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 April 3, 1999
[ ] 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 Identification No.)
incorporation or organization)
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 April 30, 1999
Common Stock, $.10 par value 41,698,796
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMEDICS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
April 3, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents (includes $86,806 and $73,377 under $109,318 $142,108
repurchase agreements with parent company)
Short-term available-for-sale investments, at quoted market value 86,242 43,310
(amortized cost of $86,094 and $43,155)
Accounts receivable, less allowances of $4,688 and $4,498 63,300 63,438
Inventories:
Raw materials and supplies 26,814 25,275
Work in process 15,885 15,918
Finished goods 19,826 21,590
Prepaid income taxes and expenses 14,649 14,572
-------- --------
336,034 326,211
-------- --------
Property, Plant, and Equipment, at Cost 61,098 60,687
Less: Accumulated depreciation and amortization 40,073 38,780
-------- --------
21,025 21,907
-------- --------
Long-term Available-for-sale Investments, at Quoted Market Value 25,866 47,259
(amortized cost of $25,822 and $47,226)
-------- --------
Other Assets 12,076 12,723
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 6) 153,477 145,518
-------- --------
$548,478 $553,618
======== ========
2
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THERMEDICS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 3, January 2,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Note payable to parent company $ 19,000 $19,000
Notes payable and current maturity of long-term obligations 11,819 6,312
Accounts payable 19,374 20,695
Accrued payroll and employee benefits 11,694 12,830
Accrued income taxes 9,725 8,159
Other accrued expenses 27,776 24,827
Due to parent company and affiliated companies 3,391 2,096
-------- --------
102,779 93,919
-------- --------
Deferred Income Taxes and Other Deferred Items 409 191
-------- --------
Long-term Obligations:
Subordinated convertible obligations 117,424 122,674
Other 217 128
-------- --------
117,641 122,802
-------- --------
Minority Interest 79,126 88,730
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 100,000,000 shares authorized; 4,174 4,174
41,740,808 and 41,739,308 shares issued
Capital in excess of par value 106,996 106,846
Retained earnings 142,226 139,644
Treasury stock at cost, 42,012 and 47,348 shares (946) (1,026)
Deferred compensation (29) -
Accumulated other comprehensive items (Note 2) (3,898) (1,662)
-------- --------
248,523 247,976
-------- --------
$548,478 $553,618
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMEDICS INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $77,604 $75,661
------- -------
Costs and Operating Expenses:
Cost of revenues 40,135 38,661
Selling, general, and administrative expenses 22,905 21,061
Research and development expenses 7,508 6,629
Nonrecurring costs (Note 7) 1,395 -
------- -------
71,943 66,351
------- -------
Operating Income 5,661 9,310
Interest Income 2,847 3,665
Interest Expense (includes $242 to parent company in 1999) (1,453) (1,206)
Gain on Sale of Investments, Net - 18
------- -------
Income Before Provision for Income Taxes, Minority Interest, and 7,055 11,787
Extraordinary Item
Provision for Income Taxes 3,257 4,769
Minority Interest Expense 1,216 1,650
------- -------
Income Before Extraordinary Item 2,582 5,368
Extraordinary Item, Net of Provision of Income Taxes of $780 (Note 3) - 1,205
------- -------
Net Income $ 2,582 $ 6,573
======= =======
Earnings per Share (Note 3):
Basic $ .06 $ .16
======= =======
Diluted $ .06 $ .16
======= =======
Weighted Average Shares (Note 3):
Basic 41,696 39,857
======= =======
Diluted 42,806 41,925
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMEDICS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net income $ 2,582 $ 6,573
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,897 2,629
Minority interest expense 1,216 1,650
Gain on repurchase of subordinated convertible debentures - (1,985)
Provision for losses on accounts receivable 324 111
Other noncash expenses 240 214
Change in current accounts:
Accounts receivable (1,235) 3,553
Inventories 171 (1,520)
Prepaid income taxes and expenses (210) 10
Accounts payable (975) 530
Other current liabilities 4,056 (770)
Other (323) (161)
-------- --------
Net cash provided by operating activities 8,743 10,834
-------- --------
Investing Activities:
Acquisition of Thermo Voltek common stock (Note 6) (19,779) -
Purchases of available-for-sale investments (88,773) (80,950)
Proceeds from sale and maturities of available-for-sale investments 67,237 46,456
Purchases of property, plant, and equipment (1,417) (1,701)
Other 1,261 (364)
-------- --------
Net cash used in investing activities (41,471) (36,559)
-------- --------
Financing Activities:
Purchases of Company and subsidiary common stock (925) (1,054)
Purchase of subordinated convertible debentures - (9,337)
Net proceeds from issuance of Company and subsidiary common stock 225 107
Net increase in short-term borrowings 667 166
Other 87 -
-------- --------
Net cash provided by (used in) financing activities 54 (10,118)
-------- --------
Exchange Rate Effect on Cash (116) 234
-------- --------
Decrease in Cash and Cash Equivalents (32,790) (35,609)
Cash and Cash Equivalents at Beginning of Period 142,108 187,012
-------- --------
Cash and Cash Equivalents at End of Period $109,318 $151,403
======== ========
Noncash Activities:
Assumption of Thermo Voltek stock options (Note 6) $ 703 $ -
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by 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 April 3, 1999, and the results of
operations and cash flows for the three-month periods ended April 3, 1999, and
April 4, 1998. Interim results are not necessarily indicative of results for a
full year.
The consolidated balance sheet presented as of January 2, 1999, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999,
filed with the Securities and Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents 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 first quarter of 1999 and 1998, the
Company's comprehensive income totaled $771,000 and $6,424,000, respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Basic
Net Income $ 2,582 $6,573
------- ------
Weighted Average Shares 41,696 39,857
------- ------
Basic Earnings per Share $ .06 $ .16
======= ======
Diluted
Net Income $ 2,582 $6,573
Effect of Majority-owned Subsidiaries' Dilutive Securities (5) (16)
------- ------
Income Available to Common Shareholders, as Adjusted 2,577 6,557
------- ------
Weighted Average Shares 41,696 39,857
Effect of:
Convertible obligations 966 1,933
Stock options 144 135
------- ------
Weighted Average Shares, as Adjusted 42,806 41,925
------- ------
Diluted Earnings per Share $ .06 $ .16
======= ======
6
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3. Earnings per Share (continued)
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 April 3, 1999, there were 1,553,000 of such options
outstanding, with exercise prices ranging from $8.47 to $29.73 per share. In
addition, the computation of diluted earnings per share for the first quarter of
1999 excludes the effect of assuming the conversion of $15,859,000 principal
amount of 2.875% subordinated convertible debentures, convertible at $14.928 per
share, because the effect would be antidilutive.
During the first quarter of 1998, the Company recorded an extraordinary
gain in connection with the repurchase of subsidiary subordinated convertible
debentures, which increased basic and diluted earnings per share by $.03.
4. Business Segment Information
Three Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues:
Quality Assurance and Security Products $20,412 $23,707
Precision Weighing and Inspection Equipment 26,556 18,946
Heart Assist and Blood Testing Devices 19,461 16,485
Power Electronics and Test Equipment 6,217 11,440
Other 4,958 5,083
------- -------
$77,604 $75,661
======= =======
Income Before Provision for Income Taxes, Minority
Interest, and Extraordinary Item:
Quality Assurance and Security Products $ 2,647 $3,070
Precision Weighing and Inspection Equipment 2,008 1,960
Heart Assist and Blood Testing Devices 2,060 2,710
Power Electronics and Test Equipment (329) 822
Other 952 1,109
Corporate (a) (1,677) (361)
------- -------
Total operating income 5,661 9,310
Interest and other income, net 1,394 2,477
------- -------
$ 7,055 $11,787
======= =======
(a) Primarily general and administrative expenses and nonrecurring costs.
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5. Accrued Acquisition Expenses
The Company has undertaken restructuring activities at certain acquired
businesses. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily
have included reductions in staffing levels and the abandonment of excess
facilities. In connection with these restructuring activities, as part of the
cost of acquisitions, the Company established reserves, primarily for severance
and excess facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. Unresolved matters at April 3, 1999,
7
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5. Accrued Acquisition Expenses (continued)
primarily included completion of planned severances and abandonment of excess
facilities for an acquisition completed during the last twelve months. A summary
of the changes in accrued acquisition expenses, included in other accrued
expenses in the accompanying balance sheet, follows:
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Abandonment
of Excess
(In thousands) Severance Facilities Total
- --------------------------------------------------------------- -------------- ------------- -------------
<S> <C> <C> <C>
Balance at January 2, 1999 $ 177 $ 788 $ 965
Reserves established 34 31 65
Usage (129) (119) (248)
------ ----- ------
Balance at April 3, 1999 $ 82 $ 700 $ 782
====== ===== ======
6. Merger with Thermo Voltek Corp.
In March 1999, the Company acquired, through a merger, all of the
outstanding shares of Thermo Voltek Corp., a majority-owned subsidiary of the
Company, that it did not previously own, other than the shares owned by Thermo
Electron Corporation. The total cost of the acquisition is expected to be
approximately $25,732,000, including related expenses and the assumption of
Thermo Voltek's $5,250,000 principal amount of 3 3/4% subordinated convertible
debentures, which became due and payable at the election of the holder following
the merger, and Thermo Voltek's outstanding stock options. The Thermo Voltek
stock options were converted into stock options that are exercisable into
619,819 shares of Company common stock at a weighted average price of $6.33 per
share, with an aggregate value of $703,000 as of the date of the acquisition.
Subsequent to this transaction, the Company and Thermo Electron owned
approximately 97% and 3%, respectively, of the outstanding common stock of
Thermo Voltek. The cost of the acquisition exceeded the estimated fair value of
the incremental net assets by $10,050,000, which is being amortized over 40
years. Pro forma data is not presented since the acquisition of the minority
interest of Thermo Voltek was not material to the Company's results of
operations.
In late March and early April 1998, four putative class actions were filed
in the Court of Chancery of the State of Delaware in and for New Castle County
by shareholders of Thermo Voltek, which were consolidated under the caption In
re Thermo Voltek Corp. Shareholders Litigation, Consolidated C.A. 16287 (the
Action) in October 1998. The complaint in the Action names the Company, Thermo
Voltek, Thermo Electron, and directors of Thermo Voltek as defendants and
alleges, among other things, that Thermo Voltek's directors violated the
fiduciary duties of loyalty, good faith, and fair dealing that they owed to all
shareholders of Thermo Voltek other than the named defendants and the affiliates
of the named defendants because the proposed price of $7.00 per share to be paid
to Thermo Voltek's shareholders under the terms of the proposed Merger Agreement
was allegedly unfair and grossly inadequate. The complaints further allege that
the Company, Thermo Voltek, and Thermo Electron have violated their alleged
fiduciary duty of fair dealing by proposing the merger transaction at the time.
The parties are currently conducting discovery. Due to the inherent uncertainty
of litigation, the outcome of this matter cannot be estimated. The Company
expects, however, that any resolution will not materially affect its future
results of operations or financial position.
7. Proposed Reorganization and Related Costs
During 1998, Thermo Electron announced a proposed reorganization involving
certain of Thermo Electron's subsidiaries, including the Company. Under this
plan, the Company would acquire Thermo Electron's wholly owned biomedical group
for shares of Company common stock. In addition, the Company's equity interests
in its Thermo Sentron Inc., Thermedics Detection Inc., and Thermo Voltek
subsidiaries would be transferred to Thermo Electron for shares of common stock
of the Company. Thermo Electron would, in turn, take Thermo Sentron and
Thermedics
8
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7. Proposed Reorganization and Related Costs (continued)
Detection private; shareholders of these subsidiaries would receive cash in
exchange for their shares of common stock. The proposed transactions are subject
to a number of conditions, including the establishment of prices and exchange
ratios; confirmation of anticipated tax consequences; the approval by the Board
of Directors of the Company (including its independent directors); negotiation
and execution of definitive agreements; clearance by the Securities and Exchange
Commission of any necessary documents in connection with the proposed
transactions; approval by the Board of Directors of Thermo Electron; and receipt
of fairness opinions from an investment banking firm on certain financial
aspects of the transactions.
In connection with this transaction, the Company recorded $1,395,000 of
nonrecurring costs in the first quarter of 1999, primarily investment banking
fees.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1999, filed with the Securities and Exchange
Commission.
Overview
The Company's businesses operate in four reportable segments: Quality
Assurance and Security Products (Quality Assurance), Precision Weighing and
Inspection Equipment (Inspection Equipment), Heart Assist and Blood Testing
Devices (Heart Assist Devices), and Power Electronics and Test Equipment (Power
Equipment). Through the Company's Thermedics Detection Inc. subsidiary, the
Quality Assurance segment develops, manufactures, and markets high-speed
detection and measurement instruments used in a variety of on-line industrial
process applications, security applications, and laboratory analyses. The
Inspection Equipment segment includes the Company's Thermo Sentron Inc.
subsidiary, which develops, manufactures, and markets high-speed
precision-weighing and inspection equipment for industrial production and
packaging lines. In June 1998, Thermo Sentron acquired the three businesses that
constituted the product-monitoring group of Graseby Limited (the
product-monitoring businesses), a subsidiary of Smiths Industries plc. The Power
Equipment segment, through the Company's Thermo Voltek Corp. subsidiary,
manufactures electronics-test instruments and a range of products related to
power amplification, conversion, and quality.
The Heart Assist Devices segment, consisting of 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. The 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. In general, a profit cannot be earned from the sale of
an LVAS in the United States until approval of the device for commercial sale
has been received from the U.S. Food and Drug Administration (FDA). Both the
air-driven and electric LVAS have received FDA approval for use as a bridge to
transplant in the United States. Until FDA approval has been obtained, the
Company may not earn a profit on the sale in the U.S. of 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.
9
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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
First Quarter 1999 Compared With First Quarter 1998
Total revenues increased to $77.6 million in the first quarter of 1999
from $75.7 million in the first quarter of 1998. Increases in revenues at the
Inspection Equipment segment of $7.6 million and the Heart Assist Devices
segment of $3.0 million were partially offset by decreases in revenues at the
Power Equipment segment of $5.2 million and the Quality Assurance segment of
$3.3 million.
Revenues from the Inspection Equipment segment increased to $26.6 million
in the first quarter of 1999 from $18.9 million in the first quarter of 1998.
Revenues increased $8.8 million as a result of the acquisition of the
product-monitoring businesses by Thermo Sentron in June 1998. This increase was
offset in part by a decrease in revenues from existing businesses of $1.0
million, primarily due to decreased demand in Europe.
Heart Assist Devices segment revenues increased to $19.5 million in the
first quarter of 1999 from $16.5 million in the first quarter of 1998. Revenues
from Thermo Cardiosystems' LVAS increased to $9.8 million in 1999 from $7.1
million in 1998, primarily due to an increase in demand for the electric LVAS as
a result of FDA approval, which was granted in September 1998 and, to a lesser
extent, price increases for the electric LVAS. These increases were offset in
part by a decrease in revenues from the air-driven LVAS and the expiration of
several government research and development contracts.
Revenues from the Power Equipment segment decreased to $6.2 million in the
first quarter of 1999 from $11.4 million in the first quarter of 1998, primarily
due to lower sales of electrostatic discharge (ESD) test equipment to the
semiconductor industry and lower demand for certain lower-margin products in
Europe. The decrease in revenues was also due to Thermo Voltek's sale of its
Universal Voltronics division in November 1998, which contributed $1.3 million
in revenues in the 1998 period.
Revenues from the Quality Assurance segment decreased to $20.4 million in
the first quarter of 1999 from $23.7 million in the first quarter of 1998.
Revenues from EGIS(R) explosives-detection systems and related services
decreased $1.5 million, primarily due to lower shipments of security systems.
During 1998, Thermedics Detection completed shipments under a contract to
provide security systems to the Federal Aviation Administration. Revenues under
the contract totaled $1.1 million during the first quarter of 1998. Revenues
from Thermedics Detection's laboratory products decreased $1.1 million,
primarily due to lower worldwide demand for its products. In addition, revenues
from Thermedics Detection's industrial process instruments decreased $0.6
million, primarily due to lower revenues from ALEXUS(R) and near-infrared
analyzers, offset in part by an increase in InScan(R) product sales and contract
revenues.
The gross profit margin was 48% in the first quarter of 1999, compared
with 49% in the first quarter of 1998. The gross profit margin at the Power
Equipment segment decreased to 39% in 1999 from 46% in 1998, primarily due to
lower revenues. The gross profit margin at the Inspection Equipment segment
decreased to 38% in 1999 from 39% in 1998, primarily due to the inclusion of
lower-margin revenues from the acquired product-monitoring businesses. These
decreases were offset in part by an increase in the gross profit margin at the
Quality Assurance segment to 58% in 1999 from 54% in 1998, primarily due to a
shift in sales mix to higher-margin products, including products introduced
after the first quarter of 1998.
10
<PAGE>
First Quarter 1999 Compared With First Quarter 1998 (continued)
Selling, general, and administrative expenses as a percentage of revenues
increased to 30% in the first quarter of 1999 from 28% in the first quarter of
1998. The increase is primarily due to a decrease in revenues at the Power
Equipment and Quality Assurance segments and, to a lesser extent, an increase in
sales and marketing staff at the Heart Assist Devices segment.
Research and development expenses increased to $7.5 million in the first
quarter of 1999 from $6.6 million in the first quarter of 1998. The increase
reflects increased expenses at the Heart Assist Devices segment associated with
a clinical trial being conducted to evaluate the electric LVAS as an alternative
to medical therapy, as well as expenses associated with the development of the
HeartMate II system. In addition, research and development expenses increased at
Thermo Sentron due to the inclusion of expenses from the acquired
product-monitoring businesses.
The Company recorded $1.4 million of nonrecurring costs in the first
quarter of 1999, primarily for investment banking fees incurred in connection
with the Company's proposed reorganization (Note 7).
Interest income decreased to $2.8 million in the first quarter of 1999
from $3.7 million in the first quarter of 1998, primarily due to lower average
invested balances as a result of cash expended for the acquisition of the
product-monitoring businesses, the repurchase of securities of the Company and
certain of its majority-owned subsidiaries, and a decrease in interest rates.
Interest expense increased to $1.5 million in the first quarter of 1999 from
$1.2 million in the first quarter of 1998, primarily as a result of interest
expense on borrowings from Thermo Electron Corporation used to partially finance
the acquisition of the product-monitoring businesses and, to a lesser extent,
the Company's issuance of $15.9 million principal amount of 2 7/8% subordinated
convertible debentures in exchange for $21.7 million principal amount of
noninterest-bearing subordinated convertible debentures in July 1998.
The effective tax rates were 46% and 40% in the first quarter of 1999 and
1998, 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
and, in 1999, the impact of nondeductible costs in connection with the Company's
proposed reorganization (Note 7).
Minority interest expense decreased to $1.2 million in the first quarter
of 1999 from $1.7 million in the first quarter of 1998, primarily due to lower
profits at certain of the Company's majority-owned subsidiaries.
In the first quarter of 1998, the Company and a majority-owned subsidiary
repurchased subordinated convertible debentures, resulting in an extraordinary
gain of $1.2 million, net of related income taxes of $0.8 million.
Liquidity and Capital Resources
Consolidated working capital was $233.3 million at April 3, 1999, compared
with $232.3 million at January 2, 1999. Cash, cash equivalents, and short- and
long-term available-for-sale investments were $221.4 million at April 3, 1999,
compared with $232.7 million at January 2, 1999. Of the $221.4 million balance
at April 3, 1999, $204.6 million was held by the Company's majority-owned
subsidiaries and the remainder by the Company and its wholly owned subsidiaries.
During the first quarter of 1999, $8.7 million of cash was provided by
operating activities. Cash of $4.1 million was provided by an increase in other
current liabilities, primarily due to the timing of interest and tax payments.
This increase in cash was offset in part by $1.2 million of cash used to fund an
increase in accounts receivable, primarily at the Heart Assist Devices segment
due to higher revenues.
Excluding available-for-sale investments activity, the Company's primary
investing activity in the first quarter of 1999 was the acquisition, through a
merger, of all of the outstanding shares of Thermo Voltek that the Company did
not previously own, other than the shares owned by Thermo Electron, for
approximately $19.8 million in cash (Note 6). The Company is currently a party
to litigation in the Delaware State Chancery Court with respect to this
transaction. The Company also expended $1.4 million for purchases of property,
plant, and equipment during the first quarter of 1999. During the remainder of
1999, the Company expects to make capital expenditures of approximately
$8 million.
11
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Liquidity and Capital Resources (continued)
During the first quarter of 1999, the Company's financing activities
provided cash of $0.1 million. Certain of the Company's majority-owned
subsidiaries expended $0.9 million to repurchase common stock. These purchases
were made pursuant to authorizations by the applicable majority-owned
subsidiaries' Boards of Directors. As of April 3, 1999, $12.9 million remained
under the Company's majority-owned subsidiaries' authorizations. 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 April
1999, the Company entered into a nonbinding letter of intent to acquire all of
the outstanding shares of Erich Jaeger GmbH for approximately $42 million,
including the repayment of debt. If completed, the Company would finance this
acquisition primarily through third-party borrowings. Jaeger develops,
manufactures, and markets a wide range of specialty medical equipment. The
acquisition is subject to certain conditions, including satisfactory completion
of due diligence, negotiation of a definitive agreement, receipt of all required
regulatory approvals, and approval by the Company's Board of Directors. There
can be no assurance that the Company will complete this acquisition.
While the Company currently has no other definitive acquisition
agreements, it expects that it would finance any acquisitions through internal
funds or through borrowings from third parties or Thermo Electron, although it
has no agreements that assure such 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 following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 on the Company's
internal business systems, products, and operations. The Company's year 2000
initiatives include (i) testing and upgrading significant information technology
systems and facilities; (ii) testing and developing upgrades, if necessary, for
the Company's current products and certain discontinued products; (iii)
assessing the year 2000 readiness of key suppliers and vendors; and (iv)
developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related equipment
for year 2000 compliance. The Company also evaluated the potential year 2000
impact on its critical facilities. The Company is currently in phase two of its
program, during which any material noncompliant systems or facilities that were
identified during phase one are prioritized and remediated. Based on its
evaluation, the Company does not believe that any material upgrades to its
critical facilities are required. The Company is currently upgrading or
replacing such noncompliant information technology systems, and this process was
approximately 80% complete as of April 3, 1999. In many cases, such upgrades or
replacements are being made in the ordinary course of business, without
accelerating previously scheduled upgrades or replacements. The Company expects
that all of its material information technology systems and critical facilities
will be year 2000 compliant by the end of 1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells or for which the Company continues to provide technical support. The
Company believes that all of such material products are year 2000 compliant.
However, as many of the Company's products are complex, interact with or
incorporate third-party products, and operate on computer systems that are not
under the Company's control, there can be no assurance that the Company has
identified all of the year
12
<PAGE>
Year 2000 (continued)
2000 problems with its current products. The Company believes that certain of
its older products, which it no longer manufactures or sells, may not be year
2000 compliant. The Company is continuing to test and evaluate such products.
The Company is focusing its efforts on products that are under warranty or early
in their expected life and/or are subject to FDA considerations due to safety
risks. The Company is offering upgrades and/or identifying potential solutions
where reasonably practicable.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and is distributing questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. To date, no significant supplier or
vendor has indicated that it believes its business operations will be materially
disrupted by the year 2000 issue. The Company has started to follow-up with and
monitor the year 2000 compliance progress of significant suppliers and vendors
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires. The Company has not completed its assessment of
third-party risk, but expects to be substantially completed by October 1999.
Year 2000 Compliance Status
----------------------------------------------------------------------
Material Information
Technology Systems and Facilities Approximately 80% completed
Material Current Products Substantially completed
Evaluation of Third-party Risk Approximately 50% completed
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred expenses to third parties (external costs)
related to year 2000 issues of approximately $0.8 million as of April 3, 1999,
and the total external costs of year 2000 remediation are expected to be
approximately $1.3 million. Year 2000 costs are funded from working capital. All
internal costs and related external costs other than capital additions related
to year 2000 remediation have been and will continue to be expensed as incurred.
The Company does not track the internal costs incurred for its year 2000
compliance project. Such costs are principally the related payroll costs for its
information systems group.
Reasonably Likely Worst Case Scenario
The Company is not currently able to determine the most reasonably likely
worst case scenario to result from the year 2000 issue. One possible worst case
scenario would be that certain of the Company's material suppliers or vendors
experience business disruptions due to the year 2000 issue and are unable to
provide materials and services to the Company on time. The Company's operations
could be delayed or temporarily shut down, and it could be unable to meet its
obligations to customers in a timely fashion. The Company's business,
operations, and financial condition could be adversely affected in amounts that
cannot be reasonably estimated at this time.
13
<PAGE>
Year 2000 (continued)
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. 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 or vendors experience business disruptions due to year 2000
issues, the Company might also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition, in amounts that cannot
be reasonably estimated at this time.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices has not changed materially
from its exposure at year-end 1998.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On March 31, 1999, at a Special Meeting of Shareholders, the shareholders
approved a proposal to list on the American Stock Exchange, Inc., 4,880,533
shares of the common stock of the Company, $.10 par value per share, to be
issued in connection with the acquisition of TMO TCA Holdings, Inc. from Thermo
Electron Corporation as follows: 33,057,588 shares were voted in favor of the
proposal, 151,350 shares were voted against, and 108,997 shares abstained. No
broker nonvotes were recorded on the proposal. The sole asset of TMO TCA
Holdings is its ownership of 3,355,705 shares of common stock of Thermo
Cardiosystems Inc.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
None.
14
<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 11th day of May 1999.
THERMEDICS INC.
/s/ Paul F. Kelleher
--------------------------
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
--------------------------
Theo Melas-Kyriazi
Chief Financial Officer
15
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS
INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED APRIL 3, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> APR-03-1999
<CASH> 109,318
<SECURITIES> 86,242
<RECEIVABLES> 67,988
<ALLOWANCES> 4,688
<INVENTORY> 62,525
<CURRENT-ASSETS> 336,034
<PP&E> 61,098
<DEPRECIATION> 40,073
<TOTAL-ASSETS> 548,478
<CURRENT-LIABILITIES> 102,779
<BONDS> 117,641
0
4,174
<COMMON> 244,349
<OTHER-SE> 548,478
<TOTAL-LIABILITY-AND-EQUITY> 77,604
<SALES> 77,604
<TOTAL-REVENUES> 40,135
<CGS> 40,135
<TOTAL-COSTS> 7,508
<OTHER-EXPENSES> 324
<LOSS-PROVISION> 1,453
<INTEREST-EXPENSE> 7,055
<INCOME-PRETAX> 3,257
<INCOME-TAX> 2,582
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 2,582
<NET-INCOME> 0
<EPS-PRIMARY> 0.06
<EPS-DILUTED> 0.06
</TABLE>
