Exhibit 13
THERMO ELECTRON CORPORATION
Consolidated Financial Statements
1997
PAGE
Thermo Electron Corporation 1997 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1997 1996 1995
------------------------------------------------------------------------
Revenues:
Product and service revenues $3,392,575 $2,766,002 $2,075,748
Research and development
contract revenues 165,745 166,556 194,543
---------- ---------- ----------
3,558,320 2,932,558 2,270,291
---------- ---------- ----------
Costs and Operating Expenses:
Cost of product and service
revenues 1,973,265 1,657,746 1,239,762
Expenses for research and
development and new lines of
business (a) 337,305 301,457 272,809
Selling, general, and
administrative expenses 840,692 689,248 510,564
Restructuring and other
nonrecurring costs, net
(Note 11) 1,272 37,641 21,938
---------- ---------- ----------
3,152,534 2,686,092 2,045,073
---------- ---------- ----------
Operating Income 405,786 246,466 225,218
Gain on Issuance of Stock by
Subsidiaries (Note 9) 80,055 126,599 80,815
Other Income (Expense), Net
(Note 10) 2,626 1,486 (7,225)
---------- ---------- ----------
Income Before Income Taxes and
Minority Interest 488,467 374,551 298,808
Provision for Income Taxes
(Note 8) 174,713 110,845 98,711
Minority Interest Expense 74,426 72,890 60,515
---------- ---------- ----------
Net Income $ 239,328 $ 190,816 $ 139,582
========== ========== ==========
Earnings per Share (Note 15):
Basic $ 1.57 $ 1.35 $ 1.10
========== ========== ==========
Diluted $ 1.41 $ 1.17 $ .95
========== ========== ==========
Weighted Average Shares (Note 15):
Basic 152,489 141,525 126,626
========== ========== ==========
Diluted 176,082 175,605 158,562
========== ========== ==========
2PAGE
Thermo Electron Corporation 1997 Financial Statements
Consolidated Statement of Income (continued)
(In thousands) 1997 1996 1995
------------------------------------------------------------------------
(a) Includes costs of:
Research and development
contracts $ 143,743 $ 144,823 $ 167,120
Internally funded research
and development 191,629 154,448 102,209
Other expenses for new lines
of business 1,933 2,186 3,480
---------- ---------- ----------
$ 337,305 $ 301,457 $ 272,809
========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
3PAGE
Thermo Electron Corporation 1997 Financial Statements
Consolidated Balance Sheet
(In thousands) 1997 1996
------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 593,580 $ 414,404
Short-term available-for-sale investments,
at quoted market value (amortized cost of
$925,855 and $1,428,564; Note 2) 929,118 1,431,881
Accounts receivable, less allowances of
$55,698 and $34,321 797,399 616,545
Unbilled contract costs and fees 69,375 77,155
Inventories 543,589 432,960
Prepaid income taxes (Note 8) 118,182 129,802
Prepaid expenses 42,955 29,082
---------- ----------
3,094,198 3,131,829
---------- ----------
Property, Plant, and Equipment, at Cost, Net 789,046 704,447
---------- ----------
Long-term Available-for-sale Investments, at
Quoted Market Value (amortized cost of
$49,581 and $84,094; Note 2) 63,306 94,401
---------- ----------
Other Assets 157,108 127,632
---------- ----------
Cost in Excess of Net Assets of Acquired
Companies (Notes 3, 8, and 11) 1,692,211 1,082,935
---------- ----------
$5,795,869 $5,141,244
========== ==========
4PAGE
Thermo Electron Corporation 1997 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1997 1996
-----------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable and current maturities of
long-term obligations (Note 5) $ 176,912 $ 153,787
Accounts payable 251,677 203,643
Accrued payroll and employee benefits 140,698 122,079
Accrued income taxes 57,923 61,534
Accrued installation and warranty costs 72,710 69,006
Deferred revenue 54,999 45,715
Other accrued expenses (Notes 1 and 3) 337,316 257,448
---------- ----------
1,092,235 913,212
---------- ----------
Deferred Income Taxes (Note 8) 90,802 81,726
---------- ----------
Other Deferred Items 59,082 81,020
---------- ----------
Long-term Obligations (Note 5):
Senior convertible obligations 187,824 369,997
Subordinated convertible obligations 1,473,015 1,009,470
Nonrecourse tax-exempt obligations 37,600 77,900
Other 44,468 92,975
---------- ----------
1,742,907 1,550,342
---------- ----------
Minority Interest 719,622 684,050
---------- ----------
Commitments and Contingencies (Note 6)
Common Stock of Subsidiaries Subject to
Redemption ($95,262 and $81,179 redemption
value; Note 1) 93,312 76,525
---------- ----------
Shareholders' Investment (Notes 4 and 7):
Preferred stock, $100 par value, 50,000
shares authorized; none issued
Common stock, $1 par value, 350,000,000
shares authorized; 159,206,337 and
149,996,979 shares issued 159,206 149,997
Capital in excess of par value 843,709 801,793
Retained earnings 1,034,640 795,312
Treasury stock at cost, 95,684 and 15,520
shares (3,839) (570)
Cumulative translation adjustment (46,339) (504)
Deferred compensation (Note 4) - (58)
Net unrealized gain on available-for-sale
investments (Note 2) 10,532 8,399
---------- ----------
1,997,909 1,754,369
---------- ----------
$5,795,869 $5,141,244
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
5PAGE
Thermo Electron Corporation 1997 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1997 1996 1995
----------------------------------------------------------------------------
Operating Activities:
Net income $ 239,328 $ 190,816 $ 139,582
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 135,738 115,167 85,869
Restructuring and other
nonrecurring costs, net
(Note 11) 1,272 37,641 21,938
Provision for losses on accounts
receivable 9,078 6,002 5,534
Increase in deferred income
taxes 1,111 20,869 4,277
Minority interest expense 74,426 72,890 60,515
Gain on issuance of stock by
subsidiaries (Note 9) (80,055) (126,599) (80,815)
Gain on sale of investments, net (5,077) (9,840) (9,305)
Other noncash items, net 9,093 15,758 19,239
Changes in current accounts,
excluding the effects of
acquisitions:
Accounts receivable (86,511) (17,078) (52,649)
Inventories 9,159 (1,298) (32,267)
Other current assets 31,445 (35,657) (9,447)
Accounts payable (8,308) (14,307) 19,198
Other current liabilities (61,681) (29,859) 27,427
----------- ----------- -----------
Net cash provided by operating
activities 269,018 224,505 199,096
----------- ----------- -----------
Investing Activities:
Acquisitions, net of cash acquired
(Note 3) (849,118) (366,317) (330,698)
Refund of acquisition purchase
price (Note 3) 36,132 - -
Proceeds from sale of businesses 27,102 - -
Purchases of available-for-sale
investments (973,687) (1,644,094) (592,364)
Proceeds from sale and maturities of
available-for-sale investments 1,543,025 835,935 617,145
Purchases of property, plant, and
equipment (111,605) (124,541) (64,016)
Proceeds from sale of property,
plant, and equipment 15,633 10,500 5,702
Increase in other assets (13,425) (26,144) (19,750)
Other 6,115 3,385 (147)
----------- ----------- -----------
Net cash used in investing
activities $ (319,828) $(1,311,276) $ (384,128)
----------- ----------- -----------
6PAGE
Thermo Electron Corporation 1997 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1997 1996 1995
----------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of
long-term obligations (Note 5) $ 490,821 $ 953,376 $ 203,387
Repayment of long-term obligations (78,287) (60,643) (14,702)
Net proceeds from issuance of
Company and subsidiary common
stock (Note 9) 164,855 303,954 173,326
Purchases of subsidiary common
stock and debentures (311,092) (144,053) (101,099)
Increase (decrease) in short-
term notes payable (24,256) (13,391) 1,438
Other (4,291) (1,279) (226)
----------- ----------- -----------
Net cash provided by financing
activities 237,750 1,037,964 262,124
----------- ----------- -----------
Exchange Rate Effect on Cash (7,764) 350 2,764
----------- ----------- -----------
Increase (Decrease) in Cash and
Cash Equivalents 179,176 (48,457) 79,856
Cash and Cash Equivalents at
Beginning of Year 414,404 462,861 383,005
----------- ----------- -----------
Cash and Cash Equivalents at End
of Year $ 593,580 $ 414,404 $ 462,861
=========== =========== ===========
See Note 12 for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial
statements.
7PAGE
Thermo Electron Corporation 1997 Financial Statements
Consolidated Statement of Shareholders' Investment
(In thousands) 1997 1996 1995
-----------------------------------------------------------------------
Common Stock, $1 Par Value
Balance at beginning of year $ 149,997 $ 89,006 $ 53,558
Issuance of stock under employees'
and directors' stock plans 866 892 571
Conversions of convertible
obligations 8,343 13,449 6,047
Effect of three-for-two stock
splits - 46,650 27,687
Acquisition through pooling-of-
interests (Note 3) - - 1,143
---------- ---------- ----------
Balance at end of year 159,206 149,997 89,006
---------- ---------- ----------
Capital in Excess of Par Value
Balance at beginning of year 801,793 614,363 493,058
Issuance of stock under employees'
and directors' stock plans 13,185 8,172 5,293
Tax benefit related to employees'
and directors' stock plans 5,456 12,821 9,666
Conversions of convertible
obligations 164,537 254,842 150,787
Effect of majority-owned
subsidiaries' equity
transactions (141,262) (41,755) (34,642)
Effect of three-for-two stock
splits - (46,650) (27,687)
Acquisition through pooling-of-
interests (Note 3) - - 17,888
---------- ---------- ----------
Balance at end of year 843,709 801,793 614,363
---------- ---------- ----------
Retained Earnings
Balance at beginning of year 795,312 604,496 472,396
Net income 239,328 190,816 139,582
Acquisition through pooling-of-
interests (Note 3) - - (7,482)
---------- ---------- ----------
Balance at end of year $1,034,640 $ 795,312 $ 604,496
---------- ---------- ----------
8PAGE
Thermo Electron Corporation 1997 Financial Statements
Consolidated Statement of Shareholders' Investment (continued)
(In thousands) 1997 1996 1995
-----------------------------------------------------------------------
Treasury Stock
Balance at beginning of year $ (570) $ (536)$ (1,631)
Activity under employees' and
directors' stock plans (3,269) (34) 1,095
---------- ---------- ----------
Balance at end of year (3,839) (570) (536)
---------- ---------- ----------
Cumulative Translation Adjustment
Balance at beginning of year (504) 608 (3,557)
Translation adjustment (45,835) (1,112) 4,193
Acquisition through pooling-of-
interests (Note 3) - - (28)
---------- ---------- ----------
Balance at end of year (46,339) (504) 608
---------- ---------- ----------
Deferred Compensation
Balance at beginning of year (58) (2,271) (2,657)
Amortization of deferred
compensation 58 296 386
ESOP II loan repayment (Note 4) - 1,917 -
---------- ---------- ----------
Balance at end of year - (58) (2,271)
---------- ---------- ----------
Net Unrealized Gain on Available-
for-sale Investments
Balance at beginning of year 8,399 4,063 (3,681)
Change in net unrealized gain
on available-for-sale
investments (Note 2) 2,133 4,336 7,744
---------- ---------- ----------
Balance at end of year 10,532 8,399 4,063
---------- ---------- ----------
Total Shareholders' Investment $1,997,909 $1,754,369 $1,309,729
========== ========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
9PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Significant Accounting Policies
Nature of Operations
Thermo Electron Corporation and its subsidiaries (the Company)
develop, manufacture, and market analytical and monitoring 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 industrial
outsourcing, laboratory, and metallurgical services, and conducts
advanced-technology research and development.
Principles of Consolidation
The accompanying financial statements include the accounts of Thermo
Electron and its majority- and wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated.
Majority-owned public subsidiaries consist of Thermedics Inc., Thermo
Instrument Systems Inc., Thermo TerraTech Inc., Thermo Power Corporation,
ThermoTrex Corporation, Thermo Fibertek Inc., and Thermo Ecotek
Corporation. Thermo Cardiosystems Inc., Thermo Voltek Corp., Thermo
Sentron Inc., and Thermedics Detection Inc. are majority-owned, public
subsidiaries of Thermedics. ThermoSpectra Corporation, ThermoQuest
Corporation, Thermo Optek Corporation, Thermo BioAnalysis Corporation,
Metrika Systems Corporation, and Thermo Vision Corporation are
majority-owned, public subsidiaries of Thermo Instrument. Thermo
Remediation Inc. and The Randers Group Incorporated are majority-owned,
public subsidiaries of Thermo TerraTech. ThermoLase Corporation and Trex
Medical Corporation are majority-owned, public subsidiaries of
ThermoTrex. Thermo Fibergen Inc. is a majority-owned, public subsidiary
of Thermo Fibertek. Thermo Information Solutions Inc. is a
majority-owned, privately held subsidiary. ONIX Systems Inc. is a
majority-owned, privately held subsidiary of Thermo Instrument. 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 Communications Corporation is a
majority-owned, privately held subsidiary of ThermoTrex. Thermo Trilogy
Corporation is a majority-owned, privately held subsidiary of Thermo
Ecotek. 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 1997, 1996, and 1995 are for the fiscal years
ended January 3, 1998, December 28, 1996, and December 30, 1995,
respectively. Fiscal year 1997 included 53 weeks; 1996 and 1995 each
included 52 weeks.
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. Deferred revenue in the
10PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Significant Accounting Policies (continued)
accompanying balance sheet consists primarily of unearned revenue on
service contracts. Substantially all of the deferred revenue in the
accompanying 1997 balance sheet will be recognized within one year.
Revenues and profits on substantially all contracts are recognized using
the percentage-of-completion method. Revenues recorded under the
percentage-of-completion method were $440.4 million in 1997, $421.1
million in 1996, and $472.0 million in 1995. 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 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.
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, by the subsidiary's parent, 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.
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 4). Accordingly,
no accounting recognition is given to stock options granted at fair
market value until they are exercised. Upon exercise, net proceeds,
including tax benefits realized, are credited to equity.
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
11PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Significant Accounting Policies (continued)
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
During the fourth quarter of 1997, the Company adopted SFAS No. 128,
"Earnings per Share" (Note 15). As a result, all previously reported
earnings per share have been restated; however, basic earnings per share
equals the Company's previously reported primary earnings per share for
1996 and 1995. Basic earnings per share have been computed by dividing
net income by the weighted average number of shares outstanding during
the year. Diluted earnings per share have been computed assuming the
conversion of convertible obligations and the elimination of the related
interest expense, and the exercise of stock options, as well as their
related income tax effects.
Stock Split
All share and per share information was restated in 1996 to reflect a
three-for-two stock split, effected in the form of a 50% stock dividend,
that was distributed in June 1996.
Cash and Cash Equivalents
Cash equivalents consists principally of corporate notes, commercial
paper, U.S. government-agency securities, 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.
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) 1997 1996
----------------------------------------------------------------------
Raw materials and supplies $260,458 $236,297
Work in process 108,327 80,614
Finished goods 174,804 116,049
-------- --------
$543,589 $432,960
======== ========
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 facilities, 5 to 25
years; machinery and equipment, 2 to 20 years; and leasehold
improvements, the shorter of the term of the lease or the life of the
asset.
12PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Significant Accounting Policies (continued)
Property, plant, and equipment consists of the following:
(In thousands) 1997 1996
----------------------------------------------------------------------
Land $ 59,867 $ 55,430
Buildings 235,103 206,406
Alternative-energy facilities 247,361 247,361
Machinery, equipment, and leasehold
improvements 617,582 500,992
---------- ----------
1,159,913 1,010,189
Less: Accumulated depreciation and
amortization 370,867 305,742
---------- ----------
$ 789,046 $ 704,447
========== ==========
Other Assets
Other assets in the accompanying balance sheet includes intangible
assets, notes receivable, deferred debt expense, prepaid pension costs,
and other assets. Intangible assets include the costs of acquired
trademarks, patents, product technology, and other specifically
identifiable intangible assets and are being amortized using the
straight-line method over their estimated useful lives, which range from
3 to 20 years. Intangible assets were $50.5 million and $39.9 million,
net of accumulated amortization of $45.7 million and $38.0 million, at
year-end 1997 and 1996, 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 $134.7 million and $96.4 million at
year-end 1997 and 1996, 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. If impairment has occurred,
any excess of carrying value over fair value is recorded as a loss.
Common Stock of Subsidiaries 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 issued in the offering will have the option to require ThermoLyte
to redeem any or all of their shares at $10.00 per share in December 1998
or 1999. ThermoLyte common stock subject to redemption of $18.1 million
is included in other accrued expenses in the accompanying 1997 balance
sheet since it is redeemable in December 1998. The redemption value is
$18.5 million.
13PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Significant Accounting Policies (continued)
In September 1996, Thermo Fibergen sold 4,715,000 units, each unit
consisting of one share of Thermo Fibergen common stock and one
redemption right, at $12.75 per unit, for net proceeds of $55.8 million.
The common stock and redemption rights began trading separately on
December 13, 1996. Holders of a redemption right have the option to
require Thermo Fibergen to redeem one share of Thermo Fibergen common
stock at $12.75 per share in September 2000 or 2001. The redemption
rights carry terms that generally provide for their expiration if the
closing price of Thermo Fibergen's common stock exceeds $19 1/8 for 20 of
any 30 consecutive trading days prior to September 2001.
In April 1997, ThermoLase completed an exchange offer whereby its
shareholders had the opportunity to exchange one share of existing
ThermoLase common stock and $3.00 (in cash or ThermoLase common stock)
for a new unit consisting of one share of ThermoLase common stock and one
redemption right. The redemption right entitles the holder to sell the
related share of common stock to ThermoLase for $20.25 during the period
from April 3, 2001, through April 30, 2001. The redemption right will
expire if the closing price of ThermoLase common stock is at least $26.00
for 20 of any 30 consecutive trading days. In connection with this offer,
ThermoLase issued in April 1997, 2,000,000 units in exchange for
2,261,706 shares of its common stock and $0.5 million in cash, net of
expenses. As a result of these transactions, $40.5 million was
reclassified from "Shareholders' investment" and "Minority interest" to
"Common stock of subsidiaries subject to redemption," based on the
issuance of the 2,000,000 redemption rights, each carrying a maximum
liability of $20.25.
The difference between the redemption value and the original carrying
amount of ThermoLyte and Thermo Fibergen common stock subject to
redemption is accreted over the period through the first redemption
period. Accretion is charged to minority interest expense in the
accompanying statement of income. All redemption rights are guaranteed on
a subordinated basis by the Company.
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.
Forward Contracts and Interest Rate Swap Agreements
The Company uses short-term forward foreign exchange contracts to
manage certain exposures to foreign currencies. The Company enters into
forward foreign exchange contracts to hedge firm purchase and sale
commitments denominated in currencies other than its subsidiaries' local
currencies. These contracts principally hedge transactions denominated in
14PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Significant Accounting Policies (continued)
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. Gains and losses
arising from forward foreign exchange contracts are recognized as offsets
to gains and losses resulting from the transactions being hedged.
Thermo Ecotek has interest rate swap agreements that convert its
variable rate obligations to fixed rate obligations (Note 5). Interest
rate swap agreements are accounted for under the accrual method. Amounts
to be received from or paid to the counterparties of the agreements are
accrued during the period to which the amounts relate and are reflected
as interest expense. The related amounts payable to the counterparties
are included in other accrued expenses in the accompanying balance sheet.
The fair value of the swap agreements is not recognized in the
accompanying financial statements since the agreements are accounted for
as hedges.
The Company does not enter into speculative foreign currency or
interest swap agreements.
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,
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
Certain amounts in 1996 and 1995 have been reclassified to conform to
the presentation in the 1997 financial statements.
2. Available-for-sale Investments
In accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," 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 on available-for-sale investments."
15PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
2. Available-for-sale 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 are as follows:
Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
------------------------------------------------------------------------
1997
Government-agency
securities $ 385,476 $ 385,049 $ 451 $ (24)
Corporate bonds 513,956 513,427 717 (188)
Other 92,992 76,960 16,628 (596)
---------- ---------- ---------- ----------
$ 992,424 $ 975,436 $ 17,796 $ (808)
========== ========== ========== ==========
1996
Government-agency
securities $ 830,446 $ 829,736 $ 761 $ (51)
Corporate bonds 581,804 581,424 482 (102)
Other 114,032 101,498 12,855 (321)
---------- ---------- ---------- ----------
$1,526,282 $1,512,658 $ 14,098 $ (474)
========== ========== ========== ==========
Short- and long-term available-for-sale investments in the
accompanying 1997 balance sheet include equity securities of $50.4
million and debt securities of $803.3 million with contractual maturities
of one year or less and $138.7 million with contractual maturities of
more than one year through 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, the issuer, or both 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. The net gain on sale of
investments resulted from gross realized gains of $5.2 million, $11.2
million, and $9.8 million and gross realized losses of $0.1 million, $1.4
million, and $0.5 million in 1997, 1996, and 1995, respectively, relating
to the sale of available-for-sale investments.
3. Acquisitions
In March 1997, Thermo Instrument acquired 95% of Life Sciences
International PLC, a London Stock Exchange-listed company. Subsequently,
Thermo Instrument acquired the remaining shares of Life Sciences'
16PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
3. Acquisitions (continued)
capital stock. The aggregate purchase price for Life Sciences was $442.8
million, net of $55.8 million of cash acquired. The purchase price
includes the repayment of $105.0 million of Life Sciences' bank debt.
Life Sciences manufactures laboratory science equipment, appliances,
instruments, consumables, and reagents for the research, clinical, and
industrial markets.
In 1997, in addition to the acquisition of Life Sciences, the Company
and its majority-owned subsidiaries made several other acquisitions for
an aggregate of $406.3 million in cash, net of cash acquired, the
issuance of subsidiary common stock and stock options valued at $4.5
million, and $5.1 million to be paid in the first quarter of 1998,
subject to certain post-closing adjustments. The Company does not expect
that aggregate post-closing adjustments, if any, will be material.
In June 1996, the Company acquired SensorMedics Corporation in
exchange for 1,243,518 shares of the Company's common stock, including
156,590 shares reserved for issuance upon exercise of assumed stock
options and warrants. SensorMedics manufactures systems for pulmonary
function diagnosis, respiratory-gas analyzers, physiological testing
equipment, and automated sleep-analysis systems. The acquisition has been
accounted for under the pooling-of-interests method.
Historical financial information presented for 1995 has been restated
to include the acquisition of SensorMedics. Revenues and net income
(loss) for 1995, as previously reported by the separate entities prior to
the acquisition and as restated for the combined Company, are as follows:
(In thousands) 1995
-----------------------------------------------------------------------
Revenues:
Previously reported $2,207,417
SensorMedics 62,874
----------
$2,270,291
==========
Net Income (Loss):
Previously reported $ 140,080
SensorMedics (498)
----------
$ 139,582
==========
In March 1996, Thermo Instrument completed the acquisition of a
substantial portion of the businesses constituting the Scientific
Instruments Division of Fisons plc (Fisons businesses), a wholly owned
subsidiary of Rhone-Poulenc Rorer Inc. (RPR), for approximately $181.2
million in cash, net of $7.7 million of cash acquired, and the assumption
of approximately $47.2 million of indebtedness. In December 1997, Thermo
Instrument and RPR negotiated a post-closing adjustment under the terms
of the purchase agreement for the Fisons acquisition pertaining to
determination of the net assets of the Fisons businesses at the date of
17PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
3. Acquisitions (continued)
acquisition. This negotiation resulted in a refund to Thermo Instrument
of $36.1 million, plus $3.8 million of interest from the date of
acquisition. Thermo Instrument has recorded $33.1 million of the refund
as a reduction in cost in excess of net assets of acquired companies. The
remaining $3.0 million represented payment for uncollected accounts
receivable acquired by the Company that were guaranteed by RPR.
In 1996, in addition to the acquisitions of SensorMedics and the
Fisons businesses, the Company and its majority-owned subsidiaries made
several other acquisitions for an aggregate of $185.1 million in cash,
net of cash acquired, the issuance of common stock of the Company and its
majority-owned subsidiaries valued at $2.4 million, and the issuance of
$26.6 million in debt.
In March 1995, the Company acquired Coleman Research Corporation in
exchange for 6,003,336 shares of the Company's common stock, including
304,292 shares reserved for issuance upon exercise of assumed stock
options. This business was renamed Thermo Coleman Corporation. Thermo
Coleman provides systems integration, systems engineering, analytical
services, technology support, information technology services and
products, and advanced-technology research and development to government
and commercial customers. The acquisition has been accounted for under
the pooling-of-interests method.
In 1995, in addition to the acquisition of Thermo Coleman, the
Company and its majority-owned subsidiaries made several other
acquisitions for an aggregate of $330.7 million in cash, net of cash
acquired, 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.
These acquisitions, except for SensorMedics and Thermo Coleman, have
been accounted for using the purchase method of accounting, and the
acquired companies' results have been included in the accompanying
financial statements from their respective dates of acquisition. The
aggregate cost of these acquisitions exceeded the estimated fair value of
the acquired net assets by $1,239.8 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 1997, is subject to
adjustment upon finalization of the purchase price allocation. The
Company has gathered no information that indicates the final purchase
price allocations will differ materially from the preliminary estimates.
Pro forma data is not presented since the acquisitions were not material
to the Company's results of operations.
In connection with the acquisition of the Fisons businesses, Thermo
Instrument had undertaken a restructuring of the acquired businesses
during 1996. In accordance with the requirements of Emerging Issues Task
Force Pronouncement (EITF) 95-3, Thermo Instrument finalized its
restructuring plans in the first quarter of 1997. The restructuring plans
include reductions in staffing levels, abandonment of excess facilities,
and other costs associated with exiting certain activities of the
acquired businesses. As part of the cost of the acquisition, Thermo
Instrument established reserves totaling $46.2 million for estimated
18PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
3. Acquisitions (continued)
severance, excess facilities, and other exit costs associated with the
acquisition, $14.3 million and $19.0 million of which was expended during
1997 and 1996, respectively, primarily for severance and
abandoned-facility payments. At January 3, 1998, the remaining reserve
for restructuring these businesses was $11.1 million, including the
impact of currency translation, and primarily represents ongoing
severance and abandoned-facility payments.
4. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
------------------
The Company has 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.
The option recipients and the terms of options granted under these plans
are determined by the Board Committee. Generally, options 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 may lapse over periods
ranging from one to ten years, 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 are generally granted at fair
market value, although the Board Committee has discretion to grant
options at a price at or above 85% of the fair market value on the date
of grant. 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.
19PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
A summary of the Company's stock option activity is as follows:
1997 1996 1995
---------------- ---------------- ----------------
Weighted Weighted Weighted
Number Average Number Average Number Average
(Shares in of Exercise of Exercise of Exercise
thousands) Shares Price Shares Price Shares Price
------------------------------------------------------------------------
Options outstanding,
beginning of year 8,421 $21.24 8,302 $17.46 7,878 $14.92
Granted 1,401 37.06 1,183 39.03 1,330 27.85
Exercised (744) 13.37 (1,125) 10.71 (1,099) 8.69
Forfeited (247) 29.45 (89) 26.97 (111) 16.67
Assumed upon
acquisitions
through pooling-
of-interests
(Note 3) - - 150 14.97 304 5.65
------ ------ ------
Options outstanding,
end of year 8,831 $24.19 8,421 $21.24 8,302 $17.46
====== ====== ====== ====== ====== ======
Options exercisable 8,821 $24.18 8,406 $21.23 8,262 $17.51
====== ====== ====== ====== ====== ======
Options available
for grant 5,132 1,291 2,397
====== ====== ======
20PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
A summary of the status of the Company's stock options at January 3,
1998, is as follows:
Options Outstanding
-------------------------------
Weighted
Average Weighted
Number Remaining Average
Range of of Contractual Exercise
Exercise Prices Shares Life Price
------------------------------------------------------------------------
(Shares in thousands)
$ 6.33 - $15.61 1,479 2.4 years $12.30
15.62 - 24.89 4,331 7.0 years 19.44
24.90 - 34.18 798 8.2 years 32.16
34.19 - 43.46 2,223 8.7 years 38.49
-----
$ 6.33 - $43.46 8,831 6.8 years $24.19
=====
The information disclosed above for options outstanding at January 3,
1998, does not differ materially for options exercisable.
Employee Stock Purchase Plan
----------------------------
Substantially all of the Company's full-time U.S. employees are
eligible to participate in an employee stock purchase plan sponsored by
the Company. Under this plan, shares of the Company's common stock can be
purchased at the end of a 12-month period at 95% of the fair market value
at the beginning of the period, and the shares purchased are subject to a
six-month resale restriction. Prior to November 1, 1995, shares of the
Company's common stock could be purchased at 85% of the fair market value
at the beginning of the period, and the shares purchased were subject to
a one-year resale restriction. Shares are purchased through payroll
deductions of up to 10% of each participating employee's gross wages.
Participants of employee stock purchase programs 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 1997, 1996, and
1995, the Company issued 243,444 shares, 285,448 shares, and 330,444
shares, respectively, of its common stock under this plan.
Employee Stock Ownership Plan
-----------------------------
The Company's Employees Stock Ownership Plan (ESOP) was split into
two plans effective December 31, 1994: ESOP I and ESOP II. The ESOP I
covers eligible full-time U.S. employees of the Company's corporate
office and its wholly owned subsidiaries. The ESOP II, terminated
effective December 31, 1994, covered employees of certain of the
Company's majority-owned subsidiaries. The Company loaned funds to the
ESOP to purchase shares of common stock of the Company and its
majority-owned subsidiaries. The shares purchased by the ESOP were
21PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
recorded as deferred compensation in the accompanying balance sheet. The
loan to the ESOP II was repaid in full in 1996 and all expense related to
the plans had been recognized. The loan repayment was recorded as a
reduction in deferred compensation in the accompanying balance sheet.
Shares are allocated to the plan participants based on employee
compensation. For these plans, the Company charged to expense $0.2
million and $0.3 million in 1996 and 1995, respectively.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-based Compensation," which sets forth a
fair-value based method of recognizing stock-based compensation expense.
As permitted by SFAS No. 123, the Company has elected to continue to
apply APB No. 25 to account for its stock-based compensation plans. Had
compensation cost for awards in 1997, 1996, and 1995 under the Company's
stock-based compensation plans been determined based on the fair value at
the grant dates consistent with the method set forth under SFAS No. 123,
the effect on the Company's net income and earnings per share would have
been as follows:
(In thousands except per share amounts) 1997 1996 1995
-----------------------------------------------------------------------
Net income:
As reported $239,328 $190,816 $139,582
Pro forma 224,337 181,880 137,587
Basic earnings per share:
As reported 1.57 1.35 1.10
Pro forma 1.47 1.29 1.09
Diluted earnings per share:
As reported 1.41 1.17 .95
Pro forma 1.32 1.12 .93
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation expense may not be representative of the amount to be
expected in future years. Pro forma compensation expense for options
granted is reflected over the vesting period; therefore, future pro forma
compensation expense may be greater as additional options are granted.
The weighted average fair value per share of options granted was
$15.14, $13.03, and $9.39 in 1997, 1996, and 1995, respectively. The fair
value of each option grant was estimated on the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
1997 1996 1995
-----------------------------------------------------------------------
Volatility 26% 24% 24%
Risk-free interest rate 6.2% 6.1% 6.0%
Expected life of options 6.5 years 5.2 years 5.0 years
22PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
4. Employee Benefit Plans (continued)
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option-pricing
models require the input of highly subjective assumptions including
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of
the fair value of its employee stock options.
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 $13.9 million, $10.1 million, and $7.6
million in 1997, 1996, and 1995, 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 20% 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 $9.3 million, $8.8 million, and $8.2 million in 1997, 1996, and
1995, respectively.
23PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
5. Long-term Obligations and Other Financing Arrangements
Long-term obligations of the Company are as follows:
(In thousands except per share amounts) 1997 1996
-----------------------------------------------------------------------
5% Senior convertible debentures,
due 2001, convertible at $21.00 per share $ - $ 175,216
4 1/4% Subordinated convertible debentures,
due 2003, convertible at $37.80 per share 585,000 585,000
4 1/2% Senior convertible debentures,
due 2003, convertible into shares
of Thermo Instrument at $34.46 per share 172,500 172,500
3 3/4% Senior convertible debentures,
due 2000, convertible into shares of
Thermo Instrument at $13.55 per share 15,324 22,281
5% Subordinated convertible debentures,
due 2000, convertible into shares of
ThermoQuest at $16.50 per share 80,591 86,250
5% Subordinated convertible debentures,
due 2000, convertible into shares of
Thermo Optek at $13.94 per share 79,956 86,250
4 7/8% Subordinated convertible debentures,
due 2000, convertible into shares of
Thermo Remediation at $17.92 per share 34,950 34,950
Noninterest-bearing subordinated convertible
debentures due 2003, convertible into
shares of Thermedics at $32.68 per share 62,300 65,000
4 3/4% Subordinated convertible debentures,
due 2004, convertible into shares of
Thermo Cardiosystems at $31.42 per share 70,000 -
Noninterest-bearing subordinated convertible
debentures, due 1997, convertible into shares
of Thermo Cardiosystems at $14.49 per share - 3,755
3 3/4% Subordinated convertible debentures,
due 2000, convertible into shares of Thermo
Voltek at $7.83 per share 7,750 9,345
4 5/8% Subordinated convertible debentures,
due 2003, convertible into shares of
Thermo TerraTech at $15.90 per share 111,850 111,850
6 1/2% Subordinated convertible debentures,
due 1997, convertible into shares of
Thermo TerraTech at $10.33 per share - 8,620
4 1/2% Subordinated convertible debentures,
due 2004, convertible into shares of
Thermo Fibertek at $12.10 per share 153,000 -
4 3/8% Subordinated convertible debentures,
due 2004, convertible into shares of
ThermoLase at $17.39 per share 115,000 -
3 1/4% Subordinated convertible debentures,
due 2007, convertible into shares of
ThermoTrex at $27.00 per share 114,500 -
24PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
5. Long-term Obligations and Other Financing Arrangements (continued)
(In thousands except per share amounts) 1997 1996
-----------------------------------------------------------------------
Noninterest-bearing subordinated convertible
debentures, due 2001, convertible into
shares of Thermo Ecotek at $13.56 per share $ 8,118 $ 22,205
4 7/8% Subordinated convertible debentures,
due 2004, convertible into shares of
Thermo Ecotek at $16.50 per share 50,000 -
8.1% Nonrecourse tax-exempt obligation,
payable in semiannual installments, with
final payment in 2000 35,600 51,200
6.0% Nonrecourse tax-exempt obligation,
payable in semiannual installments, with
final payment in 2000 23,900 43,500
Other 93,857 113,289
---------- ----------
1,814,196 1,591,211
Less: Current maturities 71,289 40,869
---------- ----------
$1,742,907 $1,550,342
========== ==========
The debentures that are convertible into subsidiary common stock have
been issued by the respective subsidiaries and are guaranteed by the
Company, on a subordinated basis in most cases.
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 4 1/4% 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,
certain 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, the proceeds of
which were used to finance two alternative-energy facilities (Delano I
and Delano II) located in Delano, California. The obligations are
credit-enhanced by a letter of credit issued by a bank group. 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 1997 and 1996, the average variable rate received under the
interest rate swap agreements was 3.7% and 3.5%, respectively. The
notional amount of the swap agreements was $61.3 million and $95.7
25PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
5. Long-term Obligations and Other Financing Arrangements (continued)
million at year-end 1997 and 1996, respectively. 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 annual requirements for long-term obligations are as follows:
(In thousands)
-----------------------------------------
1998 $ 71,289
1999 25,466
2000 224,244
2001 49,021
2002 2,940
2003 and thereafter 1,441,236
----------
$1,814,196
==========
See Note 13 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 includes $105.7 million and $112.9 million in
1997 and 1996, respectively, of short-term bank borrowings and borrowings
under lines of credit of certain of the Company's subsidiaries. The
weighted average interest rate for these borrowings was 5.7% and 5.4% at
year-end 1997 and 1996. Unused lines of credit were $205 million as of
year-end 1997.
6. Commitments and Contingencies
Operating Leases
The Company leases portions of its office and operating facilities
under various operating lease arrangements. The accompanying statement of
income includes expenses from operating leases of $73.6 million, $62.6
million, and $48.8 million in 1997, 1996, and 1995, respectively. Future
minimum payments due under noncancelable operating leases at January 3,
1998, are $71.0 million in 1998; $60.7 million in 1999; $52.2 million in
2000; $45.8 million in 2001; $42.6 million in 2002; and $165.5 million in
2003 and thereafter. Total future minimum lease payments are $437.8
million.
Litigation and Related Contingencies
ThermoTrex is a defendant in a lawsuit brought by Fischer Imaging
Corporation, which alleges that the prone breast-biopsy systems of the
Lorad division of ThermoTrex's Trex Medical subsidiary infringe a Fischer
patent on a precision mammographic needle-biopsy system. Lorad's
cumulative revenues from this product totaled approximately $118.6
million through January 3, 1998.
26PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
6. Commitments and Contingencies (continued)
Five former employees of Thermo Instrument's Epsilon Industrial, Inc.
(Epsilon) subsidiary have commenced an arbitration proceeding naming as
joint defendants Epsilon, Thermo Instrument, and certain affiliates of
Thermo Instrument, including the Company, alleging that these entities
breached the terms of certain agreements entered into with such employees
at the time that a predecessor of Epsilon acquired the assets and
business of a company formerly owned by such employees. The former
employees are claiming actual damages of between $27 million and $46
million, punitive damages of twice the actual damages, attorneys' fees
and expenses, and pre-judgment and post-judgment interest, resulting from
the alleged failure of Thermo Instrument and such affiliates, to, among
other things, use their best efforts to develop and promote certain
products acquired at that time. The arbitration proceeding, which is
binding and nonappealable, is expected to conclude in the second quarter
of 1998.
Thermo Coleman has been named as a defendant in a lawsuit initiated
by certain former employees. This suit was filed under the "qui tam"
provisions of the Federal False Claims Act (the Act), which permit an
individual to bring suit in the name of the United States and, if the
United States obtains a judgment against the defendant, to share in any
recovery. The suit alleges, among other things, that Thermo Coleman
violated the Act as a result of its performance of certain
support-service functions under a subcontract from a third party, which,
in turn, contracted directly with the U.S. government. The complaint
seeks an order requiring Thermo Coleman to cease and desist from such
allegedly improper practices, the award of treble damages in an
unspecified amount, plus other penalties. The amount of billings under
the contract activities in question were approximately $7.6 million.
Under the law, the U.S. government will investigate the allegations set
forth in the complaint, and then will determine whether it wishes to
intervene and take over the lawsuit. The Company has been advised that
the U.S. government has not completed its investigation and that no
decision has been made on whether the U.S. government will intervene in
the lawsuit.
ThermoQuest's Finnigan subsidiary has filed complaints against
Bruker-Franzen Analytik GmbH and its U.S. affiliate, and Hewlett-Packard
Company, for alleged violation of two U.S. patents owned by Finnigan
pertaining to methods used in ion-trap mass spectrometers. One of
Finnigan's complaints was filed in United States District Court and the
other was filed with the United States International Trade Commission
(ITC). In February 1998, an administrative law judge at the ITC issued an
initial determination to the effect that, although one of Finnigan's
patents was infringed, the patents were invalid for purposes of this
case. The ITC's jurisdiction on this matter is limited to the issue of
whether or not the defendants' products that use the patented methods can
be imported into the U.S. The judge's initial determination will be
considered by the full commission during the second quarter of 1998.
Bruker has presented counterclaims alleging that the Finnigan patents are
invalid and unenforceable and are not infringed by the mass spectrometers
co-marketed by Bruker. They also allege that Finnigan has violated
27PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
6. Commitments and Contingencies (continued)
antitrust laws by attempting to maintain a monopoly position and restrain
trade through enforcement of allegedly fraudulently obtained patents.
Bruker has asked for judgment consistent with its counterclaims, and for
three times the antitrust damages (including attorney's fees) it has
sustained.
The Company intends to vigorously defend these matters. In the
opinion of management, the ultimate liability for all such matters will
not be material to the Company's financial position, but an unfavorable
outcome in one or more of the matters described above could materially
affect the results of operations or cash flows for a particular quarter
or annual period.
7. Common Stock
At January 3, 1998, the Company had reserved 31,354,154 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 certain subsidiaries'
convertible obligations into common stock of the Company. Certain 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 the Company's Board of Directors (Note 5). 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 $.006 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
28PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
7. Common Stock (continued)
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.
8. Income Taxes
The components of income before income taxes and minority interest
are as follows:
(In thousands) 1997 1996 1995
------------------------------------------------------------------------
Domestic $414,146 $313,069 $256,738
Foreign 74,321 61,482 42,070
-------- -------- --------
$488,467 $374,551 $298,808
======== ======== ========
The components of the provision for income taxes are as follows:
(In thousands) 1997 1996 1995
------------------------------------------------------------------------
Currently payable:
Federal $105,889 $ 85,024 $ 72,932
Foreign 30,928 31,851 17,751
State 18,380 18,445 19,892
-------- -------- --------
155,197 135,320 110,575
-------- -------- --------
Net deferred (prepaid):
Federal 12,018 (19,994) (9,717)
Foreign 3,966 (2,275) 232
State 3,532 (2,206) (2,379)
-------- -------- --------
19,516 (24,475) (11,864)
-------- -------- --------
$174,713 $110,845 $ 98,711
======== ======== ========
29PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
8. Income Taxes (continued)
The Company and its majority-owned subsidiaries receive a tax
deduction upon exercise of nonqualified stock options by employees for
the difference between the exercise price and the market price of the
underlying common stock on the date of exercise. The provision for income
taxes that is currently payable does not reflect $15.4 million, $24.5
million, and $20.5 million of such benefits of the Company and its
majority-owned subsidiaries that have been allocated to capital in excess
of par value, directly or through the effect of majority-owned
subsidiaries' equity transactions, in 1997, 1996, and 1995, respectively.
In addition, the provision for income taxes that is currently payable
does not reflect $1.9 million, $6.5 million, and $3.0 million of tax
benefits used to reduce cost in excess of net assets of acquired
companies in 1997, 1996, and 1995, respectively. The deferred provision
for income taxes does not reflect $5.9 million of tax benefits used to
reduce cost in excess of net assets of acquired companies in 1995.
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) 1997 1996 1995
-----------------------------------------------------------------------
Provision for income taxes at
statutory rate $170,963 $131,093 $104,583
Increases (decreases) resulting from:
Gain on issuance of stock by
subsidiaries (28,019) (44,310) (28,285)
State income taxes, net of federal
tax 14,243 10,555 11,314
Foreign tax rate and tax law
differential 8,937 8,528 3,785
Amortization and write-off of cost
in excess of net assets of acquired
companies 9,918 8,643 7,484
Other, net (1,329) (3,664) (170)
-------- -------- --------
$174,713 $110,845 $ 98,711
======== ======== ========
30PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
8. Income Taxes (continued)
Prepaid income taxes and deferred income taxes in the accompanying
balance sheet consist of the following:
(In thousands) 1997 1996
------------------------------------------------------------
Prepaid income taxes:
Reserves and accruals $ 65,086 $ 84,253
Net operating loss and credit
carryforwards 64,615 76,866
Inventory basis difference 29,829 22,906
Accrued compensation 17,775 14,435
Intangible assets 2,683 5,253
Other, net 5,504 1,192
-------- --------
185,492 204,905
Less: Valuation allowance 53,992 75,103
-------- --------
$131,500 $129,802
======== ========
Deferred income taxes:
Depreciation $ 92,672 $ 68,587
Intangible assets 7,906 8,254
Other 3,542 4,885
-------- --------
$104,120 $ 81,726
======== ========
The valuation allowance relates to the uncertainty surrounding the
realization of tax loss carryforwards and the realization of tax benefits
attributable to accrued acquisition expenses and certain other tax assets
of the Company and certain subsidiaries. Of the year-end 1997 valuation
allowance, $49 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. During 1997, the valuation allowance decreased
primarily due to the decrease in tax loss carryforwards.
At year-end 1997, the Company had foreign and federal net operating
loss carryforwards of $133 million and $37 million, respectively. Use of
the carryforwards is limited based on the future income of certain
subsidiaries. The federal net operating loss carryforwards expire in the
years 1998 through 2012. Of the foreign net operating loss carryforwards,
$10 million expire in the years 1998 through 2004, and the remainder do
not expire.
The Company has not recognized a deferred tax liability for the
difference between the book basis and tax basis of its investment in 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.
31PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
8. Income Taxes (continued)
A provision has not been made for U.S. or additional foreign taxes on
$216 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.
9. Transactions in Stock of Subsidiaries
Gain on issuance of stock by subsidiaries in the accompanying
statement of income results primarily from the following transactions:
1997
Initial public offering of 2,671,292 shares of Thermedics Detection
common stock at $11.50 per share for net proceeds of $28.1 million
resulted in a gain of $17.1 million that was recorded by Thermedics.
Sale of 1,768,500 shares of ThermoQuest common stock at $15.00 per
share for net proceeds of $24.8 million and conversion of $15.7 million
of ThermoQuest 5% subordinated convertible debentures, convertible at
$16.50 per share into 949,027 shares of ThermoQuest common stock,
resulted in gains of $12.0 million and $7.8 million, respectively, that
were recorded by Thermo Instrument.
Private placements of 1,212,260 shares and 94,000 shares of Thermo
Information Solutions common stock at $9.00 and $10.00 per share,
respectively, for aggregate net proceeds of $11.0 million resulted in a
gain of $6.6 million.
Initial public offering of 2,300,000 shares of Metrika Systems common
stock at $15.50 per share for net proceeds of $32.5 million resulted in a
gain of $13.2 million that was recorded by Thermo Instrument.
Private placement of 2,832,500 shares of Trex Communications common
stock at $4.00 per share for net proceeds of $10.6 million resulted in a
gain of $5.9 million that was recorded by ThermoTrex.
Private placement of 1,639,670 shares of ONIX Systems common stock at
$14.25 per share for net proceeds of $22.0 million resulted in a gain of
$7.9 million that was recorded by Thermo Instrument.
Private placement of 1,160,900 shares of Thermo Trilogy common stock
at $8.25 per share for net proceeds of $8.9 million resulted in a gain of
$4.1 million that was recorded by Thermo Ecotek.
Initial public offering of 1,139,491 shares of Thermo Vision common
stock at $7.50 per share for net proceeds of $7.0 million resulted in a
gain of $2.3 million that was recorded by Thermo Instrument.
Conversion of $13.1 million and $3.2 million of Thermo Optek 5%
subordinated convertible debentures convertible at $14.85 per share and
$13.94 per share, respectively, into 1,111,316 shares of Thermo Optek
common stock resulted in a gain of $3.2 million that was recorded by
Thermo Instrument.
1996
Initial public offering of 3,450,000 shares of ThermoQuest common
stock at $15.00 per share for net proceeds of $47.8 million resulted in a
gain of $27.2 million that was recorded by Thermo Instrument.
32PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
9. Transactions in Stock of Subsidiaries (continued)
Private placements of 300,000 and 383,500 shares of Thermedics
Detection common stock at $10.00 and $10.75 per share, respectively, for
aggregate net proceeds of $7.0 million resulted in a gain of $5.7 million
that was recorded by Thermedics.
Initial public offering of 2,875,000 shares of Thermo Sentron common
stock at $16.00 per share for net proceeds of $42.3 million resulted in a
gain of $18.0 million that was recorded by Thermedics.
Initial public offering of 3,450,000 shares of Thermo Optek common
stock at $13.50 per share for net proceeds of $42.9 million resulted in a
gain of $25.1 million that was recorded by Thermo Instrument.
Initial public offering of 2,875,000 shares of Trex Medical common
stock and sale of 871,832 shares of Trex Medical common stock in a
concurrent rights offering at $14.00 per share and private placements of
100,000 and 300,000 shares of Trex Medical common stock at $10.75 and
$14.50 per share, respectively, for aggregate net proceeds of $54.3
million resulted in an aggregate gain of $28.3 million that was recorded
by ThermoTrex.
Initial public offering of 1,670,000 shares of Thermo BioAnalysis
common stock at $14.00 per share for net proceeds of $20.8 million
resulted in a gain of $9.8 million that was recorded by Thermo
Instrument.
Private placement of 967,828 shares of Metrika Systems common stock
at $15.00 per share for net proceeds of $13.5 million resulted in a gain
of $9.6 million that was recorded by Thermo Instrument.
1995
Initial public offering of 3,500,334 shares of Thermo Ecotek common
stock at $8.50 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 of ThermoLase common stock 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 of
ThermoSpectra common stock at $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 $7.83 per share into 1,163,098
shares of Thermo Voltek common stock resulted in a gain of $3.5 million
that was recorded by Thermedics.
33PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
9. Transactions in Stock of Subsidiaries (continued)
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.
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.
34PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
9. Transactions in Stock of Subsidiaries (continued)
The Company's ownership percentages at year end were as follows:
1997 1996 1995
---- ---- ----
Thermedics 58% 55% 51%
Thermo Cardiosystems (a) 59% 54% 55%
Thermo Voltek (a) 68% 51% 59%
Thermo Sentron (a) 78% 73% 100%
Thermedics Detection (b) 76% 94% 100%
Thermo Instrument 82% 82% 86%
ThermoSpectra (c) 83% 73% 72%
ThermoQuest (c) 88% 93% 100%
Thermo Optek (c) 92% 93% 100%
Thermo BioAnalysis (c) 78% 67% 80%
Metrika Systems (d) 60% 84% 100%
Thermo Vision (c) 80% 100% 100%
ONIX Systems (d) 87% 100% 100%
Thermo TerraTech 82% 81% 81%
Thermo Remediation (e) 70% 68% 69%
Thermo EuroTech (f) 56% 53% 62%
The Randers Group (e) 96% 100% 100%
Thermo Power 69% 64% 63%
ThermoLyte (g) 78% 78% 78%
ThermoTrex 55% 51% 51%
ThermoLase (h) 70% 64% 65%
Trex Medical (i) 79% 79% 91%
Trex Communications (i) 78% 100% 100%
Thermo Fibertek 90% 84% 81%
Thermo Fibergen (j) 71% 68% 100%
Thermo Ecotek 88% 82% 83%
Thermo Trilogy (k) 87% 100% 100%
Thermo Information Solutions 79% 100% 100%
____________________
(a) Reflects combined ownership by Thermedics and Thermo Electron.
(b) Reflects ownership by Thermedics.
(c) Reflects combined ownership by Thermo Instrument and Thermo Electron.
(d) Reflects ownership by Thermo Instrument.
(e) Reflects combined ownership by Thermo TerraTech and Thermo Electron.
(f) Reflects ownership by Thermo TerraTech.
(g) Reflects ownership by Thermo Power.
(h) Reflects combined ownership by ThermoTrex and Thermo Electron.
(i) Reflects ownership by ThermoTrex.
(j) Reflects ownership by Thermo Fibertek.
(k) Reflects ownership by Thermo Ecotek.
35PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
10. Other Income (Expense), Net
The components of other income (expense), net, in the accompanying
statement of income are as follows:
(In thousands) 1997 1996 1995
------------------------------------------------------------------------
Interest income $ 90,559 $ 94,109 $ 62,146
Interest expense (93,125) (96,695) (77,861)
Equity in losses of unconsolidated
subsidiaries (1,018) (28) (203)
Gain on sale of investments, net 5,077 9,840 9,305
Other income (expense), net 1,133 (5,740) (612)
-------- -------- --------
$ 2,626 $ 1,486 $ (7,225)
======== ======== ========
11. Restructuring and Other Nonrecurring Costs, Net
Restructuring and other nonrecurring costs, net, in 1997 includes
$7.8 million to write down certain capital equipment and intangible
assets, including cost in excess of net assets of acquired companies, in
response to a severe downturn in Thermo Remediation's soil-remediation
business that resulted in closure of two soil-remediation sites during
1997 and reduced cash flows at certain other sites, such that analysis
indicated that the investment in these assets would not be recovered.
During 1997, the Company settled two legal cases in which it was a
defendant concerning development of a proposed waste-to-energy facility
and development and construction of an alternative-energy facility. These
matters were settled for amounts less than the damages that had been
sought by the plaintiffs and less than the amounts that had been reserved
by the Company. As a result, the Company reversed $9.7 million of
reserves previously established for these matters, which is included as a
reduction of restructuring and other nonrecurring costs in 1997. In
addition, the 1997 amount includes $3.4 million of restructuring and
other nonrecurring costs, primarily severance, at two majority-owned
subsidiaries and at the Company's wholly owned businesses and $1.4
million at ThermoTrex for the write-off of acquired technology relating
to an acquisition. This amount represents the portion of the purchase
price allocated to technology in development at the acquired business.
The 1997 amount also includes a gain of $2.2 million from the sale of a
business by ThermoSpectra and $0.6 million of other nonrecurring costs.
The 1996 amount includes a write-off of $12.7 million of cost in
excess of net assets of acquired company and certain other intangible
assets at Thermedics' Corpak subsidiary, as a result of Thermedics no
longer intending to further invest in this business and reduced cash
flows, such that analysis indicated that the investment in these assets
would not be recovered. The 1996 amount also includes $11.4 million of
costs recorded by SensorMedics primarily as a result of its merger with
the Company, including employee compensation that became payable as a
result of the merger with the Company, certain investment banking fees
and other related transaction costs, the settlement of a pre-acquisition
legal dispute, and severance costs for terminated employees. In addition,
36PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
11. Restructuring and Other Nonrecurring Costs, Net (continued)
$4.4 million was recorded by the Company's wholly owned Peter Brotherhood
Ltd. subsidiary primarily for the write-off of a nontrade receivable and
severance costs, and $3.5 million and $4.9 million were recorded by Thermo
Instrument and Thermo Cardiosystems, respectively, for the write-off of
acquired technology relating to an acquisition at each subsidiary. These
amounts represent the portion of the purchase price allocated to technology
in development at the acquired businesses.
The 1995 amount includes $11.5 million to write off the Company's net
investment in a waste-recycling facility in San Diego County, California,
that was subsequently sold in 1996. The 1995 amount also includes $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 and reduced cash flows, such that analysis indicated that the
investment in these assets would not be recovered. In addition, $2.5
million was recorded to write off the cost in excess of net assets of
acquired companies at the Company's wholly owned Napco Inc. subsidiary and
$2.9 million was recorded for other nonrecurring costs at other business
units.
37PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
12. Supplemental Cash Flow Information
Supplemental cash flow information is as follows:
(In thousands) 1997 1996 1995
--------------------------------------------------------------------------
Cash Paid For:
Interest $ 100,165 $ 86,449 $ 72,714
Income taxes $ 151,685 $ 91,536 $ 51,184
Noncash Activities:
Conversions of Company and
subsidiary convertible
obligations $ 246,088 $ 390,494 $ 212,979
Exchange of subsidiary common
stock for common stock of
subsidiary subject to
redemption $ 40,500 $ - $ -
Sale of waste-recycling
facility $ - $ 112,553 $ -
Assumption by buyer of waste-
recycling facility debt $ - $ 109,862 $ -
Acquisition of asset under
capital lease $ - $ - $ 47,101
Fair value of assets of
acquired companies $1,210,319 $ 673,662 $ 521,558
Cash paid for acquired
companies (924,336) (383,685) (339,075)
Issuance of Company and
subsidiary common stock
and stock options for
acquired companies (4,543) (2,351) (18,990)
Issuance of long-term
obligations for acquired
companies - (26,560) (22,300)
Amount payable for acquired
company (5,111) - -
---------- ----------- -----------
Liabilities assumed of
acquired companies $ 276,329 $ 261,066 $ 141,193
========== =========== ===========
38PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
13. Fair Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash
equivalents, available-for-sale investments, accounts receivable, notes
payable and current maturities of long-term obligations, accounts
payable, long-term obligations, forward foreign 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 foreign 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.
The carrying amount and fair value of the Company's long-term
obligations and off-balance-sheet financial instruments are as follows:
1997 1996
---------------------- -----------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
-----------------------------------------------------------------------
Long-term obligations:
Convertible
obligations $1,660,839 $1,856,570 $1,379,467 $1,616,239
Other 82,068 83,898 170,875 171,722
---------- ---------- ---------- ----------
$1,742,907 $1,940,468 $1,550,342 $1,787,961
========== ========== ========== ==========
Off-balance-sheet
financial instruments:
Forward foreign
exchange contracts
receivable $ (1,731) $ (1,370)
Interest rate
swaps payable $ 1,324 $ 1,643
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 exceeding the conversion price of
the convertible obligations.
The Company had forward foreign exchange contracts of $46.6 million
and $19.7 million outstanding at year-end 1997 and 1996, respectively.
Additionally, the notional amount of the Company's interest rate swap
agreements was $61.3 million and $95.7 million at year-end 1997 and 1996,
respectively (Note 5). The fair value of such contracts and swap
agreements 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 foreign exchange contracts, and market
interest rates and the creditworthiness of the counterparties on interest
rate swap agreements.
39PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
14. Business Segment and Geographical Information
The Company's business segments include the following:
Instruments: biomedical, analytical, monitoring, and
process control instruments
Alternative-energy Systems: clean power generation,
biopesticides, intelligent traffic-control systems,
industrial-refrigeration systems, natural gas engines,
cooling and cogeneration units, turbines and compressors
Paper Recycling: paper recycling and papermaking
equipment, electroplating equipment
Biomedical Products: mammography and minimally invasive
breast-biopsy systems, general-purpose X-ray systems,
respiratory-care equipment, left ventricular-assist
systems, hematology products, neurophysiology monitoring
instruments, biomedical materials, laser-based
hair-removal systems, personal-care products
Industrial Outsourcing: environmental-liability
management, environmental cleanup, laboratory analysis,
metallurgical heat treating and fabrication
Advanced Technologies: process-detection systems, security
instruments, precision weighing and inspection equipment,
power-conversion instruments, programmable power
amplifiers, electronic test equipment, development of
avionics products, medical imaging equipment, and advanced
materials
40PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
14. Business Segment and Geographical Information (continued)
(In thousands) 1997 1996 1995
---------------------------------------------------------------------------
Business Segment Information
Revenues:
Instruments $1,592,314 $1,209,362 $ 782,662
Alternative-energy Systems 384,923 339,813 325,912
Paper Recycling 278,911 286,312 317,951
Biomedical Products 590,234 455,890 316,622
Industrial Outsourcing 305,508 273,894 210,503
Advanced Technologies 415,016 375,459 323,567
Intersegment Sales Elimination (a) (8,586) (8,172) (6,926)
---------- ---------- ----------
$3,558,320 $2,932,558 $2,270,291
========== ========== ==========
Income Before Income Taxes and
Minority Interest:
Instruments $ 235,674 $ 138,869 $ 113,651
Alternative-energy Systems 68,501 38,112 32,952
Paper Recycling 31,101 36,115 29,071
Biomedical Products 52,634 16,444 27,167
Industrial Outsourcing 13,896 17,709 21,215
Advanced Technologies 35,197 28,040 23,842
---------- ---------- ----------
Total Segment Income (b) 437,003 275,289 247,898
Corporate (c) 51,464 99,262 50,910
---------- ---------- ----------
$ 488,467 $ 374,551 $ 298,808
========== ========== ==========
Identifiable Assets:
Instruments $2,351,153 $1,924,400 $1,372,813
Alternative-energy Systems 873,407 617,154 695,849
Paper Recycling 431,860 296,582 238,537
Biomedical Products 992,719 691,836 596,467
Industrial Outsourcing 389,980 396,901 335,726
Advanced Technologies 466,004 389,586 301,059
Corporate (d) 290,746 824,785 245,888
---------- ---------- ----------
$5,795,869 $5,141,244 $3,786,339
========== ========== ==========
41PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
14. Business Segment and Geographical Information (continued)
(In thousands) 1997 1996 1995
--------------------------------------------------------------------------
Depreciation and Amortization:
Instruments $ 54,993 $ 44,233 $ 25,257
Alternative-energy Systems 25,109 24,253 25,186
Paper Recycling 7,438 5,333 5,228
Biomedical Products 20,659 15,148 9,626
Industrial Outsourcing 14,336 12,918 11,197
Advanced Technologies 11,704 11,952 8,104
Corporate 1,499 1,330 1,271
---------- ---------- ----------
$ 135,738 $ 115,167 $ 85,869
========== ========== ==========
Capital Expenditures:
Instruments $ 29,198 $ 19,134 $ 10,313
Alternative-energy Systems (e) 26,588 42,537 14,024
Paper Recycling 4,097 4,265 3,686
Biomedical Products 24,898 29,731 9,768
Industrial Outsourcing 17,936 18,710 19,499
Advanced Technologies 7,550 9,412 6,266
Corporate 1,338 752 460
---------- ---------- ----------
$ 111,605 $ 124,541 $ 64,016
========== ========== ==========
Geographical Information
Revenues:
United States $2,723,254 $2,171,879 $1,790,058
United Kingdom 417,072 312,522 156,863
Other Europe 558,828 536,496 353,595
Other 154,390 146,998 117,354
Transfers among geographical
areas (a) (295,224) (235,337) (147,579)
---------- ---------- ----------
$3,558,320 $2,932,558 $2,270,291
========== ========== ==========
42PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
14. Business Segment and Geographical Information (continued)
(In thousands) 1997 1996 1995
--------------------------------------------------------------------------
Income Before Income Taxes and
Minority Interest:
United States $ 339,871 $ 212,341 $ 201,815
United Kingdom 35,265 11,359 5,609
Other Europe 47,281 32,813 26,835
Other 14,586 18,776 13,639
---------- ---------- ----------
Total Segment Income (b) 437,003 275,289 247,898
Corporate (c) 51,464 99,262 50,910
---------- ---------- ----------
$ 488,467 $ 374,551 $ 298,808
========== ========== ==========
Identifiable Assets:
United States $4,165,197 $3,372,448 $2,939,286
United Kingdom 704,314 340,005 171,438
Other Europe 551,500 516,558 340,289
Other 104,087 87,449 89,439
Corporate (d) 270,771 824,784 245,887
---------- ---------- ----------
$5,795,869 $5,141,244 $3,786,339
========== ========== ==========
Export Sales Included in United
States Revenues Above (f) $ 593,850 $ 436,972 $ 340,736
========== ========== ==========
(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 $36.9 million in 1996 for the construction of a coal-
beneficiation plant in Gillette, Wyoming.
(f) In general, export revenues are denominated in U.S. dollars.
43PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
15. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1997 1996 1995
------------------------------------------------------------------------
Basic
Net income $239,328 $190,816 $139,582
-------- -------- --------
Weighted average shares 152,489 141,525 126,626
-------- -------- --------
Basic earnings per share $ 1.57 $ 1.35 $ 1.10
======== ======== ========
Diluted
Net income $239,328 $190,816 $139,582
Effect of:
Convertible debentures 18,814 23,523 15,561
Majority-owned subsidiaries'
dilutive securities (9,925) (8,084) (5,177)
-------- -------- --------
Income available to common
shareholders, as adjusted $248,217 $206,255 $149,966
-------- -------- --------
Weighted average shares 152,489 141,525 126,626
Effect of:
Convertible debentures 21,596 31,735 30,023
Stock options 1,997 2,345 1,913
-------- -------- --------
Weighted average shares, as adjusted 176,082 175,605 158,562
-------- -------- --------
Diluted earnings per share $ 1.41 $ 1.17 $ .95
======== ======== ========
The computation of diluted earnings per share for each period
excludes the effect of assuming the exercise of certain outstanding stock
options because the effect would be antidilutive. As of January 3, 1998,
there were 1,058,100 of such options outstanding, with exercise prices
ranging from $39.43 to $43.46 per share.
44PAGE
Thermo Electron Corporation 1997 Financial Statements
Notes to Consolidated Financial Statements
16. Unaudited Quarterly Information
(In thousands except per share amounts)
1997(a) First Second Third Fourth
------------------------------------------------------------------------
Revenues $ 763,505 $ 875,016 $ 909,850 $1,009,949
Gross profit 296,365 358,538 374,041 412,368
Net income 52,058 56,158 61,859 69,253
Earnings per share:
Basic .35 .37 .41 .44
Diluted .31 .34 .36 .40
1996(b) First Second Third Fourth
------------------------------------------------------------------------
Revenues $ 652,385 $ 745,759 $ 739,981 $ 794,433
Gross profit 244,381 281,697 296,627 307,284
Net income 41,023 44,919 51,242 53,632
Earnings per share:
Basic .31 .32 .36 .36
Diluted .26 .28 .31 .32
(a) Results include nontaxable gains of $33.7 million, $15.2 million,
$18.6 million, and $12.6 million in the first, second, third, and
fourth quarters, respectively, from the issuance of stock by
subsidiaries.
(b)Results include nontaxable gains of $28.9 million, $43.5 million,
$38.5 million, and $15.7 million in the first, second, third, and
fourth quarters, respectively, from the issuance of stock by
subsidiaries.
45PAGE
Thermo Electron Corporation 1997 Financial Statements
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
January 3, 1998, and December 28, 1996, and the related consolidated
statements of income, shareholders' investment, and cash flows for each
of the three years in the period ended January 3, 1998. 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 January 3, 1998, and
December 28, 1996, and the results of their operations and their cash
flows for each of the three years in the period ended January 3, 1998, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 18, 1998
46PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations.
For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects," "seeks," "estimates," and similar expressions are
intended to identify forward-looking statements. There are a number of
important factors that could cause the results of the Company to differ
materially from those indicated by such forward-looking statements,
including those detailed immediately after this Management's Discussion
and Analysis of Financial Condition and Results of Operations under the
heading "Forward-looking Statements."
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 six broad markets: instruments,
alternative-energy systems, paper recycling, biomedical, industrial
outsourcing, and advanced technologies.
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 several 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 and their profitability improves.
The Company seeks to minimize its dependence on any specific product
or market by expanding 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 will be largely affected by the strength of worldwide
economies and the continued adoption and diligent enforcement of health,
safety, and environmental regulations and standards, 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 programs, as well as capital to support the
subsidiaries' growth. As a result of the sale of stock by subsidiaries,
47PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview (continued)
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 certain periods. The size and timing of these transactions are
dependent on market and other conditions that are beyond the Company's
control. Accordingly, there can be no assurance that the Company will be
able to generate gains from such transactions in the future.
Further, 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" (the Proposed Statement). The Proposed Statement would
establish new rules for how consolidated financial statements should be
prepared. If the Proposed Statement is adopted, there would be
significant changes in the way the Company records certain transactions
of its controlled subsidiaries. Among those changes, any sale of the
stock of a subsidiary that does not result in a loss of control would be
accounted for as a transaction in equity of the consolidated entity with
no gain or loss being recorded. The exposure draft addresses the
consolidation issues in two parts: consolidation procedures, which
includes proposed rule changes affecting the Company's ability to
recognize gains on issuances of subsidiary stock, and consolidation
policy, which does not address accounting for such gains. During 1997,
the FASB decided to focus its efforts on the consolidation policy part of
the exposure draft and to consider resuming discussion on consolidation
procedures after completion of the efforts on consolidation policy. The
timing and content of any final statement are uncertain.
Results of Operations
1997 Compared With 1996
Sales in 1997 were $3,558.3 million, an increase of $625.8 million,
or 21%, over 1996. Segment income, excluding restructuring and other
nonrecurring costs, net, of $1.3 million in 1997 and $37.6 million in
1996, described below, increased 40% to $438.3 million in 1997 from
$312.9 million in 1996. (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, net, increased 65% to $405.8
million in 1997 from $246.5 million in 1996.
Instruments
-----------
Sales from the Instruments segment were $1,592.3 million in 1997, an
increase of $383.0 million, or 32%, over 1996. Sales increased primarily
due to acquisitions made by Thermo Instrument, which added $407 million
of sales in 1997. The unfavorable effects of currency translation due to
the strengthening of the U.S. dollar relative to foreign currencies in
48PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1997 Compared With 1996 (continued)
countries in which Thermo Instrument operates decreased revenues by $46.8
million in 1997. In addition, revenues increased in 1997 due to higher
sales at ThermoQuest's existing mass spectrometry business, partly as a
result of the continued success of a new product introduced in the first
quarter of 1996, and due to increased sales from Metrika Systems,
primarily as a result of increased sales in international markets at its
on-line raw-materials analyzer business. Revenues also increased at ONIX
Systems, primarily due to increased sales of industry-specific
instruments to the production segment of the oil and gas industry.
Revenues from Thermo Optek's existing businesses decreased slightly due
to the inclusion in 1996 of several large nonrecurring sales to the
Chinese and Japanese governments, a decrease in demand for elemental
products in Japan, and the elimination of certain unprofitable acquired
product lines, offset substantially by greater demand at one of its
business units.
Segment income margin (segment income margin is segment income as a
percentage of sales), excluding nonrecurring items, net, of $1.3 million
of income in 1997 and $3.5 million of costs in 1996, improved to 14.7% in
1997 from 11.8% in 1996. The improvement was primarily due to operating
margin improvement at certain of the Fisons businesses acquired in 1996
and increased sales of ThermoQuest's higher-margin mass spectrometry
products. This increase was offset in part by the inclusion of
lower-margin revenues at certain acquired businesses, including Life
Sciences, which recorded an adjustment to expense of $3.6 million
relating to the sale of inventories revalued at the date of acquisition
and, to a lesser extent, a decrease in segment income margin at
ThermoSpectra, primarily as a result of a one-time inventory write-off
and a change in sales mix at one of its business units. The 1996 period
included a charge of $2.0 million relating to the sale of inventories
revalued at the date of the acquisition of the Fisons businesses.
Nonrecurring income of $1.3 million in 1997 represents a $2.2 million
gain on the sale of a business by ThermoSpectra, offset in part by $0.9
million of severance costs for employees terminated during 1997 at one of
ThermoSpectra's business units. During 1996, the Company recorded
nonrecurring costs of $3.5 million, which represented the write-off of
acquired technology relating to the acquisition of the Fisons businesses
(Note 11).
Alternative-energy Systems
--------------------------
Sales from the Alternative-energy Systems segment were $384.9 million
in 1997, compared with $339.8 million in 1996. Within this segment,
revenues from Thermo Ecotek increased to $189.5 million in 1997 from
$154.3 million in 1996. Revenues from Thermo Ecotek's Thermo Trilogy
biopesticide subsidiary increased by $18.7 million to $21.4 million,
primarily due to the inclusion of revenues from two acquired businesses.
Thermo Ecotek's revenues in 1997 include $8.2 million for a contractual
settlement with a utility, pursuant to which Thermo Ecotek surrendered
its rights to a power sales agreement relating to a cogeneration facility
it had planned to develop and construct on Staten Island, New York. The
settlement, reached in 1993, called for Thermo Ecotek to refund $8.2
49PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1997 Compared With 1996 (continued)
million to the utility should Thermo Ecotek construct and commence
operations of a plant on Staten Island prior to 2000. Thermo Ecotek had
deferred recognition of the refundable portion of the settlement pending
a decision concerning development of the plant. During 1997, Thermo
Ecotek determined that, due to economic conditions in the domestic energy
market, it would not proceed with development of a facility on Staten
Island. In addition, higher contractual energy rates at all of Thermo
Ecotek's facilities, except the Hemphill plant in New Hampshire,
contributed to higher revenues in 1997. Pursuant to Thermo Ecotek's
utility contracts for its four plants in California, there will be no
further contractual energy rate increases beginning in 1998. Revenues in
1996 from the Company's wholly owned waste-recycling facility in southern
California, which was sold in July 1996, were $9.2 million. Sales at
Peter Brotherhood declined to $39.6 million in 1997 from $54.4 million in
1996, primarily due to the disposal of certain business units, which
resulted in a $14.2 million decrease in revenues. The business units were
sold for a nominal loss. Sales from Thermo Power increased to $155.8
million in 1997 from $122.1 million in 1996, primarily due to $38.8
million of sales from Peek plc, acquired in November 1997, as well as
higher engine sales due to a $3.6 million nonrecurring order from one
customer, offset in part by lower demand for Thermo Power's remaining
product lines.
Segment income, excluding nonrecurring items, net, of $8.3 million of
income in 1997 and $4.4 million of costs in 1996, was $60.2 million in
1997, compared with $42.5 million in 1996. Thermo Ecotek's segment income
was $50.4 million in 1997, compared with $39.3 million in 1996. The
increase primarily resulted from $8.2 million of segment income from the
contractual settlement with a utility concerning the cancellation of a
power sales agreement and, to a lesser extent, higher contractual energy
rates. These increases were offset in part by a decrease in Thermo
Ecotek's segment income of $4.6 million in 1997 as a result of the
funding of certain reserves required in connection with a nonrecourse
lease agreement for its Woodland, California plant. The Woodland plant's
results were approximately breakeven in 1997 and are expected to remain
so for the foreseeable future. Segment income in 1996 from the Company's
waste-recycling facility, which was sold in July 1996, was $4.6 million.
Results from this facility, net of related interest expense (not included
in segment income), were approximately breakeven in 1996. During 1997,
the Company settled two legal cases in which it was a defendant,
concerning development of a proposed waste-to-energy facility and
development and construction of an alternative-energy facility. These
matters were settled for amounts less than the damages that had been
sought by the plaintiffs and less than the amounts that had been reserved
by the Company. As a result, in 1997, the Company reversed $9.7 million
of reserves previously established for these matters, which is included
in restructuring and other nonrecurring costs, net (Note 11). Segment
income at Thermo Power improved to $7.5 million from $1.1 million in
1996, primarily due to contributions from Peek and, to a lesser extent,
improved segment income at its engines and industrial refrigeration
businesses, due to increased engine revenues, lower warranty costs in
50PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1997 Compared With 1996 (continued)
both businesses, as well as lower overhead as a result of consolidating
two engine manufacturing facilities. Excluding restructuring and other
nonrecurring costs of $1.4 million in 1997 and $4.4 million in 1996,
Peter Brotherhood was profitable in 1997, compared with a segment loss of
$2.5 million in 1996. The restructuring and other nonrecurring costs in
1997 related primarily to severance for employees terminated, and in 1996
related primarily to the write-off of a nontrade receivable and severance
costs.
Two of Thermo Ecotek's plants are located in New Hampshire and sell
power to Public Service Company of New Hampshire (PSNH). In January 1997,
PSNH's parent company, Northeast Utilities, disclosed in a filing with
the Securities and Exchange Commission that if a proposed deregulation
plan for the New Hampshire electric utility industry were adopted, PSNH
could default on certain financial obligations and seek bankruptcy
protection. In February 1997, the New Hampshire Public Utilities
Commission (NHPUC) voted to adopt a deregulation plan, and in March 1997,
PSNH filed suit to block the plan. In March 1997, the federal district
court issued a temporary restraining order that prohibits the NHPUC from
implementing the deregulation plan as it affects PSNH, pending a
determination by the court on whether PSNH's claim could be heard by the
court. In April 1997, the court ruled that it could now hear the case and
ordered that the restraining order would continue indefinitely pending
the outcome of the suit. In addition, in March 1997, Thermo Ecotek, along
with a group of other biomass power producers, filed a motion with the
NHPUC seeking clarification of the NHPUC's proposed deregulation plan
regarding several issues, including purchase requirements and payment of
current rate order prices with respect to Thermo Ecotek's energy output.
An unfavorable resolution of this matter, including the bankruptcy of
PSNH, could have a material adverse effect on Thermo Ecotek's results of
operations and financial position.
Thermo Ecotek has continued to address issues concerning operations
at its Gillette, Wyoming, coal-beneficiation facility. Thermo Ecotek has
conducted extensive testing and operated the facility, producing
commercially salable product. For tax purposes, the facility must be
"placed in service" by June 30, 1998, to qualify for certain tax credits
on its output. Although the facility has operated and produced
commercially salable product, Thermo Ecotek has encountered certain
difficulties in achieving optimal and sustained operation. Thermo Ecotek
has addressed and resolved certain problems previously encountered,
including a fire at the facility and certain construction problems
relating to the flow of materials within the facility and the design and
operation of certain pressure-release equipment. Currently, Thermo Ecotek
is experiencing certain operational problems relating to tar residue
build-up within the system during production. Thermo Ecotek is actively
exploring solutions to this problem. Because the technology being
developed at the facility is new and untested, no assurance can be given
that other difficulties will not arise or that Thermo Ecotek will be able
to correct these problems and achieve optimal and sustained performance.
51PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1997 Compared With 1996 (continued)
Paper Recycling
---------------
Sales in the Paper Recycling segment were $278.9 million in 1997,
compared with $286.3 million in 1996. A wholly owned subsidiary of the
Company recorded $58.0 million of revenues from a contract to design and
construct an office wastepaper de-inking facility in 1996. This contract
was substantially completed in the second quarter of 1996. Sales from
Thermo Fibertek increased 25% to $239.6 million from $192.2 million in
1996, primarily due to revenues of $52.7 million from acquired
businesses, principally Thermo Black Clawson, which was acquired in May
1997. Increases in revenues from Thermo Fibertek's accessories,
water-management, and other businesses were substantially offset by an
$11.3 million decrease in revenues at its recycling business due to a
continuing decrease in demand resulting from a severe drop in de-inked
pulp prices in 1996. In addition, the unfavorable effects of currency
translation reduced Thermo Fibertek's revenues by $6.3 million in 1997.
Sales from Thermo TerraTech's thermal-processing equipment business were
$25.3 million in 1997, compared with $25.5 million in 1996. In October
1997, this business was sold for a nominal loss. Sales of automated
electroplating equipment by Napco increased $3.4 million to $14.0
million, primarily due to higher demand.
Segment income margin, excluding restructuring and other nonrecurring
costs of $1.1 million in 1997, was 11.5% in 1997, compared with 12.6% in
1996. This decline primarily resulted from lower sales at Thermo
Fibertek's recycling business and lower-margin revenues from Thermo Black
Clawson. In addition, the Company recorded a segment loss in 1997 on the
contract to design and construct the office wastepaper de-inking facility
due to a reserve established in 1997 for disputed contractual items
relating to this facility. Thermo Fibertek recorded restructuring and
other nonrecurring costs of $1.1 million in 1997 relating to the
consolidation of the operations of two of its subsidiaries into the
operations of Thermo Black Clawson (Note 11).
Biomedical Products
-------------------
Sales from the Biomedical Products segment were $590.2 million in
1997, an increase of $134.3 million, or 29%, over 1996. Sales increased
due to the inclusion of $62.7 million in sales from acquired businesses,
increased demand at Trex Medical and Bird Medical Technologies, Inc., and
growth at ThermoLase's hair-removal business due to the opening of new
spas and higher revenues from physician- and international-licensing
arrangements. Rather than continuing to open additional domestic spas,
ThermoLase intends to concentrate its resources on attempting both to
increase the capacity utilization of its existing U.S. spas and to expand
its physician-licensing program and international licensing arrangements.
These increases in revenues were offset in part by a $4.7 million decline
in sales of Thermo Cardiosystems' left ventricular-assist systems (LVAS),
which Thermo Cardiosystems believes resulted from delayed orders as
customers await approval from the U.S. Food and Drug Administration of
its advanced electric LVAS. Although Thermo Cardiosystems believes that
such approval may be received during the first six months of 1998, there
can be no assurance that approval will occur within the expected time
period, or at all.
52PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1997 Compared With 1996 (continued)
Segment income, excluding restructuring and other nonrecurring costs
of $0.5 million in 1997 and $29.7 million in 1996, increased to $53.2
million in 1997 from $46.1 million in 1996. This increase resulted
substantially from improvements at existing businesses, primarily at Bird
Medical, SensorMedics Corporation, and Trex Medical's existing businesses
and, to a lesser extent, the inclusion of segment income from acquired
businesses. This increase in segment income was offset in part by an
increase in segment loss at ThermoLase to $18.4 million in 1997 from $7.6
million in 1996, due to the early operations of its Spa Thira
hair-removal business, which has been operating below maximum capacity as
it seeks to develop its client base and refine its process and operating
procedures, and by pre-opening costs incurred in connection with new spa
openings. ThermoLase believes that improvements in the efficacy and
duration of its SoftLight(R) hair-removal process are critical elements
in its ability to improve the profitability of its spas. In 1998, the
effect of operating each spa below maximum capacity, as ThermoLase
develops its client base and expands its product lines, will continue to
have a negative effect on ThermoLase's segment income. Thermo
Cardiosystems' profitability declined by $4.7 million primarily due to a
decrease in LVAS revenues. Restructuring and other nonrecurring costs of
$0.5 million in 1997 represent costs to close certain foreign sales
offices at certain of the Company's wholly owned businesses.
Restructuring and other nonrecurring costs of $29.7 million in 1996
included a write-off of $12.7 million of cost in excess of net assets of
acquired company and certain other intangible assets at Thermedics'
Corpak subsidiary, $11.4 million of costs incurred by SensorMedics
primarily as a result of its merger with the Company, $4.9 million for
Thermo Cardiosystems' write-off of acquired technology relating to a 1996
acquisition, and $0.7 million of other costs (Note 11).
Industrial Outsourcing
----------------------
Sales in the Industrial Outsourcing segment were $305.5 million in
1997, an increase of $31.6 million, or 12%, over 1996. Revenues from
Thermo TerraTech's remediation and recycling services increased to $136.5
million in 1997 from $121.2 million in 1996, primarily due to the
inclusion of $22.9 million of sales from acquired businesses, offset in
part by a $6.4 million decrease in revenues at one of Thermo
Remediation's business units resulting from a decline in the number of
contracts in process. In addition, revenues from Thermo Remediation's
soil-remediation services decreased 18% to $18.5 million, resulting from
lower volumes of soil processed due to overcapacity in the industry and,
to a lesser extent, competitive pricing pressures early in the year.
Revenues from consulting and design services increased $3.6 million due
to the inclusion of $12.8 million from acquired businesses, offset in
part by a decrease in revenues due to the completion of two large
contracts. Sales of metallurgical services increased to $54.2 million in
1997 from $45.7 million in 1996, due to increased demand for existing
services and the inclusion of $3.3 million of sales from an acquired
business.
53PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1997 Compared With 1996 (continued)
Segment income, excluding restructuring and other nonrecurring costs
of $7.9 million in 1997 and $0.1 million in 1996, was $21.7 million in
1997, compared with $17.8 million in 1996. Segment income improved in
1997 due to the effect in 1996 of costs incurred at Thermo TerraTech to
reduce redundancies at regional laboratories, and by costs incurred at
Thermo EuroTech in 1996 relating primarily to the settlement of several
contract disputes, as well as the impact of severe winter weather in
early 1996, which affected all phases of Thermo EuroTech's business. The
effect of these improvements was offset in part by a decline in segment
income from soil-remediation services due to lower sales as discussed
above and lower segment income from consulting and design services due to
the completion of two large contracts. Restructuring and other
nonrecurring costs in 1997 included $7.8 million to write down certain
capital equipment and intangible assets, including cost in excess of net
assets of acquired companies, in response to a severe downturn in Thermo
Remediation's soil-remediation business. This resulted in the closure of
two soil-remediation sites during 1997 and reduced cash flows at certain
other sites, such that analysis indicated that the investment in these
assets would not be recovered (Note 11).
Advanced Technologies
---------------------
Sales from the Advanced Technologies segment were $415.0 million in
1997, compared with $375.5 million in 1996. Sales at Thermo Coleman were
$156.2 million in 1997, compared with $144.2 million in 1996. This
increase resulted primarily from its Thermo Information Solutions
subsidiary's contract to supply kiosk units and, to a lesser extent,
higher integrated document management revenues and sales of $3.3 million
from acquired businesses. These increases in revenues were offset in part
by a decrease in revenues from government contracts. Sales of kiosk units
increased to $16.5 million in 1997 from $1.4 million in 1996. Thermo
Information Solutions intends to exit this business in 1998 due to
inherently low margins, lower than expected orders from its sole
customer, and the absence of other orders. Thermo Coleman experienced a
decline in backlog totaling $19.4 million in 1997. Thermo Coleman's
backlog at any certain date may not be indicative of future demand for
its products or services. Sales at Thermo Sentron increased to $78.7
million in 1997 from $70.0 million in 1996, primarily due to higher
demand and, to a lesser extent, sales of $4.2 million from acquired
businesses, offset in part by the unfavorable effects of currency
translation. Sales at Thermedics Detection increased 17% to $51.3 million
in 1997, primarily due to sales of its Alexus systems in connection with
the completion of a mandated product-line upgrade from The Coca-Cola
Company to its existing installed base, and $3.2 million of sales of
explosives-detection systems to the U.S. Federal Aviation Administration.
Thermedics Detection expects that sales of its Alexus systems will slow
in 1998 due to the completion of the mandated upgrade for The Coca-Cola
Company in 1997 and a decrease in demand for new installations. Sales at
Thermo Voltek declined to $44.6 million in 1997 from $48.5 million in
1996, primarily due to lower demand for electrostatic compatibility (EMC)
test products, resulting from the declining influence of IEC 801, the
54PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1997 Compared With 1996 (continued)
European Union directive on electromagnetic compatibility that took
effect January 1, 1996, and, to a lesser extent, a decline in the
component-reliability market for electrostatic discharge test equipment
that resulted from a slowdown in capital expenditures by the
semiconductor industry. These decreases in revenues at Thermo Voltek were
offset in part by sales of $5.8 million from acquired businesses. Sales
from ThermoTrex's business units, including Trex Communications,
increased $12.7 million in 1997 as a result of $6.9 million of sales from
an acquired business at Trex Communications and, to a lesser extent,
increased revenues from government contracts.
Segment income margin, excluding restructuring and other nonrecurring
costs of $1.4 million in 1997, was 8.8% in 1997, compared with 7.5% in
1996. This improvement resulted from increased sales and the impact in
the 1996 period of charges for inventory obsolescence and other
adjustments at Thermedics Detection, as well as a loss in the 1996 period
at ThermoTrex's advanced-technology research center due to cost overruns
and higher expenses for new lines of business. The improvement was offset
in part by a decrease in profitability at Thermo Voltek and lower margins
at Thermo Coleman as a result of increased sales of low-margin kiosk
units and reduced revenues from government contracts. Restructuring and
other nonrecurring costs of $1.4 million in 1997 were recorded by
ThermoTrex for the write-off of acquired technology relating to an
acquisition (Note 11).
Gain on Issuance of Stock by Subsidiaries
-----------------------------------------
As a result of the sale of stock by subsidiaries and issuance of
stock by subsidiaries upon conversion of convertible debentures, the
Company recorded gains of $80.1 million in 1997 and $126.6 million in
1996. See Notes 1 and 9 for a more complete description of these
transactions. Minority interest expense increased to $74.4 million in
1997 from $72.9 million in 1996. Minority interest expense includes $19.0
million in 1997 and $38.2 million in 1996 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 convertible
debentures, by their subsidiaries.
Contingent Liabilities and Other Matters
----------------------------------------
At year-end 1997, the Company was contingently liable with respect to
certain lawsuits (Note 6).
The Company is currently assessing the potential impact of the year
2000 on the processing of date-sensitive information by the Company's
computerized information systems and on products sold as well as products
purchased by the Company. The Company believes that its internal
information systems and current products are either year 2000 compliant
or will be so prior to the year 2000 without incurring material costs.
There can be no assurance, however, that the Company will not experience
unexpected costs and delays in achieving year 2000 compliance for its
internal information systems and current products, which could result in
a material adverse effect on the Company's future results of operations.
55PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1997 Compared With 1996 (continued)
The Company is presently assessing the effect that the year 2000
problem may have on its previously sold products. The Company is also
assessing whether its key suppliers are adequately addressing this issue
and the effect this might have on the Company. The Company has not
completed its analysis and is unable to conclude at this time that the
year 2000 problem as it relates to its previously sold products and
products purchased from key suppliers is not reasonably likely to have a
material adverse effect on the Company's future results of operations.
1996 Compared With 1995
Sales in 1996 were $2,932.6 million, an increase of $662.3 million,
or 29%, over 1995. Segment income, excluding restructuring and other
nonrecurring costs of $37.6 million in 1996 and $21.9 million in 1995,
described below, increased 16% to $312.9 million in 1996 from $269.8
million in 1995. Operating income, which includes restructuring and other
nonrecurring costs, was $246.5 million in 1996, compared with $225.2
million in 1995.
Instruments
-----------
Sales from the Instruments segment were $1,209.4 million in 1996, an
increase of $426.7 million, or 55%, over 1995. Sales increased primarily
due to acquisitions made by Thermo Instrument, which added $404 million
of sales in 1996. The unfavorable effects of currency translation due to
the strengthening of the U.S. dollar relative to foreign currencies in
countries in which Thermo Instrument operates decreased revenues by $21.8
million in 1996. The remainder of the increase resulted primarily from
greater demand at Thermo Instrument's mass spectrometry business as a
result of recently introduced products and, to a lesser extent, greater
demand at its Fourier transform infrared spectrometry business.
Segment income margin, excluding restructuring and other nonrecurring
costs of $3.5 million in 1996, declined to 11.8% in 1996 from 14.5% in
1995, primarily due to lower margins at acquired businesses.
Restructuring and other nonrecurring costs of $3.5 million represents the
write-off of acquired technology relating to the acquisition of the
Fisons businesses (Note 11).
Alternative-energy Systems
--------------------------
Sales from the Alternative-energy Systems segment were $339.8 million
in 1996, compared with $325.9 million in 1995. Within this segment,
revenues from Thermo Ecotek were $154.3 million in 1996, compared with
$141.4 million in 1995. This increase resulted primarily from higher
contractual energy rates at all of Thermo Ecotek's facilities, except the
Hemphill plant in New Hampshire; increased revenues at the Delano plants
in California resulting from fewer days of scheduled and unscheduled
outages; and an acquisition that added $2.6 million in revenues. Revenues
from the Company's waste-recycling facility in southern California were
$9.2 million in 1996, compared with $20.8 million in 1995. This facility
was sold in July 1996. Sales at Peter Brotherhood declined 3% to $54.4
million as a result of lower demand for steam turbines. Sales from Thermo
Power were $122.1 million in 1996, compared with $108.4 million in 1995.
56PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1996 Compared With 1995 (continued)
This increase resulted primarily from increased demand for
custom-designed industrial refrigeration packages, remanufactured
commercial cooling equipment, and the inclusion of revenues from
lift-truck engines, offset in part by declines in revenues from
marine-engine products and rental equipment.
Segment income, excluding restructuring and other nonrecurring costs
of $4.4 million in 1996 and $11.5 million in 1995, was $42.5 million in
1996, compared with $44.5 million in 1995. Thermo Ecotek had segment
income of $39.3 million in 1996, compared with $34.6 million in 1995.
This improvement results from increased revenues and, to a lesser extent,
lower fuel costs. Segment income from the Company's waste-recycling
facility, which was sold in July 1996, excluding restructuring and other
nonrecurring costs of $11.5 million in 1995, was $4.6 million in 1996 and
$5.9 million in 1995. Results from this facility, net of related interest
expense (not included in segment income), were approximately at the
breakeven level for both periods. Segment income at Thermo Power declined
by $3.9 million to $1.1 million in 1996 due to a change in sales mix, a
cost increase in one of the major components of its industrial
refrigeration packages, higher depreciation expense at NuTemp, and higher
warranty expenses for marine-engine products. Peter Brotherhood incurred
a segment loss of $2.5 million in 1996, excluding restructuring and other
nonrecurring costs of $4.4 million, compared with a loss of $1.1 million
in 1995. The decline resulted from increased costs to complete jobs in
process as well as competitive pricing pressures. Peter Brotherhood
recorded restructuring and other nonrecurring costs of $4.4 million in
1996 primarily for the write-off of a nontrade receivable and severance
costs.
Restructuring and other nonrecurring costs of $11.5 million in 1995
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) under a long-term service agreement. During the third
quarter of 1995, the County paid the Company less than the amount due
under the long-term service agreement, and in October 1995, the Company
notified the County that the County was in default of the service
agreement. The County was a party to the financing arrangements for the
facility and was also in default of certain terms of such arrangements.
As a result of the County's default under the service agreement and
financing arrangements, the Company concluded that it would be unable to
recover its investment in the facility. In 1996, in settlement of these
matters, the facility was sold to the County for a nominal amount plus
the County's assumption of the facility debt.
Paper Recycling
---------------
Sales in the Paper Recycling segment were $286.3 million in 1996,
compared with $318.0 million in 1995. A wholly owned subsidiary of the
Company recorded revenues from a contract to design and construct an
office wastepaper de-inking facility of $58.0 million in 1996 and $77.0
million in 1995. This contract was substantially completed in the second
quarter of 1996. Sales from Thermo Fibertek declined 7%, to $192.2
million in 1996. Thermo Fibertek's revenues under a subcontract from
57PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1996 Compared With 1995 (continued)
Thermo Electron to supply equipment and services for the office
wastepaper de-inking facility described above decreased $12.9 million.
Revenues from Thermo Fibertek's recycling business declined an additional
$7.5 million due to lower demand resulting from a severe drop in de-inked
pulp prices, offset in part by $2.2 million of revenues from a business
acquired during 1996. Revenues from Thermo Fibertek's accessories
business increased $8.8 million primarily due to increased demand. The
unfavorable effects of currency translation reduced Thermo Fibertek's
revenues by $1.7 million in 1996. Sales of Thermo TerraTech's
thermal-processing equipment increased $8.3 million in 1996 due to
increased demand, while sales of automated electroplating equipment by
the Company's wholly owned Napco subsidiary declined $6.4 million in
1996.
Segment income margin, excluding restructuring and other nonrecurring
costs of $7.5 million in 1995, was 12.6% in 1996, compared with 11.5% in
1995. This improvement resulted primarily from a nonrecurring payment
received under the office wastepaper de-inking facility contract in 1996,
which represented certain cost savings on the contract, and increased
revenues from Thermo TerraTech's thermal-processing equipment business
from depressed levels in 1995. Restructuring and other nonrecurring costs
of $7.5 million in 1995 represent the write-off of 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 Napco (Note 11).
Biomedical Products
-------------------
Sales in the Biomedical Products segment were $455.9 million in 1996,
an increase of $139.3 million, or 44%, over 1995. Sales increased due to
the inclusion of $111.7 million in sales from acquired businesses, as
well as increased demand for certain products at Trex Medical, Thermo
Cardiosystems' LVAS, and ThermoLase's hair-removal business.
Segment income, excluding restructuring and other nonrecurring costs
of $29.7 million in 1996, increased to $46.1 million in 1996 from $27.2
million in 1995. This improvement resulted primarily from the inclusion
of segment income from acquired businesses and increased sales at
existing businesses. Restructuring and other nonrecurring costs of $29.7
million in 1996 included a write-off of $12.7 million of cost in excess
of net assets of acquired company and certain other intangible assets at
Thermedics' Corpak subsidiary, $11.4 million of costs incurred by
SensorMedics primarily as a result of its merger with the Company, $4.9
million for Thermo Cardiosystems' write-off of acquired technology
relating to a 1996 acquisition, and $0.7 million of other costs (Note
11).
Industrial Outsourcing
----------------------
Sales in the Industrial Outsourcing segment were $273.9 million in
1996, an increase of $63.4 million, or 30%, over 1995. Revenues from
Thermo TerraTech's remediation and recycling services increased to $121.2
million in 1996 from $67.5 million in 1995, primarily due to the
inclusion of $53.9 million in revenues from acquired businesses. This
increase was offset in part by a decline in revenues from soil-
58PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1996 Compared With 1995 (continued)
remediation services of $4.9 million in 1996 due to declines in the
volume of soil processed as a result of more relaxed regulatory standards
in several states and competitive pricing pressures; and by a decline in
revenues at Thermo TerraTech's radiochemistry laboratory businesses
reflecting a reduction in spending at the U.S. Department of Energy and
reduced federal government budget appropriations. Sales of metallurgical
services were $45.7 million in 1996, compared with $42.8 million in 1995.
Sales increased due to increased demand for existing services, offset in
part by a decline of $2.9 million resulting from the closing of a small
metallurgical services division in 1995.
Segment income, excluding restructuring and other nonrecurring costs
of $0.1 million in 1996 and $2.0 million in 1995, was $17.8 million in
1996, compared with $23.2 million in 1995. Additional segment income from
acquisitions was more than offset by costs incurred at Thermo TerraTech
to reduce redundancies at regional laboratories and by costs incurred at
Thermo EuroTech relating primarily to the settlement of several contract
disputes, as well as the impact of severe winter weather in early 1996,
which affected all phases of Thermo EuroTech's business, and by the
effect of lower sales and income from the traditionally higher-margin
soil-remediation services. Restructuring and other nonrecurring costs of
$2.0 million in 1995 were recorded in connection with closing a
metallurgical services division.
Advanced Technologies
---------------------
Sales from the Advanced Technologies segment were $375.5 million in
1996, compared with $323.6 million in 1995. Sales increased $73.5 million
due to the inclusion of sales from acquired businesses. These increases
were offset in part by declines in revenues due to lower U.S. government
contract funding at Thermo Coleman and ThermoTrex due to increased
competition for government research and development funding.
Segment income, excluding restructuring and other nonrecurring costs
of $1.0 million in 1995, was $28.0 million in 1996, compared with $24.8
million in 1995. Segment income provided by acquired companies and
additional income from certain businesses were offset in part by lower
segment income at Thermo Coleman, as a result of lower revenues, and by a
loss incurred at ThermoTrex's advanced-technology research center due to
cost overruns and higher expenses for new lines of business.
Restructuring and other nonrecurring costs in 1995 primarily represent
the write-off of intangible assets at ThermoTrex's East Coast division,
which was closed.
Gain on Issuance of Stock by Subsidiaries
-----------------------------------------
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 recorded gains of $126.6 million in
1996 and $80.8 million in 1995. See Notes 1 and 9 for a more complete
description of these transactions. Minority interest expense increased to
$72.9 million in 1996 from $60.5 million in 1995. Minority interest
expense includes $38.2 million in 1996 and $28.6 million in 1995 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
convertible debentures, by their subsidiaries.
59PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
Consolidated working capital was $2,002.0 million at January 3, 1998,
compared with $2,218.6 million at December 28, 1996. Included in working
capital were cash, cash equivalents, and short-term available-for-sale
investments of $1,522.7 million at January 3, 1998, compared with
$1,846.3 million at December 28, 1996. In addition, the Company had
long-term available-for-sale investments of $63.3 million at January 3,
1998, compared with $94.4 million at December 28, 1996. Of the total
$1,586.0 million of cash, cash equivalents, and short- and long-term
available-for-sale investments at January 3, 1998, $1,333.1 million was
held by the Company's majority-owned subsidiaries and the balance was
held by the Company and its wholly owned subsidiaries.
During 1997, $269.0 million of cash was provided by operating
activities. Cash of $86.5 million was used to fund an increase in
accounts receivable, principally at Trex Medical, Thermo Instrument, and
Thermo TerraTech. The increase in receivables at Trex Medical resulted
primarily from increased sales and, to a lesser extent, longer customer
payment patterns due to higher international sales and a shift to direct
sales at a subsidiary. The increase in receivables at Thermo Instrument
resulted from increased shipments in the fourth quarter at ThermoQuest
and a competitive trend to commercial terms of 30 days from ThermoQuest's
past practice of obtaining deposits on certain systems. The increase in
receivables at Thermo TerraTech resulted from higher revenues at one
business unit and a delay in the pursuit of collections at a second,
which Thermo TerraTech expects to address in 1998 by expanding collection
efforts. In addition, cash of $61.7 million was used to reduce other
current liabilities, primarily for taxes and certain exit costs relating
to acquisitions (Note 3).
The Company's primary investing activities, excluding
available-for-sale investments activity, included acquisitions, capital
expenditures, and the sale of certain businesses and property, plant, and
equipment. During 1997, the Company expended $849.1 million, net of cash
acquired, for acquisitions and received a $36.1 million refund relating
to a 1996 acquisition (Note 3). In addition, the Company sold certain
businesses for net proceeds of $27.1 million. The Company expended $111.6
million for purchases of property, plant, and equipment and received
proceeds of $15.6 million from the sale of property, plant, and
equipment.
The Company's financing activities provided $237.8 million of cash in
1997. Net proceeds from the issuance of Company and subsidiary common
stock totaled $164.9 million, and net proceeds from the issuance of
long-term obligations totaled $490.8 million. In addition, the Company
repaid long-term obligations of $78.3 million.
During 1997, an aggregate principal amount of $246.1 million of
Company and subsidiary convertible obligations were converted into shares
of Company and subsidiary common stock.
In January 1998, Thermo Instrument issued and sold $250.0 million
principal amount of 4% subordinated convertible debentures due 2005 for
net proceeds of $243.8 million.
60PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources (continued)
The Company intends, for the foreseeable future, to maintain at least
80% ownership of its Thermo Instrument 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 it 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 5 for a description of
outstanding convertible debentures issued by Thermo Instrument and Thermo
Ecotek. In addition, at January 3, 1998, Thermo Instrument and Thermo
Ecotek had outstanding stock options for 4,365,000 shares and 1,267,000
shares, respectively, exercisable at various prices and subject to
certain vesting schedules. The Company's other majority-owned
subsidiaries also have outstanding stock options, convertible debentures,
or both.
During 1997, the Company and its majority-owned subsidiaries expended
$311.1 million to purchase common stock and debentures of certain of the
Company's majority-owned subsidiaries. These purchases were made pursuant
to authorizations by the Company's and certain majority-owned
subsidiaries' Boards of Directors. As of January 3, 1998, $13.1 million
and $35.0 million remained under the Company's and its majority-owned
subsidiaries' authorizations, respectively. Subsequent to January 3,
1998, the Company and a majority-owned subsidiary received additional
authorizations of $50.0 million and $10.0 million, respectively. The
amount of purchases in a given reporting period may vary significantly.
The Company has no material commitments for purchases of property,
plant, and equipment and expects that, for 1998, expenditures on such
items will approximate the 1997 level. Since January 3, 1998, a
majority-owned subsidiary expended $4.5 million on the acquisition of a
business and as of March 10, 1998, the Company's majority-owned
subsidiaries had agreements or nonbinding letters of intent to acquire
businesses for a total cost of approximately $67.5 million. Proposed
acquisitions of new businesses are subject to various conditions to
closing, and there can be no assurance that all proposed transactions
will be consummated.
As discussed above, 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
61PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources (continued)
consolidated entity. This credit may rank junior, pari passu with, or
senior in priority to payment of the other indebtedness of these members.
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.
Market Risk
The Company is exposed to market risk from changes in foreign
currency exchange rates, interest rates, and equity prices, which could
affect its future results of operations and financial condition. The
Company manages its exposure to these risks through its regular operating
and financing activities. Additionally, the Company uses short-term
forward contracts to manage certain exposures to foreign currencies. The
Company enters into forward foreign exchange contracts to hedge firm
purchase and sale commitments denominated in currencies other than its
subsidiaries' local currencies. The Company does not engage in extensive
foreign currency hedging activities; however, 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 Company's forward foreign exchange
contracts principally hedge transactions denominated in U.S. dollars,
British pounds sterling, French francs, and Japanese yen. Gains and
losses arising from forward contracts are recognized as offsets to gains
and losses resulting from the transactions being hedged. The Company does
not enter into speculative foreign currency agreements.
Foreign Currency Exchange Rates
The fair value of forward foreign exchange contracts is sensitive to
changes in foreign currency exchange rates. The fair value of forward
foreign exchange contracts 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. A 10% depreciation in year-end 1997
foreign currency exchange rates related to the Company's contracts would
result in a decrease in the unrealized gain on forward foreign exchange
contracts of $3 million. Since the Company uses forward foreign exchange
contracts as hedges of firm purchase and sale commitments, the unrealized
gain or loss on forward foreign currency exchange contracts resulting
from changes in foreign currency exchange rates would be offset by a
corresponding change in the fair value of the hedged item.
The Company generally views its investment in foreign subsidiaries
with a functional currency other than the Company's reporting currency as
long-term. The Company's investment in foreign subsidiaries is sensitive
to fluctuations in foreign currency exchange rates. The functional
62PAGE
Thermo Electron Corporation 1997 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Market Risk (continued)
currencies of the Company's foreign subsidiaries are principally
denominated in British pounds sterling, French francs, and German
deutsche marks. The effect of a change in foreign exchange rates on the
Company's net investment in foreign subsidiaries is recorded as a
separate component of shareholders' investment. A 10% depreciation in
year-end 1997 functional currencies, relative to the U.S. dollar, would
result in a $27 million reduction of shareholders' investment.
Interest Rates
Certain of the Company's short- and long-term available-for-sale
investments, long-term obligations, and interest rate swap agreements are
sensitive to changes in interest rates. Interest rate changes would
result in a change in the fair value of these financial instruments due
to the difference between the market interest rate and the rate at the
date of purchase or issuance of the financial instrument. A 10% decrease
in year-end 1997 market interest rates would result in a negative impact
of $18 million on the net fair value of the Company's interest-sensitive
financial instruments.
Equity Prices
The Company's available-for-sale investment portfolio includes equity
securities that are sensitive to fluctuations in price. In addition, the
Company's and its subsidiaries' convertible obligations are sensitive to
fluctuations in the price of Company or subsidiary common stock into
which the obligations are convertible. Changes in equity prices would
result in changes in the fair value of the Company's available-for-sale
investments and convertible obligations due to the difference between the
current market price and the market price at the date of purchase or
issuance of the financial instrument. A 10% increase in the year-end 1997
market equity prices would result in a negative impact of $96 million on
the net fair value of the Company's price-sensitive equity financial
instruments.
63PAGE
Thermo Electron Corporation 1997 Financial Statements
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company wishes to caution
readers that the following important factors, among others, in some cases
have affected, and in the future could affect, the Company's actual
results and could cause its actual results in 1998 and beyond to differ
materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.
Risks Associated with Acquisition Strategy. One of the Company's
principal growth strategies is to supplement its internal growth with the
acquisition of businesses and technologies that complement or augment the
Company's existing product lines. Certain businesses recently acquired by
the Company have had low levels of profitability. In addition, businesses
that the Company may seek to acquire in the future may also be marginally
profitable or unprofitable. In order for any acquired businesses to
achieve the level of profitability desired by the Company, the Company
must successfully change operations and improve market penetration. No
assurance can be given that the Company will be successful in this
regard. In addition, promising acquisitions are difficult to identify and
complete for a number of reasons, including competition among prospective
buyers, the need for regulatory approvals, including antitrust approvals,
and the high valuations of businesses resulting from historically high
stock prices in many countries. Acquisitions completed by the Company may
be made at substantial premiums over the fair value of the net assets of
the acquired companies. There can be no assurance that the Company will
be able to complete pending or future acquisitions or that the Company
will be able to successfully integrate any acquired businesses into its
existing business or make such businesses profitable. In order to finance
any such acquisitions, it may be necessary for the Company to raise
additional funds either through public or private financings. Any equity
or debt financing, if available at all, may be on terms which are not
favorable to the Company and may result in dilution to the Company's
shareholders.
Risks Associated with Spinout of Subsidiaries. The Company has
adopted a strategy of spinning out certain of its businesses into
separate subsidiaries and having these subsidiaries sell a minority
interest to outside investors. 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. These gains have represented a substantial portion of the
net income reported by the Company in certain periods. The size and
timing of these transactions are dependent on market and other conditions
that are beyond the Company's control. Accordingly, there can be no
assurance that the Company will be able to generate gains from such
transactions in the future.
Further, 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" (the Proposed Statement). The Proposed Statement would
establish new rules for how consolidated financial statements should be
64PAGE
Thermo Electron Corporation 1997 Financial Statements
Forward-looking Statements
prepared. If the Proposed Statement is adopted, there would be
significant changes in the way the Company records certain transactions
of its controlled subsidiaries. Among those changes, any sale of the
stock of a subsidiary that does not result in a loss of control would be
accounted for as a transaction in the equity of the consolidated entity
with no gain or loss being recorded. The exposure draft addresses the
consolidation issues in two parts: consolidation procedures, which
includes proposed rule changes affecting the Company's ability to
recognize gains on issuances of subsidiary stock, and consolidation
policy, which does not address accounting for such gains. During 1997,
the FASB decided to focus its efforts on the consolidation policy part of
the exposure draft and to consider resuming discussion on consolidation
procedures after completion of the efforts on consolidation policy. The
timing and content of any final statement are uncertain.
Competition. The Company encounters and expects to continue to
encounter significant competition in the sale of its products and
services. The Company's competitors include a number of large
multinational corporations, some of which may be able to adapt more
quickly to new or emerging technologies and changes in customer
requirements, or to devote greater resources to the promotion and sale of
their products than the Company. Competition could increase if new
companies enter the market or if existing competitors expand their
product lines or intensify efforts within existing product lines. There
can be no assurance that the Company's current products, products under
development, or ability to develop new technologies will be sufficient to
enable it to compete effectively.
Risks Associated with International Operations. International
revenues account for a substantial portion of the Company's revenues, and
the Company intends to continue to expand its presence in international
markets. International revenues are subject to a number of risks,
including the following: fluctuations in exchange rates may affect
product demand and adversely affect the profitability in U.S. dollars of
products and services provided by the Company in foreign markets where
payment for the Company's products and services is made in the local
currency; agreements may be difficult to enforce and receivables
difficult to collect through a foreign country's legal system; foreign
customers may have longer payment cycles; foreign countries may impose
additional withholding taxes or otherwise tax the Company's foreign
income, impose tariffs, or adopt other restrictions on foreign trade;
U.S. export licenses may be difficult to obtain; and the protection of
intellectual property in foreign countries may be more difficult to
enforce. There can be no assurance that any of these factors will not
have a material adverse impact on the Company's business and results of
operations.
Rapid and Significant Technological Change and New Products. The
markets for the Company's products are characterized by rapid and
significant technological change, evolving industry standards and
frequent new product introductions and enhancements. Many of the
Company's products and products under development are technologically
65PAGE
Thermo Electron Corporation 1997 Financial Statements
Forward-looking Statements
innovative and require significant planning, design, development, and
testing at the technological, product, and manufacturing-process levels.
These activities require significant capital commitments and investment
by the Company. In addition, products that are competitive in the
Company's markets are characterized by rapid and significant
technological change due to industry standards that may change on short
notice and by the introduction of new products and technologies that
render existing products and technologies uncompetitive or obsolete.
There can be no assurance that any of the products currently being
developed by the Company, or those to be developed in the future, will be
technologically feasible or accepted by the marketplace, that any such
development will be completed in any particular time frame, or that the
Company's products or proprietary technologies will not become
uncompetitive or obsolete.
Possible Adverse Effect from Changes in Governmental Regulations. The
Company competes in several markets which involve compliance by its
customers with federal, state, local, and foreign regulations, such as
environmental, health and safety, and food and drug regulations. The
Company develops, configures, and markets its products to meet customer
needs created by such regulations. These regulations may be amended or
eliminated in response to new scientific evidence or political or
economic considerations. Any significant change in regulations could
adversely affect demand for the Company's products in regulated markets.
Government Regulation; No Assurance of Regulatory Approvals. Certain
of the Company's products are subject to pre-marketing clearance or
approval by the U.S. Food and Drug Administration (FDA) and similar
agencies in foreign countries. The use or sale of certain of the
Company's products under development may require approvals by other
government agencies. The process of obtaining clearance and approval from
the FDA and other government agencies is time-consuming and expensive.
Furthermore, there can be no assurance that the necessary clearances or
approvals for the Company's products, services, and products and services
under development will be obtained on a timely basis, if at all.
FDA regulations also require continuing compliance with specific
standards in conjunction with the maintenance and marketing of products
and services that have been approved or cleared. Failure to comply with
applicable regulatory requirements can result in, among other things,
civil and criminal penalties, suspension of approvals, recalls, or
seizures of products, injunctions, and criminal prosecutions.
Risks Associated with Dependence on Capital Spending Policies and
Government Funding. The Company's customers include pharmaceutical and
chemical companies, laboratories, universities, healthcare providers,
paper manufacturers, consumer product companies, government agencies, and
public and private research institutions. The capital spending of these
entities can have a significant effect on the demand for the Company's
products. Such spending is based on a wide variety of factors, including
the resources available to make purchases, the spending priorities among
various types of equipment, public policy, and the effects of different
economic cycles. Any decrease in capital spending by any of the customer
groups that account for a significant portion of the Company's sales
could have a material adverse effect on the Company's business and
results of operations.
66PAGE
Thermo Electron Corporation 1997 Financial Statements
Forward-looking Statements
Dependence on Patents and Proprietary Rights. The Company places
considerable importance on obtaining patent and trade secret protection
for significant new technologies, products, and processes because of the
length of time and expense associated with bringing new products through
the development process and to the marketplace. The Company's success
depends in part on its ability to develop patentable products and obtain
and enforce patent protection for its products both in the United States
and in other countries. The Company owns numerous United States and
foreign patents, and intends to file additional applications for patents
as appropriate to cover its products. No assurance can be given that
patents will issue from any pending or future patent applications owned
by or licensed to the Company or that the claims allowed under any issued
patents will be sufficiently broad to protect the Company's technology.
In addition, no assurance can be given that any issued patents owned by
or licensed to the Company will not be challenged, invalidated, or
circumvented, or that the rights granted thereunder will provide
competitive advantages to the Company. There can be no assurance that
third parties will not assert claims against the Company that the Company
infringes the intellectual property rights of such parties. The Company
could incur substantial costs and diversion of management resources with
respect to the defense of any such claims, which could have a material
adverse effect on the Company's business, financial condition, and
results of operations. Furthermore, parties making such claims could
secure a judgment awarding substantial damages, as well as injunctive or
other equitable relief, which could effectively block the Company's
ability to make, use, sell, distribute, or market its products and
services in the United States or abroad. In the event that a claim
relating to intellectual property is asserted against the Company, the
Company may seek licenses to such intellectual property. There can be no
assurance, however, that such licenses could be obtained on commercially
reasonable terms, if at all. The failure to obtain the necessary licenses
or other rights could preclude the sale, manufacture, or distribution of
the Company's products and, therefore, could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
The Company relies on trade secrets and proprietary know-how, which
it seeks to protect, in part, by confidentiality agreements with its
collaborators, employees, and consultants. There can be no assurance that
these agreements will not be breached, that the Company would have
adequate remedies for any breach, or that the Company's trade secrets
will not otherwise become known or be independently developed by
competitors.
Potential Impact of Year 2000 on Processing of Date-sensitive
Information. The Company is currently assessing the potential impact of
the year 2000 on the processing of date-sensitive information by the
Company's computerized information systems and on products sold as well
as products purchased by the Company. The Company believes that its
internal information systems and current products are either year 2000
compliant or will be so prior to the year 2000 without incurring material
costs. There can be no assurance, however, that the Company will not
experience unexpected costs and delays in achieving year 2000 compliance
67PAGE
Thermo Electron Corporation 1997 Financial Statements
Forward-looking Statements
for its internal information systems and current products, which could
result in a material adverse effect on the Company's future results of
operations.
The Company is presently assessing the effect that the year 2000
problem may have on its previously sold products. The Company is also
assessing whether its key suppliers are adequately addressing this issue
and the effect this might have on the Company. The Company has not
completed its analysis and is unable to conclude at this time that the
year 2000 problem as it relates to its previously sold products and
products purchased from key suppliers is not reasonably likely to have a
material adverse effect on the Company's future results of operations.
68PAGE
Thermo Electron Corporation 1997 Financial Statements
Common Stock Market Information
The Company's common stock is traded on the New York Stock Exchange
under the symbol TMO. The following table sets forth the high and low
sale prices of the Company's common stock for 1997 and 1996, as reported
in the consolidated transaction reporting system. Prices have been
restated to reflect a three-for-two stock split, effected in the form of
a 50% stock dividend, that was distributed in June 1996.
1997 1996
------------------- -------------------
Quarter High Low High Low
---------------------------------------------------------------------
First $40 1/2 $30 7/8 $42 1/12 $30 2/5
Second 38 3/4 28 3/8 44 3/8 38 4/5
Third 41 1/2 32 1/8 41 7/8 31 3/4
Fourth 44 1/2 33 1/2 41 1/8 29 3/4
As of January 30, 1998, the Company had 9,288 holders of record of
its common stock. This does not include holdings in street or nominee
names. The closing market price on the New York Stock Exchange for the
Company's common stock on January 30, 1998, was $39 per share.
Common stock of the Company's majority-owned public subsidiaries is
traded on the American Stock Exchange: Thermedics Inc. (TMD), Thermo
Cardiosystems Inc. (TCA), Thermo Voltek Corp. (TVL), Thermo Sentron Inc.
(TSR), Thermedics Detection Inc. (TDX), Thermo Instrument Systems Inc.
(THI), ThermoSpectra Corporation (THS), ThermoQuest Corporation (TMQ),
Thermo Optek Corporation (TOC), Thermo BioAnalysis Corporation (TBA),
Metrika Systems Corporation (MKA), Thermo Vision Corporation (VIZ),
Thermo TerraTech Inc. (TTT), Thermo Remediation Inc. (THN), The Randers
Group Incorporated (RGI.EC), ThermoTrex Corporation (TKN), ThermoLase
Corporation (TLZ), Trex Medical Corporation (TXM), Thermo Power
Corporation (THP), Thermo Fibertek Inc. (TFT), Thermo Fibergen Inc.
(TFG), and Thermo Ecotek Corporation (TCK).
Shareholder Services
Shareholders of Thermo Electron Corporation who desire information
about the Company are invited to contact John N. Hatsopoulos, President
and Chief Financial Officer, Thermo Electron Corporation, 81 Wyman
Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046, (781) 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.
Distribution of printed quarterly reports is limited to the second
quarter only. All material will be available from Thermo Electron's
Internet site (http://www.thermo.com).
69PAGE
Thermo Electron Corporation 1997 Financial Statements
Stock Transfer Agent
BankBoston N.A. is the stock transfer agent and maintains shareholder
activity records. The agent will respond to questions on issuance of
stock certificates, change of ownership, lost stock certificates, and
change of address. For these and similar matters, please direct inquiries
to:
BankBoston N.A.
c/o Boston EquiServe Limited Partnership
P.O. Box 8040
Boston, Massachusetts 02266-8040
(617) 575-3120
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.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended
January 3, 1998, as filed with the Securities and Exchange Commission,
may be obtained at no charge by writing to John N. Hatsopoulos, President
and Chief Financial Officer, Thermo Electron Corporation, 81 Wyman
Street, P.O. Box 9046, Waltham, Massachusetts 02254-9046.
Annual Meeting
The annual meeting of shareholders will be held on Tuesday, June 2,
1998, at 4:15 p.m. at the Hyatt Regency Hotel, Scottsdale, Arizona.
70PAGE
Thermo Electron Corporation 1997 Financial Statements
Ten Year Financial Summary
(In millions except per share amounts)
1997 1996(a) 1995 1994(b) 1993(c) 1992(d) 1991(e) 1990 1989 1988
--------------------------------------------------------------------------------------------------------
Statement of
Income Data:
Revenues $3,558.3 $2,932.6 $2,270.3 $1,729.2 $1,354.5 $999.2 $ 842.5 $744.5 $640.3 $553.7
Gross Profit 1,441.3 1,130.0 863.4 650.9 482.3 326.7 256.5 233.8 176.0 157.4
Operating
Income 405.8 246.5 225.2 182.1 119.2 70.5 43.6 40.9 23.6 25.8
Net Income 239.3 190.8 139.6 104.7 76.9 59.5 48.5 35.5 27.3 23.3
Earnings per
Share:
Basic 1.57 1.35 1.10 .90 .74 .62 .56 .46 .37 .33
Diluted 1.41 1.17 .95 .78 .65 .58 .53 .43 .35 .31
Balance Sheet
Data:
Working
Capital $2,002.0 $2,218.6 $1,317.1 $1,150.7 $ 833.8 $ 508.7 $ 468.4 $244.1 $277.6 $220.1
Total Assets 5,795.9 5,141.2 3,786.3 3,061.9 2,507.6 1,838.0 1,212.5 912.0 669.9 528.5
Long-term
Obligations 1,742.9 1,550.3 1,118.1 1,049.9 647.6 494.2 255.1 210.5 177.0 152.9
Minority
Interest 719.6 684.1 471.6 327.7 277.7 164.3 122.5 83.9 51.8 22.6
Common Stock of
Subsidiaries
Subject to
Redemption 93.3 76.5 17.5 - 14.5 5.5 5.5 8.7 13.1 -
Shareholders'
Investment 1,997.9 1,754.4 1,309.7 1,007.5 873.7 563.8 489.5 314.1 229.2 196.4
(a)Reflects the issuance of $585.0 million principal amount of convertible debentures.
(b)Reflects the issuance of $345.0 million principal amount of convertible debentures.
(c)Reflects the Company's 1993 public offering of common stock for net proceeds of$246.0 million.
(d)Reflects the issuance of $260.0 million principal amount of convertible debentures.
(e)Reflects the issuance of $164.0 million principal amount of convertible debentures.
71