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 1-8002 THERMO ELECTRON CORPORATION (Exact name of Registrant as specified in its charter) Delaware 04-2209186 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 81 Wyman Street, P.O. Box 9046 Waltham, Massachusetts 02454-9046 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (781) 622-1000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at July 30, 1999 Common Stock, $1.00 par value 158,184,285 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements THERMO ELECTRON CORPORATION Consolidated Balance Sheet (Unaudited) Assets July 3, January 2, (In thousands) 1999 1999 - ---------------------------------------------------------------------------------- ------------ ---------- Current Assets: Cash and cash equivalents $ 386,864 $ 396,670 Short-term available-for-sale investments at quoted market value 681,197 1,150,585 (amortized cost of $677,486 and $1,144,785) Accounts receivable, less allowances of $63,272 and $52,607 930,228 875,615 Unbilled contract costs and fees 82,512 87,031 Inventories: Raw materials and supplies 275,327 267,901 Work in process 142,341 127,144 Finished goods 228,324 204,662 Prepaid income taxes 156,878 143,352 Prepaid expenses 58,093 48,369 ---------- ---------- 2,941,764 3,301,329 ---------- ---------- Property, Plant, and Equipment, at Cost 1,153,583 1,291,485 Less: Accumulated depreciation and amortization 442,735 458,523 ---------- ---------- 710,848 832,962 ---------- ---------- Long-term Available-for-sale Investments, at Quoted Market Value 97,432 95,537 (amortized cost of $93,834 and $99,256) ---------- ---------- Other Assets 259,510 186,168 ---------- ---------- Cost in Excess of Net Assets of Acquired Companies (Note 6) 1,925,437 1,915,649 ---------- ---------- $5,934,991 $6,331,645 ========== ========== 2 THERMO ELECTRON CORPORATION 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 $ 171,922 $ 134,071 Accounts payable 282,057 272,503 Accrued payroll and employee benefits 147,248 142,323 Accrued income taxes 23,926 92,623 Accrued installation and warranty costs 74,198 71,118 Deferred revenue 65,824 60,582 Other accrued expenses (Notes 6 and 7) 474,368 365,103 ---------- ---------- 1,239,543 1,138,323 ---------- ---------- Deferred Income Taxes and Other Deferred Items 145,164 175,984 ---------- ---------- Long-term Obligations: Senior convertible obligations 187,042 187,042 Senior notes 150,000 150,000 Subordinated convertible obligations 1,588,071 1,639,052 Nonrecourse tax-exempt obligations 14,500 15,500 Other 44,147 33,937 ---------- ---------- 1,983,760 2,025,531 ---------- ---------- Minority Interest 555,518 649,382 ---------- ---------- Common Stock of Subsidiaries Subject to Redemption ($59,003 and 57,871 94,301 $95,262 redemption value) ---------- ---------- Shareholders' Investment: Preferred stock, $100 par value, 50,000 shares authorized; none issued Common stock, $1 par value, 350,000,000 shares authorized; 167,253 166,971 167,253,232 and 166,970,806 shares issued Capital in excess of par value 1,027,956 1,033,799 Retained earnings 1,009,652 1,216,541 Treasury stock at cost, 9,100,980 and 8,477,707 shares (161,598) (151,643) Deferred compensation (6,524) - Accumulated other comprehensive items (Note 2) (83,604) (17,544) ---------- ---------- 1,953,135 2,248,124 ---------- ---------- $5,934,991 $6,331,645 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 3 THERMO ELECTRON CORPORATION Consolidated Statement of Operations (Unaudited) Three Months Ended July 3, July 4, (In thousands except per share amounts) 1999 1998 - ---------------------------------------------------------------------------------- ----------- ----------- Revenues: Product and service revenues $1,044,048 $ 899,968 Research and development contract revenues 48,292 47,831 ---------- ----------- 1,092,340 947,799 ---------- ----------- Costs and Operating Expenses: Cost of product and service revenues (Note 7) 642,488 520,351 Expenses for research and development (a) 111,348 93,652 Selling, general, and administrative expenses (Note 7) 283,301 224,200 Restructuring and other nonrecurring costs, net (Note 7) 391,258 4,112 ---------- ----------- 1,428,395 842,315 ---------- ----------- Operating Income (Loss) (336,055) 105,484 Gain on Issuance of Stock by Subsidiaries - 14,601 Other Income (Expense), Net (Notes 3 and 7) (34,283) 7,327 ---------- ----------- Income (Loss) Before Income Taxes, Minority Interest, and Extraordinary Item (370,338) 127,412 Income Tax (Provision) Benefit (Note 7) 87,632 (51,093) Minority Interest (Expense) Income 47,518 (16,697) ---------- ----------- Income (Loss) Before Extraordinary Item (235,188) 59,622 Extraordinary Item, Net of Provision for Income Taxes and Minority - 2,163 Interest of $3,582 (Note 4) ---------- ----------- Net Income (Loss) $ (235,188) $ 61,785 ========== =========== Earnings (Loss) per Share (Note 4): Basic $ (1.49) $ .37 ========== =========== Diluted $ (1.49) $ .34 ========== =========== Weighted Average Shares (Note 4): Basic 158,010 166,168 ========== =========== Diluted 158,010 183,329 ========== =========== (a) Includes Costs of: Research and development contracts $ 43,100 $ 40,634 Internally funded research and development 68,248 53,018 ---------- ----------- $ 111,348 $ 93,652 ========== =========== The accompanying notes are an integral part of these consolidated financial statements. 4 THERMO ELECTRON CORPORATION Consolidated Statement of Operations (Unaudited) Six Months Ended July 3, July 4, (In thousands except per share amounts) 1999 1998 - ---------------------------------------------------------------------------------- ----------- ----------- Revenues: Product and service revenues $2,006,466 $ 1,800,965 Research and development contract revenues 95,412 91,097 ---------- ----------- 2,101,878 1,892,062 ---------- ----------- Costs and Operating Expenses: Cost of product and service revenues (Note 7) 1,224,548 1,054,045 Expenses for research and development (a) 213,273 184,970 Selling, general, and administrative expenses (Note 7) 541,103 451,054 Restructuring and other nonrecurring costs (Note 7) 388,291 4,112 ---------- ----------- 2,367,215 1,694,181 ---------- ----------- Operating Income (Loss) (265,337) 197,881 Gain on Issuance of Stock by Subsidiaries - 54,206 Other Income (Expense), Net (Notes 3 and 7) (41,683) 4,958 ---------- ----------- Income (Loss) Before Income Taxes, Minority Interest, and Extraordinary Item (307,020) 257,045 Income Tax (Provision) Benefit (Note 7) 56,733 (91,887) Minority Interest (Expense) Income 43,398 (40,766) ---------- ----------- Income (Loss) Before Extraordinary Item (206,889) 124,392 Extraordinary Item, Net of Provision for Income Taxes and Minority - 2,886 Interest of $4,844 (Note 4) ---------- ----------- Net Income (Loss) $ (206,889) $ 127,278 ========== =========== Earnings (Loss) per Share (Note 4): Basic $ (1.31) $ .78 ========== =========== Diluted $ (1.32) $ .71 ========== =========== Weighted Average Shares (Note 4): Basic 158,028 162,650 ========== =========== Diluted 158,028 179,955 ========== =========== (a) Includes Costs of: Research and development contracts $ 84,376 $ 79,361 Internally funded research and development 128,897 105,609 ---------- ----------- $ 213,273 $ 184,970 ========== =========== The accompanying notes are an integral part of these consolidated financial statements. 5 THERMO ELECTRON CORPORATION Consolidated Statement of Cash Flows (Unaudited) Six Months Ended July 3, July 4, (In thousands) 1999 1998 - --------------------------------------------------------------------- ---------- ------------ ------------ Operating Activities: Net income (loss) $ (206,889) $ 127,278 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 91,026 78,600 Noncash restructuring and other nonrecurring costs, net (Note 7) 324,249 4,112 Provision for losses on accounts receivable (Note 7) 9,348 3,777 Change in deferred income taxes (46,643) (3,779) Minority interest expense (income) (43,398) 40,766 Equity in loss of unconsolidated subsidiaries 10,663 474 Gain on issuance of stock by subsidiaries - (54,206) Gain on sale of business (Note 7) (11,099) - (Gain) loss on investments, net 699 (5,252) Extraordinary item, net of income taxes and minority interest - (2,886) Other noncash items 31,913 8,668 Changes in current accounts, excluding the effects of acquisitions and dispositions: Accounts receivable (7,007) 20,782 Inventories (11,784) (29,532) Other current assets 4,527 (5,388) Accounts payable (2,574) (21,453) Other current liabilities (52,895) (29,751) ---------- ----------- Net cash provided by operating activities 90,136 132,210 ---------- ----------- Investing Activities: Acquisitions, net of cash acquired (Note 6) (345,214) (121,685) Acquisition of Thermo Voltek common stock (Note 8) (20,482) - Refund of acquisition purchase price 4,074 - Proceeds from sale of a business 13,537 - Purchases of available-for-sale investments (510,997) (1,484,823) Proceeds from sale and maturities of available-for-sale 983,324 1,073,609 investments Purchases of property, plant, and equipment (64,248) (74,226) Proceeds from sale of property, plant, and equipment 14,540 8,994 Increase in other assets (6,687) (6,795) Other 15,371 9,036 ---------- ----------- Net cash provided by (used in) investing activities $ 83,218 $ (595,890) ---------- ----------- 6 THERMO ELECTRON CORPORATION 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 long-term obligations $ 14,930 $ 243,973 Repayment of long-term obligations (20,005) (44,618) Net proceeds from issuance of Company and subsidiary common 4,066 474,060 stock Purchases of Company and subsidiary common stock and (140,370) (165,874) subordinated convertible debentures Redemption of subsidiary common stock (17,070) - Decrease in short-term notes payable (10,516) (26,041) Other 1,959 2,178 ----------- ------------ Net cash provided by (used in) financing activities (167,006) 483,678 ----------- ------------ Exchange Rate Effect on Cash (16,154) (2,628) ----------- ------------ Increase (Decrease) in Cash and Cash Equivalents (9,806) 17,370 Cash and Cash Equivalents at Beginning of Period 396,670 593,580 ----------- ------------ Cash and Cash Equivalents at End of Period $ 386,864 $ 610,950 =========== ============ Noncash Activities: Conversions of subsidiary convertible obligations $ - $ 16,980 =========== ============ Fair value of assets of acquired companies $ 588,437 $ 198,278 Cash paid for acquired companies (386,026) (132,568) Issuance of subsidiary common stock for acquired company - (8,250) ----------- ------------ Liabilities assumed of acquired companies $ 202,411 $ 57,460 =========== ============ The accompanying notes are an integral part of these consolidated financial statements. 7 Notes to Consolidated Financial Statements 1. General The interim consolidated financial statements presented have been prepared by Thermo Electron Corporation (the Company) without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the financial position at 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. Certain prior period amounts have been reclassified to conform to the presentation in the current financial statements. Interim results are not necessarily indicative of results for a full year. The consolidated balance sheet presented as of January 2, 1999, has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the annual financial statements and notes of the Company. The consolidated financial statements and notes included herein should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999, filed with the Securities and Exchange Commission. 2. Comprehensive Income Comprehensive income combines net income (loss) and "other comprehensive items," which represents certain amounts that are reported as components of shareholders' investment in the accompanying balance sheet, including foreign currency translation adjustments and unrealized net of tax gains and losses on available-for-sale investments. During the second quarter of 1999 and 1998, the Company had a comprehensive loss of $247.9 million and comprehensive income of $57.9 million, respectively. During the first six months of 1999 and 1998, the Company had a comprehensive loss of $257.0 million and comprehensive income of $120.1 million, respectively. 3. Other Income (Expense), Net The components of other income (expense), net in the accompanying statement of operations are: Three Months Ended Six Months Ended July 3, July 4, July 3, July 4, (In thousands) 1999 1998 1999 1998 - ------------------------------------------------------------- ---------- ----------- ---------- ---------- Interest Income $13,960 $ 28,464 $31,919 $ 52,229 Interest Expense (27,788) (26,360) (55,474) (51,967) Equity in Loss of Unconsolidated Subsidiaries (Notes 6 an 7) (10,699) (186) (10,663) (474) Gain (Loss) on Investments, Net (Note 7) (3,469) 5,412 (699) 5,252 Other (Note 7) (6,287) (3) (6,766) (82) ------- -------- ------- -------- $(34,283) $ 7,327 $(41,683) $ 4,958 ======== ======== ======== ======== 8 4. Earnings (Loss) per Share Basic and diluted earnings (loss) 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 (Loss) $(235,188) $ 61,785 $(206,889) $ 127,278 --------- ---------- --------- --------- Weighted Average Shares 158,010 166,168 158,028 162,650 --------- --------- --------- --------- Basic Earnings (Loss) per Share $ (1.49) $ .37 $ (1.31) $ .78 ========= ========= ========= ========= Diluted Net Income (Loss) $(235,188) $ 61,785 $(206,889) $ 127,278 Effect of: Convertible obligations - 3,667 - 7,334 Majority-owned subsidiaries' dilutive securities (679) (2,500) (1,483) (6,676) --------- --------- -------- --------- Income (Loss) Available to Common Shareholders, $(235,867) $ 62,952 $(208,372) $ 127,936 as Adjusted --------- --------- --------- --------- Weighted Average Shares 158,010 166,168 158,028 162,650 Effect of: Convertible obligations - 15,476 - 15,476 Stock options - 1,685 - 1,829 -------- --------- -------- --------- Weighted Average Shares, as Adjusted 158,010 183,329 158,028 179,955 -------- --------- -------- --------- Diluted Earnings (Loss) per Share $ (1.49) $ .34 $ (1.32) $ .71 ========= ========= ========= ========= The computation of diluted loss per share for the second quarter and first six months of 1999 excludes the effect of assuming the conversion of the Company's $585.0 million principal amount 4 1/4% subordinated convertible debentures, convertible at $37.80 per share, and the effect of assuming the exercise of outstanding stock options, because the effect would be antidilutive due to the Company's net loss. As of July 3, 1999, there were 11,952,000 of such options outstanding, with exercise prices ranging from $8.85 to $43.46 per share. In addition, the computation of diluted loss per share for the second quarter and first six months of 1999 excludes the effect of assuming the repurchase of 5,701,000 shares of Company common stock at a weighted average exercise price of $14.56 per share in connection with put options sold to an institutional counterparty, because the effect would be antidilutive. During 1998, the Company recorded extraordinary gains in connection with the repurchase of subsidiary subordinated convertible debentures, which increased basic and diluted earnings per share by $.01 in the second quarter of 1998 and $.02 in the first six months of 1998. 9 5. Business Segment Information Three Months Ended Six Months Ended July 3, July 4, July 3, July 4, (In thousands) 1999 1998 1999 1998 - ---------------------------------------------------------- ----------- ----------- ----------- ----------- Revenues: Measurement and Detection $ 588,502 $ 451,688 $1,105,266 $ 913,724 Biomedical and Emerging Technologies 242,864 228,293 479,193 451,555 Energy and Environment 196,467 192,369 380,747 379,361 Recycling and Resource Recovery 66,246 77,008 140,461 150,320 Intersegment (a) (1,739) (1,559) (3,789) (2,898) ---------- ---------- ---------- ---------- $1,092,340 $ 947,799 $2,101,878 $1,892,062 ========== ========== ========== ========== Income (Loss) Before Income Taxes, Minority Interest, and Extraordinary Item: Measurement and Detection (b) $ 29,300 $ 65,700 $ 82,894 $ 132,434 Biomedical and Emerging Technologies (c) (157,094) 17,328 (155,094) 35,860 Energy and Environment (d) (175,236) 20,556 (166,627) 28,197 Recycling and Resource Recovery (e) (24,120) 9,400 (9,358) 17,275 ---------- ---------- ---------- ---------- Total segment income (f) (327,150) 112,984 (248,185) 213,766 Corporate (g) (43,188) 14,428 (58,835) 43,279 ---------- ---------- ---------- ---------- $ (370,338) $ 127,412 $ (307,020) $ 257,045 ========== ========== ========== ========== (a) Intersegment sales are accounted for at prices that are representative of transactions with unaffiliated parties. (b) Includes restructuring and other nonrecurring costs of $30.4 million, $1.4 million, $31.6 million, and $1.4 million in the second quarter of 1999 and 1998, and the first six months of 1999 and 1998, respectively. Includes charges of $3.0 million and $7.6 million in the second quarter and first six months of 1999, respectively, primarily for the sale of inventories revalued in connection with an acquisition and other inventory provisions. (c) Includes restructuring and other nonrecurring costs of $142.3 million, $2.7 million, $145.1 million, and $2.7 million in the second quarter of 1999 and 1998, and the first six months of 1999 and 1998, respectively. Includes charges of $20.2 million and $22.6 million in the second quarter and first six months of 1999, respectively, primarily for inventory provisions. (d) Includes restructuring and other nonrecurring costs of $189.2 million and $189.9 million in the second quarter and first six months of 1999, respectively. Includes charges of $4.4 million in the second quarter and first six months of 1999, primarily for inventory provisions. (e) Includes restructuring and other nonrecurring costs, net of $29.4 million and $21.7 million in the second quarter and first six months of 1999, respectively. (f) Segment income is income before corporate general and administrative expenses, other income and expense, minority interest, income taxes, and extraordinary item. (g) Includes corporate general and administrative expenses, other income and expense, and in 1998, gain on issuance of stock by subsidiaries. 10 6. Acquisitions During the first quarter of 1999, Thermo Instrument acquired 17,494,684 shares (or approximately 99%) of Spectra-Physics AB, a Stockholm Stock Exchange-listed company, for approximately 160 Swedish krona per share (approximately $20 per share) in completion of Thermo Instrument's cash tender offer to acquire all of the outstanding shares of Spectra-Physics. Thermo Instrument expects to acquire the remaining Spectra-Physics shares outstanding for approximately 160 Swedish krona per share pursuant to the compulsory acquisition rules applicable to Swedish companies, of which certain shares were acquired in the second 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 subsidiary. The accompanying July 3, 1999, balance sheet 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. In connection with the acquisition of Spectra-Physics, Thermo Instrument acquired 4,162,000 shares of FLIR Systems, Inc. common stock. FLIR designs, manufactures, and markets thermal imaging and broadcast camera systems which 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. Thermo Instrument 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 Thermo Instrument to include its pro rata share of FLIR's results with its own. During the first calendar quarter of 1999, FLIR recorded a loss in connection with a pooling-of-interests transaction and certain restructuring actions. Thermo Instrument has recorded its pro rata share of this loss, $5.1 million, in equity in loss of unconsolidated subsidiaries, a component of other income (expense), net in the accompanying statement of operations. In addition, as a result of the pooling consummated by FLIR and related issuance of FLIR shares in March 1999, Thermo Instrument's pro rata share of FLIR's equity decreased. This decrease totaled $6.0 million and has been recorded as a nonrecurring loss in equity in loss of unconsolidated subsidiaries in the accompanying statement of operations, pursuant to Securities and Exchange Commission Staff Accounting Bulletin 51. In addition, the Company and its majority-owned subsidiaries made several other acquisitions during the first six months of 1999 for $37.1 million in cash, net of cash acquired, subject to certain post-closing adjustments. To date, no information has been gathered that would cause the Company to believe that the post-closing adjustments will be material. These acquisitions have been accounted for using the purchase method of accounting, and their results have been included in the accompanying financial statements from their respective dates of acquisition. The aggregate cost of these acquisitions exceeded the estimated fair value of the acquired net assets by $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. Pro forma results have not been presented as the results of the acquired businesses were not material to the Company's results of operations. The Company has undertaken restructuring activities at certain acquired businesses. The Company's restructuring activities, which were accounted for in accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily have included reductions in staffing levels and the abandonment of excess facilities. In connection with these restructuring activities, as part of the cost of acquisitions, the Company established reserves, primarily for severance and excess facilities. In accordance with EITF 95-3, the Company finalizes its restructuring plans no later than one year from the respective dates of the acquisitions. Unresolved matters at July 3, 1999, primarily included completion of planned severances and abandonment of excess facilities for certain acquisitions 11 6. Acquisitions (continued) completed during the last twelve months. A summary of the changes in accrued acquisition expenses, which are included in other accrued expenses in the accompanying balance sheet, follows: Abandonment of Excess (In thousands) Severance Facilities Other Total - ----------------------------------------------- -------------- -------------- -------------- ------------- Balance at January 2, 1999 $ 7,347 $14,577 $ 1,268 $23,192 Reserves established 15,804 1,938 1,024 18,766 Usage (5,013) (1,736) (973) (7,722) Decrease due to finalization of (455) - (242) (697) restructuring plans, recorded as a decrease to cost in excess of net assets of acquired companies Currency translation (597) (592) (89) (1,278) ------- ------- ------- ------- Balance at July 3, 1999 $17,086 $14,187 $ 988 $32,261 ======= ======= ======= ======= 7. Restructuring and Related Costs During the second quarter of 1999, the Company and certain of its subsidiaries initiated broad scale restructuring actions affecting a number of business units. As a result, the Company recorded restructuring and related costs totaling $418.8 million and other nonoperating charges totaling $24.9 million. Restructuring and related costs include $369.9 million of restructuring costs, $21.4 million of other nonrecurring costs, $25.3 million of inventory and warranty provisions, and $2.3 million of provisions for uncollectible accounts receivable. The inventory and warranty provisions are included in cost of revenues, and the provisions for uncollectible accounts receivable are included in selling, general, and administrative expenses in the accompanying statement of operations. Other nonoperating charges include $22.5 million of other expense, net and $2.5 million of income tax expense as detailed by segment below. Severance and lease costs, recorded as components of restructuring costs, were accounted for in accordance with EITF 94-3. In addition, during the first quarter of 1999, the Company and certain of its subsidiaries recorded restructuring and related costs of $4.0 million, including $5.6 million of restructuring costs, $8.6 million of other nonrecurring income, net, and $7.0 million of inventory charges. 12 7. Restructuring and Related Costs (continued) The Company recorded charges by segment for the second quarter of 1999 as follows: (In thousands) Measurement Biomedical Energy Recycling Corporate Total and and and and Detection Emerging Environment Resource Technologies Recovery - --------------------- -------------- ------------- ------------- ------------- -------------- ------------ Cost of product and $ 2,957 $ 18,176 $ 4,129 $ - $ - $ 25,262 service revenues Selling, general, - 2,049 249 - - 2,298 and administrative expenses Restructuring and 30,378 142,285 189,159 29,436 - 391,258 other nonrecurring costs, net Other expense, net 11,066 5,668 2,125 - 3,609 22,468 Income tax expense 1,409 - 1,055 - - 2,464 --------- -------- -------- -------- --------- -------- $ 45,810 $168,178 $196,717 $ 29,436 $ 3,609 $443,750 ========= ======== ======== ======== ========= ======== The Company recorded charges by segment for the first six months of 1999 as follows: (In thousands) Measurement Biomedical Energy Recycling Corporate Total and and and and Detection Emerging Environment Resource Technologies Recovery - --------------------- -------------- ------------- ------------- ------------- -------------- ------------ Cost of product and $ 7,566 $ 20,601 $ 4,129 $ - $ - $ 32,296 service revenues Selling, general, - 2,049 249 - - 2,298 and administrative expenses Restructuring and 31,621 145,090 189,860 21,720 - 388,291 other nonrecurring costs, net Other expense, net 11,066 5,668 2,125 - 3,609 22,468 Income tax expense 1,409 - 1,055 - - 2,464 --------- -------- -------- -------- --------- -------- $ 51,662 $173,408 $197,418 $ 21,720 $ 3,609 $447,817 ========= ======== ======== ======== ========= ======== The components of restructuring and related costs by segment and, where applicable, by majority-owned subsidiary, are as follows: Measurement and Detection Thermedics Inc. Thermedics recorded restructuring and related costs of $32.5 million during the second quarter of 1999 relating to the Measurement and Detection segment, including restructuring costs of $30.1 million, other nonrecurring costs of $0.1 million, a tax asset write-off of $1.4 million, and inventory provisions of $0.9 million. Restructuring costs of $30.1 million relate to a decision to sell its power electronics and test equipment business and include $28.5 million to write off related cost in excess of net assets of acquired companies to reduce the carrying value of the business to the 13 7. Restructuring and Related Costs (continued) estimated proceeds from its sale. In addition, restructuring costs include a charge of $1.6 million recorded by Thermedics to write off its remaining net investment in a subsidiary of the power electronics and test equipment business, which Thermedics intends to transfer to a buyer in consideration for a release from certain contractual obligations, primarily ongoing lease obligations. The tax write-off represents a deferred tax asset that will not be realized as a result of exiting this business. The inventory provision results from exiting and reengineering certain product lines. Unaudited revenues and operating losses, excluding restructuring and related costs, of the power electronics and test equipment business were $12.8 million and $0.9 million, respectively, for the first six months of 1999 and $37.9 million and $0.2 million, respectively, for 1998. Thermedics recorded other nonrecurring costs of $0.1 million to write off a receivable as a result of an unfavorable resolution of a post-closing adjustment in connection with the sale of a business in 1998. Thermo Instrument Systems Inc. In connection with restructuring actions commenced in 1998, certain subsidiaries of Thermo Instrument recorded restructuring costs of $0.2 million and $1.2 million during the second and first quarter of 1999, respectively. The restructuring costs were primarily for business relocation and facility-closure costs. Thermo Instrument expects to incur additional restructuring costs totaling $0.8 million in the third quarter of 1999. During the second quarter of 1999, Thermo Instrument recorded other nonrecurring charges of $13.1 million, including $11.1 million in charges relating to its equity investment in FLIR (Note 6). These charges were recorded to equity in loss of unconsolidated subsidiaries, a component of other expense, net in the accompanying statement of operations. Thermo Instrument's nonrecurring charges also include an adjustment to cost of revenues of $2.0 million relating to the sale of inventories at Spectra-Physics revalued at the date of its acquisition. Thermo Instrument recorded a charge of $4.6 million relating to the sale of such inventories in the first quarter of 1999. Biomedical and Emerging Technologies ThermoTrex Corporation During the second quarter of 1999, ThermoTrex announced restructuring actions at its Trex Medical Corporation and ThermoLase Corporation subsidiaries. In connection with these actions, ThermoTrex recorded restructuring and related costs of $93.9 million in the second quarter of fiscal 1999, including restructuring costs of $72.3 million, inventory and warranty provisions of $14.3 million, provisions for uncollectible accounts receivable of $1.6 million, and other nonoperating charges of $5.7 million. During the second quarter of 1999, Trex Medical recorded $18.1 million of restructuring and related costs, including restructuring costs of $6.1 million and inventory and warranty provisions of $12.0 million. The restructuring costs were incurred primarily in connection with the consolidation of certain facilities and, to a lesser extent, actions to reduce costs in other operations. Restructuring costs include $2.3 million for facility-closing costs, net of assumed sublease income; $2.0 million to write off leasehold improvements at facilities to be closed and to write down fixed assets to their estimated disposal value; and $1.9 million for severance for 265 employees across all functions. In August 1999, Trex Medical received notification from the FDA denying its 501(k) filing for its digital mammography system. Trex Medical plans to meet with the FDA to discuss the reasons for the denial, and expects to implement various design changes, initiate additional clinical trials, and, if appropriate after completing such clinical trials, submit a new application for marketing clearance. Trex Medical hopes to have initiated additional clinical trials within one year, but there can be no assurance regarding the timing or results of such clinical trials, or the submission of a new filing to the FDA for marketing clearance. Trex Medical recorded costs of $9.4 million to establish inventory provisions and to terminate purchase commitments for products that have become obsolete due to planned product 14 7. Restructuring and Related Costs (continued) changes or excess as a result of a recent decline in demand. The largest component of the inventory charge was recorded as a result of the decision by the FDA to deny Trex Medical's application its digital mammography system and resulting design changes expected to be made to the system. Provisions resulting from other planned product and technology changes and decreased demand for certain other products are also principal components of the inventory charge. Warranty provisions of $2.6 million were recorded for estimated costs to address certain product warranty issues, including costs associated with corrective actions to be taken with respect to certain previously sold mammography products. Trex Medical expects to incur additional restructuring costs totaling approximately $5.0 million, principally over the next several quarters, which will be recorded when incurred, such as additional charges for certain employee and business relocation and related costs. Completion of Trex Medical's restructuring plan is expected to occur in the first quarter of 2000. During 1998, ThermoLase initiated certain restructuring activities, including the announced closure of three domestic spas and the termination of a joint venture that operated its spa in France. Two of the domestic spas were closed during the fourth quarter of 1998. ThermoLase closed the third spa, as well as two additional spas, in the second quarter of 1999. Also during the second quarter of 1999, ThermoLase sold its remaining nine day spas, as well as the stock in its destination spa, The Greenhouse Spa, Inc. In connection with the sale and closures announced in 1999, as well as other actions, ThermoLase recorded restructuring and related costs of $67.7 million during the second quarter of 1999, including restructuring costs of $60.3 million, inventory provisions of $2.3 million, provisions for uncollectible accounts receivable of $1.7 million, and an investment write-down of $3.4 million. Restructuring costs include a $19.9 million loss on the sale of its spa businesses; $17.4 million for the write-off of leasehold improvements and equipment pertaining to the hair-removal business; $11.7 million for ongoing lease obligations, net of assumed sublease income; $10.0 million of estimated costs to terminate certain other obligations related to the ThermoLase hair-removal business; $0.4 million for losses on laser purchase commitments; $0.3 million to write down investments in international joint ventures; and $0.4 million for other related costs. In addition, restructuring costs include $0.2 million of severance costs for approximately 14 employees across all functions. The inventory provisions were for certain branded product lines at ThermoLase's Creative Beauty Innovations, Inc. subsidiary that have been discontinued, and the investment write-down was to reduce the carrying value of ThermoLase's investment in a privately held company to its estimated disposal value. The investment write-down is included in other expense, net in the accompanying statement of operations. Unaudited revenues and operating losses, excluding restructuring costs, of the spa businesses were $6.6 million and $15.5 million, respectively, for the first six months of 1999, and $9.6 million and $14.6 million, respectively, for 1998. ThermoTrex and the Company recorded aggregate restructuring costs of $62.7 million during the second quarter of 1999, representing a write-off of cost in excess of net assets of acquired companies. Of the total write-off, $59.3 million was to write-off cost in excess of net assets of acquired companies that arose from repurchases of ThermoLase common stock. This asset has become impaired as a result of continuing losses at ThermoLase and a decision to exit its principal business. The balance of the write off was recorded by ThermoTrex as a result of a decision to hold for sale its Trex Communications Corporation subsidiary, and represents a reduction in the carrying value of Trex Communications to the amount of expected proceeds from its sale. In addition, ThermoTrex provided a reserve of $2.3 million for impairment of a note receivable from an unaffiliated company. This amount is included in other expense, net in the accompanying statement of operations. In addition, ThermoTrex recorded restructuring and related charges of $3.5 million during the first quarter of 1999, including $1.1 million of restructuring costs, of which $0.6 million was recorded at Trex Medical. The total charge also includes inventory provisions of $2.4 million that were recorded by Trex Medical. The restructuring costs were related to severance for 72 employees across all functions. 15 7. Restructuring and Related Costs (continued) Thermo Coleman Corporation Thermo Coleman Corporation recorded restructuring and related costs of $17.0 million during the second quarter of 1999, principally as a result of a decision to exit certain businesses through sale or closure. Restructuring costs include $10.5 million to write off cost in excess of net assets of acquired companies, $2.3 million for the write down of fixed assets, $3.8 million of inventory provisions, and a $0.4 million provision for a note receivable. The charges reduce the carrying values of the businesses to the estimated proceeds from their sale. Unaudited revenues and operating losses of these businesses were $16.5 million and $3.9 million, respectively, in the first six months of 1999, and revenues and operating income of $34.5 million and $1.5 million, respectively, in 1998. Thermedics Inc. During the second quarter of 1999, Thermedics recorded $0.3 million of other nonrecurring costs relating to the proposed transfer of the Company's wholly owned Thermo Biomedical group of subsidiaries to Thermedics. In addition, Thermedics recorded $1.4 million of other nonrecurring costs in the first quarter of 1999, primarily for investment banking fees that were also associated with the proposed transfer. Thermedics expects to incur additional nonrecurring costs totaling approximately $0.7 million, principally through December 1999, which will be recorded when incurred. These charges also relate to the proposed transfer. Other The Company recorded restructuring costs of $0.2 million and $0.3 million in the second and first quarter of 1999, respectively. Energy and Environment Thermo Ecotek Corporation During the second quarter of 1999, Thermo Ecotek recorded $124.3 million of restructuring costs and other charges of $2.1 million, as a result of actions detailed below. Following significant investments of resources in attempts to correct operational problems, in May 1999, Thermo Ecotek made a decision to cease further efforts and hold for sale or disposal its Gillette, Wyoming, facility. As a result, Thermo Ecotek recorded a restructuring charge of $68.0 million, including $63.3 million to write down the plant and related equipment to a nominal salvage value, $4.4 million for estimated land reclamation costs, and $0.3 million of other exit costs, primarily abandoned-facility payments. Thermo Ecotek recorded $1.5 million of minority interest income, representing a minority partner's share of these charges. Revenues of this facility were nominal during the period it operated. The facility had unaudited operating losses, excluding restructuring costs, of $6.2 million in the first six months of 1999 and $7.6 million in 1998. Thermo Ecotek's Delano, California, biomass facilities will reach the end of the fixed price contract period of their power-sales agreement in September 2000. While Thermo Ecotek's forecasts for periods after that time project positive cash flows, the facilities would operate at a loss due to depreciation expense that extends beyond fiscal 2000. In May 1999, Thermo Ecotek entered into an agreement to terminate the power-sales agreement for its Delano facilities, effective December 31, 1999. The terms of the agreement call for Thermo Ecotek to receive payments in lieu of operating under its current agreement and is subject to regulatory approval. Thermo Ecotek recorded a restructuring charge of $51.0 million as a result of entering into the new agreement, including $47.5 million to write down the plant and related assets to their estimated recoverable value, $2.4 million related to a loss on the cancellation of the facility's primary fuel contract, and $1.1 million to write off cost in excess of net assets of acquired companies. 16 7. Restructuring and Related Costs (continued) Pacific Gas & Electric (PG&E), the customer under a long-term power-sales agreement at Thermo Ecotek's Woodland, California, plant, has interpreted the terms of such agreement to permit PG&E to cease payment of fixed contract rates effective July 1, 1999, and to thereafter purchase power at avoided cost rates. Although Thermo Ecotek contests this interpretation and is considering its alternatives concerning this dispute, Thermo Ecotek recorded a restructuring charge of $3.8 million during the second quarter of 1999, representing impairment of its net investment in the Woodland facility as a result of PG&E's decision to cease making payments of fixed contract rates. In addition, during the second quarter of 1999, Thermo Ecotek recorded a charge of $1.5 million to write off a power plant that is held for sale. Thermo Ecotek believes that the salvage value, if any, is nominal. In the second quarter of 1999, Thermo Ecotek also recorded a charge of $2.1 million representing the write-down of available-for-sale investments representing an equity interest of its minority partner in the Gillette, Wyoming, facility due to impairment that Thermo Ecotek deems permanent based on recent stock prices. This amount is included in loss on investments, net, a component of other expense, net in the accompanying statement of operations. Thermo TerraTech Inc. In May 1999, Thermo TerraTech announced that its majority-owned subsidiaries plan to sell several businesses. The businesses proposed to be sold include the used-oil processing operation of Thermo EuroTech, N.V.; three soil-recycling facilities of ThermoRetec Corporation, in addition to the sites previously announced; and the Randers division, BAC Killam Inc., and E3-Killam Inc. businesses of The Randers Killam Group Inc. In connection with these actions, Thermo TerraTech recorded $55.9 million of restructuring and related costs, including restructuring costs of $54.2 million, a tax asset write-off of $1.1 million, and an inventory provision of $0.7 million. Restructuring costs include $22.2 million to write down cost in excess of net assets of acquired companies to reduce the carrying value of the businesses proposed to be sold to the estimated proceeds from their sale; $20.2 million to write down fixed assets to their estimated disposal value; $4.6 million for ongoing lease costs for facilities that will be exited in connection with the sale of certain businesses; $2.5 million for estimated land reclamation costs; $1.9 million to write off the cumulative foreign translation adjustment related to Thermo EuroTech's used-oil processing business; $1.8 million to write off intangible assets related to license acquisition costs at the used-oil processing business; $0.6 million for severance costs for 42 employees across all functions; and $0.4 million to write off other current assets associated with the businesses. The tax asset write-off represents a deferred tax asset that will not be realized as a result of selling Thermo EuroTech's used-oil processing business. The inventory provision also relates to exiting this business. The write-down of fixed assets principally relates to special purpose equipment in the used-oil processing and soil-recycling businesses. In connection with the actions discussed above, the Company also recorded $1.7 million to write down cost in excess of net assets of acquired companies that arose in connection with the Company's repurchases of Thermo EuroTech common stock. The write off is a result of continuing losses and a decision to exit Thermo EuroTech's principal business. Thermo TerraTech expects to incur additional restructuring costs of approximately $3 million through the first half of 2000, for costs that will be recorded when incurred, such as additional severance, employee retention, and relocation expenses. The businesses that are proposed to be sold reported aggregate unaudited revenues and operating income, excluding restructuring and related costs, of $22.3 million and $0.8 million, respectively, in the first six months of 1999 and aggregate unaudited revenues and operating losses of $54.3 million and $1.1 million, respectively, in 1998. During 1998, Thermo TerraTech recorded restructuring costs, primarily related to the closure or sale of two soil-recycling facilities by ThermoRetec. ThermoRetec closed one soil-recycling facility in March 1999 and is actively seeking a buyer for the second soil-recycling facility. If no buyer is found, ThermoRetec will close the facility. 17 7. Restructuring and Related Costs (continued) Thermo Power Corporation Thermo Power undertook certain restructuring actions during the second quarter of 1999, which included a decision to divest its ThermoLyte Corporation subsidiary, as well as a decision to outsource certain manufacturing and warranty functions and reduce staffing levels at certain other subsidiaries. In addition, Thermo Power wrote down certain assets at its Peek sales and service subsidiaries located in Malaysia and Croatia that have become impaired due to business conditions in those regions. In connection with these actions, Thermo Power recorded restructuring and related costs of $12.6 million, including $8.9 million of restructuring costs, inventory provisions of $3.0 million, costs for outsourcing certain warranty repairs of $0.5 million, and a provision for uncollectible accounts receivable of $0.2 million. Restructuring costs include $4.1 million for the write-off of cost in excess of net assets of acquired companies, of which $2.9 million was to reduce the carrying value of ThermoLyte to the estimated proceeds from its sale and $1.2 million was to reduce the carrying value of Thermo Power's investment in its Peek subsidiaries located in Malaysia and Croatia due to projected undiscounted cash flows from their operations being insufficient to recover its investment. In addition, restructuring costs include $2.0 million of severance costs for approximately 63 employees across all functions; $1.6 million for the write-down of certain fixed assets, principally at operations being exited; and $1.2 million for lease costs at facilities being abandoned. Inventory provisions represent a write-down of inventories to estimated salvage value and consist of $1.9 million for raw materials for product lines being outsourced, $1.0 million for a discontinued product line, and $0.1 million for inventories at Peek's subsidiaries located in Malaysia and Croatia. Unaudited revenues and operating losses for ThermoLyte, excluding restructuring and related costs, were $7.0 million and $1.1 million, respectively, in the first six months of fiscal 1999, and $5.8 million and $1.0 million, respectively, in 1998. Thermo Power recorded restructuring costs of $0.7 million during the first quarter of 1999 related to actions taken at its Peek subsidiary. The restructuring costs consisted of $0.4 million of severance costs for approximately 70 employees across all functions, $0.2 million for lease costs at facilities being abandoned in connection with the consolidation of facilities, and an asset write-down of $0.1 million related to the consolidation of such facilities. Thermo Power expects to incur additional restructuring costs totaling approximately $2.5 million through December 1999 for costs that will be recorded when incurred, such as additional severance costs and fees associated with outsourcing certain product lines. Completion of Thermo Power's restructuring plans is expected to occur by December 1999. Recycling and Resource Recovery Thermo Fibertek Inc. Thermo Fibertek recorded $2.3 million of restructuring costs during the first quarter of 1999, consisting of $1.3 million for severance costs for 24 employees across all functions, and $1.0 million to terminate distributor agreements. In addition, Thermo Fibertek recorded other nonrecurring income, net of $10.0 million, consisting of an $11.1 million gain on the sale of its Thermo Wisconsin, Inc. subsidiary and $1.1 million of nonrecurring costs. The nonrecurring costs consist of $0.5 million for the expected settlement of a legal dispute, $0.3 million for the impairment of a building held for disposal, and $0.3 million of other nonrecurring costs. Unaudited revenues and operating income for Thermo Wisconsin were $1.8 million and $0.4 million, respectively, in the first quarter of 1999, and $18.9 million and $2.6 million, respectively, in 1998. 18 7. Restructuring and Related Costs (continued) Other In May 1999, a jury in the superior court of the state of Rhode Island rendered a verdict against the Company in connection with an installation in 1985 of a wastewater treatment system by a subsidiary of the Company. The plaintiff has submitted a brief to the court that sets forth a computation of interest on the damages that, if approved by the court, would bring the total amount of the award to approximately $21 million. The Company believes that both the verdict and the interest computation are in error and intends to appeal. Due to the inherent uncertainty of the appeal process, however, the Company has recorded a charge of $21 million for this matter in the second quarter of 1999. During the second quarter of 1999, the Company also decided to hold for sale its Peter Brotherhood, Ltd. subsidiary. The Company recorded an $8.4 million write-down of fixed assets to reduce the carrying value of the business unit to the estimated proceeds from its sale. Unaudited revenues and operating income for Peter Brotherhood, excluding restructuring costs, were $22.9 million and $0.9 million, respectively, in the first six months of 1999, and $41.7 million and $1.3 million, respectively, in 1998. Corporate During the second quarter of 1999, the Company recorded $3.6 million of other nonoperating charges to write down available-for-sale investments due to impairment that the Company deems permanent based upon recent market prices. These charges are included in loss on investments, net, a component of other expense, net in the accompanying statement of operations. General During 1998, certain subsidiaries announced restructuring actions that included plans for termination of 792 employees. As of January 2, 1999, the subsidiaries had terminated 550 employees. The restructuring actions in 1999 included plans for the termination of an additional 579 employees. During the first six months of 1999, 373 employees were terminated in connection with the restructuring plans announced in 1998 and 1999. A summary of the changes in accrued restructuring costs, included in other accrued expenses in the accompanying balance sheet, follows: Abandonment (In thousands) Severance of Excess Other(a) Total Facilities ------------------------------------------- -------------- -------------- -------------- ------------- Balance at January 2, 1999 $10,572 $5,437 $ 2,731 $18,740 Provision charged to expense 7,856 20,929 21,564 50,349 Usage (7,422) (3,246) (1,434) (12,102) Currency translation (844) (167) (225) (1,236) ------- ------ ------- ------- Balance at July 3, 1999 $10,162 $22,953 $22,636 $55,751 ======= ======= ======= ======= (a) Includes provisions in 1999 of $12.8 million for costs to terminate contracts and $6.9 million for land reclamation costs. 8. Proposed Reorganization During 1998, the Company announced a proposed reorganization, which was amended in May 1999, involving the Company and certain of its subsidiaries. The goals of the proposed reorganization include consolidating and strategically realigning certain businesses to enhance their competitive market positions and increasing liquidity in the public markets by providing larger market floats for the Company's publicly traded subsidiaries. 19 8. Proposed Reorganization(continued) The Company plans to combine its wholly owned Thermo Biomedical group of subsidiaries with Thermedics. The Company would transfer the Thermo Biomedical group of subsidiaries to Thermedics. Thermedics Detection Inc. and Thermo Sentron Inc. would be taken private. The public shareholders of Thermedics Detection and Thermo Sentron would receive cash in exchange for their shares of common stock of the respective companies. In addition, Thermedics' equity interest in Thermo Sentron, Thermedics Detection, and Thermo Voltek Corp. would be transferred to the Company and as a result each of Thermo Sentron, Thermedics Detection, and Thermo Voltek would become wholly owned subsidiaries of the Company. In March 1999, Thermedics acquired, through a merger, all of the outstanding shares of Thermo Voltek common stock that Thermedics and the Company did not already own. Subsequent to this transaction, Thermedics and the Company owned approximately 97% and 3%, respectively, of the outstanding common stock of Thermo Voltek, which ceased to be publicly traded. In May 1999, Thermo Power entered into a definitive agreement and plan of merger with the Company pursuant to which the Company would acquire, for $12.00 per share, all of the outstanding shares of common stock of Thermo Power not already owned by the Company. Following the merger, Thermo Power's common stock would cease to be publicly traded. This merger is expected to be completed in the fourth quarter of calendar 1999. In May 1999, ThermoSpectra Corporation entered into a definitive agreement and plan of merger with Thermo Instrument pursuant to which Thermo Instrument would acquire, for $16.00 per share, all of the outstanding shares of common stock of ThermoSpectra not already owned by Thermo Instrument or the Company. In July 1999, Thermo Vision Corporation entered into a definitive agreement and plan of merger with Thermo Instrument pursuant to which Thermo Instrument would acquire, for $7.00 per share, all of the outstanding shares of Thermo Vision not already owned by Thermo Instrument or the Company. Following the mergers, ThermoSpectra's and 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. Thermo TerraTech, ThermoRetec, The Randers Killam Group, ThermoTrex, ThermoLase, and Thermo Ecotek would merge into the Company. Shareholders of each of these companies would receive shares of common stock of the Company in exchange for their shares of common stock of the respective companies. The completion of the merger of Thermo Voltek into Thermedics reduced the number of the Company's majority-owned subsidiaries to 23. If the reorganization plan is completed as proposed, it would further reduce the number of the Company's majority-owned subsidiaries from 23 to 12. Each component of the reorganization is subject to numerous conditions, including the following (not all of which are applicable to each component): establishment of prices and/or exchange ratios; confirmation of anticipated tax consequences; approval by the boards of directors (including the outside directors) of each of the affected majority-owned subsidiaries; negotiation and execution of definitive purchase and sale or merger agreements; completion of review by the Securities and Exchange Commission of any necessary documents regarding the proposed transactions; and fairness opinions from one or more investment banking firms on certain financial aspects of the transactions. One or more of the transactions may not occur if the applicable conditions previously described are not satisfied. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Forward-looking Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999, filed with the Securities and Exchange Commission. 20 Results of Operations Second Quarter 1999 Compared With Second Quarter 1998 Sales in the second quarter of 1999 were $1.09 billion, an increase of $144.5 million, or 15%, over the second quarter of 1998. Excluding restructuring and other nonrecurring costs, net of $391.3 million and $4.1 million in 1999 and 1998, respectively, described below, and inventory and other provisions of $27.6 million in 1999, segment income decreased to $91.7 million in 1999 from $117.1 million in 1998. (Segment income is income before corporate general and administrative expenses, other income and expense, minority interest, income taxes, and extraordinary item.) Operating loss, which includes restructuring and other nonrecurring costs, net and inventory and other provisions, was $336.1 million in 1999, compared with operating income of $105.5 million in 1998. Measurement and Detection Sales from the Measurement and Detection segment increased $136.8 million, or 30%, to $588.5 million in 1999. Sales increased due to acquisitions made by Thermo Instrument Systems Inc. and Thermo Sentron Inc., which added $159.4 million of revenues in 1999. The unfavorable effects of currency translation, due to the strengthening of the U.S. dollar relative to foreign currencies in countries in which the Measurement and Detection segment operates, decreased revenues by $4.2 million in 1999. Revenues from Thermo Instrument's analytical products, excluding the effects of acquisitions and currency translation, increased $10.8 million, primarily due to the introduction of new products and an increase in revenues from sales to customers in Asia due to improved economic conditions there. In addition, sales of life sciences products, excluding acquisitions and currency translation, increased $3.3 million due to higher demand and expansion of sales and distribution channels into new markets. The increases in revenues from acquisitions and at certain existing businesses were offset in part by lower revenues from other businesses. Revenues from Thermo Instrument's industrial products, excluding the effects of acquisitions and currency translation, decreased $13.1 million, primarily due to lower revenues at ThermoSpectra Corporation's existing businesses as a result of continued weakness in the semiconductor industry. Revenues from Thermo Instrument's process control products, excluding acquisitions and currency translation, decreased $11.2 million as a result of 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 materials producers. Revenues from this segment's quality assurance and safety products business decreased $5.8 million due to lower demand. Revenues from this segment's power electronics and test equipment business decreased $4.2 million due to lower demand and the sale of a business unit which had sales of $1.6 million in the prior period. There can be no assurance that the trends that have adversely affected this segment will not continue. Segment income margin (segment income margin is segment income as a percentage of sales), excluding restructuring and other nonrecurring costs of $30.4 million in 1999 and $1.4 million in 1998, decreased to 10.1% in 1999 from 14.9% in 1998. Excluding charges for the sale of inventories revalued at the date of acquisition of $2.0 million and other inventory provisions of $0.9 million, segment income margin was 10.6% in 1999. Segment income margin decreased primarily due to the effect of lower revenues at certain business units and, to a lesser extent, the inclusion of lower-margin revenues from Spectra-Physics AB, which was acquired in February 1999. This segment recorded restructuring and other nonrecurring costs of $30.4 million in 1999 (Note 7), principally as a result of a decision to hold for sale its power electronics and test equipment business. The charge primarily represents a reduction in the carrying value of this business to the expected proceeds from its sale. Thermo Instrument expects to incur restructuring costs totaling approximately $0.8 million in the third quarter of 1999. In 1998, Thermo Instrument recorded $1.4 million of nonrecurring costs relating to the resolution of an arbitration proceeding. 21 Second Quarter 1999 Compared With Second Quarter 1998 (continued) Biomedical and Emerging Technologies Sales from the Biomedical and Emerging Technologies segment were $242.9 million in 1999, an increase of $14.6 million, or 6%, over the 1998 period. Sales increased primarily due to the inclusion of $16.6 million of sales from acquired businesses. In addition, sales at Thermo Cardiosystems Inc. increased $4.1 million, or 25%, while sales of respiratory and monitoring products by the Company's wholly owned Thermo Biomedical group increased $2.8 million due to higher demand. In addition, revenues at Thermo Digital Technologies L.L.C. increased due to continued shipments of digital passport printers under a contract with the U.S. government that commenced in the third quarter of 1998. These revenue increases were offset in part by lower revenues at Trex Medical Corporation. Revenues at Trex Medical, excluding revenues from an acquired business, decreased $13.1 million. Of this amount, $10.6 million resulted from the termination of an original equipment manufacturer (OEM) contract with a major customer following the customer's acquisition by another corporation. In addition, Trex Medical had lower sales of general-purpose X-ray and radiographic/fluoroscopic systems, offset in part by higher demand for mammography systems and related upgrade components. Segment loss, excluding restructuring and other nonrecurring costs of $142.3 million in 1999 and $2.7 million in 1998, was $14.8 million in 1999, compared with segment income of $20.0 million in 1998. This decline resulted primarily from inventory and other provisions at several business units which aggregated $20.2 million in 1999 (Note 7). Excluding these provisions, segment income for the Biomedical and Emerging Technologies segment was $5.4 million in 1999. Trex Medical had a segment loss, excluding restructuring costs and other provisions, of $1.5 million in 1999, compared with segment income of $9.6 million in the 1998 period. The decrease in profitability at Trex Medical was primarily due to a large decrease in sales at existing businesses. The segment loss at ThermoLase Corporation, excluding restructuring and nonrecurring costs and other provisions, totaled $7.3 million in 1999, compared with $6.0 million in 1998. ThermoLase sold The Greenhouse Spa, Inc., and nine of its day spas in June 1999, and closed its remaining spas as a result of a decision to exit this business. Thermo Coleman Corporation had a segment loss, excluding restructuring costs and other provisions, of $2.3 million in 1999, compared with segment income of $1.3 million in 1998. The segment loss resulted from losses at its Thermo Information Solutions Inc.'s Internet services subsidiary and at its Metric Vision subsidiary which commenced operations in the past year. Restructuring and other nonrecurring costs of $142.3 million in 1999 (Note 7) includes $60.3 million of costs recorded by ThermoLase in connection with the sale of its spas and exiting its hair-removal business; $59.3 million to write-off cost in excess of net assets of acquired companies arising from repurchases of ThermoLase stock; $12.7 million at Thermo Coleman and $3.4 million at ThermoTrex for the write-off of cost in excess of net assets of acquired companies and fixed assets to reduce the carrying value of three businesses to the estimated proceeds from their sale; $6.1 million at Trex Medical for severance and abandoned leases resulting principally from the consolidation of facilities; $0.3 million of nonrecurring costs at Thermedics associated with the proposed transfer of the Company's wholly owned Thermo Biomedical group of subsidiaries to Thermedics; and $0.2 million of other severance costs. This segment expects to have additional restructuring costs of approximately $5.7 million over the remainder of 1999. Restructuring costs of $2.7 million in 1998 includes $1.9 million recorded by ThermoLase in connection with certain actions, including the relocation of its headquarters from California to Texas, and $0.8 million recorded by SensorMedics Corporation in connection with the reorganization of a subsidiary in the Netherlands. Energy and Environment Sales from the Energy and Environment segment increased $4.1 million to $196.5 million in 1999. Revenues from Thermo Ecotek Corporation increased $1.5 million in 1999 to $52.3 million. The increase results from the expansion of an existing power generation facility and two facilities placed in service during the quarter for the summer peak season. These increases were offset in part by lower revenues at Thermo Ecotek's Thermo Trilogy Corporation biopesticide subsidiary due to lower demand. As noted below, the periods during which Thermo Ecotek receives fixed rates for power at these facilities has ended or will end in 2000. The change from fixed rates to avoided cost rates under the terms of the contracts, as discussed below, will have a significant adverse effect on Thermo 22 Second Quarter 1999 Compared With Second Quarter 1998 (continued) Ecotek's revenues and profitability. Sales at Thermo Power Corporation increased $3.4 million in 1999 to $68.3 million, principally due to revenues of $3.1 million from an acquired business and higher demand for gas-fueled cooling systems and standard industrial refrigeration packages. These increases were offset in part by a $7.0 million decrease in Thermo Power's revenues as a result of the sale of its Crusader Engines division in December 1998. Revenues at Thermo TerraTech Inc. decreased slightly to $75.9 million in 1999 from $76.7 million in 1998. Segment income, excluding restructuring costs of $189.2 million in 1999, was $13.9 million in 1999, compared with $20.6 million in 1998. Excluding provisions for inventories and other charges of $4.4 million, segment income was $18.3 million in 1999. Thermo Ecotek's segment income before restructuring costs in 1999 was $8.8 million in 1999, compared with $10.5 million in 1998. The decrease resulted principally from a loss of $0.3 million at Thermo Trilogy in 1999, compared with income of $0.9 million in 1998, due to lower revenues. Segment income at Thermo Power, excluding restructuring costs and other charges in 1999, was $3.8 million in 1999 and $5.4 million in 1998. The decrease occurred primarily at Thermo Power's Peek plc subsidiary as a result of a change in sales mix and higher research and development costs. Segment income before restructuring costs and other charges in 1999 at Thermo TerraTech increased to $5.7 million in 1999 from $4.7 million in 1998. The increase at Thermo TerraTech principally resulted from lower depreciation and amortization as a result of recording write-offs and writedowns during the second quarter of 1999. Restructuring costs of $189.2 million in 1999 (Note 7) include $124.4 million at Thermo Ecotek resulting principally from a decision to close its coal-beneficiation facility and from impairment of its Delano facility following an agreement to terminate the power-sales agreement for that facility. Restructuring costs in 1999 also include $8.9 million at Thermo Power resulting principally from a decision to hold for sale its ThermoLyte subsidiary, impairment at two sales and service businesses of its Peek subsidiary that operate in Malaysia and Croatia, and staff reductions and facility consolidations at other Peek units. Restructuring costs in 1999 at Thermo TerraTech totaled $54.2 million and result from decisions to sell several businesses. The charges at Thermo TerraTech primarily reduce the carrying value of the businesses to the expected proceeds from their sale. In addition, the Company recorded $1.7 million of restructuring costs associated with cost in excess of net assets of acquired companies arising from the Company's repurchases of Thermo EuroTech stock, which has become impaired due to continuing losses and a decision to exit its principal business. This segment expects to incur additional restructuring costs of approximately $5.5 million over the remainder of 1999. The power-sales agreements for Thermo Ecotek's Mendota, Woodland, and Delano plants in California are so-called standard offer #4 (SO#4) contracts, which require Pacific Gas & Electric (PG&E), in the case of Mendota and Woodland, and Southern California Edison (SCE), in the case of the Delano facilities, to purchase the power output of the projects at fixed rates through specified periods. Thereafter, the utility will pay a rate based upon the costs that would have otherwise been incurred by the purchasing utilities in generating their own electricity or in purchasing it from other sources (avoided cost). Avoided cost rates are currently substantially lower than the rates Thermo Ecotek has received under the fixed-rate portions of its contracts and are expected to remain so for the foreseeable future. PG&E commenced paying for power purchased from the Mendota and Woodland facilities at avoided cost rates effective in June and July 1999, respectively, although Thermo Ecotek believes that this change to avoided cost rates occurred six months earlier than the power-sales agreements provided. Thermo Ecotek is considering its alternatives concerning this dispute. Thermo Ecotek expects that at current avoided cost rates its Mendota plant will operate at substantially reduced operating income levels or at a loss beginning in the third quarter of 1999 and thereafter. Further, based on current avoided cost rates, the Woodland plant will operate at breakeven or nominal operating losses through 2010, primarily as a result of nonrecourse lease obligations that have been partially funded from the Woodland plant's past cash flows. Absent sufficient reductions in fuel prices and other operating costs, Thermo Ecotek will draw down power reserve funds to cover operating cash shortfalls and then, if such funds are depleted, either renegotiate its nonrecourse lease for the Woodland plant or forfeit its interest in the plant. The results of the Woodland facility were approximately breakeven in 1999 and 1998, as a result of recording as an expense the funding of reserves required under Woodland's nonrecourse lease agreement to cover expected shortfalls in lease payments. The power-sales 23 Second Quarter 1999 Compared With Second Quarter 1998 (continued) agreement with SCE for the Delano facilities calls for fixed contract rates through September 2000. If the agreement reached in May 1999 to terminate Thermo Ecotek's power-sales agreements for its Delano facilities receives regulatory approval, Thermo Ecotek expects that the results of the Delano facilities will be reduced to breakeven or a nominal loss subsequent to December 1999. Should the agreement not receive approval, Thermo Ecotek expects that its Delano facilities will continue to have positive cash flows but will operate at substantial operating losses beginning in the fourth quarter of 2000. In calendar 1998, the Mendota and Delano plants' aggregate operating income was approximately $41.7 million. In anticipation of these expected declines in revenues and operating income, Thermo Ecotek may explore other options for its biomass facilities, including disposal or repowering. Recycling and Resource Recovery Sales in the Recycling and Resource Recovery segment decreased to $66.2 million in 1999 from $77.0 million in 1998. Sales from Thermo Fibertek Inc. decreased $10.0 million to $53.5 million in 1999, primarily due to the February 1999 sale of its Thermo Wisconsin, Inc. subsidiary that resulted in a decrease in revenues of $5.7 million. Revenues at Thermo Fibertek's existing businesses also decreased primarily due to lower sales of stock-preparation equipment in Europe and North America and accessories in North America. These decreases were offset in part by higher revenues from Thermo Fibergen Inc.'s water- and fiber-recovery services. The unfavorable effects of currency translation decreased revenues by $0.4 million in 1999. Segment income, excluding restructuring and other nonrecurring costs, of $29.4 million in 1999, was $5.3 million in 1999, compared with $9.4 million in 1998. Segment income decreased primarily at Thermo Fibertek as a result of a decrease in revenues. Restructuring costs of $8.4 million were recorded at the Company's wholly owned Peter Brotherhood subsidiary to write down property and equipment to reduce the carrying value of this unit to the estimated proceeds from its sale. In May 1999, a jury in the superior court of the state of Rhode Island rendered a verdict against the Company in connection with an installation in 1985 of a wastewater treatment system by the Company's wholly owned Napco subsidiary. The plaintiff has submitted a brief to the court that sets forth a computation of interest on the damages that, if approved by the court, would bring the total amount of the award to approximately $21 million. The Company believes that both the verdict and the interest computation are in error and intends to appeal this matter. Due to the inherent uncertainty of the appeal process, however, the Company has recorded a charge of $21 million for this matter in 1999. Gain on Issuance of Stock by Subsidiaries and Minority Interest Expense The Company has, from time to time, caused certain subsidiaries to sell minority interests to investors resulting in several majority-owned, privately and publicly held subsidiaries. As a result of the sale of stock by subsidiaries and the issuance of stock by subsidiaries upon conversion of convertible debentures, the Company recorded gains of $14.6 million in 1998. The Company recorded minority interest income of $47.5 million in 1999, primarily as a result of restructuring and other nonrecurring costs at the Company's majority-owned subsidiaries. Minority interest expense was $16.7 million in 1998. Minority interest expense in 1998 includes $1.9 million related to gains recorded by the Company's majority-owned subsidiaries as a result of the sale of stock by their subsidiaries and the issuance of stock by their subsidiaries upon conversion of convertible debentures. Income Taxes The company's effective tax rate was a benefit of 24% in 1999. Excluding nontaxable gains from issuance of subsidiary stock, the Company's effective tax rate was 45% in 1998. The effective tax rates vary from the statutory federal income tax rate primarily due to state income taxes and nondeductible expenses, including in 1999, the write-off of cost in excess of net assets of acquired companies. In addition, in connection with restructuring actions, certain subsidiaries wrote off deferred tax assets aggregating $2.5 million in 1999 (Note 7). 24 First Six Months 1999 Compared With First Six Months 1998 Sales in the first six months of 1999 were $2.10 billion, an increase of $209.8 million, or 11%, over the first six months of 1998. Excluding restructuring and other nonrecurring costs, net, of $388.3 million and $4.1 million in 1999 and 1998, respectively, described below, and inventory and other provisions of $34.6 million in 1999, segment income decreased to $174.7 million in 1999 from $217.9 million in 1998. Operating loss, which includes restructuring and other nonrecurring costs, net and inventory and other provisions, was $265.3 million in 1999, compared with operating income of $197.9 million in 1998. Measurement and Detection Sales from the Measurement and Detection segment increased $191.5 million to $1.11 billion in 1999. Sales increased due to acquisitions made by Thermo Instrument and Thermo Sentron, which added $259.6 million of revenues in 1999. The favorable effects of currency translation, due to the decline in value of the U.S. dollar relative to foreign currencies in countries in which the Measurement and Detection segment operates, increased revenues by $1.3 million in 1999. Increases in revenues from acquisitions and currency translation were offset in part by lower revenues at existing businesses. Revenues from Thermo Instrument's industrial products, excluding the effects of acquisitions and currency translation, decreased $30.4 million, primarily due to lower revenues at ThermoSpectra's existing businesses as a result of continued weakness in the semiconductor industry. Revenues from Thermo Instrument's process control products, excluding acquisitions and currency translation, decreased $20.4 million due to the reasons discussed in the results for the second quarter. Revenues from this segment's quality assurance and safety products business decreased $9.1 million due to lower demand and revenues at its power electronics and test equipment business decreased $9.4 million due to lower demand and the sale of a business unit which had revenues of $2.9 million in the 1998 period. Segment income margin, excluding restructuring and other nonrecurring costs of $31.6 million in 1999 and $1.4 million in 1998, decreased to 10.4% in 1999 from 14.6% in 1998. Excluding a charge for the sale of inventories revalued at the date of acquisition of $6.7 million and other inventory provisions of $0.9 million, segment income margin was 11.0% in 1999. The decrease was due to the reasons discussed in the results for the second quarter. Restructuring and other nonrecurring costs of $30.2 million in 1999 (Note 7) principally represent a charge in connection with the planned sale of the segment's power electronics and test equipment business, discussed in the results for the second quarter. In connection with restructuring actions commenced in 1998, Thermo Instrument recorded restructuring costs of $1.4 million in 1999, primarily for business relocation and facility-closure costs and severance costs (Note 7). In 1998, Thermo Instrument recorded $1.4 million of nonrecurring costs for the reason discussed in the results of operations for the second quarter. Biomedical and Emerging Technologies Sales from the Biomedical and Emerging Technologies segment were $479.2 million in 1999, an increase of $27.6 million, or 6%, over the 1998 period. Sales increased due to the inclusion of $45.9 million of sales from acquired businesses. Sales at Thermo Cardiosystems increased $7.1 million, or 22%, due to higher demand. In addition, revenues from government contracts at Thermo Coleman increased, and revenues at Thermo Digital Technologies increased due to continued shipments of digital passport printers under a contract with the U.S. government that commenced in the third quarter of 1998. These increases were offset in part by lower revenues at Trex Medical and, to a lesser extent, from a decrease in sales of respiratory products at the Company's wholly owned Thermo Biomedical group. Revenues at Trex Medical, excluding revenues from an acquisition, decreased $35.9 million. Of this amount, $21.9 million resulted from a reduction in revenues due to the termination of an OEM contract with a major customer following the customer's acquisition by another corporation. Revenues also decreased at Trex Medical due to the inclusion in the 1998 period of a $8.8 million cardiac catheterization system sale to a Russian customer. In addition, Trex Medical had lower sales of general-purpose X-ray and radiographic/fluoroscopic systems, offset in part by higher demand for mammography systems and related upgrade components. Revenues at Thermo Biomedical decreased $4.4 million primarily due to lower international demand for respiratory products. 25 First Six Months 1999 Compared With First Six Months 1998 (continued) Segment loss, excluding restructuring and other nonrecurring costs of $145.1 million in 1999 and $2.7 million in 1998, was $10.0 million in 1999 compared with income of $38.5 million in 1998. This decline resulted primarily from inventory and other provisions in 1999 at several business units which aggregated $22.6 million (Note 7). Excluding these provisions, segment income at the Biomedical and Emerging Technologies segment was $12.6 million in 1999. Trex Medical had a segment loss, excluding restructuring costs and other provisions, of $4.6 million in 1999, compared with segment income of $18.5 million in the 1998. The decrease in profitability at Trex Medical was due to the reason discussed in the results for the second quarter. The segment loss at ThermoLase, excluding restructuring costs and other provisions, totaled $13.5 million in 1999, compared with $13.9 million in 1998. Thermo Coleman had a segment loss, excluding restructuring costs and inventory provisions, of $1.0 million in 1999, compared with segment income of $2.1 million in 1998. The decrease in profitability was primarily due to losses at its Metric Vision and Thermo Information Solutions subsidiaries. Restructuring and other nonrecurring costs of $145.1 million in 1999 (Note 7) principally includes the amounts described in the results for the second quarter. In addition, $1.4 million of nonrecurring costs were recorded by Thermedics in the first six months of 1999. These costs were associated with the proposed transfer of the Company's wholly owned Thermo Biomedical group of subsidiaries to Thermedics and primarily represent investment banking fees. ThermoTrex, including Trex Medical, recorded $1.1 million of severance costs in the first quarter of 1999 in addition to the further actions described in the results for the second quarter. The Company also recorded $0.3 million of other restructuring costs in 1999. Restructuring costs of $2.7 million in 1998 includes $1.9 million recorded by ThermoLase and $0.8 million recorded by SensorMedics for the reasons discussed in the results of operations for the second quarter. Energy and Environment Sales from the Energy and Environment segment were $380.7 million in 1999, compared with $379.4 million in 1998. Revenues from Thermo Ecotek increased $1.6 million to $99.6 million in 1999. Thermo Ecotek's revenues changed for the reasons discussed in the results of operations for the second quarter. Sales at Thermo Power decreased $4.0 million to $129.5 million in 1999, principally due to the sale of its Crusader Engines division in December 1998. Sales at Crusader totaled $14.1 million in the first six months of 1998 and its results were approximately breakeven. This decrease was offset in part by revenues of $6.8 million from an acquired business and higher demand for gas-fueled cooling systems and standard industrial refrigeration packages. Revenues at Thermo TerraTech increased $3.8 million to $151.7 million in 1999. Revenues from Thermo TerraTech's environmental-liability management services increased $1.6 million due to higher demand at certain business units and, to a lesser extent, the inclusion of $0.7 million of sales from an acquired business. Revenues from Thermo TerraTech's engineering and design services increased $1.8 million in 1999 due to an increase in demand for its laboratory services. Segment income, excluding restructuring costs of $189.9 million in 1999, was $23.2 million in 1999, compared with $28.2 million in 1998. Excluding provisions for inventories and other charges, segment income was $27.6 million in 1999. Thermo Ecotek's segment income before restructuring costs was $12.6 million in 1999, compared with $16.9 million in 1998. The change resulted from $3.8 million of higher losses in the 1999 period from Thermo Ecotek's coal-beneficiation facility which was closed in May 1999 and reduced profitability at Thermo Trilogy due to lower revenues. Segment income at Thermo Power, excluding restructuring costs and other charges in 1999, was $5.0 million in 1999 and $6.7 million in 1998. Segment income decreased for the reasons discussed in the second quarter, offset in part by the inclusion of income from an acquisition. Segment income excluding restructuring costs and other charges at Thermo TerraTech increased to $10.0 million in 1999 from $4.8 million in 1998. Segment income increased principally due to a loss of $5.4 million in 1998 at one of ThermoRetec's business units as a result of losses on certain remedial-construction contracts. Restructuring costs of $124.4 million at Thermo Ecotek, $54.2 million at Thermo TerraTech, and $1.7 million relating to the Company's repurchases of Thermo EuroTech stock, are described in the results for the second quarter. Restructuring costs of $9.6 million were recorded by Thermo Power in 1999, principally for the actions described in the results for the second quarter (Note 7). 26 First Six Months 1999 Compared With First Six Months 1998 (continued) Recycling and Resource Recovery Sales in the Recycling and Resource Recovery segment decreased to $140.5 million in 1999 from $150.3 million in 1998. Sales at Thermo Fibertek decreased $12.1 million to $113.8 million in 1999, primarily due to the February 1999 sale of its Thermo Wisconsin subsidiary that resulted in a decrease in revenues of $9.7 million. Lower revenues from stock-preparation equipment and accessories was offset in part by higher revenues from water- and fiber- recovery services. Revenues increased by $4.3 million at the Company's wholly owned Peter Brotherhood subsidiary due principally to a contract to sell turbine generators to a customer in Russia. Segment income, excluding restructuring and other nonrecurring costs, net, of $21.7 million in 1999, decreased to $12.4 million in 1999 from $17.3 million in 1998. The decrease was primarily due to lower segment income at Thermo Fibertek as a result of lower revenues and the sale of Thermo Wisconsin which represented $1.2 million of the decrease. This decrease was offset in part by an increase in segment income at Peter Brotherhood due to higher revenues. Restructuring and other nonrecurring costs, net of $21.7 million included $21.0 million related to litigation and $8.4 million in connection with the planned sale of Peter Brotherhood, as described in the results for the second quarter, offset in part by nonrecurring income of $7.7 million at Thermo Fibertek. The nonrecurring income at Thermo Fibertek consists of a gain on the sale of Thermo Wisconsin of $11.1 million, offset in part by restructuring and other nonrecurring costs of $3.4 million (Note 7). Gain on Issuance of Stock by Subsidiaries and Minority Interest Expense As a result of the sale of stock by subsidiaries and the issuance of stock upon conversion of convertible debentures, the Company recorded gains of $54.2 million in 1998. The Company recorded minority interest income of $43.4 million in 1999, primarily as a result of restructuring and other nonrecurring costs at the Company's majority-owned subsidiaries. Minority interest expense in 1998 includes $14.3 million related to gains recorded by the Company's majority-owned subsidiaries as a result of the sale of stock by their subsidiaries and the issuance of stock by their subsidiaries upon conversion of convertible debentures. Income Taxes The Company's effective tax rate in 1999 was a benefit of 18%. Excluding nontaxable gains from issuance of subsidiary stock, the Company's effective tax rate was 45% in 1998. The effective tax rates vary from the statutory federal income tax rate primarily due to state income taxes and nondeductible expenses, including in 1999, the write-off of cost in excess of net assets of acquired companies. In addition, in connection with restructuring actions, certain subsidiaries wrote off deferred tax assets aggregating $2.5 million in 1999 (Note 7). Liquidity and Capital Resources Consolidated working capital was $1.70 billion at July 3, 1999, compared with $2.16 billion at January 2, 1999. Included in working capital were cash, cash equivalents, and short-term available-for-sale investments of $1.07 billion at July 3, 1999, compared with $1.55 billion at January 2, 1999. In addition, the Company had $97.4 million of long-term available-for-sale investments at July 3, 1999, compared with $95.5 million at January 2, 1999. Of the total $1.17 billion of cash, cash equivalents, and short- and long-term available-for-sale investments at July 3, 1999, $1.09 billion was held by the Company's majority-owned subsidiaries, and the balance was held by the Company and its wholly owned subsidiaries. Cash provided by operating activities was $90.1 million during the first six months of 1999. Other current liabilities decreased by $52.9 million, primarily due to a reduction in accrued taxes as a result of a tax benefit recorded on the Company's pretax loss in 1999, as well as the timing of tax payments. Cash of $11.8 million was used to fund 27 Liquidity and Capital Resources (continued) an increase in inventories, principally relating to analytical products at Thermo Instrument due to the build-up of inventory in preparation for new product releases and the timing of shipments. In addition, cash of $7.0 million was used to fund an increase in accounts receivable, principally at Thermo Ecotek due to increased activity at its natural gas business and at Thermo Power due to the timing of shipments. These increases in accounts receivable were offset by a reduction at Thermo Instrument primarily as a result of lower revenues from analytical products in the second quarter of 1999 compared with the fourth quarter of 1998. During the first six months of 1999, the Company's primary investing activities, excluding available-for-sale investments activity, included acquisitions and the purchase of property, plant, and equipment. The Company expended $345.2 million, net of cash acquired, for acquisitions and expended $64.2 million for purchases of property, plant, and equipment. In addition, Thermedics acquired all of the outstanding shares of Thermo Voltek common stock that Thermedics and the Company did not already own, in completion of its merger agreement, for $20.5 million of cash. The Company's financing activities used $167.0 million of cash during the first six months of 1999. During the first six months of 1999, the Company expended $10.5 million to purchase shares of its common stock and the Company and certain of its majority-owned subsidiaries expended $129.9 million to purchase shares of common stock and debentures of certain of the Company's majority-owned subsidiaries. These purchases were made pursuant to authorizations by the Company's and certain majority-owned subsidiaries' Boards of Directors. As of July 3, 1999, $111.9 million remained under the Company's authorization, and $36.9 million remained under authorizations of the Company's majority-owned subsidiaries. In addition, the Company used $17.1 million of cash for the redemption of redeemable subsidiary common stock. The Company has, from time to time, sold put options for shares of its common stock to an institutional counterparty. As of July 3, 1999, the Company had a maximum potential obligation under such arrangements to purchase 5,701,000 shares of its common stock for an aggregate of $83.0 million. The put options are exercisable only at maturity, expire between November 1999 and May 2000, and have a weighted average exercise price per share of $14.56. The Company has the right to settle the put options by physical settlement of the options or by net share settlement using shares of the Company's common stock. In August 1999, Thermo Instrument 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. In connection with certain restructuring actions undertaken by the Company and its subsidiaries during 1999, the Company expects to incur cash expenditures of approximately $35 million during the remainder of 1999 and $53 million during 2000. The Company believes that the expected proceeds from businesses to be sold in connection with certain restructuring actions will exceed the aggregate estimated cash expenditures for restructuring actions and planned repurchases of subsidiary common stock in connection with the Company's proposed reorganization plan (Notes 7 and 8). The Company has no material commitments for purchases of property, plant, and equipment and expects that for the remainder of 1999 such expenditures will approximate the current level of expenditures. As of August 12, 1999, the Company's majority-owned subsidiaries acquired new businesses since July 3, 1999, for aggregate cash consideration of $55 million. 28 Year 2000 The following information constitutes a "Year 2000 Readiness Disclosure" under the Year 2000 Information and Readiness Disclosure Act. The Company continues to assess the potential impact of the year 2000 date recognition issue on the Company's internal business systems, products, and operations. The Company's year 2000 initiatives include (i) testing and upgrading significant information technology systems and facilities; (ii) testing and developing upgrades, if necessary, for the Company's current products and certain discontinued products; (iii) assessing the year 2000 readiness of its key suppliers and vendors; and (iv) developing contingency plans. The Company's State of Readiness The Company has implemented a compliance program to ensure that its critical information technology systems and non-information technology systems will be ready for the year 2000. The first phase of the program, testing and evaluating the Company's critical information technology systems and non-information technology systems for year 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. The Company's efforts included testing the year 2000 readiness of its manufacturing, utility, and telecommunications systems at its critical facilities. The Company is currently in phase two of its program, during which any material noncompliant information technology systems or non-information technology systems that were identified during phase one are prioritized and remediated. Based on its evaluations, the Company does not believe that it is required to make any material upgrades or modifications to its critical non-information technology systems. The Company is currently upgrading or replacing its material noncompliant information technology systems, and the majority of this process was complete as of July 3, 1999. The Company expects that all of its material information technology systems and critical non-information technology systems will be year 2000 compliant by the end of 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/or evaluate such products. The Company is focusing its efforts on products that are still under warranty, early in their expected life, subject to FDA considerations related to the year 2000, and/or pose a safety risk. The Company is offering upgrades and/or identifying potential solutions where reasonably practicable. The Company is in the process of identifying and assessing the year 2000 readiness of key suppliers and vendors that are believed to be significant to the Company's business operations. As part of this effort, the Company has developed and distributed questionnaires relating to year 2000 compliance to its significant suppliers and vendors. To date, no significant supplier or vendor has indicated that it believes its business operations will be materially disrupted by the year 2000 issue. The Company has begun to follow up with significant suppliers and vendors that have not responded 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 the end of October 1999. Contingency Plans The Company is developing contingency plans that will allow its primary business operations to continue despite disruptions due to year 2000 problems. These plans 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, facilities, products, and significant suppliers and vendors, it will modify and adjust its contingency plans as may be required. The Company expects to complete its contingency plan by October 1999. 29 Year 2000 (continued) 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 $8.0 million as of July 3, 1999, and the total external costs of year 2000 remediation are expected to be approximately $14 million. Year 2000 costs are funded from working capital. All internal costs and related external costs other than capital additions related to year 2000 remediation have been and will continue to be expensed as incurred. The Company does not track the internal costs incurred for its year 2000 compliance project. Such costs are principally the related payroll costs for its information systems group. Reasonably Likely Worst Case Scenario At this point in time, the Company is not able to determine the most reasonably likely worst case scenario to result from the year 2000 issue. One possible worst case scenario would be that certain of the Company's material suppliers or vendors experience business disruptions due to the year 2000 issue and are unable to provide materials and services to the Company on time. The Company's operations could be delayed or temporarily shut down, and it could be unable to meet its obligations to customers in a timely fashion. The Company's business, operations, and financial condition could be adversely affected in amounts that cannot be reasonably estimated at this time. If the Company believes that any of its key suppliers or vendors may not be year 2000 compliant, it will seek to identify and secure other suppliers or vendors as part of its contingency plan. Risks of the Company's Year 2000 Issues While the Company is attempting to minimize any negative consequences arising from the year 2000 issue, there can be no assurance that year 2000 problems will not have a material adverse impact on the Company's business, operations, or financial condition. While the Company expects that upgrades to its internal business systems will be completed in a timely fashion, there can be no assurance that the Company will not encounter unexpected costs or delays. Despite its efforts to ensure that its material current products are year 2000 compliant, the Company may see an increase in warranty and other claims, especially those related to Company products that incorporate, or operate using, third-party software or hardware. In addition, certain of the Company's older products, which it no longer manufactures or sells, may not be year 2000 compliant, which may expose the Company to claims. As described above, if any of the Company's significant suppliers or vendors experience business disruptions due to year 2000 issues, there may also be a material adverse effect on the Company. If any countries in which the Company operates experience significant year 2000 disruption, the Company could be materially adversely affected. There is expected to be a significant amount of litigation relating to the year 2000 issue, and there can be no assurance that the Company will not incur material costs in defending or bringing lawsuits. In addition, if any year 2000 issues are identified, there can be no assurance that the Company will be able to retain qualified personnel to remedy such issues. Any unexpected costs or delays arising from the year 2000 issue could have a significant adverse impact on the Company's business, operations, and financial condition in amounts that cannot be reasonably estimated at this time. Item 3 - Quantitative and Qualitative Disclosures About Market Risk The Company's exposure to market risk from changes in interest rates, foreign currency exchange rates, and equity prices has not changed materially from its exposure at year-end 1998. 30 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 reelected a class of four incumbent directors to a three-year term expiring in 2002. The directors reelected at the meeting were: Mr. John N. Hatsopoulos, Mr. Robert A. McCabe, Ms. Hutham S. Olayan, and Dr. Richard F. Syron. Mr. Hatsopoulos received 136,729,207 shares voted in favor of his election and 5,043,582 shares voted against; Mr. McCabe received 138,146,885 shares voted in favor of his election and 3,625,904 shares voted against. Ms. Olayan received 138,123,920 shares voted in favor of her election and 3,648,869 shares voted against. Dr. Syron received 140,113,097 shares voted in favor of his election and 1,659,692 shares voted against. No abstentions or broker nonvotes were recorded on the election of directors. At the Annual Meeting, the shareholders also approved a proposal to amend and restate the Corporation's Certificate of Incorporation as follows: 117,177,490 shares voted in favor of the proposal, 1,739,032 shares voted against, 563,640 shares abstained, and 22,292,627 broker nonvotes were recorded on the proposal. A shareholder proposal to endorse the CERES Principles was defeated by the shareholders at the Annual Meeting as follows: 13,014,191 shares voted in favor of the proposal, 102,791,378 shares voted against, 3,674,593 shares abstained, and 22,292,627 broker nonvotes were recorded on the proposal. A shareholder proposal to endorse an amendment to the Corporation's Certificate of Incorporation such that the chief executive officer of the Corporation shall always be a direct lineal descendent of the founder of the Corporation was defeated by the shareholders at the Annual Meeting as follows: 10,692,095 shares voted in favor of the proposal, 107,859,558 shares voted against, 928,511 shares abstained, and 22,292,625 broker nonvotes were recorded on the proposal. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index on page immediately preceding exhibits. (b) Reports on Form 8-K On May 25, 1999, the Company filed a Current Report on Form 8-K for events occurring on May 24, 1999, with respect to amendments to its previously announced corporate reorganization, restructuring and other charges totaling approximately $450 million, and the appointment of Samuel W. Bodman to the Company's Board of Directors. 31 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 ELECTRON CORPORATION /s/ Paul F. Kelleher Paul F. Kelleher Senior Vice President, Finance and Administration /s/ Theo Melas-Kyriazi Theo Melas-Kyriazi Chief Financial Officer and Vice President 32 EXHIBIT INDEX Exhibit Number Description of Exhibit 3 Amended and Restated ByLaws of the Registrant. 10.1 Amended and Restated Deferred Compensation Plan for Directors of the Registrant. 10.2 Amended and Restated Directors' Stock Option Plan of the Registrant. 10.3 Amended and Restated Nonqualified Stock Option Plan of the Registrant. 10.4 Amended and Restated Equity Incentive Plan of the Registrant. 10.5 Amended and Restated Thermo Electron Corporation - Thermedics Inc. Nonqualified Stock Option Plan. 10.6 Amended and Restated Thermo Electron Corporation - Thermo Instrument Systems Inc. Nonqualified Stock Option Plan. 10.7 Amended and Restated Thermo Electron Corporation - Thermo TerraTech Inc. Nonqualified Stock Option Plan. 10.8 Amended and Restated Thermo Electron Corporation - Thermo Power Corporation Nonqualified Stock Option Plan. 10.9 Amended and Restated Thermo Electron Corporation - Thermo Cardiosystems Inc. Nonqualified Stock Option Plan. 10.10 Amended and Restated Thermo Electron Corporation - Thermo Ecotek Corporation Nonqualified Stock Option Plan. 10.11 Amended and Restated Thermo Electron - ThermoTrex Corporation Nonqualified Stock Option Plan. 10.12 Amended and Restated Thermo Electron Corporation - Thermo Fibertek Inc. Nonqualified Stock Option Plan. 10.13 Amended and Restated Thermo Electron Corporation - Thermo Voltek Corp. Nonqualified Stock Option Plan. 10.14 Amended and Restated Thermo Electron Corporation - Thermo BioAnalysis Corporation Nonqualified Stock Option Plan. 10.15 Amended and Restated Thermo Electron Corporation - ThermoLyte Corporation Nonqualified Stock Option Plan. 10.16 Amended and Restated Thermo Electron Corporation - ThermoRetec Corporation Nonqualified Stock Option Plan. EXHIBIT INDEX Exhibit Number Description of Exhibit 10.17 Amended and Restated Thermo Electron Corporation - ThermoSpectra Corporation Nonqualified Stock Option Plan. 10.18 Amended and Restated Thermo Electron Corporation - ThermoLase Corporation Nonqualified Stock Option Plan. 10.19 Amended and Restated Thermo Electron Corporation - ThermoQuest Corporation Nonqualified Stock Option Plan. 10.20 Amended and Restated Thermo Electron Corporation - Thermo Optek Corporation Nonqualified Stock Option Plan. 10.21 Amended and Restated Thermo Electron Corporation - Thermo Sentron Inc. Nonqualified Stock Option Plan. 10.22 Amended and Restated Thermo Electron Corporation - Trex Medical Corporation Nonqualified Stock Option Plan. 10.23 Amended and Restated Thermo Electron Corporation - Thermo Fibergen Inc. Nonqualified Stock Option Plan. 10.24 Amended and Restated Thermo Electron Corporation - Thermedics Detection Inc. Nonqualified Stock Option Plan. 10.25 Amended and Restated Thermo Electron Corporation - Metrika Systems Corporation Nonqualified Stock Option Plan. 10.26 Amended and Restated Thermo Electron - Thermo Vision Corporation Nonqualified Stock Option Plan. 10.27 Amended and Restated Thermo Electron Corporation - ONIX Systems Inc. Nonqualified Stock Option Plan. 10.28 Amended and Restated Thermo Electron Corporation - The Randers Killam Group Inc. Nonqualified Stock Option Plan. 10.29 Amended and Restated Thermo Electron Corporation - Trex Communications Corporation Nonqualified Stock Option Plan. 10.30 Amended and Restated Thermo Electron Corporation - Thermo Trilogy Corporation Nonqualified Stock Option Plan. 10.31 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 is incorporated herein by reference). 27 Financial Data Schedule.