----------------------------
John N. Hatsopoulos
Chief Financial Officer and
Senior Vice President
17
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------------------------------------------------------------------------------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMOQUEST
CORPORATION'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 3,1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> OCT-03-1998
<CASH> 131,451
<SECURITIES> 0
<RECEIVABLES> 99,347
<ALLOWANCES> 3,283
<INVENTORY> 73,008
<CURRENT-ASSETS> 316,173
<PP&E> 88,443
<DEPRECIATION> 26,014
<TOTAL-ASSETS> 634,521
<CURRENT-LIABILITIES> 121,104
<BONDS> 82,185
0
0
<COMMON> 515
<OTHER-SE> 406,831
<TOTAL-LIABILITY-AND-EQUITY> 634,521
<SALES> 311,244
<TOTAL-REVENUES> 311,244
<CGS> 161,217
<TOTAL-COSTS> 161,217
<OTHER-EXPENSES> 28,458
<LOSS-PROVISION> (62)
<INTEREST-EXPENSE> 5,202
<INCOME-PRETAX> 45,492
<INCOME-TAX> 19,107
<INCOME-CONTINUING> 26,385
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,385
<EPS-PRIMARY> 0.51
<EPS-DILUTED> 0.50
</TABLE>
