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 1, 2000
[ ] 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
incorporation or organization) (I.R.S. Employer 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, 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 28, 2000
Common Stock, $.10 par value 42,049,606
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMEDICS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
<TABLE>
<CAPTION>
April 1, January 1,
<S> <C> <C>
(In thousands) 2000 2000
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
Cash and cash equivalents $ 24,851 $ 22,337
Advance to affiliate 46,077 46,285
Short-term available-for-sale investments, at quoted market value - 12,160
(amortized cost of $12,160)
Accounts receivable, less allowances of $4,106 and $4,909 55,556 58,208
Inventories:
Raw materials and supplies 16,640 16,308
Work in process 7,393 7,132
Finished goods 19,299 19,552
Deferred tax asset and prepaid expenses 12,090 12,401
Due from parent company and affiliated companies 837 -
Net assets of discontinued operations (Note 6) 74,414 74,311
-------- --------
257,157 268,694
-------- --------
Property, Plant, and Equipment, at Cost 38,946 38,780
Less: Accumulated depreciation and amortization 26,275 25,731
-------- --------
12,671 13,049
-------- --------
Other Assets 9,711 9,755
-------- --------
Cost in Excess of Net Assets of Acquired Companies (Note 6) 153,113 150,311
-------- --------
$432,652 $441,809
======== ========
2
<PAGE>
THERMEDICS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 1, January 1,
(In thousands except share amounts) 2000 2000
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Note payable to parent company $ - $ 11,000
Short-term obligations and current portion of long-term 55,557 41,509
obligations (includes advance from affiliate of $52,417 and $34,600)
Accounts payable 15,739 15,729
Accrued payroll and employee benefits 8,957 11,084
Accrued income taxes 9,079 7,121
Other accrued expenses (Note 5) 25,722 25,711
Due to parent company and affiliated companies - 3,121
-------- --------
115,054 115,275
-------- --------
Deferred Income Taxes and Other Deferred Items 1,281 1,260
-------- --------
Long-term Obligations:
Subordinated convertible obligations 47,424 47,424
Other 154 175
-------- --------
47,578 47,599
-------- --------
Minority Interest (Note 6) 33,232 44,273
-------- --------
Shareholders' Investment:
Common stock, $.10 par value, 100,000,000 shares authorized; 4,210 4,200
42,097,189 and 41,996,564 shares issued
Capital in excess of par value 109,957 108,930
Retained earnings 129,114 126,423
Treasury stock at cost, 47,583 and 50,903 shares (358) (695)
Deferred compensation (910) (1,009)
Accumulated other comprehensive items (Note 2) (6,506) (4,447)
-------- --------
235,507 233,402
-------- --------
$432,652 $441,809
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
THERMEDICS INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
April 1, April 3,
(In thousands except per share amounts) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $60,729 $51,960
------- -------
Costs and Operating Expenses:
Cost of revenues 32,245 28,018
Selling, general, and administrative expenses 18,409 15,162
Research and development expenses 4,466 3,404
Restructuring and unusual costs (Note 7) 93 1,395
------- -------
55,213 47,979
------- -------
Operating Income 5,516 3,981
Interest Income 1,046 1,051
Interest Expense (includes $704 and $242 to related parties) (891) (427)
Equity in Earnings (Loss) of Unconsolidated Subsidiaries 65 (21)
------- -------
Income from Continuing Operations Before Provision for Income Taxes 5,736 4,584
and Minority Interest
Provision for Income Taxes 2,479 2,304
Minority Interest Expense 566 588
------- -------
Income from Continuing Operations 2,691 1,692
Income from Discontinued Operations (net of income tax provision and - 890
minority interest of $1,581; Note 6) ------- -------
Net Income $ 2,691 $ 2,582
======= =======
Basic and Diluted Earnings per Share from Continuing Operations (Note 3) $ .06 $ .04
======= =======
Basic and Diluted Earnings per Share (Note 3) $ .06 $ .06
======= =======
Weighted Average Shares (Note 3):
Basic 41,982 41,696
======= =======
Diluted 42,981 42,806
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMEDICS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
April 1, April 3,
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net income $ 2,691 $ 2,582
Income from discontinued operations (Note 6) - (890)
-------- --------
Income from continuing operations 2,691 1,692
Adjustments to reconcile income from continuing operations to net
cash provided by operating activities of continuing operations:
Depreciation and amortization 2,486 1,947
Minority interest expense 566 588
Provision for losses on accounts receivable 212 308
Other noncash expenses 40 41
Change in current accounts, excluding the effect of disposition:
Accounts receivable 1,233 (693)
Inventories (1,025) (388)
Other current assets 134 (241)
Accounts payable 296 237
Other current liabilities 462 3,107
Other (2) 124
-------- --------
Net cash provided by continuing operations 7,093 6,722
Net cash provided by discontinued operations 3,600 2,021
-------- --------
Net cash provided by operating activities 10,693 8,743
-------- --------
Investing Activities:
Acquisition of Thermo Sentron common stock (Note 6) (17,729) -
Acquisition of Thermo Voltek common stock - (19,779)
Advances to affiliate, net 208 -
Proceeds from sale of available-for-sale investments 12,192 -
Purchase of property, plant, and equipment (1,195) (1,054)
Proceeds from sale of property, plant, and equipment 250 408
Other (407) 51
-------- --------
Net cash used in continuing operations (6,681) (20,374)
Net cash used in discontinued operations (3,713) (21,097)
-------- --------
Net cash used in investing activities $(10,394) $(41,471)
-------- --------
5
<PAGE>
THERMEDICS INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Three Months Ended
April 1, April 3,
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Financing Activities:
Net increase in short-term borrowings $ 1,320 $ 387
Repayment of long-term obligations (21) -
Net proceeds from issuance of Company and subsidiary common stock 958 (45)
Other - 89
-------- -------
Net cash provided by continuing operations 2,257 431
Net cash provided by (used in) discontinued operations 545 (377)
-------- -------
Net cash provided by financing activities 2,802 54
-------- -------
Exchange Rate Effect on Cash of Continuing Operations (156) 208
Exchange Rate Effect on Cash of Discontinued Operations 165 (324)
-------- -------
Increase (Decrease) in Cash and Cash Equivalents 3,110 (32,790)
Cash and Cash Equivalents at Beginning of Period 23,553 142,108
-------- -------
26,663 109,318
Cash and Cash Equivalents of Discontinued Operations at End of Period (1,812) (40,372)
-------- -------
Cash and Cash Equivalents at End of Period $ 24,851 $68,946
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
6
<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 April 1, 2000, and the results of
operations and cash flows for the three-month periods ended April 1, 2000, and
April 3, 1999. Interim results are not necessarily indicative of results for a
full year.
Historical financial results have been restated to reflect a decision to
sell the Company's majority-owned Thermo Cardiosystems Inc. and Thermo Voltek
Corp. subsidiaries, which have been presented as discontinued operations in the
accompanying financial statements (Note 6). The consolidated balance sheet
presented as of January 1, 2000, 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 1, 2000, 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 2000 and 1999, the
Company had comprehensive income of $921,000 and $1,266,000, respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
April 1, April 3,
(In thousands except per share amounts) 2000 1999
- ---------------------------------------------------------------------- - ----------- ---------- ----------
Basic
Income from Continuing Operations $2,691 $1,692
Income from Discontinued Operations - 890
------ ------
Net Income $2,691 $2,582
------ ------
Weighted Average Shares 41,982 41,696
------ ------
Basic Earnings per Share:
Continuing operations $ .06 $ .04
Discontinued operations - .02
------ ------
$ .06 $ .06
====== ======
7
<PAGE>
3. Earnings per Share (continued)
Three Months Ended
April 1, April 3,
(In thousands except per share amounts) 2000 1999
- ---------------------------------------------------------------------- - ----------- ---------- ----------
Diluted
Income from Continuing Operations $ 2,691 $ 1,692
Effect of Majority-owned Subsidiaries' Dilutive Securities - (3) (3)
------- --------
Continuing Operations
Income from Continuing Operations Available to Common 2,688 1,689
Shareholders, as Adjusted
Income from Discontinued Operations - 890
Effect of Majority-owned Subsidiaries' Dilutive Securities - - (2)
------- --------
Discontinued Operations
Income Available to Common Shareholders, as Adjusted $ 2,688 $ 2,577
------- --------
Weighted Average Shares 41,982 41,696
Effect of:
Convertible obligations 966 966
Stock options 33 144
------- --------
Weighted Average Shares, as Adjusted 42,981 42,806
------- --------
Diluted Earnings per Share:
Continuing operations $ .06 $ .04
Discontinued operations - .02
------- --------
$ .06 $ .06
======= ========
The computation of diluted earnings per share for the first quarter of
2000 and 1999 excluded $15,859,000 principal amount of 2.875% subordinated
convertible debentures, convertible at $14.928 per share because the effect
would be antidilutive.
Options to purchase 1,289,000 and 1,553,000 shares of common stock were
not included in the computation of diluted earnings per share for the first
quarter of 2000 and 1999, respectively, because the options' exercise prices
were greater than the average market price for the common stock and their effect
would have been antidilutive.
8
<PAGE>
4. Business Segment Information
Three Months Ended
April 1, April 3,
(In thousands) 2000 1999
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Revenues:
Quality Assurance and Security Products $19,491 $20,412
Precision Weighing and Inspection Equipment 25,296 26,556
Respiratory Care Products 9,999 -
Other 5,943 4,992
------- -------
$60,729 $51,960
======= =======
Income from Continuing Operations Before Provision for
Income Taxes and Minority Interest:
Quality Assurance and Security Products $3,056 $ 2,669
Precision Weighing and Inspection Equipment 1,400 2,008
Respiratory Care Products 260 -
Other 1,254 981
Corporate (a) (454) (1,677)
------ -------
Total operating income 5,516 3,981
Interest and other income, net 220 603
------ -------
$5,736 $ 4,584
====== =======
(a) Primarily general and administrative expenses. Includes $1.4 million of
unusual costs in the first quarter of 1999.
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 the 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. Accrued acquisition expenses are included in other
accrued expenses in the accompanying balance sheet.
A summary of the changes in accrued acquisition expenses for the 1998
acquisition of the product-monitoring group of Graseby Limited (the
product-monitoring businesses) is as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Abandonment Other
of Excess
(In thousands) Facilities Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 1, 2000 $1,068 $ 40 $1,108
Usage (142) - (142)
Currency translation (22) - (22)
------ ------ ------
Balance at April 1, 2000 $ 904 $ 40 $ 944
====== ====== ======
9
<PAGE>
</TABLE>
5. Accrued Acquisition Expenses (continued)
Expenses accrued for the abandonment of excess facilities at the
product-monitoring businesses are expected to be paid through the lease terms of
the abandoned facilities, which expire in 2009.
A summary of the changes in accrued acquisition expenses for the July 1999
acquisition of Erich Jaeger GmbH, which represents the Respiratory Care Products
segment, is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 1, 2000 $2,189 $ 638 $ 404 $3,231
Currency translation (112) (33) (20) (165)
------ ------ ------ ------
Balance at April 1, 2000 $2,077 $ 605 $ 384 $3,066
====== ====== ====== ======
The principal accrued acquisition expenses for Jaeger were for severance
for 29 employees across all functions and for the abandonment of operating
facilities in the United States and the Netherlands with lease terms through
2003. The amounts captioned as other primarily represent employee relocation
costs. No amounts were expended during 1999 or the first quarter of 2000.
Unresolved matters at April 1, 2000, primarily included the completion of
planned severances and abandonment of excess facilities.
6. Proposed Reorganization and Discontinued Operations
Proposed Reorganization
Thermo Electron Corporation has announced a proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company.
Under this plan, the Company has taken its Thermo Sentron Inc. and Thermedics
Detection Inc. subsidiaries private and is seeking a buyer for its Thermo
Cardiosystems subsidiary. In addition, the Company will also be taken private by
Thermo Electron Corporation.
During March 1999, the Company commenced cash tender offers for its
majority-owned Thermo Sentron and Thermedics Detection subsidiaries, for $15.50
and $8.00 per share in cash, respectively, in order to bring its equity
ownership in each of these companies, when combined with Thermo Electron's
equity ownership in each, to at least 90%. On March 31, 2000, the Company
acquired 1,143,870 shares of Thermo Sentron common stock for approximately $17.7
million in cash through a successful tender offer. Subsequent to the completion
of the tender offer the combined Company and Thermo Electron ownership of Thermo
Sentron was 99%. During the second quarter of 2000, the Company acquired the
remaining shares of Thermo Sentron not already owned by the Company and Thermo
Electron for $15.50 per share in cash through a short-form merger with Thermo
Sentron. The estimated total cost of the acquisition of the minority interest in
Thermo Sentron's common stock, excluding common stock owned by Thermo Electron,
is expected to be approximately $25.8 million, including expenses, cash paid to
settle vested stock options, and a noncash component for the value of Thermo
Sentron's outstanding stock options. Thermo Sentron's outstanding stock options
were converted into stock options that are exercisable into 414,000 shares of
Thermo Electron common stock with an aggregate value of $3.8 million as of the
date of the acquisition. Subsequent to the completion of the short-form merger,
the Company and Thermo Electron owned approximately 88% and 12%, respectively,
of the outstanding common stock of Thermo Sentron, and Thermo Sentron's common
stock ceased to be publicly traded. The cost of the acquisition exceeded the
estimated fair value of the incremental net assets by $13.1 million, which will
be amortized over 40 years. During the first quarter of 2000, the Company
recorded cost in excess of net assets of acquired company of $6.4 million
relating to Thermo Sentron common stock acquired during the quarter.
10
<PAGE>
6. Proposed Reorganization and Discontinued Operations (continued)
During the second quarter of 2000, the Company acquired 1,916,715 shares
of Thermedics Detection common stock through a successful cash tender offer.
Subsequent to the completion of the tender offer the combined Company and Thermo
Electron ownership of Thermedics Detection was 99%. The Company acquired the
remaining shares of Thermedics Detection not already owned by the Company and
Thermo Electron for $8.00 per share in cash through a short-form merger with
Thermedics Detection in April 2000. The estimated total cost of the acquisition
of the minority interest in Thermedics Detection's common stock, excluding
common stock owned by Thermo Electron, is expected to be approximately $20.6
million, including expenses, cash paid to settle vested stock options, and a
noncash component for the value of Thermedics Detection's outstanding stock
options. Thermedics Detection's outstanding stock options were converted into
stock options that are exercisable into 353,000 shares of Thermo Electron common
stock with an aggregate value of $1.8 million as of the date of the acquisition.
Subsequent to the completion of the short-form merger, the Company and Thermo
Electron owned approximately 95% and 5%, respectively, of the outstanding common
stock of Thermedics Detection, and Thermedics Detection's common stock ceased to
be publicly traded. The cost of the acquisition exceeded the estimated fair
value of the incremental net assets by $6.9 million, which will be amortized
over 40 years.
Through May 11, 2000, to partially fund the acquisition of Thermo Sentron
and Thermedics Detection common stock, the Company borrowed approximately $12
million, and expects to borrow an additional $4 million, under an existing $20
million short-term line of credit from Thermo Electron. Borrowings under the
line of credit bear interest at the 30-day Dealer Commercial Paper Rate (DCP
Rate) plus 150 basis points, set at the beginning of each month. Such rate shall
be reduced to the DCP Rate plus 50 points to the extent that funds invested by
the Company's majority-owned subsidiaries in the cash management arrangement
with Thermo Electron exceed borrowings by the Company from the cash management
arrangement with Thermo Electron. The borrowing rate was 7.55% at April 1, 2000.
On May 1, 2000, Thermo Electron commenced an exchange offer for any and
all of the outstanding shares of Company common stock held by public
shareholders. In the exchange offer, holders of Company common stock will
receive shares of Thermo Electron common stock in exchange for their shares of
the Company. Shares will be exchanged at a ratio of 0.45 shares of Thermo
Electron common stock for each share of Company common stock. Thermo Electron,
which owned approximately 76% of the outstanding shares of Company common stock
at April 1, 2000, conditioned the exchange offer on receiving acceptances from
holders of enough shares so that, when combined with its current share
ownership, Thermo Electron's ownership reaches at least 90%. If Thermo Electron
achieves this 90% ownership threshold, it would acquire all remaining
outstanding shares of the Company through a short-form merger. In the short-form
merger, minority shareholders who do not participate in the exchange offer would
also receive shares of Thermo Electron common stock in exchange for their
Company common stock at a ratio of 0.45 shares. If Thermo Electron successfully
obtains at least 90% of the outstanding Company shares, it expects to complete
the spin-in of the Company during the third quarter of 2000.
In addition, obligations under the Company's 2.875% subordinated
convertible debentures due June 1, 2003, and its noninterest-bearing
subordinated convertible debentures due June 1, 2003, would be assumed by Thermo
Electron in the short-form merger, and the debentures would be convertible into
Thermo Electron common stock.
The exchange offer will require Securities and Exchange Commission
clearance of necessary filings. The exchange offer and short-form merger
involving the Company do not require Company board or shareholder approval.
Discontinued Operations
In May 1999, the Company announced its intention to sell Thermo Voltek,
which represented its Power Electronics and Test Equipment segment. In January
2000, Thermo Electron announced a reorganization plan under which it intends to
sell Thermo Cardiosystems, which represented the Company's Heart Assist and
Blood Testing Devices segment. In accordance with the provisions of Accounting
Principles Board Opinion No. 30 concerning
11
<PAGE>
6. Proposed Reorganization and Discontinued Operations (continued)
reporting the effects of disposal of a segment of a business, the Company
classified the results of the Heart Assist and Blood Testing Devices and Power
Electronics and Test Equipment businesses as discontinued in the accompanying
statement of income for the first quarter of 1999. In addition, the net assets
of the Heart Assist and Blood Testing Devices and Power Electronics and Test
Equipment businesses have been classified as net assets of discontinued
operations in the accompanying balance sheet, and primarily consist of
inventories, accounts receivable, and machinery and equipment, net of certain
liabilities, principally subordinated convertible debentures. During the first
quarter of 2000, the Heart Assist and Blood Testing Devices and Power
Electronics and Test Equipment businesses had revenues of $27.5 million and net
income of $0.8 million.
Summary operating results of the Heart Assist and Blood Testing Devices
and Power Electronics and Test Equipment businesses for the first quarter of
1999 were as follows:
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
(In thousands)
- ------------------------------------------------------------------------------------ ---------- ----------
Revenues $ 25,678
Costs and Expenses 23,207
--------
Income from Discontinued Operations Before Income Taxes and Minority Interest 2,471
Provision for Income Taxes 953
Minority Interest Expense 628
--------
Income from Discontinued Operations $ 890
========
During the first quarter of 2000, the Company sold its Pacific Power
Source division, previously part of the Power Electronics and Test Equipment
businesses, for $3.3 million in cash, subject to post-closing adjustments. The
Company has signed letters of intent to sell the remainder of the Power
Electronics and Test Equipment businesses for approximately $10.6 million in
cash and expects to complete the sales by June 2000. The net proceeds from these
sales will be transferred to cash of continuing operations upon final
disposition of the net assets of the Power Electronics and Test Equipment
businesses. The Company is seeking a buyer for the Heart Assist and Blood
Testing Devices business and intends to complete the sale by the end of 2000.
7. Restructuring and Unusual Costs
During the first quarter of 2000, the Company recorded restructuring and
unusual costs of $93,000 for employee retention costs in connection with Thermo
Electron's reorganization plan (Note 6). The retention costs are being recorded
ratably over the period through which the employees must remain employed to
qualify for the payment. At April 1, 2000, no retention payments had been made.
The liability for retention costs is included in other accrued expenses in the
accompanying April 1, 2000, balance sheet.
8. Recent Accounting Pronouncement
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements."
SAB 101 includes requirements for when shipments may be recorded as revenue when
the terms of the sale include customer acceptance provisions or an obligation of
the seller to install the product. In such instances, SAB 101 generally requires
that revenue recognition occur at completion of installation and/or upon
customer acceptance. SAB 101 requires that companies conform their revenue
recognition practices to the requirements therein no later than the second
quarter of calendar 2000 through recording a cumulative net of tax effect of the
change in accounting as of January 2, 2000. The Company has not yet completed
the analysis to determine the effect that SAB 101 will have on its financial
statements.
12
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 1, 2000, filed with the Securities and Exchange
Commission.
Overview
The Company's continuing operations conduct business in three reportable
segments: Quality Assurance and Security Products (Quality Assurance), Precision
Weighing and Inspection Equipment (Inspection Equipment), and Respiratory Care
Products (Respiratory Care). The Quality Assurance segment consists of the
Company's Thermedics Detection Inc. subsidiary, which 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. The Respiratory Care Products segment consists of Erich
Jaeger GmbH, which was acquired by the Company in July 1999. Jaeger, based in
Germany, develops and manufactures equipment for lung-function,
cardio-pulmonary, and sleep disorder diagnosis and monitoring.
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 United States, 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.
Thermo Electron Corporation has announced a proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company (Note
6). Under this plan, the Company has taken its Thermo Sentron and Thermedics
Detection subsidiaries private, and in turn would be taken private and become a
wholly owned subsidiary of Thermo Electron. In addition, Thermo Electron has
announced that the Company will divest of its Thermo Cardiosystems Inc. and
Thermo Voltek Corp. subsidiaries, which represent its Heart Assist and Blood
Testing Devices and Power Electronics and Test Equipment businesses,
respectively.
Results of Operations
First Quarter 2000 Compared With First Quarter 1999
Total revenues were $60.7 million in the first quarter of 2000, compared
with $52.0 million in the first quarter of 1999. Revenues increased by $10.0
million due to the inclusion of revenues from Jaeger, acquired in July 1999,
which represents the Respiratory Care segment. This increase was offset in part
by a $0.7 million decrease in revenues due to the unfavorable effects of
currency translation as a result of the strengthening of the U.S. dollar
relative to foreign currencies in countries in which the Inspection Equipment
segment operates.
13
<PAGE>
First Quarter 2000 Compared With First Quarter 1999 (continued)
Revenues from the Inspection Equipment segment were $25.3 million in the
first quarter of 2000, compared with $26.6 million in the first quarter of 1999.
Excluding the effects of currency translation, revenues decreased $0.6 million,
principally due to lower demand in North America. This decrease was offset in
part by revenue improvement in Europe due to increased demand for package goods
products in that region.
Revenues from the Quality Assurance segment decreased to $19.5 million in
the first quarter of 2000 from $20.4 million in the first quarter of 1999.
Revenues from industrial process instruments decreased by $1.1 million,
primarily due to lower revenues from the sale and service of ALEXUS(R) systems.
This decline was due in part to changes in the process of recycling plastic
containers in Europe. Previously, such containers had been sanitized and reused,
a process in which recyclers used the Company's ALEXUS systems. Recent recycling
trends in Europe involve melting and reforming plastic returnables.
The gross profit margin increased to 47% in the first quarter of 2000 from
46% in the first quarter of 1999, primarily due to the inclusion of
higher-margin revenues from the recently acquired Respiratory Care segment. The
gross profit margin in the Quality Assurance segment decreased to 56% in 2000
from 58% in 1999, primarily due to lower sales of higher-margin ALEXUS products.
The gross profit margin in the Inspection Equipment segment declined to 37% in
2000 from 38% in 1999, primarily due to lower revenues.
Selling, general, and administrative expenses increased to $18.4 million
in the first quarter of 2000 from $15.2 million in the first quarter of 1999,
primarily due to the inclusion of $3.7 million of expenses from Jaeger. Selling,
general, and administrative expenses as a percentage of revenues increased to
30% in 2000 from 29% in 1999, primarily due to the inclusion of higher selling,
general, and administrative expenses as a percentage of revenues at Jaeger.
Research and development expenses increased to $4.5 million in the first
quarter of 2000 from $3.4 million in the first quarter of 1999, primarily due to
the inclusion of $1.5 million of expenses at Jaeger. This increase was offset in
part by a decrease in expenses in the Quality Assurance segment as a result of
efforts to reduce costs and focus on the development of near-term commercially
viable products.
Restructuring and unusual costs of $0.1 million were recorded by the
Company in the first quarter of 2000 for employee retention costs in connection
with Thermo Electron's reorganization plan. The Company recorded $1.4 million of
restructuring and unusual costs in the first quarter of 1999, representing costs
incurred in connection with reorganization transactions, primarily investment
banking fees.
Interest income was relatively unchanged at $1.0 million in the first
quarter of 2000, compared with $1.1 million in the first quarter of 1999.
Interest expense increased to $0.9 million in 2000 from $0.4 million in 1999,
primarily as a result of interest expense on borrowings used to partially
finance the acquisition of the Respiratory Care business.
Equity in earnings of unconsolidated subsidiaries in the accompanying
statement of income represents the Company's proportionate share of earnings
from joint ventures.
Minority interest expense was unchanged at $0.6 million in the first
quarter of 2000 and 1999.
Excluding the effect of nondeductible restructuring and unusual costs of
$1.4 million in the first quarter of 1999, the effective tax rates were 43% and
39% in the first quarter of 2000 and 1999, respectively. These 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 other intangible assets. The increase in the effective
tax rate is primarily due to the inclusion in 2000 of nondeductible amortization
of cost in excess of net assets of acquired companies and other intangible
assets at Jaeger.
14
<PAGE>
First Quarter 2000 Compared With First Quarter 1999 (continued)
In accordance with APB No. 30 concerning reporting the effect of disposal
of a segment of a business, the results of the Company's Heart Assist and Blood
Testing Devices and Power Electronics and Test Equipment businesses have been
classified as discontinued operations in the accompanying statement of income
for the first quarter of 1999. Income from discontinued operations was $0.9
million in the first quarter of 1999. The Company is not currently aware of any
known trends, events, or uncertainties involving discontinued operations that it
expects will materially affect the Company's results of operations, financial
condition, or liquidity through the date that such operations are disposed.
Liquidity and Capital Resources
Consolidated working capital was $142.1 million at April 1, 2000, compared
with $153.4 million at January 1, 2000. Cash, cash equivalents, and short-term
available-for-sale investments were $24.9 million at April 1, 2000, compared
with $34.5 million at January 1, 2000. In addition, the Company had $46.1
million and $46.3 million invested in an advance to affiliate as of April 1,
2000, and January 1, 2000, respectively. Of the total cash, cash equivalents,
and short-term available-for-sale investments at April 1, 2000, $21.6 million
was held by the Company's majority-owned subsidiaries, and the remainder by the
Company and its wholly owned subsidiaries. Of the total advance to affiliate at
April 1, 2000, $38.1 million was advanced by the Company's majority-owned
subsidiaries, and the remainder was advanced by the Company.
During the first quarter of 2000, $7.1 million of cash was provided by the
operating activities of the Company's continuing operations. Cash provided by a
$1.2 million decrease in accounts receivable was offset in part by the use of
$1.0 million of cash to fund an increase in inventories, principally at Jaeger.
The decrease in accounts receivable was primarily due to strong fourth quarter
1999 sales at Jaeger that were collected in the first quarter of 2000. Inventory
levels at Jaeger were at lower than normal levels at year-end 1999, due to
strong fourth quarter sales, and were replenished in the first quarter of 2000.
During the first quarter of 2000, the primary investing activity of the
Company's continuing operations, excluding available-for-sale investments and
advance to affiliate activity, was the acquisition of Thermo Sentron common
stock. In connection with the merger of Thermo Sentron with the Company, the
Company acquired 1,143,870 shares of Thermo Sentron common stock for $17.7
million in cash (Note 6). The Company completed its mergers with Thermo Sentron
and Thermedics Detection during the second quarter and estimates that the
additional cash costs to complete these transactions, including expenses and
cash paid to settle vested stock options, will approximate $23.1 million. The
Company also expended $1.2 million for purchases of property, plant, and
equipment in the first quarter of 2000. During the remainder of 2000, the
Company expects to make capital expenditures for the purchase of property,
plant, and equipment of approximately $4 million.
In March 2000, the Company's discontinued operations sold a portion of the
Power Electronics and Test Equipment business for net proceeds of $3.3 million
in cash, subject to post-closing adjustments (Note 6). The Company has signed
letters of intent to sell the remainder of the Power Electronics and Test
Equipment businesses for approximately $10.6 million in cash and expects to
complete the sales by June 2000. The net proceeds from these sales will be
transferred to cash of continuing operations upon final disposition of the net
assets of the Power Electronics and Test Equipment businesses.
During the first quarter of 2000, the financing activities of the
Company's continuing operations provided $2.3 million of cash. Short-term
borrowings provided $1.3 million of cash and the issuance of Company and
subsidiary common stock provided $1.0 million of cash. In March 2000, the
Company refinanced its $11.0 million note payable to a wholly owned subsidiary
of Thermo Electron with borrowings from the Thermo Electron domestic cash
management arrangement. Through May 11, 2000, the Company borrowed
approximately $12 million, and expects to borrow an additional $4 million, of
cash from Thermo Electron under a short-term line of credit to partially fund
its acquisition of the common stock of Thermo Sentron and Thermedics Detection
in completion of their merger with the Company (Note 6).
15
<PAGE>
Thermo Electron and its wholly owned subsidiary have indicated their
willingness to require payment of the Company's short-term obligations to Thermo
Electron only to the extent that the Company's cash flows permit. Excluding
such debt, the Company believes that its existing resources are sufficient to
meet the capital requirements of its existing operations for the foreseeable
future.
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 1999.
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 February 1, 2000, the Company filed a Current Report on Form 8-K dated
January 31, 2000, with respect to a proposed reorganization plan at Thermo
Electron Corporation, as well as a decision to hold for sale the Company's
Thermo Cardiosystems Inc. subsidiary.
On March 31, 2000, the Company filed a Current Report on Form 8-K dated
March 31, 2000, regarding the completion by the Company of its tender
offer for the minority interest of its Thermo Sentron Inc. subsidiary.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 12th day of May 2000.
THERMEDICS INC.
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
17
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
10.1 Transition Agreement dated February 18, 2000, between Victor
Poirer and Thermo Electron Corporation relating to the proposed
sale of Thermo Cardiosystems Inc. (filed as Exhibit 10.28 to
Thermo Cardiosystems Inc.'s Annual Report on Form 10-K for the
year ended January 1, 2000 [File No. 1-10114] and incorporated
herein by reference).
27.1 Financial Data Schedule for the quarter ended April 1, 2000.
27.2 Financial Data Schedule for the quarter ended April 3, 1999
(restated for discontinued operations).
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED APRIL 1,2000
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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