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 1-14254
THERMO SENTRON INC.
(Exact name of Registrant as specified in its charter)
Delaware 41-1827303
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
501 90th Avenue N.W.
Minneapolis, Minnesota 55433
(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 9,435,651
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO SENTRON INC.
Consolidated Balance Sheet
(Unaudited)
<S> <C> <C>
Assets
October 2, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ---------- ----------
Current Assets:
Cash and cash equivalents $ 10,538 $14,144
Advance to affiliate (Note 8) 696 -
Accounts receivable, less allowances of $1,561 and $1,367 24,647 25,076
Inventories:
Raw materials 6,048 5,603
Work in process 3,283 2,891
Finished goods 6,804 7,535
Prepaid and refundable income taxes 4,069 3,330
Prepaid expenses 1,122 859
-------- --------
57,207 59,438
-------- --------
Property, Plant, and Equipment, at Cost 6,831 6,667
Less: Accumulated depreciation and amortization 3,688 2,910
-------- --------
3,143 3,757
-------- --------
Other Assets 4,635 4,768
-------- --------
Cost in Excess of Net Assets of Acquired Companies 72,714 72,201
-------- --------
$137,699 $140,164
======== ========
2
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THERMO SENTRON INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 2, January 2,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ---------- ----------
Current Liabilities:
Note payable to Thermo Electron $ 12,000 $19,000
Short-term obligations (includes $698 and $791 to affiliated company) 3,268 3,047
Accounts payable 9,175 9,472
Accrued payroll and employee benefits 4,110 4,483
Accrued income taxes 3,699 3,664
Customer deposits 2,560 2,688
Other accrued expenses 7,191 7,098
Due to parent company and affiliated companies 1,154 810
-------- --------
43,157 50,262
-------- --------
Deferred Income Taxes 1,119 909
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 30,000,000 shares authorized; 99 99
9,882,750 and 9,875,000 shares issued
Capital in excess of par value 77,149 77,072
Retained earnings 22,038 17,359
Treasury stock at cost, 447,099 shares (4,965) (4,965)
Accumulated other comprehensive items (Note 3) (898) (572)
-------- --------
93,423 88,993
-------- --------
$137,699 $140,164
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
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THERMO SENTRON INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $27,154 $29,102
------- -------
Costs and Operating Expenses:
Cost of revenues 15,651 18,730
Selling, general, and administrative expenses 7,518 7,203
Research and development expenses 880 980
(Gain) loss on sale of property, plant, and equipment (1) 3
------- -------
24,048 26,916
------- -------
Operating Income 3,106 2,186
Interest Income 76 138
Interest Expense (includes $220 and $304 to related party) (261) (384)
Equity in Earnings of Unconsolidated Subsidiary 31 44
------- -------
Income Before Provision for Income Taxes 2,952 1,984
Provision for Income Taxes 1,190 771
------- -------
Net Income $ 1,762 $ 1,213
======= =======
Basic and Diluted Earnings per Share (Note 4) $ .19 $ .13
======= =======
Weighted Average Shares (Note 4):
Basic 9,433 9,519
======= =======
Diluted 9,493 9,520
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMO SENTRON INC.
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $81,816 $69,660
------- -------
Costs and Operating Expenses:
Cost of revenues 49,315 43,328
Selling, general, and administrative expenses 21,991 17,868
Research and development expenses 2,503 1,987
(Gain) loss on sale of property, plant, and equipment, net (87) 1
------- -------
73,722 63,184
------- -------
Operating Income 8,094 6,476
Interest Income 346 1,171
Interest Expense (includes $703 and $381 to related party) (863) (680)
Gain on Sale of Investments, Net - 11
Equity in Earnings of Unconsolidated Subsidiary 157 100
------- -------
Income Before Provision for Income Taxes 7,734 7,078
Provision for Income Taxes 3,055 2,740
------- -------
Net Income $ 4,679 $ 4,338
======= =======
Earnings per Share (Note 4):
Basic $ .50 $ .45
======= =======
Diluted $ .49 $ .45
======= =======
Weighted Average Shares (Note 4):
Basic 9,431 9,690
======= =======
Diluted 9,467 9,693
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMO SENTRON INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net income $ 4,679 $ 4,338
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,716 2,041
Provision for losses on accounts receivable 413 146
(Gain) loss on sale of property, plant, and equipment, net (87) 1
Changes in current accounts, excluding the effect of acquisition:
Accounts receivable (653) 1,936
Inventories (1,096) 364
Other current assets (335) (754)
Accounts payable 504 (813)
Other current liabilities (1,591) (2,804)
-------- -------
Net cash provided by operating activities 4,550 4,455
-------- -------
Investing Activities:
Acquisition, net of cash acquired - (44,196)
Proceeds from sale and maturities of available-for-sale investments - 9,511
Advances to affiliate, net (Note 8) (696) -
Purchases of property, plant, and equipment (1,176) (471)
Proceeds from sale of property, plant, and equipment 753 -
Other (157) (254)
-------- -------
Net cash used in investing activities (1,276) (35,410)
-------- -------
Financing Activities:
Issuance of short-term obligation to Thermo Electron - 21,000
Repayment of short-term obligation to Thermo Electron (7,000) -
Net proceeds from issuance of Company common stock 77 -
Purchases of Company common stock - (4,870)
Net increase (decrease) in short-term borrowings 326 (2,131)
-------- -------
Net cash provided by (used in) financing activities (6,597) 13,999
-------- -------
Exchange Rate Effect on Cash (283) 253
-------- -------
Decrease in Cash and Cash Equivalents (3,606) (16,703)
Cash and Cash Equivalents at Beginning of Period 14,144 30,283
-------- -------
Cash and Cash Equivalents at End of Period $ 10,538 $13,580
======== =======
Noncash Activities:
Fair value of assets of acquired company $ - $56,433
Cash paid for acquired company - (44,196)
-------- -------
Liabilities assumed of acquired company $ - $12,237
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
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Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Sentron Inc. (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. Presentation
Certain amounts in 1998 have been reclassified to conform to the
presentation in the 1999 financial statements.
3. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including foreign
currency translation adjustments and unrealized net of tax gains and losses from
available-for-sale investments. During the third quarter of 1999 and 1998, the
Company had comprehensive income of $3,903,000 and $1,637,000, respectively.
During the first nine months of 1999 and 1998, the Company had comprehensive
income of $4,353,000 and $4,713,000, respectively.
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4. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Basic
Net Income $1,762 $1,213 $4,679 $4,338
------ ------ ------ ------
Weighted Average Shares 9,433 9,519 9,431 9,690
----- ------ ----- ------
Basic Earnings per Share $ .19 $ .13 $ .50 $ .45
===== ====== ===== ======
Diluted
Net Income $1,762 $1,213 $4,679 $4,338
------ ------ ------ ------
Weighted Average Shares 9,433 9,519 9,431 9,690
Effect of Stock Options 60 1 36 3
----- ------ ----- ------
Weighted Average Shares, as Adjusted 9,493 9,520 9,467 9,693
----- ------ ----- ------
Diluted Earnings per Share $ .19 $ .13 $ .49 $ .45
===== ====== ===== ======
6
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4. 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. At October 2, 1999, there were 249,000 of such
options outstanding, with exercise prices ranging from $14.00 to $16.00 per
share.
5. Business Segment Information
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Revenues:
North America (a) $16,915 $ 16,226 $49,701 $ 39,813
Europe (b) 12,048 14,055 37,206 29,625
Other (c) 1,905 2,494 5,972 7,233
Intersegment sales elimination (d) (3,714) (3,673) (11,063) (7,011)
------- -------- ------- --------
$27,154 $ 29,102 $81,816 $ 69,660
======= ======== ======= ========
Income Before Provision for Income Taxes:
North America $ 2,684 $ 1,912 $ 6,786 $ 5,245
Europe 647 405 2,350 1,678
Other 208 336 291 919
Corporate (e) (433) (467) (1,333) (1,366)
------- -------- ------- --------
Total operating income 3,106 2,186 8,094 6,476
Interest and other income (expense), net (154) (202) (360) 602
------- -------- ------- --------
$ 2,952 $ 1,984 $ 7,734 $ 7,078
======= ======== ======= ========
(a) Includes intersegment sales of $1,576,000 and $1,622,000 in the third
quarter of 1999 and 1998, respectively, and $4,905,000 and $3,639,000 in the
first nine months of 1999 and 1998, respectively.
(b) Includes intersegment sales of $2,131,000 and $2,048,000 in the third
quarter of 1999 and 1998, respectively, and $6,147,000 and $3,363,000 in the
first nine months of 1999 and 1998, respectively.
(c) Includes intersegment sales of $7,000 and $3,000 in the third quarter of
1999 and 1998, respectively, and $11,000 and $9,000 in the first nine months
of 1999 and 1998, respectively.
(d) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(e) Primarily general and administrative expenses.
6. 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. The Company finalized its restructuring plans for
businesses acquired in June 1998 during the second quarter of 1999. Amounts
accrued at October 2, 1999, represent ongoing lease obligations (net of assumed
sublease income) through 2008 for abandoned facilities, as well as severance,
which will be paid during the fourth quarter of 1999.
7
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6. Accrued Acquisition Expenses (continued)
A summary of the changes in accrued acquisition expenses, which are
included in other accrued expenses in the accompanying balance sheet, is as
follows:
<S> <C> <C> <C> <C>
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 2, 1999 $ 177 $ 788 $ - $ 965
Reserves established 478 1,151 62 1,691
Usage (435) (550) (22) (1,007)
Decrease due to finalization of (175) (211) - (386)
restructuring plans, recorded as a
decrease to cost in excess of net assets
of acquired companies
Currency translation adjustment 8 39 - 47
------- ------- ------- -------
Balance at October 2, 1999 $ 53 $ 1,217 $ 40 $ 1,310
======= ======= ======= =======
7. Proposed Reorganization
During 1998, Thermo Electron Corporation announced a proposed
reorganization involving certain of Thermo Electron's subsidiaries, including
the Company. Under this plan, Thermedics Inc.'s majority interest in the Company
would be transferred to Thermo Electron and the Company would be taken private
and become a wholly owned subsidiary of Thermo Electron. Shareholders of the
Company would receive cash in exchange for their shares of common stock. The
proposed transactions are subject to a number of conditions, including the
establishment of prices and exchange ratios; confirmation of anticipated tax
consequences; approval by the Board of Directors of the Company, Thermedics, and
Thermo Electron (including the independent directors of the Company and
Thermedics); negotiation and execution of definitive agreements; clearance by
the Securities and Exchange Commission of any necessary documents in connection
with the proposed transactions; and the receipt of fairness opinions from
investment banking firms on certain financial aspects of the transactions.
8. Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron 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. Amounts
invested in this arrangement are included in "advance to affiliate" in the
accompanying balance sheet.
8
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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
fiscal year ended January 2, 1999, filed with the Securities and Exchange
Commission.
Overview
The Company designs, develops, manufactures, and markets high-speed
precision-weighing and inspection equipment for industrial production and
packaging lines. The Company is managed geographically and operates in three
segments based on the locations from which they conduct business: North America,
Europe, and Other, which principally includes Australia, New Zealand, and South
Africa. Each of the Company's segments serves two principal markets: packaged
goods and bulk materials. The Company's products for the packaged-goods market
include a broad line of checkweighing equipment and metal detectors that can be
integrated at various stages in production lines for process control and quality
assurance. These products are sold to customers in the food-processing,
pharmaceutical, mail-order, and other diverse industries. In June 1998, the
Company expanded its packaged-goods product line through the acquisition of the
three businesses that constituted the product-monitoring group of Graseby
Limited (the product-monitoring businesses), a subsidiary of Smiths Industries
plc. The product-monitoring businesses design, manufacture, and distribute
checkweighers, metal detectors, X-ray inspection equipment, and thermal
printers. The Company's bulk-materials product line includes conveyor-belt
scales, solid level-measurement and conveyor-monitoring systems, sampling
systems, and small-capacity feeders. These products are sold primarily to
customers in the mining and material-processing industries, as well as to
electric utilities and chemical and other manufacturing companies.
A substantial portion of the Company's sales are derived from sales of
products outside the United States, through export sales, and sales by the
Company's foreign subsidiaries. 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 affecting the relationship between the U.S. dollar and foreign
currencies.
Results of Operations
Third Quarter 1999 Compared With Third Quarter 1998
Revenues decreased to $27.2 million in the third quarter of 1999 from
$29.1 million in the third quarter of 1998. Excluding the impact of foreign
exchange, revenues in the European and Other segments decreased $1.5 million and
$0.7 million, respectively, primarily due to decreased demand. These decreases
were offset in part by an increase in revenues of $0.7 million in the North
American segment, primarily due to increased demand for packaged-goods products
in the U.S. Revenues decreased by $0.4 million due to a stronger U.S. dollar
relative to currencies in foreign countries in which the Company operates. The
Company's total backlog decreased to $12.7 million at October 2, 1999, from
$14.7 million at January 2, 1999, primarily due to decreased demand.
The gross profit margin increased to 42% in the third quarter of 1999 from
36% in the third quarter of 1998, primarily due to manufacturing efficiencies
achieved as a result of cost-reduction measures at the product-monitoring
businesses and, to a lesser extent, improved margins from sales of the Company's
packaged-goods products in North America.
9
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Third Quarter 1999 Compared With Third Quarter 1998 (continued)
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in the third quarter of 1999 from 25% in the third quarter of
1998, primarily due to decreased revenues.
Research and development expenses decreased to $0.9 million in the third
quarter of 1999 from $1.0 million in the third quarter of 1998, primarily due to
the timing of expenditures.
Interest income was $0.1 million in the third quarter of 1999 and 1998.
Interest expense decreased to $0.3 million in 1999 from $0.4 million in 1998,
primarily due to the partial repayment of the Company's note payable to Thermo
Electron Corporation.
The effective tax rate was 40% and 39% in the third quarter of 1999 and
1998, respectively. The effective tax rate exceeded the statutory federal income
tax rate primarily due to the impact of state income taxes and foreign tax rate
differences.
First Nine Months 1999 Compared With First Nine Months 1998
Revenues increased to $81.8 million in the first nine months of 1999 from
$69.7 million in the first nine months of 1998. Revenues increased $15.9 million
due to the inclusion of a full nine months of revenues from the
product-monitoring businesses, which were acquired in June 1998. Excluding the
impact of the acquisition and foreign exchange, revenues from existing
businesses in the European and Other segments decreased $3.1 million and $1.4
million, respectively, primarily due to decreased demand. These decreases were
offset in part by an increase in revenues of $1.6 million from existing
businesses in the North American segment, primarily due to increased demand for
packaged-goods products in the U.S. Revenues decreased by $0.9 million due to a
stronger U.S. dollar relative to currencies in foreign countries in which the
Company operates.
The gross profit margin increased to 40% in the first nine months of 1999
from 38% in the first nine months of 1998, primarily due to the reasons
discussed in the results of operations for the third quarter.
Selling, general, and administrative expenses as a percentage of revenues
increased to 27% in the first nine months of 1999 from 26% in the first nine
months of 1998, primarily due to expenses related to the Company's year 2000
compliance project.
Research and development expenses increased to $2.5 million in the first
nine months of 1999 from $2.0 million in the first nine months of 1998,
primarily due to the inclusion of a full nine months of expenses from the
acquired product-monitoring businesses.
Interest income decreased to $0.3 million in the first nine months of 1999
from $1.2 million in the first nine months of 1998, primarily due to a decrease
in average invested cash balances. The decrease in average invested cash
balances was principally due to cash expended for the acquisition of the
product-monitoring businesses. Interest expense increased to $0.9 million in the
first nine months of 1999 from $0.7 million in the first nine months of 1998,
primarily due to the inclusion of a full nine months of interest expense on
borrowings to partially finance the acquisition of the product-monitoring
businesses.
The effective tax rate was 40% and 39% in the first nine months of 1999
and 1998, respectively. The effective tax rate exceeded the statutory federal
income tax rate primarily due to the impact of state income taxes and foreign
tax rate differences.
10
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Liquidity and Capital Resources
Consolidated working capital was $14.1 million at October 2, 1999,
compared with $9.2 million at January 2, 1999. Included in working capital are
cash and cash equivalents of $10.5 million at October 2, 1999, compared with
$14.1 million at January 2, 1999. During the first nine months of 1999,
operating activities provided cash of $4.6 million. Cash provided by the
Company's operations was offset in part by the use of $1.6 million of cash to
fund a decrease in other current liabilities, primarily due to payments made for
accrued acquisition costs related to the purchase of the product-monitoring
businesses (Note 6), and $1.1 million of cash used to fund an increase in
inventories in an effort to decrease delivery times to customers.
During the first nine months of 1999, the Company's investing activities
used $1.3 million of cash. The Company expended $1.2 million for purchases of
property, plant, and equipment and received proceeds of $0.8 million from the
sale of property, plant, and equipment. During the remainder of 1999, the
Company expects to make capital expenditures for the purchase of property,
plant, and equipment of approximately $0.4 million.
During the first nine months of 1999, the Company's financing activities
used $6.6 million in cash. In the first nine months of 1999, the Company repaid
$7.0 million of its note payable to Thermo Electron and issued Thermo Electron a
new note for $13.0 million in exchange for the initial note. Notes payable in
the accompanying 1999 balance sheet includes $2.5 million of short-term
borrowings of foreign subsidiaries under foreign-currency-denominated
line-of-credit arrangements with banks. As of October 2, 1999, unused lines of
credit totaled $9.4 million.
Generally the Company expects to have positive cash flow from its existing
operations. Although the Company does not presently intend to actively seek to
acquire additional businesses in the near future, it may consider acquiring one
or more complementary businesses if they are presented to the Company on terms
the Company believes to be attractive. Such acquisitions may require a
significant amount of cash. While the Company currently has no agreements to
acquire other businesses, the Company expects that it would finance any such
acquisition through a combination of internal funds, additional debt or equity
financing from the capital markets, or short-term borrowings from Thermedics
Inc. or Thermo Electron, although it has no agreement with these companies to
ensure that funds will be available on acceptable terms or at all. Thermo
Electron has indicated its willingness to require payment of the Company's $12.0
million principal amount note payable, due March 2000, only to the extent that
the Company's cash flows permit. Accordingly, 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 and certain
discontinued products; (iii) assessing the year 2000 readiness of its key
suppliers and vendors; and (iv) developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and noninformation 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
noninformation 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 noninformation technology systems, which efforts included
11
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Year 2000 (continued)
testing the year 2000 readiness of its manufacturing, utility, and
telecommunications systems at its critical facilities. The Company is currently
in phase two of its program, during which any material noncompliant systems or
noninformation technology systems that were identified during phase one are
prioritized and remediated. The Company is currently upgrading or replacing its
noncompliant information technology systems, and this process was substantially
complete as of October 2, 1999. In many cases, such upgrades or replacements are
being made in the ordinary course of business, without accelerating previously
scheduled upgrades or replacements. The Company expects that all of its material
information technology systems and critical noninformation technology systems
will be year 2000 compliant by the end of 1999.
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, may not be year 2000 compliant. The Company is continuing to test and
evaluate such products. The Company is focusing its efforts on products that are
still under warranty and/or early in their expected life. The Company is
offering upgrades and/or identifying potential solutions where reasonably
practicable.
The Company has developed and 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 has
substantially completed its assessment of third-party risk.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan 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 and vendors, it will modify and
adjust its contingency plan as may be required. The Company expects to complete
its contingency plan by the end of November 1999.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred expenses to third parties (external costs)
related to year 2000 issues of approximately $400,000 as of October 2, 1999, and
the total external costs of year 2000 remediation are expected to be
approximately $430,000. All of the external costs incurred as of October 2,
1999, were spent on testing and upgrading information technology and
communications systems. 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 the internal costs incurred for its year 2000
compliance project. Such costs are principally the related payroll costs for its
information systems group.
Reasonably Likely Worst Case Scenario
The Company is not currently 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 material suppliers or vendors
experience business disruptions due to the year 2000 issue and are unable to
provide materials and services to
12
<PAGE>
Year 2000 (continued)
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 compliant, 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
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 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 material suppliers or vendors experience business disruptions due
to year 2000 issues, the Company might also be materially adversely affected. If
any countries in which the Company operates experience significant year 2000
disruption, the Company could 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 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.
(b) Reports on Form 8-K
None.
13
<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 5th day of November 1999.
THERMO SENTRON INC.
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
14
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
SENTRON INC.'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> 10,538
<SECURITIES> 0
<RECEIVABLES> 26,208
<ALLOWANCES> 1,561
<INVENTORY> 16,135
<CURRENT-ASSETS> 57,207
<PP&E> 6,831
<DEPRECIATION> 3,688
<TOTAL-ASSETS> 137,699
<CURRENT-LIABILITIES> 43,157
<BONDS> 0
0
0
<COMMON> 99
<OTHER-SE> 93,324
<TOTAL-LIABILITY-AND-EQUITY> 137,699
<SALES> 81,816
<TOTAL-REVENUES> 81,816
<CGS> 49,315
<TOTAL-COSTS> 49,315
<OTHER-EXPENSES> 2,503
<LOSS-PROVISION> 413
<INTEREST-EXPENSE> 863
<INCOME-PRETAX> 7,734
<INCOME-TAX> 3,055
<INCOME-CONTINUING> 4,679
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,679
<EPS-BASIC> 0.50
<EPS-DILUTED> 0.49
</TABLE>
