SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended October 3, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-13876
THERMOSPECTRA CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-3242970
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8 East Forge Parkway
Franklin, Massachusetts 02038
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Class Outstanding at October 30, 1998
---------------------------- -------------------------------
Common Stock, $.01 par value 15,327,197
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMOSPECTRA CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
October 3, January 3,
(In thousands) 1998 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 20,451 $ 20,672
Available-for-sale investments, at quoted
market value (cost of $2,056 in 1997) - 2,083
Accounts receivable, less allowances of $1,721
and $1,934 41,412 43,015
Inventories:
Raw materials and supplies 16,127 16,850
Work in process 7,603 7,096
Finished goods 7,928 10,839
Prepaid income taxes 7,235 7,337
Other current assets 1,925 1,774
-------- --------
102,681 109,666
-------- --------
Property, Plant, and Equipment, at Cost 29,969 31,108
Less: Accumulated depreciation and
amortization 13,041 10,717
-------- --------
16,928 20,391
-------- --------
Patents, Trademarks, and Other Assets 7,441 8,108
-------- --------
Cost in Excess of Net Assets of Acquired
Companies 113,453 115,232
-------- --------
$240,503 $253,397
======== ========
2
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THERMOSPECTRA CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 3, January 3,
(In thousands except share amounts) 1998 1998
- ------------------------------------------------------------------------
Current Liabilities:
Notes payable to Thermo Electron $ 60,000 $ 15,000
Accounts payable 9,751 12,842
Accrued payroll and employee benefits 5,487 6,987
Deferred revenue 4,428 4,695
Accrued installation and warranty expenses 4,104 4,495
Other accrued expenses (Note 5) 13,120 10,546
Due to affiliated companies 3,824 1,561
-------- --------
100,714 56,126
-------- --------
Deferred Income Taxes and Other Deferred Items 2,276 1,633
-------- --------
Long-term Obligations, Due to Thermo Electron
and Thermo Instrument 7,300 67,300
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 25,000,000
shares authorized; 15,327,620 and
15,313,506 shares issued 153 153
Capital in excess of par value 111,435 111,262
Retained earnings 18,995 17,938
Treasury stock at cost, 423 shares (7) (7)
Accumulated other comprehensive items (Note 4) (363) (1,008)
-------- --------
130,213 128,338
-------- --------
$240,503 $253,397
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMOSPECTRA CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $44,052 $52,271
------- -------
Costs and Operating Expenses:
Cost of revenues (Note 5) 27,567 32,022
Selling, general, and administrative expenses 12,728 13,569
Research and development expenses 3,632 4,346
Restructuring costs (Note 5) 4,282 -
------- -------
48,209 49,937
------- -------
Operating Income (Loss) (4,157) 2,334
Interest Income 314 116
Interest Expense (9) (10)
Interest Expense, Related Party (1,047) (1,203)
Gain on Sale of Investments 713 -
------- -------
Income (Loss) Before Income Taxes (4,186) 1,237
Income Tax Provision (Benefit) (1,683) 532
------- -------
Net Income (Loss) $(2,503) $ 705
======= =======
Basic and Diluted Earnings (Loss) per
Share (Note 3) $ (.16) $ .05
======= =======
Weighted Average Shares (Note 3):
Basic 15,327 15,256
======= =======
Diluted 15,327 15,344
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
THERMOSPECTRA CORPORATION
Consolidated Statement of Operations
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $146,177 $139,140
-------- --------
Costs and Operating Expenses:
Cost of revenues (Note 5) 86,398 80,914
Selling, general, and administrative expenses 40,006 37,294
Research and development expenses 12,344 12,130
Restructuring costs (Note 5) 4,282 800
Gain on sale of building (339) -
-------- --------
142,691 131,138
-------- --------
Operating Income 3,486 8,002
Interest Income 1,087 524
Interest Expense (9) (58)
Interest Expense, Related Party (3,423) (2,866)
Gain on Sale of Investments 713 -
-------- --------
Income Before Income Taxes 1,854 5,602
Income Tax Provision 797 2,372
-------- --------
Net Income $ 1,057 $ 3,230
======== ========
Basic and Diluted Earnings per Share (Note 3) $ .07 $ .22
======== ========
Weighted Average Shares (Note 3):
Basic 15,323 14,490
======== ========
Diluted 15,348 14,623
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
THERMOSPECTRA CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Operating Activities:
Net income $ 1,057 $ 3,230
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,314 5,006
Provision for losses on accounts receivable 198 703
Gain on sale of building and investments (1,052) -
Other noncash expenses, net 2,313 1,010
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable 2,116 391
Inventories 1,193 845
Other current assets (8) 578
Accounts payable (3,284) (556)
Due to affiliated companies 2,263 (628)
Other current liabilities 303 (4,679)
Other, net 300 68
-------- --------
Net cash provided by operating activities 10,713 5,968
-------- --------
Investing Activities:
Acquisitions, net of cash acquired - (21,104)
Proceeds from sale of product line (Note 2) 750 -
Proceeds from sale of available-for-sale
investments 2,769 -
Purchases of property, plant, and equipment (1,422) (2,025)
Proceeds from sale of property, plant, and
equipment 2,052 61
Other, net (63) (752)
-------- --------
Net cash provided by (used in) investing
activities 4,086 (23,820)
-------- --------
Financing Activities:
Repayment of long-term obligation to
Thermo Electron (15,000) -
Proceeds from issuance of long-term
obligations to Thermo Electron - 60,000
Payment to Thermo Instrument for NESLAB
debt assumed - (44,907)
Net proceeds from issuance of Company
common stock 49 353
Decrease in short-term borrowings, net - (353)
Other 125 -
-------- --------
Net cash provided by (used in) financing
activities $(14,826) $ 15,093
-------- --------
6
<PAGE>
THERMOSPECTRA CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Exchange Rate Effect on Cash $ (194) $ (412)
-------- --------
Decrease in Cash and Cash Equivalents (221) (3,171)
Cash and Cash Equivalents at Beginning of
Period 20,672 16,580
-------- --------
Cash and Cash Equivalents at End of Period $ 20,451 $ 13,409
======== ========
Noncash Activities:
Fair value of assets of acquired companies $ - $116,707
Cash paid for acquired companies - (24,342)
Stock options issued in connection with
acquisition of PSI - (1,693)
Stock issuable to Thermo Instrument in
connection with acquisition of NESLAB - (32,571)
Debt assumed in connection with acquisition
of NESLAB - (44,907)
-------- --------
Liabilities assumed of acquired companies $ - $ 13,194
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
THERMOSPECTRA CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by ThermoSpectra Corporation (the Company) without audit and, in the opinion of
management, reflect all adjustments of a normal recurring nature necessary for a
fair statement of the financial position at October 3, 1998, the results of
operations for the three- and nine-month periods ended October 3, 1998, and
September 27, 1997, and the cash flows for the nine-month periods ended October
3, 1998, and September 27, 1997. Interim results are not necessarily indicative
of results for a full year.
The consolidated balance sheet presented as of January 3, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1998,
filed with the Securities and Exchange Commission.
2. Disposition
In January 1998, the Company's Nicolet Imaging Systems subsidiary sold its
security screening product line to OSI Systems, Inc. for $750,000 in cash. No
material gain or loss was recognized on the sale of the product line, which
represented less than 0.5% of the Company's revenues.
3. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended Nine Months Ended
------------------- -------------------
(In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Basic
Net Income (Loss) $(2,503) $ 705 $ 1,057 $ 3,230
------- ------- ------- -------
Weighted Average Shares 12,568 12,497 12,564 12,469
Shares Issuable for
Acquisition of NESLAB 2,759 2,759 2,759 2,021
------- ------- ------- -------
Weighted Average Shares,
as Adjusted 15,327 15,256 15,323 14,490
------- ------- ------- -------
Basic Earnings (Loss) per
Share $ (.16) $ .05 $ .07 $ .22
======= ======= ======= =======
8
<PAGE>
3. Earnings (Loss) per Share (continued)
Three Months Ended Nine Months Ended
------------------- -------------------
(In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Diluted
Net Income (Loss) $(2,503) $ 705 $ 1,057 $ 3,230
------- ------- ------- -------
Basic Weighted Average
Shares 15,327 15,256 15,323 14,490
Effect of Stock Options - 88 25 133
------- ------- ------- -------
Weighted Average Shares,
as Adjusted 15,327 15,344 15,348 14,623
------- ------- ------- -------
Diluted Earnings (Loss) per
Share $ (.16) $ .05 $ .07 $ .22
======= ======= ======= =======
The computation of diluted earnings (loss) per share for each period
excludes the effect of assuming the exercise of certain outstanding stock
options because the effect would be antidilutive. As of October 3, 1998, there
were 715,550 of such options outstanding, with exercise prices ranging from
$10.54 to $17.15 per share.
4. Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income and "other comprehensive items," which
represents certain amounts that are reported as components of shareholders'
investment in the accompanying balance sheet, including foreign currency
translation adjustments and unrealized net-of-tax gains and losses from
available-for-sale investments. During the third quarter of 1998 and 1997, the
Company had a comprehensive loss of $2,563,000 and comprehensive income of
$432,000, respectively. During the first nine months of 1998 and 1997, the
Company had comprehensive income of $1,701,000 and $2,290,000, respectively.
5. Restructuring and Related Costs
During the third quarter of 1998, the Company recorded restructuring and
related costs of $5,361,000. Restructuring costs of $4,282,000 consist of
$3,708,000 related to severance costs for 259 employees across all functions and
$574,000 related primarily to facility-closing costs. The charge for
facility-closing costs includes $490,000 for write-downs of related fixed
assets. In addition, the Company recorded a $1,079,000 inventory write-down
related to the discontinuation of certain underperforming products, which is
included in cost of revenues in the accompanying statement of operations. In
connection with these actions,
9
<PAGE>
5. Restructuring and Related Costs (continued)
the Company expects to incur an additional $1.4 million of costs during the
fourth quarter of 1998 and the first quarter of 1999 for costs not permitted as
charges in the third quarter of 1998, pursuant to the requirements of Emerging
Issues Task Force Pronouncement 94-3. These costs primarily include costs for
certain employee relocation and related costs. The Company plans to complete
implementation of its restructuring plan in early 1999. As of October 3, 1998,
the Company had terminated 135 employees and had expended $680,000 of the
established reserves. The remaining liability for severance and facility-closing
costs of $3,112,000 is included in other accrued expenses in the accompanying
balance sheet as of October 3, 1998.
6. Proposed Reorganization
On August 12, 1998, Thermo Electron Corporation announced a proposed
reorganization involving certain of Thermo Electron's subsidiaries, including
the Company. As part of this reorganization, Thermo Electron announced that the
Company may be taken private and become a wholly owned subsidiary of Thermo
Instrument Systems Inc. Shareholders of the Company would receive cash or shares
of the common stock of Thermo Instrument in exchange for their shares of the
Company's common stock. The completion of this transaction is subject to
numerous conditions, including the establishment of prices or exchange ratios;
confirmation of anticipated tax consequences; the approval of the Board of
Directors of Thermo Instrument; the negotiation and execution of a definitive
merger agreement; the receipt of a fairness opinion from an investment banking
firm that the transaction is fair to the Company's shareholders (other than
Thermo Instrument and Thermo Electron) from a financial point of view; the
approval of the Company's Board of Directors, including its independent
directors; and clearance by the Securities and Exchange Commission of any
necessary documents regarding the proposed transaction.
7. Subsequent Event
On October 5, 1998, the Company acquired the assets, subject to certain
liabilities, of Topometrix Corporation, a scanning-probe microscope
manufacturing business, for approximately $8,000,000 in cash, subject to a
post-closing adjustment. To date, no information has been gathered that would
cause the Company to believe that the post-closing adjustment will be material.
The acquisition will be accounted for using the purchase method of accounting
and its results will be included in the Company's results from the date of
acquisition.
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 and 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,"
10
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
"anticipates," "plans," "expects," "seeks," "estimates," and similar expressions
are intended to identify forward-looking statements. There are a number of
important factors that could cause the results of the Company to differ
materially from those indicated by such forward-looking statements, including
those detailed under the heading "Forward-looking Statements" in Exhibit 13 to
the Company's Annual Report on Form 10-K for the fiscal year ended January 3,
1998, filed with the Securities and Exchange Commission.
Overview
The Company develops, manufactures, and markets precision imaging,
inspection, temperature-control, and test and measurement instruments. These
instruments are generally combined with proprietary operations and analysis
software to provide industrial and research customers with integrated systems
that address their specific needs. The Company's products include test and
measurement systems consisting of digital oscillographic recorders, digital
storage oscilloscopes (DSOs), and data- acquisition systems; X-ray
microanalyzers; X-ray fluorescence instruments; nondestructive X-ray inspection
systems; specialty X-ray tubes; and confocal laser scanning microscopes. In
1997, the Company broadened its product offerings through the acquisitions of
Park Scientific Instruments Corporation (PSI), a manufacturer of scanning-probe
microscopes; NESLAB Instruments, Inc., a supplier of temperature-control
products; and Sierra Research and Technology Inc. (SRT), a manufacturer of
systems used for the rework and repair of printed circuit boards. In October
1998, the Company acquired Topometrix, a manufacturer of scanning-probe
microscopes.
The Company's growth strategy includes acquiring complementary businesses,
developing new applications for its technology to address related market
segments, and strengthening its presence in selected geographic markets. Because
the Company competes primarily on the basis of its technology, it will also need
to continually improve the technology underlying the products of any company it
acquires. One of the Company's principal goals during recent quarters has been
to improve operating margins. A part of this plan included the December 1997 and
January 1998 divestitures of two low-margin product lines (Note 2).
A significant portion of the Company's total revenues is attributable to the
sale of products and related services to customers in the semiconductor
industry. The semiconductor industry has historically been cyclical and is
characterized by sudden and sharp changes in supply and demand. Demand for the
Company's products and services within the semiconductor industry is dependent
upon, among other factors, the level of capital spending by semiconductor
companies. The semiconductor industry is currently being affected in all regions
due to a downturn in orders. Customers have reacted to these business
difficulties by delaying equipment deliveries and investments in capacity and
strategic programs. There is a high degree of uncertainty regarding the length
and severity
11
<PAGE>
Overview (continued)
of the current industry downturn. Further decreases in semiconductor activities
could have a significant adverse effect upon the demand for the Company's
products and related services, which would materially adversely affect the
Company's business and future results of operations.
The Company conducts all of its manufacturing operations in the United
States, except for the production of certain DSOs that are manufactured in
England. The Company sells its products worldwide. During 1997, exports from the
Company's U.S. and foreign subsidiaries to the Far East represented 15% of total
revenues. Exports to Japan represented 8% of total revenues and exports to
Taiwan, South Korea, and Singapore, collectively, represented 5% of total
revenues. Asia is experiencing a severe economic crisis, which has been
characterized by sharply reduced economic activity and liquidity, highly
volatile foreign-currency-exchange and interest rates, and unstable stock
markets. The Company's sales in Asia have been, and are expected to continue to
be, adversely affected by the unstable economic conditions there. Additionally,
certain of the Company's customers located outside of the Asian region could be
adversely affected by the unstable economic conditions in Asia.
The Company anticipates that a significant portion of its revenues will
continue to be from sales to customers outside the United States. The Company's
business activities outside the United States are conducted through sales and
service subsidiaries and through third-party representatives and distributors.
The results of the Company's international operations are subject to foreign
currency fluctuations, and the exchange-rate value of the dollar may have a
significant impact on both revenues and earnings. The Company may use forward
contracts to reduce its exposure to currency fluctuations.
Results of Operations
Third Quarter 1998 Compared With Third Quarter 1997
Revenues decreased 16%, or $8.2 million, to $44.1 million in the third
quarter of 1998 from $52.3 million in the third quarter of 1997, primarily due
to the downturn in the semiconductor industry as discussed in the overview
above. Revenues decreased $1.8 million due to the exclusion of revenues from the
NIS product lines that were sold in late 1997 and early 1998 (Note 2). Revenues
were adversely affected by approximately $0.3 million due to the strengthening
in the value of the U.S. dollar relative to currencies in foreign countries in
which the Company operates. Revenues from the Company's temperature-control
business, which represented 31% of the Company's third quarter 1998 revenues,
decreased $2.6 million, or 16%, to $13.7 million as a result of a severe
reduction in capital-equipment expenditures in the semiconductor industry.
Excluding the impact of dispositions and foreign exchange, combined revenues at
the Company's imaging and inspection companies, which represented 45% of the
Company's third quarter 1998 revenues, decreased $1.8 million to $20.0 million,
primarily due to reduced demand for semiconductor-related products and a
downturn in the overseas
12
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
markets. Combined revenues at the Company's test and measurement companies,
which represented 24% of the Company's third quarter 1998 revenues, decreased
$1.7 million, or 14%, to $10.4 million due to decreased demand for their
products. The Company's backlog decreased $12.2 million during the second and
third quarters of 1998 to $24.2 million. The backlog was adversely affected by
the downturn in the semiconductor industry, sales to which represented
approximately 30% of the Company's 1997 revenues. As a result, the Company's
results of operations for the second and third quarters of 1998 may not be
indicative of future results.
Excluding an inventory write-down of $1.1 million in the third quarter of
1998, primarily for the discontinuation of certain underperforming products
(Note 5), and an inventory write-down in the third quarter of 1997 at Nicolet
Imaging Systems (NIS), the gross profit margin was unchanged at 40% in the third
quarter of 1998 and 1997.
Selling, general, and administrative expenses as a percentage of revenues
increased to 29% in the third quarter of 1998 from 26% in the third quarter of
1997, primarily due to decreased revenues. The impact of decreased revenues was
offset in part by lower employment and spending levels at most of the Company's
subsidiaries in response to the revenue decline.
Research and development expenses declined to $3.6 million in the third
quarter of 1998 from $4.3 million in the third quarter of 1997 due to the
discontinuation of underperforming products, completion of efforts as a result
of new-product releases, and a decrease in professional services.
In addition to the inventory write-down, the Company recorded restructuring
costs of $4.3 million during the third quarter of 1998 (Note 5). Of these
charges, $3.7 million represents severance costs and $0.6 million represents
facility-closing costs. The Company plans to complete the implementation of its
restructuring plan in early 1999. In connection with the closing of certain
facilities, the Company expects to incur an additional $1.4 million of costs
during the fourth quarter of 1998 and the first quarter of 1999.
Interest income increased to $0.3 million in the third quarter of 1998 from
$0.1 million in the third quarter of 1997, due to higher average invested
balances. Interest expense, related party, primarily represents interest
incurred on the $60.0 million aggregate amount of promissory notes issued to
Thermo Electron Corporation in 1997 in connection with acquisitions and
decreased in 1998 due to the repayment of a $15.0 million promissory note to
Thermo Electron in August 1998.
During the third quarter of 1998, the Company sold the shares of SteriGenics
International, Inc. common stock that were received in connection with the 1997
sale of its Linac business, resulting in a gain of $713,000.
13
<PAGE>
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
The Company's effective tax rate was a benefit of 40% in the third quarter
of 1998, compared with a provision of 43% in the third quarter of 1997. The
effective tax rates exceeded the statutory federal income tax rate primarily due
to the impact of state income taxes and nondeductible amortization of cost in
excess of net assets of acquired companies for certain of the Company's
acquisitions.
First Nine Months 1998 Compared With First Nine Months 1997
Revenues increased 5%, or $7.0 million, to $146.2 million in the first nine
months of 1998 from $139.1 million in the first nine months of 1997. Revenues
increased $16.8 million, net, due to the inclusion of revenues for the full 1998
period from NESLAB, acquired for accounting purposes effective March 1997; PSI,
acquired in March 1997; and SRT, acquired in July 1997; and the exclusion of
revenues from the NIS product lines that were sold. Revenues were adversely
affected by approximately $1.0 million due to the strengthening in the value of
the U.S. dollar relative to currencies in foreign countries in which the Company
operates. Excluding the impact of foreign exchange, combined revenues at the
Company's test and measurement companies, which represented 22% of the Company's
revenues in the first nine months of 1998, decreased $3.8 million, or 10%, due
to decreased demand. Comparable-period revenues at the Company's
temperature-control business, which represented 33% of the Company's revenues in
the first nine months of 1998, decreased $3.1 million, or 9%, as a result of a
severe reduction in capital-equipment expenditures in the semiconductor
industry. Excluding the impact of acquisitions, dispositions, and foreign
exchange, combined revenues at the Company's imaging and inspection companies,
which represented 45% of the Company's revenues in the first nine months of
1998, decreased $1.8 million, or 3%, primarily due to reduced demand for
semiconductor-related products, a downturn in the overseas markets, and a large
shipment at Kevex Instruments that occurred in the first quarter of 1997. The
Company's backlog decreased $16.2 million during the first nine months of 1998
to $24.2 million, primarily due to the downturn in the semiconductor industry.
As a result, the Company's results of operations for the first nine months of
1998 may not be indicative of future results.
Excluding the inventory write-downs in 1998 and 1997 discussed in the
results of operations for the third quarter, the gross profit margin was
unchanged at 42% in the first nine months of 1998 and 1997.
Selling, general, and administrative expenses as a percentage of revenues
were unchanged at 27% in the first nine months of 1998 and 1997.
Research and development expenses increased slightly to $12.3 million in the
first nine months of 1998 from $12.1 million in the first nine months of 1997.
Increases due to the inclusion of NESLAB and PSI for the full period in 1998
were substantially offset by decreased spending as discussed in the results of
operations for the third quarter.
In addition to the inventory write-downs, the Company recorded restructuring
costs of $4.3 million in 1998, compared with $0.8 million
14
<PAGE>
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
in 1997 (Note 5). Of the 1998 charges, $3.7 million represents severance costs
and $0.6 million represents facility-closing costs. The Company plans to
complete the implementation of its restructuring plan in early 1999.
Interest income increased to $1.1 million in the first nine months of 1998
from $0.5 million in the first nine months of 1997, due to higher average
invested balances. Interest expense, related party, primarily represents
interest incurred on the $60.0 million aggregate amount of promissory notes
issued to Thermo Electron in 1997 in connection with acquisitions.
During the third quarter of 1998, the Company sold the shares of SteriGenics
common stock that were received in connection with the 1997 sale of its Linac
business, resulting in a gain of $713,000.
The effective tax rate was 43% in the first nine months of 1998, compared
with 42% in the first nine months of 1997. The effective tax rates exceeded the
statutory federal income tax rate primarily due to the impact of state income
taxes and nondeductible amortization of cost in excess of net assets of acquired
companies for certain of the Company's acquisitions.
Liquidity and Capital Resources
Consolidated working capital was $62.0 million at October 3, 1998, excluding
the notes payable of $60.0 million due to Thermo Electron in 1999 (see
discussion below), compared with working capital of $53.5 million at January 3,
1998. Included in working capital are cash, cash equivalents, and
available-for-sale investments of $20.5 million at October 3, 1998, compared
with $22.8 million at January 3, 1998. Cash provided by operating activities was
$10.7 million in the first nine months of 1998. A decrease in accounts
receivable provided $2.1 million of cash and a decrease in accounts payable used
$3.3 million of cash, primarily due to the decline in revenues and corresponding
decline in purchases as a result of the downturn in the semiconductor industry.
Cash of $4.1 million was provided by investing activities during the first
nine months of 1998. During this period, the Company received cash of $0.8
million from the sale of a product line (Note 2), $2.8 million from the sale of
available-for-sale investments, and $2.1 million from the sale of property,
plant, and equipment, primarily from the sale of a building by Gould. The
Company expended $1.4 million during the period for purchases of property,
plant, and equipment and plans to spend an additional $1.6 million for capital
expenditures during the remainder of 1998.
On October 5, 1998, the Company acquired the assets, subject to certain
liabilities, of Topometrix Corporation, a scanning-probe microscope
manufacturing business, for approximately $8.0 million in cash, subject to a
post-closing adjustment. To date, no information has
15
<PAGE>
Liquidity and Capital Resources (continued)
been gathered that would cause the Company to believe that the post-closing
adjustment will be material.
In August 1998, the Company used $15.0 million to repay a promissory note to
Thermo Electron.
The Company expects to generate positive cash flow from its existing
operations. The Company currently is not contemplating making additional
acquisitions for the foreseeable future. Thermo Electron has indicated that it
will seek repayment of the notes due to it in 1999 only to the extent the
Company's cash flow permits such repayment. Accordingly, the Company believes
that its existing resources and cash provided by operations are sufficient to
meet the capital requirements of its existing businesses for the foreseeable
future.
Year 2000
The Company continues to assess the potential impact of the year 2000 on the
Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading internal business
systems and facilities; (ii) testing and developing necessary upgrades for the
Company's current products and certain discontinued products; (iii) contacting
key suppliers, vendors, and customers to determine their year 2000 compliance
status; and (iv) developing contingency plans.
The Company's State of Readiness
The Company has tested and evaluated its critical information technology
systems for year 2000 compliance, including its significant computer systems,
software applications, and related equipment. The Company is currently in the
process of upgrading or replacing its noncompliant systems. In most cases, such
upgrades or replacements are being made in the ordinary course of business. The
Company expects that all of its material information technology systems will be
year 2000 compliant by the end of 1999. The Company is also evaluating the
potential year 2000 impact on its facilities, including its buildings and
utility systems. Any problems that are identified will be prioritized and
remediated based on their assigned priority. The Company will continue periodic
testing of its critical internal business systems and facilities in an effort to
minimize operating disruptions due to year 2000 issues.
The Company believes that all of the material products that it currently
manufactures and sells are year 2000 compliant. However, as many of the
Company's products are complex, interact with third-party products, and operate
on computer systems that are not under the Company's control, there can be no
assurance that the Company has identified all of the year 2000 problems with its
current products. The Company believes that certain of its older products, which
it no longer manufactures or sells, may not be year 2000 compliant. The Company
is
16
<PAGE>
Year 2000 (continued)
continuing to test and evaluate such products and may offer upgrades or
alternative products where reasonably practicable.
The Company is in the process of identifying and contacting suppliers,
vendors, and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part of
this effort, the Company has developed and is distributing questionnaires
relating to year 2000 compliance to its significant suppliers, vendors, and
customers. The Company intends to follow-up and monitor the year 2000 compliant
progress of significant suppliers, vendors, and customers that indicate that
they are not year 2000 compliant or that do not respond to the Company's
questionnaires.
Contingency Plan
The Company intends to develop a contingency plan that will allow its
primary business operations to continue despite disruptions due to year 2000
problems. This plan may include identifying and securing other suppliers,
increasing inventories, and modifying production facilities and schedules. As
the Company continues to evaluate the year 2000 readiness of its business
systems and facilities, products and significant suppliers, vendors, and
customers, it will modify and adjust its contingency plan as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have been
incurred in the ordinary course of upgrading the Company's products and
operating systems. The Company does not expect total year 2000 remediation costs
to be material, but there can be no assurance that the Company will not
encounter unexpected costs or delays in achieving year 2000 compliance.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
material suppliers, vendors, or customers experience business disruptions due to
year 2000 issues, the Company might also be materially adversely
17
<PAGE>
Year 2000 (continued)
affected. The Company's research and development, production, distribution,
financial, administrative, and communications operations might be disrupted.
There is expected to be a significant amount of litigation relating to the year
2000 issue and there can be no assurance that the Company will not incur
material costs in defending or bringing lawsuits. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition.
PART II - OTHER INFORMATION
Item 2 - Changes in Securities
(c) Recent Sales of Unregistered Securities
On October 22, 1998, the Company issued 2,759,042 shares of its common stock
to Thermo Instrument in connection with the Company's acquisition of NESLAB
Instruments, Inc., NESLAB Instruments Europa BV, and NESLAB Instruments Ltd.
from Thermo Instrument. Exemption from registration for this transaction is
claimed under Section 4(2) of the Securities Act of 1933, as amended.
Item 4 - Submission of Matters to a Vote of Security Holders
On September 22, 1998, at a Special Meeting of Shareholders, the Company's
shareholders approved the listing of 2,759,042 shares of the Company's common
stock on the American Stock Exchange, in connection with the Company's 1997
acquisition of NESLAB Instruments, Inc., NESLAB Instruments Europa BV, and
NESLAB Instruments Ltd. from Thermo Instrument, as follows: 10,285,500 shares
voted in favor of the proposal, 7,736 shares voted against the proposal, and
2,025 shares abstained. No broker nonvotes were recorded.
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 August 13, 1998, the Company filed a Current Report on Form 8-K dated
August 12, 1998, with respect to a proposed reorganization by the Company's
ultimate parent corporation, Thermo Electron Corporation, involving certain of
Thermo Electron's subsidiaries, including the Company.
On September 29, 1998, the Company filed a Current Report on Form 8-K dated
September 29, 1998, with respect to restructuring and related charges recorded
during the third quarter of 1998.
18
<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 9th day of November 1998.
THERMOSPECTRA CORPORATION
Paul F. Kelleher
----------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
----------------------------
John N. Hatsopoulos
Chief Financial Officer and
Senior Vice President
19
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- -----------------------------------------------------------------------------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THERMOSPECTRA CORPORATION'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 3,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-END> OCT-03-1998
<CASH> 20,451
<SECURITIES> 0
<RECEIVABLES> 43,133
<ALLOWANCES> 1,721
<INVENTORY> 31,658
<CURRENT-ASSETS> 102,681
<PP&E> 29,969
<DEPRECIATION> 13,041
<TOTAL-ASSETS> 240,503
<CURRENT-LIABILITIES> 100,714
<BONDS> 0
0
0
<COMMON> 153
<OTHER-SE> 130,060
<TOTAL-LIABILITY-AND-EQUITY> 240,503
<SALES> 146,177
<TOTAL-REVENUES> 146,177
<CGS> 86,398
<TOTAL-COSTS> 86,398
<OTHER-EXPENSES> 16,626
<LOSS-PROVISION> 198
<INTEREST-EXPENSE> 3,432
<INCOME-PRETAX> 1,854
<INCOME-TAX> 797
<INCOME-CONTINUING> 1,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,057
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
