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 July 4, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-9567
THERMEDICS INC.
(Exact name of Registrant as specified in its charter)
Massachusetts 04-2788806
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
470 Wildwood Street, P.O. Box 2999
Woburn, Massachusetts 01888-1799
(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 July 31, 1998
---------------------------- ----------------------------
Common Stock, $.10 par value 36,789,389 Actual
41,738,108 Pro Forma
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMEDICS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
July 4, January 3,
(In thousands) 1998 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents (includes $58,435
and $175,101 under repurchase agreement
with parent company) $123,184 $187,012
Short-term available-for-sale investments,
at quoted market value (amortized cost
of $51,568 and $58,144) 51,682 58,317
Accounts receivable, less allowances of
$5,183 and $4,207 63,763 61,488
Inventories:
Raw materials and supplies 27,543 23,857
Work in process 19,896 18,218
Finished goods 20,734 17,499
Prepaid income taxes and expenses 13,808 12,769
-------- --------
320,610 379,160
-------- --------
Property, Plant, and Equipment, at Cost 60,364 55,597
Less: Accumulated depreciation and
amortization 37,675 33,986
-------- --------
22,689 21,611
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $46,625 and $12,655) 46,625 12,665
-------- --------
Other Assets 11,472 12,139
-------- --------
Cost in Excess of Net Assets of Acquired
Companies (Note 2) 148,748 110,977
-------- --------
$550,144 $536,552
======== ========
2
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THERMEDICS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
July 4, January 3,
(In thousands except share amounts) 1998 1998
- --------------------------------------------------------------------------
Current Liabilities:
Notes payable and current maturity of
long-term obligation (includes $21,000 due
to Thermo Electron in 1998; Note 2) $ 28,348 $ 7,498
Accounts payable 19,700 18,020
Accrued payroll and employee benefits 10,151 12,576
Accrued commissions 4,160 3,389
Accrued income taxes 9,308 6,815
Accrued warranty costs 5,190 3,784
Other accrued expenses 16,536 15,449
Due to parent company and affiliated companies 2,228 2,266
-------- --------
95,621 69,797
-------- --------
Deferred Income Taxes and Other Deferred Items 181 177
-------- --------
Long-term Obligations:
Subordinated convertible obligations (Note 5) 122,673 142,750
Other 13 21
-------- --------
122,686 142,771
-------- --------
Minority Interest 89,867 96,461
-------- --------
Shareholders' Investment (Note 3):
Common stock, $.10 par value, 100,000,000 shares
authorized; 41,738,108 pro forma shares and
36,846,175 shares issued 4,174 3,685
Capital in excess of par value 110,557 113,913
Retained earnings 131,314 116,034
Treasury stock at cost, 68,186 and 134,172
shares (1,488) (3,449)
Accumulated other comprehensive items (Note 7) (2,768) (2,837)
-------- --------
241,789 227,346
-------- --------
$550,144 $536,552
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
THERMEDICS INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
------------------
July 4, June 28,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $76,711 $75,996
------- -------
Costs and Operating Expenses:
Cost of revenues 38,872 38,140
Selling, general, and administrative expenses 22,421 21,552
Research and development expenses 6,146 6,227
------- -------
67,439 65,919
------- -------
Operating Income 9,272 10,077
Interest Income 3,281 3,305
Interest Expense (includes $77 to related party
in 1998; Note 2) (1,233) (714)
Gain on Sale of Investments, Net 13 -
------- -------
Income Before Provision for Income Taxes,
Minority Interest, and Extraordinary Item 11,333 12,668
Provision for Income Taxes 4,331 5,174
Minority Interest Expense 1,728 1,988
------- -------
Income Before Extraordinary Item 5,274 5,506
Extraordinary Item, Net of Provision for Income
Taxes of $2,312 (Note 5) 3,433 -
------- -------
Net Income $ 8,707 $ 5,506
======= =======
Earnings per Share (Notes 5 and 6):
Basic $ .21 $ .15
======= =======
Diluted $ .20 $ .14
======= =======
Weighted Average Shares (Notes 5 and 6):
Basic 41,663 36,697
======= =======
Diluted 43,494 38,884
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMEDICS INC.
Consolidated Statement of Income
(Unaudited)
Six Months Ended
------------------
July 4, June 28,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $152,372 $148,053
-------- --------
Costs and Operating Expenses:
Cost of revenues 77,533 75,101
Selling, general, and administrative expenses 43,482 43,516
Research and development expenses 12,775 11,811
-------- --------
133,790 130,428
-------- --------
Operating Income 18,582 17,625
Interest Income 6,946 5,942
Interest Expense (includes $77 to related party
in 1998; Note 2) (2,439) (983)
Gain on Issuance of Stock by Subsidiary - 17,075
Gain on Sale of Investments, Net 31 -
-------- --------
Income Before Provision for Income Taxes,
Minority Interest, and Extraordinary Item 23,120 39,659
Provision for Income Taxes 9,100 8,938
Minority Interest Expense 3,378 3,249
-------- --------
Income Before Extraordinary Item 10,642 27,472
Extraordinary Item, Net of Provision for Income
Taxes of $3,092 (Note 5) 4,638 -
-------- --------
Net Income $ 15,280 $ 27,472
======== ========
Earnings per Share (Notes 5 and 6):
Basic $ .37 $ .75
======== ========
Diluted $ .36 $ .71
======== ========
Weighted Average Shares (Notes 5 and 6):
Basic 40,760 36,690
======== ========
Diluted 42,709 38,920
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMEDICS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
--------------------
July 4, June 28,
(In thousands) 1998 1997
- -------------------------------------------------------------------------
Operating Activities:
Net income $ 15,280 $ 27,472
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,392 5,411
Provision for losses on accounts
receivable 391 285
Gain on issuance of stock by subsidiary - (17,075)
Gain on sale of investments, net (31) -
Gain on repurchase and exchange of
subordinated convertible debentures
(Note 5) (7,730) -
Minority interest expense 3,378 3,249
Other noncash expenses 484 738
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable 4,641 1,293
Inventories (2,338) (5,897)
Prepaid income taxes and expenses (597) (568)
Accounts payable (1,596) (518)
Other current liabilities (3,849) 2,098
Other (335) -
--------- ---------
Net cash provided by operating activities 13,090 16,488
--------- ---------
Investing Activities:
Acquisitions, net of cash acquired (Note 2) (44,195) (3,880)
Purchases of available-for-sale investments (126,950) (51,900)
Proceeds from sale and maturities of
available-for-sale investments 99,975 66,920
Purchases of property, plant, and equipment (3,741) (3,573)
Other (503) 97
--------- ---------
Net cash provided by (used in) investing
activities $ (75,414) $ 7,664
--------- ---------
6
<PAGE>
THERMEDICS INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
------------------
July 4, June 28,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of Company and
subsidiaries' common stock $ 251 $ 28,674
Proceeds from issuance of short-term obligation
to Thermo Electron (Note 2) 21,000 -
Purchases of Company and subsidiaries'
common stock (11,737) (37,429)
Net proceeds from issuance of subordinated
convertible debentures - 68,139
Repurchase of subordinated convertible
debentures (Note 5) (11,384) -
Net increase (decrease) in short-term borrowings (186) 853
International Technidyne transfer from
parent company - 350
-------- --------
Net cash provided by (used in) financing
activities (2,056) 60,587
-------- --------
Exchange Rate Effect on Cash 552 805
-------- --------
Increase (Decrease) in Cash and Cash
Equivalents (63,828) 85,544
Cash and Cash Equivalents at Beginning of
Period 187,012 82,800
-------- --------
Cash and Cash Equivalents at End of Period $123,184 $168,344
======== ========
Noncash Activities (Notes 2 and 5):
Fair value of assets of acquired companies $ 54,294 $ 6,240
Cash paid for acquired companies acquired (44,195) (4,307)
-------- --------
Liabilities assumed of acquired companies $ 10,099 $ 1,933
======== ========
Conversions of subsidiaries' convertible
obligations $ - $ 895
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
THERMEDICS INC.
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermedics 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 July 4, 1998, the results of
operations for the three- and six-month periods ended July 4, 1998, and June 28,
1997, and the cash flows for the six-month periods ended July 4, 1998, and June
28, 1997. Interim results are not necessarily indicative of results for a full
year.
The consolidated balance sheet presented as of January 3, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1998,
filed with the Securities and Exchange Commission.
2. Acquisition
On June 12, 1998, the Company's Thermo Sentron Inc. subsidiary acquired the
three businesses that constitute the product-monitoring group of Smiths
Industries plc's Graseby Limited subsidiary (the product-monitoring businesses)
for $44.2 million in cash, net of cash acquired, and the assumption of certain
liabilities. The product-monitoring businesses design, manufacture, and
distribute specialized packaged-goods equipment, including checkweighers and
metal detectors, for the food and pharmaceutical industries. The
product-monitoring businesses are based in the United Kingdom and had combined
revenues in calendar 1997 of approximately $46.0 million. To partially finance
this acquisition, Thermo Sentron borrowed $21.0 million from Thermo Electron
Corporation pursuant to a promissory note due December 1998, bearing interest at
the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter.
This acquisition has been accounted for using the purchase method of
accounting, and the results of operations of the product-monitoring businesses
have been included in the accompanying financial statements from the date of
acquisition. The cost of the acquisition exceeded the estimated fair value of
the acquired net assets by $38.6 million, which is being amortized over 40
years. Allocation of the purchase price was based on an estimate of the fair
value of the net assets acquired and is subject to adjustment upon finalization
of the purchase price allocation. The Company has gathered no information that
indicates the final allocation will differ materially from the preliminary
estimate. Pro forma data has not been presented as the results of the
product-monitoring businesses were not material to the Company's results of
operations.
8
<PAGE>
3. Common Stock
On February 5, 1998, the Company's Board of Directors voted to issue
4,880,533 shares of its common stock to Thermo Electron in exchange for 100% of
the stock of TMO TCA Holdings Inc., which is the beneficial owner of 3,355,705
shares of common stock of the Company's Thermo Cardiosystems Inc. subsidiary.
The Company's issuance of the 4,880,533 shares of its common stock to Thermo
Electron is subject to approval by the Company's shareholders. However, because
Thermo Electron is the majority shareholder and intends to vote its shares in
favor of the transaction, approval is assured and, therefore, the shares are
considered to be outstanding as of February 5, 1998, for purposes of computing
weighted average shares. The shares of common stock will be exchanged at their
respective fair market values as of February 5, 1998.
4. Offer to Acquire the Outstanding Common Stock of Thermo Voltek Corp.
On March 31, 1998, the Company proposed to acquire, through a merger, all of
the outstanding shares of common stock of Thermo Voltek Corp. (a publicly
traded, majority-owned subsidiary) that the Company does not own, at a price of
$7.00 per share in cash. In addition, the proposal contemplates the redemption
of Thermo Voltek's $5.3 million principal amount of 3 3/4% subordinated
convertible debentures due 2000. As of July 4, 1998, the Company owned 67% of
the outstanding common stock of Thermo Voltek. In addition, Thermo Electron owns
approximately 3% of the outstanding common stock of Thermo Voltek.
On March 31, 1998, complaints were filed by certain shareholders of Thermo
Voltek, each attempting to act on behalf of Thermo Voltek's public shareholders.
The complaints allege, among other things, that the proposed price of $7.00 per
share to be paid to the shareholders of Thermo Voltek is unfair and grossly
inadequate.
Thermo Voltek has appointed a special committee, comprised of its
independent directors, to evaluate the proposal with the assistance of a
financial advisor, HSBC Securities, Inc., which is also working with the special
committee to evaluate alternatives to the proposal, including the possibility of
identifying another buyer of Thermo Voltek. The merger is contingent upon, among
other things, the negotiation and execution of a definitive merger agreement;
receipt by Thermo Voltek's Board of Directors of an opinion by an investment
banking firm that the Company's offer is fair to Thermo Voltek's shareholders
(other than the Company and Thermo Electron) from a financial point of view;
approval by the holders of a majority of Thermo Voltek's shares, excluding the
Company and Thermo Electron; the approval of Thermo Voltek's Board of Directors
upon recommendation of its special committee; and clearance by the Securities
and Exchange Commission of the proxy materials regarding the proposed
transaction.
5. Repurchase and Exchange of Subordinated Convertible Debentures
In June 1998, the Company offered holders of its noninterest-bearing
subordinated convertible debentures due 2003, convertible at $31.125 per share,
the opportunity to exchange such debentures for newly issued 2 7/8% subordinated
convertible debentures due 2003, convertible at
9
<PAGE>
5. Repurchase and Exchange of Subordinated Convertible Debentures
(continued)
$14.928 per share. Holders of $21.7 million principal amount of outstanding
debentures exchanged such debentures for $15.9 million principal amount of newly
issued debentures. This transaction resulted in an extraordinary gain of $3.0
million, net of taxes of $2.1 million, in accordance with the provisions of
Emerging Issues Task Force Pronouncement No. 96-19. In addition, earlier in the
second quarter of 1998, the Company repurchased $2.7 million principal amount of
noninterest-bearing subordinated convertible debentures for $2.1 million in
cash, resulting in an extraordinary gain of $0.4 million, net of taxes of $0.2
million. During the first quarter of 1998, the Company and a majority-owned
subsidiary repurchased $11.5 million principal amount of subordinated
convertible debentures for $9.3 million in cash, resulting in an extraordinary
gain of $1.2 million, net of taxes of $0.8 million.
The extraordinary gains recorded by the Company increased basic and diluted
earnings per share by $.08 in the second quarter of 1998 and $.11 in the first
six months of 1998.
6. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Six Months Ended
------------------ -------------------
(In thousands except July 4, June 28, July 4, June 28,
per share amounts) 1998 1997 1998 1997
- ---------------------------------------------------------------------------
Basic
Net income $ 8,707 $ 5,506 $15,280 $27,472
------- ------- ------- -------
Weighted average shares 36,782 36,697 36,764 36,690
Effect of shares issuable
in exchange for
Thermo Cardiosystems
common stock 4,881 - 3,996 -
------- ------- ------- -------
Pro forma basic weighted
average shares 41,663 36,697 40,760 36,690
------- ------- ------- -------
Basic earnings per share $ .21 $ .15 $ .37 $ .75
======= ======= ======= =======
10
<PAGE>
6. Earnings per Share (continued)
Three Months Ended Six Months Ended
------------------ ------------------
(In thousands except July 4, June 28, July 4, June 28,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Diluted
Net income $ 8,707 $ 5,506 $15,280 $27,472
Effect of:
Convertible obligations 1 - 1 -
Majority-owned
subsidiaries' dilutive
securities (24) (11) (59) (19)
------- ------- ------- -------
Income available to
common shareholders,
as adjusted $ 8,684 $ 5,495 $15,222 $27,453
======= ======= ======= =======
Basic weighted average
shares 41,663 36,697 40,760 36,690
Effect of:
Convertible obligations 1,722 1,989 1,827 1,989
Stock options 109 198 122 241
------- ------- ------- -------
Pro forma weighted average
shares, as adjusted 43,494 38,884 42,709 38,920
------- ------- ------- -------
Diluted earnings per
share $ .20 $ .14 $ .36 $ .71
======= ======= ======= =======
The computation of diluted earnings per share excludes the effect of
assuming the exercise of certain outstanding stock options because the effect
would be antidilutive. As of July 4, 1998, there were 1,090,850 of such options
outstanding, with exercise prices ranging from $15.52 to $29.73 per share.
7. Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income and "other comprehensive items," which
represent 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 second quarter of 1998 and 1997, the
Company's comprehensive income totaled $8.9 million and $5.6 million,
respectively. During the first six months of 1998 and 1997, the Company's
comprehensive income totaled $15.3 million and $25.8 million, respectively.
11
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 3, 1998, filed with the Securities and Exchange
Commission.
Overview
The Company's business is divided into two segments: Instruments and Other
Equipment, and Biomedical Products. The Instruments and Other Equipment segment
includes the Company's Thermo Sentron Inc. subsidiary, which develops,
manufactures, and sells high-speed precision-weighing and inspection equipment
for industrial production and packaging lines; its Thermedics Detection Inc.
subsidiary, which develops, manufactures, and markets high-speed detection
instruments used in a variety of on-line industrial process applications,
security applications, and laboratory analysis; and its Thermo Voltek Corp.
subsidiary, which manufactures electronics-test instruments and a range of
products related to power amplification, conversion, and quality. On June 12,
1998, Thermo Sentron acquired the three businesses that constitute the
product-monitoring group of Smiths Industries plc's Graseby Limited subsidiary
(the product-monitoring businesses; Note 2).
As part of its Biomedical Products segment, the Company's Thermo
Cardiosystems Inc. subsidiary manufactures two implantable left
ventricular-assist systems (LVAS): a pneumatic, or air-driven, system and an
electric version. Thermo Cardiosystems' electric LVAS is being used in Europe as
a bridge to transplant and as an alternative to medical therapy. According to
terms set by the U.S. Food and Drug Administration (FDA), no profit can be
earned from the sale of an LVAS in the U.S. until the FDA has approved the
device for commercial sale. With the FDA's approval, the Company began earning a
profit on the sale of its air-driven LVAS in 1994. Until FDA approval has been
obtained, the Company may not earn a profit on the sale in the U.S. of other
products, such as the electric LVAS, currently used in clinical studies. Thermo
Cardiosystems' International Technidyne Corporation subsidiary is a leading
manufacturer of near-patient, whole-blood coagulation testing equipment and
related disposables and also manufactures premium-quality, single-use
skin-incision devices. The Company also develops and manufactures enteral
nutrition-delivery systems and a line of medical-grade polymers used in medical
disposables and in nonmedical, industrial applications, including safety glass
and automotive coatings.
12
<PAGE>
Overview (continued)
A significant amount of the Company's revenues is derived from sales of
products outside of the U.S., through export sales and sales by the Company's
foreign subsidiaries. The Company expects an increase in the percentage of
revenues derived from international operations. 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 between the U.S. dollar and foreign currencies. Where
appropriate, the Company uses forward contracts to reduce its exposure to
currency fluctuations.
Results of Operations
Second Quarter 1998 Compared With Second Quarter 1997
Total revenues were $76.7 million in the second quarter of 1998, compared
with $76.0 million in the second quarter of 1997. Instruments and Other
Equipment segment revenues were $56.3 million in 1998, compared with $56.0
million in 1997. An increase of $3.1 million in revenues from Thermo Sentron was
offset in part by decreases in revenues of $1.6 million and $1.2 million at
Thermedics Detection and Thermo Voltek, respectively.
Revenues from Thermo Sentron increased to $21.6 million in the second
quarter of 1998 from $18.5 million in the second quarter of 1997, primarily due
to the inclusion of $2.6 million of revenues from the acquisitions of Westerland
Engineering Ltd. in July 1997, and the product-monitoring businesses on June 12,
1998, and, to a lesser extent, increased product demand. These increases were
offset in part by a decrease of $0.7 million due to the impact of a stronger
U.S. dollar relative to currencies in foreign countries in which Thermo Sentron
operates. Revenues at Thermedics Detection decreased to $24.0 million 1998 from
$25.6 million in 1997. Revenues from Thermedics Detection's EGIS(R)
explosives-detection systems and related services decreased to $2.2 million in
1998 from $3.1 million in 1997, primarily due to a decline in international
demand. Revenues from Thermedics Detection's industrial process instruments and
related services decreased to $8.1 million in 1998 from $8.5 million in 1997,
primarily as a result of the fulfillment in 1997 of a mandated product-line
upgrade for The Coca-Cola Company to its existing installed base of Alexus(R)
systems. This decrease was partially offset by an increase in InScan(R) product
sales. Revenues from Thermo Voltek decreased to $10.7 million in 1998 from $11.9
million in 1997, primarily due to a decline in demand for electrostatic
discharge (ESD) test equipment.
Biomedical Products segment revenues increased to $20.4 million in the
second quarter of 1998 from $20.0 million in the second quarter of 1997.
Revenues from Thermo Cardiosystems increased to $16.1 million in 1998 from $15.9
million in 1997. Increases in revenues from International Technidyne and the
air-driven LVAS were offset in part by a decrease in revenues from the electric
LVAS. In June 1998, Thermo Cardiosystems
13
<PAGE>
Second Quarter 1998 Compared With Second Quarter 1997 (continued)
received approval from the FDA for engineering advancements made to the electric
LVAS. The FDA also presented additional questions regarding certain other
aspects of Thermo Cardiosystems' submission. Thermo Cardiosystems responded to
these questions in July 1998 and is currently awaiting the FDA's response.
The gross profit margin decreased to 49% in the second quarter of 1998 from
50% in the second quarter of 1997. The gross profit margin for the Instruments
and Other Equipment segment decreased to 47% in 1998 from 49% in 1997. This
decline was the result of a decrease in higher-margin Alexus service revenues at
Thermedics Detection and, to a lesser extent, lower gross profit margins at
Thermo Sentron associated with the sale of inventories revalued at the time of
the acquisition of the product-monitoring businesses .
The gross profit margin for the Biomedical Products segment increased to 55%
in the second quarter of 1998 from 52% in the second quarter of 1997. The gross
profit margin at Thermo Cardiosystems increased as a result of an increase in
revenues from higher-margin International Technidyne products and, to a lesser
extent, a shift in the sales mix to higher-margin air-driven LVAS.
Selling, general, and administrative expenses as a percentage of revenues
increased to 29% in the second quarter of 1998 from 28% in the second quarter of
1997. The increase is primarily due to an increase in marketing efforts at
Thermo Cardiosystems due to increased promotional expenses at International
Technidyne. This increase was offset in part by a decrease in Thermo Voltek's
selling, general, and administrative expenses as a percentage of revenues due to
efficiencies gained from operational, organizational, and personnel changes
implemented in 1997.
Research and development expenses were relatively unchanged at $6.1 million
in the second quarter of 1998, compared with $6.2 million in the second quarter
of 1997. Increased expenses at Thermo Cardiosystems, primarily due to expenses
incurred in association with a clinical trial being conducted by Thermo
Cardiosystems to evaluate the electric LVAS as an alternative to medical therapy
and, to a lesser extent, expenses associated with the development of Thermo
Cardiosystems' HeartMate II system, were more than offset by decreases in
research and development expenses at Thermo Voltek and Thermedics Detection due
to the completion of certain projects and a reallocation of resources to
third-party contracts, respectively.
Interest income was $3.3 million in both the second quarter of 1998 and
1997. Interest expense increased to $1.2 million in 1998 from $0.7 million in
1997, primarily as a result of Thermo Cardiosystems' issuance of $70.0 million
principal amount of 4 3/4% subordinated convertible debentures in May 1997 and
Thermo Sentron's borrowing of $21.0 million from Thermo Electron to partially
finance the acquisition of the product-monitoring businesses.
14
<PAGE>
Second Quarter 1998 Compared With Second Quarter 1997 (continued)
The effective tax rates were 38% and 41% in the second quarter of 1998 and
1997, respectively. The effective tax rates exceeded the statutory federal
income tax rate primarily due to the impact of state income taxes and
nondeductible amortization of cost in excess of net assets of acquired
companies. The effective tax rate decreased due to a decrease in the relative
effect of nondeductible expenses.
Minority interest expense decreased to $1.7 million in the second quarter of
1998 from $2.0 million in the second quarter of 1997, primarily due to lower
profits at Thermo Cardiosystems and the Company's increased percentage ownership
of Thermo Cardiosystems, Thermo Voltek, and Thermedics Detection. This was
offset in part by higher profits at Thermo Voltek, and the effect on minority
interest of the sale of Orion Research Inc. to Thermedics Detection in May 1998.
In June 1998, the Company exchanged $21.7 million principal amount of
noninterest-bearing subordinated convertible debentures for $15.9 million
principal amount 2 7/8% subordinated convertible debentures due 2003, resulting
in an extraordinary gain of $3.0 million, net of taxes of $2.1 million (Note 5).
In addition, earlier in the second quarter of 1998, the Company repurchased $2.7
million principal amount of noninterest-bearing subordinated convertible
debentures for $2.1 million in cash, resulting in an extraordinary gain of $0.4
million, net of taxes of $0.2 million (Note 5).
The Company is currently assessing the potential impact of the year 2000 on
the processing of date-sensitive information by the Company's computerized
information systems and on products sold as well as products purchased by the
Company. The Company believes that its internal information systems and current
products are either year 2000 compliant or will be so prior to the year 2000
without incurring material costs. There can be no assurance, however, that the
Company will not experience unexpected costs and delays in achieving year 2000
compliance for its internal information systems and current products, which
could result in a material adverse effect on the Company's future results of
operations.
The Company is presently assessing the effect that the year 2000 issue may
have on its previously sold products. The Company is also assessing whether its
key suppliers are adequately addressing this issue and the effect this might
have on the Company. The Company has not completed its analysis and is unable to
conclude at this time that the year 2000 issue as it relates to its previously
sold products and products purchased from key suppliers is not reasonably likely
to have a material adverse effect on the Company's future results of operations.
First Six Months 1998 Compared With First Six Months 1997
Total revenues were $152.4 million in the first six months of 1998, compared
with $148.1 million in the first six months of 1997. Instruments and Other
Equipment segment revenues were $110.4 million in 1998 compared to $109.2
million in 1997. An increase of $4.1 million in revenues from Thermo Sentron was
offset in part by a decrease in revenues of $3.5 million at Thermedics
Detection.
15
<PAGE>
First Six Months 1998 Compared With First Six Months 1997 (continued)
Revenues from Thermo Sentron increased to $40.6 million in the first six
months of 1998 from $36.5 million in the first six months of 1997, primarily due
to the acquisitions of Westerland in July 1997 and the product monitoring
businesses on June 12, 1998, and increased product demand. These increases were
offset in part by a decrease of $1.6 million due to the impact of a stronger
U.S. dollar relative to currencies in foreign countries in which Thermo Sentron
operates. Revenues at Thermedics Detection decreased to $47.7 million in 1998
from $51.2 million in 1997. Revenues from Thermedics Detection's industrial
process instruments and related services decreased to $15.2 million in 1998 from
$19.2 million in 1997, primarily as a result of the fulfillment in 1997 of a
mandated product-line upgrade for The Coca-Cola Company to its existing
installed base of Alexus systems and a $0.8 million decrease in revenues from
moisture analyzers, primarily due to a slowdown in product demand in North
America. These decreases in industrial process instruments revenues were offset
in part by an increase in revenues from Thermedics Detection's InScan product
line. Revenue from EGIS explosives-detection systems and related services
increased to $4.6 million in 1998 from $4.2 million in 1997, primarily due to
$1.1 million of shipments under a contract with the U.S. Federal Aviation
Administration (FAA). Product shipments under this contract were completed in
the first quarter of 1998. Revenues from Thermo Voltek were $22.2 million in
1998, compared with $21.6 million in 1997. Increased revenue of $1.0 million due
to the acquisition of Milmega Ltd. in April 1997 was offset in part by a decline
in demand for ESD test equipment.
Biomedical Products segment revenues increased to $42.0 million in the first
six months of 1998 from $38.8 million in the first six months of 1997. Revenues
from Thermo Cardiosystems increased to $32.6 million in 1998 from $30.8 million
in 1997, primarily due to an increase in revenues from International Technidyne
and its air-driven LVAS, offset in part by a decrease in revenues from its
electric LVAS. In addition, revenues from the Company's Polymer Products
division increased $1.0 million due to an increase in demand for its polymer
film product line.
The gross profit margin was unchanged at 49% in the first six months of 1998
and 1997. The gross profit margin for the Instruments and Other Equipment
segment decreased to 47% in 1998 from 48% in 1997. This decrease is the result
of a decline in the gross profit margin at Thermedics Detection, primarily due
to a decrease in higher-margin service revenues, as well as higher costs
relating to Thermedics Detection's service contract with the FAA.
The gross profit margin for the Biomedical Products segment increased to 55%
in the first six months of 1998 from 53% in the first six months of 1997. The
gross profit margin at Thermo Cardiosystems increased as a result of an increase
in revenues from higher-margin International Technidyne products and, to a
lesser extent, a shift in the sales mix to higher-margin air-driven LVAS.
Selling, general, and administrative expenses as a percentage of revenues
were unchanged at 29% in the first six months of 1998 and 1997.
16
<PAGE>
First Six Months 1998 Compared With First Six Months 1997 (continued)
A decrease in Thermo Voltek's selling, general, and administrative expenses as a
percentage of revenues due to efficiencies gained from operational,
organizational, and personnel changes implemented in 1997 was offset by an
increase in selling, general, and administrative expenses at Thermo
Cardiosystems due to increased promotional expenses at International Technidyne.
Research and development expenses increased to $12.8 million in the first
six months of 1998 from $11.8 million in the first six months of 1997. The
increase was primarily due to increased expenses at Thermo Cardiosystems in
association with a clinical trial being conducted to evaluate the electric LVAS
as an alternative to medical therapy and, to a lesser extent, expenses
associated with the development of Thermo Cardiosystems' HeartMate II system.
Interest income increased to $6.9 million in the first six months of 1998
from $5.9 million in the first six months of 1997, primarily due to higher
average invested balances at Thermo Cardiosystems as a result of its issuance of
$70.0 million principal amount of 4 3/4% subordinated convertible debentures in
May 1997 and at Thermedics Detection as a result of its March 1997 initial
public offering of common stock. Interest expense increased to $2.4 million in
1998 from $1.0 million in 1997, primarily as a result of Thermo Cardiosystems'
issuance of 4 3/4% subordinated convertible debentures and Thermo Sentron's
borrowing from Thermo Electron to partially finance its acquisition of the
product-monitoring businesses.
During the first six months of 1997, the Company recorded a nontaxable gain
on issuance of stock by subsidiary of $17.1 million as a result of the sale of
stock by Thermedics Detection.
The effective tax rates were 39% and 23% in the first six months of 1998 and
1997, respectively. The effective tax rate in the 1998 exceeded the statutory
federal income tax rate primarily due to the impact of state income taxes and
nondeductible amortization of cost in excess of net assets of acquired
companies. The effective tax rate in 1997 was below the statutory federal income
tax rate primarily due to the nontaxable gain on issuance of stock by
subsidiary, offset in part by the impact of state income taxes and nondeductible
amortization of cost in excess of net assets of acquired companies.
Minority interest expense increased to $3.4 million in the first six months
of 1998 from $3.2 million in the first six months of 1997, primarily due to
higher profits at Thermo Voltek, offset in part by the effect on minority
interest expense of the Company's increased ownership of Thermo Voltek and
Thermo Cardiosystems.
In June 1998, the Company exchanged $21.7 million principal amount of
noninterest-bearing subordinated convertible debentures for $15.9 million
principal amount 2 7/8% subordinated convertible debentures due 2003, resulting
in an extraordinary gain of $3.0 million, net of related income taxes of $2.1
million (Note 5). In addition, the Company and a majority-owned subsidiary
repurchased $14.2 million principal amount of subordinated convertible
debentures for $11.4 million in cash, resulting in an extraordinary gain of $1.6
million, net of related income taxes of $1.0 million (Note 5).
17
<PAGE>
Liquidity and Capital Resources
Consolidated working capital was $225.0 million at July 4, 1998, compared
with $309.4 million at January 3, 1998. Cash, cash equivalents, and short- and
long-term available-for-sale investments were $221.5 million at July 4, 1998,
compared with $258.0 million at January 3, 1998. Of the $221.5 million balance
at July 4, 1998, $191.1 million was held by the Company's majority-owned
subsidiaries, and the remainder by the Company and its wholly owned
subsidiaries.
During the first six months of 1998, $13.1 million of cash was provided by
operating activities. Cash of $4.6 million was provided by a decrease in
accounts receivable, primarily at Thermo Sentron, Thermo Cardiosystems due to
improved collections, and at Thermedics Detection due to a decrease in revenues.
This increase in cash was partially offset by cash of $3.8 million used to fund
a decrease in other current liabilities, primarily accrued payroll and related
benefits.
Excluding available-for-sale investment activity, the Company's primary
investing activity during the first six months of 1998 was the purchase of the
product-monitoring group of Smiths Industries plc's Graseby Limited subsidiary
by Thermo Sentron for $44.2 million, net of cash acquired (Note 2). The Company
expended $3.7 million for the purchases of property, plant, and equipment during
the first six months of 1998. During the remainder of 1998, the Company expects
to make capital expenditures of approximately $6.0 million.
During the first six months of 1998, the Company's financing activities used
cash of $2.1 million. Thermo Sentron borrowed $21.0 million from Thermo Electron
to partially finance the acquisition of the product-monitoring businesses. The
Company and a majority-owned subsidiary expended $11.4 million for the
repurchase of subordinated convertible debentures (Note 5).
The Company intends, for the foreseeable future, to maintain at least 50%
ownership of its majority-owned subsidiaries. This may require the Company to
purchase additional shares of common stock or, if applicable, convertible
debentures (which are then converted) of these companies from time to time, as
the number of these companies' outstanding shares increases, whether as a result
of conversion of convertible notes or exercise of stock options issued by them,
or otherwise. These or any other purchases may be made (i) in the open market or
in negotiated transactions, (ii) directly from Thermo Electron or the relevant
subsidiary, or (iii) in the case of Thermo Voltek, pursuant to the conversion of
all or part of its subordinated convertible notes held by the Company.
During the first six months of 1998, the Company and certain of its
majority-owned subsidiaries expended $8.9 million and $14.2 million,
respectively, to purchase securities of the Company and certain of its
majority-owned subsidiaries. These purchases were made pursuant to
authorizations by the Company and the applicable majority-owned subsidiaries'
Boards of Directors. In March 1998, the Company's Board of Directors authorized
the repurchase, through March 5, 1999, of up to an additional $10.0 million of
its own securities and those of its majority-
18
<PAGE>
Liquidity and Capital Resources
owned subsidiaries in the open market, or in negotiated transactions. As of July
4, 1998, $0.3 million and $3.7 million remained under the Company's and its
majority-owned subsidiaries' authorizations, respectively. Any such purchases
are funded from working capital.
The Company expects to continue to pursue its strategy of expanding its
business both through the continued development, manufacture, and sale of new
products, and through the possible acquisition of companies that will provide
additional marketing or manufacturing capabilities and new products. In March
1998, the Company proposed to acquire, through a merger, all of the outstanding
shares of Thermo Voltek's common stock that the Company does not own, as well as
redeem Thermo Voltek's $5.3 million principal amount of 3 3/4% subordinated
convertible debentures due 2000. The total transaction cost is estimated to be
approximately $27 million, which would be paid from internal funds. While the
Company currently has no other agreements to make any acquisitions, it expects
that it would finance any acquisitions through a combination of internal funds,
additional debt or equity financing from the capital markets, or short-term
borrowings from Thermo Electron, although its has no agreement with Thermo
Electron that assures funds will be available on acceptable terms or at all. The
Company believes that its existing resources are sufficient to meet the capital
requirements of its existing operations for the foreseeable future.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On June 1, 1998, at the Annual Meeting of Shareholders, the
shareholders elected seven incumbent directors to a one-year term expiring
in 1999. The Directors elected at the meeting were Peter O. Crisp, Paul F.
Ferrari, Dr. George N. Hatsopoulos, John N. Hatsopoulos, John T. Keiser,
John W. Wood Jr., and Dr. Nicholas T. Zervas. Mr. Crisp received
34,834,890 shares voted in favor of his election and 535,341 shares voted
against. Mr. Ferrari received 34,830,190 shares voted in favor of his
election and 540,041 shares voted against. Dr. Hatsopoulos received
34,832,899 shares voted in favor of his election and 537,332 shares voted
against. Mr. Hatsopoulos received 34,835,261 shares voted in favor of his
election and 534,970 shares voted against. Mr. Keiser received 34,834,065
shares voted in favor of his election and 536,166 shares voted against.
Mr. Wood received 34,834,011 shares voted in favor of his election and
536,220 voted against. Dr. Zervas received 34,832,040 shares voted in
favor of his election and 538,191 shares voted against. No abstentions or
broker nonvotes were recorded on the election of directors.
Item 5 - Other Information
Pursuant to recent amendments to the rules relating to proxy statements
under the Securities Exchange Act of 1934, as amended (the Exchange Act),
shareholders of the Company are hereby notified that any shareholder proposal
not included in the Company's proxy materials for its 1999 Annual Meeting of
Shareholders (the Annual Meeting) in
19
<PAGE>
Item 5 - Other Information (continued)
accordance with Rule 14a-8 under the Exchange Act will be considered untimely
for the purposes of Rules 14a-4 and 14a-5 under the Exchange Act if notice
thereof is received by the Company after March 15, 1999. Management proxies will
be authorized to exercise discretionary voting authority with respect to any
shareholder proposal not included in the Company's proxy materials for the
Annual Meeting unless (a) the Company receives notice of such proposal by March
15, 1999, and (b) the conditions set forth in Rule 14a-4(c)(2)(i)-(iii) under
the Exchange Act are met.
Item 6 - Exhibits
See Exhibit Index on the page immediately preceding exhibits.
20
<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 12th day of August 1998.
THERMEDICS INC.
Paul F. Kelleher
---------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
---------------------------
John N. Hatsopoulos
Chief Financial Officer and
Senior Vice President
21
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- -----------------------------------------------------------------------------
27 Financial Data Schedule.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS
INC.'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED JULY 4, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JUL-04-1998
<CASH> 123,184
<SECURITIES> 51,682
<RECEIVABLES> 68,946
<ALLOWANCES> 5,183
<INVENTORY> 68,173
<CURRENT-ASSETS> 320,610
<PP&E> 60,364
<DEPRECIATION> 37,675
<TOTAL-ASSETS> 550,144
<CURRENT-LIABILITIES> 95,621
<BONDS> 122,686
0
0
<COMMON> 4,174
<OTHER-SE> 237,615
<TOTAL-LIABILITY-AND-EQUITY> 550,144
<SALES> 152,372
<TOTAL-REVENUES> 152,372
<CGS> 77,533
<TOTAL-COSTS> 77,533
<OTHER-EXPENSES> 12,775
<LOSS-PROVISION> 391
<INTEREST-EXPENSE> 2,439
<INCOME-PRETAX> 23,120
<INCOME-TAX> 9,100
<INCOME-CONTINUING> 10,642
<DISCONTINUED> 0
<EXTRAORDINARY> 4,638
<CHANGES> 0
<NET-INCOME> 15,280
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.36
</TABLE>
