Exhibit 13
THERMO ELECTRON CORPORATION
Consolidated Financial Statements
as of December 30, 1995
PAGE
Thermo Electron Corporation
Consolidated Statement of Income
(In thousands except per share amounts) 1995 1994 1993
--------------------------------------------------------------------------
Revenues:
Product revenues $1,802,371 $1,418,306 $1,103,558
Service revenues 210,503 141,438 121,987
Research and development contract
revenues 194,543 169,447 128,963
---------- ---------- ----------
2,207,417 1,729,191 1,354,508
---------- ---------- ----------
Costs and Expenses:
Cost of products 1,064,775 824,845 664,201
Cost of services 144,864 103,800 91,292
Expenses for research and development
and new lines of business (a) 269,584 233,099 183,965
Selling, general and administrative
expenses 480,774 384,715 289,282
Restructuring and other nonrecurring
costs (Note 12) 21,938 650 6,616
---------- ---------- ----------
1,981,935 1,547,109 1,235,356
---------- ---------- ----------
Operating Income 225,482 182,082 119,152
Gain on Issuance of Stock by
Subsidiaries (Note 10) 80,815 25,283 39,863
Other Expense, Net (Note 11) (6,802) (989) (27,548)
---------- ---------- ----------
Income Before Income Taxes and
Minority Interest 299,495 206,376 131,467
Provision for Income Taxes (Note 9) 98,900 70,703 33,513
Minority Interest Expense 60,515 30,962 21,086
---------- ---------- ----------
Net Income $ 140,080 $ 104,711 $ 76,868
========== ========== ==========
Earnings per Share:
Primary $ 1.67 $ 1.35 $ 1.11
========== ========== ==========
Fully diluted $ 1.48 $ 1.20 $ 1.00
========== ========== ==========
Weighted Average Shares:
Primary 83,656 77,667 69,468
========== ========== ==========
Fully diluted 105,402 100,819 87,079
========== ========== ==========
2PAGE
Thermo Electron Corporation
Consolidated Statement of Income (continued)
(In thousands) 1995 1994 1993
--------------------------------------------------------------------------
(a) Includes costs of:
Research and development
contracts $ 167,120 $ 149,645 $ 116,733
Internally funded research
and development 98,984 79,555 59,583
Other expenses for new lines
of business 3,480 3,899 7,649
---------- ---------- ----------
$ 269,584 $ 233,099 $ 183,965
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3PAGE
Thermo Electron Corporation
Consolidated Balance Sheet
(In thousands) 1995 1994
------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 461,983 $ 383,005
Short-term available-for-sale investments,
at quoted market value (amortized cost of
$588,471 and $617,837) (Note 2) 593,802 614,915
Accounts receivable, less allowances
of $28,021 and $21,664 476,479 347,444
Unbilled contract costs and fees 74,941 59,906
Inventories 318,182 233,382
Prepaid income taxes (Note 9) 72,993 57,824
Prepaid expenses 22,846 15,148
---------- ----------
2,021,226 1,711,624
---------- ----------
Property, Plant and Equipment, at Cost, Net 712,845 624,888
---------- ----------
Long-term Available-for-sale Investments, at
Quoted Market Value (amortized cost of $60,780
and $65,218) (Note 2) 61,845 62,451
---------- ----------
Long-term Held-to-Maturity Investments
(quoted market value of $24,942) (Note 2) 23,819 -
---------- ----------
Other Assets 98,102 85,338
---------- ----------
Cost in Excess of Net Assets of Acquired
Companies (Notes 3 and 9) 827,071 577,634
---------- ----------
$3,744,908 $3,061,935
========== ==========
4PAGE
Thermo Electron Corporation
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1995 1994
------------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable and current maturities of
long-term obligations (Note 6) $ 106,248 $ 94,003
Accounts payable 164,605 116,768
Accrued payroll and employee benefits 91,393 79,849
Accrued income taxes 51,807 35,845
Accrued installation and warranty costs 40,699 33,442
Other accrued expenses (Note 3) 260,084 200,985
---------- ----------
714,836 560,892
---------- ----------
Deferred Income Taxes (Note 9) 59,188 58,250
---------- ----------
Other Deferred Items 65,878 57,723
---------- ----------
Long-term Obligations (Note 6):
Senior convertible obligations 458,925 620,000
Subordinated convertible obligations 343,076 186,661
Tax-exempt obligations 128,567 130,985
Nonrecourse tax-exempt obligations 94,700 95,300
Other 90,743 16,904
---------- ----------
1,116,011 1,049,850
---------- ----------
Minority Interest 471,648 327,734
---------- ----------
Commitments and Contingencies (Note 7)
Common Stock of Subsidiary Subject to
Redemption ($18,450 redemption value) 17,513 -
---------- ----------
Shareholders' Investment (Notes 4 and 5):
Preferred stock, $100 par value, 50,000
shares authorized; none issued
Common stock, $1 par value, 175,000,000
shares authorized; 87,863,315 and 53,558,248
shares issued 87,863 53,558
Capital in excess of par value 597,678 493,058
Retained earnings 612,476 472,396
Treasury stock at cost, 11,574 and 38,318
shares (536) (1,631)
Cumulative translation adjustment 561 (3,557)
Deferred compensation (Note 8) (2,271) (2,657)
Net unrealized gain (loss) on available-for-sale
investments (Note 2) 4,063 (3,681)
---------- ----------
1,299,834 1,007,486
---------- ----------
$3,744,908 $3,061,935
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5PAGE
Thermo Electron Corporation
Consolidated Statement of Cash Flows
(In thousands) 1995 1994 1993
--------------------------------------------------------------------------
Operating Activities:
Net income $ 140,080 $ 104,711 $ 76,868
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 84,979 65,028 44,192
Restructuring and other nonrecurring
costs (Note 12) 21,938 650 6,616
Equity in losses of unconsolidated
subsidiaries 203 4,019 22,721
Provision for losses on accounts
receivable 5,473 4,225 2,720
Increase in deferred income taxes 4,562 9,403 14,134
Gain on sale of property, plant
and equipment (547) (15,025) (198)
Gain on sale of investments (9,305) (4,851) (2,469)
Gain on issuance of stock by
subsidiaries (Note 10) (80,815) (25,283) (39,863)
Minority interest expense 60,515 30,962 21,086
Other noncash expenses 15,642 9,809 7,850
Changes in current accounts,
excluding the effects of
acquisitions:
Accounts receivable (49,442) (8,526) (45,034)
Inventories (31,805) 10,017 (6,525)
Other current assets (8,868) (9,713) (8,319)
Accounts payable 16,341 804 13,865
Other current liabilities 25,613 16,295 (6,319)
--------- --------- ---------
Net cash provided by operating
activities 194,564 192,525 101,325
--------- --------- ---------
Investing Activities:
Acquisitions, net of cash acquired
(Note 3) (330,698) (173,764) (142,962)
Purchases of available-for-sale
investments (570,064) (748,879) -
Purchases of long-term held-to-
maturity investments (22,300) - -
Proceeds from sale and maturities of
available-for-sale investments 617,145 495,361 -
Purchases of property, plant and
equipment (62,907) (65,525) (62,704)
Proceeds from sale of property,
plant and equipment 5,643 21,391 5,224
Purchases of long-term investments - - (20,573)
Proceeds from sale of long-term
investments - - 16,651
Increase in short-term investments - - (193,894)
6PAGE
Thermo Electron Corporation
Consolidated Statement of Cash Flows (continued)
(In thousands) 1995 1994 1993
-------------------------------------------------------------------------
Decrease in net restricted funds $ - $ 23,420 $ -
Other (18,858) (7,662) (7,297)
--------- --------- ---------
Net cash used in investing
activities (382,039) (455,658) (405,555)
--------- --------- ---------
Financing Activities:
Proceeds from issuance of long-term
obligations 201,891 368,620 102,282
Repayment and repurchase of long-term
obligations (16,826) (27,176) (11,732)
Proceeds from issuance of Company
and subsidiary common stock 173,326 60,601 378,790
Purchases of Company and subsidiary
common stock (97,789) (101,481) (57,198)
Increase in short-term notes
payable, net 1,588 16,683 27,343
Other 962 987 3,096
--------- --------- ---------
Net cash provided by financing
activities 263,152 318,234 442,581
--------- --------- ---------
Exchange Rate Effect on Cash 3,301 1,915 (3,374)
--------- --------- ---------
Increase in Cash and Cash Equivalents 78,978 57,016 134,977
Cash and Cash Equivalents at
Beginning of Year 383,005 325,989 191,012
--------- --------- ---------
Cash and Cash Equivalents at End
of Year $ 461,983 $ 383,005 $ 325,989
========= ========= =========
See Note 13 for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial
statements.
7PAGE
Thermo Electron Corporation
Consolidated Statement of Shareholders' Investment
Common Capital
Stock, in Excess
$1 Par of Par Retained
(In thousands) Value Value Earnings
-------------------------------------------------------------------------
Balance January 2, 1993 $ 29,633 $260,185 $290,817
Net income - - 76,868
Public offering of Company
common stock 4,500 241,505 -
Issuance of stock under
employees' and directors'
stock plans 216 763 -
Conversion of convertible
obligations 285 6,619 -
Effect of majority-owned
subsidiaries' equity
transactions - (19,029) -
Effect of three-for-two stock
split 15,850 (15,850) -
Translation adjustment - - -
Amortization of deferred
compensation - - -
-------- -------- --------
Balance January 1, 1994 50,484 474,193 367,685
Net income - - 104,711
Issuance of stock under
employees' and directors'
stock plans 153 2,429 -
Conversion of convertible
obligations 2,921 63,013 -
Effect of majority-owned
subsidiaries' equity
transactions - (46,577) -
Translation adjustment - - -
Amortization of deferred
compensation - - -
Effect of change in accounting
principle (Note 2) - - -
Change in net unrealized gain
(loss) on available-for-sale
investments (Note 2) - - -
-------- -------- --------
8PAGE
Thermo Electron Corporation
Consolidated Statement of Shareholders' Investment (continued)
Common Capital
Stock, in Excess
$1 Par of Par Retained
(In thousands) Value Value Earnings
-------------------------------------------------------------------------
Balance December 31, 1994 $ 53,558 $493,058 $472,396
Net income - - 140,080
Issuance of stock under
employees' and directors'
stock plans 571 5,293 -
Tax benefit related to directors'
and employees' stock plans - 9,666 -
Conversion of convertible
obligations 6,047 150,787 -
Effect of majority-owned
subsidiaries' equity
transactions - (33,439) -
Effect of three-for-two stock
split 27,687 (27,687) -
Translation adjustment - - -
Amortization of deferred
compensation - - -
Change in net unrealized gain
(loss) on available-for-sale
investments (Note 2) - - -
-------- -------- --------
Balance December 30, 1995 $ 87,863 $597,678 $612,476
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
9PAGE
Thermo Electron Corporation
Consolidated Statement of Shareholders' Investment (continued)
Net
Unrealized
Cumulative Gain (Loss)
Transla- on Avail-
tion Deferred able-for-
Treasury Adjust- Compensa- sale
(In thousands) Stock ment tion Investments
---------------------------------------------------------------------------
Balance January 2, 1993 $ (3,810) $ (7,949) $ (5,050) $ -
Net income - - - -
Public offering of Company
common stock - - - -
Issuance of stock under
employees' and directors'
stock plans 2,598 - - -
Conversion of convertible
obligations - - - -
Effect of majority-owned
subsidiaries' equity
transactions - - - -
Effect of three-for-two stock
split - - - -
Translation adjustment - (5,642) - -
Amortization of deferred
compensation - - 1,211 -
-------- -------- -------- --------
Balance January 1, 1994 (1,212) (13,591) (3,839) -
Net income - - - -
Issuance of stock under
employees' and directors'
stock plans (419) - - -
Conversion of convertible
obligations - - - -
Effect of majority-owned
subsidiaries' equity
transactions - - - -
Translation adjustment - 10,034 - -
Amortization of deferred
compensation - - 1,182 -
Effect of change in accounting
principle (Note 2) - - - 2,868
Change in net unrealized gain
(loss) on available-for-sale
investments (Note 2) - - - (6,549)
-------- -------- -------- --------
10PAGE
Thermo Electron Corporation
Consolidated Statement of Shareholders' Investment (continued)
Net
Unrealized
Cumulative Gain (Loss)
Transla- on Avail-
tion Deferred able-for-
Treasury Adjust- Compensa- sale
(In thousands) Stock ment tion Investments
---------------------------------------------------------------------------
Balance December 31, 1994 $ (1,631) $ (3,557) $ (2,657) $ (3,681)
Net income - - - -
Issuance of stock under
employees' and directors'
stock plans 1,095 - - -
Tax benefit related to directors'
and employees' stock plans - - - -
Conversion of convertible
obligations - - - -
Effect of majority-owned
subsidiaries' equity
transactions - - - -
Effect of three-for-two stock
split - - -
Translation adjustment - 4,118 - -
Amortization of deferred
compensation - - 386 -
Change in net unrealized gain
(loss) on available-for-sale
investments (Note 2) - - - 7,744
-------- -------- -------- --------
Balance December 30, 1995 $ (536) $ 561 $ (2,271) $ 4,063
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
11PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
1. Nature of Operations and Significant Accounting Policies
Nature of Operations
Thermo Electron Corporation and its subsidiaries develop, manufacture, and
market environmental monitoring and analysis instruments; biomedical
products including heart-assist devices, respiratory care equipment, and
mammography systems; paper-recycling and papermaking equipment;
alternative-energy systems; industrial process equipment; and other
specialized products. The Company also provides environmental, laboratory,
and metallurgical services and conducts advanced-technology research and
development.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Thermo Electron Corporation and its majority- and wholly owned subsidiaries
(the Company). All material intercompany accounts and transactions have
been eliminated. Majority-owned public subsidiaries include Thermedics
Inc., Thermo Instrument Systems Inc., Thermo TerraTech Inc. (formerly
Thermo Process Systems Inc.), Thermo Power Corporation, ThermoTrex
Corporation, Thermo Fibertek Inc., and Thermo Ecotek Corporation. Thermo
Cardiosystems Inc. and Thermo Voltek Corp. are majority-owned, public
subsidiaries of Thermedics. Thermo Remediation Inc. is a majority-owned
public subsidiary of Thermo TerraTech. ThermoLase Corporation is a
majority-owned, public subsidiary of ThermoTrex. ThermoSpectra Corporation
is a majority-owned, public subsidiary of Thermo Instrument. Thermo
BioAnalysis Corporation is a majority-owned, privately held subsidiary of
Thermo Instrument. ThermoQuest Corporation and Thermo Optek Corporation are
wholly owned subsidiaries of Thermo Instrument, which have privately sold
debentures that will be convertible into shares of common stock of these
subsidiaries upon completion of their initial public offerings. Thermo
EuroTech N.V. is a majority-owned, privately held subsidiary of Thermo
TerraTech. ThermoLyte Corporation is a majority-owned, privately held
subsidiary of Thermo Power. Trex Medical Corporation is a majority-owned,
privately held subsidiary of ThermoTrex. The Company accounts for
investments in businesses in which it owns between 20% and 50% using the
equity method.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1995, 1994, and 1993 are for the fiscal years ended
December 30, 1995, December 31, 1994, and January 1, 1994, respectively.
Revenue Recognition
For the majority of its operations, the Company recognizes revenues upon
shipment of its products or upon completion of services it renders. The
Company provides a reserve for its estimate of warranty and installation
costs at the time of shipment. Revenues and profits on substantially all
contracts are recognized using the percentage-of-completion method.
Revenues recorded under the percentage-of-completion method were $472.0
million in 1995, $319.8 million in 1994, and $281.4 million in 1993. The
percentage of completion is determined by relating either the actual costs
or actual labor incurred to date to management's estimate of total costs or
total labor, respectively, to be incurred on each contract. If a loss is
indicated on any contract in process, a provision is made currently for the
entire loss. The Company's contracts generally provide for billing of
customers upon the attainment of certain milestones specified in each
12PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
1. Nature of Operations and Significant Accounting Policies (continued)
contract. Revenues earned on contracts in process in excess of billings are
classified as unbilled contract costs and fees in the accompanying balance
sheet. There are no significant amounts included in the accompanying
balance sheet that are not expected to be recovered from existing contracts
at current contract values, or that are not expected to be collected within
one year, including amounts that are billed but not paid under retainage
provisions.
In August 1993, the Company agreed, in exchange for a cash settlement,
to terminate a power sales agreement between a subsidiary of the Company
and a utility. The power sales agreement required the utility to purchase
output of a cogeneration facility that had been under development. Under
the termination agreement, the Company received $15.3 million through 1995,
with subsequent payments of $2.7 million to be made through 1997. The
Company will be obligated to return $8.2 million of this settlement if the
Company elects to proceed with the facility and it achieves commercial
operation before January 1, 2000. Accordingly, the Company has deferred
recognition of $8.2 million of revenues, pending final determination of the
project's status. During 1993, the Company recorded revenues of $9.8
million and operating income of $5.4 million from the termination of the
power sales agreement.
Gain on Issuance of Stock by Subsidiaries
At the time a subsidiary sells its stock to unrelated parties at a price in
excess of its book value, the Company's net investment in that subsidiary
increases. If at that time the subsidiary is an operating entity and not
engaged principally in research and development, the Company records the
increase as a gain.
If gains have been recognized on issuances of a subsidiary's stock and
shares of the subsidiary are subsequently repurchased by the subsidiary or
by the Company, gain recognition does not occur on issuances subsequent to
the date of a repurchase until such time as shares have been issued in an
amount equivalent to the number of repurchased shares. Such transactions
are reflected as equity transactions, and the net effect of these
transactions is reflected in the accompanying statement of shareholders'
investment as the effect of majority-owned subsidiaries' equity
transactions.
Income Taxes
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income
taxes based on the expected future tax consequences of differences between
the financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
Earnings per Share
Primary earnings per share have been computed based on the weighted average
number of common shares outstanding during the year. Because the effect of
common stock equivalents was not material, they have been excluded from the
primary earnings per share calculation. Fully diluted earnings per share
assumes the exercise of stock options and the conversion of the Company's
dilutive convertible obligations and elimination of the related interest
expense.
13PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
1. Nature of Operations and Significant Accounting Policies (continued)
Stock Split
All share and per share information has been restated to reflect a
three-for-two stock split, effected in the form of a 50% stock dividend,
which was distributed in May 1995.
Cash and Cash Equivalents
Cash equivalents consist principally of U.S. government agency securities,
corporate notes, commercial paper, money market funds, and other marketable
securities purchased with an original maturity of three months or less.
These investments are carried at cost, which approximates market value.
Available-for-sale and Held-to-maturity Investments
Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," short- and long-term debt and marketable equity
securities that the Company considers available-for-sale are accounted for
at market value. Debt securities that the Company intends to hold to
maturity are accounted for at amortized cost (Note 2). Prior to 1994,
short- and long-term marketable equity securities were carried at the lower
of cost or market value.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out or
weighted average basis) or market value and include materials, labor, and
manufacturing overhead. The components of inventories are as follows:
(In thousands) 1995 1994
----------------------------------------------------------------------
Raw materials and supplies $172,742 $128,876
Work in process 72,087 44,711
Finished goods 73,353 59,795
-------- --------
$318,182 $233,382
======== ========
Property, Plant and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the
estimated useful lives of the property as follows: buildings and
improvements -- 5 to 40 years, alternative-energy and waste-recycling
14PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
1. Nature of Operations and Significant Accounting Policies (continued)
facilities -- 5 to 25 years, machinery and equipment -- 3 to 20 years, and
leasehold improvements -- the shorter of the term of the lease or the life
of the asset. Property, plant and equipment consist of the following:
(In thousands) 1995 1994
-----------------------------------------------------------------------
Land $ 47,848 $ 43,990
Buildings 175,165 143,727
Alternative-energy and waste-recycling
facilities 382,257 335,064
Machinery, equipment and leasehold
improvements 361,799 288,544
-------- --------
967,069 811,325
Less: Accumulated depreciation and
amortization 254,224 186,437
-------- --------
$712,845 $624,888
======== ========
Other Assets
Other assets in the accompanying balance sheet include the costs of
acquired trademarks, patents, and other specifically identifiable
intangible assets, as well as capitalized costs associated with the
Company's operation of certain alternative-energy facilities. These assets
are being amortized using the straight-line method over their estimated
useful lives, which range from 5 to 20 years. These assets were $44.5
million and $39.7 million, net of accumulated amortization of $27.4 million
and $21.7 million, at year-end 1995 and 1994, respectively.
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method principally over 40 years.
Accumulated amortization was $65.3 million and $47.3 million at year-end
1995 and 1994, respectively. The Company assesses the future useful life of
this asset whenever events or changes in circumstances indicate that the
current useful life has diminished. The Company considers the future
undiscounted cash flows of the acquired companies in assessing the
recoverability of this asset.
Common Stock of Subsidiary Subject to Redemption
In March 1995, ThermoLyte sold 1,845,000 units, each unit consisting of one
share of ThermoLyte common stock and one redemption right, at $10.00 per
unit, for net proceeds of $17.3 million. Holders of the common stock
purchased in the offering will have the option to require ThermoLyte to
redeem in December 1998 or 1999 any or all of their shares at $10.00 per
share. The difference between the redemption value and the original
carrying amount of common stock of subsidiary subject to redemption is
accreted over the period ending December 1998, which corresponds to the
first redemption period. The accretion is charged to minority interest
expense in the accompanying statement of income.
15PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
1. Nature of Operations and Significant Accounting Policies (continued)
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are
translated at average exchange rates for the year in accordance with SFAS
No. 52, "Foreign Currency Translation." Resulting translation adjustments
are reflected as a separate component of shareholders' investment titled
"Cumulative translation adjustment." Foreign currency transaction gains and
losses are included in the accompanying statement of income and are not
material for the three years presented.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Presentation
The historical financial information presented has been restated to reflect
the March 1995 acquisition of Coleman Research Corporation, which has been
accounted for under the pooling-of-interests method (Note 3).
2. Available-for-sale and Held-to-maturity Investments
Effective January 2, 1994, the Company adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." In accordance with
SFAS No. 115, certain of the Company's debt and marketable equity
securities are considered available-for-sale investments in the
accompanying balance sheet and are carried at market value, with the
difference between cost and market value, net of related tax effects,
recorded currently as a component of shareholders' investment titled "Net
unrealized gain (loss) on available-for-sale investments." Effect of change
in accounting principle in the accompanying 1994 statement of shareholders'
investment represents the unrealized gain, net of related tax effects,
pertaining to available-for-sale investments held by the Company on January
2, 1994.
16PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
2. Available-for-sale and Held-to-maturity Investments (continued)
The aggregate market value, cost basis, and gross unrealized gains and
losses of short- and long-term available-for-sale investments by major
security type, at year-end 1995 and 1994, are as follows:
1995 Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
---------------------------------------------------------------------------
Government agency securities $367,208 $366,659 $ 574 $ (25)
Corporate bonds 194,628 192,422 2,223 (17)
Tax-exempt securities 16,275 16,247 28 -
Other 77,536 73,923 3,885 (272)
-------- -------- -------- --------
$655,647 $649,251 $ 6,710 $ (314)
======== ======== ======== ========
1994 Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
---------------------------------------------------------------------------
Government agency securities $287,418 $291,342 $ - $ (3,924)
Corporate bonds 298,799 301,103 74 (2,378)
Tax-exempt securities 33,588 33,882 - (294)
Other 57,561 56,728 2,783 (1,950)
-------- -------- -------- --------
$677,366 $683,055 $ 2,857 $ (8,546)
======== ======== ======== ========
Short- and long-term available-for-sale investments in the
accompanying 1995 balance sheet include equity securities of $22.9 million,
debt securities of $280.9 million with contractual maturities of one year
or less, debt securities of $321.0 million with contractual maturities of
more than one year through five years, and debt securities of $30.8 million
with contractual maturities of more than five years. Actual maturities may
differ from contractual maturities as a result of the Company's intent to
sell these securities prior to maturity and as a result of put and call
options that enable either the Company and/or the issuer to redeem these
securities at an earlier date.
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains and losses recorded
in the accompanying statement of income. Gain on sale of investments in
1995 resulted from gross realized gains of $9.8 million and gross realized
losses of $0.5 million relating to the sale of available-for-sale
investments. Gain on sale of investments in 1994 resulted from gross
realized gains of $6.7 million and gross realized losses of $1.8 million
relating to the sale of available-for-sale investments.
Held-to-maturity investments in the accompanying 1995 balance sheet
represent investments in U.S. treasury bonds that mature in February and
May 1998. It is the Company's intent to hold these securities to maturity.
17PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
3. Acquisitions
In March 1995, the Company acquired Coleman Research Corporation in
exchange for 4,002,224 shares of the Company's common stock, including
202,861 shares reserved for issuance upon exercise of stock options assumed
upon the acquisition of Coleman Research. Coleman Research provides systems
integration, systems engineering, and analytical services to government and
commercial customers in fields of information technology, energy and the
environment, software engineering, launch systems, advanced radar imaging,
and health systems. The acquisition has been accounted for under the
pooling-of-interests method.
Accordingly, all historical financial information presented has been
restated to include the acquisition of Coleman Research. Revenues and net
income for 1994 and 1993, as previously reported by the separate entities
prior to the acquisition and as restated for the combined Company, are as
follows:
(In thousands) 1994 1993
------------------------------------------------------------------
Revenues:
Previously reported $1,585,348 $1,249,718
Coleman Research 143,843 104,790
---------- ----------
$1,729,191 $1,354,508
========== ==========
Net Income:
Previously reported $ 103,410 $ 76,633
Coleman Research 1,301 235
---------- ----------
$ 104,711 $ 76,868
========== ==========
In addition, in 1995, the Company and its majority-owned subsidiaries
made several acquisitions for an aggregate of $339.1 million in cash, the
issuance of common stock and stock options of the Company's majority-owned
subsidiaries valued at $19.0 million, and the issuance of $22.3 million in
debt. In 1994, the Company and its majority-owned subsidiaries made several
acquisitions for an aggregate of $174.3 million in cash.
These acquisitions have been accounted for using the purchase method
of accounting, and the acquired companies' results of operations have been
included in the accompanying financial statements from their respective
dates of acquisition. The aggregate cost of the acquisitions in 1994 and
1995 exceeded the estimated fair value of the acquired net assets by $385.6
million, which is being amortized principally over 40 years. Allocation of
the purchase price for these acquisitions was based on estimates of the
fair value of the net assets acquired and, for acquisitions completed in
1995, is subject to adjustment upon finalization of the purchase price
allocation. Pro forma data is not presented since the acquisitions were not
material to the Company's results of operations.
Other accrued expenses in the accompanying balance sheet includes
approximately $33 million and $26 million at year-end 1995 and 1994,
respectively, for estimated severance, relocation, and other reserves
associated with acquisitions.
18PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
4. Common Stock
At December 30, 1995, the Company had reserved 30,229,901 unissued shares
of its common stock for possible issuance under stock-based compensation
plans, for possible conversion of the Company's convertible debentures, and
for possible exchange of subsidiaries' convertible obligations into common
stock of the Company. Substantially all of the subsidiaries' obligations
are exchangeable into common stock of the Company in the event of a change
in control (as defined in the related fiscal agency agreement) that has not
been approved by the continuing members of Company's Board of Directors
(Note 6). The exchange price would be equal to 50% of the average price of
the Company's common stock for the 30 trading days preceding the change in
control.
In January 1996, the Company redeemed the share purchase rights
outstanding under its previously existing shareholder rights plan for $.02
per right, or $.009 per share of the Company's common stock outstanding.
Simultaneous with this redemption, the Company distributed rights under a
new shareholder rights plan adopted by the Company's Board of Directors to
holders of outstanding shares of the Company's common stock. Each right
entitles the holder to purchase one ten-thousandth of a share of Series B
Junior Participating Preferred Stock, $100 par value, at a purchase price
of $250 per share, subject to adjustment. The rights will not be
exercisable until the earlier of (i) 10 days following a public
announcement that a person or group of affiliated or associated persons (an
Acquiring Person) has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the outstanding shares of common
stock (the Stock Acquisition Date), or (ii) 10 business days following the
commencement of a tender offer or exchange offer for 15% or more of the
outstanding shares of common stock.
In the event that a person becomes the beneficial owner of 15% or more
of the outstanding shares of common stock, except pursuant to an offer for
all outstanding shares of common stock approved by the outside Directors,
each holder of a right (except for the Acquiring Person) will thereafter
have the right to receive, upon exercise, that number of shares of common
stock that equals the exercise price of the right divided by one half of
the current market price of the common stock. In the event that, at any
time after any person has become an Acquiring Person, (i) the Company is
acquired in a merger or other business combination transaction in which the
Company is not the surviving corporation or its common stock is changed or
exchanged (other than a merger that follows an offer approved by the
outside Directors), or (ii) 50% or more of the Company's assets or earning
power is sold or transferred, each holder of a right (except for the
Acquiring Person) shall thereafter have the right to receive, upon
exercise, the number of shares of common stock of the acquiring company
that equals the exercise price of the right divided by one half of the
current market price of such common stock.
At any time until 10 days following the Stock Acquisition Date, the
Company may redeem the rights in whole, but not in part, at a price of $.01
per right (payable in cash or stock). The rights expire on January 29,
2006, unless earlier redeemed or exchanged.
19PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
5. Stock-based Compensation Plans
The Company has several stock-based compensation plans for its key
employees, directors, and others, which permit the award of stock-based
incentives in the stock of the Company and its majority-owned subsidiaries.
The Company has a nonqualified stock option plan, adopted in 1974, and an
incentive stock option plan, adopted in 1981, which permit the award of
stock options to key employees. The incentive stock option plan expired in
1991, and no grants were made after that date. An equity incentive plan,
adopted in 1989, permits the grant of a variety of stock and stock-based
awards as determined by the human resources committee of the Company's
Board of Directors (the Board Committee), including restricted stock, stock
options, stock bonus shares or performance-based shares. To date, only
nonqualified stock options have been awarded under this plan. The option
recipients and the terms of options granted under these plans are
determined by the Board Committee. Generally, options presently outstanding
under these plans are exercisable immediately, but are subject to certain
transfer restrictions and the right of the Company to repurchase shares
issued upon exercise of the options at the exercise price, upon certain
events. The restrictions and repurchase rights generally lapse ratably over
periods ranging from two to ten years after the first anniversary of the
grant date, depending on the term of the option, which may range from three
to twelve years. In addition, under certain options, shares acquired upon
exercise are restricted from resale until retirement or other events.
Nonqualified options may be granted at any price determined by the Board
Committee, while incentive stock options must be granted at not less than
the fair market value of the Company's stock on the date of grant.
Generally, stock options have been granted at fair market value. The
Company also has a directors' stock option plan, adopted in 1993, that
provides for the annual grant of stock options of the Company and its
majority-owned subsidiaries to outside directors pursuant to a formula
approved by the Company's shareholders. Options awarded under this plan are
exercisable six months after the date of grant and expire three to seven
years after the date of grant. In addition to the Company's stock-based
compensation plans, certain officers and key employees may also participate
in stock-based compensation plans of the Company's majority-owned
subsidiaries.
In connection with the acquisition of Coleman Research in 1995, the
Company assumed certain outstanding options granted under Coleman
Research's nonqualified stock option plan. Such options were converted into
options to purchase shares of the Company's common stock, in accordance
with the original terms of the options. On the date of acquisition, 25% of
the nonvested options being converted became exercisable immediately. The
remaining options become exercisable commencing two or three years after
the date of grant, and expire three or four years from the date of grant.
No accounting recognition is given to options granted at fair market
value until they are exercised. Upon exercise, net proceeds, including tax
benefits realized, are credited to equity.
20PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
5. Stock-based Compensation Plans (continued)
A summary of the Company's stock option information is as follows:
1995 1994 1993
---------------- ---------------- ----------------
Range Range Range
of of of
Option Option Option
Number Prices Number Prices Number Prices
(In thousands except of per of per of per
per share amounts) Shares Share Shares Share Shares Share
--------------------------------------------------------------------------
Options outstanding, $ 4.85- $ 4.85- $ 4.85-
beginning of year 5,252 $30.07 4,442 $28.21 3,111 $20.87
Assumed upon
acquisition of 5.21-
Coleman 203 10.45 -- -- -- --
32.17- 25.79- 26.15-
Granted 887 48.90 1,094 30.07 1,838 28.21
4.85- 6.15- 4.85-
Exercised (733) 27.59 (210) 20.87 (476) 19.35
8.33- 7.69- 7.15-
Lapsed or canceled (74) 37.27 (74) 27.59 (31) 24.71
----- ----- -----
Options outstanding, $ 6.36- $ 4.85- $ 4.85-
end of year 5,535 $48.90 5,252 $30.07 4,442 $28.21
===== ===== =====
$ 6.36- $ 4.85- $ 4.85-
Options exercisable 5,508 $48.90 5,252 $30.07 4,442 $28.21
===== ===== =====
Options available
for grant 1,598 2,418 438
===== ===== =====
21PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
6. Long-term Obligations and Other Financing Arrangements
Long-term obligations of the Company are as follows:
(In thousands except per share amounts) 1995 1994
- -------------------------------------------------------------------------------
5% Senior convertible debentures,
due 2001, convertible at $31.50 per share $ 309,000 $ 345,000
4 5/8% Senior convertible debentures,
due 1997, convertible at $21.50 per share 82,325 205,000
4 7/8% Subordinated convertible debentures,
due 1997, convertible at $21.50 per share 55,000 55,000
3 3/4% Senior convertible debentures,
due 2000, convertible into shares of
Thermo Instrument at $16.93 per share 67,600 70,000
6 5/8% Subordinated convertible debentures,
due 2001, convertible into shares of
Thermo Instrument at $9.38 per share 22,275 36,862
5% Subordinated convertible debentures,
due 2000, convertible into shares of ThermoQuest 86,250 -
5% Subordinated convertible debentures,
due 2000, convertible into shares of Thermo Optek 86,250 -
4 7/8% Subordinated convertible debentures,
due 2000, convertible into shares of
Thermo Remediation at $17.92 per share 34,950 -
6 1/2% Subordinated convertible debentures,
due 1998, convertible into shares of
Thermedics at $10.42 per share 8,037 10,252
6 1/2% Subordinated convertible debentures,
due 1997, convertible into shares of
Thermo TerraTech at $10.33 per share 13,432 16,597
Noninterest-bearing subordinated convertible
debentures, due 1997, convertible into shares
of Thermo Cardiosystems at $21.74 per share 11,642 33,000
5 1/2% Subordinated convertible notes,
due 2002, convertible into shares of
Thermo Cardiosystems at $9.88 per share - 450
3 3/4% Subordinated convertible debentures,
due 2000, convertible into shares of Thermo
Voltek at $11.75 per share 25,240 34,500
8.1% Nonrecourse tax-exempt obligation, payable
in semiannual installments, with final
payment in 2000 59,100 62,500
6.0% Nonrecourse tax-exempt obligation, payable
in semiannual installments, with final
payment in 2000 49,700 49,700
Tax-exempt obligations, payable in semiannual
installments, with final payment in 2017 132,047 133,670
Other 101,228 19,353
---------- ----------
1,144,076 1,071,884
Less: Current maturities of long-term
obligations 28,065 22,034
---------- ----------
$1,116,011 $1,049,850
========== ==========
22PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
6. Long-term Obligations and Other Financing Arrangements (continued)
The debentures that are convertible into subsidiary common stock have
been issued by the respective subsidiaries and are guaranteed by the
Company.
In the event of a change in control of the Company (as defined in the
related fiscal agency agreement) that has not been approved by the
continuing members of the Company's Board of Directors, each holder of the
5%, 4 5/8%, and 4 7/8% convertible debentures issued by the Company will
have the right to require the Company to buy all or part of the holder's
debentures, at par value plus accrued interest, within 50 calendar days
after the date of expiration of a specified approval period. In addition,
substantially all of the obligations convertible into subsidiary common
stock become exchangeable for common stock of the Company at an exchange
price equal to 50% of the average price of the Company's common stock for
the 30 trading days preceding the change in control.
Nonrecourse tax-exempt obligations represent obligations issued by the
California Pollution Control Financing Authority (CPCFA), the proceeds of
which were used to finance two alternative-energy facilities (Delano I and
Delano II) located in Delano, California. The obligations are payable only
by a subsidiary of Thermo Ecotek and are not guaranteed by the Company,
except under limited circumstances. As required by the financing bank
group, Thermo Ecotek entered into interest rate swap agreements that
effectively convert these obligations from floating rates to the fixed
rates described above. These swaps have terms expiring in 2000,
commensurate with the final maturity of the debt. During 1995 and 1994, the
average variable rate received under the interest rate swap agreements was
3.8% and 4.9%, respectively.
Tax-exempt obligations represent obligations issued by the CPCFA in
January 1992, the proceeds of which were used to finance the construction
of a waste-recycling facility in San Diego County, California. Construction
of this facility was completed in 1994. Of these tax-exempt obligations,
$93 million carry fixed rates of interest ranging from 7.2% to 8.5%, and
$39 million carry a floating rate of interest that varies weekly based on
short-term, tax-exempt markets. The interest rate ranged from 4.3% to 7.5%
in 1995 and 3.1% to 7.2% in 1994.
During 1994, the Company capitalized $2.1 million of interest expense,
net of interest income, incurred in connection with the construction of the
waste-recycling facility discussed above.
The annual requirements for long-term obligations are as follows:
(In thousands)
--------------------------------------------------------
1996 $ 28,065
1997 214,181
1998 67,650
1999 37,084
2000 333,316
2001 and thereafter 463,780
----------
$1,144,076
==========
23PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
6. Long-term Obligations and Other Financing Arrangements (continued)
Certain of the Company's obligations include requirements to maintain
predetermined financial ratios. At December 30, 1995, the Company was in
compliance with these requirements.
See Note 14 for fair value information pertaining to the Company's
long-term obligations.
Notes payable and current maturities of long-term obligations in the
accompanying balance sheet include $78.1 million and $71.9 million in 1995
and 1994, respectively, of short-term bank borrowings by several of the
Company's subsidiaries. The weighted average interest rates for these
borrowings were 5.1% and 6.2% at year-end 1995 and 1994, respectively.
7. Commitments and Contingencies
Litigation
Cogeneration Joint Venture
The Company has participated in the operation of the Dade County Downtown
Government Center cogeneration facility in Miami, Florida, through a 50/50
joint venture of the Company and Rolls-Royce, Inc. Because the demand for
power and chilled water at the Dade County Downtown Government Center
complex has been substantially less than anticipated since the plant's
startup in 1987, and because the plant has had difficulty disposing of the
remainder of its output, the joint venture has experienced continuing
losses. In September 1994, the plant's operations were suspended in
connection with the resolution of litigation that the joint venture brought
against Dade County related to the plant.
The joint venture has a pending antitrust lawsuit against another
purchaser of part of the plant's output, Florida Power and Light (FPL). FPL
has continued to pursue petitions it has filed with the Florida Public
Service Commission (FPSC) and the Federal Energy Regulatory Commission
(FERC). The petition at FPSC seeks a determination that the joint venture
has been engaging in illegal retail sales of electricity. FPL's actions at
FERC seek to take advantage of a 1993 FERC order finding that, from 1987
through 1991, the plant did not meet required operating efficiencies. If
either FPSC or FERC were to take the action requested by FPL, the joint
venture could be subject to potentially significant refund and other
liabilities, including any deficiency between (a) in the event the lessor
of the plant's generating equipment declared a default under the lease and
sold the equipment, approximately $44 million and the amount realized from
the sale, or (b) in the case of a re-lease by the lessor in lieu of a sale,
the present value of future rentals and prepayment penalty under the lease
(approximately $33 million) and the present value of a fair rental to be
collected from a new tenant. The joint venture's revenues for the
cumulative period from 1987 through 1991 were $26.3 million.
In 1996, the joint venture and FPL entered into an agreement to settle
their disputes. Before the settlement can become effective, it must be
approved by FPSC. There can be no assurance as to whether or when FPSC will
approve the settlement agreement. The settlement would include (i) the
continued closure of the plant but the availability of its capacity for
24PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
7. Commitments and Contingencies (continued)
potential dispatch by FPL, (ii) payments by FPL of the plant's lease
payments and operation and maintenance costs, and (iii) termination of the
antitrust litigation and withdrawal of FPL's motions in the FPSC and FERC
proceedings.
Other Litigation and Related Contingencies
The Company's wholly owned Napco, Inc. subsidiary is challenging a jury
verdict rendered against it during the third quarter of 1994 for
approximately $11.0 million in a contract dispute arising out of an
allegedly defective waste-treatment system installed by Napco in 1984. The
Company believes that the verdict is in error and has appealed the decision
to the U.S. Court of Appeals for the First Circuit. Because this verdict
exceeds Napco's financial ability to pay, Napco has filed a petition for
bankruptcy.
In a lawsuit relating to the Company's waste-recycling facility in
southern California, a third party, from which the Company acquired certain
development rights, alleges that fees totaling $7.9 million plus interest
and legal costs are due and payable by the Company in connection with
construction of the facility. The Company contends that no additional fees
are payable because the facility actually built was substantially different
from the one contemplated in the agreement with the third-party developer.
The Company has been sued by third-party developers of an alternative-
energy facility, constructed by the Company and its subcontractors in 1988
and 1989 and leased and operated by a partnership including Thermo Ecotek.
The third-party developers seek $25 million in damages for alleged
misrepresentation, breach of contract, and other causes of action. The
dispute arises out of the development, construction, and subsequent
operating performance of the plant. The Company believes that the
allegations are without merit and intends to vigorously defend this matter.
The Company's ThermoTrex subsidiary is a defendant in a lawsuit brought
by Fischer Imaging Corporation (Fischer), which alleges that the
StereoGuide(R) prone breast-biopsy system of ThermoTrex's Lorad division
infringes on a Fischer patent on a precision mammographic needle-biopsy
system. The Company believes it has meritorious legal defenses and intends
to vigorously defend the matter. Lorad's cumulative revenues from this
product totaled approximately $39 million through December 30, 1995.
In the opinion of management, the ultimate liability for all such
matters, together with the liability for all other pending legal
proceedings, asserted legal claims, and known potential legal claims that
are probable of assertion, will not be material to the Company's financial
position, but could materially affect the results of operations or cash
flows for a particular quarter or annual period.
25PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
7. Commitments and Contingencies (continued)
Operating Leases
The Company leases portions of its office and operating facilities under
various noncancelable operating lease arrangements. The accompanying
statement of income includes expenses from operating leases of $30.3
million, $24.3 million, and $17.2 million in 1995, 1994, and 1993,
respectively. Minimum rental commitments under noncancelable operating
leases at December 30, 1995, are as follows:
(In thousands)
------------------------------------------------------
1996 $ 30,591
1997 23,955
1998 18,228
1999 13,717
2000 11,994
2001 and thereafter 49,346
--------
$147,831
========
8. Employee Benefit Plans
401(k) Savings Plan
The Company's 401(k) savings plan covers the majority of the Company's
eligible full-time U.S. employees. Contributions to the plan are made by
both the employee and the Company. Company contributions are based on the
level of employee contributions. For this plan, the Company contributed and
charged to expense $7.6 million, $6.5 million, and $4.5 million in 1995,
1994, and 1993, respectively.
Other Retirement Plans
Certain of the Company's subsidiaries offer retirement plans, separate from
the Company's 401(k) savings plan. These retirement plans cover
approximately a third of the Company's U.S. employees. The majority of
these subsidiaries offer 401(k) savings plans; however, one subsidiary
offers a money purchase plan, and two subsidiaries offer profit-sharing
plans. Company contributions to the 401(k) savings plans are based on the
level of employee contributions. Company contributions to the money
purchase plan and profit-sharing plans are based on formulas determined by
the Company. For these plans, the Company contributed and charged to
expense $7.7 million, $5.8 million, and $4.8 million in 1995, 1994, and
1993, respectively.
26PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
8. Employee Benefit Plans (continued)
Employee Stock Ownership Plan
The Company's Employee Stock Ownership Plan (ESOP) covers eligible
full-time U.S. employees. The Company borrowed funds from a financial
institution and then loaned these funds to the ESOP to purchase shares of
common stock of the Company and its majority-owned subsidiaries. The loan
balance between the Company and the financial institution was paid in 1992.
The loan between the Company and the ESOP remains outstanding. The shares
purchased are reported as deferred compensation in the accompanying balance
sheet. The Company makes annual contributions to the ESOP, and shares are
allocated to plan participants based on employee compensation. Effective
December 31, 1994, the ESOP was split into two plans: ESOP I, covering
employees of the Company's corporate office and its wholly owned
subsidiaries and ESOP II, covering employees of certain of the Company's
majority-owned subsidiaries. Also, effective December 31, 1994, ESOP II was
terminated, and as a result, employees of certain of the Company's
majority-owned subsidiaries are no longer eligible to participate in an
ESOP. For this plan, the Company charged to expense $0.3 million, $1.1
million, and $1.1 million in 1995, 1994, and 1993, respectively.
Employee Stock Purchase Plan
Substantially all of the Company's full-time U.S. employees are eligible to
participate in employee stock purchase plans sponsored by the Company or by
the Company's majority-owned public subsidiaries. Prior to the November
1995 plan year, shares of the Company's common stock could be purchased at
the end of a 12-month plan year at 85% of the fair market value at the
beginning of the plan year, and the shares purchased were subject to a
one-year resale restriction. Effective November 1, 1995, shares of the
Company's common stock may be purchased at 95% of the fair market value at
the beginning of the plan year, and the shares purchased are subject to a
six-month resale restriction. Shares are purchased through payroll
deductions of up to 10% of each participating employee's gross wages.
Participants of employee stock purchase plans sponsored by the Company's
majority-owned public subsidiaries may also elect to purchase shares of the
common stock of the subsidiary by which they are employed under the same
general terms described above. During 1995, 1994, and 1993, the Company
issued 220,296 shares, 145,836 shares, and 187,902 shares of its common
stock, respectively, under these plans.
27PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
9. Income Taxes
The components of income before income taxes and minority interest are as
follows:
(In thousands) 1995 1994 1993
-------------------------------------------------------------------------
Domestic $257,214 $165,761 $113,500
Foreign 42,281 40,615 17,967
-------- -------- --------
$299,495 $206,376 $131,467
======== ======== ========
The components of the provision for income taxes are as follows:
(In thousands) 1995 1994 1993
-------------------------------------------------------------------------
Currently payable:
Federal $ 72,496 $ 30,089 $ 10,270
Foreign 17,751 16,343 8,643
State 19,733 9,672 5,320
-------- -------- --------
109,980 56,104 24,233
-------- -------- --------
Deferred (prepaid), net:
Federal (9,050) 11,355 6,922
Foreign 232 (243) 931
State (2,262) 3,487 1,427
-------- -------- --------
(11,080) 14,599 9,280
-------- -------- --------
$ 98,900 $ 70,703 $ 33,513
======== ======== ========
The provision for income taxes that are currently payable does not
reflect $20.5 million, $3.5 million, and $3.4 million of tax benefits of
the Company and its majority-owned subsidiaries allocated to capital in
excess of par value, directly or through the effect of majority-owned
subsidiaries' equity transactions, or $3.0 million, $0.1 million, and $2.3
million of tax benefits used to reduce cost in excess of net assets of
acquired companies in 1995, 1994, and 1993, respectively. The deferred
provision for income taxes does not reflect $5.8 million of tax benefits
used to reduce cost in excess of net assets of acquired companies in 1995.
28PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
9. Income Taxes (continued)
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal
income tax rate of 35% to income before income taxes and minority interest
due to the following:
(In thousands) 1995 1994 1993
--------------------------------------------------------------------------
Provision for income taxes at
statutory rate $104,823 $ 72,232 $ 46,013
Increases (decreases) resulting from:
Gain on issuance of stock by
subsidiaries (28,285) (8,849) (13,770)
State income taxes, net of federal tax 11,356 8,317 4,307
Investment and research and development
tax credits - (2,786) (6,625)
Foreign tax rate and tax law differential 3,785 1,422 3,969
Amortization and write-off of cost in
excess of net assets of acquired companies 7,484 3,450 3,400
Reduction in valuation allowance (2,104) - -
Other, net 1,841 (3,083) (3,781)
-------- -------- --------
$ 98,900 $ 70,703 $ 33,513
======== ======== ========
Prepaid income taxes and deferred income taxes in the accompanying
balance sheet consist of the following:
(In thousands) 1995 1994
----------------------------------------------------------------
Prepaid income taxes:
Reserves and accruals $ 31,659 $ 31,369
Inventory basis difference 19,782 16,756
Capitalized costs and joint venture equity 4,821 3,727
Accrued compensation 12,551 8,599
Allowance for doubtful accounts 5,592 5,470
Net operating loss carryforwards 28,692 17,022
Federal tax credit carryforwards 6,770 7,869
Available-for-sale investments (2,383) 1,025
Other, net 4,723 6,185
-------- --------
112,207 98,022
Less: Valuation allowance 39,214 40,198
-------- --------
$ 72,993 $ 57,824
======== ========
Deferred income taxes:
Depreciation $ 55,418 $ 49,313
Intangible assets 2,806 7,373
Other 964 1,564
-------- --------
$ 59,188 $ 58,250
======== ========
29PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
9. Income Taxes (continued)
The valuation allowance relates to the uncertainty surrounding the
realization of tax loss and credit carryforwards and the realization of tax
benefits attributable to purchase accounting reserves and certain other tax
assets of the Company and certain subsidiaries. Of the year-end 1995
valuation allowance, $24.6 million will be used to reduce cost in excess of
net assets of acquired companies when any portion of the related deferred
tax asset is recognized, and $2.1 million will increase capital in excess
of par value when previously unrealized stock option benefits are
recognized.
During 1995, the valuation allowance was reduced as it became more
likely than not that certain tax benefits will be realized, offset in part
by the establishment of valuation allowances for tax loss and credit
carryforwards of businesses acquired in 1995.
The Company has not recognized a deferred tax liability for the
difference between the book basis and tax basis of the common stock of its
domestic subsidiaries (such difference relates primarily to unremitted
earnings and gains on issuance of stock by subsidiaries) because the
Company does not expect this basis difference to become subject to tax at
the parent level. The Company believes it can implement certain tax
strategies to recover its investment in its domestic subsidiaries tax-free.
A provision has not been made for U.S. or additional foreign taxes on
$101 million of undistributed earnings of foreign subsidiaries that could
be subject to taxation if remitted to the U.S. because the Company
currently plans to keep these amounts permanently reinvested overseas. The
Company believes that any additional U.S. tax liability due upon remittance
of such earnings would be immaterial due to available U.S. foreign tax
credits.
10. Transactions in Stock of Subsidiaries
Gain on issuance of stock by subsidiaries in the accompanying statement of
income results primarily from the following transactions:
1995
Initial public offering of 2,333,556 shares of Thermo Ecotek common
stock at $12.75 per share for net proceeds of $27.5 million resulted in a
gain of $7.9 million.
Private placement of 1,601,500 shares of Thermo BioAnalysis common
stock at $10.00 per share for net proceeds of $14.9 million resulted in a
gain of $9.5 million that was recorded by Thermo Instrument.
Private placement of 500,000 shares of Thermo Remediation common stock
at $13.25 per share for net proceeds of $6.6 million resulted in a gain of
$1.6 million that was recorded by Thermo TerraTech.
Private placements of 150,000 and 50,000 shares of ThermoLase common
stock at $13.75 and $12.825 per share, respectively, and a public offering
of 2,250,000 shares at $25.25 per share, for aggregate net proceeds of
$55.3 million resulted in an aggregate gain of $34.7 million that was
recorded by ThermoTrex.
Initial public offering of 1,725,000 shares of ThermoSpectra common
stock at $14.00 per share and a private placement of 202,000 shares at
30PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
10. Transactions in Stock of Subsidiaries (continued)
$15.72 per share, for aggregate net proceeds of $24.9 million resulted in
an aggregate gain of $10.6 million that was recorded by Thermo Instrument.
Conversion of $9.1 million of Thermo Voltek 3 3/4% subordinated
convertible debentures convertible at $11.75 per share into 775,399 shares
of Thermo Voltek common stock resulted in a gain of $3.5 million that was
recorded by Thermedics.
Private placement of 1,862,000 shares of Trex Medical common stock at
$10.25 per share for net proceeds of $17.6 million resulted in a gain of
$12.8 million that was recorded by ThermoTrex.
1994
Public offering of 1,610,000 shares of ThermoTrex common stock at
$15.375 per share for net proceeds of $23.0 million resulted in a gain of
$7.9 million.
Initial public offering of 5,349,572 shares of ThermoLase common stock
at $3.00 per share for net proceeds of $14.8 million resulted in a gain of
$8.6 million that was recorded by ThermoTrex.
Private placements of 1,505,000 shares of ThermoSpectra common stock
at $10.00 per share for net proceeds of $14.0 million resulted in a gain of
$6.5 million that was recorded by Thermo Instrument.
Conversion of $3.7 million of Thermedics 6 1/2% subordinated
convertible debentures convertible at $10.42 per share into 357,597 shares
of Thermedics common stock resulted in a gain of $1.0 million.
1993
Public offering of 3,225,000 shares of Thermedics common stock at
$10.00 per share for net proceeds of $30.0 million resulted in a gain of
$10.7 million.
Public offering of 4,312,500 shares of Thermo Power common stock at
$9.00 per share for net proceeds of $36.0 million resulted in a gain of
$10.6 million.
Private placements of 2,062,500 shares of ThermoTrex common stock at
$11.17 and $14.50 per share for net proceeds of $27.5 million resulted in a
gain of $11.4 million.
Private placement of 300,000 shares and initial public offering of
1,650,000 shares of Thermo Remediation common stock at $6.59 and $8.33 per
share, respectively, for aggregate net proceeds of $14.6 million resulted
in an aggregate gain of $4.2 million that was recorded by Thermo TerraTech.
Conversion of $7.3 million of Thermedics 6 1/2% subordinated
convertible debentures convertible at $10.42 per share into 697,919 shares
of Thermedics common stock resulted in a gain of $2.5 million.
The Company's ownership percentage in these subsidiaries changed
primarily as a result of the transactions listed above, as well as the
Company's purchases of shares of its majority-owned subsidiaries' stock,
the subsidiaries' purchases of their own stock, the issuance of
subsidiaries' stock by the Company or by the subsidiaries under stock-based
compensation plans or in other transactions, and the conversion of
convertible obligations held by the Company, its subsidiaries, or by third
parties.
31PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
10. Transactions in Stock of Subsidiaries (continued)
The Company's ownership percentages at year-end were as follows:
1995 1994 1993
---- ---- ----
Thermedics 51% 51% 52%
Thermo Instrument 86% 83% 81%
Thermo TerraTech 81% 80% 72%
Thermo Power 63% 60% 52%
ThermoTrex 51% 50% 55%
Thermo Fibertek 81% 81% 80%
Thermo Ecotek 83% 97% 88%
Thermo Cardiosystems (a) 55% 58% 57%
Thermo Voltek (a) 59% 71% 67%
Thermo Remediation (b) 69% 65% 67%
ThermoLase (c) 65% 69% 81%
ThermoSpectra (d) 72% 86% 100%
Thermo EuroTech (e) 62% 64% 72%
ThermoLyte (f) 78% 100% 100%
Thermo BioAnalysis (d) 80% 100% 100%
ThermoQuest (d) 100% 100% 100%
Thermo Optek (d) 100% 100% 100%
Trex Medical (c) 91% 100% 100%
(a) Reflects combined ownership by Thermedics and Thermo Electron.
(b) Reflects combined ownership by Thermo TerraTech and Thermo Electron.
(c) Reflects ownership by ThermoTrex.
(d) Reflects ownership by Thermo Instrument.
(e) Reflects ownership by Thermo TerraTech.
(f) Reflects ownership by Thermo Power.
11. Other Expense, Net
The components of other expense, net, in the accompanying statement of
income are as follows:
(In thousands) 1995 1994 1993
-------------------------------------------------------------------------
Interest income $ 62,146 $ 43,280 $ 23,905
Interest expense (76,961) (59,844) (31,736)
Equity in losses of unconsolidated
subsidiaries (203) (4,019) (22,721)
Gain on sale of investments 9,305 4,851 2,469
Gain on sale of land - 14,698 -
Other income (expense), net (1,089) 45 535
-------- -------- --------
$ (6,802) $ (989) $(27,548)
======== ======== ========
32PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
12. Restructuring and Other Nonrecurring Costs
Restructuring and other nonrecurring costs in the accompanying 1995 statement
of income includes $11.5 million to write off the Company's net investment in a
waste-recycling facility in southern California due to contractual defaults by
the facility's sole customer, which have caused operations to be substantially
curtailed; $5.0 million to write off the cost in excess of net assets of
acquired companies at Thermo TerraTech's thermal-processing equipment business
due to this asset no longer being recoverable based on discontinuing investment
in this business; $2.5 million to write off the cost in excess of net assets of
acquired companies at the Company's Napco subsidiary, which is a defendant in
litigation described in Note 7; and $2.9 million of other nonrecurring costs.
The 1994 amount represents severance costs and, to a lesser extent, the
costs to write off leasehold improvements at ThermoTrex's East Coast division.
The 1993 amount primarily represents a $1.9 million reserve for the
write-off of machinery and equipment and costs to phase out a product line in
the Company's metal-fabrication services business, a $1.2 million reserve for
restructuring at the Company's steam turbines and compressors business, and
$2.7 million for the write-off of mobile soil-remediation assets and other
related expenses.
13. Supplemental Cash Flow Information
Supplemental cash flow information is as follows:
(In thousands) 1995 1994 1993
--------------------------------------------------------------------------
Cash Paid For:
Interest $ 71,816 $ 47,745 $ 29,529
Income taxes $ 50,788 $ 27,456 $ 9,909
Noncash Activities:
Conversions of the Company's and
subsidiaries' convertible obligations $ 212,979 $ 89,625 $ 50,403
Acquisition of asset under capital
lease $ 47,020 $ - $ -
Purchase of alternative-energy
facility through assumption of
debt $ - $ - $ 66,900
Fair value of assets of acquired
companies $ 521,558 $ 250,404 $ 208,193
Cash paid for acquired companies (339,075) (174,330) (143,790)
Issuance of subsidiaries' common stock
and stock options for acquired
companies (18,990) - -
Issuance of long-term obligations for
acquired company (22,300) - -
--------- -------- --------
Liabilities assumed of acquired
companies $ 141,193 $ 76,074 $ 64,403
========= ========= =========
33PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
14. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, available-for-sale and held-to-maturity investments, accounts
receivable, notes payable and current maturities of long-term obligations,
accounts payable, long-term obligations, forward exchange contracts, and
interest rate swaps. The carrying amount of these financial instruments, with
the exception of available-for-sale investments, long-term obligations, forward
exchange contracts, and interest rate swaps, approximates fair value due to
their short-term nature.
Available-for-sale investments are carried at fair value in the
accompanying balance sheet. The fair values were determined based on quoted
market prices. See Note 2 for fair value information pertaining to these
financial instruments. Held-to-maturity investments in the accompanying balance
sheet are carried at amortized cost. The fair values are disclosed on the
accompanying balance sheet and were determined based on quoted market prices.
The Company enters into forward exchange contracts to hedge certain firm
purchase and sale commitments denominated in currencies other than its
subsidiaries' local currencies, principally U.S. dollars, British pounds
sterling, French francs, and Japanese yen. The purpose of the Company's foreign
currency hedging activities is to protect the Company's local currency cash
flows related to these commitments from fluctuations in foreign exchange rates.
The amounts of such forward exchange contracts at year-end 1995 and 1994 were
$34.2 million and $19.9 million, respectively.
The Company's Thermo Ecotek subsidiary has interest rate swap agreements
relating to its nonrecourse tax-exempt obligations. The interest rate swap
agreements are with a different counterparty than the holders of the underlying
debt. The Company believes, however, that the credit risks associated with
these swaps are minimal because the agreements are with a large, reputable
bank. The notional amount of the swap agreement is $110.0 million at December
30, 1995 and December 31, 1994.
The carrying amount and fair value of the Company's long-term obligations
and off-balance-sheet financial instruments are as follows:
1995 1994
----------------------- ------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
--------------------------------------------------------------------------
Long-term obligations:
Convertible obligations$ 802,001 $1,354,682 $ 806,661 $ 973,659
Other long-term
obligations 314,010 334,004 243,189 245,045
---------- ---------- ---------- ----------
$1,116,011 $1,688,686 $1,049,850 $1,218,704
========== ========== ========== ==========
Off-balance-sheet
financial instruments:
Forward exchange
contracts receivable $ (1,015) $ (579)
Interest rate swaps
(receivable) payable $ 3,467 $ (2,113)
34PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
14. Fair Value of Financial Instruments (continued)
The fair value of long-term obligations was determined based on quoted
market prices and on borrowing rates available to the Company at the respective
year-ends. The fair value of convertible obligations exceeds the carrying
amount primarily due to the market price of the Company's or subsidiaries'
common stock at the respective year-ends exceeding the conversion price of the
convertible obligations.
The fair value of forward exchange contracts and interest rate swap
agreements (used for hedging purposes) is the estimated amount that the Company
would pay or receive upon termination of the contract, taking into account the
change in foreign exchange rates on forward exchange contracts, and market
interest rates and the creditworthiness of the counterparties on interest rate
swap agreements.
15. Business Segment and Geographical Information
The Company's business segments include the following:
Instruments: environmental-monitoring, analytical, test and measurement, and
process-control instruments
Alternative-energy Systems: biomass power plants, waste-recycling facility,
industrial refrigeration systems, natural gas engines, cooling and
cogeneration units, turbines and compressors
Process Equipment: paper-recycling equipment, papermaking systems and
accessories, metallurgical-processing systems, electroplating equipment
Biomedical Products: biomedical materials, mammography and needle-biopsy
systems, general-purpose X-ray systems, respiratory-care equipment,
skin-incision devices, blood coagulation-monitoring equipment, left
ventricular-assist systems, neurophysiology monitoring instruments,
personal-care products
Environmental Services: thermal soil-remediation, industrial-fluids
recycling, nuclear monitoring and cleanup, on-site industrial remediation,
laboratory analysis, environmental sciences, metallurgical heat treating and
fabrication
Advanced Technologies: process detection systems, explosives-detection
instruments, precision weighing and inspection equipment, electronic test
equipment, power-conversion instruments, laser-based hair-removal system,
systems integration and engineering, development of avionics products and
medical equipment
35PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
15. Business Segment and Geographical Information (continued)
(In thousands) 1995 1994 1993
--------------------------------------------------------------------------
Business Segment Information
Revenues:
Instruments $ 782,662 $ 650,114 $ 516,712
Alternative-energy Systems 325,912 285,410 242,662
Process Equipment 317,951 190,217 167,524
Biomedical Products 255,752 180,318 127,533
Environmental Services 210,503 141,438 121,987
Advanced Technologies 321,563 286,523 181,094
Intersegment Sales Elimination (a) (6,926) (4,829) (3,004)
---------- ---------- ----------
$2,207,417 $1,729,191 $1,354,508
========== ========== ==========
Income Before Income Taxes and
Minority Interest:
Instruments $ 113,651 $ 105,440 $ 91,412
Alternative-energy Systems 32,952 34,451 12,859
Process Equipment 29,071 20,730 13,444
Biomedical Products 32,343 17,601 5,758
Environmental Services 21,215 14,853 4,702
Advanced Technologies 18,930 12,563 8,260
---------- ---------- ----------
Total Segment Income (b) 248,162 205,638 136,435
Equity in Losses of Unconsolidated
Subsidiaries (203) (4,019) (22,721)
Corporate (c) 51,536 4,757 17,753
---------- ---------- ----------
$ 299,495 $ 206,376 $ 131,467
========== ========== ==========
Identifiable Assets:
Instruments $1,372,814 $1,011,916 $ 850,688
Alternative-energy Systems 695,849 577,781 593,247
Process Equipment 238,537 191,846 179,251
Biomedical Products 552,825 348,199 285,715
Environmental Services 335,726 192,523 146,658
Advanced Technologies 303,270 236,543 203,375
Corporate (d) 245,887 503,127 248,663
---------- ---------- ----------
$3,744,908 $3,061,935 $2,507,597
========== ========== ==========
Depreciation and Amortization:
Instruments $ 25,257 $ 22,070 $ 18,059
Alternative-energy Systems 25,186 16,078 4,982
Process Equipment 5,228 4,780 4,277
Biomedical Products 8,597 6,292 5,328
Environmental Services 11,197 8,382 6,641
Advanced Technologies 8,243 6,193 3,679
Corporate 1,271 1,233 1,226
---------- ---------- ----------
$ 84,979 $ 65,028 $ 44,192
========== ========== ==========
36PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
15. Business Segment and Geographical Information (continued)
(In thousands) 1995 1994 1993
--------------------------------------------------------------------------
Capital Expenditures:
Instruments $ 10,313 $ 7,574 $ 6,347
Alternative-energy Systems (e) 14,024 31,717 92,862
Process Equipment 3,686 3,231 2,631
Biomedical Products 7,168 7,284 9,042
Environmental Services 19,499 7,559 7,583
Advanced Technologies 7,757 8,019 8,898
Corporate 460 141 2,241
---------- ---------- ----------
$ 62,907 $ 65,525 $ 129,604
========== ========== ==========
Geographical Information
Revenues:
United States $1,739,910 $1,386,455 $1,103,133
Europe 504,439 374,192 298,562
Other 117,425 91,161 65,165
Transfers among geographical
areas (a) (154,357) (122,617) (112,352)
---------- ----------- ----------
$2,207,417 $1,729,191 $1,354,508
========== ========== ==========
Income Before Income Taxes and
Minority Interest:
United States $ 201,464 $ 182,177 $ 116,863
Europe 33,059 13,315 12,175
Other 13,639 10,146 7,397
---------- ---------- ----------
Total Segment Income (b) 248,162 205,638 136,435
Equity in Losses of Unconsolidated
Subsidiaries (203) (4,019) (22,721)
Corporate (c) 51,536 4,757 17,753
---------- ---------- ----------
$ 299,495 $ 206,376 $ 131,467
========== ========== ==========
Identifiable Assets:
United States $2,907,585 $2,110,843 $1,905,825
Europe 501,997 387,268 300,302
Other 89,439 60,697 52,807
Corporate (d) 245,887 503,127 248,663
---------- ---------- ----------
$3,744,908 $3,061,935 $2,507,597
========== ========== ==========
Export Sales Included in United
States Revenues Above (f) $ 336,702 $ 265,298 $ 219,914
========== ========== ==========
37PAGE
Thermo Electron Corporation
Notes to Consolidated Financial Statements
15. Business Segment and Geographical Information (continued)
(a) Intersegment sales and transfers among geographical areas are accounted
for at prices that are representative of transactions with unaffiliated
parties.
(b) Segment income is income before corporate general and administrative
expenses, other income and expense, minority interest expense, and income
taxes.
(c) Includes corporate general and administrative expenses, other income and
expense, and gain on issuance of stock by subsidiaries.
(d) Primarily cash and cash equivalents, short- and long-term investments, and
property and equipment at the Company's Waltham, Massachusetts,
headquarters.
(e) Includes $88.4 million in 1993 for the purchase of an alternative-energy
facility in Delano, California.
(f) In general, export revenues are denominated in U.S. dollars.
16. Subsequent Events
Issuance of Subordinated Convertible Debentures
On January 3, 1996, the Company issued and sold $585 million principal amount
of 4 1/4% subordinated convertible debentures due 2003. The debentures will be
convertible into shares of the Company's common stock at a price of $56.70 per
share.
Pending Acquisition
On March 1, 1995, Thermo Instrument entered into an agreement with Fisons plc
(Fisons) to acquire the Scientific Instruments Division of Fisons for
approximately 202 million British pounds sterling. On April 13, 1995, Thermo
Instrument announced that it had received a "second request" for information
regarding the transaction from the U.S. Federal Trade Commission (FTC). After
extensive discussions with Fisons and the FTC, in January 1996 Thermo
Instrument withdrew its original pre-merger notification filing under the
Hart-Scott-Rodino Antitrust Improvements Act (the HSR Act), and submitted a new
filing with respect to a modified form of the acquisition. On February 15,
1996, Thermo Instrument announced that the FTC had granted early termination of
the waiting period under the HSR Act with respect to the modified acquisition
and on March 1, 1996, Thermo Instrument announced that it had received
clearance from U.K. antitrust regulatory authorities. The form of the
acquisition cleared by the FTC and the U.K. authorities excludes from the
businesses to be acquired by Thermo Instrument substantially all of the mass
spectrometer businesses of Fisons and a high-resolution mass
spectrometer/inductively-coupled plasma product. These businesses accounted for
slightly less than 20% of the 1995 revenues of Fisons' Scientific Instruments
Division. The new purchase price is expected to be slightly less than 150
million British pounds sterling and will be subject to a post-closing
adjustment based on the net asset value of the acquired businesses as of the
closing date. The modified acquisition is still subject to the consent of
certain third parties and the satisfaction of other closing conditions.
38PAGE
Report of Independent Public Accountants
To the Shareholders and Board of Directors
of Thermo Electron Corporation:
We have audited the accompanying consolidated balance sheet of Thermo
Electron Corporation (a Delaware corporation) and subsidiaries as of
December 30, 1995 and December 31, 1994, and the related consolidated
statements of income, shareholders' investment, and cash flows for each of
the three years in the period ended December 30, 1995. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Thermo Electron Corporation and subsidiaries as of December 30, 1995 and
December 31, 1994, and the results of their operations and their cash flows
for each of the three years in the period ended December 30, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements,
effective January 2, 1994, the Company changed its method of accounting for
investments in debt and marketable equity securities.
Arthur Andersen LLP
Boston, Massachusetts
February 15, 1996 (except with
respect to the matters discussed
in Note 16 as to which the date
is March 1, 1996)
39PAGE
Thermo Electron Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The Company develops and manufactures a broad range of products that are
sold worldwide. The Company expands the product lines and services it
offers by developing and commercializing its own core technologies and by
making strategic acquisitions of complementary businesses. The majority of
the Company's businesses fall into four broad markets: environmental,
energy, process control, and selected health and safety instrumentation.
An important component of the Company's strategy is to establish
leading positions in its markets through the application of proprietary
technology, whether developed internally or acquired. A key contribution to
the growth of the Company's segment income (as defined in the results of
operations below), particularly over the last three years, has been the
ability to identify attractive acquisition opportunities, complete those
acquisitions, and derive a growing income contribution from the newly
acquired businesses as they are integrated into the Company's business
segments.
The Company seeks to minimize its dependence on any specific product
or market by maintaining and diversifying its portfolio of businesses and
technologies. Similarly, the Company's goal is to maintain a balance in its
businesses between those affected by various regulatory cycles and those
more dependent on the general level of economic activity. Although the
Company is diversified in terms of technology, product offerings, and
geographic markets served, the future financial performance of the Company
as a whole is largely affected by the strength of worldwide economies and
the continued adoption and diligent enforcement of environmental, health,
and safety regulations, among other factors.
The Company believes that maintaining an entrepreneurial atmosphere is
essential to its continued growth and development. In order to preserve
this atmosphere, the Company has adopted a strategy of spinning out certain
of its businesses into separate subsidiaries and having these subsidiaries
sell a minority interest to outside investors. The Company believes that
this strategy provides additional motivation and incentives for the
management of the subsidiaries through the establishment of subsidiary-
level stock option incentive programs, as well as capital to support the
subsidiaries' growth. As a result of the sale of stock by subsidiaries, the
issuance of stock by subsidiaries upon conversion of convertible
debentures, and similar transactions, the Company records gains that
represent the increase in the Company's net investment in the subsidiaries
and are classified as "Gain on issuance of stock by subsidiaries" in the
accompanying statement of income. These gains have represented a
substantial portion of the net income reported by the Company in recent
years. The size and timing of these transactions are dependent on market
and other conditions that are beyond the Company's control. Accordingly,
there can be no assurance that the Company will be able to generate gains
from such transactions in the future.
Proposed Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board (FASB)
issued an exposure draft of a Proposed Statement of Financial Accounting
Standards, "Consolidated Financial Statements: Policy and Procedures"
(Proposed Statement). The Proposed Statement would establish new rules for
determining when entities should be consolidated and how consolidated
financial statements should be prepared. Under the Proposed Statement, it
is possible that companies would be required to consolidate entities in
40PAGE
Thermo Electron Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Proposed Accounting Pronouncement (continued)
which their legal ownership is as low as 40%. Companies involved with
special purpose entities could be required to include these entities in
their consolidated financial statements in such instances as when a company
is the only general partner, although the company may own only a very small
percentage of the entity (e.g. 1%). This portion of the Proposed Statement
is expected to have little effect on the Company's consolidated financial
statements. The portion of the Proposed Statement referred to as the
Procedures portion, which describes how consolidated financial statements
should be prepared, could result in significant changes in the way the
Company records certain transactions once control, as newly defined, has
been reached. Under the Proposed Statement, the following accounting will
result:
Decreases in a parent's ownership interest in a subsidiary -- Under
the Proposed Statement, any sale of the stock of a subsidiary that does not
result in loss of control would be accounted for as a transaction in the
equity of the consolidated entity with no gain or loss being recognized.
This would occur even when the sale is made by the parent, and even though
such a sale would result in a gain for corporate tax purposes. Under this
provision, any sale of a non-controlling interest, e.g. 49% of a wholly
owned entity, whether the sale results in an economic gain or loss, would
be recorded only in the equity section of the balance sheet.
Recording gains from the purchase of additional shares -- Under
current practice, a company that owns marketable equity securities of other
issuers may account for them as "available-for-sale" under Statement of
Financial Accounting Standards (SFAS) No. 115, with the fair value
adjustment being recorded in equity. Upon obtaining "significant influence"
(current practice being twenty percent or greater ownership), under the
Proposed Statement the unrealized holding gains and losses previously
recorded in equity would be recorded in the income statement. The same
accounting would result if an entity increased its ownership from an SFAS
No. 115 investment directly to control and consolidation. Under this
accounting, the more the acquirer pays for the additional shares, the
greater the gain recorded.
Changes in a parent's ownership interest in a subsidiary and step
acquisitions -- Under the FASB's proposed economic unit model, once control
is obtained, any transactions in a subsidiary's stock between the
controlling and noncontrolling shareholders are considered equity
transactions and, therefore, only the equity accounts of the reporting
entity are impacted. Under the Proposed Statement, after control is
obtained, the cost of any subsequent purchase is recorded as a reduction of
equity. As a result, no additional goodwill is recorded on these subsequent
purchases, but the charge to equity would reduce the book value of the
acquirer. This charge to equity would not become part of the "cost" of
acquiring the entity and, therefore, it would be possible to sell the
entity at a later date and record a "gain" on the transaction, even though
the seller actually sold it for less than what the seller paid to acquire
it.
41PAGE
Thermo Electron Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Proposed Accounting Pronouncement (continued)
The FASB conducted a hearing concerning the Proposed Statement in
February 1996, at which the Company, along with other major companies and
many of the major accounting firms and accounting associations, expressed
their disagreement with various parts of the Proposed Statement. The FASB
expects to issue a final Statement by June 30, 1996, which could become
effective for fiscal years beginning after December 15, 1996.
Results of Operations
1995 Compared With 1994
Sales in 1995 were $2,207.4 million, an increase of $478.2 million, or
28%, over 1994. Segment income, excluding restructuring and other
nonrecurring costs described below of $21.9 million in 1995 and $0.7
million in 1994, was $270.1 million, compared with $206.3 million in 1994,
an increase of 31%. (Segment income is income before corporate general and
administrative expenses, other income and expense, minority interest
expense, and income taxes.) Operating income, which includes restructuring
and other nonrecurring costs, was $225.5 million, an increase of $43.4
million, or 24%, over 1994. Financial results for 1994 have been restated
to include Coleman Research, which was acquired in a pooling-of-interests
transaction in March 1995 (Note 3).
Sales from the Instruments segment were $782.7 million in 1995, an
increase of $132.5 million, or 20% over 1994. Sales increased primarily due
to acquisitions made by Thermo Instrument, which added $104 million to
sales in 1995. The remaining sales increase was substantially due to the
favorable effects of currency translation due to a weaker U.S. dollar in
1995. Segment income margin (segment income margin is segment income as a
percentage of sales) was 14.5% in 1995, compared with 16.2% in 1994.
Segment income margin declined due to lower margins at acquired businesses
and reduced shipments at Thermo Instrument's air-monitoring instruments
subsidiary.
Sales from the Alternative-energy Systems segment were $325.9 million
in 1995, an increase of $40.5 million, or 14%, over 1994. Within this
segment, revenues from Thermo Ecotek, which consist of revenues from
biomass power plant operations, were $141.4 million in 1995, compared with
$134.3 million in 1994. This increase results from a full year of revenues
from the Whitefield, New Hampshire, plant which did not operate for most of
the first half of 1994 due to major damage to the turbine-generator, as
well as higher contractual energy rates in 1995 at all of Thermo Ecotek's
facilities, excluding the facility in Hemphill, New Hampshire. These
increases were offset largely by utility-imposed curtailment of power at
the Woodland and Mendota plants in California. The utility that purchases
the electrical output of these California plants has the right to curtail
the plants' power output up to 1,000 hours per year during periods of low
demand. The utility commonly experiences low demand following periods of
heavy rain or snow, when hydroelectric power is available. During 1995,
these plants were each curtailed for 1,000 hours. During January and
February 1996, these plants each experienced approximately 200 hours of
curtailment and are likely to receive the contractual maximum during 1996.
Revenues from the Company's waste-recycling facility in southern California
declined by $0.8 million due to a reduction in the amounts paid by the
facility's customer. The facility ceased processing waste during 1995 and
the Company wrote off its net investment in this facility in the third
42PAGE
Thermo Electron Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
1995 Compared With 1994 (continued)
quarter of 1995, as described below. Sales at Peter Brotherhood Ltd.
increased $18.1 million to $56.2 million as a result of increased demand
for steam turbines and, to a lesser extent, increased demand for special
purpose machinery over depressed 1994 levels. Sales from Thermo Power
increased $16.5 million to $108.4 million, due primarily to increased
demand for refrigeration packages and marine engine-related products and,
to a lesser extent, the acquisition of NuTemp, Inc. in May 1994.
Segment income from the Alternative-energy Systems segment, excluding
restructuring and other nonrecurring costs of $11.5 million in 1995, was
$44.5 million in 1995, compared with $34.5 million in 1994. Thermo Ecotek
had segment income of $34.6 million in 1995, compared with $26.9 million in
1994. This improvement results from lower fuel costs at two of the
California plants and higher contractual energy rates in 1995, offset in
part by utility-imposed curtailment of power at the Woodland and Mendota
facilities. Segment income at Thermo Power declined to $5.1 million in 1995
from $5.3 million in 1994, reflecting an increase in expenditures for
research and development. Peter Brotherhood incurred a segment loss of $1.1
million in 1995, compared with a loss of $0.8 million in 1994, as a result
of increased costs to complete jobs in process and competitive pricing
pressures.
In 1995, the Company recorded restructuring and other nonrecurring
costs of $11.5 million for this segment. This amount represents the
Company's net investment in a waste-recycling facility in southern
California that contracted to process waste for San Diego County (the
County). The County had previously advised the Company that it was
attempting to raise funds to purchase the facility and had entered into
discussions with the Company regarding termination of the Company's
long-term service agreement. Termination of the service agreement would
have required the County to pay the Company a termination fee and reimburse
the Company for certain other items connected with the facility. To date,
the County has been unable to raise the necessary funds on terms acceptable
to the County. During the third quarter of 1995, the County paid the
Company less than the amount due under the service agreement. In October
1995, the Company notified the County that the County was in default of the
service agreement and that, pursuant to that agreement, the County had 45
days to cure the default. To date, the County has not cured this default.
The Company's financing on this facility consists of tax-exempt obligations
(Note 6), which are nonrecourse to the Company for events of County
default. The County is a party to these financing arrangements. The County
is in default of certain terms of its agreements with the bank group that
provided the financing and if the County does not cure these defaults, it
could be declared in default under the financing agreements. Based upon
County assertions, its financial obligation to the Company in a default
situation would be limited to the funds it has available from the
day-to-day operation of the County's solid waste-disposal system, which
would be insufficient for the Company to recover any of its investment.
In a lawsuit relating to the waste-recycling facility discussed above,
a third party, from which the Company's subsidiary acquired certain
development rights, alleges that fees totaling $7.9 million plus interest
and legal costs are due and payable in connection with construction of the
facility. The Company contends that no additional fees are payable because
the facility actually built was substantially different from the one
contemplated in the agreement with the third-party developer. There can be
43PAGE
Thermo Electron Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
1995 Compared With 1994 (continued)
no assurance as to the outcome of this matter.
Certain of Thermo Ecotek's plants have power sales agreements with
utilities under which the rates paid for power will convert from fixed
rates to "avoided-cost" rates in the year 2000. Avoided-cost rates are
currently substantially less than the fixed rates. One of these plants,
located in Woodland, California, has conditions in its nonrecourse lease
agreement that require funding of a "power reserve" in years prior to 2000,
based on projections of operating cash flow shortfalls in the year 2000 and
thereafter. The power reserve represents funds available to make lease
payments in the event that revenues are not sufficient after the Woodland
plant converts to avoided-cost rates. Without sufficient increases in
avoided-cost rates or reductions in fuel costs and other operating expenses
by the year 2000, Thermo Ecotek expects to either renegotiate its
nonrecourse lease agreement or forfeit its interest in the Woodland plant.
Beginning in the third quarter of 1996, Thermo Ecotek will expense the
funding of reserves required under the nonrecourse lease agreement. As a
result, the Company expects that the results of the plant will be reduced
to approximately breakeven at that time. During 1995, the plant contributed
$6.3 million of operating income.
Sales in the Process Equipment segment were $318.0 million in 1995,
compared with $190.2 million in 1994. Sales from Thermo Fibertek increased
$44.1 million to $206.7 million, due to an increase of $23.3 million in
sales of paper-recycling equipment, which included $14.7 million of sales
under an approximately $16 million subcontract with Thermo Electron to
supply equipment and services for an office wastepaper de-inking facility
in Menominee, Michigan, and due to increased demand at Thermo Fibertek's
paper-recycling business in France. Sales at Thermo Fibertek also increased
$17.3 million due to greater demand at its North American accessories
business, and increased by $2.7 million due to the favorable effects of
currency translation. In addition to sales recorded by Thermo Fibertek
under the Michigan project, a wholly owned subsidiary of the Company
recorded revenues from the project of $77.0 million. This facility is
expected to be completed by the end of 1996. Sales of Thermo TerraTech's
(formerly Thermo Process Systems) thermal-processing equipment and Napco's
automated electroplating equipment increased $2.6 million and $4.2 million,
respectively, from depressed 1994 levels. Segment income margin, excluding
restructuring and other nonrecurring costs of $7.5 million in 1995, was
11.5% in 1995, compared with 10.9% in 1994. Thermo Fibertek's segment
income margin improved to 16.2% from 12.9% in 1994, primarily due to
increased sales and an improved sales mix. During 1995, the Process
Equipment segment recorded restructuring and other nonrecurring costs of
$7.5 million to write off cost in excess of net assets of acquired
companies, of which $5.0 million was recorded by Thermo TerraTech, and $2.5
million was recorded by the Company's Napco subsidiary. Thermo TerraTech
has decided to focus its resources on growing the environmental
infrastructure services part of its business and, therefore, no longer
expects to reinvest in its thermal-processing equipment business to the
extent necessary to recover this investment. Napco is appealing a jury
verdict rendered against it for approximately $11.0 million in a contract
dispute arising out of an allegedly defective waste-treatment system
installed by Napco in 1984. Because this verdict exceeds Napco's financial
44PAGE
Thermo Electron Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
1995 Compared With 1994 (continued)
ability to pay, Napco has filed a petition for bankruptcy. The Company
believes that it will be unable to recover its investment in Napco. Napco's
sales and income are not significant to the Company's consolidated results
of operations.
Sales in the Biomedical Products segment were $255.8 million in 1995,
an increase of $75.4 million, or 42%, over 1994 due primarily to increased
demand for a number of the Company's biomedical products and the inclusion
of $31.6 million in sales from Bird Medical Technologies, Inc. and Bennett
X-Ray Corporation, which were acquired in the third quarter of 1995. Sales
of ThermoTrex's mammography and needle-biopsy systems increased 38% to
$74.9 million; Thermo Cardiosystems' implantable left ventricular-assist
system (LVAS) increased 98% to $20.6 million; ThermoLase's skin-care
products increased 33% to $24.9 million; neurodiagnostic monitoring
equipment sold by the Company's wholly owned Nicolet Biomedical Inc.
subsidiary increased 12% to $53.1 million; and sales of blood
coagulation-monitoring products and skin-incision devices sold by the
Company's wholly owned International Technidyne Corporation subsidiary
increased 13% to $32.3 million. Segment income margin improved to 12.6%
from 9.8% in 1994 as a result of increased sales and, to a lesser extent,
price increases for Thermo Cardiosystems' air-driven LVAS.
Sales in the Environmental Services segment were $210.5 million in
1995, an increase of $69.1 million, or 49%, over 1994. Within this segment,
sales from Thermo Remediation were $57.5 million in 1995, compared with
$50.4 million in 1994. Sales from Thermo Remediation's soil-remediation and
fluids-recycling services increased due to acquisitions, offset in part by
lower sales at existing sites resulting from ongoing regulatory
uncertainties, primarily at two sites, as well as severe weather conditions
at one site, and competitive pricing pressures. Thermo Remediation's
nuclear services sales from existing sites increased primarily due to a
long-term environmental restoration contract for the U.S. Department of
Energy's (DOE's) Hanford site, offset in part by a decrease in
radiochemistry laboratory work, reflecting a reduction in spending at the
DOE. Sales of analytical laboratory and environmental consulting services
increased $60.2 million, to $100.6 million, due to the inclusion of sales
from acquired businesses. Sales of metallurgical services declined $2.0
million to $42.8 million, due to the effect of closing a small plant in
1995. Segment income margin, excluding restructuring and other nonrecurring
costs of $1.9 million in 1995, improved to 11.0% from 10.5% in 1994, due
primarily to higher sales, offset in part by higher legal expenses incurred
within the environmental consulting services operations. The restructuring
and other nonrecurring costs included $1.5 million as a result of the
decision to close a metallurgical services division located in Albuquerque,
New Mexico. The costs primarily represent severance costs and the write-off
of cost in excess of net assets of acquired companies and leasehold
improvements. The facility was closed in the second quarter of 1995.
Sales from the Advanced Technologies segment were $321.6 million in
1995, compared with $286.5 million in 1994. Sales increased $22.3 million
due to the inclusion of a full year of sales from Thermo Sentron Inc.
(formerly Ramsey Technology Inc.), which was acquired in March 1994, and
sales from the Orion laboratory products division of Analytical Technology,
Inc., which was acquired in December 1995. Sales at Thermo Voltek increased
45PAGE
Thermo Electron Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
1995 Compared With 1994 (continued)
$12.7 million to $36.3 million, due to the inclusion of $7.2 million in
sales from acquired businesses and, to a lesser extent, the introduction of
a new product line and an increase in demand. Sales at Coleman Research
increased $20.7 million to $164.6 million due to increased contract
funding. Coleman Research has experienced a decline in backlog, which could
result in lower revenues in 1996. Sales of Thermedics Detection's
process-detection instruments declined $21.8 million to $16.2 million
primarily due to lower demand from its principal customer, which has
substantially completed its deployment of these systems, and sales of
EGIS(R) explosives-detection systems declined $2.1 million to $8.0 million,
due primarily to lower demand as a result of the shipment of several large
orders in 1994. Segment income, excluding restructuring and other
nonrecurring costs of $1.0 million in 1995 and $0.7 million in 1994,
increased $6.7 million to $19.9 million as a result of improved margins at
Coleman Research and Thermo Sentron, due primarily to efforts to control
costs. These improvements were offset in part by a decline in segment
income from Thermedics Detection, primarily as a result of lower sales and,
to a lesser extent, increased expenses incurred by ThermoLase to develop
and commercialize its laser-based hair-removal process. Restructuring and
other nonrecurring costs of $1.0 million in 1995 were recorded by
ThermoTrex as a result of the decision to close its East Coast division.
The costs included $0.6 million for the write-off of intangible assets.
As a result of the sale of stock by subsidiaries, the issuance of
stock by subsidiaries upon conversion of indebtedness, and similar
transactions, the Company recorded gains of $80.8 million in 1995 and $25.3
million in 1994. Such gains represent the increase in the Company's
proportionate share of the subsidiaries' equity and are classified as gain
on issuance of stock by subsidiaries in the accompanying statement of
income. See Notes 1 and 10 for a more complete description of these
transactions. Minority interest expense increased to $60.5 million in 1995
from $31.0 million in 1994. Minority interest expense includes $28.6
million in 1995 and $5.7 million in 1994 related to gains recorded by the
Company's majority-owned subsidiaries as a result of the sale of stock and
the issuance of stock upon conversion of indebtedness, by their
subsidiaries.
Other expense, net, in the accompanying statement of income includes a
gain of $14.7 million in 1994 resulting from the sale of the Peter
Brotherhood facility in the United Kingdom. Also included is equity in
losses of unconsolidated subsidiaries, which represents the Company's
portion of results from entities in which the Company's ownership is 50% or
less, including the operation of the Dade County cogeneration facility. The
loss associated with the Dade County facility was $1.6 million in 1995 and
$5.7 million in 1994. Because the demand for power and chilled water at the
Dade County Downtown Government Center complex has been substantially less
than anticipated since the plant's startup in 1987, and because the plant
has had difficulty disposing of the remainder of its output, the joint
venture has experienced continuing losses. In September 1994, the joint
venture suspended operation of this plant for an indefinite period of time,
although it will continue to be responsible for lease and fixed costs. In
1993, the Company established a reserve representing management's estimate,
discounted to present value, of the Company's share of estimated negative
cash flows of the joint venture. The Company is involved in regulatory
46PAGE
Thermo Electron Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
1995 Compared With 1994 (continued)
proceedings that could require additional reserves if the outcome of one or
more matters is adverse to the Company. See Note 7 for a description of
these and other legal proceedings involving the Company.
1994 Compared With 1993
Sales in 1994 were $1,729.2 million, an increase of $374.7 million, or
28%, over 1993. Segment income, excluding restructuring and other
nonrecurring costs described below, of $0.7 million in 1994 and $6.6
million in 1993, was $206.3 million, compared with $143.1 million in 1993,
an increase of 44%. Operating income was $182.1 million, compared with
$119.2 million in 1993, an increase of 53%.
Sales from the Instruments segment were $650.1 million in 1994, an
increase of $133.4 million, or 26%, over 1993. Sales increased due to
acquisitions made by Thermo Instrument during 1993 and its acquisition of
several businesses within the EnviroTech Measurements & Controls group of
Baker Hughes Incorporated in March 1994. Segment income margin was 16.2%,
compared with 17.7% in 1993. Segment income margin declined principally due
to lower margins at the acquired businesses within the EnviroTech
Measurements & Controls group.
Sales from the Alternative-energy Systems segment were $285.4 million,
an increase of $42.7 million, or 18%, over 1993. Within this segment,
revenues from Thermo Ecotek, which consist of revenues from biomass power
plant operations, were $134.3 million, compared with $117.7 million in
1993. This increase results from an additional plant in operation in 1994
and, to a lesser extent, the absence of utility-imposed curtailments of
power output as well as improved performance at two California plants and
annual contractual energy rate increases under certain power sales
contracts. The 1993 period included $9.8 million of revenues recorded as a
result of the termination of a power sales contract and $3.1 million from
the one-time sale of gas pipeline rights. Sales from the Company's wholly
owned Energy Systems division increased $10.7 million as a result of a
waste-recycling facility in San Diego County that commenced operation in
the first quarter of 1994. Sales from Thermo Power increased 19%, to $91.9
million, as a result of the inclusion of $8.4 million in sales from NuTemp,
which was acquired in May 1994, and due to increased demand for
refrigeration packages at its FES division.
Segment income from the Alternative-energy Systems segment, excluding
restructuring and other nonrecurring costs of $1.5 million in 1993, was
$34.5 million, compared with $14.4 million in 1993. Thermo Ecotek had
segment income of $26.9 million, compared with $13.2 million in 1993. This
improvement results from an additional power plant in operation during
1994, the absence of utility-imposed curtailments of power output and
improved performance at two California plants, and annual contractual
energy rate increases under certain power sales contracts. Thermo Ecotek's
segment income also improved as a result of lower lease expense, offset in
part by depreciation expense, resulting from the December 1993 purchase of
the Delano I facility in California. The 1993 period included $8.6 million
of income from the termination of a power sales contract and the one-time
sale of gas pipeline rights. Segment income from the Company's Energy
47PAGE
Thermo Electron Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
1994 Compared With 1993 (continued)
Systems division, excluding restructuring and other nonrecurring costs of
$0.3 million in 1993, increased $3.4 million as a result of the
waste-recycling facility that commenced operation in the first quarter of
1994. Segment income increased at Thermo Power by $2.6 million as a result
of increased sales, as well as lower expenses at its Crusader Engines
division. During 1993, the Company recorded restructuring and other
nonrecurring costs of $1.5 million for this segment, which primarily
represents a $1.2 million reserve for restructuring at the Company's steam
turbines and compressors business.
Sales in the Process Equipment segment were $189.9 million, compared
with $167.5 million in 1993. Within this segment, sales from Thermo
Fibertek increased to $162.6 million from $137.1 million in 1993 due to an
increase of $17.6 million in sales as a result of the acquisition of AES
Engineered Systems in June 1993, an increase of $7.9 million in sales from
the Company's paper-recycling equipment business as a result of three large
contracts received earlier in the year, and an increase of $4.1 million in
sales from the Company's U.S. accessories business due to greater demand.
These increases were offset in part by a decline of $4.4 million in sales
of environmental-process systems sold by the Company's U.K. subsidiary, to
$1.3 million in 1994, as a result of changes in U.K. environmental
regulations that required modifications to that subsidiary's equipment.
Sales of Thermo TerraTech's thermal-processing equipment, which remain
depressed, declined $1.5 million in 1994, and sales of automated
electroplating equipment from Napco declined $1.5 million due to weak
demand. Segment income margin in the Process Equipment segment, excluding
restructuring and other nonrecurring costs of $0.5 million in 1993, was
10.9%, compared with 8.3% in 1993. Thermo Fibertek's segment income margin,
excluding restructuring and other nonrecurring costs of $0.5 million in
1993, improved to 12.9% from 11.6% in 1993, primarily due to increased
sales and an improved sales mix. Thermal-processing equipment operations
were just above the breakeven level, while Napco operations resulted in a
segment loss of $0.3 million due to lower sales levels.
Sales in the Biomedical Products segment were $180.3 million, an
increase of $52.8 million, or 41%, over 1993. Sales increased $18.1 million
due to the inclusion for a full year of sales from CBI Laboratories, Inc.,
which was acquired by ThermoLase in December 1993. Sales of a number of the
Company's biomedical products also contributed to the increase, including
ThermoTrex's mammography and needle-biopsy systems, which increased 45% to
$54.4 million; Thermo Cardiosystems' implantable LVAS, which increased $6.9
million; blood coagulation-monitoring products and skin-incision devices
sold by the Company's wholly owned International Technidyne Corporation
subsidiary, which increased 18% to $28.6 million; and Thermedics' Scent
Seal fragrance samplers, which increased $3.0 million, due primarily to
increased demand. Segment income margin improved to 9.8% from 4.5% in 1993
as a result of increased sales and efforts to reduce costs.
48PAGE
Thermo Electron Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
1994 Compared With 1993 (continued)
Sales in the Environmental Services segment were $141.8 million,
compared with $122.0 million in 1993. Within this segment, sales from
Thermo Remediation increased $8.6 million, to $29.7 million, primarily due
to an increase in the volume of soil processed at its soil-remediation
centers and, to a lesser extent, the inclusion of revenues from businesses
acquired during 1994 and late 1993. Sales of analytical laboratory and
environmental consulting services increased 10.9% to $61.2 million, due to
the inclusion of sales from businesses acquired during 1994 and, to a
lesser extent, the addition of a long-term environmental restoration
contract for the DOE's Hanford site. Sales of metallurgical services
increased 9.1%, to $44.8 million, due to increased demand. Segment income
margin, excluding restructuring and other nonrecurring costs of $4.6
million in 1993, improved to 10.5% from 7.6% in 1993, due to increased
sales and efforts to reduce costs. During 1993, the Company recorded
restructuring and other nonrecurring costs of $4.6 million for this
segment, which represents a $1.9 million reserve for the write-off of
machinery and equipment and costs to phase out a product line in the
Company's metal-fabrication services business and $2.7 million for the
write-off of mobile soil-remediation assets and related expenses.
Sales from the Advanced Technologies segment were $286.5 million,
compared with $181.1 million in 1993. Sales increased $54.7 million due to
the inclusion of sales from Thermo Sentron, which was acquired by
Thermedics in March 1994, and Comtest, which was acquired by Thermo Voltek
in August 1993. Revenues from Coleman Research's government-sponsored
research and development contracts increased $39.1 million, while revenues
from ThermoTrex's government-sponsored research and development contracts
increased $1.8 million. Sales of Thermedics Detection's EGIS explosives-
detection systems increased $4.1 million, and sales of Thermedics
Detection's process-detection instruments, principally to one customer,
increased $3.6 million. Segment income margin, excluding restructuring and
other nonrecurring costs of $0.7 million in 1994, was 4.6% in both 1994 and
1993. Improved segment income margin at Coleman Research resulting from
increased revenues was offset by lower margins at ThermoTrex due to
increased research and development expenses to develop and commercialize
new products and, to a lesser extent, lower margins at newly acquired
businesses. During 1994, the Company recorded restructuring and other
nonrecurring costs of $0.7 million for severance costs and, to a lesser
extent, the costs to write off leasehold improvements at ThermoTrex's East
Coast division.
The Company's Napco subsidiary is challenging a jury verdict rendered
against it during the third quarter of 1994 (Note 7). In the third quarter
of 1994, the Company increased its reserve for potential losses from
pending litigation by approximately $4.0 million, which is reflected in
corporate general and administrative expenses.
49PAGE
Thermo Electron Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
1994 Compared With 1993 (continued)
As a result of the sale of stock by subsidiaries, the issuance of
stock by subsidiaries upon conversion of indebtedness, and similar
transactions, the Company recorded gains of $25.3 million in 1994 and $39.9
million in 1993. See Notes 1 and 10 for a more complete description of
these transactions. Minority interest expense increased to $31.0 million in
1994 from $21.1 million in 1993. Minority interest expense includes $5.7
million in 1994 and $1.3 million in 1993 relating to gains recorded by the
Company's majority-owned subsidiaries as a result of the sale of stock by
their subsidiaries.
Other expense, net, in the accompanying statement of income includes a
gain of $14.7 million resulting from the sale of the Peter Brotherhood
facility in the United Kingdom. Also included is equity in losses of
unconsolidated subsidiaries, which represents the Company's portion of
results from entities in which the Company's ownership is 50% or less,
primarily the operation of the Dade County cogeneration facility, and
beginning in 1994, the Company's share of the profit from a 50%-owned joint
venture that is responsible for the operation and maintenance of the
Company's waste-recycling facility in San Diego. The loss associated with
the Dade County facility was $5.7 million in 1994 and 1993, excluding a
$15.0 million provision recorded in 1993 as management's estimate,
discounted to present value, of the Company's share of estimated future
negative cash flows of the venture.
Liquidity and Capital Resources
Consolidated working capital was $1,306.4 million at December 30, 1995,
compared with $1,150.7 million at December 31, 1994. Included in working
capital were cash, cash equivalents, and short-term available-for-sale
investments of $1,055.8 million at December 30, 1995, compared with $997.9
million at December 31, 1994. In addition, at December 30, 1995, the
Company had $61.8 million of long-term available-for-sale investments and
$23.8 million of long-term held-to-maturity investments, compared with
$62.5 million of long-term available-for-sale investments at December 31,
1994. During 1995, certain of the Company's majority-owned subsidiaries
issued long-term obligations of $201.9 million. During 1995, an aggregate
principal amount of $213.0 million of the Company's and subsidiaries'
convertible obligations were converted into shares of the Company's or
subsidiaries' common stock. Net proceeds from the issuance of Company and
subsidiary common stock totaled $173.3 million in 1995. In January 1996,
the Company issued and sold $585 million principal amount of 4 1/4%
subordinated convertible debentures due 2003.
On February 15, 1996, the Company announced that the Federal Trade
Commission had granted early termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act with respect to the previously
announced modified acquisition of the Scientific Instruments Division of
Fisons plc and on March 1, 1996, the Company announced that it had received
clearance of the transaction from U.K. antitrust regulatory authorities
(see Note 16 for information regarding this pending acquisition).
50PAGE
Thermo Electron Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources (continued)
In 1995, the Company expended $330.7 million for acquisitions and
$62.9 million for purchases of property, plant and equipment. Including the
Fisons transaction discussed above, as of March 11, 1996, the Company had
agreements or letters of intent to expend approximately $245 million on the
acquisition of new businesses. These transactions are subject to various
conditions to closing, and there can be no assurance that these
transactions will be consummated. The Company has no material commitments
for purchases of property, plant and equipment and expects that, for 1996,
such expenditures will approximate the 1995 level.
A substantial percentage of the Company's consolidated cash and
investments is held by subsidiaries that are not wholly owned by the
Company. This percentage may vary significantly over time. Pursuant to the
Thermo Electron Corporate Charter (the Charter), to which each of the
majority-owned subsidiaries of the Company is a party, the combined
financial resources of Thermo Electron and its subsidiaries allow the
Company to provide banking, credit, and other financial services to its
subsidiaries so that each member of the Thermo Electron group of companies
may benefit from the financial strength of the entire organization. Toward
that end, the Charter states that each member of the group may be required
to provide certain credit support to the consolidated entity. Nonetheless,
the Company's ability to access assets held by its majority-owned
subsidiaries through dividends, loans, or other transactions is subject in
each instance to a fiduciary duty owed to the minority shareholders of the
relevant subsidiary. In addition, dividends received by Thermo Electron
from a subsidiary that does not consolidate with Thermo Electron for tax
purposes are subject to tax. Therefore, under certain circumstances, a
portion of the Company's consolidated cash and short-term investments may
not be readily available to Thermo Electron or certain of its subsidiaries.
The Company intends for the foreseeable future to maintain at least
80% ownership of its Thermo Instrument, Thermo Fibertek, and Thermo Ecotek
subsidiaries, which is required in order to continue to file a consolidated
federal income tax return with these subsidiaries. In addition, the Company
intends to maintain greater than 50% ownership of its other majority-owned
subsidiaries so that the Company may continue to consolidate these
subsidiaries for financial reporting purposes. This may require the
purchase by the Company of additional shares or convertible debentures of
these companies from time to time as the number of outstanding shares
issued by these companies increases, either in the open market or directly
from the subsidiaries. See Note 6 for a description of outstanding
convertible debentures issued by Thermo Instrument. In addition, at
December 30, 1995, Thermo Instrument, Thermo Fibertek, and Thermo Ecotek
had outstanding stock options for 3,221,000 shares, 2,522,000 shares, and
1,113,000 shares, respectively, exercisable at various prices and subject
to certain vesting schedules. The Company's other majority-owned
subsidiaries also have outstanding stock options and/or convertible
debentures.
51PAGE
Thermo Electron Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Liquidity and Capital Resources (continued)
During 1995, the Company expended $97.8 million to purchase common
stock of certain of the Company's subsidiaries. The Company expects that
these purchases will continue although the amount of purchases in a given
reporting period may vary significantly. In addition, the Company repaid
and repurchased long-term obligations of $16.8 million in 1995.
52PAGE
Thermo Electron Corporation
Information as to Publicly Owned Businesses (Unaudited)
(In thousands) 1995 1994 1993
-------------------------------------------------------------------------
Revenues:
Thermedics Inc. (a) $ 175,754 $ 155,111 $ 80,220
Thermo Instrument Systems Inc. (b) 782,662 649,992 529,278
Thermo TerraTech Inc. (c) 197,769 123,463 108,737
Thermo Power Corporation 108,393 91,873 77,360
ThermoTrex Corporation (d) 129,626 91,052 54,329
Thermo Fibertek Inc. 206,743 162,625 137,088
Thermo Ecotek Corporation 141,435 134,261 117,691
Wholly Owned Nonpublic Companies 487,576 323,816 251,892
Intercompany Sales Elimination (22,541) (3,002) (2,087)
---------- ---------- ----------
$2,207,417 $1,729,191 $1,354,508
========== ========== ==========
Income Before Income Taxes and
Minority Interest:
Thermedics Inc. (a) $ 21,662 $ 16,909 $ 8,292
Thermo Instrument Systems Inc. (b) 113,652 106,241 96,786
Thermo TerraTech Inc. (c) 11,918 9,219 (1,803)
Thermo Power Corporation 5,078 5,263 2,707
ThermoTrex Corporation (d) 3,024 817 485
Thermo Fibertek Inc. 33,408 20,948 15,902
Thermo Ecotek Corporation 34,564 26,928 13,184
Wholly Owned Nonpublic Companies 24,856 19,313 882
---------- ---------- ----------
Total Segment Income (e) 248,162 205,638 136,435
Equity in Losses of Unconsolidated
Subsidiaries (203) (4,019) (22,721)
Corporate 51,536 4,757 17,753
---------- ---------- ----------
$ 299,495 $ 206,376 $ 131,467
========== ========== ==========
(a) Includes Thermo Cardiosystems Inc. and Thermo Voltek Corp.
(b) Includes ThermoSpectra Corporation.
(c) Includes Thermo Remediation Inc.
(d) Includes ThermoLase Corporation.
(e) Segment income is income before corporate general and administrative
expenses, other income and expense, minority interest expense, and
income taxes.
53PAGE
Thermo Electron Corporation
Quarterly Information (Unaudited)
(In thousands except per share amounts)
1995(a) First Second Third Fourth
-------------------------------------------------------------------------
Revenues $478,545 $528,721 $570,373 $629,778
Gross profit 179,295 198,818 214,938 237,607
Net income 29,548 32,584 38,133 39,815
Earnings per share:
Primary .37 .39 .45 .46
Fully diluted .32 .35 .40 .41
1994(b) First Second Third Fourth
-------------------------------------------------------------------------
Revenues $383,724 $428,547 $445,516 $471,404
Gross profit 140,020 159,736 171,114 180,031
Net income 22,925 24,418 27,827 29,541
Earnings per share:
Primary .30 .32 .35 .37
Fully diluted .27 .28 .31 .33
(a) Results include nontaxable gains of $12.9 million, $9.7 million, $43.0
million, and $15.2 million in the first, second, third, and fourth
quarters, respectively, from the issuance of stock by subsidiaries.
(b) Results include nontaxable gains of $8.5 million, $0.2 million, $12.6
million, and $4.0 million in the first, second, third, and fourth
quarters, respectively, from the issuance of stock by subsidiaries.
Common Stock Market Information
--------------------------------------------------------------------------
The following table shows the market range for the Company's common stock
based on reported sales prices on the New York Stock Exchange (symbol TMO)
for 1995 and 1994. Prices have been restated to reflect a three-for-two
stock split, effected in the form of a 50% stock dividend, which was
distributed in May 1995.
1995 1994
---------------- ----------------
Quarter High Low High Low
-----------------------------------------------------------------------
First $34 1/4 $29 1/4 $29 3/5 $25 1/3
Second 41 32 2/3 27 3/5 24
Third 46 5/8 40 30 3/5 25 1/4
Fourth 52 42 3/8 31 11/12 27 1/6
The closing market price on the New York Stock Exchange for the
Company's common stock on January 26, 1996, was $53 7/8 per share.
As of January 26, 1996, the Company had 7,787 holders of record of its
common stock. This does not include holdings in street or nominee names.
54PAGE
Thermo Electron Corporation
Common stock of the Company's majority-owned public subsidiaries is
traded on the American Stock Exchange: Thermedics Inc. (TMD), Thermo
Instrument Systems Inc. (THI), Thermo TerraTech Inc. (TTT), Thermo Power
Corporation (THP), ThermoTrex Corporation (TKN), Thermo Fibertek Inc.
(TFT), Thermo Ecotek Corporation (TCK), Thermo Cardiosystems Inc. (TCA),
Thermo Voltek Corp. (TVL), Thermo Remediation Inc. (THN), ThermoLase
Corporation (TLZ), and ThermoSpectra Corporation (THS).
Stock Transfer Agent
The Bank of Boston is the stock transfer agent and maintains shareholder
activity records. The agent will respond to questions on issuances of stock
certificates, changes of ownership, lost stock certificates, and changes of
address. For these and similar matters, please direct inquiries to:
The Bank of Boston
Post Office Box 644
Mail Stop: 45-02-09
Boston, Massachusetts 02102-0644
(617) 575-3120
Shareholder Services
Shareholders of Thermo Electron Corporation who desire information about
the Company are invited to contact John N. Hatsopoulos, Chief Financial
Officer, Thermo Electron Corporation, 81 Wyman Street, P.O. Box 9046,
Waltham, Massachusetts 02254-9046, (617) 622-1111. A mailing list is
maintained to enable shareholders whose stock is held in street name, and
other interested individuals, to receive quarterly reports, annual reports,
and press releases as quickly as possible. Quarterly reports and press
releases are also available through the Internet at Thermo Electron's home
page on the World Wide Web (http://www.thermo.com).
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use
earnings to finance expansion and growth. Payment of dividends will rest
within the discretion of the Board of Directors and will depend upon, among
other factors, the Company's earnings, capital requirements, and financial
condition.
Annual Meeting
The annual meeting of shareholders will be held on Tuesday, May 21, 1996,
at 5:00 p.m. at the Turnberry Isle Resort & Club, Aventura, Florida.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended December
30, 1995, as filed with the Securities and Exchange Commission, may be
obtained at no charge by writing to John N. Hatsopoulos, Chief Financial
Officer, Thermo Electron Corporation, 81 Wyman Street, P.O. Box 9046,
Waltham, Massachusetts 02254-9046.
55PAGE
Thermo Electron Corporation
Ten Year Financial Summary
(In millions except per share amounts)
1995 1994(a) 1993(b) 1992(c) 1991(d) 1990(e) 1989 1988 1987 1986
-------- -------- -------- ------ ------ ------ ------ ------ ------ ------
Revenues $2,207.4 $1,729.2 $1,354.5 $999.2 $842.5 $744.5 $640.3 $553.7 $430.8 $368.0
-------- -------- -------- ------ ------ ------ ------ ------ ------ ------
Costs and Expenses:
Cost of revenues 1,209.6 928.6 755.5 609.0 532.9 465.1 424.2 359.6 280.3 244.8
Expenses for R&D
and new lines of
business 269.6 233.1 183.9 106.5 84.6 74.5 60.7 54.3 40.9 33.9
Selling, general
and administrative
expenses 480.8 384.7 289.3 213.2 177.7 163.0 129.6 113.1 90.4 71.7
Restructuring and
other nonrecurring
costs 21.9 .7 6.6 - 3.7 1.0 2.2 0.9 3.4 7.1
-------- -------- -------- ------ ------ ------ ------ ------ ------ ------
1,981.9 1,547.1 1,235.3 928.7 798.9 703.6 616.7 527.9 415.0 357.5
-------- -------- -------- ------ ------ ------ ------ ------ ------ ------
Operating Income 225.5 182.1 119.2 70.5 43.6 40.9 23.6 25.8 15.8 10.5
Gain on Issuance
of Stock by
Subsidiaries 80.8 25.3 39.8 30.2 27.4 20.3 16.8 6.0 16.1 15.9
Other Income
(Expense), Net (6.8) (1.0) (27.5) 1.8 10.6 (0.5) 1.1 2.8 (2.5) (5.1)
-------- -------- -------- ------ ------ ------ ------ ------ ------ ------
Income Before
Income Taxes,
Minority Interest,
and Cumulative
Effect of Change
in Accounting
Principle 299.5 206.4 131.5 102.5 81.6 60.7 41.5 34.6 29.4 21.3
Provision for
Income Taxes 98.9 70.7 33.5 27.7 25.8 18.1 10.9 9.2 6.3 4.4
Minority Interest
Expense 60.5 31.0 21.1 13.9 7.3 7.1 3.3 2.1 1.9 0.5
-------- -------- -------- ------ ------ ------ ------ ------ ------ ------
56PAGE
Thermo Electron Corporation
Ten Year Financial Summary (continued)
(In millions except per share amounts)
1995 1994(a) 1993(b) 1992(c) 1991(d) 1990(e) 1989 1988 1987 1986
----- ------ ------ ------ ------ ------ ------ ------ ------ ------
Income Before
Cumulative Effect
of Change in
Accounting
Principle 140.1 104.7 76.9 60.9 48.5 35.5 27.3 23.3 21.2 16.4
Cumulative Effect
of Change in
Accounting Prin-
ciple, Net of
Tax (f) - - - 1.4 - - - - - -
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Income $140.1 $104.7 $ 76.9 $ 59.5 $ 48.5 $ 35.5 $ 27.3 $ 23.3 $ 21.2 $ 16.4
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Earnings per
Share Before
Cumulative Effect
of Change in
Accounting
Principle:
Primary $ 1.67 $ 1.35 $ 1.11 $ .95 $ .84 $ .68 $ .55 $ .48 $ .43 $ .34
Fully diluted $ 1.48 $ 1.20 $ 1.00 $ .90 $ .79 $ .65 $ .53 $ .48 $ .43 $ .34
Earnings per Share:
Primary $ 1.67 $ 1.35 $ 1.11 $ .93 $ .84 $ .68 $ .55 $ .48 $ .43 $ .34
Fully diluted $ 1.48 $ 1.20 $ 1.00 $ .88 $ .79 $ .65 $ .53 $ .48 $ .43 $ .34
57PAGE
Thermo Electron Corporation
Ten Year Financial Summary (continued)
(In millions except per share amounts)
1995 1994(a) 1993(b) 1992(c) 1991(d) 1990(e) 1989 1988 1987 1986
-------- -------- ------- ------- ------- ------- ------ ------ ------ ------
Balance Sheet
Data:
Working
capital $1,306.4 $1,150.7 $ 833.8 $ 508.7 $ 468.4 $ 244.1 $277.6 $220.1 $211.8 $124.5
Total
assets 3,744.9 3,061.9 2,507.6 1,838.0 1,212.5 912.0 669.9 528.5 465.0 336.0
Long-term
obliga-
tions 1,116.0 1,049.9 647.6 494.2 255.1 210.5 177.0 152.9 136.1 61.4
Minority
interest 471.6 327.7 277.7 164.3 122.5 83.9 51.8 22.6 25.8 20.1
Common stock
of subsid-
iaries
subject to
redemption 17.5 - 14.5 5.5 5.5 8.7 13.1 - - -
Shareholders'
investment 1,299.8 1,007.5 873.7 563.8 489.5 314.1 229.2 196.4 175.3 154.5
(a) Reflects the issuance of $345.0 million principal amount of convertible debentures
(b) Reflects the Company's 1993 public offering of common stock for net proceeds of $246.0 million.
(c) Reflects the August 1992 acquisition of Nicolet Instrument Corporation and the issuance of $260.0
million principal amount of convertible debentures.
(d) Reflects the issuance of $164.0 million principal amount of convertible debentures.
(e) Reflects the May 1990 acquisition of Finnigan Corporation.
(f) Reflects the adoption in fiscal 1992 of Statement of Financial Accounting Standards No. 106,
"Accounting for Post-retirement Benefits Other Than Pensions".
58PAGE