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 1-11757
THERMO OPTEK CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-3283973
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer 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 July 30, 1999
Common Stock, $.01 par value 51,092,456
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO OPTEK CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
July 3, January 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------------- ---------- -----------
Current Assets:
Cash and cash equivalents $ 55,054 $59,427
Advance to affiliate (Note 7) 8,823 -
Accounts receivable, less allowance of $4,321 and $4,960 91,273 105,759
Inventories:
Raw materials and supplies 32,053 30,657
Work in process 13,933 12,360
Finished goods 21,623 20,680
Prepaid expenses 7,869 6,831
Prepaid income taxes 10,821 10,777
Due from Thermo Vision Corporation 3,947 -
Due from parent company and affiliated companies 1,573 704
-------- --------
246,969 247,195
-------- --------
Property, Plant, and Equipment, at Cost 98,885 100,446
Less: Accumulated depreciation and amortization 40,089 37,552
-------- --------
58,796 62,894
-------- --------
Patents and Other Assets 5,640 6,427
-------- --------
Due from Thermo Vision Corporation - 3,947
-------- --------
Cost in Excess of Net Assets of Acquired Companies 227,791 241,205
-------- --------
$539,196 $561,668
======== ========
2
THERMO OPTEK 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 $ 14,981 $22,602
Accounts payable 21,418 22,685
Accrued payroll and employee benefits 11,082 12,824
Accrued income taxes 19,246 20,958
Accrued installation and warranty expenses 13,161 15,171
Deferred revenue 19,746 20,017
Other accrued expenses (Notes 5 and 6) 32,272 35,147
-------- --------
131,906 149,404
-------- --------
Deferred Income Taxes 10,387 10,546
-------- --------
Other Deferred Items 2,790 2,906
-------- --------
Long-term Obligations:
5% Subordinated convertible debentures 68,985 71,505
Other 97 256
-------- --------
69,082 71,761
-------- --------
Shareholders' Investment:
Common stock, $.01 par value, 100,000,000 shares authorized; 518 518
51,815,565 and 51,790,115 shares issued
Capital in excess of par value 266,184 265,904
Retained earnings 86,689 69,640
Treasury stock at cost, 723,109 and 479,209 shares (6,912) (4,459)
Deferred compensation (68) -
Accumulated other comprehensive items (Note 2) (21,380) (4,552)
-------- --------
325,031 327,051
-------- --------
$539,196 $561,668
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
THERMO OPTEK CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ---------
Revenues $110,142 $107,829
-------- --------
Costs and Operating Expenses:
Cost of revenues 58,825 55,742
Selling, general, and administrative expenses 27,034 27,301
Research and development expenses 6,952 5,972
Restructuring costs (Note 6) 133 -
-------- -------
92,944 89,015
-------- -------
Operating Income 17,198 18,814
Interest Income (includes $50 and $56 from a related party) 523 1,200
Interest Expense (includes $577 to a related party in 1998) (1,233) (2,352)
Other Expense (53) -
-------- -------
Income Before Provision for Income Taxes 16,435 17,662
Provision for Income Taxes 6,493 7,330
-------- -------
Net Income $ 9,942 $10,332
======== =======
Earnings per Share (Note 3):
Basic $ .19 $ .20
======== =======
Diluted $ .19 $ .19
======== =======
Weighted Average Shares (Note 3):
Basic 51,093 51,674
======== =======
Diluted 56,072 57,864
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
4
THERMO OPTEK CORPORATION
Consolidated Statement of Income
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands except per share amounts) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Revenues $216,305 $221,628
-------- --------
Costs and Operating Expenses:
Cost of revenues 115,846 116,701
Selling, general, and administrative expenses 56,308 56,187
Research and development expenses 13,551 12,356
Restructuring costs (Note 6) 645 -
-------- -------
186,350 185,244
-------- -------
Operating Income 29,955 36,384
Interest Income (includes $103 and $243 from a related party) 1,171 2,301
Interest Expense (includes $1,155 to a related party in 1998) (2,544) (4,254)
Other Expense (146) -
-------- -------
Income Before Provision for Income Taxes 28,436 34,431
Provision for Income Taxes 11,387 14,289
-------- -------
Net Income $ 17,049 $20,142
======== =======
Earnings per Share (Note 3):
Basic $ .33 $ .39
======== =======
Diluted $ .32 $ .37
======== =======
Weighted Average Shares (Note 3):
Basic 51,145 51,661
======== =======
Diluted 56,232 57,830
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
5
THERMO OPTEK CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Operating Activities:
Net income $ 17,049 $20,142
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 7,844 7,799
Provision for losses on accounts receivable (85) -
Other noncash items 532 763
Changes in current accounts excluding the effects of acquisitions:
Accounts receivable 9,005 6,604
Inventories (7,684) (1,119)
Other current assets (1,296) (15)
Accounts payable (37) 314
Due to parent company and affiliated companies (1,103) 227
Other current liabilities (2,059) 875
Other - 334
-------- -------
Net cash provided by operating activities 22,166 35,924
-------- -------
Investing Activities:
Advances to affiliate, net (Note 7) (8,823) -
Acquisitions, net of cash acquired - (1,332)
Refund from parent company for acquisitions - 6,737
Purchases of property, plant, and equipment (4,873) (2,648)
Proceeds from sale of property, plant, and equipment 1,941 -
Other 12 (193)
-------- -------
Net cash provided by (used in) investing activities (11,743) 2,564
-------- -------
Financing Activities:
Net proceeds from issuance of Company common stock 93 140
Purchases of Company common stock and subordinated convertible (4,794) -
debentures
Decrease in short-term obligations, net (6,272) (3,695)
Repayment of long-term obligations (176) (230)
-------- -------
Net cash used in financing activities (11,149) (3,785)
-------- -------
Exchange Rate Effect on Cash (3,647) (258)
-------- -------
Increase (Decrease) in Cash and Cash Equivalents (4,373) 34,445
Cash and Cash Equivalents at Beginning of Period 59,427 71,245
-------- -------
Cash and Cash Equivalents at End of Period $ 55,054 $105,690
======== ========
6
THERMO OPTEK CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
July 3, July 4,
(In thousands) 1999 1998
- ----------------------------------------------------------------------------------- ----------- ----------
Noncash Activities:
Conversion of convertible debentures $ - $ 1,780
======== =======
Fair value of assets of acquired companies $ - $ 2,561
Cash paid for acquired companies - (1,397)
-------- -------
Liabilities assumed of acquired companies $ - $ 1,164
======== =======
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 July 3, 1999, the results of
operations for the three- and six-month periods ended July 3, 1999, and July 4,
1998, and the cash flows for the six-month periods ended July 3, 1999, and July
4, 1998. Interim results are not necessarily indicative of results for a full
year.
The consolidated balance sheet presented as of January 2, 1999, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 2, 1999,
filed with the Securities and Exchange Commission.
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents foreign currency translation adjustments reported as a
component of shareholders' investment in the accompanying balance sheet. During
the second quarter of 1999 and 1998, the Company had comprehensive income of
$3,558,000 and $10,524,000, respectively. During the first six months of 1999
and 1998, the Company had comprehensive income of $221,000 and $18,794,000,
respectively.
3. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Basic
Net Income $9,942 $10,332 $17,049 $20,142
------ ------- ------- -------
Weighted Average Shares 51,093 51,674 51,145 51,661
------ ------- ------ -------
Basic Earnings per Share $ .19 $ .20 $ .33 $ .39
====== ======= ====== =======
8
3. Earnings per Share (continued)
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(In thousands except per share amounts) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Diluted
Net Income $ 9,942 $10,332 $17,049 $20,142
Effect of Convertible Obligations 517 598 1,051 1,197
------- ------- ------ -------
Income Available to Common Shareholders, as Adjusted $10,459 $10,930 $18,100 $21,339
------- ------- ------- -------
Weighted Average Shares 51,093 51,674 51,145 51,661
Effect of:
Convertible obligations 4,947 5,715 5,024 5,723
Stock options 32 475 63 446
------- ------- ------ -------
Weighted Average Shares, as Adjusted 56,072 57,864 56,232 57,830
------- ------- ------ -------
Diluted Earnings per Share $ .19 $ .19 $ .32 $ .37
======= ======= ====== =======
The computation of diluted earnings per share for all periods excludes the
effect of assuming the exercise of certain outstanding stock options because the
effect would be antidilutive. As of July 3, 1999, there were 2,629,080 of such
options outstanding, with exercise prices ranging from $9.59 to $16.88 per
share.
4. Business Segment Information
Three Months Ended Six Months Ended
July 3, July 4, July 3, July 4,
(In thousands) 1999 1998 1999 1998
- ------------------------------------------------------------- ---------- ----------- ---------- ----------
Revenues:
Spectroscopy (a) $83,844 $ 85,964 $165,714 $173,722
Materials Science (b) 26,327 21,948 50,732 48,139
Intersegment sales elimination (c) (29) (83) (141) (233)
------- -------- ------- --------
$110,142 $107,829 $216,305 $221,628
======== ======== ======== ========
Income Before Provision for Income Taxes:
Spectroscopy $13,938 $ 15,996 $24,801 $ 30,493
Materials Science 4,537 4,082 7,790 8,473
Corporate (d) (1,277) (1,264) (2,636) (2,582)
------- -------- ------- --------
Total operating income 17,198 18,814 29,955 36,384
Interest and other expense, net (763) (1,152) (1,519) (1,953)
------- -------- ------- --------
$16,435 $ 17,662 $28,436 $ 34,431
======= ======== ======= ========
(a) Includes intersegment sales of $32,000 and $43,000 in the first six months
of 1999 and 1998, respectively.
(b) Includes intersegment sales of $29,000 and $83,000 in the second quarter of
1999 and 1998, respectively, and $109,000 and $190,000 in the first six
months of 1999 and 1998, respectively.
(c) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(d) Primarily general and administrative expenses.
9
5. Accrued Acquisition Expenses
The Company has undertaken restructuring activities at certain acquired
businesses. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily
have included reductions in staffing levels and the abandonment of excess
facilities. In connection with these restructuring activities, as part of the
cost of 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 the acquisitions
completed during the last 12 months. A summary of the changes in accrued
acquisition expenses, included in other accrued expenses in the accompanying
balance sheet, is as follows:
Abandonment Total
of Excess
(In thousands) Severance Facilities
- --------------------------------------------------------------- -------------- ------------- -------------
Balance at January 2, 1999 $ 520 $ 615 $1,135
Usage (53) (281) (334)
Currency translation (60) (35) (95)
------ ----- ------
Balance at July 3, 1999 $ 407 $ 299 $ 706
====== ===== ======
6. Restructuring Costs
During 1998, the Company recorded restructuring costs, which were
accounted for in accordance with EITF 94-3, primarily for severance of 160
employees and facility-closing costs. As of January 2, 1999, the Company had
terminated 123 employees and had $4.9 million accrued for severance and
facility-closing costs relating to these activities. During the first six months
of 1999, the Company terminated 27 additional employees and recorded additional
restructuring charges of $0.6 million primarily for pension costs for terminated
employees, abandoned lease costs, and other facility costs, which could not be
accrued previously under EITF 94-3, all of which was expended during the first
six months of 1999. The Company expects to incur additional restructuring costs
of $0.6 million in the third quarter of 1999. A summary of the changes in
accrued restructuring costs, included in other accrued expenses in the
accompanying balance sheet, is as follows:
Facility- Other
closing
(In thousands) Severance Costs Total
- ----------------------------------------------- -------------- -------------- -------------- -------------
Balance at January 2, 1999 $ 3,190 $ 1,069 $ 684 $ 4,943
Amount charged to expense (20) 422 243 645
Usage (2,105) (904) (415) (3,424)
Currency translation (197) (82) (61) (340)
------- ------- ------- -------
Balance at July 3, 1999 $ 868 $ 505 $ 451 $ 1,824
======= ======= ======= =======
10
7. Cash Management Arrangement
Effective June 1, 1999, the Company and Thermo Electron Corporation
commenced use of a new domestic cash management arrangement. Under the new
arrangement, amounts advanced to Thermo Electron by the Company for domestic
cash management purposes bear interest at the 30-day Dealer Commercial Paper
Rate plus 50 basis points, set at the beginning of each month. Thermo Electron
is contractually required to maintain cash, cash equivalents, and/or immediately
available bank lines of credit equal to at least 50% of all funds invested under
this cash management arrangement by all Thermo Electron subsidiaries other than
wholly owned subsidiaries. The Company has the contractual right to withdraw its
funds invested in the cash management arrangement upon 30 days' prior notice.
Amounts invested in this arrangement are included in "advance to affiliate" in
the accompanying balance sheet.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the results
of the Company to differ materially from those indicated by such forward-looking
statements, including those detailed under the heading "Forward-looking
Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 1999, filed with the Securities and Exchange
Commission.
Overview
Thermo Optek Corporation (the Company) is a worldwide leader in analytical
instruments that use a range of optical spectroscopy and energy-based
techniques, and systems for materials analysis, characterization, and
preparation. These instruments are used in virtually every industry for
elemental and molecular analysis of a wide variety of solids, liquids, and
gases, as well as in testing and fabricating advanced materials. The Company
operates in two reportable segments: Spectroscopy and Materials Science.
The Spectroscopy segment 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. (ARL), a manufacturer and distributor of wavelength-dispersive X-ray
fluorescence and AE instruments.
The Materials Science segment has two principal operating units, VG
Systems Limited, located in East Grinstead, England, and Gebrueder Haake GmbH
(Haake), located in Karlsruhe, Germany. VG Systems primarily includes VG
Semicon, a manufacturer and distributor of molecular-beam epitaxy systems for
the production of gallium arsenide waters, and VG Scientific, a manufacturer and
distributor of instrumentation for surface and chemical analysis. Haake is a
supplier of viscometry and rheometry systems used by a wide variety of
manufacturers to measure the properties of liquid substances.
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.
11
Overview (continued)
In 1998, the Company's U.S. and foreign operations had revenues from
customers in Asia of approximately $72.7 million, or 16% of total revenues.
Certain countries in Asia continue to experience a severe economic crisis,
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 continue to be adversely affected by the
unstable economic conditions there.
Results of Operations
Second Quarter 1999 Compared With Second Quarter 1998
Revenues increased to $110.1 million in the second quarter of 1999 from
$107.8 million in the second quarter of 1998. Revenues increased $1.5 million
from acquisitions, net of dispositions. Revenues decreased $1.5 million due to
the unfavorable effects of currency translation due to the strengthening of the
U.S. dollar relative to the foreign currencies in countries where the Company
operates. Revenues at the Materials Science segment, excluding acquisitions, net
of dispositions and foreign currency translation, increased $4.6 million,
primarily due to VG Semicon's first shipment of a new model, the V150 system.
Excluding the impact of acquisitions, net of dispositions and foreign currency
translation, revenues at the Spectroscopy segment decreased $2.4 million,
primarily due to a reduction in demand for components sold into the excimer
laser market compared to the same period in the prior year due to continuing
softness in the semiconductor industry and a reduction in sales at certain
elemental analysis businesses due to increased price competition. Backlog at
July 3, 1999, increased 8% to $88.6 million from $81.7 million a year ago, as a
result of increased demand for new products.
The gross profit margin decreased to 47% in the second quarter of 1999
from 48% in the second quarter of 1998 primarily due to lower margins at VG
Semicon resulting from higher costs on its first V150 system relative to the
costs of its other models.
Selling, general, and administrative expenses as a percentage of revenues
remained unchanged at 25% in the second quarter of 1999 and 1998.
Research and development expenses increased to $7.0 million in the second
quarter of 1999 from $6.0 million in the second quarter of 1998 due to increased
spending on new product development, including the V150 system at VG Semicon
and, to a lesser extent, due to the inclusion of expenses at acquired companies.
Restructuring costs of $0.1 million in the second quarter of 1999
primarily represents facility-closing costs. The Company expects to incur an
additional $0.6 million of restructuring costs in the third quarter of 1999
(Note 6).
Interest income decreased to $0.5 million in the second quarter of 1999
from $1.2 million in the second quarter of 1998, primarily due to lower average
invested balances as a result of the Company's repurchases of its common stock
and subordinated convertible debentures. Interest expense decreased to $1.2
million in the second quarter of 1999 from $2.4 million in the second quarter of
1998, primarily due to a decrease in borrowings under notes payable. 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
and the purchase by the Company of a portion of its subordinated convertible
debentures.
The effective tax rate was 39.5% and 41.5% in the second quarter of 1999
and 1998, respectively. The Company's effective tax rate for both periods
exceeded the statutory federal income tax rate primarily due to the effect of
foreign tax law and rate differences, 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. The
effective tax rate decreased as a result of a change in the relative earnings by
country and the effect of foreign tax law and rate differences.
12
First Six Months 1999 Compared With First Six Months 1998
Revenues decreased to $216.3 million in the first six months of 1999 from
$221.6 million in the first six months of 1998. Acquisitions, net of
dispositions, contributed $3.4 million of revenues in 1999. Excluding the impact
of acquisitions, net of dispositions, revenues at the Spectroscopy segment
decreased $10.8 million, primarily due to lower sales to Asia at certain
subsidiaries in the first quarter of 1999, reduced demand for components sold
into the excimer laser market due to continuing softness in the semiconductor
industry, and increased price competition at certain elemental analysis
businesses. This decrease in revenues was offset in part by a $1.9 million
increase in revenues at the Materials Science segment, excluding the effect of
acquisitions, net of dispositions, primarily due to VG Semicon's first shipment
of a new model, the V150 system, offset in part by lower revenues due to
decreased demand in the first quarter of 1999 at certain divisions.
The gross profit margin decreased to 46% in the first six months of 1999
from 47% in the first six months of 1998 primarily due to lower margins at VG
Semicon resulting from higher costs on its first V150 system relative to the
costs of its other models.
Selling, general, and administrative expenses as a percentage of revenues
increased to 26% in the first six months of 1999 from 25% in the first six
months of 1998, primarily due to lower sales volume, offset in part by cost
reductions resulting from restructuring actions taken in 1998.
Research and development expenses increased to $13.6 million in the first
six months of 1999 from $12.4 million in the first six months of 1998, primarily
due to the reasons discussed in the results of operations for the second
quarter.
Restructuring costs of $0.6 million in the first six months of 1999
primarily represent pension costs for terminated employees, abandoned lease
costs, and other facility costs (Note 6).
Interest income decreased to $1.2 million in the first six months of 1999
from $2.3 million in the first six months of 1998 and interest expense decreased
to $2.5 million in the first six months of 1999 from $4.3 million in the first
six months of 1998, primarily due to the reasons discussed in the results of
operations for the second quarter.
The effective tax rate was 40.0% and 41.5% in the first six months of 1999
and 1998, respectively. The Company's effective tax rate for both periods
exceeded the statutory federal income tax rate primarily due to the effect of
foreign tax law and rate differences, 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. The
effective tax rate decreased due to the reasons discussed in the results of
operations for the second quarter.
Liquidity and Capital Resources
Consolidated working capital was $115.1 million at July 3, 1999, compared
with $97.8 million at January 2, 1999. Included in working capital are cash and
cash equivalents of $55.1 million at July 3, 1999, compared with $59.4 million
at January 2, 1999. In addition, as of July 3, 1999, the Company had $8.8
million invested in an advance to affiliate. Prior to the use of a new domestic
cash management arrangement between the Company and Thermo Electron Corporation
(Note 7), which became effective June 1, 1999, amounts invested with Thermo
Electron were included in cash and cash equivalents. At July 3, 1999, $52.4
million of the Company's cash and cash equivalents was held by its foreign
subsidiaries. While this cash can be used outside of the United States,
including for acquisitions, repatriation of this cash into the United States
would be subject to foreign withholding taxes and could also be subject to a
U.S. tax.
During the first six months of 1999, $22.2 million of cash was provided by
operating activities. Cash was provided by a $9.0 million decrease in accounts
receivable, primarily as a result of lower revenues in the second quarter of
1999 compared with the fourth quarter of 1998 and, to a lesser extent,
management's efforts to improve collections. These sources of cash were offset
in part by $7.7 million of cash used to increase inventories, primarily due to
the buildup of inventory in preparation for new product introductions in the
second half of 1999 and the timing of shipments.
13
Liquidity and Capital Resources (continued)
The Company's investing activities used $11.7 million of cash in the first
six months of 1999. Excluding advance to affiliate activity, the Company's
primary investing activities included $4.9 million for the purchase of property,
plant, and equipment. During the remainder of 1999, the Company plans to make
capital expenditures of approximately $9 million.
The Company's financing activities used $11.1 million of cash in the first
six months of 1999. The Company used $4.8 million of cash to repurchase Company
common stock and subordinated convertible debentures pursuant to an
authorization by the Company's Board of Directors. At July 3, 1999, the Company
had a remaining authorization to purchase $4.6 million of Company common stock
and subordinated convertible debentures in the open market or negotiated
transactions through September 1999. Any such purchases are funded from working
capital. During the first six months of 1999, the Company repaid $6.4 million of
short- and long-term borrowings. The Company's $69.0 million principal amount 5%
subordinated convertible debentures are due in October 2000. The Company may
need to borrow funds at the debentures' maturity from Thermo Instrument Systems
Inc. or the guarantor, Thermo Electron, although it has no agreements currently
to do so. The maturity of this debt could adversely affect the Company's
liquidity beginning in the last quarter of 2000.
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,
additional debt or equity financing from capital markets, 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.
Year 2000
The following information constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act. The Company
continues to assess the potential impact of the year 2000 date recognition issue
on the Company's internal business systems, products, and operations. The
Company's year 2000 initiatives include (i) testing and upgrading significant
information technology systems and facilities; (ii) testing and developing
upgrades, if necessary, for the Company's current products and certain
discontinued products; (iii) assessing the year 2000 readiness of key suppliers
and vendors; and (iv) developing a contingency plan. Based on its evaluations of
its critical facilities, the Company does not believe any material upgrades or
modifications are required.
The Company's State of Readiness
The Company has implemented a compliance program to ensure that its
critical information technology systems and non-information technology systems
will be ready for the year 2000. The first phase of the program, testing and
evaluating the Company's critical information technology systems and
non-information technology systems for year 2000 compliance, has largely been
completed. During phase one, the Company tested and evaluated its significant
computer systems, software applications, and related equipment for year 2000
compliance. The Company also evaluated the potential year 2000 impact on its
critical non-information technology systems, which efforts included testing the
year 2000 readiness of its manufacturing, utility, and 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 it is required to make any material upgrades to its critical
non-information technology systems. The Company is currently upgrading or
replacing its material noncompliant information technology systems, and this
process was approximately 85% complete as of July 3, 1999. In many cases, such
upgrades or replacements are being made in the ordinary course of business,
without accelerating previously scheduled upgrades or replacements. The Company
expects that all of its material information technology systems and critical
non-information technology systems will be year 2000 compliant by September
1999.
14
Year 2000 (continued)
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, will not be year 2000 compliant.
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 started to follow-up and
monitor the year 2000 compliance progress of significant suppliers and vendors
that indicate that they are not year 2000 compliant or that do not respond to
the Company's questionnaires. The Company has completed the majority of its
assessment of third-party risk, and expects to be substantially completed by the
end of September 1999.
Contingency Plan
The Company is developing a contingency plan that will allow its primary
business operations to continue despite disruptions due to year 2000 problems.
This plan may include identifying and securing other suppliers, increasing
inventories, and modifying production facilities and schedules. As the Company
continues to evaluate the year 2000 readiness of its business systems and
facilities, products, and significant suppliers and vendors, it will modify and
adjust its contingency plan as may be required. The Company expects to complete
its contingency plan in October 1999.
Estimated 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. 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.
15
Year 2000 (continued)
Risks of the Company's Year 2000 Issues
While the Company is attempting to minimize any negative consequences
arising from the year 2000 issue, there can be no assurance that year 2000
problems will not have a material adverse impact on the Company's business,
operations, or financial condition. While the Company expects that upgrades to
its internal business systems will be completed in a timely fashion, there can
be no assurance that the Company will not encounter unexpected costs or delays.
Despite its efforts to ensure that its material current products are year 2000
compliant, the Company may see an increase in warranty and other claims,
especially those related to Company products that incorporate, or operate using,
third-party software or hardware. In addition, certain of the Company's older
products, which it no longer manufactures or sells, may not be year 2000
compliant, which may expose the Company to claims. As discussed above, if any of
the Company's material suppliers or vendors experience business disruptions due
to year 2000 issues, the Company might also be materially adversely affected.
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. 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 year 2000 issues could have a material adverse impact on the
Company's business, operations, and financial condition in amounts that cannot
be reasonably estimated at this time.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in foreign currency
exchange rates, interest rates, and equity prices has not changed materially
from its exposure at year-end 1998.
PART II - OTHER INFORMATION
Item 2 - Changes in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities.
On May 25, 1999, the Company issued 2,075,342 shares of its common stock
to Thermo Instrument Systems Inc. in connection with the Company's acquisition
in 1998 of the business comprising the Haake Instruments division of Thermo
Instrument. Such shares were valued at approximately $23,814,000 at the time of
sale. In addition, on May 25, 1999, the Company issued 1,000 shares of its
common stock to Thermo Instrument in connection with its acquisition in 1997 of
Spectronic Instruments Inc. from Thermo Instrument. Such shares were valued at
approximately $14,000 at the time of sale. Exemption from registration for these
transactions is claimed under Section 4(2) of the Securities Act of 1933, as
amended.
Item 4 - Submission of Matters to a Vote of Security Holders
On May 27, 1999, at the Annual Meeting of Shareholders, the shareholders
elected five incumbent directors to a one-year term expiring in 2000. The
Directors elected at the meeting were: Dr. George N. Hatsopoulos, Mr. Barry S.
Howe, Mr. Stephen R. Levy, Mr. Earl R. Lewis, and Mr. Robert A. McCabe. Dr.
Hatsopoulos received 48,638,970 shares voted in favor of his election and 10,813
shares voted against. Messrs. Howe and Levy each received 48,639,470 shares
voted in favor of his election and 10,313 shares voted against. Mr. Lewis
received 48,639,420 shares voted in favor of his election and 10,363 shares
voted against. Mr. McCabe received 48,639,520 shares voted in favor of his
election and 10,263 shares voted against. No abstentions or broker non-votes
were recorded on the election of directors.
16
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
None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 11th day of August 1999.
THERMO OPTEK CORPORATION
/s/ Paul F. Kelleher
Paul F. Kelleher
Chief Accounting Officer
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Chief Financial Officer
18
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
10.1 Master Cash Management, Guarantee Reimbursement and Loan
Agreement dated as of June 1, 1999, by and between the
Registrant and Thermo Electron Corporation.
10.2 Amended and Restated Equity Incentive Plan of the Registrant.
10.3 Amended and Restated Deferred Compensation Plan for Directors
of the Registrant.
10.4 Amended and Restated Directors Stock Option Plan of the
Registrant.
27 Financial Data Schedule.