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 March 29, 1997.
[ ] 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 (I.R.S. Employer
incorporation or organization) Identification No.)
1275 Hammerwood Avenue
Sunnyvale, California 94089
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 622-1000
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter
period that the Registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of
the issuer's classes of Common Stock, as of the
latest practicable date.
Class Outstanding at April 25, 1997
---------------------------- -----------------------------
Common Stock, $.10 par value 97,214,545
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
March 29, December 28,
(In thousands) 1997 1996
------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 432,256 $ 522,688
Available-for-sale investments, at quoted
market value (amortized cost of $7,470
and $7,430) 7,477 7,452
Accounts receivable, less allowances
of $20,711 and $16,981 363,049 303,331
Unbilled contract costs and fees 7,720 6,043
Inventories:
Raw materials and supplies 122,729 95,920
Work in process 59,478 47,518
Finished goods 103,020 70,245
Prepaid expenses 25,436 13,417
Prepaid income taxes 71,037 58,296
---------- ----------
1,192,202 1,124,910
---------- ----------
Property, Plant, and Equipment, at Cost 306,107 250,976
Less: Accumulated depreciation and
amortization 76,741 72,313
---------- ----------
229,366 178,663
---------- ----------
Patents and Other Assets 31,691 32,454
---------- ----------
Cost in Excess of Net Assets of Acquired
Companies (Note 3) 930,862 588,373
---------- ----------
$2,384,121 $1,924,400
========== ==========
2PAGE
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
March 29, December 28,
(In thousands except share amounts) 1997 1996
-----------------------------------------------------------------------
Current Liabilities:
Notes payable $ 189,598 $ 89,462
Accounts payable 102,002 83,161
Accrued payroll and employee benefits 57,597 51,728
Accrued income taxes 51,677 39,686
Accrued installation and warranty expenses 45,854 44,211
Accrued acquisition expenses (Note 3) 42,245 30,025
Deferred revenue 45,258 35,959
Other accrued expenses 137,021 101,646
Due to parent company 9,293 12,329
---------- ----------
680,545 488,207
---------- ----------
Deferred Income Taxes 20,538 20,710
---------- ----------
Other Deferred Items 27,944 29,805
---------- ----------
Long-term Obligations:
Senior convertible obligations (includes
$140,000 due to parent company) 330,784 334,781
Subordinated convertible obligations 192,500 192,500
Other (includes $235,000 and $15,000 due
to parent company; Note 3) 255,313 26,933
---------- ----------
778,597 554,214
---------- ----------
Minority Interest 102,019 85,197
---------- ----------
Shareholders' Investment:
Common stock, $.10 par value, 250,000,000
shares authorized; 97,913,322 and
97,674,228 shares issued 9,791 9,767
Capital in excess of par value 323,682 319,464
Retained earnings 458,228 424,641
Treasury stock at cost, 706,230 and
750,055 shares (8,405) (8,679)
Cumulative translation adjustment (8,822) 1,060
Net unrealized gain on available-for-sale
investments 4 14
---------- ----------
774,478 746,267
---------- ----------
$2,384,121 $1,924,400
========== ==========
The accompanying notes are an integral part of these consolidated
financial statements.
3PAGE
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Income
(Unaudited)
Three Months Ended
------------------------
March 29, March 30,
(In thousands except per share amounts) 1997 1996
------------------------------------------------------------------------
Revenues $329,120 $225,571
-------- --------
Costs and Operating Expenses:
Cost of revenues 173,448 118,207
Selling, general, and administrative expenses 89,569 65,709
Research and development expenses 23,407 16,549
Write-off of acquired technology - 3,500
-------- --------
286,424 203,965
-------- --------
Operating Income 42,696 21,606
Interest Income 7,224 5,111
Interest Expense (includes $1,559 and $1,537
to parent company) (8,460) (6,290)
Gain on Issuance of Stock by Subsidiaries
(Note 4) 12,035 24,257
-------- --------
Income Before Provision for Income Taxes
and Minority Interest Expense 53,495 44,684
Provision for Income Taxes 17,770 10,073
Minority Interest Expense 2,138 568
-------- --------
Net Income $ 33,587 $ 34,043
======== ========
Earnings per Share:
Primary $ .35 $ .37
======== ========
Fully diluted $ .32 $ .33
======== ========
Weighted Average Shares:
Primary 97,071 91,875
======== ========
Fully diluted 111,442 107,269
======== ========
The accompanying notes are an integral part of these consolidated
financial statements.
4PAGE
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
-----------------------
March 29, March 30,
(In thousands) 1997 1996
-----------------------------------------------------------------------
Operating Activities:
Net income $ 33,587 $ 34,043
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 11,662 9,036
Provision for losses on accounts
receivable 1,084 413
Gain on issuance of stock by
subsidiaries (Note 4) (12,035) (24,257)
Write-off of acquired technology - 3,500
Minority interest expense 2,138 568
Decrease in deferred income taxes - (40)
Other noncash expenses 1,419 1,138
Changes in current accounts, excluding
the effects of acquisitions:
Accounts receivable (12,326) 8,814
Inventories (10,436) (6,998)
Other current assets (7,745) 1,168
Accounts payable (404) (1,861)
Other current liabilities (1,439) 5,012
Other (28) 198
--------- ---------
Net cash provided by operating activities 5,477 30,734
--------- ---------
Investing Activities:
Acquisitions, net of cash acquired (Note 3) (336,935) (239,406)
Purchases of property, plant, and equipment (3,989) (5,370)
Other 601 1,527
--------- ---------
Net cash used in investing activities (340,323) (243,249)
--------- ---------
Financing Activities:
Net proceeds from issuance of Company and
subsidiaries' common stock (Note 4) 25,219 42,010
Short-term borrowings from parent company - 89,012
Proceeds from issuance of short-term
obligation to parent company - 30,000
Proceeds from issuance of long-term
obligations to parent company (Note 3) 220,000 -
Repayment of long-term obligations (253) (1,139)
--------- ---------
Net cash provided by financing activities $ 244,966 $ 159,883
--------- ---------
5PAGE
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Three Months Ended
-----------------------
March 29, March 30,
(In thousands) 1997 1996
-----------------------------------------------------------------------
Exchange Rate Effect on Cash $ (552) $ (128)
--------- ---------
Decrease in Cash and Cash Equivalents (90,432) (52,760)
Cash and Cash Equivalents at Beginning
of Period 522,688 395,233
--------- ---------
Cash and Cash Equivalents at End of Period $ 432,256 $ 342,473
========= =========
Noncash Activities:
Fair value of assets of acquired companies $ 607,466 $ 494,240
Cash paid for acquired companies (383,247) (251,964)
Cash to be paid for remaining outstanding
shares of tender offer (21,102) -
Issuance of subsidiary stock options
for acquisition (2,080) -
--------- ---------
Liabilities assumed of acquired companies $ 201,037 $ 242,276
========= =========
Conversions of convertible obligations $ 3,997 $ 14,356
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
6PAGE
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 March 29, 1997, the results of operations for the three-month periods
ended March 29, 1997, and March 30, 1996, and the cash flows for the
three-month periods ended March 29, 1997, and March 30, 1996. Interim
results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 28, 1996, 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 December 28, 1996, as
amended, filed with the Securities and Exchange Commission.
2. Presentation
Certain amounts in 1996 have been reclassified to the presentation in
the 1997 financial statements.
3. Acquisitions
In March 1997, the Company acquired 166,557,897 shares (or
approximately 95%) of Life Sciences International PLC (Life Sciences), a
London Stock Exchange-listed company, for 135 pence per share
(approximately $2.15 per share, or an aggregate of approximately $362.7
million, including related expenses) in completion of the Company's offer
to acquire all of the outstanding shares of Life Sciences. The Company
expects to acquire the Life Sciences shares that remain outstanding for
135 pence per share pursuant to the compulsory acquisition rules
applicable to United Kingdom companies. The accompanying balance sheet as
of March 29, 1997, includes $21.1 million accrued for the purchase of the
remaining Life Sciences shares outstanding, plus shares issuable upon
exercise of outstanding stock options. Subsequent to the end of the
quarter, the Company repaid approximately $75 million of Life Sciences'
debt. Life Sciences manufactures laboratory science equipment,
appliances, instruments, consumables, and reagents for the research,
clinical, and industrial markets.
To partially finance the acquisition of Life Sciences, the Company
borrowed $210.0 million from Thermo Electron Corporation (Thermo
Electron) pursuant to a promissory note due March 1999, and bearing
interest at the Commercial Paper Composite Rate plus 25 basis points, set
at the beginning of each quarter.
7PAGE
THERMO INSTRUMENT SYSTEMS INC.
3. Acquisitions (continued)
During the first quarter of 1997, the Company made several other
acquisitions for approximately $20.5 million in cash, the issuance of
subsidiary stock options valued at an aggregate $2.1 million, and a
subsidiary's issuance of a $10.0 million promissory note to Thermo
Electron, which is due March 1999, and bears interest at the 90-day
Commercial Paper Composite Rate plus 25 basis points, set at the
beginning of each quarter.
The acquisitions completed in the first quarter of 1997 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 cost of these acquisitions exceeded
the estimated fair value of the acquired net assets by $349.5 million,
which is being amortized over 40 years. Allocation of the purchase price
for these acquisitions was based on estimates of the fair value of the
net assets acquired and is subject to adjustment upon finalization of the
purchase price allocation.
Based on unaudited data, the following table presents selected
financial information for the Company and Life Sciences on a pro forma
basis, assuming the companies had been combined since the beginning of
1996. The effect of the acquisitions not included in the pro forma data
was not material to the Company's results of operations.
Three Months Ended
--------------------------
March 29, March 30,
(In thousands except per share amounts) 1997 1996
------------------------------------------------------------------------
Revenues $381,892 $307,232
Net income 20,485 30,813
Earnings per share:
Primary .21 .34
Fully diluted .20 .30
The pro forma results are not necessarily indicative of future
operations or the actual results that would have occurred had the
acquisition of Life Sciences been made at the beginning of 1996.
During 1996, the Company had undertaken a restructuring of a
substantial portion of the businesses comprising the Scientific
Instruments Division of Fisons plc (Fisons), acquired in March 1996.
During the first quarter of 1997, the Company expended $5.1 million for
restructuring costs, primarily for severance and abandoned facility
payments. In connection with finalizing its restructuring plans for the
businesses acquired from Fisons, the Company recorded an additional $8.1
million of acquisition reserves in the first quarter of 1997, primarily
for the abandonment of excess facilities, as well as severance. This
amount was recorded as an increase in cost in excess of net assets of
acquired companies. The remaining reserve for restructuring these
businesses was $20.6 million at March 29, 1997, which primarily
represents ongoing severance and abandoned facility payments. As of March
29, 1997, the Company has accrued $42.2 million in connection with
8PAGE
THERMO INSTRUMENT SYSTEMS INC.
3. Acquisitions (continued)
restructuring activities of all of its acquisitions, including the
businesses acquired from Fisons.
4. Issuance of Stock by Subsidiary
In March 1997, the Company's ThermoQuest Corporation (ThermoQuest)
subsidiary sold 1,768,500 shares of its common stock at $15.00 per share
for net proceeds of approximately $25 million, resulting in a gain of
approximately $12 million. Following the sale, the Company owned 90% of
ThermoQuest's outstanding common stock.
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 caption "Forward-looking Statements"
in Exhibit 13 to the Company's Annual Report on form 10-K for the fiscal
year ended December 28, 1996, filed with the Securities and Exchange
Commission.
Results of Operations
First Quarter 1997 Compared With First Quarter 1996
Revenues increased $103.5 million, or 46%, to $329.1 million in the
first quarter of 1997 from $225.6 million in the first quarter of 1996
due to acquisitions, which included Life Sciences International PLC (Life
Sciences) in March 1997 (Note 3) and a substantial portion of the
businesses comprising the Scientific Instruments Division of Fisons plc
(Fisons) in March 1996. Acquisitions added revenues of $110.9 million in
the first quarter of 1997. The increase in revenues from acquisitions was
offset in part by a decrease of $8.0 million in revenues 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. An increase in revenues from
ThermoQuest Corporation's (ThermoQuest) existing mass spectrometry
business as a result of the continued success of a new product introduced
in the first quarter of 1996 was offset by a decrease in revenues at
certain of the Company's other existing businesses, principally Thermo
Optek Corporation (Thermo Optek). Revenues from Thermo Optek's existing
businesses decreased due to the inclusion in 1996 of several large
nonrecurring sales to the Chinese and Japanese governments and the
elimination of certain unprofitable acquired product lines.
9PAGE
THERMO INSTRUMENT SYSTEMS INC.
First Quarter 1997 Compared With First Quarter 1996 (continued)
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
forward exchange contracts to reduce its exposure to currency
fluctuations.
The gross profit margin remained relatively unchanged at 47.3% in the
first quarter of 1997, compared with 47.6% in the first quarter of 1996.
An increase in ThermoQuest's gross profit margin, primarily due to the
increase in sales of higher-margin mass spectrometry products, was more
than offset by the inclusion of lower-margin revenues from acquired
businesses, including Life Sciences, which recorded an adjustment to
expense of $2.7 million relating to the revaluation of the finished goods
inventories acquired by the Company.
Selling, general, and administrative expenses as a percentage of
revenues decreased to 27% in the first quarter of 1997 from 29% in the
first quarter of 1996, primarily due to efforts at Thermo Optek to reduce
selling and administrative costs at certain acquired businesses and the
integration of products from businesses acquired from Fisons into Thermo
Optek's existing distribution channels. Research and development expenses
as a percentage of revenues remained relatively unchanged at 7.1% in
1997, compared with 7.3% in 1996.
In the first quarter of 1996, the Company wrote off $3.5 million of
acquired technology in connection with the acquisition of a significant
portion of the businesses comprising the Scientific Instruments Division
of Fisons.
Interest income increased to $7.2 million in the first quarter of
1997 from $5.1 million in the first quarter of 1996, due to interest
income earned on invested proceeds from the issuance of $172.5 million
principal amount of 4 1/2% senior convertible debentures by the Company
in October 1996 and, to a lesser extent, from the sale of common stock by
ThermoQuest, Thermo BioAnalysis Corporation (Thermo BioAnalysis), and
Metrika Systems Corporation (Metrika Systems) in 1996. The increase in
interest income was offset in part by a reduction in cash as a result of
acquisitions. Interest expense increased to $8.5 million in 1997 from
$6.3 million in 1996, primarily due to the issuance of the 4 1/2% senior
convertible debentures by the Company and, to a lesser extent, the
inclusion of interest expense on debt assumed as part of the Fisons and
Life Sciences acquisitions. Subsequent to the end of the quarter, the
Company repaid approximately $75 million of Life Sciences' debt. The
Company expects to repay the remaining $30 million of Life Sciences' debt
in June 1997. The increases in interest expense were offset in part by
the conversion of a portion of the Company's convertible obligations into
common stock of the Company. Interest expense will increase as a result
of an aggregate $220.0 million in promissory notes issued to Thermo
Electron Corporation (Thermo Electron) in connection with acquisitions
(Note 3).
10PAGE
THERMO INSTRUMENT SYSTEMS INC.
First Quarter 1997 Compared With First Quarter 1996 (continued)
The Company has adopted a strategy of spinning out certain of its
businesses into separate subsidiaries and having these subsidiaries sell
a minority interest to outside investors. The Company believes that this
strategy provides additional motivation and incentives for the management
of the subsidiaries through the establishment of subsidiary-level stock
option incentive programs, as well as capital to support the
subsidiaries' growth. As a result of the sale of stock by subsidiaries,
the Company recorded gains of approximately $12 million in the first
quarter of 1997 and $24 million in the first quarter of 1996 (Note 4).
The size and timing of these transactions are dependent on market and
other conditions that are beyond the Company's control. Accordingly,
there can be no assurance that the Company will be able to realize gains
from such transactions in the future.
The effective tax rate increased to 33% in the first quarter of 1997
from 23% in the first quarter of 1996, primarily due to a lower
nontaxable gain on issuance of stock by subsidiaries in 1997. Excluding
the impact of the gain on issuance of stock by subsidiaries in 1997 and
1996, 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, the inability to provide a
tax benefit on losses incurred at certain foreign subsidiaries, the
impact of state income taxes, and in 1996, the write-off of acquired
technology in connection with the acquisition of the businesses from
Fisons.
Minority interest expense increased to $2.1 million in the first
quarter of 1997 from $0.6 million in the first quarter of 1996, primarily
due to the minority interest associated with the Company's newly public
ThermoQuest, Thermo Optek, and Thermo BioAnalysis subsidiaries.
Liquidity and Capital Resources
Consolidated working capital was $511.7 million at March 29, 1997,
compared with $636.7 million at December 28, 1996. Included in working
capital are cash, cash equivalents, and available-for-sale investments of
$439.7 million at March 29, 1997, and $530.1 million at December 28,
1996. Of the $439.7 million balance at March 29, 1997, $207.3 million was
held by ThermoQuest, $61.5 million by Thermo Optek, $12.2 million by
ThermoSpectra, $59.2 million by Thermo BioAnalysis, $17.4 million by
Metrika Systems, and $82.1 million by the Company and its wholly owned
subsidiaries. The Company's operating activities provided cash of $5.5
million in the first quarter of 1997. Accounts receivable increased $12.3
million primarily due to increased shipments by one of ThermoQuest's
foreign subsidiaries in the first quarter of 1997, compared with the
fourth quarter of 1996, and an increase in accounts receivable at Life
Sciences from the date of its acquisition by the Company. Inventories
increased $10.4 million primarily due to replenishing year-end levels,
which had decreased by $17.2 million during the fourth quarter of 1996.
At March 29, 1997, $104.6 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, including for acquisitions,
11PAGE
THERMO INSTRUMENT SYSTEMS INC.
Liquidity and Capital Resources (continued)
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.
The Company's investing activities used $340.3 million of cash in the
first quarter of 1997. The Company expended $336.9 million for
acquisitions (Note 3) and $4.0 million for the purchase of property,
plant, and equipment. Subsequent to the end of the quarter, the Company
repaid approximately $75 million of Life Sciences' debt. The Company
expects to repay the remaining $30 million of Life Sciences' debt in June
1997. Such debt is included in current notes payable in the accompanying
1997 balance sheet.
The Company's financing activities provided $245.0 million of cash in
the first quarter of 1997. In March 1997, to partially finance
acquisitions, the Company borrowed an aggregate $220.0 million from
Thermo Electron pursuant to promissory notes due March 1999 (Note 3). In
March 1997, ThermoQuest sold shares of its common stock for net proceeds
of approximately $25 million (Note 4).
In April 1997, Metrika Systems filed a registration statement under
the Securities Act of 1933 with the Securities and Exchange Commission
covering shares of common stock to be offered in its initial public
offering.
During the remainder of 1997, the Company plans to make expenditures
of approximately $21 million for property, plant, and equipment. 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, additional debt or
equity financing from the capital markets, 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.
12PAGE
THERMO INSTRUMENT SYSTEMS INC.
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 January 22, 1997, the Company filed a Current Report on Form 8-K
pertaining to its tender offer for all of the outstanding shares of Life
Sciences International PLC.
On April 4, 1997, the Company filed a Current Report on Form 8-K
pertaining to its acquisition of Life Sciences International PLC.
13PAGE
THERMO INSTRUMENT SYSTEMS INC.
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 6th day of May 1997.
THERMO INSTRUMENT SYSTEMS INC.
Paul F. Kelleher
----------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
----------------------------
John N. Hatsopoulos
Vice President and Chief
Financial Officer
14PAGE
THERMO INSTRUMENT SYSTEMS INC.
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
------------------------------------------------------------------------
10.1 $210,000,000 Promissory Note dated as of March 27, 1997,
issued by the Company to Thermo Electron Corporation.
11 Statement re: Computation of Earnings per Share.
27 Financial Data Schedule.