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 2, 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 October 29, 1999
Common Stock, $.10 par value 119,241,067
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
October 2, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
<S> <C> <C>
Cash and cash equivalents (includes $408,490 under repurchase agreements $ 199,925 $ 553,825
with parent company in fiscal 1998)
Advance to affiliate (Note 8) 217,472 -
Accounts receivable, less allowances of $34,036 and $23,726 457,705 407,430
Unbilled contract costs and fees 13,938 13,114
Inventories:
Raw materials and supplies 157,334 118,286
Work in process 67,704 55,086
Finished goods 123,396 103,217
Prepaid and refundable income taxes 78,107 62,921
Other current assets 37,500 19,705
---------- ----------
1,353,081 1,333,584
---------- ----------
Property, Plant, and Equipment, at Cost 435,144 344,368
Less: Accumulated depreciation and amortization 150,065 124,137
---------- ----------
285,079 220,231
---------- ----------
Other Assets 158,960 73,705
---------- ----------
Cost in Excess of Net Assets of Acquired Companies (Note 5) 1,067,716 938,254
---------- ----------
$2,864,836 $2,565,774
========== ==========
2
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 2, January 2,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Short-term obligations and current maturities of long-term $ 167,776 $ 70,772
obligations (includes advance from affiliate of $12,300; Note 8)
Short-term obligations and current maturities of long-term 338,800 60,000
obligations, due to parent company (Note 5)
Accounts payable 115,505 101,009
Accrued payroll and employee benefits 65,906 59,649
Accrued income taxes 61,837 59,984
Accrued installation and warranty expenses 43,387 39,958
Deferred revenue 43,902 46,354
Other accrued expenses (Notes 5 and 6) 182,303 135,708
Due to parent company and affiliated companies 7,468 14,195
---------- ----------
1,026,884 587,629
---------- ----------
Deferred Income Taxes 42,562 29,278
---------- ----------
Other Deferred Items 39,636 31,056
---------- ----------
Long-term Obligations:
Senior convertible obligations (Note 9) 172,500 327,042
Subordinated convertible obligations 318,985 389,436
Other 45,482 26,965
---------- ----------
536,967 743,443
---------- ----------
Minority Interest 249,551 229,361
---------- ----------
Shareholders' Investment:
Common stock, $.10 par value, 250,000,000 shares authorized; 12,356 12,288
123,564,702 and 122,879,889 shares issued
Capital in excess of par value 337,901 331,621
Retained earnings 731,087 675,983
Treasury stock at cost, 4,323,635 and 3,603,358 shares (70,472) (63,671)
Deferred compensation (432) -
Accumulated other comprehensive items (Note 2) (41,204) (11,214)
---------- ----------
969,236 945,007
---------- ----------
$2,864,836 $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
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Revenues $523,210 $407,010
-------- --------
Costs and Operating Expenses:
Cost of revenues 282,662 230,234
Selling, general, and administrative expenses 145,327 110,905
Research and development expenses 39,847 28,089
Restructuring and other nonrecurring costs, net (Note 6) 144 21,871
-------- --------
467,980 391,099
-------- --------
Operating Income 55,230 15,911
Interest Income 5,901 8,688
Interest Expense (includes $4,610 and $2,502 to parent company) (13,708) (11,108)
Equity in Earnings of Unconsolidated Subsidiaries (Note 5) 705 -
Gain on Sale of Investments 160 713
Gain on Issuance of Stock by Subsidiary - (2,431)
Other Expense (2,456) -
-------- --------
Income Before Provision for Income Taxes, Minority Interest, and 45,832 11,773
Extraordinary Item
Provision for Income Taxes 18,791 8,000
Minority Interest Expense 3,371 891
-------- --------
Income Before Extraordinary Item 23,670 2,882
Extraordinary Item, Net of Provision for Income Taxes and Minority - 195
Interest of $143
-------- --------
Net Income $ 23,670 $ 3,077
======== ========
Earnings per Share (Note 3):
Basic $ .20 $ .03
======== ========
Diluted $ .18 $ .03
======== ========
Weighted Average Shares (Note 3):
Basic 119,742 120,399
======== ========
Diluted 130,685 120,974
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- -------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
Revenues $1,522,423 $1,210,345
---------- ----------
Costs and Operating Expenses:
Cost of revenues 824,538 649,118
Selling, general, and administrative expenses 428,598 324,576
Research and development expenses 115,288 84,349
Restructuring and other nonrecurring costs, net (Note 6) 1,543 23,294
---------- ----------
1,369,967 1,081,337
---------- ----------
Operating Income 152,456 129,008
Interest Income 17,599 26,238
Interest Expense (includes $12,173 and $8,956 to parent company) (39,364) (34,735)
Equity in Losses of Unconsolidated Subsidiaries (Notes 5 and 6) (10,229) -
Gain on Sale of Investments 1,116 713
Gain on Issuance of Stock by Subsidiaries - 18,582
Other Expense (3,386) -
---------- ----------
Income Before Provision for Income Taxes, Minority Interest, and 118,192 139,806
Extraordinary Item
Provision for Income Taxes 52,012 50,948
Minority Interest Expense 11,076 10,525
---------- ----------
Income Before Extraordinary Item 55,104 78,333
Extraordinary Item, Net of Provision for Income Taxes and Minority - 195
Interest of $143
---------- ----------
Net Income $ 55,104 $ 78,528
========== ==========
Earnings per Share (Note 3):
Basic $ .46 $ .65
========== ==========
Diluted $ .43 $ .60
========== ==========
Weighted Average Shares (Note 3):
Basic 119,464 121,547
========== ==========
Diluted 130,897 133,900
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
<S> <C> <C>
Net income $ 55,104 $ 78,528
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 60,614 47,011
Noncash restructuring and nonrecurring costs (Note 6) 109 2,204
Provision for losses on accounts receivable 5,471 1,508
Equity in losses of unconsolidated subsidiaries (Notes 5 and 6) 10,229 -
Gain on sale of investments (1,116) (713)
Gain on issuance of stock by subsidiaries - (18,582)
Minority interest expense 11,076 10,525
Extraordinary item, net of minority interest expense - (320)
Decrease in deferred income taxes (306)
Other noncash expenses 12,549 13,713
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable 9,096 19,062
Inventories (4,194) (15,515)
Other current assets (1,619) (2,349)
Accounts payable (9,613) (9,195)
Other current liabilities (42,748) (15,048)
Other (2,597) (1,739)
---------- ---------
Net cash provided by operating activities 102,055 109,090
---------- ---------
Investing Activities:
Acquisitions, net of cash acquired (Note 5) (339,865) (79,063)
Refunds of acquisition purchase price (Note 5) 5,169 -
Payment to affiliated company for acquired business - (19,117)
Advances to affiliate, net (Note 8) (217,351) -
Purchases of property, plant, and equipment (33,750) (18,901)
Proceeds from sale of property, plant, and equipment 7,793 7,802
Proceeds from sale and maturities of available-for-sale investments 9,647 2,769
Other, net 1,229 (6,283)
---------- ---------
Net cash used in investing activities $ (567,128) $(112,793)
---------- ---------
6
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THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands) 1999 1998
- ------------------------------------------------------------------------- --------- ----------- ----------
Financing Activities:
Net proceeds from issuance of Company and subsidiary common stock $ 1,796 $ 112,638
Net proceeds from issuance of subordinated convertible debentures - 244,226
Repurchase of Company and subsidiary common stock and subordinated (26,779) (87,861)
convertible debentures
Net proceeds from issuance of short-term obligation to parent
company (Note 5) 200,000 -
Repayment of short- and long-term obligations to parent company (Note 5) (65,000) (160,000)
Increase (decrease) in short-term obligations, net 12,664 (10,149)
Proceeds from issuance of long-term obligations 14,528 -
Repayment of long-term obligations (18,210) (2,085)
---------- ---------
Net cash provided by financing activities 118,999 96,769
---------- ---------
Exchange Rate Effect on Cash (7,826) 4,127
---------- ---------
Increase (Decrease) in Cash and Cash Equivalents (353,900) 97,193
Cash and Cash Equivalents at Beginning of Period 553,825 468,848
---------- ---------
Cash and Cash Equivalents at End of Period $ 199,925 $ 566,041
========== =========
Noncash Activities (Note 5):
Fair value of assets of acquired companies $ 598,031 $ 114,774
Cash paid for acquired companies (382,218) (82,424)
Issuance of short- and long-term obligations for acquired company (14,852) -
Cash to be paid for remaining outstanding shares of tender offer (2,012) -
---------- ---------
Liabilities assumed of acquired companies $ 198,949 $ 32,350
========== =========
Conversions of Company and subsidiary convertible obligations $ 9,277 $ 7,562
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
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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 October 2, 1999, the
results of operations for the three- and nine-month periods ended October 2,
1999, and October 3, 1998, and the cash flows for the nine-month periods ended
October 2, 1999, and October 3, 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 third quarter of 1999 and 1998, the
Company's comprehensive income totaled $41.2 million and $23.6 million,
respectively. During the first nine months of 1999 and 1998, the Company's
comprehensive income totaled $29.9 million and $98.5 million, respectively.
3. Earnings per Share
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Basic and diluted earnings per share were calculated as follows:
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------ ---------- ----------- ---------- -----------
Basic
Net Income $23,670 $ 3,077 $55,104 $ 78,528
------- -------- ------- --------
Weighted Average Shares 119,742 120,399 119,464 121,547
------- -------- ------- --------
Basic Earnings per Share $ .20 $ .03 $ .46 $ .65
======= ======== ======= ========
8
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3. Earnings per Share (continued)
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Diluted
Net Income $23,670 $ 3,077 $55,104 $ 78,528
Effect of:
Convertible obligations 816 - 2,525 2,568
Majority-owned subsidiaries' dilutive securities (762) (24) (1,978) (1,405)
------- -------- ------- --------
Income Available to Common Shareholders, as Adjusted $23,724 $ 3,053 $55,651 $ 79,691
------- -------- ------- --------
Weighted Average Shares 119,742 120,399 119,464 121,547
Effect of:
Convertible obligations 10,891 - 11,236 11,426
Stock options 52 575 197 927
------- -------- ------- --------
Weighted Average Shares, as Adjusted 130,685 120,974 130,897 133,900
------- -------- ------- --------
Diluted Earnings per Share $ .18 $ .03 $ .43 $ .60
======= ======== ======= ========
The computation of diluted earnings per share for each period excludes the
effect of assuming the conversion of certain of the Company's convertible
obligations because the effect would be antidilutive. As of October 2, 1999, the
Company's $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, were
excluded from the calculation of diluted earnings per share.
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 2, 1999, there
were 3,235,000 of such options outstanding, with exercise prices ranging from
$13.26 to $31.35 per share.
During the third quarter of 1998, the Company recorded an extraordinary
gain in connection with the repurchase of subsidiary subordinated convertible
debentures, which increased basic and diluted earnings per share by $.01 in the
three- and nine-month periods ended October 3, 1998.
9
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4. Business Segment Information
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands) 1999 1998 1999 1998
- ----------------------------------------------------- ------------ ------------- ------------ ------------
Revenues:
<S> <C> <C> <C> <C>
Analytical $ 218,228 $ 210,311 $ 645,320 $ 635,627
Life Sciences 66,468 51,110 205,088 153,756
Process Control 52,855 60,196 155,686 164,875
Industrial 189,281 89,084 527,053 268,918
Intersegment sales eliminations (a) (3,622) (3,691) (10,724) (12,831)
--------- ---------- ---------- ----------
$ 523,210 $ 407,010 $1,522,423 $1,210,345
========= ========== ========== ==========
Income Before Provision for Income Taxes,
Minority Interest, and Extraordinary Item:
Analytical (b) $ 35,012 $ 17,098 $ 100,689 $ 88,313
Life Sciences (c) 5,843 154 19,805 12,131
Process Control (d) 2,112 3,084 7,438 15,900
Industrial (e) 12,800 (3,851) 27,298 13,084
Corporate (f) (537) (574) (2,774) (420)
--------- ---------- ---------- ----------
Total operating income 55,230 15,911 152,456 129,008
Interest and other income (expense), net(g) (9,398) (4,138) (34,264) 10,798
--------- ---------- ---------- ----------
$ 45,832 $ 11,773 $ 118,192 $ 139,806
========= ========== ========= ==========
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Includes restructuring and related costs of $0.1 million and $0.8 million in
the three- and nine-month periods ended October 2, 1999, respectively, and
$15.5 million in the three- and nine-month periods ended October 3, 1998.
(c) Includes restructuring and related costs of $4.1 million in the three- and
nine-month periods ended October 3, 1998.
(d) Includes reversals of previously recorded restructuring costs of $0.1
million and $0.2 million in the three- and nine-month periods ended October
2, 1999, and restructuring costs of $1.8 million in the three- and
nine-month periods ended October 3, 1998.
(e) Includes restructuring costs of $0.1 million and $0.9 million in the three-
and nine-month periods ended October 2, 1999, respectively, and
restructuring and other nonrecurring costs of $9.1 million and $10.5 million
in the three- and nine-month periods ended October 3, 1998, respectively.
(f) Primarily corporate general and administrative expenses.
(g) Includes equity in losses of unconsolidated subsidiaries of $10.2 million in
the nine-month period ended October 2, 1999 (Notes 5 and 6).
During the first quarter of 1999, the Company acquired Spectra-Physics AB
(Note 5), which increased total assets of the Industrial segment by $528.0
million.
10
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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, certain shares of which were acquired in the second and third
quarters of 1999. The aggregate purchase price was approximately $351.0 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
October 2, 1999, includes $2.0 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. In August 1999, the Company repaid $50.0
million of the principal amount outstanding under the promissory note and
refinanced the balance of the note through borrowings from Thermo Electron due
February 2000. The borrowings bear interest at a rate equal to the 30-day Dealer
Commercial Paper Rate (DCP Rate) plus 150 basis points, set at the beginning of
each month, provided such rate shall be reduced to the DCP Rate plus 50 basis
points to the extent of any funds invested by the Company's majority-owned
subsidiaries in the domestic cash management arrangement with Thermo Electron
(Note 8).
During the first nine months of 1999, the Company's majority-owned
subsidiaries made several other acquisitions for approximately $28.0 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 $173.4 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.
11
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5. Acquisitions (continued)
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.
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<S> <C> <C> <C>
Three Nine
Months Ended Months Ended
October 3, October 2, October 3,
(In thousands except per share amounts) 1998 1999 1998
- ----------------------------------------------------- ------------------------- ------------ -------------
Revenues $ 514,090 $1,561,712 $1,538,994
Net Income 4,868 49,185 76,514
Earnings per Share:
Basic .04 .41 .63
Diluted .04 .38 .58
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.
In July 1998, the Company's Metrika Systems Corporation subsidiary
acquired the stock of Honeywell-Measurex Data Measurement Corporation, a wholly
owned subsidiary of Honeywell-Measurex Corporation. During the first quarter of
1999, Metrika Systems received a refund of $0.6 million related to a previously
agreed upon purchase price adjustment in connection with the acquisition. Also
during the first quarter of 1999, Metrika Systems and Honeywell negotiated a
post-closing adjustment under the terms of the purchase agreement pertaining to
the determination of the amount of certain assets and liabilities at the date of
acquisition for which Honeywell had maintained responsibility. This negotiation
resulted in an amount due to Metrika Systems of $7.8 million, which is payable
to Metrika Systems in three installments from April through December 1999, of
which $4.0 million was received as of October 2, 1999. A corresponding increase
in allowance for bad debts and certain liability accounts has been recorded to
reflect the transfer of responsibility for these matters to Metrika Systems.
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 October 2, 1999, primarily included
completion of planned severances and abandonment of excess facilities for
certain acquisitions completed during the last 12 months.
12
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5. Acquisitions (continued)
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<CAPTION>
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 14,382 1,716 1,249 17,347
Usage (6,495) (2,030) (1,188) (9,713)
Decrease due to finalization of restructuring (725) (90) (265) (1,080)
plan, recorded as a decrease to cost in
excess of net assets of acquired companies
Currency translation (206) (256) (38) (500)
-------- -------- -------- -------
Balance at October 2, 1999 $ 10,762 $ 11,022 $ 773 $22,557
======== ======== ======== =======
In connection with the acquisition of Spectra-Physics, the Company
acquired 4,162,000 shares of FLIR Systems, Inc. common stock. FLIR designs,
manufactures, and markets thermal imaging and broadcast camera systems that
detect infrared radiation or heat emitted directly by all objects and materials.
The Company accounts for its investment in FLIR using the equity method with a
one quarter lag to ensure the availability of FLIR's operating results in time
to enable the Company to include its pro rata share of FLIR's results with its
own. During FLIR's first calendar quarter of 1999, FLIR recorded a loss in
connection with a pooling-of-interests transaction and certain restructuring
actions. The Company has recorded its pro rata share of this loss, $5.1 million,
in equity in losses of unconsolidated subsidiaries in the accompanying statement
of income for the nine months ended October 2, 1999. FLIR reported profitable
results subsequent to its first quarter. In addition, as a result of the pooling
consummated by FLIR and related issuance of FLIR shares in March 1999, the
Company's pro rata share of FLIR's equity decreased to 29.4% from 34.6% prior to
the transaction. This decrease totaled $6.0 million and has been recorded as a
nonrecurring loss in equity in losses of unconsolidated subsidiaries in the
accompanying statement of income for the nine months ended October 2, 1999,
pursuant to Securities and Exchange Commission Staff Accounting Bulletin 51.
6. Restructuring and Other Nonrecurring 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 729 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. 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. During the second quarter of 1999, the Company terminated
47 additional employees and recorded additional restructuring costs of $0.7
million. The restructuring costs consist of $0.4 million for business relocation
and facility-closing costs, $0.2 million related to severance for 28 employees,
and $0.1 million for the write-off of fixed assets no longer of use. In
addition, the Company determined that 17 employees would not be terminated and,
accordingly, reversed $0.6 million of previously established restructuring
reserves. During the third quarter of 1999, the Company terminated 23 additional
employees and recorded additional restructuring costs of $0.5 million. The
restructuring costs consist of $0.4 million for business relocation and
facility-closing costs and $0.1 million of costs related to severance for 4
employees. In addition, the Company settled certain severance matters for less
than what had been accrued and, as a result, reversed $0.3 million of previously
established restructuring reserves. The Company expects to incur additional
restructuring costs totaling $0.1 million in the fourth
13
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6. Restructuring and Other Nonrecurring Costs (continued)
quarter of 1999, which are not permitted as charges until incurred pursuant to
the requirements of EITF 94-3. 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 $ 9,281 $ 1,262 $ 682 $11,225
Charged to expense 611 1,063 652 2,326
Reversal of reserve (876) (16) - (892)
Usage (6,559) (2,012) (974) (9,545)
Currency translation (377) 26 (66) (417)
------- ------- ------- -------
Balance at October 2, 1999 $ 2,080 $ 323 $ 294 $ 2,697
======= ======= ======= =======
During the second quarter of 1999, the Company recorded a loss of $11.1
million in equity in losses of unconsolidated subsidiaries, which resulted from
restructuring charges following a pooling at FLIR as well as from a decrease in
the Company's pro rata share of FLIR as a result of the pooling. The Company's
investment in FLIR was acquired in connection with the Company's acquisition of
Spectra-Physics in February 1999 and is accounted for using the equity method
(Note 5).
7. Proposed Reorganization
During 1998, Thermo Electron announced a proposed reorganization, which it
amended in May 1999, involving certain of Thermo Electron's subsidiaries,
including the Company. As part of this reorganization, the Company's
ThermoSpectra Corporation subsidiary announced in May 1999 that it had entered
into a definitive agreement and plan of merger with the Company pursuant to
which the Company would acquire all of the outstanding shares of common stock of
ThermoSpectra that are held by the public shareholders in exchange for $16.00
per share in cash. Following the merger, ThermoSpectra's common stock would
cease to be publicly traded. This transaction is expected to be completed on or
about December 9, 1999. In addition, in July 1999, the Company's Thermo Vision
Corporation subsidiary announced that it had entered into a definitive agreement
and plan of merger with the Company pursuant to which the Company would acquire
all of the outstanding shares of common stock of Thermo Vision that are held by
the public shareholders in exchange for $7.00 per share in cash. Following the
merger, Thermo Vision's common stock would cease to be publicly traded. The
stockholders' meeting for this transaction is expected to be held in the first
quarter of 2000.
8. Cash Management Arrangements
Effective June 1, 1999, the Company and Thermo Electron commenced use of a
new domestic cash management arrangement. Under the new arrangement, amounts
advanced to Thermo Electron by the Company for domestic cash management purposes
bear interest at the 30-day DCP Rate plus 50 basis points, set at the beginning
of each month. Thermo Electron is contractually required to maintain cash, cash
equivalents, and/or immediately available bank lines of credit equal to at least
50% of all funds invested under this cash management arrangement by all Thermo
Electron subsidiaries other than wholly owned subsidiaries. The Company has the
contractual right to withdraw its funds invested in the cash management
arrangement upon 30 days' prior notice.
14
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8. Cash Management Arrangements (continued)
In addition, the Company's European-based subsidiaries participate in a
new cash management arrangement with a wholly owned subsidiary of Thermo
Electron on terms similar to the domestic cash management arrangement.
Amounts invested in or borrowed under these arrangements are included in
"advance to affiliate" or "advance from affiliate," respectively, in the
accompanying balance sheet.
9. Redemption of Convertible Debentures
In August 1999, the Company called for redemption on September 3, 1999,
all of the outstanding $14.5 million principal amount of its 3 3/4% senior
convertible debentures due 2000. During the three months ended October 2, 1999,
$9.3 million principal amount of the debentures was converted into the Company's
common stock and the remaining balance was repaid.
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 biomolecular instruments and consumables; clinical laboratory equipment
and supplies, including 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, in addition to laser-based
instrumentation systems, primarily for the process control, industrial
measurement, construction, research, commercial, and government markets.
15
<PAGE>
Overview (continued)
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.
Results of Operations
Third Quarter 1999 Compared With Third Quarter 1998
Revenues increased $116.2 million to $523.2 million in the third quarter
of 1999 from $407.0 million in the third quarter of 1998, primarily due to
acquisitions. Revenues increased $121.2 million due to 1999 acquisitions and the
inclusion of revenues from 1998 acquisitions for the full period. The increase
in revenues was offset in part by a decrease of $6.3 million due to the
unfavorable effects of currency translation as a result of the strengthening of
the U.S. dollar relative to foreign currencies in countries in which the Company
operates. Excluding the impact of acquisitions and currency translation,
revenues increased $1.3 million.
Analytical segment revenues increased to $218.2 million in the third
quarter of 1999 from $210.3 million in the third quarter of 1998. Revenues from
existing operations increased at Thermo Optek, primarily due to an increase in
revenues of spectrometry instruments sold by certain elemental analysis
businesses and increased shipments of grating components. In addition, revenues
increased at ThermoQuest, primarily due to an increase in revenues in Europe in
certain product lines. Acquisitions added revenues of $1.7 million in the third
quarter of 1999. These increases were offset in part by a decrease in revenues
in North America in certain of ThermoQuest's product lines and a decrease in
revenues of $3.0 million due to the unfavorable effects of currency translation.
Life Sciences segment revenues increased to $66.5 million in the third
quarter of 1999 from $51.1 million in the third quarter of 1998, primarily due
to the inclusion of $12.0 million in revenues from acquisitions and, to a lesser
extent, higher demand for certain of the segment's products and the expansion of
sales and distribution channels into new markets. The unfavorable effects of
currency translation decreased revenues by $1.3 million.
Process Control segment revenues decreased to $52.9 million in the third
quarter of 1999 from $60.2 million in the third quarter of 1998, primarily due
to lower sales at existing operations as a result of reduced discretionary
capital spending in the oil and gas production sector and, to a lesser extent,
reduced spending by raw-material producers, particularly in the cement sector.
In addition, the unfavorable effects of currency translation decreased revenues
by $0.8 million. These decreases were offset in part by the inclusion of $1.7
million in revenues from acquisitions.
Industrial segment revenues increased to $189.3 million in the third
quarter of 1999 from $89.1 million in the third quarter of 1998. An increase in
revenues of $105.8 million from acquisitions, primarily Spectra-Physics in
February 1999 (Note 5), was offset in part by lower revenues from existing
businesses. Revenues from existing operations decreased primarily due to lower
demand in Europe. In addition, the unfavorable effects of currency translation
decreased revenues by $1.2 million.
The gross profit margin increased to 46% in the third quarter of 1999 from
43% in the third quarter of 1998, primarily due to the inclusion in the 1998
period of inventory write-downs of $8.6 million for discontinued product lines
and excess inventories caused by lower product demand. Excluding the inventory
write-downs in 1998, the gross profit margin was 46%.
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in the third quarter of 1999 from 27% in the third quarter of
1998, primarily due to the inclusion of higher selling, general, and
administrative expenses as a percentage of revenues at Spectra-Physics and, to a
lesser extent, other acquired businesses.
16
<PAGE>
Third Quarter 1999 Compared With Third Quarter 1998 (continued)
Research and development expenses increased to $39.8 million in the third
quarter of 1999 from $28.1 million in the third quarter of 1998, primarily due
to the inclusion of expenses from Spectra-Physics and, to a lesser extent, other
acquired businesses. Research and development expenses as a percentage of
revenues were 7.6% in 1999, compared with 6.9% in 1998. Excluding the expenses
at acquired businesses, research and development expenses as a percentage of
revenues were 7.2% in 1999.
In connection with the restructuring actions undertaken by the Company in
1998, the Company incurred additional costs of $0.1 million in the third quarter
of 1999 (Note 6). In connection with the closing of certain facilities, the
Company expects to incur approximately $0.1 million of additional costs in the
fourth quarter of 1999. During the third quarter of 1998, the Company recorded
restructuring costs of $21.9 million in addition to the inventory write-downs
discussed above. The restructuring costs consisted of $17.2 million for
severance for approximately 729 employees, $4.3 million for facility-closing
costs, and $0.4 million for the loss on the sale of a division.
Interest income decreased to $5.9 million in the third quarter of 1999
from $8.7 million in the third quarter of 1998, primarily due to a reduction in
invested balances as a result of acquisitions, including the acquisition of
Spectra-Physics in February 1999, and, to a lesser extent, the repurchase of
Company and subsidiary common stock and debentures primarily in the second half
of 1998 and the first quarter of 1999. These decreases were offset in part by
the inclusion of interest income from Spectra-Physics.
Interest expense increased to $13.7 million in the third quarter of 1999
from $11.1 million in the third quarter of 1998, primarily due to borrowings
from Thermo Electron Corporation 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.
Equity in earnings of unconsolidated subsidiaries of $0.7 million in the
third quarter of 1999 primarily relates to Spectra-Physics' minority investment
in FLIR Systems, Inc. (Note 5).
Gain on sale of investments in the third quarter of 1999 primarily
resulted from the sale of an available-for-sale investment. Gain on sale of
investments in the third quarter of 1998 primarily resulted from the sale of
shares of common stock of SteriGenics International, Inc. by ThermoSpectra,
which it obtained in connection with the 1997 sale of one of its product lines.
In the third quarter of 1998, the Company reversed $2.4 million of
previously recognized gains as a result of a repurchase by one of its
subsidiaries of its common stock.
Other expense of $2.5 million in the third quarter of 1999 represents net
foreign currency exchange losses. As part of the Company's acquisition of
Spectra Physics, the Company acquired a majority interest in Spectra-Physics
Lasers, Inc. (SPLI) a U.S. publicly traded company. Prior to its acquisition by
the Company, SPLI elected early adoption of Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivatives." The Company has not
elected early adoption of SFAS No. 133, although it must adopt the statement no
later than 2001. Under SFAS No. 133, SPLI is permitted under certain conditions
to enter foreign exchange contracts to hedge anticipated transactions without
recording gains and losses on such contracts in income. Such contracts are
deemed speculative hedges under SFAS No. 52, "Foreign Currency Translation," and
must be marked to market with the resulting gain or loss reported as a component
of the Company's results of operations. During the third quarter of 1999, the
Company recorded a loss on foreign exchange contracts entered by SPLI of $2.7
million. The Company's results may continue to be affected by such transactions
in the future.
17
<PAGE>
Third Quarter 1999 Compared With Third Quarter 1998 (continued)
Excluding the impact of a nontaxable reversal of a gain on issuance of
stock by a subsidiary in the third quarter of 1998, the effective tax rate was
41% in the third quarter of 1999, compared with 56% in the third quarter of
1998. The effective tax rate exceeded the statutory federal income tax rate in
both periods 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. The effective tax rate decreased primarily due to the
larger relative effect of nondeductible expenses in the 1998 period due to lower
income as a result of restructuring and related costs recorded during the third
quarter of 1998.
Minority interest expense increased to $3.4 million in the third quarter
of 1999 from $0.9 million in the third quarter of 1998, primarily due to lower
earnings at the Company's majority-owned subsidiaries in the 1998 period as a
result of restructuring and related costs recorded in the third quarter of 1998.
During the third quarter of 1998, a majority-owned subsidiary of the
Company repurchased a portion of its subordinated convertible debentures
resulting in an extraordinary gain, net of taxes and minority interest, of $0.2
million.
First Nine Months 1999 Compared With First Nine Months 1998
Revenues increased $312.1 million to $1,522.4 million in the first nine
months of 1999 from $1,210.3 million in the first nine months of 1998, primarily
due to acquisitions. Revenues increased $364.9 million due to 1999 acquisitions
and the inclusion of revenues from 1998 acquisitions for the full period. The
increase in revenues was offset in part by a decrease of $4.4 million due to the
unfavorable effects of currency translation as a result of the strengthening of
the U.S. dollar relative to foreign currencies in countries in which the Company
operates. Excluding the impact of acquisitions and currency translation,
revenues decreased $48.4 million.
Analytical segment revenues increased to $645.3 million in the first nine
months of 1999 from $635.6 million in the first nine months of 1998, primarily
due to the inclusion of $7.1 million in revenues from acquisitions and an
increase in revenues in Europe at ThermoQuest in certain product lines. These
increases were offset in part by a decrease in revenues primarily due to reduced
demand for components sold into the excimer laser market and increased price
competition at certain elemental analysis businesses of Thermo Optek. In
addition, the unfavorable effects of currency translation decreased revenues by
$1.6 million.
Life Sciences segment revenues increased to $205.1 million in the first
nine months of 1999 from $153.8 million in the first nine months of 1998,
primarily due to the inclusion of $43.8 million in revenues from acquisitions
and, to a lesser extent, higher demand for certain of the segment's products and
the expansion of sales and distribution channels into new markets. In addition,
the unfavorable effects of currency translation decreased revenues by $1.2
million.
Process Control segment revenues decreased to $155.7 million in the first
nine months of 1999 from $164.9 million in the first nine months of 1998,
primarily due to lower sales from existing operations as a result of reduced
discretionary capital spending by companies in the process control industry, due
to difficult market conditions, by the oil and gas production sector and, to a
lesser extent, by raw-material producers, particularly in the cement sector. In
addition, the unfavorable effects of currency translation decreased revenues by
$1.0 million. These decreases were offset in part by the inclusion of $20.5
million in revenues from acquisitions.
Industrial segment revenues increased to $527.1 million in the first nine
months of 1999 from $268.9 million in the first nine months of 1998, primarily
due to the inclusion of $293.5 million in revenues from acquisitions, primarily
Spectra-Physics in February 1999 (Note 5). These increases were offset in part
by lower revenues from existing
18
<PAGE>
First Nine Months 1999 Compared With First Nine Months 1998 (continued)
businesses, primarily at ThermoSpectra, principally due to softness in the
semiconductor industry in the first half of 1999, compared with the first half
of 1998. The unfavorable effects of currency translation decreased revenues by
$0.6 million.
The gross profit margin was 46% in the first nine months of 1999 and 1998.
The inclusion in the 1999 period of lower-margin revenues from Spectra-Physics,
which recorded an adjustment to expense of $6.7 million relating to the sale of
inventories revalued at the time of acquisition, was offset by the inclusion of
inventory write-downs of $8.6 million in the 1998 period, as discussed in the
results of operations for the third quarter.
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in the first nine months of 1999 from 27% in the first nine
months of 1998, principally due to the inclusion of higher selling, general,
and, administrative expenses as a percentage of revenues at acquired businesses,
primarily Spectra-Physics and, to a lesser extent, lower sales volume at several
of the Company's subsidiaries.
Research and development expenses increased to $115.3 million in the first
nine months of 1999 from $84.3 million in the first nine months of 1998,
primarily due to the inclusion of expenses at Spectra-Physics and, to a lesser
extent, other acquired businesses. Research and development expenses as a
percentage of revenues were 7.6% in 1999, compared with 7.0% in 1998. Excluding
the expenses at acquired businesses, research and development expenses as a
percentage of revenues were 7.5% in 1999.
In connection with the restructuring actions undertaken by the Company in
1998, the Company incurred additional costs of $1.5 million in the first nine
months of 1999 (Note 6). During the first nine months of 1998, the Company
recorded restructuring and nonrecurring costs of $23.3 million, in addition to
the inventory write-downs discussed above. These costs consisted of $21.9
million of restructuring costs as discussed in the results of operations for the
third quarter and $1.4 million of nonrecurring costs relating to the resolution
of an arbitration proceeding.
Interest income decreased to $17.6 million in the first nine months of
1999 from $26.2 million in the first nine months of 1998, primarily due to the
reasons discussed in the results of operations for the third quarter.
Interest expense increased to $39.4 million in the first nine months of
1999 from $34.7 million in the first nine months of 1998, primarily due to the
reasons discussed in the results of operations for the third quarter.
Equity in losses of unconsolidated subsidiaries of $10.2 million in the
first nine months of 1999 primarily relates to nonrecurring charges associated
with Spectra-Physics' minority investment in FLIR that were recorded in the
second quarter of 1999. Of this amount, $5.1 million represents the Company's
pro rata share of FLIR's loss that arose in connection with restructuring
activities following a merger completed by FLIR, which was accounted for as a
pooling of interests. In addition, $6.0 million of the loss resulted from a
decrease in the Company's pro rata share of FLIR's equity following completion
of the pooling transaction and related issuance of FLIR shares (Notes 5 and 6).
Gain on sale of investments in the first nine months of 1999 primarily
resulted from the sale of an available-for-sale investment. Gain on sale of
investments in the first nine months of 1998 represents the sale of shares of
common stock of SteriGenics by ThermoSpectra as discussed in the results of
operations for the third quarter.
As a result of the sale of stock by subsidiaries, the Company recorded a
gain of $18.6 million in the first nine months of 1998.
Other expense of $3.4 million in the first nine months of 1999 represents
net foreign currency exchange losses. Of this amount, $3.1 million arose from
the reason discussed in the results of operations for the third quarter.
19
<PAGE>
First Nine Months 1999 Compared With First Nine Months 1998 (continued)
Excluding the impact of a nontaxable gain on issuance of stock by
subsidiaries in the first nine months of 1998, the effective tax rate was 44% in
the first nine months of 1999, compared with 42% in the first nine months of
1998. The effective tax rate exceeded the statutory federal income tax rate in
both periods 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. The effective tax rate increased in 1999 primarily due to
nonrecurring charges.
Minority interest expense increased to $11.1 million in the first nine
months of 1999 from $10.5 million in the first nine months of 1998, primarily
due to the reason discussed in the results of operations for the third quarter.
Liquidity and Capital Resources
Consolidated working capital was $326.2 million at October 2, 1999,
compared with $746.0 million at January 2, 1999. Included in working capital are
cash and cash equivalents of $199.9 million at October 2, 1999, compared with
$553.8 million at January 2, 1999. Of the cash and cash equivalents balance at
October 2, 1999, $142.0 million was held by the Company's majority-owned
subsidiaries and the balance was held by the Company and its wholly owned
subsidiaries. In addition, as of October 2, 1999, the Company had $217.5 million
invested in an advance to affiliate. Of the advance to affiliate at October 2,
1999, $196.0 million was held by the Company's majority-owned subsidiaries and
the balance was advanced by the Company and its wholly owned subsidiaries. Prior
to the use of new cash management arrangements between the Company and Thermo
Electron (Note 8), which became effective in 1999, such amounts were included in
cash and cash equivalents. At October 2, 1999, $153.0 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. Also
reflected in working capital are $338.8 million of short-term obligations and
current maturities of long-term obligations due to Thermo Electron over various
periods in 2000 and $61.0 million principal amount of ThermoQuest's 5%
subordinated convertible debentures due September 2000.
Cash provided by operating activities in the first nine months of 1999 was
$102.1 million. The Company generated $9.1 million of cash from a decrease in
accounts receivable, principally in the Analytical segment resulting primarily
from lower revenues in the third quarter of 1999, compared with the fourth
quarter of 1998. Cash of $9.6 million was used to fund a decrease in accounts
payable, primarily due to the timing of payments. The Company used $42.7 million
of cash to reduce other current liabilities, primarily as a result of payments
for accrued restructuring and accrued acquisition costs and, to a lesser extent,
the timing of payments and 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. As of October 2, 1999, the Company had
$2.7 million of accrued restructuring costs, of which it expects to pay $0.3
million in the fourth quarter of 1999 and the remainder in 2000. As of October
2, 1999, the Company had $22.3 million of accrued acquisition costs. The Company
expects to pay $10.8 million of this amount relating to severance over the next
three to six months and the remainder relating primarily to the abandonment of
excess facilities over the term of the leases of such facilities.
During the first nine months of 1999, the Company's primary investing
activities, excluding advance to affiliate and available-for-sale investments
activity, included acquisitions and the purchase of property, plant, and
equipment. The Company expended $339.9 million, net of cash acquired, for
acquisitions, including the acquisition of Spectra-Physics, and received an
aggregate $5.2 million of purchase price adjustments for acquisitions, primarily
for an acquisition by Metrika Systems in 1998 (Note 5). Metrika Systems received
an additional $2.5 million of the purchase price adjustment on October 4, 1999,
and expects to receive the final installment of the post-closing adjustment of
$1.3 million during the fourth quarter of 1999. The Company expended $33.8
million for purchases of property, plant, and equipment and received proceeds of
$7.8 million from the sale of property, plant, and equipment in the first nine
20
<PAGE>
Liquidity and Capital Resources (continued)
months of 1999. During the remainder of 1999, the Company plans to make
expenditures of approximately $25 million for property, plant, and equipment.
The Company's financing activities provided $119.0 million of cash in the
first nine months 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). In August 1999, the Company repaid $50.0 million
of the principal amount outstanding under this promissory note and refinanced
the balance of the note through borrowings from Thermo Electron due February
2000 (Note 5). Thermo Electron has indicated that it will seek repayment of this
note in 2000 only to the extent the Company's cash flow permits such repayment.
In March and July 1999, ThermoSpectra repaid an aggregate $15.0 million of
borrowings to Thermo Electron. In July 1999, Thermo Electron extended the
maturity of ThermoSpectra's $45.0 million promissory note to December 1999.
During the first nine months of 1999, a net increase in short-term obligations
provided $12.7 million of cash. In addition, certain divisions of Thermo
BioAnalysis borrowed $14.5 million, denominated in foreign currencies of
countries where the divisions operate, primarily to fund acquisitions. The
Company used $18.2 million of cash for the repayment of long-term obligations.
In September 1999, the Company's Board of Directors authorized the
repurchase through September 15, 2000, of up to $25 million of its own
securities and those of its publicly held subsidiaries in the open market, or in
negotiated transactions. During the first nine months of 1999, the Company and
certain of its majority-owned subsidiaries expended $26.8 million to repurchase
common stock of the Company and common stock and debentures of certain of the
Company's majority-owned subsidiaries. In addition, as of October 2, 1999, the
Company had recorded a liability of $2.3 million for common stock repurchases
executed prior to that date that settled subsequently. The majority-owned
subsidiaries' purchases were made pursuant to authorizations by the Boards of
Directors of such subsidiaries. As of October 2, 1999, $14.9 million remained
under the Company's authorization and $15.9 million remained under one of the
Company's majority-owned subsidiary's authorization to purchase its securities.
In October and November 1999, several majority-owned subsidiaries' Board of
Directors authorized the repurchase of up to an additional $15.0 million of
their respective securities through October and November 2000.
In August 1999, the Company called for redemption on September 3, 1999,
all of the outstanding $14.5 million principal amount of its 3 3/4% senior
convertible debentures due 2000. During the three months ended October 2, 1999,
$9.3 million principal amount of the debentures was converted into the Company's
common stock and the remaining balance was repaid.
In May and July 1999, the Company entered into definitive merger
agreements with ThermoSpectra and Thermo Vision, respectively, pursuant to which
the Company would acquire all of the outstanding shares of common stock of these
subsidiaries that are held by public shareholders. The aggregate cash cost of
the mergers is estimated to be approximately $31 million, which will be paid
with internal funds (Note 7).
The Company's short-term obligations and current maturities of long-term
obligations due to Thermo Electron totaling $338.0 million at October 2, 1999,
are due in 1999 and over various periods in 2000. In addition, ThermoQuest's
$61.0 million and Thermo Optek's $69.0 million principal amount 5% subordinated
convertible debentures are due in September and October 2000, respectively. The
Company may need to borrow funds at the debts' maturity from Thermo Electron,
although it has no agreements to do so. The repayment of the debt to Thermo
Electron and maturities of the 5% subordinated convertible debentures could
adversely affect the Company's liquidity in 2000. Excluding such debt, the
Company believes that its existing resources are sufficient to meet the capital
requirements of its existing operations for the foreseeable future. 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
21
<PAGE>
Liquidity and Capital Resources (continued)
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 non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
non-information technology systems for year 2000 compliance, has largely been
completed. During phase one, the Company tested and evaluated its significant
computer systems, software applications, and related equipment for year 2000
compliance. The Company also evaluated the potential year 2000 impact on its
critical non-information technology systems, which efforts included testing the
year 2000 readiness of its manufacturing, utility, and telecommunication systems
at its critical facilities. In phase two of its program, any noncompliant
systems or non-information technology systems that were identified during phase
one were prioritized and remediated. Based on its evaluations of its critical
non-information technology systems, 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 more than 90% complete as of October 2, 1999. In many cases, such
upgrades or replacements were made in the ordinary course of business, without
accelerating previously scheduled upgrades or replacements. The Company expects
that its remaining material information technology systems and critical
non-information technology systems will be year 2000 compliant by the end of
November 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 is following-up with
its significant suppliers and vendors that have not responded to the Company's
questionnaires. The Company has substantially completed its assessment of
third-party risk.
22
<PAGE>
Year 2000 (continued)
Contingency Plan
The Company has substantially completed a contingency plan that will allow
its primary business operations to continue despite disruptions due to year 2000
problems. This plan includes 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 $3.9 million as of October 2, 1999,
and the total external costs of year 2000 remediation are expected to be
approximately $5.2 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.
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
compliant, 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.
23
<PAGE>
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 its exposure at 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
None.
24
<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 10th day of November 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
25
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
10 $150,000,000 Promissory Note dated as of August 27, 1999, issued
by the Registrant to Thermo Electron Corporation.
27 Financial Data Schedule.
</TABLE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"). THESE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT, AND NOT WITH A VIEW TO DISTRIBUTION OR RESALE, AND MAY NOT BE SOLD,
PLEDGED, MORTGAGED, HYPOTHECATED OR OTHERWISE TRANSFERRED (1) WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT COVERING THESE SECURITIES OR (2)
UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
THERMO INSTRUMENT SYSTEMS INC.
Amended and Restated Promissory Note Due February 28, 2000
Waltham, Massachusetts
August 27, 1999
For value received, Thermo Instrument Systems Inc., a Delaware corporation
(the "Company"), hereby promises to pay to Thermo Electron Corporation
(hereinafter referred to as the "Payee"), or registered assigns, on February 28,
2000, the principal sum of one hundred fifty million dollars ($150,000,000) or
such part thereof as then remains unpaid to pay interest from the date hereof on
the whole amount of said principal sum remaining from time to time unpaid at a
rate per annum equal to the Dealer Commercial Paper Rate for 30-day maturities
as reported in The Wall Street Journal on the first business day of each fiscal
month of the Company (the "DCP Rate") plus one-hundred fifty (150) basis points.
If, however, one or more of the Company's majority-owned U.S. subsidiaries (i.e.
not wholly-owned) is participating in the cash management arrangement with
Payee, then the rate payable on the Company's outstanding principal balance
shall be calculated as follows: If the aggregate amount of the Company's
majority-owned U.S. subsidiaries' cash balance under the cash management
arrangement ("Majority-Owned Excess Cash") equals or exceeds the Company's
outstanding principal balance, then the Company shall pay interest on the
aggregate unpaid principal amount hereunder at a rate per annum equal to the DCP
Rate plus fifty (50) basis points. If the aggregate amount of the Majority-Owned
Excess Cash is less than the Company's outstanding principal balance, then (A)
the Company shall pay interest at a rate per annum equal to the DCP Rate plus
fifty (50) basis points on that portion of the unpaid principal amount equal to
the Majority-Owned Excess Cash, and (B) the Company shall pay interest at a rate
per annum equal to the DCP Rate plus one hundred fifty (150) basis points on
that portion of the unpaid principal amount equal to (i) the Company's
outstanding principal balance, minus (ii) the Majority-Owned Excess Cash. Each
of the interest rates set forth in the prior sentences shall be adjusted on the
second business day of each fiscal month of the Company and shall be in effect
for the entirety of such fiscal month. Interest is payable in arrears on the
first business day of each fiscal month of the Company, until all amounts
outstanding are paid in full. Overdue principal and interest shall bear interest
at a rate per annum equal to the rate of interest published from time to time in
The Wall Street Journal as the "prime rate" plus one percent (1%). Principal and
all accrued but unpaid interest shall be repaid on February 28, 2000. Principal
and interest shall be payable in lawful money of the United States of America,
in immediately available funds, at the principal office of the Payee or at such
other place as the legal holder may designate from time to time in writing to
<PAGE>
the Company. Interest shall be computed on an actual 360-day basis. This Note
may be prepaid at any time or from time to time, in whole or in part, without
any premium or penalty. All prepayments shall be applied first to accrued
interest and then to principal.
The then unpaid principal amount of, and interest outstanding on, this
Note shall be and become immediately due and payable without notice or demand,
at the option of the holder hereof, upon the occurrence of any of the following
events:
(a) the failure of the Company to pay any amount due hereunder
within ten (10) days of the date when due;
(b) any representation, warranty or statement made or furnished to
the Payee by the Company in connection with this Note or the transaction
from which it arises shall prove to have been false or misleading in any
material respect as of the date when made or furnished;
(c) the failure of the Company to pay its debts as they become due,
the insolvency of the Company, the filing by or against the Company of any
petition under the U.S. Bankruptcy Code (or the filing of any similar
petition under the insolvency law of any jurisdiction), or the making by
the Company of an assignment or trust mortgage for the benefit of
creditors or the appointment of a receiver, custodian or similar agent
with respect to, or the taking by any such person of possession of, any
property of the Company;
(d) the sale by the Company of all or substantially all of its
assets;
(e) the merger or consolidation of the Company with or into any
other corporation in a transaction in which the Company is not the
surviving entity;
(f) the issuance of any writ of attachment, by trustee process or
otherwise, or any restraining order or injunction not removed, repealed or
dismissed within thirty (30) days of issuance, against or affecting the
person or property of the Company or any liability or obligation of the
Company to the holder hereof; and
(g) the suspension of the transaction of the usual business of the
Company.
Upon surrender of this Note for transfer or exchange, a new Note or new
Notes of the same tenor dated the date to which interest has been paid on the
surrendered Note and in an aggregate principal amount equal to the unpaid
principal amount of the Note so surrendered will be issued to, and registered in
the name of, the transferee or transferees. The Company may treat the person in
whose name this Note is registered as the owner hereof for the purpose of
receiving payment and for all other purposes.
In case any payment herein provided for shall not be paid when due, the
Company further promises to pay all cost of collection, including all reasonable
attorneys' fees.
<PAGE>
No delay or omission on the part of the Payee in exercising any right
hereunder shall operate as a waiver of such right or of any other right of the
Payee, nor shall any delay, omission or waiver on any one occasion be deemed a
bar to or waiver of the same or any other right on any future occasion. The
Company hereby waives presentment, demand, notice of prepayment, protest and all
other demands and notices in connection with the delivery, acceptance,
performance, default or enforcement of this Note. The undersigned hereby assents
to any indulgence and any extension of time for payment of any indebtedness
evidenced hereby granted or permitted by the Payee.
This Note amends and restates in its entirety that certain promissory note
issued by the Company to Thermo Electron Corporation dated March 3, 1999.
This Note shall be governed by and construed in accordance with, the laws
of the Commonwealth of Massachusetts and shall have the effect of a sealed
instrument.
THERMO INSTRUMENT SYSTEMS INC.
By: /s/Earl R. Lewis
---------------------
Earl R. Lewis
President and CEO
[Corporate Seal]
Attest:
/s/Sandra L. Lambert
- -----------------------
Sandra L. Lambert
Secretary
<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
OCTOBER 2, 1999 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-01-2000
<PERIOD-END> OCT-02-1999
<CASH> 199,925
<SECURITIES> 0
<RECEIVABLES> 491,741
<ALLOWANCES> 34,036
<INVENTORY> 348,434
<CURRENT-ASSETS> 1,353,081
<PP&E> 435,144
<DEPRECIATION> 150,065
<TOTAL-ASSETS> 2,864,836
<CURRENT-LIABILITIES> 1,026,884
<BONDS> 536,967
0
0
<COMMON> 12,356
<OTHER-SE> 956,880
<TOTAL-LIABILITY-AND-EQUITY> 2,864,836
<SALES> 1,522,423
<TOTAL-REVENUES> 1,522,423
<CGS> 824,538
<TOTAL-COSTS> 824,538
<OTHER-EXPENSES> 116,831
<LOSS-PROVISION> 5,471
<INTEREST-EXPENSE> 39,364
<INCOME-PRETAX> 118,192
<INCOME-TAX> 52,012
<INCOME-CONTINUING> 11,076
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,104
<EPS-BASIC> 0.46
<EPS-DILUTED> 0.43
</TABLE>
