SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended April 1, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-9786
THERMO INSTRUMENT SYSTEMS INC.
(Exact name of Registrant as specified in its charter)
Delaware 04-2925809
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at April 28, 2000
Common Stock, $.10 par value 129,407,639
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
April 1, January 1,
(In thousands) 2000 2000
- ----------------------------------------------------------------------------------- ----------- ----------
Current Assets:
Cash and cash equivalents $ 188,588 $ 185,492
Advance to affiliate 274,335 256,522
Accounts receivable, less allowances of $29,315 and $29,837 458,063 489,264
Inventories:
Raw materials and supplies 154,068 152,865
Work in process 66,067 60,227
Finished goods 125,789 114,809
Deferred tax asset and refundable income taxes 66,343 67,627
Other current assets 46,621 45,280
---------- ----------
1,379,874 1,372,086
---------- ----------
Property, Plant, and Equipment, at Cost 443,154 441,577
Less: Accumulated depreciation and amortization 160,742 154,170
---------- ----------
282,412 287,407
---------- ----------
Other Assets 147,841 159,574
---------- ----------
Cost in Excess of Net Assets of Acquired Companies 1,041,155 1,066,291
---------- ----------
$2,851,282 $2,885,358
========== ==========
2
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
April 1, January 1,
(In thousands except share amounts) 2000 2000
- ----------------------------------------------------------------------------------- ----------- ----------
Current Liabilities:
Short-term obligations and current maturities of long-term $ 268,196 $ 292,702
obligations (includes advance from affiliate of $72,359 and
$54,855 and related-party debt of $8,755)
Short-term obligations and current maturities of long-term 153,800 153,800
obligations, due to parent company
Accounts payable 118,273 119,956
Accrued payroll and employee benefits 66,205 73,077
Accrued income taxes 100,433 90,734
Accrued installation and warranty expenses 41,040 41,796
Deferred revenue 55,052 46,592
Other accrued expenses (Notes 5 and 6) 156,700 175,436
Due to parent company and affiliated companies 10,023 9,193
---------- ----------
969,722 1,003,286
---------- ----------
Deferred Income Taxes 18,015 22,034
---------- ----------
Other Deferred Items 36,465 35,433
---------- ----------
Long-term Obligations:
Senior convertible obligations (includes $140,000 due to parent 172,500 312,500
company in 1999; Note 9)
Subordinated convertible obligations (includes $3,000 of related-party debt) 250,000 250,000
Other 32,061 33,994
---------- ----------
454,561 596,494
---------- ----------
Minority Interest 242,621 243,545
---------- ----------
Shareholders' Investment (Note 9):
Common stock, $.10 par value, 250,000,000 shares authorized; 13,400 12,359
133,996,730 and 123,591,238 shares issued
Capital in excess of par value 488,392 343,891
Retained earnings 783,114 763,782
Treasury stock at cost, 4,635,300 and 4,824,335 shares (73,940) (75,914)
Deferred compensation (331) (373)
Accumulated other comprehensive items (Note 2) (80,737) (59,179)
---------- ----------
1,129,898 984,566
---------- ----------
$2,851,282 $2,885,358
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
3
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
April 1, April 3,
(In thousands except per share amounts) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $521,086 $463,579
-------- --------
Costs and Operating Expenses:
Cost of revenues 276,202 252,123
Selling, general, and administrative expenses 150,737 130,444
Research and development expenses 44,842 34,193
Restructuring and other unusual costs (income), net (Note 6) (12,477) 1,243
-------- --------
459,304 418,003
-------- --------
Operating Income 61,782 45,576
Interest Income 5,906 6,326
Interest Expense (includes $3,055 and $2,986 to parent company) (12,583) (12,185)
Equity in Losses of Unconsolidated Subsidiaries (13,402) -
Other Income (Expense), Net 1,567 (570)
-------- --------
Income Before Provision for Income Taxes and Minority Interest 43,270 39,147
Provision for Income Taxes 19,482 16,008
Minority Interest Expense 4,456 4,254
-------- --------
Net Income $ 19,332 $ 18,885
======== ========
Earnings per Share (Note 3):
Basic $ .16 $ .16
======== ========
Diluted $ .15 $ .15
======== ========
Weighted Average Shares (Note 3):
Basic 124,462 119,302
======== ========
Diluted 130,225 131,088
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
April 1, April 3,
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net income $ 19,332 $ 18,885
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 20,729 17,405
Provision for losses on accounts receivable 1,304 943
Gain on sale of businesses (Note 6) (12,393) -
Equity in losses of unconsolidated subsidiaries (Note 6) 13,402 -
Minority interest expense 4,456 4,254
Increase (decrease) in deferred income taxes (1,528) 29
Other noncash items (1,044) 5,839
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable 12,732 13,200
Inventories (32,386) (9,093)
Other current assets (1,720) (707)
Accounts payable (4,071) (5,111)
Other current liabilities (1,640) (12,604)
Other (60) (1,971)
---------- ---------
Net cash provided by operating activities 17,113 31,069
---------- ---------
Investing Activities:
Acquisitions, net of cash acquired (4,744) (322,996)
Acquisition of minority interest of subsidiaries (Note 7) (11,520) -
Proceeds from sale of businesses, net of cash divested (Note 6) 38,484 -
Advances to affiliate, net (19,875) -
Purchases of property, plant, and equipment (12,578) (9,204)
Proceeds from sale of property, plant, and equipment 1,317 4,802
Other, net 2,018 1,541
---------- ---------
Net cash used in investing activities $ (6,898) $(325,857)
---------- ---------
5
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Three Months Ended
April 1, April 3,
(In thousands) 2000 1999
- ------------------------------------------------------------------------- --------- ----------- ----------
Financing Activities:
Net proceeds from issuance of Company and subsidiary common stock $ 5,615 $ 442
Purchases of Company and subsidiary common stock and subordinated - (12,042)
convertible debentures
Net proceeds from issuance of short-term obligation to parent company - 200,000
Repayment of long-term obligations to parent company - (10,000)
Increase (decrease) in short-term obligations, net (18,589) 309
Proceeds from issuance of long-term obligations 3,019 14,484
Repayment of long-term obligations (3,519) (3,118)
---------- ---------
Net cash provided by (used in) financing activities (13,474) 190,075
---------- ---------
Exchange Rate Effect on Cash 6,355 (6,043)
---------- ---------
Increase (Decrease) in Cash and Cash Equivalents 3,096 (110,756)
Cash and Cash Equivalents at Beginning of Period 185,492 553,825
---------- ---------
Cash and Cash Equivalents at End of Period $ 188,588 $ 443,069
========== =========
Noncash Activities:
Fair value of assets of acquired companies $ 7,479 $ 560,910
Cash paid for acquired companies (5,000) (363,498)
Cash to be paid for remaining outstanding shares of tender offer - (2,452)
---------- ---------
Liabilities assumed of acquired companies $ 2,479 $ 194,960
========== =========
Conversions of Company convertible obligations by parent company $ 140,000 $ -
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
6
THERMO INSTRUMENT SYSTEMS INC.
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Instrument Systems Inc. (the Company) without audit and, in the
opinion of management, reflect all adjustments of a normal recurring nature
necessary for a fair statement of the financial position at April 1, 2000, and
the results of operations and cash flows for the three-month periods ended April
1, 2000, and April 3, 1999. Interim results are not necessarily indicative of
results for a full year.
The consolidated balance sheet presented as of January 1, 2000, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2000,
filed with the Securities and Exchange Commission.
2. 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. During the first quarter of 2000 and 1999, the
Company had comprehensive income of $0.8 million and a comprehensive loss of
$8.3 million, respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
April 1, April 3,
(In thousands except per share amounts) 2000 1999
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Basic
Net Income $19,332 $ 18,885
------- --------
Weighted Average Shares 124,462 119,302
------- --------
Basic Earnings per Share $ .16 $ .16
======= ========
Diluted
Net Income $19,332 $ 18,885
Effect of:
Convertible obligations 357 855
Majority-owned subsidiaries' dilutive securities (781) (503)
------- --------
Income Available to Common Shareholders, as Adjusted $18,908 $ 19,237
------- --------
Weighted Average Shares 124,462 119,302
Effect of:
Convertible obligations 4,771 11,409
Stock options 992 377
------- --------
Weighted Average Shares, as Adjusted 130,225 131,088
------- --------
Diluted Earnings per Share $ .15 $ .15
======= ========
7
3. Earnings per Share (continued)
The computation of diluted earnings per share for the first quarter of
2000 and 1999 excludes the effect of assuming the conversion of the Company's
$250.0 million principal amount 4% subordinated convertible debentures,
convertible at $35.65 per share, and $172.5 million principal amount 4 1/2%
senior convertible debentures, convertible at $34.46 per share, because the
effect would be antidilutive. In addition, options to purchase 355,000 and
449,000 shares of common stock were not included in the computation of diluted
earnings per share for the first quarter of 2000 and 1999, respectively, because
their effect would have been antidilutive due to the options' exercise prices
exceeding the average market price for the common stock.
4. Business Segment Information
Three Months Ended
April 1, April 3,
(In thousands) 2000 1999
- -------------------------------------------------------------- --- ------------- ------------ ------------
Revenues:
Life Sciences $178,076 $169,236
Optical Technologies 198,011 178,478
Measurement and Control 147,673 118,673
Intersegment sales eliminations (a) (2,674) (2,808)
-------- --------
$521,086 $463,579
======== ========
Income Before Provision for Income Taxes and Minority Interest:
Life Sciences $25,970 $ 24,529
Optical Technologies (b) 29,634 15,118
Measurement and Control (c) 7,517 6,891
Corporate (d) (1,339) (962)
------- --------
Total operating income 61,782 45,576
Interest and other expense, net (e) (18,512) (6,429)
------- --------
$43,270 $ 39,147
======= ========
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Includes restructuring and other unusual income of $12.5 million in the
first quarter of 2000 and restructuring costs of $1.2 million in the first
quarter of 1999. Also includes charges of $1.4 million in the first quarter
of 1999 for the sale of inventories revalued in connection with the
acquisition of Spectra-Physics AB.
(c) Includes charges of $3.2 million in the first quarter of 1999 for the sale
of inventories revalued in connection with the acquisition of
Spectra-Physics AB.
(d) Primarily corporate general and administrative expenses.
(e) Includes equity in losses of unconsolidated subsidiaries of $13.4 million in
the first quarter of 2000 (Note 6).
8
5. Accrued Acquisition Expenses
The Company has undertaken restructuring activities at certain acquired
businesses. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily
have included reductions in staffing levels and the abandonment of excess
facilities. In connection with these restructuring activities, as part of the
cost of the acquisitions, the Company established reserves, primarily for
severance and excess facilities. In accordance with EITF 95-3, the Company
finalizes its restructuring plans no later than one year from the respective
dates of the acquisitions. Accrued acquisition expenses are included in other
accrued expenses in the accompanying balance sheet.
A summary of the changes in accrued acquisition expenses for acquisitions
completed before and during 1997 is as follows:
1997 Acquisitions
--------------------------------------
Abandonment Other
of Excess Pre-1997
(In thousands) Severance Facilities Acquisitions Total
- -------------------------------- -------------- -------------- -------------- -------------- -------------
Balance at January 1, 2000 $ 23 $1,420 $ 248 $7,437 $9,128
Usage - (14) - (318) (332)
Currency translation (5) (27) (15) (164) (211)
------ ------ ------ ------ ------
Balance at April 1, 2000 $ 18 $1,379 $ 233 $6,955 $8,585
====== ====== ====== ====== ======
The remaining accrued acquisition expenses for pre-1997 acquisitions
primarily represent lease obligations for a building in Uxbridge, England, and
an operating facility in Hayworth, England, with obligations through 2007.
The remaining accrued acquisition expenses for 1997 acquisitions primarily
represent lease obligations for 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.
A summary of the changes in accrued acquisition expenses for acquisitions
completed during 1998 is as follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 1, 2000 $ 281 $ 117 $ 43 $ 441
Usage (52) (5) (10) (67)
Decrease recorded to cost in excess of net (1) (94) - (95)
assets of acquired companies
Currency translation (9) - - (9)
----- ----- ----- -----
Balance at April 1, 2000 $ 219 $ 18 $ 33 $ 270
===== ===== ===== =====
The remaining accrued acquisition expenses for abandonment of excess
facilities for 1998 acquisitions primarily represent a lease obligation for a
facility in Maryland. The amounts captioned as "other" in 1998 primarily
represent relocation costs.
9
5. Accrued Acquisition Expenses (continued)
A summary of the changes in accrued acquisition expenses for acquisitions
completed during 1999 is as follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 1, 2000 $4,984 $2,065 $2,611 $9,660
Reserves established 101 55 - 156
Usage (1,013) (52) (226) (1,291)
Decrease due to finalization of (127) - - (127)
restructuring plans, recorded as a
decrease to cost in excess of net assets
of acquired companies
Currency translation (84) (63) (41) (188)
------ ------ ------ ------
Balance at April 1, 2000 $3,861 $2,005 $2,344 $8,210
====== ====== ====== ======
The principal accrued acquisition expenses for 1999 acquisitions are
severance for approximately 175 employees across all functions and for abandoned
facilities, primarily at Spectra-Physics AB. The abandoned facilities at
Spectra-Physics include operating facilities in Sweden, Germany, and France with
obligations 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 April 1, 2000, included 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.
6. Restructuring Costs and Other Unusual Income
During the first quarter of 2000, the Optical Technologies segment
recorded $12.4 million of unusual income resulting from the sale of its Nicolet
Imaging Systems (NIS) and Sierra Research and Technology, Inc. (SRT)
subsidiaries. The businesses manufacture products that include imaging systems
used in assembling complex printed circuit boards and in airbag manufacturing.
NIS and SRT were sold for aggregate proceeds of $40.0 million and had aggregate
revenues and operating income of $28.3 million and $2.2 million, respectively,
in 1999. These units were sold due to a consolidation trend among manufacturers
of test equipment in the markets these businesses serve. The Company has decided
to focus on growth in other sectors of the instruments market. During the first
quarter of 2000, this segment also recorded a noncash charge of $13.4 million
associated with its equity method investment in FLIR Systems, Inc., acquired as
part of the February 1999 acquisition of Spectra-Physics. FLIR recorded
significant charges in its fourth quarter of 1999 and the segment has recorded
its pro rata share of FLIR's loss. The segment records FLIR's results on a one
quarter lag. This charge was recorded to equity in losses of unconsolidated
subsidiaries in the accompanying statement of income. In addition, the Optical
Technologies segment recorded other noncash income of $1.7 million related to
hedging transactions of its majority-owned Spectra-Physics Lasers, Inc. (SPLI)
subsidiary, which elected early adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities."
During 1998 and 1999, the Company and its subsidiaries recorded
restructuring costs, which were accounted for in accordance with EITF 94-3,
primarily for severance for 723 employees and abandoned-facility payments. As of
January 1, 2000, the Company had terminated 711 employees and during the first
quarter of 2000, the Company terminated 7 additional employees. As of January 1,
2000, the Company had $1.7 million accrued for severance and facility-closing
costs relating to these activities. During the first quarter of 2000, the
Optical Technologies segment reversed $0.1 million of previously established
restructuring reserves. The Company expects to incur additional restructuring
costs totaling $0.2 million in the remainder of 2000, which are not permitted as
charges until incurred pursuant to the requirements of EITF 94-3.
10
6. Restructuring Costs and Other Unusual Income (continued)
A summary of the changes in accrued restructuring costs, which are
included in other accrued expenses in the accompanying balance sheet, is as
follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 1, 2000 $ 893 $ 224 $ 565 $1,682
Reversal of reserves - (84) - (84)
Usage (357) - - (357)
Currency translation (24) (2) (9) (35)
------ ------ ------ ------
Balance at April 1, 2000 $ 512 $ 138 $ 556 $1,206
====== ====== ====== ======
7. Acquisition of Thermo Vision Minority Interest
In July 1999, the Company's Thermo Vision Corporation subsidiary announced
that it had entered into a definitive agreement and plan of merger with the
Company pursuant to which the Company would acquire all of the outstanding
shares of common stock of Thermo Vision held by the public shareholders in
exchange for $7.00 per share in cash. The merger of Thermo Vision was completed
in January 2000 and its common stock has ceased to be publicly traded.
8. Proposed Reorganization
In January 2000, the Company announced plans to take private Thermo Optek
Corporation, ThermoQuest Corporation, Thermo BioAnalysis Corporation, Metrika
Systems Corporation, and ONIX Systems Inc. In addition, the Company announced
that Thermo Electron Corporation 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 owned more
than 90% of the outstanding shares of Thermo Optek and ThermoQuest common stock,
these two companies were spun in for cash through a "short-form" merger, at
$15.00 and $17.00 per share, respectively, during the second quarter of 2000 and
their common stock has ceased to be publicly traded. Also during the second
quarter of 2000, the Company successfully completed 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%. The
Company subsequently completed the acquisition of the outstanding minority
interest in each of these companies through short-form mergers at the same cash
prices as the tender offers and their common stock has ceased to be publicly
traded. As a result, the Company currently owns approximately 79.2%, 91.5%, and
97.9% 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.
During the second quarter of 2000, Thermo Electron commenced 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 88.6% of the
outstanding shares of the Company's common stock, has conditioned 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.
11
8. Proposed Reorganization (continued)
The exchange offer will require Securities and Exchange Commission (SEC)
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.
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 third 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, will remain a public subsidiary while the
Company and Thermo Electron continue to evaluate the SPLI business. The Company
owns approximately 78.5% of the outstanding shares of SPLI common stock.
9. Conversion of 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 was classified as noncurrent in the accompanying 1999 balance sheet.
10. Recent Accounting Pronouncement
In December 1999, the SEC 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 no later than the second quarter of calendar 2000 through
recording a cumulative net of tax effect of the change in accounting as of
January 2, 2000. The Company has not yet completed the analysis to determine the
effect that SAB 101 will have on its financial statements.
11. Subsequent Event
On May 11, 2000, the Company announced that it had entered into an
agreement to sell its wholly owned Spectra Precision, Inc. businesses to Trimble
Navigation Limited for approximately $200 million in cash and $80 million in
seller debt financing. Spectra Precision, part of the Measurement and Control
segment, was acquired in February 1999 as part of Spectra-Physics and provides
the construction, surveying, and heavy machine industries with precision
positioning equipment. These businesses are being sold as they are outside the
Company's renewed focus on measurement and detection instrumentation. Closing of
the transaction, expected at the end of the second quarter of 2000, is subject
to regulatory approval, financing, and other customary conditions.
12
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 1, 2000, filed with the Securities and Exchange
Commission.
Overview
The Company is a worldwide 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 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 other 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. 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.
Results of Operations
First Quarter 2000 Compared With First Quarter 1999
Revenues increased $57.5 million to $521.1 million in the first quarter of
2000 from $463.6 million in the first quarter of 1999. Revenues increased $53.6
million due to the inclusion of revenues from 1999 acquisitions for the full
period and an acquisition made in 2000, net of dispositions that reduced
revenues by $3.6 million. This increase in revenues was offset in part by a
decrease in revenues of $14.9 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, dispositions, and currency translation, revenues
increased $18.8 million.
13
First Quarter 2000 Compared With First Quarter 1999 (continued)
Life Sciences segment revenues increased to $178.1 million in the first
quarter of 2000 from $169.2 million in the first quarter of 1999. Revenues
increased $7.5 million due to acquisitions. The unfavorable effects of currency
translation decreased revenues in this segment by $7.4 million. Excluding the
effect of acquisitions and currency translation, revenues increased $8.8
million. Revenues from pharmaceutical and biochemical research products
increased $3.9 million due to higher demand for the segment's immunoassay
testing and newly introduced Multiblock deoxyribonucleic acid (DNA)
amplification products. Revenues from analytical instruments increased $3.2
million due to higher sales of mass spectrometers in Europe and Asia. Revenues
from scientific equipment increased $2.2 million due to higher demand for
controlled-environment laboratory equipment. These increases in revenues were
offset in part by lower revenues from information management systems due to
lower demand in the U.S.
Optical Technologies segment revenues increased to $198.0 million in the
first quarter of 2000 from $178.5 million in the first quarter of 1999. Revenues
increased $13.8 million due to acquisitions, net of dispositions, primarily the
acquisition of SPLI, in which the Company acquired a majority interest on
February 22, 1999. The dispositions primarily included the segment's Nicolet
Imaging Systems (NIS) and Sierra Research and Technology, Inc. (SRT) businesses
that were sold in March 2000 (Note 6). These units were sold due to a
consolidation trend among manufacturers of test equipment in the markets these
businesses serve. The Company has decided to focus on growth in other sectors of
the instruments market. The unfavorable effects of currency translation
decreased revenues in this segment by $5.4 million in 2000. Excluding the effect
of acquisitions, dispositions, and currency translation, revenues increased
$11.1 million. The increase in revenues was due in part to $4.6 million of
increased demand for products sold to the semiconductor industry by the
segment's physical properties business. The semiconductor sector is experiencing
renewed growth after a downturn in the first half of 1999. Revenues from
elemental analysis instruments increased $3.2 million in 2000, primarily due to
new product introductions, and revenues from photonics products increased $2.8
million, primarily due to strong demand for gratings used in systems for
semiconductor manufacturers and in telecommunications.
Measurement and Control segment revenues increased to $147.7 million in
the first quarter of 2000 from $118.7 million in the first quarter of 1999.
Revenues increased $32.3 million due to acquisitions, primarily that of
Spectra-Physics AB's wholly owned businesses, acquired on February 22, 1999. The
unfavorable effects of currency translation decreased revenues in this segment
by $2.1 million. Excluding the effect of acquisitions and currency translation,
revenues decreased $1.2 million. Revenues from process control products
decreased $1.5 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. Revenues from process-optimization systems decreased $1.2
million, primarily due to a reduction in spending in the metals industry due to
depressed pricing. These decreases in revenues were offset in part by higher
revenues from the sale of environmental-monitoring instruments.
The gross profit margin increased to 47% in the first quarter of 2000 from
46% the first quarter of 1999. The 1999 period included lower-margin revenues
from Spectra-Physics, which recorded a charge of $4.6 million relating to the
sale of inventories revalued at the date of acquisition, of which $3.2 million
was recorded by the Measurement and Control segment and $1.4 million by the
Optical Technologies segment. Excluding the charge for the sale of revalued
inventories in 1999, the gross profit margin remained unchanged at 47% in 2000
and 1999.
Selling, general, and administrative expenses as a percentage of revenues
increased to 29% in the first quarter of 2000 from 28% in the first quarter of
1999, principally due to the inclusion of higher selling, general, and
administrative expenses as a percentage of revenues at the wholly owned
businesses of Spectra-Physics.
Research and development expenses increased to $44.8 million in the first
quarter of 2000 from $34.2 million in the first quarter of 1999, 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
due to spending on new product development, including the V150 molecular beam
epitaxy system. Research and development expenses as a percentage of revenues
were 8.6% in 2000, compared with 7.4% in 1999. Excluding the expenses at
acquired businesses, research and development expenses as a percentage of
revenues were 7.7% in 2000.
14
First Quarter 2000 Compared With First Quarter 1999 (continued)
The Optical Technologies segment recorded unusual income of $12.4 million
in the first quarter of 2000 resulting from the sale of NIS and SRT (Note 6). In
connection with the restructuring actions undertaken by the Company in 1998,
this segment reversed previously established restructuring reserves of $0.1
million in the first quarter of 2000. In connection with the closing of certain
facilities, the Company expects to incur approximately $0.2 million of
additional costs in 2000.
Interest income decreased to $5.9 million in the first quarter of 2000
from $6.3 million in the first quarter of 1999, primarily due to a reduction in
invested balances as a result of acquisitions, including the acquisition of
Spectra-Physics in February 1999.
Interest expense increased to $12.6 million in the first quarter of 2000
from $12.2 million in the first quarter of 1999, primarily due to borrowings
from Thermo Electron Corporation in connection with the acquisition of
Spectra-Physics. This increase was offset in part by a decrease in interest
expense as a result of the repayment of certain promissory notes to Thermo
Electron that were issued in connection with acquisitions and the conversion by
Thermo Electron of the Company's $140.0 million principal amount 3 3/4% senior
convertible note in February 2000 (Note 9).
Equity in losses of unconsolidated subsidiaries of $13.4 million in the
first quarter of 2000 primarily relates to charges associated with
Spectra-Physics' minority investment in FLIR Systems, Inc., which recorded
significant charges in its fourth quarter of 1999. The Company reports its pro
rata share of FLIR's results on a one quarter lag (Note 6).
Other income (expense), net, in the first quarter of 2000 and 1999
primarily represents currency gains and losses resulting from hedging activities
at SPLI, which elected early adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (Note 6).
The effective tax rate was 45% in the first quarter of 2000, compared with
41% in the first quarter of 1999. 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 effective tax rate
increased in 2000 primarily due to the tax benefit for the loss at FLIR being
recorded at 28%, the tax rate of the Swedish subsidiary that holds the
investment in FLIR.
Minority interest expense remained relatively unchanged at $4.5 million in
the first quarter of 2000 and $4.3 million in the first quarter of 1999.
Liquidity and Capital Resources
Consolidated working capital was $410.2 million at April 1, 2000, compared
with $368.8 million at January 1, 2000. Included in working capital are cash and
cash equivalents of $188.6 million at April 1, 2000, compared with $185.5
million at January 1, 2000. Of the cash and cash equivalents balance at April 1,
2000, $149.1 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 April 1, 2000, the Company had $274.3 million invested in an
advance to affiliate. Of the advance to affiliate at April 1, 2000, $270.7
million was held by the Company's majority-owned subsidiaries and the balance
was advanced by the Company and its wholly owned subsidiaries. At April 1, 2000,
$149.6 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 August 2000.
15
Liquidity and Capital Resources (continued)
Cash provided by operating activities was $17.1 million in the first three
months of 2000. A decrease in accounts receivable provided cash of $12.7
million, primarily in the Optical Technologies and Life Sciences segments due to
lower sales volume in the first quarter of 2000, compared with the fourth
quarter of 1999. Cash of $32.4 million was used to fund an increase in
inventories, primarily in the Optical Technologies and Life Sciences segments
due to a build-up of inventory in preparation of new product releases and the
replenishment of year-end inventory levels. Cash of $5.7 million was used to
fund a decrease in accounts payable and other current liabilities, primarily due
to the timing of payments, offset in part by an increase in deferred revenue,
primarily in the Optical Technologies and Life Sciences segments due to annual
service contract billings in the first quarter of 2000. As of April 1, 2000, the
Company had $1.2 million of accrued restructuring costs, primarily all of which
it expects to pay in 2000. As of April 1, 2000, the Company had accrued $17.0
million for acquisition expenses. Accrued acquisition expenses includes $4.1
million of severance obligations, which the Company expects to pay primarily in
2000. The balance, which primarily represents abandoned-facility payments, will
be paid over the remaining terms of the leases through 2014.
During the first three months of 2000, the Company's primary investing
activities, excluding advance to affiliate activity, included the acquisition of
the minority interest of Thermo Vision, dispositions, and the purchase of
property, plant, and equipment. During the first three months of 2000, the
Company expended $11.2 million to acquire the minority interest of Thermo Vision
(Note 7) and expended an additional $0.3 million related to the acquisition of
the minority interest of ThermoSpectra, which was completed in December 1999.
The Company will expend additional cash of approximately $260 million, primarily
in the second quarter of 2000, for the repurchases of the public shares that it
does not already own of its majority-owned subsidiaries, excluding SPLI (Note
8). The Company received aggregate net proceeds of $38.5 million, net of cash
divested, from the sale of NIS and SRT in March 2000 (Note 6). The Company
expended $12.6 million for purchases of property, plant, and equipment and $4.7
million, net of cash acquired, for an acquisition. During the remainder of 2000,
the Company plans to make expenditures of approximately $53 million for
property, plant, and equipment.
The Company's financing activities used $13.5 million of cash in the first
three months of 2000, primarily as a result of the repayment of $22.1 million of
short- and long-term obligations.
On May 11, 2000, the Company announced that it had entered into an
agreement to sell its wholly owned Spectra Precision, Inc. businesses to Trimble
Navigation Limited for approximately $200 million in cash and $80 million in
seller debt financing (Note 11).
The Company has short-term obligations and current maturities of long-term
obligations due to Thermo Electron primarily in August 2000, totaling $153.8
million at April 1, 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, although earlier repayment is
expected upon completion of the transactions discussed in Note 8. 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. As of May 12, 2000, the Company has
borrowed $231 million under this agreement. 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.
16
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices has not changed materially
from its exposure at year-end 1999.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On February 1, 2000, the Company filed a Current Report on Form 8-K dated
January 31, 2000, with respect to certain corporate transactions affecting
it and its majority-owned public subsidiaries.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 12th day of May 2000.
THERMO INSTRUMENT SYSTEMS INC.
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
18
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
3 Amended By-Laws of the Registrant.
27 Financial Data Schedule.