Exhibit 13
Thermo Electron Corporation
Consolidated Financial Statements
1998
Thermo Electron Corporation 1998 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- ----------
Revenues
Product and service revenues $3,690,545 $3,392,575 $2,766,002
Research and development contract revenues 177,051 165,745 166,556
---------- ---------- ----------
3,867,596 3,558,320 2,932,558
---------- ---------- ----------
Costs and Operating Expenses:
Cost of product and service revenues 2,186,893 1,973,265 1,657,746
Expenses for research and development (a) 367,343 335,372 299,271
Selling, general, and administrative expenses 937,640 842,625 691,434
Restructuring and other nonrecurring costs, net (Note 11) 44,450 1,272 37,641
---------- ---------- ----------
3,536,326 3,152,534 2,686,092
---------- ---------- ----------
Operating Income 331,270 405,786 246,466
Gain on Issuance of Stock by Subsidiaries (Note 9) 51,775 80,055 126,599
Other Income, Net (Note 10) 8,465 2,626 1,486
---------- ---------- ----------
Income Before Income Taxes, Minority Interest, and Extraordinary 391,510 488,467 374,551
Items
Provision for Income Taxes (Note 8) 170,680 174,713 110,845
Minority Interest Expense 44,023 74,426 72,890
---------- ---------- ----------
Income Before Extraordinary Items 176,807 239,328 190,816
Extraordinary Items, Net of Provision for Income Taxes and 5,094 - -
Minority Interest of $8,247 (Note 5)
---------- ---------- ----------
Net Income $ 181,901 $ 239,328 $ 190,816
========== ========== ==========
Earnings per Share (Note 15)
Basic $ 1.12 $ 1.57 $ 1.35
========== ========== ==========
Diluted $ 1.07 $ 1.41 $ 1.17
========== ========== ==========
Weighted Average Shares (Note 15)
Basic 161,866 152,489 141,525
========== ========== ==========
Diluted 178,449 176,082 175,605
========== ========== ==========
(a) Includes Costs of:
Research and development contracts $ 154,172 $ 143,743 $ 144,823
Internally funded research and development 213,171 191,629 154,448
---------- ---------- ----------
$ 367,343 $ 335,372 $ 299,271
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
Thermo Electron Corporation 1998 Financial Statements
Consolidated Balance Sheet
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ------------ -----------
Assets
Current Assets:
Cash and cash equivalents $ 396,670 $ 593,580
Short-term available-for-sale investments, at quoted market value 1,150,585 929,118
(amortized cost of $1,144,785 and $925,855; Note 2)
Accounts receivable, less allowances of $52,607 and $55,698 875,615 797,399
Unbilled contract costs and fees 87,031 69,375
Inventories 599,707 543,589
Prepaid income taxes (Note 8) 143,352 118,182
Prepaid expenses 48,369 42,955
---------- ----------
3,301,329 3,094,198
---------- ----------
Property, Plant, and Equipment, at Cost, Net 832,962 789,046
---------- ----------
Long-term Available-for-sale Investments, at Quoted Market Value 95,537 63,306
---------- ----------
(amortized cost of $99,256 and $49,581; Note 2)
Other Assets 186,168 157,108
---------- ----------
Cost in Excess of Net Assets of Acquired Companies (Notes 3, 8, and 11) 1,915,649 1,692,211
---------- ----------
$6,331,645 $5,795,869
========== ==========
3
Thermo Electron Corporation 1998 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1998 1997
- ---------------------------------------------------------------------------------- ------------ -----------
Liabilities and Shareholders' Investment
Current Liabilities:
Notes payable and current maturities of long-term obligations (Note 5) $ 134,071 $ 176,912
Accounts payable 272,503 251,677
Accrued payroll and employee benefits 142,323 140,698
Accrued income taxes 92,623 57,923
Accrued installation and warranty costs 71,118 72,710
Deferred revenue 60,582 54,999
Other accrued expenses (Notes 1 and 3) 365,103 337,316
---------- ----------
1,138,323 1,092,235
---------- ----------
Deferred Income Taxes (Note 8) 102,404 90,802
---------- ----------
Other Deferred Items 73,580 59,082
---------- ----------
Long-term Obligations (Note 5):
Senior convertible obligations 187,042 187,824
Senior notes 150,000 -
Subordinated convertible obligations 1,639,052 1,473,015
Nonrecourse tax-exempt obligations 15,500 37,600
Other 33,937 44,468
---------- ----------
2,025,531 1,742,907
---------- ----------
Minority Interest 649,382 719,622
---------- ----------
Commitments and Contingencies (Note 6)
Common Stock of Subsidiaries Subject to Redemption ($95,262 redemption 94,301 93,312
value; Note 1)
---------- ----------
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; 166,970,806 166,971 159,206
and 159,206,337 shares issued
Capital in excess of par value 1,033,799 843,709
Retained earnings 1,216,541 1,034,640
Treasury stock at cost, 8,477,707 and 95,684 shares (151,643) (3,839)
Accumulated other comprehensive items (Note 16) (17,544) (35,807)
---------- ----------
2,248,124 1,997,909
---------- ----------
$6,331,645 $5,795,869
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Thermo Electron Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------ ------------- ------------ ------------
Operating Activities
Net income $ 181,901 $ 239,328 $ 190,816
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 162,277 135,738 115,167
Noncash restructuring and other nonrecurring costs 15,524 (3,068) 24,331
(income), net (Note 11)
Provision for losses on accounts receivable 10,038 9,078 6,002
Change in deferred income taxes 2,476 1,111 20,869
Minority interest expense 44,023 74,426 72,890
Gain on issuance of stock by subsidiaries (Note 9) (51,775) (80,055) (126,599)
Gain on sale of investments, net (12,872) (5,077) (9,840)
Extraordinary items, net of income taxes and (5,094) - -
minority interest (Note 5)
Other noncash items, net 31,067 9,093 15,758
Changes in current accounts, excluding the effects
of acquisitions and dispositions:
Accounts receivable (10,845) (86,511) (17,078)
Inventories (13,961) 9,377 (1,298)
Other current assets (28,354) 31,445 (35,657)
Accounts payable (13,689) (8,308) (14,307)
Other current liabilities 17,745 (57,559) (16,549)
------------ ----------- -----------
Net cash provided by operating activities 328,461 269,018 224,505
------------ ----------- -----------
Investing Activities
Acquisitions, net of cash acquired (Note 3) (253,192) (849,118) (366,317)
Refund of acquisition purchase price (Note 3) - 36,132 -
Proceeds from sale of businesses 11,905 27,102 -
Purchases of available-for-sale investments (2,194,838) (973,687) (1,644,094)
Proceeds from sale and maturities of available-for-sale 1,936,558 1,543,025 835,935
investments
Purchases of property, plant, and equipment (148,008) (111,605) (124,541)
Proceeds from sale of property, plant, and equipment 16,373 15,633 10,500
Increase in other assets (18,116) (13,425) (26,144)
Other 17,002 6,115 3,385
------------ ----------- -----------
Net cash used in investing activities (632,316) (319,828) (1,311,276)
------------ ----------- -----------
Financing Activities
Net proceeds from issuance of long-term obligations 394,068 490,821 953,376
(Note 5)
Repayment of long-term obligations (75,775) (78,287) (60,643)
Net proceeds from issuance of Company and subsidiary 476,139 164,855 303,954
common stock (Notes 7 and 9)
Purchases of Company and subsidiary common stock and (658,999) (311,092) (144,053)
subordinated convertible debentures (Note 5)
Decrease in short-term notes payable (27,929) (24,256) (13,391)
Other (5,326) (4,291) (1,279)
------------ ----------- -----------
Net cash provided by financing activities $ 102,178 $ 237,750 $ 1,037,964
------------ ----------- -----------
5
Thermo Electron Corporation 1998 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------- ------------- ------------ ------------
Exchange Rate Effect on Cash $ 4,767 $ (7,764) $ 350
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (196,910) 179,176 (48,457)
Cash and Cash Equivalents at Beginning of Year 593,580 414,404 462,861
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 396,670 $ 593,580 $ 414,404
=========== =========== ===========
See Note 12 for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial
statements.
6
Thermo Electron Corporation 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Comprehensive Income
Net Income $ 181,901 $ 239,328 $ 190,816
---------- ---------- ----------
Other Comprehensive Items (Note 16):
Foreign currency translation adjustment 27,424 (45,835) (1,112)
Unrealized gains (losses) on available-for-sale investments, (9,161) 2,133 4,336
net of reclassification adjustment
---------- ---------- ----------
18,263 (43,702) 3,224
Minority interest (7,736) 12,874 139
---------- ---------- ----------
10,527 (30,828) 3,363
---------- ---------- ----------
$ 192,428 $ 208,500 $ 194,179
========== ========== ==========
Shareholders' Investment
Common Stock, $1 Par Value:
Balance at beginning of year $ 159,206 $ 149,997 $ 89,006
Public offering of Company common stock (Note 7) 7,475 - -
Issuance of stock under employees' and directors' stock plans 290 866 892
Conversions of convertible obligations - 8,343 13,449
Effect of three-for-two stock split - - 46,650
---------- ---------- ----------
Balance at end of year 166,971 159,206 149,997
---------- ---------- ----------
Capital in Excess of Par Value:
Balance at beginning of year 843,709 801,793 614,363
Public offering of Company common stock (Note 7) 282,655 - -
Activity under employees' and directors' stock plans (3,285) 13,185 8,172
Tax benefit related to employees' and directors' stock plans 10,938 5,456 12,821
Conversions of convertible obligations - 164,537 254,842
Effect of majority-owned subsidiaries' equity transactions (100,218) (141,262) (41,755)
Effect of three-for-two stock split - - (46,650)
---------- ---------- ----------
Balance at end of year 1,033,799 843,709 801,793
---------- ---------- ----------
Retained Earnings:
Balance at beginning of year 1,034,640 795,312 604,496
Net income 181,901 239,328 190,816
---------- ---------- ----------
Balance at end of year 1,216,541 1,034,640 795,312
---------- ---------- ----------
Treasury Stock:
Balance at beginning of year (3,839) (570) (536)
Purchases of Company common stock (148,132) - -
Activity under employees' and directors' stock plans 328 (3,269) (34)
---------- ---------- ----------
Balance at end of year $ (151,643) $ (3,839) $ (570)
---------- ---------- ----------
7
Thermo Electron Corporation 1998 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued)
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Accumulated Other Comprehensive Items (Note 16):
Balance at beginning of year $ (35,807) $ 7,895 $ 4,671
Other comprehensive items 18,263 (43,702) 3,224
---------- ---------- ----------
Balance at end of year (17,544) (35,807) 7,895
----------- ---------- ----------
Deferred Compensation:
Balance at beginning of year - (58) (2,271)
Amortization of deferred compensation - 58 296
ESOP II loan repayment (Note 4) - - 1,917
---------- ---------- ----------
Balance at end of year - - (58)
---------- ---------- ----------
$2,248,124 $1,997,909 $1,754,369
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
8
Thermo Electron Corporation 1998 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Electron Corporation and its subsidiaries (the Company or the
Registrant) develop and manufacture a range of products that are sold worldwide.
The Company is a world leader in monitoring, analytical, and biomedical
instrumentation; biomedical products including heart-assist devices,
respiratory-care equipment, and mammography systems; and paper recycling and
papermaking equipment. The Company also develops alternative-energy systems and
clean fuels, provides a range of services including industrial outsourcing and
environmental-liability management, and conducts research and development in
advanced imaging, laser, and electronic information-management technologies. The
Company performs its business through wholly owned subsidiaries and divisions,
as well as majority-owned subsidiaries that are partially owned by the public or
private investors.
Principles of Consolidation
The accompanying financial statements include the accounts of Thermo
Electron and its majority- and wholly owned subsidiaries. The Company's
majority-owned public and privately held subsidiaries are listed in Note 9. All
material intercompany accounts and transactions have been eliminated. The
Company accounts for investments in businesses in which it owns between 20% and
50% using the equity method. During 1998, the Company announced a proposed
reorganization involving certain of the Company's majority-owned subsidiaries
(Note 17).
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1998, 1997, and 1996 are for the fiscal years ended January 2,
1999, January 3, 1998, and December 28, 1996, respectively. Fiscal years 1998
and 1996 each included 52 weeks; fiscal year 1997 included 53 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 accompanying balance sheet consists
primarily of unearned revenue on service contracts. Substantially all of the
deferred revenue in the accompanying 1998 balance sheet will be recognized
within one year. Revenues on substantially all contracts are recognized using
the percentage-of-completion method. Revenues recorded under the
percentage-of-completion method were $489.8 million, $440.4 million, and $421.1
million in 1998, 1997, and 1996, respectively. 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 comprehensive income
and shareholders' investment as "Effect of majority-owned subsidiaries' equity
transactions."
9
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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 shareholders' investment.
Income Taxes
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
Earnings per Share
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.
Cash and Cash Equivalents
Cash equivalents consists principally of corporate notes, U.S.
government-agency securities, commercial paper, money market funds, and other
marketable securities purchased with an original maturity of three months or
less. These investments are carried at cost, which approximates market value.
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:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ------------ -----------
Raw Materials and Supplies $267,901 $260,458
Work in Progress 127,144 108,327
Finished Goods 204,662 174,804
-------- --------
$599,707 $543,589
======== ========
10
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
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; electric generating facilities, 25 years; coal-beneficiation facility,
based upon units of production over the life of the facility; machinery and
equipment, 1 to 15 years; and leasehold improvements, the shorter of the term of
the lease or the life of the asset. Property, plant, and equipment consists of:
(In thousands) 1998 1997
- ---------------------------------------------------------------------------------- ------------ -----------
Land $ 65,335 $ 59,867
Buildings 254,030 235,103
Electric Generating and Coal-beneficiation Facilities 331,319 247,361
Machinery, Equipment, and Leasehold Improvements 640,801 617,582
---------- ----------
1,291,485 1,159,913
Less: Accumulated Depreciation and Amortization 458,523 370,867
---------- ----------
$ 832,962 $ 789,046
========== ==========
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 $62.7 million and
$50.5 million, net of accumulated amortization of $54.1 million and $45.7
million, at year-end 1998 and 1997, 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 $186.8 million and $134.7 million at year-end 1998
and 1997, 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 have the option to require ThermoLyte to redeem any or all of their
shares at $10.00 per share in December 1998 or December 1999. In December 1998,
1,707,000 shares of ThermoLyte common stock were redeemed for a total redemption
value of $17.1 million. A payable for the redeemed common stock of ThermoLyte of
$17.1 million and a liability for the remaining ThermoLyte common stock subject
to redemption of $1.4 million are included in other accrued expenses in the
accompanying 1998 balance sheet. The ThermoLyte common stock subject to
redemption of $18.1 million was included in other accrued expenses in the
accompanying 1997 balance sheet.
11
1. Nature of Operations and Summary of 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
September 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
in 1997 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.
ThermoLyte common stock subject to redemption was accreted to its full
redemption value in December 1998. 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 in the
"Accumulated other comprehensive items" component of shareholders' investment.
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 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.
12
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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 1997 and 1996 have been reclassified to conform to the
presentation in the 1998 financial statements.
2. Available-for-sale Investments
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 in the "Accumulated other comprehensive items"
component of shareholders' investment.
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:
(In thousands) Gross Gross
Market Cost Unrealized Unrealized
Value Basis Gains Losses
- -------------------------------------------------- ------------- ------------- ------------- --------------
1998
Corporate Bonds $ 698,607 $ 696,501 $ 2,253 $ (147)
Government-agency Securities 420,920 420,341 602 (23)
Other 126,595 127,199 6,362 (6,966)
---------- ---------- ---------- ----------
$1,246,122 $1,244,041 $ 9,217 $ (7,136)
========== ========== ========== ==========
1997
Corporate Bonds $ 513,956 $ 513,427 $ 717 $ (188)
Government-agency Securities 385,476 385,049 451 (24)
Other 92,992 76,960 16,628 (596)
---------- ---------- ---------- ----------
$ 992,424 $ 975,436 $ 17,796 $ (808)
========== ========== ========== ==========
Short- and long-term available-for-sale investments in the accompanying
1998 balance sheet include equity securities of $38.3 million and debt
securities of $809.1 million with contractual maturities of one year or less,
$386.8 million with contractual maturities of more than one year through five
years, and $11.9 million with contractual maturities of more than five years.
Actual maturities may differ from contractual maturities as a result of the
Company's intent to sell these securities prior to maturity and as a result of
put and call features of the securities 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 $13.6 million, $5.2 million, and $11.2 million and
gross realized losses of $0.7 million, $0.1 million, and $1.4 million in 1998,
1997, and 1996, respectively, relating to the sale of available-for-sale
investments.
13
3. Acquisitions
In 1998, the Company and its majority-owned subsidiaries made several
acquisitions for $253.2 million in cash, net of cash acquired, the issuance of
subsidiary common stock valued at $16.5 million, and $7.7 million, which was
accrued as of January 2, 1999, subject to certain post-closing adjustments. The
Company does not expect that aggregate post-closing adjustments will be
material.
In March 1997, Thermo Instrument acquired Life Sciences International PLC,
a London Stock Exchange-listed company. 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 which
was paid in the first quarter of 1998.
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.
In March 1996, Thermo Instrument completed the acquisition of a
substantial portion of the businesses constituting the Scientific Instruments
Division of Fisons plc (the 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
acquisition of the Fisons businesses pertaining to determination of the net
assets of the Fisons businesses at the date of 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 recorded $33.1 million
of the refund as a reduction of cost in excess of net assets of acquired
companies. The remaining $3.0 million represented payment for uncollected
accounts receivable acquired by Thermo Instrument 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.
These acquisitions, except for SensorMedics, 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 $1,154.4 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 1998, 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 these acquisitions, the Company has undertaken
restructuring activities at the acquired businesses. The Company's restructuring
activities, which were accounted for in accordance with Emerging Issues Task
Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing
levels and the abandonment of excess facilities. In connection with these
restructuring activities, as part of the cost of the acquisitions, the Company
established reserves as detailed below, primarily for severance and excess
facilities. In accordance with EITF 95-3, the Company finalized, and for 1998
acquisitions intends to finalize, its restructuring plans no later than one year
from the respective dates of the acquisitions. Unresolved matters at January 2,
1999, primarily included completion of planned
14
3. Acquisitions (continued)
severances and abandonment of excess facilities for certain acquisitions
completed during 1998. A summary of the changes in accrued acquisition expenses,
which are included in other accrued expenses in the accompanying balance sheet,
is:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- --------------
Balance at December 30, 1995 $ 7,499 $ 7,910 $ 2,552 $ 17,961
Reserves established 27,832 9,993 3,858 41,683
Usage (20,147) (6,134) (2,717) (28,998)
Decrease due to finalization of (2,089) (3,357) (1,912) (7,358)
restructuring plans, recorded as a
decrease in cost in excess of net
assets of acquired companies
Currency translation adjustment - - 185 185
-------- -------- -------- --------
Balance at December 28, 1996 13,095 8,412 1,966 23,473
Reserves established 18,207 12,737 4,512 35,456
Usage (13,580) (5,594) (1,601) (20,775)
Decrease due to finalization of (3,364) (1,405) (393) (5,162)
restructuring plans, recorded as a
decrease in cost in excess of net
assets of acquired companies
Currency translation adjustment - - (487) (487)
-------- -------- -------- --------
Balance at January 3, 1998 14,358 14,150 3,997 32,505
Reserves established 7,265 3,912 935 12,112
Usage (12,296) (3,398) (1,802) (17,496)
Decrease due to finalization of (1,980) (87) (2,555) (4,622)
restructuring plans, recorded as a
decrease in cost in excess of net
assets of acquired companies
Currency translation adjustment - - 693 693
-------- -------- -------- --------
Balance at January 2, 1999 $ 7,347 $ 14,577 $ 1,268 $ 23,192
======== ======== ======== ========
15
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. Two of the plans
permit the grant of nonqualified and incentive stock options to key employees.
The incentive stock option plan expired in 1991, and no grants were made after
that date. The Company also has an equity incentive plan, which 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 one 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 that provides for the annual grant of
stock options of the Company and its majority-owned subsidiaries to outside
directors pursuant to a formula approved by the Company's shareholders. Options
awarded under this plan are exercisable six months after the date of grant and
expire three to seven years after the date of grant. In addition to the
Company's stock-based compensation plans, certain officers and key employees may
also participate in stock-based compensation plans of the Company's
majority-owned subsidiaries.
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 1,513,000 shares at a weighted average exercise price of $36.15 per
share elected to participate in this exchange and, as a result, received options
to purchase 756,000 shares of Company common stock at $18.08 per share, which
are included in the 1998 grants in the table below. The other terms of the new
options are the same as the exchanged options except that the holders may not
sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by the Company.
16
4. Employee Benefit Plans (continued)
A summary of the Company's stock option activity is:
1998 1997 1996
------------------- ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- --------- ---------- -------- ---------- --------- ---------
Options Outstanding, Beginning of Year 8,831 $24.19 8,421 $21.24 8,302 $17.46
Granted 3,554 23.64 1,401 37.06 1,183 39.03
Exercised (625) 15.96 (744) 13.37 (1,125) 10.71
Forfeited (334) 33.38 (247) 29.45 (89) 26.97
Canceled due to exchange (1,513) 36.15 - - - -
Assumed upon acquisition through - - - - 150 14.97
pooling-of-interests (Note 3)
----- ----- -----
Options Outstanding, End of Year 9,913 $22.38 8,831 $24.19 8,421 $21.24
===== ====== ===== ====== ===== ======
Options Exercisable 9,909 $22.38 8,821 $24.18 8,406 $21.23
===== ====== ===== ====== ===== ======
Options Available for Grant 3,417 5,132 1,291
===== ===== =====
A summary of the status of the Company's stock options at January 2, 1999,
is:
Options Outstanding
-----------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ---------------------------------------------------- -------------- ------------------- -------------------
$ 6.33 - $ 15.61 1,204 2.9 years $12.58
15.62 - 24.89 6,320 6.2 years 18.70
24.90 - 34.17 549 8.0 years 32.24
34.18 - 43.46 1,840 8.6 years 38.48
-----
$ 6.33 - $ 43.46 9,913 6.3 years $22.38
=====
The information disclosed above for options outstanding at January 2,
1999, does not differ materially for options exercisable.
17
4. Employee Benefit Plans (continued)
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.
Prior to the 1998 plan year, shares of the Company's common stock could 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 were subject to a six-month
resale restriction. Beginning in November 1998, shares of the Company's common
stock may be purchased at 85% of the lower of the fair market value at the
beginning or end of the period, and the shares purchased are 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 at which they are employed under the same general terms described
above. The Company issued no shares of its common stock under this plan during
1998. During 1997 and 1996, the Company issued 243,000 shares and 285,000
shares, respectively, of its common stock under this plan.
Employee Stock Ownership Plan
The Company's Employee 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 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 in 1996.
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 granted
after 1994 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:
(In thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- ---------- ---------
Net Income:
As reported $ 181,901 $ 239,328 $190,816
Pro forma 158,602 224,337 181,880
Basic Earnings per Share:
As reported 1.12 1.57 1.35
Pro forma .98 1.47 1.29
Diluted Earnings per Share:
As reported 1.07 1.41 1.17
Pro forma .94 1.32 1.12
18
4. Employee Benefit Plans (continued)
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 $8.13,
$15.14, and $13.03 in 1998, 1997, and 1996, 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:
1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ----------
Volatility 29% 26% 24%
Risk-free Interest Rate 4.8% 6.2% 6.1%
Expected Life of Options 4.7 years 6.5 years 5.2 years
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 $12.2 million, $13.9 million, and $10.1 million in 1998, 1997, and 1996,
respectively.
Other Retirement Plans
Certain of the Company's subsidiaries offer retirement plans, in lieu of
participation in the Company's principal 401(k) savings plan. Company
contributions to these plans are based on formulas determined by the Company.
For these plans, the Company contributed and charged to expense $17.7 million,
$16.2 million, and $14.6 million in 1998, 1997, and 1996, respectively.
19
5. Long-term Obligations and Other Financing Arrangements
(In thousands except per share amounts) 1998 1997
- ---------------------------------------------------------------------------------- ------------ -----------
4 1/2% Senior Convertible Debentures, Due 2003, Convertible Into Shares $ 172,500 $ 172,500
of Thermo Instrument at $34.46 per Share
3 3/4% Senior Convertible Debentures, Due 2000, Convertible Into Shares 14,542 15,324
of Thermo Instrument at $13.55 per Share
7 5/8% Senior Notes, Due 2008 150,000 -
4 1/4% Subordinated Convertible Debentures, Due 2003, Convertible at $37.80 per 585,000 585,000
Share
4% Subordinated Convertible Debentures, Due 2005, Convertible Into 250,000 -
Shares of Thermo Instrument at $35.65 per Share
5% Subordinated Convertible Debentures, Due 2000, Convertible Into 67,631 80,591
Shares of ThermoQuest at $16.50 per Share
5% Subordinated Convertible Debentures, Due 2000, Convertible Into 71,155 79,956
Shares of Thermo Optek at $13.94 per Share
Noninterest-bearing Subordinated Convertible Debentures, Due 2003, 31,565 62,300
Convertible Into Shares of Thermedics at $32.68 per Share
2 7/8% Subordinated Convertible Debentures, Due 2003, Convertible Into 15,859 -
Shares of Thermedics at $14.93
4 3/4% Subordinated Convertible Debentures, Due 2004, Convertible Into 70,000 70,000
Shares of Thermo Cardiosystems at $31.42 per Share
3 3/4% Subordinated Convertible Debentures, Due 2000, Convertible Into 5,250 7,750
Shares of Thermo Voltek at $7.83 per Share
4 5/8% Subordinated Convertible Debentures, Due 2003, Convertible Into 111,850 111,850
Shares of Thermo TerraTech at $15.90 per Share
4 7/8% Subordinated Convertible Debentures, Due 2000, Convertible Into 34,525 34,950
Shares of ThermoRetec at $17.92 per Share
2 1/2% Subordinated Convertible Debentures, Due 2001, Convertible Into 6,999 -
Shares of Thermo EuroTech at $5.25 per Share
4 1/2% Subordinated Convertible Debentures, Due 2004, Convertible Into 153,000 153,000
Shares of Thermo Fibertek at $12.10 per Share
3 1/4% Senior Convertible Debentures, Due 2007, Convertible Into Shares 78,948 114,500
of ThermoTrex at $27.00 per Share
4 3/8% Subordinated Convertible Debentures, Due 2004, Convertible Into 110,500 115,000
Shares of ThermoLase at $17.39 per Share
Noninterest-bearing Subordinated Convertible Debentures, Due 2001, 1,820 8,118
Convertible Into Shares of Thermo Ecotek at $13.56 per Share
4 7/8% Subordinated Convertible Debentures, Due 2004, Convertible Into 44,950 50,000
Shares of Thermo Ecotek at $16.50 per Share
8.3% Nonrecourse Tax-exempt Obligation, Payable in Semiannual 27,200 35,600
Installments, With Final Payment in 2000
6.0% Nonrecourse Tax-exempt Obligation, Payable in Semiannual 10,400 23,900
Installments, With Final Payment in 2000
Other 60,198 93,857
---------- ----------
2,073,892 1,814,196
Less: Current Maturities 48,361 71,289
---------- ----------
$2,025,531 $1,742,907
========== ==========
20
5. Long-term Obligations and Other Financing Arrangements (continued)
In October 1998, the Company issued and sold $150.0 million principal
amount of 7 5/8% senior 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 senior notes is 8.87%.
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%
subordinated 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 1998 and 1997, the average variable rate received under the interest rate
swap agreements was 3.5% and 3.7%, respectively. The notional amount of the swap
agreements was $41.5 million and $61.3 million at year-end 1998 and 1997,
respectively. The interest rate swap agreements are with a different
counterparty than the holders of the underlying debt. Management believes that
any credit risk associated with these swaps is remote.
The annual requirements for long-term obligations are:
(In thousands)
- ----------------------------------------------------------------------------------------------- -----------
1999 $ 48,361
2000 221,318
2001 14,421
2002 5,038
2003 922,218
2004 and thereafter 862,536
----------
$2,073,892
==========
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 $85.7 million and $105.6
million in 1998 and 1997, 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 4.1% and 5.7% at
year-end 1998 and 1997, respectively. Unused lines of credit were $234 million
as of year-end 1998.
During 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, during
1998, certain majority-owned subsidiaries of Thermo Instrument repurchased $14.3
million principal amount of their subordinated convertible debentures for $13.3
million in cash, which resulted in an extraordinary gain recorded by Thermo
Instrument. Thermedics and one of its majority-owned subsidiaries also
repurchased $14.2 million principal amount of their subordinated convertible
debentures for $11.4 million in cash, which resulted in an extraordinary gain
recorded by Thermedics during 1998.
21
5. Long-term Obligations and Other Financing Arrangements (continued)
In June 1998, Thermedics offered holders of its noninterest-bearing
subordinated convertible debentures due 2003, convertible at $32.68 per share,
the opportunity to exchange such debentures for newly issued 2 7/8% subordinated
convertible debentures due 2003, convertible at $14.93 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 EITF 96-19.
The Company recorded aggregate extraordinary gains from these transactions
of $5.1 million, net of taxes and minority interest of $8.2 million.
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 $83.8 million, $73.6 million, and
$62.6 million in 1998, 1997, and 1996, respectively. Future minimum payments due
under noncancelable operating leases at January 2, 1999, are $71.3 million in
1999, $61.8 million in 2000, $54.1 million in 2001, $48.7 million in 2002, $40.3
million in 2003, and $133.3 million in 2004 and thereafter. Total future minimum
lease payments are $409.5 million.
Letters of Credit
Outstanding letters of credit, principally relating to performance bonds,
totaled $100.6 million at January 2, 1999.
Litigation and Related Contingencies
Trex Medical is a defendant in a lawsuit brought by Fischer Imaging
Corporation, which alleges that the prone breast-biopsy systems of the Lorad
division of Trex Medical infringe Fischer's patents on a precision mammographic
needle-biopsy system and a motorized mammographic biopsy apparatus. Lorad's
cumulative revenues from these products totaled approximately $147.2 million
through January 2, 1999.
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. The U.S. government has decided not to 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 April 1998, the ITC determined
that the defendants did not engage in unfair practices in U.S. import trade with
respect to the Finnigan patents, and that the Finnigan patents are invalid
and/or not infringed. Finnigan has appealed the ITC's determination with respect
to one of its patents to the United States Court of Appeals for the Federal
Circuit (CAFC). The CAFC heard arguments in the appeal on March 4, 1999. 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 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.
22
6. Commitments and Contingencies (continued)
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
In April 1998, the Company sold 7,475,000 shares of its common stock at
$40.625 per share for net proceeds of $290.1 million.
During 1998, in a series of transactions with an institutional
counterparty, the Company sold put options for 5,001,000 shares of its common
stock at an average exercise price per share of $14.76 and purchased call
options for 2,500,500 shares of its common stock at an average exercise price
per share of $15.62. 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 5,001,000 shares for an aggregate
of $73.8 million. These put and call options are exercisable only at maturity
and expire between November 1999 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. Under the call options,
the Company has the right, but not the obligation, to purchase from the
counterparty 2,500,500 shares of its common stock at an average price per share
of $15.62. The Company may, from time to time, enter into additional put and
call option arrangements.
At January 2, 1999, the Company had reserved 32,746,998 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 (a Unit) of Series B Junior
Participating Preferred Stock, $100 par value, at a purchase price of $250 per
Unit, subject to adjustment. The rights will not be exercisable until the
earlier of (i) 10 days following a public announcement that a person or group of
affiliated or associated persons (an Acquiring Person) has acquired, or obtained
the right to acquire, beneficial ownership of 15% or more of the outstanding
shares of common stock (the Stock Acquisition Date), or (ii) 10 business days
following the commencement of a tender offer or exchange offer for 15% or more
of the outstanding shares of common stock.
In the event that a person becomes the beneficial owner of 15% or more of
the outstanding shares of common stock, except pursuant to an offer for all
outstanding shares of common stock approved by the outside Directors, each
holder of a right (except for the Acquiring Person) will thereafter have the
right to receive, upon exercise, that number of shares of common stock that
equals the exercise price of the right divided by one half of the current market
price of the common stock. In the event that, at any time after any person has
become an Acquiring Person, (i) the Company is acquired in a merger or other
business combination transaction in which the Company is not the surviving
corporation or its common stock is changed or exchanged (other than a merger
that follows an offer approved by the outside Directors), or (ii) 50% or more of
the Company's assets or earning power is sold or transferred, each holder of a
right (except for the Acquiring Person) shall thereafter have the right to
receive, upon exercise, the number of shares of common stock of the acquiring
company that equals the exercise price of the right divided by one half of the
current market price of such common stock.
23
7. Common Stock (continued)
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, minority interest, and
extraordinary items are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Domestic $ 284,982 $414,146 $313,069
Foreign 106,528 74,321 61,482
--------- -------- --------
$ 391,510 $488,467 $374,551
========= ======== ========
The components of the provision for income taxes are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Currently Payable:
Federal $ 88,236 $105,889 $ 85,024
Foreign 44,197 30,928 31,851
State 16,696 18,380 18,445
--------- ------- ----------
149,129 155,197 135,320
--------- ------- ----------
Net Deferred (Prepaid):
Federal 23,741 12,018 (19,994)
Foreign (4,242) 3,966 (2,275)
State 2,052 3,532 (2,206)
--------- ------- ----------
21,551 19,516 (24,475)
--------- ------- ----------
$ 170,680 $174,713 $ 110,845
========= ======== =========
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 $16.6 million, $15.4 million, and $24.5 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 1998, 1997, and 1996,
respectively. In addition, the provision for income taxes that is currently
payable does not reflect $4.4 million, $1.9 million, and $6.5 million of tax
benefits used to reduce cost in excess of net assets of acquired companies in
1998, 1997, and 1996, respectively.
24
8. Income Taxes (continued)
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income before income taxes, minority interest, and
extraordinary items due to:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ----------- ---------- ----------
Provision for Income Taxes at Statutory Rate $137,029 $170,963 $ 131,093
Increases (Decreases) Resulting From:
Gain on issuance of stock by subsidiaries (18,121) (28,019) (44,310)
Valuation allowance for ThermoLase losses 20,459 - -
State income taxes, net of federal tax 12,186 14,243 10,555
Amortization and write-off of cost in excess of net assets of 9,538 9,918 8,643
acquired companies
Foreign tax rate and tax law differential 2,670 8,937 8,528
Other, net 6,919 (1,329) (3,664)
-------- ------- ---------
$170,680 $174,713 $ 110,845
======== ======== =========
Prepaid income taxes and deferred income taxes in the accompanying balance
sheet consist of:
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------- ---------- ----------
Prepaid Income Taxes:
Net operating loss and credit carryforwards $123,982 $ 64,615
Reserves and accruals 83,461 65,086
Inventory basis difference 36,085 29,829
Accrued compensation 18,315 17,775
Intangible assets 1,560 2,683
Other, net 17,088 5,504
-------- --------
280,491 185,492
Less: Valuation allowance 131,042 53,992
-------- --------
$149,449 $131,500
======== ========
Deferred Income Taxes:
Depreciation $ 85,445 $ 92,672
Intangible assets 13,465 7,906
Other 9,591 3,542
-------- --------
$108,501 $104,120
======== ========
25
8. Income Taxes (continued)
The valuation allowance relates to the uncertainty surrounding the
realization of tax loss carryforwards and the realization of tax benefits
attributable to certain tax assets of the Company and certain subsidiaries. Of
the year-end 1998 valuation allowance, $95 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 1998, the valuation allowance increased
primarily due to pre-acquisition loss carryforwards and other deferred tax
assets at an acquired business and increased uncertainty surrounding the
realization of tax loss carryforwards at ThermoLase.
At year-end 1998, the Company had federal and foreign net operating loss
carryforwards of $97 million and $155 million, respectively. In addition, the
Company had $88 million of foreign capital loss carryforwards. Use of the
carryforwards is limited based on the future income of certain subsidiaries. The
federal net operating loss carryforwards expire in the years 1999 through 2012.
Of the foreign net operating loss carryforwards, $40 million expire in the years
1999 through 2004, and the remainder do not expire. Substantially all of the
foreign capital loss carryforwards 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.
A provision has not been made for U.S. or additional foreign taxes on $282
million of undistributed earnings of foreign subsidiaries that could be subject
to taxation if remitted to the U.S. because the Company 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:
1998
Public offering of 5,175,000 shares of Trex Medical 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.
Private placement of 781,921 shares of Thermo Trilogy 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.
Initial public offering of 3,300,000 shares of ONIX Systems common stock
at $14.50 per share for net proceeds of $43.7 million resulted in a gain of
$10.0 million that was recorded by Thermo Instrument.
Private placement of 1,543,000 shares of Thermo Coleman common stock at
$10.00 per share for net proceeds of $14.3 million resulted in a gain of $7.2
million.
Public offering of 2,450,000 shares of Thermo BioAnalysis common stock at
$18.125 per share for net proceeds of $41.5 million resulted in a gain of $5.9
million that was recorded by Thermo Instrument.
Conversion of $1.8 million of Thermo Optek 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 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.
26
9. Transactions in Stock of Subsidiaries (continued)
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 placements of 1,639,640 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.
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.
27
9. Transactions in Stock of Subsidiaries (continued)
The Company's ownership percentage in these subsidiaries changed primarily
as a result of the transactions listed above, purchases of shares of certain
majority-owned subsidiaries' stock by the Company or its direct subsidiaries,
certain 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, the conversion of convertible
obligations held by the Company, its subsidiaries, or by third parties, and the
issuance of subsidiaries' stock in connection with acquisitions.
The Company's ownership percentages at year end were:
1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- ----------
Thermedics Inc. 74% 58% 55%
Thermedics Detection Inc. (a) 88% 76% 94%
Thermo Cardiosystems Inc. (a) 60% 59% 54%
Thermo Sentron Inc. (a) 86% 78% 73%
Thermo Voltek Corp. (a) 69% 68% 51%
Thermo Ecotek Corporation 94% 88% 82%
Thermo Trilogy Corporation (b) 80% 87% 100%
Thermo Fibertek Inc. 91% 90% 84%
Thermo Fibergen Inc. (a) 73% 71% 68%
Thermo Instrument Systems Inc. 85% 82% 82%
Metrika Systems Corporation (a) 76% 60% 84%
ONIX Systems Inc. (a) 81% 87% 100%
Thermo BioAnalysis Corporation (a) 84% 78% 67%
Thermo Optek Corporation (a) 95% 92% 93%
ThermoQuest Corporation (a) 90% 88% 93%
ThermoSpectra Corporation (a) 92% 83% 73%
Thermo Vision Corporation(a) 80% 80% 100%
Thermo Power Corporation 79% 69% 64%
ThermoLyte Corporation (b) 98% 78% 78%
Thermo TerraTech Inc. 86% 82% 81%
The Randers Killam Group Inc. (a) 96% 96% 100%
ThermoRetec Corporation (a) 71% 70% 68%
Thermo EuroTech N.V. (a)(b) 89% 56% 53%
ThermoTrex Corporation 64% 55% 51%
ThermoLase Corporation (a) 80% 70% 64%
Trex Medical Corporation (a) 77% 79% 79%
Trex Communications Corporation (b) 69% 78% 100%
Thermo Coleman Corporation (b) 87% 100% 100%
Thermo Information Solutions Inc. (b) 79% 79% 100%
(a) Reflects combined ownership by direct parent company and Thermo Electron.
(b) Privately held subsidiary.
28
10. Other Income, Net
The components of other income, net, in the accompanying statement of
income are:
(In thousands) 1998 1997 1996
- ------------------------------------------------------------------------- ---------- ---------- -----------
Interest Income $ 99,284 $ 90,559 $ 94,109
Interest Expense (104,035) (93,125) (96,695)
Equity in Losses of Unconsolidated Subsidiaries (723) (1,018) (28)
Gain on Sale of Investments, Net 12,872 5,077 9,840
Other Income (Expense), Net 1,067 1,133 (5,740)
--------- --------- ----------
$ 8,465 $ 2,626 $ 1,486
========= ========= ==========
11. Restructuring and Other Nonrecurring Costs, Net
1998
During 1998, the Company recorded restructuring and related costs and
other nonrecurring costs of $59.9 million as described below, including
restructuring and other nonrecurring costs of $44.4 million, inventory
write-downs of $8.6 million, and a tax asset write-off of $6.9 million.
Restructuring costs were accounted for in accordance with EITF 94-3. 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.
Thermo Instrument
Thermo Instrument recorded restructuring and related costs and other
nonrecurring costs of $31.8 million in 1998. Restructuring costs of $21.6
million consist of $16.2 million related to severance costs for approximately
780 employees across all functions, $4.2 million related primarily to
facility-closing costs, $0.8 million for the write-off of cost in excess of net
assets of acquired companies for a business that was closed, and $0.4 million
related to the loss on the sale of a division. The charge for facility-closing
costs includes $2.0 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 statement of income, 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 early 1999 totaling $2.4 million, for costs not permitted as
charges in 1998, pursuant to EITF 94-3. These costs primarily include costs for
certain employee relocation, moving, and related costs. Thermo Instrument
expects to complete the implementation of its restructuring plan in 1999. As of
year-end 1998, Thermo Instrument had terminated approximately 500 employees and
had expended $7.4 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 1998, and Thermo Instrument recorded $1.6
million of nonrecurring costs related to the resolution of this matter in 1998.
ThermoTrex
ThermoLase recorded restructuring and related costs of $17.0 million
during 1998, including $6.9 million for the write-off of a tax asset.
Restructuring costs of $8.2 million recorded during 1998 consist of $4.6 million
related to the closure of three Spa Thira locations and $3.6 million in
connection with the closure of another spa that was operated under a joint
venture agreement, primarily to liquidate the joint venture and to write-off
ThermoLase's remaining investment. The $4.6 million of costs includes $2.4
million for the write-off of leasehold improvements and related spa assets and
$2.2 million primarily for abandoned-facility payments. ThermoLase also recorded
restructuring costs
29
11. Restructuring and Other Nonrecurring Costs, Net (continued)
of $1.9 million related to certain actions, including the relocation of its
headquarters from California to Texas, where it maintains another facility. This
amount included $1.1 million for severance for 40 terminated employees and $0.8
million for the write-off of fixed assets no longer of use. In addition,
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 1998 statement of
income.
ThermoLase's investment in leasehold improvements and related equipment at
its remaining spas totaled approximately $16.7 million at year-end 1998. The
realizability of these assets is dependent on future cash flows from spa
operations. ThermoLase's future cash flows from operating its spas are dependent
on the degree of success it experiences following the transition of its existing
spas to full-service luxury day spas offering an expanded line of services and
products, operated under The Greenhouse Spa, Inc. name. It is reasonably
possible that actual cash flows from spa operations will vary significantly from
ThermoLase's estimates of such cash flows. As a result, the carrying amount of
spa assets could change significantly in the near term. Additionally, at
year-end 1998, ThermoLase has operating lease commitments of approximately $28
million related to these spas. In the event any additional spas close in the
future, the amount of lease obligations related to such spas in excess of income
from subleasing the facilities would be recorded as a loss. In connection with
purchases of ThermoLase common stock, the Company has recorded cost in excess of
net assets of acquired companies, which totaled $27 million at year-end 1998.
The realizability of this asset is also dependent on the future success of
ThermoLase.
Thermo TerraTech
Thermo TerraTech recorded restructuring costs of $10.2 million during
1998. Of these restructuring costs, $9.2 million was recorded by ThermoRetec, 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
During 1998, Thermo Power recorded restructuring and other nonrecurring
costs of $1.0 million relating to a loss on discontinuance and subsequent sale
of its engines business and the Company's wholly owned SensorMedics subsidiary
recorded restructuring costs of $0.8 million, primarily for severance, in
connection with a reorganization of a subsidiary in the Netherlands. The 1998
amount also includes a gain of $1.4 million from the sale of a business at
Thermo Information Solutions and restructuring and other nonrecurring costs of
$0.5 million.
The remaining liability for severance and facility-closing costs of $18.7
million, as adjusted for the impact of foreign currency translation, is included
in other accrued expenses in the accompanying 1998 balance sheet.
1997
During 1997, the Company recorded restructuring and other nonrecurring
costs of $1.3 million as described below.
Thermo TerraTech
Thermo TerraTech recorded restructuring costs of $7.8 million in 1997 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-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.
30
11. Restructuring and Other Nonrecurring Costs, Net (continued)
Other
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 $4.0 million
of restructuring and other nonrecurring costs, primarily severance, at several
businesses and $1.4 million at Trex Communications for the write-off of
in-process 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.
1996
During 1996, the Company recorded restructuring and other nonrecurring
costs of $37.6 million as described below.
Thermedics
Thermedics recorded restructuring and other nonrecurring costs of $17.6
million during 1996. 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.
In addition, Thermo Cardiosystems recorded $4.9 million for the write-off of
in-process technology relating to an acquisition. This amount represents the
portion of the purchase price allocated to technology in development at the
acquired business.
Wholly Owned Businesses
SensorMedics recorded nonrecurring costs of $11.4 million during 1996,
primarily as a result of its merger with the Company, including employee
compensation that became payable as a result of the merger, certain investment
banking fees and other related transaction costs, the settlement of a
pre-acquisition legal dispute, and severance costs for terminated employees. The
1996 amount also included a write-off of a nontrade receivable and severance
costs of $4.4 million that was recorded by Peter Brotherhood Ltd. and $0.7
million of other nonrecurring costs.
Thermo Instrument
Thermo Instrument recorded restructuring costs of $3.5 million for the
write-off of in-process technology relating to an acquisition. This amount
represents the portion of the purchase price allocated to technology in
development at the acquired business.
31
12. Supplemental Cash Flow Information
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Cash Paid For
Interest $ 92,084 $ 100,165 $ 86,449
Income taxes 117,999 151,685 91,536
Noncash Activities
Conversions of Company and subsidiary convertible obligations $ 18,910 $ 246,088 $ 390,494
Issuance of subsidiary subordinated convertible debentures 15,859 - -
in connection with exchange offer
Exchange of subsidiary common stock for common stock of - 40,500 -
subsidiary subject to redemption
Sale of waste-recycling facility - - 112,553
Assumption by buyer of waste-recycling facility debt - - 109,862
Fair value of assets of acquired companies $ 404,431 $1,210,319 $ 673,662
Cash paid for acquired companies (274,825) (924,336) (383,685)
Issuance of Company and subsidiary common stock and stock (16,450) (4,543) (2,351)
options for acquired companies
Issuance of long-term obligations for acquired companies - - (26,560)
Amount payable for acquired company (7,715) (5,111) -
---------- ---------- ----------
Liabilities assumed of acquired companies $ 105,441 $ 276,329 $ 261,066
========== ========== ==========
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, common stock of subsidiaries subject to redemption, forward foreign
exchange contracts, and interest rate swaps. The carrying amount of cash and
cash equivalents, accounts receivable, notes payable and current maturities of
long-term obligations, and accounts payable 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:
1998 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -------------------------------------------------------- ------------ ------------ ----------- ------------
Long-term Obligations:
Convertible obligations $ 1,826,094 $ 1,577,598 $1,660,839 $ 1,856,570
Other 199,437 207,403 82,068 83,898
----------- ----------- ---------- -----------
$ 2,025,531 $ 1,785,001 $1,742,907 $ 1,940,468
=========== =========== ========== ===========
32
13. Fair Value of Financial Instruments (continued)
1998 1997
------------------------ ------------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -------------------------------------------------------- ------------ ------------ ----------- ------------
Common Stock of Subsidiaries Subject to Redemption $ 94,301 $ 85,876 $ 93,312 $ 89,093
Off-balance-sheet Financial Instruments:
Forward foreign exchange contracts payable $ 703 $ (1,731)
(receivable)
Interest rate swaps payable (receivable) $ (989) $ 1,324
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 common stock of subsidiaries subject to redemption
was determined based upon quoted market prices.
The notional amounts of forward foreign exchange contracts outstanding
totaled $47.1 million and $46.6 million at year-end 1998 and 1997, respectively.
Additionally, the notional amount of the Company's interest rate swap agreements
was $41.5 million and $61.3 million at year-end 1998 and 1997, 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.
14. Business Segment and Geographical Information
The Company's businesses are managed in four segments:
- Measurement and Detection: monitoring, analytical, biomedical, and process-control
instruments
- Biomedical and Emerging Technologies: medical imaging systems,
respiratory-care equipment, left ventricular-assist systems, hematology
products, neurophysiology monitoring instruments, biomedical materials,
personal-care products and services, and systems engineering,
information-management services and products, and research in
communications, avionics, digital imaging, signal processing, advanced
materials, and lasers
- Energy and Environment: clean-power generation, biopesticides, traffic-control
systems, industrial-refrigeration systems, and environmental-liability management,
environmental cleanup, laboratory analysis, and metallurgical heat treating services
- Recycling and Resource Recovery: paper recycling and papermaking equipment,
water-management systems, and resource-recovery facilities and services
33
14. Business Segment and Geographical Information (continued)
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Business Segment Information
Revenues:
Measurement and Detection (a) $1,888,259 $1,820,032 $1,422,501
Biomedical and Emerging Technologies (b) 894,126 812,844 647,309
Energy and Environment (c) 793,168 640,790 555,687
Recycling and Resource Recovery (d) 299,403 293,240 315,233
Intersegment (e) (7,360) (8,586) (8,172)
---------- ---------- ----------
$3,867,596 $3,558,320 $2,932,558
========== ========== ==========
Income Before Income Taxes, Minority Interest, and Extraordinary
Items:
Measurement and Detection $ 220,891 $ 265,583 $ 162,219
Biomedical and Emerging Technologies 43,863 63,121 26,666
Energy and Environment 64,468 79,193 58,603
Recycling and Resource Recovery 33,492 29,106 27,801
---------- ---------- ----------
Total Segment Income (f) 362,714 437,003 275,289
Corporate (g) 28,796 51,464 99,262
---------- ---------- ----------
$ 391,510 $ 488,467 $ 374,551
========== ========== ==========
Identifiable Assets:
Measurement and Detection $2,923,832 $2,696,336 $2,240,426
Biomedical and Emerging Technologies 1,208,294 1,135,252 783,830
Energy and Environment 1,202,346 1,202,901 967,992
Recycling and Resource Recovery 478,584 468,856 323,052
Corporate (h) 518,589 292,524 825,944
---------- ---------- ----------
$6,331,645 $5,795,869 $5,141,244
========== ========== ==========
Depreciation and Amortization:
Measurement and Detection $ 69,461 $ 62,117 $ 51,548
Biomedical and Emerging Technologies 32,913 27,209 21,505
Energy and Environment 47,056 36,032 33,923
Recycling and Resource Recovery 9,882 8,881 6,861
Corporate 2,965 1,499 1,330
---------- ---------- ----------
$ 162,277 $ 135,738 $ 115,167
========== ========== ==========
Capital Expenditures:
Measurement and Detection $ 35,719 $ 32,728 $ 24,320
Biomedical and Emerging Technologies 25,140 30,432 35,787
Energy and Environment 75,899 42,268 59,081
Recycling and Resource Recovery 8,639 4,839 4,601
Corporate 2,611 1,338 752
---------- ---------- ----------
$ 148,008 $ 111,605 $ 124,541
========== ========== ==========
34
14. Business Segment and Geographical Information (continued)
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------------- ----------- ----------- -----------
Geographical Information
Revenues (i):
United States $2,885,035 $2,732,335 $2,171,879
England 417,659 387,606 312,522
Other 870,779 724,935 670,678
Transfers among geographical areas (e) (305,877) (286,556) (222,521)
---------- ---------- ----------
$3,867,596 $3,558,320 $2,932,558
========== ========== ==========
Long-lived Assets (j):
United States $ 726,287 $ 697,127 $ 594,955
Other 128,758 112,232 142,352
---------- ---------- ----------
$ 855,045 $ 809,359 $ 737,307
========== ========== ==========
Export Sales Included in United States Revenues Above (k) $ 600,594 $ 593,850 $ 436,972
========== ========== ==========
(a) Includes intersegment sales of $1,893,000, $2,520,000, and $1,895,000 in
1998, 1997, and 1996, respectively.
(b) Includes intersegment sales of $5,025,000, $5,051,000, and $6,228,000 in
1998, 1997, and 1996, respectively.
(c) Includes intersegment sales of $435,000, $698,000, and $45,000 in 1998,
1997, and 1996, respectively.
(d) Includes intersegment sales of $7,000, $317,000, and $4,000 in 1998, 1997,
and 1996, respectively.
(e) Intersegment sales and transfers among geographical areas are accounted for
at prices that are representative of transactions with unaffiliated parties.
(f) Segment income is income before corporate general and administrative
expenses, other income and expense, minority interest expense, income taxes,
and extraordinary items.
(g) Includes corporate general and administrative expenses, other income and
expense, and gain on issuance of stock by subsidiaries.
(h) Primarily cash and cash equivalents, short- and long-term investments, and
property and equipment at the Company's Waltham, Massachusetts,
headquarters.
(i) Revenues are attributed to countries based on selling location.
(j) Includes property, plant, and equipment, net and other long-term tangible
assets.
(k) In general, export revenues are denominated in U.S. dollars.
35
15. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------- ---------- --------- ----------
Basic
Net Income $ 181,901 $239,328 $ 190,816
--------- -------- ---------
Weighted Average Shares 161,866 152,489 141,525
--------- -------- ---------
Basic Earnings per Share $ 1.12 $ 1.57 $ 1.35
========= ======== =========
Diluted
Net Income $ 181,901 $239,328 $ 190,816
Effect of:
Convertible obligations 14,669 18,814 23,523
Majority-owned subsidiaries' dilutive securities (5,106) (9,925) (8,084)
--------- -------- ---------
Income Available to Common Shareholders, as Adjusted $ 191,464 $248,217 $ 206,255
--------- -------- ---------
Weighted Average Shares 161,866 152,489 141,525
Effect of:
Convertible obligations 15,476 21,596 31,735
Stock options 1,107 1,997 2,345
--------- -------- ---------
Weighted Average Shares, as Adjusted 178,449 176,082 175,605
--------- -------- ---------
Diluted Earnings per Share $ 1.07 $ 1.41 $ 1.17
========= ======== =========
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 2, 1999, there were 7,920,851 of
such options outstanding, with exercise prices ranging from $17.06 to $43.46 per
share. In addition, the computation of diluted earnings per share for 1998
excludes the effect of assuming the repurchase of 5,001,000 shares of Company
common stock at a weighted average exercise price of $14.76 per share in
connection with put options (Note 7), because the effect would be antidilutive.
During 1998, the Company recorded extraordinary gains in connection with
the repurchase and exchange of subsidiary subordinated convertible debentures,
which increased basic and diluted earnings per share by $.03 (Note 5).
36
16. Comprehensive Income
During the first quarter of 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." This pronouncement sets forth requirements for
disclosure of the Company's comprehensive income and accumulated other
comprehensive items. In general, comprehensive income combines net income and
"other comprehensive items," which 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.
Accumulated other comprehensive items in the accompanying balance sheet
consists of:
(In thousands) 1998 1997
- ------------------------------------------------------------------------------------- ---------- ----------
Cumulative Translation Adjustment $(18,915) $(46,339)
Net Unrealized Gain on Available-for-sale Investments 1,371 10,532
-------- --------
$(17,544) $(35,807)
======== ========
Unrealized gains (losses) on available-for-sale investments, a component
of other comprehensive items in the accompanying statement of comprehensive
income and shareholders' investment, includes:
(In thousands) 1998 1997 1996
- -------------------------------------------------------------------------- ---------- ---------- -----------
Unrealized Holding Gains (Losses) Arising During the Year (net $ (1,309) $ 5,332 $ 10,240
of income tax provision (benefit) of $(726), $3,110, and
$6,828)
Reclassification Adjustment for Gains Included in Net Income (7,852) (3,199) (5,904)
(net of income tax provision of $5,020, $1,878, and $3,936)
-------- -------- --------
Net Unrealized Gains (Losses) (net of income tax provision $ (9,161) $ 2,133 $ 4,336
(benefit) of $(5,746), $1,231, and $2,892)
======== ======== ========
37
17. Proposed Reorganization
During 1998, the Company announced a proposed reorganization involving the
Company and certain of its subsidiaries. The goals of the proposed
reorganization include consolidating and strategically realigning certain
businesses to enhance their competitive market positions and improve management
coordination and 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 16. 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.
One or more of the transactions may not occur if the applicable conditions
previously described are not satisfied.
The Company may transfer its wholly owned Thermo Biomedical group of
subsidiaries to Thermedics. The Company would transfer the Thermo Biomedical
group of subsidiaries to Thermedics in exchange for newly issued shares of
common stock of Thermedics and for Thermedics' equity interests in Thermo
Sentron, Thermedics Detection, and Thermo Voltek. Thermedics Detection and
Thermo Sentron would then be taken private and become wholly owned subsidiaries
of the Company. The public shareholders of Thermedics Detection and Thermo
Sentron would receive cash in exchange for their shares of common stock of
Thermedics Detection and Thermo Sentron, respectively. Thermo Voltek has signed
a definitive merger agreement with Thermedics, which, if the remaining
shareholder approvals are secured, will make Thermo Voltek 100%-owned by
Thermedics and the Company.
ThermoSpectra, a majority-owned public subsidiary of Thermo Instrument,
may be taken private. The public shareholders of ThermoSpectra would receive
cash in exchange for their shares of common stock.
The Randers Killam Group, ThermoRetec, and Thermo EuroTech, may merge into
Thermo TerraTech. Shareholders of each of the Randers Killam Group, ThermoRetec,
and Thermo EuroTech would receive shares of common stock of Thermo TerraTech in
exchange for their shares of common stock of the Randers Killam Group,
ThermoRetec, and Thermo EuroTech, respectively.
Thermo Power may be taken private and become a wholly owned subsidiary of
the Company. The public shareholders of Thermo Power would receive cash in
exchange for their shares of common stock of Thermo Power.
38
18. Unaudited Quarterly Information
(In thousands except per share amounts)
1998 First Second Third Fourth
- ----------------------------------------------------------- ----------- ----------- ----------- ------------
Revenues $ 944,263 $ 947,799 $ 977,169 $ 998,365
Gross Profit 371,842 386,814 383,415 384,460
Income Before Extraordinary Items 64,770 59,622 15,651 36,764
Net Income (a) 65,493 61,785 17,582 37,041
Earnings per Share (a):
Basic .41 .37 .11 .23
Diluted .37 .34 .10 .23
1997 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
(a) Reflects extraordinary items, net of taxes and minority interest, of $0.7
million, $2.2 million, $1.9 million, and $0.3 million in the first, second,
third, and fourth quarters, respectively. The extraordinary items increased
basic earnings per share by $.01 in each of the first, second, and third
quarters and diluted earnings per share by $.01 in each of the second and
third quarters.
19. Subsequent Event
On February 22, 1999, Thermo Instrument declared unconditional in all
respects its cash tender offer for all outstanding shares of Spectra-Physics AB,
a Stockholm Stock Exchange-listed company, for 160 Swedish krona per share
(approximately $20 per share). As of that date, the Company had purchased or
received acceptances representing approximately 98% of the Spectra-Physics
shares outstanding. There were approximately 17.6 million Spectra-Physics shares
outstanding. The aggregate cost for Spectra-Physics will total approximately
$355 million. Payment was made for all shares as to which acceptances had been
received by March 1, 1999. The acquisition will be accounted for using the
purchase method of accounting and its results will be included in the Company's
results from the date of acquisition. Spectra-Physics manufactures a wide range
of laser-based instrumentation systems, primarily for the process-control,
industrial measurement, construction, research, commercial, and government
markets. Spectra-Physics had revenues of approximately $442 million in 1998,
with operations throughout North America and Europe, and a presence in the
Pacific Rim.
39
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 2,
1999, and January 3, 1998, and the related consolidated statements of income,
cash flows, and comprehensive income and shareholders' investment for each of
the three years in the period ended January 2, 1999. 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 2, 1999, and January 3,
1998, and the results of their operations and their cash flows for each of the
three years in the period ended January 2, 1999, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 16, 1999 (except with respect to the matter
discussed in Note 19, as to which the date is March 1, 1999)
40
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 four business segments: measurement and detection,
biomedical and emerging technologies, energy and environment, and recycling and
resource recovery.
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. Another component that has contributed
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 maintaining a diverse 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 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 and the issuance of stock by subsidiaries upon
conversion of convertible debentures, the Company records gains that represent
the increase in the Company's net investment in the subsidiaries and are
classified as "Gain on issuance of stock by subsidiaries" in the accompanying
statement of income. These gains have represented a substantial portion of the
net income reported by the Company in certain periods. The size and timing of
these transactions are dependent on market and other conditions that are beyond
the Company's control. Accordingly, there can be no assurance that the Company
will be able to generate gains from such transactions in the future.
During 1998, the Company proposed a reorganization plan that would
simplify its structure by reducing the number of public subsidiaries from 23 to
16 (Note 17).
41
Overview (continued)
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." In
February 1999, the FASB issued a revision of the earlier document entitled
"Consolidated Financial Statements: Purpose and Policy." The October 1995
exposure draft proposed new rules for how consolidated financial statements
should be prepared. Under that proposed statement, 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 in equity of the
consolidated entity with no gain or loss being recorded. The 1995 exposure draft
addressed rule changes concerning consolidation procedures which would affect
the Company's ability to record gains on issuance of subsidiary stock and
consolidation policy which does not affect the accounting for such gains. The
February 1999 revised exposure draft addresses only consolidation policy. The
FASB has indicated that it will consider resuming discussion on consolidation
procedures after completion of the efforts on consolidation policy. The timing
and contents of any final statement on consolidation procedures are uncertain.
Results of Operations
1998 Compared With 1997
Sales in 1998 were $3,867.6 million, an increase of $309.3 million, or 9%,
over 1997. Segment income, excluding inventory write-downs of $8.6 million and
restructuring and other nonrecurring costs, net, of $44.4 million in 1998 and
$1.3 million in 1997, described below, decreased to $415.8 million in 1998 from
$438.3 million in 1997. (Segment income is income before corporate general and
administrative expenses, other income and expense, minority interest expense,
income taxes, and extraordinary items.) Operating income, which includes
inventory write-downs and restructuring and other nonrecurring costs, net, was
$331.3 million in 1998, compared with $405.8 million in 1997.
Measurement and Detection
Sales from the Measurement and Detection segment increased $68.2 million
to $1,888.3 million in 1998. Sales increased due to acquisitions made by Thermo
Instrument and Thermo Sentron, which added $181.2 million of revenues 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 the Measurement
and Detection segment operates decreased revenues by $14.9 million in 1998.
Revenues from Thermo Instrument's analytical products, excluding the effects of
acquisitions and currency translation, decreased $61.7 million, primarily due to
lower sales to customers in Asia due to unstable economic conditions in that
region and, to a lesser extent, lower sales to customers in the semiconductor
industry. Revenues from Thermo Instrument's industrial products, excluding the
effects of acquisitions and currency translation, decreased $18.3 million,
primarily due to lower revenues at ThermoSpectra's existing businesses as a
result of a downturn in the semiconductor industry and lower sales to customers
overseas. Revenues at Thermedics Detection decreased $12.8 million, due in part
to lower shipments of its Alexus(R) systems following the fulfillment in 1997 of
a mandated product-line upgrade from The Coca-Cola Company to its existing
installed base. In addition, demand for Thermedics Detection's near-infrared
analyzers and explosives-detection systems decreased in 1998. Backlog at the
Measurement and Detection segment decreased $22.0 million during 1998. Backlog
declined $15.4 million at Thermo Instrument primarily due to lower backlog at
Thermo Optek and ThermoSpectra, principally as a result of a slowdown in the
semiconductor and related industries and a decrease in demand in Asia. To a
lesser extent, the decrease in the Measurement and Detection segment backlog was
due to Thermedics Detection's completion of a contract with the U.S. Federal
Aviation Administration (FAA) and a decrease in demand at Thermo Voltek. In
addition, revenues from Thermo Instrument's process-control products are
expected to be adversely impacted in the first half of 1999 by a decrease in
capital spending in the oil and gas and cement industries and increased
competition for process-control products relating to raw-materials analysis.
42
1998 Compared With 1997 (continued)
Segment income margin (segment income margin is segment income as a
percentage of sales), excluding restructuring and other nonrecurring costs of
$23.2 million in 1998 and nonrecurring income of $1.3 million in 1997, decreased
to 12.9% in 1998 from 14.5% in 1997, primarily due to the effect on segment
income margin of lower revenues at certain business units and $8.6 million of
inventory write-downs for discontinued product lines and excess inventories
caused by lower product demand. Segment income margin in the 1997 period
included the unfavorable effect of an adjustment to expense of $3.6 million
relating to the sale of inventories revalued at the time of the acquisition of
Life Sciences International PLC by Thermo Instrument and an inventory write-down
at ThermoSpectra. Restructuring and other nonrecurring costs of $20.8 million in
1998 were recorded by wholly and majority-owned subsidiaries of Thermo
Instrument, primarily for severance costs. In connection with the closing of
certain facilities, Thermo Instrument expects to incur additional costs in early
1999 totaling $2.4 million. Thermo Instrument expects to complete the
implementation of its restructuring plan in 1999. Also in 1998, Thermo
Instrument recorded $1.6 million of nonrecurring costs relating to the
resolution of an arbitration proceeding and wrote off $0.8 million of cost in
excess of net assets of acquired companies for a business that has been closed
(Note 11). Nonrecurring income of $1.3 million in 1997 represents a gain of $2.2
million from the sale of a business by ThermoSpectra, offset in part by $0.9
million of severance costs for employees terminated at one of ThermoSpectra's
business units.
Biomedical and Emerging Technologies
Sales from the Biomedical and Emerging Technologies segment were $894.1
million in 1998, an increase of $81.3 million, or 10%, over the 1997 period.
Sales increased due to the inclusion of $103.8 million of sales from acquired
businesses. In addition, higher demand in 1998 resulted in increased sales from
the specialty-metals fabrication services business as well as higher revenues at
Thermo Cardiosystems and, to a lesser extent, Bird Medical Technologies, Inc.
These increases were offset in part by lower revenues in the existing business
units of Trex Medical and, to a lesser extent, ThermoLase. The decrease in
revenues at Trex Medical's existing businesses totaled $22.5 million. More than
half of this decrease resulted from the loss of a major customer following its
acquisition by another corporation. Sales to this customer totaled $26.5 million
in 1998. In addition, revenues decreased at Trex Medical due to lower demand for
breast-biopsy and other medical-imaging equipment. Revenue growth at Trex
Medical is expected to significantly decrease in the first half of 1999 as a
result of the loss of the significant customer, a slowing of sales of
breast-biopsy systems, and the effect in 1998 of a $9.0 million nonrecurring
order from a customer located in Russia. The decrease in revenues at ThermoLase
was due to lower demand at ThermoLase's spa services business, a decline of $5.9
million in fees from international licensing arrangements and, to a lesser
extent, lower revenues from the sale of beauty products. 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 would 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 announced plans to close four spas, three of which have
been closed, and has converted its remaining eleven Spa Thira locations into
full-service luxury day spas offering an expanded line of services and products.
Because costs at the spas continue to be high relative to revenues, ThermoLase
does not plan to expand its day spa operation and is assessing whether
particular spas should be closed or sold. Revenues decreased slightly at Thermo
Coleman, where an increase in government contract revenues was offset by lower
kiosk revenues at its Thermo Information Solutions unit. Thermo Information
Solutions exited the kiosk business in 1998 due to inherently low margins, lower
than expected orders from its sole customer, and the absence of additional
orders.
Segment income, excluding restructuring and nonrecurring costs of $10.0
million in 1998 and $1.9 million in 1997, decreased to $53.8 million in 1998
from $65.1 million in 1997. This change resulted primarily from $10.1 million of
lower segment income at Trex Medical and $9.0 million of increased segment loss
(excluding restructuring costs) at ThermoLase. The lower segment income at Trex
Medical was primarily due to the decrease in revenues at
43
1998 Compared With 1997 (continued)
existing businesses without a corresponding decrease in costs. The segment loss
at ThermoLase, excluding restructuring costs of $10.1 million, totaled $27.4
million in 1998 and increased due to lower revenues as well as fixed costs of
operating more spas. In addition, ThermoLase reported operating losses from its
beauty products subsidiary in 1998, compared with profitable operations in 1997.
The effect of continuing to operate its spas below maximum capacity will
continue to have a negative effect on ThermoLase's segment income. These
decreases in segment income were offset in part by improved results at certain
businesses, primarily Bird Medical Technologies and the specialty-metals
fabrication services business. Restructuring and other nonrecurring costs of
$10.1 million in 1998 were recorded by ThermoLase in connection with the
announced closure of four spas and relocation of its headquarters to Texas where
it maintains another facility. The degree to which ThermoLase is successful in
improving its profitability will affect the future of its remaining spas and the
realizability of related assets (Note 11). Restructuring and other nonrecurring
costs in 1998 also include $0.8 million at SensorMedics Corporation, primarily
for severance, in connection with the reorganization of a subsidiary in the
Netherlands and $0.5 million at certain of the Company's other wholly owned
businesses. In addition, Thermo Information Solutions sold an Internet dial-up
service business in 1998, resulting in nonrecurring income of $1.4 million.
Restructuring and other nonrecurring costs in 1997 includes $1.4 million at Trex
Communications for the write-off of in-process technology associated with an
acquired business and $0.5 million at certain of the Company's wholly owned
businesses to close certain foreign sales offices.
Energy and Environment
Sales from the Energy and Environment segment increased to $793.2 million
in 1998 from $640.8 million in 1997. Revenues from Thermo Ecotek increased to
$206.2 million in 1998 from $189.5 million in 1997, primarily due to the
inclusion of $8.4 million of revenues from newly acquired power operations in
the Czech Republic and higher contractual energy rates at certain facilities. In
addition, the 1998 period included $1.9 million of nonrecurring revenue from
fees received for the release of Thermo Ecotek's rights to certain
power-generating equipment, while the 1997 period included $8.2 million of
nonrecurring revenue from a contractual settlement with a utility, relating to a
cogeneration facility Thermo Ecotek had planned to develop and construct on
Staten Island, New York. From various dates in 1998 onward, no further rate
increases will occur at Thermo Ecotek's four energy facilities in California. In
addition, as noted below, the periods during which Thermo Ecotek receives fixed
rates for power at these facilities ends in 1999 or 2000. The change from fixed
rates to avoided cost rates under the terms of the contracts, as discussed
below, will have a significant adverse effect on Thermo Ecotek's revenues and
profitability. Revenues from Thermo Ecotek's Thermo Trilogy biopesticide
subsidiary increased to $31.3 million in 1998 from $21.4 million in 1997,
primarily due to the inclusion of revenues from an acquired business. Sales at
Thermo Power increased to $281.4 million in 1998 from $155.8 million in 1997,
due to the inclusion of $131.8 million of revenues from acquired businesses,
primarily Peek plc, acquired in November 1997. This increase was offset in part
by a decrease in revenues at Thermo Power's Crusader engines division, which was
sold in December 1998. Sales at Crusader totaled $23.0 million in 1998, with
approximate breakeven segment income. Revenues at Thermo TerraTech increased to
$305.5 million in 1998 from $295.5 million in 1997. Revenues from Thermo
TerraTech's thermal-processing equipment business, sold in October 1997, were
$25.3 million in 1997. Revenues from Thermo TerraTech's environmental-liability
management services increased to $156.7 million in 1998 from $136.5 million in
1997, primarily due to higher demand at certain business units and, to a lesser
extent, the inclusion of $17.5 million of sales from acquired businesses. These
increases were offset in part by a $16.6 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 $14.3 million in 1998 due to the inclusion of $7.4 million of revenues
from an acquired business and an increase in construction and labor management
services.
44
1998 Compared With 1997 (continued)
Segment income, excluding restructuring and other nonrecurring costs of
$11.2 million in 1998 and nonrecurring income of $1.9 million in 1997, was $75.7
million in 1998, compared with $77.3 million in 1997. Thermo Ecotek's segment
income was $44.5 million in 1998, compared with $50.4 million in 1997. The
decrease resulted primarily from the inclusion in 1997 of $8.2 million of
segment income from the contractual settlement with a utility. In addition,
Thermo Ecotek's coal-beneficiation facility in Gillette, Wyoming, began
operations in April 1998. This facility reported operating losses in 1998 and
Thermo Ecotek expects that it will continue to do so in the future. The
economics of this facility arise primarily from tax benefits associated with its
production. In 1998, the facility's losses included the effect of certain
operational issues described below. The decrease in segment income at Thermo
Ecotek was offset in part by 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. Segment income at Thermo Power, excluding
restructuring and other nonrecurring costs of $1.0 million in 1998, improved to
$17.4 million in 1998 from $7.5 million in 1997, primarily due to contributions
from Peek. Segment income at Thermo TerraTech, excluding restructuring and other
nonrecurring costs of $10.2 million in 1998 and $7.8 million in 1997, was $14.4
million in 1998, compared with $18.2 million in 1997. Segment income declined in
1998 due to a loss incurred at one of ThermoRetec's business units as a result
of losses on certain remedial-construction contracts and a decline in the number
of contracts in process. In addition, the 1997 period included segment income of
$1.8 million from Thermo TerraTech's thermal-processing equipment business,
which was sold in October 1997. These decreases in segment income were offset in
part by higher segment income from other business units within Thermo TerraTech,
principally due to higher revenues. Restructuring and other nonrecurring costs
of $10.2 million in 1998 and $7.8 million in 1997 were recorded by Thermo
TerraTech, principally 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-remediation business. This
resulted in the closure of two soil-remediation sites during 1997 and two
additional sites in 1998. The 1998 charge also included $1.0 million for
abandoned-facility payments at Thermo TerraTech relating to the consolidation of
facilities. The 1997 charge also included a write down of ThermoRetec's
investment in certain other soil-recycling sites in response to reduced cash
flows, which indicated that the investment in these assets would not be
recovered. Restructuring and other nonrecurring costs of $1.0 million were
recorded by Thermo Power in 1998 relating to a loss on discontinuance and
subsequent sale of its engines business. 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).
The power-sales agreements for Thermo Ecotek's Woodland, Mendota, and
Delano plants in California are so-called standard offer #4 (SO#4) contracts,
which require Pacific Gas & Electric (PG&E), in the case of Woodland and
Mendota, and Southern California Edison (SCE), in the case of Delano I and
Delano II, to purchase the power output of the projects at fixed rates until
2000. However, with respect to Woodland and Mendota, PG&E has asserted that the
fixed rates under its agreements will terminate mid-1999, although Thermo Ecotek
disputes this assertion. Thereafter, the utility will pay a rate based upon the
costs that would have otherwise been incurred by the purchasing utilities in
generating their own electricity or in purchasing it from other sources (avoided
cost). At present, the avoided cost is substantially lower than the payments
currently being made by PG&E and SCE to Thermo Ecotek under the fixed-rate
portions of its contracts. In addition, although it is difficult to predict
future levels of avoided cost, based on current estimates, avoided cost is
expected to be substantially lower in 2000 than the rates currently being paid
by PG&E and SCE under its fixed-rate contracts. Thermo Ecotek expects, that at
current avoided cost rates, absent sufficient reductions in fuel prices and
other operating costs, Thermo Ecotek's Mendota and Delano plants will operate
45
1998 Compared With 1997 (continued)
at substantially reduced operating income levels or at a loss beginning in 2000.
In 1998, the Mendota and Delano plants' aggregate operating income was
approximately $41.7 million. Further, if the Woodland plant were to operate at
projected avoided cost levels, substantial losses would result, primarily due to
nonrecourse lease obligations that extend beyond 2000. Absent sufficient
reductions in fuel prices and other operating costs, under such circumstances
Thermo Ecotek would draw down power reserve funds to cover operating cash
shortfalls and then, should such funds be depleted, either renegotiate its
nonrecourse lease for the Woodland plant or forfeit its interest in the plant.
The results of the Woodland facility were approximately breakeven in 1998 and
1997, as a result of recording as an expense the funding of reserves required
under Woodland's nonrecourse lease agreement to cover proposed shortfalls in
lease payments. If PG&E ultimately prevails in its assertion that its obligation
to pay fixed rates ends in mid-1999, and if Thermo Ecotek is unsuccessful in
renegotiating the terms of its lease or its power purchase agreement with PG&E,
Thermo Ecotek's investment in its Woodland operating assets could be impaired by
approximately $3 to $5 million, based on projected cash flows. This impairment
and the operating losses that would arise in 1999 and thereafter if the Woodland
facility's operating costs exceeded its revenues would have a material adverse
effect on Thermo Ecotek's future results of operations.
Two of Thermo Ecotek's plants are located in New Hampshire and have rate
orders from the New Hampshire Public Utilities Commission (NHPUC) to sell all of
their power to Public Service Company of New Hampshire (PSNH). The assets of
PSNH were acquired in 1990 by Northeast Utilities (NU) in connection with PSNH's
federal bankruptcy reorganization plan. Thereafter, PSNH sought to renegotiate
some of the terms of certain rate orders with small power producers, including
the plants that Thermo Ecotek operates in New Hampshire. PSNH reached an
agreement in principle with Thermo Ecotek's plants to settle the renegotiation
of their rate orders. The settlement agreement is subject to the approval of the
NHPUC. In January 1997, NU publicly announced 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, NHPUC voted to adopt a deregulation plan, and in March 1997, PSNH
filed suit to block the plan. The federal district court issued a restraining
order which prohibits the NHPUC from implementing the deregulation plan as it
affects PSNH pending the outcome of the suit. In May 1998, NHPUC issued a
written ruling rejecting the settlement agreements and modifications that would
impact PSNH's ability to finance and secure the settlement agreement. No
assurances may be made as to the outcome of this matter. 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.
As discussed above, Thermo Ecotek began reporting the results of
operations of its coal-beneficiation facility, located near Gillette, Wyoming,
in April 1998. Although the facility has operated and produced commercially
salable product, Thermo Ecotek has encountered certain difficulties in
optimizing its performance to achieve optimal and sustained operation. Thermo
Ecotek has addressed and resolved certain problems previously encountered,
however, it continues to experience other operational problems. Thermo Ecotek is
actively exploring solutions to these problems. Because the technology being
developed is new and untested, no assurance can be given that other difficulties
will not arise or that Thermo Ecotek will be able to correct these problems and
achieve optimal and sustained performance.
Recycling and Resource Recovery
Sales in the Recycling and Resource Recovery segment increased to $299.4
million in 1998 from $293.2 million in 1997. Sales from Thermo Fibertek
increased to $247.4 million in 1998 from $239.6 million in 1997, primarily due
to an increase in revenues of $14.0 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 twelve-month period in 1998 was offset in
part by a decrease in its revenues due to lower demand in Asia, Europe, and
North America, and a decrease in revenues from Thermo Fibertek's accessories and
water-management product lines. The unfavorable effects of currency translation
reduced Thermo Fibertek's revenues by $2.4 million in 1998. In February 1999,
Thermo Fibertek sold its Thermo Wisconsin, Inc. subsidiary for approximately
$13.0 million in cash. Thermo Wisconsin's revenues and
46
1998 Compared With 1997 (continued)
segment income in 1998 totaled approximately $18.9 million and $2.7 million,
respectively. In addition, a decrease in sales of automated electroplating
equipment at Napco was offset in part by higher revenues from sales of turbine
generators at Peter Brotherhood Ltd.
Segment income, excluding restructuring costs of $2.5 million in 1997,
improved to $33.5 million in 1998 from $31.6 million in 1997. This increase
resulted primarily from improvements at Thermo Fibertek, and lower costs in 1998
associated with a dispute concerning an office wastepaper de-inking facility
completed in 1996. These improvements were offset in part by a decrease in
segment income at Napco due to lower sales. Thermo Fibertek recorded
restructuring and other nonrecurring costs of $1.1 million in 1997 relating to
the consolidation of two of its subsidiaries into the operations of Thermo Black
Clawson. Peter Brotherhood recorded a charge of $1.4 million in 1997 related
primarily to severance for employees terminated.
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 and $80.1 million in 1997. See Notes 1 and 9 of
Notes to Consolidated Financial Statements for a more complete description of
these transactions. Minority interest expense decreased to $44.0 million in 1998
from $74.4 million in 1997. Minority interest expense includes $13.9 million in
1998 and $19.0 million in 1997 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. Minority
interest expense decreased primarily as a result of lower income at the
Company's majority-owned 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 1998 and 1997, respectively. The tax assets
written off were at ThermoLase and consisted primarily of tax loss carryforwards
(Note 8). The effective tax rate increased in 1998 primarily as a result of a
valuation allowance established at ThermoLase for net operating loss
carryforwards due to increased uncertainty surrounding their realization. The
effective tax rate also increased due to the larger relative effect of
nondeductible expenses, including amortization and the write off of cost in
excess of net assets of acquired companies, due to lower income. In 1998, the
effective tax rate exceeded the statutory federal income tax rate primarily due
to the valuation allowance established for ThermoLase tax loss carryforwards,
nondeductible expenses, and state income taxes. In 1997, the effective tax rate
exceeded the statutory federal tax rate primarily due to nondeductible expenses
and state income taxes.
Contingent Liabilities
At year-end 1998, the Company was contingently liable with respect to
certain lawsuits (Note 6). 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.
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 to $438.3 million in 1997 from $312.9 million in 1996. Operating
income, which includes restructuring and other nonrecurring costs, net,
increased to $405.8 million in 1997 from $246.5 million in 1996.
47
1997 Compared With 1996 (continued)
Measurement and Detection
Sales from the Measurement and Detection segment were $1,820.0 million in
1997, an increase of $397.5 million, or 28%, over 1996. Sales increased
primarily due to acquisitions, which added $417 million of sales in 1997. In
addition, revenues from Thermo Instrument's analytical products increased in
1997 due to higher sales at ThermoQuest's existing mass spectrometry business,
due in part to the continued success of a new product introduced in the first
quarter of 1996, offset in part by a decrease at Thermo Optek. 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. Revenues from Thermo
Instrument's process control products increased as a result of improvements at
ONIX Systems, primarily due to increased sales of industry-specific instruments
to the production segment of the oil and gas industry, and at Metrika Systems,
primarily due to increased sales in international markets at its on-line
raw-materials analyzer business. Revenues increased $9.8 million at Thermedics
Detection primarily due to the completion in 1997 of a mandated product-line
upgrade from The Coca-Cola Company to its existing installed base, which
contributed $6.6 million of revenues. In addition, Thermedics Detection's sales
increased due to $3.2 million of revenues from EGIS security systems sold to the
FAA. Revenues decreased at Thermo Voltek due to lower demand for electrostatic
compatibility test products, resulting from the declining influence of IEC 801,
the European Union directive on electromagnetic compatibility that took effect
on January 1, 1996. The unfavorable effects of currency translation decreased
revenues by $49.5 million in 1997.
Segment income margin, excluding nonrecurring income, net, of $1.3 million
in 1997 and nonrecurring costs of $3.5 million in 1996, improved to 14.5% in
1997 from 11.6% 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. In addition,
segment income margin improved at Thermedics Detection due to higher sales in
1997 and the inclusion of higher costs in 1996 for inventory obsolescence and
other adjustments. The improvement in segment income margin was offset 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 an 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. In addition, Thermo Voltek had lower profitability in 1997.
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).
Biomedical and Emerging Technologies
Sales from the Biomedical and Emerging Technologies segment were $812.8
million in 1997, an increase of $165.5 million, or 26%, over 1996. Sales
increased due to the inclusion of $76.2 million in sales from acquired
businesses, increased demand at Trex Medical and Bird Medical, and growth at
ThermoLase's hair-removal business due to the opening of new spas and higher
revenues from physician- and international-licensing arrangements. 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, 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. 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 awaited approval from the U.S. Food and Drug
Administration (FDA) for commercial sale of its advanced electric LVAS as a
bridge to transplant.
48
1997 Compared With 1996 (continued)
Segment income, excluding restructuring and other nonrecurring costs of
$1.9 million in 1997 and $29.7 million in 1996, increased to $65.1 million in
1997 from $56.3 million in 1996. This increase resulted substantially from
improvements at existing businesses, primarily at Bird Medical, SensorMedics,
and Trex Medical's existing businesses and, to a lesser extent, the inclusion of
segment income from acquired businesses. In addition, ThermoTrex's
advanced-technology research center incurred a loss in 1996 due to cost overruns
and higher expenses for new lines of business. 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 operations of its spa services
business, which operated below maximum capacity, and by pre-opening costs
incurred in connection with new spa openings. Thermo Cardiosystems'
profitability declined by $4.7 million primarily due to a decrease in LVAS
revenues and Thermo Coleman had lower profits primarily due to a loss at Thermo
Information Solutions compared with profitable operations in 1996. Restructuring
and other nonrecurring costs in 1997 included $1.4 million at Trex
Communications for a write-off of in-process technology relating to an
acquisition and $0.5 million at certain of the Company's wholly owned businesses
to close certain foreign sales offices. 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 in-process technology relating to an acquisition,
and $0.7 million of other costs (Note 11).
Energy and Environment
Sales from the Energy and Environment segment were $640.8 million in 1997,
compared with $555.7 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 $18.7
million to $21.4 million, primarily due to the inclusion of revenue from two
acquired businesses. Thermo Ecotek's revenues in 1997 included $8.2 million of
nonrecurring revenue from a contractual settlement with a utility, under which
Thermo Ecotek surrendered its rights to a power-sales agreement. 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.
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 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, 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. Revenues at Thermo TerraTech increased to $295.5 million in 1997 from
$270.3 million in 1996. Revenues from Thermo TerraTech's environmental-liability
management 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
ThermoRetec's business units resulting from a decline in the number of contracts
in process. In addition, revenues from ThermoRetec'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 engineering and design services
increased $5.7 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. Revenues from Thermo TerraTech's thermal-processing
equipment business were $25.3 million in 1997 and $25.5 million in 1996.
This business was sold in October 1997 for a nominal loss.
Segment income, excluding nonrecurring income, net, of $1.9 million in
1997, was $77.3 million in 1997, compared with $58.7 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 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. 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
49
1997 Compared With 1996 (continued)
in segment income), were approximately breakeven in 1996. 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 both businesses, as well as lower overhead as
a result of consolidating two engine manufacturing facilities. Segment income at
Thermo TerraTech, excluding restructuring costs of $7.8 million in 1997,
increased to $18.2 million in 1997 from $13.7 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 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. 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 engineering and
design services due to the completion of two large contracts. Restructuring and
other nonrecurring income, net, of $1.9 million, consisted of $9.7 million of
previously established litigation reserves that were reversed upon settlement of
a related matter and $7.8 million at ThermoRetec principally 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 its
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).
Recycling and Resource Recovery
Sales in the Recycling and Resource Recovery segment were $293.2 million
in 1997, compared with $315.2 million in 1996. A wholly owned subsidiary of the
Company recorded $58.0 million of revenues in 1996 from a contract to design and
construct an office wastepaper de-inking facility. This contract was
substantially completed in the second quarter of 1996. Sales from Thermo
Fibertek increased 25% to $239.6 million in 1997 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 of
automated electroplating equipment by Napco increased $3.4 million to $14.0
million, primarily due to higher demand. 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.
Segment income, excluding restructuring and other nonrecurring costs of
$2.5 million in 1997 and $4.4 million in 1996, was $31.6 million in 1997,
compared with $32.2 million in 1996. This decline primarily resulted from lower
sales at Thermo Fibertek's recycling business. 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. 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. 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. Peter Brotherhood
recorded $1.4 million of restructuring costs in 1997, primarily for severance.
In 1996, Peter Brotherhood incurred $4.4 million of nonrecurring costs related
primarily to the write-off of a nontrade receivable and severance costs (Note
11).
50
1997 Compared With 1996 (continued)
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 of
Notes to Consolidated Financial Statements 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.
Income Taxes
Excluding nontaxable gains from issuance of subsidiary stock, the
Company's effective tax rates were 43% and 45% in 1997 and 1996, respectively.
The effective tax rate decreased in 1997 primarily as a result of the lower
relative effect of higher foreign tax rates and tax law differentials and the
lower relative effect of amortization of cost in excess of net assets of
acquired companies. In both periods, the effective tax rates exceed the
statutory federal income tax rate primarily due to nondeductible expenses and
state income taxes.
Liquidity and Capital Resources
Consolidated working capital was $2,163.0 million at January 2, 1999,
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
$1,547.3 million at January 2, 1999, compared with $1,522.7 million at January
3, 1998. In addition, the Company had $95.5 million of long-term
available-for-sale investments at January 2, 1999, compared with $63.3 million
at January 3, 1998. Of the total $1,642.8 million of cash, cash equivalents, and
short- and long-term available-for-sale investments at January 2, 1999, $1,243.9
million was held by the Company's majority-owned subsidiaries and the balance
was held by the Company and its wholly owned subsidiaries.
Cash provided by operating activities was $328.5 million during 1998. An
increase in accounts receivable used $10.9 million of cash, primarily at Thermo
Power due to slower payment patterns at its Peek subsidiary. Cash of $14.0
million was used to fund an increase in inventories, principally at Trex Medical
due to lower than anticipated sales. The increase in inventories at Trex Medical
was offset in part by a decrease at Thermo Instrument. An increase in other
current assets used $28.4 million of cash, primarily due to an increase in
prepaid income taxes and, to a lesser extent, an increase in unbilled contract
costs and fees as result of the timing of billings on percentage-of-completion
contracts. In addition, the Company used $13.7 million of cash to fund a
decrease in accounts payable, resulting principally from the timing of payments.
These reductions in cash provided by operating activities were offset in part by
a $17.7 million increase in other current liabilities, which was principally due
to reserves established for restructuring costs in 1998.
During 1998, the Company's primary investing activities, excluding
available-for-sale investments activity, included acquisitions and the purchase
of property, plant, and equipment. The Company expended $253.2 million, net of
cash acquired, for acquisitions and expended $148.0 million for purchases of
property, plant, and equipment.
The Company's financing activities provided $102.2 million of cash during
1998. Net proceeds from the issuance of long-term obligations totaled $394.1
million (Note 5). Net proceeds from the issuance of Company and subsidiary
stock, which includes $290.1 million of proceeds from the April 1998 sale of
Company common stock (Note 7), totaled $476.1 million. In addition, the Company
used $75.8 million of cash for the repayment of long-term obligations and $27.9
million of cash to fund a decrease in short-term notes payable.
During 1998, an aggregate principal amount of $18.9 million of subsidiary
convertible obligations were converted into shares of subsidiary common stock.
51
Liquidity and Capital Resources (continued)
During 1998, the Company expended $148.1 million to purchase shares of its
common stock and the Company and certain of its majority-owned subsidiaries
expended $510.9 million to purchase shares of common stock and debentures of
certain of the Company's majority-owned subsidiaries. These purchases were made
pursuant to authorizations by the Company's and certain majority-owned
subsidiaries' Boards of Directors. As of January 2, 1999, $127.3 million
remained under the Company's authorization and $44.5 million and 126,000 shares
remained under authorizations of the Company's majority-owned subsidiaries.
Subsequent to January 2, 1999, certain majority-owned subsidiaries received
additional authorizations totaling $15.0 million. In addition to these
authorizations, Thermedics entered into a merger agreement with its Thermo
Voltek subsidiary to acquire all of the outstanding shares of Thermo Voltek's
common stock that Thermedics and the Company do not own, including the
assumption 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 $25 million. The Company may also expend
additional amounts to complete its reorganization plans (Note 17).
The Company has no material commitments for purchases of property, plant,
and equipment and expects that for 1999, such expenditures will approximate the
current level of expenditures. Since January 2, 1999, the Company and its
majority-owned subsidiaries have expended approximately $377 million on
acquisitions of businesses and as of March 18, 1999, the Company's
majority-owned subsidiaries had agreements or nonbinding letters of intent to
acquire new businesses totaling approximately $15 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 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 interest rates,
foreign currency exchange 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.
52
Market Risk (continued)
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 1998 market
interest rates would result in a negative impact to the Company of $158 million
on the net fair value of its interest-sensitive financial instruments.
Foreign Currency Exchange Rates
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 currencies of the Company's
foreign subsidiaries are principally denominated in British pounds sterling,
French francs, and German marks. The effect of a change in foreign exchange
rates on the Company's net investment in foreign subsidiaries is reflected in
the "Accumulated other comprehensive items" component of shareholders'
investment. A 10% depreciation in year-end 1998 functional currencies, relative
to the U.S. dollar, would result in an $82 million reduction of shareholders'
investment.
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
currency exchange rates. A 10% depreciation in year-end 1998 foreign currency
exchange rates related to the Company's contracts would result in a increase in
the unrealized loss 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.
Certain of the Company's cash and cash equivalents are denominated in
currencies other than the functional currency of the depositor and are sensitive
to changes in foreign currency exchange rates. A 10% depreciation in the related
foreign currency exchange rates would result in a negative impact of $2 million
on the Company's net income.
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 1998 market equity prices would result in a
negative impact to the Company of $53 million on the net fair value of its
price-sensitive equity financial instruments, principally its convertible
obligations.
The Company's common stock of subsidiaries subject to redemption is
sensitive to fluctuations in the price of the underlying redeemable common
stock. The holder of a redemption right may require the Company to redeem one
share of common stock at a special price per share at various dates through
September 2001. If the underlying common stock is trading on the open market at
a price that is less than the redemption price on the redemption date, then the
holders of redemption rights would more likely than not exercise their
redemption rights. In the event all redemption rights are exercised, the Company
may use up to $95 million in cash to settle redemption obligations.
In addition, changes in equity prices would result in changes in the fair
value of common stock of subsidiaries subject to redemption due to the
difference between the current market price and the price at the date of
issuance of the underlying financial instruments, subsidiary common stock and
redemption rights. Since the market price of redemption rights generally
fluctuates in the opposite direction of fluctuations in the market price of the
redeemable common stock, the effect of a 10% increase in the market price of the
redeemable common stock on the fair value of common stock of subsidiaries
subject to redemption would be negated in part by a decrease in the market price
of redemption rights.
53
Year 2000
The following constitutes a "Year 2000 Readiness Disclosure" under the
Year 2000 Information and Readiness Disclosure Act. The Company continues to
assess the potential impact of the year 2000 on the Company's internal business
systems, products, and operations. The Company's year 2000 initiatives include
(i) testing and upgrading significant information technology systems and
facilities; (ii) testing and developing upgrades, if necessary, for the
Company's current products and certain discontinued products; (iii) contacting
key suppliers and vendors to determine their year 2000 compliance status; and
(iv) developing contingency plans.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and facilities will be ready for the
year 2000. The first phase of the program, testing and evaluating the Company's
critical information technology systems and facilities for year 2000 compliance,
has largely been completed. During phase one, the Company tested and evaluated
its significant computer systems, software applications, and related equipment
for year 2000 compliance. The Company also evaluated the potential year 2000
impact on its critical facilities. The Company is currently in phase two of its
program, during which any noncompliant systems or facilities that were
identified during phase one are prioritized and remediated. The Company is
currently upgrading or replacing such noncompliant information technology
systems, and the majority of this process was complete as of January 2, 1999.
The Company expects that all of its material information technology systems and
critical facilities will be year 2000 compliant by the end of October 1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all of such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate third-party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company has
identified all of the year 2000 problems with its current products. The Company
believes that certain of its older products, which it no longer manufactures or
sells, may not be year 2000 compliant. The Company is continuing to test and/or
evaluate such products. The Company is focusing its efforts on products that are
still under warranty, early in their expected life, subject to FDA
considerations related to the year 2000, and/or pose a safety risk. The Company
is offering upgrades and/or identifying potential solutions where reasonably
practicable.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and is distributing questionnaires relating to year 2000 compliance to
its significant suppliers and vendors. The Company has begun to follow-up and
monitor the year 2000 compliance progress of significant suppliers and vendors
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires. The Company has not completed the majority of its
assessment of third-party risk, but expects to be substantially completed by
October 1999.
Contingency Plans
The Company is developing contingency plans that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
These plans may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems,
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plans as may be required.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred expenses to third parties (external costs)
related to year 2000 issues of approximately $6 million as of January 2, 1999,
and the total external costs of year 2000 remediation are expected to be
approximately $13 million. Year 2000 costs are funded from working capital. All
internal costs and related external
54
Year 2000 (continued)
costs other than capital additions related to Year 2000 remediation have been
and will continue to be expensed as incurred. The Company does not track the
internal costs incurred for its year 2000 compliance project. Such costs are
principally the related payroll costs for its information systems group.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
significant suppliers or vendors experience business disruptions due to year
2000 issues, there may also be a material adverse effect on the Company. There
is expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
55
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 1999 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 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." In
February 1999, the FASB issued a revision of the earlier document entitled
"Consolidated Financial Statements: Purpose and Policy." The October 1995
exposure draft proposed new rules for how consolidated financial statements
should be prepared. Under that proposed statement, 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 in equity of the
consolidated entity with no gain or loss being recorded. The 1995 exposure draft
addressed rule changes concerning consolidation procedures which would affect
the Company's ability to record gains on issuance of subsidiary stock and
consolidation policy which does not affect the accounting for such gains. The
February 1999 revised exposure draft addresses only consolidation policy. The
FASB has indicated that it will consider resuming discussion on consolidation
procedures after completion of the efforts on consolidation policy. The timing
and contents of any final statement on consolidation procedures are uncertain.
56
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. A portion of
the Company's revenues is derived from exports to Asia. Certain countries in
Asia are experiencing a severe economic crisis, which has been characterized by
sharply reduced economic activity and liquidity, highly volatile
foreign-currency-exchange and interest rates, and unstable stock markets. The
Company's export sales to Asia may continue to be adversely affected by the
unstable economic conditions there, which may continue to adversely affect the
Company's results of operations, financial condition, or business.
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 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.
57
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 manufacturers of
semiconductors and products incorporating semiconductors, 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, including fluctuating
demand in the semiconductor industry. 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.
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.
Proceedings initiated by the Company to protect its proprietary rights could
result in substantial cost to the Company. 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.
58
Potential Impact of Year 2000 on Processing of Date-sensitive Information.
While the Company is attempting to minimize any negative consequences arising
from the year 2000 issue, there can be no assurance that year 2000 problems will
not have a material adverse impact on the Company's business, operations, or
financial condition. While the Company expects that upgrades to its internal
business systems will be completed in a timely fashion, there can be no
assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. If any of the Company's
significant suppliers or vendors experience business disruptions due to year
2000 issues, there may also be a material adverse effect on the Company. There
is expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
59
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 1998 and 1997, as reported in the consolidated
transaction reporting system.
1998 1997
-------------------- ----------------------
Quarter High Low High Low
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
First $44 1/4 $36 5/8 $40 1/2 $30 7/8
Second 41 15/16 30 3/4 38 3/4 28 3/8
Third 35 3/16 14 3/16 41 1/2 32 1/8
Fourth 20 1/16 13 9/16 44 1/2 33 1/2
As of January 29, 1999, the Company had 8,277 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 29, 1999, was $16 5/8 per share.
Common stock of the Company's majority-owned public subsidiaries is traded
on the American Stock Exchange: Thermedics Inc. (TMD), Thermedics Detection Inc.
(TDX), Thermo Cardiosystems Inc. (TCA), Thermo Voltek Corp. (TVL), Thermo
Sentron Inc. (TSR), Thermo Ecotek Corporation (TCK), Thermo Fibertek Inc. (TFT),
Thermo Fibergen Inc. (TFG), Thermo Instrument Systems Inc. (THI), Metrika
Systems Corporation (MKA), ONIX Systems Inc. (ONX), Thermo BioAnalysis
Corporation (TBA), Thermo Optek Corporation (TOC), ThermoQuest Corporation
(TMQ), ThermoSpectra Corporation (THS), Thermo Vision Corporation (VIZ), Thermo
Power Corporation (THP), Thermo TerraTech Inc. (TTT), The Randers Killam Group
Inc. (RGI), ThermoRetec Corporation (THN), ThermoTrex Corporation (TKN),
ThermoLase Corporation (TLZ), and Trex Medical Corporation (TXM).
Shareholder Services
Shareholders of Thermo Electron Corporation who desire information about
the Company are invited to contact the Investor Relations Department, Thermo
Electron Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts
02454-9046, (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 is available from Thermo Electron's Internet site
(http://www.thermo.com).
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, (781) 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
2, 1999, as filed with the Securities and Exchange Commission, may be obtained
at no charge by writing to the Investor Relations Department, Thermo Electron
Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.
Annual Meeting
The annual meeting of shareholders will be held on Thursday, May 27, 1999,
at 3 p.m. at The Westin Hotel, 70 Third Avenue, Waltham, Massachusetts.
60
Ten Year Financial Summary
(In millions except 1998 (a) 1997 1996 (b) 1995 1994 (c) 1993 (d) 1992 (e) 1991 (f) 1990 1989
per share amounts)
- ------------------------- --------- ---------- --------- ---------- --------- ---------- --------- ---------- --------- ----------
Statement of Income Data
Revenues $3,867.6 $3,558.3 $2,932.6 $2,270.3 $1,729.2 $1,354.5 $ 999.2 $ 842.5 $ 744.5 $ 640.3
Gross Profit 1,526.5 1,441.3 1,130.0 863.4 650.9 482.3 326.7 256.5 233.8 176.0
Operating Income 331.3 405.8 246.5 225.2 182.1 119.2 70.5 43.6 40.9 23.6
Net Income 181.9 239.3 190.8 139.6 104.7 76.9 59.5 48.5 35.5 27.3
Earnings per Share:
Basic 1.12 1.57 1.35 1.10 .90 .74 .62 .56 .46 .37
Diluted 1.07 1.41 1.17 .95 .78 .65 .58 .53 .43 .35
Balance Sheet Data
Working Capital $2,163.0 $2,002.0 $2,218.6 $1,317.1 $1,150.7 $ 833.8 $ 508.7 $ 468.4 $ 244.1 $ 277.6
Total Assets 6,331.6 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
Long-term Obligations 2,025.5 1,742.9 1,550.3 1,118.1 1,049.9 647.6 494.2 255.1 210.5 177.0
Minority Interest 649.4 719.6 684.1 471.6 327.7 277.7 164.3 122.5 83.9 51.8
Common Stock of 94.3 93.3 76.5 17.5 - 14.5 5.5 5.5 8.7 13.1
Subsidiaries Subject
to Redemption
Shareholders' Investment 2,248.1 1,997.9 1,754.4 1,309.7 1,007.5 873.7 563.8 489.5 314.1 229.2
(a) Reflects the issuance of $150.0 million principal amount of the Company's
notes and the Company's public offering of common stock for net proceeds of
$290.1 million.
(b) Reflects the issuance of $585.0 million principal amount of the Company's
convertible debentures.
(c) Reflects the issuance of $345.0 million principal amount of the Company's
convertible debentures.
(d) Reflects the Company's public offering of common stock for net proceeds of
$246.0 million.
(e) Reflectsthe issuance of $260.0 million principal amount of the Company's
convertible debentures.
(f) Reflects the issuance of $164.0 million principal amount of the Company's
convertible debentures.
61