SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended October 3, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-8002
THERMO ELECTRON CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2209186
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
Class Outstanding at October 30, 1998
----------------------------- -------------------------------
Common Stock, $1.00 par value 158,834,186
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
October 3, January 3,
(In thousands) 1998 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 416,084 $ 593,580
Short-term available-for-sale investments
at quoted market value (amortized cost
of $1,132,076 and $925,855) 1,135,876 929,118
Accounts receivable, less allowances of
$55,315 and $55,698 833,948 797,399
Unbilled contract costs and fees 81,529 69,375
Inventories:
Raw materials and supplies 273,790 260,458
Work in process 133,720 108,327
Finished goods 211,805 174,804
Prepaid income taxes 134,259 118,182
Prepaid expenses 48,264 42,955
---------- ----------
3,269,275 3,094,198
---------- ----------
Property, Plant, and Equipment, at Cost 1,268,395 1,159,913
Less: Accumulated depreciation and
amortization 443,375 370,867
---------- ----------
825,020 789,046
---------- ----------
Long-term Available-for-sale Investments,
at Quoted Market Value (amortized cost
of $89,498 and $49,581) 96,248 63,306
---------- ----------
Other Assets 173,515 157,108
---------- ----------
Cost in Excess of Net Assets of Acquired
Companies (Note 6) 1,880,069 1,692,211
---------- ----------
$6,244,127 $5,795,869
========== ==========
2
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 3, January 3,
(In thousands except share amounts) 1998 1998
- --------------------------------------------------------------------------
Current Liabilities:
Notes payable and current maturities of
long-term obligations $ 122,252 $ 176,912
Accounts payable 250,612 251,677
Accrued payroll and employee benefits 144,045 140,698
Accrued income taxes 99,961 57,923
Accrued installation and warranty costs 74,423 72,710
Deferred revenue 60,495 54,999
Other accrued expenses (Notes 6 and 8) 370,689 337,316
---------- ----------
1,122,477 1,092,235
---------- ----------
Deferred Income Taxes and Other Deferred Items 165,129 149,884
---------- ----------
Long-term Obligations:
Senior convertible obligations 187,042 187,824
Subordinated convertible obligations (Note 3) 1,642,114 1,473,015
Nonrecourse tax-exempt obligations 33,700 37,600
Other 31,687 44,468
---------- ----------
1,894,543 1,742,907
---------- ----------
Minority Interest 746,650 719,622
---------- ----------
Common Stock of Subsidiaries Subject to
Redemption ($95,262 redemption value) 94,054 93,312
---------- ----------
Shareholders' Investment (Note 7):
Preferred stock, $100 par value, 50,000
shares authorized; none issued
Common stock, $1 par value, 350,000,000
shares authorized; 166,970,711 and
159,206,337 shares issued 166,971 159,206
Capital in excess of par value 1,027,857 843,709
Retained earnings 1,179,500 1,034,640
Treasury stock at cost, 8,139,845 and
95,684 shares (146,032) (3,839)
Accumulated other comprehensive items (Note 4) (7,022) (35,807)
---------- ----------
2,221,274 1,997,909
---------- ----------
$6,244,127 $5,795,869
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues:
Product and service revenues $933,028 $869,424
Research and development contract revenues 44,141 40,426
-------- --------
977,169 909,850
-------- --------
Costs and Operating Expenses:
Cost of product and service revenues 554,474 500,739
Expenses for research and development (a) 93,177 83,974
Selling, general, and administrative expenses 234,246 205,884
Restructuring and other nonrecurring costs,
net (Note 8) 41,620 2,517
-------- --------
923,517 793,114
-------- --------
Operating Income 53,652 116,736
Gain on Issuance of Stock by Subsidiaries
(Note 2) (2,431) 18,587
Other Expense, Net (Note 3) (119) (4,763)
-------- --------
Income Before Income Taxes, Minority Interest,
and Extraordinary Items 51,102 130,560
Provision for Income Taxes 38,182 47,950
Minority Interest (Income) Expense (2,731) 20,751
-------- --------
Income Before Extraordinary Items 15,651 61,859
Extraordinary Items, Net of Provision for Income
Taxes and Minority Interest of $3,108 (Note 3) 1,931 -
-------- --------
Net Income $ 17,582 $ 61,859
======== ========
Earnings per Share (Notes 3 and 5):
Basic $ .11 $ .41
======== ========
Diluted $ .10 $ .36
======== ========
Weighted Average Shares (Notes 3 and 5):
Basic 163,362 150,345
======== ========
Diluted 163,936 176,191
======== ========
(a) Includes costs of:
Research and development contracts $ 39,280 $ 35,070
Internally funded research and development 53,897 48,904
-------- --------
$ 93,177 $ 83,974
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- ---------------------------------------------------------------------------
Revenues:
Product and service revenues $2,733,993 $2,426,797
Research and development contract revenues 135,238 121,574
---------- ----------
2,869,231 2,548,371
---------- ----------
Costs and Operating Expenses:
Cost of product and service revenues 1,608,519 1,413,400
Expenses for research and development (a) 278,147 242,765
Selling, general, and administrative expenses 685,300 605,611
Restructuring and other nonrecurring costs,
net (Note 8) 45,732 7,468
---------- ----------
2,617,698 2,269,244
Operating Income 251,533 279,127
Gain on Issuance of Stock by Subsidiaries
(Note 2) 51,775 67,467
Other Income (Expense), Net (Note 3) 4,839 (5,489)
---------- ----------
Income Before Income Taxes, Minority Interest,
and Extraordinary Items 308,147 341,105
Provision for Income Taxes 130,069 118,373
Minority Interest Expense 38,035 52,657
---------- ----------
Income Before Extraordinary Items 140,043 170,075
Extraordinary Items, Net of Provision for Income
Taxes and Minority Interest of $7,952 (Note 3) 4,817 -
---------- ----------
Net Income $ 144,860 $ 170,075
========== ==========
Earnings per Share (Notes 3 and 5):
Basic $ .89 $ 1.13
========== ==========
Diluted $ .84 $ 1.01
========== ==========
Weighted Average Shares (Notes 3 and 5):
Basic 162,887 150,196
========== ==========
Diluted 179,774 175,976
========== ==========
(a) Includes costs of:
Research and development contracts $ 118,641 $ 106,027
Internally funded research and development 159,506 136,738
---------- ----------
$ 278,147 $ 242,765
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
5
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- -------------------------------------------------------------------------
Operating Activities:
Net income $ 144,860 $ 170,075
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 119,755 99,223
Noncash restructuring and other
nonrecurring costs, net (Note 8) 14,780 7,468
Provision for losses on accounts
receivable 5,473 6,974
Change in deferred income taxes (3,746) 2,296
Minority interest expense 38,035 52,657
Gain on issuance of stock by
subsidiaries (Note 2) (51,775) (67,467)
Gain on sale of investments, net (5,125) (1,310)
Extraordinary items, net of minority
interest expense (Note 3) (9,733) -
Other noncash items 27,407 7,036
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable 15,274 (76,165)
Inventories (36,465) (20,543)
Other current assets (19,603) (9,838)
Accounts payable (28,968) (13,896)
Other current liabilities 8,691 (14,043)
----------- -----------
Net cash provided by operating activities 218,860 142,467
----------- -----------
Investing Activities:
Acquisitions, net of cash acquired
(Note 6) (177,678) (636,858)
Purchases of available-for-sale
investments (1,793,500) (717,850)
Proceeds from sale and maturities of
available-for-sale investments 1,549,940 1,147,287
Purchases of property, plant, and
equipment (108,785) (78,319)
Proceeds from sale of property, plant,
and equipment 12,283 11,276
Increase in other assets (23,153) (6,329)
Other 14,559 13,455
----------- -----------
Net cash used in investing activities $ (526,334) $ (267,338)
----------- -----------
6
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- -------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of long-term
obligations $ 244,649 $ 378,331
Repayment of long-term obligations (55,031) (45,858)
Net proceeds from issuance of Company and
subsidiary common stock (Note 7) 475,449 134,614
Purchases of Company and subsidiary common
stock and subordinated convertible
debentures (508,698) (246,185)
Decrease in short-term notes payable (28,404) (4,385)
Other (3,412) (3,876)
----------- -----------
Net cash provided by financing activities 124,553 212,641
----------- -----------
Exchange Rate Effect on Cash 5,425 (8,887)
----------- -----------
Increase (Decrease) in Cash and Cash
Equivalents (177,496) 78,883
Cash and Cash Equivalents at Beginning of
Period 593,580 414,404
----------- -----------
Cash and Cash Equivalents at End of Period $ 416,084 $ 493,287
=========== ===========
Noncash activities:
Conversions of subsidiary convertible
obligations $ 18,280 $ 65,239
=========== ===========
Fair value of assets of acquired companies $ 290,302 $ 828,425
Cash paid for acquired companies (190,759) (691,288)
Issuance of subsidiary common stock and
stock options for acquired companies (11,450) (4,093)
----------- -----------
Liabilities assumed of acquired
companies $ 88,093 $ 133,044
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
7
THERMO ELECTRON CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Electron Corporation (the Company) without audit and, in the opinion
of management, reflect all adjustments of a normal recurring nature necessary
for a fair statement of the financial position at October 3, 1998, the results
of operations for the three- and nine-month periods ended October 3, 1998, and
September 27, 1997, and the cash flows for the nine-month periods ended October
3, 1998, and September 27, 1997. Certain prior period amounts have been
reclassified to conform to the presentation in the current financial statements.
Interim results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of January 3, 1998, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K, as amended, for the fiscal year ended
January 3, 1998, filed with the Securities and Exchange Commission.
2. Transactions in Stock of Subsidiaries
Gain on issuance of stock by subsidiaries in the accompanying statement of
income for the nine-month period ended October 3, 1998, resulted primarily from
the following:
Public offering of 5,175,000 shares of Trex Medical Corporation common stock
at $13.75 per share for net proceeds of $66.9 million resulted in a gain of
$23.8 million that was recorded by ThermoTrex Corporation.
Private placement of 781,921 shares of Thermo Trilogy Corporation common
stock at $8.25 per share for net proceeds of $6.0 million resulted in a gain
of $2.2 million that was recorded by Thermo Ecotek Corporation.
Initial public offering of 3,300,000 shares of ONIX Systems Inc. common
stock at $14.50 per share for net proceeds of $43.2 million resulted in a
gain of $10.0 million that was recorded by Thermo Instrument Systems Inc.
Private placement of 1,543,000 shares of Thermo Coleman Corporation common
stock at $10.00 per share for net proceeds of $14.3 million resulted in a
gain of $7.2 million.
8
2. Transactions in Stock of Subsidiaries (continued)
Public offering of 3,000,000 shares of Thermo BioAnalysis Corporation common
stock at $18.125 per share for net proceeds of $51.5 million resulted in a
gain of $8.3 million that was recorded by Thermo Instrument in the second
quarter of 1998. In the third quarter of 1998, Thermo BioAnalysis
repurchased 550,000 shares of its common stock, which resulted in a gain
reversal of $2.4 million that was recorded by Thermo Instrument.
Conversion of $1.8 million of Thermo Optek Corporation 5% subordinated
convertible debentures, convertible at $13.94 per share, into 127,646 shares
of Thermo Optek common stock resulted in a gain of $0.9 million that was
recorded by Thermo Instrument.
Conversion of $4.0 million of ThermoQuest Corporation 5% subordinated
convertible debentures, convertible at $16.50 per share, into 239,393 shares
of ThermoQuest common stock resulted in a gain of $1.8 million that was
recorded by Thermo Instrument.
3. Other Income (Expense), Net and Extraordinary Items
Other Income (Expense), Net
The components of other income (expense), net in the accompanying statement
of income are as follows:
Three Months Ended Nine Months Ended
-------------------- --------------------
Oct. 3, Sept. 27, Oct. 3, Sept. 27,
(In thousands) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Interest Income $ 25,253 $ 20,332 $ 77,482 $ 63,451
Interest Expense (25,110) (24,896) (77,077) (67,794)
Equity in Loss of
Unconsolidated
Subsidiaries (162) (475) (636) (722)
Gain (Loss) on Sale of
Investments, Net (127) 714 5,125 1,310
Other 27 (438) (55) (1,734)
-------- -------- -------- --------
$ (119) $ (4,763) $ 4,839 $ (5,489)
======== ======== ======== ========
Extraordinary Items
During the third quarter of 1998, ThermoTrex repurchased $35.6 million
principal amount of its 3 1/4% subordinated convertible debentures for $30.5
million in cash, which resulted in an extraordinary gain recorded by ThermoTrex.
In addition, in the third quarter of 1998, a majority-owned subsidiary of Thermo
Instrument repurchased $5.0 million principal amount of its 5% subordinated
convertible debentures for
9
3. Other Income (Expense), Net and Extraordinary Items (continued)
$4.6 million in cash, which resulted in an extraordinary gain recorded by Thermo
Instrument. The combined extraordinary gain resulting from these transactions
was $1.9 million, net of taxes and minority interest of $3.1 million.
In June 1998, Thermedics Inc. offered holders of its noninterest-bearing
subordinated convertible debentures due 2003, convertible at $31.125 per share,
the opportunity to exchange such debentures for newly issued 2 7/8% subordinated
convertible debentures due 2003, convertible at $14.928 per share. Holders of
$21.7 million principal amount of outstanding debentures exchanged such
debentures for $15.9 million principal amount of newly issued debentures.
Thermedics recognized an extraordinary gain on this transaction in accordance
with the provisions of Emerging Issues Task Force Pronouncement (EITF) No.
96-19. In addition, earlier in the second quarter of 1998, Thermedics
repurchased $2.7 million principal amount of its noninterest-bearing
subordinated convertible debentures for $2.1 million in cash, which also
resulted in an extraordinary gain recorded by Thermedics. The combined
extraordinary gain resulting from these transactions was $2.2 million, net of
taxes and minority interest of $3.6 million.
During the first quarter of 1998, Thermedics and one of its majority-owned
subsidiaries repurchased $11.5 million principal amount of their subordinated
convertible debentures for $9.3 million in cash, which resulted in an
extraordinary gain of $0.7 million, net of taxes and minority interest of $1.3
million.
The extraordinary gains recorded by the Company increased basic and diluted
earnings per share by $.01 in the third quarter of 1998 and $.03 in the first
nine months of 1998.
4. Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income and "other comprehensive items," which
represents certain amounts that are reported as components of shareholders'
investment in the accompanying balance sheet, including foreign currency
translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments. During the third quarter of 1998 and 1997, the
Company's comprehensive income totaled $44.9 million and $52.4 million,
respectively. During the first nine months of 1998 and 1997, the Company's
comprehensive income totaled $165.0 million and $141.5 million, respectively.
10
5. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Nine Months Ended
------------------ ------------------
(In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Basic
Net Income $ 17,582 $ 61,859 $144,860 $170,075
-------- -------- -------- --------
Weighted Average Shares 163,362 150,345 162,887 150,196
-------- -------- -------- --------
Basic Earnings per Share $ .11 $ .41 $ .89 $ 1.13
======== ======== ======== ========
Diluted
Net Income $ 17,582 $ 61,859 $144,860 $170,075
Effect of:
Convertible debentures - 4,946 11,002 14,864
Majority-owned subsidiaries'
dilutive securities (999) (3,407) (5,280) (6,820)
-------- -------- -------- --------
Income Available to Common
Shareholders, as Adjusted $ 16,583 $ 63,398 $150,582 $178,119
-------- -------- -------- --------
Weighted Average Shares 163,362 150,345 162,887 150,196
Effect of:
Convertible debentures - 23,736 15,476 23,792
Stock options 574 2,110 1,411 1,988
-------- -------- -------- --------
Weighted Average Shares,
as Adjusted 163,936 176,191 179,774 175,976
-------- -------- -------- --------
Diluted Earnings per Share $ .10 $ .36 $ .84 $ 1.01
======== ======== ======== ========
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 October 3, 1998, there were 4,515,000 such
options outstanding, with exercise prices ranging from $21.45 to $43.46 per
share.
In addition, the computation of diluted earnings per share for the
three-month period ended October 3, 1998, excludes the effect of assuming the
conversion of the Company's $585.0 million principal amount 4 1/4% subordinated
convertible debentures, convertible at $37.80 per share, because the effect
would be antidilutive.
6. Acquisitions
The Company and its majority-owned subsidiaries made several acquisitions
during the first nine months of 1998 for $177.7 million in cash, net of cash
acquired, and the issuance of subsidiary common stock
11
6. Acquisitions (continued)
valued at $11.5 million, subject to post-closing adjustments. These acquisitions
have been accounted for using the purchase method of accounting, and their
results have been included in the accompanying financial statements from their
respective dates of acquisition. The aggregate cost of these acquisitions
exceeded the estimated fair value of the acquired net assets by $140.4 million,
which is being amortized over periods not exceeding 40 years. Allocation of the
purchase price for these acquisitions was based on estimates of the fair value
of the net assets acquired and is subject to adjustment upon finalization of the
purchase price allocations. The Company has gathered no information that
indicates the final allocations will differ materially from the preliminary
estimates. Pro forma results have not been presented as the results of the
acquired businesses were not material to the Company's results of operations.
During 1996, Thermo Instrument undertook a restructuring of a substantial
portion of the businesses constituting the Scientific Instruments Division of
Fisons plc, acquired in March 1996. In March 1997, Thermo Instrument finalized
its plan for restructuring the acquired businesses. At January 3, 1998, the
remaining reserve for these restructuring activities totaled $11.1 million.
During the first nine months of 1998, Thermo Instrument expended $1.5 million
for restructuring costs, primarily for abandoned-facility and severance
payments. At October 3, 1998, the remaining reserve for restructuring these
businesses was $10.0 million, as adjusted for the impact of currency
translation, which is included in other accrued expenses in the accompanying
balance sheet and is primarily for ongoing payments for abandoned-facilities
and, to a lesser extent, severance.
7. Sale of Common Stock
In April 1998, the Company sold 7,475,000 shares of its common stock at
$40.625 per share for net proceeds of $290.2 million.
8. Restructuring and Other Nonrecurring Costs
During the third quarter of 1998, the Company recorded restructuring and
related costs of $57.1 million as described below, including restructuring costs
of $41.6 million, inventory write-downs of $8.6 million, and a tax asset
write-off of $6.9 million. The inventory write-downs are included in cost of
revenues and the tax asset write-off is included in the provision for income
taxes in the accompanying statement of income. In addition, during the second
quarter of 1998, the Company recorded $4.1 million of restructuring and other
nonrecurring costs.
Thermo Instrument Systems Inc.
Thermo Instrument recorded restructuring and related costs of $30.5 million
during the third quarter of 1998. Restructuring costs of $21.9 million consist
of $17.2 million related to severance costs for approximately 760 employees
across all functions, $4.3 million related primarily to facility-closing costs,
and $0.4 million related to the loss
12
8. Restructuring and Other Nonrecurring Costs (continued)
on the sale of a division. The charge for facility-closing costs includes $2.2
million for write-downs of related fixed assets. In addition, Thermo Instrument
recorded $8.6 million of inventory write-downs, included in cost of revenues in
the accompanying financial statements, related to discontinuing certain product
lines and increased excess and obsolescence reserves associated with lower
product demand.
In connection with these actions, Thermo Instrument expects to incur
additional costs in the fourth quarter of 1998 and the first quarter of 1999
totaling $2.2 million for costs not permitted as charges in the third quarter of
1998, pursuant to EITF No. 94-3. These costs primarily include costs to move
inventories, and certain employee relocation and related costs. Thermo
Instrument expects to complete the implementation of its restructuring plans in
the first half of 1999. As of October 3, 1998, Thermo Instrument had terminated
274 employees and had expended $1.7 million of the established reserves.
In addition, five former employees of Thermo Instrument's Epsilon
Industrial, Inc. subsidiary had sought damages in an arbitration proceeding for
alleged breaches of agreements entered into with such employees prior to
Epsilon's acquisition by Thermo Instrument. The arbitrators rendered a decision
with respect to such claims during the second quarter of 1998, and Thermo
Instrument recorded $1.4 million of nonrecurring costs related to the resolution
of this matter at that time.
ThermoTrex Corporation
ThermoLase Corporation, a subsidiary of ThermoTrex, recorded restructuring
and related costs of $15.1 million during the third quarter of 1998.
Restructuring costs of $8.2 million recorded during the third quarter of 1998
consist of $4.6 million related to the closure of three Spa Thira locations,
including $2.4 million for the write-off of leasehold improvements and related
spa assets, and $2.2 million primarily for abandoned-facility payments. In
addition, in connection with the closure of another spa which was operated under
a joint venture agreement, ThermoLase recorded costs of $3.6 million, primarily
to liquidate the joint venture and to write-off its remaining investment.
ThermoLase also recorded a charge of $6.9 million to write off certain tax
assets, primarily loss carryforwards due to uncertainty concerning their
realization as a result of ThermoLase's recent operating results. This amount is
included in provision for income taxes in the accompanying financial statements.
During the second quarter of 1998, ThermoLase recorded restructuring costs of
$1.9 million related to certain actions, including the relocation of its
headquarters from California to Texas. This amount included $1.2 million for
severance for 40 terminated employees and $0.8 million for the write-off of
fixed assets no longer of use.
13
8. Restructuring and Other Nonrecurring Costs (continued)
Thermo TerraTech Inc.
Thermo TerraTech recorded restructuring costs of $10.2 million during the
third quarter of 1998. Of these restructuring costs, $9.2 million was recorded
by ThermoRetec Corporation (formerly Thermo Remediation Inc.), a majority-owned
subsidiary of Thermo TerraTech, in connection with the closure of two
soil-recycling facilities. The costs included a write-down of fixed assets to
their estimated disposal value and a write-off of intangible assets, including
cost in excess of net assets of acquired companies, as well as other closure
costs. In addition, Thermo TerraTech recorded $1.0 million of restructuring
costs for abandoned-facility payments relating to the consolidation of the
facilities of another business.
Other
Thermo Power Corporation recorded restructuring and other nonrecurring costs
of $1.0 million during the third quarter of 1998 relating to a loss on
discontinuance of its engines business. The Company's wholly owned SensorMedics
Corporation subsidiary recorded restructuring costs of $0.7 million during the
second quarter of 1998, primarily for severance, in connection with a
reorganization of a subsidiary in the Netherlands. In addition, the Company
recorded additional Biomedical Products segment restructuring costs of $0.3
million during the third quarter of 1998.
The remaining liability for severance and facility-closing costs of $26.4
million is included in other accrued expenses in the accompanying balance sheet
at October 3, 1998.
9. Proposed Reorganization
On August 12, 1998, the Company announced a proposed reorganization
involving the Company and certain of its subsidiaries. The goals of the proposed
reorganization include (1) consolidating and strategically realigning certain
businesses to enhance their competitive market positions and improve management
coordination and (2) increasing liquidity in the public markets by providing
larger market floats for the Company's publicly traded subsidiaries. If
completed as proposed, the reorganization would reduce the number of the
Company's majority-owned public subsidiaries from 23 to 15. It may take up to
two years to complete all aspects of the plan. Each component of the
reorganization is subject to numerous conditions, including the following (not
all of which are applicable to each component): establishment of prices and/or
exchange ratios; confirmation of anticipated tax consequences; approval by the
boards of directors (including the independent directors) of each of the
affected majority-owned subsidiaries; negotiation and execution of definitive
purchase and sale or merger agreements; clearance, where necessary, by the
Securities and Exchange Commission of any necessary documents regarding the
proposed transactions; and, where appropriate, fairness opinions from one or
more investment banking firms on certain financial aspects of the transactions.
14
9. Proposed Reorganization (continued)
The proposed reorganization can be summarized as follows. One or more of
these transactions may not occur if the applicable conditions described above
are not satisfied.
Reorganization of Biomedical Businesses
The Company may transfer its wholly owned Thermo Biomedical group of
subsidiaries to Thermedics. Thermedics is a majority-owned, publicly traded
subsidiary of the Company. The Company would transfer the Thermo Biomedical
subsidiaries to Thermedics in exchange for newly issued shares of common stock
of Thermedics.
Realignment of Instrument Companies
Thermedics may transfer to the Company its equity interests in Thermo
Sentron Inc., Thermedics Detection Inc., and Thermo Voltek Corp., each presently
majority-owned, publicly traded subsidiaries of Thermedics, in exchange for a
portion of the shares of Thermedics held by the Company. The Company would then
transfer its equity interests in Thermo Sentron and Thermedics Detection to
Thermo Instrument in exchange for cash. Thermo Instrument is a majority-owned,
publicly traded subsidiary of the Company.
In addition, Metrika Systems Corporation and ONIX Systems, majority-owned,
publicly traded subsidiaries of Thermo Instrument, and Thermo Sentron may merge
to form one majority-owned, publicly traded subsidiary of Thermo Instrument.
Shareholders of Metrika Systems, ONIX Systems, and Thermo Sentron would receive
shares of common stock of the combined entity in exchange for their shares of
common stock of Metrika Systems, ONIX Systems, and Thermo Sentron, respectively.
ThermoSpectra Corporation, a majority-owned, publicly traded subsidiary of
Thermo Instrument, and Thermedics Detection, may be taken private and become
wholly owned subsidiaries of Thermo Instrument. The public shareholders of
ThermoSpectra and Thermedics Detection would receive cash or newly issued shares
of common stock of Thermo Instrument in exchange for their shares of common
stock of ThermoSpectra and Thermedics Detection, respectively.
Consolidation of Industrial Outsourcing Companies
The Randers Group Incorporated and ThermoRetec, both majority-owned,
publicly traded subsidiaries of Thermo TerraTech, a majority-owned, publicly
traded subsidiary of the Company, along with Thermo EuroTech N.V., a
majority-owned, private subsidiary of Thermo TerraTech, may merge into Thermo
TerraTech. Shareholders of each of Randers, ThermoRetec, and Thermo EuroTech
would receive shares of common stock of Thermo TerraTech in exchange for their
shares of common stock of Randers, ThermoRetec, and Thermo EuroTech,
respectively.
15
9. Proposed Reorganization (continued)
Other Reorganizations
Thermo Coleman, a majority-owned, private subsidiary of the Company, may
merge into ThermoTrex, a majority-owned, publicly traded subsidiary of the
Company. Shareholders of Thermo Coleman, including the Company, would receive
newly issued shares of common stock of ThermoTrex in exchange for their shares
of common stock of Thermo Coleman.
Thermo Power, a majority-owned, publicly traded subsidiary of the Company,
may be taken private and become a wholly owned subsidiary of the Company. The
public shareholders of Thermo Power would receive cash or newly issued shares of
common stock of the Company in exchange for their shares of common stock of
Thermo Power.
10. Subsequent Events
Sale of Notes
In October 1998, the Company issued and sold $150.0 million principal amount
of 7 5/8% notes due 2008. Proceeds of $138.0 million were net of $10.4 million
incurred on treasury rate lock agreements entered into by the Company to hedge
the interest rate on the notes and other associated costs. As a result of the
rate lock agreements and associated costs, the effective interest rate on the
notes is 8.86%.
Equity Transactions
In October 1998, in a series of transactions with an institutional
counterparty, the Company sold put options for 3,334,000 shares of its common
stock at an average exercise price per share of $14.14 and purchased call
options for 1,667,000 shares of its common stock at an average exercise price
per share of $14.90. The Company sold two put options for each call option
purchased. No cash was exchanged as a result of these transactions. After
completion of these transactions, the Company has a maximum potential obligation
under the put options to buy back 3,334,000 shares for an aggregate of $47.1
million. These put and call options are exercisable only at maturity and expire
between January and April 2000. The Company has the right to settle the put
options by physical settlement of the options or by net share settlement using
shares of the Company's common stock. The Company may, from time to time, enter
into additional put and call option arrangements.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are
16
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
intended to identify forward-looking statements. There are a number of important
factors that could cause the results of the Company to differ materially from
those indicated by such forward-looking statements, including those detailed
under the heading "Forward-looking Statements" in Exhibit 13 to the Company's
Annual Report on Form 10-K, as amended, for the fiscal year ended January 3,
1998, filed with the Securities and Exchange Commission.
Results of Operations
Third Quarter 1998 Compared With Third Quarter 1997
Sales in the third quarter of 1998 were $977.2 million, an increase of $67.3
million, or 7%, over the third quarter of 1997. Segment income, excluding
inventory write-downs of $8.6 million in 1998 and restructuring and other
nonrecurring costs of $41.6 million and $2.5 million in 1998 and 1997,
respectively, described below, decreased to $111.6 million in 1998 from $127.3
million in 1997. (Segment income is income before corporate general and
administrative expenses, other income and expense, minority interest, and income
taxes.) Operating income, which includes restructuring and other nonrecurring
costs, decreased to $53.7 million in 1998 from $116.7 million in 1997.
Instruments
Sales from the Instruments segment were $407.0 million in 1998, compared
with $403.9 million in 1997. Sales increased due to acquisitions made by Thermo
Instrument Systems Inc., which added $29.8 million in sales. This increase was
substantially offset by a decrease in sales at existing businesses, including a
decrease of $11.2 million at Thermo Optek Corporation, primarily due to lower
sales to customers in Asia and to the semiconductor industry and a decrease of
$8.2 million at ThermoSpectra Corporation, primarily due to the downturn in the
semiconductor industry. In addition, certain other business units experienced
lower demand, partially as a result of global economic conditions. In total, 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 $1.0 million in 1998. Backlog for the Instruments
segment decreased $7.3 million during the first nine months of 1998 to $291.6
million. Backlog decreased primarily at Thermo Optek and ThermoSpectra,
principally as a result of a decrease in demand in Asia and a slowdown in the
semiconductor and related industries.
Segment income margin (segment income margin is segment income as a
percentage of sales), excluding restructuring and other nonrecurring costs of
$21.9 million in 1998, decreased to 10.1% in 1998 from 15.0% in 1997, primarily
due to $8.6 million of inventory write-downs for discontinued product lines and
excess inventories caused by lower customer demand. In addition, segment income
margin decreased due to higher costs relating to the opening and expansion of
sales and service
17
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
offices at certain business units of Thermo BioAnalysis Corporation and the
effect of lower sales at certain business units without a proportional reduction
in costs. The recent restructuring actions described below and in Note 8 of
Notes to Consolidated Financial Statements will reduce costs in the future.
Segment margin in 1997 included the unfavorable effect of an inventory write-off
at ThermoSpectra. Restructuring and other nonrecurring costs of $21.9 million in
1998 were recorded by wholly and majority-owned businesses of Thermo Instrument,
primarily for severance costs. Thermo Instrument expects to complete the
implementation of its restructuring plan in the first half of 1999. In
connection with the closing of certain facilities, Thermo Instrument expects to
incur additional costs during the fourth quarter of 1998 and the first quarter
of 1999 totaling $2.2 million.
Biomedical Products
Sales from the Biomedical Products segment were $158.4 million in 1998, an
increase of $15.5 million, or 11%, over the 1997 period. Sales increased $24.2
million due to the inclusion of revenues from acquired businesses. This increase
was offset in part by a reduction in revenues at several existing businesses of
Trex Medical Corporation due in part to shipment delays at two business units as
customers renovate sites for delivery of certain large equipment. Such shipments
are expected to occur primarily in the next two quarters. To a lesser extent,
revenues decreased at ThermoLase Corporation primarily due to lower demand at
its spa services business and the inclusion in 1997 of $1.5 million of fees from
international licensing arrangements. Rather than continuing to open additional
spas, ThermoLase intends to concentrate its resources on both increasing the
capacity utilization of its existing spas and expanding its physicians'
licensing program and international licensing arrangements. In response to the
decrease in revenues, ThermoLase significantly reduced its prices in April 1998
in an attempt to establish an optimum price point that will result in increased
demand and higher revenues. In addition, in June 1998, ThermoLase acquired The
Greenhouse Spa, Inc., a full-service, luxury destination spa. Following this
acquisition, ThermoLase closed four spas and announced its intention to convert
its remaining eleven Spa Thira locations into full-service luxury day spas
offering an expanded line of products and services. There can be no assurance
that these strategies will be successful.
Segment income, excluding restructuring and other nonrecurring costs of $8.2
million in 1998, decreased to $10.0 million in 1998 from $13.9 million in 1997.
This decrease resulted from lower income at certain units of Trex Medical as a
result of lower sales and a segment loss of $1.0 million at its newly acquired
Trophy Radiologie subsidiary. Trex Medical is restructuring certain parts of
Trophy Radiologie, including its sales and marketing function. Trophy
Radiologie's sales during the third quarter of 1998 were adversely affected by
these activities. In addition, higher marketing expenses to promote Trophy
Radiologie as a Trex Medical company and a nonrecurring charge of $0.3 million
related to the sale of inventories revalued at the date of acquisition
contributed to Trophy Radiologie's segment loss. Also contributing to lower
18
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
profitability was the effect of an increase in segment loss at ThermoLase to
$6.4 million in 1998 from $5.2 million in 1997 resulting from a loss at its
beauty products subsidiary due in part to an increase in promotional spending
and other costs related to product introductions. These decreases in segment
income were offset in part by the inclusion of segment income from acquired
businesses. The effect of operating its spas below maximum capacity, as
ThermoLase works to convert the spas into full-service, luxury day spas, will
continue to have a negative effect on ThermoLase's segment income. Restructuring
and other nonrecurring costs of $8.2 million in 1998 were recorded by ThermoLase
in connection with the closure of four spas. The costs primarily represent a
write-off of leasehold improvements and related spa assets and
abandoned-facility payments (Note 8). The degree to which ThermoLase is
successful in improving its profitability will affect the future of its
remaining spas and the realizability of its related assets.
Advanced Technology
Sales from the Advanced Technology segment increased 12% to $118.8 million
in 1998 from $106.5 million in 1997. Revenues from Thermo Sentron Inc. increased
to $29.1 million in 1998 from $19.5 million in 1997, primarily due to the
inclusion of $11.0 million of sales from acquired businesses, offset in part by
lower demand and the unfavorable effects of currency translation. Sales from
ThermoTrex Corporation's contract research business units increased $5.0 million
in 1998, primarily as a result of the inclusion of $3.3 million in sales from
acquired businesses at its Trex Communications Corporation subsidiary. Sales at
Thermo Coleman Corporation were $42.1 million in 1998, compared with $40.3
million in 1997. This increase resulted from higher revenues from government
contracts, offset in part by a decline in sales at its Thermo Information
Solutions Inc. subsidiary. The decrease in sales at Thermo Information Solutions
was due to lower sales of kiosk units as a result of substantially exiting this
business, offset in part by higher revenues from Internet-related services.
Sales at Thermedics Detection Inc. decreased 10% to $23.6 million in 1998,
primarily due to lower demand for laboratory products and near-infrared
analyzers. Sales at Thermo Voltek Corp. decreased to $8.7 million in 1998 from
$11.1 million in 1997, primarily as a result of lower demand for
electromagnetic-compatibility test instruments, due in part to lower sales in
Europe as well as unstable economic conditions in Asia.
Segment income decreased to $8.0 million in 1998 from $10.9 million in 1997,
excluding $1.4 million of nonrecurring charges in 1997. This decrease resulted
from lower segment income at Thermedics Detection and Thermo Voltek, primarily
due to lower sales, offset in part by an increase in profitability at Thermo
Coleman as a result of higher sales. In 1997, Trex Communications incurred a
charge of $1.4 million for the write-off of in-process technology associated
with an acquisition.
19
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
Alternative Energy
Sales from the Alternative Energy segment increased to $146.0 million in
1998 from $97.7 million in 1997. Revenues from Thermo Ecotek Corporation
increased to $63.2 million in 1998 from $59.5 million in 1997. Thermo Ecotek's
energy revenues decreased to $52.4 million in 1998 from $53.9 million in 1997.
This decrease was due to $8.2 million of nonrecurring revenue in the 1997 period
related to a contractual settlement with a utility under which Thermo Ecotek
surrendered its rights to a power sales agreement. In the 1998 period, Thermo
Ecotek had $1.9 million of nonrecurring revenue from fees received for the
release of its rights to certain power-generating equipment. Excluding the
nonrecurring revenues, Thermo Ecotek's energy revenues increased due to an
increase in contractual energy rates at certain facilities and the inclusion of
$1.6 million of revenues from newly acquired power operations in the Czech
Republic. From various dates in 1998 onward, no further rate increases will
occur at Thermo Ecotek's four energy facilities in California. Revenues from
Thermo Ecotek's Thermo Trilogy Corporation biopesticide subsidiary increased
$5.2 million to $10.8 million, primarily due to the inclusion of revenues from
an acquired business. Sales at Thermo Power Corporation increased to $71.7
million in 1998 from $29.6 million in 1997, primarily due to the inclusion of
$42.6 million of sales from acquired businesses, primarily Peek plc, acquired in
November 1997.
Segment income, excluding restructuring and other nonrecurring costs of $1.0
million in 1998, was $29.2 million in 1998, compared with $27.6 million in 1997.
Thermo Ecotek's segment income was $22.6 million in 1998, compared with $25.5
million in 1997. This decrease resulted from $8.2 million of nonrecurring income
in the 1997 period related to a contractual settlement with a utility, offset in
part by nonrecurring income of $1.9 million in the 1998 period from fees
received for the release of its rights to certain power-generating equipment. In
addition, Thermo Ecotek's segment income was favorably impacted in 1998 by rate
increases at certain facilities and higher profitability at Thermo Trilogy,
primarily as a result of contributions from an acquired business. Segment income
at Thermo Power, excluding restructuring and other nonrecurring costs, improved
to $6.1 million in 1998 from $1.8 million in 1997, primarily due to
contributions from Peek. Due to funding patterns of government entities, as well
as seasonality, Peek has historically experienced higher sales and segment
income in the second and fourth calendar quarters and lower amounts in the first
and third calendar quarters. Restructuring and other nonrecurring costs of $1.0
million in 1998 were recorded by Thermo Power relating to a loss on
discontinuance of its engines business (Note 8).
Industrial Outsourcing
Sales in the Industrial Outsourcing segment were $87.3 million in 1998, an
increase of $7.5 million, or 9%, over 1997. Revenues from Thermo TerraTech
Inc.'s environmental-liability management services increased to $39.1 million in
1998 from $37.0 million in 1997, primarily due to the
20
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
inclusion of $4.3 million of sales from acquired businesses and, to a lesser
extent, greater demand at certain businesses. These increases were offset in
part by a $5.5 million decrease in revenues at one of ThermoRetec Corporation's
business units resulting from a decline in the number of contracts in process.
Revenues from Thermo TerraTech's engineering and design services increased $2.4
million in 1998, primarily due to an increase in construction and labor
management services. Sales of metallurgical services increased $1.8 million in
1998, principally due to increased demand.
Segment income, excluding restructuring and other nonrecurring costs of
$10.2 million in 1998, was $7.3 million in 1998, compared with $6.5 million in
1997. Segment income increased in 1998 principally as a result of the increase
in sales of metallurgical services and improved profitability in that business.
Restructuring and other nonrecurring costs of $10.2 million include $9.2 million
of costs at ThermoRetec related to the closure of two soil-recycling facilities
and $1.0 million for abandoned-facility payments at Thermo TerraTech relating to
the consolidation of facilities (Note 8).
Paper Recycling
Sales in the Paper Recycling segment decreased to $61.8 million in 1998 from
$81.4 million in 1997. Sales from Thermo Fibertek Inc. decreased 12% to $59.7
million in 1998 from $67.6 million in 1997, primarily due to a decrease in
revenues from its recycling and water-management businesses as a result of a
decrease in demand in Asia and North America. These decreases were offset in
part by the inclusion of $2.7 million of revenues from acquired businesses. The
unfavorable effects of currency translation reduced Thermo Fibertek's revenues
by $0.5 million in 1998. Sales from Thermo TerraTech's thermal-processing
equipment business, sold in October 1997, were $9.9 million in 1997.
Segment income margin, excluding restructuring and other nonrecurring costs
of $1.1 million in 1997, was 12.0% in 1998, compared with 9.5% in 1997. This
increase primarily resulted from improvements at Thermo Fibertek and the
inclusion in 1997 of lower segment income margins from Thermo TerraTech's
thermal-processing equipment business. Thermo Fibertek recorded restructuring
and other nonrecurring costs of $1.1 million in 1997, primarily for severance
costs.
Gain on Issuance of Stock by Subsidiaries
The Company has adopted a strategy of spinning out certain of its businesses
into separate subsidiaries and having these subsidiaries sell a minority
interest to outside investors. The Company believes that this strategy provides
additional motivation and incentives for the management of the subsidiary
through the establishment of subsidiary-level stock option programs, as well as
capital to support the subsidiary's growth. As a result of the sale of stock by
subsidiaries and the issuance of stock by subsidiaries upon conversion of
convertible debentures, the Company records gains that represent the increase in
the Company's net
21
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
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. In the third quarter of 1998, Thermo
BioAnalysis repurchased shares of its common stock, which resulted in a reversal
of $2.4 million of previously recorded gains (Note 2). The Company recorded
gains of $18.6 million in 1997 as a result of subsidiary stock transactions. The
Company recorded minority interest income of $2.7 million in 1998 and minority
interest expense of $20.8 million in 1997. Minority interest includes $0.4
million of income in 1998 and $5.1 million of expense in 1997 related to a gain
reversal and gains, respectively, recorded by the Company's majority-owned
subsidiaries as a result of stock transactions by their subsidiaries.
Income Taxes
Excluding nontaxable gains from issuance of subsidiary stock and, in 1998,
the effect of a write-off of $6.9 million of tax assets, the Company's effective
tax rates were 58% and 43% in the 1998 and 1997 periods, respectively. The tax
assets were at ThermoLase and consisted primarily of tax loss carryforwards
(Note 8). The effective tax rate increased in 1998 primarily as a result of the
larger relative effect of nondeductible expenses, including amortization of cost
in excess of net assets of acquired companies, due to lower income as a result
of restructuring and related costs recorded in the 1998 period. In both periods,
the effective tax rates exceed the statutory federal income tax rate primarily
due to nondeductible expenses and state income taxes.
First Nine Months 1998 Compared With First Nine Months 1997
Sales in the first nine months of 1998 were $2,869.2 million, an increase of
$320.9 million, or 13%, over the first nine months of 1997. Segment income,
excluding inventory write-downs of $8.6 million and restructuring and other
nonrecurring costs of $45.7 million in 1998 and $7.5 million in 1997, described
below, increased to $329.4 million in 1998 from $310.6 million in 1997.
Operating income, which includes restructuring and other nonrecurring costs, was
$251.5 million in 1998, compared with $279.1 million in 1997.
Instruments
Sales from the Instruments segment increased $72.1 million, or 6%, to
$1,210.3 million in 1998. Sales increased due to acquisitions made by Thermo
Instrument, which added $122.3 million of sales in 1998. 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 $16.3 million in 1998. Revenues decreased $18.9 million at Thermo
Optek as a result of the reasons discussed in the results of operations for the
third quarter. At
22
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
ThermoQuest, revenues from Asia decreased $12.0 million due to economic
uncertainty in that region. In addition, revenues from ThermoSpectra's existing
businesses decreased due to lower sales to the semiconductor industry.
Segment income margin, excluding restructuring and other nonrecurring costs
of $23.3 million in 1998 and $0.8 million in 1997, decreased to 13.4% in 1998
from 14.6% in 1997, primarily due to the reasons discussed in the results of
operations for the third quarter. Segment income margin in the 1997 period
included the unfavorable effect of an adjustment to expense of $3.2 million
relating to the sale of inventories revalued at the time of the acquisition of
Life Sciences International PLC and an inventory write-off at ThermoSpectra.
Restructuring and other nonrecurring costs of $21.9 million in 1998 are
discussed in the results of operations for the third quarter. In addition,
Thermo Instrument recorded $1.4 million of costs relating to the resolution of
an arbitration proceeding concluded during the second quarter of 1998 (Note 8).
Restructuring and other nonrecurring costs of $0.8 million in 1997 represent
severance for employees terminated at one of ThermoSpectra's business units.
Biomedical Products
Sales from the Biomedical Products segment were $489.9 million in 1998, an
increase of $65.5 million, or 15%, over the 1997 period. Sales increased due to
the inclusion of $55.9 million of sales from acquired businesses as well as
increased demand at Trex Medical, Bird Medical Technologies, Inc. and, to a
lesser extent, Thermo Cardiosystems Inc. These increases were offset in part by
a decrease in revenues of $10.0 million at ThermoLase. This decrease was
primarily due to lower demand at ThermoLase's spa services business, the
inclusion in 1997 of $3.9 million of fees from international licensing
arrangements and, to a lesser extent, lower revenues from the sale of beauty
products.
Segment income, excluding restructuring costs of $10.9 million in 1998,
increased to $43.4 million in 1998 from $34.0 million in 1997. This increase
resulted substantially from improvements at existing businesses, primarily at
Bird Medical and Trex Medical, as a result of higher revenues and, to a lesser
extent, the inclusion of segment income from acquired businesses. These
increases were offset in part by an increase in segment loss at ThermoLase to
$20.3 million in 1998 from $15.9 million in 1997, primarily due to a decrease in
revenues, as well as increased fixed costs associated with operating more spas
and operating losses from its beauty products subsidiary compared with
profitable operations in the prior year. Restructuring costs of $10.9 million in
1998 include $10.2 million recorded by ThermoLase in connection with the closure
of four spas and certain actions including the relocation of ThermoLase's
headquarters to Texas where it maintains another facility. In addition, $0.7
million of restructuring costs, primarily for severance, were recorded by
SensorMedics Corporation in connection with the reorganization of a subsidiary
in the Netherlands.
23
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
Advanced Technology
Sales from the Advanced Technology segment increased to $328.1 million in
1998 from $302.9 million in 1997. Revenues from Thermo Sentron increased to
$69.7 million in 1998 from $56.0 million in 1997, primarily due to the inclusion
of $14.5 million of sales from acquired businesses and, to a lesser extent,
increased demand, offset in part by the unfavorable effects of currency
translation. Sales from ThermoTrex's business units increased $14.7 million in
1998, primarily as a result of the inclusion of $10.2 million in sales from
acquired businesses at its Trex Communications subsidiary and, to a lesser
extent, higher revenues from government contracts. Sales at Thermo Coleman were
$120.5 million in 1998, compared with $115.9 million in 1997. This increase was
due to higher revenues from government contracts, offset in part by a decline in
sales at Thermo Information Solutions. The decrease in sales at Thermo
Information Solutions was due to lower sales of kiosk units as a result of
substantially exiting this business, offset in part by higher revenues from
Internet-related services. Sales at Thermedics Detection decreased 8% to $71.2
million in 1998, primarily due to lower sales of its Alexus systems in
connection with the fulfillment in 1997 of a mandated product-line upgrade from
The Coca-Cola Company to its existing installed base. Sales at Thermo Voltek
decreased to $30.8 million in 1998 from $32.7 million in 1997, due to lower
demand for electromagnetic-compatibility test instruments in Europe and Asia.
Segment income, excluding nonrecurring costs of $1.4 million in 1997,
decreased to $22.0 million in 1998 from $26.8 million in 1997. This decrease
resulted primarily from lower segment income at Thermedics Detection due to
lower sales and at Trex Communications due to higher administrative costs as a
result of expanding its management team. Nonrecurring costs of $1.4 million in
the 1997 period are discussed in the results of operations for the third
quarter.
Alternative Energy
Sales from the Alternative Energy segment increased to $396.1 million in
1998 from $265.5 million in 1997. Revenues from Thermo Ecotek increased to
$161.2 million in 1998 from $141.7 million in 1997, primarily due to higher
contractual energy rates at certain facilities and the inclusion of $6.0 million
of revenues from newly acquired power operations in the Czech Republic. In
addition, the 1998 period includes $1.9 million of nonrecurring revenue from
fees received for the release of its rights to certain power-generating
equipment, while the 1997 period includes $8.2 million of nonrecurring revenue
from a contractual settlement with a utility. Revenues from Thermo Ecotek's
Thermo Trilogy biopesticide subsidiary increased to $26.6 million in 1998 from
$15.0 million in 1997, primarily due to the inclusion of revenues from an
acquired business. Sales at Thermo Power increased to $205.2 million in 1998
from $92.3 million in 1997, due to the inclusion of $115.9 million of sales from
acquired businesses, primarily Peek, acquired in November 1997. Sales at Peter
Brotherhood Ltd. declined to $29.7 million in 1998 from $31.6 million in 1997,
due to the disposal of several business units in 1997.
24
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
Segment income, excluding restructuring and other nonrecurring costs of $1.0
million in 1998 and income of $3.7 million in 1997, was $53.0 million in 1998,
compared with $44.9 million in 1997. Thermo Ecotek's segment income was $39.6
million in 1998, compared with $39.1 million in 1997. The increase resulted
primarily from higher contractual energy rates at certain facilities,
nonrecurring income of $1.9 million described above, the inclusion of results of
the newly acquired Czech Republic power operations, and improved profitability
at Thermo Trilogy. These increases were substantially offset by $8.2 million of
nonrecurring income in the 1997 period related to a contractual settlement with
a utility. Segment income at Thermo Power, excluding restructuring and other
nonrecurring costs, improved to $12.8 million in 1998 from $3.8 million in 1997,
primarily due to contributions from Peek. Restructuring and other nonrecurring
costs of $1.0 million were recorded by Thermo Power relating to a loss on
discontinuance of its engines business (Note 8). Restructuring and other
nonrecurring income, net, of $3.7 million in 1997, consisted of $5.0 million of
previously established litigation reserves that were reversed upon settlement of
a related matter and $1.3 million of costs, primarily for severance, related to
restructuring activities at Peter Brotherhood.
Industrial Outsourcing
Sales in the Industrial Outsourcing segment were $256.4 million in 1998, an
increase of $34.8 million, or 16%, over 1997. Revenues from Thermo TerraTech's
environmental-liability management services increased to $115.4 million in 1998
from $98.2 million in 1997, primarily due to higher demand at certain business
units and, to a lesser extent, the inclusion of $13.5 million of sales from
acquired businesses. These increases were offset in part by a $14.4 million
decrease in revenues at one of ThermoRetec's business units resulting from a
decline in the number of contracts in process. Revenues from Thermo TerraTech's
engineering and design services increased $9.3 million in 1998 due to the
inclusion of $7.4 million of revenues from an acquired business and, to a lesser
extent, an increase in construction and labor management services. Sales of
metallurgical services increased $6.7 million in 1998, principally due to
increased demand for existing services.
Segment income, excluding restructuring and other nonrecurring costs of
$10.2 million in 1998 and $7.8 million in 1997, was $16.1 million in 1998,
compared with $16.7 million in 1997. Segment income declined in 1998 due to a
loss incurred at one of ThermoRetec's business units due to losses on certain
remedial-construction contracts and a decline in the number of contracts in
process. This decrease in segment income was offset in part by higher segment
income from other business units within the segment, principally due to higher
revenues. Restructuring and other nonrecurring costs of $10.2 million in 1998
(Note 8) and $7.8 million in 1997 were recorded to write down certain capital
equipment and intangible assets, including cost in excess of net assets of
acquired companies, in response to a severe downturn in ThermoRetec's
soil-recycling business. This resulted in the closure of two soil-recycling
sites during 1997 and two additional sites in 1998. In addition, the 1998 charge
included
25
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
$1.0 million for abandoned-facility payments at Thermo TerraTech relating to the
consolidation of facilities. The 1997 charge also included a component in
response to reduced cash flows at certain other sites, such that analysis
indicated that the investment in these assets would not be recovered.
Paper Recycling
Sales in the Paper Recycling segment decreased to $193.4 million in 1998
from $202.7 million in 1997. Sales from Thermo Fibertek increased to $185.6
million in 1998 from $166.8 million in 1997, primarily due to an increase in
revenues of $21.4 million from Thermo Black Clawson, acquired in May 1997. An
increase in revenues from Thermo Black Clawson due to the inclusion of revenues
for the full nine-month period in 1998 was offset in part by a decrease in its
revenues from Asia and North America due to lower demand and a decrease in
revenues from Thermo Fibertek's water-management business. In addition, the
unfavorable effects of currency translation reduced Thermo Fibertek's revenues
by $3.0 million in 1998. Sales from Thermo TerraTech's thermal-processing
equipment business, sold in October 1997, were $25.3 million in 1997.
Segment income margin, excluding restructuring costs of $1.1 million in
1997, was 12.6% in 1998, compared with 10.7% in 1997. This increase primarily
resulted from improvements at Thermo Fibertek and the inclusion in 1997 of lower
segment income margins from Thermo TerraTech's thermal-processing equipment
business. Thermo Fibertek recorded restructuring and other recurring costs of
$1.1 million in 1997, primarily for severance costs.
Gain on Issuance of Stock by Subsidiaries
As a result of the sale of stock by subsidiaries and the issuance of stock
by subsidiaries upon conversion of convertible debentures, the Company recorded
gains of $51.8 million in 1998 (Note 2) and $67.5 million in 1997. Minority
interest expense decreased to $38.0 million in 1998 from $52.7 million in 1997.
Minority interest expense includes $13.9 million in 1998 and $17.0 million in
1997 related to gains recorded by the Company's majority-owned subsidiaries as a
result of the sale of stock by their subsidiaries.
Income Taxes
Excluding nontaxable gains from issuance of subsidiary stock and, in 1998,
the effect of a write-off of $6.9 million of tax assets, the Company's effective
tax rates were 48% and 43% in the 1998 and 1997 periods, respectively. The tax
assets were at ThermoLase and consisted primarily of tax loss carryforwards
(Note 8). The effective tax rate increased in 1998 primarily as a result of the
larger relative effect of nondeductible expenses, including amortization of cost
in excess of net assets of acquired companies, due to lower income as a result
of restructuring and related costs recorded in the third quarter of 1998. In
both periods, the effective tax rates exceed the statutory federal income tax
rate primarily due to nondeductible expenses and state income taxes.
26
Liquidity and Capital Resources
Consolidated working capital was $2,146.8 million at October 3, 1998,
compared with $2,002.0 million at January 3, 1998. Included in working capital
were cash, cash equivalents, and short-term available-for-sale investments of
$1,552.0 million at October 3, 1998, compared with $1,522.7 million at January
3, 1998. In addition, the Company had $96.2 million of long-term
available-for-sale investments at October 3, 1998, compared with $63.3 million
at January 3, 1998. Of the total $1,648.2 million of cash, cash equivalents, and
short- and long-term available-for-sale investments at October 3, 1998, $1,305.4
million was held by the Company's majority-owned subsidiaries and the balance
was held by the Company and its wholly owned subsidiaries (Note 10).
Cash provided by operating activities was $218.9 million during the first
nine months of 1998. Cash of $36.5 million was used to fund increases in
inventories, principally at Thermo Instrument and Trex Medical. The increase at
Thermo Instrument was primarily due to replenishing year-end inventory levels at
ThermoQuest's European sales offices and increasing inventory levels at certain
of Thermo Instrument's subsidiaries in preparation for new product releases. To
a lesser extent, Thermo Instrument's inventories increased at one of its
subsidiaries due to longer production cycles and at another subsidiary due to a
decrease in sales in Asia. The increase in inventories at Trex Medical resulted
primarily from lower than anticipated sales and, to a lesser extent, an increase
in inventories in anticipation of a new product release. In addition, the
Company used $29.0 million of cash to fund a decrease in accounts payable,
resulting principally from the timing of payments. An increase in other current
assets used $19.6 million of cash, primarily due to an increase in unbilled
costs and fees as result of the timing of billings on percentage-of-completion
contracts and, to a lesser extent, an increase in prepaid income taxes. A
decrease in accounts receivable provided $15.3 million of cash, primarily at
Thermo Instrument. This decrease resulted principally from lower revenues at
Thermo Optek and Thermo BioAnalysis, management efforts to improve collections
at Thermo Optek, and the timing of collections at Metrika Systems. The decrease
in accounts receivable was offset in part by an increase at Trex Medical,
primarily due to slower customer payment patterns as a result of increased
export and direct sales at a majority of its operations and a shift from OEM
sales to direct and dealer sales at one of its subsidiaries.
During the first nine months of 1998, the Company's primary investing
activities, excluding available-for-sale investments activity, included
acquisitions and the purchase of property, plant, and equipment. During the
first nine months of 1998, the Company expended $177.7 million, net of cash
acquired, for acquisitions and expended $108.8 million for purchases of
property, plant, and equipment.
The Company's financing activities provided $124.6 million of cash during
the first nine months of 1998. Net proceeds from the issuance of long-term
obligations totaled $244.6 million. Net proceeds from the issuance of Company
and subsidiary stock, which includes $290.2 million of proceeds from the April
1998 sale of Company common stock (Note 7), totaled $475.4 million. In addition,
the Company used $55.0 million of
27
Liquidity and Capital Resources (continued)
cash for the repayment of long-term obligations and $28.4 million of cash to
fund a decrease in short-term notes payable. In October 1998, the Company issued
$150.0 million principal amount of notes for net proceeds of $138.0 million
(Note 10).
During the first nine months of 1998, an aggregate principal amount of $18.3
million of subsidiary convertible obligations were converted into shares of
subsidiary common stock.
During the first nine months of 1998, the Company and certain of its
majority-owned subsidiaries expended $508.7 million to purchase common stock of
the Company and 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 October 3, 1998, $117.2 million remained under the Company's
authorization and $90.8 million and 573,000 shares remained under authorizations
of the Company's majority-owned subsidiaries. In addition to these
authorizations, Thermedics Inc. has presented a proposal to its Thermo Voltek
subsidiary to acquire, through a merger, all of the outstanding shares of Thermo
Voltek's common stock that Thermedics does not own, including the redemption of
Thermo Voltek's $5.3 million principal amount of 3 3/4% subordinated convertible
debentures due 2000, for a total transaction cost estimated to be approximately
$27 million. The Company may also expend additional amounts to complete its
reorganization plans (Note 9).
The Company has no material commitments for purchases of property, plant,
and equipment and expects that for the remainder of 1998, such expenditures will
approximate the current level of expenditures. Since October 3, 1998, the
Company and its majority-owned subsidiaries have expended $27.8 million on
acquisitions of businesses and as of November 11, 1998, the Company's
majority-owned subsidiaries had agreements or nonbinding letters of intent to
acquire new businesses totaling approximately $70 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.
Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices has not changed materially
from its exposure at year-end 1997.
Year 2000
The Company continues to assess the potential impact of the year 2000 on the
Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading material internal
business systems and facilities; (ii) testing and developing necessary upgrades
for the Company's current products and
28
Year 2000 (continued)
certain discontinued products; (iii) contacting key suppliers, vendors, and
customers to determine their year 2000 compliance status; and (iv) developing
contingency plans.
The Company's State of Readiness
The Company has tested and evaluated its critical information technology
systems for year 2000 compliance, including its significant computer systems,
software applications, and related equipment. The Company is currently in the
process of upgrading or replacing its significant noncompliant systems. In most
cases, such upgrades or replacements are being made in the ordinary course of
business. The Company expects that all of its material information technology
systems will be year 2000 compliant by the end of 1999. The Company is also
evaluating the potential year 2000 impact on its facilities, including its
buildings and utility systems. Any problems that are identified will be
prioritized and remediated based on their assigned priority. The Company will
continue periodic testing of its critical internal business systems and
facilities in an effort to minimize operating disruptions due to year 2000
issues.
The Company believes that all of the material products that it currently
manufactures and sells are year 2000 compliant. However, as many of the
Company's products are complex, interact with third-party products, and operate
on computer systems that are not under the Company's control, there can be no
assurance that the Company has identified all of the year 2000 problems with its
current products. The Company believes that certain of its older products, which
it no longer manufactures or sells, may not be year 2000 compliant. The Company
is continuing to test and evaluate such products and may offer upgrades or
alternative products where reasonably practicable.
The Company is in the process of identifying and contacting suppliers,
vendors, and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part of
this effort, the Company has developed and is distributing questionnaires
relating to year 2000 compliance to its significant suppliers, vendors, and
customers. The Company intends to follow-up and monitor the year 2000 compliant
progress of significant suppliers, vendors, and customers that indicate that
they are not year 2000 compliant or that do not respond to the Company's
questionnaires.
Contingency Plan
The Company intends to develop a contingency plan that will allow its
primary business operations to continue despite disruptions due to year 2000
problems. This plan may include identifying and securing other suppliers,
increasing inventories, and modifying production facilities and schedules. As
the Company continues to evaluate the year 2000 readiness of its business
systems and facilities, products and significant suppliers, vendors, and
customers, it will modify and adjust its contingency plan as may be required.
29
Year 2000 (continued)
Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not been
material. The Company does not expect total year 2000 remediation costs to be
material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its material internal business systems will be completed in a timely fashion,
there can be no assurance that the Company will not encounter unexpected costs
or delays. Despite its efforts to ensure that its material current products are
year 2000 compliant, the Company may see an increase in warranty and other
claims, especially those related to Company products that incorporate, or
operate using, third-party software or hardware. In addition, certain of the
Company's older products, which it no longer manufactures or sells, may not be
year 2000 compliant, which may expose the Company to claims. If any of the
Company's material suppliers, vendors, or customers experience business
disruptions due to year 2000 issues, the Company might also be materially
adversely affected. The Company's research and development, production,
distribution, financial, administrative, and communications operations might be
disrupted. There is expected to be a significant amount of litigation relating
to the year 2000 issue and there can be no assurance that the Company will not
incur material costs in defending or bringing lawsuits. Any unexpected costs or
delays arising from the year 2000 issue could have a significant adverse impact
on the Company's business, operations, and financial condition.
30
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page immediately preceding exhibits.
(b) Reports on Form 8-K
On July 7, 1998, the Company filed a Current Report on Form 8-K with respect
to the Company's anticipated total gains from the issuance of stock by the
Company's subsidiaries for the quarter ended July 4, 1998.
On July 22, 1998, the Company filed a Current Report on Form 8-K with
respect to the Company's expected operating income for the quarter ended July 4,
1998.
On September 3, 1998, the Company filed a Current Report on Form 8-K with
respect to changes in the executive management of the Company.
On September 15, 1998, the Company filed a Current Report on Form 8-K with
respect to the retirement of the Company's Chief Financial Officer.
On September 30, 1998, the Company filed a Current Report on Form 8-K with
respect to restructuring and other charges at the Company.
31
THERMO ELECTRON CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 12th day of November 1998.
THERMO ELECTRON CORPORATION
Paul F. Kelleher
------------------------------
Paul F. Kelleher
Senior Vice President, Finance
and Administration
John N. Hatsopoulos
------------------------------
John N. Hatsopoulos
Chief Financial Officer
32
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------------------------------------------------------------------------------
3 By-laws of the Registrant, as amended.
4.1 Indenture dated as of October 29, 1998, by and between the Registrant
and Bankers Trust Company, as Trustee, relating to the issuance of
senior debt securities by the Registrant (filed as Exhibit 4.1 to the
Registrant's Current Report on Form 8-K dated October 29, 1998, filed
with the Securities and Exchange Commission on October 30, 1998, and
incorporated herein by reference).
4.2 First Supplemental Indenture dated as of October 29, 1998, by and
between the Registrant and Bankers Trust Company, as Trustee,
relating to the issuance by the Registrant of $150,000,000 aggregate
principal amount of its 7.625% Notes due 2008 (filed as Exhibit 4.2
to the Registrant's Current Report on Form 8-K dated October 29,
1998, filed with the Securities and Exchange Commission on October
30, 1998, and incorporated herein by reference).
10.1 Thermo Electron Corporation 1998 Executive Retention Plan/Form
of Executive Retention Agreement.
10.2 Letter Agreement dated as of September 15, 1998, between the
Registrant and Mr. John N. Hatsopoulos.
27 Financial Data Schedule.