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 AprilJuly 4, 1998.
[ ] 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
incorporation or organization) Identification No.)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02254-904602454-9046
(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 May 1,July 31, 1998
----------------------------- ------------------------------------------------------
Common Stock, $1.00 par value 159,328,044
PAGE166,053,791
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
AprilJuly 4, January 3,
(In thousands) 1998 1998
----------------------------------------------------------------------- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 595,664610,950 $ 593,580
Short-term available-for-sale investments
at quoted market value (amortized cost
of $1,175,416$1,307,872 and $925,855) 1,194,5871,310,377 929,118
Accounts receivable, less allowances of
$53,477$54,944 and $55,698 777,636797,291 797,399
Unbilled contract costs and fees 70,07271,409 69,375
Inventories:
Raw materials and supplies 270,348284,811 260,458
Work in process 115,054121,723 108,327
Finished goods 176,237192,586 174,804
Prepaid income taxes 118,384119,649 118,182
Prepaid expenses 47,49946,770 42,955
---------- ----------
3,365,4813,555,566 3,094,198
---------- ----------
Property, Plant, and Equipment, at Cost 1,189,4851,237,841 1,159,913
Less: Accumulated depreciation and
amortization 392,802421,620 370,867
---------- ----------
796,683816,221 789,046
---------- ----------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $69,201$89,930 and $49,581) 82,34395,202 63,306
---------- ----------
Other Assets 158,557161,787 157,108
---------- ----------
Cost in Excess of Net Assets of Acquired
Companies 1,707,840(Note 6) 1,807,433 1,692,211
---------- ----------
$6,110,904$6,436,209 $5,795,869
========== ==========
2PAGE2
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
AprilJuly 4, January 3,
(In thousands except share amounts) 1998 1998
----------------------------------------------------------------------- --------------------------------------------------------------------------
Current Liabilities:
Notes payable and current maturities of
long-term obligations $ 136,346119,120 $ 176,912
Accounts payable 249,103248,104 251,677
Accrued payroll and employee benefits 124,434130,695 140,698
Accrued income taxes 85,73384,615 57,923
Accrued installation and warranty costs 71,33071,385 72,710
Deferred revenue 64,98360,120 54,999
Other accrued expenses (Note 6) 322,257325,910 337,316
---------- ----------
1,054,1861,039,949 1,092,235
---------- ----------
Deferred Income Taxes and Other Deferred Items 150,303152,128 149,884
---------- ----------
Long-term Obligations:
Senior convertible obligations 187,297187,292 187,824
Subordinated convertible obligations 1,706,941(Note 3) 1,689,183 1,473,015
Nonrecourse tax-exempt obligations 37,60033,700 37,600
Other 48,30939,807 44,468
---------- ----------
1,980,1471,949,982 1,742,907
---------- ----------
Minority Interest 802,187840,411 719,622
---------- ----------
Common Stock of Subsidiaries Subject to
Redemption ($95,262 redemption value) 93,55993,806 93,312
---------- ----------
Shareholders' Investment (Note 7):
Preferred stock, $100 par value, 50,000
shares authorized; none issued
Common stock, $1 par value, 350,000,000
shares authorized; 159,362,236166,968,457 and
159,206,337 shares issued 159,362166,968 159,206
Capital in excess of par value 817,9631,078,997 843,709
Retained earnings 1,100,1331,161,918 1,034,640
Treasury stock at cost, 168,977104,406 and
95,684 shares (6,753)(4,002) (3,839)
Accumulated other comprehensive items (Note 5) (40,183)4) (43,948) (35,807)
---------- ----------
2,030,5222,359,933 1,997,909
---------- ----------
$6,110,904$6,436,209 $5,795,869
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3PAGE3
THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
----------------------
April---------------------
July 4, March 29,June 28,
(In thousands except per share amounts) 1998 1997
------------------------------------------------------------------------ --------------------------------------------------------------------------
Revenues:
Product and service revenues $900,997 $722,625$899,968 $834,748
Research and development contract revenues 43,266 40,88047,831 40,268
-------- --------
944,263 763,505947,799 875,016
-------- --------
Costs and Operating Expenses:
Cost of product and service revenues 533,694 430,802520,351 481,859
Expenses for research and development and
new lines of business (a) 92,148 78,54194,035 81,480
Selling, general, and administrative expenses 226,024 185,330223,817 213,167
Restructuring and other nonrecurring costs
- 7,800(income), net (Note 8) 4,112 (2,849)
-------- --------
851,866 702,473842,315 773,657
-------- --------
Operating Income 92,397 61,032105,484 101,359
Gain on Issuance of Stock by Subsidiaries (Note 2) 39,605 33,66614,601 15,214
Other Income (Expense), Net (Note 3) (384) 2,8977,327 (3,623)
-------- --------
Income Before Income Taxes, and Minority Interest,
131,618 97,595and Extraordinary Item 127,412 112,950
Provision for Income Taxes 41,574 28,39751,093 42,026
Minority Interest Expense 24,551 17,14016,697 14,766
-------- --------
Income Before Extraordinary Item 59,622 56,158
Extraordinary Item, Net of Provision for Income
Taxes and Minority Interest of $3,582 (Note 3) 2,163 -
-------- --------
Net Income $ 65,49361,785 $ 52,05856,158
======== ========
Earnings per Share (Note 4)(Notes 3 and 5):
Basic $ .41.37 $ .35.37
======== ========
Diluted $ .37.34 $ .31.34
======== ========
Weighted Average Shares (Note 4)(Notes 3 and 5):
Basic 159,131 150,070166,168 150,173
======== ========
Diluted 176,580 175,925183,329 175,813
======== ========
(a) Includes costs of:
Research and development contracts $ 38,72740,634 $ 36,33834,619
Internally funded research and
development 52,591 41,60453,018 46,230
Other expenses for new lines of business 830 599383 631
-------- --------
$ 92,14894,035 $ 78,54181,480
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4PAGE4
THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Six Months Ended
-----------------------
July 4, June 28,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues:
Product and service revenues $1,800,965 $1,557,373
Research and development contract revenues 91,097 81,148
---------- ----------
1,892,062 1,638,521
---------- ----------
Costs and Operating Expenses:
Cost of product and service revenues 1,054,045 912,661
Expenses for research and development and
new lines of business (a) 186,183 160,021
Selling, general, and administrative expenses 449,841 398,497
Restructuring and other nonrecurring costs,
net (Note 8) 4,112 4,951
---------- ----------
1,694,181 1,476,130
---------- ----------
Operating Income 197,881 162,391
Gain on Issuance of Stock by Subsidiaries
(Note 2) 54,206 48,880
Other Income (Expense), Net (Note 3) 4,958 (726)
---------- ----------
Income Before Income Taxes, Minority Interest,
and Extraordinary Item 257,045 210,545
Provision for Income Taxes 91,887 70,423
Minority Interest Expense 40,766 31,906
---------- ----------
Income Before Extraordinary Item 124,392 108,216
Extraordinary Item, Net of Provision for Income
Taxes and Minority Interest of $4,844 (Note 3) 2,886 -
---------- ----------
Net Income $ 127,278 $ 108,216
========== ==========
Earnings per Share (Notes 3 and 5):
Basic $ .78 $ .72
========== ==========
Diluted $ .71 $ .65
========== ==========
Weighted Average Shares (Notes 3 and 5):
Basic 162,650 150,122
========== ==========
Diluted 179,955 175,869
========== ==========
(a) Includes costs of:
Research and development contracts $ 79,361 $ 70,957
Internally funded research and
development 105,609 87,834
Other expenses for new lines of business 1,213 1,230
---------- ----------
$ 186,183 $ 160,021
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
ThreeSix Months Ended
----------------------
April--------------------------
July 4, March 29,June 28,
(In thousands) 1998 1997
------------------------------------------------------------------------ -------------------------------------------------------------------------
Operating Activities:
Net income $ 65,493127,278 $ 52,058108,216
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 38,059 29,91778,600 63,604
Restructuring and other nonrecurring
costs, - 7,800net (Note 8) 4,112 4,951
Provision for losses on accounts
receivable 1,856 2,5583,777 5,221
Change in deferred income taxes (699) 957(3,779) (2,706)
Minority interest expense 24,551 17,14040,766 31,906
Gain on issuance of stock by
subsidiaries (Note 2) (39,605) (33,666)
(Gain) loss(54,206) (48,880)
Gain on sale of investments, net 160 (550)(5,252) (596)
Extraordinary item, net (Note 3) (2,886) -
Other noncash items net 2,624 4,6479,142 9,732
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable 15,998 (3,476)20,782 (41,041)
Inventories (19,696) (20,785)(29,532) (32,060)
Other current assets (4,822) (16,878)(5,388) (11,623)
Accounts payable (2,561) (11,107)(21,453) (8,506)
Other current liabilities (11,636) 3,516
--------- ---------(29,751) (21,078)
----------- -----------
Net cash provided by operating activities 69,722 32,131
--------- ---------132,210 57,140
----------- -----------
Investing Activities:
Acquisitions, net of cash acquired
(5,625) (349,038)(Note 6) (121,685) (602,667)
Purchases of available-for-sale
investments (610,285) (207,237)(1,484,823) (411,644)
Proceeds from sale and maturities of
available-for-sale investments 327,205 485,8001,073,609 860,385
Purchases of property, plant, and
equipment (37,766) (23,103)(74,226) (48,797)
Proceeds from sale of property, plant,
and equipment 5,702 2,6738,994 9,071
Increase in other assets (509) (4,765)(6,795) (4,213)
Other 3,652 1,942
--------- ---------9,036 7,754
----------- -----------
Net cash used in investing activities $(317,626) $ (93,728)
--------- ---------
5PAGE(595,890) $ (190,111)
----------- -----------
6
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
ThreeSix Months Ended
----------------------
April--------------------------
July 4, March 29,June 28,
(In thousands) 1998 1997
------------------------------------------------------------------------ -------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of long-term
obligations $ 249,963243,973 $ -116,531
Repayment of long-term obligations (1,902) (28,068)(44,618) (32,207)
Net proceeds from issuance of Company and
subsidiary common stock 124,791 62,816(Note 7) 474,060 101,982
Purchases of subsidiary common stock and
debentures (79,697) (51,870)
Increase (decrease)(165,874) (161,221)
Decrease in short-term notes payable (42,217) 11,858(26,041) (3,844)
Other (1,632) (1,894)
--------- ---------2,178 (3,782)
----------- -----------
Net cash provided by (used in) financing activities 249,306 (7,158)
--------- ---------483,678 17,459
----------- -----------
Exchange Rate Effect on Cash 682 (3,896)
--------- ---------(2,628) (10,154)
----------- -----------
Increase (Decrease) in Cash and Cash
Equivalents 2,084 (72,651)17,370 (125,666)
Cash and Cash Equivalents at Beginning of
Period 593,580 414,404
--------- -------------------- -----------
Cash and Cash Equivalents at End of Period $ 595,664610,950 $ 341,753
========= =========288,738
=========== ===========
Noncash activities:
Conversions of subsidiary convertible
obligations $ 5,09016,980 $ 9,612
========= =========15,854
=========== ===========
Fair value of assets of acquired companies $ 9,191198,278 $ 619,372760,665
Cash paid for acquired companies (5,700) (395,709)(132,568) (647,586)
Issuance of subsidiary common stock and
stock options for acquired companies (275)(8,250) (2,080)
--------- -------------------- -----------
Liabilities assumed of acquired
companies $ 3,21657,460 $ 221,583
========= =========110,999
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
6PAGE7
THERMO ELECTRON CORPORATION
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 AprilJuly 4, 1998, and the results of
operations for the three- and six-month periods ended July 4, 1998, and June 28,
1997, and the cash flows for the three-monthsix-month periods ended AprilJuly 4, 1998, and March 29,June
28, 1997. 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 3, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K, as amended, for the fiscal year ended
January 3, 1998, filed with the Securities and Exchange Commission.
2. IssuanceTransactions in Stock of Stock by Subsidiaries
Gain on issuance of stock by subsidiaries in the accompanying statement of
income for the three-monthsix-month period ended AprilJuly 4, 1998, resulted primarily from the
following:
SalePublic offering of 5,175,000 shares of Trex Medical Corporation common stock
at $13.75 per share for net proceeds of $66.9 million resulted in a gain of
$23.8 million that was recorded by ThermoTrex Corporation.
Private placement of 781,921 shares of Thermo Trilogy Corporation common
stock at $8.25 per share for net proceeds of $6.0 million resulted in a gain
of $2.2 million that was recorded by Thermo Ecotek Corporation.
Initial public offering of 3,300,000 shares of ONIX Systems Inc. common
stock at $14.50 per share for net proceeds of $43.2 million resulted in a
gain of $10.0 million that was recorded by Thermo Instrument Systems Inc.
Private placement of 746,2501,543,000 shares of Thermo Coleman Corporation common
stock at $10.00 per share for net proceeds of $6.8$14.3 million resulted in a
gain of $3.6$7.2 million.
7PAGE8
THERMO ELECTRON CORPORATION2. Transactions in Stock of Subsidiaries (continued)
Public offering of 3,000,000 shares of Thermo BioAnalysis Corporation common
stock at $18.125 per share for net proceeds of $51.5 million resulted in a
gain of $8.3 million that was recorded by Thermo Instrument.
Conversion of $1.8 million of Thermo Optek Corporation 5% subordinated
convertible debentures, convertible at $13.94 per share, into 127,646 shares
of Thermo Optek common stock resulted in a gain of $0.9 million that was
recorded by Thermo Instrument.
Conversion of $4.0 million of ThermoQuest Corporation 5% subordinated
convertible debentures, convertible at $16.50 per share, into 239,393 shares
of ThermoQuest common stock resulted in a gain of $1.8 million that was
recorded by Thermo Instrument.
3. Other Income (Expense), Net and Extraordinary Item
Other Income (Expense), Net
The components of other income (expense), net, in the accompanying statement
of income are as follows:
Three Months Ended Six Months Ended
--------------------- --------------------
AprilJuly 4, March 29,June 28, July 4, June 28,
(In thousands) 1998 1997 ------------------------------------------------------------------------1998 1997
- --------------------------------------------------------------------------
Interest income $ 23,76528,464 $ 24,95218,167 $ 52,229 $ 43,119
Interest expense (25,607) (21,412)(26,360) (21,486) (51,967) (42,898)
Equity in income (loss)loss of
unconsolidated
subsidiaries (288) 290(186) (537) (474) (247)
Gain (loss) on sale of
investments, net (160) 5505,412 46 5,252 596
Other 1,906 (1,483)(3) 187 (82) (1,296)
-------- -------- -------- --------
$ (384)7,327 $ 2,897(3,623) $ 4,958 $ (726)
======== ======== 4. Earnings======== ========
Extraordinary Item
In June 1998, Thermedics Inc. offered holders of its noninterest-bearing
subordinated convertible debentures due 2003, convertible at $31.125 per Share
Basicshare,
the opportunity to exchange such debentures for newly issued 2 7/8% subordinated
convertible debentures due 2003, convertible at $14.928 per share. Holders of
$21.7 million principal amount of outstanding debentures exchanged such
debentures for $15.9 million principal amount of newly issued debentures.
Thermedics recognized an extraordinary gain on this transaction in accordance
with the provisions of Emerging Issues Task Force Pronouncement No. 96-19. In
addition,
9
3. Other Income (Expense), Net and Extraordinary Item (continued)
earlier in the second quarter of 1998, Thermedics repurchased $2.7 million
principal amount of noninterest-bearing subordinated convertible debentures for
$2.0 million in cash, which also resulted in an extraordinary gain recorded by
Thermedics. The combined extraordinary gain resulting from these transactions
was $2.2 million, net of taxes and minority interest of $3.6 million.
During the first quarter of 1998, Thermedics and one of its majority-owned
subsidiaries repurchased $11.5 million principal amount of their subordinated
convertible debentures for $9.3 million in cash, resulting in an extraordinary
gain of $0.7 million, net of taxes and minority interest of $1.3 million.
The extraordinary gains recorded by the Company increased basic and diluted
earnings per share were calculated as follows:
Three Months Ended
--------------------
April 4, March 29,
(In thousands except per share amounts)by $.01 in the second quarter of 1998 1997
------------------------------------------------------------------------
Basic
Net income $ 65,493 $ 52,058
-------- --------
Weighted average shares 159,131 150,070
-------- --------
Basic earnings per share $ .41 $ .35
======== ========
Diluted
Net income $ 65,493 $ 52,058
Effect of:
Convertible debentures 3,667 4,959
Majority-owned subsidiaries'
dilutive securities (4,192) (1,864)
-------- --------
Income available to common
shareholders, as adjusted $ 64,968 $ 55,153
-------- --------
Weighted average shares 159,131 150,070
Effect of:
Convertible debentures 15,476 23,820
Stock options 1,973 2,035
-------- --------
Weighted average shares, as adjusted 176,580 175,925
-------- --------
Diluted earnings per share $ .37 $ .31
======== ========
8PAGE
THERMO ELECTRON CORPORATIONand $.02 in the first
six months of 1998.
4. Earnings per Share (continued)
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 4, 1998,
there were 715,000 of such options outstanding, with exercise prices
ranging from $39.84 to $43.46 per share.
5. Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income and "other comprehensive items," which
representrepresents 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 firstsecond quarter of 1998 and 1997, the
Company's comprehensive income totaled $62.2$57.9 million and $34.7$54.7 million,
respectively. During the first six months of 1998 and 1997, the Company's
comprehensive income totaled $120.1 million and $89.4 million, respectively.
5. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Six Months Ended
--------------------- ---------------------
(In thousands except July 4, June 28, July 4, June 28,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Basic
Net income $ 61,785 $ 56,158 $127,278 $108,216
-------- -------- -------- --------
Weighted average shares 166,168 150,173 162,650 150,122
-------- -------- -------- --------
Basic earnings per share $ .37 $ .37 $ .78 $ .72
======== ======== ======== ========
10
5. Earnings per Share (continued)
Three Months Ended Six Months Ended
--------------------- ---------------------
(In thousands except July 4, June 28, July 4, June 28,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Diluted
Net income $ 61,785 $ 56,158 $127,278 $108,216
Effect of:
Convertible debentures 3,667 4,959 7,334 9,918
Majority-owned
subsidiaries'
dilutive securities (2,500) (1,562) (6,676) (3,421)
-------- -------- -------- --------
Income available to common
shareholders, as
adjusted $ 62,952 $ 59,555 $127,936 $114,713
-------- -------- -------- --------
Weighted average shares 166,168 150,173 162,650 150,122
Effect of:
Convertible debentures 15,476 23,820 15,476 23,820
Stock options 1,685 1,820 1,829 1,927
-------- -------- -------- --------
Weighted average shares,
as adjusted 183,329 175,813 179,955 175,869
-------- -------- -------- --------
Diluted earnings per
share $ .34 $ .34 $ .71 $ .65
======== ======== ======== ========
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 July 4, 1998, there were 2,230,000 of such
options outstanding, with exercise prices ranging from $36.68 to $43.46 per
share.
6. Accrued Acquisition ExpensesAcquisitions
The Company and its majority-owned subsidiaries made several acquisitions
during the first six months of 1998 for $121.7 million in cash, net of cash
acquired, and the issuance of subsidiary common stock valued at $8.3 million,
subject to post-closing adjustments. 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 $111.1 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.
11
6. Acquisitions (continued)
During 1996, Thermo Instrument had undertakenundertook a restructuring of a substantial
portion of the businesses constituting the Scientific Instruments Division of
Fisons plc, acquired in March 1996. In March 1997, Thermo Instrument finalized
its plan for restructuring the acquired businesses. At January 3, 1998, the
remaining reserve for these restructuring activities totaled $11.1 million.
During the first quartersix months of 1998, Thermo Instrument expended $0.6$1.2 million for
restructuring costs, primarily for ongoing severance and abandoned-facility payments. At
AprilJuly 4, 1998, the remaining reserve for restructuring these businesses was $10.5$9.9
million, which is included in other accrued expenses in the accompanying 1998
balance sheet and primarily represents ongoing severance and abandoned-facility
payments.
7. Subsequent EventSale of Common Stock
In April 1998, the Company sold 7,475,000 shares of its common stock at
$40.625 per share for net proceeds of approximately $290$290.2 million.
9PAGE
THERMO ELECTRON CORPORATION8. Restructuring and Other Nonrecurring Costs
During the second quarter of 1998, ThermoLase Corporation recorded $1.9
million of restructuring costs for severance and the write-off of fixed assets
in connection with certain actions including the relocation of its headquarters
from California to Texas. In addition, five former employees of Thermo
Instrument's Epsilon Industrial, Inc. subsidiary had sought damages in an
arbitration proceeding for alleged breaches of agreements entered into with such
employees prior to Epsilon's acquisition by Thermo Instrument. The arbitrators
rendered a decision with respect to such claims during the second quarter of
1998 and Thermo Instrument recorded $1.4 million of nonrecurring costs related
to the resolution of this matter. The Company's SensorMedics Corporation
subsidiary recorded $0.8 million of restructuring costs during the second
quarter of 1998, primarily severance, in connection with a reorganization of a
subsidiary in the Netherlands.
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, as
amended, for the fiscal year ended January 3, 1998, filed with the Securities
and Exchange Commission.
12
Results of Operations
FirstSecond Quarter 1998 Compared With FirstSecond Quarter 1997
---------------------------------------------------
Sales in the firstsecond quarter of 1998 were $944.3$947.8 million, an increase of
$180.8$72.8 million, or 24%8%, over the firstsecond quarter of 1997. Segment income, excluding
restructuring and other nonrecurring costs of $7.8$4.1 million in 1998 and
restructuring and other nonrecurring income, net, of $2.8 million in 1997,
described below, increased 31%10% to $100.8$117.1 million in 1998 from $76.7$106.5 million in
1997. (Segment income is income before corporate general and administrative
expenses, other income and expense, minority interest expense, and income
taxes.) Operating income, which includes restructuring and other nonrecurring
costs,costs/income, increased 51% to $92.4$105.5 million in 1998 from $61.0$101.4 million in 1997.
Instruments
-----------
Sales from the Instruments segment increased $78.8 million, or 24%,
to $407.9were $395.4 million in 1998.1998, compared
with $405.2 million in 1997. Sales increaseddecreased primarily due to acquisitions
made by Thermo Instrument Systems Inc.,an $18.4 million
decline in sales at ThermoQuest Corporation, which added $81.6resulted principally from a
decrease in sales of analytical instruments of $15.6 million. Of that decrease,
$9.0 million ofwas attributable to a decline in revenues from Europe and North
America, primarily due to orders being received late in the quarter, and $4.0
million was attributable to lower sales in 1998.Asia due to unstable economic
conditions in that region. The remainder of the decrease in ThermoQuest's sales
resulted primarily from an affiliated company no longer using ThermoQuest's
sales offices as a distributor for certain products and the unfavorable effects
of currency translation due to the strengthening of the U.S. dollar relative to
foreign currencies in countries in which Thermo Instrument operates decreased revenuesThermoQuest operates. ThermoQuest's
backlog at July 4, 1998, increased by $8.5$7.2 million infrom the end of the first
quarter of 1998. In addition, revenues increasedthe effect of lower sales at Thermo Optek
Corporation, primarily due to lower sales to the semiconductor industry and
lower sales in 1998 due toAsia, was offset in part by higher sales at Metrika Systems Corporation as a result of greater demand at its
finished-materials business and, to a lesser extent, at its raw-materials
business. Revenues also increased at ONIX Systems Inc., due
to the inclusion of revenues from acquisitions and increased sales of
industry-specific instruments to the production segment of the oil and gas
industry. An increaseIn total, acquisitions made by Thermo Instrument Systems Inc. added
$15.0 million of sales in revenues at ThermoQuest Corporation
from Europe and North America was offset by a decrease in its revenues
from Japan of $7.0 million due to economic uncertainty in that country.
Increased revenues at the majority of ThermoSpectra Corporation's
existing operations were slightly more than offset by a decline for test
and measurement systems at one of its subsidiaries1998, and the inclusionunfavorable effects of currency
translation decreased Thermo Instrument's revenues by $7.2 million in 19971998.
Thermo Instrument's backlog decreased $29.1 million during the first six months
of 1998 to $269.8 million. Backlog decreased primarily at Thermo Optek and at
ThermoSpectra Corporation, principally as a result of a large shipment at another subsidiary.
10
THERMO ELECTRON CORPORATION
First Quarter 1998 Compared With First Quarter 1997 (continued)
---------------------------------------------------slowdown in the
semiconductor and related industries.
Segment income margin (segment income margin is segment income as a
percentage of sales) improved, excluding restructuring and other nonrecurring costs of
$1.4 million in 1998 and $0.8 million in 1997, increased to 14.9%15.2% in 1998 from
14.0%14.8% in 1997. The
improvement was primarily1997 due to improvements at acquired businesses. Five former employees
of Thermo Instrument's Epsilon Industrial, Inc. subsidiary had sought damages in
an arbitration proceeding for alleged breaches of agreements entered into with
such employees prior to Epsilon's acquisition by Thermo Instrument. The
arbitrators rendered a decision with respect to such claims during the effect in thesecond
quarter of 1998 and Thermo Instrument recorded $1.4 million of
13
Second Quarter 1998 Compared With Second Quarter 1997 period of an
adjustment to expense of $2.7 million relating(continued)
nonrecurring costs related to the saleresolution of inventories
revaluedthis matter. Restructuring and
other nonrecurring costs of $0.8 million in 1997 represents severance for
employees terminated at one of ThermoSpectra's business units. ThermoSpectra
expects to undertake additional restructuring activities during the timeremainder of
the acquisition of Life Sciences International
PLC.1998, which will result in additional charges.
Biomedical Products
-------------------
Sales from the Biomedical Products segment were $166.0$165.6 million in 1998, an
increase of $29.1$21.0 million, or 21%15%, over the 1997 period. Sales increased primarily due to
the inclusion of revenues from acquired businesses. In addition, increased
demand at Trex Medical Corporation Bird Medical Technologies, Inc., and, to a lesser extent, Thermo
Cardiosystems Inc. In addition, sales increased due to the inclusion of
$11.9 million of sales from acquired businesses. These increases werewas offset in part by a decrease in revenues of $3.6$4.0
million at ThermoLase Corporation, primarily due to lower demand at its
hair-removal business and the inclusion in 1997 of $1.3$1.1 million of fees from
international-international licensing arrangements. Rather than continuing to open additional
spas, ThermoLase intends to concentrate its resources on attempting both to
increase the capacity utilization of its existing spas and to expand its
physician-licensing program and international licensing arrangements. In
response to the decrease in revenues, ThermoLase significantly reduced its
prices in April 1998 in an attempt to establish an optimum price point that will
result in increased demand and higher revenues. There can be no assurance such
strategy will be successful.
Segment income, excluding restructuring costs of $2.7 million in 1998,
increased to $16.6$16.8 million in 1998 from $8.4$11.7 million in 1997. This increase
resulted substantially from improvements at existing businesses, primarily at Trex Medical and
Bird Medical and Trex Medical as a
result of higher revenuesTechnologies, Inc. and, to a lesser extent, the inclusion of
segment income from acquired businesses. These increases were offset in part by
an increase in segment loss at ThermoLase to $7.9$6.0 million in 1998 from $5.3$5.4
million in 1997, primarily due to the decrease in revenues described above, as well as increased fixed costs associated with
operating more spas and supporting more physician-licensees.above. The
effect of operating each spa below maximum capacity, as ThermoLase developsworks to
develop its client base and expandsexpand its product lines, will continue to have a
negative effect on ThermoLase's segment income. ThermoLase believes that
improvements in the efficacy and duration of its SoftLight(R) hair-removal
process, as well as increased spa utilization throughby broadening the array of spa-relatedspa services and
products offered, are critical elements in its ability to improve the profitability of its
spas.profitability.
The degree to which ThermoLase's recent pricing structure changes are successful
will also affect its segment income. 11PAGERestructuring costs of $2.7 million in 1998
include $1.9 million recorded by ThermoLase in connection with certain actions,
including the relocation of its headquarters from California to Texas, and $0.8
million recorded by SensorMedics Corporation in connection with the
reorganization of a subsidiary in the Netherlands.
14
THERMO ELECTRON CORPORATION
FirstSecond Quarter 1998 Compared With FirstSecond Quarter 1997 (continued)
---------------------------------------------------
Advanced Technology
-------------------
Sales from the Advanced Technology segment increased 8% to $100.9$108.3 million in
1998 from $96.5$100.0 million in 1997. Revenues from Thermo Sentron Inc. increased to
$18.9$21.6 million in 1998 from $18.0$18.5 million in 1997, primarily due to increased demand and the inclusion
of $0.9$2.6 million of sales from acquired businesses and, to a lesser extent,
increased demand, offset in part by the unfavorable effects of currency
translation. Sales at Thermo Voltek Corp. increased to $11.4
million in 1998 from $9.7 million in 1997, due to the inclusion of $1.0
million of sales from an acquired business and an increase in sales of
electromagnetic compatibility test instruments. Sales from ThermoTrex Corporation's business units increased $4.7$4.3
million in 1998, primarily as a result of the inclusion of $3.2$3.8 million in sales
from an acquired businessbusinesses at its Trex Communications Corporation subsidiary.
Sales at Thermo Coleman Corporation were $36.9$41.5 million in 1998, compared with
$37.8 million in 1997. This decreaseincrease resulted from higher revenues from
government contracts, offset in part by a decline of $3.2$0.5 million in sales as a
result of lower sales of kiosk units byat its Thermo Information Solutions Inc.
subsidiary, which intends to exithas substantially exited this business due to inherently low
margins, lower than expected orders from its sole customer, and the
absence of other orders. This decrease was offset in part by higher
revenues from government contracts.business. Sales at Thermedics
Detection Inc. decreased 7% to $23.7$24.0 million in 1998, primarily due to lower$1.9
million of sales in the 1997 period of its AlexusAlexus(R) systems in connection with
the fulfillment in 1997 of a mandated product-line upgrade from The Coca-Cola Company to
its existing installed base, offsetbase. Sales at Thermo Voltek Corp. decreased to $10.7
million in part by increased shipments of security systems
and related services under a contract with the U.S. Federal Aviation
Administration, which was completed during the quarter.1998 from $11.9 million in 1997, due to lower demand for
electromagnetic-compatibility test instruments.
Segment income decreased to $6.2$7.8 million in 1998 from $6.8$9.1 million in 1997.
This decrease resulted from lower segment income at Thermedics Detection, and Thermo Coleman,
primarily due to lower sales, offset in part by an increase in profitability at
Thermo Voltek principally due to an increasecost reductions as a result of organizational
changes made in sales.1997.
Alternative Energy
------------------
Sales from the Alternative Energy segment increased to $123.7$126.4 million in
1998 from $78.7$89.0 million in 1997. Within this segment, revenues from Thermo
Ecotek Corporation increased to $47.2$50.7 million in 1998 from $38.7$43.5 million in
1997. Thermo Ecotek's increase in revenues was due in part to higher contractual
energy rates at certain facilities and the inclusion of $2.0 million of revenues
from newly acquired power operations in the Czech Republic. From various dates
in 1998 onward, no further rate increases will occur in Thermo Ecotek's four
California energy facilities. Revenues from Thermo Ecotek's Thermo Trilogy
Corporation biopesticide subsidiary increased by $4.4$2.1 million to $8.0$7.8 million,
primarily due to the inclusion of revenues from twoan acquired businesses.
The remainder of Thermo Ecotek's increase in revenues was a result of the
inclusion of $2.4 million of revenues from newly acquired power
operations in the Czech Republic and, to a lesser extent, higher
contractual energy rates at several facilities. No further rate increases
will occur in Thermo Ecotek's four California energy facilities beginning
in 1998. Sales at Peter Brotherhood Ltd. declined to $7.9 million in 1998
from $11.2 million in 1997, due to the disposal of several business units
in 1997.business. Sales at
Thermo Power Corporation increased to $68.6$64.9 million in 1998 from $28.8$33.8 million
in 1997, primarily due to the inclusion of $39.0$34.3 million of sales from Peek plc,
acquired in November 1997.
12PAGE
THERMO ELECTRON CORPORATION
First Quarter 1998 Compared With First Quarter 1997 (continued)
---------------------------------------------------
Segment income, excluding restructuring and other nonrecurring income, net,
of $3.7 million in 1997, was $7.7$16.1 million in 1998, compared with $4.8$12.5 million
in 1997. Thermo Ecotek's segment income was $6.5$10.5 million in 1998, compared with
$4.4$9.2 million in 1997. The increase resulted primarily from higher profitability
at Thermo Trilogy, due to contributions from an acquired business and, to a
lesser extent, higher
15
Second Quarter 1998 Compared With Second Quarter 1997 (continued)
contractual energy rates, asa well as the inclusion of results of the newly
acquired Czech Republic power operations. Segment income at Thermo Power
improved to $1.2$5.4 million in 1998 from $0.7$1.3 million in 1997, primarily due to
contributions from Peek. Due to funding patterns of government entities, as well
as seasonality, Peek has historically experienced higher sales and segment
income in the second and fourth calendar quarters and lower amounts in the first
and third calendar quarters. The 1997 period included restructuring and other
nonrecurring income, net, of $3.7 million, which consisted of $5.0 million of
previously established litigation reserves that were reversed upon settlement of
a related matter and $1.3 million of costs, primarily severance, related to
restructuring activities at Peter Brotherhood was nominally profitable in 1998, compared
with a segment loss in 1997.Ltd.
Industrial Outsourcing
----------------------
Sales in the Industrial Outsourcing segment were $81.7$87.4 million in 1998, an
increase of $13.2$14.2 million, or 19%, over 1997. Revenues from Thermo TerraTech
Inc.'s remediation and recyclingenvironmental-liability management services increased to $36.4$40.0 million in
1998 from $30.4$30.7 million in 1997, primarily due to higher demand at certain
business units and, to a lesser extent, the inclusion of $4.8$4.4 million of sales
from acquired businesses. In addition, revenues from Thermo Remediation Inc.'s
soil-remediation services increased $1.8 million due to an increase in the
volume of soil processed. These increases were offset in part by a $4.8$4.2 million
decrease in revenues at one of Thermo Remediation Inc.'sRemediation's business units resulting
from a decline in the number of contracts in process. In addition, revenuesRevenues from Thermo
Remediation's
soil-remediation services decreased 15% to $4.2 million, resulting from
the closure of two sites as well as heavy rains, which unfavorably
affected operations at certain west coast sites. Revenues from consultingTerraTech's engineering and design services increased $4.7$2.2 million in 1998,
primarily due to the inclusion of $3.9$3.5 million of revenues from an acquired
business.business, offset in part by the effect on revenues of the postponement of
several major contracts. Sales of metallurgical services increased $2.4$2.6 million
in 1998, principally due to increased demand for existing services.
Segment income excluding restructuring and other nonrecurring costs
of $7.8 million in 1997, was $1.9$6.9 million in 1998, compared with $4.5$5.8 million in 1997.
Segment income declinedincreased in 1998 due toprincipally as a lossresult of $4.5
million incurred at onethe increase in
sales of Thermo Remediation's business units on certain
remedial-construction contracts. This decreasemetallurgical services and improved profitability in segment income was
offset in part by higher income from consulting and design services
principally due to higher revenues. Restructuring and other nonrecurring
costs of $7.8 million in the first quarter of 1997 were recorded to write
down certain capital equipment and intangible assets, including cost in
excess of net assets of acquired companies, in response to a severe
downturn in Thermo Remediation's soil-remediationthat business.
This resulted
in the closure of two soil-remediation sites during 1997 and reduced cash
flows at certain other sites, such that analysis indicated that the
investment in these assets would not be recovered.
13PAGE
THERMO ELECTRON CORPORATION
First Quarter 1998 Compared With First Quarter 1997 (continued)
---------------------------------------------------
Paper Recycling
---------------
Sales in the Paper Recycling segment increased to $65.4$66.3 million in 1998 from
$56.0$65.3 million in 1997. Sales from Thermo Fibertek Inc. increased 40%17% to $62.3$63.6
million in 1998 from $44.7$54.5 million in 1997, primarily due to the inclusion ofan increase in
revenues of $17.4$8.7 million from Thermo Black Clawson, acquired in May 1997. In
addition, an increase in revenues from Thermo Fibertek's accessoriesrecycling business
resulting from higher demand was offset in part by a decrease in revenues of
$2.6 million at its recyclingaccessories business of
$2.3 million due to a continuing decrease in demand resulting from a
severe drop in de-inked pulp prices.lower demand. The unfavorable
effects of currency translation reduced Thermo Fibertek's revenues by $1.5$1.0
million in 1998. Sales from Thermo TerraTech's thermal-processing equipment
business, which was sold in October 1997, were $7.9$7.4 million in 1997.
16
Second Quarter 1998 Compared With Second Quarter 1997 (continued)
Segment income margin was 11.9%13.9% in 1998, compared with 11.5% in 1997. This
increase primarily resulted from improvements at Thermo Fibertek and the
inclusion in 1997 of lower segment income margins from Thermo TerraTech's
thermal-processing equipment business.
Gain on Issuance of Stock by Subsidiaries
-----------------------------------------
The Company has 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 and the issuance of stock by subsidiaries upon conversion of
convertible debentures, the Company records gains that represent the increase in
the Company's net investment in the subsidiaries and are classified as "Gain on
issuance of stock by subsidiaries" in the accompanying statement of income.
These gains have represented a substantial portion of the net income reported by
the Company in certain periods. The size and timing of these transactions are
dependent on market and other conditions that are beyond the Company's control.
Accordingly, there can be no assurance that the Company will be able to generate
gains from such transactions in the future. The Company recorded gains of $39.6$14.6
million in 1998 (Note 2) and $33.7$15.2 million in 1997 as a result of such
transactions. Minority interest expense increased to $16.7 million in 1998 from
$14.8 million in 1997. Minority interest expense includes $1.9 million in 1998
and $2.4 million in 1997 related to gains recorded by the Company's
majority-owned subsidiaries as a result of the sale of stock by their
subsidiaries.
Other Matters
The Company is currently assessing the potential impact of the year 2000 on
the processing of date-sensitive information by the Company's computerized
information systems and on products sold as well as products purchased by the
Company. The Company believes that its internal information systems and current
products are either year 2000 compliant or will be so prior to the year 2000
without incurring material costs. There can be no assurance, however, that the
Company will not experience unexpected costs and delays in achieving year 2000
compliance for its internal information systems and current products, which
could result in a material adverse effect on the Company's future results of
operations.
The Company is presently assessing the effect that the year 2000 issue may
have on its previously sold products. The Company is also assessing whether its
key suppliers are adequately addressing this issue and the effect this might
have on the Company. The Company has not completed its analysis and is unable to
conclude at this time that the year 2000 issue as it relates to its previously
sold products and products purchased from key suppliers is not reasonably likely
to have a material adverse effect on the Company's future results of operations.
17
First Six Months 1998 Compared With First Six Months 1997
Sales in the first six months of 1998 were $1,892.1 million, an increase of
$253.5 million, or 15%, over the first six months of 1997. Segment income,
excluding restructuring and other nonrecurring costs, net, of $4.1 million in
1998 and $5.0 million in 1997, described below, increased 19% to $217.9 million
in 1998 from $183.2 million in 1997. Operating income, which includes
restructuring and other nonrecurring costs, increased 22% to $197.9 million in
1998 from $162.4 million in 1997.
Instruments
Sales from the Instruments segment increased $69.0 million, or 9%, to $803.3
million in 1998. Sales increased primarily due to acquisitions made by Thermo
Instrument, which added $96.6 million of sales in 1998. Sales increased at ONIX
Systems due to higher sales of industry-specific instruments to the production
segment of the oil and gas industry and at Metrika Systems Corporation as a
result of higher demand at its finished-materials business and, to a lesser
extent, at its raw-materials business. The unfavorable effects of currency
translation due to the strengthening of the U.S. dollar relative to foreign
currencies in countries in which Thermo Instrument operates decreased revenues
by $15.7 million in 1998. At ThermoQuest, revenues from Asia decreased by $12.0
million due to economic uncertainty in that region. Revenues decreased at Thermo
Optek due to lower sales to the semiconductor industry and lower sales in Asia.
Segment income margin, excluding restructuring and other nonrecurring costs
of $1.4 million in 1998 and $0.8 million in 1997, improved to 15.1% in 1998 from
14.4% in 1997. The improvement was primarily due to the effect in the 1997
period of an adjustment to expense of $3.2 million relating to the sale of
inventories revalued at the time of the acquisition of Life Sciences
International PLC. Restructuring and other nonrecurring costs of $1.4 million in
1998 and $0.8 million in 1997 are discussed in the results of operations for the
second quarter.
Biomedical Products
Sales from the Biomedical Products segment were $331.6 million in 1998, an
increase of $50.0 million, or 18%, over the 1997 period. Sales increased due to
the inclusion of $31.5 million of sales from acquired businesses as well as
increased demand at Trex Medical, Bird Medical, and, to a lesser extent, Thermo
Cardiosystems Inc. These increases were offset in part by a decrease in revenues
of $7.5 million at ThermoLase, primarily due to lower demand at its hair-removal
business and the inclusion in 1997 of $2.4 million of fees from international
licensing arrangements.
Segment income, excluding restructuring costs of $2.7 million in 1998,
increased to $33.4 million in 1998 from $20.1 million in 1997. This increase
resulted substantially from improvements at existing businesses, primarily at
Bird Medical and Trex Medical as a result of higher revenues and, to a lesser
extent, the inclusion of segment income from acquired businesses. These
increases were offset in part by an increase in segment
18
First Six Months 1998 Compared With First Six Months 1997 (continued)
loss at ThermoLase to $13.9 million in 1998 from $10.7 million in 1997,
primarily due to the decrease in revenues described above, as well as increased
fixed costs associated with operating more spas. Restructuring costs of $2.7
million in the first six months of 1998 are discussed in the results of
operations for the second quarter.
Advanced Technology
Sales from the Advanced Technology segment increased to $209.2 million in
1998 from $196.4 million in 1997. Revenues from Thermo Sentron increased to
$40.6 million in 1998 from $36.5 million in 1997, primarily due to the inclusion
of $3.5 million of sales from acquired businesses and, to a lesser extent,
increased demand, offset in part by the unfavorable effects of currency
translation. Sales at Thermo Voltek increased to $22.2 million in 1998 from
$21.6 million in 1997, due to the inclusion of $1.0 million of sales from an
acquired business, offset in part by a decrease in sales of
electromagnetic-compatibility test instruments. Sales from ThermoTrex's business
units increased $9.0 million in 1998, primarily as a result of the inclusion of
$7.0 million in sales from acquired businesses at its Trex Communications
subsidiary. Sales at Thermo Coleman were $78.4 million in 1998, compared with
$75.6 million in 1997. This increase was due to higher revenues from government
contracts, offset in part by lower sales of kiosk units by its Thermo
Information Solutions subsidiary, which has substantially exited this business.
Sales at Thermedics Detection decreased 7% to $47.7 million in 1998, primarily
due to lower sales of its Alexus systems in connection with the fulfillment in
1997 of a mandated product-line upgrade from The Coca-Cola Company to its
existing installed base. This decrease was offset in part by higher sales of
Thermedics Detection's InScan(R) product.
Segment income decreased to $14.0 million in 1998 from $15.9 million in
1997. This decrease resulted primarily from lower segment income at Thermedics
Detection and Thermo Coleman, due to lower sales and lower- margin contracts,
respectively, offset in part by an increase in profitability at Thermo Voltek,
principally due to organizational changes made in 1997.
Alternative Energy
Sales from the Alternative Energy segment increased to $250.1 million in
1998 from $167.8 million in 1997. Within this segment, revenues from Thermo
Ecotek increased to $98.0 million in 1998 from $82.2 million in 1997. Thermo
Ecotek's increase in revenues was a result of the inclusion of $4.4 million of
revenues from newly acquired power operations in the Czech Republic and, to a
lesser extent, higher contractual energy rates at several facilities. Revenues
from Thermo Ecotek's Thermo Trilogy biopesticide subsidiary increased by $6.5
million to $15.9 million in 1998, primarily due to the inclusion of revenues
from an acquired business. Sales at Thermo Power increased to $133.5 million in
1998 from $62.7 million in 1997, due to the inclusion of $73.3 million of sales
from Peek, acquired in November 1997. Sales at Peter Brotherhood declined to
$18.7 million in 1998 from $22.9 million in 1997, due to the disposal of several
business units in 1997.
19
First Six Months 1998 Compared With First Six Months 1997 (continued)
Segment income, excluding restructuring and other nonrecurring income, net,
of $3.7 million in 1997, was $23.8 million in 1998, compared with $17.2 million
in 1997. Thermo Ecotek's segment income was $16.9 million in 1998, compared with
$13.6 million in 1997. The increase resulted primarily from higher contractual
energy rates, the inclusion of results of the newly acquired Czech Republic
power operations, and improved profitability at Thermo Trilogy. Segment income
at Thermo Power improved to $6.7 million in 1998 from $2.0 million in 1997,
primarily due to contributions from Peek. Restructuring and other nonrecurring
income, net, in the 1997 period is discussed in the results of operations for
the second quarter.
Industrial Outsourcing
Sales in the Industrial Outsourcing segment were $169.1 million in 1998, an
increase of $27.4 million, or 19%, over 1997. Revenues from Thermo TerraTech's
environmental-liability management services increased to $76.3 million in 1998
from $61.2 million in 1997, primarily due to the inclusion of $9.2 million of
sales from acquired businesses and, to a lesser extent, higher demand at certain
business units. In addition, revenues from Thermo Remediation's soil-remediation
services increased 12% to $10.1 million due to an increase in the volume of soil
processed. These increases were offset in part by an $8.9 million decrease in
revenues at one of Thermo Remediation's business units resulting from a decline
in the number of contracts in process. Revenues from Thermo TerraTech's
engineering and design services increased $6.9 million in 1998, due to the
inclusion of $7.4 million of revenues from an acquired business, offset in part
by lower revenues from existing businesses. Sales of metallurgical services
increased $5.0 million in 1998, principally due to increased demand for existing
services.
Segment income, excluding restructuring and other nonrecurring costs of $7.8
million in 1997, was $8.8 million in 1998, compared with $10.2 million in 1997.
Segment income declined in 1998 due to a loss incurred at one of Thermo
Remediation's business units due to losses on certain remedial-construction
contracts and a decline in the number of contracts in process. This decrease in
segment income was offset in part by higher income from other business units
within the segment, principally due to higher revenues. Restructuring and other
nonrecurring costs of $7.8 million in 1997 were recorded to write down certain
capital equipment and intangible assets, including cost in excess of net assets
of acquired companies, in response to a severe downturn in Thermo Remediation's
soil-remediation business. This resulted in the closure of two soil-remediation
sites during 1997 and reduced cash flows at certain other sites, such that
analysis indicated that the investment in these assets would not be recovered.
20
First Six Months 1998 Compared With First Six Months 1997 (continued)
Paper Recycling
Sales in the Paper Recycling segment increased to $131.6 million in 1998
from $121.3 million in 1997. Sales from Thermo Fibertek increased 27% to $125.9
million in 1998 from $99.2 million in 1997, primarily due to an increase in
revenues of $26.1 million from Thermo Black Clawson, acquired in May 1997. The
unfavorable effects of currency translation reduced Thermo Fibertek's revenues
by $2.5 million in 1998. Sales from Thermo TerraTech's thermal-processing
equipment business, which was sold in October 1997, were $15.3 million in 1997.
Segment income margin was 12.9% in 1998, compared with 11.5% in 1997. This
increase primarily resulted from improvements at Thermo Fibertek and the
inclusion in 1997 of lower segment income margins from Thermo TerraTech's
thermal-processing equipment business.
Gain on Issuance of Stock by Subsidiaries
As a result of the sale of stock by subsidiaries and the issuance of stock
by subsidiaries upon conversion of convertible debentures, the Company recorded
gains of $54.2 million in 1998 (Note 2) and $48.9 million in 1997. Minority
interest expense increased to $24.6$40.8 million in 1998 from $17.1$31.9 million in 1997.
Minority interest expense includes $12.4$14.3 million in 1998 and $9.5$11.9 million in
1997 related to gains recorded by the Company's majority-owned subsidiaries as a
result of the sale of stock by their subsidiaries.
Liquidity and Capital Resources
Consolidated working capital was $2,311.3$2,515.6 million at AprilJuly 4, 1998, compared
with $2,002.0 million at January 3, 1998. Included in working capital were cash,
cash equivalents, and short-term available-for-sale investments of $1,790.3$1,921.3
million at AprilJuly 4, 1998, compared with $1,522.7 million at January 3, 1998. In
addition, the Company had $82.3$95.2 million of long-term available-for-sale
investments at AprilJuly 4, 1998, compared with $63.3 million of long-term available-for-sale investments at January 3, 1998. Of
the total $1,872.6$2,016.5 million of cash, cash equivalents, and short- and long-term
available-for-sale investments at AprilJuly 4, 1998, $1,569.2$1,492.6 million was held by the
Company's majority-owned subsidiaries and the balance was held by the Company
and its wholly owned subsidiaries.
Cash provided by operating activities was $69.7$132.2 million during the first
quartersix months of 1998. Cash of $19.7$29.5 million was used to fund increases 14PAGE
THERMO ELECTRON CORPORATION
Liquidity and Capital Resources (continued)
in
inventories, principally at Thermo Instrument, in part to increase finished
goods inventory at Thermo BioAnalysis Corporation's liquid-handling business and
in part to replenish year-end inventory levels at ThermoQuest's European sales
offices as well as at
certain other Thermo Instrument subsidiaries, and to build up ThermoQuest's inventories at ONIX Systems' industry-specific and composition analysis businesses asin preparation for a resultnew
product release. In addition, the Company used $21.5 million of long lead-time orders. Cash flow from operations was improved
bycash to fund a
decrease in accounts payable, resulting principally from the timing of payments,
and $29.8 million of cash to fund a decrease in other current liabilities,
21
Liquidity and Capital Resources (continued)
primarily at Thermo Instrument. The decrease in other current liabilities at
Thermo Instrument resulted principally from a reduction of accrued payroll and
related benefits at ThermoQuest and payments made for accrued acquisition
expenses. A decrease in accounts receivable provided $20.8 million of $16.0 million,cash,
primarily at Thermo Instrument, dueresulting principally from lower revenues at
ThermoQuest and Thermo Optek, management efforts at Thermo Optek to reduce its
investment in accounts receivable, and the timing of cash collections at Metrika
Systems, management's efforts to reduce its investmentSystems. The decrease in accounts receivable was offset in part by an increase
at Thermo Optek,Trex Medical, primarily due to increased sales and, the effectto a lesser extent,
slower customer payment patterns as a result of lowerincreased export and direct
sales at a majority of its operations, extended payment terms for a significant
customer, and a shift from OEM sales to direct and dealer sales at one of ThermoSpectra's business units.its
subsidiaries.
During the first quartersix months of 1998, the Company's primary investing
activity, excluding available-for-sale investments activity, wasincluded
acquisitions and the purchase of property, plant, and equipmentequipment. During the
first six months of 1998, the Company expended $121.7 million, net of cash
acquired, for $37.8 million.acquisitions and expended $74.2 million for purchases of property,
plant, and equipment.
The Company's financing activities provided $249.3$483.7 million of cash in the
first quartersix months of 1998. Net proceeds from the issuance of long-term
obligations totaled $250.0 million and net$244.0 million. Net proceeds from the issuance of Company
and subsidiary stock, which includes $290.2 million of proceeds from the April
1998 sale of Company common stock (Note 7), totaled $124.8$474.1 million. In addition,
the Company used $42.2$44.6 million of cash for the repayment of long-term
obligations and $26.0 million of cash to fund a decrease in short-term notes
payable.
In April 1998, the Company sold 7,475,000 shares of its
common stock at $40.625 per share for net proceeds of approximately $290
million.
During the first quartersix months of 1998, an aggregate principal amount of $5.1$17.0
million subsidiary convertible obligations were converted into shares of
subsidiary common stock.
During the first quartersix months of 1998, the Company and its majority-owned
subsidiaries expended $80.0$165.9 million to purchase 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 AprilJuly 4, 1998, $50.9$34.8 million and $25.7$7.6
million remained under the Company's and its majority-owned subsidiaries'
authorizations, respectively. In July 1998, the Board of Directors of the
Company authorized the repurchase of $100.0 million of its securities and those
of its majority-owned subsidiaries. In addition, in July and August 1998, the
Boards of Directors of certain majority-owned subsidiaries authorized the
repurchase of $35.0 million and 4 million shares of such subsidiaries' common
stock, or the equivalent in outstanding convertible debentures, in open market
or negotiated transactions. In addition to these authorizations, Thermedics Inc.
has presented a proposal to its Thermo Voltek subsidiary to acquire, through a
merger, all of the outstanding shares of Thermo Voltek's common
22
Liquidity and Capital Resources (continued)
stock that Thermedics does not own, including the redemption of Thermo Voltek's
$5.3 million principal amount of 3 3/4% subordinated convertible debentures due
2000, for a total transaction cost estimated to be approximately $27 million.
The Company has no material commitments for purchases of property, plant,
and equipment and expects that for the remainder of 1998, such expenditures will
approximate the current level of expenditures. Since AprilJuly 4, 1998, a majority-owned subsidiary of the Company
hasand its majority-owned subsidiaries have expended $35$52 million on an acquisitionacquisitions of
businesses and as of May 18,August 12, 1998, the Company's majority-owned subsidiaries
had agreements or nonbinding letters of intent to acquire new businesses
totaling approximately $168$51 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.
15PAGE
THERMO ELECTRON CORPORATION
Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices has not changed materially
from its exposure at year-end 1997.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On June 2, 1998, at the Annual Meeting of Shareholders, the
shareholders reelected a class of four incumbent directors to a three-year
term expiring in 2001. The directors reelected at the meeting were: Dr.
Elias P. Gyftopoulos, Mr. Frank Jungers, Dr. Frank E. Morris, and Mr.
Donald E. Noble. Dr. Gyftopoulos received 135,019,458 shares voted in
favor of his election and 853,822 shares voted against; Mr. Jungers
received 120,949,861 shares voted in favor of his election and 14,923,419
shares voted against; Dr. Morris received 134,577,140 shares voted in
favor of his election and 1,296,140 shares voted against; and Mr. Noble
received 134,963,550 shares voted in favor of his election and 909,730
shares voted against. No abstentions or broker nonvotes were recorded on
the election of directors.
At the Annual Meeting, the shareholders also approved a proposal to amend
the Company's employee stock purchase plan and reserve an additional 750,000
shares of common stock as follows: 133,028,752 shares voted in favor of the
proposal, 2,495,714 shares voted against, and 348,814 shares abstained. No
broker nonvotes were recorded on the proposal.
A shareholder proposal to endorse the CERES Principles was defeated by the
shareholders at the Annual Meeting as follows: 9,053,276 shares voted in favor
of the proposal, 99,411,722 shares voted against, 3,761,379 shares abstained,
and 23,646,903 broker nonvotes were recorded on the proposal.
23
Item 5 - Other Information
Pursuant to recent amendments to the rules relating to proxy statements
under the Securities Exchange Act of 1934, as amended (the Exchange Act),
shareholders of the Company are hereby notified that any shareholder proposal
not included in the Company's proxy materials for its 1999 Annual Meeting of
Shareholders (the Annual Meeting) in accordance with Rule 14a-8 under the
Exchange Act will be considered untimely for the purposes of Rules 14a-4 and
14a-5 under the Exchange Act if notice thereof is received by the Company after
March 15, 1999. Management proxies will be authorized to exercise discretionary
voting authority with respect to any shareholder proposal not included in the
Company's proxy materials for the Annual Meeting unless (a) the Company receives
notice of such proposal by March 15, 1999, and (b) the conditions set forth in
Rule 14a-4(c)(2)(i)-(iii) under the Exchange Act are met.
On August 12, 1998, the Company issued a press release concerning a
proposed corporate reorganization including several of its subsidiaries.
See Exhibit 99.
Item 6 - Exhibits
-----------------
See Exhibit Index on page immediately preceding exhibits.
16PAGE24
THERMO ELECTRON CORPORATION
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 18th12th day of MayAugust 1998.
THERMO ELECTRON CORPORATION
Paul F. Kelleher
------------------------------
Paul F. Kelleher
Senior Vice President, Finance
and Administration
John N. Hatsopoulos
------------------------------
John N. Hatsopoulos
President and Chief Financial
Officer
17PAGE25
THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
27- -------------------------------------------------------------------------------
3 Amended and Restated Bylaws of the Registrant.
10.1 Amended and Restated Equity Incentive Plan.
10.2 Description of Arrangements Regarding Stock Owndership By
Officers of the Registrant.
27.1 Financial Data Schedule.
Schedule for the Six Months Ended July 4, 1998.
27.2 Restated Financial Data Schedule for the Quarter ended April 4,
1998.
99 Press Release dated August 12, 1998.
26