SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended October 3, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-9786
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: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Class Outstanding at October 30, 1998
---------------------------- -------------------------------
Common Stock, $.10 par value 119,229,843
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
October 3, January 3,
(In thousands) 1998 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents (includes $424,541
and $283,995 under repurchase agreement with
parent company) $ 566,041 $ 468,848
Available-for-sale investments, at quoted
market value (amortized cost of $6,019
and $8,287) 6,021 8,328
Accounts receivable, less allowances of
$25,064 and $22,786 371,927 364,075
Unbilled contract costs and fees 12,124 9,191
Inventories:
Raw materials and supplies 121,638 118,611
Work in process 63,833 52,870
Finished goods 106,871 93,238
Prepaid expenses 21,407 19,292
Prepaid income taxes 62,100 54,915
---------- ----------
1,331,962 1,189,368
---------- ----------
Property, Plant, and Equipment, at Cost 336,018 317,605
Less: Accumulated depreciation and
amortization 119,872 97,666
---------- ----------
216,146 219,939
---------- ----------
Other Assets 64,347 45,477
---------- ----------
Cost in Excess of Net Assets of Acquired
Companies (Note 6) 939,194 896,369
---------- ----------
$2,551,649 $2,351,153
========== ==========
2
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 3, January 3,
(In thousands except share amounts) 1998 1998
- --------------------------------------------------------------------------
Current Liabilities:
Notes payable and current maturities of
long-term obligations (includes $60,000
and $55,000 due to parent company) $ 113,213 $ 116,226
Accounts payable 90,843 97,516
Accrued payroll and employee benefits 49,971 59,745
Accrued income taxes 59,226 61,409
Accrued installation and warranty expenses 42,387 42,404
Accrued acquisition expenses (Note 6) 25,286 33,789
Deferred revenue 46,240 41,759
Other accrued expenses (Note 7) 126,987 101,827
Due to parent company and affiliated companies 22,577 22,027
---------- ----------
576,730 576,702
---------- ----------
Deferred Income Taxes 30,757 30,430
---------- ----------
Other Deferred Items 30,291 27,273
---------- ----------
Long-term Obligations:
Senior convertible obligations (includes
$140,000 due to parent company) 327,042 327,824
Subordinated convertible obligations
(Notes 2 and 8) 398,767 160,547
Other (includes $3,800 and $168,800 due to
parent company) 18,229 184,823
---------- ----------
744,038 673,194
---------- ----------
Minority Interest 251,729 165,996
---------- ----------
Shareholders' Investment:
Common stock, $.10 par value, 250,000,000
shares authorized; 122,855,781 and
122,645,040 shares issued 12,286 12,265
Capital in excess of par value 327,880 333,580
Retained earnings 650,427 571,899
Treasury stock at cost, 3,625,938 and 670,827
shares (64,091) (6,965)
Accumulated other comprehensive items (Note 4) (8,398) (33,221)
---------- ----------
918,104 877,558
---------- ----------
$2,551,649 $2,351,153
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $407,010 $403,900
-------- --------
Costs and Operating Expenses:
Cost of revenues (Note 7) 230,234 214,999
Selling, general, and administrative expenses 110,905 105,080
Research and development expenses 28,089 27,407
Restructuring and nonrecurring costs (Note 7) 21,871 -
-------- --------
391,099 347,486
-------- --------
Operating Income 15,911 56,414
Interest Income 8,688 6,864
Interest Expense (includes $2,502 and $6,574 to
parent company) (11,108) (13,448)
Gain on Issuance of Stock by Subsidiaries
(Note 5) (2,431) 12,659
Gain on Sale of Investments 713 -
-------- --------
Income Before Provision for Income Taxes,
Minority Interest, and Extraordinary Item 11,773 62,489
Provision for Income Taxes 8,000 21,919
Minority Interest Expense 891 3,297
-------- --------
Income Before Extraordinary Item 2,882 37,273
Extraordinary Item, Net of Provision for Income
Taxes and Minority Interest of $143 (Note 8) 195 -
-------- --------
Net Income $ 3,077 $ 37,273
======== ========
Earnings per Share (Notes 3 and 8):
Basic $ .03 $ .31
======== ========
Diluted $ .03 $ .28
======== ========
Weighted Average Shares (Notes 3 and 8):
Basic 120,399 121,585
======== ========
Diluted 120,974 139,475
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $1,210,345 $1,138,255
---------- ----------
Costs and Operating Expenses:
Cost of revenues (Note 7) 649,118 598,941
Selling, general, and administrative
expenses 324,576 305,977
Research and development expenses 84,349 78,604
Restructuring and nonrecurring costs
(Note 7) 23,294 800
---------- ----------
1,081,337 984,322
---------- ----------
Operating Income 129,008 153,933
Interest Income 26,238 18,541
Interest Expense (includes $8,956 and $13,192
to parent company) (34,735) (33,843)
Gain on Issuance of Stock by Subsidiaries
(Note 5) 18,582 37,871
Gain on Sale of Investments 713 -
---------- ----------
Income Before Provision for Income Taxes,
Minority Interest, and Extraordinary Item 139,806 176,502
Provision for Income Taxes 50,948 60,680
Minority Interest Expense 10,525 7,743
---------- ----------
Income Before Extraordinary Item 78,333 108,079
Extraordinary Item, Net of Provision for Income
Taxes and Minority Interest of $143 (Note 8) 195 -
---------- ----------
Net Income $ 78,528 $ 108,079
========== ==========
Earnings per Share (Notes 3 and 8):
Basic $ .65 $ .89
========== ==========
Diluted $ .60 $ .81
========== ==========
Weighted Average Shares (Notes 3 and 8):
Basic 121,547 121,483
========== ==========
Diluted 133,900 139,355
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Operating Activities:
Net income $ 78,528 $ 108,079
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 47,011 41,822
Noncash restructuring and nonrecurring
costs (Note 7) 2,204 -
Provision for losses on accounts
receivable 1,508 3,607
Decrease in deferred income taxes - (650)
Gain on issuance of stock by subsidiaries
(Note 5) (18,582) (37,871)
Gain on sale of investments (713) -
Minority interest expense 10,525 7,743
Extraordinary item, net of minority
interest expense (Note 8) (320) -
Other noncash expenses, net 13,713 4,855
Changes in current accounts, excluding the
effects of acquisitions:
Accounts receivable 19,062 (22,770)
Inventories (15,515) (12,163)
Other current assets (2,349) (1,443)
Accounts payable (9,195) (3,271)
Other current liabilities (15,048) (5,820)
Other (1,739) (111)
--------- ---------
Net cash provided by operating activities 109,090 82,007
--------- ---------
Investing Activities:
Acquisitions, net of cash acquired (Note 6) (79,063) (482,784)
Payment to affiliated company for acquired
business (19,117) -
Purchases of available-for-sale investments - (9,000)
Proceeds from sale and maturities of
available-for-sale investments 2,769 5,600
Purchases of property, plant, and equipment (18,901) (21,292)
Proceeds from sale of property, plant, and
equipment 7,802 6,732
Other, net (6,283) 660
--------- ---------
Net cash used in investing activities $(112,793) $(500,084)
--------- ---------
6
<PAGE>
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of Company and
subsidiary common stock (Note 5) $ 112,638 $ 78,756
Net proceeds from issuance of subordinated
convertible debentures (Note 2) 244,226 -
Repurchase of Company and subsidiary common
stock and subordinated convertible
debentures (Note 8) (87,861) -
Proceeds from issuance of short- and long-
term obligations to parent company - 428,800
Repayment of short- and long-term obligations
to parent company (Note 2) (160,000) (220,000)
Decrease in short-term notes payable (10,149) (5,719)
Repayment of long-term obligations (2,085) (4,492)
--------- ---------
Net cash provided by financing activities 96,769 277,345
--------- ---------
Exchange Rate Effect on Cash 4,127 (4,511)
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents 97,193 (145,243)
Cash and Cash Equivalents at Beginning of Period 468,848 522,688
--------- ---------
Cash and Cash Equivalents at End of Period $ 566,041 $ 377,445
========= =========
Noncash Activities (Note 6):
Fair value of assets of acquired companies $ 114,774 $ 624,805
Cash paid for acquired companies (82,424) (533,965)
Issuance of subsidiary stock options for
acquired company - (1,693)
--------- ---------
Liabilities assumed of acquired companies $ 32,350 $ 89,147
========= =========
Conversions of Company and subsidiary
convertible obligations $ 7,562 $ 15,997
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
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 October 3, 1998, the
results of operations for the three- and nine-month periods ended October 3,
1998, and September 27, 1997, and the cash flows for the nine-month periods
ended October 3, 1998, and September 27, 1997. Interim results are not
necessarily indicative of results for a full year.
The consolidated balance sheet presented as of January 3, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1998,
filed with the Securities and Exchange Commission.
2. Subordinated Convertible Debentures
In January 1998, the Company sold at par value $250.0 million principal
amount of 4% subordinated convertible debentures due 2005 for net proceeds of
$244.2 million. The debentures are convertible into shares of the Company's
common stock at a conversion price of $35.65 per share and are guaranteed on a
subordinated basis by Thermo Electron Corporation. The Company used a portion of
the proceeds to repay a $105.0 million promissory note to Thermo Electron. The
$105.0 million promissory note was classified as long-term in the accompanying
balance sheet as of January 3, 1998, as its repayment was made using the
proceeds of debt with a maturity beyond one year.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Nine Months Ended
------------------- -------------------
(In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Basic
Net Income $ 3,077 $ 37,273 $ 78,528 $108,079
-------- -------- -------- --------
Weighted Average Shares 120,399 121,585 121,547 121,483
-------- -------- -------- --------
Basic Earnings per Share $ .03 $ .31 $ .65 $ .89
======== ======== ======== ========
8
<PAGE>
3. Earnings per Share (continued)
Three Months Ended Nine Months Ended
------------------- -------------------
(In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Diluted
Net Income $ 3,077 $ 37,273 $ 78,528 $108,079
Effect of:
Convertible obligations - 2,021 2,568 6,072
Majority-owned
subsidiaries' dilutive
securities (24) (906) (1,405) (1,658)
-------- -------- -------- --------
Income Available to Common
Shareholders, as
Adjusted $ 3,053 $ 38,388 $ 79,691 $112,493
-------- -------- -------- --------
Weighted Average Shares 120,399 121,585 121,547 121,483
Effect of:
Convertible obligations - 16,692 11,426 16,737
Stock options 575 1,198 927 1,135
-------- -------- -------- --------
Weighted Average Shares,
as Adjusted 120,974 139,475 133,900 139,355
-------- -------- -------- --------
Diluted Earnings per Share $ .03 $ .28 $ .60 $ .81
======== ======== ======== ========
The computation of diluted earnings per share for the three- and nine-month
periods ended October 3, 1998, excludes the effect of assuming the conversion of
certain of the Company's convertible obligations because the effect would be
antidilutive. The computation of diluted earnings per share for the three-month
period ended October 3, 1998, excludes the Company's convertible obligations as
follows: $140.0 million principal amount 3 3/4% senior convertible note due to
parent company, convertible at $13.55 per share; $14.5 million principal amount
3 3/4% senior convertible debentures, convertible at $13.55 per share; $172.5
million principal amount 4 1/2% senior convertible debentures, convertible at
$34.46 per share; and $250.0 million principal amount 4% subordinated
convertible debentures, convertible at $35.65 per share. The computation of
diluted earnings per share for the nine-month period ended October 3, 1998,
excludes the Company's 4 1/2% senior convertible debentures and 4% subordinated
convertible debentures.
In addition, the computation of diluted earnings per share for each period
excludes the effect of assuming the exercise of certain outstanding stock
options because the effect would be antidilutive. As of October 3, 1998, there
were 1,145,625 of such options outstanding, with exercise prices ranging from
$26.29 to $31.35 per share.
9
<PAGE>
4. Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income and "other comprehensive items," which
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 on
available-for-sale investments. During the third quarter of 1998 and 1997, the
Company's comprehensive income totaled $23.6 million and $28.4 million,
respectively. During the first nine months of 1998 and 1997, the Company's
comprehensive income totaled $98.5 million and $82.3 million, respectively.
5. Issuance of Stock by Subsidiaries
Gain on issuance of stock by subsidiaries in the accompanying statement of
income for the nine-month period ended October 3, 1998, resulted from the
following:
Sale of 3,000,000 shares of Thermo BioAnalysis Corporation common stock in a
public offering during the second quarter of 1998 at $18.125 per share for net
proceeds of $51.5 million resulted in a gain of $8.3 million. In addition, in
the same offering, Thermo BioAnalysis sold 1,000,000 shares of its common stock
to Thermo Electron for net proceeds of $17.5 million, for which no gain was
recognized. In the third quarter of 1998, Thermo BioAnalysis repurchased 550,000
shares of its common stock, which resulted in a gain reversal of $2.4 million.
As of October 3, 1998, the Company owned 62% of Thermo BioAnalysis' outstanding
common stock.
Sale of 3,300,000 shares of ONIX Systems Inc. common stock in an initial
public offering at $14.50 per share for net proceeds of $43.2 million resulted
in a gain of $10.0 million. As of October 3, 1998, the Company owned 72% of ONIX
Systems' outstanding common stock.
Conversion of $1.8 million of Thermo Optek Corporation 5% subordinated
convertible debentures, convertible at $13.94 per share, into 127,646 shares of
Thermo Optek common stock resulted in a gain of $0.9 million. As of October 3,
1998, the Company owned 92% of Thermo Optek's outstanding common stock.
Conversion of $4.0 million of ThermoQuest Corporation 5% subordinated
convertible debentures, convertible at $16.50 per share, into 239,393 shares of
ThermoQuest common stock resulted in a gain of $1.8 million. As of October 3,
1998, the Company owned 88% of ThermoQuest's outstanding common stock.
10
<PAGE>
6. Acquisitions
In June 1998, the Company acquired two businesses that constitute a portion
of the environmental group of Smiths Industries plc's Graseby Limited subsidiary
for $23.2 million in cash, net of cash acquired. These businesses are based in
the United Kingdom and provide particulate-monitoring equipment and systems for
the extraction and analysis of samples from industrial smokestacks. During the
first nine months of 1998, the Company acquired several other businesses for
$55.9 million in cash, net of cash acquired.
These acquisitions 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 aggregate cost of
these acquisitions exceeded the estimated fair value of the acquired net assets
by $49.0 million, which is being amortized over periods not exceeding 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 allocations. The Company has gathered no
information that indicates the final allocations will differ materially from the
preliminary estimates. Pro forma results have not been presented as the results
of the acquired businesses were not material to the Company's results of
operations.
During 1997, the Company undertook a restructuring of Life Sciences
International PLC, acquired in March 1997. In March 1998, the Company finalized
its plan for restructuring the acquired business. At January 3, 1998, the
remaining reserve for these restructuring activities totaled $10.2 million.
During the first nine months of 1998, the Company expended $5.7 million for
restructuring costs relating to this acquisition, primarily for severance. At
October 3, 1998, the remaining reserve for restructuring the Life Sciences
businesses was $7.3 million, as adjusted for the impact of currency translation,
and primarily represents ongoing severance and abandoned-facility payments.
During 1996, the Company undertook a restructuring of a substantial portion
of the businesses constituting the Scientific Instruments Division of Fisons
plc, acquired in March 1996. In March 1997, the Company finalized its plan for
restructuring the acquired businesses. At January 3, 1998, the remaining reserve
for these restructuring activities totaled $11.1 million. During the first nine
months of 1998, the Company expended $1.5 million for restructuring costs
relating to this acquisition, primarily for abandoned-facility and severance
payments. At October 3, 1998, the remaining reserve for restructuring the Fisons
businesses was $10.0 million, as adjusted for the impact of currency
translation, and is primarily for ongoing payments for abandoned-facilities and,
to a lesser extent, severance.
7. Restructuring and Nonrecurring Costs
During the third quarter of 1998, the Company and its subsidiaries recorded
restructuring and related costs of $30.5 million. Restructuring costs of $21.9
million consist of $17.2 million related to severance costs for approximately
760 employees across all functions, $4.3 million
11
<PAGE>
7. Restructuring and Nonrecurring Costs (continued)
related primarily to facility-closing costs, and $0.4 million related to the
loss on the sale of a division. The charge for facility-closing costs includes
$2.2 million for write-downs of related fixed assets. In addition, the Company
recorded $8.6 million of inventory write-downs, included in cost of revenues in
the accompanying statement of income, related to discontinuing certain product
lines and increased excess and obsolescence reserves associated with lower
product demand.
In connection with these actions, the Company expects to incur additional
costs in the fourth quarter of 1998 and the first quarter of 1999 totaling $2.2
million, for costs not permitted as charges in the third quarter of 1998,
pursuant to Emerging Issues Task Force Pronouncement No. 94-3. These costs
primarily include costs to move inventories and certain employee relocation and
related costs.
The Company expects to complete the implementation of its restructuring plan
in the first half of 1999. As of October 3, 1998, the Company had terminated 274
employees and had expended $1.7 million of the established reserves. The
remaining liability for severance and facility-closing costs of $18.0 million,
as adjusted for the impact of currency translation, is included in other accrued
expenses in the accompanying balance sheet as of October 3, 1998.
In December 1996, five former employees of the Company's Epsilon Industrial,
Inc. subsidiary sought damages in an arbitration proceeding for alleged breaches
of agreements entered into with such employees prior to Epsilon's acquisition by
the Company. The arbitrators rendered a decision with respect to such claims
during the second quarter of 1998, and the Company recorded $1.4 million of
nonrecurring costs related to the resolution of this matter at that time.
8. Extraordinary Item
During the third quarter of 1998, a majority-owned subsidiary of the Company
repurchased $5.0 million principal amount of its subordinated convertible
debentures for $4.6 million in cash, resulting in an extraordinary gain of $0.2
million, net of taxes and minority interest of $0.1 million. The extraordinary
gain recorded by the Company increased basic and diluted earnings per share by
$.01 in the three- and nine-month periods ended October 3, 1998.
9. Proposed Reorganization
On August 12, 1998, Thermo Electron announced a proposed reorganization
involving certain of Thermo Electron's subsidiaries, including the Company. As
part of this reorganization, Thermo Electron may acquire Thermedics Inc.'s
equity interest in Thermo Sentron Inc. and Thermedics Detection Inc. for shares
of Thermedics common stock and, in turn, transfer such equity interests to the
Company in exchange for cash. Subsequently, Metrika Systems Corporation, ONIX
Systems, and Thermo Sentron may be merged to form one majority-owned, publicly
traded subsidiary of the Company. Shareholders of Metrika Systems, ONIX Systems,
12
<PAGE>
9. Proposed Reorganization (continued)
and Thermo Sentron would receive shares of common stock of the combined entity
in exchange for their shares of common stock of Metrika Systems, ONIX Systems,
and Thermo Sentron, respectively. Also, ThermoSpectra Corporation and Thermedics
Detection may be taken private and become wholly owned subsidiaries of the
Company. The public shareholders of ThermoSpectra and Thermedics Detection would
receive cash or newly issued shares of the Company's common stock in exchange
for their shares of common stock of ThermoSpectra and Thermedics Detection,
respectively. The completion of these transactions is subject to numerous
conditions, including the establishment of prices or exchange ratios;
confirmation of anticipated tax consequences; the approval of the boards of
directors (including the independent directors) of the respective companies,
including the Company; the negotiation and execution of definitive agreements;
the receipt of fairness opinions from one or more investment banking firms on
certain financial aspects of the transactions; the approval of Thermo Electron's
Board of Directors; and clearance by the Securities and Exchange Commission of
any necessary documents regarding the proposed transactions. One or more of
these transactions may not occur if the applicable conditions described above
are not satisfied.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 3, 1998, filed with the Securities and Exchange
Commission.
Results of Operations
Third Quarter 1998 Compared With Third Quarter 1997
Revenues increased $3.1 million to $407.0 million in the third quarter of
1998 from $403.9 million in the third quarter of 1997. Acquisitions added
revenues of $29.8 million in the third quarter of 1998. The increase was
substantially offset by a decrease in revenues at the Company's existing
businesses. A decrease in revenues at Thermo Optek Corporation of $11.2 million
in 1998 was primarily due to lower sales to customers in Asia and to the
semiconductor industry. Revenues at ThermoSpectra Corporation decreased $8.2
million in 1998, primarily due to a downturn in the semiconductor industry. In
addition, certain of the
13
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
Company's other business units experienced lower demand, in part as a result of
global economic conditions. The unfavorable effects of currency translation due
to the strengthening of the U.S. dollar relative to foreign currencies in
countries in which the Company operates decreased revenues by $1.0 million in
1998.
The Company's backlog decreased $7.3 million during the first nine months of
1998 to $291.6 million. Backlog decreased primarily at Thermo Optek and
ThermoSpectra, principally as a result of a decrease in demand in Asia and the
slowdown in the semiconductor and related industries.
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 decreased to 43% in the third quarter of 1998 from
47% in the third quarter of 1997, primarily due to inventory write-downs of $8.6
million recorded in 1998 for discontinued product lines and excess inventories
caused by lower product demand (Note 7). The gross profit margin in the 1997
period included the unfavorable effect of an inventory write-off at
ThermoSpectra.
Selling, general, and administrative expenses as a percentage of revenues
increased to 27% in the third quarter of 1998 from 26% in the third quarter of
1997, primarily due to the opening and expansion of sales and service offices at
Thermo BioAnalysis Corporation's liquid-handling and bioinstrumentation
businesses and the effect of lower sales at certain of the Company's business
units without a proportional reduction in costs. The recent restructuring
actions described below and in Note 7 to Consolidated Financial Statements will
reduce costs in the future. Research and development expenses as a percentage of
revenues was unchanged at 7% in 1998 and 1997.
In addition to the inventory write-downs discussed above, the Company
recorded restructuring costs of $21.9 million during the third quarter of 1998
(Note 7). Of these charges, $17.2 million represents severance costs for
approximately 760 employees, $4.3 million represents facility-closing costs, and
$0.4 million represents the loss on the sale of a division. The Company expects
to complete the implementation of its restructuring plan in the first half of
1999. In connection with the closing of certain facilities, the Company expects
to incur additional costs in the fourth quarter of 1998 and the first quarter of
1999 totaling $2.2 million.
Interest income increased to $8.7 million in the third quarter of 1998 from
$6.9 million in the third quarter of 1997. This increase was primarily due to
interest income earned on invested proceeds from the Company's January 1998
issuance of $250.0 million principal amount of 4%
14
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
subordinated convertible debentures, offset in part by the use of a portion of
the proceeds to repay a $105.0 million promissory note to Thermo Electron
Corporation (Note 2). To a lesser extent, interest income increased due to
higher average invested balances as a result of the sale of common stock by the
Company's subsidiaries in 1997 and 1998. Interest expense decreased to $11.1
million in 1998 from $13.4 million in 1997. This decrease was primarily due to
the repayment of certain promissory notes to Thermo Electron, issued in
connection with acquisitions, and the conversion of a portion of the Company's
and subsidiaries' convertible obligations into common stock of the Company and
its subsidiaries.
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. In the third quarter of 1998,
Thermo BioAnalysis repurchased shares of its common stock, which resulted in a
reversal of $2.4 million of previously recognized gains (Note 5). As a result of
the sale of stock by subsidiaries and issuance of stock by subsidiaries upon
conversion of convertible debentures, the Company recorded gains of $12.7
million in the third quarter of 1997. 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.
In the third quarter of 1998, ThermoSpectra sold its shares of common stock
of SteriGenics International, Inc., received in connection with the 1997 sale of
one of its product lines, resulting in gain of $0.7 million.
The effective tax rate was 68% in the third quarter of 1998 and 35% in the
third quarter of 1997. Excluding the impact of the nontaxable gains on issuance
of stock by subsidiaries in 1998 and 1997, 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 and the
impact of state income taxes. Excluding the impact of the nontaxable gains, the
effective tax rate increased in 1998, primarily due to the larger relative
effect of nondeductible expenses due to lower income in the 1998 period as a
result of restructuring and related costs recorded during the third quarter of
1998.
Minority interest expense decreased to $0.9 million in the third quarter of
1998 from $3.3 million in the third quarter of 1997, primarily due to lower
profits at the Company's majority-owned subsidiaries as a result of
restructuring and related costs recorded during the third quarter of 1998.
15
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
During the third quarter of 1998, a majority-owned subsidiary of the Company
repurchased $5.0 million principal amount of its subordinated convertible
debentures for $4.6 million in cash, resulting in an extraordinary gain of $0.2
million, net of taxes and minority interest of $0.1 million (Note 8).
First Nine Months 1998 Compared With First Nine Months 1997
Revenues increased $72.1 million, or 6%, to $1,210.3 million in the first
nine months of 1998 from $1,138.3 million in the first nine months of 1997,
primarily due to acquisitions, which included Life Sciences International PLC in
March 1997. Acquisitions added revenues of $122.3 million in the first nine
months of 1998. Revenues from existing businesses increased at ONIX Systems Inc.
due to higher sales of industry-specific instruments to the production segment
of the oil and gas industry and at Metrika Systems Corporation as a result of
higher demand at its finished-materials business and, to a lesser extent, at its
raw-materials business. Revenues at Thermo Optek decreased $18.9 million in
1998, primarily due to lower sales to customers in Asia and to the semiconductor
industry. Revenues at ThermoQuest decreased due to a decline in revenues of
$12.0 million to customers in Asia due to economic uncertainty in that region.
The decrease in revenues at Thermo Optek and ThermoQuest was offset in part by
an increase in revenues due to acquisitions, which is included in the total
effect of acquisitions discussed above. Revenues at ThermoSpectra's existing
businesses decreased due to lower sales to the semiconductor industry. In total,
the unfavorable effects of currency translation decreased revenues by $16.3
million in 1998.
The gross profit margin decreased to 46% in the first nine months of 1998
from 47% in the first nine months of 1997, primarily due to inventory
write-downs of $8.6 million as discussed in the results of operations for the
third quarter (Note 7). The 1997 period included an adjustment to expense of
$3.2 million relating to the sale of inventories revalued at the time of the
acquisition of Life Sciences and an inventory write-off at ThermoSpectra.
Selling, general, and administrative expenses as a percentage of revenues
was unchanged at 27% in the first nine months of 1998 and 1997. Research and
development expenses as a percentage of revenues was unchanged at 7% in 1998 and
1997.
In addition to the inventory write-downs discussed above, the Company
recorded restructuring and nonrecurring costs of $23.3 million in the first nine
months of 1998 (Note 7). In the third quarter of 1998, the Company recorded
$21.9 million of restructuring costs as discussed in the results of operations
for the third quarter. In the second quarter of 1998, the Company recorded $1.4
million of nonrecurring costs relating to the resolution of an arbitration
proceeding. The arbitration proceeding involved five former employees of the
Company's Epsilon Industrial, Inc. subsidiary who had sought damages for alleged
breaches of agreements entered into with such employees prior to Epsilon's
acquisition by the
16
<PAGE>
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
Company. Restructuring costs of $0.8 million in 1997 represents severance
for employees terminated at one of ThermoSpectra's business units.
Interest income increased to $26.2 million in the first nine months of 1998
from $18.5 million in the first nine months of 1997, primarily due to the
reasons discussed in the results of operations for the third quarter. Interest
expense increased to $34.7 million in 1998 from $33.8 million in 1997, primarily
due to the issuance of an aggregate $428.8 million of promissory notes to Thermo
Electron in 1997 in connection with acquisitions, and the Company's January 1998
issuance of 4% subordinated convertible debentures (Note 2). The increase was
offset in part by the repayment of certain promissory notes to Thermo Electron,
issued in connection with acquisitions and, to a lesser extent, the conversion
of a portion of the Company's and subsidiaries' convertible obligations into
common stock of the Company and its subsidiaries.
As a result of the sale of stock by subsidiaries and issuance of stock by
subsidiaries upon conversion of convertible debentures, the Company recorded
gains of $18.6 million in the first nine months of 1998 (Note 5) and $37.9
million in the first nine months of 1997. The gains recorded in 1998 are net of
a $2.4 million gain reversal as discussed in the results of operations for the
third quarter (Note 5).
In the third quarter of 1998, ThermoSpectra sold its shares of common stock
of SteriGenics International, received in connection with the 1997 sale of one
of its product lines, resulting in gain of $0.7 million.
The effective tax rate was 36% in the first nine months of 1998, compared
with 34% in the first nine months of 1997. Excluding the impact of the
nontaxable gains on issuance of stock by subsidiaries in 1998 and 1997, 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 and the impact of state income taxes. Excluding the impact of
the nontaxable gains, the effective tax rate decreased in 1998, primarily due to
certain foreign tax losses not benefited in the first two quarters of 1997.
Minority interest expense increased to $10.5 million in the first nine
months of 1998 from $7.7 million in the first nine months of 1997, primarily due
to the minority interest associated with the Company's newly public ONIX
Systems, Metrika Systems, and Thermo Vision Corporation subsidiaries and the
earnings of certain of the Life Sciences businesses sold to ThermoQuest and
Thermo Optek in 1997. This increase was offset in part by lower profits at the
Company's majority-owned subsidiaries as a result of restructuring and related
costs recorded in the third quarter of 1998.
17
<PAGE>
Liquidity and Capital Resources
Consolidated working capital was $755.2 million at October 3, 1998, compared
with $612.7 million at January 3, 1998. Included in working capital are cash,
cash equivalents, and available-for-sale investments of $572.1 million at
October 3, 1998, and $477.2 million at January 3, 1998. Of the $572.1 million
balance at October 3, 1998, $363.5 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
$109.1 million in the first nine months of 1998. Cash flow from operations was
improved by a decrease in accounts receivable of $19.1 million. Accounts
receivable decreased primarily due to lower revenues at Thermo Optek and Thermo
BioAnalysis, management efforts at Thermo Optek to improve collections, and the
timing of cash collections at Metrika Systems. The Company used cash of $15.5
million to increase inventories. The increase in inventories was primarily due
to replenishing year-end inventory levels at ThermoQuest's European sales
offices and to build up inventories at certain of the Company's subsidiaries in
preparation for new product releases. To a lesser extent, inventories increased
at one of the Company's subsidiaries due to longer production cycles and at
Thermo BioAnalysis' clinical laboratory products business resulting from a
decrease in sales in Asia. The Company used cash of $9.2 million to fund a
decrease in accounts payable, primarily due to the timing of payments at ONIX
Systems. The Company used cash of $15.0 million to reduce other current
liabilities, primarily to make payments for accrued acquisition expenses (Note
6).
At October 3, 1998, $129.2 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 $112.8 million of cash in the first
nine months of 1998, including $79.1 million, net of cash acquired, for
acquisitions (Note 6). ONIX Systems used $19.1 million of cash to pay Thermo
Power Corporation for the Peek Measurement Business, acquired effective November
1997. The Company expended $18.9 million for purchases of property, plant, and
equipment, and received proceeds of $7.8 million from the sale of property,
plant, and equipment.
The Company's financing activities provided $96.8 million of cash in the
first nine months of 1998. Net proceeds from the issuance of Company and
subsidiary common stock totaled $112.6 million, which included $112.2 million of
net proceeds from the June 1998 sale of Thermo BioAnalysis' common stock and the
March 1998 initial public offering of ONIX Systems' common stock (Note 5). In
January 1998, the Company sold at par value $250.0 million principal amount of
4% subordinated convertible debentures due 2005 for net proceeds of $244.2
million (Note 2). The Company used a portion of the proceeds to repay a $105.0
million promissory note to Thermo Electron. In addition, Thermo Optek and
ThermoSpectra repaid an aggregate $55.0 million of promissory notes to Thermo
Electron during the period.
18
<PAGE>
Liquidity and Capital Resources (continued)
During the first nine months of 1998, an aggregate principal amount of $7.6
million of the Company's and subsidiaries' convertible obligations were
converted into shares of Company and subsidiary common stock.
During the first nine months of 1998, the Company and its majority-owned
subsidiaries expended $87.9 million to purchase common stock of the Company and
common stock and debentures of certain of the Company's majority-owned
subsidiaries. Through October 3, 1998, the Company's majority-owned subsidiaries
had committed $7.1 million under their authorizations, which was payable as of
October 3, 1998, in settlement of trades executed prior to that date. These
purchases were made pursuant to authorizations by the Company's and certain
majority-owned subsidiaries' Boards of Directors. As of October 3, 1998, $9.8
million remained under the Company's authorization to purchase subsidiary
securities and $47.1 million remained under the Company's majority-owned
subsidiaries' authorizations to purchase subsidiary securities.
During the remainder of 1998, the Company plans to make expenditures of
approximately $9 million for property, plant, and equipment. Since October 3,
1998, the Company and its majority-owned subsidiaries have expended $10.8
million on acquisitions of businesses, and as of November 11, 1998, the Company
and its majority-owned subsidiaries had agreements or nonbinding letters of
intent to acquire new businesses totaling approximately $31 million. Proposed
acquisitions of new businesses are subject to various conditions to closing, and
there can be no assurance that all proposed transactions will be consummated.
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 and/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.
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 1997, as described in the Company's Annual Report
on Form 10-K for the year ended January 3, 1998.
19
<PAGE>
Year 2000
The Company continues to assess the potential impact of the year 2000 on the
Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading material internal
business systems and facilities; (ii) testing and developing necessary upgrades
for the Company's current products and certain discontinued products; (iii)
contacting key suppliers, vendors, and customers to determine their year 2000
compliance status; and (iv) developing contingency plans.
The Company's State of Readiness
The Company has tested and evaluated its critical information technology
systems for year 2000 compliance, including its significant computer systems,
software applications, and related equipment. The Company is currently in the
process of upgrading or replacing its significant noncompliant systems. In most
cases, such upgrades or replacements are being made in the ordinary course of
business. The Company expects that all of its material information technology
systems will be year 2000 compliant by the end of 1999. The Company is also
evaluating the potential year 2000 impact on its facilities, including its
buildings and utility systems. Any problems that are identified will be
prioritized and remediated based on their assigned priority. The Company will
continue periodic testing of its critical internal business systems and
facilities in an effort to minimize operating disruptions due to year 2000
issues.
The Company believes that all of the material products that it currently
manufactures and sells are year 2000 compliant. However, as many of the
Company's products are complex, interact with third-party products, and operate
on computer systems that are not under the Company's control, there can be no
assurance that the Company has identified all of the year 2000 problems with its
current products. The Company believes that certain of its older products, which
it no longer manufactures or sells, may not be year 2000 compliant. The Company
is continuing to test and evaluate such products and may offer upgrades or
alternative products where reasonably practicable.
The Company is in the process of identifying and contacting suppliers,
vendors, and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part of
this effort, the Company has developed and is distributing questionnaires
relating to year 2000 compliance to its significant suppliers, vendors, and
customers. The Company intends to follow-up and monitor the year 2000 compliant
progress of significant suppliers, vendors, and customers that indicate that
they are not year 2000 compliant, or that do not respond to the Company's
questionnaires.
20
<PAGE>
Year 2000 (continued)
Contingency Plan
The Company intends to develop a contingency plan that will allow its
primary business operations to continue despite disruptions due to year 2000
problems. This plan may include identifying and securing other suppliers,
increasing inventories, and modifying production facilities and schedules. As
the Company continues to evaluate the year 2000 readiness of its business
systems and facilities, products and significant suppliers, vendors, and
customers, it will modify and adjust its contingency plan as may be required.
Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not been
material. The Company does not expect total year 2000 remediation costs to be
material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its material internal business systems will be completed in a timely fashion,
there can be no assurance that the Company will not encounter unexpected costs
or delays. Despite its efforts to ensure that its material current products are
year 2000 compliant, the Company may see an increase in warranty and other
claims, especially those related to Company products that incorporate, or
operate using, third-party software or hardware. In addition, certain of the
Company's older products, which it no longer manufactures or sells, may not be
year 2000 compliant, which may expose the Company to claims. If any of the
Company's material suppliers, vendors, or customers experience business
disruptions due to year 2000 issues, the Company might also be materially
adversely affected. The Company's research and development, production,
distribution, financial, administrative, and communications operations might be
disrupted. There is expected to be a significant amount of litigation relating
to the year 2000 issue and there can be no assurance that the Company will not
incur material costs in defending or bringing lawsuits. Any unexpected costs or
delays arising from the year 2000 issue could have a significant adverse impact
on the Company's business, operations, and financial condition.
21
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On July 22, 1998, the Company filed a Current Report on Form 8-K dated July
21, 1998, with respect to its expected operating income for the second quarter
of 1998.
On September 29, 1998, the Company filed a Current Report on Form 8-K dated
September 29, 1998, with respect to restructuring and other charges recorded
during the third quarter of 1998.
22
<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 November 1998.
THERMO INSTRUMENT SYSTEMS INC.
Paul F. Kelleher
----------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
----------------------------
John N. Hatsopoulos
Chief Financial Officer and
Senior Vice President
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- -------------------------------------------------------------------------------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
INSTRUMENT SYSTEMS INC.'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 3,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> OCT-03-1998
<CASH> 566,041
<SECURITIES> 6,021
<RECEIVABLES> 396,991
<ALLOWANCES> 25,064
<INVENTORY> 292,342
<CURRENT-ASSETS> 1,331,962
<PP&E> 336,018
<DEPRECIATION> 119,872
<TOTAL-ASSETS> 2,551,649
<CURRENT-LIABILITIES> 576,730
<BONDS> 600,238
0
0
<COMMON> 12,286
<OTHER-SE> 905,818
<TOTAL-LIABILITY-AND-EQUITY> 2,551,649
<SALES> 1,210,345
<TOTAL-REVENUES> 1,210,345
<CGS> 649,118
<TOTAL-COSTS> 649,118
<OTHER-EXPENSES> 107,643
<LOSS-PROVISION> 1,508
<INTEREST-EXPENSE> 34,735
<INCOME-PRETAX> 139,806
<INCOME-TAX> 50,948
<INCOME-CONTINUING> 78,333
<DISCONTINUED> 0
<EXTRAORDINARY> 195
<CHANGES> 0
<NET-INCOME> 78,528
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.60
</TABLE>
