SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended October 2, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-8002
THERMO ELECTRON CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2209186
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at October 29, 1999
Common Stock, $1.00 par value 158,236,781
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
October 2, January 2,
(In thousands) 1999 1999
- ---------------------------------------------------------------------------------- ------------ ----------
Current Assets:
Cash and cash equivalents $ 424,279 $ 396,670
Short-term available-for-sale investments at quoted market value 709,844 1,150,585
(amortized cost of $707,490 and $1,144,785)
Accounts receivable, less allowances of $66,521 and $52,607 925,758 875,615
Unbilled contract costs and fees 86,172 87,031
Inventories:
Raw materials and supplies 287,905 267,901
Work in process 135,508 127,144
Finished goods 217,197 204,662
Prepaid and refundable income taxes 156,287 143,352
Other current assets 73,401 48,369
---------- ----------
3,016,351 3,301,329
---------- ----------
Property, Plant, and Equipment, at Cost 1,193,985 1,291,485
Less: Accumulated depreciation and amortization 468,965 458,523
---------- ----------
725,020 832,962
---------- ----------
Long-term Available-for-sale Investments, at Quoted Market Value 77,397 95,537
(amortized cost of $75,125 and $99,256)
---------- ----------
Other Assets 272,017 186,168
---------- ----------
Cost in Excess of Net Assets of Acquired Companies (Note 6) 1,976,656 1,915,649
---------- ----------
$6,067,441 $6,331,645
========== ==========
2
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 2, January 2,
(In thousands except share amounts) 1999 1999
- ---------------------------------------------------------------------------------- ------------ ----------
Current Liabilities:
Short-term obligations and current maturities of debt and $ 320,694 $ 135,451
common stock redemption obligations
Accounts payable 289,064 272,503
Accrued payroll and employee benefits 160,712 142,323
Accrued income taxes 27,318 92,623
Accrued installation and warranty costs 73,857 71,118
Deferred revenue 61,979 60,582
Other accrued expenses (Notes 6 and 7) 481,935 363,723
---------- ----------
1,415,559 1,138,323
---------- ----------
Deferred Income Taxes and Other Deferred Items 157,574 175,984
---------- ----------
Long-term Obligations:
Senior convertible obligations 172,500 187,042
Senior notes 150,000 150,000
Subordinated convertible obligations 1,518,035 1,639,052
Nonrecourse tax-exempt obligations 14,500 15,500
Other 52,892 33,937
---------- ----------
1,907,927 2,025,531
---------- ----------
Minority Interest 556,708 649,382
---------- ----------
Common Stock of Subsidiaries Subject to Redemption ($7,692 and 7,692 94,301
$95,262 redemption value)
---------- ----------
Shareholders' Investment:
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized; 167,248 166,971
167,248,232 and 166,970,806 shares issued
Capital in excess of par value 1,032,230 1,033,799
Retained earnings 1,045,981 1,216,541
Treasury stock at cost, 9,011,451 and 8,477,707 shares (159,855) (151,643)
Deferred compensation (6,189) -
Accumulated other comprehensive items (Note 2) (57,434) (17,544)
---------- ----------
2,021,981 2,248,124
---------- ----------
$6,067,441 $6,331,645
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
THERMO ELECTRON CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- ---------------------------------------------------------------------------------- ----------- -----------
Revenues:
Product and service revenues $1,031,823 $ 933,028
Research and development contract revenues 45,447 44,141
---------- -----------
1,077,270 977,169
---------- -----------
Costs and Operating Expenses:
Cost of product and service revenues (Note 7) 620,490 554,474
Expenses for research and development (a) 106,227 93,177
Selling, general, and administrative expenses 267,309 234,246
Restructuring and other nonrecurring costs (income), net (Note 7) (4,862) 41,620
---------- -----------
989,164 923,517
---------- -----------
Operating Income 88,106 53,652
Gain on Issuance of Stock by Subsidiaries - (2,431)
Other Expense, Net (Notes 3 and 7) (14,522) (119)
---------- -----------
Income Before Income Taxes, Minority Interest, and Extraordinary Items 73,584 51,102
Income Tax Provision (30,537) (38,182)
Minority Interest (Expense) Income (6,718) 2,731
---------- -----------
Income Before Extraordinary Items 36,329 15,651
Extraordinary Items, Net of Provision for Income Taxes and - 1,931
Minority Interest of $3,108 (Note 4)
---------- -----------
Net Income $ 36,329 $ 17,582
========== ===========
Earnings per Share (Note 4):
Basic $ .23 $ .11
========== ===========
Diluted $ .22 $ .10
========== ===========
Weighted Average Shares (Note 4):
Basic 158,198 163,362
========== ===========
Diluted 158,384 163,936
========== ===========
(a) Includes Costs of:
Research and development contracts $ 37,670 $ 39,280
Internally funded research and development 68,557 53,897
---------- -----------
$ 106,227 $ 93,177
========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMO ELECTRON CORPORATION
Consolidated Statement of Operations
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands except per share amounts) 1999 1998
- ---------------------------------------------------------------------------------- ----------- -----------
Revenues:
Product and service revenues $3,038,289 $ 2,733,993
Research and development contract revenues 140,859 135,238
---------- -----------
3,179,148 2,869,231
---------- -----------
Costs and Operating Expenses:
Cost of product and service revenues (Note 7) 1,845,038 1,608,519
Expenses for research and development (a) 319,500 278,147
Selling, general, and administrative expenses (Note 7) 808,412 685,300
Restructuring and other nonrecurring costs, net (Note 7) 383,429 45,732
---------- -----------
3,356,379 2,617,698
---------- -----------
Operating Income (Loss) (177,231) 251,533
Gain on Issuance of Stock by Subsidiaries - 51,775
Other Income (Expense), Net (Notes 3 and 7) (56,205) 4,839
---------- -----------
Income (Loss) Before Income Taxes, Minority Interest, and Extraordinary Items (233,436) 308,147
Income Tax (Provision) Benefit (Note 7) 26,196 (130,069)
Minority Interest (Expense) Income 36,680 (38,035)
---------- -----------
Income (Loss) Before Extraordinary Items (170,560) 140,043
Extraordinary Items, Net of Provision for Income Taxes and - 4,817
Minority Interest of $7,952 (Note 4)
---------- -----------
Net Income (Loss) $ (170,560) $ 144,860
========== ===========
Earnings (Loss) per Share (Note 4):
Basic $ (1.08) $ .89
========== ===========
Diluted $ (1.09) $ .84
========== ===========
Weighted Average Shares (Note 4):
Basic 158,084 162,887
========== ===========
Diluted 158,084 179,774
========== ===========
(a) Includes Costs of:
Research and development contracts $ 122,046 $ 118,641
Internally funded research and development 197,454 159,506
---------- -----------
$ 319,500 $ 278,147
========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
5
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands) 1999 1998
- --------------------------------------------------------------------- ---------- ------------ ------------
Operating Activities:
Net income (loss) $ (170,560) $ 144,860
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 144,928 125,398
Noncash restructuring and other nonrecurring costs, net (Note 7) 328,160 14,780
Provision for losses on accounts receivable (Note 7) 14,440 5,473
Change in deferred income taxes (38,901) (3,746)
Minority interest expense (income) (36,680) 38,035
Equity in loss of unconsolidated subsidiaries 9,708 636
Gain on issuance of stock by subsidiaries - (51,775)
Gain on sale of business and termination of operating contract (24,616) -
(Note 7)
Gain on investments, net (1,039) (5,125)
Extraordinary items, net of income taxes and minority interest - (4,817)
Other noncash items 47,736 21,128
Changes in current accounts, excluding the effects of
acquisitions and dispositions:
Accounts receivable 7,252 15,274
Inventories (3,147) (36,465)
Other current assets (3,116) (19,603)
Accounts payable (3,770) (28,968)
Other current liabilities (50,962) 3,775
---------- -----------
Net cash provided by operating activities 219,433 218,860
---------- -----------
Investing Activities:
Acquisitions, net of cash acquired (Note 6) (396,495) (177,678)
Acquisition of minority interests of subsidiaries (Note 8) (23,534) -
Refund of acquisition purchase price 4,574 -
Proceeds from sale of a business and termination of 29,367 -
operating contract (Note 7)
Purchases of available-for-sale investments (657,146) (1,793,500)
Proceeds from sale and maturities of available-for-sale investments 1,122,822 1,549,940
Purchases of property, plant, and equipment (92,947) (108,785)
Proceeds from sale of property, plant, and equipment 11,154 12,283
Increase in other assets (6,589) (23,153)
Other 20,771 14,559
---------- -----------
Net cash provided by (used in) investing activities $ 11,977 $ (526,334)
---------- -----------
6
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
October 2, October 3,
(In thousands) 1999 1998
- ------------------------------------------------------------------------- ------ ------------ ------------
Financing Activities:
Net proceeds from issuance of long-term obligations $ 15,069 $ 244,649
Repayment of long-term obligations (42,938) (55,031)
Net proceeds from issuance of Company and subsidiary common 9,552 475,449
stock
Purchases of Company and subsidiary common stock and (166,757) (508,698)
subordinated convertible debentures
Redemption of subsidiary common stock (17,070) -
Increase (decrease) in short-term obligations 10,276 (28,404)
Other (574) (3,412)
---------- -----------
Net cash provided by (used in) financing activities (192,442) 124,553
---------- -----------
Exchange Rate Effect on Cash (11,359) 5,425
---------- -----------
Increase (Decrease) in Cash and Cash Equivalents 27,609 (177,496)
Cash and Cash Equivalents at Beginning of Period 396,670 593,580
---------- -----------
Cash and Cash Equivalents at End of Period $ 424,279 $ 416,084
========== ===========
Noncash Activities:
Conversions of subsidiary convertible obligations $ 9,277 $ 18,280
========== ===========
Fair value of assets of acquired companies $ 695,078 $ 290,302
Cash paid for acquired companies (441,634) (190,759)
Issuance of short- and long-term obligations for acquired company (14,852) -
Issuance of subsidiary common stock for acquired company - (11,450)
---------- -----------
Liabilities assumed of acquired companies $ 238,592 $ 88,093
========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
7
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Electron Corporation (the Company) without audit and, in the opinion
of management, reflect all adjustments of a normal recurring nature necessary
for a fair statement of the financial position at October 2, 1999, the results
of operations for the three- and nine-month periods ended October 2, 1999, and
October 3, 1998, and the cash flows for the nine-month periods ended October 2,
1999, and October 3, 1998. Certain prior-period amounts have been reclassified
to conform to the presentation in the current financial statements. Interim
results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of January 2, 1999, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999,
filed with the Securities and Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income (loss) and "other comprehensive
items," which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including foreign
currency translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments. During the third quarter of 1999 and 1998, the
Company's comprehensive income totaled $55.2 million and $44.9 million,
respectively. During the first nine months of 1999 and 1998, the Company had a
comprehensive loss of $201.8 million and comprehensive income of $165.0 million,
respectively.
3. Other Income (Expense), Net
The components of other income (expense), net in the accompanying
statement of operations are:
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------ ---------- ----------- ---------- ----------
Interest Income $ 14,366 $ 25,253 $ 46,285 $ 77,482
Interest Expense (29,317) (25,110) (84,791) (77,077)
Equity in Earnings (Loss) of Unconsolidated 955 (162) (9,708) (636)
Subsidiaries (Notes 6 and 7)
Gain (Loss) on Investments, Net (Note 7) 1,738 (127) 1,039 5,125
Other (Note 7) (2,264) 27 (9,030) (55)
-------- -------- -------- --------
$(14,522) $ (119) $(56,205) $ 4,839
======== ======== ======== ========
8
4. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Basic
Net Income (Loss) $ 36,329 $ 17,582 $(170,560) $ 144,860
-------- --------- --------- ---------
Weighted Average Shares 158,198 163,362 158,084 162,887
-------- --------- -------- ---------
Basic Earnings (Loss) per Share $ .23 $ .11 $ (1.08) $ .89
======== ========= ========= =========
Diluted
Net Income (Loss) $ 36,329 $ 17,582 $(170,560) $ 144,860
Effect of:
Convertible obligations - - - 11,002
Majority-owned subsidiaries' dilutive securities (1,320) (999) (2,097) (5,280)
-------- --------- -------- ---------
Income (Loss) Available to Common Shareholders, $ 35,009 $ 16,583 $(172,657) $ 150,582
as Adjusted
-------- --------- --------- ---------
Weighted Average Shares 158,198 163,362 158,084 162,887
Effect of:
Convertible obligations - - - 15,476
Stock options 186 574 - 1,411
-------- --------- -------- ---------
Weighted Average Shares, as Adjusted 158,384 163,936 158,084 179,774
-------- --------- -------- ---------
Diluted Earnings (Loss) per Share $ .22 $ .10 $ (1.09) $ .84
======== ========= ======== =========
The computation of diluted earnings (loss) per share for the third quarter
and first nine months of 1999 excludes the effect of assuming the conversion of
the Company's $585.0 million principal amount 4 1/4% subordinated convertible
debentures, convertible at $37.80 per share, because the effect would be
antidilutive. In addition, the computation of diluted earnings (loss) per share
for the third quarter and first nine months of 1999 excludes the effect of
assuming the repurchase of 5,701,000 shares of Company common stock at a
weighted average exercise price of $14.56 per share in connection with put
options sold to an institutional counterparty because the effect would be
antidilutive.
The computation of diluted earnings per share for each period excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of October 2, 1999, there were 9,706,000 of
such options outstanding, with exercise prices ranging from $16.59 to $43.46 per
share.
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 $.01 in the third
quarter of 1998 and $.03 in the first nine months of 1998.
9
5. Business Segment Information
Three Months Ended Nine Months Ended
October 2, October 3, October 2, October 3,
(In thousands) 1999 1998 1999 1998
- ---------------------------------------------------------- ----------- ----------- ----------- -----------
Revenues:
Measurement and Detection $ 575,372 $ 468,351 $1,680,638 $1,382,075
Biomedical and Emerging Technologies 238,406 226,020 717,599 677,575
Energy and Environment 201,592 212,085 582,339 591,446
Recycling and Resource Recovery 64,531 72,833 204,992 223,153
Intersegment (a) (2,631) (2,120) (6,420) (5,018)
---------- ---------- ---------- ----------
$1,077,270 $ 977,169 $3,179,148 $2,869,231
========== ========== ========== ==========
Income (Loss) Before Income Taxes, Minority Interest,
and Extraordinary Items:
Measurement and Detection (b) $ 61,230 $ 24,992 $ 144,124 $ 157,426
Biomedical and Emerging Technologies (c) 1,225 5,862 (153,869) 41,722
Energy and Environment (d) 30,613 22,571 (136,014) 50,768
Recycling and Resource Recovery (e) 2,458 7,925 (6,900) 25,200
---------- ---------- ---------- ----------
Total segment income (loss) (f) 95,526 61,350 (152,659) 275,116
Corporate (g) (21,942) (10,248) (80,777) 33,031
---------- ---------- ---------- ----------
$ 73,584 $ 51,102 $ (233,436) $ 308,147
========== ========== ========== ==========
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Includes restructuring and other nonrecurring costs of $0.1 million, $21.9
million, $31.7 million, and $23.3 million in the third quarter of 1999 and
1998, and the first nine months of 1999 and 1998, respectively. Includes
charges of $1.9 million, $8.6 million, $9.4 million, and $8.6 million in the
third quarter of 1999 and 1998, and the first nine months of 1999 and 1998,
respectively, primarily for the sale of inventories revalued in connection
with an acquisition and other inventory provisions.
(c) Includes restructuring and other nonrecurring costs of $3.7 million, $8.5
million, $148.8 million, and $11.2 million in the third quarter of 1999 and
1998, and the first nine months of 1999 and 1998, respectively. Includes
charges of $1.9 million and $24.6 million in the third quarter and first
nine months of 1999, respectively, primarily for inventory provisions.
(d) Includes restructuring costs and other nonrecurring income, net, of $11.4
million in the third quarter of 1999 and restructuring and other
nonrecurring costs of $11.2 million, $178.5 million, and $11.2 million in
the third quarter of 1998, and first nine months of 1999 and 1998,
respectively. Includes charges of $6.3 million and $10.7 million in the
third quarter and first nine months of 1999, respectively, primarily for
inventory provisions.
(e) Includes restructuring and other nonrecurring costs, net of $2.7 million and
$24.4 million in the third quarter and first nine months of 1999.
(f) Segment income (loss) is income before corporate general and administrative
expenses, other income and expense, minority interest, income taxes, and
extraordinary items.
(g) Includes corporate general and administrative expenses, other income and
expense, and gain on issuance of stock by subsidiaries.
10
6. Acquisitions
During the first quarter of 1999, Thermo Instrument Systems Inc. acquired
17,494,684 shares (or approximately 99%) of Spectra-Physics AB, a Stockholm
Stock Exchange-listed company, for approximately 160 Swedish krona per share
(approximately $20 per share) in completion of Thermo Instrument's cash tender
offer to acquire all of the outstanding shares of Spectra-Physics. Thermo
Instrument expects to acquire the remaining Spectra-Physics shares outstanding
for approximately 160 Swedish krona per share pursuant to the compulsory
acquisition rules applicable to Swedish companies, of which certain shares were
acquired in the second and third quarters of 1999. The aggregate purchase price
was approximately $351.0 million, including related expenses. On the date of
acquisition, Spectra-Physics had $39.1 million of cash, which included $30.5
million held by its majority-owned subsidiary. The accompanying balance sheet as
of October 2, 1999, includes $2.0 million accrued for the purchase of the
remaining Spectra-Physics shares outstanding. Spectra-Physics manufactures a
wide range of laser-based instrumentation systems, primarily for the
process-control, industrial measurement, construction, research, commercial, and
government markets. Spectra-Physics had revenues of approximately $442 million
in 1998, with operations throughout North America and Europe, and a presence in
the Pacific Rim.
In connection with the acquisition of Spectra-Physics, Thermo Instrument
acquired 4,162,000 shares of FLIR Systems, Inc. common stock. FLIR designs,
manufactures, and markets thermal imaging and broadcast camera systems that
detect infrared radiation or heat emitted directly by all objects and materials.
Thermo Instrument accounts for its investment in FLIR using the equity method
with a one quarter lag to ensure the availability of FLIR's operating results in
time to enable Thermo Instrument to include its pro rata share of FLIR's results
with its own. During FLIR's first calendar quarter of 1999, FLIR recorded a loss
in connection with a pooling-of-interests transaction and certain restructuring
actions. Thermo Instrument has recorded its pro rata share of this loss, $5.1
million, in equity in earnings (loss) of unconsolidated subsidiaries, a
component of other income (expense), net in the accompanying statement of
operations for the first nine months of 1999. FLIR has subsequently reported
profitable results. In addition, as a result of the pooling consummated by FLIR
and related issuance of FLIR shares in March 1999, Thermo Instrument's pro rata
share of FLIR's equity decreased to 29.4% from 34.6% prior to the transaction.
This decrease totaled $6.0 million and has been recorded as a nonrecurring loss
in equity in earnings (loss) of unconsolidated subsidiaries in the accompanying
statement of operations for the first nine months of 1999, pursuant to
Securities and Exchange Commission Staff Accounting Bulletin 51.
In addition, the Company and its majority-owned subsidiaries made several
other acquisitions during the first nine months of 1999 for $84.6 million in
cash, net of cash acquired, subject to certain post-closing adjustments. To
date, no information has been gathered that would cause the Company to believe
that the post-closing adjustments will be material.
These acquisitions have been accounted for using the purchase method of
accounting, and their results have been included in the accompanying financial
statements from their respective dates of acquisition. The aggregate cost of
these acquisitions exceeded the estimated fair value of the acquired net assets
by $203.2 million, which is being amortized over periods not exceeding 40 years.
Allocation of the purchase price for these acquisitions was based on estimates
of the fair value of the net assets acquired and is subject to adjustment upon
finalization of the purchase price allocations. The Company has gathered no
information that indicates the final allocations will differ materially from the
preliminary estimates. Pro forma results have not been presented as the results
of the acquired businesses were not material to the Company's results of
operations.
The Company has undertaken restructuring activities at certain acquired
businesses. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily
have included reductions in staffing levels and the abandonment of excess
facilities. In connection with these restructuring activities, as part of the
cost of acquisitions, the Company established reserves, primarily for severance
and excess facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. Unresolved matters at October 2, 1999,
11
6. Acquisitions (continued)
primarily included completion of planned severances and abandonment of excess
facilities for certain acquisitions completed during the last 12 months. A
summary of the changes in accrued acquisition expenses, which are included in
other accrued expenses in the accompanying balance sheet, follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 2, 1999 $ 7,347 $14,577 $ 1,268 $23,192
Reserves established 16,896 2,867 1,812 21,575
Usage (8,666) (2,579) (1,890) (13,135)
Decrease due to finalization of (1,201) (301) (265) (1,767)
restructuring plans, recorded as a
decrease to cost in excess of net assets
of acquired companies
Currency translation (396) (225) (25) (646)
------- ------- ------- -------
Balance at October 2, 1999 $13,980 $14,339 $ 900 $29,219
======= ======= ======= =======
7. Restructuring and Related Costs and Nonrecurring Items
During the second and third quarters of 1999, the Company and certain of
its subsidiaries recorded restructuring and related costs in connection with
broad scale restructuring actions, initiated in the second quarter of 1999 and
affecting a number of business units. Restructuring costs and other nonrecurring
income, net, totaling $4.9 million were recorded in the third quarter of 1999,
which includes $5.7 million of restructuring costs and $10.6 million of other
nonrecurring income, net. The Company also recorded $7.3 million of inventory
provisions, $2.7 million of other expense, net, and a revenue reversal of $2.8
million resulting from a dispute with a utility customer. The inventory
provisions are included in cost of revenues in the accompanying statement of
operations. Severance and lease costs, recorded as components of restructuring
costs, were accounted for in accordance with EITF 94-3.
The Company and certain of its subsidiaries recorded restructuring and
related costs totaling $418.8 million and other nonoperating charges totaling
$24.9 million during the second quarter of 1999. Restructuring and related costs
include $369.9 million of restructuring costs, $21.4 million of other
nonrecurring costs, $25.3 million of inventory and warranty provisions, and $2.3
million of provisions for uncollectible accounts receivable. The inventory and
warranty provisions are included in cost of revenues, and the provisions for
uncollectible accounts receivable are included in selling, general, and
administrative expenses in the accompanying statement of operations. Other
nonoperating charges include $22.5 million of other expense, net and $2.5
million of income tax expense as detailed by segment below.
In addition, during the first quarter of 1999, the Company and certain of
its subsidiaries recorded restructuring and related costs of $4.0 million,
including $5.6 million of restructuring costs, $8.6 million of other
nonrecurring income, net, and $7.0 million of inventory charges.
12
7. Restructuring and Related Costs and Nonrecurring Items (continued)
The Company recorded charges by segment for the third quarter of 1999 as
follows:
(In thousands) Measurement Biomedical Energy and Recycling Total
and and Environment and
Detection Emerging Resource
Technologies Recovery
- ------------------------------------ ------------- ------------- ------------- -------------- ------------
Revenues $ - $ - $ 2,832 $ - $ 2,832
Cost of Product and Service 1,860 1,900 3,510 - 7,270
Revenues
Restructuring and Other Nonrecurring 124 3,668 (11,369) 2,715 (4,862)
Costs (Income), Net
Other Expense, Net 2,682 - - - 2,682
-------- -------- -------- --------- --------
$ 4,666 $ 5,568 $ (5,027) $ 2,715 $ 7,922
======== ======== ======== ========= ========
The Company recorded charges by segment for the first nine months of 1999
as follows:
(In thousands) Corporate Measurement Biomedical Energy and Recycling Total
and and Environment and
Detection Emerging Resource
Technologies Recovery
- --------------------- -------------- ------------- ------------- ------------- -------------- ------------
Revenues $ - $ - $ - $ 2,832 $ - $ 2,832
Cost of Product and - 9,426 22,501 7,639 - 39,566
Service Revenues
Selling, General, - - 2,049 249 - 2,298
and Administrative
Expenses
Restructuring and - 31,745 148,758 178,491 24,435 383,429
Other Nonrecurring
Costs, Net
Other Expense, Net 3,609 13,748 5,668 2,125 - 25,150
Income Tax Expense - 1,409 - 1,055 - 2,464
--------- -------- -------- -------- --------- --------
$ 3,609 $ 56,328 $178,976 $192,391 $ 24,435 $455,739
========= ======== ======== ======== ========= ========
The components of restructuring and related costs by segment and, where
applicable, by majority-owned subsidiary, are as follows:
Measurement and Detection
Thermedics Inc.
Thermedics recorded $1.9 million of inventory provisions in cost of
revenues relating to the Measurement and Detection segment in the third quarter
of 1999. These provisions were at its Thermedics Detection Inc. subsidiary and
related to inventories deemed excess based on recent demand.
13
7. Restructuring and Related Costs and Nonrecurring Items (continued)
Thermedics recorded restructuring and related costs of $32.5 million
during the second quarter of 1999 relating to the Measurement and Detection
segment, including restructuring costs of $30.1 million, other nonrecurring
costs of $0.1 million, a tax asset write-off of $1.4 million, and inventory
provisions of $0.9 million. Restructuring costs of $30.1 million relate to a
decision to sell its power electronics and test equipment business and include
$28.5 million to write off related cost in excess of net assets of acquired
companies to reduce the carrying value of the business to the estimated proceeds
from its sale. In addition, restructuring costs include a charge of $1.6 million
recorded by Thermedics to write off its remaining net investment in a subsidiary
of the power electronics and test equipment business, which Thermedics
transferred to a buyer in consideration for a release from certain contractual
obligations, primarily ongoing lease obligations. The tax write-off represents a
deferred tax asset that will not be realized as a result of exiting this
business. The inventory provision results from exiting and reengineering certain
product lines. Unaudited revenues and operating losses, excluding restructuring
and related costs, of the power electronics and test equipment business were
$20.2 million and $0.7 million, respectively, for the first nine months of 1999,
and $37.9 million and $0.2 million, respectively, for 1998. Thermedics recorded
other nonrecurring costs of $0.1 million to write off a receivable as a result
of an unfavorable resolution of a post-closing adjustment in connection with the
sale of a business in 1998.
Thermo Instrument Systems Inc.
In connection with restructuring actions commenced in 1998, certain
subsidiaries of Thermo Instrument recorded restructuring costs of $0.1 million,
$0.2 million, and $1.2 million during the third, second, and first quarters of
1999, respectively. The restructuring costs were primarily for business
relocation and facility-closure costs.
As part of Thermo Instrument's acquisition of Spectra-Physics, it acquired
a majority interest in Spectra-Physics Lasers, Inc. (SPLI), a U.S. publicly
traded company. Prior to its acquisition by Thermo Instrument, SPLI elected
early adoption of Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivatives." The Company has not elected early adoption of SFAS
No. 133, although it must adopt the statement no later than 2001. Under SFAS No.
133, SPLI is permitted under certain conditions to enter foreign exchange
contracts to hedge anticipated transactions without recording gains and losses
on such contracts in income. Such contracts are deemed speculative hedges under
SFAS No. 52, "Foreign Currency Translation," and must be marked to market with
the resulting gain or loss reported as a component of Thermo Instrument's
results of operations. During the third quarter of 1999, Thermo Instrument
recorded a loss on foreign exchange contracts entered into by SPLI of $2.7
million, which is included in other income (expense), net in the accompanying
statement of operations. Thermo Instrument's results may continue to be affected
by such transactions in the future.
During the second quarter of 1999, Thermo Instrument recorded other
nonrecurring charges of $13.1 million, including $11.1 million in charges
relating to its equity investment in FLIR (Note 6). These charges were recorded
to equity in earnings (loss) of unconsolidated subsidiaries, a component of
other income (expense), net in the accompanying statement of operations. Thermo
Instrument's nonrecurring charges also include an adjustment to cost of revenues
of $2.0 million relating to the sale of inventories at Spectra-Physics revalued
at the date of its acquisition. Thermo Instrument recorded a charge of $4.6
million relating to the sale of such inventories in the first quarter of 1999.
Biomedical and Emerging Technologies
ThermoTrex Corporation
During the third quarter of 1999, ThermoTrex's Trex Medical Corporation
subsidiary recorded restructuring costs of $3.2 million related to the actions
described below. These costs primarily represent certain employee retention
incentives for employees in facilities being closed that are being accrued
ratably through the date on which their services will no longer be required, as
well as severance and other incremental costs of consolidating facilities. In
addition, Trex Medical recorded inventory provisions in cost of revenues
totaling $1.9 million for product deemed excess based on recent demand.
14
7. Restructuring and Related Costs and Nonrecurring Items (continued)
During the second quarter of 1999, ThermoTrex announced restructuring
actions at its Trex Medical and ThermoLase Corporation subsidiaries. In
connection with these actions, ThermoTrex recorded restructuring and related
costs of $93.9 million in the second quarter of 1999, including restructuring
costs of $72.3 million, inventory and warranty provisions of $14.3 million,
provisions for uncollectible accounts receivable of $1.6 million, and other
nonoperating charges of $5.7 million.
During the second quarter of 1999, Trex Medical recorded $18.1 million of
restructuring and related costs, including restructuring costs of $6.1 million
and inventory and warranty provisions of $12.0 million. The restructuring costs
were incurred primarily in connection with the consolidation of certain
facilities and, to a lesser extent, actions to reduce costs in other operations.
Restructuring costs include $2.3 million for facility-closing costs, net of
assumed sublease income; $2.0 million to write off leasehold improvements at
facilities to be closed and to write down fixed assets to their estimated
disposal value; and $1.9 million for severance for 265 employees across all
functions.
In August 1999, Trex Medical received notification from the Food and Drug
Administration (FDA) denying its 510(k) filing for its digital mammography
system. In September, Trex Medical received a letter from the director of the
FDA's Office of Device Evaluation indicating that the FDA believes that a
pre-market approval (PMA) application, followed up by significant post-approval
screening trials, may be the more viable option for obtaining market clearance
for digital mammography systems. A PMA is generally more burdensome than a
510(k), because it applies to devices considered to be of higher risk. In light
of the FDA's letter, Trex Medical continues to evaluate its options relating to
marketing authorization. For example, Trex Medical may incorporate the data that
formed the basis of its 510(k) application into a PMA application for submission
to the FDA. After such submission, Trex Medical may implement various design and
engineering changes that may require additional preapproval clinical trials, but
there can be no assurance regarding the timing or results of the submission of a
new filing to the FDA or such clinical trials. Trex Medical recorded costs of
$9.4 million to establish inventory provisions and to terminate purchase
commitments for products that have become obsolete due to planned product
changes or excess as a result of a recent decline in demand. The largest
component of the inventory charge was recorded as a result of the decision by
the FDA to deny Trex Medical's application for its digital mammography system
and resulting design changes expected to be made to the system. Provisions
resulting from other planned product and technology changes and decreased demand
for certain other products are also principal components of the inventory
charge. Warranty provisions of $2.6 million were recorded for estimated costs to
address certain product warranty issues, including costs associated with
corrective actions to be taken with respect to certain previously sold
mammography products.
Trex Medical expects to incur additional restructuring costs totaling
approximately $1.1 million, principally over the next several quarters, which
will be recorded when incurred, such as additional charges for certain employee
and business relocation and related costs. Completion of Trex Medical's
restructuring plan is expected to occur in the first quarter of 2000.
During 1998, ThermoLase initiated certain restructuring activities,
including the announced closure of three domestic spas and the termination of a
joint venture that operated its spa in France. Two of the domestic spas were
closed during the fourth quarter of 1998. ThermoLase closed the third spa, as
well as two additional spas, in the second quarter of 1999. Also during the
second quarter of 1999, ThermoLase sold its remaining nine day spas, as well as
the stock in its destination spa, The Greenhouse Spa, Inc. In connection with
the sale and closures announced in 1999, as well as other actions, ThermoLase
recorded restructuring and related costs of $67.6 million during the second
quarter of 1999, including restructuring costs of $60.3 million, inventory
provisions of $2.3 million, provisions for uncollectible accounts receivable of
$1.6 million, and an investment write-down of $3.4 million. Restructuring costs
include a $19.9 million loss on the sale of its spa businesses; $17.4 million
for the write-off of leasehold improvements and equipment pertaining to the
hair-removal business; $11.7 million for ongoing lease obligations, net of
assumed sublease income; $10.0 million of estimated costs to terminate certain
other obligations related to the ThermoLase hair-removal business; $0.4 million
for losses on laser purchase commitments; $0.3 million to write down investments
15
7. Restructuring and Related Costs and Nonrecurring Items (continued)
in international joint ventures; and $0.4 million for other related costs. In
addition, restructuring costs include $0.2 million of severance costs for
approximately 14 employees across all functions. The inventory provisions were
for certain branded product lines at ThermoLase's Creative Beauty Innovations,
Inc. subsidiary that have been discontinued, and the investment write-down was
to reduce the carrying value of ThermoLase's investment in a privately held
company to its estimated disposal value. The investment write-down is included
in other income (expense), net, in the accompanying statement of operations.
Unaudited revenues and operating losses, excluding restructuring costs, of the
spa businesses prior to their sale or closure were $6.6 million and $15.5
million, respectively, for the first nine months of 1999, and $9.6 million and
$14.6 million, respectively, for 1998.
ThermoTrex and the Company recorded aggregate restructuring costs of $62.7
million during the second quarter of 1999, representing a write-off of cost in
excess of net assets of acquired companies. Of the total write-off, $59.3
million was to write off cost in excess of net assets of acquired companies that
arose from prior repurchases of ThermoLase common stock. This asset has become
impaired as a result of continuing losses at ThermoLase and a decision to exit
its principal business. The balance of the write off was recorded by ThermoTrex
as a result of a decision to hold for sale its Trex Communications Corporation
subsidiary, and represents a reduction in the carrying value of Trex
Communications to the amount of expected proceeds from its sale. In addition,
ThermoTrex provided a reserve of $2.3 million for impairment of a note
receivable from an unaffiliated company. This amount is included in other income
(expense), net in the accompanying statement of operations.
In addition, ThermoTrex recorded restructuring and related charges of $3.5
million during the first quarter of 1999, including $1.1 million of
restructuring costs, of which $0.6 million was recorded at Trex Medical. The
total charge also includes inventory provisions of $2.4 million that were
recorded by Trex Medical. The restructuring costs were related to severance for
72 employees across all functions.
Thermo Coleman Corporation
Thermo Coleman recorded $0.3 million of restructuring costs in the third
quarter of 1999 related to a loss on disposal of a business unit at its Thermo
Information Solutions subsidiary.
Thermo Coleman recorded restructuring and related costs of $17.0 million
during the second quarter of 1999, principally as a result of a decision to exit
certain businesses through sale or closure. Restructuring costs include $10.5
million to write off cost in excess of net assets of acquired companies, $2.3
million for the write down of fixed assets, $3.8 million of inventory
provisions, and a $0.4 million provision for a note receivable. The charges
reduce the carrying values of the businesses to the estimated proceeds from
their sale. Unaudited revenues and operating losses before restructuring and
related costs of these businesses were $26.8 million and $5.9 million,
respectively, in the first nine months of 1999, and revenues and operating
income of $34.5 million and $1.5 million, respectively, in 1998.
Thermedics Inc.
During the third quarter of 1999, Thermedics recorded $0.2 million of
other nonrecurring costs relating to the proposed transfer of the Company's
wholly owned Thermo Biomedical group of subsidiaries to Thermedics.
During the second quarter of 1999, Thermedics recorded $0.3 million of
other nonrecurring costs relating to this proposed transfer. In addition,
Thermedics recorded $1.4 million of other nonrecurring costs in the first
quarter of 1999, primarily for investment banking fees that were also associated
with the proposed transfer. Thermedics expects to incur additional nonrecurring
costs totaling approximately $0.4 million, principally through December 1999,
which will be recorded when incurred. These charges also relate to the proposed
transfer.
16
7. Restructuring and Related Costs and Nonrecurring Items (continued)
Other
The Company recorded restructuring costs of $0.2 million and $0.3 million
in the second and first quarter of 1999, respectively.
Energy and Environment
Thermo Ecotek Corporation
During the third quarter of 1999, Thermo Ecotek recorded $11.5 million of
nonrecurring income, net, inventory provisions of $3.5 million, and a reversal
of revenue of $2.8 million. Nonrecurring income of $13.5 million resulted from
the termination of the power-sales agreement for its Gorbell facility in Athens,
Maine. The income represents the proceeds from the termination agreement, net of
facility closure costs including lease and fuel cancellation payments. The
Gorbell facility's revenues and operating income before the effect of the
contract termination were $6.3 million and $0.8 million, respectively, in the
first nine months of 1999, and $10.0 million and $1.4 million, respectively, in
1998. Thermo Ecotek also recorded restructuring and nonrecurring costs of $1.9
million, which included $0.7 million for abandoned assets, $0.6 million for
severance for 17 employees, $0.4 million for unrecouped development costs
associated with a project sold to a joint venture partner, and $0.2 million of
other costs. A dispute arose during 1999, between Thermo Ecotek and Southern
California Edison (SCE), the utility that purchases the output of Thermo
Ecotek's Delano plants. SCE interpreted the terms of its contract with the
Delano facilities to permit it to pay a reduced rate in 1999 for power output
during nonpeak periods, as defined. Although Thermo Ecotek contests this
interpretation, SCE has adjusted its recent payments to reflect the lower rates
for all of 1999. As a result, Thermo Ecotek has established a reserve through a
reduction in revenues totaling $2.8 million for amounts in dispute with SCE and
is considering its alternatives with respect to this claim. Thermo Ecotek's
Thermo Trilogy unit recorded $3.5 million of inventory provisions for product
deemed excess based on recent demand, following a downturn in its sales of
biopesticides.
During the second quarter of 1999, Thermo Ecotek recorded $124.3 million
of restructuring costs and other charges of $2.1 million, as a result of actions
detailed below.
Following significant investments of resources in attempts to correct
operational problems, in May 1999, Thermo Ecotek made a decision to cease
further efforts and hold for sale or disposal its Gillette, Wyoming, facility.
As a result, Thermo Ecotek recorded a restructuring charge of $68.0 million,
including $63.3 million to write down the plant and related equipment to a
nominal salvage value, $4.4 million for estimated land reclamation costs, and
$0.3 million of other exit costs, primarily abandoned-facility payments. Thermo
Ecotek recorded $1.5 million of minority interest income, representing a
minority partner's share of these charges. Revenues of this facility were
nominal during the period it operated. The facility had unaudited operating
losses, excluding restructuring costs, of $6.8 million in the first nine months
of 1999 and $7.6 million in 1998.
Thermo Ecotek's Delano, California, biomass facilities will reach the end
of the fixed price contract period of their power-sales agreement in September
2000. While Thermo Ecotek's forecasts for periods after that time project
positive cash flows, the facilities would operate at a loss due to depreciation
expense that extends beyond 2000. In May 1999, Thermo Ecotek entered into an
agreement to terminate the power-sales agreement for its Delano facilities,
effective December 31, 1999. The terms of the agreement call for Thermo Ecotek
to receive payments in lieu of operating under its current agreement. Thermo
Ecotek recorded a restructuring charge of $51.0 million as a result of entering
into the new agreement, including $47.5 million to write down the plant and
related assets to their estimated recoverable value, $2.4 million related to a
loss on the cancellation of the facility's primary fuel contract, and $1.1
million to write off cost in excess of net assets of acquired companies.
17
7. Restructuring and Related Costs and Nonrecurring Items (continued)
Pacific Gas & Electric (PG&E), the customer under a long-term power-sales
agreement at Thermo Ecotek's Woodland, California, plant, has interpreted the
terms of such agreement to permit PG&E to cease payment of fixed contract rates
effective July 1, 1999, and to thereafter purchase power at avoided cost rates.
Although Thermo Ecotek contests this interpretation and is considering its
alternatives concerning this dispute, Thermo Ecotek recorded a restructuring
charge of $3.8 million during the second quarter of 1999, representing
impairment of its net investment in the Woodland facility as a result of PG&E's
decision to cease making payments of fixed contract rates.
In addition, during the second quarter of 1999, Thermo Ecotek recorded a
charge of $1.5 million to write off a power plant that is held for sale. Thermo
Ecotek believes that the salvage value, if any, is nominal.
In the second quarter of 1999, Thermo Ecotek also recorded a charge of
$2.1 million representing the write-down of available-for-sale investments
representing an equity interest of its minority partner in the Gillette,
Wyoming, facility due to impairment that Thermo Ecotek deems permanent based on
recent stock prices. This amount is included in gain (loss) on investments, net,
a component of other income (expense), net in the accompanying statement of
operations.
Thermo TerraTech Inc.
In the third quarter of 1999, Thermo TerraTech recorded $0.1 million of
cash restructuring costs associated with the planned sale of one of its
ThermoRetec Corporation subsidiary's soil-recycling facilities, discussed below.
In May 1999, Thermo TerraTech announced that its majority-owned
subsidiaries plan to sell several businesses. The businesses proposed to be sold
include the used-oil processing operation of Thermo EuroTech, N.V.; three
soil-recycling facilities of ThermoRetec, in addition to the sites previously
announced; and the Randers division, BAC Killam Inc., and E3-Killam Inc.
businesses of The Randers Killam Group Inc. In connection with these actions,
Thermo TerraTech recorded $55.9 million of restructuring and related costs,
including restructuring costs of $54.2 million, a tax asset write-off of $1.1
million, and an inventory provision of $0.7 million. Restructuring costs include
$22.2 million to write down cost in excess of net assets of acquired companies
to reduce the carrying value of the businesses proposed to be sold to the
estimated proceeds from their sale; $20.2 million to write down fixed assets to
their estimated disposal value; $4.6 million for ongoing lease costs for
facilities that will be exited in connection with the sale of certain
businesses; $2.5 million for estimated land reclamation costs; $1.9 million to
write off the cumulative foreign translation adjustment related to Thermo
EuroTech's used-oil processing business; $1.8 million to write off intangible
assets related to license acquisition costs at the used-oil processing business;
$0.6 million for severance costs for 42 employees across all functions; and $0.4
million to write off other current assets associated with the businesses. The
tax asset write-off represents a deferred tax asset that will not be realized as
a result of selling Thermo EuroTech's used-oil processing business. The
inventory provision also relates to exiting this business. The write-down of
fixed assets principally relates to special purpose equipment in the used-oil
processing and soil-recycling businesses. In connection with the actions
discussed above, the Company also recorded $1.7 million to write down cost in
excess of net assets of acquired companies that arose in connection with the
Company's prior repurchases of Thermo EuroTech common stock. The write off is a
result of continuing losses and a decision to exit Thermo EuroTech's principal
business. Thermo TerraTech expects to incur additional restructuring costs of
approximately $3.0 million through the first half of 2000, for costs that will
be recorded when incurred, such as additional severance, employee retention, and
relocation expenses.
The businesses that are proposed to be sold reported aggregate unaudited
revenues and operating income, excluding restructuring and related costs, of
$33.2 million and $1.6 million, respectively, in the first nine months of 1999
and aggregate unaudited revenues and operating losses of $54.3 million and $1.1
million, respectively, in 1998.
18
7. Restructuring and Related Costs and Nonrecurring Items (continued)
During 1998, Thermo TerraTech recorded restructuring costs, primarily
related to the closure or sale of two soil-recycling facilities by ThermoRetec.
ThermoRetec closed one soil-recycling facility in March 1999 and is actively
seeking a buyer for the second soil-recycling facility. If no buyer is found,
ThermoRetec will close the facility.
Thermo Power Corporation
During the third quarter of 1999, Thermo Power recorded $0.1 million of
cash restructuring costs associated with the actions described below.
Thermo Power undertook certain restructuring actions during the second
quarter of 1999, which included a decision to divest its ThermoLyte Corporation
subsidiary, as well as a decision to outsource certain manufacturing and
warranty functions and reduce staffing levels at certain other subsidiaries. In
addition, Thermo Power wrote down certain assets at its Peek sales and service
subsidiaries located in Malaysia and Croatia that have become impaired due to
business conditions in those regions. In connection with these actions, Thermo
Power recorded restructuring and related costs of $12.6 million, including $8.9
million of restructuring costs, inventory provisions of $3.0 million, costs for
outsourcing certain warranty repairs of $0.5 million, and a provision for
uncollectible accounts receivable of $0.2 million. Restructuring costs include
$4.1 million for the write-off of cost in excess of net assets of acquired
companies, of which $2.9 million was to reduce the carrying value of ThermoLyte
to the estimated proceeds from its sale and $1.2 million was to reduce the
carrying value of Thermo Power's investment in its Peek subsidiaries located in
Malaysia and Croatia due to projected undiscounted cash flows from their
operations being insufficient to recover its investment. In addition,
restructuring costs include $2.0 million of severance costs for approximately 63
employees across all functions; $1.6 million for the write-down of certain fixed
assets, principally at operations being exited; and $1.2 million for lease costs
at facilities being abandoned. Inventory provisions represent a write-down of
inventories to estimated salvage value and consist of $1.9 million for raw
materials for product lines being outsourced, $1.0 million for a discontinued
product line, and $0.1 million for inventories at Peek's subsidiaries located in
Malaysia and Croatia. Unaudited revenues and operating income for ThermoLyte,
excluding restructuring and related costs, were $10.3 million and $0.3 million,
respectively, in the first nine months of 1999, and unaudited revenues and
operating losses were $5.8 million and $1.0 million, respectively, in 1998.
Thermo Power recorded restructuring costs of $0.7 million during the first
quarter of 1999 related to actions taken at its Peek subsidiary. The
restructuring costs consisted of $0.4 million of severance costs for
approximately 70 employees across all functions, $0.2 million for lease costs at
facilities being abandoned in connection with the consolidation of facilities,
and an asset write-down of $0.1 million related to the consolidation of such
facilities.
Thermo Power expects to incur additional restructuring costs totaling
approximately $2.5 million through December 1999 for costs that will be recorded
when incurred, such as additional severance costs and fees associated with
outsourcing certain product lines. Completion of Thermo Power's restructuring
plans is expected to occur by December 1999.
Recycling and Resource Recovery
Thermo Fibertek Inc.
During the third quarter of 1999, Thermo Fibertek recorded $2.7 million of
nonrecurring costs, net. Of this amount, $2.8 million relates to impairment of a
note receivable secured by a tissue mill. In the second quarter of 1999, Thermo
Fibertek entered into a nonbinding letter of intent with a third party to
dispose of this asset for an amount in excess of the carrying value.
Subsequently, however, the third party elected not to proceed with the
transaction and Thermo Fibertek has written the asset down to its estimated
recoverable value. In addition, Thermo Fibertek recorded $0.1 million of
nonrecurring income in the third quarter of 1999 related to the sale of a
facility written down to estimated disposal value in the first quarter of 1999.
19
7. Restructuring and Related Costs and Nonrecurring Items (continued)
Thermo Fibertek recorded $2.3 million of restructuring costs during the
first quarter of 1999, consisting of $1.3 million for severance costs for 24
employees across all functions and $1.0 million to terminate distributor
agreements. In addition, Thermo Fibertek recorded other nonrecurring income,
net, of $10.0 million, consisting of an $11.1 million gain on the sale of its
Thermo Wisconsin, Inc. subsidiary and $1.1 million of nonrecurring costs. The
nonrecurring costs consist of $0.5 million for the expected settlement of a
legal dispute, $0.3 million for the impairment of a building held for disposal,
and $0.3 million of other nonrecurring costs. Unaudited revenues and operating
income for Thermo Wisconsin were $1.8 million and $0.4 million, respectively, in
the first quarter of 1999, and $18.9 million and $2.6 million, respectively, in
1998.
Other
In May 1999, a jury in the superior court of the state of Rhode Island
rendered a verdict against the Company in connection with an installation in
1985 of a wastewater treatment system by a subsidiary of the Company. The
plaintiff has submitted a brief to the court that sets forth a computation of
interest on the damages that, if approved by the court, would bring the total
amount of the award to approximately $21 million. The Company believes that both
the verdict and the interest computation are in error and intends to appeal. Due
to the inherent uncertainty of the appeal process, however, the Company has
recorded a charge of $21 million for this matter in the second quarter of 1999.
During the second quarter of 1999, the Company also decided to hold for
sale its Peter Brotherhood, Ltd. subsidiary. The Company recorded an $8.4
million write-down of fixed assets to reduce the carrying value of the business
unit to the estimated proceeds from its sale. Unaudited revenues and operating
income for Peter Brotherhood, excluding restructuring costs, were $32.4 million
and $1.3 million, respectively, in the first nine months of 1999, and $41.7
million and $1.3 million, respectively, in 1998.
Corporate
During the second quarter of 1999, the Company recorded $3.6 million of
other nonoperating charges to write down available-for-sale investments due to
impairment that the Company deems permanent based upon recent market prices.
These charges are included in gain (loss) on investments, net, a component of
other income (expense), net in the accompanying statement of operations.
General
During 1998, certain subsidiaries announced restructuring actions that
included plans for termination of 792 employees. As of January 2, 1999, the
subsidiaries had terminated 550 employees. The restructuring actions in 1999
included plans for the termination of an additional 598 employees. During the
first nine months of 1999, 490 employees were terminated in connection with the
restructuring plans announced in 1998 and 1999. A summary of the changes in
accrued restructuring costs, included in other accrued expenses in the
accompanying balance sheet, follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other(a) Total
--------------------------------------------- -------------- -------------- -------------- ------------
Balance at January 2, 1999 $ 10,572 $ 5,437 $ 2,731 $ 18,740
Provision charged to expense 9,302 21,502 23,687 54,491
Usage (11,342) (5,752) (6,525) (23,619)
Currency translation (543) 33 (164) (674)
--------- --------- --------- ---------
Balance at October 2, 1999 $ 7,989 $ 21,220 $ 19,729 $ 48,938
========= ========= ========= =========
(a) Includes provisions in 1999 of $12.8 million for costs to terminate
contracts and $6.9 million for land reclamation costs.
20
8. Proposed Reorganization
During 1998, the Company announced a proposed reorganization, which was
amended in May 1999, involving the Company and certain of its subsidiaries. The
goals of the proposed reorganization include consolidating and strategically
realigning certain businesses to enhance their competitive market positions and
focus management attention.
The Company plans to combine its wholly owned Thermo Biomedical group of
subsidiaries with Thermedics. The Company would transfer the Thermo Biomedical
group of subsidiaries to Thermedics. Thermedics Detection and Thermo Sentron
Inc. would be taken private. The public shareholders of Thermedics Detection and
Thermo Sentron would receive cash in exchange for their shares of common stock
of the respective companies. In addition, Thermedics' equity interest in Thermo
Sentron, Thermedics Detection, and Thermo Voltek Corp. would be transferred to
the Company and as a result each of Thermo Sentron, Thermedics Detection, and
Thermo Voltek would become wholly owned subsidiaries of the Company. In March
1999, Thermedics acquired, through a merger, all of the outstanding shares of
Thermo Voltek common stock that Thermedics and the Company did not already own.
Subsequent to this transaction, Thermedics and the Company owned approximately
97% and 3%, respectively, of the outstanding common stock of Thermo Voltek,
which ceased to be publicly traded.
In May 1999, Thermo Power entered into a definitive agreement and plan of
merger with the Company pursuant to which the Company would acquire, for $12.00
per share in cash, all of the outstanding shares of common stock of Thermo Power
not already owned by the Company. This merger was completed in October 1999 and
the common stock of Thermo Power has ceased to be publicly traded.
In May 1999, ThermoSpectra Corporation entered into a definitive agreement
and plan of merger with Thermo Instrument pursuant to which Thermo Instrument
would acquire, for $16.00 per share in cash, all of the outstanding shares of
common stock of ThermoSpectra not already owned by Thermo Instrument or the
Company. This transaction is expected to be completed on or about December 9,
1999. In July 1999, Thermo Vision Corporation entered into a definitive
agreement and plan of merger with Thermo Instrument pursuant to which Thermo
Instrument would acquire, for $7.00 per share in cash, all of the outstanding
shares of common stock of Thermo Vision not already owned by Thermo Instrument
or the Company. The shareholders' meeting for this transaction is expected to be
held during the first quarter of 2000. Following the mergers, ThermoSpectra's
and Thermo Vision's common stock would cease to be publicly traded.
In October 1999, Thermo TerraTech entered into a definitive agreement and
plan of merger with the Company pursuant to which the Company would acquire all
of Thermo TerraTech's outstanding shares of common stock not already owned by
the Company in exchange for a number of shares of the Company's common stock to
be determined based upon the average price of the Company's common stock during
the 20 trading days ending five days prior to the effective date of the merger.
Under the agreement, Thermo TerraTech shareholders would receive Company common
stock valued between $7.25 and $9.25 per share of Thermo TerraTech common stock.
However, the Company may elect to terminate the agreement if it is required to
issue 1.8 million or more shares of its common stock in this transaction. Also
in October 1999, ThermoRetec and The Randers Killam Group entered into
definitive agreements and plans of merger with the Company pursuant to which the
Company would acquire, for $7.00 and $4.50 per share in cash, respectively, all
of the outstanding shares of common stock of ThermoRetec and Randers Killam not
already owned by Thermo TerraTech or the Company. Following the mergers, the
common stock of Thermo TerraTech, ThermoRetec, and Randers Killam would cease to
be publicly traded. Each of these mergers are expected to be completed in the
first quarter of 2000.
ThermoTrex, ThermoLase, and Thermo Ecotek would merge into the Company.
Shareholders of each of these companies would receive shares of common stock of
the Company in exchange for their shares of common stock of the respective
companies.
21
8. Proposed Reorganization (continued)
The completion of the mergers of Thermo Voltek into Thermedics and Thermo
Power into the Company reduced the number of the Company's publicly traded,
majority-owned subsidiaries to 22. If the reorganization plan is completed as
proposed, it would further reduce the number of the Company's publicly traded,
majority-owned subsidiaries from 22 to 12. Each component of the reorganization
is subject to numerous conditions, including the following (not all of which are
applicable to each component): establishment of prices and/or exchange ratios;
confirmation of anticipated tax consequences; approval by the boards of
directors (including the outside directors) of each of the affected
majority-owned subsidiaries; negotiation and execution of definitive purchase
and sale or merger agreements; completion of review by the Securities and
Exchange Commission of any necessary documents regarding the proposed
transactions; and fairness opinions from one or more investment banking firms on
certain financial aspects of the transactions. One or more of the transactions
may not occur if the applicable conditions previously described are not
satisfied.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1999, filed with the Securities and Exchange
Commission.
Results of Operations
Third Quarter 1999 Compared With Third Quarter 1998
Sales in the third quarter of 1999 were $1.08 billion, an increase of
$100.1 million, or 10%, over the third quarter of 1998. Excluding restructuring
costs and other nonrecurring income, net of $4.9 million in 1999 and
restructuring and other nonrecurring costs of $41.6 million in 1998, inventory
provisions of $7.3 million and $8.6 million in 1999 and 1998, respectively, and
a reversal of revenues of $2.8 million in 1999 resulting from a customer
dispute, all described below, segment income decreased to $100.8 million in 1999
from $111.6 million in 1998. (Segment income is income before corporate general
and administrative expenses, other income and expense, minority interest, income
taxes, and extraordinary items.) Operating income, which includes restructuring
costs and other nonrecurring income, net, was $88.1 million in 1999, compared
with $53.7 million in 1998.
Measurement and Detection
Sales from the Measurement and Detection segment increased $107.0 million,
or 23%, to $575.4 million in 1999. Sales increased due to acquisitions made by
Thermo Instrument Systems Inc., which added $121.2 million of revenues in 1999.
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 $6.7 million in 1999.
Revenues from Thermo Instrument's analytical products, excluding the effects of
acquisitions and currency translation, increased $9.2 million, primarily due to
higher demand. In addition, sales of life sciences products, excluding the
effects of acquisitions and currency translation, increased $4.7 million due to
higher demand and expansion of sales and distribution channels into new markets.
The increases in revenues from acquisitions and certain existing businesses were
offset in part by lower revenues from other businesses. Revenues from Thermo
Instrument's process control products, excluding the effects of acquisitions and
currency translation, decreased $8.2 million as a result of a reduction in
discretionary capital spending by companies in the process control industry,
22
Third Quarter 1999 Compared With Third Quarter 1998 (continued)
primarily the petrochemical, oil and gas, and mining sectors, due to difficult
market conditions and, to a lesser extent, a reduction in spending by raw
materials producers, particularly in the cement sector. Revenues from Thermo
Instrument's industrial products, excluding the effects of acquisitions and
currency translation, decreased $4.4 million, primarily due to lower demand in
Europe. Revenues from this segment's quality assurance and safety products
business decreased $6.0 million due to lower demand. Revenues from sales of
precision weighing and inspection equipment, excluding the effect of currency
translation, decreased $1.5 million due to lower international demand.
Comparative results for this segment were also affected by the disposition of a
business unit that had sales of $1.5 million in the 1998 period. There can be no
assurance that the trends that have adversely affected certain businesses within
this segment will not continue.
Segment income margin (segment income margin is segment income as a
percentage of sales), excluding restructuring and other nonrecurring costs of
$0.1 million and $21.9 million in 1999 and 1998, respectively, and inventory
provisions of $1.9 million and $8.6 million in 1999 and 1998, respectively, was
11.0% in 1999, compared with 11.8% in 1998. Segment income margin decreased
primarily due to the effect of lower revenues at certain business units and, to
a lesser extent, the inclusion of lower-margin revenues from Spectra-Physics AB,
which was acquired in February 1999 (Note 5). This segment recorded
restructuring and other nonrecurring costs of $0.1 million in 1999 (Note 7),
principally for remaining aspects of a plan undertaken in 1998. This segment's
quality assurance and safety products business recorded $1.9 million of
inventory provisions in cost of revenues in 1999 for excess inventories caused
by lower demand. In 1998, Thermo Instrument recorded $21.9 million of
restructuring and other nonrecurring costs, primarily for severance, and $8.6
million of inventory provisions in cost of revenues for the write-down of
discontinued product lines and excess inventories caused by lower demand.
Biomedical and Emerging Technologies
Sales from the Biomedical and Emerging Technologies segment were $238.4
million in 1999, an increase of $12.4 million, or 5%, over the 1998 period.
Sales increased primarily due to the inclusion of $18.6 million of sales from
acquired businesses. In addition, sales of respiratory and monitoring products
by the Company's wholly owned Thermo Biomedical group increased $7.4 million, or
12%, excluding acquisitions, while sales at Thermo Cardiosystems Inc. increased
$3.9 million, or 25%. These revenue increases were offset in part by lower
revenues at Trex Medical Corporation and ThermoLase Corporation. Revenues at
Trex Medical decreased $10.0 million primarily due to the termination of an
original equipment manufacturer (OEM) contract with a major customer following
the customer's acquisition by another corporation. Revenues from this customer
were $10.6 million in the 1998 period. In addition, Trex Medical's revenues
declined due to lower sales of general-purpose X-ray and
radiographic/fluoroscopic systems as well as dental X-ray systems, offset in
part by higher demand for mammography systems and related upgrade components.
Trex Medical's backlog at October 2, 1999, excluding intrasegment orders,
decreased to $45.6 million from $52.1 million at July 3, 1999, primarily due to
a decrease in orders for mammography equipment. Revenues decreased $3.7 million
at ThermoLase principally as a result of the sale of its spa business.
ThermoLase sold The Greenhouse Spa, Inc. and nine of its day spas in June 1999,
and closed its remaining spas as a result of a decision to exit this business
(Note 7).
Segment income, excluding restructuring and other nonrecurring costs of
$3.7 million in 1999 and $8.5 million in 1998, as well as inventory provisions
at Trex Medical of $1.9 million in 1999, was $6.8 million in 1999, compared with
$14.4 million in 1998. Trex Medical had a segment loss, excluding restructuring
costs and inventory provisions, of $4.5 million in 1999, compared with segment
income of $3.6 million in the 1998 period. The decrease in profitability at Trex
Medical was primarily due to the loss of the OEM contract with a major customer
and other decreases in sales at existing businesses. Thermo Coleman Corporation
had a segment loss of $2.7 million in 1999, compared with segment income of $2.8
million in 1998, principally due to losses at two business units at its Thermo
Information Solutions Inc. subsidiary. One of these businesses was disposed of
just prior to the end of the third quarter while the other is held for sale.
These decreases in segment income were offset in part by improved results at
ThermoLase and Thermo
23
Third Quarter 1999 Compared With Third Quarter 1998 (continued)
Biomedical. The segment loss at ThermoLase, excluding restructuring and
nonrecurring costs of $8.2 million in 1998, totaled $1.1 million in 1999,
compared with $6.4 million in 1998. The decrease resulted primarily from the
June 1999 sale of its spa business. Thermo Biomedical's segment income increased
33% to $11.3 million, primarily as a result of internal growth.
Restructuring and other nonrecurring costs of $3.7 million in 1999 (Note
7) includes $3.2 million of costs recorded by Trex Medical, primarily for
severance and relocation costs associated with a restructuring plan announced in
the second quarter of 1999, and $0.2 million of nonrecurring costs recorded by
Thermedics, which are associated with the proposed transfer of the Company's
wholly owned Thermo Biomedical group to Thermedics. In addition, Thermo Coleman
recorded $0.3 million of restructuring costs associated with a business unit
disposed of in the third quarter of 1999. This segment expects to have
additional restructuring costs of approximately $1.1 million over the remainder
of 1999. Restructuring costs of $8.5 million in 1998 were primarily recorded by
ThermoLase in connection with the closure of four spas. The costs primarily
represent a write-off of leasehold improvements and related spa assets and
abandoned-facility payments.
Energy and Environment
Sales from the Energy and Environment segment decreased $10.5 million to
$201.6 million in 1999. Revenues from Thermo Ecotek Corporation decreased $2.4
million in 1999 to $60.8 million. The decrease resulted from lower energy
revenues as a result of a $2.8 million dispute with a utility customer and
commencement of a transition to avoided cost rates in California, particularly
at its Mendota plant. These decreases in revenues were offset in part by the
expansion of an existing power generation facility and $1.1 million of fees
earned in connection with the transfer of rights under a power-sales agreement.
A dispute arose during 1999 between Thermo Ecotek and Southern California Edison
(SCE), the utility that purchases the output of Thermo Ecotek's Delano,
California plants. SCE interpreted that the terms of its contract with the
Delano facilities permit it to pay a reduced rate in 1999 for power output
during nonpeak periods, as defined. Although Thermo Ecotek contests this
interpretation, SCE has adjusted its recent payments to reflect the lower rates
for all of 1999. As a result, Thermo Ecotek has reversed previously recorded
revenues totaling $2.8 million for amounts in dispute with SCE and is
considering its alternatives with respect to this claim. As noted below, the
periods during which Thermo Ecotek receives fixed rates for power at these
facilities have ended or will end in 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.
In addition, $0.9 million of lower revenues at Thermo Ecotek's Thermo Trilogy
Corporation biopesticide subsidiary resulted from lower demand. Sales at Thermo
Power Corporation decreased $9.0 million to $62.7 million in 1999, principally
due to $6.0 million of lower sales at its Peek subsidiary due to reduced demand
in Europe and efforts to divest of lower-margin business. In addition, the
decrease in revenues at Thermo Power resulted from the December 1998 sale of its
Crusader Engines division, which had revenues of $5.1 million in 1998. These
decreases in revenues at Thermo Power were offset in part by higher demand in
other businesses. Revenues at Thermo TerraTech Inc. increased slightly to $78.0
million in 1999 from $77.2 million in 1998. A $3.4 million increase in Thermo
TerraTech's revenues from environmental-liability management services was offset
in part by lower revenues from engineering and design services.
Segment income, excluding restructuring costs and nonrecurring income, net
of $11.4 million in 1999, as well as the $2.8 million charge described above
associated with a dispute with a utility customer and inventory provisions of
$3.5 million in 1999, and restructuring costs and nonrecurring costs of $11.2
million in 1998, was $25.6 million in 1999, compared with $33.8 million in 1998.
Thermo Ecotek's segment income, excluding restructuring costs and nonrecurring
income, net as well as the charge for disputed revenue and inventory provisions,
was $14.5 million in 1999, compared with $22.6 million in 1998. The decrease
resulted principally from lower profits from Thermo Ecotek's energy operations
as the fixed price period of its utility contract at its Mendota plant ended, as
well as lower profits from Thermo Trilogy due to reduced sales of biopesticides.
These decreases were offset in part by $1.1 million
24
Third Quarter 1999 Compared With Third Quarter 1998 (continued)
of fees received in 1999 in connection with the sale of rights to a power-sales
agreement. Segment income at Thermo Power, excluding restructuring costs and
other charges in both periods, decreased to $4.8 million in 1999 from $6.1
million in 1998, primarily due to lower sales at Peek. Segment income at Thermo
TerraTech, excluding restructuring and other nonrecurring costs in both periods,
increased to $6.3 million in 1999 from $5.0 million in 1998, principally as a
result of $1.0 million of lower depreciation and amortization as a result of
recording write-offs and writedowns during the second quarter of 1999.
Restructuring and nonrecurring income, net, of $11.4 million in 1999 (Note
7) includes nonrecurring income of $13.5 million at Thermo Ecotek as a result of
entering into an agreement to terminate the power-sales agreement at its Gorbell
facility. The Gorbell facility's revenues and operating income before the effect
of the contract termination were $6.3 million and $0.8 million, respectively, in
the first nine months of 1999, and $10.0 million and $1.4 million, respectively,
in 1998. Thermo Ecotek also recorded restructuring and nonrecurring costs of
$1.9 million, of which $0.7 million was for abandoned assets, $0.6 million was
for severance, $0.5 million was for unrecovered development costs associated
with a project sold to a joint venture partner, and $0.1 million was for other
costs. In addition, restructuring costs of $0.1 million were recorded at both
Thermo TerraTech and Thermo Power relating to plans undertaken in the second
quarter of 1999. This segment expects to incur additional restructuring costs of
approximately $5.5 million through the first half of 2000. In 1999, Thermo
Trilogy recorded $3.5 million of inventory provisions in cost of revenues for
inventories deemed excess based on recent demand. In 1998, Thermo TerraTech
recorded $10.2 million of restructuring costs, including $9.2 million of costs
at ThermoRetec relating to the closure of two soil-recycling facilities and $1.0
million for abandoned-facility payments at Thermo TerraTech relating to the
consolidation of facilities. Thermo Power recorded $1.0 million of restructuring
and other nonrecurring costs in 1998 relating to a loss on discontinuance of its
engines business.
The power-sales agreements for Thermo Ecotek's Mendota, Woodland, and
Delano plants in California are so-called standard offer #4 (SO#4) contracts,
which require Pacific Gas & Electric (PG&E), in the case of Mendota and
Woodland, and SCE, in the case of the Delano facilities, to purchase the power
output of the projects at fixed rates through specified periods. Thereafter, the
utility will pay a rate based upon the costs that would have otherwise been
incurred by the purchasing utilities in generating their own electricity or in
purchasing it from other sources (avoided cost). Avoided cost rates are
currently substantially lower than the rates Thermo Ecotek has received under
the fixed-rate portions of its contracts and are expected to remain so for the
foreseeable future. PG&E commenced paying for power purchased from the Mendota
and Woodland facilities at avoided cost rates effective in July and August 1999,
respectively, although Thermo Ecotek believes that this change to avoided cost
rates occurred six months earlier than the power-sales agreements provided.
Thermo Ecotek is considering its alternatives concerning this dispute. Based on
current avoided cost rates, Thermo Ecotek expects that the Woodland plant will
operate at breakeven or nominal operating losses through 2010, primarily as a
result of nonrecourse lease obligations that have been partially funded from the
Woodland plant's past cash flows. Absent sufficient reductions in fuel prices
and other operating costs, Thermo Ecotek will draw down power reserve funds to
cover operating cash shortfalls and then, if such funds are depleted, either
renegotiate its nonrecourse lease for the Woodland plant or forfeit its interest
in the plant. Revenues from the Woodland plant were $21.4 million in the first
nine months of 1999 and $30.1 million in 1998. The results of the Woodland
facility were approximately breakeven in both periods, as a result of recording
as an expense the funding of reserves required under Woodland's nonrecourse
lease agreement to cover expected shortfalls in lease payments.
As a result of the reduction in avoided cost rates, the Mendota plant
operated at a loss in the third quarter of 1999 and is expected to do so in the
fourth quarter of 1999. The Mendota plant's operating results in 2000 and
thereafter will be dependent on avoided cost rates and operating costs. The
power-sales agreement with SCE for the Delano facilities calls for fixed
contract rates through September 2000. As a result of reaching this agreement,
Thermo Ecotek expects that the results of the Delano facilities will be reduced
to breakeven or a nominal loss subsequent to
25
Third Quarter 1999 Compared With Third Quarter 1998 (continued)
December 1999. The Mendota and Delano plants' aggregate revenues and operating
income before restructuring charges were approximately $65.7 million and $26.6
million, respectively, in the first nine months of 1999, and $91.0 million and
$41.7 million, respectively, in 1998. In anticipation of these expected declines
in revenues and operating income, Thermo Ecotek may continue to explore other
options for its biomass facilities, including disposal or repowering.
Recycling and Resource Recovery
Sales in the Recycling and Resource Recovery segment decreased to $64.5
million in 1999 from $72.8 million in 1998. Sales from Thermo Fibertek Inc.
decreased $6.6 million to $53.1 million in 1999, primarily due to the February
1999 sale of its Thermo Wisconsin, Inc. subsidiary that resulted in a decrease
in revenues of $4.0 million. Revenues at Thermo Fibertek's existing businesses
also decreased primarily due to lower sales of stock-preparation equipment in
Europe and North America. These decreases were offset in part by higher revenues
from Thermo Fibergen Inc.'s water- and fiber-recovery services and $0.4 million
of revenues from an acquired business. The unfavorable effects of currency
translation decreased revenues by $0.6 million in 1999. Sales at Peter
Brotherhood Ltd. decreased $1.6 million due to lower demand in 1999.
Segment income, excluding nonrecurring costs, net of $2.7 million in 1999,
was $5.2 million in 1999, compared with $7.9 million in 1998. Segment income
decreased primarily at Thermo Fibertek as a result of a decrease in revenues.
Nonrecurring costs, net, principally represent a $2.8 million charge recorded by
Thermo Fibertek for a writedown of a note receivable, secured by a tissue mill.
In the second quarter of 1999, Thermo Fibertek entered into a nonbinding letter
of intent with a third party to dispose of this asset for an amount in excess of
the carrying value. Subsequently, however, the third party elected not to
proceed with the transaction and Thermo Fibertek has written the asset down to
its estimated recoverable value.
Gain on Issuance of Stock by Subsidiaries and Minority Interest Expense
The Company has, from time to time, caused certain subsidiaries to sell
minority interests to investors resulting in several majority-owned, privately
and publicly held subsidiaries. As a result of the sale of stock by subsidiaries
and the issuance of stock by subsidiaries upon conversion of convertible
debentures, the Company has recorded gains on such transactions. In the third
quarter of 1998, a subsidiary repurchased shares of its common stock, which
resulted in the reversal of $2.4 million of previously recorded gains. Minority
interest expense was $6.7 million in 1999. The Company recorded minority
interest income of $2.7 million in 1998, primarily as a result of restructuring
and other nonrecurring costs at certain of the Company's majority-owned
subsidiaries.
Income Taxes
The Company's effective tax rate was 41.5% in 1999. Excluding a nontaxable
gain reversal from the repurchase of subsidiary stock and the effect of a
write-off of $6.9 million of tax assets, the Company's effective tax rate was
58% in 1998. The effective tax rates vary from the statutory federal income tax
rate primarily due to state income taxes and nondeductible expenses. The
effective rate decreased in 1999 due to certain nondeductible components of
write-offs recorded in 1998, which caused the effective tax rate to be higher,
and as a result of the lower relative effect of nondeductible expenses in 1999.
26
First Nine Months 1999 Compared With First Nine Months 1998
Sales in the first nine months of 1999 were $3.18 billion, an increase of
$309.9 million, or 11%, over the first nine months of 1998. Excluding
restructuring and other nonrecurring costs, net, of $383.4 million and $45.7
million in 1999 and 1998, respectively, described below, and inventory and other
provisions of $44.7 million and $8.6 million in 1999 and 1998, respectively,
segment income decreased to $275.5 million in 1999 from $329.4 million in 1998.
Operating loss, which includes these items, was $177.2 million in 1999, compared
with operating income of $251.5 million in 1998.
Measurement and Detection
Sales from the Measurement and Detection segment increased $298.6 million
to $1.68 billion in 1999. Sales increased due to acquisitions made by Thermo
Instrument and Thermo Sentron Inc., which added $380.8 million of revenues in
1999. 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 $5.3 million
in 1999. Increases in revenues from acquisitions and currency translation were
offset in part by lower revenues at existing businesses. Revenues from Thermo
Instrument's industrial products, excluding the effects of acquisitions and
currency translation, decreased $34.7 million, primarily due to lower revenues
at ThermoSpectra Corporation's existing businesses. Revenues from Thermo
Instrument's process control products, excluding the effects of acquisitions and
currency translation, decreased $28.7 million due to the reasons discussed in
the results of operations for the third quarter. Revenues from this segment's
quality assurance and safety products business decreased $15.1 million due to
lower demand and revenues at its power electronics and test equipment business
decreased $10.6 million due to lower demand and the sale of a business unit
which had revenues of $4.4 million in the 1998 period. These decreases in
revenues were offset in part by higher revenues from Thermo Instrument's sales
of analytical and life sciences products.
Segment income margin, excluding restructuring and other nonrecurring
costs of $31.7 million in 1999 and $23.3 million in 1998, decreased to 10.5% in
1999 from 13.1% in 1998. Excluding a charge for the sale of inventories revalued
at the date of acquisition of $6.7 million in 1999; and other inventory
provisions of $2.8 million and $8.6 million in 1999 and 1998, respectively,
segment income margin was 11.0% in 1999 and 13.7% in 1998. The decrease was due
to the reasons discussed in the results of operations for the third quarter. In
1999, this segment incurred a restructuring charge of $30.2 million in
connection with the planned sale of its power electronics and test equipment
business. The charge primarily represents a reduction in the carrying value of
this business to the expected proceeds from its sale. In connection with
restructuring actions commenced in 1998, Thermo Instrument recorded
restructuring costs of $1.5 million in 1999, primarily for business relocation
and facility-closure costs and severance costs for restructuring plans commenced
in 1998 (Note 7). In 1998, Thermo Instrument recorded $21.9 million of
restructuring costs, primarily for severance, and $1.4 million of nonrecurring
costs relating to the resolution of an arbitration proceeding.
Biomedical and Emerging Technologies
Sales from the Biomedical and Emerging Technologies segment were $717.6
million in 1999, an increase of $40.0 million, or 6%, over the 1998 period.
Sales increased due to the inclusion of $64.2 million of sales from acquired
businesses. Sales at Thermo Cardiosystems increased $11.0 million, or 23%, due
to higher demand. Revenues from government contracts at Thermo Coleman
increased, and revenues at Thermo Digital Technologies L.L.C. increased due to
continued shipments of digital passport printers under a contract with the U.S.
government that commenced in the third quarter of 1998. In addition, sales of
monitoring products increased at Thermo Biomedical due to higher demand. These
increases were offset in part by lower revenues at Trex Medical. Revenues at
Trex Medical, excluding revenues from an acquisition, decreased $45.9 million.
Of this amount, $32.5 million resulted from a reduction in revenues due to the
termination of an OEM contract with a major customer following the customer's
acquisition by another corporation. Revenues also decreased at Trex Medical due
to the inclusion in the
27
First Nine Months 1999 Compared With First Nine Months 1998 (continued)
1998 period of a $8.8 million cardiac catheterization system sale to a Russian
customer. In addition, Trex Medical had lower sales of general-purpose X-ray and
radiographic/fluoroscopic systems, offset in part by higher demand for
mammography systems and related upgrade components.
Segment loss, excluding restructuring and other nonrecurring costs of
$148.8 million in 1999 and $11.2 million in 1998, was $5.1 million in 1999
compared with income of $52.9 million in 1998. This decline resulted in part
from inventory and other provisions at several business units that aggregated
$24.6 million. Trex Medical had a segment loss, excluding restructuring costs
and inventory and other charges, of $9.1 million in 1999, compared with segment
income of $22.0 million in 1998. The decrease in profitability at Trex Medical
was due to a decline in sales at each of its principal domestic business units
and disruption caused by the planned consolidation of its four domestic units
into two. The segment loss at ThermoLase, excluding restructuring costs and
other provisions, totaled $14.6 million in 1999, compared with $20.3 million in
1998, and decreased following the June 1999 sale of its spas. Thermo Coleman had
a segment loss, excluding restructuring costs and inventory provisions, of $3.7
million in 1999, compared with segment income of $4.9 million in 1998. The
decrease in profitability was primarily due to losses at two businesses of its
Thermo Information Solutions unit and, to a lesser extent, its Metric Vision
Corporation subsidiary.
Restructuring and other nonrecurring costs of $148.8 million in 1999 (Note
7) includes $60.3 million of costs recorded by ThermoLase in connection with the
sale of its spas and exiting its hair-removal business; $59.3 million to
write-off cost in excess of net assets of acquired companies arising from
repurchases of ThermoLase stock; $13.1 million at Thermo Coleman and $3.4
million at ThermoTrex principally for the write-off of cost in excess of net
assets of acquired companies and fixed assets to reduce the carrying value of
three businesses to the estimated proceeds from their sale; $10.4 million at
ThermoTrex and Trex Medical for severance and abandoned leases resulting
principally from the consolidation of facilities; and $0.2 million of other
severance costs. In addition, $1.8 million of nonrecurring costs were recorded
by Thermedics in 1999 relating to the proposed transfer of the Company's wholly
owned Thermo Biomedical group of subsidiaries to Thermedics. The Company also
recorded $0.3 million of other restructuring costs in 1999. Restructuring costs
of $11.2 million in 1998 include $10.2 million recorded by ThermoLase in
connection with the closure of four spas and certain actions including the
relocation of ThermoLase's headquarters from California to Texas. In addition,
the Company incurred $1.0 million of other restructuring costs, primarily for
severance in connection with the reorganization of a subsidiary in the
Netherlands.
Energy and Environment
Sales from the Energy and Environment segment were $582.3 million in 1999,
compared with $591.4 million in 1998. Revenues from Thermo Ecotek were
relatively unchanged at $160.4 million in 1999 and $161.2 million in 1998. A
$3.6 million decrease in Thermo Trilogy's sales of biopesticides was
substantially offset by higher energy revenues. The higher energy revenues
resulted from peak period operation of two new California plants and a plant
expansion, offset in part by lower revenues at Thermo Ecotek's Mendota plant due
to the conclusion of its fixed price contract period. Sales at Thermo Power
decreased $13.0 million to $192.2 million in 1999, principally due to the sale
of its Crusader Engines division in December 1998 and lower sales at Peek due to
reduced demand. Sales at Crusader totaled $18.2 million in the first nine months
of 1998 and its results were approximately breakeven. These decreases were
offset in part by revenues of $7.7 million from an acquired business and higher
demand for gas-fueled cooling systems and standard industrial refrigeration
packages. Revenues at Thermo TerraTech increased $4.6 million to $229.7 million
in 1999. Revenues from Thermo TerraTech's environmental-liability management
services increased $5.0 million due to higher demand at certain business units
and, to a lesser extent, the inclusion of $0.6 million of sales from an acquired
business.
Segment income, excluding restructuring and nonrecurring costs of $178.5
million in 1999 and $11.2 million in 1998, was $42.5 million in 1999, compared
with $62.0 million in 1998. Excluding provisions for inventories and other
charges totaling $10.7 million, segment income was $53.2 million in 1999. Thermo
Ecotek's segment income before
28
First Nine Months 1999 Compared With First Nine Months 1998 (continued)
restructuring costs and inventory and other charges was $27.1 million in 1999,
compared with $39.6 million in 1998. The change resulted in part from $5.5
million of lower profits at Thermo Ecotek's Mendota plant due to the facility
having reached the end of its fixed price contract period. In addition, reduced
profitability occurred at Thermo Trilogy due to lower revenues and at Thermo
Ecotek's coal-beneficiation facility as a result of $2.5 million of higher
losses in the 1999 period. This facility closed in May 1999. Segment income at
Thermo Power, excluding restructuring costs and other charges, was $9.8 million
in 1999 and $12.8 million in 1998. Segment income decreased for the reasons
discussed in the results of operations for the third quarter, offset in part by
the inclusion of income from an acquisition. Segment income excluding
restructuring costs and other charges at Thermo TerraTech increased to $16.3
million in 1999 from $9.8 million in 1998. Segment income increased principally
due to a loss of $6.0 million in 1998 at one of ThermoRetec Corporation's
business units as a result of losses on certain remedial-construction contracts.
In addition, segment income at Thermo TerraTech increased $2.0 million as a
result of lower depreciation and amortization expense as a result of recording
write-offs and write-downs during the second quarter of 1999.
Restructuring and nonrecurring costs of $178.5 million in 1999 (Note 7)
include $112.8 million of net expense at Thermo Ecotek resulting principally
from a decision to close its coal-beneficiation facility and from impairment of
its Delano facility following an agreement to terminate the power-sales
agreement for that facility. In addition to these actions, Thermo Ecotek
recorded $13.5 million of nonrecurring income and abandoned certain assets and
sold its share of a project in development as discussed in the results for the
third quarter. Restructuring and nonrecurring costs in 1999 also include $9.7
million at Thermo Power resulting principally from a decision to hold for sale
its ThermoLyte subsidiary, impairment at two sales and service businesses of its
Peek subsidiary that operate in Malaysia and Croatia, and staff reductions and
facility consolidations at other Peek units. Restructuring costs in 1999 at
Thermo TerraTech totaled $54.3 million and result from decisions to sell several
businesses. The charges at Thermo TerraTech were primarily to reduce the
carrying value of the businesses to the expected proceeds from their sale. In
addition, the Company recorded $1.7 million of restructuring costs associated
with cost in excess of net assets of acquired companies arising from the
Company's repurchases of Thermo EuroTech stock, which has become impaired due to
continuing losses and a decision to exit its principal business. A revenue
reversal of $2.8 million and $3.5 million of inventory provisions were recorded
at Thermo Ecotek in 1999, as discussed in the results of operations for the
third quarter. In addition, Thermo Power and Thermo TerraTech recorded $3.7
million and $0.7 million, respectively, of provisions, principally for
inventory, in the first nine months of 1999. Restructuring costs of $11.2
million were recorded in 1998 for the reasons discussed in the results of
operations for the third quarter.
Recycling and Resource Recovery
Sales in the Recycling and Resource Recovery segment decreased to $205.0
million in 1999 from $223.2 million in 1998. Sales at Thermo Fibertek decreased
$18.7 million to $166.8 million in 1999, primarily due to the February 1999 sale
of its Thermo Wisconsin subsidiary that resulted in a decrease in revenues of
$13.7 million. Lower revenues from stock-preparation equipment and accessories
were offset in part by higher revenues from water-management products and water-
and fiber-recovery services and $0.5 million of revenues from an acquired
business. Revenues increased at the Company's wholly owned Peter Brotherhood
subsidiary due principally to a contract to sell turbine generators to a
customer in Russia.
Segment income, excluding restructuring and other nonrecurring costs, net,
of $24.4 million in 1999, decreased to $17.5 million in 1999 from $25.2 million
in 1998. The decrease was primarily due to lower segment income at Thermo
Fibertek as a result of lower revenues and the sale of Thermo Wisconsin which
represented $1.7 million of the decrease. Restructuring costs of $8.4 million
were recorded at the Company's wholly owned Peter Brotherhood subsidiary to
write down property and equipment to reduce the carrying value of this unit to
the estimated proceeds from its sale. In May 1999, a jury in the superior court
of the state of Rhode Island rendered a verdict against the Company in
connection with an installation in 1985 of a wastewater treatment system by the
Company's wholly owned Napco subsidiary. The plaintiff has submitted a brief to
the court that sets forth a computation of interest on the damages that, if
approved by the court, would bring the total amount of the award to
approximately $21 million. The
29
First Nine Months 1999 Compared With First Nine Months 1998 (continued)
Company believes that both the verdict and the interest computation are in error
and intends to appeal this matter. Due to the inherent uncertainty of the appeal
process, however, the Company has recorded a charge of $21 million for this
matter in 1999. In addition, Thermo Fibertek recorded nonrecurring income of
$5.0 million in 1999, consisting of a gain on the sale of Thermo Wisconsin of
$11.1 million, which was offset in part by impairment of a note receivable of
$3.0 million (including $0.2 million recorded in the first quarter of 1999) and
restructuring and other nonrecurring costs of $3.1 million (Note 7).
Gain on Issuance of Stock by Subsidiaries and Minority Interest Expense
As a result of the sale of stock by subsidiaries and the issuance of stock
upon conversion of convertible debentures, the Company recorded gains of $51.8
million in 1998. The Company recorded minority interest income of $36.7 million
in 1999, primarily as a result of restructuring and other nonrecurring costs at
the Company's majority-owned subsidiaries. Minority interest expense in 1998
includes $13.9 million related to gains recorded by the Company's majority-owned
subsidiaries as a result of the sale of stock by their subsidiaries and the
issuance of stock by their subsidiaries upon conversion of convertible
debentures.
Income Taxes
The Company's effective tax rate in 1999 was a benefit of 11%. Excluding
nontaxable gains from issuance of subsidiary stock in 1998 and the effect of the
write-off of $2.5 million (Note 7) and $6.9 million of tax assets in 1999 and
1998, respectively, the Company's effective tax rate was 12% in 1999 and 48% in
1998. The effective tax rates vary from the statutory federal income tax rate
primarily due to state income taxes and nondeductible expenses, including in
1999, the write-off of cost in excess of net assets of acquired companies.
Liquidity and Capital Resources
Consolidated working capital was $1.60 billion at October 2, 1999,
compared with $2.16 billion at January 2, 1999. Included in working capital were
cash, cash equivalents, and short-term available-for-sale investments of $1.13
billion at October 2, 1999, compared with $1.55 billion at January 2, 1999. In
addition, the Company had $77.4 million of long-term available-for-sale
investments at October 2, 1999, compared with $95.5 million at January 2, 1999.
Of the total $1.21 billion of cash, cash equivalents, and short- and long-term
available-for-sale investments at October 2, 1999, $1.07 billion was held by the
Company's majority-owned subsidiaries, and the balance was held by the Company
and its wholly owned subsidiaries.
Cash provided by operating activities was $219.4 million during the first
nine months of 1999. Other current liabilities decreased by $51.0 million,
primarily due to a reduction in accrued taxes as a result of a tax benefit
recorded on the Company's pretax loss in 1999, as well as the timing of tax
payments. Cash of $7.3 million was provided by a decrease in accounts
receivable, principally due to lower sales at certain businesses in the third
quarter of 1999 compared with the fourth quarter of 1998. At October 2, 1999,
the Company had $29.2 million accrued for acquisition expenses. The Company
expects to pay $14.0 million, representing severance obligations, primarily over
the next six to nine months. The balance, which primarily represents
abandoned-facility payments, will be paid over the remaining terms of the
leases.
During the first nine months of 1999, the Company's primary investing
activities, excluding available-for-sale investments activity, included
acquisitions and the purchase of property, plant, and equipment. The Company
expended $396.5 million, net of cash acquired, for acquisitions and expended
$92.9 million for purchases of property, plant, and equipment. Thermedics
acquired all of the outstanding shares of Thermo Voltek common stock that
Thermedics and the Company did not already own, in completion of its merger
agreement, for $20.5 million of cash. In addition, a majority-owned subsidiary
expended $3.0 million to reacquire the minority interest in a privately held
30
Liquidity and Capital Resources (continued)
subsidiary. In October 1999, the Company acquired all of the outstanding shares
of Thermo Power common stock that the Company did not already own, in completion
of its merger agreement, for $32.3 million in cash. The Company and a
majority-owned subsidiary have agreed to pay approximately $63 million in cash
for all of the outstanding shares of ThermoSpectra, Thermo Vision, ThermoRetec,
and The Randers Killam Group that they do not already own. In addition, the
Company and two majority-owned subsidiaries have agreed to pay approximately $44
million in cash for all of the outstanding shares of certain privately held,
majority-owned subsidiaries that they do not already own.
The Company's financing activities used $192.4 million of cash during the
first nine months of 1999. During the first nine months of 1999, the Company
expended $10.5 million to purchase shares of its common stock and the Company
and certain of its majority-owned subsidiaries expended $156.3 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 October 2, 1999, $102.9 million remained under the Company's
authorization, and $44.1 million remained under authorizations of the Company's
majority-owned subsidiaries. Subsequent to the end of the third quarter, several
majority-owned subsidiaries' Board of Directors authorized the purchase of up to
an additional aggregate $40.0 of their respective securities through November
2000. In addition, the Company used $17.1 million of cash for the redemption of
redeemable subsidiary common stock during the first nine months of 1999.
The Company has sold put options for shares of its common stock to an
institutional counterparty. As of October 2, 1999, the Company had a maximum
potential obligation under such arrangements to purchase 5,701,000 shares of its
common stock for an aggregate of $83.0 million. The put options are exercisable
only at maturity, expire between November 1999 and May 2000, and have a weighted
average exercise price per share of $14.56. The Company has the right to settle
the put options by physical settlement of the options or by net share settlement
using shares of the Company's common stock.
In connection with certain restructuring actions undertaken by the Company
and its subsidiaries during 1999, the Company expects to incur cash expenditures
of approximately $18 million during the remainder of 1999, $35 million during
2000, and $20 million during 2001 and beyond, with the payments in 2001 and
beyond primarily for abandoned-facility payments, which will be paid over the
remaining terms of the leases. These expenditures include amounts accrued at
October 2, 1999, and costs that will be incurred in the future related to
actions undertaken in 1999. The Company believes that the expected proceeds from
businesses to be sold in connection with certain restructuring actions will
exceed the aggregate estimated cash expenditures for restructuring actions and
planned repurchases of subsidiary common stock in connection with the Company's
proposed reorganization plan (Notes 7 and 8).
The Company has no material commitments for purchases of property, plant,
and equipment and expects that for the remainder of 1999 such expenditures will
approximate the current level of expenditures.
Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 date recognition issue
on the Company's internal business systems, products, and operations. The
Company's year 2000 initiatives include (i) testing and upgrading significant
information technology systems and facilities; (ii) testing and developing
upgrades, if necessary, for the Company's current products and certain
discontinued products; (iii) assessing the year 2000 readiness of its key
suppliers and vendors; and (iv) developing contingency plans.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
non-information technology systems for year
31
Year 2000 (continued)
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 non-information technology systems,
which efforts included testing the year 2000 readiness of its manufacturing,
utility, and telecommunications systems at its critical facilities. In phase two
of its program, any material noncompliant information technology systems or
non-information technology systems that were identified during phase one were
prioritized and remediated. Based on its evaluations, the Company does not
believe that it is required to make any material upgrades or modifications to
its critical non-information technology systems. The Company is currently
upgrading or replacing its material noncompliant information technology systems,
and a substantial portion of this process was complete as of October 2, 1999.
The Company expects that all of its material information technology systems and
critical non-information technology systems will be year 2000 compliant by the
end of November 1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all of such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate third-party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company has
identified all of the year 2000 problems with its current products. The Company
believes that certain of its older products, which it no longer manufactures or
sells, may not be year 2000 compliant. The Company is continuing to test and/or
evaluate such products. The Company is focusing its efforts on products that are
still under warranty, early in their expected life, subject to FDA
considerations related to the year 2000, and/or pose a safety risk. The Company
is offering upgrades and/or identifying potential solutions where reasonably
practicable.
The Company is in the process of identifying and assessing the year 2000
readiness of key suppliers and vendors that are believed to be significant to
the Company's business operations. As part of this effort, the Company has
developed and distributed questionnaires relating to year 2000 compliance to its
significant suppliers and vendors. To date, no significant supplier or vendor
has indicated that it believes its business operations will be materially
disrupted by the year 2000 issue. The Company is following up with significant
suppliers and vendors that have not responded to the Company's questionnaires.
The Company has substantially completed its assessment of third-party risk.
Contingency Plans
The Company has substantially completed its contingency plans that will
allow its primary business operations to continue despite disruptions due to
year 2000 problems. These plans 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 $9.9 million as of October 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 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.
32
Year 2000 (continued)
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's material
suppliers or vendors experience business disruptions due to the year 2000 issue
and are unable to provide materials and services to the Company on time. The
Company's operations could be delayed or temporarily shut down, and it could be
unable to meet its obligations to customers in a timely fashion. The Company's
business, operations, and financial condition could be adversely affected in
amounts that cannot be reasonably estimated at this time. If the Company
believes that any of its key suppliers or vendors may not be year 2000
compliant, it will seek to identify and secure other suppliers or vendors as
part of its contingency plan.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. As described above, if any of
the Company's significant suppliers or vendors experience business disruptions
due to year 2000 issues, there may also be a material adverse effect on the
Company. If any countries in which the Company operates experience significant
year 2000 disruption, the Company could be materially adversely affected. There
is expected to be a significant amount of litigation relating to the year 2000
issue, and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a significant adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in interest rates,
foreign currency exchange rates, and equity prices has not changed materially
from its exposure at year-end 1998.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page immediately preceding exhibits.
(b) Reports on Form 8-K
None.
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 10th day of November 1999.
THERMO ELECTRON CORPORATION
/s/ Paul F. Kelleher
Paul F. Kelleher
Senior Vice President, Finance and
Administration
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer and Vice President
34
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
10.1 Form of Indemnification Agreement between the Registrant and the directors and officers
of its majority-owned subsidiaries (filed as Exhibit 10.1 to the Registrant's
Registration Statement on Form S-4 [Reg. No. 333-90661] and incorporated herein by
reference).
10.2 Form of Amended and Restated Indemnification Agreement between the Registrant and its
directors and officers (filed as Exhibit 10.2 to the Registrant's Registration Statement
on Form S-4 [Reg. No. 333-90661] and incorporated herein by reference).
27 Financial Data Schedule.