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 September 27, 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.)
860 West Airport Freeway
Suite 301
Hurst, Texas 76054
(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 September 27, 1997
---------------------------- ---------------------------------
Common Stock, $.10 par value 121,623,296
PAGE
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
September 27, December 28,
(In thousands) 1997 1996
------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 377,445 $ 522,688
Available-for-sale investments, at quoted
market value (amortized cost of $10,931
and $7,430) 10,949 7,452
Accounts receivable, less allowances
of $23,936 and $16,981 363,506 303,331
Unbilled contract costs and fees 12,371 6,043
Inventories:
Raw materials and supplies 122,621 95,920
Work in process 59,106 47,518
Finished goods 96,870 70,245
Prepaid expenses 21,807 13,417
Prepaid income taxes 70,245 58,296
---------- ----------
1,134,920 1,124,910
---------- ----------
Property, Plant, and Equipment, at Cost 315,726 250,976
Less: Accumulated depreciation and
amortization 92,105 72,313
---------- ----------
223,621 178,663
---------- ----------
Patents and Other Assets 29,495 32,454
---------- ----------
Cost in Excess of Net Assets of Acquired
Companies (Note 3) 919,456 588,373
---------- ----------
$2,307,492 $1,924,400
========== ==========
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
September 27, December 28,
(In thousands except share amounts) 1997 1996
------------------------------------------------------------------------
Current Liabilities:
Notes payable (includes $55,000 due to
parent company in 1997; Note 3) $ 129,918 $ 89,462
Accounts payable 92,649 83,161
Accrued payroll and employee benefits 59,462 51,728
Accrued income taxes 72,438 39,686
Accrued installation and warranty expenses 46,760 44,211
Accrued acquisition expenses (Note 3) 22,009 30,025
Deferred revenue 39,373 35,959
Other accrued expenses 114,576 101,646
Due to parent company 10,196 12,329
---------- ----------
587,381 488,207
---------- ----------
Deferred Income Taxes 20,080 20,710
---------- ----------
Other Deferred Items 27,273 29,805
---------- ----------
Long-term Obligations:
Senior convertible obligations (includes
$140,000 due to parent company) 330,784 334,781
Subordinated convertible obligations 180,500 192,500
Other (includes $168,800 and $15,000 due
to parent company; Note 3) 186,009 26,933
---------- ----------
697,293 554,214
---------- ----------
Minority Interest 146,535 85,197
---------- ----------
Shareholders' Investment (Note 6):
Common stock, $.10 par value, 250,000,000
shares authorized; 122,391,652 and
97,674,228 shares issued 12,239 9,767
Capital in excess of par value 320,483 319,464
Retained earnings 532,720 424,641
Treasury stock at cost, 768,356 and
750,055 shares (7,435) (8,679)
Cumulative translation adjustment (29,089) 1,060
Net unrealized gain on available-for-sale
investments 12 14
---------- ----------
828,930 746,267
---------- ----------
$2,307,492 $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
----------------------------
September 27, September 28,
(In thousands except per share amounts) 1997 1996
------------------------------------------------------------------------
Revenues $403,900 $315,292
-------- --------
Costs and Operating Expenses:
Cost of revenues 214,999 167,489
Selling, general, and administrative
expenses 105,080 90,087
Research and development expenses 27,407 22,197
-------- --------
347,486 279,773
-------- --------
Operating Income 56,414 35,519
Interest Income 6,864 4,821
Interest Expense (includes $6,574 and $2,502
to parent company) (13,448) (7,248)
Gain on Issuance of Stock by Subsidiaries
(Note 4) 12,659 11,350
-------- --------
Income Before Provision for Income Taxes
and Minority Interest Expense 62,489 44,442
Provision for Income Taxes 21,919 12,351
Minority Interest Expense 3,297 1,570
-------- --------
Net Income $ 37,273 $ 30,521
======== ========
Earnings per Share:
Primary $ .31 $ .25
======== ========
Fully diluted $ .28 $ .23
======== ========
Weighted Average Shares:
Primary 121,585 120,748
======== ========
Fully diluted 139,611 134,334
======== ========
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)
Nine Months Ended
----------------------------
September 27, September 28,
(In thousands except per share amounts) 1997 1996
------------------------------------------------------------------------
Revenues $1,138,255 $ 862,415
---------- ----------
Costs and Operating Expenses:
Cost of revenues 598,941 462,724
Selling, general, and administrative
expenses 305,977 250,852
Research and development expenses 78,604 61,969
Nonrecurring costs (Note 5) 800 3,500
---------- ----------
984,322 779,045
---------- ----------
Operating Income 153,933 83,370
Interest Income 18,541 14,171
Interest Expense (includes $13,192 and $6,562
to parent company) (33,843) (20,765)
Gain on Issuance of Stock by Subsidiaries
(Note 4) 37,871 61,133
---------- ----------
Income Before Provision for Income Taxes
and Minority Interest Expense 176,502 137,909
Provision for Income Taxes 60,680 34,807
Minority Interest Expense 7,743 3,242
---------- ----------
Net Income $ 108,079 $ 99,860
========== ==========
Earnings per Share:
Primary $ .89 $ .85
========== ==========
Fully diluted $ .82 $ .77
========== ==========
Weighted Average Shares:
Primary 121,483 118,145
========== ==========
Fully diluted 139,555 134,263
========== ==========
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)
Nine Months Ended
-----------------------------
September 27, September 28,
(In thousands) 1997 1996
------------------------------------------------------------------------
Operating Activities:
Net income $ 108,079 $ 99,860
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 41,822 34,164
Provision for losses on accounts
receivable 3,607 2,140
Nonrecurring costs (Note 5) 800 3,500
Gain on issuance of stock by
subsidiaries (Note 4) (37,871) (61,133)
Minority interest expense 7,743 3,242
Decrease in deferred income taxes (650) (265)
Other noncash expenses 4,855 3,871
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable (22,770) 12,280
Inventories (12,163) (3,064)
Other current assets (1,443) (946)
Accounts payable (3,271) (15,715)
Other current liabilities (6,620) (23,262)
Other (111) 254
--------- ---------
Net cash provided by operating activities 82,007 54,926
--------- ---------
Investing Activities:
Acquisitions, net of cash acquired (Note 3) (482,784) (242,935)
Purchases of available-for-sale investments (9,000) (10,250)
Proceeds from sale and maturities of
available-for-sale investments 5,600 -
Purchases of property, plant, and equipment (21,292) (14,835)
Proceeds from sale of property, plant, and
equipment 6,732 3,682
Other 660 4
--------- ---------
Net cash used in investing activities (500,084) (264,334)
--------- ---------
Financing Activities:
Net proceeds from issuance of Company and
subsidiaries' common stock (Note 4) 78,756 109,974
Proceeds from issuance of short- and
long-term obligations to parent
company (Note 3) 428,800 110,000
Repayment of short- and long-term
obligations to parent company (Note 3) (220,000) (30,000)
Decrease in short-term obligations (5,719) (10,317)
Repayment of long-term obligations (4,492) (4,892)
--------- ---------
Net cash provided by financing activities $ 277,345 $ 174,765
--------- ---------
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
-----------------------------
September 27, September 28,
(In thousands) 1997 1996
------------------------------------------------------------------------
Exchange Rate Effect on Cash $ (4,511) $ 1,770
--------- ---------
Decrease in Cash and Cash Equivalents (145,243) (32,873)
Cash and Cash Equivalents at Beginning
of Period 522,688 395,233
--------- ---------
Cash and Cash Equivalents at End of Period $ 377,445 $ 362,360
========= =========
Noncash Activities:
Fair value of assets of acquired companies $ 624,805 $ 471,509
Cash paid for acquired companies (533,965) (253,069)
Issuance of subsidiary stock options
for acquired company (1,693) -
--------- ---------
Liabilities assumed of acquired
companies $ 89,147 $ 218,440
========= =========
Conversions of the Company's and
subsidiary convertible obligations $ 15,997 $ 64,576
========= =========
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 September 27, 1997, the results of operations for the three- and
nine-month periods ended September 27, 1997, and September 28, 1996, and
the cash flows for the nine-month periods ended September 27, 1997, and
September 28, 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 conform 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 approximately $448.3 million, net of $50.7 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
September 1997, the Company repaid $105.0 million of this promissory
note. 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, which was repaid in September 1997. In connection with
the Company's Thermo Optek Corporation (Thermo Optek) subsidiary's
acquisition of Spectronic Instruments, Inc. (Spectronic) and VG Systems
Limited (VG Systems) from the Company, Thermo Optek borrowed $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
8PAGE
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THERMO INSTRUMENT SYSTEMS INC.
3. Acquisitions (continued)
Fisons plc (Fisons), a substantial portion of which was acquired by the
Company in March 1996. In connection with the Company's ThermoSpectra
Corporation (ThermoSpectra) subsidiary's acquisition of the NESLAB
Instruments, Inc. (NESLAB) businesses of Life Sciences from the Company,
ThermoSpectra borrowed $45.0 million from Thermo Electron pursuant to a
promissory note due July 1999. The promissory notes bear interest at the
90-day Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter.
During the first nine months of 1997, the Company made several other
acquisitions for approximately $35.0 million in cash, including the
repayment of $1.3 million of bank debt, and the issuance of subsidiary
stock options valued at an aggregate $1.7 million. During the first nine
months of 1997, ThermoSpectra borrowed $10.0 million and $5.0 million
from Thermo Electron pursuant to promissory notes due March 1999 and July
1999, respectively, and Thermo Vision Corporation, a subsidiary of Thermo
Optek, borrowed $3.8 million from Thermo Electron pursuant to a
promissory note due July 2000. The promissory notes bear 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 nine 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 $363.5 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 Nine
Months Ended Months Ended
------------- ----------------------------
(In thousands except September 28, September 27, September 28,
per share amounts) 1996 1997 1996
------------------------------------------------------------------------
Revenues $ 396,816 $1,191,027 $1,119,249
Net income 30,008 92,811 98,487
Earnings per share:
Primary .25 .76 .83
Fully diluted .23 .71 .76
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.
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THERMO INSTRUMENT SYSTEMS INC.
3. Acquisitions (continued)
During 1996, the Company had undertaken a restructuring of a
substantial portion of the businesses constituting the Scientific
Instruments Division of Fisons, acquired in March 1996. During the first
nine months of 1997, the Company expended $13.4 million for restructuring
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 $12.1 million at September 27, 1997, which primarily
represents ongoing severance and abandoned-facility payments. As of
September 27, 1997, the Company has accrued $22.0 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 $24.8 million, resulting in a gain of $12.0 million.
In August and September 1997, $12.0 million aggregate principal amount of
ThermoQuest's subordinated convertible debentures, convertible at $16.50
per share, was converted into 727,272 shares of ThermoQuest's common
stock, resulting in a gain of $6.1 million. Following the sale of stock
and the conversions, the Company owned 88% 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 $32.5
million, resulting in a gain of $13.2 million. Following the initial
public offering, the Company owned 60% of Metrika Systems' outstanding
common stock.
In September 1997, the Company's ONIX Systems Inc. (ONIX Systems)
subsidiary sold 2,210,521 shares of its common stock in a private
placement at $9.50 per share for net proceeds of $19.6 million, resulting
in a gain of $6.6 million. Following the private placement, the Company
owned 88% of ONIX 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.
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THERMO INSTRUMENT SYSTEMS INC.
6. Stock Split
In October 1997, the Company declared a five-for-four stock split in
the form of a 25% stock dividend, distributed on October 31, 1997, to
shareholders of record as of October 20, 1997. All share and per share
information, except for share information in the accompanying 1996
balance sheet, has been restated to reflect the stock split.
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.
Results of Operations
Third Quarter 1997 Compared With Third Quarter 1996
Revenues increased $88.6 million, or 28%, to $403.9 million in the
third quarter of 1997 from $315.3 million in the third quarter of 1996,
due to acquisitions, which included Life Sciences in March 1997 (Note 3).
Acquisitions added revenues of $94.5 million in the third quarter of
1997. In addition, revenues from Thermo Optek's and, to a lesser extent,
ThermoSpectra's existing businesses increased primarily due to greater
product demand. The increase in revenues was offset in part by a decrease
of $13.7 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 was 46.8% in the third quarter of 1997,
compared with 46.9% in the third quarter of 1996. Margin improvements at
certain of the businesses acquired from Fisons in 1996 were offset by a
decline in ThermoSpectra's gross profit margin, primarily as a result of
a one-time inventory write-off and change in sales mix at one of its
subsidiaries, as well as lower margins at an acquired business.
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THERMO INSTRUMENT SYSTEMS INC.
Third Quarter 1997 Compared With Third Quarter 1996 (continued)
Selling, general, and administrative expenses as a percentage of
revenues decreased to 26% in the third quarter of 1997 from 29% in the
third quarter of 1996, primarily due to efforts to reduce selling and
administrative costs at certain acquired businesses and, to a lesser
extent, lower selling costs associated with certain of the businesses
acquired from Life Sciences. Research and development expenses as a
percentage of revenues remained relatively unchanged at 6.8% in 1997,
compared with 7.0% in 1996.
Interest income increased to $6.9 million in the third quarter of
1997 from $4.8 million in the third 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
the Company's subsidiaries in 1997 and late 1996. The increase in
interest income was offset in part by a reduction in cash as a result of
acquisitions. Interest expense increased to $13.4 million in 1997 from
$7.2 million in 1996, primarily due to the issuance of an aggregate
$428.8 million of promissory notes to Thermo Electron in 1997 in
connection with acquisitions (Note 3) and the issuance of 4 1/2% senior
convertible debentures by the Company in October 1996. In September 1997,
the Company repaid $220.0 million of its outstanding promissory notes to
Thermo Electron (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 programs, as well as capital to support the subsidiaries' growth.
As a result of the sale of stock by subsidiaries and issuance of stock by
a subsidiary upon conversion of convertible debentures, the Company
recorded gains of $12.7 million and $11.4 million in the third quarter of
1997 and 1996, respectively (Note 4). 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 third quarter of 1997
from 28% in the third quarter of 1996, primarily due to higher
nondeductible amortization of cost in excess of net assets of acquired
companies as a result of the acquisition of Life Sciences in March 1997
and, in the 1996 period, the effect of conforming the effective tax rate
to the anticipated rate for the full year. Excluding the impact of the
nontaxable 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.
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THERMO INSTRUMENT SYSTEMS INC.
Third Quarter 1997 Compared With Third Quarter 1996 (continued)
Minority interest expense increased to $3.3 million in the third
quarter of 1997 from $1.6 million in the third quarter of 1996, primarily
due to minority interest associated with the Company's newly public
Metrika Systems subsidiary and higher earnings at Thermo BioAnalysis
Corporation (Thermo BioAnalysis), Thermo Optek, and ThermoQuest. These
increases were offset in part by lower earnings at ThermoSpectra.
First Nine Months 1997 Compared With First Nine Months 1996
Revenues increased $275.8 million, or 32%, to $1,138.3 million in the
first nine months of 1997 from $862.4 million in the first nine 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 $293.0 million in the first nine months of
1997. The increase in revenues from acquisitions was offset in part by a
decrease of $29.2 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, offset in
part by greater demand at two of its business units.
The gross profit margin increased to 47.4% in the first nine months
of 1997 from 46.3% in the first nine months of 1996. The increase was
primarily due to margin improvements at certain of the businesses
acquired from Fisons in 1996 and an increase in ThermoQuest's gross
profit margin as a result of the increase in sales of higher-margin mass
spectrometry products. These increases were 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 in
the first nine months of 1997 relating to the revaluation of the
finished-goods inventories acquired by the Company, and, to a lesser
extent, a decrease in the gross profit margin at ThermoSpectra as
discussed in the results of operations for the third quarter. 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 nine months of 1997 from 29% in
the first nine months of 1996, primarily due to the reasons discussed in
the results of operations for the third quarter. Research and development
expenses as a percentage of revenues remained relatively unchanged at
6.9% in 1997, compared with 7.2% in 1996.
Nonrecurring costs in the first nine months of 1997 represents
severance costs for employees terminated during the second quarter at one
13PAGE
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THERMO INSTRUMENT SYSTEMS INC.
First Nine Months 1997 Compared With First Nine Months 1996 (continued)
of ThermoSpectra's business units. Nonrecurring costs in the first nine
months of 1996 represents a write-off in the first quarter of acquired
technology in connection with the acquisition of a significant portion of
the businesses constituting the Scientific Instruments Division of
Fisons.
Interest income increased to $18.5 million in the first nine months
of 1997 from $14.2 million in the first nine 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 the Company's subsidiaries in 1997 and 1996. The increase in
interest income was offset in part by a reduction in cash as a result of
acquisitions. Interest expense increased to $33.8 million in 1997 from
$20.8 million in 1996, primarily due to the issuance of an aggregate
$428.8 million of promissory notes to Thermo Electron in connection with
acquisitions (Note 3), the issuance of 4 1/2% senior convertible
debentures by the Company in October 1996 and, to a lesser extent, the
inclusion of interest expense on debt assumed in connection with the
Fisons and Life Sciences acquisitions, which has subsequently been
repaid. In September 1997, the Company repaid $220.0 million of its
outstanding promissory notes to Thermo Electron (Note 3). 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.
As a result of the sale of stock by subsidiaries and issuance of
stock by a subsidiary upon conversion of convertible debentures, the
Company recorded gains of $37.9 million and $61.1 million in the first
nine months of 1997 and 1996, respectively (Note 4).
The effective tax rate increased to 34% in the first nine months of
1997 from 25% in the first nine 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 $7.7 million in the first nine
months of 1997 from $3.2 million in the first nine months of 1996,
primarily due to higher earnings at Thermo BioAnalysis and ThermoQuest
and, to a lesser extent, minority interest associated with the Company's
newly public Metrika Systems and Thermo Optek subsidiaries. These
increases were offset in part by lower earnings at ThermoSpectra.
14PAGE
<PAGE>
THERMO INSTRUMENT SYSTEMS INC.
Liquidity and Capital Resources
Consolidated working capital was $547.5 million at September 27,
1997, compared with $636.7 million at December 28, 1996. Included in
working capital are cash, cash equivalents, and available-for-sale
investments of $388.4 million at September 27, 1997, and $530.1 million
at December 28, 1996. Of the $388.4 million balance at September 27,
1997, $237.2 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 $82.0
million in the first nine months of 1997. Accounts receivable increased
$22.8 million primarily due to increased shipments at the end of the
third quarter of 1997 by ThermoQuest and a competitive trend to
commercial terms of 30 days from ThermoQuest's past practice of generally
obtaining deposits on certain systems.
At September 27, 1997, $120.5 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.
The Company's investing activities used $500.1 million of cash in the
first nine months of 1997. The Company expended $482.8 million, net of
cash acquired, for acquisitions, including the repayment of $106.3
million of bank debt (Note 3), and $21.3 million for purchases of
property, plant, and equipment. The Company recorded proceeds of $6.7
million from the sale of property, plant, and equipment.
The Company's financing activities provided $277.3 million of cash in
the first nine months of 1997. During the first nine months of 1997, to
partially finance acquisitions, the Company and its majority-owned
subsidiaries borrowed an aggregate $428.8 million from Thermo Electron
pursuant to promissory notes with various dates of maturity (Note 3). In
September 1997, the Company repaid $220.0 million of its outstanding
promissory notes to Thermo Electron (Note 3). Net proceeds from the
issuance of Company and subsidiary common stock totaled $78.8 million
(Note 4).
During the fourth quarter of 1997, the Company plans to make
expenditures of approximately $10 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 6 - Exhibits
See Exhibit Index on the page immediately preceding exhibits.
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 5th day of November
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
------------------------------------------------------------------------
10.1 $3,800,000 Promissory Note dated as of July 14, 1997,
issued by Thermo Vision Corporation to Thermo Electron
Corporation (filed as Exhibit 10 to Thermo Optek
Corporation's Quarterly Report on Form 10-Q for the
Quarter Ended September 27, 1997 [File No. 1-11757]
and incorporated herein by reference).
10.2 $45,000,000 Promissory Note dated as of
September 12, 1997, issued by ThermoSpectra Corporation
to Thermo Electron Corporation (filed as Exhibit 10 to
ThermoSpectra Corporation's Quarterly Report on Form
10-Q for the Quarter Ended September 27, 1997
[File No. 1-13876] and incorporated herein by reference).
11 Statement re: Computation of Earnings per Share.
27 Financial Data Schedule.
Exhibit 11
THERMO INSTRUMENT SYSTEMS INC.
Computation of Earnings per Share
Three Months Ended
------------------------------
September 27, September 28,
1997 1996
------------------------------------------------------------------------
Computation of Fully Diluted Earnings
per Share:
Income:
Net income $ 37,273,000 $ 30,521,000
Add: Convertible debt interest, net
of tax 2,021,000 920,000
------------ ------------
Income applicable to common stock
assuming full dilution (a) $ 39,294,000 $ 31,441,000
------------ ------------
Shares:
Weighted average shares outstanding 121,584,875 120,748,062
Add: Shares issuable from assumed
conversion of convertible debt 16,691,527 12,280,635
Shares issuable from assumed
exercise of options (as determined
by the application of the treasury
stock method) 1,334,855 1,305,202
------------ ------------
Weighted average shares outstanding,
as adjusted (b) 139,611,257 134,333,899
------------ ------------
Fully Diluted Earnings per Share (a)/(b) $ .28 $ .23
============ ============
PAGE
<PAGE>
Exhibit 11
THERMO INSTRUMENT SYSTEMS INC.
Computation of Earnings per Share
Nine Months Ended
------------------------------
September 27, September 28,
1997 1996
------------------------------------------------------------------------
Computation of Fully Diluted Earnings
per Share:
Income:
Net income $108,079,000 $ 99,860,000
Add: Convertible debt interest, net
of tax 6,072,000 3,324,000
------------ ------------
Income applicable to common stock
assuming full dilution (a) $114,151,000 $103,184,000
------------ ------------
Shares:
Weighted average shares outstanding 121,483,470 118,144,645
Add: Shares issuable from assumed
conversion of convertible debt 16,736,915 14,813,011
Shares issuable from assumed
exercise of options (as determined
by the application of the treasury
stock method) 1,334,855 1,305,202
------------ ------------
Weighted average shares outstanding,
as adjusted (b) 139,555,240 134,262,858
------------ ------------
Fully Diluted Earnings per Share (a)/(b) $ .82 $ .77
============ ============
<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
SEPTEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-03-1998
<PERIOD-END> SEP-27-1997
<CASH> 377,445
<SECURITIES> 10,949
<RECEIVABLES> 387,442
<ALLOWANCES> 23,936
<INVENTORY> 278,597
<CURRENT-ASSETS> 1,134,920
<PP&E> 315,726
<DEPRECIATION> 92,105
<TOTAL-ASSETS> 2,307,492
<CURRENT-LIABILITIES> 587,381
<BONDS> 388,493
0
0
<COMMON> 12,239
<OTHER-SE> 816,691
<TOTAL-LIABILITY-AND-EQUITY> 2,307,492
<SALES> 1,138,255
<TOTAL-REVENUES> 1,138,255
<CGS> 598,941
<TOTAL-COSTS> 598,941
<OTHER-EXPENSES> 79,404
<LOSS-PROVISION> 3,607
<INTEREST-EXPENSE> 33,843
<INCOME-PRETAX> 176,502
<INCOME-TAX> 60,680
<INCOME-CONTINUING> 108,079
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108,079
<EPS-PRIMARY> .89<F1>
<EPS-DILUTED> .82<F1>
<FN>
<F1>REFLECTS A FIVE - FOR - FOUR STOCK SPLIT EFFECTIVE OCTOBER 31, 1997.
PREVIOUSLY FILED FINANCIAL DATA SCHEDULES WILL NOT BE RESTATED
</FN>
</TABLE>
