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 2, 1999
[ ] 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 incorporation or organization) (I.R.S. Employer 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 29, 1999
Common Stock, $.01 par value 50,563,080
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMOQUEST CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
<TABLE>
<CAPTION>
October 2, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (includes $97,073 under repurchase $ 42,751 $132,439
agreements with affiliated company in fiscal 1998)
Advance to affiliate (Note 7) 105,931 -
Accounts receivable, less allowances of $3,557 and $4,065 95,764 108,409
Inventories:
Raw materials and supplies 21,907 20,872
Work in process 13,900 15,344
Finished goods 32,830 34,396
Prepaid income taxes 13,051 13,005
Other current assets 2,913 2,591
-------- --------
329,047 327,056
-------- --------
Property, Plant, and Equipment, at Cost 91,364 90,631
Less: Accumulated depreciation and amortization 31,290 27,168
-------- --------
60,074 63,463
-------- --------
Patents and Other Assets 3,327 3,041
-------- --------
Cost in Excess of Net Assets of Acquired Companies 242,145 249,682
-------- --------
$634,593 $643,242
======== ========
2
<PAGE>
THERMOQUEST CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 2, January 2,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Short-term obligations and current maturities of long-term obligations $ 5,128 $ 12,074
Current maturity of subordinated convertible debentures 61,031 -
Accounts payable 23,083 27,024
Accrued payroll and employee benefits 14,852 17,361
Accrued installation and warranty expenses 9,486 9,623
Accrued income taxes 21,312 23,009
Deferred revenue 11,635 10,785
Customer deposits 3,353 6,227
Other accrued expenses (Notes 5 and 6) 14,687 18,448
Due to parent company and affiliated companies 2,833 2,487
-------- --------
167,400 127,038
-------- --------
Deferred Income Taxes 8,444 8,370
-------- --------
Accrued Pension and Other Deferred Items 15,294 16,629
-------- --------
Long-term Obligations:
5% Subordinated convertible debentures - 67,931
Other 5,304 6,273
-------- --------
5,304 74,204
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 100,000,000 shares authorized; 515 515
51,528,179 and 51,520,004 shares issued
Capital in excess of par value 309,095 309,009
Retained earnings 148,955 116,607
Treasury stock at cost, 965,099 and 550,342 shares (10,327) (5,300)
Deferred compensation (61) -
Accumulated other comprehensive items (Note 2) (10,026) (3,830)
-------- --------
438,151 417,001
-------- --------
$634,593 $643,242
======== ========
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 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $107,930 $105,003
-------- --------
Costs and Operating Expenses:
Cost of revenues 57,717 55,800
Selling, general, and administrative expenses 25,404 25,613
Research and development expenses 6,972 7,864
Restructuring costs (Note 6) (326) 4,600
Gain on sale of property - (254)
-------- --------
89,767 93,623
-------- --------
Operating Income 18,163 11,380
Interest Income 1,973 1,606
Interest Expense (1,306) (1,788)
-------- --------
Income Before Provision for Income Taxes 18,830 11,198
Provision for Income Taxes 7,531 4,704
-------- --------
Net Income $ 11,299 $ 6,494
======== ========
Earnings per Share (Note 3):
Basic $ .22 $ .13
======== ========
Diluted $ .22 $ .13
======== ========
Weighted Average Shares (Note 3):
Basic 50,572 51,505
======== ========
Diluted 54,668 56,115
======== ========
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 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $321,402 $311,244
-------- --------
Costs and Operating Expenses:
Cost of revenues 169,016 161,217
Selling, general, and administrative expenses 78,458 76,665
Research and development expenses 21,973 23,858
Restructuring costs (Note 6) (326) 4,600
Gain on sale of property (1,604) (1,307)
-------- --------
267,517 265,033
-------- --------
Operating Income 53,885 46,211
Interest Income (includes $186 from related party in 1998) 5,176 4,483
Interest Expense (3,939) (5,202)
-------- --------
Income Before Provision for Income Taxes 55,122 45,492
Provision for Income Taxes 22,774 19,107
-------- --------
Net Income $ 32,348 $ 26,385
======== ========
Earnings per Share (Note 3):
Basic $ .64 $ .51
======== ========
Diluted $ .62 $ .50
======== ========
Weighted Average Shares (Note 3):
Basic 50,681 51,327
======== ========
Diluted 54,853 56,276
======== ========
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 2, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net income $ 32,348 $ 26,385
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 11,360 11,466
Noncash restructuring costs - 700
Gain on sale of property (1,604) (1,307)
Provision for losses on accounts receivable 281 (62)
Other noncash expenses 324 405
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable 10,219 2,122
Inventories (334) (3,461)
Other current assets (396) (531)
Accounts payable (3,274) (978)
Due to parent company and affiliated companies 867 (3,088)
Other current liabilities (8,358) 196
Other (151) -
--------- ---------
Net cash provided by operating activities 41,282 31,847
--------- ---------
Investing Activities:
Acquisitions, net of cash acquired (2,368) (1,300)
Refund from parent company for acquisitions - 5,953
Advances to affiliate, net (Note 7) (105,895) -
Purchases of property, plant, and equipment (3,712) (3,570)
Proceeds from sale of property, plant, and equipment 1,657 3,325
--------- ---------
Net cash provided by (used in) investing activities (110,318) 4,408
--------- ---------
Financing Activities:
Repurchase of Company securities (11,644) -
Net proceeds from issuance of Company common stock 11 411
Increase (decrease) in short-term obligations (7,084) 2,773
Repayment of long-term obligations (977) (1,677)
Other 50 1,293
--------- ---------
Net cash provided by (used in) financing activities (19,644) 2,800
--------- ---------
Exchange Rate Effect on Cash (1,008) 498
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents (89,688) 39,553
Cash and Cash Equivalents at Beginning of Period 132,439 91,898
--------- ---------
Cash and Cash Equivalents at End of Period $ 42,751 $ 131,451
========= =========
6
<PAGE>
THERMOQUEST CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Noncash Activities:
Fair value of assets of acquired companies $ 3,030 $ 1,300
Cash paid for acquired companies (2,400) (1,300)
--------- ---------
Liabilities assumed of acquired companies $ 630 $ -
========= =========
Conversions of convertible debentures $ - $ 5,000
========= =========
</TABLE>
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 2, 1999, the results of
operations for the three- and nine-month periods ended October 2, 1999, and
October 3, 1998, and the cash flows for the nine-month periods ended October 2,
1999, and October 3, 1998. Interim results are not necessarily indicative of
results for a full year.
The consolidated balance sheet presented as of January 2, 1999, 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 2, 1999,
filed with the Securities and Exchange Commission.
2. Comprehensive Income
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 1999 and 1998, the Company's comprehensive income totaled
$17,203,000 and $12,755,000, respectively. During the first nine months of 1999
and 1998, the Company's comprehensive income totaled $26,152,000 and
$31,861,000, respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic
Net Income $11,299 $ 6,494 $32,348 $26,385
------- ------- ------- -------
Weighted Average Shares 50,572 51,505 50,681 51,327
------- ------- ------- -------
Basic Earnings per Share $ .22 $ .13 $ .64 $ .51
======= ======= ======= =======
Diluted
Net Income $11,299 $ 6,494 $32,348 $26,385
Effect of Convertible Obligations 491 559 1,492 1,738
------- ------- ------- -------
Income Available to Common Shareholders, as Adjusted $11,790 $ 7,053 $33,840 $28,123
------- ------- ------- -------
Weighted Average Shares 50,572 51,505 50,681 51,327
Effect of:
Convertible obligations 4,037 4,591 4,087 4,762
Stock options 59 19 85 187
------- ------- ------- -------
Weighted Average Shares, as Adjusted 54,668 56,115 54,853 56,276
------- ------- ------- -------
Diluted Earnings per Share $ .22 $ .13 $ .62 $ .50
======= ======= ======= =======
8
<PAGE>
3. Earnings per Share (continued)
The computation of diluted earnings per share for each period excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of October 2, 1999, there were 2,185,000 of
such options outstanding, with exercise prices ranging from $11.63 to $17.20 per
share.
4. Business Segment Information
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Revenues:
Analytical Instruments $ 75,871 $ 70,555 $223,544 $212,420
Scientific Equipment 32,059 34,448 97,858 98,824
-------- -------- -------- --------
$107,930 $105,003 $321,402 $311,244
======== ======== ======== ========
Income Before Provision for Income Taxes:
Analytical Instruments (a) $ 13,613 $ 6,123 $ 40,082 $ 31,260
Scientific Equipment 5,803 6,506 17,677 18,863
Corporate (b) (1,253) (1,249) (3,874) (3,912)
-------- -------- -------- --------
Total operating income 18,163 11,380 53,885 46,211
Interest income (expense), net 667 (182) 1,237 (719)
-------- -------- -------- --------
$ 18,830 $ 11,198 $ 55,122 $ 45,492
======== ======== ======== ========
(a) Includes reversal of previously recorded restructuring costs of $0.3 million
in three- and nine-month periods ended October 2, 1999, and restructuring
costs of $4.6 million in the three- and nine-month periods ended October 3,
1998.
(b) Primarily general and administrative expenses.
</TABLE>
5. Accrued Acquisition Expenses
The Company has undertaken restructuring activities at certain acquired
businesses. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily
have included reductions in staffing levels and the abandonment of excess
facilities. In connection with these restructuring activities, as part of the
cost of acquisitions, the Company established reserves, primarily for severance
and excess facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. As of January 2, 1999, the remaining reserve for these
restructuring activities totaled $331,000, and related to the abandonment of
excess facilities. During the first nine months of 1999, the Company expended
$22,000 of the established reserve. As of October 2, 1999, the remaining reserve
for restructuring activities at acquired businesses totaled $304,000, as
adjusted for the impact of foreign currency translation, and is included in
other accrued expenses in the accompanying balance sheet.
6. Restructuring Costs
During 1998, the Company recorded restructuring costs, which were
accounted for in accordance with EITF 94-3, for severance for 85 employees. As
of January 2, 1999, the Company had terminated 49 employees and had $1,634,000
accrued for severance. During the first nine months of 1999, the Company
terminated 34 employees and had expended $962,000 of the established reserve for
severance. During the third quarter of 1999, the Company settled certain
severance matters for less than what had been accrued and, as a result, reversed
$326,000 of previously established restructuring reserves. As of October 2,
1999, the remaining reserve for severance totaled $219,000, as adjusted for the
impact of foreign currency translation, and is included in other accrued
expenses in the accompanying balance sheet.
9
<PAGE>
7. Cash Management Arrangements
Effective June 1, 1999, the Company and Thermo Electron Corporation
commenced use of a new domestic cash management arrangement. Under the new
arrangement, amounts advanced to Thermo Electron by the Company for domestic
cash management purposes bear interest at the 30-day Dealer Commercial Paper
Rate plus 50 basis points, set at the beginning of each month. Thermo Electron
is contractually required to maintain cash, cash equivalents, and/or immediately
available bank lines of credit equal to at least 50% of all funds invested under
this cash management arrangement by all Thermo Electron subsidiaries other than
wholly owned subsidiaries. The Company has the contractual right to withdraw its
funds invested in the cash management arrangement upon 30 days' prior notice.
Effective August 1999, the Company's Germany-based subsidiaries commenced
use of a new cash management arrangement with a wholly owned subsidiary of
Thermo Electron. Under the new arrangement, amounts advanced to the subsidiary
of Thermo Electron bear interest at prevailing German market rates, set at the
beginning of each month. Thermo Electron's subsidiary maintains cash, cash
equivalents, and/or immediately available bank lines of credit equal to at least
100% of all funds invested under this cash management arrangement by all Thermo
Electron subsidiaries. The Company can withdraw its funds invested in this
arrangement with no prior notice.
Amounts invested in these arrangements are included in "advanced to
affiliate" in the accompanying balance sheet.
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 2, 1999, filed with the Securities and Exchange Commission.
Overview
The Company's businesses are reported in two segments: Analytical
Instruments and Scientific Equipment. The Company's Analytical Instruments
segment develops, manufactures, sells, and services mass spectrometers, liquid
chromatographs, gas chromatographs, and multi-instrument combinations of these
products used in the quantitative and qualitative analysis of chemical compounds
at ultratrace levels of detection. The Company's Analytical Instruments segment
also supplies consumables for the chromatography industry. The Company's
Scientific Equipment segment develops, manufactures, sells, and services
scientific equipment for the preparation and preservation of chemical samples.
The Company's products are used primarily by pharmaceutical companies for drug
research, testing, and quality control; by biotechnology researchers to study
proteins and other biological samples to gain knowledge about diseases and
possible treatments; 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.
10
<PAGE>
Results of Operations
Third Quarter 1999 Compared With Third Quarter 1998
Revenues increased to $107.9 million in the third quarter of 1999 from
$105.0 million in the third quarter of 1998. Revenues from the Analytical
Instruments segment increased $5.3 million, or 8%, to $75.9 million in 1999 from
$70.6 million in 1998. The increase resulted primarily from an increase in
revenues in Europe, generally across all product lines, and the inclusion of
$0.5 million of revenues from an acquisition in the third quarter of 1999. The
increases were offset in part by a decrease in revenues of $1.1 million due to
the unfavorable effects of currency translation as a result of the strengthening
in value of the U.S. dollar relative to foreign currencies in countries in which
the Company operates. Revenues from the Scientific Equipment segment decreased
to $32.1 million in 1999 from $34.4 million in 1998, primarily due to a decrease
in revenues in North America across all product lines. The backlog at the
Scientific Equipment segment increased $2.0 million in the third quarter of 1999
from the second quarter of 1999.
The gross profit margin remained unchanged at 47% in the third quarter of
1999 and 1998. A decrease in the gross profit margin due to a shift in the
product mix in the Analytical Instruments segment was offset by the inclusion of
higher-margin revenues from a newly acquired business in this segment.
Selling, general, and administrative expenses as a percentage of revenues
remained unchanged at 24% in the third quarter of 1999 and 1998. Selling,
general, and administrative expenses remained relatively unchanged at $25.4
million in 1999, compared with $25.6 million in 1998.
Research and development expenses decreased to $7.0 million in the third
quarter of 1999 from $7.9 million in the third quarter of 1998, primarily due to
lower spending in the Analytical Instruments segment as a result of the
completed development of certain new products.
In the third quarter of 1999, the Company reversed $0.3 million of
previously established restructuring reserves that were not required (Note 6).
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.
In the third quarter of 1998, the Company's Analytical Instruments segment
recorded a gain of $0.3 million, primarily relating to the sale of real estate
in California.
Interest income increased to $2.0 million in the third quarter of 1999
from $1.6 million in the third quarter of 1998, primarily due to higher invested
balances. Interest expense decreased to $1.3 million in 1999 from $1.8 million
in 1998, primarily due to the conversions and repurchases of a portion of the
Company's 5% subordinated convertible debentures.
The effective tax rate was 40% in the third quarter of 1999, compared with
42% in the third quarter of 1998. The effective tax rate exceeded the statutory
federal income tax rate in both periods 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. The
effective tax rate decreased in 1999 due to a change in the Company's estimated
effective rate as a result of the favorable resolution of a Company claim for
prior-year research and development tax credits.
11
<PAGE>
First Nine Months 1999 Compared With First Nine Months 1998
Revenues increased to $321.4 million in the first nine months of 1999 from
$311.2 million in the first nine months of 1998. Revenues from the Analytical
Instruments segment increased $11.1 million to $223.5 million in 1999 from
$212.4 million in 1998. The increase resulted primarily from an increase in
revenues in Europe, principally across all product lines, and the inclusion of
$0.5 million of revenues from an acquisition in the third quarter of 1999. In
addition, revenues increased $0.3 million due to the favorable effects of
currency translation as a result of the weakening of the U.S. dollar relative to
foreign currencies in countries in which the Company operates, primarily the
Japanese yen. The increases were offset in part by lower demand for the
Company's Fourier transform mass spectrometers and, to a lesser extent, a
decline in revenues from customers in Brazil due to the unstable economic
conditions there. Revenues from the Scientific Equipment segment decreased to
$97.9 million in 1999 from $98.8 million in 1998, primarily due to a decline in
revenues from customers in Europe as a result of heightened competition in one
of the Company's product lines, offset in part by an increase in revenues in
Asia due to the improved economic conditions there.
The gross profit margin decreased to 47% in the first nine months of 1999
from 48% in the first nine months of 1998, primarily due to a shift in the
product mix in the Analytical Instruments segment.
Selling, general, and administrative expenses as a percentage of revenues
remained relatively unchanged at 24.4% in the first nine months of 1999,
compared with 24.6% in the first nine months of 1998. Selling, general, and
administrative expenses increased to $78.5 million in 1999 from $76.7 million in
1998, primarily due to higher selling and marketing expenses in the Scientific
Equipment segment and, to a lesser extent, the Analytical Instruments segment.
Research and development expenses decreased to $22.0 million in the first
nine months of 1999 from $23.9 million in the first nine months of 1998,
primarily due to lower spending in the Analytical Instruments segment as a
result of the completed development of certain new products.
In the third quarter of 1999, the Company reversed $0.3 million of
previously established restructuring reserves that were not required (Note 6).
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.
In the first nine months of 1999 and 1998, the Company's Analytical
Instruments segment recorded gains of $1.6 million and $1.3 million,
respectively, primarily relating to the sale of real estate in California.
Interest income increased to $5.2 million in the first nine months of 1999
from $4.5 million in the first nine months of 1998, primarily due to higher
invested balances. Interest expense decreased to $3.9 million in 1999 from $5.2
million in 1998, primarily due to the conversions and repurchases of a portion
of the Company's 5% subordinated convertible debentures.
The effective tax rate was 41% in the first nine months of 1999, compared
with 42% in the first nine months of 1998. The effective tax rate exceeded the
statutory federal income tax rate in both periods 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. The effective tax rate decreased in 1999 due to the reason discussed
in the results of operations for the third quarter.
12
<PAGE>
Liquidity and Capital Resources
Consolidated working capital was $161.6 million at October 2, 1999,
compared with $200.0 million at January 2, 1999. Included in working capital are
cash and cash equivalents of $42.8 million at October 2, 1999, compared with
$132.4 million at January 2, 1999. In addition, as of October 2, 1999, the
Company had $105.9 million invested in an advance to affiliate. Prior to the use
of new cash management arrangements between the Company and Thermo Electron
Corporation (Note 7), which became effective in 1999, such amounts were included
in cash and cash equivalents. At October 2, 1999, $36.6 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 U.S. tax. Also reflected in
working capital is $61.0 million principal amount of 5% subordinated convertible
debentures due September 2000.
Cash provided by operating activities was $41.3 million in the first nine
months of 1999. A decrease in accounts receivable provided cash of $10.2
million, primarily due to lower revenues in the third quarter of 1999, compared
with the fourth quarter of 1998. Cash of $8.4 million was used to reduce other
current liabilities, primarily due to a reduction in accrued payroll and related
benefits and customer deposits. Cash of $3.3 million was used to fund a decrease
in accounts payable, primarily due to the timing of payments.
During the first nine months of 1999, the Company's primary investing
activities, excluding advance to affiliate activity (Note 7), included an
acquisition and the purchase of property, plant, and equipment. The Company
expended $2.4 million for an acquisition and $3.7 million for purchases of
property, plant, and equipment. In addition, the Company received $1.7 million
in proceeds from the sale of property, plant, and equipment, primarily relating
to the sale of real estate in California. During the remainder of 1999, the
Company plans to make capital expenditures of approximately $3.0 million.
The Company's financing activities used $19.6 million of cash in the first
nine months of 1999. The Company used $11.6 million of cash to purchase Company
securities pursuant to authorizations by the Company's Board of Directors. As of
October 2, 1999, the Company had a remaining authorization to purchase $15.9
million of its own securities, through September 24, 2000, in the open market,
or in negotiated transactions. Such purchases are funded from working capital.
During the first nine months of 1999, the Company used $8.1 million of cash for
the repayment of short- and long-term obligations.
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 Systems Inc. or Thermo Electron,
although there is no agreement with these companies to ensure that funds will be
available on acceptable terms or at all. The Company's 5% subordinated
convertible debentures are due in September 2000. The maturity of this debt may
adversely affect the Company's liquidity beginning in the third quarter of 2000.
Excluding the debentures, 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 following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 date recognition issue
on the Company's internal business systems, products, and operations. The
Company's year 2000 initiatives include (i) testing and upgrading significant
information technology systems and facilities; (ii) testing and developing
upgrades, if necessary, for the Company's current products; (iii) assessing the
year 2000 readiness of key suppliers and vendors; and (iv) developing a
contingency plan.
13
<PAGE>
Year 2000 (continued)
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
non-information technology systems for year 2000 compliance, has largely been
completed. During phase one, the Company tested and evaluated its significant
computer systems, software applications, and related equipment for year 2000
compliance. The Company also evaluated the potential year 2000 impact on its
critical non-information technology systems, which efforts included testing the
year 2000 readiness of its manufacturing, utility, and telecommunications
systems at its critical facilities. In phase two of its program, any
noncompliant systems or non-information technology systems that were identified
during phase one were prioritized and remediated. Based on its evaluations of
its critical non-information technology systems, the Company does not believe
any material upgrades or modifications are required. The Company has
substantially completed upgrading or replacing its material noncompliant
information technology systems. In many cases, such upgrades or replacements
were made in the ordinary course of business, without accelerating previously
scheduled upgrades or replacements. The Company believes that all of its
material information technology systems and critical non-information technology
systems are currently year 2000 compliant.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all of such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate 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, will not be year 2000 compliant.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and has distributed questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. To date, no significant supplier or
vendor has indicated that it believes its business operations will be materially
disrupted by the year 2000 issue. The Company is following up with its
significant suppliers and vendors that have not responded to the Company's
questionnaires. The Company has substantially completed its assessment of
third-party risk.
Contingency Plan
The Company has substantially completed a contingency plan that will allow
its primary business operations to continue despite disruptions due to year 2000
issues. This plan includes 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 and vendors, it will modify and
adjust its contingency plan as may be required.
Estimated 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. Year 2000 costs
were funded from working capital. All internal costs and related external costs,
other than capital additions, related to year 2000 remediation have been and
will continue to be expensed as incurred. The Company does not track internal
costs incurred for its year 2000 compliance project. Such costs are principally
the related payroll costs for its information systems group.
14
<PAGE>
Year 2000 (continued)
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's significant
suppliers or vendors experience business disruptions due to the year 2000 issue
and are unable to provide materials and services to the Company on time. The
Company's operations could be delayed or temporarily shut down, and it could be
unable to meet its obligations to customers in a timely fashion. The Company's
business, operations, and financial condition could be adversely affected in
amounts that cannot be reasonably estimated at this time. If the Company
believes that any of its key suppliers or vendors may not be year 2000 ready, it
will seek to identify and secure other suppliers or vendors as part of its
contingency plan.
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
issues will not have a material adverse impact on the Company's business,
operations, or financial condition. Despite its efforts to ensure that its
material current products are year 2000 compliant, the Company may 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. As discussed above, if any of the Company's significant
suppliers or vendors experience business disruptions due to year 2000 issues,
the Company might also be materially adversely affected. 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. In addition, if any year 2000 issues are identified, there
can be no assurance that the Company will be able to retain qualified personnel
to remedy such issues. Any unexpected costs or delays arising from the year 2000
issue could have a material adverse impact on the Company's business,
operations, and financial condition in amounts that cannot be reasonably
estimated at this time.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices has not changed materially
from its exposure at year-end 1998.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(a) Reports on Form 8-K
None.
15
<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 4th day of November 1999.
THERMOQUEST CORPORATION
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
16
<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 QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 2, 1999
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-01-2000
<PERIOD-END> OCT-02-1999
<CASH> 42,751
<SECURITIES> 0
<RECEIVABLES> 99,321
<ALLOWANCES> 3,557
<INVENTORY> 68,637
<CURRENT-ASSETS> 329,047
<PP&E> 91,364
<DEPRECIATION> 31,290
<TOTAL-ASSETS> 634,593
<CURRENT-LIABILITIES> 167,400
<BONDS> 5,304
0
0
<COMMON> 515
<OTHER-SE> 437,636
<TOTAL-LIABILITY-AND-EQUITY> 634,593
<SALES> 321,402
<TOTAL-REVENUES> 321,402
<CGS> 169,016
<TOTAL-COSTS> 169,016
<OTHER-EXPENSES> 21,647
<LOSS-PROVISION> 281
<INTEREST-EXPENSE> 3,939
<INCOME-PRETAX> 55,122
<INCOME-TAX> 22,774
<INCOME-CONTINUING> 32,348
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,348
<EPS-BASIC> 0.64
<EPS-DILUTED> 0.62
</TABLE>
