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 June 28, 1997.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-9786
THERMO INSTRUMENT SYSTEMS INC.
(Exact name of Registrant as specified in its charter)
Delaware 04-2925809
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1851 Central Drive
Suite 314
Bedford, Texas 76021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 622-1000
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter
period that the Registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of
the issuer's classes of Common Stock, as of the
latest practicable date.
Class Outstanding at July 25, 1997
---------------------------- ----------------------------
Common Stock, $.10 par value 97,245,951
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
June 28, December 28,
(In thousands) 1997 1996
------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 459,328 $ 522,688
Available-for-sale investments, at quoted
market value (amortized cost of $1,709
and $7,430) 1,713 7,452
Accounts receivable, less allowances
of $23,470 and $16,981 353,206 303,331
Unbilled contract costs and fees 10,791 6,043
Inventories:
Raw materials and supplies 128,282 95,920
Work in process 59,158 47,518
Finished goods 98,892 70,245
Prepaid expenses 25,240 13,417
Prepaid income taxes 64,023 58,296
---------- ----------
1,200,633 1,124,910
---------- ----------
Property, Plant, and Equipment, at Cost 316,012 250,976
Less: Accumulated depreciation and
amortization 84,632 72,313
---------- ----------
231,380 178,663
---------- ----------
Patents and Other Assets 32,584 32,454
---------- ----------
Cost in Excess of Net Assets of Acquired
Companies (Note 3) 922,190 588,373
---------- ----------
$2,386,787 $1,924,400
========== ==========
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
June 28, December 28,
(In thousands except share amounts) 1997 1996
------------------------------------------------------------------------
Current Liabilities:
Notes payable (includes $115,000 due to
parent company in 1997; Note 3) $ 184,377 $ 89,462
Accounts payable 92,295 83,161
Accrued payroll and employee benefits 52,096 51,728
Accrued income taxes 53,339 39,686
Accrued installation and warranty expenses 47,636 44,211
Accrued acquisition expenses (Note 3) 28,348 30,025
Deferred revenue 42,292 35,959
Other accrued expenses 114,977 101,646
Due to parent company 20,550 12,329
---------- ----------
635,910 488,207
---------- ----------
Deferred Income Taxes 19,986 20,710
---------- ----------
Other Deferred Items 28,328 29,805
---------- ----------
Long-term Obligations:
Senior convertible obligations (includes
$140,000 due to parent company) 330,784 334,781
Subordinated convertible obligations 192,500 192,500
Other (includes $235,000 and $15,000 due
to parent company; Note 3) 252,844 26,933
---------- ----------
776,128 554,214
---------- ----------
Minority Interest 126,480 85,197
---------- ----------
Shareholders' Investment:
Common stock, $.10 par value, 250,000,000
shares authorized; 97,913,322 and
97,674,228 shares issued 9,791 9,767
Capital in excess of par value 321,093 319,464
Retained earnings 495,447 424,641
Treasury stock at cost, 673,391 and
750,055 shares (8,044) (8,679)
Cumulative translation adjustment (18,335) 1,060
Net unrealized gain on available-for-sale
investments 3 14
---------- ----------
799,955 746,267
---------- ----------
$2,386,787 $1,924,400
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
-----------------------
June 28, June 29,
(In thousands except per share amounts) 1997 1996
------------------------------------------------------------------------
Revenues $405,235 $321,552
-------- --------
Costs and Operating Expenses:
Cost of revenues 210,494 177,028
Selling, general, and administrative expenses 111,328 95,056
Research and development expenses 27,790 23,223
Nonrecurring costs (Note 5) 800 -
-------- --------
350,412 295,307
-------- --------
Operating Income 54,823 26,245
Interest Income 4,453 4,239
Interest Expense (includes $5,059 and $2,523
to parent company) (11,935) (7,227)
Gain on Issuance of Stock by Subsidiaries
(Note 4) 13,177 25,526
-------- --------
Income Before Provision for Income Taxes
and Minority Interest Expense 60,518 48,783
Provision for Income Taxes 20,991 12,383
Minority Interest Expense 2,308 1,104
-------- --------
Net Income $ 37,219 $ 35,296
======== ========
Earnings per Share:
Primary $ .38 $ .37
======== ========
Fully diluted $ .35 $ .34
======== ========
Weighted Average Shares:
Primary 97,222 95,074
======== ========
Fully diluted 111,431 107,402
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Income
(Unaudited)
Six Months Ended
-----------------------
June 28, June 29,
(In thousands except per share amounts) 1997 1996
------------------------------------------------------------------------
Revenues $734,355 $547,123
-------- --------
Costs and Operating Expenses:
Cost of revenues 383,942 295,235
Selling, general, and administrative expenses 200,897 160,765
Research and development expenses 51,197 39,772
Nonrecurring costs (Note 5) 800 3,500
-------- --------
636,836 499,272
-------- --------
Operating Income 97,519 47,851
Interest Income 11,677 9,350
Interest Expense (includes $6,618 and $4,060
to parent company) (20,395) (13,517)
Gain on Issuance of Stock by Subsidiaries
(Note 4) 25,212 49,783
-------- --------
Income Before Provision for Income Taxes
and Minority Interest Expense 114,013 93,467
Provision for Income Taxes 38,761 22,456
Minority Interest Expense 4,446 1,672
-------- --------
Net Income $ 70,806 $ 69,339
======== ========
Earnings per Share:
Primary $ .73 $ .74
======== ========
Fully diluted $ .67 $ .67
======== ========
Weighted Average Shares:
Primary 97,146 93,474
======== ========
Fully diluted 111,436 107,385
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
-----------------------
June 28, June 29,
(In thousands) 1997 1996
------------------------------------------------------------------------
Operating Activities:
Net income $ 70,806 $ 69,339
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for losses on accounts
receivable 2,890 1,283
Depreciation and amortization 26,092 22,256
Nonrecurring costs (Note 5) 800 3,500
Gain on issuance of stock by
subsidiaries (Note 4) (25,212) (49,783)
Minority interest expense 4,446 1,672
Decrease in deferred income taxes (597) (109)
Other noncash expenses 2,874 2,350
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable (9,608) 19,264
Inventories (15,370) (7,653)
Other current assets (5,983) 271
Accounts payable 11,425 (9,177)
Other current liabilities (25,399) (8,249)
Other (18) 170
--------- ---------
Net cash provided by operating activities 37,146 45,134
--------- ---------
Investing Activities:
Acquisitions, net of cash acquired (Note 3) (476,420) (249,460)
Purchases of available-for-sale investments - (4,650)
Proceeds from sale and maturities of
available-for-sale investments 5,600 -
Purchases of property, plant, and equipment (10,026) (9,730)
Proceeds from sale of property, plant, and
equipment 4,974 1,059
Other 579 321
--------- ---------
Net cash used in investing activities (475,293) (262,460)
--------- ---------
Financing Activities:
Net proceeds from issuance of Company and
subsidiaries' common stock (Note 4) 58,320 85,719
Proceeds from issuance of short-term
obligations to parent company (Note 3) 115,000 95,000
Proceeds from issuance of long-term
obligations to parent company (Note 3) 220,000 -
Increase (decrease) in short-term obligations (7,550) 1,917
Repayment of long-term obligations (3,930) (409)
--------- ---------
Net cash provided by financing activities $ 381,840 $ 182,227
--------- ---------
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
----------------------
June 28, June 29,
(In thousands) 1997 1996
-----------------------------------------------------------------------
Exchange Rate Effect on Cash $ (7,053) $ 804
--------- ---------
Decrease in Cash and Cash Equivalents (63,360) (34,295)
Cash and Cash Equivalents at Beginning
of Period 522,688 395,233
--------- ---------
Cash and Cash Equivalents at End of Period $ 459,328 $ 360,938
========= =========
Noncash Activities:
Fair value of assets of acquired companies $ 599,409 $ 465,479
Cash paid for acquired companies (518,662) (252,088)
Issuance of subsidiary stock options
for acquired company (2,080) -
--------- ---------
Liabilities assumed of acquired companies $ 78,667 $ 213,391
========= =========
Conversions of convertible obligations $ 3,997 $ 59,966
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
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THERMO INSTRUMENT SYSTEMS INC.
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been
prepared by Thermo Instrument Systems 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 June 28, 1997, the results of operations for the three- and six-month
periods ended June 28, 1997, and June 29, 1996, and the cash flows for
the six-month periods ended June 28, 1997, and June 29, 1996. Interim
results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 28, 1996, 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, as amended, for the fiscal year ended
December 28, 1996, filed with the Securities and Exchange Commission.
2. Presentation
Certain amounts in 1996 have been reclassified to the presentation in
the 1997 financial statements.
3. Acquisitions
In March 1997, the Company acquired 95% of Life Sciences
International PLC (Life Sciences), a London Stock Exchange-listed
company. Subsequently, the Company acquired the remaining shares of Life
Sciences' capital stock. The aggregate purchase price for Life Sciences
was $447.9 million, net of $41.8 million of cash acquired. The purchase
price includes the repayment of $105.0 million of Life Sciences' bank
debt. Life Sciences manufactures laboratory science equipment,
appliances, instruments, consumables, and reagents for the research,
clinical, and industrial markets.
In March 1997, to partially finance the acquisition of Life Sciences,
the Company borrowed $210.0 million from Thermo Electron Corporation
(Thermo Electron) pursuant to a promissory note due March 1999. In June
1997, to finance the repayment of Life Sciences' debt, the Company
borrowed $115.0 million from Thermo Electron pursuant to a promissory
note due December 1997. In August 1997, in connection with the Company's
Thermo Optek Corporation (Thermo Optek) subsidiary's agreement in July
1997 to acquire Spectronic Instruments, Inc. (Spectronic) and VG Systems
Limited (VG Systems) from the Company, Thermo Optek borrwoed $40.0
million from Thermo Electron pursuant to a promissory note due July 1998.
Spectronic is a former subsidiary of Life Sciences and VG Systems is a
business formerly part of the Scientific Instruments Division of Fisons
plc (Fisons), a substantial portion of which was acquired by the Company
in March 1996. The promissory notes bear interest at the 90-day
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THERMO INSTRUMENT SYSTEMS INC.
3. Acquisitions (continued)
Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter. In connection with the Company's ThermoSpectra
Corporation (ThermoSpectra) subsidiary's agreement in July 1997 to
acquire the NESLAB Instruments, Inc. (NESLAB) businesses of Life Sciences
from the Company, Thermo Electron intends to lend ThermoSpectra $45.0
million pursuant to a promissory note payable in July 1999. The
promissory note is expected to bear interest at the 90-day Commercial
Paper Composite Rate plus 25 basis points, set at the beginning of each
quarter.
During the first six months of 1997, the Company made several other
acquisitions for approximately $29.0 million in cash, including the
repayment of $1.3 million of bank debt, the issuance of subsidiary stock
options valued at an aggregate $2.1 million, and a subsidiary's issuance
of a $10.0 million promissory note to Thermo Electron that is due March
1999 and bears interest at the 90-day Commercial Paper Composite Rate
plus 25 basis points, set at the beginning of each quarter.
The acquisitions completed in the first six months of 1997 have been
accounted for using the purchase method of accounting and their results
have been included in the accompanying financial statements from their
respective dates of acquisition. The cost of these acquisitions exceeded
the estimated fair value of the acquired net assets by $350.7 million,
which is being amortized over 40 years. Allocation of the purchase price
for these acquisitions was based on estimates of the fair value of the
net assets acquired and is subject to adjustment upon finalization of the
purchase price allocation.
Based on unaudited data, the following table presents selected
financial information for the Company and Life Sciences on a pro forma
basis, assuming the companies had been combined since the beginning of
1996. The effect of the acquisitions not included in the pro forma data
was not material to the Company's results of operations.
Three Six
Months Ended Months Ended
------------ ---------------------
(In thousands except June 29, June 28, June 29,
per share amounts) 1996 1997 1996
------------------------------------------------------------------------
Revenues $415,201 $787,127 $722,433
Net income 38,238 55,581 68,548
Earnings per share:
Primary .40 .57 .73
Fully diluted .37 .54 .66
The pro forma results are not necessarily indicative of future
operations or the actual results that would have occurred had the
acquisition of Life Sciences been made at the beginning of 1996.
During 1996, the Company had undertaken a restructuring of a
substantial portion of the businesses comprising the Scientific
Instruments Division of Fisons, acquired in March 1996. During the first
six months of 1997, the Company expended $10.5 million for restructuring
9PAGE
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THERMO INSTRUMENT SYSTEMS INC.
3. Acquisitions (continued)
costs, primarily for severance and abandoned-facility payments. In
connection with finalizing its restructuring plans for the businesses
acquired from Fisons, the Company recorded an additional $8.1 million of
acquisition reserves in the first quarter of 1997, primarily for the
abandonment of excess facilities, as well as for severance pay. This
amount was recorded as an increase in cost in excess of net assets of
acquired companies. The remaining reserve for restructuring these
businesses was $15.4 million at June 28, 1997, which primarily represents
ongoing severance and abandoned-facility payments. As of June 28, 1997,
the Company has accrued $28.3 million in connection with restructuring
activities of all of its acquisitions, including the businesses acquired
from Fisons.
4. Issuance of Stock by Subsidiaries
In March 1997, the Company's ThermoQuest Corporation (ThermoQuest)
subsidiary sold 1,768,500 shares of its common stock at $15.00 per share
for net proceeds of approximately $25 million, resulting in a gain of
approximately $12 million. Following the sale, the Company owned 90% of
ThermoQuest's outstanding common stock.
In June 1997, the Company's Metrika Systems Corporation (Metrika
Systems) subsidiary sold 2,300,000 shares of its common stock in an
initial public offering at $15.50 per share for net proceeds of
approximately $33 million, resulting in a gain of $13 million. Following
the initial public offering, the Company owned 60% of Metrika Systems'
outstanding common stock.
5. Nonrecurring Costs
In the second quarter of 1997, ThermoSpectra incurred an $0.8 million
charge related to severance costs for employees terminated during the
quarter at one of its business units.
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 caption "Forward-looking Statements"
in Exhibit 13 to the Company's Annual Report on Form 10-K for the fiscal
year ended December 28, 1996, filed with the Securities and Exchange
Commission.
10PAGE
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THERMO INSTRUMENT SYSTEMS INC.
Results of Operations
Second Quarter 1997 Compared With Second Quarter 1996
Revenues increased $83.7 million, or 26%, to $405.2 million in the
second quarter of 1997 from $321.6 million in the second quarter of 1996
due to acquisitions, which included Life Sciences in March 1997 (Note 3)
and a substantial portion of the businesses comprising the Scientific
Instruments Division of Fisons in late March 1996. Acquisitions added
revenues of $88.7 million in the second quarter of 1997. In addition,
revenues from ThermoQuest's existing mass spectrometry business
increased, due in part to the continued success of a new product
introduced in the first quarter of 1996. The increase in revenues was
offset in part by a decrease of $7.7 million 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 Company operates.
International sales account for a significant portion of the
Company's total revenues. Although the Company seeks to charge its
customers in the same currency as its operating costs, the Company's
financial performance and competitive position can be affected by
currency exchange rate fluctuations. Where appropriate, the Company uses
forward exchange contracts to reduce its exposure to currency
fluctuations.
The gross profit margin increased to 48.1% in the second quarter of
1997 from 44.9% in the second quarter of 1996, primarily due to margin
improvements at certain of the businesses acquired from Fisons in 1996
and, to a lesser extent, the increase in sales of higher-margin mass
spectrometry products.
Selling, general, and administrative expenses as a percentage of
revenues decreased to 27% in the second quarter of 1997 from 30% in the
second quarter of 1996, primarily due to efforts to reduce selling and
administrative costs at certain acquired businesses and the integration
of products from businesses acquired from Fisons into the Company's
existing distribution channels. Research and development expenses as a
percentage of revenues remained relatively unchanged at 6.9% in 1997,
compared with 7.2% in 1996.
In the second quarter of 1997, ThermoSpectra incurred an $0.8 million
charge related to severance costs for employees terminated during the
quarter at one of its business units, which is classified as
"Nonrecurring costs" in the accompanying 1997 statement of income.
Interest income increased to $4.5 million in the second quarter of
1997 from $4.2 million in the second quarter of 1996, due to interest
income earned on invested proceeds from the issuance of $172.5 million
principal amount of 4 1/2% senior convertible debentures by the Company
in October 1996 and, to a lesser extent, from the sale of common stock by
ThermoQuest in March 1997 and Thermo BioAnalysis Corporation (Thermo
BioAnalysis) and Metrika Systems in 1996. The increase in interest income
was offset in part by a reduction in cash as a result of acquisitions.
Interest expense increased to $11.9 million in 1997 from $7.2 million in
11PAGE
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THERMO INSTRUMENT SYSTEMS INC.
Second Quarter 1997 Compared With Second Quarter 1996 (continued)
1996, primarily due to the issuance of an aggregate $220.0 million in
promissory notes to Thermo Electron in connection with acquisitions
(Note 3), 4 1/2% senior convertible debentures by the Company and, to a
lesser extent, the inclusion of interest expense on debt assumed as part
of the Life Sciences acquisition. The Company repaid approximately $105.0
million of Life Sciences' debt in the second quarter of 1997. The
increases in interest expense were offset in part by the conversion of a
portion of the Company's convertible obligations into common stock of the
Company. Interest expense will increase as a result of a $40.0 million
promissory note issued to Thermo Electron by Thermo Optek in August 1997,
as well as a $45.0 million promissory note to be issued to Thermo
Electron by ThermoSpectra, in connection with their agreements to acquire
certain businesses from the Company (Note 3).
The Company has adopted a strategy of spinning out certain of its
businesses into separate subsidiaries and having these subsidiaries sell
a minority interest to outside investors. The Company believes that this
strategy provides additional motivation and incentives for the management
of the subsidiaries through the establishment of subsidiary-level stock
option incentive programs, as well as capital to support the
subsidiaries' growth. As a result of the sale of stock by subsidiaries,
the Company recorded gains of approximately $13 million in the second
quarter of 1997 (Note 4) and $26 million in the second quarter of 1996.
The size and timing of these transactions are dependent on market and
other conditions that are beyond the Company's control. Accordingly,
there can be no assurance that the Company will be able to realize gains
from such transactions in the future.
The effective tax rate increased to 35% in the second quarter of 1997
from 25% in the second quarter of 1996, primarily due to a lower
nontaxable gain on issuance of stock by subsidiaries in 1997. Excluding
the impact of the gain on issuance of stock by subsidiaries in 1997 and
1996, the effective tax rates in both periods exceeded the statutory
federal income tax rate due to nondeductible amortization of cost in
excess of net assets of acquired companies, the inability to provide a
tax benefit on losses incurred at certain foreign subsidiaries, and the
impact of state income taxes.
Minority interest expense increased to $2.3 million in the second
quarter of 1997 from $1.1 million in the second quarter of 1996,
primarily due to higher earnings at ThermoQuest and Thermo BioAnalysis
and, to a lesser extent, the minority interest associated with the
Company's newly public Thermo Optek and Metrika Systems subsidiaries.
These increases were offset in part by lower earnings at ThermoSpectra.
First Six Months 1997 Compared With First Six Months 1996
Revenues increased $187.2 million, or 34%, to $734.4 million in the
first six months of 1997 from $547.1 million in the first six months of
1996 due to acquisitions, which included Life Sciences in March 1997
(Note 3) and a substantial portion of the businesses comprising the
Scientific Instruments Division of Fisons in late March 1996.
Acquisitions added revenues of $198.3 million in the first six months
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THERMO INSTRUMENT SYSTEMS INC.
First Six Months 1997 Compared With First Six Months 1996 (continued)
of 1997. The increase in revenues from acquisitions was offset in part by
a decrease of $15.4 million 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 Company
operates. An increase in revenues from ThermoQuest's existing mass
spectrometry business, partly as a result of the continued success of a
new product introduced in the first quarter of 1996, was offset in part
by a decrease in revenues at certain of the Company's other existing
businesses, principally at Thermo Optek. Revenues from Thermo Optek's
existing businesses decreased due to the inclusion in 1996 of several
large nonrecurring sales to the Chinese and Japanese governments and the
elimination of certain unprofitable acquired product lines.
The gross profit margin increased to 47.7% in the first six months of
1997 from 46.0% in the first six months of 1996. The increase was
primarily due to an increase in ThermoQuest's gross profit margin as a
result of the increase in sales of higher-margin mass spectrometry
products, offset in part by the inclusion of lower-margin revenues from
acquired businesses, including Life Sciences, which recorded an
adjustment to expense of $3.2 million relating to the revaluation of the
finished goods inventories acquired by the Company. The 1996 period
included an adjustment to expense of $2.0 million for inventories
revalued with the acquisition of the Fisons businesses.
Selling, general, and administrative expenses as a percentage of
revenues decreased to 27% in the first six months of 1997 from 29% in the
first six months of 1996, primarily due to the reasons discussed in the
results of operations for the second quarter. Research and development
expenses as a percentage of revenues remained relatively unchanged at
7.0% in 1997, compared with 7.3% in 1996.
In the first quarter of 1996, the Company wrote off $3.5 million of
acquired technology in connection with the acquisition of a significant
portion of the businesses comprising the Scientific Instruments Division
of Fisons, which is classified as "Nonrecurring costs" in the
accompanying 1996 statement of income.
Interest income increased to $11.7 million in the first six months of
1997 from $9.4 million in the first six months of 1996, due to interest
income earned on invested proceeds from the issuance of $172.5 million
principal amount of 4 1/2% senior convertible debentures by the Company
in October 1996 and, to a lesser extent, from the sale of common stock by
ThermoQuest in March 1997 and in 1996 and by Thermo BioAnalysis and
Metrika Systems in 1996. The increase in interest income was offset in
part by a reduction in cash as a result of acquisitions. Interest expense
increased to $20.4 million in 1997 from $13.5 million in 1996, primarily
due to the issuance of an aggregate $220.0 million in promissory notes to
Thermo Electron in connection with acquisitions (Note 3), 4 1/2% senior
convertible debentures by the Company and, to a lesser extent, the
inclusion of interest expense on debt assumed as part of the Fisons and
Life Sciences acquisitions, which has subsequently been repaid. The
increases in interest expense were offset in part by the conversion of a
13PAGE
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THERMO INSTRUMENT SYSTEMS INC.
First Six Months 1997 Compared With First Six Months 1996 (continued)
portion of the Company's convertible obligations into common stock of the
Company.
As a result of the sale of stock by subsidiaries, the Company
recorded gains of approximately $25 million in the first six months of
1997 and $50 million in the first six months of 1996 (Note 4).
The effective tax rate increased to 34% in the first six months of
1997 from 24% in the first six months of 1996, primarily due to a lower
nontaxable gain on issuance of stock by subsidiaries in 1997. Excluding
the impact of the gain on issuance of stock by subsidiaries in 1997 and
1996, the effective tax rates in both periods exceeded the statutory
federal income tax rate due to nondeductible amortization of cost in
excess of net assets of acquired companies, the inability to provide a
tax benefit on losses incurred at certain foreign subsidiaries, the
impact of state income taxes, and in 1996, the write-off of acquired
technology in connection with the acquisition of the businesses from
Fisons.
Minority interest expense increased to $4.4 million in the first six
months of 1997 from $1.7 million in the first six months of 1996,
primarily due to the reasons discussed in the results of operations for
the second quarter.
Liquidity and Capital Resources
Consolidated working capital was $564.7 million at June 28, 1997,
compared with $636.7 million at December 28, 1996. Included in working
capital are cash, cash equivalents, and available-for-sale investments of
$461.0 million at June 28, 1997, and $530.1 million at December 28, 1996.
Of the $461.0 million balance at June 28, 1997, $395.3 million was held
by the Company's majority-owned subsidiaries and the balance was held by
the Company and its wholly owned subsidiaries. The Company's operating
activities provided cash of $37.1 million in the first six months of
1997. Accounts receivable increased $9.6 million primarily due to
increased shipments at the end of the quarter by ThermoQuest, offset in
part by improvement in accounts receivable at ThermoSpectra due in part
to higher revenue levels in the fourth quarter of 1996 compared with the
second quarter of 1997. An increase in inventories of $15.4 million,
primarily due to replenishing year-end levels, which had decreased by
$17.2 million during the fourth quarter of 1996, contributed to an
increase in accounts payable of $11.4 million. Other current liabilities
decreased $25.4 million, primarily due to restructuring expenditures at
businesses acquired by the Company in 1996.
At June 28, 1997, $92.5 million of the Company's cash and cash
equivalents was held by its foreign subsidiaries. While this cash can be
used outside of the United States, including for acquisitions,
repatriation of this cash into the United States would be subject to
foreign withholding taxes and could also be subject to a United States
tax.
14PAGE
<PAGE>
THERMO INSTRUMENT SYSTEMS INC.
Liquidity and Capital Resources (continued)
The Company's investing activities used $475.3 million of cash in the
first six months of 1997. The Company expended $476.4 million, net of
cash acquired, for acquisitions, including the repayment of $106.3
million of bank debt, (Note 3) and $10.0 million for the purchase of
property, plant, and equipment. The Company recorded proceeds of $5.0
million from the sale of property, plant, and equipment in the first six
months of 1997.
The Company's financing activities provided $381.8 million of cash in
the first six months of 1997. In March 1997, to partially finance
acquisitions, the Company borrowed an aggregate $220.0 million from
Thermo Electron pursuant to promissory notes due March 1999 (Note 3). In
March 1997, ThermoQuest sold shares of its common stock for net proceeds
of approximately $25 million. In June 1997, Metrika Systems sold shares
of its common stock in an initial public offering for net proceeds of
approximately $33 million (Note 4). In June 1997, to finance the
repayment of the debt assumed in connection with the acquisition of Life
Sciences, the Company borrowed $115.0 million from Thermo Electron
pursuant to a promissory note due December 1997 (Note 3).
In July 1997, in connection with an acquisition, ThermoSpectra
borrowed $5.0 million from Thermo Electron pursuant to a promissory note
due July 1999 and bearing interest at the 90-day Commercial Paper
Composite Rate plus 25 basis points, set at the beginning of each
quarter.
In August 1997, in connection with Thermo Optek's agreement in July
1997 to acquire Spectronic and VG Systems from the Company, Thermo Optek
borrowed $40.0 million from Thermo Electron pursuant to a promissory note
due July 1998 (Note 3). In connection with ThermoSpectra's agreement in
July 1997 to acquire NESLAB from the Company, Thermo Electron intends to
lend ThermoSpectra $45.0 million pursuant to a promissory note payable in
July 1999 (Note 3). The Company expects to repay its $115.0 million
promissory note to Thermo Electron with proceeds from the sale of certain
of its wholly owned businesses to its majority-owned subsidiaries.
During the remainder of 1997, the Company plans to make expenditures
of approximately $15 million for property, plant, and equipment. The
Company believes that its existing resources are sufficient to meet the
capital requirements of its existing operations for the foreseeable
future. The Company has historically complemented internal development
with acquisitions of businesses or technologies that extend the Company's
presence in current markets or provide opportunities to enter and compete
effectively in new markets. The Company will consider making acquisitions
of such businesses or technologies that are consistent with its plans for
strategic growth. The Company expects that it will finance these
acquisitions through a combination of internal funds, additional debt or
equity financing from the capital markets, or short-term borrowings from
Thermo Electron, although there is no agreement with Thermo Electron to
ensure that funds will be available on acceptable terms or at all.
15PAGE
<PAGE>
THERMO INSTRUMENT SYSTEMS INC.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On June 2, 1997, at the Annual Meeting of Shareholders, the
shareholders elected five incumbent directors to a one-year term expiring
in 1998. The directors reelected at the meeting were: Frank Borman, Dr.
George N. Hatsopoulos, John N. Hatsopoulos, Arvin H. Smith, and Polyvios
C. Vintiadis. Mr. Borman received 91,902,732 shares voted in favor of
election and 52,188 shares voted against; Dr. G. Hatsopoulos and Mr. J.
Hatsopoulos each received 91,916,373 shares voted in favor of election
and 38,547 shares voted against; Mr. Smith received 91,916,454 shares
voted in favor of election and 38,466 shares voted against; and Mr.
Vintiadis received 91,916,161 shares voted in favor of election and
38,759 shares voted against. No abstentions or broker nonvotes were
recorded on the election of directors.
The shareholders also approved a proposal to extend the term of the
Company's employees' stock purchase program to November 2, 2005, as
follows: 91,796,986 shares voted in favor, 106,644 shares voted against,
and 51,290 shares abstained. No broker nonvotes were recorded on the
proposal.
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 April 4, 1997, the Company filed a Current Report on Form 8-K
pertaining to its acquisition of Life Sciences International PLC. On
June 9, 1997, the Company filed an amendment on Form 8-K/A, the purpose
of which was to file the financial information required by Form 8-K
concerning this acquisition.
16PAGE
<PAGE>
THERMO INSTRUMENT SYSTEMS INC.
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 6th day of August
1997.
THERMO INSTRUMENT SYSTEMS INC.
Paul F. Kelleher
----------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
----------------------------
John N. Hatsopoulos
Vice President and Chief
Financial Officer
17PAGE
<PAGE>
THERMO INSTRUMENT SYSTEMS INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
10 $115,000,000 Promissory Note dated as of
June 24, 1997, issued by the Company to Thermo
Electron Corporation.
11 Statement re: Computation of Earnings per Share.
27 Financial Data Schedule.
EXHIBIT 10
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THESE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT, AND NOT WITH A VIEW
TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD, PLEDGED,
MORTGAGED, HYPOTHECATED OR OTHERWISE TRANSFERRED (1) WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT COVERING THESE
SECURITIES OR (2) UNLESS AN EXEMPTION FROM REGISTRATION IS
AVAILABLE.
THERMO INSTRUMENT SYSTEMS INC.
Promissory Note Due December 22, 1997
Waltham, Massachusetts
June 24, 1997
For value received, Thermo Instrument Systems Inc., a
Delaware corporation (the "Company"), hereby promises to pay to
Thermo Electron Corporation (hereinafter referred to as the
"Payee"), or registered assigns, on December 22, 1997, as
described below, the principal sum of one hundred fifteen million
dollars ($115,000,000) or such part thereof as then remains
unpaid, to pay interest from the date hereof on the whole amount
of said principal sum remaining from time to time unpaid at a
rate per annum equal to the rate of the Commercial Paper
Composite Rate as reported by Merrill Lynch Capital Markets, as
an average of the last five business days of the fiscal quarter,
plus twenty-five (25) basis points, such interest to be payable
in arrears on the first day of each fiscal quarter of the Company
during the term set forth herein, until the whole amount of the
principal hereof remaining unpaid shall become due and payable,
and to pay interest on all overdue principal and interest at a
rate per annum equal to the rate of interest announced from time
to time by The First National Bank of Boston at its head office
in Boston, Massachusetts as its "base rate" plus one percent
(1%). Principal and all accrued but unpaid interest shall be
repaid on December 22, 1997. Principal and interest shall be
payable in lawful money of the United States of America, in
immediately available funds, at the principal office of the Payee
or at such other place as the legal holder may designate from
time to time in writing to the Company. Interest shall be
computed on an actual 360-day basis.
This Note may be prepaid at any time or from time to time,
in whole or in part, without any premium or penalty. All
prepayments shall be applied first to accrued interest and then
to principal.
1PAGE
<PAGE>
The then unpaid principal amount of, and interest
outstanding on, this Note shall be and become immediately due and
payable without notice or demand, at the option of the holder
hereof, upon the occurrence of any of the following events:
(a) the failure of the Company to pay any amount due
hereunder within ten (10) days of the date when due;
(b) any representation, warranty or statement made or
furnished to the Payee by the Company in connection with
this Note or the transaction from which it arises shall
prove to have been false or misleading in any material
respect as of the date when made or furnished;
(c) the failure of the Company to pay its debts as
they become due, the insolvency of the Company, the filing
by or against the Company of any petition under the U.S.
Bankruptcy Code (or the filing of any similar petition under
the insolvency law of any jurisdiction), or the making by
the Company of an assignment or trust mortgage for the
benefit of creditors or the appointment of a receiver,
custodian or similar agent with respect to, or the taking by
any such person of possession of, any property of the
Company;
(d) the sale by the Company of all or substantially
all of its assets;
(e) the merger or consolidation of the Company with or
into any other corporation in a transaction in which the
Company is not the surviving entity;
(f) the issuance of any writ of attachment, by trustee
process or otherwise, or any restraining order or injunction
not removed, repealed or dismissed within thirty (30) days
of issuance, against or affecting the person or property of
the Company or any liability or obligation of the Company to
the holder hereof; and
(g) the suspension of the transaction of the usual
business of the Company.
Upon surrender of this Note for transfer or exchange, a new
Note or new Notes of the same tenor dated the date to which
interest has been paid on the surrendered Note and in an
aggregate principal amount equal to the unpaid principal amount
of the Note so surrendered will be issued to, and registered in
the name of, the transferee or transferees. The Company may
treat the person in whose name this Note is registered as the
owner hereof for the purpose of receiving payment and for all
other purposes.
2PAGE
<PAGE>
In case any payment herein provided for shall not be paid
when due, the Company further promises to pay all cost of
collection, including all reasonable attorneys' fees.
No delay or omission on the part of the Payee in exercising
any right hereunder shall operate as a waiver of such right or of
any other right of the Payee, nor shall any delay, omission or
waiver on any one occasion be deemed a bar to or waiver of the
same or any other right on any future occasion. The Company
hereby waives presentment, demand, notice of prepayment, protest
and all other demands and notices in connection with the
delivery, acceptance, performance, default or enforcement of this
Note. The undersigned hereby assents to any indulgence and any
extension of time for payment of any indebtedness evidenced
hereby granted or permitted by the Payee.
This Note shall be governed by and construed in accordance
with, the laws of the Commonwealth of Massachusetts and shall
have the effect of a sealed instrument.
THERMO INSTRUMENT SYSTEMS INC.
By:
__________________________________
Arvin H. Smith
Chairman and Chief Executive
Officer
[Corporate Seal]
Attest:
____________________________
Sandra L. Lambert
Secretary
cc: Terry Dudding
Seth Hoogasian
Maureen Jacobs
Sandra Lambert
Karen Levin
Andy Pilla
Gina Silvestri
Chris Vinchesi
3
Exhibit 11
THERMO INSTRUMENT SYSTEMS INC.
Computation of Earnings per Share
Three Months Ended
-----------------------------
June 28, June 29,
1997 1996
------------------------------------------------------------------------
Computation of Fully Diluted Earnings
per Share:
Income:
Net income $ 37,219,000 $ 35,296,000
Add: Convertible obligation interest,
net of tax 2,021,000 1,055,000
------------ ------------
Income applicable to common stock
assuming full dilution (a) $ 39,240,000 $ 36,351,000
------------ ------------
Shares:
Weighted average shares outstanding 97,221,904 95,073,737
Add: Shares issuable from assumed
conversion of convertible
obligations 13,353,222 11,281,008
Shares issuable from assumed
exercise of options (as determined
by the application of the treasury
stock method) 855,492 1,047,598
------------ ------------
Weighted average shares outstanding,
as adjusted (b) 111,430,618 107,402,343
------------ ------------
Fully Diluted Earnings per Share (a)/(b) $ .35 $ .34
============ ============
PAGE
<PAGE>
Exhibit 11
THERMO INSTRUMENT SYSTEMS INC.
Computation of Earnings per Share
Six Months Ended
-----------------------------
June 28, June 29,
1997 1996
------------------------------------------------------------------------
Computation of Fully Diluted Earnings
per Share:
Income:
Net income $ 70,806,000 $ 69,339,000
Add: Convertible obligation interest,
net of tax 4,051,000 2,404,000
------------ ------------
Income applicable to common stock
assuming full dilution (a) $ 74,857,000 $ 71,743,000
------------ ------------
Shares:
Weighted average shares outstanding 97,146,214 93,474,351
Add: Shares issuable from assumed
conversion of convertible
obligations 13,407,687 12,863,360
Shares issuable from assumed
exercise of options (as determined
by the application of the treasury
stock method) 882,359 1,047,598
------------ ------------
Weighted average shares outstanding,
as adjusted (b) 111,436,260 107,385,309
------------ ------------
Fully Diluted Earnings per Share (a)/(b) $ .67 $ .67
============ ============
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
INSTRUMENT SYSTEMS INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED
JUNE 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> JUN-28-1997
<CASH> 459,328
<SECURITIES> 1,713
<RECEIVABLES> 376,676
<ALLOWANCES> 23,470
<INVENTORY> 286,332
<CURRENT-ASSETS> 1,200,633
<PP&E> 316,012
<DEPRECIATION> 84,632
<TOTAL-ASSETS> 2,386,787
<CURRENT-LIABILITIES> 635,910
<BONDS> 401,128
0
0
<COMMON> 9,791
<OTHER-SE> 790,164
<TOTAL-LIABILITY-AND-EQUITY> 2,386,787
<SALES> 734,355
<TOTAL-REVENUES> 734,355
<CGS> 383,942
<TOTAL-COSTS> 383,942
<OTHER-EXPENSES> 800
<LOSS-PROVISION> 2,890
<INTEREST-EXPENSE> 20,395
<INCOME-PRETAX> 114,013
<INCOME-TAX> 38,761
<INCOME-CONTINUING> 70,806
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70,806
<EPS-PRIMARY> .73
<EPS-DILUTED> .67
</TABLE>
