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 1-11757
THERMO OPTEK CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-3283973
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8 East Forge Parkway
Franklin, Massachusetts 02038
(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 51,092,456
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO OPTEK CORPORATION
Consolidated Balance Sheet
(Unaudited)
<S> <C> <C>
Assets
October 2, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ---------- ----------
Current Assets:
Cash and cash equivalents $ 52,107 $59,427
Advance to affiliate (Note 7) 22,431 -
Accounts receivable, less allowance of $4,197 and $4,960 94,475 105,759
Inventories:
Raw materials and supplies 33,470 30,657
Work in process 14,818 12,360
Finished goods 21,593 20,680
Prepaid expenses 8,024 6,831
Prepaid income taxes 10,906 10,777
Due from Thermo Vision Corporation 3,947 -
Due from parent company and affiliated companies 1,896 704
-------- --------
263,667 247,195
-------- --------
Property, Plant, and Equipment, at Cost 101,928 100,446
Less: Accumulated depreciation and amortization 42,533 37,552
-------- --------
59,395 62,894
-------- --------
Patents and Other Assets 5,312 6,427
-------- --------
Due from Thermo Vision Corporation - 3,947
-------- --------
Cost in Excess of Net Assets of Acquired Companies 230,210 241,205
-------- --------
$558,584 $561,668
======== ========
2
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THERMO OPTEK 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 $ 13,168 $22,602
obligations (includes advance from affiliate of $2,039;
Note 7)
Accounts payable 22,118 22,685
Accrued payroll and employee benefits 13,321 12,824
Accrued income taxes 18,492 20,958
Accrued installation and warranty expenses 12,649 15,171
Deferred revenue 18,801 20,017
Other accrued expenses (Notes 5 and 6) 34,594 35,147
-------- --------
133,143 149,404
-------- --------
Deferred Income Taxes 10,502 10,546
-------- --------
Other Deferred Items 2,995 2,906
-------- --------
Long-term Obligations:
5% Subordinated convertible debentures (includes $4,375 68,985 71,505
and $350 of related-party debt)
Other 90 256
-------- --------
69,075 71,761
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 100,000,000 shares authorized; 518 518
51,815,565 and 51,790,115 shares issued
Capital in excess of par value 266,184 265,904
Retained earnings 96,637 69,640
Treasury stock at cost, 723,109 and 479,209 shares (6,912) (4,459)
Deferred compensation (61) -
Accumulated other comprehensive items (Note 2) (13,497) (4,552)
-------- --------
342,869 327,051
-------- --------
$558,584 $561,668
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMO OPTEK CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Revenues $111,581 $107,507
-------- --------
Costs and Operating Expenses:
Cost of revenues 59,668 60,128
Selling, general, and administrative expenses 27,505 26,640
Research and development expenses 7,107 6,139
Restructuring costs (Note 6) 453 8,882
-------- --------
94,733 101,789
-------- --------
Operating Income 16,848 5,718
Interest Income (includes $50 and $58 from a related party) 710 1,191
Interest Expense (includes $191 to a related party in 1998) (1,201) (1,533)
Other Income 109 -
-------- --------
Income Before Provision for Income Taxes and Extraordinary Item 16,466 5,376
Provision for Income Taxes 6,518 3,063
-------- --------
Income Before Extraordinary Item 9,948 2,313
Extraordinary Item, Net of Provision for Income Taxes of $125 - 213
-------- --------
Net Income $ 9,948 $ 2,526
======== ========
Earnings per Share (Note 3):
Basic $ .19 $ .05
======== ========
Diluted $ .19 $ .05
======== ========
Weighted Average Shares (Note 3):
Basic 51,092 51,778
======== ========
Diluted 56,062 51,883
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMO OPTEK CORPORATION
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Revenues $327,886 $329,135
-------- --------
Costs and Operating Expenses:
Cost of revenues 175,514 176,829
Selling, general, and administrative expenses 83,813 82,827
Research and development expenses 20,658 18,495
Restructuring costs (Note 6) 1,098 8,882
-------- --------
281,083 287,033
-------- --------
Operating Income 46,803 42,102
Interest Income (includes $153 and $301 from a related party) 1,881 3,492
Interest Expense (includes $1,346 to a related party in 1998) (3,745) (5,787)
Other Expense (37) -
-------- --------
Income Before Provision for Income Taxes and Extraordinary Item 44,902 39,807
Provision for Income Taxes 17,905 17,352
-------- --------
Income Before Extraordinary Item 26,997 22,455
Extraordinary Item, Net of Provision for Income Taxes of $125 - 213
-------- --------
Net Income $ 26,997 $ 22,668
======== ========
Earnings per Share (Note 3):
Basic $ .53 $ .44
======== ========
Diluted $ .51 $ .42
======== ========
Weighted Average Shares (Note 3):
Basic 51,127 51,700
======== ========
Diluted 56,175 57,689
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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THERMO OPTEK CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Operating Activities:
Net income $ 26,997 $22,668
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 12,468 12,653
Provision for losses on accounts receivable (170) 56
Extraordinary item - (338)
Other noncash items 578 3,311
Changes in current accounts excluding the effects of acquisitions:
Accounts receivable 8,338 10,211
Inventories (8,043) (2,113)
Other current assets (1,355) 517
Accounts payable (74) (2,092)
Due to parent company and affiliated companies (1,224) 439
Other current liabilities (1,764) 2,378
Other - 106
-------- -------
Net cash provided by operating activities 35,751 47,796
-------- -------
Investing Activities:
Acquisitions, net of cash acquired - (6,875)
Advances to affiliate, net (Note 7) (22,431) -
Refund from parent company for acquisitions - 6,737
Purchases of property, plant, and equipment (7,196) (4,951)
Proceeds from sale of property, plant, and equipment 2,070 -
Other 48 1,028
-------- -------
Net cash used in investing activities (27,509) (4,061)
-------- -------
Financing Activities:
Net proceeds from issuance of Company common stock 93 182
Purchases of Company common stock and subordinated convertible (4,794) (4,587)
debentures
Repayment of note payable to Thermo Electron - (40,000)
Decrease in short-term obligations, net (8,566) (11,204)
Repayment of long-term obligations (294) (733)
-------- -------
Net cash used in financing activities (13,561) (56,342)
-------- -------
Exchange Rate Effect on Cash (2,001) 1,475
-------- -------
Decrease in Cash and Cash Equivalents (7,320) (11,132)
Cash and Cash Equivalents at Beginning of Period 59,427 71,245
-------- -------
Cash and Cash Equivalents at End of Period $ 52,107 $60,113
======== =======
6
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THERMO OPTEK CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Noncash Activities:
Conversion of convertible debentures $ - $ 1,780
======== =======
Fair value of assets of acquired companies $ - $11,383
Cash paid for acquired companies - (7,505)
-------- -------
Liabilities assumed of acquired companies $ - $ 3,878
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
7
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Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Optek 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
$17.8 million and $10.9 million, respectively. During the first nine months of
1999 and 1998, the Company's comprehensive income totaled $18.1 million and
$29.7 million, respectively.
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3. Earnings per Share
<S> <C> <C> <C> <C>
Basic and diluted earnings per share were calculated as follows:
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 $9,948 $ 2,526 $26,997 $22,668
------ ------- ------- -------
Weighted Average Shares 51,092 51,778 51,127 51,700
------ ------- ------ -------
Basic Earnings per Share $ .19 $ .05 $ .53 $ .44
====== ======= ====== =======
Diluted
Net Income $9,948 $ 2,526 $26,997 $22,668
Effect of Convertible Obligations 517 - 1,568 1,746
------ ------- ------ -------
Income Available to Common Shareholders, as Adjusted $10,465 $ 2,526 $28,565 $24,414
------- ------- ------- -------
Weighted Average Shares 51,092 51,778 51,127 51,700
Effect of:
Convertible obligations 4,947 - 4,998 5,657
Stock options 23 105 50 332
------ ------- ------ -------
Weighted Average Shares, as Adjusted 56,062 51,883 56,175 57,689
------ ------- ------ -------
Diluted Earnings per Share $ .19 $ .05 $ .51 $ .42
====== ======= ====== =======
8
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3. Earnings per Share (continued)
The computation of diluted earnings per share for all periods 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 2,612,000 of
such options outstanding, with exercise prices ranging from $9.59 to $16.88 per
share.
In the third quarter of 1998, the Company repurchased $5,000,000 principal
amount of 5% subordinated convertible debentures for $4,587,000 in cash,
resulting in an extraordinary gain of $213,000, net of taxes of $125,000. The
extraordinary gain increased basic and diluted earnings per share by $.01 in the
third quarter of 1998 and basic earnings per share by $.01 in the first nine
months of 1998.
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:
Spectroscopy $87,243 $ 83,210 $252,957 $256,932
Materials Science 24,390 24,440 75,122 72,579
Intersegment sales elimination (a) (52) (143) (193) (376)
------- -------- ------- --------
$111,581 $107,507 $327,886 $329,135
======== ======== ======== ========
Income Before Provision for Income Taxes and
Extraordinary Item:
Spectroscopy (b) $14,052 $ 5,523 $38,853 $ 36,016
Materials Science (c) 4,115 1,550 11,905 10,023
Corporate (d) (1,319) (1,355) (3,955) (3,937)
------- -------- ------- --------
Total operating income 16,848 5,718 46,803 42,102
Interest and other expense, net (382) (342) (1,901) (2,295)
------- -------- ------- --------
$16,466 $ 5,376 $44,902 $ 39,807
======= ======== ======= ========
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Includes restructuring and related costs of $0.2 million and $9.2 million in
the third quarter of 1999 and 1998, respectively, and $0.7 million and $9.2
million in the first nine months of 1999 and 1998, respectively.
(c) Includes restructuring costs of $0.3 million and $1.7 million in the third
quarter of 1999 and 1998, respectively, and $0.4 million and $1.7 million in
the first nine months of 1999 and 1998, respectively.
(d) Primarily general and administrative expenses.
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. Unresolved matters at October 2, 1999, primarily included
completion of planned severances and abandonment of excess facilities for
acquisitions completed
9
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5. Accrued Acquisition Expenses (continued)
during the last 12 months. A summary of the changes in accrued acquisition
expenses, included in other accrued expenses in the accompanying balance sheet,
follows:
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<S> <C> <C> <C> <C>
Abandonment Total
of Excess
(In thousands) Severance Facilities
- --------------------------------------------------------------- -------------- ------------- -------------
Balance at January 2, 1999 $ 520 $ 615 $1,135
Usage (138) (396) (534)
Currency translation (47) (19) (66)
------ ----- ------
Balance at October 2, 1999 $ 335 $ 200 $ 535
====== ===== ======
6. Restructuring Costs
During 1998, the Company recorded restructuring costs, which were
accounted for in accordance with EITF 94-3, primarily for severance of 160
employees and facility-closing costs. As of January 2, 1999, the Company had
terminated 123 employees and had $4.9 million accrued for severance and
facility-closing costs relating to these activities. During the first nine
months of 1999, the Company terminated 30 additional employees and recorded
additional restructuring charges of $1.1 million, primarily for abandoned lease
costs, pension costs for terminated employees, and other facility costs, which
could not be accrued previously under EITF 94-3, all of which was expended
during the first nine months of 1999. The Company does not expect to incur any
additional restructuring costs in 1999. A summary of the changes in accrued
restructuring costs, which are included in other accrued expenses in the
accompanying balance sheet, follows:
Facility-
closing
(In thousands) Severance Costs Other Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 2, 1999 $ 3,190 $ 1,069 $ 684 $ 4,943
Charged to expense 57 798 243 1,098
Usage (2,573) (1,572) (565) (4,710)
Currency translation (75) 24 (68) (119)
------- ------- ------- -------
Balance at October 2, 1999 $ 599 $ 319 $ 294 $ 1,212
======= ======= ======= =======
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.
10
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7. Cash Management Arrangements (continued)
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 or borrowed from
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 or borrowed under these arrangements are included in
"advance to affiliate" or "advance from affiliate," respectively, 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
fiscal year ended January 2, 1999, filed with the Securities and Exchange
Commission.
Overview
Thermo Optek Corporation (the Company) is a worldwide leader in analytical
instruments that use a range of optical spectroscopy and energy-based
techniques, and systems for materials analysis, characterization, and
preparation. These instruments are used in virtually every industry for
elemental and molecular analysis of a wide variety of solids, liquids, and
gases, as well as in testing and fabricating advanced materials. The Company
operates in two reportable segments: Spectroscopy and Materials Science.
The Spectroscopy segment has four principal operating units: Madison,
Wisconsin-based Nicolet Instrument Corporation, a manufacturer and distributor
of Fourier transform infrared (FT-IR) and FT-Raman spectrometry products;
Ecublens, Switzerland-based A.R.L. Applied Research Laboratories S.A. (ARL), a
manufacturer and distributor of wavelength-dispersive X-ray fluorescence and AE
instruments; Franklin, Massachusetts-based Thermo Jarrell Ash Corporation, a
manufacturer and distributor of atomic absorption (AA) and atomic emission (AE)
spectrometry products; and Rochester, New York-based Spectronic Instruments, a
manufacturer and distributor of UV-visible spectrophotometers.
The Materials Science segment has two principal operating units, VG
Systems Limited, located in East Grinstead, England, and Gebrueder Haake GmbH
(Haake), located in Karlsruhe, Germany. VG Systems primarily includes VG
Semicon, a manufacturer and distributor of molecular-beam epitaxy systems for
the production of gallium arsenide wafers, and VG Scientific, a manufacturer and
distributor of instrumentation for surface and chemical analysis. Haake is a
supplier of viscometry and rheometry systems used by a wide variety of
manufacturers to measure the properties of liquid substances.
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.
11
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Results of Operations
Third Quarter 1999 Compared With Third Quarter 1998
Revenues increased to $111.6 million in the third quarter of 1999 from
$107.5 million in the third quarter of 1998. Revenues increased $0.6 million
from acquisitions, net of dispositions. Revenues decreased $1.6 million due to
the unfavorable effects of currency translation due to the strengthening of the
U.S. dollar relative to the foreign currencies in countries in which the Company
operates. Revenues at the Spectroscopy segment increased $4.0 million to $87.2
million in 1999. Excluding the impact of acquisitions, net of disposition, and
foreign currency translation, revenues at the Spectroscopy segment increased
$4.6 million, primarily due to increases in spectrometry instruments sold by
certain elemental analysis businesses and increased shipments of grating
components. Increased sales to the semiconductor industry and to Asia
contributed to the higher revenue compared with the same quarter a year ago.
Revenues in the Materials Science segment were flat at $24.4 million in both
periods. Revenues at this segment, excluding acquisitions, net of disposition,
and foreign currency translation, increased $0.5 million, primarily due to
increased sales at its VG Semicon business. Backlog at October 2, 1999,
increased 13% to $86.5 million from $76.5 million a year ago, as a result of
increased demand for new products.
The gross profit margin increased to 46.5% in the third quarter of 1999
from 44.1% in the third quarter of 1998, primarily due to the inclusion of
inventory write-downs of $2.0 million in the 1998 period for discontinued
products and excess inventories caused by decreased product demand. The
inventory write-downs in 1998 primarily included certain spectrometers in the
Spectroscopy segment. Excluding the impact of the write-downs in 1998, the gross
profit margin increased 0.5%, primarily due to shipments of higher-margin
grating components.
Selling, general, and administrative expenses as a percentage of revenues
remained unchanged at 25% in the third quarter of 1999 and 1998.
Research and development expenses increased to $7.1 million in the third
quarter of 1999 from $6.1 million in the third quarter of 1998, due to increased
spending on new product development, including the V150 system at VG Semicon and
new products at Nicolet Instrument and Thermo Jarrell Ash.
Restructuring costs of $0.5 million in the third quarter of 1999 primarily
represent facility-closing cash costs associated with the restructuring plan
undertaken in 1998 (Note 6). In the third quarter of 1998, in addition to the
inventory write-downs described above, the Company recorded restructuring costs
of $8.9 million primarily related to severance costs and the closure of
facilities.
Interest income decreased to $0.7 million in the third quarter of 1999
from $1.2 million in the third quarter of 1998, primarily due to lower average
invested balances as a result of the Company's repurchases of common stock and
subordinated convertible debentures. Interest expense decreased to $1.2 million
in the third quarter of 1999 from $1.5 million in the third quarter of 1998,
primarily due to lower borrowings under notes payable. In addition, interest
expense declined due to the conversion of a portion of the Company's
subordinated convertible debentures into common stock of the Company in 1998 and
the purchase by the Company of a portion of its subordinated convertible
debentures in 1999 and 1998.
The effective tax rate was 40% and 57% in the third quarter of 1999 and
1998, respectively. The Company's effective tax rate exceeded the statutory
federal income tax rate in both periods primarily due to the effect of foreign
tax law and rate differences, state income taxes, and nondeductible amortization
of cost in excess of net assets of acquired companies, offset in part by the tax
benefit associated with a foreign sales corporation. The effective tax rate
decreased as a result of the lower relative impact of nondeductible expenses in
the 1999 period due to higher profitability.
During the third quarter of 1998, the Company recorded an extraordinary
gain, net of tax, of $0.2 million related to the early extinguishment of debt.
12
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First Nine Months 1999 Compared With First Nine Months 1998
Revenues were $327.9 million in the first nine months of 1999, compared
with $329.1 million in the first nine months of 1998. Revenues increased $4.1
million due to acquisitions, net of dispositions. Revenues decreased $1.7
million due to the unfavorable effects of currency translation due to the
strengthening of the U.S. dollar relative to the foreign currencies in countries
in which the Company operates. Revenues at the Spectroscopy segment decreased
$4.0 million to $253.0 million in 1999. Excluding the impact of acquisitions,
net of disposition and foreign currency translation, revenues at the
Spectroscopy segment decreased $5.9 million, primarily due to reduced demand for
components sold into the excimer laser market and increased price competition at
certain elemental analysis businesses. Revenues at the Materials Science segment
increased $2.5 million to $75.1 million in 1999. Revenues at this segment,
excluding the effect of acquisitions, net of disposition, and foreign currency
translation, increased $2.3 million, primarily due to increased sales at its VG
Semicon business.
The gross profit margin remained unchanged at 46% in the first nine months
of 1999 and 1998. Excluding the impact of the inventory write-downs of $2.0
million in 1998, discussed in the results of operations for the third quarter,
the gross profit margin decreased 0.4% primarily due to lower margins at VG
Semicon as a result of higher costs on its first V150 system relative to the
costs of its other models.
Selling, general, and administrative expenses as a percentage of revenues
increased to 26% in the first nine months of 1999 from 25% in the first nine
months of 1998, primarily due to lower revenues, offset in part by cost
reductions as a result of restructuring actions taken in 1998.
Research and development expenses increased to $20.7 million in the first
nine months of 1999 from $18.5 million in the first nine months of 1998,
primarily due to the reasons discussed in the results of operations for the
third quarter.
Restructuring costs of $1.1 million in the first nine months of 1999
primarily represent facility-closing costs and pension costs for terminated
employees (Note 6). In addition to the inventory write-downs in the first nine
months of 1998, the Company recorded restructuring costs of $8.9 million related
to severance costs and the closure of facilities.
Interest income decreased to $1.9 million in the first nine months of 1999
from $3.5 million in the first nine months of 1998 and interest expense
decreased to $3.7 million in the first nine months of 1999 from $5.8 million in
the first nine months of 1998, primarily due to the reasons discussed in the
results of operations for the third quarter.
The effective tax rate was 40% and 44% in the first nine months of 1999
and 1998, respectively. The Company's effective tax rate exceeded the statutory
federal income tax rate in both periods primarily due to the effect of foreign
tax law and rate differences, state income taxes, and nondeductible amortization
of cost in excess of net assets of acquired companies, offset in part by the tax
benefit associated with a foreign sales corporation. The effective tax rate
decreased due to the reason discussed in the results of operations for the third
quarter.
Liquidity and Capital Resources
Consolidated working capital was $130.5 million at October 2, 1999,
compared with $97.8 million at January 2, 1999. Included in working capital are
cash and cash equivalents of $52.1 million at October 2, 1999, compared with
$59.4 million at January 2, 1999. In addition, as of October 2, 1999, the
Company had $22.4 million invested in an advance to affiliate. Prior to the use
of new domestic 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, $49.1 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.
13
<PAGE>
Liquidity and Capital Resources (continued)
During the first nine months of 1999, $35.8 million of cash was provided
by operating activities. Cash was provided by a $8.3 million decrease in
accounts receivable, primarily as a result of lower revenues in the third
quarter of 1999 compared with the fourth quarter of 1998 and, to a lesser
extent, management's efforts to improve collections. This source of cash was
offset in part by $8.0 million of cash used to increase inventories, primarily
due to the buildup of inventory in preparation for new product introductions in
the second half of 1999 and the timing of shipments.
The Company's investing activities used $27.5 million of cash in the first
nine months of 1999. Excluding advance to affiliate activity, the Company's
primary investing activities included $7.2 million for the purchase of property,
plant, and equipment. The Company also sold equipment for proceeds of $2.1
million. During the remainder of 1999, the Company plans to make capital
expenditures of approximately $2 million.
The Company's financing activities used $13.6 million of cash in the first
nine months of 1999. The Company used $4.8 million of cash to repurchase Company
common stock and subordinated convertible debentures pursuant to an
authorization by the Company's Board of Directors. In November 1999, the
Company's Board of Directors authorized the repurchase of up to an additional
$5.0 million of its own securities through October 29, 2000, in the open market
or in negotiated transactions. Any such purchases are funded from working
capital. During the first nine months of 1999, the Company repaid $8.9 million
of short- and long-term borrowings. The Company's $69.0 million principal amount
5% subordinated convertible debentures are due in October 2000. The Company may
need to borrow funds at the debentures' maturity from Thermo Instrument Systems
Inc. or the guarantor, Thermo Electron, although it has no agreements currently
to do so. The maturity of this debt could adversely affect the Company's
liquidity in the last half of 2000.
Although the Company expects to have positive cash flow from its existing
operations, the Company may require significant amounts of cash for any
acquisition of complementary businesses. The Company expects that it will
finance any such acquisitions through a combination of internal funds,
additional debt financing from capital markets, or short-term borrowings from
Thermo Instrument or Thermo Electron, although it has no agreement with these
companies to ensure that funds will be available on acceptable terms or at all.
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 key suppliers
and vendors; and (iv) developing a contingency plan. Based on its evaluations of
its critical facilities, the Company does not believe any material upgrades or
modifications are required.
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 material
noncompliant information technology systems or non-information technology
systems that were identified during phase one were prioritized and remediated.
Based on its evaluations, the Company
14
<PAGE>
Year 2000 (continued)
does not believe it is required to make any material upgrades to its critical
non-information technology systems. 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 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
problems. 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. 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
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 material
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
compliant, it will seek to identify and secure other suppliers or vendors as
part of its contingency plan.
15
<PAGE>
Year 2000 (continued)
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. 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. 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. 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 year 2000
issues 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.
(b) Reports on Form 8-K
None.
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 8th day of November 1999.
THERMO OPTEK CORPORATION
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
17
<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 OPTEK
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> 52,107
<SECURITIES> 0
<RECEIVABLES> 98,672
<ALLOWANCES> 4,197
<INVENTORY> 69,881
<CURRENT-ASSETS> 263,667
<PP&E> 101,928
<DEPRECIATION> 42,533
<TOTAL-ASSETS> 558,584
<CURRENT-LIABILITIES> 133,143
<BONDS> 64,700
0
0
<COMMON> 518
<OTHER-SE> 342,351
<TOTAL-LIABILITY-AND-EQUITY> 558,584
<SALES> 327,886
<TOTAL-REVENUES> 327,886
<CGS> 175,514
<TOTAL-COSTS> 175,514
<OTHER-EXPENSES> 21,756
<LOSS-PROVISION> (170)
<INTEREST-EXPENSE> 3,745
<INCOME-PRETAX> 44,902
<INCOME-TAX> 17,905
<INCOME-CONTINUING> 26,997
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,997
<EPS-BASIC> 0.53
<EPS-DILUTED> 0.51
</TABLE>
