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 1-13876
THERMOSPECTRA CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-3242970
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 29, 1999
Common Stock, $.01 par value 15,393,988
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMOSPECTRA CORPORATION
Consolidated Balance Sheet
(Unaudited)
<S> <C> <C>
Assets
October 2, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ---------- ----------
Current Assets:
Cash and cash equivalents $ 8,990 $20,717
Advance to affiliate (Note 7) 5,856 -
Accounts receivable, less allowances of $2,154 and $2,386 37,012 41,016
Inventories:
Raw materials and supplies 17,405 18,355
Work in process 4,396 5,899
Finished goods 5,759 7,491
Prepaid income taxes 13,116 10,188
Other current assets 2,002 2,271
-------- --------
94,536 105,937
-------- --------
Property, Plant, and Equipment, at Cost 32,398 30,517
Less: Accumulated depreciation and amortization 16,571 13,526
-------- --------
15,827 16,991
-------- --------
Patents, Trademarks, and Other Assets 6,828 7,280
-------- --------
Cost in Excess of Net Assets of Acquired Companies 117,611 119,674
-------- --------
$234,802 $249,882
======== ========
2
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THERMOSPECTRA CORPORATION
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 (includes $45,000 and $60,000 due to $48,089 $ 60,000
Thermo Electron)
Accounts payable 11,090 11,822
Accrued payroll and employee benefits 6,064 6,239
Accrued installation and warranty expenses 4,437 4,362
Deferred revenue 3,345 4,360
Accrued income taxes 5,672 3,735
Accrued restructuring costs (Note 6) 791 2,459
Other accrued expenses (Note 5) 10,116 10,684
Due to parent company and affiliated companies 1,953 4,528
-------- --------
91,557 108,189
-------- --------
Deferred Income Taxes and Other Deferred Items 4,788 3,558
-------- --------
Long-term Obligations, Due to Related Party 7,300 7,300
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 25,000,000 shares authorized; 154 153
15,387,785 and 15,327,620 shares issued
Capital in excess of par value 112,099 111,549
Retained earnings 21,310 19,763
Treasury stock at cost, 297 and 423 shares (8) (7)
Accumulated other comprehensive items (Note 2) (2,398) (623)
-------- --------
131,157 130,835
-------- --------
$234,802 $249,882
======== ========
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 2, October 3,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ---------- ----------
Revenues $44,512 $44,052
------- -------
Costs and Operating Expenses:
Cost of revenues 26,009 27,567
Selling, general, and administrative expenses 12,072 12,728
Research and development expenses 3,677 3,632
Restructuring costs (Note 6) 64 4,282
------- -------
41,822 48,209
------- -------
Operating Income (Loss) 2,690 (4,157)
Interest Income 109 314
Interest Expense, Related Party (894) (1,056)
Gain on Sale of Investments - 713
------- -------
Income (Loss) Before Income Taxes 1,905 (4,186)
Income Tax Provision (Benefit) 914 (1,683)
------- -------
Net Income (Loss) $ 991 $(2,503)
======= =======
Basic and Diluted Earnings (Loss) per Share (Note 3) $ .06 $ (.16)
======= =======
Weighted Average Shares (Note 3):
Basic 15,380 15,327
======= =======
Diluted 15,594 15,327
======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMOSPECTRA CORPORATION
Consolidated Statement of Operations
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- ------------------------------------------------------------------------------------ ---------- ----------
Revenues $129,121 $146,177
-------- --------
Costs and Operating Expenses:
Cost of revenues 76,496 86,398
Selling, general, and administrative expenses 35,550 40,006
Research and development expenses 11,207 12,344
Restructuring costs (Note 6) 939 4,282
Gain on sale of property, plant, and equipment (45) (339)
-------- --------
124,147 142,691
-------- --------
Operating Income 4,974 3,486
Interest Income 473 1,087
Interest Expense, Related Party (2,471) (3,432)
Gain on Sale of Investments - 713
-------- --------
Income Before Income Taxes 2,976 1,854
Income Tax Provision 1,429 797
-------- --------
Net Income $ 1,547 $ 1,057
======== ========
Basic and Diluted Earnings per Share (Note 3) $ .10 $ .07
======== ========
Weighted Average Shares (Note 3):
Basic 15,352 15,323
======== ========
Diluted 15,484 15,348
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
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THERMOSPECTRA CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------ ---------- ----------
Operating Activities:
Net income $ 1,547 $ 1,057
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 6,645 5,938
Provision for losses on accounts receivable 264 198
Gain on sale of property, plant, and equipment and investments (45) (1,052)
Other noncash items 142 1,689
Changes in current accounts, excluding the effects of a disposition:
Accounts receivable 2,931 2,116
Inventories 2,694 1,193
Other current assets 229 (8)
Accounts payable (594) (3,284)
Due to parent company and affiliated companies (2,362) 2,263
Other current liabilities (2,979) 303
Other - 300
------- --------
Net cash provided by operating activities 8,472 10,713
------- --------
Investing Activities:
Proceeds from sale of a product line - 750
Refund of acquisition purchase price 595 -
Proceeds from sale of available-for-sale investments - 2,769
Advances to affiliate, net (Note 7) (5,844) -
Purchases of property, plant, and equipment (2,663) (1,422)
Proceeds from sale of property, plant, and equipment 186 2,052
Other (187) (63)
------- --------
Net cash provided by (used in) investing activities (7,913) 4,086
------- --------
Financing Activities:
Repayment of obligations to Thermo Electron (15,000) (15,000)
Net proceeds from issuance of Company common stock 550 49
Increase in short-term borrowings 2,812 -
Other - 125
------- --------
Net cash used in financing activities (11,638) (14,826)
------- --------
Exchange Rate Effect on Cash (648) (194)
------- --------
Decrease in Cash and Cash Equivalents (11,727) (221)
Cash and Cash Equivalents at Beginning of Period 20,717 20,672
------- --------
Cash and Cash Equivalents at End of Period $ 8,990 $ 20,451
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
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Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by 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 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,
as amended, 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, in the 1998 period, unrealized net of tax
gains and losses from available-for-sale investments. During the third quarter
of 1999 and 1998, the Company had comprehensive income of $1,286,000 and a
comprehensive loss of $2,564,000, respectively. During the first nine months of
1999 and 1998, the Company had a comprehensive loss of $228,000 and
comprehensive income of $1,701,000, respectively.
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3. Earnings (Loss) per Share
Basic and diluted earnings (loss) 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 (Loss) $ 991 $(2,503) $1,547 $ 1,057
------ ------- ------ -------
Weighted Average Shares 15,380 15,327 15,352 15,323
------ ------- ------ -------
Basic Earnings (Loss) per Share $ .06 $ (.16) $ .10 $ .07
====== ======= ====== =======
Diluted
Net Income $ 991 $(2,503) $1,547 $ 1,057
------ ------- ------ -------
Weighted Average Shares 15,380 15,327 15,352 15,323
Effect of Stock Options 214 - 132 25
------ ------- ------ -------
Weighted Average Shares, as Adjusted 15,594 15,327 15,484 15,348
------ ------- ------ -------
Diluted Earnings (Loss) per Share $ .06 $ (.16) $ .10 $ .07
====== ======= ====== =======
7
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3. Earnings (Loss) per Share (continued)
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 2, 1999, there
were 2,250 of such options outstanding, with exercise prices ranging from $15.88
to $17.15 per share.
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:
Imaging and Inspection $ 20,871 $ 19,988 $ 62,750 $ 65,101
Temperature Control 13,642 13,666 38,154 48,211
Test and Measurement 9,999 10,398 28,217 32,865
--------- -------- --------- --------
$ 44,512 $ 44,052 $ 129,121 $146,177
========= ======== ========= ========
Income (Loss) Before Income Taxes:
Imaging and Inspection (a) $ 1,060 $ (1,807) $ 1,816 $ 1,249
Temperature Control (b) 1,313 886 2,691 5,384
Test and Measurement (c) 862 (2,899) 2,007 (1,715)
Corporate (d) (545) (337) (1,540) (1,432)
--------- -------- --------- --------
Total operating income (loss) 2,690 (4,157) 4,974 3,486
Interest expense and other income, net (785) (29) (1,998) (1,632)
--------- -------- --------- --------
$ 1,905 $ (4,186) $ 2,976 $ 1,854
========= ======== ========= ========
(a) Includes restructuring and related costs of $0.1 million and $0.9 million in
the three- and nine-month periods ended October 2, 1999, respectively, and
$2.1 million in the three- and nine-month periods ended October 3, 1998.
(b) Includes restructuring costs of $0.2 million in the three- and nine-month
periods ended October 3, 1998.
(c) Includes restructuring and related costs of $3.1 million in the three- and
nine-month periods ended October 3, 1998.
(d) Primarily general and administrative expenses.
5. Accrued Acquisition Expenses
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, as detailed below,
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.
8
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5. Accrued Acquisition Expenses (continued)
A summary of the changes in accrued acquisition expenses for severance
follows:
Imaging and
Inspection
Segment
(In thousands) TopoMetrix
- --------------------------------------------------------------- -------------- ------------- --------------
Balance at January 2, 1999 $ 30
Reserves established 44
Usage (69)
Currency translation (4)
-----
Balance at October 2, 1999 $ 1
=====
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A summary of the changes in accrued acquisition expenses for the
abandonment of excess facilities follows:
<S> <C> <C> <C> <C>
(In thousands) Imaging and Temperature
Inspection Control
Segment Segment
TopoMetrix NESLAB Total
--------------------------------------------------------------------------------------------------------
Balance at January 2, 1999 $ 365 $ 51 $ 416
Reserves established 235 - 235
Usage (485) (41) (526)
Currency translation (21) (5) (26)
----- ----- -----
Balance at October 2, 1999 $ 94 $ 5 $ 99
===== ===== =====
The increase in accrued acquisition expenses in 1999 principally related
to cancellation of operating leases at the Imaging and Inspection segment's
TopoMetrix Corporation subsidiary's sales and services office in Germany and at
its manufacturing facility in California, both of which were closed. In
addition, the increase represented severance across all functions at this
business.
Amounts accrued at October 2, 1999, primarily represent ongoing payments
for abandonment of excess facilities. Accrued acquisition expenses are included
in other accrued expenses in the accompanying balance sheet.
6. Restructuring Costs
During 1998, the Company recorded restructuring costs, which were
accounted for in accordance with EITF 94-3, primarily for severance for 259
employees. As of January 2, 1999, the Company had terminated 182 employees and
had $2,459,000 accrued for severance costs. During the first quarter of 1999,
the Company terminated 30 additional employees and incurred restructuring costs
of $758,000, which consisted of $259,000 related to severance costs for four
employees at a foreign sales office, $155,000 for facility-closing costs, and
$344,000 related to certain business relocation and related costs. During the
second quarter of 1999, the Company terminated six additional employees and
incurred restructuring costs of $117,000, which consisted of $6,000 related to
severance costs for five employees at a foreign sales office, $46,000 for
facility-closing costs, and $65,000 for certain business relocation and related
costs. During the third quarter of 1999, the Company incurred restructuring
costs of $64,000, which represent facility-closing costs. The Company expects
that the remainder of the employees will be terminated primarily in the fourth
quarter of 1999.
9
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6. Restructuring Costs (continued)
A summary of the changes in accrued restructuring costs for the Company's
1998 restructuring plan follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 2, 1999 $ 2,459 $ - $ - $ 2,459
Costs incurred in 1999 (a) 265 265 409 939
1999 Usage (1,902) (265) (409) (2,576)
Currency translation (31) - - (31)
------- ------- ------- -------
Balance at October 2, 1999 $ 791 $ - $ - $ 791
======= ======= ======= =======
(a) Reflects restructuring costs recorded by the Imaging and Inspection segment.
In connection with the Company's restructuring activities, the Company
expects to incur approximately $100,000 of additional costs which, pursuant to
the requirements of EITF 94-3, are not permitted as charges until incurred.
These additional costs primarily include costs for certain employee and business
relocation and related costs. The Company plans to complete the implementation
of its restructuring plan in the fourth quarter of 1999.
7. Cash Management Arrangements
Effective June 1, 1999, the Company and Thermo Electron Corporation
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 Dealer Commercial Paper
Rate (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.
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 these arrangements are included in "advance to
affiliate" in the accompanying balance sheet.
Under the new domestic cash management arrangement, amounts borrowed from
Thermo Electron by the Company for domestic cash management purposes bear
interest at the 30-day DCP Rate plus 150 basis points, set at the beginning of
each month. Amounts borrowed under this arrangement are included in "short-term
obligations" in the accompanying balance sheet as of October 2, 1999.
8. Proposed Merger
On May 21, 1999, the Company entered into a definitive agreement and plan
of merger with Thermo Instrument Systems Inc. pursuant to which Thermo
Instrument would acquire all of the outstanding shares of Company common stock
held by shareholders other than Thermo Instrument and Thermo Electron in
exchange for $16.00 in cash per share, without interest. Following the merger,
the Company's common stock would cease to be publicly traded. The Board of
Directors of the Company unanimously approved the merger agreement based on a
recommendation by a
10
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8. Proposed Merger (continued)
special committee of the Board of Directors, consisting solely of outside
directors of the Company. The special committee's recommendation was based on
extensive negotiations, related to the pricing and terms of this proposed
transaction, with representatives of Thermo Instrument. The completion of this
merger is subject to certain conditions, including shareholder approval of the
merger agreement. The Company has set December 9, 1999, as the meeting date for
shareholders to vote on the approval of the merger agreement. Thermo Electron
and Thermo Instrument intend to vote all of their shares of common stock of the
Company in favor of approval of the merger agreement and, therefore, approval of
the merger agreement is assured. This merger is expected to be completed shortly
after the shareholder meeting.
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," "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 Amendment No. 1 to the Company's Annual Report on
Form 10-K/A for the fiscal year ended January 2, 1999, filed with the Securities
and Exchange Commission.
Overview
The Company develops, manufactures, and markets precision instruments in
three segments: Imaging and Inspection, Temperature Control, and Test and
Measurement. 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 Imaging and
Inspection segment includes X-ray microanalysis instruments; X-ray fluorescence
instruments; nondestructive X-ray inspection systems; specialty X-ray tubes; and
confocal laser scanning microscopes. In 1998, the Company acquired a
manufacturer of scanning probe microscopes, TopoMetrix Corporation. The
Temperature Control segment manufactures and markets precision temperature
control systems for analytical, laboratory, industrial, research and
development, laser, and semiconductor applications. The Test and Measurement
segment includes digital oscillographic recorders, digital storage oscilloscopes
(DSOs), and data acquisition systems.
The Company's growth strategy has included acquiring complementary
businesses, developing new applications for its technologies to address related
market segments, and strengthening its presence in selected geographic markets.
Because the Company competes primarily on the basis of its technology in all of
its segments, 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. As part of this
plan, the Company completed the divestiture of a low-margin product line and
undertook certain other restructuring actions during 1998.
A significant portion of the Company's total revenues, primarily in the
Imaging and Inspection and Temperature Control segments, 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 things, the level of capital spending by semiconductor
companies. The semiconductor industry has been experiencing weakness in demand
for its products as a result of the economic crisis in Asia, excess
manufacturing capacity, and a slowdown in sales of high-end personal computers.
Many semiconductor manufacturers delayed construction or expansion of their
production facilities in response to the foregoing conditions. The slowdown
11
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Overview (continued)
in semiconductor activity began to affect demand for the Company's products in
the second quarter of 1998. During the first nine months of 1999, the
semiconductor industry has shown some increased activity, but not to the levels
experienced prior to this most recent slowdown. Continued fluctuation in the
semiconductor industry could have a significant adverse effect upon the demand
for the Company's products and related services, which could materially
adversely affect the Company's business and future results of operations.
The Company anticipates that a significant portion of its revenues in all
three segments will 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 1999 Compared With Third Quarter 1998
Total revenues increased to $44.5 million in the third quarter of 1999
from $44.1 million in the third quarter of 1998. Revenues from the Imaging and
Inspection segment increased to $20.9 million in 1999 from $20.0 million in
1998, primarily due to the inclusion of $2.1 million of revenues from
TopoMetrix, acquired in October 1998. The increase was offset in part by a $0.9
million decrease in revenues at Nicolet Imaging Systems (NIS) due to lower
demand for certain automated systems in overseas markets and a $0.9 million
decrease in revenues at Kevex Instruments due to lower demand. Revenues from the
Temperature Control segment were relatively unchanged at $13.6 million in 1999
and $13.7 million in 1998. Revenues from the Test and Measurement segment
decreased to $10.0 million in 1999 from $10.4 million in 1998, primarily due to
a decline in demand for its products. The Company's total backlog increased to
$27.2 million at October 2, 1999, from $26.0 million at year-end 1998.
The gross profit margin increased to 42% in the third quarter of 1999 from
37% in the third quarter of 1998, primarily due to the inclusion in the 1998
period of an inventory write-down of $1.1 million. The inventory write-down was
recorded in cost of revenues and related to the discontinuation of certain
underperforming products, including certain recorders and plotters in the Test
and Measurement segment, and excess inventories in the Imaging and Inspection
segment due to the consolidation of facilities. Excluding the inventory
write-down in 1998, the gross profit margin increased approximately 2% in 1999,
primarily due to reduced spending on labor and overhead of $0.5 million as a
result of restructuring actions commenced in 1998.
Selling, general, and administrative expenses as a percentage of revenues
decreased to 27% in the third quarter of 1999 from 29% in the third quarter of
1998, primarily due to decreased spending levels resulting from restructuring
actions commenced in 1998.
Research and development expenses were relatively unchanged at $3.7
million in the third quarter of 1999 and $3.6 million in the third quarter of
1998.
The Company recorded restructuring costs of $0.1 million in the third
quarter of 1999, all of which represents cash costs that were paid in 1999 (Note
6). The restructuring charges were recorded by the Imaging and Inspection
segment and relate to actions initiated in 1998 for facility-closing costs at
Kevex Instruments in connection with the closure of its southern California
facility. 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. In addition to the inventory write-down recorded in the third
quarter of 1998, the Company recorded restructuring costs of $4.3 million in
1998. The restructuring charges consisted of severance costs of $3.7 million for
259 employees and facility-closing costs of $0.6 million.
12
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Third Quarter 1999 Compared With Third Quarter 1998 (continued)
Interest income decreased to $0.1 million in the third quarter of 1999
from $0.3 million in the third quarter of 1998, principally due to a reduction
in invested balances as a result of the repayment of an aggregate $25.0 million
of promissory notes to Thermo Electron Corporation in August 1998 and March
1999. Interest expense, related party, decreased to $0.9 million in 1999 from
$1.1 million in 1998, primarily due to the repayment of such promissory notes.
During the third quarter of 1998, the Company sold the shares of
SteriGenics International, Inc. common stock that were obtained in connection
with the 1997 sale of its Linac business, resulting in a gain of $713,000.
The effective tax rate was a provision of 48% in the third quarter of
1999, compared with a benefit of 40% in the third quarter of 1998. The effective
tax rate exceeded the statutory federal income tax rate in both periods
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 and, in 1999, the inability to provide a tax benefit on
certain foreign losses. The effective tax rate increased primarily due to the
higher relative impact of nondeductible amortization of cost in excess of net
assets of acquired companies.
First Nine Months 1999 Compared With First Nine Months 1998
Total revenues decreased to $129.1 million in the first nine months of
1999 from $146.2 million in the first nine months of 1998. Revenues from the
Imaging and Inspection segment decreased $2.4 million to $62.8 million in 1999,
primarily due to a $4.9 million decrease in revenues at Kevex Instruments as a
result of lower demand and lower revenues due to softness in the semiconductor
industry in the first half of 1999, compared with the first half of 1998. In
addition, revenues decreased $2.4 million at NIS due to lower demand for certain
automated systems in overseas markets. The decrease in revenues at the Imaging
and Inspection segment was offset in part by an increase of $6.0 million due to
the inclusion of revenues from TopoMetrix, acquired in October 1998. Revenues
from the Temperature Control segment decreased $10.1 million to $38.2 million in
1999, principally due to softness in the semiconductor industry in the first
half of 1999, compared with the first half of 1998. Revenues from the Test and
Measurement segment decreased $4.6 million to $28.2 million in 1999, primarily
due to a decline in demand for its products.
The gross profit margin was 41% in the first nine months of 1999 and 1998.
A decrease in the gross profit margin due to lower sales volume was offset by
reduced spending on labor and overhead of $3.7 million as a result of
restructuring actions commenced in 1998. In addition, the 1998 period included
an inventory write-down of $1.1 million, 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 1998, primarily due to decreased revenues. Selling, general, and
administrative expenses decreased 11% to $35.6 million in 1999, primarily as a
result of restructuring actions commenced in 1998.
Research and development expenses decreased to $11.2 million in the first
nine months of 1999 from $12.3 million in the first nine months of 1998. The
decreased spending resulted from the discontinuation of research and development
efforts on underperforming product lines, which reduced expenses by $0.7 million
and, to a lesser extent, the completion of efforts relating to new-product
releases.
The Company recorded restructuring costs of $0.9 million in the first nine
months of 1999, all of which represent cash costs that were paid in 1999 (Note
6). The restructuring costs relate to actions initiated in 1998 and consist of
severance costs of $0.3 million, facility-closing costs of $0.2 million, and
business relocation and related costs of $0.4 million. Of the total charge for
severance, $0.2 million was recorded by Park Scientific Instruments Corporation
(PSI) and $40,000 was recorded by Kevex Instruments, both of which are included
in the Imaging and Inspection segment. The severance charge was for terminations
across all functions. The restructuring charges for facility-closing and
business relocation and related costs were recorded by Kevex Instruments and
relate to the closure of its southern
13
<PAGE>
First Nine Months 1999 Compared With First Nine Months 1998 (continued)
California facility. In addition to the inventory write-down recorded in the
third quarter of 1998, the Company recorded restructuring costs of $4.3 million
in 1998 as discussed in the results of operations for the third quarter.
Interest income decreased to $0.5 million in the first nine months of 1999
from $1.1 million in the first nine months of 1998. Interest expense, related
party, decreased to $2.5 million in 1999 from $3.4 million in 1998. Interest
income and interest expense decreased due to the reasons discussed in the
results of operations for the third quarter.
During the third quarter of 1998, the Company sold the shares of
SteriGenics International, Inc. common stock that were obtained in connection
with the 1997 sale of its Linac business, resulting in a gain of $713,000.
The effective tax rate was 48% in the first nine months of 1999, compared
with 43% in the first nine months of 1998. The effective tax rate exceeded the
statutory federal income tax rate in both periods 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 and, in
1999, the inability to provide a tax benefit on certain foreign losses. The
effective tax rate increased primarily due to the inability to provide a tax
benefit on certain foreign losses in 1999.
Liquidity and Capital Resources
The Company had working capital of $3.0 million at October 2, 1999,
compared with negative working capital of $2.3 million at January 2, 1999.
Included in working capital are cash and cash equivalents of $9.0 million at
October 2, 1999, compared with $20.7 million at January 2, 1999. In addition, as
of October 2, 1999, the Company had $5.9 million invested in an advance to
affiliate. Prior to the use of new cash management arrangements between the
Company and Thermo Electron (Note 7), which became effective in 1999, such
amounts were included in cash and cash equivalents. Also reflected in working
capital are notes payable to Thermo Electron of $45.0 million at October 2,
1999, and $60.0 million at January 2, 1999.
During the first nine months of 1999, the Company's operating activities
provided $8.5 million of cash. A decrease in accounts receivable, primarily due
to lower revenues, provided $2.9 million of cash. A decrease in inventories, due
to the timing of shipments and sale of demonstration inventory, provided $2.7
million of cash. These increases in cash were reduced in part by the use of $2.4
million of cash to fund a decrease in amounts due to parent company and
affiliated companies, primarily due to the timing of payments. In addition, cash
of $3.0 million was used to fund a decrease in other current liabilities,
primarily for cash payments relating to severance and facility-closure costs
(Note 6). As of October 2, 1999, the Company had $0.8 million of accrued
restructuring costs, of which it expects to pay $0.2 million in the fourth
quarter of 1999 and the remainder in 2000.
During the first nine months of 1999, the Company's primary investing
activities, excluding advance to affiliate activity, included the purchase of
property, plant, and equipment. The Company used $2.7 million of cash for
purchases of property, plant, and equipment and received a $0.6 million refund
of a portion of the acquisition purchase price for PSI, which resulted from the
final determination of the post-closing adjustment. During the remainder of
1999, the Company plans to expend approximately $1.3 million for purchases of
property, plant, and equipment.
During the first nine months of 1999, the Company's financing activities
used $11.6 million of cash. The Company repaid $10.0 million of borrowings to
Thermo Electron in March 1999. In addition, in July 1999 the Company repaid its
$5.0 million promissory note owed to Thermo Electron, and Thermo Electron
extended the maturity of the Company's $45.0 million promissory note to December
1999. The promissory note bears interest at the 30-day Dealer Commercial Paper
Rate plus 150 basis points, set at the beginning of each month. In addition, an
increase in short-term borrowings provided $2.8 million of cash.
14
<PAGE>
Liquidity and Capital Resources (continued)
The Company generally expects to have positive cash flow from its existing
operations. Although the Company does not presently intend to actively seek to
acquire additional businesses in the near future, it may acquire one or more
complementary businesses if they are presented to the Company on terms the
Company believes to be attractive. Such acquisitions may require significant
amounts of cash. The Company expects that it would seek to finance any such
acquisitions through a combination of internal funds and/or short-term
borrowings from Thermo Instrument or Thermo Electron, although it has no
agreement with these companies to ensure that any additional funds will be
available on acceptable terms or at all. Thermo Electron has indicated that it
will seek repayment from the Company of its $45.0 million promissory note, the
maturity of which was extended by Thermo Electron to December 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, including at least the next 24 months.
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 its key
suppliers and vendors to determine their year 2000 compliance status; 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. In the first phase of the program, the Company
tested and evaluated critical information technology systems and non-information
technology systems for year 2000 compliance, which efforts included testing and
evaluating its significant computer systems, software applications, and related
equipment for year 2000 compliance, and testing the year 2000 readiness of its
manufacturing, utility, and telecommunications systems at its critical
facilities. In phase two of its program, any material noncompliant information
technology systems or non-information technology systems that were identified
during phase one were prioritized and remediated. In many cases, upgrades or
replacements were made in the ordinary course of business, without accelerating
previously scheduled upgrades or replacements. The Company believes that all of
its material information technology systems and critical non-information
technology systems are currently year 2000 compliant.
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 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 such products. The Company is focusing its efforts on products that are
still under warranty and/or are early in their expected life. The Company is
offering upgrades and/or identifying potential solutions where reasonably
practicable.
The Company has also identified and assessed the year 2000 readiness of key
suppliers and vendors that are believed to be significant to the Company's
business operations. As part of this effort, the Company developed and
distributed questionnaires relating to year 2000 compliance to its significant
suppliers and vendors. The Company
15
<PAGE>
Year 2000 (continued)
followed up with its significant suppliers and vendors that did not respond to
the Company's questionnaires. The Company has substantially completed its
assessment of third-party risk.
Contingency Plan
The Company has developed 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
To date, costs incurred in connection with the year 2000 issue have not
been material. The Company does not expect total year 2000 remediation costs to
be material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance. Year 2000 costs
are, and will continue to be, 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. 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 significant
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 significant adverse impact on the Company's business,
operations, and financial condition in amounts that cannot be reasonably
estimated at this time.
16
<PAGE>
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates and interest rates 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.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 12th day of November 1999.
THERMOSPECTRA CORPORATION
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THERMOSPECTRA CORPORATION'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> 8,990
<SECURITIES> 0
<RECEIVABLES> 39,166
<ALLOWANCES> 2,154
<INVENTORY> 27,560
<CURRENT-ASSETS> 94,536
<PP&E> 32,398
<DEPRECIATION> 16,571
<TOTAL-ASSETS> 234,802
<CURRENT-LIABILITIES> 91,557
<BONDS> 0
0
0
<COMMON> 154
<OTHER-SE> 131,003
<TOTAL-LIABILITY-AND-EQUITY> 234,802
<SALES> 129,121
<TOTAL-REVENUES> 129,121
<CGS> 76,496
<TOTAL-COSTS> 76,496
<OTHER-EXPENSES> 894
<LOSS-PROVISION> 264
<INTEREST-EXPENSE> (2,471)
<INCOME-PRETAX> 2,976
<INCOME-TAX> 1,429
<INCOME-CONTINUING> 1,547
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,547
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
