SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended April 3, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-9786
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 Identification No.)
incorporation or organization)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at April 30, 1999
Common Stock, $.10 par value 119,335,191
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet
(Unaudited)
<S> <C> <C>
Assets
April 3, January 2,
(In thousands) 1999 1999
- ---------------------------------------------------------------------------------- ------------ ----------
Current Assets:
Cash and cash equivalents (includes $249,018 and $408,490 under $ 443,069 $ 553,825
repurchase agreements with parent company)
Accounts receivable, less allowances of $34,157 and $23,726 464,742 407,430
Unbilled contract costs and fees 11,749 13,114
Inventories:
Raw materials and supplies 147,790 118,286
Work in process 74,682 55,086
Finished goods 136,592 103,217
Prepaid expenses 39,307 19,705
Prepaid and refundable income taxes 76,550 62,921
---------- ----------
1,394,481 1,333,584
---------- ----------
Property, Plant, and Equipment, at Cost 416,378 344,368
Less: Accumulated depreciation and amortization 130,587 124,137
---------- ----------
285,791 220,231
---------- ----------
Other Assets 163,892 73,705
---------- ----------
Cost in Excess of Net Assets of Acquired Companies (Note 5) 1,060,763 938,254
---------- ----------
$2,904,927 $2,565,774
========== ==========
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 3, January 2,
(In thousands except share amounts) 1999 1999
- ---------------------------------------------------------------------------------- ------------ ----------
Current Liabilities:
Notes payable and current maturities of long-term obligations (includes $ 339,573 $ 130,772
$250,000 and $60,000 due to parent company; Note 5)
Accounts payable 115,879 101,009
Accrued payroll and employee benefits 63,201 59,649
Accrued income taxes 63,682 59,984
Accrued installation and warranty expenses 46,329 39,958
Deferred revenue 52,875 46,354
Other accrued expenses (Notes 5 and 6) 195,883 135,708
Due to parent company and affiliated companies 12,654 14,195
---------- ----------
890,076 587,629
---------- ----------
Deferred Income Taxes 42,620 29,278
---------- ----------
Other Deferred Items 39,665 31,056
---------- ----------
Long-term Obligations:
Senior convertible obligations (includes $140,000 due to parent company) 327,042 327,042
Subordinated convertible obligations 386,916 389,436
Other (includes $3,800 due to parent company) 45,829 26,965
---------- ----------
759,787 743,443
---------- ----------
Minority Interest 241,874 229,361
---------- ----------
Shareholders' Investment:
Common stock, $.10 par value, 250,000,000 shares authorized; 12,288 12,288
122,879,889 shares issued
Capital in excess of par value 330,481 331,621
Retained earnings 694,868 675,983
Treasury stock at cost, 3,551,227 and 3,603,358 shares (62,747) (63,671)
Deferred compensation (519) -
Accumulated other comprehensive items (Note 2) (43,466) (11,214)
---------- ----------
930,905 945,007
---------- ----------
$2,904,927 $2,565,774
========== ==========
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
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $463,579 $407,943
-------- --------
Costs and Operating Expenses:
Cost of revenues 252,123 214,209
Selling, general, and administrative expenses 130,444 107,727
Research and development expenses 34,193 28,519
Restructuring costs (Note 6) 1,243 -
-------- -------
418,003 350,455
-------- --------
Operating Income 45,576 57,488
Interest Income 6,326 8,169
Interest Expense (includes $2,986 and $3,431 to parent company) (12,185) (11,493)
Gain on Issuance of Stock by Subsidiary - 9,950
Other Expense (570) -
-------- -------
Income Before Provision for Income Taxes and Minority Interest 39,147 64,114
Provision for Income Taxes 16,008 21,959
Minority Interest Expense 4,254 4,300
-------- -------
Net Income $ 18,885 $37,855
======== =======
Earnings per Share (Note 3):
Basic $ .16 $ .31
======== =======
Diluted $ .15 $ .28
======== =======
Weighted Average Shares (Note 3):
Basic 119,302 122,065
======== =======
Diluted 131,088 146,708
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ------------------------------------------------------------------------ ---------- ----------- ----------
Operating Activities:
Net income $ 18,885 $ 37,855
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 17,405 16,117
Provision for losses on accounts receivable 943 185
Gain on issuance of stock by subsidiary - (9,950)
Minority interest expense 4,254 4,300
Increase in deferred income taxes 29 -
Other noncash expenses 5,839 1,478
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable 13,200 13,700
Inventories (9,093) (14,028)
Other current assets (707) (5,796)
Accounts payable (5,111) 997
Other current liabilities (12,604) 7,123
Other (1,971) (1,074)
---------- ---------
Net cash provided by operating activities 31,069 50,907
---------- ---------
Investing Activities:
Acquisitions, net of cash acquired (Note 5) (322,996) (1,300)
Payment to affiliated company for acquired business - (19,117)
Purchases of property, plant, and equipment (9,204) (6,573)
Proceeds from sale of property, plant, and equipment 4,802 3,768
Other, net 1,541 159
---------- ---------
Net cash used in investing activities (325,857) (23,063)
---------- ---------
Financing Activities:
Net proceeds from issuance of Company and subsidiary common stock 442 43,701
Net proceeds from issuance of subordinated convertible - 244,150
debentures
Repurchase of Company and subsidiary common stock and subordinated (12,042) -
convertible debentures
Net proceeds from issuance of short-term obligation to parent
company (Note 5) 200,000 -
Increase (decrease) in short-term obligations, net 309 (2,966)
Proceeds from issuance of long-term obligations 14,484 -
Repayment of long-term obligations (3,118) (894)
Repayment of long-term obligations to parent company (10,000) (105,000)
Other - 77
---------- ---------
Net cash provided by financing activities $ 190,075 $ 179,068
---------- ---------
5
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Three Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ------------------------------------------------------------------------ ---------- ----------- ----------
Exchange Rate Effect on Cash $ (6,043) $ 2,835
---------- ---------
Increase (Decrease) in Cash and Cash Equivalents (110,756) 209,747
Cash and Cash Equivalents at Beginning of Period 553,825 468,848
---------- ---------
Cash and Cash Equivalents at End of Period $ 443,069 $ 678,595
========== =========
Noncash Activities (Note 5):
Fair value of assets of acquired companies $ 560,910 $ 1,300
Cash to be paid for remaining outstanding shares of tender offer (2,452) -
Cash paid for acquired companies (363,498) (1,300)
---------- ---------
Liabilities assumed of acquired companies $ 194,960 $ -
========== =========
Conversions of Company and subsidiary convertible obligations $ - $ 567
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
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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 April 3, 1999, and
the results of operations and cash flows for the three-month periods ended April
3, 1999, and April 4, 1998. Interim results are not necessarily indicative of
results for a full year.
The consolidated balance sheet presented as of January 2, 1999, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999,
filed with the Securities and Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including foreign
currency translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments. During the first quarter of 1999 and 1998, the
Company had a comprehensive loss of $8.3 million and comprehensive income of
$34.9 million, respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Basic
Net Income $ 18,885 $37,855
-------- -------
Weighted Average Shares 119,302 122,065
-------- -------
Basic Earnings per Share $ .16 $ .31
======== =======
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3. Earnings per Share (continued)
Three Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Diluted
Net Income $ 18,885 $37,855
Effect of:
Convertible obligations 855 3,477
Majority-owned subsidiaries' dilutive securities (503) (907)
-------- -------
Income Available to Common Shareholders, as Adjusted $ 19,237 $40,425
-------- -------
Weighted Average Shares 119,302 122,065
Effect of:
Convertible obligations 11,409 23,456
Stock options 377 1,187
-------- -------
Weighted Average Shares, as Adjusted 131,088 146,708
-------- -------
Diluted Earnings per Share $ .15 $ .28
======== =======
The computation of diluted earnings per share for the three-month period
ended April 3, 1999, excludes the effect of assuming the conversion of the
Company's $172.5 million principal amount 4 1/2% senior convertible debentures,
convertible at $34.46 per share, and its $250.0 million principal amount 4%
subordinated convertible debentures, convertible at $35.65 per share, because
the effect would be antidilutive.
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 April 3, 1999, there
were 449,000 of such options outstanding, with exercise prices ranging from
$16.83 to $31.35 per share.
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4. Business Segment Information
Three Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------- ------------ ----------
Revenues:
Analytical $210,354 $219,742
Life Sciences 65,774 51,131
Process Control 52,967 51,856
Industrial 139,365 90,219
Intersegment sales eliminations (a) (4,881) (5,005)
-------- --------
$463,579 $407,943
======== ========
Income Before Provision for Income Taxes and Minority Interest:
Analytical $ 31,143 $ 37,175
Life Sciences 6,407 5,368
Process Control 3,677 5,510
Industrial 6,069 9,541
Corporate (b) (1,720) (106)
-------- --------
Total operating income 45,576 57,488
Interest and other income (expense), net (6,429) 6,626
-------- --------
$ 39,147 $ 64,114
======== ========
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Primarily corporate general and administrative expenses.
During the first quarter of 1999, the Company acquired Spectra-Physics AB
(Note 5), which increased total assets at the Industrial segment by $528.0.
million.
5. Acquisitions
During the first quarter of 1999, the Company acquired 17,494,684 shares
(or approximately 99%) of Spectra-Physics AB, a Stockholm Stock Exchange-listed
company, for approximately 160 Swedish krona per share (approximately $20 per
share) in completion of the Company's tender offer to acquire all of the
outstanding shares of Spectra-Physics. The Company expects to acquire the
remaining Spectra-Physics shares outstanding for approximately 160 Swedish Krona
per share pursuant to compulsory acquisition rules applicable to Swedish
companies. The aggregate purchase price was approximately $347.2 million,
including related expenses. On the date of acquisition, Spectra-Physics had
$39.1 million of cash, which included $30.5 million held by its majority-owned
Spectra-Physics Lasers, Inc. subsidiary. The accompanying balance sheet as of
April 3, 1999, includes $2.5 million accrued for the purchase of the remaining
Spectra-Physics shares outstanding. Spectra-Physics manufactures a wide range of
laser-based instrumentation systems, primarily for the process-control,
industrial measurement, construction, research, commercial, and government
markets. Spectra-Physics had revenues of approximately $442 million in 1998,
with operations throughout North America and Europe, and a presence in the
Pacific Rim.
To finance this acquisition, the Company used a combination of available
cash and $200.0 million of borrowings from Thermo Electron Corporation, pursuant
to a promissory note due August 1999. The promissory note bears interest at a
variable commercial paper-based rate, which is initially 5.03%.
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5. Acquisitions (continued)
During the first quarter of 1999, the Company's majority-owned
subsidiaries made several other acquisitions for approximately $14.9 million in
cash, net of cash acquired, subject to post-closing adjustments. To date, no
information has been gathered that would cause the Company to believe that the
post-closing adjustments will be material.
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 $149.9 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.
Based on unaudited data, the following table presents selected financial
information for the Company and Spectra-Physics on a pro forma basis, assuming
the companies had been combined since the beginning of 1998. The effect of the
acquisitions not included in the pro forma data was not material to the
Company's results of operations.
Three Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $502,868 $516,394
Net Income 14,711 32,042
Earnings per Share:
Basic .12 .26
Diluted .11 .24
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition of
Spectra-Physics been made at the beginning of 1998.
The Company has undertaken restructuring activities at certain acquired
businesses. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily
have included reductions in staffing levels and the abandonment of excess
facilities. In connection with these restructuring activities, as part of the
cost of acquisitions, the Company established reserves, primarily for severance
and excess facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. Unresolved matters at April 3, 1999, primarily included completion
of planned severances and abandonment of excess facilities for certain
acquisitions completed during the last twelve months.
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5. Acquisitions (continued)
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A summary of the changes in accrued acquisition expenses, which are
included in other accrued expenses in the accompanying balance sheet, follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at January 2, 1999 $ 3,806 $ 11,682 $ 1,015 $ 16,503
Reserves established 14,140 498 463 15,101
Usage (1,287) (804) (133) (2,224)
Decrease due to finalization of (224) - (242) (466)
restructuring plan, recorded as a
decrease to cost in excess of net assets
of acquired companies
Currency translation adjustment (172) (313) (61) (546)
-------- -------- -------- --------
Balance at April 3, 1999 $ 16,263 $ 11,063 $ 1,042 $ 28,368
======== ======== ======== ========
6. Restructuring Costs
During 1998, the Company and its subsidiaries recorded restructuring
costs, which were accounted for in accordance with EITF 94-3, primarily for
severance for 780 employees and abandoned-facility payments. As of January 2,
1999, the Company had terminated 500 employees and had $11.2 million accrued for
severance and facility-closing costs relating to these activities. During the
first quarter of 1999, the Company terminated 115 additional employees and
recorded additional restructuring costs of $1.2 million, which could not be
charged to expense previously under EITF 94-3. The restructuring costs consist
of $0.7 million for business relocation and facility-closing costs, $0.3 million
of costs related to severance for 8 employees, and $0.2 million of other
restructuring costs. The Company expects to incur additional restructuring costs
totaling $1.1 million through the third quarter of 1999. A summary of the
changes in accrued restructuring costs, which are included in other accrued
expenses in the accompanying balance sheet, follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ---------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 2, 1999 $ 9,161 $ 1,029 $ 1,035 $ 11,225
Charged to expense 324 168 751 1,243
Usage (4,066) (532) (1,172) (5,770)
Currency translation adjustment - - (246) (246)
-------- -------- -------- --------
Balance at April 3, 1999 $ 5,419 $ 665 $ 368 $ 6,452
======== ======== ======== ========
7. Proposed Reorganization
During 1998, Thermo Electron announced a proposed reorganization involving
certain of Thermo Electron's subsidiaries, including the Company. As part of
this reorganization, the Company's ThermoSpectra Corporation subsidiary may be
taken private. The public shareholders of ThermoSpectra would receive cash in
exchange for their shares of common stock of ThermoSpectra. Representatives of
the Company and members of a special committee of ThermoSpectra's independent
directors (formed for the purpose of evaluating and negotiating the proposed
transaction), along with their financial and legal advisors, have been
conducting negotiations related to the pricing and terms of this proposed
transaction. The completion of this transaction is subject to numerous
conditions, including the
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7. Proposed Reorganization (continued)
establishment of prices; confirmation of anticipated tax consequences; the
approval of the boards of directors (including the independent directors) of
ThermoSpectra and the Company; the negotiation and execution of a definitive
agreement; the receipt of a fairness opinion from an investment banking firm on
certain financial aspects of the transaction; and clearance by the Securities
and Exchange Commission of any necessary documents regarding the proposed
transaction. This transaction 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 2, 1999, filed with the Securities and Exchange
Commission.
Overview
The Company is a worldwide leader in the development, manufacture, and
marketing of measurement instruments used to monitor, collect, and analyze
information. These systems are used for multiple applications in a range of
industries, including industrial processing, food and beverage production, life
sciences research, and medical diagnostics.
The Company's businesses operate in four instrumentation segments:
Analytical, Life Sciences, Process Control, and Industrial. The Analytical
segment, which includes the Company's Thermo Optek Corporation and ThermoQuest
Corporation subsidiaries, develops and manufactures analytical instruments that
are used in the quantitative and qualitative analysis of elements and molecular
compounds in gases, liquids, and solids. The Life Sciences segment includes
Thermo BioAnalysis Corporation (excluding its Eberline Health Physics business
for periods prior to July 1998, when it contributed this business to a joint
venture in the Industrial segment). This segment develops, manufactures, and
markets a broad range of products, including biomolecular instruments and
consumables, clinical laboratory equipment and supplies, rapid point-of-care
diagnostic test kits, and laboratory information-management systems used in
biochemical research, clinical diagnosis, and pharmaceutical production. The
Process Control segment, consisting of the Company's Metrika Systems Corporation
and ONIX Systems Inc. subsidiaries, specializes in on-line instruments that
measure and control products such as oil, gas, chemicals, raw materials, and
finished goods throughout a variety of industrial processes. The Industrial
segment, which generally includes the Company's Thermo Vision Corporation,
ThermoSpectra Corporation, Spectra-Physics Lasers, Inc., and wholly owned
subsidiaries, including businesses of Spectra-Physics AB, acquired in February
1999 (Note 5), provides components and systems for applications such as test and
measurement, environmental and nuclear monitoring, and imaging and inspection.
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 short-term forward foreign exchange
contracts to reduce its exposure to currency fluctuations.
12
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Results of Operations
First Quarter 1999 Compared With First Quarter 1998
Revenues increased $55.7 million to $463.6 million in the first quarter of
1999 from $407.9 million in the first quarter of 1998, primarily due to
acquisitions. Revenues increased $91.4 million due to 1999 acquisitions and the
inclusion of revenues from 1998 acquisitions for the full period. In addition,
revenues increased $5.7 million due to the favorable effects of currency
translation as a result of the weakening of the U.S. dollar relative to foreign
currencies in countries in which the Company operates. Excluding the impact of
acquisitions and currency translation, revenues decreased $41.4 million.
Analytical segment revenues decreased to $210.4 million in the first
quarter of 1999 from $219.7 million in the first quarter of 1998. Revenues from
existing operations decreased primarily as a result of lower sales to customers
in Asia due to the economic conditions in that region and, to a lesser extent,
continuing lower sales to customers in the semiconductor industry. In addition,
revenues decreased due to lower sales to customers in Brazil due to the unstable
economic conditions there. These decreases were offset in part by an increase in
revenues of $3.6 million due to the favorable effects of currency translation
and the inclusion of $2.9 million of revenues from acquisitions.
Life Sciences segment revenues increased to $65.8 million in the first
quarter of 1999 from $51.1 million in the first quarter of 1998, primarily due
to the inclusion of $11.9 million of revenues from acquisitions and, to a lesser
extent, increased product demand and the expansion of sales and distribution
channels into new markets. In addition, the favorable effects of currency
translation increased revenues by $1.7 million.
Process Control segment revenues increased to $53.0 million in the first
quarter of 1999 from $51.9 million in the first quarter of 1998, primarily due
to the inclusion of $10.0 million of revenues from acquisitions. The increase in
revenues from acquisitions was substantially offset by lower sales from existing
operations due to a reduction in discretionary capital spending by companies in
the process control industry due to difficult market conditions and, to a lesser
extent, a reduction in spending by raw-material producers.
Industrial segment revenues increased to $139.4 million in the first
quarter of 1999 from $90.2 million in the first quarter of 1998. An increase in
revenues of $65.8 million from acquisitions, primarily Spectra-Physics in
February 1999 (Note 5), was offset in part by lower revenues at existing
businesses. Revenues from existing operations decreased primarily at
ThermoSpectra, principally due to the continued weakness in the semiconductor
industry.
The gross profit margin decreased to 46% in the first quarter of 1999
from 47% in the first quarter of 1998, primarily due to the inclusion of
lower-margin revenues from Spectra-Physics, which recorded an adjustment to
expense of $4.5 million relating to the sale of inventories revalued at the time
of acquisition. The Company expects to record additional charges relating to the
sale of revalued inventories in connection with this acquisition of
approximately $6 to $7 million, primarily in the second quarter of 1999.
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in the first quarter of 1999 from 26% in the first quarter of
1998, primarily due to lower sales volume at Thermo Optek and, to a lesser
extent, the opening of four direct sales and service offices and the expansion
of a U.S. direct sales and service office at Thermo BioAnalysis.
Research and development expenses increased to $34.2 million in the first
quarter of 1999 from $28.5 million in the first quarter of 1998, primarily due
to the inclusion of expenses at acquired businesses. Research and development
expenses as a percentage of revenues were 7.4% in 1999, compared with 7.0% in
1998. Excluding the acquisition of Spectra-Physics, research and development
expenses as a percentage of revenues was 7.5% in 1999.
13
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First Quarter 1999 Compared With First Quarter 1998 (continued)
In connection with the restructuring actions undertaken by the Company in
1998, the Company incurred additional costs of $1.2 million in the first quarter
of 1999, primarily for business relocation and facility-closing costs,
severance, and other restructuring costs (Note 6).
Interest income decreased to $6.3 million in the first quarter of 1999
from $8.2 million in the first quarter of 1998, primarily due to a reduction in
cash as a result of acquisitions, including the acquisition of Spectra-Physics
in February 1999. To a lesser extent, interest income decreased due to a
reduction in cash as a result of the purchase by the Company and its
subsidiaries of common stock of the Company and common stock and debentures of
certain of the Company's majority-owned subsidiaries in the second half of 1998.
The decrease was offset in part by interest income earned on invested proceeds
from the sale of common stock by the Company's subsidiaries in 1998.
Interest expense increased to $12.2 million in the first quarter of 1999
from $11.5 million in the first quarter of 1998, primarily due to the issuance
to Thermo Electron Corporation of a $200.0 million promissory note in connection
with the acquisition of Spectra-Physics (Note 5). The increase was offset in
part by a decrease in interest expense due to the repayment in 1998 of certain
promissory notes to Thermo Electron that were issued in connection with
acquisitions.
As a result of the sale of stock by a subsidiary, the Company recorded a
gain of $10.0 million in the first quarter of 1998.
Other expense of $0.6 million in the first quarter of 1999 represents net
foreign currency exchange losses.
Excluding the impact of the nontaxable gain on issuance of stock by
subsidiary, the effective tax rate was 41% in the first quarter of 1999 and
1998. The effective tax rate in both periods exceeded the statutory federal
income tax rate due to nondeductible amortization of cost in excess of net
assets of acquired companies, foreign tax rate and tax law differences, and the
impact of state income taxes.
Minority interest expense remained unchanged at $4.3 million in the first
quarter of 1999 and 1998.
Liquidity and Capital Resources
Consolidated working capital was $504.4 million at April 3, 1999, compared
with $746.0 million at January 2, 1999. Included in working capital are cash and
cash equivalents of $443.1 million at April 3, 1999, compared with $553.8
million at January 2, 1999. Of the $443.1 million balance at April 3, 1999,
$367.3 million was held by the Company's majority-owned subsidiaries and the
balance was held by the Company and its wholly owned subsidiaries. Cash provided
by operating activities in the first quarter of 1999 was $31.1 million. The
Company generated $13.2 million of cash from a decrease in accounts receivable,
principally in the Analytical segment resulting primarily from lower revenues in
the first quarter of 1999. Cash of $9.1 million was used to fund an increase in
inventories, primarily in the Analytical segment due to the replenishment of
year-end inventory levels, lower revenues, and a build-up of inventory in
preparation of new product releases. The Company used $12.6 million of cash to
reduce other current liabilities, primarily as a result of the usage of
restructuring and acquisition reserves and, to a lesser extent, a decrease in
deferred revenue in the Process Control segment due to the shipment of products
for which advance payments had been received in the fourth quarter of 1998.
At April 3, 1999, $166.5 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, for activities including 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.
14
<PAGE>
Liquidity and Capital Resources (continued)
The Company's investing activities used $325.9 million of cash in the
first quarter of 1999. The Company expended $323.0 million, net of cash
acquired, for acquisitions, including the acquisition of Spectra-Physics (Note
5). In addition, the Company expended $9.2 million for purchases of property,
plant, and equipment and received proceeds of $4.8 million from the sale of
property, plant, and equipment in the first quarter of 1999. During the
remainder of 1999, the Company plans to make expenditures of approximately $56
million for property, plant, and equipment.
The Company's financing activities provided $190.1 million of cash in the
first quarter of 1999. To finance the acquisition of Spectra-Physics, the
Company borrowed $200.0 million from Thermo Electron pursuant to a promissory
note due August 1999 (Note 5). The Company intends to refinance this obligation
through borrowings from external sources, however, there can be no assurance
that the Company can obtain debt financing on acceptable terms or at all. Thermo
Electron has indicated that it will seek repayment of this note in 1999 only to
the extent the Company's cash flow permits such repayment. The Company used
$13.1 million of cash for the repayment of long-term obligations, including the
repayment by ThermoSpectra of $10.0 million of borrowings from Thermo Electron.
During the first quarter of 1999, certain divisions of Thermo BioAnalysis
borrowed $14.5 million of debt denominated in foreign currencies of countries
where the divisions operate, primarily to fund acquisitions.
During the first quarter of 1999, certain of the Company's majority-owned
subsidiaries expended $12.0 million to repurchase common stock and debentures.
These purchases were made pursuant to authorizations by the Boards of Directors
of certain majority-owned subsidiaries. As of April 3, 1999, $10.3 million
remained under the Company's majority-owned subsidiaries' authorizations to
purchase their securities.
As of May 13, 1999, the Company and its majority-owned subsidiaries had
agreements or nonbinding letters of intent to acquire new businesses totaling
approximately $19 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.
Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 date recognition issue
on the Company's internal business systems, products, and operations. The
Company's year 2000 initiatives include (i) testing and upgrading significant
information technology systems and facilities; (ii) testing and developing
upgrades, if necessary, for the Company's current products and certain
discontinued products; (iii) assessing the year 2000 readiness of key suppliers
and vendors; and (iv) developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related
15
<PAGE>
Year 2000 (continued)
equipment for year 2000 compliance. The Company also evaluated the potential
year 2000 impact on its critical facilities. The Company's efforts included
testing the year 2000 readiness of its manufacturing, utility, and
telecommunication systems at its critical facilities. The Company is currently
in phase two of its program, during which any noncompliant systems or facilities
that were identified during phase one are prioritized and remediated. Based on
its evaluations of its critical facilities, the Company does not believe any
material upgrades or modifications are required. The Company is currently
upgrading or replacing its material noncompliant information technology systems,
and this process was approximately 75% complete as of April 3, 1999. In many
cases, such upgrades or replacements are being made in the ordinary course of
business, without accelerating previously scheduled upgrades or replacements.
The Company expects that all of its material information technology systems and
critical facilities will be year 2000 compliant by October 1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all of such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate third-party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company has
identified all of the year 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 certain of such products. The Company is focusing its efforts on
products that are still under warranty, early in their expected life, and/or
subject to U.S. Food and Drug Administration considerations related to the year
2000. The Company is offering upgrades and/or identifying potential solutions
where reasonably practicable.
The Company is in the process of identifying and contacting suppliers and
vendors 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 has distributed questionnaires relating to year 2000
compliance to its significant suppliers and vendors. To date, no significant
supplier or vendor has indicated that it believes its business operations will
be materially disrupted by the year 2000 issue. The Company has started to
follow-up and monitor the year 2000 compliance progress of significant suppliers
and vendors that indicate that they are not year 2000 compliant, or that do not
respond to the Company's questionnaires. The Company has not completed the
majority of its assessment of third-party risk, and expects to be substantially
completed by September 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred expenses to third parties (external costs)
related to year 2000 issues of approximately $3.2 million as of April 3, 1999,
and the total external costs of year 2000 remediation are expected to be
approximately $5.3 million. Year 2000 costs were funded from working capital.
All internal costs and related external costs, other than capital additions
related to year 2000 remediation, have been and will continue to be expensed as
incurred.
The Company does not track the internal costs incurred for its year 2000
compliance project. Such costs are principally the related payroll costs for its
information systems group.
16
<PAGE>
Year 2000 (continued)
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's material
suppliers or vendors experience business disruptions due to the year 2000 issue
and are unable to provide materials and services to the Company on time. The
Company's operations could be delayed or temporarily shut down, and it could be
unable to meet its obligations to customers in a timely fashion. The Company's
business, operations, and financial condition could be adversely affected in
amounts that cannot be reasonably estimated at this time. If the Company
believes that any of its key suppliers or vendors may not be year 2000 ready, it
will seek to identify and secure other suppliers or vendors as part of its
contingency plan.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. As discussed above, if any of
the Company's material suppliers or vendors experience business disruptions due
to year 2000 issues, the Company might also be materially adversely affected. If
any countries in which the Company operates experience significant year 2000
disruption, the Company could also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a material adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices has not changed materially
from year-end 1998.
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 January 8, 1999, the Company filed a Current Report on Form 8-K for
events occurring on January 7, 1999, with respect to its tender offer for all of
the outstanding shares of Spectra-Physics AB.
On March 9, 1999, the Company filed a Current Report on Form 8-K for
events occurring on February 22, 1999, announcing that the Company had purchased
and received acceptances for 98% of all outstanding Spectra-Physics AB shares at
a price of approximately 160 Swedish krona per share.
17
<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 13th day of May 1999.
THERMO INSTRUMENT SYSTEMS INC.
/s/ Paul F. Kelleher
--------------------------
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
--------------------------
Theo Melas-Kyriazi
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27.1 Financial Data Schedule for the period ended April 3, 1999.
27.2 Amended Financial Data Schedule for the year ended January 2, 1999.
</TABLE>
<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 PERIOD ENDED
APRIL 3, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> APR-03-1999
<CASH> 443,069
<SECURITIES> 0
<RECEIVABLES> 498,899
<ALLOWANCES> 34,157
<INVENTORY> 359,064
<CURRENT-ASSETS> 1,394,481
<PP&E> 416,378
<DEPRECIATION> 130,587
<TOTAL-ASSETS> 2,904,927
<CURRENT-LIABILITIES> 890,076
<BONDS> 615,987
0
0
<COMMON> 12,288
<OTHER-SE> 918,617
<TOTAL-LIABILITY-AND-EQUITY> 2,904,927
<SALES> 463,579
<TOTAL-REVENUES> 463,579
<CGS> 252,123
<TOTAL-COSTS> 252,123
<OTHER-EXPENSES> 35,436
<LOSS-PROVISION> 943
<INTEREST-EXPENSE> 12,185
<INCOME-PRETAX> 39,147
<INCOME-TAX> 16,008
<INCOME-CONTINUING> 18,885
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,885
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.15
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO
INSTRUMENT SYSTEMS INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY
2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> JAN-02-1999
<CASH> 553,825
<SECURITIES> 0
<RECEIVABLES> 431,156
<ALLOWANCES> 23,726
<INVENTORY> 276,589
<CURRENT-ASSETS> 1,333,584
<PP&E> 344,368
<DEPRECIATION> 124,137
<TOTAL-ASSETS> 2,565,774
<CURRENT-LIABILITIES> 587,629
<BONDS> 599,643
0
0
<COMMON> 12,288
<OTHER-SE> 932,719
<TOTAL-LIABILITY-AND-EQUITY> 2,565,774
<SALES> 1,659,981
<TOTAL-REVENUES> 1,659,981
<CGS> 889,575
<TOTAL-COSTS> 889,575
<OTHER-EXPENSES> 137,126
<LOSS-PROVISION> 4,169
<INTEREST-EXPENSE> 45,458
<INCOME-PRETAX> 193,916
<INCOME-TAX> 74,674
<INCOME-CONTINUING> 103,565
<DISCONTINUED> 0
<EXTRAORDINARY> 519
<CHANGES> 0
<NET-INCOME> 104,084
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.79
</TABLE>
