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 July 3, 1999
[ ] 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 Identification No.)
incorporation or organization)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at July 30, 1999
Common Stock, $.10 par value 119,441,915
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet
(Unaudited)
Assets
July 3, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ----------- -----------
Current Assets:
Cash and cash equivalents (includes $14,307 and $408,490 under $ 223,949 $ 553,825
repurchase agreements with parent company)
Advance to affiliate (Note 8) 233,114 -
Accounts receivable, less allowances of $32,389 and $23,726 458,076 407,430
Unbilled contract costs and fees 9,647 13,114
Inventories:
Raw materials and supplies 146,910 118,286
Work in process 71,038 55,086
Finished goods 130,334 103,217
Prepaid expenses 33,298 19,705
Prepaid and refundable income taxes 74,924 62,921
---------- ----------
1,381,290 1,333,584
---------- ----------
Property, Plant, and Equipment, at Cost 420,592 344,368
Less: Accumulated depreciation and amortization 138,339 124,137
---------- ----------
282,253 220,231
---------- ----------
Other Assets 141,259 73,705
---------- ----------
Cost in Excess of Net Assets of Acquired Companies (Note 5) 1,049,461 938,254
---------- ----------
$2,854,263 $2,565,774
========== ==========
2
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
July 3, January 2,
(In thousands except share amounts) 1999 1999
- ----------------------------------------------------------------------------------- ----------- -----------
Current Liabilities:
Notes payable and current maturities of long-term obligations $ 325,644 $ 130,772
(includes $250,000 and $60,000 due to parent company; Note 5)
Accounts payable 111,015 101,009
Accrued payroll and employee benefits 60,363 59,649
Accrued income taxes 62,213 59,984
Accrued installation and warranty expenses 42,355 39,958
Deferred revenue 48,943 46,354
Other accrued expenses (Notes 5 and 6) 184,653 135,708
Due to parent company and affiliated companies 9,832 14,195
---------- ----------
845,018 587,629
---------- ----------
Deferred Income Taxes 42,291 29,278
---------- ----------
Other Deferred Items 38,469 31,056
---------- ----------
Long-term Obligations:
Senior convertible obligations (includes $140,000 due to parent 327,042 327,042
company; Note 9)
Subordinated convertible obligations 386,766 389,436
Other (includes $3,800 due to parent company) 43,436 26,965
---------- ----------
757,244 743,443
---------- ----------
Minority Interest 242,891 229,361
---------- ----------
Shareholders' Investment:
Common stock, $.10 par value, 250,000,000 shares authorized; 122,879,889 12,288 12,288
shares issued
Capital in excess of par value 332,469 331,621
Retained earnings 707,417 675,983
Treasury stock at cost, 3,484,563 and 3,603,358 shares (61,556) (63,671)
Deferred compensation (475) -
Accumulated other comprehensive items (Note 2) (61,793) (11,214)
---------- ----------
928,350 945,007
---------- ----------
$2,854,263 $2,565,774
========== ==========
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
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ------------------------------------------------------------------------------------ ----------- ----------
Revenues $535,634 $395,392
-------- --------
Costs and Operating Expenses:
Cost of revenues 289,753 204,675
Selling, general, and administrative expenses 152,766 105,944
Research and development expenses 41,248 27,741
Restructuring and other nonrecurring costs, net (Note 6) 156 1,423
-------- -------
483,923 339,783
-------- -------
Operating Income 51,711 55,609
Interest Income 5,372 9,381
Interest Expense (includes $4,577 and $3,023 to parent company) (13,471) (12,134)
Equity in Losses of Unconsolidated Subsidiaries (Notes 5 and 6) (10,995) -
Gain on Sale of Investments 956 -
Gain on Issuance of Stock by Subsidiary - 11,063
Other Expense (360) -
-------- -------
Income Before Provision for Income Taxes and Minority Interest 33,213 63,919
Provision for Income Taxes 17,213 20,989
Minority Interest Expense 3,451 5,334
-------- -------
Net Income $ 12,549 $37,596
======== =======
Earnings per Share (Note 3):
Basic $ .11 $ .31
======== =======
Diluted $ .10 $ .28
======== =======
Weighted Average Shares (Note 3):
Basic 119,348 122,176
======== =======
Diluted 130,918 146,644
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Income
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ------------------------------------------------------------------------------------ ----------- ----------
Revenues $999,213 $803,335
-------- --------
Costs and Operating Expenses:
Cost of revenues 541,876 418,884
Selling, general, and administrative expenses 283,271 213,671
Research and development expenses 75,441 56,260
Restructuring and other nonrecurring costs, net (Note 6) 1,399 1,423
-------- --------
901,987 690,238
-------- --------
Operating Income 97,226 113,097
Interest Income 11,698 17,550
Interest Expense (includes $7,563 and $6,454 to parent company) (25,656) (23,627)
Equity in Losses of Unconsolidated Subsidiaries (Notes 5 and 6) (10,934) -
Gain on Sale of Investments 956 -
Gain on Issuance of Stock by Subsidiaries - 21,013
Other Expense (930) -
-------- --------
Income Before Provision for Income Taxes and Minority Interest 72,360 128,033
Provision for Income Taxes 33,221 42,948
Minority Interest Expense 7,705 9,634
-------- --------
Net Income $ 31,434 $ 75,451
======== ========
Earnings per Share (Note 3):
Basic $ .26 $ .62
======== ========
Diluted $ .24 $ .55
======== ========
Weighted Average Shares (Note 3):
Basic 119,325 122,121
======== ========
Diluted 131,003 146,676
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ------------------------------------------------------------------------- ---------- ----------- ----------
Operating Activities:
Net income $ 31,434 $ 75,451
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 36,928 31,261
Noncash restructuring costs (Note 6) 149 -
Provision for losses on accounts receivable 2,681 661
Equity in losses of unconsolidated subsidiaries (Notes 5 and 6) 10,934 -
Gain on sale of investments (956) -
Gain on issuance of stock by subsidiaries - (21,013)
Minority interest expense 7,705 9,634
Increase in deferred income taxes 29 -
Other noncash expenses 11,201 3,530
Changes in current accounts, excluding the effects of acquisitions:
Accounts receivable 10,538 25,565
Inventories (11,098) (17,574)
Other current assets 3,064 (5,471)
Accounts payable (10,880) (835)
Other current liabilities (27,400) (21,349)
Other (2,265) (1,376)
---------- ---------
Net cash provided by operating activities 62,064 78,484
---------- ---------
Investing Activities:
Acquisitions, net of cash acquired (Note 5) (324,655) (33,084)
Refund of acquisition purchase price (Note 5) 4,074 -
Payment to affiliated company for acquired business - (19,117)
Advances to affiliate, net (Note 8) (233,114) -
Purchases of property, plant, and equipment (24,467) (12,361)
Proceeds from sale of property, plant, and equipment 8,727 6,621
Proceeds from sale of available-for-sale investments 9,103 -
Other, net 1,277 1,551
---------- ---------
Net cash used in investing activities $ (559,055) $ (56,390)
---------- ---------
6
THERMO INSTRUMENT SYSTEMS INC.
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ------------------------------------------------------------------------- ---------- ----------- ----------
Financing Activities:
Net proceeds from issuance of Company and subsidiary common stock $ 1,149 $ 112,558
Net proceeds from issuance of subordinated convertible debentures - 244,155
Repurchase of Company and subsidiary common stock and subordinated (12,475) -
convertible debentures
Net proceeds from issuance of short-term obligation to parent
company (Note 5) 200,000 -
Decrease in short-term obligations, net (14,498) (10,383)
Proceeds from issuance of long-term obligations 14,528 -
Repayment of long-term obligations (3,043) (1,657)
Repayment of long-term obligations to parent company (10,000) (105,000)
Other - 91
---------- ---------
Net cash provided by financing activities 175,661 239,764
---------- ---------
Exchange Rate Effect on Cash (8,546) (567)
---------- ---------
Increase (Decrease) in Cash and Cash Equivalents (329,876) 261,291
Cash and Cash Equivalents at Beginning of Period 553,825 468,848
---------- ---------
Cash and Cash Equivalents at End of Period $ 223,949 $ 730,139
========== =========
Noncash Activities (Note 5):
Fair value of assets of acquired companies $ 563,386 $ 35,982
Cash to be paid for remaining outstanding shares of tender offer (2,190) -
Cash paid for acquired companies (365,157) (33,695)
---------- ---------
Liabilities assumed of acquired companies $ 196,039 $ 2,287
========== =========
Conversions of Company and subsidiary convertible obligations $ - $ 6,262
========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
7
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo 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 July 3, 1999, the
results of operations for the three- and six-month periods ended July 3, 1999,
and July 4, 1998, and the cash flows for the six-month periods ended July 3,
1999, and July 4, 1998. Interim results are not necessarily indicative of
results for a full year.
The consolidated balance sheet presented as of January 2, 1999, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999,
filed with the Securities and Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income 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 second quarter of 1999 and 1998, the
Company had a comprehensive loss of $3.0 million and comprehensive income of
$40.0 million, respectively. During the first six months of 1999 and 1998, the
Company had a comprehensive loss of $11.3 million and comprehensive income of
$74.9 million, respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Basic
Net Income $12,549 $ 37,596 $31,434 $ 75,451
------- -------- ------- --------
Weighted Average Shares 119,348 122,176 119,325 122,121
------- -------- ------- --------
Basic Earnings per Share $ .11 $ .31 $ .26 $ .62
======= ======== ======= ========
8
3. Earnings per Share (continued)
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Diluted
Net Income $12,549 $ 37,596 $31,434 $ 75,451
Effect of:
Convertible obligations 855 3,476 1,710 6,953
Majority-owned subsidiaries' dilutive securities (703) (736) (1,210) (1,643)
------- -------- ------- --------
Income Available to Common Shareholders, as Adjusted $12,701 $ 40,336 $31,934 $ 80,761
------- -------- ------- --------
Weighted Average Shares 119,348 122,176 119,325 122,121
Effect of:
Convertible obligations 11,409 23,446 11,409 23,451
Stock options 161 1,022 269 1,104
------- -------- ------- --------
Weighted Average Shares, as Adjusted 130,918 146,644 131,003 146,676
------- -------- ------- --------
Diluted Earnings per Share $ .10 $ .28 $ .24 $ .55
======= ======== ======= ========
The computation of diluted earnings per share for the three- and six-month
periods ended July 3, 1999, excludes the effect of assuming the conversion of
the Company's $172.5 million principal amount 4 1/2% senior convertible
debentures, convertible at $34.46 per share, and $250.0 million principal amount
4% subordinated convertible debentures, convertible at $35.65 per share, because
the effect would be antidilutive.
In addition, the computation of diluted earnings per share for each period
excludes the effect of assuming the exercise of certain outstanding stock
options because the effect would be antidilutive. As of July 3, 1999, there were
1,088,000 of such options outstanding, with exercise prices ranging from $14.19
to $31.35 per share.
9
4. Business Segment Information
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(In thousands) 1999 1998 1999 1998
- ----------------------------------------------------------- ----------- ----------- ----------- -----------
Revenues:
Analytical $216,738 $205,574 $427,092 $425,316
Life Sciences 72,846 51,515 138,620 102,646
Process Control 49,864 52,823 102,831 104,679
Industrial 198,407 89,615 337,772 179,834
Intersegment sales eliminations (a) (2,221) (4,135) (7,102) (9,140)
-------- -------- -------- --------
$535,634 $395,392 $999,213 $803,335
======== ======== ======== ========
Income Before Provision for Income Taxes and Minority
Interest:
Analytical $ 34,534 $ 33,878 $ 65,677 $ 71,215
Life Sciences 7,555 6,609 13,962 11,977
Process Control 1,649 7,306 5,326 12,816
Industrial 9,248 7,394 14,498 16,935
Corporate (b) (1,275) 422 (2,237) 154
-------- -------- -------- --------
Total operating income 51,711 55,609 97,226 113,097
Interest and other income (expense), net (c) (18,498) 8,310 (24,866) 14,936
-------- -------- -------- --------
$ 33,213 $ 63,919 $ 72,360 $128,033
======== ======== ======== ========
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Primarily corporate general and administrative expenses.
(c) Includes equity in losses of unconsolidated subsidiaries of $11.0 million
and $10.9 million in the three- and six-month periods ended July 3, 1999,
respectively (Notes 5 and 6).
During the first quarter of 1999, the Company acquired Spectra-Physics AB
(Note 5), which increased total assets at the Industrial segment by $528.0
million.
5. 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. The Company expects to acquire the
remaining Spectra-Physics shares outstanding for approximately 160 Swedish krona
per share pursuant to compulsory acquisition rules applicable to Swedish
companies, certain shares of which were acquired in the second quarter of 1999.
The aggregate purchase price was approximately $347.2 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 Spectra-Physics Lasers,
Inc. subsidiary. The accompanying balance sheet as of July 3, 1999, includes
$2.2 million accrued for the purchase of the remaining Spectra-Physics shares
outstanding. Spectra-Physics manufactures a wide range of laser-based
instrumentation systems, primarily for the process-control, industrial
measurement, construction, research, commercial, and government markets.
Spectra-Physics had revenues of approximately $442 million in 1998, with
operations throughout North America and Europe, and a presence in the Pacific
Rim.
10
5. Acquisitions (continued)
To finance this acquisition, the Company used a combination of available
cash and $200.0 million of borrowings from Thermo Electron Corporation, pursuant
to a promissory note due August 1999. The promissory note bears interest at a
variable commercial paper-based rate, which was 5.58% as of July 3, 1999.
During the first six months of 1999, the Company's majority-owned
subsidiaries made several other acquisitions for approximately $16.0 million in
cash, net of cash acquired, subject to post-closing adjustments. To date, no
information has been gathered that would cause the Company to believe that the
post-closing adjustments will be material.
These acquisitions have been accounted for using the purchase method of
accounting, and their results have been included in the accompanying financial
statements from their respective dates of acquisition. The aggregate cost of
these acquisitions exceeded the estimated fair value of the acquired net assets
by $157.1 million, which is being amortized over periods not exceeding 40 years.
Allocation of the purchase price for these acquisitions was based on estimates
of the fair value of the net assets acquired and is subject to adjustment upon
finalization of the purchase price allocations. The Company has gathered no
information that indicates the final allocations will differ materially from the
preliminary estimates.
Based on unaudited data, the following table presents selected financial
information for the Company and Spectra-Physics on a pro forma basis, assuming
the companies had been combined since the beginning of 1998. The effect of the
acquisitions not included in the pro forma data was not material to the
Company's results of operations.
Three Six
Months Ended Months Ended
July 4, July 3, July 4,
(In thousands except per share amounts) 1998 1999 1998
- ----------------------------------------------------- ------------------------- ------------ -------------
Revenues $ 508,565 $1,038,502 $1,024,904
Net Income 39,691 28,256 71,737
Earnings per Share:
Basic .32 .24 .59
Diluted .29 .22 .53
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 been made at the beginning of 1998.
In July 1998, the Company's Metrika Systems Corporation subsidiary
acquired the stock of Honeywell-Measurex Data Measurement Corporation, a wholly
owned subsidiary of Honeywell-Measurex Corporation. During the first quarter of
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 the first quarter of 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, which is payable
to Metrika Systems in three installments from April through December 1999, of
which $3.5 million was received during the second quarter of 1999.
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
11
5. Acquisitions (continued)
connection with these restructuring activities, as part of the cost of
acquisitions, the Company established reserves, primarily for severance and
excess facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. Unresolved matters at July 3, 1999, primarily included completion
of planned severances and abandonment of excess facilities for certain
acquisitions completed during the last 12 months. A summary of the changes in
accrued acquisition expenses, which are included in other accrued expenses in
the accompanying balance sheet, follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ------------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 2, 1999 $ 3,806 $ 11,682 $ 1,015 $16,503
Reserves established 14,642 789 962 16,393
Usage (3,686) (1,423) (870) (5,979)
Decrease due to finalization of restructuring (455) - (242) (697)
plan, recorded as a decrease to cost in
excess of net assets of acquired companies
Currency translation (337) (612) (44) (993)
-------- -------- -------- -------
Balance at July 3, 1999 $ 13,970 $ 10,436 $ 821 $25,227
======== ======== ======== =======
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 investment in FLIR shares represented 29.4% of FLIR's outstanding shares as
of July 3, 1999. The Company accounts for its investment in FLIR on 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. This decrease totaled
$6.0 million and has been recorded as a nonrecurring loss in equity in losses of
unconsolidated subsidiaries in the accompanying 1999 statement of income,
pursuant to Securities and Exchange Commission Staff Accounting Bulletin 51.
6. Restructuring and Other Nonrecurring Costs
During 1998, the Company and its subsidiaries recorded restructuring
costs, which were accounted for in accordance with EITF 94-3, primarily for
severance for 729 employees and abandoned-facility payments. As of January 2,
1999, the Company had terminated 500 employees and had $11.2 million accrued for
severance and facility-closing costs relating to these activities. During the
first quarter of 1999, the Company terminated 115 additional employees and
recorded additional restructuring costs of $1.2 million. The restructuring costs
consist of $0.7 million for business relocation and facility-closing costs, $0.3
million of costs related to severance for 8 employees, and $0.2 million of other
restructuring costs. During the second quarter of 1999, the Company terminated
47 additional employees and recorded additional restructuring costs of $0.7
million. The restructuring costs consist of $0.4 million for business relocation
and facility-closing costs, $0.2 million related to severance for 28 employees,
and $0.1 million for the write-off of fixed assets no longer of use. The Company
has determined that 17 employees will not be terminated and, accordingly, has
reversed $0.6 million of previously established restructuring reserves. The
12
6. Restructuring and Other Nonrecurring Costs (continued)
Company expects to incur additional restructuring costs totaling $0.8 million in
the third quarter of 1999, which are not permitted as charges until incurred
pursuant to the requirements of EITF 94-3. A summary of the changes in accrued
restructuring costs, which are included in other accrued expenses in the
accompanying balance sheet, follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ------------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 2, 1999 $ 9,281 $ 1,262 $ 682 $ 11,225
Charged to expense 541 623 652 1,816
Reversal of reserve (550) (16) - (566)
Usage (5,450) (1,281) (824) (7,555)
Currency translation (577) (83) (61) (721)
-------- -------- -------- --------
Balance at July 3, 1999 $ 3,245 $ 505 $ 449 $ 4,199
======== ======== ======== ========
During the second quarter of 1999, the Company recorded a loss of $11.1
million in equity in losses of unconsolidated subsidiaries, which resulted from
restructuring charges following a pooling at FLIR as well as from a decrease in
the Company's pro rata share of FLIR as a result of the pooling. The Company's
investment in FLIR was acquired in connection with the Company's acquisition of
Spectra-Physics in February 1999 and is accounted for under the equity method
(Note 5).
7. Proposed Reorganization
During 1998, Thermo Electron announced a proposed reorganization, which it
expanded in May 1999, involving certain of Thermo Electron's subsidiaries,
including the Company. As part of this reorganization, the Company's
ThermoSpectra Corporation subsidiary announced in May 1999 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
ThermoSpectra that are held by the public shareholders in exchange for $16.00
per share in cash. Following the merger, ThermoSpectra's common stock would
cease to be publicly traded. In addition, 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
that are held by the public shareholders in exchange for $7.00 per share in
cash. Following the merger, Thermo Vision's common stock would cease to be
publicly traded. Both of these mergers are expected to be completed in the
fourth quarter of 1999, subject to the satisfaction of certain conditions
applicable to such transactions.
8. Cash Management Arrangement
Effective June 1, 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. Amounts
invested in this arrangement are included in "advance to affiliate" in the
accompanying balance sheet.
13
8. Cash Management Arrangement (continued)
In addition, under this arrangement, amounts may be borrowed from Thermo
Electron on a short-term, revolving credit basis bearing interest at the 30-day
Dealer Commercial Paper Rate (DCP Rate) plus 150 basis points, set at the
beginning of each month, provided such rate shall be reduced to the DCP Rate
plus 50 basis points to the extent of any funds invested by the Company's
majority-owned subsidiaries in the cash management arrangement. The Company has
no borrowings under this arrangement at July 3, 1999.
9. Redemption of Convertible Debentures
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. The value of the securities into which the
debentures are convertible exceeded the redemption amount as of the notice date
of the redemption.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1999, filed with the Securities and Exchange
Commission.
Overview
The Company is a worldwide leader in the development, manufacture, and
marketing of measurement instruments used to monitor, collect, and analyze
information. These systems are used for multiple applications in a range of
industries, including industrial processing, food and beverage production, life
sciences research, and medical diagnostics.
The Company's businesses operate in four instrumentation segments:
Analytical, Life Sciences, Process Control, and Industrial. The Analytical
segment, which includes the Company's Thermo Optek Corporation and ThermoQuest
Corporation subsidiaries, develops and manufactures analytical instruments that
are used in the quantitative and qualitative analysis of elements and molecular
compounds in gases, liquids, and solids. The Life Sciences segment includes
Thermo BioAnalysis Corporation (excluding its Eberline Health Physics business
for periods prior to July 1998, when it contributed this business to a joint
venture in the Industrial segment). This segment develops, manufactures, and
markets a broad range of products, including biomolecular instruments and
consumables, clinical laboratory equipment and supplies, rapid point-of-care
diagnostic test kits, and laboratory information-management systems used in
biochemical research, clinical diagnosis, and pharmaceutical production. The
Process Control segment, consisting of the Company's Metrika Systems Corporation
and ONIX Systems Inc. subsidiaries, specializes in on-line instruments that
measure and control products such as oil, gas, chemicals, raw materials, and
finished goods throughout a variety of industrial processes. The Industrial
segment, which generally includes the Company's Thermo Vision Corporation,
ThermoSpectra Corporation, Spectra-Physics Lasers, Inc., and wholly owned
subsidiaries, including businesses of Spectra-Physics AB, acquired in February
1999 (Note 5), provides components and systems for applications such as test and
measurement, environmental and nuclear monitoring, and imaging and inspection.
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.
14
Results of Operations
Second Quarter 1999 Compared With Second Quarter 1998
Revenues increased $140.2 million to $535.6 million in the second quarter
of 1999 from $395.4 million in the second quarter of 1998, primarily due to
acquisitions. Revenues increased $152.3 million due to 1999 acquisitions and the
inclusion of revenues from 1998 acquisitions for the full period. The increase
in revenues was offset in part by a decrease of $3.8 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 $8.3 million.
Analytical segment revenues increased to $216.7 million in the second
quarter of 1999 from $205.6 million in the second quarter of 1998. Revenues from
existing operations increased primarily at ThermoQuest as a result of an
increase in revenues in North America due to the introduction of new products at
the Pittsburgh Conference in March 1999 and an increase in revenues from sales
to customers in Asia due to the improved economic conditions there, compared
with the second quarter of 1998. In addition, revenues increased at Thermo Optek
primarily due to the first shipment of a new product model and the inclusion of
$2.5 million in revenues from acquisitions. These increases were offset in part
by a decrease in revenues due to reduced demand for certain of Thermo Optek's
components due to continuing softness in the semiconductor industry and a
decrease in revenues of $2.2 million due to the unfavorable effects of currency
translation.
Life Sciences segment revenues increased to $72.8 million in the second
quarter of 1999 from $51.5 million in the second quarter of 1998, primarily due
to the inclusion of $18.7 million in revenues from acquisitions and, to a lesser
extent, higher demand for certain of the segment's products and the expansion of
sales and distribution channels into new markets. The unfavorable effects of
currency translation decreased revenues by $0.7 million.
Process Control segment revenues decreased to $49.9 million in the second
quarter of 1999 from $52.8 million in the second quarter of 1998, primarily due
to lower sales from existing operations due to a reduction in discretionary
capital spending by companies in the process control industry due to difficult
market conditions and, to a lesser extent, a reduction in spending by
raw-material producers, particularly in the cement sector. In addition, the
unfavorable effects of currency translation decreased revenues by $0.4 million.
These decreases were offset in part by the inclusion of $8.7 million in revenues
from acquisitions.
Industrial segment revenues increased to $198.4 million in the second
quarter of 1999 from $89.6 million in the second quarter of 1998. An increase in
revenues of $122.4 million from acquisitions, primarily Spectra-Physics in
February 1999 (Note 5), was offset in part by lower revenues at existing
businesses. Revenues from existing operations decreased primarily at
ThermoSpectra, principally due to continued weakness in the semiconductor
industry. In addition, the unfavorable effects of currency translation decreased
revenues by $0.5 million.
The gross profit margin decreased to 46% in the second quarter of 1999
from 48% in the second quarter of 1998, primarily due to the inclusion of
lower-margin revenues from acquired businesses, including Spectra-Physics, which
recorded an adjustment to expense of $2.0 million relating to the sale of
inventories revalued at the time of acquisition.
Selling, general, and administrative expenses as a percentage of revenues
increased to 29% in the second quarter of 1999 from 27% in the second quarter of
1998, primarily due to the inclusion of higher selling, general, and
administrative expenses as a percentage of revenues at Spectra-Physics.
Research and development expenses increased to $41.2 million in the second
quarter of 1999 from $27.7 million in the second quarter of 1998, primarily due
to the inclusion of expenses at Spectra-Physics. Research and development
expenses as a percentage of revenues were 7.7% in 1999, compared with 7.0% in
1998. Excluding the expenses at Spectra-Physics, research and development
expenses as a percentage of revenues were 7.4% in 1999.
15
Second Quarter 1999 Compared With Second Quarter 1998 (continued)
In connection with the restructuring actions undertaken by the Company in
1998, the Company incurred additional costs of $0.2 million in the second
quarter of 1999 (Note 6). In connection with the closing of certain facilities,
the Company expects to incur approximately $0.8 million of additional costs in
the third quarter of 1999.
Interest income decreased to $5.4 million in the second quarter of 1999
from $9.4 million in the second quarter of 1998, primarily due to a reduction in
invested balances as a result of acquisitions, including the acquisition of
Spectra-Physics in February 1999. To a lesser extent, interest income decreased
due to a reduction in invested balances as a result of the repurchase of Company
and subsidiary common stock and debentures primarily in the second half of 1998.
These decreases were offset in part by the inclusion of interest income from
Spectra-Physics.
Interest expense increased to $13.5 million in the second quarter of 1999
from $12.1 million in the second quarter of 1998, primarily due to the issuance
to Thermo Electron Corporation of a $200.0 million promissory note in connection
with the acquisition of Spectra-Physics (Note 5). The increase was offset in
part by a decrease in interest expense due to the repayment in 1998 of certain
promissory notes to Thermo Electron that were issued in connection with
acquisitions and, to a lesser extent, the conversion and repurchase of a portion
of subordinated convertible debentures by ThermoQuest and Thermo Optek.
Equity in losses of unconsolidated subsidiaries of $11.0 million in the
second quarter of 1999 primarily relates to nonrecurring charges associated with
Spectra-Physics' minority investment in FLIR Systems, Inc. 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 (Notes 5 and 6).
Gain on sale of investments in the second quarter of 1999 primarily
resulted from the sale of an available-for-sale investment.
As a result of the sale of stock by a subsidiary, the Company recorded a
gain of $11.1 million in the second quarter of 1998.
Other expense in the second quarter of 1999 represents net foreign
currency exchange losses.
Excluding the impact of a nontaxable gain on issuance of stock by a
subsidiary in the second quarter of 1998, the effective tax rate was 52% in the
second quarter of 1999, compared with 40% in the second quarter of 1998. The
effective tax rate 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. The effective tax rate increased in 1999 primarily due to
nonrecurring charges.
Minority interest expense decreased to $3.5 million in the second quarter
of 1999 from $5.3 million in the second quarter of 1998, primarily due to lower
earnings at certain of the Company's majority-owned subsidiaries. This decrease
was offset in part by increased minority interest associated with Thermo
BioAnalysis as a result of its June 1998 sale of common stock.
First Six Months 1999 Compared With First Six Months 1998
Revenues increased $195.9 million to $999.2 million in the first six
months of 1999 from $803.3 million in the first six months of 1998, primarily
due to acquisitions. Revenues increased $243.7 million due to 1999 acquisitions
and the inclusion of revenues from 1998 acquisitions for the full period. In
addition, revenues increased $1.9 million due to the favorable effects of
currency translation as a result of the weakening 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 $49.7
million.
16
First Six Months 1999 Compared With First Six Months 1998 (continued)
Analytical segment revenues increased to $427.1 million in the first six
months of 1999 from $425.3 million in the first six months of 1998, primarily
due to the inclusion of $5.4 million in revenues from acquisitions and an
increase in revenues to customers in Asia at ThermoQuest in the second quarter
of 1999 due to the improved economic conditions there. In addition, the
favorable effects of currency translation increased revenues by $1.4 million.
These increases were offset in part by a decrease in revenues primarily due to
increased price competition at certain of the segment's product lines,
principally certain elemental analysis businesses at Thermo Optek.
Life Sciences segment revenues increased to $138.6 million in the first
six months of 1999 from $102.6 million in the first six months of 1998,
primarily due to the inclusion of $31.4 million in revenues from acquisitions
and, to a lesser extent, higher demand for certain of the segment's products and
the expansion of sales and distribution channels into new markets. In addition,
the favorable effects of currency translation increased revenues by $0.5
million.
Process Control segment revenues decreased to $102.8 million in the first
six months of 1999 from $104.7 million in the first six months of 1998,
primarily due to the reasons discussed in the results of operations for the
second quarter. In addition, the unfavorable effects of currency translation
decreased revenues by $0.2 million. These decreases were offset in part by the
inclusion of $18.7 million in revenues from acquisitions.
Industrial segment revenues increased to $337.8 million in the first six
months of 1999 from $179.8 million in the first six months of 1998, primarily
due to the inclusion of $188.2 million in revenues from acquisitions, primarily
Spectra-Physics in February 1999 (Note 5). In addition, the favorable effects of
currency translation increased revenues by $0.2 million. These increases were
offset in part by lower revenues at existing businesses, primarily at
ThermoSpectra, principally due to continued weakness in the semiconductor
industry.
The gross profit margin decreased to 46% in the first six months of 1999
from 48% in the first six months of 1998, primarily due to the inclusion of
lower-margin revenues from Spectra-Physics, which recorded an adjustment to
expense of $6.7 million relating to the sale of inventories revalued at the time
of acquisition.
Selling, general, and administrative expenses as a percentage of revenues
increased to 28% in the first six months of 1999 from 27% in the first six
months of 1998, primarily due to the inclusion of higher selling, general, and,
administrative expenses as a percentage of revenues from acquisitions and, to a
lesser extent, lower sales volume at several of the Company's subsidiaries.
Research and development expenses increased to $75.4 million in the first
six months of 1999 from $56.3 million in the first six months of 1998, primarily
due to the inclusion of expenses at Spectra-Physics. Research and development
expenses as a percentage of revenues were 7.6% in 1999, compared with 7.0% in
1998. Excluding the expenses at Spectra-Physics, research and development
expenses as a percentage of revenues were 7.4% in 1999.
In connection with the restructuring actions undertaken by the Company in
1998, the Company incurred additional costs of $1.4 million in the first six
months of 1999 (Note 6).
Interest income decreased to $11.7 million in the first six months of 1999
from $17.6 million in the first six months of 1998, primarily due to the reasons
discussed in the results of operations for the second quarter.
Interest expense increased to $25.7 million in the first six months of
1999 from $23.6 million in the first six months of 1998, primarily due to the
reasons discussed in the results of operations for the second quarter.
Equity in losses of unconsolidated subsidiaries of $10.9 million in the
first six months of 1999 primarily relates to nonrecurring charges associated
with Spectra-Physics' minority investment in FLIR as discussed in the results of
operations for the second quarter.
17
First Six Months 1999 Compared With First Six Months 1998 (continued)
Gain on sale of investments in the first six months of 1999 primarily
resulted from the sale of an available-for-sale investment.
As a result of the sale of stock by subsidiaries, the Company recorded a
gain of $21.0 million in the first six months of 1998.
Other expense of $0.9 million in the first six months of 1999 represents
net foreign currency exchange losses.
Excluding the impact of a nontaxable gain on issuance of stock by
subsidiaries in the first six months of 1998, the effective tax rate was 46% in
the first six months of 1999, compared with 40% in the first six months of 1998.
The effective tax rate 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. The effective tax rate increased in 1999 primarily due to
nonrecurring charges.
Minority interest expense decreased to $7.7 million in the first six
months of 1999 from $9.6 million in the first six months of 1998, primarily due
to the reasons discussed in the results of operations for the second quarter.
Liquidity and Capital Resources
Consolidated working capital was $536.3 million at July 3, 1999, compared
with $746.0 million at January 2, 1999. Included in working capital are cash and
cash equivalents of $223.9 million at July 3, 1999, compared with $553.8 million
at January 2, 1999. Of the cash and cash equivalents balance at July 3, 1999,
$148.1 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 July 3, 1999, the Company had $233.1 million invested in an advance to
affiliate. Of the advance to affiliate at July 3, 1999, $202.5 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 a new domestic
cash management arrangement between the Company and Thermo Electron (Note 8),
which became effective June 1, 1999, amounts invested with Thermo Electron were
included in cash and cash equivalents.
At July 3, 1999, $169.0 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.
Cash provided by operating activities in the first six months of 1999 was
$62.1 million. The Company generated $10.5 million of cash from a decrease in
accounts receivable, principally in the Analytical segment resulting primarily
from lower revenues in the second quarter of 1999, compared with the fourth
quarter of 1998. Cash of $11.1 million was used to fund an increase in
inventories, primarily in the Analytical segment due to a buildup of inventory
in preparation of new product introductions in the second half of 1999 and the
timing of shipments. Cash of $10.9 million was used to fund a decrease in
accounts payable, primarily due to the timing of payments. The Company used
$27.4 million of cash to reduce other current liabilities, primarily as a result
of the usage of restructuring and acquisition reserves.
During the first six months of 1999, the Company's primary investing
activities, excluding advance to affiliate activity, included acquisitions and
the purchase of property, plant, and equipment. The Company expended $324.7
million, net of cash acquired, for acquisitions, including the acquisition of
Spectra-Physics, and received a $4.1 million adjustment of the purchase price
for an acquisition by Metrika Systems in 1998 (Note 5). The Company will receive
an additional post-closing adjustment of $4.3 million relating to this
acquisition, payable over the remainder of 1999. The Company expended $24.5
million for purchases of property, plant, and equipment and received proceeds of
$8.7 million from the sale of property, plant, and equipment in the first six
months of 1999. During the remainder of 1999, the Company plans to make
expenditures of approximately $41 million for property, plant, and equipment.
18
Liquidity and Capital Resources (continued)
The Company's financing activities provided $175.7 million of cash in the
first six months of 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 5). In August 1999, the Company intends to repay
$50.0 million of the principal amount outstanding under this promissory note and
refinance the balance of the note through borrowings from Thermo Electron
bearing interest at a rate equal to the 30-day Dealer Commercial Paper Rate (DCP
Rate) plus 150 basis points, set at the beginning of each month, which rate
shall be reduced to the DCP rate plus 50 basis points to the extent of any funds
invested by the Company's majority-owned subsidiaries in the cash management
arrangement. This note will be due February 2000 and Thermo Electron has
indicated that it will seek repayment of this note in 2000 only to the extent
the Company's cash flow permits such repayment. The Company used $27.5 million
of cash for the repayment of short- and long-term obligations, including the
repayment by ThermoSpectra of $10.0 million of borrowings from Thermo Electron.
In July 1999, ThermoSpectra repaid a $5.0 million promissory note to Thermo
Electron, and Thermo Electron extended the maturity of ThermoSpectra's $45.0
million promissory note to December 1999. During the first six months of 1999,
certain divisions of Thermo BioAnalysis borrowed $14.5 million, denominated in
foreign currencies of countries where the divisions operate, primarily to fund
acquisitions.
During the first six months of 1999, certain of the Company's
majority-owned subsidiaries expended $12.5 million to repurchase common stock
and debentures. These purchases were made pursuant to authorizations by the
Boards of Directors of certain majority-owned subsidiaries. As of July 3, 1999,
$9.9 million remained under the Company's majority-owned subsidiaries'
authorizations to purchase their securities.
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.
As of August 12, 1999, the Company's majority-owned subsidiaries had
acquired new businesses for aggregate consideration of $13.4 million since July
3, 1999. 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.
Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 date recognition issue
on the Company's internal business systems, products, and operations. The
Company's year 2000 initiatives include (i) testing and upgrading significant
information technology systems and facilities; (ii) testing and developing
upgrades, if necessary, for the Company's current products and certain
discontinued products; (iii) assessing the year 2000 readiness of key suppliers
and vendors; and (iv) developing a contingency plan.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
non-information technology systems for year 2000 compliance, has largely been
completed. During phase one, the Company tested and evaluated its significant
computer systems, software applications, and related equipment for year 2000
compliance. The Company also evaluated the potential year 2000 impact on its
critical non-information technology systems, which efforts included testing the
year 2000 readiness of its manufacturing, utility, and telecommunication systems
at its critical facilities.
19
Year 2000 (continued)
The Company is currently in phase two of its program, during which any
noncompliant systems or non-information technology systems that were identified
during phase one are prioritized and remediated. Based on its evaluations of its
critical non-information technology systems, the Company does not believe any
material upgrades or modifications are required. The Company is currently
upgrading or replacing its material noncompliant information technology systems,
and this process was approximately 85% complete as of July 3, 1999. In many
cases, such upgrades or replacements are being made in the ordinary course of
business, without accelerating previously scheduled upgrades or replacements.
The Company expects that all of its material information technology systems and
critical non-information technology systems will be year 2000 compliant by
October 1999.
The Company has also implemented a compliance program to test and evaluate
the year 2000 readiness of the material products that it currently manufactures
and sells. The Company believes that all of such material products are year 2000
compliant. However, as many of the Company's products are complex, interact with
or incorporate third-party products, and operate on computer systems that are
not under the Company's control, there can be no assurance that the Company has
identified all of the year 2000 problems with its current products. The Company
believes that certain of its older products, which it no longer manufactures or
sells, may not be year 2000 compliant. The Company is continuing to test and
evaluate certain of such products. The Company is focusing its efforts on
products that are still under warranty, early in their expected life, and/or
subject to U.S. Food and Drug Administration considerations related to the year
2000. The Company is offering upgrades and/or identifying potential solutions
where reasonably practicable.
The Company is in the process of identifying and contacting suppliers and
vendors that are believed to be significant to the Company's business operations
in order to assess their year 2000 readiness. As part of this effort, the
Company has developed and has distributed questionnaires relating to year 2000
compliance to its significant suppliers and vendors. To date, no significant
supplier or vendor has indicated that it believes its business operations will
be materially disrupted by the year 2000 issue. The Company has started to
follow-up and monitor the year 2000 compliance progress of significant suppliers
and vendors that indicate that they are not year 2000 compliant, or that do not
respond to the Company's questionnaires. The Company has completed the majority
of its assessment of third-party risk, and expects to be substantially completed
by September 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required. The Company expects to complete
its contingency plan by November 1999.
Estimated Costs to Address the Company's Year 2000 Issues
The Company had incurred expenses to third parties (external costs)
related to year 2000 issues of approximately $3.5 million as of July 3, 1999,
and the total external costs of year 2000 remediation are expected to be
approximately $5.0 million. Year 2000 costs were funded from working capital.
All internal costs and related external costs, other than capital additions
related to year 2000 remediation, have been and will continue to be expensed as
incurred. The Company does not track the internal costs incurred for its year
2000 compliance project. Such costs are principally the related payroll costs
for its information systems group.
20
Year 2000 (continued)
Reasonably Likely Worst Case Scenario
At this point in time, the Company is not able to determine the most
reasonably likely worst case scenario to result from the year 2000 issue. One
possible worst case scenario would be that certain of the Company's material
suppliers or vendors experience business disruptions due to the year 2000 issue
and are unable to provide materials and services to the Company on time. The
Company's operations could be delayed or temporarily shut down, and it could be
unable to meet its obligations to customers in a timely fashion. The Company's
business, operations, and financial condition could be adversely affected in
amounts that cannot be reasonably estimated at this time. If the Company
believes that any of its key suppliers or vendors may not be year 2000 ready, it
will seek to identify and secure other suppliers or vendors as part of its
contingency plan.
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. As discussed above, if any of
the Company's material suppliers or vendors experience business disruptions due
to year 2000 issues, the Company might also be materially adversely affected. If
any countries in which the Company operates experience significant year 2000
disruption, the Company could also be materially adversely affected. There is
expected to be a significant amount of litigation relating to the year 2000
issue and there can be no assurance that the Company will not incur material
costs in defending or bringing lawsuits. In addition, if any year 2000 issues
are identified, there can be no assurance that the Company will be able to
retain qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the year 2000 issue could have a material adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices has not changed materially
from its exposure at year-end 1998.
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security Holders
On May 27, 1999, at the Annual Meeting of Shareholders, the shareholders
elected six incumbent directors to a one-year term expiring in 2000. The
directors elected at the meeting were: Col. Frank Borman, Dr. George N.
Hatsopoulos, Mr. John N. Hatsopoulos, Mr. Earl R. Lewis, Mr. Arvin H. Smith, and
Mr. Polyvios C. Vintiadis. Col. Borman received 118,380,784 shares voted in
favor of election and 146,157 shares voted against; Dr. G. Hatsopoulos received
118,361,212 shares voted in favor of election and 165,729 shares voted against;
Mr. J. Hatsopoulos received 118,359,267 shares voted in favor of election and
167,674 shares voted against; Mr. Lewis received 118,381,941 shares voted in
favor of election and 145,000 shares voted against; Mr. Smith received
118,383,365 shares voted in favor of election and 143,576 shares voted against;
and Mr. Vintiadis received 118,383,649 shares voted in favor of election and
143,292 shares voted against. No abstentions or broker nonvotes were recorded on
the election of directors.
21
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 May 25, 1999, the Company filed a Current Report on Form 8-K, for
events occurring on May 24, 1999, with respect to a write-down in an investment
the Company expected to record in the second quarter of 1999.
22
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 August 1999.
THERMO INSTRUMENT SYSTEMS INC.
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
23
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
10.1 Master Cash Management, Guarantee Reimbursement and Loan
Agreement dated as of June 1, 1999, between the Registrant and
Thermo Electron Corporation.
10.2 Amended and Restated $45,000,000 Promissory Note dated as of July 30,
1999, issued by ThermoSpectra Corporation to Thermo Electron
Corporation (filed as Exhibit 10.2 to ThermoSpectra's Quarterly
Report on Form 10-Q for the quarter ended July 3, 1999 [File No.
1-13876] and incorporated herein by reference).
10.3 Amended and Restated Deferred Compensation Plan for Directors of the Registrant.
10.4 Amended and Restated Directors Stock Option Plan of the Registrant.
10.5 Amended and Restated Nonqualified Stock Option Plan of the Registrant.
10.6 Amended and Restated Equity Incentive Plan of the Registrant.
10.7 Amended and Restated Thermo Instrument Systems Inc. - ThermoSpectra
Corporation Nonqualified Stock Option Plan.
10.8 Amended and Restated Thermo Instrument Systems Inc. - ThermoQuest
Corporation Nonqualified Stock Option Plan.
10.9 Amended and Restated Thermo Instrument Systems Inc. - Thermo BioAnalysis
Corporation Nonqualified Stock Option Plan.
10.10 Amended and Restated Thermo Instrument Systems Inc. - Thermo Optek
Corporation Nonqualified Stock Option Plan.
10.11 Amended and Restated Thermo Instrument Systems Inc. - Metrika Systems
Corporation Nonqualified Stock Option Plan.
10.12 Amended and Restated Thermo Instrument Systems Inc. - Thermo Vision
Corporation Nonqualified Stock Option Plan.
10.13 Amended and Restated Thermo Instrument Systems Inc. - ONIX Systems Inc.
Nonqualified Stock Option Plan.
10.14 1997 Spectra-Physics Lasers, Inc. Stock Option Plan (filed as Exhibit
10.6 of Amendment No. 1 to Spectra-Physics Lasers, Inc.'s Registration
Statement on Form S-1 [File No. 333-38329] and incorporated herein by
reference).
10.15 Master Cash Management, Guarantee Reimbursement and Loan Agreement dated
as of June 1, 1999, between ThermoSpectra Corporation and Thermo
Electron Corporation (filed as Exhibit 10.1 to ThermoSpectra's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1999
[File No. 1-13876] and incorporated herein by reference).
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
10.16 Master Cash Management, Guarantee Reimbursement and Loan Agreement dated
as of June 1, 1999, between ThermoQuest Corporation and Thermo
Electron Corporation (filed as Exhibit 10.1 to ThermoQuest's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1999
[File No. 1-14262] and incorporated herein by reference).
10.17 Master Cash Management, Guarantee Reimbursement and Loan Agreement dated
as of June 1, 1999, between Thermo BioAnalysis Corporation and
Thermo Electron Corporation (filed as Exhibit 10.1 to Thermo
BioAnalysis' Quarterly Report on Form 10-Q for the quarter ended
July 3, 1999 [File No. 1-12179] and incorporated herein by
reference).
10.18 Master Cash Management, Guarantee Reimbursement and Loan Agreement dated
as of June 1, 1999, between Thermo Optek Corporation and Thermo
Electron Corporation (filed as Exhibit 10.1 to Thermo Optek's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1999
[File No.
1-11757] and incorporated herein by reference).
10.19 Master Cash Management, Guarantee Reimbursement and Loan Agreement dated
as of June 1, 1999, between Metrika Systems Corporation and
Thermo Electron Corporation (filed as Exhibit 10.1 to Metrika
Systems' Quarterly Report on Form 10-Q for the quarter ended July
3, 1999 [File No. 1-13085] and incorporated herein by reference).
10.20 Master Cash Management, Guarantee Reimbursement and Loan Agreement dated
as of June 1, 1999, between Thermo Vision Corporation and Thermo
Electron Corporation (filed as Exhibit 10.1 to Thermo Vision's
Quarterly Report on Form 10-Q for the quarter ended July 3, 1999
[File No. 1-13391] and incorporated herein by reference).
10.21 Master Cash Management, Guarantee Reimbursement and Loan Agreement dated
as of June 1, 1999, between ONIX Systems Inc. and Thermo Electron
Corporation (filed as Exhibit 10.1 to ONIX Systems' Quarterly
Report on Form 10-Q for the quarter ended July 3, 1999 [File No.
1-13975] and incorporated herein by reference).
27 Financial Data Schedule.