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 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 AprilJuly 30, 1999
Common Stock, $1.00 par value 157,885,450158,184,285
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
1
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
AprilJuly 3, January 2,
(In thousands) 1999 1999
- ---------------------------------------------------------------------------------- ------------ ----------
Current Assets:
Cash and cash equivalents $ 404,195386,864 $ 396,670
Short-term available-for-sale investments at quoted market value 753,801681,197 1,150,585
(amortized cost of $749,069$677,486 and $1,144,785)
Accounts receivable, less allowances of $63,073$63,272 and $52,607 901,241930,228 875,615
Unbilled contract costs and fees 98,07882,512 87,031
Inventories:
Raw materials and supplies 299,470275,327 267,901
Work in process 145,838142,341 127,144
Finished goods 238,218228,324 204,662
Prepaid and refundable income taxes 159,281156,878 143,352
Prepaid expenses 67,51358,093 48,369
---------- ----------
3,067,6352,941,764 3,301,329
---------- ----------
Property, Plant, and Equipment, at Cost 1,373,6421,153,583 1,291,485
Less: Accumulated depreciation and amortization 479,612442,735 458,523
---------- ----------
894,030710,848 832,962
---------- ----------
Long-term Available-for-sale Investments, at Quoted Market Value 74,28797,432 95,537
(amortized cost of $78,243$93,834 and $99,256)
---------- ----------
Other Assets 276,782259,510 186,168
---------- ----------
Cost in Excess of Net Assets of Acquired Companies (Note 6) 2,037,6641,925,437 1,915,649
---------- ----------
$6,350,398$5,934,991 $6,331,645
========== ==========
2
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
AprilJuly 3, January 2,
(In thousands except share amounts) 1999 1999
- ---------------------------------------------------------------------------------- ------------ ----------
Current Liabilities:
Notes payable and current maturities of long-term obligations $ 159,800171,922 $ 134,071
Accounts payable 277,387282,057 272,503
Accrued payroll and employee benefits 145,417147,248 142,323
Accrued income taxes 100,24323,926 92,623
Accrued installation and warranty costs 77,34474,198 71,118
Deferred revenue 68,85965,824 60,582
Other accrued expenses (Notes 6 and 7) 396,613474,368 365,103
---------- ----------
1,225,6631,239,543 1,138,323
---------- ----------
Deferred Income Taxes and Other Deferred Items 200,765145,164 175,984
---------- ----------
Long-term Obligations:
Senior convertible obligations 187,042 187,042
Senior notes 150,000 150,000
Subordinated convertible obligations 1,623,4611,588,071 1,639,052
Nonrecourse tax-exempt obligations 15,50014,500 15,500
Other 45,98344,147 33,937
---------- ----------
2,021,9861,983,760 2,025,531
---------- ----------
Minority Interest 602,948555,518 649,382
---------- ----------
Common Stock of Subsidiaries Subject to Redemption ($92,84459,003 and 57,871 94,301
$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; 167,016,009 167,016167,253 166,971
167,253,232 and 166,970,806 shares issued
Capital in excess of par value 1,024,2261,027,956 1,033,799
Retained earnings 1,244,8401,009,652 1,216,541
Treasury stock at cost, 9,131,3689,100,980 and 8,477,707 shares (162,081)(161,598) (151,643)
Deferred compensation (1,796)(6,524) -
Accumulated other comprehensive items (Note 2) (64,615)(83,604) (17,544)
---------- ----------
2,207,5901,953,135 2,248,124
---------- ----------
$6,350,398$5,934,991 $6,331,645
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
THERMO ELECTRON CORPORATION
Consolidated Statement of IncomeOperations
(Unaudited)
Three Months Ended
AprilJuly 3, AprilJuly 4,
(In thousands except per share amounts) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------------------------------------------- ----------- ---------------------
Revenues:
Product and service revenues $1,044,048 $ 962,418 $ 900,997899,968
Research and development contract revenues 47,120 43,26648,292 47,831
---------- ---------
1,009,538 944,263-----------
1,092,340 947,799
---------- --------------------
Costs and Operating Expenses:
Cost of product and service revenues 582,060 533,694(Note 7) 642,488 520,351
Expenses for research and development (a) 101,925 91,318111,348 93,652
Selling, general, and administrative expenses 257,802 226,854(Note 7) 283,301 224,200
Restructuring costs and other nonrecurring income,costs, net (Note 7) (2,967) -391,258 4,112
---------- ---------
938,820 851,866-----------
1,428,395 842,315
---------- --------------------
Operating Income 70,718 92,397(Loss) (336,055) 105,484
Gain on Issuance of Stock by Subsidiaries - 39,60514,601
Other Expense,Income (Expense), Net (Note 3) (7,400) (2,369)(Notes 3 and 7) (34,283) 7,327
---------- --------------------
Income (Loss) Before Income Taxes, Minority Interest, and Extraordinary Item 63,318 129,633
Provision for(370,338) 127,412
Income Taxes 30,899 40,794Tax (Provision) Benefit (Note 7) 87,632 (51,093)
Minority Interest Expense 4,120 24,069(Expense) Income 47,518 (16,697)
---------- --------------------
Income (Loss) Before Extraordinary Item 28,299 64,770(235,188) 59,622
Extraordinary Item, Net of Provision for Income Taxes and Minority - 7232,163
Interest of $1,262$3,582 (Note 4)
---------- --------------------
Net Income (Loss) $ 28,299(235,188) $ 65,49361,785
========== ====================
Earnings (Loss) per Share (Note 4):
Basic $ .18 $ .41
========== =========
Diluted $ .17(1.49) $ .37
========== ====================
Diluted $ (1.49) $ .34
========== ===========
Weighted Average Shares (Note 4):
Basic 158,045 159,131158,010 166,168
========== ====================
Diluted 158,270 176,580158,010 183,329
========== ====================
(a) Includes Costs of:
Research and development contracts $ 41,27643,100 $ 38,72740,634
Internally funded research and development 60,649 52,59168,248 53,018
---------- --------------------
$ 101,925111,348 $ 91,31893,652
========== ====================
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMO ELECTRON CORPORATION
Consolidated Statement of Operations
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ---------------------------------------------------------------------------------- ----------- -----------
Revenues:
Product and service revenues $2,006,466 $ 1,800,965
Research and development contract revenues 95,412 91,097
---------- -----------
2,101,878 1,892,062
---------- -----------
Costs and Operating Expenses:
Cost of product and service revenues (Note 7) 1,224,548 1,054,045
Expenses for research and development (a) 213,273 184,970
Selling, general, and administrative expenses (Note 7) 541,103 451,054
Restructuring and other nonrecurring costs (Note 7) 388,291 4,112
---------- -----------
2,367,215 1,694,181
---------- -----------
Operating Income (Loss) (265,337) 197,881
Gain on Issuance of Stock by Subsidiaries - 54,206
Other Income (Expense), Net (Notes 3 and 7) (41,683) 4,958
---------- -----------
Income (Loss) Before Income Taxes, Minority Interest, and Extraordinary Item (307,020) 257,045
Income Tax (Provision) Benefit (Note 7) 56,733 (91,887)
Minority Interest (Expense) Income 43,398 (40,766)
---------- -----------
Income (Loss) Before Extraordinary Item (206,889) 124,392
Extraordinary Item, Net of Provision for Income Taxes and Minority - 2,886
Interest of $4,844 (Note 4)
---------- -----------
Net Income (Loss) $ (206,889) $ 127,278
========== ===========
Earnings (Loss) per Share (Note 4):
Basic $ (1.31) $ .78
========== ===========
Diluted $ (1.32) $ .71
========== ===========
Weighted Average Shares (Note 4):
Basic 158,028 162,650
========== ===========
Diluted 158,028 179,955
========== ===========
(a) Includes Costs of:
Research and development contracts $ 84,376 $ 79,361
Internally funded research and development 128,897 105,609
---------- -----------
$ 213,273 $ 184,970
========== ===========
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
AprilJuly 3, AprilJuly 4,
(In thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------------------- ---------- ----------- ---------------------- ------------
Operating Activities:
Net income (loss) $ 28,299(206,889) $ 65,493127,278
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 45,118 38,05991,026 78,600
Noncash restructuring costs and other nonrecurring income, 599 -costs, net (Note 7) 324,249 4,112
Provision for losses on accounts receivable 3,640 1,856(Note 7) 9,348 3,777
Change in deferred income taxes 2,831 (699)(46,643) (3,779)
Minority interest expense 4,120 24,069(income) (43,398) 40,766
Equity in loss of unconsolidated subsidiaries 10,663 474
Gain on issuance of stock by subsidiaries - (39,605)(54,206)
Gain on sale of business (Note 7) (11,099) -
(Gain) loss on sale of investments, net (2,770) 160699 (5,252)
Extraordinary item, net of income taxes and minority interest - (723)(2,886)
Other noncash items 3,039 4,61131,913 8,668
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable 35,235 15,998(7,007) 20,782
Inventories (9,881) (19,696)(11,784) (29,532)
Other current assets (15,461) (4,822)4,527 (5,388)
Accounts payable (9,572) (2,561)(2,574) (21,453)
Other current liabilities (3,249) (12,418)(52,895) (29,751)
---------- --------------------
Net cash provided by operating activities 70,849 69,72290,136 132,210
---------- --------------------
Investing Activities:
Acquisitions, net of cash acquired (Note 6) (334,484) (5,625)(345,214) (121,685)
Acquisition of Thermo Voltek common stock (Note 8) (19,779)(20,482) -
Refund of acquisition purchase price 4,074 -
Proceeds from sale of a business 13,537 -
Purchases of available-for-sale investments (130,427) (610,285)(510,997) (1,484,823)
Proceeds from sale and maturities of available-for-sale 548,124 327,205983,324 1,073,609
investments
Purchases of property, plant, and equipment (24,134) (37,766)(64,248) (74,226)
Proceeds from sale of property, plant, and equipment 7,855 5,70214,540 8,994
Increase in other assets (2,033) (509)(6,687) (6,795)
Other 13 3,65215,371 9,036
---------- --------------------
Net cash provided by (used in) investing activities $ 58,672 $(317,626)83,218 $ (595,890)
---------- ---------
5-----------
6
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
ThreeSix Months Ended
AprilJuly 3, AprilJuly 4,
(In thousands) 1999 1998
- ------------------------------------------------------------------------ ---------- ----------- ----------------------------------------------------------------------------------- ------ ------------ ------------
Financing Activities:
Net proceeds from issuance of long-term obligations $ 14,58314,930 $ 249,963243,973
Repayment of long-term obligations (5,406) (1,902)(20,005) (44,618)
Net proceeds from issuance of Company and subsidiary common 2,551 124,7914,066 474,060
stock
Purchases of Company and subsidiary common stock and (97,736) (79,697)(140,370) (165,874)
subordinated convertible debentures
Redemption of subsidiary common stock (17,070) -
Decrease in short-term notes payable (3,161) (42,217)(10,516) (26,041)
Other (47) (1,632)
---------- ---------1,959 2,178
----------- ------------
Net cash provided by (used in) financing activities (106,286) 249,306
---------- ---------(167,006) 483,678
----------- ------------
Exchange Rate Effect on Cash (15,710) 682
---------- ---------(16,154) (2,628)
----------- ------------
Increase (Decrease) in Cash and Cash Equivalents 7,525 2,084(9,806) 17,370
Cash and Cash Equivalents at Beginning of Period 396,670 593,580
---------- -------------------- ------------
Cash and Cash Equivalents at End of Period $ 404,195386,864 $ 595,664
========== =========610,950
=========== ============
Noncash Activities:
Conversions of subsidiary convertible obligations $ - $ 5,090
========== =========16,980
=========== ============
Fair value of assets of acquired companies $ 571,252588,437 $ 9,191198,278
Cash paid for acquired companies (374,986) (5,700)(386,026) (132,568)
Issuance of subsidiary common stock for acquired company - (275)
---------- ---------(8,250)
----------- ------------
Liabilities assumed of acquired companies $ 196,266202,411 $ 3,216
========== =========57,460
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
67
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 3, 1999, and the results of
operations for the three- and six-month periods ended July 3, 1999, and July 4,
1998, and the cash flows for the three-monthsix-month periods ended AprilJuly 3, 1999, and AprilJuly
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 (loss) 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 firstsecond quarter of 1999 and 1998, the
Company had a comprehensive loss of $9.1$247.9 million and comprehensive income of
$62.2$57.9 million, respectively. During the first six months of 1999 and 1998, the
Company had a comprehensive loss of $257.0 million and comprehensive income of
$120.1 million, respectively.
3. Other Expense,Income (Expense), Net
The components of other expense,income (expense), net in the accompanying
statement of incomeoperations are:
Three Months Ended AprilSix Months Ended
July 3, AprilJuly 4, July 3, July 4,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------------------ ---------- ----------- ---------- ----------
Interest Income $13,960 $ 17,959 $23,76528,464 $31,919 $ 52,229
Interest Expense (27,686) (25,607)(27,788) (26,360) (55,474) (51,967)
Equity in Loss of Unconsolidated Subsidiaries (Notes 6 an 7) (10,699) (186) (10,663) (474)
Gain (Loss) on Sale of Investments, Net 2,770 (160)(Note 7) (3,469) 5,412 (699) 5,252
Other (443) (367)(Note 7) (6,287) (3) (6,766) (82)
------- -------- ------- --------
$(34,283) $ (7,400) $(2,369)7,327 $(41,683) $ 4,958
======== =======
7======== ======== ========
8
4. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended AprilSix Months Ended
July 3, AprilJuly 4, July 3, July 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------------------ ---------- ----------- ---------- ----------
Basic
Net Income (Loss) $(235,188) $ 28,299 $65,493
-------- -------61,785 $(206,889) $ 127,278
--------- ---------- --------- ---------
Weighted Average Shares 158,045 159,131
-------- -------158,010 166,168 158,028 162,650
--------- --------- --------- ---------
Basic Earnings (Loss) per Share $ .18(1.49) $ .41
======== =======.37 $ (1.31) $ .78
========= ========= ========= =========
Diluted
Net Income (Loss) $(235,188) $ 28,299 $65,49361,785 $(206,889) $ 127,278
Effect of:
Convertible obligations - 3,667 - 7,334
Majority-owned subsidiaries' dilutive securities (1,183) (4,192)(679) (2,500) (1,483) (6,676)
--------- --------- -------- ----------------
Income (Loss) Available to Common Shareholders, $(235,867) $ 62,952 $(208,372) $ 127,936
as Adjusted
$ 27,116 $64,968
-------- ---------------- --------- --------- ---------
Weighted Average Shares 158,045 159,131158,010 166,168 158,028 162,650
Effect of:
Convertible obligations - 15,476 - 15,476
Stock options 138 1,973
Put options 87 - 1,685 - 1,829
-------- ---------------- -------- ---------
Weighted Average Shares, as Adjusted 158,270 176,580158,010 183,329 158,028 179,955
-------- ---------------- -------- ---------
Diluted Earnings (Loss) per Share $ .17(1.49) $ .37
======== =======.34 $ (1.32) $ .71
========= ========= ========= =========
The computation of diluted earningsloss per share for the second quarter and first
quartersix months 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 excludesand the effect of assuming the
exercise of certain outstanding stock options, because the effect would be antidilutive.antidilutive
due to the Company's net loss. As of AprilJuly 3, 1999, there were 9,610,00011,952,000 of such
options outstanding, with exercise prices ranging from $15.26$8.85 to $43.46 per
share. TheIn addition, the computation of diluted earningsloss per share for the second
quarter and first quartersix months of 1999 also excludes the effect of assuming the
repurchase of 4,034,0005,701,000 shares (of an
aggregate maximum of 5,701,000 shares) of Company common stock at a weighted average
exercise price of $13.97$14.56 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 gaingains in connection with
the repurchase of subsidiary subordinated convertible debentures, which
increased basic and diluted earnings per share by $.01. The extraordinary
gain had no impact on diluted earnings per share.
8$.01 in the second quarter of
1998 and $.02 in the first six months of 1998.
9
5. Business Segment Information
Three Months Ended AprilSix Months Ended
July 3, AprilJuly 4, July 3, July 4,
(In thousands) 1999 1998 1999 1998
- ---------------------------------------------------------------------------------- ------------ -------------------------------------------------------------------- ----------- ----------- ----------- -----------
Revenues:
Measurement and Detection $ 516,764588,502 $ 462,036451,688 $1,105,266 $ 913,724
Biomedical and Emerging Technologies 236,329 223,262242,864 228,293 479,193 451,555
Energy and Environment 184,280 186,992196,467 192,369 380,747 379,361
Recycling and Resource Recovery 74,215 73,31266,246 77,008 140,461 150,320
Intersegment (a) (2,050) (1,339)(1,739) (1,559) (3,789) (2,898)
---------- ---------- $1,009,538---------- ----------
$1,092,340 $ 944,263947,799 $2,101,878 $1,892,062
========== ========== ========== ==========
Income (Loss) Before Income Taxes, Minority Interest,
and Extraordinary Item:
Measurement and Detection (b) $ 53,59429,300 $ 66,73465,700 $ 82,894 $ 132,434
Biomedical and Emerging Technologies 2,000 18,532(c) (157,094) 17,328 (155,094) 35,860
Energy and Environment 8,609 7,641(d) (175,236) 20,556 (166,627) 28,197
Recycling and Resource Recovery 14,762 7,875(e) (24,120) 9,400 (9,358) 17,275
---------- ---------- ---------- ----------
Total segment income (b) 78,965 100,782(f) (327,150) 112,984 (248,185) 213,766
Corporate (c) (15,647) 28,851(g) (43,188) 14,428 (58,835) 43,279
---------- ---------- ---------- ----------
$ 63,318(370,338) $ 129,633127,412 $ (307,020) $ 257,045
========== ========== ========== ==========
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Includes restructuring and other nonrecurring costs of $30.4 million, $1.4
million, $31.6 million, and $1.4 million in the second quarter of 1999 and
1998, and the first six months of 1999 and 1998, respectively. Includes
charges of $3.0 million and $7.6 million in the second quarter and first six
months of 1999, respectively, primarily for the sale of inventories revalued
in connection with an acquisition and other inventory provisions.
(c) Includes restructuring and other nonrecurring costs of $142.3 million, $2.7
million, $145.1 million, and $2.7 million in the second quarter of 1999 and
1998, and the first six months of 1999 and 1998, respectively. Includes
charges of $20.2 million and $22.6 million in the second quarter and first
six months of 1999, respectively, primarily for inventory provisions.
(d) Includes restructuring and other nonrecurring costs of $189.2 million and
$189.9 million in the second quarter and first six months of 1999,
respectively. Includes charges of $4.4 million in the second quarter and
first six months of 1999, primarily for inventory provisions.
(e) Includes restructuring and other nonrecurring costs, net of $29.4 million
and $21.7 million in the second quarter and first six months of 1999,
respectively.
(f) Segment income is income before corporate general and administrative
expenses, other income and expense, minority interest, expense, income taxes, and
extraordinary item.
(c)(g) Includes corporate general and administrative expense,expenses, other income and
expense, and in 1998, gain on issuance of stock by subsidiaries.
10
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.companies, of which certain shares were
acquired in the second quarter of 1999. 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 July 3, 1999,
balance sheet as
of April 3, 1999, includes $2.5$2.2 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 connection with the acquisition of Spectra-Physics, Thermo Instrument
acquired 4,162,000 shares of FLIR Systems, Inc. common stock. FLIR designs,
manufactures, and markets thermal imaging and broadcast camera systems which
detect infrared radiation or heat emitted directly by all objects and materials.
The investment in FLIR shares represented 29.4% of FLIR's outstanding shares as
of July 3, 1999. Thermo Instrument accounts for its investment in FLIR on the
equity method with a one quarter lag to ensure the availability of FLIR's
operating results in time to enable Thermo Instrument to include its pro rata
share of FLIR's results with its own. During the first calendar quarter of 1999,
FLIR recorded a loss in connection with a pooling-of-interests transaction and
certain restructuring actions. Thermo Instrument has recorded its pro rata share
of this loss, $5.1 million, in equity in loss of unconsolidated subsidiaries, a
component of other income (expense), net in the accompanying statement of
operations. In addition, as a result of the pooling consummated by FLIR and
related issuance of FLIR shares in March 1999, Thermo Instrument's pro rata
share of FLIR's equity decreased. This decrease totaled $6.0 million and has
been recorded as a nonrecurring loss in equity in loss of unconsolidated
subsidiaries in the accompanying statement of operations, pursuant to Securities
and Exchange Commission Staff Accounting Bulletin 51.
In addition, the Company and its majority-owned subsidiaries made several
other acquisitions during the first quartersix months of 1999 for $26.4$37.1 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.
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 $157.1 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 certain post-closing adjustments. To date,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 been gathered that would causeundertaken 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 to believe thatestablished reserves, primarily for severance
and excess facilities. In accordance with EITF 95-3, the post-closing adjustments will be material.
9
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 AprilCompany finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. Unresolved matters at July 3, 1999, primarily included completion
of planned severances and abandonment of excess facilities for certain
acquisitions
11
6. Acquisitions (continued)
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:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- --------------
-------------
Balance at January 2, 1999 $ 7,347 $14,577 $ 1,268 $23,192
Reserves established 14,140 498 463 15,10115,804 1,938 1,024 18,766
Usage (3,279) (888) (159) (4,326)(5,013) (1,736) (973) (7,722)
Decrease due to finalization of (224)(455) - (262) (486)(242) (697)
restructuring plans, recorded as a
decrease to cost in excess of net assets
of acquired companies
Currency translation adjustment (6) (282) (297) (585)(597) (592) (89) (1,278)
------- ------- ------- -------
Balance at AprilJuly 3, 1999 $17,978 $13,905$17,086 $14,187 $ 1,013 $32,896988 $32,261
======= ======= ======= =======
7. Restructuring and Related Costs
During the second quarter of 1999, the Company and certain of its
subsidiaries initiated broad scale restructuring actions affecting a number of
business units. As a result, the Company recorded restructuring and related
costs totaling $418.8 million and other nonoperating charges totaling $24.9
million. Restructuring and related costs include $369.9 million of restructuring
costs, $21.4 million of other nonrecurring costs, $25.3 million of inventory and
warranty provisions, and $2.3 million of provisions for uncollectible accounts
receivable. The inventory and warranty provisions are included in cost of
revenues, and the provisions for uncollectible accounts receivable are included
in selling, general, and administrative expenses in the accompanying statement
of operations. Other Nonrecurring Income, Net
Duringnonoperating charges include $22.5 million of other
expense, net and $2.5 million of income tax expense as detailed by segment
below. Severance and lease costs, recorded as components of restructuring costs,
were accounted for in accordance with EITF 94-3.
In addition, during the first quarter of 1999, the Company and certain of
its subsidiaries recorded restructuring and related costs of $4.0 million,
including $5.6 million which were accounted
for in accordance with EITF 94-3, andof restructuring costs, $8.6 million of other
nonrecurring income, net, and $7.0 million of $8.6inventory charges.
12
7. Restructuring and Related Costs (continued)
The Company recorded charges by segment for the second quarter of 1999 as
follows:
(In thousands) Measurement Biomedical Energy Recycling Corporate Total
and and and and
Detection Emerging Environment Resource
Technologies Recovery
- --------------------- -------------- ------------- ------------- ------------- -------------- ------------
Cost of product and $ 2,957 $ 18,176 $ 4,129 $ - $ - $ 25,262
service revenues
Selling, general, - 2,049 249 - - 2,298
and administrative
expenses
Restructuring and 30,378 142,285 189,159 29,436 - 391,258
other nonrecurring
costs, net
Other expense, net 11,066 5,668 2,125 - 3,609 22,468
Income tax expense 1,409 - 1,055 - - 2,464
--------- -------- -------- -------- --------- --------
$ 45,810 $168,178 $196,717 $ 29,436 $ 3,609 $443,750
========= ======== ======== ======== ========= ========
The Company recorded charges by segment for the first six months of 1999
as follows:
(In thousands) Measurement Biomedical Energy Recycling Corporate Total
and and and and
Detection Emerging Environment Resource
Technologies Recovery
- --------------------- -------------- ------------- ------------- ------------- -------------- ------------
Cost of product and $ 7,566 $ 20,601 $ 4,129 $ - $ - $ 32,296
service revenues
Selling, general, - 2,049 249 - - 2,298
and administrative
expenses
Restructuring and 31,621 145,090 189,860 21,720 - 388,291
other nonrecurring
costs, net
Other expense, net 11,066 5,668 2,125 - 3,609 22,468
Income tax expense 1,409 - 1,055 - - 2,464
--------- -------- -------- -------- --------- --------
$ 51,662 $173,408 $197,418 $ 21,720 $ 3,609 $447,817
========= ======== ======== ======== ========= ========
The components of restructuring and related costs by segment and, where
applicable, by majority-owned subsidiary, are as follows:
Measurement and Detection
Thermedics Inc.
Thermedics recorded restructuring and related costs of $32.5 million
during the second quarter of 1999 relating to the Measurement and Detection
segment, including restructuring costs of $30.1 million, other nonrecurring
costs of $0.1 million, a tax asset write-off of $1.4 million, and inventory
provisions of $0.9 million. Restructuring costs of $30.1 million relate to a
decision to sell its power electronics and test equipment business and include
$28.5 million to write off related cost in excess of net assets of acquired
companies to reduce the carrying value of the business to the
13
7. Restructuring and Related Costs (continued)
estimated proceeds from its sale. In addition, restructuring costs include a
charge of $1.6 million recorded by Thermedics to write off its remaining net
investment in a subsidiary of the power electronics and test equipment business,
which Thermedics intends to transfer to a buyer in consideration for a release
from certain contractual obligations, primarily ongoing lease obligations. The
tax write-off represents a deferred tax asset that will not be realized as a
result of exiting this business. The inventory provision results from exiting
and reengineering certain product lines. Unaudited revenues and operating
losses, excluding restructuring and related costs, of the power electronics and
test equipment business were $12.8 million and $0.9 million, respectively, for
the first six months of 1999 and $37.9 million and $0.2 million, respectively,
for 1998. Thermedics recorded other nonrecurring costs of $0.1 million to write
off a receivable as a result of an unfavorable resolution of a post-closing
adjustment in connection with the sale of a business in 1998.
Thermo Instrument Systems Inc.
In connection with restructuring actions commenced in 1998, certain
subsidiaries of Thermo Instrument recorded restructuring costs of $0.2 million
and $1.2 million during the second and first quarter of 1999, respectively. The
restructuring costs were primarily for business relocation and facility-closure
costs. Thermo Instrument expects to incur additional restructuring costs
totaling $0.8 million in the third quarter of 1999.
During the second quarter of 1999, Thermo Instrument recorded other
nonrecurring charges of $13.1 million, including $11.1 million in charges
relating to its equity investment in FLIR (Note 6). These charges were recorded
to equity in loss of unconsolidated subsidiaries, a component of other expense,
net in the accompanying statement of operations. Thermo Instrument's
nonrecurring charges also include an adjustment to cost of revenues of $2.0
million relating to the sale of inventories at Spectra-Physics revalued at the
date of its acquisition. Thermo Instrument recorded a charge of $4.6 million
relating to the sale of such inventories in the first quarter of 1999.
Biomedical and Emerging Technologies
ThermoTrex Corporation
During the second quarter of 1999, ThermoTrex announced restructuring
actions at its Trex Medical Corporation and ThermoLase Corporation subsidiaries.
In connection with these actions, ThermoTrex recorded restructuring and related
costs of $93.9 million in the second quarter of fiscal 1999, including
restructuring costs of $72.3 million, inventory and warranty provisions of $14.3
million, provisions for uncollectible accounts receivable of $1.6 million, and
other nonoperating charges of $5.7 million.
During the second quarter of 1999, Trex Medical recorded $18.1 million of
restructuring and related costs, including restructuring costs of $6.1 million
and inventory and warranty provisions of $12.0 million. The restructuring costs
were incurred primarily in connection with the consolidation of certain
facilities and, to a lesser extent, actions to reduce costs in other operations.
Restructuring costs include $2.3 million for facility-closing costs, net of
assumed sublease income; $2.0 million to write off leasehold improvements at
facilities to be closed and to write down fixed assets to their estimated
disposal value; and $1.9 million for severance for 265 employees across all
functions.
In August 1999, Trex Medical received notification from the FDA denying
its 501(k) filing for its digital mammography system. Trex Medical plans to meet
with the FDA to discuss the reasons for the denial, and expects to implement
various design changes, initiate additional clinical trials, and, if appropriate
after completing such clinical trials, submit a new application for marketing
clearance. Trex Medical hopes to have initiated additional clinical trials
within one year, but there can be no assurance regarding the timing or results
of such clinical trials, or the submission of a new filing to the FDA for
marketing clearance. Trex Medical recorded costs of $9.4 million to establish
inventory provisions and to terminate purchase commitments for products that
have become obsolete due to planned product
14
7. Restructuring and Related Costs (continued)
changes or excess as a result of a recent decline in demand. The largest
component of the inventory charge was recorded as a result of the decision by
the FDA to deny Trex Medical's application its digital mammography system and
resulting design changes expected to be made to the system. Provisions resulting
from other planned product and technology changes and decreased demand for
certain other products are also principal components of the inventory charge.
Warranty provisions of $2.6 million were recorded for estimated costs to address
certain product warranty issues, including costs associated with corrective
actions to be taken with respect to certain previously sold mammography
products.
Trex Medical expects to incur additional restructuring costs totaling
approximately $5.0 million, principally over the next several quarters, which
will be recorded when incurred, such as additional charges for certain employee
and business relocation and related costs. Completion of Trex Medical's
restructuring plan is expected to occur in the first quarter of 2000.
During 1998, ThermoLase initiated certain restructuring activities,
including the announced closure of three domestic spas and the termination of a
joint venture that operated its spa in France. Two of the domestic spas were
closed during the fourth quarter of 1998. ThermoLase closed the third spa, as
well as two additional spas, in the second quarter of 1999. Also during the
second quarter of 1999, ThermoLase sold its remaining nine day spas, as well as
the stock in its destination spa, The Greenhouse Spa, Inc. In connection with
the sale and closures announced in 1999, as well as other actions, ThermoLase
recorded restructuring and related costs of $67.7 million during the second
quarter of 1999, including restructuring costs of $60.3 million, inventory
provisions of $2.3 million, provisions for uncollectible accounts receivable of
$1.7 million, and an investment write-down of $3.4 million. Restructuring costs
include a $19.9 million loss on the sale of its spa businesses; $17.4 million
for the write-off of leasehold improvements and equipment pertaining to the
hair-removal business; $11.7 million for ongoing lease obligations, net of
assumed sublease income; $10.0 million of estimated costs to terminate certain
other obligations related to the ThermoLase hair-removal business; $0.4 million
for losses on laser purchase commitments; $0.3 million to write down investments
in international joint ventures; and $0.4 million for other related costs. In
addition, restructuring costs include $0.2 million of severance costs for
approximately 14 employees across all functions. The inventory provisions were
for certain branded product lines at ThermoLase's Creative Beauty Innovations,
Inc. subsidiary that have been discontinued, and the investment write-down was
to reduce the carrying value of ThermoLase's investment in a privately held
company to its estimated disposal value. The investment write-down is included
in other expense, net in the accompanying statement of operations. Unaudited
revenues and operating losses, excluding restructuring costs, of the spa
businesses were $6.6 million and $15.5 million, respectively, for the first six
months of 1999, and $9.6 million and $14.6 million, respectively, for 1998.
ThermoTrex and the Company recorded aggregate restructuring costs of $62.7
million during the second quarter of 1999, representing a write-off of cost in
excess of net assets of acquired companies. Of the total write-off, $59.3
million was to write-off cost in excess of net assets of acquired companies that
arose from repurchases of ThermoLase common stock. This asset has become
impaired as a result of continuing losses at ThermoLase and a decision to exit
its principal business. The balance of the write off was recorded by ThermoTrex
as a result of a decision to hold for sale its Trex Communications Corporation
subsidiary, and represents a reduction in the carrying value of Trex
Communications to the amount of expected proceeds from its sale. In addition,
ThermoTrex provided a reserve of $2.3 million for impairment of a note
receivable from an unaffiliated company. This amount is included in other
expense, net in the accompanying statement of operations.
In addition, ThermoTrex recorded restructuring and related charges of $3.5
million during the first quarter of 1999, including $1.1 million of
restructuring costs, of which $0.6 million was recorded at Trex Medical. The
total charge also includes inventory provisions of $2.4 million that were
recorded by Trex Medical. The restructuring costs were related to severance for
72 employees across all functions.
15
7. Restructuring and Related Costs (continued)
Thermo Coleman Corporation
Thermo Coleman Corporation recorded restructuring and related costs of
$17.0 million during the second quarter of 1999, principally as a result of a
decision to exit certain businesses through sale or closure. Restructuring costs
include $10.5 million to write off cost in excess of net assets of acquired
companies, $2.3 million for the write down of fixed assets, $3.8 million of
inventory provisions, and a $0.4 million provision for a note receivable. The
charges reduce the carrying values of the businesses to the estimated proceeds
from their sale. Unaudited revenues and operating losses of these businesses
were $16.5 million and $3.9 million, respectively, in the first six months of
1999, and revenues and operating income of $34.5 million and $1.5 million,
respectively, in 1998.
Thermedics Inc.
During the second quarter of 1999, Thermedics recorded $0.3 million of
other nonrecurring costs relating to the proposed transfer of the Company's
wholly owned Thermo Biomedical group of subsidiaries to Thermedics. In addition,
Thermedics recorded $1.4 million of other nonrecurring costs in the first
quarter of 1999, primarily for investment banking fees that were also associated
with the proposed transfer. Thermedics expects to incur additional nonrecurring
costs totaling approximately $0.7 million, principally through December 1999,
which will be recorded when incurred. These charges also relate to the proposed
transfer.
Other
The Company recorded restructuring costs of $0.2 million and $0.3 million
in the second and first quarter of 1999, respectively.
Energy and Environment
Thermo Ecotek Corporation
During the second quarter of 1999, Thermo Ecotek recorded $124.3 million
of restructuring costs and other charges of $2.1 million, as describeda result of actions
detailed below.
Following significant investments of resources in attempts to correct
operational problems, in May 1999, Thermo Ecotek made a decision to cease
further efforts and hold for sale or disposal its Gillette, Wyoming, facility.
As a result, Thermo Ecotek recorded a restructuring charge of $68.0 million,
including $63.3 million to write down the plant and related equipment to a
nominal salvage value, $4.4 million for estimated land reclamation costs, and
$0.3 million of other exit costs, primarily abandoned-facility payments. Thermo
Ecotek recorded $1.5 million of minority interest income, representing a
minority partner's share of these charges. Revenues of this facility were
nominal during the period it operated. The facility had unaudited operating
losses, excluding restructuring costs, of $6.2 million in the first six months
of 1999 and $7.6 million in 1998.
Thermo Ecotek's Delano, California, biomass facilities will reach the end
of the fixed price contract period of their power-sales agreement in September
2000. While Thermo Ecotek's forecasts for periods after that time project
positive cash flows, the facilities would operate at a loss due to depreciation
expense that extends beyond fiscal 2000. In May 1999, Thermo Ecotek entered into
an agreement to terminate the power-sales agreement for its Delano facilities,
effective December 31, 1999. The terms of the agreement call for Thermo Ecotek
to receive payments in lieu of operating under its current agreement and is
subject to regulatory approval. Thermo Ecotek recorded a restructuring charge of
$51.0 million as a result of entering into the new agreement, including $47.5
million to write down the plant and related assets to their estimated
recoverable value, $2.4 million related to a loss on the cancellation of the
facility's primary fuel contract, and $1.1 million to write off cost in excess
of net assets of acquired companies.
16
7. Restructuring and Related Costs (continued)
Pacific Gas & Electric (PG&E), the customer under a long-term power-sales
agreement at Thermo Ecotek's Woodland, California, plant, has interpreted the
terms of such agreement to permit PG&E to cease payment of fixed contract rates
effective July 1, 1999, and to thereafter purchase power at avoided cost rates.
Although Thermo Ecotek contests this interpretation and is considering its
alternatives concerning this dispute, Thermo Ecotek recorded a restructuring
charge of $3.8 million during the second quarter of 1999, representing
impairment of its net investment in the Woodland facility as a result of PG&E's
decision to cease making payments of fixed contract rates.
In addition, during the second quarter of 1999, Thermo Ecotek recorded a
charge of $1.5 million to write off a power plant that is held for sale. Thermo
Ecotek believes that the salvage value, if any, is nominal.
In the second quarter of 1999, Thermo Ecotek also recorded a charge of
$2.1 million representing the write-down of available-for-sale investments
representing an equity interest of its minority partner in the Gillette,
Wyoming, facility due to impairment that Thermo Ecotek deems permanent based on
recent stock prices. This amount is included in loss on investments, net, a
component of other expense, net in the accompanying statement of operations.
Thermo TerraTech Inc.
In May 1999, Thermo TerraTech announced that its majority-owned
subsidiaries plan to sell several businesses. The businesses proposed to be sold
include the used-oil processing operation of Thermo EuroTech, N.V.; three
soil-recycling facilities of ThermoRetec Corporation, in addition to the sites
previously announced; and the Randers division, BAC Killam Inc., and E3-Killam
Inc. businesses of The Randers Killam Group Inc. In connection with these
actions, Thermo TerraTech recorded $55.9 million of restructuring and related
costs, including restructuring costs of $54.2 million, a tax asset write-off of
$1.1 million, and an inventory provision of $0.7 million. Restructuring costs
include $22.2 million to write down cost in excess of net assets of acquired
companies to reduce the carrying value of the businesses proposed to be sold to
the estimated proceeds from their sale; $20.2 million to write down fixed assets
to their estimated disposal value; $4.6 million for ongoing lease costs for
facilities that will be exited in connection with the sale of certain
businesses; $2.5 million for estimated land reclamation costs; $1.9 million to
write off the cumulative foreign translation adjustment related to Thermo
EuroTech's used-oil processing business; $1.8 million to write off intangible
assets related to license acquisition costs at the used-oil processing business;
$0.6 million for severance costs for 42 employees across all functions; and $0.4
million to write off other current assets associated with the businesses. The
tax asset write-off represents a deferred tax asset that will not be realized as
a result of selling Thermo EuroTech's used-oil processing business. The
inventory provision also relates to exiting this business. The write-down of
fixed assets principally relates to special purpose equipment in the used-oil
processing and soil-recycling businesses. In connection with the actions
discussed above, the Company also recorded $1.7 million to write down cost in
excess of net assets of acquired companies that arose in connection with the
Company's repurchases of Thermo EuroTech common stock. The write off is a result
of continuing losses and a decision to exit Thermo EuroTech's principal
business. Thermo TerraTech expects to incur additional restructuring costs of
approximately $3 million through the first half of 2000, for costs that will be
recorded when incurred, such as additional severance, employee retention, and
relocation expenses.
The businesses that are proposed to be sold reported aggregate unaudited
revenues and operating income, excluding restructuring and related costs, of
$22.3 million and $0.8 million, respectively, in the first six months of 1999
and aggregate unaudited revenues and operating losses of $54.3 million and $1.1
million, respectively, in 1998.
During 1998, Thermo TerraTech recorded restructuring costs, primarily
related to the closure or sale of two soil-recycling facilities by ThermoRetec.
ThermoRetec closed one soil-recycling facility in March 1999 and is actively
seeking a buyer for the second soil-recycling facility. If no buyer is found,
ThermoRetec will close the facility.
17
7. Restructuring and Related Costs (continued)
Thermo Power Corporation
Thermo Power undertook certain restructuring actions during the second
quarter of 1999, which included a decision to divest its ThermoLyte Corporation
subsidiary, as well as a decision to outsource certain manufacturing and
warranty functions and reduce staffing levels at certain other subsidiaries. In
addition, Thermo Power wrote down certain assets at its Peek sales and service
subsidiaries located in Malaysia and Croatia that have become impaired due to
business conditions in those regions. In connection with these actions, Thermo
Power recorded restructuring and related costs of $12.6 million, including $8.9
million of restructuring costs, inventory provisions of $3.0 million, costs for
outsourcing certain warranty repairs of $0.5 million, and a provision for
uncollectible accounts receivable of $0.2 million. Restructuring costs include
$4.1 million for the write-off of cost in excess of net assets of acquired
companies, of which $2.9 million was to reduce the carrying value of ThermoLyte
to the estimated proceeds from its sale and $1.2 million was to reduce the
carrying value of Thermo Power's investment in its Peek subsidiaries located in
Malaysia and Croatia due to projected undiscounted cash flows from their
operations being insufficient to recover its investment. In addition,
restructuring costs include $2.0 million of severance costs for approximately 63
employees across all functions; $1.6 million for the write-down of certain fixed
assets, principally at operations being exited; and $1.2 million for lease costs
at facilities being abandoned. Inventory provisions represent a write-down of
inventories to estimated salvage value and consist of $1.9 million for raw
materials for product lines being outsourced, $1.0 million for a discontinued
product line, and $0.1 million for inventories at Peek's subsidiaries located in
Malaysia and Croatia. Unaudited revenues and operating losses for ThermoLyte,
excluding restructuring and related costs, were $7.0 million and $1.1 million,
respectively, in the first six months of fiscal 1999, and $5.8 million and $1.0
million, respectively, in 1998.
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 of severance costs for
approximately 70 employees across all functions, $0.2 million for lease costs at
facilities being abandoned in connection with the consolidation of facilities,
and an asset write-down of $0.1 million related to the consolidation of such
facilities.
Thermo Power expects to incur additional restructuring costs totaling
approximately $2.5 million through December 1999 for costs that will be recorded
when incurred, such as additional severance costs and fees associated with
outsourcing certain product lines. Completion of Thermo Power's restructuring
plans is expected to occur by December 1999.
Recycling and Resource Recovery
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 3824
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 other nonrecurring income, net
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 $1.4Unaudited revenues and operating
income for Thermo Wisconsin were $1.8 million of nonrecurring costsand $0.4 million, respectively, 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.
10and $18.9 million and $2.6 million, respectively, in
1998.
18
7. Restructuring and Related Costs and(continued)
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 announceda jury in the superior court of the state of Rhode Island
rendered a verdict against the Company in connection with an installation in
1985 of a wastewater treatment system by a subsidiary of the Company. The
plaintiff has submitted a brief to the court that it planssets forth a computation of
interest on the damages that, if approved by the court, would bring the total
amount of the award to incur additional restructuringapproximately $21 million. The Company believes that both
the verdict and related
coststhe interest computation are in error and intends to appeal. Due
to the inherent uncertainty of approximately $11the appeal process, however, the Company has
recorded a charge of $21 million primarily for the consolidation of
manufacturing facilities and severance. Trex Medical expects to incur
approximately $6 to $7 million of such coststhis matter in the second quarter andof 1999.
During 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 firstsecond quarter of 1999, relatedthe Company also decided to actions taken athold for
sale its PeekPeter Brotherhood, Ltd. subsidiary. The Company recorded an $8.4
million write-down of fixed assets to reduce the carrying value of the business
unit to the estimated proceeds from its sale. Unaudited revenues and operating
income for Peter Brotherhood, excluding restructuring costs, consistedwere $22.9 million
and $0.9 million, respectively, in the first six months of $0.41999, and $41.7
million relatedand $1.3 million, respectively, in 1998.
Corporate
During the second quarter of 1999, the Company recorded $3.6 million of
other nonoperating charges to severance costs for
approximately 70 employees across all functions, $0.2 million for
abandoned-facility payments relatedwrite down available-for-sale investments due to
impairment that the consolidationCompany deems permanent based upon recent market prices.
These charges are included in loss on investments, net, a component of facilities, and an
asset write-downother
expense, net in the accompanying statement 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.operations.
General
During 1998, certain subsidiaries announced restructuring actions whichthat
included plans for termination of 847792 employees. As of January 2, 1999, the
subsidiaries had terminated 550 employees. The restructuring actions in 1999
included plans for the termination of an additional 579 employees. During the
first quartersix months of 1999, an
additional 132373 employees were terminated in connection with the
restructuring plans announced in 1998.1998 and 1999. A summary of the changes in
accrued restructuring costs, included in other accrued expenses in the
changes in accrued restructuring
costs, included in other accrued expenses in the accompanying balance sheet, follows:
Abandonment
of Excess
(In thousands) Severance of Excess Other(a) Total
Facilities Other Total
------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 2, 1999 $10,513 $4,996$10,572 $5,437 $ 3,2312,731 $18,740
Provision charged to expense 3,111 390 2,019 5,5207,856 20,929 21,564 50,349
Usage (5,254) (662) (1,718) (7,634)(7,422) (3,246) (1,434) (12,102)
Currency translation adjustment (272) (1) (120) (393)(844) (167) (225) (1,236)
------- ------ ------- -------
Balance at AprilJuly 3, 1999 $ 8,098 $4,723 $ 3,412 $16,233
======= ======$10,162 $22,953 $22,636 $55,751
======= ======= 11
======= =======
(a) Includes provisions in 1999 of $12.8 million for costs to terminate
contracts and $6.9 million for land reclamation costs.
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.
19
8. Proposed Reorganization(continued)
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. Thermedics in exchange for additional equity in
ThermedicsDetection Inc. 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.private. The public shareholders of Thermedics
Detection and Thermo Sentron would receive cash in exchange for their shares of
common stock of the respective companies. In addition, Thermedics' equity
interest in Thermo Sentron, Thermedics Detection, and Thermo Voltek Corp. would
be transferred to the Company and as a result each of Thermo Sentron, respectively.Thermedics
Detection, and Thermo Voltek would become wholly owned subsidiaries of the
Company. 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.
OnIn May 5, 1999, Thermo Power entered into a definitive agreement and plan of
merger with the Company underpursuant to 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 thirdfourth quarter of calendar 1999.
In May 1999, ThermoSpectra Corporation entered into a definitive agreement
and plan of merger with Thermo Instrument pursuant to which Thermo Instrument
would acquire, for $16.00 per share, all of the outstanding shares of common
stock of ThermoSpectra not already owned by Thermo Instrument or the Company. In
July 1999, Thermo Vision Corporation entered into a definitive agreement and
plan of merger with Thermo Instrument pursuant to which Thermo Instrument would
acquire, for $7.00 per share, all of the outstanding shares of Thermo Vision not
already owned by Thermo Instrument or the Company. Following the mergers,
ThermoSpectra's and Thermo Vision's common stock would cease to be publicly
traded. Both of these mergers are expected to be completed in the fourth quarter
of 1999.
Thermo TerraTech, ThermoRetec, The Randers Killam Group, ThermoTrex,
ThermoLase, and Thermo Ecotek 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.
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 16.12. 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.
1220
Results of Operations
FirstSecond Quarter 1999 Compared With FirstSecond Quarter 1998
Sales in the firstsecond quarter of 1999 were $1.01$1.09 billion, an increase of
$65.3$144.5 million, or 7%15%, over the firstsecond quarter of 1998. Segment income, excludingExcluding restructuring costs
and other nonrecurring income,costs, net of $3.0$391.3 million and $4.1 million in 1999 and
1998, respectively, described below, and inventory and other provisions of $27.6
million in 1999, segment income decreased to $76.0$91.7 million in 1999 from $100.8$117.1
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,loss, which includes restructuring and
other nonrecurring costs, net and inventory and other provisions, was $70.7$336.1
million in 1999, compared with $92.4operating income of $105.5 million in 1998.
Measurement and Detection
Sales from the Measurement and Detection segment increased $54.7$136.8 million,
or 30%, to $516.8$588.5 million in 1999. Sales increased due to acquisitions made by
Thermo Instrument Systems Inc. and Thermo Sentron Inc., which added $100.2$159.4
million of revenues in 1999. The favorableunfavorable effects of currency translation,
due to the decline in valuestrengthening of the U.S. dollar relative to foreign currencies in
countries in which the Measurement and Detection segment operates, increaseddecreased
revenues by $5.7$4.2 million in 1999. Revenues from Thermo Instrument's analytical
products, excluding the effects of acquisitions and currency translation,
increased $10.8 million, primarily due to the introduction of new products and
an increase in revenues from sales to customers in Asia due to improved economic
conditions there. In addition, sales of life sciences products, excluding
acquisitions and currency translation, increased $3.3 million due to higher
demand and expansion of sales and distribution channels into new markets. The
increases in revenues from acquisitions and at certain existing businesses were
offset in part by lower revenues from other businesses. Revenues from Thermo
Instrument's industrial products, excluding the effects of acquisitions and
currency translation, decreased $17.4$13.1 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$11.2 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.this segment's quality assurance and safety products
business decreased $5.2$5.8 million due to lower demand. Revenues from this
segment's power electronics and test equipment business decreased $4.2 million
due to lower demand and the sale of a business unit which had sales of $1.3$1.6
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.continue.
Segment income margin (segment income margin is segment income as a
percentage of sales), excluding restructuring and other nonrecurring costs of
$1.2$30.4 million in 1999 and $1.4 million in 1998, decreased to 10.6%10.1% in 1999 from
14.4%14.9% in 1998,1998. Excluding charges for the sale of inventories revalued at the
date of acquisition of $2.0 million and other inventory provisions of $0.9
million, segment income margin was 10.6% in 1999. Segment income margin
decreased primarily due to the effect on
segment income margin of lower revenues at certain business
units and, to a lesser extent, 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 inventorieswas acquired in connection with this acquisition of approximately $6 to $7 million, primarily in
the second quarter ofFebruary 1999. In connection with restructuring actions commenced
in 1998, Thermo InstrumentThis segment recorded
restructuring and other nonrecurring costs of $1.2$30.4 million in 1999 primarily for business relocation and facility-closure costs and severance (Note 7).,
principally as a result of a decision to hold for sale its power electronics and
test equipment business. The charge primarily represents a reduction in the
carrying value of this business to the expected proceeds from its sale. Thermo
Instrument expects to incur additional restructuring costs totaling approximately $1.1$0.8
million throughin the third quarter of 1999. In 1998, Thermo Instrument recorded $1.4
million of nonrecurring costs relating to the resolution of an arbitration
proceeding.
21
Second Quarter 1999 Compared With Second Quarter 1998 (continued)
Biomedical and Emerging Technologies
Sales from the Biomedical and Emerging Technologies segment were $236.3$242.9
million in 1999, an increase of $13.1$14.6 million, or 6%, over the 1998 period.
Sales increased primarily due to the inclusion of $29.2$16.6 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. SalesIn addition, sales at Thermo Cardiosystems Inc. increased
$4.1 million, or 25%, while sales of respiratory and monitoring products by the
Company's wholly owned Thermo Biomedical group increased $2.8 million due to
higher demand. In addition, revenues at Thermo Digital Technologies Inc.L.L.C.
increased due to continued shipments of digital passport printers under a
contract with the U.S. government that commenced in the third quarter of 1998.
These revenue increases were offset in part by lower revenues in the existing business units ofat Trex Medical
Corporation and,
to a lesser extent, Bird Medical Technologies Inc. The decrease in revenuesCorporation. Revenues at Trex Medical's existing businesses totaled $22.7Medical, excluding revenues from an acquired
business, decreased $13.1 million. Half ofOf this decreaseamount, $10.6 million resulted from
a reduction in revenues asthe termination of an OEMoriginal equipment manufacturer (OEM) contract with a
major customer
wound down following the customer's acquisition by another corporation. Revenues
also decreased at Trex Medical
13
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,loss, excluding restructuring and other nonrecurring costs of
$2.8$142.3 million in 1999 decreased to $4.8and $2.7 million in 1998, was $14.8 million in 1999,
from $18.5compared with segment income of $20.0 million in 1998. This decline resulted
primarily from inventory and other provisions at several business units which
aggregated $20.2 million in 1999 (Note 7). Excluding these provisions, segment
income for the Biomedical and Emerging Technologies segment was $5.4 million in
1999. Trex Medical had a segment loss, at Trex Medical in the first
quarter of 1999 of $5.5 million, excluding restructuring costs and other
provisions, of $1.5 million in 1999, compared with segment income of $8.8$9.6
million in the 1998 period. The decrease in profitability at Trex Medical was
primarily due to lowera large decrease in 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.businesses. The segment
loss at ThermoLase Corporation, excluding restructuring and nonrecurring costs
and other provisions, totaled $6.1$7.3 million in 1999, compared with a loss of $7.9$6.0 million
in 1998. ThermoLase does
not plan to expandsold The Greenhouse Spa, Inc., and nine of its day spa operation, announced plansspas in
June 1999, and closed its remaining spas as a result of a decision to close two
additionalexit this
business. Thermo Coleman Corporation had a segment loss, excluding restructuring
costs and other provisions, of $2.3 million in 1999, compared with segment
income of $1.3 million in 1998. The segment loss resulted from losses at its
Thermo Information Solutions Inc.'s Internet services subsidiary and at its
Metric Vision subsidiary which commenced operations in the past year.
Restructuring and other nonrecurring costs of $142.3 million in 1999 (Note
7) includes $60.3 million of costs recorded by ThermoLase in connection with the
sale of its spas and is also assessing whether it will close or sell other spas.
ThermoLase's investment in spa assets and lasers totaled approximately $27exiting its hair-removal business; $59.3 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 spaswrite-off cost in excess of incomenet assets of acquired companies arising from
subleasing the facilities will be recorded as a loss. In connection
with purchasesrepurchases of ThermoLase common stock, $29.2stock; $12.7 million at Thermo Coleman and $3.4
million at ThermoTrex for the write-off of cost in excess of net assets is included inof
acquired companies and fixed assets to reduce the Company's balance sheetcarrying value of three
businesses to the estimated proceeds from their sale; $6.1 million at April 3, 1999, which
could be subject to impairment dependent on decisions concerning this business.
RestructuringTrex
Medical for severance and other nonrecurring costsabandoned leases resulting principally from the
consolidation of $2.8 million in 1999 includes $1.4facilities; $0.3 million of nonrecurring costs which were recorded byat 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 $0.3Thermedics; and $0.2 million of other
severance costs. This segment expects to have additional restructuring costs.costs of
approximately $5.7 million over the remainder of 1999. Restructuring costs of
$2.7 million in 1998 includes $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.
Energy and Environment
Sales from the Energy and Environment segment were $184.3increased $4.1 million to
$196.5 million in 1999,
compared with $187.0 million in 1998.1999. Revenues from Thermo Ecotek Corporation were relatively unchanged at $47.3increased $1.5
million in 1999 to $52.3 million. The increase results from the expansion of an
existing power generation facility and $47.2 milliontwo facilities placed 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 datesservice during
the quarter for the summer peak season. These increases were offset in 1998 onward, contractual energy rate increases ceasedpart by
lower revenues at Thermo Ecotek's four energy facilities in California. In addition, asThermo Trilogy Corporation biopesticide
subsidiary due to lower demand. As noted below, the periods during which Thermo
Ecotek receives fixed rates for power at these facilities endshas ended or will end
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
22
Second Quarter 1999 Compared With Second Quarter 1998 (continued)
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
$61.2increased
$3.4 million in 1999 from $68.6to $68.3 million, in 1998, principally due to revenues of $3.1
million from an acquired business and higher demand for gas-fueled cooling
systems and standard industrial refrigeration packages. These increases were
offset in part by a $7.0 million decrease in Thermo Power's revenues as a result
of 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. increaseddecreased slightly to $75.8$75.9 million in 1999 from $71.2$76.7
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
First Quarter 1999 Compared With First Quarter 1998 (continued)
Segment income, excluding restructuring costs of $0.7$189.2 million in 1999,
was $9.3$13.9 million in 1999, compared with $7.6$20.6 million in 1998. Excluding
provisions for inventories and other charges of $4.4 million, segment income was
$18.3 million in 1999. Thermo Ecotek's segment income before restructuring costs
in 1999 was $3.8$8.8 million in 1999, compared with $6.5$10.5 million in 1998. The
decrease resulted principally from a loss of $0.3 million at Thermo Ecotek's coal-beneficiation facilityTrilogy in
Gillette, Wyoming began
operations in April 1998. This facility reported operating losses1999, compared with income of $4.3$0.9 million in the first quarter of 1999, and Thermo Ecotek expects that it will
continue1998, due 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.lower revenues.
Segment income at Thermo Power, excluding restructuring costs and other charges
in 1999, was unchanged at $1.2$3.8 million in 1999 and $5.4 million in 1998. The decrease
occurred primarily at Thermo Power's Peek plc subsidiary as a result of a change
in sales mix and higher research and development costs. Segment income before
restructuring costs and other charges in 1999 at Thermo TerraTech increased to
$4.3$5.7 million in 1999 from $0.1$4.7 million in 1998,1998. The increase at Thermo TerraTech
principally due to a loss of $4.5 million in 1998 at one of ThermoRetec's
business unitsresulted from lower depreciation and amortization as a result of
losses on certain remedial-construction contracts.
This business unit's operating loss totaled $0.7 million inrecording write-offs and writedowns during the second quarter of 1999.
Restructuring costs of $0.7$189.2 million were recorded byin 1999 (Note 7) include $124.4
million at Thermo Ecotek resulting principally from a decision to close its
coal-beneficiation facility and from impairment of its Delano facility following
an agreement to terminate the power-sales agreement for that facility.
Restructuring costs in 1999 also include $8.9 million at Thermo Power in 1999resulting
principally from a decision to hold for certain actionssale its ThermoLyte subsidiary,
impairment at two sales and service businesses of its Peek subsidiary principally severancethat
operate in Malaysia and abandoned-facility paymentsCroatia, and staff reductions and facility
consolidations at other Peek units. Restructuring costs in connection1999 at Thermo
TerraTech totaled $54.2 million and result from decisions to sell several
businesses. The charges at Thermo TerraTech primarily reduce the carrying value
of the businesses to the expected proceeds from their sale. In addition, the
Company recorded $1.7 million of restructuring costs associated with cost in
excess of net assets of acquired companies arising from the consolidationCompany's
repurchases of facilities (Note 7).Thermo EuroTech stock, which has become impaired due to
continuing losses and a decision to exit its principal business. This segment
expects to incur additional restructuring costs of approximately $5.5 million
over the remainder of 1999.
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.through
specified periods. 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 avoidedAvoided cost isrates are currently substantially lower than the payments currently being made by PG&E and SCE torates
Thermo Ecotek has received under the fixed-rate portions of their contracts. In addition,
although it is difficultits contracts and
are expected to predict future levels ofremain so for the foreseeable future. PG&E commenced paying for
power purchased from the Mendota and Woodland facilities at avoided cost based on
current estimates,rates
effective in June and July 1999, respectively, although Thermo Ecotek believes
that this change to avoided cost is expected to be substantially lower in 2000rates occurred six months earlier than the
rates currently being paid by PG&E and SCE under their fixed-rate
contracts.power-sales agreements provided. Thermo Ecotek is considering its alternatives
concerning this dispute. 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 fourththird quarter of 20001999 and thereafter,thereafter.
Further, based on current avoided cost rates, the facilitiesWoodland plant will operate at
substantialbreakeven or nominal 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 wouldthrough 2010, primarily as a result primarily due toof
nonrecourse lease obligations that extend beyond 2000.have been partially funded from the Woodland
plant's past cash flows. Absent sufficient reductions in fuel prices and other
operating costs, Thermo Ecotek wouldwill draw down power reserve funds to cover
operating cash shortfalls and then, shouldif such funds beare 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 proposedexpected
shortfalls in lease payments. The power-sales
23
Second Quarter 1999 Compared With Second Quarter 1998 (continued)
agreement with SCE for the Delano facilities calls for fixed contract rates
through September 2000. If PG&E
ultimately prevailsthe agreement reached in May 1999 to terminate Thermo
Ecotek's power-sales agreements for its assertionDelano facilities receives regulatory
approval, Thermo Ecotek expects that the results of the Delano facilities will
be reduced to breakeven or a nominal loss subsequent to December 1999. Should
the agreement not receive approval, Thermo Ecotek expects that its obligationDelano
facilities will continue 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 projectedhave positive cash flows. The impairment and theflows but will operate at
substantial operating losses that would arisebeginning in the thirdfourth quarter of 19992000. In
calendar 1998, the Mendota and thereafter if the Woodland
facility'sDelano plants' aggregate operating costs exceeded its revenues would have a material adverse
effect on Thermo Ecotek's future results of operations.income was
approximately $41.7 million. 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
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 increaseddecreased to $74.2$66.2
million in 1999 from $73.3$77.0 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 $10.0 million to $60.2$53.5 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$5.7 million. Revenues at Thermo Fibertek's existing businesses
increased slightly,also decreased primarily due to increasedlower sales of stock-preparation equipment in
Europe and water-management equipmentNorth America and accessories in North America. These revenue increases at Thermo Fibertekdecreases were
offset in part by a decrease inhigher revenues from the sale of its stock-preparation equipmentThermo Fibergen Inc.'s water- and
accessories in North America.fiber-recovery services. The favorableunfavorable effects of currency translation
increaseddecreased revenues by $0.6$0.4 million in 1999.
Segment income, excluding restructuring and other nonrecurring costs, and nonrecurring income,
net, of
$7.7$29.4 million in 1999, was $7.0$5.3 million in 1999, compared with $9.4 million in
1998. Segment income decreased primarily at Thermo Fibertek as a result of a
decrease in revenues. Restructuring costs of $8.4 million were recorded at the
Company's wholly owned Peter Brotherhood subsidiary to write down property and
equipment to reduce the carrying value of this unit to the estimated proceeds
from its sale. In May 1999, a jury in the superior court of the state of Rhode
Island rendered a verdict against the Company in connection with an installation
in 1985 of a wastewater treatment system by the Company's wholly owned Napco
subsidiary. The plaintiff has submitted a brief to the court that sets forth a
computation of interest on the damages that, if approved by the court, would
bring the total amount of the award to approximately $21 million. The Company
believes that both the verdict and the interest computation are in error and
intends to appeal this matter. Due to the inherent uncertainty of the appeal
process, however, the Company has recorded a charge of $21 million for this
matter in 1999.
Gain on Issuance of Stock by Subsidiaries and Minority Interest Expense
The Company has, from time to time, caused certain subsidiaries to sell
minority interests to investors resulting in several majority-owned, privately
and publicly held 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 $14.6 million in 1998. The Company
recorded minority interest income of $47.5 million in 1999, primarily as a
result of restructuring and other nonrecurring costs at the Company's
majority-owned subsidiaries. Minority interest expense was $16.7 million in
1998. Minority interest expense in 1998 includes $1.9 million related to gains
recorded by the Company's majority-owned subsidiaries as a result of the sale of
stock by their subsidiaries and the issuance of stock by their subsidiaries upon
conversion of convertible debentures.
Income Taxes
The company's effective tax rate was a benefit of 24% in 1999. Excluding
nontaxable gains from issuance of subsidiary stock, the Company's effective tax
rate was 45% in 1998. The effective tax rates vary from the statutory federal
income tax rate primarily due to state income taxes and nondeductible expenses,
including in 1999, the write-off of cost in excess of net assets of acquired
companies. In addition, in connection with restructuring actions, certain
subsidiaries wrote off deferred tax assets aggregating $2.5 million in 1999
(Note 7).
24
First Six Months 1999 Compared With First Six Months 1998
Sales in the first six months of 1999 were $2.10 billion, an increase of
$209.8 million, or 11%, over the first six months of 1998. Excluding
restructuring and other nonrecurring costs, net, of $388.3 million and $4.1
million in 1999 and $7.91998, respectively, described below, and inventory and other
provisions of $34.6 million in 1999, segment income decreased to $174.7 million
in 1999 from $217.9 million in 1998. Operating loss, which includes
restructuring and other nonrecurring costs, net and inventory and other
provisions, was $265.3 million in 1999, compared with operating income of $197.9
million in 1998.
Measurement and Detection
Sales from the Measurement and Detection segment increased $191.5 million
to $1.11 billion in 1999. Sales increased due to acquisitions made by Thermo
Instrument and Thermo Sentron, which added $259.6 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 $1.3 million
in 1999. Increases in revenues from acquisitions and currency translation were
offset in part by lower revenues at existing businesses. Revenues from Thermo
Instrument's industrial products, excluding the effects of acquisitions and
currency translation, decreased $30.4 million, primarily due to lower revenues
at ThermoSpectra's existing businesses as a result of continued weakness in the
semiconductor industry. Revenues from Thermo Instrument's process control
products, excluding acquisitions and currency translation, decreased $20.4
million due to the reasons discussed in the results for the second quarter.
Revenues from this segment's quality assurance and safety products business
decreased $9.1 million due to lower demand and revenues at its power electronics
and test equipment business decreased $9.4 million due to lower demand and the
sale of a business unit which had revenues of $2.9 million in the 1998 period.
Segment income margin, excluding restructuring and other nonrecurring
costs of $31.6 million in 1999 and $1.4 million in 1998, decreased to 10.4% in
1999 from 14.6% in 1998. Excluding a charge for the sale of inventories revalued
at the date of acquisition of $6.7 million and other inventory provisions of
$0.9 million, segment income margin was 11.0% in 1999. The decrease was due to
the reasons discussed in the results for the second quarter. Restructuring and
other nonrecurring costs of $30.2 million in 1999 (Note 7) principally represent
a charge in connection with the planned sale of the segment's power electronics
and test equipment business, discussed in the results for the second quarter. In
connection with restructuring actions commenced in 1998, Thermo Instrument
recorded restructuring costs of $1.4 million in 1999, primarily for business
relocation and facility-closure costs and severance costs (Note 7). In 1998,
Thermo Instrument recorded $1.4 million of nonrecurring costs for the reason
discussed in the results of operations for the second quarter.
Biomedical and Emerging Technologies
Sales from the Biomedical and Emerging Technologies segment were $479.2
million in 1999, an increase of $27.6 million, or 6%, over the 1998 period.
Sales increased due to the inclusion of $45.9 million of sales from acquired
businesses. Sales at Thermo Cardiosystems increased $7.1 million, or 22%, due to
higher demand. In addition, revenues from government contracts at Thermo Coleman
increased, and revenues at Thermo Digital Technologies increased due to
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 at Trex Medical and, to a lesser extent, from a
decrease in sales of respiratory products at the Company's wholly owned Thermo
Biomedical group. Revenues at Trex Medical, excluding revenues from an
acquisition, decreased $35.9 million. Of this amount, $21.9 million resulted
from a reduction in revenues due to the termination of an OEM contract with a
major customer following the customer's acquisition by another corporation.
Revenues also decreased at Trex Medical due to the inclusion in the 1998 period
of a $8.8 million cardiac catheterization 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. Revenues at Thermo
Biomedical decreased $4.4 million primarily due to lower international demand
for respiratory products.
25
First Six Months 1999 Compared With First Six Months 1998 (continued)
Segment loss, excluding restructuring and other nonrecurring costs of
$145.1 million in 1999 and $2.7 million in 1998, was $10.0 million in 1999
compared with income of $38.5 million in 1998. This decline resulted primarily
from inventory and other provisions in 1999 at several business units which
aggregated $22.6 million (Note 7). Excluding these provisions, segment income at
the Biomedical and Emerging Technologies segment was $12.6 million in 1999. Trex
Medical had a segment loss, excluding restructuring costs and other provisions,
of $4.6 million in 1999, compared with segment income of $18.5 million in the
1998. The decrease in profitability at Trex Medical was due to the reason
discussed in the results for the second quarter. The segment loss at ThermoLase,
excluding restructuring costs and other provisions, totaled $13.5 million in
1999, compared with $13.9 million in 1998. Thermo Coleman had a segment loss,
excluding restructuring costs and inventory provisions, of $1.0 million in 1999,
compared with segment income of $2.1 million in 1998. The decrease in
profitability was primarily due to losses at its Metric Vision and Thermo
Information Solutions subsidiaries.
Restructuring and other nonrecurring costs of $145.1 million in 1999 (Note
7) principally includes the amounts described in the results for the second
quarter. In addition, $1.4 million of nonrecurring costs were recorded by
Thermedics in the first six months of 1999. These costs were associated with the
proposed transfer of the Company's wholly owned Thermo Biomedical group of
subsidiaries to Thermedics and primarily represent investment banking fees.
ThermoTrex, including Trex Medical, recorded $1.1 million of severance costs in
the first quarter of 1999 in addition to the further actions described in the
results for the second quarter. The Company also recorded $0.3 million of other
restructuring costs in 1999. Restructuring costs of $2.7 million in 1998
includes $1.9 million recorded by ThermoLase and $0.8 million recorded by
SensorMedics for the reasons discussed in the results of operations for the
second quarter.
Energy and Environment
Sales from the Energy and Environment segment were $380.7 million in 1999,
compared with $379.4 million in 1998. Revenues from Thermo Ecotek increased $1.6
million to $99.6 million in 1999. Thermo Ecotek's revenues changed for the
reasons discussed in the results of operations for the second quarter. Sales at
Thermo Power decreased $4.0 million to $129.5 million in 1999, principally due
to the sale of its Crusader Engines division in December 1998. Sales at Crusader
totaled $14.1 million in the first six months of 1998 and its results were
approximately breakeven. This decrease was offset in part by revenues of $6.8
million from an acquired business and higher demand for gas-fueled cooling
systems and standard industrial refrigeration packages. Revenues at Thermo
TerraTech increased $3.8 million to $151.7 million in 1999. Revenues from Thermo
TerraTech's environmental-liability management services increased $1.6 million
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 $1.8 million in
1999 due to an increase in demand for its laboratory services.
Segment income, excluding restructuring costs of $189.9 million in 1999,
was $23.2 million in 1999, compared with $28.2 million in 1998. Excluding
provisions for inventories and other charges, segment income was $27.6 million
in 1999. Thermo Ecotek's segment income before restructuring costs was $12.6
million in 1999, compared with $16.9 million in 1998. The change resulted from
$3.8 million of higher losses in the 1999 period from Thermo Ecotek's
coal-beneficiation facility which was closed in May 1999 and reduced
profitability at Thermo Trilogy due to lower revenues. Segment income at Thermo
Power, excluding restructuring costs and other charges in 1999, was $5.0 million
in 1999 and $6.7 million in 1998. Segment income decreased for the reasons
discussed in the second quarter, offset in part by the inclusion of income from
an acquisition. Segment income excluding restructuring costs and other charges
at Thermo TerraTech increased to $10.0 million in 1999 from $4.8 million in
1998. Segment income increased principally due to a loss of $5.4 million in 1998
at one of ThermoRetec's business units as a result of losses on certain
remedial-construction contracts. Restructuring costs of $124.4 million at Thermo
Ecotek, $54.2 million at Thermo TerraTech, and $1.7 million relating to the
Company's repurchases of Thermo EuroTech stock, are described in the results for
the second quarter. Restructuring costs of $9.6 million were recorded by Thermo
Power in 1999, principally for the actions described in the results for the
second quarter (Note 7).
26
First Six Months 1999 Compared With First Six Months 1998 (continued)
Recycling and Resource Recovery
Sales in the Recycling and Resource Recovery segment decreased to $140.5
million in 1999 from $150.3 million in 1998. Sales at Thermo Fibertek decreased
$12.1 million to $113.8 million in 1999, primarily due to the February 1999 sale
of its Thermo Wisconsin subsidiary that resulted in a decrease in revenues of
$9.7 million. Lower revenues from stock-preparation equipment and accessories
was offset in part by higher revenues from water- and fiber- recovery services.
Revenues increased by $4.3 million at the Company's wholly owned Peter
Brotherhood subsidiary due principally to a contract to sell turbine generators
to a customer in Russia.
Segment income, excluding restructuring and other nonrecurring costs, net,
of $21.7 million in 1999, decreased to $12.4 million in 1999 from $17.3 million
in 1998. The decrease was primarily due to lower segment income at Thermo
Fibertek as a result of a
decrease inlower revenues from its stock-preparation business in North America.and the sale of Thermo Wisconsin which
represented $1.2 million of the decrease. This decrease was offset in part by an
increase in segment income at Peter Brotherhood due to higher revenues.
Restructuring and other nonrecurring costs, net of $21.7 million included $21.0
million related to litigation and $8.4 million in connection with the planned
sale of Peter Brotherhood, as described in the results for the second quarter,
offset in part by nonrecurring income net, of $7.7 million was recorded byat Thermo Fibertek. The
nonrecurring income at 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 and the issuance of stock
upon conversion of convertible debentures, the Company recorded gains of $39.6$54.2
million in 1998. MinorityThe Company recorded minority interest expense decreased to $4.1income of $43.4 million
in 1999, from $24.1 million in 1998.primarily as a result of restructuring and other nonrecurring costs at
the Company's majority-owned subsidiaries. Minority interest expense in 1998
includes $12.4$14.3 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 assubsidiaries and the
issuance of stock by their subsidiaries upon conversion of convertible
debentures.
Income Taxes
The Company's effective tax rate in 1999 was a resultbenefit of lower income at the Company's majority-owned subsidiaries.
Income Taxes18%. Excluding
nontaxable gains from issuance of subsidiary stock, the Company's effective tax
rates were 49% andrate was 45% in 1999 and 1998, respectively.1998. The effective tax rates exceedvary from 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 amortizationin 1999, the write-off of cost in excess of net assets of acquired
companies,
due to lower pretax income.
16
companies. In addition, in connection with restructuring actions, certain
subsidiaries wrote off deferred tax assets aggregating $2.5 million in 1999
(Note 7).
Liquidity and Capital Resources
Consolidated working capital was $1.84$1.70 billion at AprilJuly 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$1.07 billion
at AprilJuly 3, 1999, compared with $1.55 billion at January 2, 1999. In addition,
the Company had $74.3$97.4 million of long-term available-for-sale investments at
AprilJuly 3, 1999, compared with $95.5 million at January 2, 1999. Of the total $1.23$1.17
billion of cash, cash equivalents, and short- and long-term available-for-sale
investments at AprilJuly 3, 1999, $1.08$1.09 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$90.1 million during the first
quartersix months of 1999. A decrease in accounts receivable provided $35.2Other current liabilities decreased by $52.9 million,
of
cash, primarily at Thermo Instrument due to lower revenues from analytical
products and at Trex Medical due to lower revenues at a majorityreduction in accrued taxes as a result of its
subsidiaries.a tax benefit
recorded on the Company's pretax loss in 1999, as well as the timing of tax
payments. Cash of $9.9$11.8 million was used to fund
27
Liquidity and Capital Resources (continued)
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 offor new
product releases. An increase in other current
assetsreleases and the timing of shipments. In addition, cash of $7.0 million
was used $15.5 million of cash, primarily to fund an increase in unbilled
contract costsaccounts receivable, principally at Thermo
Ecotek due to increased activity at its natural gas business 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, primarilyPower
due to the timing of payments.shipments. These increases in accounts receivable were
offset by a reduction at Thermo Instrument primarily as a result of lower
revenues from analytical products in the second quarter of 1999 compared with
the fourth quarter of 1998.
During the first quartersix months 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$345.2 million, net of cash acquired, for acquisitions and expended
$24.1$64.2 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$20.5 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$167.0 million of cash during the
first quartersix months of 1999. The Company used $17.1 million of cash for the redemption
of redeemable subsidiary common stock. During the first quartersix months 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$129.9 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 AprilJuly 3, 1999, $46.3$111.9 million remained under the Company's
authorization, and $38.5$36.9 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 $100Company used $17.1 million of Company
andcash
for the redemption of redeemable 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 AprilJuly 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
LiquidityIn August 1999, Thermo Instrument called for redemption on September 3,
1999, all of the outstanding $14.5 million principal amount of its 3 3/4% senior
convertible debentures due 2000. The value of the securities into which the
debentures are convertible exceeded the redemption amount as of the notice date
of the redemption.
In connection with certain restructuring actions undertaken by the Company
and Capital Resources (continued)its subsidiaries during 1999, the Company expects to incur cash expenditures
of approximately $35 million during the remainder of 1999 and $53 million during
2000. The Company believes that the expected proceeds from businesses to be sold
in connection with certain restructuring actions will exceed the aggregate
estimated cash expenditures for restructuring actions and planned repurchases of
subsidiary common stock in connection with the Company's proposed reorganization
plan (Notes 7 and 8).
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 MayAugust 12, 1999, the
Company's majority-owned subsidiaries had agreements or nonbinding letters of intent to
acquireacquired new businesses totaling approximately $67since July 3,
1999, for aggregate cash consideration of $55 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.28
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 facilitiesnon-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
facilitiesnon-information technology systems for year 2000 compliance, has largely been
completed. During phase one, the Company tested and evaluated its significant
computer systems, software applications, and related equipment for year 2000
compliance. The Company also evaluated the potential year 2000 impact on its
critical facilities.non-information technology systems. 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 facilitiesnon-information technology systems 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.non-information technology systems. The Company is
currently upgrading or replacing its material noncompliant information
technology systems, and the majority of this process was complete as of AprilJuly 3,
1999. The Company expects that all of its material information technology
systems and critical facilitiesnon-information technology systems 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 the end of
October 1999.
18
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. The Company expects to complete
its contingency plan by October 1999.
29
Year 2000 (continued)
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$8.0 million as of AprilJuly 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 its exposure at year-end 1998.
1930
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On May 27, 1999, at the Annual Meeting of Shareholders, the shareholders
reelected a class of four incumbent directors to a three-year term expiring in
2002. The directors reelected at the meeting were: Mr. John N. Hatsopoulos, Mr.
Robert A. McCabe, Ms. Hutham S. Olayan, and Dr. Richard F. Syron. Mr.
Hatsopoulos received 136,729,207 shares voted in favor of his election and
5,043,582 shares voted against; Mr. McCabe received 138,146,885 shares voted in
favor of his election and 3,625,904 shares voted against. Ms. Olayan received
138,123,920 shares voted in favor of her election and 3,648,869 shares voted
against. Dr. Syron received 140,113,097 shares voted in favor of his election
and 1,659,692 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
and restate the Corporation's Certificate of Incorporation as follows:
117,177,490 shares voted in favor of the proposal, 1,739,032 shares voted
against, 563,640 shares abstained, and 22,292,627 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: 13,014,191 shares voted in favor
of the proposal, 102,791,378 shares voted against, 3,674,593 shares abstained,
and 22,292,627 broker nonvotes were recorded on the proposal.
A shareholder proposal to endorse an amendment to the Corporation's
Certificate of Incorporation such that the chief executive officer of the
Corporation shall always be a direct lineal descendent of the founder of the
Corporation was defeated by the shareholders at the Annual Meeting as follows:
10,692,095 shares voted in favor of the proposal, 107,859,558 shares voted
against, 928,511 shares abstained, and 22,292,625 broker nonvotes were recorded
on the proposal.
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,May 25, 1999, the Company filed a Current Report on Form 8-K for events
occurring on January 7,May 24, 1999, with respect to Thermo Instrument Systems
Inc.'s cash tender offer for allamendments to its previously
announced corporate reorganization, restructuring and other charges totaling
approximately $450 million, and the appointment of Samuel W. Bodman to the
outstanding sharesCompany's Board 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.
20Directors.
31
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 13th12th day of MayAugust 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
2132
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
3 Amended and Restated ByLaws of the Registrant.
10.1 Amended and Restated Deferred Compensation Plan for Directors of the Registrant.
10.2 Amended and Restated Directors' Stock Option Plan of the Registrant.
10.3 Amended and Restated Nonqualified Stock Option Plan of the Registrant.
10.4 Amended and Restated Equity Incentive Plan of the Registrant.
10.5 Amended and Restated Thermo Electron Corporation - Thermedics Inc. Nonqualified Stock
Option Plan.
10.6 Amended and Restated Thermo Electron Corporation - Thermo Instrument Systems Inc.
Nonqualified Stock Option Plan.
10.7 Amended and Restated Thermo Electron Corporation - Thermo TerraTech Inc. Nonqualified
Stock Option Plan.
10.8 Amended and Restated Thermo Electron Corporation - Thermo Power Corporation Nonqualified
Stock Option Plan.
10.9 Amended and Restated Thermo Electron Corporation - Thermo Cardiosystems Inc. Nonqualified
Stock Option Plan.
10.10 Amended and Restated Thermo Electron Corporation - Thermo Ecotek Corporation Nonqualified
Stock Option Plan.
10.11 Amended and Restated Thermo Electron - ThermoTrex Corporation Nonqualified Stock Option
Plan.
10.12 Amended and Restated Thermo Electron Corporation - Thermo Fibertek Inc. Nonqualified
Stock Option Plan.
10.13 Amended and Restated Thermo Electron Corporation - Thermo Voltek Corp. Nonqualified Stock
Option Plan.
10.14 Amended and Restated Thermo Electron Corporation - Thermo BioAnalysis Corporation
Nonqualified Stock Option Plan.
10.15 Amended and Restated Thermo Electron Corporation - ThermoLyte Corporation Nonqualified
Stock Option Plan.
10.16 Amended and Restated Thermo Electron Corporation - ThermoRetec Corporation Nonqualified
Stock Option Plan.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
10.17 Amended and Restated Thermo Electron Corporation - ThermoSpectra Corporation Nonqualified
Stock Option Plan.
10.18 Amended and Restated Thermo Electron Corporation - ThermoLase Corporation Nonqualified
Stock Option Plan.
10.19 Amended and Restated Thermo Electron Corporation - ThermoQuest Corporation Nonqualified
Stock Option Plan.
10.20 Amended and Restated Thermo Electron Corporation - Thermo Optek Corporation Nonqualified
Stock Option Plan.
10.21 Amended and Restated Thermo Electron Corporation - Thermo Sentron Inc. Nonqualified Stock
Option Plan.
10.22 Amended and Restated Thermo Electron Corporation - Trex Medical Corporation Nonqualified
Stock Option Plan.
10.23 Amended and Restated Thermo Electron Corporation - Thermo Fibergen Inc. Nonqualified
Stock Option Plan.
10.24 Amended and Restated Thermo Electron Corporation - Thermedics Detection Inc. Nonqualified
Stock Option Plan.
10.25 Amended and Restated Thermo Electron Corporation - Metrika Systems Corporation
Nonqualified Stock Option Plan.
10.26 Amended and Restated Thermo Electron - Thermo Vision Corporation Nonqualified Stock
Option Plan.
10.27 Amended and Restated Thermo Electron Corporation - ONIX Systems Inc. Nonqualified Stock
Option Plan.
10.28 Amended and Restated Thermo Electron Corporation - The Randers Killam Group Inc.
Nonqualified Stock Option Plan.
10.29 Amended and Restated Thermo Electron Corporation - Trex Communications Corporation
Nonqualified Stock Option Plan.
10.30 Amended and Restated Thermo Electron Corporation - Thermo Trilogy Corporation
Nonqualified Stock Option Plan.
10.31 1997 Spectra-Physics Lasers, Inc. Stock Option Plan (filed as Exhibit 10.6 of Amendment
No. 1 to Spectra-Physics, Lasers Inc.'s Registration Statement on Form S-1 [File No.
333-38329] and is incorporated herein by reference).
27 Financial Data Schedule.