SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_____________________________________
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended October 3, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-9567
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 October 30, 1998
---------------------------- -------------------------------
Common Stock, $.10 par value 36,809,777 Actual
41,690,310 Pro Forma
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
THERMEDICS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
October 3, January 3,
(In thousands) 1998 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents (includes $71,868
and $175,101 under repurchase agreement
with parent company) $119,543 $187,012
Short-term available-for-sale investments,
at quoted market value (amortized cost of
$74,029 and $58,144) 74,152 58,317
Accounts receivable, less allowances of
$5,049 and $4,207 62,616 61,488
Inventories:
Raw materials and supplies 26,746 23,857
Work in process 18,018 18,218
Finished goods 20,699 17,499
Prepaid income taxes and expenses 15,772 12,769
-------- --------
337,546 379,160
-------- --------
Property, Plant, and Equipment, at Cost 62,089 55,597
Less: Accumulated depreciation and
amortization 39,687 33,986
-------- --------
22,402 21,611
-------- --------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $38,860 and $12,655) 38,901 12,665
-------- --------
Other Assets 11,470 12,139
-------- --------
Cost in Excess of Net Assets of Acquired
Companies (Note 2) 148,700 110,977
-------- --------
$559,019 $536,552
======== ========
2
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THERMEDICS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 3, January 3,
(In thousands except share amounts) 1998 1998
- --------------------------------------------------------------------------
Current Liabilities:
Notes payable and current maturity of
long-term obligation (includes $21,000 to
parent company at October 3, 1998) $ 27,885 $ 7,498
Accounts payable 18,564 18,020
Accrued payroll and employee benefits 12,350 12,576
Accrued income taxes 12,099 6,815
Accrued warranty costs 5,089 3,784
Other accrued expenses 26,953 18,838
Due to parent company and affiliated companies 2,010 2,266
-------- --------
104,950 69,797
-------- --------
Deferred Income Taxes and Other Deferred Items 183 177
-------- --------
Long-term Obligations:
Subordinated convertible obligations (Note 5) 122,673 142,750
Other 5 21
-------- --------
122,678 142,771
-------- --------
Minority Interest 87,600 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 106,352 113,913
Retained earnings 135,592 116,034
Treasury stock at cost, 47,798 and 134,172
shares (1,036) (3,449)
Accumulated other comprehensive items (Note 7) (1,474) (2,837)
-------- --------
243,608 227,346
-------- --------
$559,019 $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
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $81,515 $76,217
------- -------
Costs and Operating Expenses:
Cost of revenues 44,061 38,433
Selling, general, and administrative expenses 23,189 20,335
Research and development expenses 6,768 5,941
------- -------
74,018 64,709
------- -------
Operating Income 7,497 11,508
Interest Income 3,099 3,531
Interest Expense (includes $304 to parent
company in 1998) (1,628) (1,202)
Gain on Sale of Investments, Net - 427
------- -------
Income Before Provision for Income Taxes
and Minority Interest 8,968 14,264
Provision for Income Taxes 3,504 5,453
Minority Interest Expense 1,186 2,147
------- -------
Net Income $ 4,278 $ 6,664
======= =======
Earnings per Share (Note 6):
Basic $ .10 $ .18
======= =======
Diluted $ .10 $ .17
======= =======
Weighted Average Shares (Note 6):
Basic 41,675 36,704
======= =======
Diluted 43,764 38,898
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMEDICS INC.
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $233,887 $224,270
-------- --------
Costs and Operating Expenses:
Cost of revenues 121,594 113,534
Selling, general, and administrative
expenses 66,671 63,851
Research and development expenses 19,543 17,752
-------- --------
207,808 195,137
-------- --------
Operating Income 26,079 29,133
Interest Income 10,045 9,473
Interest Expense (includes $384 to parent
company in 1998) (4,067) (2,185)
Gain on Issuance of Stock by Subsidiary - 17,075
Gain on Sale of Investments, Net 31 427
-------- --------
Income Before Provision for Income Taxes,
Minority Interest, and Extraordinary Item 32,088 53,923
Provision for Income Taxes 12,604 14,391
Minority Interest Expense 4,564 5,396
-------- --------
Income Before Extraordinary Item 14,920 34,136
Extraordinary Item, Net of Provision for
Income Taxes of $3,092 (Note 5) 4,638 -
-------- --------
Net Income $ 19,558 $ 34,136
======== ========
Earnings per Share (Notes 5 and 6):
Basic $ .48 $ .93
======== ========
Diluted $ .46 $ .88
======== ========
Weighted Average Shares (Notes 5 and 6):
Basic 41,065 36,695
======== ========
Diluted 43,061 38,913
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMEDICS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
--------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Operating Activities:
Net income $ 19,558 $ 34,136
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,481 8,287
Provision for losses on accounts
receivable 569 486
Gain on issuance of stock by
subsidiary - (17,075)
Gain on sale of investments, net (31) (427)
Minority interest expense 4,564 5,396
Gain on repurchase and exchange of
subordinated convertible debentures
(Note 5) (7,730) -
Other noncash expenses 712 698
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable 5,464 (478)
Inventories 545 (7,490)
Prepaid income taxes and expenses (681) (713)
Accounts payable (2,358) (952)
Other current liabilities 1,045 4,577
Other (332) -
--------- ---------
Net cash provided by operating activities 29,806 26,445
--------- ---------
Investing Activities:
Acquisitions, net of cash acquired (Note 2) (44,196) (5,658)
Purchases of available-for-sale investments (169,235) (71,900)
Proceeds from sale and maturities of
available-for-sale investments 127,560 86,884
Purchases of property, plant, and equipment (5,525) (5,015)
Other (653) 117
--------- ---------
Net cash provided by (used in) investing
activities $ (92,049) $ 4,428
--------- ---------
6
<PAGE>
THERMEDICS INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of Company and
subsidiaries' common stock $ 438 $ 28,929
Proceeds from issuance of short-term
obligation to Thermo Electron (Note 2) 21,000 -
Purchases of Company and subsidiaries'
common stock (14,744) (49,055)
Net proceeds from issuance of subordinated
convertible debentures - 68,030
Repurchase of subordinated convertible
debentures (Note 5) (11,384) -
Net increase (decrease) in short-term
borrowings (1,000) 2,705
International Technidyne transfer from
parent company - 350
--------- ---------
Net cash provided by (used in) financing
activities (5,690) 50,959
--------- ---------
Exchange Rate Effect on Cash 464 787
--------- ---------
Increase (Decrease) in Cash and Cash
Equivalents (67,469) 82,619
Cash and Cash Equivalents at Beginning of
Period 187,012 82,800
--------- ---------
Cash and Cash Equivalents at End of Period $ 119,543 $ 165,419
========= =========
Noncash Activities (Note 2):
Fair value of assets of acquired companies $ 56,433 $ 9,306
Cash paid for acquired companies acquired (44,196) (6,268)
--------- ---------
Liabilities assumed of acquired companies $ 12,237 $ 3,038
========= =========
Conversions of subsidiaries' convertible
obligations $ - $ 4,650
========= =========
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 October 3, 1998, the results of
operations for the three- and nine-month periods ended October 3, 1998, and
September 27, 1997, and the cash flows for the nine-month periods ended October
3, 1998, and September 27, 1997. Interim results are not necessarily indicative
of results for a full year.
The consolidated balance sheet presented as of January 3, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1998,
filed with the Securities and Exchange Commission.
2. Acquisition
On June 12, 1998, the Company's Thermo Sentron Inc. subsidiary acquired the
three businesses that constituted 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 $39.0 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. To date, the Company has gathered no
information that indicates the final purchase price 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, other than
shares owned by Thermo Electron, 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 October 3, 1998, the Company owned 66% 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 appointed a special committee, comprised of its independent
directors, to evaluate the proposal with the assistance of a financial advisor,
HSBC Securities, Inc. In September 1998, Thermo Voltek's Board of Directors,
upon recommendation of the special committee, voted to proceed with the
Company's proposal. The merger is still subject to, among other things, the
negotiation and execution of a definitive merger agreement; approval by the
holders of a majority of Thermo Voltek's shares, excluding the Company and
Thermo Electron; 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 $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
9
<PAGE>
5. Repurchase and Exchange of Subordinated Convertible Debentures
(continued)
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 its 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 $.11 in the first nine months of 1998.
6. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Nine Months Ended
------------------ ------------------
(In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Basic
Net Income $ 4,278 $ 6,664 $19,558 $34,136
------- ------- ------- -------
Weighted Average Shares 36,794 36,704 36,774 36,695
Effect of Shares Issuable
in Exchange for
Thermo Cardiosystems
Common Stock 4,881 - 4,291 -
------- ------- ------- -------
Pro Forma Basic Weighted
Average Shares 41,675 36,704 41,065 36,695
------- ------- ------- -------
Basic Earnings per Share $ .10 $ .18 $ .48 $ .93
======= ======= ======= =======
10
<PAGE>
6. Earnings per Share (continued)
Three Months Ended Nine Months Ended
------------------ ------------------
(In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Diluted
Net Income $ 4,278 $ 6,664 $19,558 $34,136
Effect of:
Convertible obligations 68 - 70 -
Majority-owned
subsidiaries' dilutive
securities (6) (14) (24) (30)
------- ------- ------- -------
Income Available to Common
Shareholders, as Adjusted $ 4,340 $ 6,650 $19,604 $34,106
------- ------- ------- -------
Pro Forma Basic Weighted
Average Shares 41,675 36,704 41,065 36,695
Effect of:
Convertible obligations 2,028 1,989 1,894 1,989
Stock options 61 205 102 229
------- ------- ------- -------
Pro Forma Weighted Average
Shares, as Adjusted 43,764 38,898 43,061 38,913
------- ------- ------- -------
Diluted Earnings per Share $ .10 $ .17 $ .46 $ .88
======= ======= ======= =======
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 October 3, 1998, there were 1,366,650 such options
outstanding, with exercise prices ranging from $12.43 to $29.73 per share.
7. Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards 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 third quarter of 1998 and 1997, the
Company's comprehensive income totaled $5.3 million and $6.3 million,
respectively. During the first nine months of 1998 and 1997, the Company's
comprehensive income totaled $20.6 million and $32.1 million, respectively.
11
<PAGE>
8. Proposed Reorganization
On August 12, 1998, Thermo Electron announced a proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company.
Under this plan, the Company may acquire Thermo Electron's wholly owned
biomedical group for shares of Company common stock. In addition, the Company's
equity interests in Thermo Sentron Inc., Thermedics Detection Inc., and Thermo
Voltek Corp. subsidiaries may be transferred to Thermo Electron for shares of
common stock of the Company. Thermo Electron may, in turn, transfer such equity
interests in Thermo Sentron and Thermedics Detection to Thermo Instrument, in
exchange for cash. The proposed transactions are subject to a number of
conditions, as outlined in the Company's current Report on Form 8-K for events
occurring on August 12, 1998, filed with the Securities and Exchange Commission.
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 packaging lines in the food, pharmaceutical, and other diverse industries,
and for producers of bulk materials; its Thermedics Detection Inc. subsidiary,
which develops, manufactures, and markets high-speed detection instruments used
in a variety of on-line industrial process and quality-control applications,
security applications, and laboratory analyses; and its Thermo Voltek Corp.
subsidiary, which manufactures a range of products related to power
amplification and conversion, as well as instruments that test electronic
systems and components. On June 12, 1998, Thermo Sentron acquired the three
businesses that constituted the product-monitoring group of Smiths Industries
plc's Graseby Limited subsidiary (the product-monitoring businesses; Note 2).
12
<PAGE>
Overview (continued)
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 to provide long-term cardiac support for patients not
eligible for a heart transplant. 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. In September 1998, the Company announced that the FDA granted
approval for commercial sale in the U.S. of the electric LVAS as a bridge to
transplant, and as a result Thermo Cardiosystems has become eligible to earn a
profit on the sale of the electric LVAS. Until FDA approval has been obtained,
the Company may not earn a profit on the sale in the U.S. of other products
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.
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
Third Quarter 1998 Compared With Third Quarter 1997
Total revenues were $81.5 million in the third quarter of 1998, compared
with $76.2 million in the third quarter of 1997. Instruments and Other Equipment
segment revenues were $61.3 million in 1998, compared with $56.9 million in
1997. An increase of $9.6 million in revenues from Thermo Sentron was offset in
part by decreases in revenues of $2.7 million and $2.5 million at Thermedics
Detection and Thermo Voltek, respectively.
Revenues from Thermo Sentron increased to $29.1 million in the third quarter
of 1998 from $19.5 million in the third quarter of 1997, primarily due to the
inclusion of $11.0 million of revenues from the acquisition of the
product-monitoring businesses on June 12, 1998. This increase was offset in part
by a decrease of $0.9 million due to a decrease in demand in Asia and Europe.
Revenues at Thermedics Detection
13
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
decreased to $23.6 million in 1998 from $26.2 million in 1997. Revenues from
Thermedics Detection's laboratory products instruments and related services
decreased to $13.0 million in 1998 from $14.1 million in 1997, primarily due to
a decrease in worldwide demand. Revenues from Thermedics Detection's industrial
process instruments and related services decreased to $7.9 million in 1998 from
$9.0 million in 1997, primarily due to a decrease in large corporate orders for
near-infrared analyzers and related products. Revenues from Thermedics
Detection's EGIS(R) explosives-detection systems and related services decreased
to $2.4 million in 1998 from $2.8 million in 1997, primarily due to a decline in
international demand. Revenues from Thermo Voltek decreased to $8.7 million in
1998 from $11.1 million in 1997, primarily due to a decline in demand for
certain lower-margin products in Europe and for electrostatic discharge (ESD)
test equipment for the semiconductor industry in Asia.
Biomedical Products segment revenues increased to $20.2 million in the third
quarter of 1998 from $19.4 million in the third quarter of 1997. Revenues from
Thermo Cardiosystems increased to $15.8 million in 1998 from $14.7 million in
1997. An increase in revenues from sales of the electric LVAS were offset in
part by a slight decrease in revenues from International Technidyne.
The gross profit margin decreased to 46% in the third quarter of 1998 from
50% in the third quarter of 1997. The gross profit margin for the Instruments
and Other Equipment segment decreased to 44% in 1998 from 48% in 1997. This
decline was primarily the result of the inclusion of lower-margin revenues from
the product-monitoring businesses at Thermo Sentron and a decrease in sales of
high-margin ESD test equipment at Thermo Voltek.
The gross profit margin for the Biomedical Products segment decreased to 52%
in the third quarter of 1998 from 54% in the third quarter of 1997. The gross
profit margin at Thermo Cardiosystems decreased primarily due to an increase in
lower-margin electric LVAS revenues. As a result of the FDA's approval of the
electric LVAS, Thermo Cardiosystems has announced a 13% price increase in the
electric LVAS product line in the U.S., effective November 1, 1998.
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in the third quarter of 1998 from 27% in the third quarter of
1997. The increase is primarily due to a decrease in revenues at Thermedics
Detection and Thermo Voltek and, to a lesser extent, an increase in sales and
marketing staff at Thermo Cardiosystems in anticipation of increased electric
LVAS sales following the FDA approval.
Research and development expenses increased to $6.8 million in the third
quarter of 1998 from $5.9 million in the third quarter of 1997. The increase
reflects increased expenses at Thermo Cardiosystems, primarily due to costs
associated with a clinical trial being conducted by Thermo Cardiosystems to
evaluate the electric LVAS as a long-term cardiac support for patients not
eligible for a heart transplant and, to a lesser extent, costs associated with
the development of Thermo Cardiosystems'
14
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
HeartMate II system. In addition, research and development expenses increased at
Thermo Sentron due to the inclusion of expenses from the product-monitoring
businesses.
Interest income decreased to $3.1 million in the third quarter of 1998 from
$3.5 million in the third quarter of 1997, primarily due to lower average
invested balances as a result of Thermo Sentron's acquisition of the
product-monitoring businesses and cash expended to repurchase securities of the
Company and certain of its majority-owned subsidiaries. Interest expense
increased to $1.6 million in 1998 from $1.2 million in 1997, primarily as a
result of interest expense on borrowings at Thermo Sentron used to partially
finance the acquisition of the product-monitoring businesses.
The effective tax rates were 39% and 38% in the third 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.
Minority interest expense decreased to $1.2 million in the third quarter of
1998 from $2.1 million in the third quarter of 1997, primarily due to lower
profits at the Company's majority-owned subsidiaries and the Company's increased
ownership of Thermo Cardiosystems (Note 3).
First Nine Months 1998 Compared With First Nine Months 1997
Total revenues were $233.9 million in the first nine months of 1998,
compared with $224.3 million in the first nine months of 1997. Instruments and
Other Equipment segment revenues were $171.7 million in 1998, compared with
$166.1 million in 1997. An increase of $13.7 million in revenues from Thermo
Sentron was offset in part by decreases in revenues of $6.2 million and $1.9
million at Thermedics Detection and Thermo Voltek, respectively.
Revenues from Thermo Sentron increased to $69.7 million in the first nine
months of 1998 from $56.0 million in the first nine months of 1997. Thermo
Sentron's revenues increased $14.5 million as a result of acquisitions and, to a
lesser extent, increased product demand. These increases were offset in part by
a decrease in revenues of $2.1 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 $71.2 million in 1998
from $77.4 million in 1997. Revenues from Thermedics Detection's industrial
process instruments and related services decreased to $23.1 million in 1998 from
$28.1 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, offset in part by an increase in InScan(R)
product sales in 1998. Revenues from Thermedics Detection's EGIS
explosives-detection systems and related services decreased slightly to $6.9
million in 1998 from $7.0 million in 1997. Revenues from Thermo Voltek decreased
to $30.8 million in 1998 from $32.7 million in 1997,
15
<PAGE>
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
primarily due to lower demand for certain lower-margin products in Europe and
lower sales of high-margin ESD test equipment for the semiconductor industry,
due in part to Asian economic conditions.
Biomedical Products segment revenues increased to $62.2 million in the first
nine months of 1998 from $58.2 million in the first nine months of 1997.
Revenues from Thermo Cardiosystems increased to $48.4 million in 1998 from $45.6
million in 1997, primarily due to an increase in revenues from its air-driven
LVAS and International Technidyne.
The gross profit margin decreased to 48% in the first nine months of 1998
from 49% in the first nine months of 1997. The gross profit margin for the
Instruments and Other Equipment segment decreased to 46% in 1998 from 48% in
1997. This decrease is primarily the result of the inclusion of lower-margin
revenues from the product-monitoring businesses at Thermo Sentron.
The gross profit margin for the Biomedical Products segment increased to 54%
in the first nine months of 1998 from 53% in the first nine months of 1997. The
gross profit margin at Thermo Cardiosystems increased as a result of an increase
in revenues from the higher-margin air-driven LVAS and, to a lesser extent, an
increase in revenues from higher-margin International Technidyne products.
Selling, general, and administrative expenses as a percentage of revenues
were unchanged at 28.5% in the first nine months of 1998 and 1997. A decrease in
selling, general, and administrative expenses as a percentage of revenues at
Thermo Voltek 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 the reasons
discussed in the results of operations for the third quarter.
Research and development expenses increased to $19.5 million in the first
nine months of 1998 from $17.8 million in the first nine months of 1997,
primarily due to the reasons discussed in the results of operations for the
third quarter.
Interest income increased to $10.0 million in the first nine months of 1998
from $9.5 million in the first nine months of 1997, primarily due to higher
average invested balances as a result of Thermo Cardiosystems' issuance of $70.0
million principal amount of 4 3/4% subordinated convertible debentures in May
1997 and Thermedics Detection's March 1997 initial public offering of common
stock. These increases were offset by decreased interest income due to lower
average invested balances at Thermo Sentron due to cash expended for the
acquisition of the product-monitoring businesses and cash expended to repurchase
securities of the Company and certain of its majority-owned subsidiaries.
Interest expense increased to $4.1 million in 1998 from $2.2 million in 1997,
primarily as a result of Thermo Cardiosystems' issuance of 4 3/4% subordinated
convertible debentures and interest expense at Thermo Sentron on borrowings used
to partially finance the acquisition of the product-monitoring businesses.
16
<PAGE>
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
During the first nine months of 1997, the Company recorded a gain on the
issuance of stock by subsidiary of $17.1 million as a result of Thermedics
Detection's March 1997 initial public offering of common stock.
The effective tax rates were 39% and 27% in the first nine months of 1998
and 1997, respectively. The effective tax rate in 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 decreased to $4.6 million in the first nine months
of 1998 from $5.4 million in the first nine months of 1997, primarily due to
lower profits at certain of the Company's majority-owned subsidiaries and the
Company's increased ownership of Thermo Cardiosystems (Note 3).
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. 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 taxes of $1.0
million (Note 5).
Liquidity and Capital Resources
Consolidated working capital was $232.6 million at October 3, 1998, compared
with $309.4 million at January 3, 1998. Cash, cash equivalents, and short- and
long-term available-for-sale investments were $232.6 million at October 3, 1998,
compared with $258.0 million at January 3, 1998. Of the $232.6 million balance
at October 3, 1998, $198.7 million was held by the Company's majority-owned
subsidiaries, and the remainder by the Company and its wholly owned
subsidiaries.
During the first nine months of 1998, $29.8 million of cash was provided by
operating activities. Cash of $5.5 million was provided by a decrease in
accounts receivable, primarily due to decreased revenues at certain of the
Company's majority-owned subsidiaries. This increase was offset in part by the
use of cash of $2.4 million to fund a decrease in accounts payable.
Excluding available-for-sale investment activity, the Company's primary
investing activity during the first nine 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
17
<PAGE>
Liquidity and Capital Resources (continued)
cash acquired (Note 2). The Company expended $5.5 million for the purchase of
property, plant, and equipment during the first nine months of 1998. During the
remainder of 1998, the Company expects to make capital expenditures of
approximately $3.0 million.
During the first nine months of 1998, the Company's financing activities
used cash of $5.7 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).
During the first nine months of 1998, the Company and certain of its
majority-owned subsidiaries expended $9.9 million and $16.2 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-owned subsidiaries in the open
market, or in negotiated transactions. As of October 3, 1998, $0.3 million and
$18.6 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, other than
shares owned by Thermo Electron, 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 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.
Year 2000
The Company continues to assess the potential impact of the year 2000 on the
Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading internal business
systems and facilities; (ii) testing and developing necessary upgrades for the
Company's current products and certain discontinued products; (iii) contacting
key suppliers, vendors, and customers to determine their year 2000 compliance
status; and (iv) developing contingency plans.
18
<PAGE>
Year 2000 (continued)
The Company's State of Readiness
The Company has tested and evaluated its critical information technology
systems for year 2000 compliance, including its significant computer systems,
software applications, and related equipment. The Company is currently in the
process of upgrading or replacing its noncompliant systems. The Company expects
that all of its material information technology systems will be year 2000
compliant by the end of 1999. The Company is also evaluating the potential year
2000 impact on its facilities, including its buildings and utility systems. Any
problems that are identified will be prioritized and remediated based on their
assigned priority. The Company will continue periodic testing of its critical
internal business systems and facilities in an effort to minimize operating
disruptions due to year 2000 issues.
The Company believes that all of the material products that it currently
manufactures and sells are year 2000 compliant. However, as many of the
Company's products are complex, interact with third-party products, and operate
on computer systems that are not under the Company's control, there can be no
assurance that the Company has identified all of the year 2000 problems with its
current products. The Company believes that certain of its older products, which
it no longer manufactures or sells, may not be year 2000 compliant. The Company
is continuing to test and evaluate such products and may offer upgrades or
alternative products where reasonably practicable.
The Company is in the process of identifying and contacting suppliers,
vendors, and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part of
this effort, the Company has developed and is distributing questionnaires
relating to year 2000 compliance to its significant suppliers, vendors, and
customers. The Company intends to follow-up and monitor the year 2000 compliant
progress of significant suppliers, vendors, and customers that indicate that
they are not year 2000 compliant or that do not respond to the Company's
questionnaires.
Contingency Plan
The Company intends to develop a contingency plan that will allow its
primary business operations to continue despite disruptions due to year 2000
problems. This plan may include identifying and securing other suppliers,
increasing inventories, and modifying production facilities and schedules. As
the Company continues to evaluate the year 2000 readiness of its business
systems and facilities, products and significant suppliers, vendors, and
customers, it will modify and adjust its contingency plan as may be required.
19
<PAGE>
Year 2000 (continued)
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.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
material suppliers, vendors, or customers experience business disruptions due to
year 2000 issues, the Company might also be materially adversely affected. The
Company's research and development, production, distribution, financial,
administrative, and communications operations might be disrupted. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. Any unexpected costs or delays arising
from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition.
20
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On August 13, 1998, the Company filed a Current Report on Form 8-K dated
August 12, 1998, with respect to a proposed reorganization by the Company's
parent organization, Thermo Electron Corporation, involving certain of Thermo
Electron's subsidiaries, including the Company.
On September 30, 1998, the Company filed a Current Report on Form 8-K dated
September 29, 1998, with respect to FDA approval of Thermo Cardiosystems'
electric LVAS.
21
<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 9th day of November 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
22
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ----------------------------------------------------------------------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS
INC.'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 3, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> OCT-03-1998
<CASH> 119,543
<SECURITIES> 74,152
<RECEIVABLES> 67,665
<ALLOWANCES> 5,049
<INVENTORY> 65,463
<CURRENT-ASSETS> 337,546
<PP&E> 62,089
<DEPRECIATION> 39,687
<TOTAL-ASSETS> 559,019
<CURRENT-LIABILITIES> 104,950
<BONDS> 122,678
0
0
<COMMON> 4,174
<OTHER-SE> 239,434
<TOTAL-LIABILITY-AND-EQUITY> 559,019
<SALES> 233,887
<TOTAL-REVENUES> 233,887
<CGS> 121,594
<TOTAL-COSTS> 121,594
<OTHER-EXPENSES> 19,543
<LOSS-PROVISION> 569
<INTEREST-EXPENSE> 4,067
<INCOME-PRETAX> 32,088
<INCOME-TAX> 12,604
<INCOME-CONTINUING> 14,920
<DISCONTINUED> 0
<EXTRAORDINARY> 4,638
<CHANGES> 0
<NET-INCOME> 19,558
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.46
</TABLE>
