Exhibit 13
Thermo Instrument Systems Inc.
Consolidated Financial Statements
1999
Thermo Instrument Systems Inc. 1999 Financial Statements
Consolidated Statement of Income
(In thousands except per share amounts) 1999 1998 1997
- ----------------------------------------------------------------------- ----------- ----------- ----------
Revenues (Note 13) $2,093,537 $1,659,981 $1,592,314
---------- ---------- ----------
Costs and Operating Expenses:
Cost of revenues (Note 11) 1,136,675 889,575 842,009
Selling, general, and administrative expenses (Note 8) 580,432 447,860 424,695
Research and development expenses 157,255 113,917 107,613
Restructuring and other unusual costs (income), net (Note 11) 1,211 23,209 (1,257)
---------- ---------- ----------
1,875,573 1,474,561 1,373,060
---------- ---------- ----------
Operating Income 217,964 185,420 219,254
Interest Income 22,124 33,509 28,253
Interest Expense (includes $16,498, $11,136, and $18,014 (50,988) (45,458) (45,894)
to parent company)
Equity in Losses of Unconsolidated Subsidiaries (Notes 3 and 11) (7,886) - -
Gain on Sale of Investments (Note 2) 1,159 713 -
Gain on Issuance of Stock by Subsidiaries (Note 10) - 18,582 46,404
Other Income (Expense), Net (Note 11) (2,690) 1,150 -
---------- ---------- ----------
Income Before Provision for Income Taxes, Minority Interest, and 179,683 193,916 248,017
Extraordinary Item
Provision for Income Taxes (Note 5) 75,437 74,674 88,113
Minority Interest Expense 16,447 15,677 12,646
---------- ---------- ----------
Income Before Extraordinary Item 87,799 103,565 147,258
Extraordinary Item, Net of Provision for Income Taxes and - 519 -
Minority Interest of $391 (Note 6) ---------- ---------- ----------
Net Income $ 87,799 $ 104,084 $ 147,258
========== ========== ==========
Earnings per Share (Note 15)
Basic $ .74 $ .86 $ 1.21
========== ========== ==========
Diluted $ .67 $ .79 $ 1.09
========== ========== ==========
Weighted Average Shares (Note 15)
Basic 119,305 120,975 121,548
========== ========== ==========
Diluted 130,518 133,103 139,415
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
2
Thermo Instrument Systems Inc. 1999 Financial Statements
Consolidated Balance Sheet
(In thousands) 1999 1998
- ---------------------------------------------------------------------------------- ------------ ----------
Assets
Current Assets:
Cash and cash equivalents (includes $408,490 under repurchase $ 185,492 $ 553,825
agreements with parent company in 1998)
Advance to affiliate 256,522 -
Accounts receivable, less allowances of $29,837 and $23,726 489,264 407,430
Unbilled contract costs and fees 17,570 13,114
Inventories 327,901 276,589
Deferred tax asset and refundable income taxes (Note 5) 67,627 62,921
Other current assets 27,710 19,705
---------- ----------
1,372,086 1,333,584
---------- ----------
Property, Plant, and Equipment, at Cost, Net 287,407 220,231
---------- ----------
Other Assets (Notes 2, 3, and 4) 159,574 73,705
---------- ----------
Cost in Excess of Net Assets of Acquired Companies (Notes 3, 5, and 11) 1,066,291 938,254
---------- ----------
$2,885,358 $2,565,774
========== ==========
3
Thermo Instrument Systems Inc. 1998 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Liabilities and Shareholders' Investment
Current Liabilities:
Short-term obligations and current maturities of long-term $ 292,702 $ 70,772
obligations (includes advance from affiliate of $54,855 and
related-party debt of $8,755 in 1999; Note 6)
Short-term obligations and current maturities of long-term obligations, 153,800 60,000
due to parent company (Notes 3 and 6)
Accounts payable 119,956 101,009
Accrued payroll and employee benefits 73,077 59,649
Accrued income taxes (includes $18,139 and $12,500 due to parent company) 90,734 59,984
Accrued installation and warranty expenses 41,796 39,958
Deferred revenue 46,592 46,354
Other accrued expenses (Notes 3 and 11) 175,436 135,708
Due to parent company and affiliated companies 9,193 14,195
---------- ----------
1,003,286 587,629
---------- ----------
Deferred Income Taxes (Note 5) 22,034 29,278
---------- ----------
Other Deferred Items 35,433 31,056
---------- ----------
Long-term Obligations (Note 6):
Senior convertible obligations (includes $140,000 due to parent company; 312,500 327,042
Note 18)
Subordinated convertible obligations (includes $3,000 and $650 of 250,000 389,436
related-party debt)
Other (includes $3,800 due to parent company in 1998) 33,994 26,965
---------- ----------
596,494 743,443
---------- ----------
Minority Interest 243,545 229,361
---------- ----------
Commitments and Contingencies (Note 7)
Shareholders' Investment (Notes 4 and 9):
Common stock, $.10 par value, 250,000,000 shares authorized; 123,591,238 and 12,359 12,288
122,879,889 shares issued
Capital in excess of par value 343,891 331,621
Retained earnings 763,782 675,983
Treasury stock at cost, 4,824,335 and 3,603,358 shares (75,914) (63,671)
Deferred compensation (373) -
Accumulated other comprehensive items (Note 14) (59,179) (11,214)
---------- ----------
984,566 945,007
---------- ----------
$2,885,358 $2,565,774
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Thermo Instrument Systems Inc. 1999 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ---------
Operating Activities
Net income $ 87,799 $ 104,084 $ 147,258
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 81,244 65,078 58,051
Noncash restructuring and other unusual costs (income), net 111 3,226 (1,257)
(Note 11)
Provision for losses on accounts receivable 7,301 4,169 4,366
Equity in losses of unconsolidated subsidiaries (Notes 3 and 11) 7,886 - -
Gain on sale of investments (Note 2) (1,159) (713) -
Gain on issuance of stock by subsidiaries (Note 10) - (18,582) (46,404)
Minority interest expense 16,447 15,677 12,646
Increase (decrease) in deferred income taxes (116) (53) 2,742
Extraordinary item, net of income taxes and minority - (519) -
interest (Note 6)
Other noncash expenses 13,316 11,081 3,100
Change in current accounts, excluding the effects of acquisitions:
Accounts receivable (24,698) (1,404) (19,157)
Inventories 10,868 10,110 13,768
Other current assets (7,809) 963 3,547
Accounts payable 6,717 (5,310) 14,317
Other current liabilities (7,916) (14,763) (23,868)
Other (2,298) (1,638) 205
--------- ---------- ---------
Net cash provided by operating activities 187,693 171,406 169,314
--------- ---------- ---------
Investing Activities
Acquisitions, net of cash acquired (Note 3) (344,816) (129,598) (508,059)
Acquisition of minority interest of subsidiary (Note 17) (22,694) - -
Payment to affiliated company for acquired business (Note 3) - (19,117) -
Refunds of acquisition purchase price (Note 3) 8,969 - 36,132
Proceeds from sale of businesses (Note 11) - - 4,980
Advances to affiliate, net (257,314) - -
Purchases of available-for-sale investments - (6,919) (9,000)
Proceeds from sale of available-for-sale investments 9,691 - -
Proceeds from maturities of available-for-sale investments - 9,005 10,250
Purchases of property, plant, and equipment (51,677) (30,902) (29,198)
Proceeds from sale of property, plant, and equipment 7,939 9,510 7,877
Other, net 1,420 730 2,030
--------- ---------- ---------
Net cash used in investing activities $(648,482) $ (167,291) $(484,988)
--------- ---------- ---------
5
Thermo Instrument Systems Inc. 1999 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------ ---------- ----------- ----------
Financing Activities
Net proceeds from issuance of Company and subsidiary $ 1,914 $ 103,327 $ 91,375
common stock (Note 10)
Net proceeds from issuance of subordinated convertible - 244,111 -
debentures
Purchases of Company and subsidiary common stock and (37,613) (119,792) -
subordinated convertible debentures (Note 6)
Net proceeds from issuance of short- and long-term 200,000 - 428,800
obligations to parent company (Notes 3 and 6)
Repayment of short- and long-term obligations to parent (110,000) (160,000) (220,000)
company (Note 6)
Increase (decrease) in short-term obligations, net 61,930 500 (21,528)
Net proceeds from issuance of long-term obligations 16,692 11,502 -
Repayment of long-term obligations (20,870) (2,780) (7,817)
--------- ---------- ----------
Net cash provided by financing activities 112,053 76,868 270,830
--------- ---------- ----------
Exchange Rate Effect on Cash (19,597) 3,994 (8,996)
--------- ---------- ----------
Increase (Decrease) in Cash and Cash Equivalents (368,333) 84,977 (53,840)
Cash and Cash Equivalents at Beginning of Year 553,825 468,848 522,688
--------- ---------- ----------
Cash and Cash Equivalents at End of Year $ 185,492 $ 553,825 $ 468,848
========= ========== ==========
Cash Paid For
Interest $ 49,101 $ 44,899 $ 43,755
Income taxes $ 64,066 $ 66,423 $ 62,895
Noncash Activities
Fair value of assets of acquired companies $ 598,459 $ 165,220 $ 673,382
Cash paid for acquired companies (385,275) (132,933) (545,303)
Issuance of short- and long-term obligations for acquired company (14,852) - -
Cash to be paid for remaining outstanding shares of tender offer (1,864) - -
Due to affiliated company for acquired company - - (19,117)
Issuance of subsidiary stock options for acquired company - - (1,693)
--------- ---------- ----------
Liabilities assumed of acquired companies $ 196,468 $ 32,287 $ 107,269
========= ========== ==========
Conversions of Company and subsidiary convertible obligations $ 9,277 $ 7,562 $ 38,910
========= ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
6
Thermo Instrument Systems Inc. 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ---------
Comprehensive Income
Net Income $ 87,799 $ 104,084 $147,258
-------- --------- --------
Other Comprehensive Items (Note 14):
Foreign currency translation adjustment (48,601) 22,917 (34,317)
Unrealized gains (losses) on available-for-sale investments, 636 (910) 22
net of reclassification adjustment -------- --------- --------
(47,965) 22,007 (34,295)
Minority Interest 7,676 (4,248) 4,162
-------- --------- --------
$ 47,510 $ 121,843 $117,125
======== ========= ========
Shareholders' Investment
Common Stock, $.10 Par Value:
Balance at beginning of year $ 12,288 $ 12,265 $ 9,767
Issuance of stock under employees' and directors' stock plans 3 17 4
Conversions of convertible obligations 68 6 45
Effect of stock split - - 2,449
-------- --------- --------
Balance at end of year 12,359 12,288 12,265
-------- --------- --------
Capital in Excess of Par Value:
Balance at beginning of year 331,621 333,580 319,464
Issuance of stock under employees' and directors' stock plans (1,284) 590 1,270
Tax benefit related to employees' and directors' stock plans 632 158 514
Conversions of convertible obligations 9,209 765 6,817
Effect of stock split - - (2,449)
Effect of majority-owned subsidiaries' equity transactions 3,713 (3,472) 7,964
-------- --------- --------
Balance at end of year 343,891 331,621 333,580
-------- --------- --------
Retained Earnings:
Balance at beginning of year 675,983 571,899 424,641
Net income 87,799 104,084 147,258
-------- --------- --------
Balance at end of year $763,782 $ 675,983 $571,899
-------- --------- --------
7
Thermo Instrument Systems Inc. 1999 Financial Statements
Consolidated Statement of Comprehensive Income and Shareholders' Investment (continued)
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------- ---------- ----------- ---------
Treasury Stock:
Balance at beginning of year $(63,671) $ (6,965) $ (8,679)
Activity under employees' and directors' stock plans 3,271 102 1,714
Purchases of Company common stock (15,514) (56,808) -
-------- -------- --------
Balance at end of year (75,914) (63,671) (6,965)
-------- -------- --------
Deferred Compensation:
Balance at beginning of year - - -
Issuance of restricted stock under employees' stock plans (Note 4) (547) - -
Amortization of deferred compensation 174 - -
-------- -------- --------
Balance at end of year (373) - -
-------- -------- --------
Accumulated Other Comprehensive Items (Note 14):
Balance at beginning of year (11,214) (33,221) 1,074
Other comprehensive (income) expense (47,965) 22,007 (34,295)
-------- -------- --------
Balance at end of year (59,179) (11,214) (33,221)
-------- -------- --------
$984,566 $945,007 $877,558
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
8
Thermo Instrument Systems Inc. 1999 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Instrument Systems Inc. (the Company) is a global leader in the
development, manufacture, and sale of measurement and detection instruments used
in virtually every industry to monitor, collect, and analyze data that provide
knowledge for the user. For example, the Company's powerful analysis
technologies help researchers sift through data to make the discoveries that
will fight disease or prolong life; allow manufacturers to fabricate
ever-smaller components required to increase the speed and quality of
communications; or monitor and control industrial processes on-line to ensure
that critical quality standards are met efficiently and safely.
Relationship with Thermo Electron Corporation
The Company was incorporated on May 28, 1986, as a wholly owned subsidiary
of Thermo Electron Corporation. As of January 1, 2000, Thermo Electron owned
104,271,860 shares of the Company's common stock, representing 88% of such stock
outstanding.
In January 2000, Thermo Electron announced a reorganization plan under
which the Company would take private ThermoQuest Corporation, Thermo Optek
Corporation, Thermo BioAnalysis Corporation, Metrika Systems Corporation, and
ONIX Systems Inc. In addition, Thermo Electron would take the Company private
(Note 18).
Principles of Consolidation
The accompanying financial statements include the accounts of the Company;
its wholly owned subsidiaries; and its majority-owned public subsidiaries,
ThermoQuest, Thermo Optek, Thermo BioAnalysis, Metrika Systems, ONIX Systems,
ThermoSpectra Corporation (Note 17), Thermo Vision Corporation (Note 17), and
Spectra-Physics Lasers, Inc. (SPLI), which was acquired indirectly by the
Company as part of its acquisition of Spectra-Physics AB (Note 3). All material
intercompany accounts and transactions have been eliminated.
The Company accounts for investments in businesses in which it owns
between 20% and 50% using the equity method (Note 3). Under the equity method,
the Company records its initial investment in the business at cost, and adjusts
the carrying value of the investment to recognize its proportionate share of the
business's earnings or losses.
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 1999, 1998, and 1997 are for the fiscal years ended January 1,
2000, January 2, 1999, and January 3, 1998, respectively. Fiscal years 1999 and
1998 each included 52 weeks; fiscal year 1997 included 53 weeks.
Revenue Recognition
The Company generally recognizes product revenues upon shipment of its
products and recognizes service contract revenues ratably over the term of the
contract. The Company provides a reserve for its estimate of warranty and
installation costs at the time of shipment. Deferred revenue in the accompanying
balance sheet consists primarily of unearned revenue on service contracts.
Substantially all of the deferred revenue in the accompanying 1999 balance sheet
will be recognized within one year.
Gain on Issuance of Stock by Subsidiaries
At the time a subsidiary sells its stock to unrelated parties at a price
in excess of its book value, the Company's net investment in that subsidiary
increases. If at that time the subsidiary is an operating entity, and not
engaged principally in research and development, the Company records the
increase as a gain.
9
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
If gains have been recognized on issuances of a subsidiary's stock and
shares of the subsidiary are subsequently repurchased by the subsidiary, the
Company, or Thermo Electron, gain recognition does not occur on issuances
subsequent to the date of a repurchase until such time as shares have been
issued in an amount equivalent to the number of repurchased shares. Such
transactions are reflected as equity transactions, and the net effect of these
transactions is reflected in the accompanying statement of comprehensive income
and shareholders' investment as "Effect of majority-owned subsidiaries' equity
transactions."
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 4). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
Income Taxes
The Company and Thermo Electron have a tax allocation agreement under
which the Company and its greater than 80%-owned subsidiaries, exclusive of
foreign operations, are included in Thermo Electron's consolidated federal and
certain state income tax returns. The agreement provides that in years in which
the Company has taxable income, it will pay to Thermo Electron amounts
comparable to the taxes the Company would have paid if it had filed separate tax
returns. If Thermo Electron's equity ownership of the Company were to drop below
80%, the Company would be required to file its own federal income tax return.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
Earnings per Share
Basic earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding during the year. Except where the
result would be antidilutive, diluted earnings per share have been computed
assuming the conversion of convertible obligations and the elimination of the
related interest expense, and the exercise of stock options, as well as their
related income tax effects (Note 15).
Cash and Cash Equivalents
The Company, along with certain European-based subsidiaries of Thermo
Electron, participates in a notional pool arrangement in the U.K. with Barclays
Bank. Under this arrangement, Barclays notionally combines the positive and
negative cash balances held by the participants to calculate the net interest
yield/expense for the group. The benefit derived from this arrangement is then
allocated based on balances attributable to the respective participants. The
Company has access to a $60.2 million bank line of credit under this
arrangement. Thermo Electron guarantees all of the obligations of each
participant in this arrangement. At year-end 1999 and 1998, the Company had
invested $41.4 million and $51.1 million, respectively, and borrowed $41.4
million and $24.3 million, respectively, under this arrangement (Note 6).
The Company, along with certain European-based subsidiaries of Thermo
Electron, participates in a cash management arrangement in the Netherlands with
a wholly owned subsidiary of Thermo Electron through ABN AMRO. Under this
arrangement, participants' balances are pooled for interest calculation
purposes. Interest under this arrangement is based on Euro market rates. The
Company has access to an $8.7 million bank line of credit under this
arrangement. Thermo Electron guarantees all of the obligations of each
participant in this arrangement. At year-end 1999, the Company had $16.5 million
invested and $5.5 million borrowed under this arrangement (Note 6).
10
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
At year-end 1998, $392.0 million of the Company's cash equivalents were
invested in a repurchase agreement with Thermo Electron. Under this agreement,
the Company in effect lent excess cash to Thermo Electron, which Thermo Electron
collateralized with investments principally consisting of corporate notes, U.S.
government-agency securities, commercial paper, money market funds, and other
marketable securities, in the amount of at least 103% of such obligation. The
Company's funds subject to the repurchase agreement were readily convertible
into cash by the Company. The repurchase agreement earned a rate based on the
90-day Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter. Effective June 1999, the Company adopted a new cash
management arrangement with Thermo Electron, described below, that replaces the
repurchase agreement. At year-end 1998, the Company had invested $16.5 million
and borrowed $6.1 million in a similar arrangement in the Netherlands (Note 6).
At year-end 1999 and 1998, the Company's cash equivalents also include
investments in short-term certificates of deposit of the Company's foreign
subsidiaries, which have an original maturity of three months or less. Cash
equivalents are carried at cost, which approximates market value.
Advance to/from Affiliate
Effective June 1999, the Company and Thermo Electron commenced use of a
new domestic cash management arrangement. Under the new arrangement, amounts
advanced to Thermo Electron by the Company for domestic cash management purposes
bear interest at the 30-day Dealer Commercial Paper Rate plus 50 basis points,
set at the beginning of each month. Thermo Electron is contractually required to
maintain cash, cash equivalents, and/or immediately available bank lines of
credit equal to at least 50% of all funds invested under this cash management
arrangement by all Thermo Electron subsidiaries other than wholly owned
subsidiaries. The Company has the contractual right to withdraw its funds
invested in the cash management arrangement upon 30 days' prior notice. At
year-end 1999, the Company had borrowed $36.2 million under this arrangement
(Note 6).
In addition, certain of the Company's European-based subsidiaries
participate in new cash management arrangements with a wholly owned subsidiary
of Thermo Electron. The Company has access to a $43.3 million line of credit
from such wholly owned subsidiary of Thermo Electron under these arrangements,
of which the Company had borrowed $18.7 million at year-end 1999 (Note 6).
Interest under these arrangements is based on Euro market rates. The other terms
of these arrangements are similar to the domestic cash management arrangement.
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out or
weighted average basis) or net realizable value and include materials, labor,
and manufacturing overhead. The components of inventories are as follows:
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Raw Materials and Supplies $ 152,865 $ 118,286
Work in Progress 60,227 55,086
Finished Goods 114,809 103,217
--------- ---------
$ 327,901 $ 276,589
========= =========
The Company periodically reviews its quantities of inventories on hand and
compares these amounts to expected usage of each particular product or product
line. The Company records as a charge to cost of revenues any amounts required
to reduce the carrying value of inventories to net realizable value.
11
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: buildings and improvements, 3 to 40
years; machinery and equipment, 1 to 20 years; and leasehold improvements, the
shorter of the term of the lease or the life of the asset. Property, plant, and
equipment consists of the following:
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Land $ 41,858 $ 33,335
Buildings 152,055 124,875
Machinery and Equipment 230,175 171,307
Leasehold Improvements 17,489 14,851
--------- ---------
441,577 344,368
Less: Accumulated Depreciation and Amortization 154,170 124,137
--------- ---------
$ 287,407 $ 220,231
========= =========
Other Assets
Other assets in the accompanying balance sheet includes the costs of
acquired trademarks, patents, and other specifically identifiable intangible
assets. These assets are amortized using the straight-line method over their
estimated useful lives, which range from 3 to 20 years. These assets were $44.3
million and $32.3 million, net of accumulated amortization of $28.2 million and
$22.9 million, at year-end 1999 and 1998, respectively. Other assets in the
accompanying balance sheet also includes an investment in FLIR Systems, Inc.
common stock (Note 3), prepaid pension costs (Note 4), deferred debt costs, and
long-term available-for-sale investments (Note 2).
Cost in Excess of Net Assets of Acquired Companies
The excess of cost over the fair value of net assets of acquired companies
is amortized using the straight-line method over periods not exceeding 40 years.
Accumulated amortization was $134.3 million and $104.5 million at year-end 1999
and 1998, respectively. The Company assesses the future useful life of this
asset whenever events or changes in circumstances indicate that the current
useful life has diminished. Such events or circumstances generally include the
occurrence of operating losses or a significant decline in earnings associated
with the acquired business or asset. The Company considers the future
undiscounted cash flows of the acquired companies in assessing the
recoverability of this asset. The Company assesses cash flows before interest
charges and, when impairment is indicated, writes the asset down to fair value.
If quoted market values are not available, the Company estimates fair value by
calculating the present value of future cash flows. If impairment has occurred,
any excess of carrying value over fair value is recorded as a loss.
Environmental Liabilities
The Company accrues for costs associated with the remediation of
environmental pollution when it is probable that a liability has been incurred
and the Company's proportionate share of the amount can be reasonably estimated.
Any recorded liabilities have not been discounted.
12
1. Nature of Operations and Summary of Significant Accounting Policies (continued)
Foreign Currency
All assets and liabilities of the Company's foreign subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' investment
(Note 14). In 1998, the Company recorded a foreign currency transaction gain of
$1.2 million, arising from the repayment of certain foreign subsidiaries'
intercompany borrowings denominated in U.S. dollars, which is included in other
income in the accompanying statement of income. In 1999, the Company recorded a
charge of $2.8 million related to foreign exchange contracts at SPLI, which is
included in other expense in the accompanying statement of income (Note 11).
Foreign currency transaction gains and losses included in the accompanying 1997
statement of income are not material.
Forward Contracts
The Company uses short-term forward foreign exchange contracts to manage
certain exposures to foreign currencies. The Company enters into forward foreign
exchange contracts to hedge certain firm purchase and sale commitments
denominated in currencies other than its subsidiaries' local currencies. These
contracts principally hedge transactions denominated in U.S. dollars, British
pounds sterling, Japanese yen, French francs, Swiss francs, German marks,
Swedish krona, and Netherlands guilders. The purpose of the Company's foreign
currency hedging activities is to protect the Company's local currency cash
flows related to these commitments from fluctuations in foreign exchange rates.
Gains and losses arising from forward foreign exchange contracts are recognized
as offsets to gains and losses resulting from the transactions being hedged. The
Company does not generally enter into speculative foreign currency agreements.
See Note 11 for the effect of SPLI's early adoption of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities."
Recent Accounting Pronouncement
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements."
SAB 101 includes requirements for when shipments may be recorded as revenue when
the terms of the sale include customer acceptance provisions or an obligation of
the seller to install the product. In such instances, SAB 101 generally requires
that revenue recognition occur upon customer acceptance and/or at completion of
installation. SAB 101 requires that companies conform their revenue recognition
practices to the requirements therein during the first quarter of calendar 2000
through recording a cumulative net of tax effect of the change in accounting.
The Company has not completed the analysis to determine the effect that SAB 101
will have on its financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
13
2. Available-for-sale Investments
The Company's marketable equity securities are considered
available-for-sale investments in the accompanying balance sheet and are carried
at market value, with the difference between cost and market value, net of
related tax effects, recorded in the "Accumulated other comprehensive items"
component of shareholders' investment.
The market value of long-term available-for-sale investments at year-end
1999 and 1998 was $1.9 million and $5.6 million, respectively, and the cost
basis of long-term available-for-sale investments was $2.4 million and $6.9
million, respectively. The difference between the market value and the cost
basis of long-term available-for-sale investments at year-end 1999 and 1998 was
$0.5 million and $1.3 million, respectively, which represents gross unrealized
losses on those investments.
Long-term available-for-sale investments are included in other assets in
the accompanying balance sheet. The cost of available-for-sale investments that
were sold was based on specific identification in determining realized gains
recorded in the accompanying statement of income in 1999 and 1998.
3. Acquisitions
During the first quarter of 1999, the Company 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 the Company's tender offer to acquire all of the
outstanding shares of Spectra-Physics. In March 2000, the Company completed the
acquisition of the remaining Spectra-Physics shares outstanding pursuant to
compulsory acquisition rules applicable to Swedish companies. The aggregate
purchase price was approximately $351.5 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 SPLI subsidiary. The
accompanying balance sheet as of January 1, 2000, includes $1.9 million accrued
for the acquisition of the remaining Spectra-Physics shares outstanding that
were purchased in March 2000. 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.
To finance this acquisition, the Company used a combination of available
cash and $200.0 million of borrowings from Thermo Electron, pursuant to a
promissory note due August 1999. In August 1999, the Company repaid $50.0
million of the principal amount outstanding under the promissory note and
refinanced the balance of the note through borrowings from Thermo Electron due
February 2000. In February 2000, Thermo Electron extended the maturity of the
promissory note to August 2000 (Note 6).
During 1999, the Company's majority-owned subsidiaries made several other
acquisitions for approximately $32.4 million in cash, net of cash acquired,
subject to post-closing adjustments.
During 1998, the Company acquired several businesses for $129.6 million in
cash, net of cash acquired.
In March 1997, the Company acquired 95% of Life Sciences International
PLC, a London Stock Exchange-listed company. Subsequently, the Company acquired
the remaining shares of Life Sciences' capital stock. The aggregate purchase
price for Life Sciences was approximately $442.8 million, net of $55.8 million
of cash acquired. The purchase price includes the repayment of $105.0 million of
Life Sciences' bank debt. Life Sciences manufactures laboratory science
equipment, appliances, instruments, consumables, and reagents for the research,
clinical, and industrial markets. In March 1997, to partially finance the
acquisition of Life Sciences, the Company borrowed $210.0 million from Thermo
Electron pursuant to a promissory note due March 1999. The Company repaid $105.0
million of this promissory note in September 1997 and the remaining $105.0
million in January 1998. In addition, in June 1997, to finance the repayment of
Life Sciences' debt, the Company borrowed $115.0 million from Thermo Electron,
which was repaid in September 1997.
14
3. Acquisitions (continued)
On November 6, 1997, Thermo Power Corporation, a majority-owned subsidiary
of Thermo Electron, acquired Peek plc. Thereafter, ONIX Systems acquired from
Thermo Power the stock of three businesses comprising the Peek Measurement
Business for $19.1 million, which was paid in 1998. The purchase price was
determined based on the net book value of the Peek Measurement Business at
November 6, 1997, a pro rata allocation of Thermo Power's total cost in excess
of net assets of acquired companies recorded in connection with its acquisition
of Peek plc based on the 1997 revenues of the Peek Measurement Business relative
to Peek plc's total revenues, plus an estimate of Thermo Power's tax liability
that arose from the sale of the business to ONIX Systems. The Peek Measurement
Business manufactures flow and density measurement systems for use in the
water/wastewater and oil and gas industries.
During 1997, the Company made several other acquisitions for approximately
$46.2 million, net of cash acquired, including the repayment of $1.3 million of
bank debt, and the issuance of subsidiary stock options valued at an aggregate
$1.7 million. To partially finance 1997 acquisitions, ThermoSpectra borrowed an
aggregate of $60.0 million from Thermo Electron pursuant to promissory notes
that were repaid in 1999 and Thermo Vision borrowed $3.8 million from Thermo
Electron pursuant to a promissory note due 2000 (Note 6).
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 $606.6 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, for acquisitions completed in
fiscal 1999, is subject to adjustment upon finalization of the purchase price
allocation. The Company has gathered no information that indicates the final
purchase price allocations will differ materially from the preliminary
estimates.
Based on unaudited data, the following table presents selected financial
information for the Company, Spectra-Physics, and Life Sciences on a pro forma
basis, assuming the Company and Spectra-Physics had been combined since the
beginning of 1998, and the Company and Life Sciences had been combined since the
beginning of 1997. The effect of the acquisitions not included in the pro forma
data was not material to the Company's results of operations.
(In thousands except per share amounts) 1999 1998 1997
- -------------------------------------------------------------------- ------------ ------------ -----------
Revenues $ 2,132,826 $ 2,102,384 $ 1,645,086
Net Income 81,964 108,101 126,528
Earnings per Share:
Basic .69 .89 1.04
Diluted .63 .82 .95
The pro forma results are not necessarily indicative of future operations
or the actual results that would have occurred had the acquisition of
Spectra-Physics and Life Sciences been made at the beginning of 1998 and 1997,
respectively.
15
3. Acquisitions (continued)
In July 1998, Metrika Systems acquired the stock of Honeywell-Measurex
Data Measurement Corporation, a wholly owned subsidiary of Honeywell-Measurex
Corporation. During 1999, Metrika Systems received a refund of $0.6 million
related to a previously agreed upon purchase price adjustment in connection with
the acquisition. Also during 1999, Metrika Systems and Honeywell negotiated a
post-closing adjustment under the terms of the purchase agreement pertaining to
the determination of the amount of certain assets and liabilities at the date of
acquisition for which Honeywell had maintained responsibility. This negotiation
resulted in an amount due to Metrika Systems of $7.8 million, all of which was
received in three installments during 1999. A corresponding increase in the
allowance for bad debts and certain liability accounts has been recorded to
reflect the transfer of responsibility for these matters to Metrika Systems.
In March 1996, the Company completed the acquisition of a substantial
portion of the businesses constituting the Scientific Instruments Division of
Fisons plc (the Fisons businesses), a wholly owned subsidiary of Rhone-Poulenc
Rorer Inc. (RPR), for approximately $181.2 million, net of $7.7 million of cash
acquired, and the assumption of approximately $47.2 million of indebtedness. In
December 1997, the Company and RPR negotiated a post-closing adjustment under
the terms of the purchase agreement for the acquisition of the Fisons businesses
pertaining to determination of the net assets of the Fisons businesses at the
date of acquisition. This negotiation resulted in a refund to the Company of
$36.1 million, plus $3.8 million of interest from the date of acquisition. The
Company recorded $33.1 million of the refund as a reduction of cost in excess of
net assets of acquired companies. The remaining $3.0 million represented payment
for uncollected accounts receivable acquired by the Company that was guaranteed
by RPR.
In connection with its acquisitions, the Company has undertaken
restructuring activities at the acquired businesses. The Company's restructuring
activities, which were accounted for in accordance with Emerging Issues Task
Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing
levels and the abandonment of excess facilities. In connection with these
restructuring activities, as part of the cost of the acquisitions, the Company
established reserves as detailed below, primarily for severance and excess
facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. Accrued acquisition expenses are included in other accrued
expenses in the accompanying balance sheet.
16
3. Acquisitions (continued)
A summary of the changes in accrued acquisition expenses for acquisitions
completed before and during 1997 is as follows:
1997 Acquisitions
--------------------------------------
Abandonment
of Excess Pre-1997
(In thousands) Severance Facilities Other Acquisitions Total
- --------------------------------- -------------- -------------- ------------- -------------- -------------
Balance at December 28, 1996 $ - $ - $ - $ 19,509 $ 19,509
Reserves established 9,021 2,848 2,401 - 14,270
Increases in reserves related - - - 10,010 10,010
to 1996 acquisitions
Usage (4,965) (309) (337) (12,917) (18,528)
Decrease due to finalization (8) - - (4,765) (4,773)
of restructuring plans,
recorded as a decrease in
cost in excess of net
assets of acquired
companies
Currency translation 20 3 69 (156) (64)
-------- -------- ------- -------- --------
Balance at January 3, 1998 4,068 2,542 2,133 11,681 20,424
Reserves established 1,078 791 30 - 1,899
Usage (3,757) (1,005) (577) (2,257) (7,596)
Decrease due to finalization (608) (63) (1,346) (1,004) (3,021)
of restructuring plans,
recorded as a decrease in
cost in excess of net
assets of acquired companies
Currency translation (22) 54 49 191 272
-------- -------- ------- -------- --------
Balance at January 2, 1999 759 2,319 289 8,611 11,978
Usage (681) (834) - (855) (2,370)
Currency translation (55) (65) (41) (319) (480)
-------- -------- ------- -------- --------
Balance at January 1, 2000 $ 23 $ 1,420 $ 248 $ 7,437 $ 9,128
======== ======== ======= ======== ========
The principal accrued acquisition expenses for pre-1997 acquisitions were
for severance and abandoned facilities, primarily from the 1996 acquisition of
the Fisons businesses. In 1996 and 1997, the Company established reserves for
severance for 542 employees of Fisons and for lease obligations for Fisons'
former headquarters in Uxbridge, England, and a Fisons operating facility in
Hayworth, England, with obligations through 2007. The Company finalized its
restructuring plans for the 1996 acquisitions in 1997.
17
3. Acquisitions (continued)
The principal acquisition expenses for 1997 acquisitions were for
severance for 368 employees across all functions and for abandoned facilities,
primarily at the Life Sciences acquisition. The Life Sciences facilities
primarily include an operating location in Runcorn, England, with an obligation
through 2014. The amounts captioned as "other" in 1997 primarily represent costs
to exit certain joint venture arrangements of Life Sciences. The Company
finalized its restructuring plans for the 1997 acquisitions in 1998.
A summary of accrued acquisition expenses for acquisitions completed
during 1998 is as follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Reserves established $ 3,400 $ 1,311 $ 468 $ 5,179
Usage (1,198) (403) (247) (1,848)
Currency translation 14 (27) 23 10
-------- -------- -------- --------
Balance at January 2, 1999 2,216 881 244 3,341
Reserves established 511 313 554 1,378
Usage (1,539) (833) (730) (3,102)
Decrease due to finalization of (827) (255) - (1,082)
restructuring plans, recorded as a
decrease in cost in excess of net assets
of acquired companies
Currency translation (80) 11 (25) (94)
-------- -------- -------- --------
Balance at January 1, 2000 $ 281 $ 117 $ 43 $ 441
======== ======== ======== ========
The principal acquisition expenses for 1998 were for severance for 160
employees across all functions and the cancellation of operating leases at a
sales and service office in Germany and a manufacturing facility in California,
both of which were closed. The amounts captioned as "other" were primarily for
employee relocation expenses and moving expenses for two manufacturing
facilities. The Company finalized its restructuring plans for the 1998
acquisitions in 1999.
A summary of accrued acquisition expenses for acquisitions completed
during 1999 is as follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Reserves established $ 9,186 $ 2,247 $ 3,642 $ 15,075
Usage (3,899) (71) (957) (4,927)
Currency translation (303) (111) (74) (488)
-------- -------- -------- --------
Balance at January 1, 2000 $ 4,984 $ 2,065 $ 2,611 $ 9,660
======== ======== ======== ========
18
3. Acquisitions (continued)
The principal acquisition expenses for 1999 acquisitions are severance for
approximately 175 employees across all functions and for abandoned facilities,
primarily at Spectra-Physics. The Spectra-Physics facilities include operating
facilities in Sweden, Germany, and France with lease terms through 2000. The
amounts captioned as "other" primarily represent relocation, contract
termination, and other exit costs. The Company expects to pay amounts accrued
for severance and other primarily in 2000 and amounts accrued for abandoned
facilities over the respective lease terms. The Company finalized its
restructuring plans for Spectra-Physics in 1999. Unresolved matters at year-end
1999 include completion of planned severances and abandonment of excess
facilities for other acquisitions completed in 1999. Such matters will be
resolved no later than one year from the respective acquisition dates.
In connection with the acquisition of Spectra-Physics, the Company
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.
The Company 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 the Company 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. The Company has recorded its pro rata share of this loss, $5.1 million,
in equity in losses of unconsolidated subsidiaries in the accompanying 1999
statement of income. In addition, as a result of the pooling consummated by FLIR
and related issuance of FLIR shares in March 1999, the Company'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 loss in equity in
losses of unconsolidated subsidiaries in the accompanying 1999 statement of
income, pursuant to Securities and Exchange Commission SAB 51. The Company's
investment in FLIR is included in other assets in the accompanying 1999 balance
sheet.
4. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
The Company has stock-based compensation plans for its key employees,
directors, and others. These plans permit the grant of a variety of stock and
stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee), including restricted stock,
stock options, stock bonus shares, or performance-based shares. The option
recipients and the terms of options granted under these plans are determined by
the Board Committee. Generally, options granted to date are exercisable
immediately, but are subject to certain transfer restrictions and the right of
the Company to repurchase shares issued upon exercise of the options at the
exercise price, upon certain events. The restrictions and repurchase rights
generally lapse ratably over a one- to ten-year period, depending on the term of
the option, which may range from five to twelve years. Nonqualified stock
options may be granted at any price determined by the Board Committee, although
incentive stock options must be granted at not less than the fair market value
of the Company's stock on the date of grant. Generally, all options have been
granted at fair market value. The Company also has a directors' stock option
plan that provides for the grant of stock options in the Company to outside
directors pursuant to a formula approved by the Company's shareholders. Options
in the Company awarded under this plan are immediately exercisable and expire
three to seven years after the date of grant. In addition to the Company's
stock-based compensation plans, certain officers and key employees may also
participate in the stock-based compensation plans of Thermo Electron.
19
4. Employee Benefit Plans (continued)
In November 1998, the Company's employees, excluding its officers and
directors, were offered the opportunity to exchange previously granted options
to purchase shares of Company common stock for an amount of options equal to
half of the number of options previously held, exercisable at a price equal to
the fair market value at the time of the exchange offer. Holders of options to
acquire 669,000 shares at a weighted average exercise price of $29.69 per share
elected to participate in this exchange and, as a result, received options to
purchase 334,000 shares of Company common stock at $13.11 per share, which are
included in the 1998 grants in the table below. The other terms of the new
options are the same as the exchanged options except that the holders could not
sell shares purchased pursuant to such new options for six months from the
exchange date. The options exchanged were canceled by the Company.
In 1999, the Company awarded 12,300 shares of restricted Company common
stock to certain key employees. The shares had an aggregate value of $0.2
million and vest three years from the date of award, assuming continued
employment, with certain exceptions. Also in 1999, certain of the Company's
majority-owned subsidiaries awarded shares of restricted common stock of their
respective companies. The shares of subsidiary common stock have the same terms
as the Company's restricted common stock and had an aggregate value of $0.3
million. The Company has recorded the fair value of the restricted stock as
deferred compensation in the accompanying balance sheet and is amortizing such
amount over the vesting period.
A summary of the Company's stock option activity is as follows:
1999 1998 1997
------------------ ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Price Price
Number Number Number
of of of
(Shares in thousands) Shares Shares Shares
- ---------------------------------------------- -------- ---------- --------- --------- --------- ---------
Options Outstanding, Beginning of Year 3,888 $14.57 4,365 $16.83 4,066 $13.98
Granted 1,265 13.42 698 13.30 727 30.24
Assumed in merger with subsidiary (Note 17) 1,082 7.45 - - - -
Exercised (186) 9.51 (325) 9.23 (263) 9.50
Forfeited (291) 16.67 (181) 17.88 (165) 17.56
Canceled due to exchange - - (669) 29.69 - -
----- ----- -----
Options Outstanding, End of Year 5,758 $13.04 3,888 $14.57 4,365 $16.83
===== ====== ===== ====== ===== ======
Options Exercisable 5,758 $13.04 3,886 $14.56 4,365 $16.83
===== ====== ===== ====== ===== ======
Options Available for Grant 2,254 2,498 2,346
===== ===== =====
20
4. Employee Benefit Plans (continued)
A summary of the status of the Company's stock options at January 1, 2000,
is as follows:
Options Outstanding and Exercisable
----------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ---------------------------------------------- -------------------- ------------------- ------------------
$ 1.82 - $ 9.20 994 8.0 years $ 7.21
9.21 - 16.59 4,380 5.4 years 13.08
16.60 - 23.98 35 5.2 years 17.29
23.99 - 31.37 349 7.2 years 28.61
-----
$ 1.82 - $ 31.37 5,758 6.0 years $13.04
=====
Employee Stock Purchase Program
Substantially all of the Company's full-time U.S. employees are eligible
to participate in an employee stock purchase program sponsored by the Company
and Thermo Electron. Under this program, shares of the Company's and Thermo
Electron's common stock may be purchased at 85% of the lower of the fair market
value at the beginning or end of the plan year, and shares purchased are subject
to a one-year resale restriction. Prior to the 1998 program year, shares of the
Company's and Thermo Electron's common stock could be purchased at the end of a
12-month period at 95% of the fair market value at the beginning of the period
and the shares purchased were subject to a six- month resale restriction. Shares
are purchased through payroll deductions of up to 10% of each participating
employee's gross wages. During 1999 and 1997, the Company issued 22,000 and
52,000 shares, respectively, of its common stock under this program. No shares
of Company common stock were issued under this program during 1998.
Pro Forma Stock-based Compensation Expense
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-based Compensation," which sets forth a fair-value
based method of recognizing stock-based compensation expense. As permitted by
SFAS No. 123, the Company has elected to continue to apply APB No. 25 to account
for its stock-based compensation plans. Had compensation cost for awards granted
after 1994 under the Company's stock-based compensation plans been determined
based on the fair value at the grant dates consistent with the method set forth
under SFAS No. 123, the effect on the Company's net income and earnings per
share would have been as follows:
(In thousands except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------- ---------- --------- ---------
Net Income:
As reported $ 87,799 $104,084 $ 147,258
Pro forma 78,517 96,922 143,083
Basic Earnings per Share:
As reported .74 .86 1.21
Pro forma .66 .80 1.18
Diluted Earnings per Share:
As reported .67 .79 1.09
Pro forma .61 .74 1.06
21
4. Employee Benefit Plans (continued)
Because the method prescribed by SFAS No. 123 has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
expense may not be representative of the amount to be expected in future years.
Pro forma compensation expense for options granted is reflected over the vesting
period; therefore, future pro forma compensation expense may be greater as
additional options are granted.
The weighted average fair value per share of options granted was $4.11,
$3.93, and $11.09 in 1999, 1998, and 1997, respectively. The fair value of each
option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
1999 1998 1997
- --------------------------------------------------------------------------- ---------- --------- ---------
Volatility 31% 29% 28%
Risk-free Interest Rate 5.5% 4.5% 5.9%
Expected Life of Options 3.6 years 3.8 years 5.2 years
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plan
The majority of the Company's full-time U.S. employees are eligible to
participate in Thermo Electron's 401(k) savings plan. Contributions to the plan
are made by both the employee and the Company. Company contributions are based
on the level of employee contributions. For this plan, the Company contributed
and charged to expense $5.5 million, $4.2 million, and $4.7 million in 1999,
1998, and 1997, respectively.
Defined Benefit Pension Plans
Two of the Company's German subsidiaries and one of its U.K. subsidiaries
have defined benefit pension plans covering substantially all full-time
employees at the respective subsidiaries. One of the German subsidiaries' plans
is unfunded. Net periodic benefit costs for the plans in aggregate included the
following components:
(In thousands) 1999 1998 1997
- ------------------------------------------------------------------------------- -------- --------- -------
Service Cost $ 2,639 $ 2,859 $ 3,104
Interest Cost on Benefit Obligation 3,899 4,414 4,188
Expected Return on Plan Assets (5,264) (6,616) (6,406)
Recognized Net Actuarial Gain (34) (39) (45)
Amortization of Unrecognized Gain (23) (50) (67)
Amortization of Unrecognized Initial Obligation 41 43 44
------- -------- -------
$ 1,258 $ 611 $ 818
======= ======== =======
22
4. Employee Benefit Plans (continued)
The activity under the Company's defined benefit plans is as follows:
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Change in Benefit Obligation:
Benefit obligation, beginning of year $ 77,013 $ 62,584
Service cost 2,639 2,859
Interest cost 3,899 4,414
Benefits paid (1,876) (1,794)
Actuarial (gain) loss (5,288) 6,957
Currency translation (4,625) 1,993
-------- --------
Benefit obligation, end of year 71,762 77,013
-------- --------
Change in Plan Assets:
Fair value of plan assets, beginning of year 79,893 68,676
Company contributions 186 186
Benefits paid (1,482) (1,391)
Actual return on plan assets 13,981 11,144
Currency translation (3,185) 1,278
------- -------
Fair value of plan assets, end of year 89,393 79,893
------- -------
Funded Status 17,631 2,880
Unrecognized Net Actuarial Gain (14,595) (967)
Unrecognized Initial Obligation 155 226
-------- --------
Prepaid Pension Costs $ 3,191 $ 2,139
======== ========
The aggregate projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the pension plans with accumulated
benefit obligations in excess of plan assets were $17.7 million, $14.6 million,
and $5.2 million, respectively, at year-end 1999 and $19.1 million, $16.4
million, and $5.7 million, respectively, at year-end 1998.
The weighted average rates used to determine the net periodic pension
costs were as follows:
1999 1998 1997
- ------------------------------------------------------------------------ ---------- ----------- ----------
Discount Rate 5.1% 7.0% 8.2%
Rate of Increase in Salary Levels 4.4% 6.3% 7.7%
Expected Long-term Rate of Return on Assets 6.9% 9.7% 9.7%
Other Retirement Plans
Certain of the Company's subsidiaries offer other retirement plans in lieu
of participation in the Thermo Electron 401(k) savings plan. Company
contributions to these plans are based on formulas determined by the Company.
For these plans, the Company contributed and charged to expense $7.2 million,
$6.4 million, and $5.3 million in 1999, 1998, and 1997, respectively.
23
5. Income Taxes
The components of income before provision for income taxes, minority
interest, and extraordinary item are as follows:
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------- ---------- --------- ---------
Domestic $ 101,347 $119,584 $ 186,133
Foreign 78,336 74,332 61,884
--------- -------- ---------
$ 179,683 $193,916 $ 248,017
========= ======== =========
The components of the provision for income taxes are as follows:
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------- ---------- --------- ---------
Currently Payable:
Federal $ 37,310 $35,085 $ 47,121
State 7,302 6,263 8,154
Foreign 35,259 30,775 26,242
-------- ------- --------
79,871 72,123 81,517
-------- ------- --------
Net Deferred (Prepaid):
Federal (4,322) 2,721 3,860
State 2 304 819
Foreign (114) (474) 1,917
-------- ------- --------
(4,434) 2,551 6,596
-------- ------- --------
$ 75,437 $74,674 $ 88,113
======== ======= ========
The Company and its majority-owned subsidiaries receive a tax deduction
upon exercise of nonqualified stock options by employees for the difference
between the exercise price and the market price of the underlying common stock
on the date of exercise. The provision for income taxes that is currently
payable does not reflect $1.1 million, $1.5 million, and $1.6 million of such
benefits of the Company and its majority-owned subsidiaries that have been
allocated to capital in excess of par value, directly or through the effect of
majority-owned subsidiaries' equity transactions, in 1999, 1998, and 1997,
respectively. The provision for income taxes that is currently payable does not
reflect $3.5 million, $4.4 million, and $2.4 million of tax benefits used to
reduce cost in excess of net assets of acquired companies in 1999, 1998, and
1997, respectively.
24
5. Income Taxes (continued)
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income before provision for income taxes, minority interest,
and extraordinary item due to the following:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Provision for Income Taxes at Statutory Rate $ 62,889 $ 67,871 $ 86,806
Increases (Decreases) Resulting From:
Gain on issuance of stock by subsidiaries - (6,504) (16,241)
Foreign tax rate and tax loss differential 6,330 4,285 6,500
State income taxes, net of federal tax 4,747 4,269 5,832
Amortization of cost in excess of net assets of acquired 5,502 5,344 4,492
companies
Tax benefit of foreign sales corporation (3,385) (2,606) (2,517)
Research and development tax credit claims from prior years (1,740) - -
Other, net 1,094 2,015 3,241
-------- -------- --------
$ 75,437 $ 74,674 $ 88,113
======== ======== ========
Deferred tax asset and deferred income taxes in the accompanying balance
sheet consist of the following:
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Deferred Tax Asset:
Tax loss carryforwards $ 39,220 $ 51,563
Inventory basis difference 25,600 22,557
Reserves and accruals 25,104 27,192
Accrued compensation 8,518 7,733
Allowance for doubtful accounts 4,251 4,358
-------- --------
102,693 113,403
Less: Valuation allowance 39,220 51,563
-------- --------
$ 63,473 $ 61,840
======== ========
Deferred Income Taxes:
Depreciation $ 9,889 $ 17,631
Intangible assets (4,392) 7,840
Other, net 16,537 3,807
-------- --------
$ 22,034 $ 29,278
======== ========
The valuation allowance relates to uncertainty surrounding the realization
of certain tax assets, including $116.2 million of foreign tax loss
carryforwards and $6.1 million of certain federal tax loss carryforwards in
1999, the realization of which is limited to the future income of certain
subsidiaries. Of the $116.2 million of foreign tax loss
25
5. Income Taxes (continued)
carryforwards, approximately $60 million expire from 2000 through 2009 and the
remainder do not expire. The federal tax loss carryforwards expire from 2000
through 2012. The decrease in the valuation allowance results primarily from the
expiration of acquired foreign net operating loss carryforwards. Any tax benefit
resulting from the use of acquired loss carryforwards is used to reduce cost in
excess of net assets of acquired companies.
The Company has not recognized a deferred tax liability for the difference
between the book basis and tax basis of its investment in the common stock of
its domestic subsidiaries (such difference relates primarily to unremitted
earnings and gains on issuance of stock by subsidiaries) because the Company
does not expect this basis difference to become subject to tax at the parent
level. The Company believes it can implement certain tax strategies to recover
its investment in its domestic subsidiaries tax-free.
A provision has not been made for U.S. or additional foreign taxes on
approximately $391 million of undistributed earnings of foreign subsidiaries
that could be subject to taxation if remitted to the U.S. because the Company
plans to keep these amounts permanently reinvested overseas.
6. Short- and Long-term Obligations
Short-term Obligations
Short-term obligations and current maturities of long-term obligations in
the accompanying balance sheet includes $94.1 million and $59.4 million of bank
borrowings at several of the Company's foreign subsidiaries at year-end 1999 and
1998, respectively, including borrowings under an arrangement with Barclays Bank
(Note 1). The weighted average interest rate for these borrowings was 4.0% and
3.4% at year-end 1999 and 1998, respectively.
At year-end 1999, the Company had borrowings of $36.2 million under a
domestic cash management arrangement with Thermo Electron (Note 1). The
borrowings bear interest at a rate equal to the 30-day Dealer Commercial Paper
Rate plus 150 basis points, set at the beginning of each month, provided such
rate shall be reduced to the Dealer Commercial Paper Rate plus 50 basis points
to the extent of any funds invested by the Company's majority-owned subsidiaries
in this arrangement. The weighted average interest rate for these borrowings was
6.0 % at year-end 1999.
At year-end 1999, the Company had borrowings of $24.2 million under
arrangements with a wholly owned subsidiary of Thermo Electron (Note 1). The
weighted average interest rate for these borrowings was 4.0% at year-end 1999.
At year-end 1998, certain of the Company's Netherlands-based subsidiaries
had borrowings of $6.1 million under an arrangement with a wholly owned
subsidiary of Thermo Electron (Note 1). The weighted average interest rate for
these borrowings was 4.5% at year-end 1998.
Unused lines of credit, including amounts available under arrangements
with a wholly owned subsidiary of Thermo Electron, were $147.9 million at
year-end 1999. Borrowings under lines of credit are generally guaranteed by
Thermo Electron.
In addition, in February 1999, to finance the acquisition of
Spectra-Physics, the Company borrowed $200.0 million from Thermo Electron
pursuant to a promissory note due August 1999 (Note 3). In August 1999, the
Company repaid $50.0 million of the principal amount outstanding under the
promissory note and refinanced the balance of the note through borrowings from
Thermo Electron due February 2000. In February 2000, Thermo Electron extended
the maturity of the promissory note to August 2000. The borrowings bear interest
at a rate equal to the 30-day Dealer Commercial Paper Rate plus 150 basis
points, set at the beginning of each month, provided such rate shall be reduced
to the Dealer Commercial Paper Rate plus 50 basis points to the extent of any
funds invested by the Company's majority-owned subsidiaries in the domestic cash
management arrangement with Thermo Electron. The interest rate for the
promissory note was 6.0% at year-end 1999.
26
6. Short- and Long-term Obligations (continued)
Long-term Obligations
(In thousands except per share amounts) 1999 1998
- -------------------------------------------------------------------------------------- ---------- --------
3 3/4% Senior Convertible Note to Parent Company, Due 2000, $ 140,000 $140,000
Convertible at $13.55 per Share
3 3/4% Senior Convertible Debentures, Due 2000, Convertible at - 14,542
$13.55 per Share
4 1/2% Senior Convertible Debentures, Due 2003, Convertible at 172,500 172,500
$34.46 per Share
4% Subordinated Convertible Debentures, Due 2005, Convertible at 250,000 250,000
$35.65 per Share (a)
5% Subordinated Convertible Debentures, Due 2000, Convertible Into Shares 61,031 67,931
of ThermoQuest at $16.50 per Share
5% Subordinated Convertible Debentures, Due 2000, Convertible Into Shares of 68,985 71,505
Thermo Optek at $13.94 per Share
10.23% Mortgage Loan Secured by Property with a Net Book Value of $14,601, 6,187 7,319
Payable in Monthly Installments with Final Payments in 2004
Promissory Notes to Parent Company from ThermoSpectra, Due 1999 (b) - 60,000
Promissory Note to Parent Company from Thermo Vision, Due 2000 (b) 3,800 3,800
Other 35,981 21,179
--------- --------
738,484 808,776
Less: Current Maturities of Long-term Obligations 141,990 65,333
--------- --------
$ 596,494 $743,443
========= ========
(a) The Company used a portion of the proceeds from the 4% subordinated
convertible debentures to repay a $105.0 million promissory note to Thermo
Electron.
(b) Bears interest at the 90-day Commercial Paper Composite Rate plus 25 basis
points, set at the beginning of each quarter. The interest rate for the
notes outstanding at year-end 1999 and 1998 was 5.55% and 5.36%,
respectively.
The senior convertible debentures are guaranteed on a senior basis by
Thermo Electron. The 4% subordinated convertible debentures of the Company and
the 5% subordinated convertible debentures of ThermoQuest and Thermo Optek are
guaranteed on a subordinated basis by Thermo Electron. The Company has agreed to
reimburse Thermo Electron in the event Thermo Electron is required to make a
payment under the guarantee. The terms of the debentures of ThermoQuest and
Thermo Optek will require repayment of the obligations upon completion of the
transactions described in Note 18.
On February 15, 2000, the Company's $140.0 million principal amount 3 3/4%
senior convertible note was converted by Thermo Electron into 10,334,620 shares
of Company common stock. Accordingly, the note has been classified as noncurrent
at year-end 1999 (Note 18).
The annual requirements for long-term obligations as of January 1, 2000,
excluding the $140.0 million note converted to equity by Thermo Electron in
February 2000, are $142.0 million in 2000; $7.2 million in 2001; $7.8 million in
2002; $179.8 million 2003; $0.7 million in 2004; and $261.0 million in 2005 and
thereafter. Total future requirements of long-term obligations are $598.5
million.
27
6. Short- and Long-term Obligations (continued)
During 1999, 1998, and 1997, convertible obligations of $9.3 million, $7.6
million, and $38.9 million, respectively, were converted into common stock of
the Company or its subsidiaries.
During 1999, ThermoQuest and Thermo Optek repurchased an aggregate $9.4
million principal amount of their subordinated convertible debentures for $9.2
million in cash, resulting in a nominal gain. During 1998, ThermoQuest and
Thermo Optek repurchased an aggregate $14.3 million principal amount of their
subordinated convertible debentures for $13.3 million in cash, resulting in an
extraordinary gain of $0.5 million, net of taxes and minority interest of $0.4
million. The extraordinary gain recorded by the Company did not affect the
reported amounts of 1998 basic and diluted earnings per share.
See Note 12 for the fair value information pertaining to the Company's
long-term obligations.
7. Commitments and Contingencies
Operating Leases
The Company leases portions of its office and operating facilities under
various operating lease arrangements. The accompanying statement of income
includes expenses from operating leases of $40.9 million, $32.4 million, and
$28.2 million in 1999, 1998, and 1997, respectively. Future minimum payments due
under noncancelable operating leases at January 1, 2000, are $28.0 million in
2000; $23.5 million in 2001; $19.5 million in 2002; $15.5 million in 2003; $12.1
million in 2004; and $19.5 million in 2005 and thereafter. Total future minimum
lease payments are $118.1 million.
Contingencies
ThermoQuest's Finnigan Corporation subsidiary has filed complaints against
Bruker-Franzen Analytik GmbH and its U.S. affiliate, and Hewlett-Packard
Company, for alleged violation of two U.S. patents owned by Finnigan pertaining
to methods used in ion-trap mass spectrometers. The complaint was filed in the
U.S. District Court for the District of Massachusetts. Finnigan has asked for
damages to compensate for the infringement, and for injunctions against further
infringement.
The District Court action was stayed pending completion of a parallel
investigation by the United States International Trade Commission (ITC). In
April 1998, the ITC determined that the defendants did not engage in unfair
practices in U.S. import trade with respect to the Finnigan patents, and that
the Finnigan patents are invalid and/or not infringed. Finnigan appealed the
ITC's determination with respect to one of its patents to the United States
Court of Appeals for the Federal Circuit (CAFC). The CAFC issued its decision in
June 1999 affirming the ITC's determination of noninfringement but reversing the
ITC's determination of invalidity.
Bruker presented counterclaims in the ITC investigation. The counterclaims
were removed to the District Court in Massachusetts and also stayed. These
claims allege that the Finnigan patents are invalid and unenforceable and are
not infringed by the mass spectrometers manufactured by Bruker. They also allege
that Finnigan has violated U.S. and Massachusetts antitrust laws and engaged in
unfair competition by attempting to maintain a monopoly position and restrain
trade through enforcement of allegedly fraudulently obtained patents. Bruker has
asked for judgment consistent with its counterclaims, and for three times the
antitrust damages (including attorneys' fees) it has sustained.
The stays on both cases in the District Court in Massachusetts have been
lifted and the cases are proceeding in the District Court.
In February 1999, Finnigan filed complaints against Bruker-Franzen
Analytik GmbH and Hewlett-Packard GmbH, in District Court in Dusseldorf,
Germany, for violation of four German patents owned by Finnigan. The patents
pertain to methods used in ion-trap mass spectrometers. Bruker and
Hewlett-Packard have challenged the validity of these patents in Federal Patent
Court in Munich. Bruker has filed a complaint against Finnigan in District Court
in Dusseldorf for alleged violation of two German patents owned by Bruker.
28
7. Commitments and Contingencies (continued)
Although the Company intends to vigorously defend this matter, there can
be no assurance as to its outcome. In the opinion of management, while an
unfavorable resolution of this matter could materially affect the Company's
results of operations and cash flows in a particular quarter or year, any such
resolution would not have a material adverse effect on the Company's financial
position.
The Company is also contingently liable with respect to certain other
lawsuits and matters which, in the opinion of management, will not have a
material effect upon the financial position of the Company or its results of
operations.
Letters of Credit
Outstanding letters of credit, principally related to performance bonds,
totaled $71.8 million at January 1, 2000.
8. Related-party Transactions
Corporate Services Agreement
The Company and Thermo Electron have a corporate services agreement under
which Thermo Electron's corporate staff provides certain administrative
services, including certain legal advice and services, risk management, certain
employee benefit administration, tax advice and preparation of tax returns,
centralized cash management, and certain financial and other services, for which
the Company pays Thermo Electron annually an amount equal to 0.8% of the
Company's revenues, excluding the revenues of SPLI. SPLI, acquired indirectly by
the Company as part of its acquisition of Spectra-Physics in February 1999, does
not participate in the corporate services agreement and, as a result, the
Company is not charged the fee based on SPLI's revenues. The Company paid an
amount equal to 0.8% and 1.0% of the Company's revenues in 1998 and 1997,
respectively. For these services, the Company was charged $15.7 million, $13.3
million, and $15.9 million in 1999, 1998, and 1997, respectively. The fee is
reviewed and adjusted annually by mutual agreement of the parties. Management
believes that the service fee charged by Thermo Electron is reasonable and that
such fees are representative of the expenses the Company would have incurred on
a stand-alone basis. The corporate services agreement is renewed annually but
can be terminated upon 30 days' prior notice by the Company or upon the
Company's withdrawal from the Thermo Electron Corporate Charter (the Thermo
Electron Corporate Charter defines the relationship among Thermo Electron and
its majority-owned subsidiaries). For additional items such as employee benefit
plans, insurance coverage, and other identifiable costs, Thermo Electron charges
the Company based upon costs attributable to the Company.
Cash Management
The Company invests excess cash and borrows short-term funds under
arrangements with Thermo Electron as discussed in Note 1.
Short- and Long-term Obligations
See Notes 6 and 18 for short- and long-term obligations of the Company
held by Thermo Electron.
9. Common Stock
At January 1, 2000, the Company had reserved 30,350,000 unissued shares of
its common stock for possible issuance under stock-based compensation plans and
for issuance upon possible conversion of the Company's convertible obligations.
29
10. Issuance of Stock by Subsidiaries
Gain on issuance of stock by subsidiaries in the accompanying statement of
income results from the following transactions:
1998
Sale of 2,450,000 shares of Thermo BioAnalysis common stock in a public
offering at $18.125 per share for net proceeds of $41.5 million resulted in a
gain of $5.9 million. In addition, in the same offering, Thermo BioAnalysis sold
1,000,000 shares of its common stock to Thermo Electron for proceeds, net of
commissions, of $17.5 million, for which no gain was recognized.
Sale of 3,300,000 shares of ONIX Systems common stock in an initial public
offering at $14.50 per share for net proceeds of $43.7 million resulted in a
gain of $10.0 million.
Conversion of $1.8 million of Thermo Optek 5% subordinated convertible
debentures, convertible at $13.94 per share, into 127,646 shares of Thermo Optek
common stock resulted in a gain of $0.9 million.
Conversion of $4.0 million of ThermoQuest 5% subordinated convertible
debentures, convertible at $16.50 per share, into 239,393 shares of ThermoQuest
common stock resulted in a gain of $1.8 million.
1997
Sale of 1,768,500 shares of ThermoQuest common stock at $15.00 per share
for net proceeds of $24.8 million and conversion of $15.7 million of ThermoQuest
5% subordinated convertible debentures, convertible at $16.50 per share, into
949,027 shares of ThermoQuest common stock resulted in gains of $12.0 million
and $7.8 million, respectively.
Initial public offering of 2,300,000 shares of Metrika Systems common
stock at $15.50 per share for net proceeds of $32.5 million resulted in a gain
of $13.2 million.
Private placements of 1,639,640 shares of ONIX Systems common stock at
$14.25 per share for net proceeds of $22.0 million resulted in a gain of $7.9
million.
Conversion of $13.1 million and $3.2 million of Thermo Optek 5%
subordinated convertible debentures, convertible at $14.85 per share and $13.94
per share, respectively, into 1,111,316 shares of Thermo Optek common stock
resulted in a gain of $3.2 million.
Initial public offering of 1,139,491 shares of Thermo Vision common stock
at $7.50 per share for net proceeds of $7.0 million resulted in a gain of $2.3
million.
The Company's ownership percentages of its majority-owned subsidiaries at
year end were as follows:
1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
ThermoQuest 90% 89% 88%
Thermo Optek 93% 93% 91%
Thermo BioAnalysis 67% 62% 70%
Metrika Systems 70% 67% 60%
ONIX Systems 80% 80% 87%
Thermo Vision (a) 78% 78% 78%
ThermoSpectra (b) 90% 82% 77%
Spectra-Physics Lasers, Inc. (c) 80% - -
(a) In January 2000, Thermo Vision was taken private (Note 17).
(b) Minority interest in ThermoSpectra in 1999 is held by Thermo Electron (Note 17).
(c) Acquired indirectly as part of the acquisition of Spectra-Physics AB (Note 3).
30
11. Restructuring and Other Unusual Costs (Income), Net
In response to a downturn in business at many of its operating units, the
Company and its subsidiaries recorded restructuring and related costs and other
unusual costs of $31.8 million in 1998, including restructuring costs of $21.6
million, inventory write-downs of $8.6 million, and other unusual costs of $1.6
million, discussed below. The charges occurred as a result of an economic crisis
in Asia; a related downturn in the semiconductor industry; and depressed prices
in the oil, petrochemical, and natural resources industries.
Restructuring costs of $21.6 million, which were accounted for in
accordance with EITF 94-3, consist of $15.7 million related to severance costs
for approximately 729 employees across all functions, $3.7 million related
primarily to facility-closing costs, $0.8 million for the write-off of cost in
excess of net assets of acquired companies for a business that was closed, $1.0
million for miscellaneous items, including costs for terminating certain
contracts and agency relationships, and $0.4 million related to the loss on the
sale of a division. The charge for facility-closing costs includes $1.7 million
for lease payments on abandoned facilities, primarily for manufacturing
facilities in the United Kingdom with lease obligations through 2000, and $2.0
million to write-down related fixed assets. These actions were undertaken to
reduce costs as a response to the lower volume of business at the operating
units, and occurred across the Company's principal businesses. In addition, the
Company recorded $8.6 million of inventory write-downs, included in cost of
revenues in the accompanying statement of income, related to the discontinuation
of certain product lines and increased excess and obsolescence reserves
associated with lower product demand.
During 1998, the Company had terminated approximately 500 employees and
had expended $7.4 million of the established reserves. During 1999, the Company
terminated 216 additional employees and recorded additional restructuring costs
of $3.4 million. The restructuring costs consist of $1.5 million of costs
related to severance for 32 employees, $1.3 million for facility-closing costs,
$0.1 million for the write-off of fixed assets no longer of use, and $0.7
million of other restructuring costs. In addition, the Company determined that
38 employees would not be terminated and also settled certain severance matters
for less than what had been accrued. Accordingly, the Company reversed an
aggregate $2.3 million of previously established restructuring reserves. In
connection with these actions, the Company expects to incur additional
restructuring costs totaling $0.1 million in 2000, which are not permitted as
charges until incurred pursuant to the requirements of EITF 94-3. Accrued
restructuring costs are included in other accrued expenses in the accompanying
balance sheet.
In connection with its acquisition of Spectra-Physics (Note 3), the
Company recorded an adjustment to cost of revenues of $6.7 million relating to
the sale of inventories that were revalued on the date of acquisition. Of this
amount, $3.5 million was recorded by the Measurement and Control segment and
$3.2 million by the Optical Technologies segment.
In addition, the Company's Measurement and Control segment recorded
unusual charges of $11.1 million relating to the Company's equity investment in
FLIR, which was acquired in connection with the acquisition of Spectra-Physics
(Note 3). This charge was recorded to equity in losses of unconsolidated
subsidiaries in the accompanying statement of income.
Prior to its acquisition by the Company, SPLI elected early adoption of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
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 the Company's results of operations. During
1999, the Company recorded a loss on foreign exchange contracts entered into by
SPLI of $2.8 million, which is included in other expense in the accompanying
statement of income. The Company's results may continue to be affected by such
transactions during 2000.
31
11. Restructuring and Other Unusual Costs (Income), Net (continued)
In December 1996, five former employees of the Company's Epsilon
Industrial, Inc. subsidiary sought damages in an arbitration proceeding for
alleged breaches of agreements entered into with such employees prior to
Epsilon's acquisition by the Company. The arbitrators rendered a decision with
respect to such claims during 1998, and the Company recorded $1.6 million of
unusual costs related to the resolution of this matter in 1998.
Unusual income, net, in 1997 reflects a gain of $2.2 million recognized by
ThermoSpectra on the sale of its Linac business for $5.0 million in cash and
$2.1 million in equity securities. In addition, ThermoSpectra recorded
restructuring costs of $0.9 million, primarily related to severance costs for 40
employees terminated during the year.
The Company recorded restructuring and other unusual costs, net, as
follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
1997 Restructuring Plan
Costs incurred in 1997 (a) $ 953 $ - $ - $ 953
1997 Usage (709) - - (709)
------- ------- ------- -------
Balance at January 3, 1998 (b) 244 - - 244
1998 Usage (244) - - (244)
------- ------- ------- -------
Balance at January 2, 1999 and
January 1, 2000 $ - $ - $ - $ -
======= ======= ======= =======
1998 Restructuring Plan
Costs incurred in 1998 (c) $15,700 $ 1,656 $ 1,045 $18,401
1998 Usage (6,630) (418) (390) (7,438)
Currency translation 211 24 27 262
------- ------- ------- -------
Balance at January 2, 1999 (d) 9,281 1,262 682 11,225
Costs incurred in 1999 (e) 1,486 1,280 652 3,418
Reversal of reserves (f) (2,101) (217) - (2,318)
1999 Usage (7,205) (2,046) (743) (9,994)
Currency translation (568) (55) (26) (649)
------- ------- ------- -------
Balance at January 1, 2000 (g) $ 893 $ 224 $ 565 $ 1,682
======= ======= ======= =======
(a) Excludes a $2.2 million gain on the sale of a business in the Optical Technologies segment.
(b) The balance of accrued severance at year-end 1997 represents amounts for planned severances in the
Optical Technologies segment. The severances occurred in 1998.
(c) Reflects restructuring and other unusual costs of $11.3 million, $4.8
million, and $2.3 million in the Optical Technologies, Life Sciences, and
Measurement and Control segments, respectively. Excludes noncash charges of
$1.1 million, $1.1 million, and $1.0 million in the Optical Technologies,
Life Sciences, and Measurement and Control segments, respectively, and $1.6
million of cash costs related to an arbitration matter, which was paid in
1998.
(d) The balance of accrued severance at year-end 1998 represents amounts for
planned severances principally at the Optical Technologies and Life Sciences
segments, substantially all of which occurred in 1999. The balance of
accrued abandoned facility costs represents lease costs that will be paid
through 2000. The balance of accrued other represents exit costs at the
Optical Technologies segment, for costs that will be paid through 2000.
32
11. Restructuring and Other Unusual Costs (Income), Net (continued)
(e) Reflects restructuring costs of $3.1 million and $0.3 million in the Optical
Technologies and Measurement and Control segments, respectively. Excludes a
noncash asset write-down of $0.1 million in the Measurement and Control
segment.
(f) Reflects reversals of previously recorded restructuring costs of $1.4
million, $0.6 million, and $0.3 million in the Optical Technologies,
Measurement and Control, and Life Sciences segments, respectively.
(g) The balance of accrued severance at year-end 1999 represents severance
obligations, principally at the Optical Technologies and Measurement and
Control segments. These payments will occur primarily through 2000. The
balance of accrued abandoned facility costs represent lease costs that will
be paid during 2000. The balance of accrued other represents exit costs at
the Optical Technologies segment, expected to be paid during 2000.
12. Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, advance to affiliate, accounts receivable, long-term
available-for-sale investments, short-term obligations and current maturities of
long-term obligations, accounts payable, due to parent company and affiliated
companies, long-term obligations, and forward foreign exchange contracts. The
carrying amounts of these financial instruments, with the exception of
available-for-sale investments, current maturities of convertible obligations,
long-term obligations, and forward foreign exchange contracts, approximate fair
value due to their short-term nature.
Available-for-sale investments are carried at fair value in the
accompanying balance sheet. The fair values were determined based on quoted
market prices (Note 2).
The carrying amounts and fair value of the Company's long-term obligations
and off-balance-sheet financial instruments are as follows:
1999 1998
------------------- --------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- -------------------------------------------------------------- ---------- ---------- ---------- ----------
Current Maturities of Convertible Obligations $130,016 $126,879 $ - $ -
======== ======== ======== =========
Long-term Obligations:
Convertible obligations $562,500 $452,388 $716,478 $ 668,978
Other 33,994 35,614 26,965 29,440
-------- -------- -------- ---------
$596,494 $488,002 $743,443 $ 698,418
======== ======== ======== =========
Off-balance-sheet Financial Instruments:
Forward foreign exchange contracts payable $ 400 $ 828
The fair value of long-term obligations was determined based on quoted
market prices and on borrowing rates available to the Company at the respective
year-ends.
The notional amounts of forward foreign exchange contracts outstanding,
excluding the contracts at SPLI discussed below, totaled $76.2 million and $28.4
million at year-end 1999 and 1998, respectively. The fair value of such
contracts is the estimated amount that the Company would receive or pay if it
were to terminate the contracts,
33
12. Fair Value of Financial Instruments (continued)
taking into account the change in foreign exchange rates. The forward foreign
exchange contracts of SPLI that are not hedges of firm commitments are recorded
in the balance sheet at fair value. The fair value of these contracts was $2.0
million at year-end 1999 and is included in other deferred items in the
accompanying balance sheet (Note 11).
13. Business Segment and Geographical Information
The Company's businesses operate in three instrumentation segments: Life
Sciences, Optical Technologies, and Measurement and Control. The Life Sciences
segment, which includes Thermo BioAnalysis (excluding its Eberline Heath Physics
business for periods prior to July 1998, when Thermo BioAnalysis contributed
this business to a joint venture in the Measurement and Control segment),
ThermoQuest, and certain wholly owned subsidiaries, develops and manufactures
systems for drug discovery and medical diagnosis and for chemical analysis at
ultratrace levels. The Optical Technologies segment, which includes Thermo
Optek, ThermoSpectra, Thermo Vision, SPLI, and certain wholly owned
subsidiaries, develops and manufactures optical and energy-based analytical
systems; high-power laser systems; and industrial imaging, inspection, and
measurement instruments. The Measurement and Control segment, which generally
includes ONIX Systems, Metrika Systems, and certain of the Company's wholly
owned subsidiaries, including businesses of Spectra-Physics AB, acquired in
February 1999, develops and manufactures on-line systems for industrial
processes and quality control, field-measurement instruments, and real-time
sensors.
34
13. Business Segment and Geographical Information (continued)
(In thousands) 1999 1998 1997
- ----------------------------------------------------------------------- ----------- ----------- ----------
Business Segment Information
Revenues:
Life Sciences $ 715,665 $ 652,221 $ 612,011
Optical Technologies 802,008 677,079 715,296
Measurement and Control 585,489 342,435 283,429
Intersegment sales eliminations (a) (9,625) (11,754) (18,422)
---------- ---------- ----------
$2,093,537 $1,659,981 $1,592,314
========== ========== ==========
Income Before Provision for Income Taxes, Minority Interest,
and Extraordinary Item:
Life Sciences (b) $ 103,195 $ 85,119 $ 89,587
Optical Technologies (c) 79,393 70,013 93,067
Measurement and Control (d) 38,695 31,414 37,192
Corporate (e) (3,319) (1,126) (592)
---------- ---------- ----------
Total operating income 217,964 185,420 219,254
Interest and other income (expense), net (38,281) 8,496 28,763
---------- ---------- ----------
$ 179,683 $ 193,916 $ 248,017
========== ========== ==========
Total Assets:
Life Sciences $1,080,857 $1,082,438 $ 941,342
Optical Technologies 1,069,318 865,472 888,880
Measurement and Control 726,983 424,318 372,238
Corporate (f) 8,200 193,546 148,693
---------- ---------- ----------
$2,885,358 $2,565,774 $2,351,153
========== ========== ==========
Depreciation and Amortization:
Life Sciences $ 28,504 $ 26,863 $ 23,982
Optical Technologies 32,867 26,414 26,292
Measurement and Control 19,839 11,733 7,686
Corporate 34 68 91
---------- ---------- ----------
$ 81,244 $ 65,078 $ 58,051
========== ========== ==========
Capital Expenditures:
Life Sciences $ 13,350 $ 14,691 $ 9,520
Optical Technologies 28,171 12,718 11,051
Measurement and Control 10,019 3,473 8,594
Corporate 137 20 33
---------- ---------- ----------
$ 51,677 $ 30,902 $ 29,198
========== ========== ==========
35
13. Business Segment and Geographical Information (continued)
(In thousands) 1999 1998 1997
- ----------------------------------------------------------------------- ----------- ----------- ----------
Geographical Information
Revenues (g):
United States $1,379,405 $1,067,995 $1,010,964
England 300,546 281,431 296,570
Germany 217,969 176,584 172,696
Other 549,800 400,035 380,179
Transfers among geographical areas (a) (354,183) (266,064) (268,095)
---------- ---------- ----------
$2,093,537 $1,659,981 $1,592,314
========== =========== ==========
Long-lived Assets (h):
United States $ 198,004 $ 145,981 $ 146,978
Sweden 66,339 93 754
Germany 26,057 24,197 23,264
England 25,841 19,814 23,444
Other 43,559 34,849 29,388
---------- --------- ----------
$ 359,800 $ 224,934 $ 223,828
========== ========= ==========
Export Revenues Included in United States Revenues Above (i) $ 391,886 $ 345,691 $ 334,853
========== ========= ==========
(a) Intersegment sales and transfers among geographical areas are accounted for
at prices that are representative of transactions with unaffiliated parties.
(b) Includes reversal of previously recorded restructuring costs of $0.3 million
in 1999 and restructuring costs of $5.9 million in 1998. Includes charges of
$2.8 million in 1998 for inventory write-downs and $2.9 million in 1997 for
the sale of inventories revalued in connection with an acquisition.
(c) Includes restructuring costs and other unusual costs (income), net, of $1.7
million, $12.4 million, and $(1.3) million in 1999, 1998, and 1997,
respectively. Includes charges of $3.2 million and $0.7 million in 1999 and
1997, respectively, for the sale of inventories revalued in connection with
acquisitions. Includes charges of $5.3 million and $0.8 million in 1998 and
1997, respectively, for inventory write-downs.
(d) Includes a net reversal of previously recorded restructuring costs of $0.2
million in 1999 and restructuring and other unusual costs of $4.9 million in
1998. Includes charges of $3.5 million in 1999 for the sale of inventories
revalued in connection with an acquisition and $0.5 million of inventory
write-downs.
(e) Primarily corporate general and administrative expenses.
(f) Primarily cash, cash equivalents, and available-for-sale investments.
(g) Revenues are attributed to countries based on selling location.
(h) Includes property, plant, and equipment, net and other long-term tangible assets.
(i) In general, export revenues are denominated in U.S. dollars.
36
14. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including foreign
currency translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments.
Accumulated other comprehensive items in the accompanying balance sheet
consists of the following:
(In thousands) 1999 1998
- ------------------------------------------------------------------------------------- ---------- ---------
Cumulative Translation Adjustment $ (58,941) $ (10,340)
Net Unrealized Losses on Available-for-sale Investments (238) (874)
--------- ---------
$ (59,179) $ (11,214)
========= =========
Unrealized gains (losses) on available-for-sale investments, which is also
a component of other comprehensive items in the accompanying statement of
comprehensive income and shareholders' investment, includes the following:
(In thousands) 1999 1998 1997
- -------------------------------------------------------------------------- ---------- ---------- ---------
Unrealized Holding Gains (Losses) Arising During the Year (net $1,378 $ (454) $ 22
of income tax provision (benefit) of $714, $(219), and $(3))
Reclassification Adjustment for Gains Included in Net Income (742) (456) -
(net of income tax provision of $417 in 1999 and $257 in 1998) ------ ------ ------
Net Unrealized Gains (Losses) (net of income tax provision $ 636 $ (910) $ 22
(benefit) of $297, $(476), and $(3)) ====== ====== ======
37
15. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
(In thousands except per share amounts) 1999 1998 1997
- --------------------------------------------------------------------------- ---------- --------- ---------
Basic
Net Income $ 87,799 $104,084 $ 147,258
--------- -------- ---------
Weighted Average Shares 119,305 120,975 121,548
--------- -------- ---------
Basic Earnings per Share $ .74 $ .86 $ 1.21
========= ======== =========
Diluted
Net Income $ 87,799 $104,084 $ 147,258
Effect of:
Convertible obligations 3,300 3,423 8,089
Majority-owned subsidiaries' dilutive securities (3,079) (2,343) (2,839)
--------- -------- ---------
Income Available to Common Shareholders, as Adjusted $ 88,020 $105,164 $ 152,508
--------- -------- ---------
Weighted Average Shares 119,305 120,975 121,548
Effect of:
Convertible obligations 11,011 11,422 16,713
Stock options 202 706 1,154
--------- -------- ---------
Weighted Average Shares, as Adjusted 130,518 133,103 139,415
--------- -------- ---------
Diluted Earnings per Share $ .67 $ .79 $ 1.09
========= ======== =========
Options to purchase 2,329,000, 1,197,000, and 218,000 shares of common
stock were not included in the computation of diluted earnings per share for
fiscal 1999, 1998, and 1997, respectively, because their effect would have been
antidilutive due to the options' exercise prices exceeding the average market
price for the common stock. In addition, the computation of diluted earnings per
share excludes the effect of assuming the conversion of the Company's $250.0
million principal amount of 4% subordinated convertible debentures, convertible
at $35.65 per share, and $172.5 million principal amount of 4 1/2% subordinated
convertible debentures, convertible at $34.46 per share, for fiscal 1999 and
1998, respectively, because the effect would be antidilutive.
The extraordinary gain recorded by the Company in 1998 (Note 6) did not
affect the reported amounts of basic and diluted earnings per share.
38
16. Unaudited Quarterly Information
(In thousands except per share amounts)
1999 (a) First (b) Second Third Fourth
- ------------------------------------------------- -------------- ------------- ------------- -------------
Revenues $ 463,579 $535,634 $523,210 $ 571,114
Gross Profit 211,456 245,881 240,548 258,977
Net Income 18,885 12,549 23,670 32,695
Earnings per Share:
Basic .16 .11 .20 .28
Diluted .15 .10 .18 .25
1998 (c) First Second Third Fourth
- ------------------------------------------------- -------------- ------------- ------------- -------------
Revenues $ 407,943 $395,392 $407,010 $ 449,636
Gross Profit 193,734 190,717 176,776 209,179
Income Before Extraordinary Item 37,855 37,596 2,882 25,232
Net Income (d) 37,855 37,596 3,077 25,556
Earnings per Share (d):
Basic .31 .31 .03 .21
Diluted .28 .28 .03 .20
(a) Reflects restructuring and other unusual charges (income) of $5.9 million,
$13.7 million, $2.8 million, and $(0.7) million in the first, second, third,
and fourth quarters, respectively.
(b) Reflects the February 1999 acquisition of Spectra-Physics.
(c) Reflects restructuring and other unusual charges (income) of $1.4 million,
$30.5 million, and $(0.1) million in the second, third, and fourth quarters,
respectively.
(d) Reflects an extraordinary item of $0.2 million and $0.3 million in the third
quarter and fourth quarter, respectively, net of taxes and minority
interest. The extraordinary item increased diluted earnings per share by
$.01 in the fourth quarter.
17. Acquisition of ThermoSpectra and Thermo Vision Minority Interests
The Company's ThermoSpectra and Thermo Vision subsidiaries announced in
May and July 1999, respectively, that they had entered into definitive
agreements and plans of merger with the Company pursuant to which the Company
would acquire all of the outstanding shares of common stock of ThermoSpectra and
Thermo Vision held by the public shareholders in exchange for $16.00 per share
and $7.00 per share in cash, respectively. The mergers of ThermoSpectra and
Thermo Vision were completed in December 1999 and January 2000, respectively,
and their common stock has ceased to be publicly traded.
18. Subsequent Events
Proposed Reorganization
In January 2000, the Company announced that it plans to take private
Thermo Optek, ThermoQuest, Thermo BioAnalysis, Metrika Systems, and ONIX
Systems. In addition, the Company announced that Thermo Electron plans to take
the Company private. These actions are part of a major reorganization plan under
which Thermo Electron will spin in, spin off, and sell various businesses to
focus solely on its core measurement and detection instruments business. Because
the Company currently owns more than 90% of the outstanding shares of Thermo
Optek and
39
18. Subsequent Events (continued)
ThermoQuest common stock, these two companies are expected to be spun in for
cash through a "short-form" merger, at $15.00 and $17.00 per share,
respectively. In addition, the Company will conduct cash tender offers of $28.00
per share for Thermo BioAnalysis, $9.00 per share for Metrika Systems, and $9.00
per share for ONIX Systems, in order to bring its own equity ownership,
collective with Thermo Electron, in each of these companies to at least 90%. If
the tender offers are successful, each of these companies would then be spun
into the Company through a short-form merger at the same cash prices as the
tender offers. The Company currently owns approximately 67.3%, 70.5%, and 80.3%
of the outstanding shares of Thermo BioAnalysis, Metrika Systems, and ONIX
Systems common stock, respectively, and Thermo Electron currently owns
approximately 20.8%, 8.5%, and 2.1% of the outstanding shares of Thermo
BioAnalysis, Metrika Systems, and ONIX Systems common stock, respectively.
Thermo Electron has announced that it plans to conduct an exchange offer
for any and all of the outstanding shares of the Company's common stock held by
minority shareholders. The Company's shareholders would receive 0.85 shares of
Thermo Electron common stock for each share of Company common stock held. Thermo
Electron, which currently owns approximately 88.8% of the outstanding shares of
the Company's common stock, will condition the exchange offer on receiving
acceptances from holders of enough shares so that, when combined with its
current share ownership, Thermo Electron's ownership reaches at least 90%. If
Thermo Electron achieves this 90%-ownership threshold, it will acquire all
remaining outstanding shares of the Company's common stock through a short-form
merger. In the short-form merger, minority shareholders who do not participate
in the exchange offer would also receive shares of Thermo Electron common stock
in exchange for their shares of the Company's common stock at the same ratio.
The short-form mergers for ThermoQuest and Thermo Optek, the tender
offers, and the exchange offer will require Securities and Exchange Commission
clearance of necessary filings. The exchange offer and subsequent short-form
merger of the Company with Thermo Electron would not require approval by the
Company's Board of Directors or shareholders.
The Company plans to conduct its subsidiary tender offers during the
second quarter of 2000. If the Company successfully obtains ownership,
collective with Thermo Electron, of at least 90% of the outstanding Thermo
BioAnalysis, Metrika Systems, and ONIX Systems shares, it expects to complete
these spin-ins by the end of the second quarter of 2000. The Company expects to
complete the Thermo Optek and ThermoQuest transactions by the end of the second
quarter of 2000. Thermo Electron plans to conduct the exchange offer for the
Company's common stock during the second quarter of 2000. If Thermo Electron
successfully obtains ownership of at least 90% of the outstanding shares of the
Company's common stock, it expects to complete the spin-in of the Company by the
end of the second quarter of 2000.
Obligations under the Company's 4% subordinated convertible debentures due
January 15, 2005, and its 4 1/2% senior convertible debentures due October 15,
2003, would be assumed by Thermo Electron in the short-form merger, and the
debentures would be convertible into Thermo Electron common stock.
SPLI, acquired indirectly by the Company as part of its February 1999
acquisition of Spectra-Physics (Note 3), will remain a public subsidiary while
the Company and Thermo Electron continue to evaluate the SPLI business. The
Company owns approximately 80.4% of the outstanding shares of SPLI common stock.
Senior Convertible Note Due to Parent Company
On February 15, 2000, the Company's $140.0 million principal amount 3 3/4%
senior convertible note, convertible at $13.55 per share, was converted by
Thermo Electron into 10,334,620 shares of Company common stock. Accordingly, the
note has been classified as noncurrent at year-end 1999. Following the
conversion, Thermo Electron owned 88.8% of the outstanding shares of the
Company's common stock.
40
Thermo Instrument Systems Inc. 1999 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Instrument Systems Inc.:
We have audited the accompanying consolidated balance sheet of Thermo
Instrument Systems Inc. (a Delaware corporation and 88%-owned subsidiary of
Thermo Electron Corporation) and subsidiaries as of January 1, 2000, and January
2, 1999, the related consolidated statements of income, cash flows, and
comprehensive income and shareholders' investment for each of the three years in
the period ended January 1, 2000. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermo
Instrument Systems Inc. and subsidiaries as of January 1, 2000, and January 2,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended January 1, 2000, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
February 15, 2000 (except with respect to the matters
discussed in Note 18, as to which the date is March 8, 2000)
41
Thermo Instrument Systems Inc. 1999 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
Overview
The Company is a global leader in the development, manufacture, and sale
of measurement and detection instruments used in virtually every industry to
monitor, collect, and analyze data that provide knowledge for the user. For
example, the Company's powerful analysis technologies help researchers sift
through data to make the discoveries that will fight disease or prolong life;
allow manufacturers to fabricate ever-smaller components required to increase
the speed and quality of communications; or monitor and control industrial
processes on-line to ensure that critical quality standards are met efficiently
and safely.
The Company's businesses operate in three instrumentation segments: Life
Sciences, Optical Technologies, and Measurement and Control. The Life Sciences
segment includes the Company's Thermo BioAnalysis Corporation (excluding its
Eberline Health Physics business for periods prior to July 1998, when Thermo
BioAnalysis contributed this business to a joint venture in the Measurement and
Control segment) and ThermoQuest Corporation subsidiaries, as well as certain
wholly owned subsidiaries. This segment develops and manufactures systems for
drug discovery and medical diagnosis and for chemical analysis at ultratrace
levels. The Optical Technologies segment consists of Thermo Optek Corporation,
ThermoSpectra Corporation, Thermo Vision Corporation, Spectra-Physics Lasers,
Inc. (SPLI), and certain wholly owned businesses. This segment develops and
manufactures optical and energy-based analytical systems; high-power laser
systems; and industrial imaging, inspection, and measurement instruments. The
Measurement and Control segment includes the Company's ONIX Systems Inc. and
Metrika Systems Corporation subsidiaries, as well as certain wholly owned
subsidiaries, including businesses of Spectra-Physics AB, acquired in February
1999 (Note 3). This segment develops and manufactures on-line systems for
industrial processes and quality control, field-measurement instruments, and
real-time sensors.
International sales account for a significant portion of the Company's
total revenues. Although the Company seeks to charge its customers in the same
currency as its operating costs, the Company's financial performance and
competitive position can be affected by currency exchange rate fluctuations.
Where appropriate, the Company uses short-term forward foreign exchange
contracts to reduce its exposure to currency fluctuations (Note 12).
Results of Operations
1999 Compared With 1998
Revenues increased $433.6 million to $2.09 billion in 1999 from $1.66
billion in 1998. Revenues increased $491.2 million due to 1999 acquisitions and
the inclusion of revenues from 1998 acquisitions for the full period. This
increase in revenues was offset in part by a decrease in revenues of $22.2
million due to the unfavorable effects of currency translation as a result of
the strengthening of the U.S. dollar relative to foreign currencies in countries
in which the Company operates. Excluding the impact of acquisitions and currency
translation, revenues decreased $35.4 million, principally in the first half of
1999.
42
Thermo Instrument Systems Inc. 1999 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
1999 Compared With 1998 (continued)
Life Sciences segment revenues increased to $715.7 million in 1999 from
$652.2 million in 1998, primarily due to the inclusion of $59.6 million in
revenues from acquisitions. Revenues at Thermo BioAnalysis' existing operations
increased $17.3 million due to higher demand in Asia for its products and the
expansion of sales and distribution channels into new markets. These increases
were offset in part by lower revenues at ThermoQuest, primarily due to a $5.8
million decline in revenues in Asia as a result of lower shipments to Japan, and
$3.2 million of lower demand for its Fourier-transform mass spectrometers,
offset in part by increased demand for other mass spectrometers. In addition,
the unfavorable effects of currency translation decreased revenues in this
segment by $9.9 million.
Optical Technologies segment revenues increased to $802.0 million in 1999
from $677.1 million in 1998, due to the inclusion of $147.7 million in revenues
from acquisitions, primarily SPLI, which was acquired in connection with the
acquisition of Spectra-Physics in February 1999 (Note 3). In addition, revenues
at Thermo Optek's existing operations increased $7.2 million, primarily due to
increased demand from the semiconductor industry and higher sales of its V150
molecular-beam epitaxy (MBE) systems. Revenues from ThermoSpectra's existing
operations decreased $21.3 million, principally due to a continued downturn in
the semiconductor industry in the first half of 1999. ThermoSpectra's existing
businesses had modest revenue growth in the last half of 1999. In addition, the
unfavorable effects of currency translation decreased revenues in this segment
by $8.2 million.
Measurement and Control segment revenues increased to $585.5 million in
1999 from $342.4 million in 1998, due to inclusion of $283.9 million in revenues
from acquisitions, primarily Spectra-Physics in February 1999. These increases
were offset in part by lower revenues from existing businesses, primarily at
ONIX Systems and Metrika Systems. Revenues from ONIX Systems' existing
operations decreased $19.2 million, primarily as a result of reduced
discretionary capital spending by companies in the process control industry and
by the oil and gas production sector. Energy prices declined precipitously in
1998 and, while prices have rebounded in 1999, capital equipment spending has
not returned to prior levels. In addition, lower prices for natural resources in
the first half of 1999 reduced spending in that industry during all of 1999.
Revenues from Metrika Systems' existing operations decreased $11.9 million,
primarily due to a reduction in spending by raw-material producers, particularly
in the cement sector due to depressed pricing. The balance of the decrease in
revenues from existing operations resulted from lower demand for nuclear-sensing
products. In addition, the unfavorable effects of currency translation decreased
revenues in this segment by $4.1 million.
The gross profit margin remained unchanged at 46% in 1999 and 1998. The
1999 period included lower-margin revenues from Spectra-Physics, which recorded
a charge of $6.7 million relating to the sale of inventories revalued at the
date of acquisition, of which $3.5 million was recorded by the Measurement and
Control segment and $3.2 million by the Optical Technologies segment. The 1998
period included inventory write-downs of $8.6 million, of which $5.3 million was
recorded by the Optical Technologies segment, $2.8 million by the Life Sciences
segment, and $0.5 million by the Measurement and Control segment. The inventory
write-downs related to the discontinuation of certain product lines and
increased excess and obsolescence reserves associated with lower product demand
and were included in cost of revenues in the accompanying statement of income.
Excluding the charge for the sale of revalued inventories in 1999 and provisions
for inventory in 1998, the gross profit margin decreased to 46% in 1999 from 47%
in 1998, primarily due to the inclusion of lower-margin revenues from
acquisitions, principally Spectra-Physics.
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in 1999 from 27% in 1998, principally due to the inclusion of
higher selling, general, and administrative expenses as a percentage of revenues
at acquired businesses, primarily Spectra-Physics and, to a lesser extent, lower
sales volume at several of the Company's subsidiaries. In addition, expanded
selling efforts in India and China resulted in higher costs.
43
1999 Compared With 1998 (continued)
Research and development expenses increased to $157.3 million in 1999 from
$113.9 million in 1998, primarily due to the inclusion of expenses at
Spectra-Physics and, to a lesser extent, other acquired businesses. In addition,
research and development expenses increased $2.8 million at Thermo Optek,
primarily due to increased spending on new product development, including the
V150 MBE system. Research and development expenses as a percentage of revenues
were 7.5% in 1999, compared with 6.9% in 1998. Excluding the expenses at
acquired businesses, research and development expenses as a percentage of
revenues were 7.1% in 1999.
In connection with the restructuring actions undertaken by the Company in
1998, the Company incurred additional net restructuring costs of $1.2 million in
1999 (Note 11). Of the $1.2 million of restructuring costs, $1.7 million was
recorded by the Optical Technologies segment and net reversals of previously
recorded restructuring costs of $0.3 million and $0.2 million were recorded by
the Life Sciences and Measurement and Control segments, respectively. During
1998, the Company recorded restructuring and unusual costs of $23.2 million, in
addition to the inventory write-downs discussed above. These costs consisted of
$21.6 million of restructuring costs as discussed in the results of operations
for 1998 and $1.6 million of unusual costs relating to the resolution of an
arbitration proceeding, which was recorded by the Measurement and Control
segment. Of the $21.6 million of restructuring costs, $12.4 million was recorded
by the Optical Technologies segment, $5.9 million by the Life Sciences segment,
and $3.3 million by the Measurement and Control segment. In connection with the
closing of certain facilities, the Company expects to incur approximately $0.1
million of additional costs in 2000. The restructuring activities resulted in
annualized cost savings of approximately $29.3 million, beginning primarily in
the fourth quarter of 1999. The total of annualized cost savings includes $16.2
million, $7.7 million, and $5.4 million at the Optical Technologies, Life
Sciences, and Measurement and Control segments, respectively.
Interest income decreased to $22.1 million in 1999 from $33.5 million in
1998, primarily due to a reduction in invested balances as a result of
acquisitions, including the acquisition of Spectra-Physics in February 1999 and,
to a lesser extent, the repurchase of Company and subsidiary common stock and
debentures in the second half of 1998 and during 1999.
Interest expense increased to $51.0 million in 1999 from $45.5 million in
1998, primarily due to borrowings from Thermo Electron Corporation in connection
with the acquisition of Spectra-Physics, offset in part by the repayment in 1998
of certain promissory notes to Thermo Electron that were issued in connection
with acquisitions.
Equity in losses of unconsolidated subsidiaries of $7.9 million in 1999
primarily relates to charges associated with Spectra-Physics' minority
investment in FLIR that were recorded in the second quarter of 1999 (Note 11).
Of this amount, $5.1 million represents the Company's pro rata share of FLIR's
loss that arose in connection with restructuring activities following a merger
completed by FLIR, which was accounted for as a pooling of interests. In
addition, $6.0 million of the loss resulted from a decrease in the Company's pro
rata share of FLIR's equity following completion of the pooling transaction and
related issuance of FLIR shares.
Gain on sale of investments in 1999 resulted from the sale of shares of
common stock of Fairey Group PLC and PSC, Inc. by the Company. The shares of PSC
common stock were obtained in connection with the acquisition of
Spectra-Physics. Gain on sale of investments in 1998 resulted from the sale of
shares of common stock of SteriGenics International, Inc. by ThermoSpectra,
which were obtained in connection with the 1997 sale of one of its product
lines.
Other expense, net, in 1999 primarily represents losses on foreign
exchange contracts entered into by SPLI (Note 11). The Company's results may
continue to be affected by such transactions in 2000. Other income in 1998
represents a foreign currency transaction gain at Thermo BioAnalysis, arising
from the repayment of certain foreign subsidiaries' intercompany borrowings
denominated in U.S. dollars.
As a result of the sale of stock by subsidiaries, the Company recorded a
gain of $18.6 million in 1998 (Note 10).
44
1999 Compared With 1998 (continued)
Excluding the impact of a nontaxable gain on issuance of stock by
subsidiaries in 1998, the effective tax rate was 42% in 1999, compared with 43%
in 1998. The effective tax rate exceeded the statutory federal income tax rate
in both periods due to foreign tax rate and tax law differences, nondeductible
amortization of cost in excess of net assets of acquired companies, and the
impact of state income taxes. The 1999 tax rate was favorably affected by $1.7
million of research and development tax credits as a result of the resolution of
prior year claims.
Minority interest expense increased to $16.4 million in 1999 from $15.7
million in 1998, primarily due to lower earnings at the Company's majority-owned
subsidiaries in 1998 as a result of restructuring and related costs recorded in
1998.
During 1998, two majority-owned subsidiaries repurchased a portion of
their subordinated convertible debentures resulting in an extraordinary gain,
net of taxes and minority interest, of $0.5 million (Note 6).
See Note 7 for a description of certain legal proceedings involving the
Company.
1998 Compared With 1997
Revenues increased $67.7 million to $1.66 billion in 1998 from $1.59
billion in 1997, primarily due to acquisitions. Revenues increased $156.6
million due to 1998 acquisitions and the inclusion of revenues from 1997
acquisitions for the full year. The increase in revenues was offset in part by a
decrease of $12.7 million due to the unfavorable effects of currency translation
as a result of the strengthening of the U.S. dollar relative to foreign
currencies in countries in which the Company operates. Excluding the impact of
acquisitions and currency translation, revenues decreased $76.2 million.
Life Sciences segment revenues increased to $652.2 million in 1998 from
$612.0 million in 1997, primarily due to the inclusion of $59.0 million in
revenues from acquisitions. Revenues from ThermoQuest's existing operations
decreased $15.5 million, primarily as a result of a $7.8 million decline in
sales to customers in Asia due to unstable economic conditions in that region
and heightened competition in two of its product lines. In addition, revenues in
this segment decreased $4.6 million due to the unfavorable effects of currency
translation.
Optical Technologies segment revenues decreased to $677.1 million in 1998
from $715.3 million in 1997, primarily due to a decline in revenues from
existing operations at Thermo Optek, ThermoSpectra, and Thermo Vision. Revenues
from Thermo Optek's existing operations decreased $34.3 million in 1998,
primarily due to lower sales to Asia and, to a lesser extent, the semiconductor
industry. Revenues from ThermoSpectra's existing operations decreased $21.4
million in 1998, primarily due to a downturn in the semiconductor industry.
Revenues from Thermo Vision's existing operations decreased, primarily as a
result of the slowdown in the semiconductor industry and the economic crisis in
Asia. In addition, revenues in this segment decreased $7.1 million due to the
unfavorable effects of currency translation. These decreases were offset in part
by the inclusion of $33.7 million in revenues from acquisitions.
Measurement and Control segment revenues increased to $342.4 million in
1998 from $283.4 million in 1997, primarily due to the inclusion of $63.9
million in revenues from acquisitions, offset in part by lower revenues at
existing businesses due to lower demand. In addition, revenues in this segment
decreased $1.0 million due to the unfavorable effects of currency translation.
The gross profit margin decreased to 46% in 1998 from 47% in 1997,
primarily due to inventory write-downs of $8.6 million recorded in 1998 for the
discontinuation of certain product lines and increased excess and obsolescence
reserves associated with lower product demand (Note 11). The 1997 period
included a charge of $3.6 million relating to the sale of inventories revalued
at the time of the acquisition of Life Sciences International PLC, of which $2.9
million was recorded by the Life Sciences segment and $0.7 million by the
Optical Technologies segment. In addition, the 1997 period included an inventory
write-down $0.8 million recorded by the Optical Technologies segment related
primarily to the discontinuation of an underperforming product.
45
1998 Compared With 1997 (continued)
Selling, general, and administrative expenses as a percentage of revenues
was unchanged at 27% in 1998 and 1997.
Research and development expenses increased to $113.9 million in 1998 from
$107.6 million in 1997, primarily due to the inclusion of expenses at acquired
businesses.
In addition to the inventory write-downs discussed above, the Company
recorded restructuring and unusual costs of $23.2 million in 1998 (Note 11). The
Company recorded $21.6 million of restructuring costs, including $15.7 million
of severance costs for approximately 729 employees across all functions, $3.7
million related primarily to facility-closing costs, $0.8 million for the
write-off of cost in excess of net assets of acquired companies for a business
that was closed, $1.0 million for miscellaneous items, including costs for
terminating certain contracts and agency relationships, and $0.4 million related
to the loss on the sale of a division. The Company also recorded $1.6 million of
unusual costs relating to the resolution of an arbitration proceeding. In 1997,
the Optical Technologies segment recognized a gain of $2.2 million on the sale
of ThermoSpectra's Linac business, which was offset in part by a charge by
ThermoSpectra of $0.9 million for severance costs for employees terminated
during 1997 (Note 11).
Interest income increased to $33.5 million in 1998 from $28.3 million in
1997. This increase was primarily due to interest income earned on invested
proceeds from the Company's January 1998 issuance of $250.0 million principal
amount of 4% subordinated convertible debentures, offset in part by the use of a
portion of the proceeds to repay a $105.0 million promissory note to Thermo
Electron. To a lesser extent, interest income increased due to higher average
invested balances as a result of the sale of common stock by the Company's
subsidiaries in 1998 and 1997.
Interest expense was relatively unchanged at $45.5 million in 1998 and
$45.9 million in 1997. An increase in interest expense due to the issuance of an
aggregate $428.8 million of promissory notes to Thermo Electron in 1997 in
connection with acquisitions and the Company's January 1998 issuance of 4%
subordinated convertible debentures (Note 6) was offset by the repayment of
certain promissory notes to Thermo Electron issued in connection with
acquisitions, and, to a lesser extent, the conversion of a portion of the
Company's and subsidiaries' convertible obligations into common stock of the
Company and its subsidiaries.
Gain on sale of investments in 1998 resulted from the sale of shares of
common stock of SteriGenics International by ThermoSpectra, which were obtained
in connection with the 1997 sale of one of its product lines.
As a result of the sale of stock by subsidiaries and issuance of stock by
subsidiaries upon conversion of convertible debentures, the Company recorded
gains of $18.6 million in 1998 and $46.4 million in 1997 (Note 10).
Other income in 1998 represents a foreign currency transaction gain at
Thermo BioAnalysis, arising from the repayment of certain foreign subsidiaries'
intercompany borrowings denominated in U.S. dollars.
The effective tax rate was 39% in 1998, compared with 36% in 1997.
Excluding the impact of the nontaxable gains on issuance of stock by
subsidiaries in 1998 and 1997, the effective tax rates in both periods exceeded
the statutory federal income tax rate due to nondeductible amortization of cost
in excess of net assets of acquired companies, foreign tax rate and tax law
differences, and the impact of state income taxes. Excluding the impact of the
nontaxable gains, the effective tax rate decreased in 1998, primarily due to
certain foreign tax losses not benefited in the first half of 1997, offset in
part by higher nondeductible amortization.
Minority interest expense increased to $15.7 million in 1998 from $12.6
million in 1997, primarily due to minority interest associated with the
Company's newly public ONIX Systems and Metrika Systems subsidiaries, the
earnings of certain of the Life Sciences businesses sold by the Company to
ThermoQuest and Thermo Optek in 1997, and the increase in minority ownership as
a result of the 1998 sale of common stock by Thermo BioAnalysis. This increase
was offset in part by lower profits at the Company's majority-owned subsidiaries
as a result of restructuring and related costs recorded in 1998.
During 1998, two majority-owned subsidiaries repurchased a portion of
their subordinated convertible debentures resulting in an extraordinary gain,
net of taxes and minority interest, of $0.5 million (Note 6).
46
Liquidity and Capital Resources
Consolidated working capital was $368.8 million at January 1, 2000,
compared with $746.0 million at January 2, 1999. Included in working capital are
cash and cash equivalents of $185.5 million at January 1, 2000, compared with
$553.8 million at January 2, 1999. Of the cash and cash equivalents balance at
January 1, 2000, $154.3 million was held by the Company's majority-owned
subsidiaries and the balance was held by the Company and its wholly owned
subsidiaries. In addition, as of January 1, 2000, the Company had $256.5 million
invested in an advance to affiliate. Of the advance to affiliate at January 1,
2000, $252.7 million was held by the Company's majority-owned subsidiaries and
the balance was advanced by the Company and its wholly owned subsidiaries. Prior
to the use of new cash management arrangements between the Company and Thermo
Electron, which became effective in 1999, such amounts were included in cash and
cash equivalents. At January 1, 2000, $146.3 million of the Company's cash and
cash equivalents was held by its foreign subsidiaries. While this cash can be
used outside of the United States, for activities including acquisitions,
repatriation of this cash into the United States would be subject to foreign
withholding taxes and could also be subject to a United States tax. Also
reflected in working capital are $153.8 million of short-term obligations and
current maturities of long-term obligations due to Thermo Electron in 2000 and
an aggregate $130.0 million principal amount of ThermoQuest and Thermo Optek 5%
subordinated convertible debentures due August and October 2000, respectively.
Of the $153.8 million due to Thermo Electron, $150.0 million represents a
promissory note due February 2000, the maturity of which Thermo Electron
extended to August 2000 (Note 6).
Cash provided by operating activities in 1999 was $187.7 million. An
increase in accounts receivable used cash of $24.7 million, principally in the
Life Sciences segment due in part to the majority of fourth quarter shipments by
one of ThermoQuest's factories being made in December 1999 as a result of delays
caused by the implementation of a new management information system. In
addition, accounts receivable increased at Thermo BioAnalysis, primarily due to
the timing of customer payments and shipments, as well as an increase in
revenues. The Company generated $10.9 million of cash from a decrease in
inventories, primarily in the Measurement and Control segment, principally
resulting from a reduction in inventories at Spectra-Physics from its date of
acquisition. The Company used $7.9 million of cash to reduce other current
liabilities, primarily as a result of payments for accrued restructuring and
accrued acquisition costs. As of January 1, 2000, the Company had $1.7 million
of accrued restructuring costs, all of which it expects to pay in 2000. As of
January 1, 2000, the Company had $19.2 million of accrued acquisition costs. The
Company expects to pay $5.3 million of this amount relating to severance over
the next three to six months and the remainder relating primarily to the
abandonment of excess facilities over the term of the leases of such facilities.
During 1999, the Company's primary investing activities, excluding advance
to affiliate and available-for-sale investments activity, included acquisitions
and the purchase of property, plant, and equipment. The Company expended $344.8
million, net of cash acquired, for acquisitions, including the acquisition of
Spectra-Physics, and received an aggregate $9.0 million of purchase price
adjustments for acquisitions, primarily for an acquisition by Metrika Systems in
1998 (Note 3). The Company expended $51.7 million for purchases of property,
plant, and equipment and received proceeds of $7.9 million from the sale of
property, plant, and equipment in 1999. During 2000, the Company plans to make
expenditures of approximately $58 million for property, plant, and equipment. In
December 1999, the Company acquired all of the outstanding shares of
ThermoSpectra common stock that were held by public shareholders, in completion
of its merger agreement, for $22.7 million in cash. In January 2000, the Company
acquired all of the outstanding shares of Thermo Vision held by public
shareholders in completion of its merger agreement for $11.2 million in cash
(Note 17).
The Company's financing activities provided $112.1 million of cash in
1999. To finance the acquisition of Spectra-Physics, the Company borrowed $200.0
million from Thermo Electron pursuant to a promissory note due August 1999. In
August 1999, the Company repaid $50.0 million of the principal amount
outstanding under this
47
Liquidity and Capital Resources (continued)
promissory note and refinanced the balance of the note through borrowings from
Thermo Electron due February 2000. In February 2000, Thermo Electron extended
the maturity of this note to August 2000 (Note 3). In 1999, ThermoSpectra repaid
an aggregate $60.0 million of borrowings to Thermo Electron. During 1999, a net
increase in short-term obligations provided $61.9 million of cash. Net proceeds
from the issuance of long-term obligations of $16.7 million in 1999 primarily
represents borrowings by certain divisions of Thermo BioAnalysis, principally to
fund acquisitions. Such debt is denominated in foreign currencies of countries
where the divisions operate. The Company used $20.9 million of cash for the
repayment of long-term obligations.
During 1999, the Company and certain of its majority-owned subsidiaries
expended $37.6 million to repurchase common stock of the Company and common
stock and debentures of certain of the Company's majority-owned subsidiaries.
These purchases were made pursuant to authorizations by the Company's and
certain majority-owned subsidiaries' Boards of Directors. As of January 1, 2000,
$9.5 million remained under the Company's authorization and $28.1 million
remained under the authorizations of the Company's majority-owned subsidiaries.
The Company and its subsidiaries do not expect to expend any additional amounts
on purchases of their securities as a result of Thermo Electron's plan to take
the Company and its subsidiaries private (Note 18).
In August 1999, the Company called for redemption on September 3, 1999,
all of the outstanding $14.5 million principal amount of its 3 3/4% senior
convertible debentures due 2000. Of the total principal amount outstanding, $9.3
million was converted into the Company's common stock and the remaining balance
was repaid.
In February 2000, the Company's $140.0 million principal amount 3 3/4%
senior convertible note was converted by Thermo Electron into 10,334,620 shares
of Company common stock.
Excluding its $140.0 million principal amount senior convertible note that
was converted in February 2000 (Note 18), the Company has short-term obligations
and current maturities of long-term obligations due to Thermo Electron totaling
$153.8 million at January 1, 2000. Thermo Electron extended the maturity of
$150.0 million of this amount to August 2000. In addition, ThermoQuest's $61.0
million and Thermo Optek's $69.0 million principal amount 5% subordinated
convertible debentures are due in August and October 2000, respectively, and may
require earlier repayment upon completion of the transaction discussed in Note
18. The Company has an agreement with Thermo Electron under which the Company
may borrow up to $400 million on a short-term basis in connection with the
acquisition of the minority interest of its publicly held subsidiaries,
excluding SPLI, and the redemption of the subsidiary debentures. Thermo Electron
has indicated that it will seek repayment from the Company of such borrowings,
in addition to the Company's $150.0 million promissory note, only to the extent
the Company's cash flow permits such repayments. Excluding such debt and the 5%
subordinated convertible debentures of ThermoQuest and Thermo Optek, the Company
believes that its existing resources are sufficient to meet the capital
requirements of its existing operations for the foreseeable future. The Company
has historically complemented internal development with acquisitions of
businesses or technologies that extend the Company's presence in current markets
or provide opportunities to enter and compete effectively in new markets. The
Company will consider making acquisitions of such businesses or technologies
that are consistent with its plans for strategic growth. The Company expects
that it will finance these acquisitions through a combination of internal funds,
and/or short-term borrowings from Thermo Electron although there is no agreement
with Thermo Electron to ensure that funds will be available on acceptable terms
or at all.
48
Market Risk
The Company is exposed to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices, which could affect its future
results of operations and financial condition. The Company manages its exposure
to these risks through its regular operating and financing activities.
Additionally, the Company uses short-
term forward contracts to manage certain exposures to foreign currencies. The
Company enters into forward foreign exchange contracts to hedge firm purchase
and sale commitments denominated in currencies other than its subsidiaries'
local currencies. The Company does not engage in extensive foreign currency
hedging activities; however, the purpose of the Company's foreign currency
hedging activities is to protect the Company's local currency cash flows related
to these commitments from fluctuations in foreign exchange rates. The Company's
forward foreign exchange contracts principally hedge transactions denominated in
U.S. dollars, British pounds sterling, Japanese yen, French francs, Swiss
francs, German marks, Swedish krona, and Netherlands guilders. Gains and losses
arising from forward contracts are recognized as offsets to gains and losses
resulting from the transactions being hedged. The Company does not generally
enter into speculative foreign currency agreements. See Note 11 for the effect
of SPLI's early adoption of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities."
Foreign Currency Exchange Rates
The Company generally views its investment in foreign subsidiaries with a
functional currency other than the Company's reporting currency as long-term.
The Company's investment in foreign subsidiaries is sensitive to fluctuations in
foreign currency exchange rates. The functional currencies of the Company's
foreign subsidiaries are principally denominated in British pounds sterling,
German marks, Netherlands guilders, Swedish krona, and French francs. The effect
of a change in foreign currency exchange rates on the Company's net investment
in foreign subsidiaries is reflected in the "Accumulated other comprehensive
items" component of shareholders' investment. A 10% depreciation in year-end
1999 and 1998 functional currencies, relative to the U.S. dollar, would result
in a reduction of the Company's shareholders' investment of $33 million and $58
million, respectively.
Forward foreign exchange contracts are sensitive to changes in foreign
currency exchange rates. The fair value of forward foreign exchange contracts is
the estimated amount that the Company would pay or receive upon termination of
the contract, taking into account the change in foreign currency exchange rates.
A 10% depreciation in year-end 1999 and 1998 foreign currency exchange rates
related to the Company's contracts would result in an increase in the unrealized
loss on forward foreign exchange contracts of $10.5 million and $1.5 million,
respectively. Since the Company uses forward foreign exchange contracts as
hedges of firm purchase and sale commitments, the unrealized gain or loss on
forward foreign currency exchange contracts resulting from changes in foreign
currency exchange rates would be offset by a corresponding change in the fair
value of the hedged item.
Certain of the Company's cash and cash equivalents are denominated in
currencies other than the functional currency of the depositor and are sensitive
to changes in foreign currency exchange rates. A 10% depreciation in the related
year-end 1999 and 1998 foreign currency exchange rates would result in a
negative impact on the Company's net income of $1.1 million and $1.4 million,
respectively.
Interest Rates
Certain of the Company's available-for-sale investments and long-term
obligations are sensitive to changes in interest rates. Interest rate changes
would result in a change in the fair value of these financial instruments due to
the difference between the market interest rate and the rate at the date of
purchase or issuance of the financial instrument. A 10% decrease in year-end
1999 and 1998 market interest rates would result in a negative impact of $13.8
million and $45.4 million, respectively, on the net fair value of the Company's
interest-sensitive financial instruments.
The Company's cash, cash equivalents, and variable-rate short- and
long-term obligations are sensitive to changes in interest rates. Interest rate
changes would result in a change in interest income and expense due to the
49
Market Risk (continued)
difference between the current interest rates on cash, cash equivalents, and the
variable-rate short-and long-term obligations and the rate that these financial
instruments may adjust to in the future. A 10% decrease in year-end 1999 and
1998 interest rates would result in a negative impact of $0.4 million and $1.3
million, respectively, on the Company's net income.
Equity Prices
The Company's available-for-sale investment portfolio includes equity
securities that are sensitive to fluctuations in price. In addition, the
Company's and its subsidiaries' subordinated convertible debentures are
sensitive to fluctuations in the price of Company or subsidiary common stock
into which the obligations are convertible. Changes in equity prices would
result in changes in the fair value of the Company's available-for-sale
investments and subordinated convertible debentures due to the difference
between the current market price and the market price at the date of purchase or
issuance of the debentures. A 10% increase in the year-end 1999 and 1998 market
equity prices would result in a negative impact of $11.2 million and $23.9
million, respectively, on the net fair value of the Company's price-sensitive
equity financial instruments.
Year 2000
As of the date of this report, the Company has completed its year 2000
initiatives, which included: (i) testing and upgrading significant information
technology systems and facilities; (ii) testing and developing upgrades, where
necessary, for the Company's current products and certain discontinued products;
(iii) assessing the year 2000 readiness of its key suppliers, vendors, and
customers; and (iv) developing contingency plans.
As a result of completing these initiatives, the Company believes that all
of its material information technology systems and critical non-information
technology systems are year 2000 compliant. The Company believes that all of the
material products that it currently manufactures and sells are year 2000
compliant or are not date sensitive. In addition, the Company is not aware of
any significant supplier or vendor that has experienced material disruption due
to year 2000 issues. The Company has also developed a contingency plan to allow
its primary business operations to continue despite disruptions due to year 2000
problems, if any, that might yet arise in the future. The Company has incurred
expenses to third parties (external costs) related to year 2000 issues of
approximately $4.4 million as of January 1, 2000, and the total external costs
of year 2000 remediation are expected to be approximately $5.0 million.
While the Company to date has been successful in minimizing negative
consequences arising from year 2000 issues, there can be no assurance that in
the future the Company's business operations or financial condition may not be
impacted by year 2000 problems, such as increased warranty claims, vendor and
supplier disruptions, or litigation relating to year 2000 issues.
50
Thermo Instrument Systems Inc. 1999 Financial Statements
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company wishes to caution readers that the
following important factors, among others, in some cases have affected, and in
the future could affect, the Company's actual results and could cause its actual
results in 2000 and beyond to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company.
Uncertainty of Growth. Certain of the markets in which the Company
competes have been flat or declining over the past several years. The Company
has pursued a number of potential growth strategies, including acquiring
complementary businesses; developing new applications for its technologies; and
strengthening its presence in selected geographic markets. No assurance can be
given that the Company will be able to successfully implement these strategies,
or that these strategies will result in growth of the Company's business.
Risks Associated with Acquisition Strategy. One of the Company's growth
strategies is to supplement its internal growth with the acquisition of
businesses and technologies that complement or augment the Company's existing
product lines. Certain businesses acquired by the Company have had low levels of
profitability. In addition, businesses that the Company may seek to acquire in
the future may also be marginally profitable or unprofitable. In order for any
acquired businesses to achieve the level of profitability desired by the
Company, the Company must successfully change operations and improve market
penetration. No assurance can be given that the Company will be successful in
this regard. In addition, promising acquisitions are difficult to identify and
complete for a number of reasons, including competition among prospective
buyers, the need for regulatory approvals, including antitrust approvals, and
the high valuations of businesses resulting from historically high stock prices
in many countries. Acquisitions made by the Company may be made at substantial
premiums over the fair value of the net assets of the acquired companies. There
can be no assurance that the Company will be able to complete pending or future
acquisitions or that the Company will be able to successfully integrate any
acquired business into its existing business or make such businesses profitable.
In order to finance any such acquisitions, it may be necessary for the Company
to raise additional funds either through public or private financing. Any
financing, if available at all, may be on terms that are not favorable to the
Company.
Risks Associated with Product Development, Technological Change,
Obsolescence, and the Acceptance of New Products. The Company's growth strategy
includes significant investment in product development and it intends to
increase spending in the area of research and development. In addition, the
market for the Company's products and services is characterized by rapid and
significant technological change and evolving industry standards. New product
development and introductions require significant investments, planning, design,
development, and testing at the technological, product, and manufacturing
process levels, and may render existing products and technologies uncompetitive
or obsolete. There can be no assurance that the Company's products will not
become uncompetitive or obsolete. In addition, industry acceptance of new
products or technologies developed by the Company may be slow to develop due to,
among other things, that such products or technologies represent alternatives to
traditional methods or technologies which may require further validation of its
efficiency, or that existing regulations are written specifically for older
technologies and general unfamiliarity of users with new products or
technologies. There can be no assurance that the Company will be successful in
developing effective new products in a timely manner or at all.
Risks Associated with Dependence on Capital Spending Policies and
Government Funding. The Company's customers include manufacturers of
semiconductors and products incorporating semiconductors, pharmaceutical and
chemical companies, laboratories, government agencies, and public and private
research institutions. The capital spending of these entities can have a
significant effect on the demand for the Company's products. Such spending
levels are based on a wide variety of factors, including the resources available
to make such purchases, the spending priorities among various types of research
equipment, public policy, and the effects of different economic cycles,
51
including fluctuating demand in the semiconductor industry. Any decrease in
capital spending by any of the customer groups that account for a significant
portion of the Company's sales could have a material adverse effect on the
Company's business and results of operations.
Possible Adverse Effect from Consolidation in the Environmental Market and
Changes in Environmental Regulations. One of the important markets for the
Company's products is environmental analysis. During the past several years,
there has been a contraction in the market for analytical instruments used for
environmental analysis. This contraction has caused consolidation in the
businesses serving this market. Such consolidation may have an adverse impact on
certain of the Company's businesses. In addition, most air, water, and soil
analysis is conducted to comply with federal, state, local, and foreign
environmental regulations. These regulations are frequently specific as to the
type of technology required for a particular analysis and the level of detection
required for that analysis. The Company develops, configures, and markets its
products to meet customer needs created by existing and anticipated
environmental regulations. These regulations may be amended or eliminated in
response to new scientific evidence or political or economic considerations. Any
significant change in environmental regulations or enforcement efforts could
result in a reduction in demand for the Company's products.
Possible Adverse Impact of Significant International Operations.
International revenues accounted for a significant portion of the Company's
total revenues in 1999, and the Company expects that international revenues will
continue to account for a significant portion of the Company's revenues in the
future. Sales to customers in foreign countries are subject to a number of
risks, including the following: fluctuations in exchange rates may affect
product demand and adversely affect the profitability in U.S. dollars of
products and services provided by the Company in foreign markets where payment
for the Company's products and services is made in the local currency;
agreements may be difficult to enforce and receivables difficult to collect
through a foreign country's legal system; foreign customers may have longer
payment cycles; foreign countries could impose withholding taxes or otherwise
tax the Company's foreign income, impose tariffs, or adopt other restrictions on
foreign trade; export licenses, if required, may be difficult to obtain and the
protection of intellectual property in foreign countries may be more difficult
to enforce. There can be no assurance that any of these factors will not have a
material adverse effect on the Company's business and results of operations. A
portion of the Company's revenues is derived from exports to Asia. Certain
countries in Asia experienced a severe economic crisis in the late 1990s,
involving sharply reduced economic activity and liquidity, highly volatile
foreign-currency-exchange and interest rates, and unstable stock markets. The
Company's export sales to Asia were adversely affected in 1998 and early 1999
and may continue to be adversely affected by the unstable economic conditions
there, which may continue to adversely affect the Company's results of
operations, financial condition, or business.
Competition. The Company encounters and expects to continue to encounter
intense competition in the sale of its products. The Company believes that the
principal competitive factors affecting the market for its products include
product performance, price, reliability, and customer service. Competitors may
be able to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion and sale
of their products, than the Company. In addition, competition could increase if
new companies enter the market or if existing competitors expand their product
lines or intensify efforts within existing product lines. There can be no
assurance that the Company's current products, products under development, or
ability to discover new technologies will be sufficient to enable it to compete
effectively with its competitors.
52
Risks Associated with Protection, Defense, and Use of Intellectual
Property. The Company holds many patents relating to various aspects of its
products, and believes that proprietary technical know-how is critical to many
of its products. Proprietary rights relating to the Company's products are
protected from unauthorized use by third parties only to the extent that they
are covered by valid and enforceable patents or are maintained in confidence as
trade secrets. There can be no assurance that patents will issue from any
pending or future patent applications owned by or licensed to the Company or
that the claims allowed under any issued patents will be sufficiently broad to
protect the Company's technology. In the absence of patent protection, the
Company may be vulnerable to competitors who attempt to copy the Company's
products or gain access to its trade secrets and know-how. Proceedings initiated
by the Company to protect its proprietary rights could result in substantial
costs to the Company. There can be no assurance that competitors of the Company
will not initiate litigation to challenge the validity of the Company's patents,
or that they will not use their resources to design comparable products that do
not infringe the Company's patents. There may also be pending or issued patents
held by parties not affiliated with the Company that relate to the Company's
products or technologies. The Company may need to acquire licenses to, or
contest the validity of, any such patents. There can be no assurance that any
license required under any such patent would be made available on acceptable
terms or that the Company would prevail in any such contest. The Company could
incur substantial costs in defending itself in suits brought against it or in
suits in which the Company may assert its patent rights against others. If the
outcome of any such litigation is unfavorable to the Company, the Company's
business and results of operations could be materially adversely affected.
Further, the laws of some jurisdictions do not protect the Company's proprietary
rights to the same extent as the laws of the U.S. and there can be no assurance
that available protections will be adequate. In addition, the Company relies on
trade secrets and proprietary know-how which it seeks to protect, in part, by
confidentiality agreements with its collaborators, employees, and consultants.
There can be no assurance that these agreements will not be breached, that the
Company would have adequate remedies for any breach, or that the Company's trade
secrets will not otherwise become known or be independently developed by
competitors.
Risks Associated with Cash Management Arrangement with Thermo Electron.
The Company participates in a cash management arrangement with Thermo Electron.
Under this cash management arrangement, the Company lends its excess cash to
Thermo Electron on an unsecured basis. The Company has the contractual right to
withdraw its funds invested in the cash management arrangement upon 30 days'
prior notice. Thermo Electron is contractually required to maintain cash, cash
equivalents and/or immediately available bank lines of credit equal to at least
50% of all funds invested under the cash management arrangement by all Thermo
Electron subsidiaries other than wholly owned subsidiaries. The funds are held
on an unsecured basis and therefore are subject to the credit risk of Thermo
Electron. The Company's ability to receive its cash upon notice of withdrawal
could be adversely affected if participants in the cash management arrangement
demand withdrawal of their funds in an aggregate amount in excess of the 50%
reserve required to be maintained by Thermo Electron. In the event of a
bankruptcy of Thermo Electron, the Company would be treated as an unsecured
creditor and its right to receive funds from the bankruptcy estate would be
subordinated to secured creditors and would be treated on a pari passu basis
with all other unsecured creditors. Further, all cash withdrawn by the Company
from the cash management arrangement within one year before the bankruptcy would
be subject to rescission. The inability of Thermo Electron to return the
Company's cash on a timely basis or at all could have a material adverse effect
on the Company's results of operations and financial position.
53
Selected Financial Information
(In thousands except per share amounts) 1999 (a) 1998 (b) 1997 (c) 1996 (d) 1995
- ------------------------------------------ ------------ ------------ ------------ ------------ -----------
Statement of Income Data
Revenues $2,093,537 $1,659,981 $1,592,314 $1,209,362 $ 782,662
Net Income 87,799 104,084 147,258 132,751 79,306
Earnings per Share:
Basic .74 .86 1.21 1.12 .70
Diluted .67 .79 1.09 1.01 .64
Balance Sheet Data
Working Capital $ 368,800 $ 745,955 $ 612,666 $ 636,703 $ 489,895
Total Assets 2,885,358 2,565,774 2,351,153 1,924,400 1,372,813
Long-term Obligations 596,494 743,443 673,194 554,214 441,034
Shareholders' Investment 984,566 945,007 877,558 746,267 542,705
(a) Reflects a pretax charge of $21.7 million for restructuring and related
costs, consisting of restructuring and unusual costs, net, of $15.0 million
and inventory provisions of $6.7 million. Also reflects the February 1999
acquisition of Spectra-Physics AB, the reclassification as short-term of an
aggregate $130.0 million of 5% subordinated convertible debentures of
ThermoQuest and Thermo Optek due August and October 2000, respectively, and
the classification as noncurrent of the Company's $140.0 million 3 3/4%
senior convertible note as a result of its conversion by Thermo Electron in
February 2000.
(b)Reflects a pretax charge of $31.8 million, consisting of restructuring and
unusual costs, net, of $23.2 million and inventory provisions of $8.6
million. Also reflects nontaxable gains of $18.6 million from the issuance
of stock by subsidiaries and the January 1998 issuance of $250.0 million
principal amount of 4% subordinated convertible debentures due 2005.
(c) Reflects the March 1997 acquisition of Life Sciences International PLC and
nontaxable gains of $46.4 million from the issuance of stock by
subsidiaries.
(d) Reflects the March 1996 acquisition of a substantial portion of the
businesses constituting the Scientific Instruments Division of Fisons plc,
the October 1996 issuance of $172.5 million principal amount of 4 1/2%
senior convertible debentures due 2003, and nontaxable gains of $71.7
million from the issuance of stock by subsidiaries.
54
Thermo Instrument Systems Inc. 1999 Financial Statements
Common Stock Market Information
The Company's common stock is traded on the American Stock Exchange under
the symbol THI. The following table sets forth the high and low sale prices of
the Company's common stock for 1999 and 1998, as reported in the consolidated
transaction reporting system.
1999 1998
------------------- ---------------------
Quarter High Low High Low
- -------------------------------------------------------------- ---------- ---------- ----------- ---------
First $17 7/16 $13 1/2 $35 7/16 $27 13/16
Second 16 7/8 12 3/16 34 5/8 25 7/8
Third 17 10 3/8 26 3/4 11
Fourth 12 1/2 8 1/4 15 1/8 7 7/8
As of January 28, 2000, the Company had 2,519 holders of record of its
common stock. This does not include holdings in street or nominee names. The
closing market price on the American Stock Exchange for the Company's common
stock on January 28, 2000, was $15 11/16 per share.
Common stock of the Company's following majority-owned public subsidiaries
is traded on the American Stock Exchange: ThermoQuest Corporation (symbol TMQ),
Thermo Optek Corporation (symbol TOC), Thermo BioAnalysis Corporation (symbol
TBA), Metrika Systems Corporation (symbol MKA), and ONIX Systems Inc. (symbol
ONX). Common stock of the Company's majority-owned Spectra-Physics Lasers, Inc.
subsidiary is traded on the NASDAQ National Market System (symbol SPLI).
Shareholder Services
Shareholders of Thermo Instrument Systems Inc. who desire information
about the Company are invited to contact the Investor Relations Department,
Thermo Instrument Systems Inc., 81 Wyman Street, P.O. Box 9046, Waltham,
Massachusetts 02454-9046, (781) 622-1111. Distribution of printed quarterly
reports is limited to the second quarter only. Company information is available
at http://www.thermo.com/subsid/thi1.html on Thermo Electron's Internet site.
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent and
maintains shareholder activity records. The agent will respond to questions on
issuance of stock certificates, change of ownership, lost stock certificates,
and change of address. For these and similar matters, please direct inquiries
to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street, 46th Floor
New York, New York 10005
(718) 921-8200
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Board of Directors and will depend upon, among other factors,
the Company's earnings, capital requirements, and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended January
1, 2000, as filed with the Securities and Exchange Commission, may be obtained
at no charge by writing to the Investor Relations Department, Thermo Instrument
Systems Inc., 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts 02454-9046.