SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended April 3, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-8002
THERMO ELECTRON CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2209186
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at April 30, 1999
Common Stock, $1.00 par value 157,885,450
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
1
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
<S> <C> <C>
Assets
April 3, January 2,
(In thousands) 1999 1999
- ---------------------------------------------------------------------------------- ------------ ----------
Current Assets:
Cash and cash equivalents $ 404,195 $ 396,670
Short-term available-for-sale investments at quoted market value 753,801 1,150,585
(amortized cost of $749,069 and $1,144,785)
Accounts receivable, less allowances of $63,073 and $52,607 901,241 875,615
Unbilled contract costs and fees 98,078 87,031
Inventories:
Raw materials and supplies 299,470 267,901
Work in process 145,838 127,144
Finished goods 238,218 204,662
Prepaid and refundable income taxes 159,281 143,352
Prepaid expenses 67,513 48,369
---------- ----------
3,067,635 3,301,329
---------- ----------
Property, Plant, and Equipment, at Cost 1,373,642 1,291,485
Less: Accumulated depreciation and amortization 479,612 458,523
---------- ----------
894,030 832,962
---------- ----------
Long-term Available-for-sale Investments, at Quoted Market Value 74,287 95,537
(amortized cost of $78,243 and $99,256)
---------- ----------
Other Assets 276,782 186,168
---------- ----------
Cost in Excess of Net Assets of Acquired Companies (Note 6) 2,037,664 1,915,649
---------- ----------
$6,350,398 $6,331,645
========== ==========
2
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THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 3, January 2,
(In thousands except share amounts) 1999 1999
- ---------------------------------------------------------------------------------- ------------ ----------
Current Liabilities:
Notes payable and current maturities of long-term obligations $ 159,800 $ 134,071
Accounts payable 277,387 272,503
Accrued payroll and employee benefits 145,417 142,323
Accrued income taxes 100,243 92,623
Accrued installation and warranty costs 77,344 71,118
Deferred revenue 68,859 60,582
Other accrued expenses (Notes 6 and 7) 396,613 365,103
---------- ----------
1,225,663 1,138,323
---------- ----------
Deferred Income Taxes and Other Deferred Items 200,765 175,984
---------- ----------
Long-term Obligations:
Senior convertible obligations 187,042 187,042
Senior notes 150,000 150,000
Subordinated convertible obligations 1,623,461 1,639,052
Nonrecourse tax-exempt obligations 15,500 15,500
Other 45,983 33,937
---------- ----------
2,021,986 2,025,531
---------- ----------
Minority Interest 602,948 649,382
---------- ----------
Common Stock of Subsidiaries Subject to Redemption ($92,844 and $95,262 91,446 94,301
redemption value)
---------- ----------
Shareholders' Investment:
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized; 167,016,009 167,016 166,971
and 166,970,806 shares issued
Capital in excess of par value 1,024,226 1,033,799
Retained earnings 1,244,840 1,216,541
Treasury stock at cost, 9,131,368 and 8,477,707 shares (162,081) (151,643)
Deferred compensation (1,796) -
Accumulated other comprehensive items (Note 2) (64,615) (17,544)
---------- ----------
2,207,590 2,248,124
---------- ----------
$6,350,398 $6,331,645
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
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THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues:
Product and service revenues $ 962,418 $ 900,997
Research and development contract revenues 47,120 43,266
---------- ---------
1,009,538 944,263
---------- ---------
Costs and Operating Expenses:
Cost of product and service revenues 582,060 533,694
Expenses for research and development (a) 101,925 91,318
Selling, general, and administrative expenses 257,802 226,854
Restructuring costs and other nonrecurring income, net (Note 7) (2,967) -
---------- ---------
938,820 851,866
---------- ---------
Operating Income 70,718 92,397
Gain on Issuance of Stock by Subsidiaries - 39,605
Other Expense, Net (Note 3) (7,400) (2,369)
---------- ---------
Income Before Income Taxes, Minority Interest, and Extraordinary Item 63,318 129,633
Provision for Income Taxes 30,899 40,794
Minority Interest Expense 4,120 24,069
---------- ---------
Income Before Extraordinary Item 28,299 64,770
Extraordinary Item, Net of Provision for Income Taxes and Minority - 723
Interest of $1,262 (Note 4)
---------- ---------
Net Income $ 28,299 $ 65,493
========== =========
Earnings per Share (Note 4):
Basic $ .18 $ .41
========== =========
Diluted $ .17 $ .37
========== =========
Weighted Average Shares (Note 4):
Basic 158,045 159,131
========== =========
Diluted 158,270 176,580
========== =========
(a) Includes Costs of:
Research and development contracts $ 41,276 $ 38,727
Internally funded research and development 60,649 52,591
---------- ---------
$ 101,925 $ 91,318
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
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THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ------------------------------------------------------------------------ ---------- ----------- ----------
Operating Activities:
Net income $ 28,299 $ 65,493
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 45,118 38,059
Noncash restructuring costs and other nonrecurring income, 599 -
net (Note 7)
Provision for losses on accounts receivable 3,640 1,856
Change in deferred income taxes 2,831 (699)
Minority interest expense 4,120 24,069
Gain on issuance of stock by subsidiaries - (39,605)
Gain on sale of business (Note 7) (11,099) -
(Gain) loss on sale of investments, net (2,770) 160
Extraordinary item, net of income taxes and minority interest - (723)
Other noncash items 3,039 4,611
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable 35,235 15,998
Inventories (9,881) (19,696)
Other current assets (15,461) (4,822)
Accounts payable (9,572) (2,561)
Other current liabilities (3,249) (12,418)
---------- ---------
Net cash provided by operating activities 70,849 69,722
---------- ---------
Investing Activities:
Acquisitions, net of cash acquired (Note 6) (334,484) (5,625)
Acquisition of Thermo Voltek common stock (Note 8) (19,779) -
Proceeds from sale of a business 13,537 -
Purchases of available-for-sale investments (130,427) (610,285)
Proceeds from sale and maturities of available-for-sale 548,124 327,205
investments
Purchases of property, plant, and equipment (24,134) (37,766)
Proceeds from sale of property, plant, and equipment 7,855 5,702
Increase in other assets (2,033) (509)
Other 13 3,652
---------- ---------
Net cash provided by (used in) investing activities $ 58,672 $(317,626)
---------- ---------
5
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THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Three Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ------------------------------------------------------------------------ ---------- ----------- ----------
Financing Activities:
Net proceeds from issuance of long-term obligations $ 14,583 $ 249,963
Repayment of long-term obligations (5,406) (1,902)
Net proceeds from issuance of Company and subsidiary common 2,551 124,791
stock
Purchases of Company and subsidiary common stock and (97,736) (79,697)
subordinated convertible debentures
Redemption of subsidiary common stock (17,070) -
Decrease in short-term notes payable (3,161) (42,217)
Other (47) (1,632)
---------- ---------
Net cash provided by (used in) financing activities (106,286) 249,306
---------- ---------
Exchange Rate Effect on Cash (15,710) 682
---------- ---------
Increase in Cash and Cash Equivalents 7,525 2,084
Cash and Cash Equivalents at Beginning of Period 396,670 593,580
---------- ---------
Cash and Cash Equivalents at End of Period $ 404,195 $ 595,664
========== =========
Noncash Activities:
Conversions of subsidiary convertible obligations $ - $ 5,090
========== =========
Fair value of assets of acquired companies $ 571,252 $ 9,191
Cash paid for acquired companies (374,986) (5,700)
Issuance of subsidiary common stock for acquired company - (275)
---------- ---------
Liabilities assumed of acquired companies $ 196,266 $ 3,216
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
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Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Electron 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 April 3, 1999, and the results
of operations and cash flows for the three-month periods ended April 3, 1999,
and April 4, 1998. Certain prior period amounts have been reclassified to
conform to the presentation in the current financial statements. Interim results
are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of January 2, 1999, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999,
filed with the Securities and Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including foreign
currency translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments. During the first quarter of 1999 and 1998, the
Company had a comprehensive loss of $9.1 million and comprehensive income of
$62.2 million, respectively.
3. Other Expense, Net
The components of other expense, net in the accompanying statement of
income are:
Three Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Interest Income $ 17,959 $23,765
Interest Expense (27,686) (25,607)
Gain (Loss) on Sale of Investments, Net 2,770 (160)
Other (443) (367)
-------- -------
$ (7,400) $(2,369)
======== =======
7
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4. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
April 3, April 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Basic
Net Income $ 28,299 $65,493
-------- -------
Weighted Average Shares 158,045 159,131
-------- -------
Basic Earnings per Share $ .18 $ .41
======== =======
Diluted
Net Income $ 28,299 $65,493
Effect of:
Convertible obligations - 3,667
Majority-owned subsidiaries' dilutive securities (1,183) (4,192)
-------- -------
Income Available to Common Shareholders, as Adjusted $ 27,116 $64,968
-------- -------
Weighted Average Shares 158,045 159,131
Effect of:
Convertible obligations - 15,476
Stock options 138 1,973
Put options 87 -
-------- -------
Weighted Average Shares, as Adjusted 158,270 176,580
-------- -------
Diluted Earnings per Share $ .17 $ .37
======== =======
The computation of diluted earnings per share for the first quarter of
1999 excludes the effect of assuming the conversion of the Company's $585.0
million principal amount 4 1/4% subordinated convertible debentures, convertible
at $37.80 per share, because the effect would be antidilutive. In addition, the
computation of diluted earnings per share for each period excludes the effect of
assuming the exercise of certain outstanding stock options because the effect
would be antidilutive. As of April 3, 1999, there were 9,610,000 of such options
outstanding, with exercise prices ranging from $15.26 to $43.46 per share. The
computation of diluted earnings per share for the first quarter of 1999 also
excludes the effect of assuming the repurchase of 4,034,000 shares (of an
aggregate maximum of 5,701,000 shares) of Company common stock at a weighted
average exercise price of $13.97 per share in connection with put options sold
to an institutional counterparty, because the effect would be antidilutive.
During the first quarter of 1998, the Company recorded an extraordinary
gain in connection with the repurchase of subsidiary subordinated convertible
debentures, which increased basic earnings per share by $.01. The extraordinary
gain had no impact on diluted earnings per share.
8
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5. Business Segment Information
Three Months Ended
April 3, April 4,
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------- ------------ ----------
Revenues:
Measurement and Detection $ 516,764 $ 462,036
Biomedical and Emerging Technologies 236,329 223,262
Energy and Environment 184,280 186,992
Recycling and Resource Recovery 74,215 73,312
Intersegment (a) (2,050) (1,339)
---------- ----------
$1,009,538 $ 944,263
========== ==========
Income Before Income Taxes, Minority Interest, and Extraordinary Item:
Measurement and Detection $ 53,594 $ 66,734
Biomedical and Emerging Technologies 2,000 18,532
Energy and Environment 8,609 7,641
Recycling and Resource Recovery 14,762 7,875
---------- ----------
Total segment income (b) 78,965 100,782
Corporate (c) (15,647) 28,851
---------- ----------
$ 63,318 $ 129,633
========== ==========
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Segment income is income before corporate general and administrative
expenses, other income and expense, minority interest expense, income taxes,
and extraordinary item.
(c) Includes corporate general and administrative expense, other income and
expense, and gain on issuance of stock by subsidiaries.
6. Acquisitions
During the first quarter of 1999, Thermo Instrument 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 Thermo Instrument's cash tender
offer to acquire all of the outstanding shares of Spectra-Physics. Thermo
Instrument expects to acquire the remaining Spectra-Physics shares outstanding
for approximately 160 Swedish krona per share pursuant to the compulsory
acquisition rules applicable to Swedish companies. The aggregate purchase price
was approximately $347.2 million, including related expenses. On the date of
acquisition, Spectra-Physics had $39.1 million of cash, which included $30.5
million held by its majority-owned subsidiary. The accompanying balance sheet as
of April 3, 1999, includes $2.5 million accrued for the purchase of the
remaining Spectra-Physics shares outstanding. Spectra-Physics manufactures a
wide range of laser-based instrumentation systems, primarily for the
process-control, industrial measurement, construction, research, commercial, and
government markets. Spectra-Physics had revenues of approximately $442 million
in 1998, with operations throughout North America and Europe, and a presence in
the Pacific Rim.
In addition, the Company and its majority-owned subsidiaries made several
other acquisitions during the first quarter of 1999 for $26.4 million in cash,
net of cash acquired, subject to certain 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.
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9
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6. Acquisitions (continued)
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 $150.2 million, which is being amortized over periods not exceeding 40 years.
Allocation of the purchase price for these acquisitions was based on estimates
of the fair value of the net assets acquired and is subject to adjustment upon
finalization of the purchase price allocations. The Company has gathered no
information that indicates the final allocations will differ materially from the
preliminary estimates. Pro forma results have not been presented as the results
of the acquired businesses were not material to the Company's results of
operations.
The Company has undertaken restructuring activities at certain acquired
businesses. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily
have included reductions in staffing levels and the abandonment of excess
facilities. In connection with these restructuring activities, as part of the
cost of acquisitions, the Company established reserves, primarily for severance
and excess facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. Unresolved matters at April 3, 1999, primarily included completion
of planned severances and abandonment of excess facilities for certain
acquisitions completed during the last twelve months. A summary of the changes
in accrued acquisition expenses, which are included in other accrued expenses in
the accompanying balance sheet, follows:
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Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance at January 2, 1999 $ 7,347 $14,577 $ 1,268 $23,192
Reserves established 14,140 498 463 15,101
Usage (3,279) (888) (159) (4,326)
Decrease due to finalization of (224) - (262) (486)
restructuring plans, recorded as a
decrease to cost in excess of net assets
of acquired companies
Currency translation adjustment (6) (282) (297) (585)
------- ------- ------- -------
Balance at April 3, 1999 $17,978 $13,905 $ 1,013 $32,896
======= ======= ======= =======
7. Restructuring Costs and Other Nonrecurring Income, Net
During the first quarter of 1999, the Company and certain of its
subsidiaries recorded restructuring costs of $5.6 million, which were accounted
for in accordance with EITF 94-3, and other nonrecurring income, net, of $8.6
million as described below.
Thermo Fibertek Inc.
Thermo Fibertek recorded $2.3 million of restructuring costs during the
first quarter of 1999, consisting of $1.3 million for severance costs for 38
employees across all functions, none of whom were terminated as of April 3,
1999, and $1.0 million to terminate distributor agreements. In addition, Thermo
Fibertek recorded nonrecurring income of $10.0 million, consisting of an $11.1
million gain on the sale of its Thermo Wisconsin, Inc. subsidiary and $1.1
million of nonrecurring costs. The nonrecurring costs consist of $0.5 million
for the expected settlement of a legal dispute, $0.3 million for the impairment
of a building held for disposal, and $0.3 million of other nonrecurring costs.
Thermedics Inc.
Thermedics recorded $1.4 million of nonrecurring costs in the first
quarter of 1999, primarily for investment banking fees associated with the
proposed transfer of the Company's wholly owned Thermo Biomedical group of
subsidiaries to Thermedics.
10
<PAGE>
7. Restructuring Costs and Other Nonrecurring Income, Net (continued)
Thermo Instrument Systems Inc.
In connection with restructuring actions commenced in 1998, Thermo
Instrument recorded restructuring costs of $1.2 million at certain of its
subsidiaries during the first quarter of 1999. The restructuring costs consist
of $0.7 million for business relocation and facility-closure costs, $0.3 million
of costs related to severance for 8 employees, and $0.2 million of other
restructuring costs. Thermo Instrument expects to incur additional restructuring
costs totaling $1.1 million through the third quarter of 1999.
ThermoTrex Corporation
ThermoTrex recorded restructuring costs of $1.1 million during the first
quarter of 1999, of which $0.6 million was recorded at Trex Medical Corporation.
The restructuring costs were related to severance for 72 employees across all
functions, all of whom were terminated during the quarter. In May 1999, Trex
Medical announced that it plans to incur additional restructuring and related
costs of approximately $11 million, primarily for the consolidation of
manufacturing facilities and severance. Trex Medical expects to incur
approximately $6 to $7 million of such costs in the second quarter and the
remainder as the related costs are incurred over the following several quarters.
Thermo Power Corporation
Thermo Power recorded restructuring costs of $0.7 million during the first
quarter of 1999 related to actions taken at its Peek subsidiary. The
restructuring costs consisted of $0.4 million related to severance costs for
approximately 70 employees across all functions, $0.2 million for
abandoned-facility payments related to the consolidation of facilities, and an
asset write-down of $0.1 million related to the consolidation of such
facilities. Thermo Power plans to complete its restructuring plan by September
1999. As of April 3, 1999, Thermo Power had terminated 20 employees.
General
During 1998, certain subsidiaries announced restructuring actions which
included plans for termination of 847 employees. As of January 2, 1999, the
subsidiaries had terminated 550 employees. During the first quarter of 1999, an
additional 132 employees were terminated in connection with the restructuring
plans announced in 1998. A summary of the changes in accrued restructuring
costs, 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 $10,513 $4,996 $ 3,231 $18,740
Provision charged to expense 3,111 390 2,019 5,520
Usage (5,254) (662) (1,718) (7,634)
Currency translation adjustment (272) (1) (120) (393)
------- ------ ------- -------
Balance at April 3, 1999 $ 8,098 $4,723 $ 3,412 $16,233
======= ====== ======= =======
11
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8. Proposed Reorganization
During 1998, the Company announced a proposed reorganization, which was
amended in May 1999, involving the Company and certain of its subsidiaries. The
goals of the proposed reorganization include consolidating and strategically
realigning certain businesses to enhance their competitive market positions and
increasing liquidity in the public markets by providing larger market floats for
the Company's publicly traded subsidiaries.
The Company plans to combine its wholly owned Thermo Biomedical group of
subsidiaries with Thermedics. The Company would transfer the Thermo Biomedical
group of subsidiaries to Thermedics in exchange for additional equity in
Thermedics and for Thermedics' equity interests in Thermo Sentron Inc.,
Thermedics Detection Inc., and Thermo Voltek Corp. Thermedics Detection and
Thermo Sentron would then be taken private and become wholly owned subsidiaries
of the Company. The public shareholders of Thermedics Detection and Thermo
Sentron would receive cash in exchange for their shares of common stock of
Thermedics Detection and Thermo Sentron, respectively. In March 1999, Thermedics
acquired, through a merger, all of the outstanding shares of Thermo Voltek
common stock that Thermedics and the Company did not already own. Subsequent to
this transaction, Thermedics and the Company owned approximately 97% and 3%,
respectively, of the outstanding common stock of Thermo Voltek, which ceased to
be publicly traded.
ThermoSpectra Corporation, a majority-owned public subsidiary of Thermo
Instrument, would be taken private. The public shareholders of ThermoSpectra
would receive cash in exchange for their shares of common stock.
Thermo TerraTech Inc., ThermoRetec Corporation, and The Randers Killam
Group Inc. would merge into the Company. Shareholders of each of these companies
would receive shares of common stock of the Company in exchange for their shares
of common stock of the respective companies.
On May 5, 1999, Thermo Power entered into a definitive agreement and plan
of merger with the Company under which the Company would acquire, for $12.00 per
share, all of the outstanding shares of common stock of Thermo Power not already
owned by the Company. Following the merger, Thermo Power's common stock would
cease to be publicly traded. This merger is expected to be completed in the
third quarter of calendar 1999.
The completion of the merger of Thermo Voltek into Thermedics reduced the
number of the Company's majority-owned subsidiaries to 23. If the reorganization
plan is completed as proposed, it would further reduce the number of the
Company's majority-owned subsidiaries from 23 to 16. Each component of the
reorganization is subject to numerous conditions, including the following (not
all of which are applicable to each component): establishment of prices and/or
exchange ratios; confirmation of anticipated tax consequences; approval by the
boards of directors (including the outside directors) of each of the affected
majority-owned subsidiaries; negotiation and execution of definitive purchase
and sale or merger agreements; completion of review, where necessary, by the
Securities and Exchange Commission of any necessary documents regarding the
proposed transactions; and, where appropriate, fairness opinions from one or
more investment banking firms on certain financial aspects of the transactions.
One or more of the transactions may not occur if the applicable conditions
previously described are not satisfied.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1999, filed with the Securities and Exchange
Commission.
12
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Results of Operations
First Quarter 1999 Compared With First Quarter 1998
Sales in the first quarter of 1999 were $1.01 billion, an increase of
$65.3 million, or 7%, over the first quarter of 1998. Segment income, excluding
restructuring costs and other nonrecurring income, net, of $3.0 million in 1999,
described below, decreased to $76.0 million in 1999 from $100.8 million in 1998.
(Segment income is income before corporate general and administrative expenses,
other income and expense, minority interest expense, income taxes, and
extraordinary item.) Operating income, which includes restructuring and other
nonrecurring costs, net, was $70.7 million in 1999, compared with $92.4 million
in 1998.
Measurement and Detection
Sales from the Measurement and Detection segment increased $54.7 million
to $516.8 million in 1999. Sales increased due to acquisitions made by Thermo
Instrument Systems Inc. and Thermo Sentron Inc., which added $100.2 million of
revenues in 1999. The favorable effects of currency translation, due to the
decline in value of the U.S. dollar relative to foreign currencies in countries
in which the Measurement and Detection segment operates, increased revenues by
$5.7 million in 1999. Revenues from Thermo Instrument's industrial products,
excluding the effects of acquisitions and currency translation, decreased $17.4
million, primarily due to lower revenues at ThermoSpectra Corporation's existing
businesses as a result of continued weakness in the semiconductor industry.
Revenues from Thermo Instrument's analytical products, excluding the effects of
acquisitions and currency translation, decreased $15.9 million, primarily due to
lower sales to customers in Asia due to the economic conditions in that region
and, to a lesser extent, continuing lower sales to customers in the
semiconductor industry. In addition, revenues from analytical products decreased
due to lower sales to customers in Brazil due to the economic conditions in that
region. Revenues from Thermo Instrument's process control products, excluding
acquisitions and foreign currency translation, decreased $9.2 million as a
result of a reduction in discretionary capital spending by companies in the
process control industry due to difficult market conditions and, to a lesser
extent, a reduction in spending by raw materials producers. Revenues from Thermo
Voltek Corp. decreased $5.2 million due to lower demand and the sale of a
business unit which had sales of $1.3 million in the prior period. There can be
no assurance that the trends that have adversely affected this segment will not
continue during the remainder of 1999.
Segment income margin (segment income margin is segment income as a
percentage of sales), excluding restructuring costs of $1.2 million in 1999,
decreased to 10.6% in 1999 from 14.4% in 1998, primarily due to the effect on
segment income margin of lower revenues at certain business units and the
inclusion of lower-margin revenues from Spectra-Physics AB, which recorded an
adjustment to cost of revenues of $4.5 million relating to the sale of
inventories revalued at the date of its acquisition. Thermo Instrument expects
to record additional charges relating to the sale of revalued inventories in
connection with this acquisition of approximately $6 to $7 million, primarily in
the second quarter of 1999. In connection with restructuring actions commenced
in 1998, Thermo Instrument recorded restructuring costs of $1.2 million in 1999,
primarily for business relocation and facility-closure costs and severance (Note
7). Thermo Instrument expects to incur additional restructuring costs totaling
approximately $1.1 million through the third quarter of 1999.
Biomedical and Emerging Technologies
Sales from the Biomedical and Emerging Technologies segment were $236.3
million in 1999, an increase of $13.1 million, or 6%, over the 1998 period.
Sales increased due to the inclusion of $29.2 million of sales from acquired
businesses. Revenues from government contracts at Thermo Coleman Corporation
increased, as well as revenues from Internet services at its Thermo Information
Solutions Inc. subsidiary. Sales at Thermo Cardiosystems Inc. increased due to
higher demand. In addition, Thermo Digital Technologies Inc. continued shipments
of digital passport printers under a contract with the U.S. government that
commenced in the third quarter of 1998. These increases were offset in part by
lower revenues in the existing business units of Trex Medical Corporation and,
to a lesser extent, Bird Medical Technologies Inc. The decrease in revenues at
Trex Medical's existing businesses totaled $22.7 million. Half of this decrease
resulted from a reduction in revenues as an OEM contract with a major customer
wound down following the customer's acquisition by another corporation. Revenues
also decreased at Trex Medical
13
<PAGE>
First Quarter 1999 Compared With First Quarter 1998 (continued)
due to the inclusion in the 1998 period of a $6.7 million cardiac catherization
system sale to a Russian customer. In addition, Trex Medical had lower sales of
general-purpose X-ray and radiographic/fluoroscopic systems, offset in part by
higher demand for mammography systems and related upgrade components. The
decrease in revenues at Bird Medical resulted from lower international demand.
Segment income, excluding restructuring and nonrecurring costs of $2.8
million in 1999, decreased to $4.8 million in 1999 from $18.5 million in 1998.
This decline resulted primarily from a segment loss at Trex Medical in the first
quarter of 1999 of $5.5 million, excluding restructuring costs, compared with
segment income of $8.8 million in the 1998 period. The decrease in profitability
at Trex Medical was primarily due to lower sales of higher-margin products at
existing businesses and inventory provisions of $2.4 million. In May 1999, Trex
Medical announced a restructuring plan, which will commence in the second
quarter of 1999, primarily for the consolidation of facilities and headcount
reductions. Trex Medical expects to incur charges totaling approximately $11
million in connection with these actions, of which approximately $6 to $7
million is expected to occur in the second quarter with the remainder during the
second half of 1999. The segment loss at ThermoLase Corporation totaled $6.1
million in 1999 compared with a loss of $7.9 million in 1998. ThermoLase does
not plan to expand its day spa operation, announced plans to close two
additional spas, and is also assessing whether it will close or sell other spas.
ThermoLase's investment in spa assets and lasers totaled approximately $27
million at April 3, 1999. The realizability of these assets is dependent on the
outcome of this assessment. In addition, at April 3, 1999, ThermoLase had
operating lease commitments of approximately $24 million related to its spas,
other than those announced as closing in 1998. As additional spas are closed in
the future, the amount of lease obligations related to such spas in excess of
income from subleasing the facilities will be recorded as a loss. In connection
with purchases of ThermoLase common stock, $29.2 million of cost in excess of
net assets is included in the Company's balance sheet at April 3, 1999, which
could be subject to impairment dependent on decisions concerning this business.
Restructuring and other nonrecurring costs of $2.8 million in 1999 includes $1.4
million of nonrecurring costs which were recorded by Thermedics and were
associated with the proposed transfer of the Company's wholly owned Thermo
Biomedical group of subsidiaries to Thermedics. The costs primarily represent
investment banking fees. ThermoTrex Corporation, including Trex Medical,
incurred an aggregate of $1.1 million of severance costs for personnel whose
employment terminated during the first quarter of 1999 (Note 7). In addition,
the Company recorded $0.3 million of other restructuring costs.
Energy and Environment
Sales from the Energy and Environment segment were $184.3 million in 1999,
compared with $187.0 million in 1998. Revenues from Thermo Ecotek Corporation
were relatively unchanged at $47.3 million in 1999 and $47.2 million in 1998.
Revenues from Thermo Ecotek's power operations increased $1.9 million
principally due to higher contractual energy rates at certain facilities. From
various dates in 1998 onward, contractual energy rate increases ceased at Thermo
Ecotek's four energy facilities in California. In addition, as noted below, the
periods during which Thermo Ecotek receives fixed rates for power at these
facilities ends in 1999 or 2000. The change from fixed rates to avoided cost
rates under the terms of the contracts, as discussed below, will have a
significant adverse effect on Thermo Ecotek's revenues and profitability.
Revenues from Thermo Ecotek's Thermo Trilogy Corporation biopesticide subsidiary
decreased to $6.3 million in 1999 from $8.0 million in 1998, primarily due to a
shift in distribution networks. Sales at Thermo Power Corporation decreased to
$61.2 million in 1999 from $68.6 million in 1998, principally due to the sale of
its Crusader Engines division in December 1998. Sales at Crusader totaled $6.6
million in the 1998 period and resulted in a nominal loss. Revenues at Thermo
TerraTech Inc. increased to $75.8 million in 1999 from $71.2 million in 1998.
Revenues from Thermo TerraTech's environmental-liability management services
increased to $39.1 million in 1999 from $36.4 million in 1998, primarily due to
higher demand at certain business units and, to a lesser extent, the inclusion
of $0.7 million of sales from an acquired business. Revenues from Thermo
TerraTech's engineering and design services increased $1.3 million in 1999 due
to an increase in demand for its laboratory services and, to a lesser extent,
construction and labor management services.
14
<PAGE>
First Quarter 1999 Compared With First Quarter 1998 (continued)
Segment income, excluding restructuring costs of $0.7 million in 1999, was
$9.3 million in 1999, compared with $7.6 million in 1998. Thermo Ecotek's
segment income was $3.8 million in 1999, compared with $6.5 million in 1998.
Thermo Ecotek's coal-beneficiation facility in Gillette, Wyoming began
operations in April 1998. This facility reported operating losses of $4.3
million in the first quarter of 1999, and Thermo Ecotek expects that it will
continue to do so in the future. The economics of this facility arise primarily
from tax benefits associated with its production. The decrease in segment income
at Thermo Ecotek was offset in part by higher contractual energy rates at
certain facilities. Segment income at Thermo Power, excluding restructuring
costs in 1999, was unchanged at $1.2 million in 1999 and 1998. Segment income at
Thermo TerraTech increased to $4.3 million in 1999 from $0.1 million in 1998,
principally due to a loss of $4.5 million in 1998 at one of ThermoRetec's
business units as a result of losses on certain remedial-construction contracts.
This business unit's operating loss totaled $0.7 million in 1999. Restructuring
costs of $0.7 million were recorded by Thermo Power in 1999 for certain actions
at its Peek subsidiary, principally severance and abandoned-facility payments in
connection with the consolidation of facilities (Note 7).
The power-sales agreements for Thermo Ecotek's Mendota, Woodland, and
Delano plants in California are so-called standard offer #4 (SO#4) contracts,
which require Pacific Gas & Electric (PG&E), in the case of Mendota and
Woodland, to purchase the power output of the projects at fixed rates until
January and February 2000, and Southern California Edison (SCE), in the case of
the Delano facilities, to purchase the power output of the projects at fixed
rates until September 2000. However, with respect to Mendota and Woodland, PG&E
has asserted that the fixed rates under its agreements will terminate in June
and July 1999, although Thermo Ecotek disputes this assertion. Thereafter, the
utility will pay a rate based upon the costs that would have otherwise been
incurred by the purchasing utilities in generating their own electricity or in
purchasing it from other sources (avoided cost). At present, the avoided cost is
substantially lower than the payments currently being made by PG&E and SCE to
Thermo Ecotek under the fixed-rate portions of their contracts. In addition,
although it is difficult to predict future levels of avoided cost, based on
current estimates, avoided cost is expected to be substantially lower in 2000
than the rates currently being paid by PG&E and SCE under their fixed-rate
contracts. Thermo Ecotek expects that at current avoided cost rates, absent
sufficient reductions in fuel prices and other operating costs, its Mendota
plant will operate at substantially reduced operating income levels or at a loss
beginning in 2000. In addition, although Thermo Ecotek expects that its Delano
facilities will continue to have positive cash flows in the fourth quarter of
2000 and thereafter, the facilities will operate at substantial operating
losses. In calendar 1998, the Mendota and Delano plants' aggregate operating
income was approximately $41.7 million. Further, if the Woodland plant were to
operate at projected avoided cost levels, substantial losses would result,
primarily due to nonrecourse lease obligations that extend beyond 2000. Absent
sufficient reductions in fuel prices and other operating costs, Thermo Ecotek
would draw down power reserve funds to cover operating cash shortfalls and then,
should such funds be depleted, either renegotiate its nonrecourse lease for the
Woodland plant or forfeit its interest in the plant. The results of the Woodland
facility were approximately breakeven in 1999 and 1998, as a result of recording
as an expense the funding of reserves required under Woodland's nonrecourse
lease agreement to cover proposed shortfalls in lease payments. If PG&E
ultimately prevails in its assertion that its obligation to pay fixed rates ends
in mid-1999, and if Thermo Ecotek is unsuccessful in renegotiating the terms of
its lease or its power purchase agreement with PG&E, Thermo Ecotek's investment
in its Woodland operating assets could be impaired by approximately $3 to $5
million, based on projected cash flows. The impairment and the operating losses
that would arise in the third quarter of 1999 and thereafter if the Woodland
facility's operating costs exceeded its revenues would have a material adverse
effect on Thermo Ecotek's future results of operations. In anticipation of these
expected declines in revenues and operating income, Thermo Ecotek may explore
other options for its biomass facilities, including disposal or repowering.
As discussed above, Thermo Ecotek began reporting the results of
operations of its coal-beneficiation facility, located near Gillette, Wyoming,
in April 1998. Although the facility is operating and producing commercially
salable product, Thermo Ecotek has encountered certain difficulties in
optimizing its performance to achieve sustained operation. Thermo Ecotek
continues to experience operational problems. Although Thermo Ecotek continues
to explore solutions to these problems, it does not intend to provide
significant amounts of additional capital to
15
<PAGE>
First Quarter 1999 Compared With First Quarter 1998 (continued)
implement operational solutions. If any proposed solutions do require
significant amounts of additional capital, Thermo Ecotek may pursue alternatives
including, but not limited to, seeking alternative sources of capital, such as
another partner; reducing the expected output of the facility; or terminate its
participation in the partnership by selling the facility or its partnership
interest. Given the operating history of the facility, any of these alternatives
could have a material adverse effect on Thermo Ecotek's financial position and
results of operations. The net book value of the K-Fuel Facility at April 3,
1999, was approximately $67 million. Because the technology being developed is
new and untested, no assurance can be given that other difficulties will not
arise or that Thermo Ecotek will be able to correct these problems.
Recycling and Resource Recovery
Sales in the Recycling and Resource Recovery segment increased to $74.2
million in 1999 from $73.3 million in 1998. Revenues increased by $3.9 million
at the Company's wholly owned Peter Brotherhood Ltd. subsidiary due to a
contract to sell turbine generators to a customer in Russia. Sales from Thermo
Fibertek Inc. decreased to $60.2 million in 1999 from $62.3 million in 1998,
primarily due to the February 1999 sale of its Thermo Wisconsin, Inc. subsidiary
that resulted in a decrease in revenues of $4.0 million. Revenues at Thermo
Fibertek's existing businesses increased slightly, primarily due to increased
sales of stock-preparation equipment in Europe and water-management equipment in
North America. These revenue increases at Thermo Fibertek were offset in part by
a decrease in revenues from the sale of its stock-preparation equipment and
accessories in North America. The favorable effects of currency translation
increased revenues by $0.6 million in 1999.
Segment income, excluding restructuring costs and nonrecurring income,
net, of $7.7 million in 1999, was $7.0 million in 1999 and $7.9 million in 1998,
primarily due to lower segment income at Thermo Fibertek as a result of a
decrease in revenues from its stock-preparation business in North America. This
decrease was offset in part by an increase in segment income at Peter
Brotherhood due to higher revenues. Restructuring and nonrecurring income, net,
of $7.7 million was recorded by Thermo Fibertek in 1999, which consists of a
gain on the sale of Thermo Wisconsin of $11.1 million, offset in part by
restructuring and other nonrecurring costs of $3.4 million (Note 7).
Gain on Issuance of Stock by Subsidiaries and Minority Interest Expense
The Company adopted a strategy of spinning out certain of its businesses
into separate subsidiaries and having these subsidiaries sell a minority
interest to outside investors. The Company believes that this strategy provides
additional motivation and incentives for the management of the subsidiary
through the establishment of subsidiary-level stock option programs, as well as
capital to support the subsidiary's growth. As a result of the sale of stock by
subsidiaries, the Company recorded gains of $39.6 million in 1998. Minority
interest expense decreased to $4.1 million in 1999 from $24.1 million in 1998.
Minority interest expense in 1998 includes $12.4 million related to gains
recorded by the Company's majority-owned subsidiaries as a result of the sale of
stock by their subsidiaries. Minority interest expense also decreased as a
result of lower income at the Company's majority-owned subsidiaries.
Income Taxes
Excluding nontaxable gains from issuance of subsidiary stock, the
Company's effective tax rates were 49% and 45% in 1999 and 1998, respectively.
The effective tax rates exceed the statutory federal income tax rate primarily
due to nondeductible expenses, state income taxes, and the establishment of a
valuation allowance for ThermoLase tax loss carryforwards. The effective tax
rate increased due to the larger relative effect of nondeductible expenses,
including amortization of cost in excess of net assets of acquired companies,
due to lower pretax income.
16
<PAGE>
Liquidity and Capital Resources
Consolidated working capital was $1.84 billion at April 3, 1999, compared
with $2.16 billion at January 2, 1999. Included in working capital were cash,
cash equivalents, and short-term available-for-sale investments of $1.16 billion
at April 3, 1999, compared with $1.55 billion at January 2, 1999. In addition,
the Company had $74.3 million of long-term available-for-sale investments at
April 3, 1999, compared with $95.5 million at January 2, 1999. Of the total
$1.23 billion of cash, cash equivalents, and short- and long-term
available-for-sale investments at April 3, 1999, $1.08 billion was held by the
Company's majority-owned subsidiaries, and the balance was held by the Company
and its wholly owned subsidiaries.
Cash provided by operating activities was $70.8 million during the first
quarter of 1999. A decrease in accounts receivable provided $35.2 million of
cash, primarily at Thermo Instrument due to lower revenues from analytical
products and at Trex Medical due to lower revenues at a majority of its
subsidiaries. Cash of $9.9 million was used to fund an increase in inventories,
principally relating to analytical products at Thermo Instrument due to the
replenishment of year-end inventory levels, lower revenues, and a build-up of
inventory in preparation of new product releases. An increase in other current
assets used $15.5 million of cash, primarily to fund an increase in unbilled
contract costs and fees at the Company's wholly Peter Brotherhood subsidiary and
Thermo Fibertek, which was the result of the timing of billings on
percentage-of-completion contracts. In addition, the Company used $9.6 million
of cash to reduce accounts payable, primarily due to the timing of payments.
During the first quarter of 1999, the Company's primary investing
activities, excluding available-for-sale investments activity, included
acquisitions and the purchase of property, plant, and equipment. The Company
expended $334.5 million, net of cash acquired, for acquisitions and expended
$24.1 million for purchases of property, plant, and equipment. In addition,
Thermedics acquired all of the outstanding shares of Thermo Voltek common stock
that Thermedics and the Company did not already own, in completion of its merger
agreement, for $19.8 million of cash. The total cost of the acquisition of
Thermo Voltek is expected to be approximately $25.7 million, including related
expenses, the assumption of Thermo Voltek's $5.2 million principal amount of 3
3/4% subordinated convertible debentures, which became due and payable at the
election of the holder following the merger, and the assumption of Thermo
Voltek's outstanding stock options valued at $0.7 million (Note 8).
The Company's financing activities used $106.3 million of cash during the
first quarter of 1999. The Company used $17.1 million of cash for the redemption
of redeemable subsidiary common stock. During the first quarter of 1999, the
Company expended $10.5 million to purchase shares of its common stock and the
Company and certain of its majority-owned subsidiaries expended $87.2 million to
purchase shares of common stock and debentures of certain of the Company's
majority-owned subsidiaries. These purchases were made pursuant to
authorizations by the Company's and certain majority-owned subsidiaries' Boards
of Directors. As of April 3, 1999, $46.3 million remained under the Company's
authorization, and $38.5 million remained under authorizations of the Company's
majority-owned subsidiaries. In addition, on May 5, 1999, the Company's Board of
Directors authorized the purchase of up to an additional $100 million of Company
and subsidiary common stock. The Company may also expend additional amounts to
complete its reorganization plans (Note 8).
The Company has, from time to time, sold put options for shares of its
common stock to an institutional counterparty. As of April 3, 1999, the Company
had a maximum potential obligation under such arrangements to purchase 5,701,000
shares of its common stock for an aggregate of $83.0 million. The put options
are exercisable only at maturity, expire between November 1999 and May 2000, and
have a weighted average exercise price per share of $14.56. The Company has the
right to settle the put options by physical settlement of the options or by net
share settlement using shares of the Company's common stock.
17
<PAGE>
Liquidity and Capital Resources (continued)
The Company has no material commitments for purchases of property, plant,
and equipment and expects that for the remainder of 1999, such expenditures will
approximate the current level of expenditures. As of May 12, 1999, the Company's
majority-owned subsidiaries had agreements or nonbinding letters of intent to
acquire new businesses totaling approximately $67 million. Proposed acquisitions
of new businesses are subject to various conditions to closing, and there can be
no assurance that all proposed transactions will be consummated.
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; and (iv) developing contingency plans.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related equipment
for year 2000 compliance. The Company also evaluated the potential year 2000
impact on its critical facilities. The Company's efforts included testing the
year 2000 readiness of its manufacturing, utility, and telecommunications
systems at its critical facilities. The Company is currently in phase two of its
program, during which any material noncompliant information technology systems
or facilities that were identified during phase one are prioritized and
remediated. Based on its evaluations, the Company does not believe that it is
required to make any material upgrades or modifications to its critical
facilities. The Company is currently upgrading or replacing its material
noncompliant information technology systems, and the majority of this process
was complete as of April 3, 1999. The Company expects that all of its material
information technology systems and critical facilities will be year 2000
compliant by the end of October 1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all of such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate third-party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company has
identified all of the year 2000 problems with its current products. The Company
believes that certain of its older products, which it no longer manufactures or
sells, may not be year 2000 compliant. The Company is continuing to test and/or
evaluate such products. The Company is focusing its efforts on products that are
still under warranty, early in their expected life, subject to FDA
considerations related to the year 2000, and/or pose a safety risk. The Company
is offering upgrades and/or identifying potential solutions where reasonably
practicable.
The Company is in the process of identifying and assessing 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 has
developed and distributed questionnaires relating to year 2000 compliance to its
significant suppliers and vendors. To date, no significant supplier or vendor
has indicated that it believes its business operations will be materially
disrupted by the year 2000 issue. The Company has begun to follow up with
significant suppliers and vendors that have not responded to the Company's
questionnaires. The Company has completed the majority of its assessment of
third-party risk, and expects to be substantially completed by October 1999.
18
<PAGE>
Year 2000 (continued)
Contingency Plans
The Company is developing contingency plans that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
These plans 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,
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plans 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 $7.4 million as of April 3, 1999,
and the total external costs of year 2000 remediation are expected to be
approximately $14 million. Year 2000 costs are 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 described above, if any of
the Company's significant suppliers or vendors experience business disruptions
due to year 2000 issues, there may also be a material adverse effect on the
Company. If any countries in which the Company operates experience significant
year 2000 disruption, the Company could 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.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in interest rates,
foreign currency exchange rates, and equity prices has not changed materially
from year-end 1998.
19
<PAGE>
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page immediately preceding exhibits.
(b) Reports on Form 8-K
On January 8, 1999, the Company filed a Current Report on Form 8-K for
events occurring on January 7, 1999, with respect to Thermo Instrument Systems
Inc.'s cash tender offer for all of the outstanding shares of Spectra-Physics
AB.
On March 9, 1999, the Company filed a Current Report on Form 8-K for
events occurring on February 22, 1999, announcing that Thermo Instrument Systems
Inc. had purchased and received acceptances for 98% of the outstanding shares of
Spectra-Physics AB at a price of approximately 160 Swedish krona per share.
On March 15, 1999, the Company filed a Current Report on Form 8-K for
events occurring on March 15, 1999, with respect to changes in the executive
management of the Company and expected results for the first quarter of 1999.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 13th day of May 1999.
THERMO ELECTRON CORPORATION
/s/ Paul F. Kelleher
-------------------------------------------------
Paul F. Kelleher
Senior Vice President, Finance and Administration
/s/ Theo Melas-Kyriazi
-------------------------------------------------
Theo Melas-Kyriazi
Chief Financial Officer and Vice President
21
<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 THERMO
ELECTRON CORPORATION'S QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED APRIL
3, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-01-2000
<PERIOD-END> APR-03-1999
<CASH> 404,195
<SECURITIES> 753,801
<RECEIVABLES> 964,314
<ALLOWANCES> 63,073
<INVENTORY> 683,526
<CURRENT-ASSETS> 3,067,635
<PP&E> 1,373,642
<DEPRECIATION> 479,612
<TOTAL-ASSETS> 6,350,398
<CURRENT-LIABILITIES> 1,225,663
<BONDS> 2,021,986
0
0
<COMMON> 167,016
<OTHER-SE> 2,040,574
<TOTAL-LIABILITY-AND-EQUITY> 6,350,398
<SALES> 962,418
<TOTAL-REVENUES> 1,009,538
<CGS> 582,060
<TOTAL-COSTS> 623,336<F1>
<OTHER-EXPENSES> 57,682<F2>
<LOSS-PROVISION> 3,640
<INTEREST-EXPENSE> 27,686
<INCOME-PRETAX> 63,318
<INCOME-TAX> 30,899
<INCOME-CONTINUING> 28,299
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,299
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.17
<FN>
<F1> THIS LINE IS MADE UP OF THE FOLLOWING INCOME STATEMENT
ACCOUNTS: "COST OF PRODUCT AND SERVICE REVENUES" AND
"COST OF RESEARCH AND DEVELOPMENT CONTRACTS".
<F2> THIS LINE IS MADE UP OF THE FOLLOWING INCOME STATEMENT
ACCOUNTS: "RESTRUCTURING COSTS AND OTHER NONRECURRING INCOME, NET" AND
"INTERNALLY FUNDED RESEARCH AND DEVELOPMENT".
</FN>
</TABLE>
