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 October 3, 1998.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-11757
THERMO OPTEK CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-3283973
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8 East Forge Parkway
Franklin, Massachusetts 02038
(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 October 30, 1998
---------------------------- -------------------------------
Common Stock, $.01 par value 49,453,364 Actual
51,528,706 Pro Forma
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO OPTEK CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
October 3, January 3,
(In thousands) 1998 1998
- --------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 60,113 $ 71,245
Accounts receivable, less allowances of $4,850
and $5,709 93,419 99,342
Inventories:
Raw materials and supplies 31,707 35,101
Work in process 16,594 12,369
Finished goods 24,941 22,625
Prepaid expenses 7,294 7,643
Prepaid income taxes 9,654 9,634
Due from parent company and affiliated companies - 5,342
-------- --------
243,722 263,301
-------- --------
Property, Plant, and Equipment, at Cost 97,979 92,711
Less: Accumulated depreciation and amortization 37,090 29,970
-------- --------
60,889 62,741
-------- --------
Patents and Other Assets 6,993 7,707
-------- --------
Due from Thermo Vision Corporation 3,947 3,947
-------- --------
Cost in Excess of Net Assets of Acquired Companies
(Note 4) 247,050 242,840
-------- --------
$562,601 $580,536
======== ========
2
THERMO OPTEK CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
October 3, January 3,
(In thousands except share amounts) 1998 1998
- --------------------------------------------------------------------------
Current Liabilities:
Notes payable and current maturities of
long-term obligations (includes $40,000 due
to Thermo Electron at January 3, 1998) $ 18,570 $ 67,267
Accounts payable 22,270 22,798
Accrued payroll and employee benefits 13,242 12,825
Accrued income taxes 19,699 18,906
Accrued installation and warranty expenses 16,915 19,266
Deferred revenue 21,056 19,486
Other accrued expenses (Note 6) 41,373 35,161
Due to parent company and affiliated companies 1,307 -
-------- --------
154,432 195,709
-------- --------
Deferred Income Taxes 12,478 12,456
-------- --------
Other Deferred Items 2,690 2,678
-------- --------
Long-term Obligations:
5% Subordinated convertible debentures 73,176 79,956
Other 788 1,444
-------- --------
73,964 81,400
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 100,000,000
shares authorized; 51,790,115 and 51,645,161
shares issued 518 516
Capital in excess of par value 265,600 263,301
Retained earnings 58,445 35,777
Treasury stock at cost, 137,209 and 594 shares (1,285) (10)
Accumulated other comprehensive items (Note 3) (4,241) (11,291)
-------- --------
319,037 288,293
-------- --------
$562,601 $580,536
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
THERMO OPTEK CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $107,507 $127,871
-------- --------
Costs and Operating Expenses:
Cost of revenues (Note 6) 60,128 68,771
Selling, general, and administrative expenses 26,640 31,421
Research and development expenses 6,139 7,925
Restructuring costs (Note 6) 8,882 -
-------- --------
101,789 108,117
-------- --------
Operating Income 5,718 19,754
Interest Income (includes $58 from related
party in 1998) 1,191 1,420
Interest Expense (includes $192 and $1,279 to
related party) (1,533) (3,367)
-------- --------
Income Before Provision for Income Taxes and
Extraordinary Item 5,376 17,807
Provision for Income Taxes 3,063 7,599
-------- --------
Income Before Extraordinary Item 2,313 10,208
Extraordinary Item, Net of Provision for
Income Taxes of $125 (Note 5) 213 -
-------- --------
Net Income $ 2,526 $ 10,208
======== ========
Earnings per Share (Note 2):
Basic $ .05 $ .20
======== ========
Diluted $ .05 $ .19
======== ========
Weighted Average Shares (Note 2):
Basic 51,778 50,528
======== ========
Diluted 51,883 57,318
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMO OPTEK CORPORATION
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands except per share amounts) 1998 1997
- --------------------------------------------------------------------------
Revenues $329,135 $373,214
-------- --------
Costs and Operating Expenses:
Cost of revenues (Note 6) 176,829 200,806
Selling, general, and administrative expenses 82,827 94,015
Research and development expenses 18,495 22,371
Restructuring costs (Note 6) 8,882 -
-------- --------
287,033 317,192
-------- --------
Operating Income 42,102 56,022
Interest Income (includes $300 from related
party in 1998) 3,492 3,238
Interest Expense (includes $1,346 and $1,848 to
related party) (5,787) (7,925)
-------- --------
Income Before Provision for Income Taxes and
Extraordinary Item 39,807 51,335
Provision for Income Taxes 17,352 22,044
-------- --------
Income Before Extraordinary Item 22,455 29,291
Extraordinary Item, Net of Provision for Income
Taxes of $125 (Note 5) 213 -
-------- --------
Net Income $ 22,668 $ 29,291
======== ========
Earnings per Share (Note 2):
Basic $ .44 $ .58
======== ========
Diluted $ .42 $ .55
======== ========
Weighted Average Shares (Note 2):
Basic 51,700 50,527
======== ========
Diluted 57,689 57,145
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
THERMO OPTEK CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Operating Activities:
Net income $ 22,668 $ 29,291
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,756 13,715
Other noncash items 3,870 1,268
Provision for losses on accounts receivable 56 222
Changes in current accounts, excluding the
effects of acquisitions:
Accounts receivable 10,211 (8,711)
Inventories (2,113) (1,798)
Other current assets 517 (381)
Accounts payable (2,092) (4,388)
Due to parent company and affiliated
companies 439 15,677
Other current liabilities 2,378 (747)
Other 106 741
-------- --------
Net cash provided by operating activities 47,796 44,889
-------- --------
Investing Activities:
Acquisitions, net of cash acquired (Note 4) (6,875) (45,449)
Refund from parent company for acquisitions 6,737 -
Cash payment to parent company for
acquisition of VG Systems - (45,546)
Purchases of property, plant, and equipment (4,951) (6,172)
Proceeds from sale of property, plant, and
equipment - 1,456
Other 1,028 (69)
-------- ---------
Net cash used in investing activities (4,061) (95,780)
-------- --------
Financing Activities:
Net proceeds from issuance of Company common
stock 182 64
Repurchase of convertible debentures (4,587) -
Proceeds from issuance (repayment) of
note payable to Thermo Electron (40,000) 43,800
Decrease in short-term obligations, net (11,204) (7,031)
Repayment of long-term obligations (733) (97)
-------- ---------
Net cash provided by (used in) financing
activities $(56,342) $ 36,736
-------- --------
6
THERMO OPTEK CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
-------------------------
October 3, September 27,
(In thousands) 1998 1997
- --------------------------------------------------------------------------
Exchange Rate Effect on Cash $ 1,475 $ (874)
-------- ---------
Decrease in Cash and Cash Equivalents (11,132) (15,029)
Cash and Cash Equivalents at Beginning of Period 71,245 66,671
-------- --------
Cash and Cash Equivalents at End of Period $ 60,113 $ 51,642
======== ========
Noncash Activities:
Conversion of convertible debentures $ 1,780 $ -
======== ========
Fair value of assets of acquired companies $ 11,383 $ 55,927
Cash paid for acquired companies (7,505) (45,707)
Stock issuable to parent company for acquired
companies - (12)
-------- --------
Liabilities assumed of acquired companies $ 3,878 $ 10,208
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
7
THERMO OPTEK CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Optek 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 October 3, 1998, the results of
operations for the three- and nine-month periods ended October 3, 1998, and
September 27, 1997, and the cash flows for the nine-month periods ended October
3, 1998, and September 27, 1997. Interim results are not necessarily indicative
of results for a full year.
Historical financial results have been restated to include Gebruder Haake
GmbH (Haake), which was acquired in a transaction accounted for in a manner
similar to a pooling of interests (Note 4). 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 3, 1998,
filed with the Securities and Exchange Commission.
2. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Nine Months Ended
------------------- ------------------
(In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Basic
Net Income $ 2,526 $10,208 $22,668 $29,291
------- ------- ------- -------
Weighted Average Shares 49,703 48,453 49,625 48,452
Shares Issuable in Connection
With the Acquisition of
Haake (Note 4) 2,075 2,075 2,075 2,075
------- ------- ------- -------
Pro Forma Weighted Average
Shares 51,778 50,528 51,700 50,527
------- ------- ------- -------
Basic Earnings per Share $ .05 $ .20 $ .44 $ .58
======= ======= ======= =======
8
2. Earnings per Share (continued)
Three Months Ended Nine Months Ended
------------------- ------------------
(In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27,
per share amounts) 1998 1997 1998 1997
- --------------------------------------------------------------------------
Diluted
Net Income $ 2,526 $10,208 $22,668 $29,291
Effect of Convertible
Debentures - 722 1,746 2,165
------- ------- ------- -------
Income Available to Common
Shareholders, as Adjusted $ 2,526 $10,930 $24,414 $31,456
------- ------- ------- -------
Pro Forma Weighted Average
Shares 51,778 50,528 51,700 50,527
Effect of:
Convertible debentures - 6,481 5,657 6,481
Stock options 105 309 332 137
------- ------- ------- -------
Pro Forma Weighted Average
Shares, as Adjusted 51,883 57,318 57,689 57,145
------- ------- ------- -------
Diluted Earnings per Share $ .05 $ .19 $ .42 $ .55
======= ======= ======= =======
The computation of diluted earnings per share for the three months ended
October 3, 1998, does not include the effect of conversion of the Company's 5%
subordinated convertible debentures, convertible at $13.94 per share because the
effect would be antidilutive. At October 3, 1998, the Company had $73.2 million
principal amount outstanding of the subordinated convertible debentures. In
addition, the computation of diluted earnings per share for certain periods
excludes the effect of assuming the exercise of certain outstanding stock
options because the effect would be antidilutive. As of October 3, 1998, there
were 2,631,607 of such options outstanding, with exercise prices ranging from
$10.38 to $16.88 per share.
3. Comprehensive Income
During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income and "other comprehensive items," which
represents foreign currency translation adjustments reported as a component of
shareholders' investment in the accompanying balance sheet. During the third
quarter of 1998 and 1997, the Company's comprehensive income totaled $10.9
million and $6.7 million, respectively. During the first nine months of 1998 and
1997, the Company's comprehensive income totaled $29.7 million and $19.7
million, respectively.
9
4. Acquisitions
On March 29, 1996, Thermo Instrument Systems Inc. acquired a substantial
portion of the businesses constituting the Scientific Instruments Division of
Fisons plc (Fisons), a wholly owned subsidiary of Rhone-Poulenc Rorer Inc. In
July 1998, the Company agreed to acquire Gebruder Haake GmbH (Haake), a business
formerly part of Fisons, from Thermo Instrument for 2,075,342 shares of the
Company's common stock, valued at $23.8 million at the time of the transaction,
and the assumption of $10.4 million of debt. The purchase price for this
acquisition was determined based on the net tangible book value of Haake at
March 29, 1996, and a pro rata allocation of Thermo Instrument's total cost in
excess of net assets acquired associated with its acquisition of the Fisons
businesses. The purchase price for Haake included $4,781,000 for the increase in
the net book value from the date the business was acquired by Thermo Instrument
to July 4, 1998. This amount was recorded as a deemed distribution from retained
earnings, reflecting payment by the Company to Thermo Instrument for the
earnings of Haake from the date of the acquisition by Thermo Instrument until
the date of transfer to the Company. Haake is a supplier of viscometry and
rheometry systems used by a wide variety of manufacturers to measure the
properties of liquid substances. Haake also manufactures mixers, extruders,
post-extrusion equipment, circulators, baths, cryostats, water recirculators,
and PVT analyzers.
Because the Company and Haake were deemed for accounting purposes to be
under control of their common majority owner, Thermo Instrument, the transaction
has been accounted for in a manner similar to a pooling of interests.
Accordingly, the Company's historical financial information has been restated to
include the results of Haake from March 29, 1996, the date the business was
acquired by Thermo Instrument.
In August 1998, the Company purchased Scintag Inc. for $4.0 million in cash
and the assumption of approximately $0.8 million of debt. Scintag, located in
Cupertino, California, is a leading supplier of powder X-ray diffractometers
used primarily in research laboratories for applications in metallurgy,
materials science, ceramics, electronics, mineralogy, and chemistry. In
addition, during the first nine months of 1998, the Company acquired two
businesses for an aggregate purchase price of $2.6 million in cash and
assumption of debt of approximately $0.6 million.
These acquisitions have been accounted for using the purchase method of
accounting and the results of operations have been included in the accompanying
financial statements from the respective dates of acquisition. The cost of these
acquisitions exceeded the estimated fair value of the acquired net assets by
$6.1 million, which is being amortized over 40 years. Allocation of the purchase
price was based on an estimate of the fair value of the net assets acquired and
is subject to adjustment upon finalization of the purchase price allocations. To
date, the Company has gathered no information that indicates the final
allocation of purchase price will differ from the preliminary estimate. Pro
forma results have not been presented because the results of the acquired
businesses were not material to the Company's results of operations.
10
5. Repurchase of Subordinated Convertible Debentures
In the third quarter of 1998, the Company repurchased $5.0 million principal
amount of 5% subordinated convertible debentures for $4.6 million in cash,
resulting in an extraordinary gain of $0.2 million, net of taxes of $0.1
million.
The extraordinary gain increased basic and diluted earnings per share by
$.01 in the third quarter of 1998 and basic earnings per share by $.01 in the
first nine months of 1998.
6. Restructuring and Related Costs
During the third quarter of 1998, the Company recorded restructuring charges
and related costs of $10.9 million. Restructuring costs of $8.9 million consists
of $6.0 million for severance and benefits for an estimated 170 employees,
primarily in manufacturing positions; $1.2 million for lease payments on
abandoned facilities; $0.6 million for a write-down of assets, primarily
leasehold improvements to be abandoned; $0.4 million for the loss on the sale of
a division (VG Broadcast, see below); and $0.7 million for miscellaneous items,
including costs for terminating certain contracts and agency relationships. In
addition, the Company recorded a $2.0 million inventory write-down related to
discontinuing certain product lines and increased excess and obsolescence
reserves associated with lower product demand. The inventory write-down is
included in cost of revenues in the accompanying statement of income.
During the third quarter of 1998, the Company sold its VG Broadcast
division, a United Kingdom-based business providing data and text transmission
equipment to the television industry. In 1997, VG Broadcast had revenues and
operating income of $3.2 million and $0.6 million, respectively. In 1998,
through the date of its sale in July 1998, it had revenues of $1.4 million and
operating income before restructuring costs of $0.4 million.
In connection with these actions, the Company expects to incur an estimated
$0.8 million of expenses in aggregate in the fourth quarter of 1998 and the
first quarter of 1999 for costs not permitted as restructuring charges in the
third quarter of 1998, pursuant to the requirements of Emerging Issues Task
Force Pronouncement 94-3. These costs primarily include costs to move inventory
and certain employee relocation and related costs. The Company plans to complete
the implementation of its restructuring plan during the first half of 1999.
During the third quarter of 1998, the Company terminated 53 employees and
made $0.5 million of severance payments. The remaining reserve for severance,
abandoned-facility and related exit costs of $7.6 million, net of currency
changes, is included in other accrued expenses in the accompanying balance sheet
as of October 3, 1998.
11
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 3, 1998, filed with the Securities and Exchange
Commission.
Overview
The Company is a worldwide leader in instrumentation based upon energy and
light measurements (molecular and elemental analysis), and systems for materials
analysis, characterization, and preparation (materials science).
With the acquisition of Gebruder Haake GmbH
(Haake; Note 4), the Company has expanded its presence in the physical
properties market. The Company provides industry, government, and academia with
complete solutions to specific analytical problems, moving sophisticated
analytical technology outside the laboratory. The Company's instruments are used
in virtually every industry for research and development, manufacturing, and
quality control.
For molecular and elemental analysis, the Company has three principal
operating units: Madison, Wisconsin-based Nicolet Instrument Corporation, a
manufacturer and distributor of Fourier transform infrared (FT-IR) and FT-Raman
spectrometry products; Franklin, Massachusetts-based Thermo Jarrell Ash
Corporation, a manufacturer and distributor of atomic absorption (AA) and atomic
emission (AE) spectrometry products; and Ecublens, Switzerland-based A.R.L.
Applied Research Laboratories S.A., a manufacturer and distributor of
wavelength-dispersive X-ray fluorescence and AE instruments.
For materials science, the Company has one principal operating unit, VG
Systems Limited, located in the United Kingdom. VG Systems primarily includes VG
Semicon, a manufacturer and distributor of equipment for the production of
molecular-beam epitaxy products, and VG Scientific, a manufacturer and
distributor of instrumentation for surface and chemical analysis.
Effective March 12, 1997, the Company acquired Spectronic Instruments Inc.,
from Thermo Instrument. Based in Rochester, New York, Spectronic is a supplier
of ultraviolet/visible (UV/Vis) spectrophotometers and accessories, fluorescence
instruments, and diffraction gratings.
12
Overview (continued)
In December 1997, the Company distributed 100 percent of its Thermo Vision
Corporation subsidiary's capital stock in the form of a dividend to the
Company's shareholders. Thermo Vision designs, manufactures, and markets a
diverse array of photonic products, including optical components, imaging
sensors and systems, lasers, optically based instruments, optoelectronics, and
fiber optics. As a result of the distribution, Thermo Vision is a publicly
traded, majority-owned subsidiary of Thermo Instrument. The consolidated
financial statements of the Company include the results of Thermo Vision through
December 15, 1997.
The Company sells its products worldwide. Although the Company seeks to
charge its customers in the same currency as its operating costs, the Company's
financial performance and competitive position can be affected by currency
exchange rate fluctuations. Where appropriate, the Company uses forward
contracts to reduce its exposure to currency fluctuations.
During 1997, the Company's U.S. and foreign operations had revenues from
customers in Asia of approximately 22% of total revenues. Certain countries in
Asia are experiencing a severe economic crisis, which has been characterized by
sharply reduced economic activity and liquidity, highly volatile
foreign-currency-exchange and interest rates, and unstable stock markets. The
Company's sales to Asia have been adversely affected by the unstable economic
conditions there.
At October 3, 1998, the Company's backlog was $76.5 million, compared with
$81.7 million at July 4, 1998, and $101.0 million at January 3, 1998. The
Company generally does not believe that its backlog is necessarily indicative of
the intermediate or long-term trends in its business. However, the Company is
currently experiencing a decrease in sales to certain countries, primarily in
Asia and to the semiconductor industry. The Company expects to continue to
report lower revenues in 1998 compared with 1997, excluding the effect of the
spinout of Thermo Vision, which could adversely impact its operating results.
Results of Operations
Third Quarter 1998 Compared With Third Quarter 1997
Revenues decreased to $107.5 million in the third quarter of 1998 from
$127.9 million in the third quarter of 1997. The decrease was due to a reduction
in revenues of $11.2 million primarily resulting from lower sales to Asia and
lower sales to the semiconductor industry; the distribution of Thermo Vision in
December 1997, which had revenues of $10.0 million in the third quarter of 1997;
a decrease in sales of $0.8 million due to the July 1998 sale of VG Broadcast;
and a decrease of $0.1 million due to the unfavorable effects of currency
translation as a result of the strengthening in the value of the U.S. dollar
relative to foreign currencies in countries in which the Company operates.
Acquisitions increased revenues by $1.7 million in the third quarter of 1998.
13
Third Quarter 1998 Compared With Third Quarter 1997 (continued)
The gross profit margin decreased to 44.1% in the third quarter of 1998 from
46.2% in the third quarter of 1997, due to inventory write-downs of $2.0 million
in 1998 for discontinued products and excess inventories caused by decreased
product demand (Note 6). Excluding the impact of the write-downs, the gross
profit margin would have been relatively constant at 45.9% in 1998.
Selling, general, and administrative expenses as a percentage of revenues
remained relatively unchanged at 24.8% and 24.6% in the third quarter of 1998
and 1997, respectively.
Research and development expenses decreased to $6.1 million in the third
quarter of 1998 from $7.9 million in the third quarter of 1997, primarily as a
result of the distribution of Thermo Vision.
In addition to the inventory write-downs, the Company recorded restructuring
costs of $8.9 million primarily related to severance costs and the closure of
facilities (Note 6).
Interest income remained relatively unchanged at $1.2 million in the third
quarter of 1998, compared with $1.4 million in the third quarter of 1997.
Interest expense decreased to $1.5 million in 1998 from $3.4 million in 1997,
due primarily to the repayment of a $40.0 million note payable to Thermo
Electron Corporation in August 1998. In addition, interest expense declined due
to the conversion of a portion of the Company's subordinated convertible
debentures into common stock of the Company.
The effective tax rate was 57% in the third quarter of 1998 and 43% in the
third quarter of 1997. The effective tax rate in 1998 increased primarily due to
the effect of losses benefited in certain low-tax jurisdictions. In addition,
the Company's effective tax rate for both periods exceeded the federal statutory
rate due to the effect of state income taxes and nondeductible amortization of
cost in excess of net assets of acquired companies, offset in part by the tax
benefit associated with a foreign sales corporation.
During the third quarter of 1998, the Company recorded an extraordinary
gain, net of tax, of $0.2 million related to the early extinguishment of debt
(Note 5).
First Nine Months 1998 Compared With First Nine Months 1997
Revenues decreased to $329.1 million in the first nine months of 1998 from
$373.2 million in the first nine months of 1997. The decrease was the result of
several factors including the distribution of Thermo Vision, which had revenues
of $26.2 million during the first nine months of 1997; an $18.9 million decrease
primarily resulting from lower sales to Asia and lower sales to the
semiconductor industry; a $5.3 million decrease due to the unfavorable effects
of currency translation; a $2.0 million decrease due to a change in distribution
channels of an
14
First Nine Months 1998 Compared With First Nine Months 1997 (continued)
affiliated party; and a $0.8 million decrease due to the sale of VG Broadcast.
These decreases were offset in part by the inclusion of $9.1 million of revenues
from acquisitions in the first nine months of 1998.
The gross profit margin was 46.3% in the first nine months of 1998 compared
with 46.2% in the first nine months of 1997. Excluding the impact of inventory
write-downs of $2.0 million described in the results of operations for the third
quarter, the gross profit margin for 1998 would have increased to 46.9%,
primarily due to higher margin sales at certain of the Company's divisions.
Selling, general, and administrative expenses as a percentage of revenues
were unchanged at 25.2% in the first nine months of 1998 and 1997.
Research and development expenses decreased to $18.5 million in the first
nine months of 1998 from $22.4 million in the first nine months of 1997,
primarily as a result of the distribution of Thermo Vision.
In addition to the inventory write-downs, the Company recorded restructuring
costs of $8.9 million related to severance costs and the closure of facilities
(Note 6).
Interest income increased to $3.5 million in the first nine months of 1998
from $3.2 million in the first nine months of 1997, due to higher average
invested balances. Interest expense decreased to $5.8 million in 1998 from $7.9
million in 1997, due to the reasons described in the results of operations for
the third quarter.
The effective tax rate was 44% and 43% in the first nine months of 1998 and
1997, respectively. The effective tax rates exceeded the statutory federal
income tax rate due to the reasons described in the results of operations for
the third quarter.
Liquidity and Capital Resources
Consolidated working capital was $89.3 million at October 3, 1998, compared
with $67.6 million at January 3, 1998. Included in working capital are cash and
cash equivalents of $60.1 million at October 3, 1998, compared with $71.2
million at January 3, 1998. Cash provided by operating activities was $47.8
million in the first nine months of 1998. Cash provided by the Company's
operating results benefited from a $10.2 million decrease in accounts receivable
as a result of a decrease in revenues during 1998 compared with 1997 and
management's efforts to improve collections in 1998.
The Company's investing activities used $4.1 million of cash in the first
nine months of 1998. The Company expended $6.9 million, net of cash acquired for
the acquisition of three companies (Note 4). The Company received a refund of
$6.7 million from Thermo Instrument relating to the 1997 and 1996 purchases of
certain former Fisons businesses. The Company expended $5.0 million for the
purchase of property, plant, and equipment during the first nine months of 1998
and plans to expend an additional $1.7 million for such purchases during the
remainder of 1998.
15
Liquidity and Capital Resources (continued)
The Company's financing activities used $56.3 million of cash in the first
nine months of 1998. In August 1998, upon maturity, the Company repaid a $40.0
million note payable to Thermo Electron out of available cash. The Company used
$11.2 million for the repayment of short-term borrowings in the first nine
months of 1998. The Company's Board of Directors has authorized the repurchase,
through September 25, 1999, of up to $20.0 million of Company securities.
Through October 3, 1998, the Company had expended $4.6 million under this
authorization for the purchase of subordinated convertible debentures and had
committed an additional $1.3 million for the purchase of Company common stock,
which was payable as of October 3, 1998, in settlement of trades executed prior
to that date. Any such purchases are funded from working capital.
Although the Company expects to have positive cash flow from its existing
operations, the Company may require significant amounts of cash for any
acquisition of complementary businesses. The Company expects that it will
finance any such acquisitions through a combination of internal funds and/or
short-term borrowings from Thermo Instrument or Thermo Electron, although it has
no agreement with these companies to ensure that funds will be available on
acceptable terms or at all. The Company believes its existing resources are
sufficient to meet the capital requirements of its existing operations for the
foreseeable future.
Year 2000
The Company continues to assess the potential impact of the year 2000 on the
Company's internal business systems, products, and operations. The Company's
year 2000 initiatives include (i) testing and upgrading internal business
systems and facilities; (ii) testing and developing necessary upgrades for the
Company's current products and certain discontinued products; (iii) contacting
key suppliers, vendors, and customers to determine their year 2000 compliance
status; and (iv) developing contingency plans.
The Company's State of Readiness
The Company has tested and evaluated its critical information technology
systems for year 2000 compliance, including its significant computer systems,
software applications, and related equipment. The Company is currently in the
process of upgrading or replacing its noncompliant systems. The Company expects
that all of its material information technology systems will be year 2000
compliant by the end of 1999. The Company is also evaluating the potential year
2000 impact on its facilities, including its buildings and utility systems. Any
problems that are identified will be prioritized and remediated based on their
assigned priority. The Company will continue periodic testing of its critical
internal business systems and facilities in an effort to minimize operating
disruptions due to year 2000 issues.
16
Year 2000 (continued)
The Company believes that all of the material products that it currently
manufactures and sells are year 2000 compliant. However, as many of the
Company's products are complex, interact with third-party products, and operate
on computer systems that are not under the Company's control, there can be no
assurance that the Company has identified all of the year 2000 problems with its
current products. The Company believes that certain of its older products, which
it no longer manufactures or sells, may not be year 2000 compliant. The Company
is continuing to test and evaluate such products and may offer upgrades or
alternative products where reasonably practicable.
The Company is in the process of identifying and contacting suppliers,
vendors, and customers that are believed to be significant to the Company's
business operations in order to assess their year 2000 readiness. As part of
this effort, the Company has developed and is distributing questionnaires
relating to year 2000 compliance to its significant suppliers, vendors, and
customers. The Company intends to follow up and monitor the year 2000 compliant
progress of significant suppliers, vendors, and customers that indicate that
they are not year 2000 compliant or that do not respond to the Company's
questionnaires.
Contingency Plans
The Company intends to develop a contingency plan 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 and facilities, products, and significant suppliers, vendors, and
customers, it will modify and adjust its contingency plan as may be required.
Costs to Address the Company's Year 2000 Issues
To date, costs incurred in connection with the year 2000 issue have not been
material. The Company does not expect total year 2000 remediation costs to be
material, but there can be no assurance that the Company will not encounter
unexpected costs or delays in achieving year 2000 compliance.
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
17
Year 2000 (continued)
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. If any of the Company's material suppliers, vendors, or
customers experience business disruptions due to year 2000 issues, the Company
might also be materially adversely affected. The Company's research and
development, production, distribution, financial, administrative, and
communications operations might be disrupted. 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. 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.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Reports on Form 8-K
On September 29, 1998, the Company filed a Current Report on Form 8-K dated
September 29, 1998, with respect to restructuring and other charges recorded
during the third quarter of 1998.
18
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 9th day of November 1998.
THERMO OPTEK CORPORATION
Paul F. Kelleher
-----------------------------
Paul F. Kelleher
Chief Accounting Officer
John N. Hatsopoulos
-----------------------------
John N. Hatsopoulos
Chief Financial Officer and
Senior Vice President
19
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- -----------------------------------------------------------------------------
27.1 Financial Data Schedule for the quarter ended October 3, 1998.
27.2 Financial Data Schedule for the quarter ended September 27, 1997
(restated for the acquisition of Haake).