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 June 28, 1997. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Commission File Number 1-12745 THERMEDICS DETECTION INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-3106698 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 220 Mill Road Chelmsford, Massachusetts 01824-4178 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 622-1000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at July 25, 1997 ---------------------------- ---------------------------- Common Stock, $.10 par value 13,354,792 PAGE PART I - FINANCIAL INFORMATION Item 1 - Financial Statements THERMEDICS DETECTION INC. Consolidated Balance Sheet (Unaudited) Assets June 28, December 28, (In thousands) 1997 1996 ------------------------------------------------------------------------ Current Assets: Cash and cash equivalents $ 45,714 $ 13,484 Accounts receivable, less allowances of $1,171 and $1,215 8,164 9,387 Inventories: Raw materials 6,858 6,135 Work in process and finished goods 4,268 2,965 Prepaid and refundable income taxes 2,189 2,173 Prepaid expenses 712 547 -------- -------- 67,905 34,691 -------- -------- Property, Plant, and Equipment, at Cost 5,994 5,683 Less: Accumulated depreciation and amortization 4,374 3,899 -------- -------- 1,620 1,784 -------- -------- Cost in Excess of Net Assets of Acquired Companies 15,813 16,694 -------- -------- Other Assets 301 314 -------- -------- $ 85,639 $ 53,483 ======== ======== 2PAGE THERMEDICS DETECTION INC. Consolidated Balance Sheet (continued) (Unaudited) Liabilities and Shareholders' Investment June 28, December 28, (In thousands except share amounts) 1997 1996 ----------------------------------------------------------------------- Current Liabilities: Promissory note to parent company $ 21,200 $ - Accounts payable 3,033 3,030 Accrued payroll and employee benefits 1,230 1,375 Accrued installation and warranty expenses 1,020 1,413 Deferred revenue 1,648 1,281 Customer deposits 1,440 637 Accrued income taxes 1,671 334 Other accrued expenses 2,880 3,102 Due to parent company and Thermo Electron Corporation 900 161 -------- -------- 35,022 11,333 -------- -------- Deferred Income Taxes 40 40 -------- -------- Promissory Note to Parent Company - 21,200 -------- -------- Shareholders' Investment (Note 2): Common stock, $.10 par value, 50,000,000 shares authorized; 13,354,792 and 10,683,500 shares issued and outstanding 1,335 1,068 Capital in excess of par value 40,984 13,130 Retained earnings 9,575 7,136 Cumulative translation adjustment (1,317) (424) -------- -------- 50,577 20,910 -------- -------- $ 85,639 $ 53,483 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 3PAGE THERMEDICS DETECTION INC. Consolidated Statement of Operations (Unaudited) Three Months Ended ----------------------- June 28, June 29, (In thousands except per share amounts) 1997 1996 ----------------------------------------------------------------------- Revenues: Product $ 8,766 $ 6,724 Service 3,631 3,380 ------- ------- 12,397 10,104 ------- ------- Costs and Operating Expenses: Cost of product revenues 3,907 4,193 Cost of service revenues 1,970 1,883 Selling, general, and administrative expenses 3,123 4,777 Research and development expenses 1,374 1,203 ------- ------- 10,374 12,056 ------- ------- Operating Income (Loss) 2,023 (1,952) Interest Income 656 56 Interest Expense, Related Party (317) (252) Other Income (Expense), Net (3) 125 ------- ------- Income (Loss) Before Income Taxes 2,359 (2,023) Income Tax (Provision) Benefit (944) 779 ------- ------- Net Income (Loss) $ 1,415 $(1,244) ======= ======= Earnings (Loss) per Share $ .11 $ (.12) ======= ======= Weighted Average Shares 13,355 10,342 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 4PAGE THERMEDICS DETECTION INC. Consolidated Statement of Operations (Unaudited) Six Months Ended ----------------------- June 28, June 29, (In thousands except per share amounts) 1997 1996 ----------------------------------------------------------------------- Revenues: Product $17,839 $13,281 Service 6,987 6,168 ------- ------- 24,826 19,449 ------- ------- Costs and Operating Expenses: Cost of product revenues 8,521 7,746 Cost of service revenues 3,452 3,512 Selling, general, and administrative expenses 6,572 8,335 Research and development expenses 2,445 2,379 ------- ------- 20,990 21,972 ------- ------- Operating Income (Loss) 3,836 (2,523) Interest Income 859 56 Interest Expense, Related Party (623) (473) Other Income (Expense), Net (7) 80 ------- ------- Income (Loss) Before Income Taxes 4,065 (2,860) Income Tax (Provision) Benefit (1,626) 1,092 ------- ------- Net Income (Loss) $ 2,439 $(1,768) ======= ======= Earnings (Loss) per Share $ .20 $ (.17) ======= ======= Weighted Average Shares 12,165 10,220 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 5PAGE THERMEDICS DETECTION INC. Consolidated Statement of Cash Flows (Unaudited) Six Months Ended ----------------------- June 28, June 29, (In thousands) 1997 1996 ------------------------------------------------------------------------ Operating Activities: Net income (loss) $ 2,439 $ (1,768) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 746 1,647 Provision for losses on accounts receivable 43 121 Other noncash expenses 162 1,308 Changes in current accounts, excluding the effects of acquisitions: Accounts receivable 945 (95) Inventories (2,263) 982 Other current assets (235) (1,039) Accounts payable 38 24 Other current liabilities 2,554 2,820 -------- -------- Net cash provided by operating activities 4,429 4,000 -------- -------- Investing Activities: Acquisitions, net of cash acquired - (21,668) Purchases of property, plant, and equipment (396) (317) Other 80 38 -------- -------- Net cash used in investing activities (316) (21,947) -------- -------- Financing Activities: Net proceeds from issuance of Company common stock (Note 2) 28,121 3,000 Proceeds from issuance of promissory note to parent company - 21,200 Transfers to parent company and additional capital contributions, net - 120 Other (35) (30) -------- -------- Net cash provided by financing activities 28,086 24,290 -------- -------- Exchange Rate Effect on Cash 31 (163) -------- -------- Increase in Cash and Cash Equivalents 32,230 6,180 Cash and Cash Equivalents at Beginning of Period 13,484 1,282 -------- -------- Cash and Cash Equivalents at End of Period $ 45,714 $ 7,462 ======== ======== Noncash Activities: Fair value of assets of acquired companies $ - $ 24,328 Cash paid for acquired companies - (21,668) -------- -------- Liabilities assumed of acquired companies $ - $ 2,660 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 6PAGE THERMEDICS DETECTION INC. Notes to Consolidated Financial Statements 1. General The interim consolidated financial statements presented have been prepared by Thermedics Detection Inc. (the Company) without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the financial position at June 28, 1997, the results of operations for the three- and six-month periods ended June 28, 1997, and June 29, 1996, and the cash flows for the six-month periods ended June 28, 1997, and June 29, 1996. Interim results are not necessarily indicative of results for a full year. The consolidated balance sheet presented as of December 28, 1996, has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and notes of the Company. The consolidated financial statements and notes included herein should be read in conjunction with the consolidated financial statements and notes included in the Company's Registration Statement on Form S-1 (File No. 333-19199), filed with the Securities and Exchange Commission. 2. Initial Public Offering In March 1997, the Company sold 2,671,292 shares of common stock in an initial public offering at $11.50 per share for net proceeds of $28.1 million. Following the offering, Thermedics Inc. (Thermedics) owned approximately 75% of the Company's outstanding common stock. 3. Presentation Certain amounts in 1996 have been reclassified to conform to the 1997 financial statement presentation. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the caption "Risk Factors" included in the Company's Registration Statement on Form S-1 (File No. 333-19199). 7PAGE THERMEDICS DETECTION INC. Overview The Company develops, manufactures, and markets high-speed detection and measurement systems used in on-line industrial process applications, explosives detection, and laboratory analysis. The Company's industrial process systems use ultratrace chemical detectors, high-speed gas chromatography, X-ray imaging, near-infrared spectroscopy, and other technologies for quality assurance of in-process and finished products, primarily in the food, beverage, pharmaceutical, forest products, chemical, and other consumer products industries. The Company's explosives-detection equipment uses simultaneous trace particle- and vapor-detection techniques based on its proprietary chemiluminescence and high-speed gas chromatography technologies. Customers use the Company's explosives-detection equipment to detect plastic and other explosives at airports and border crossings, for other high-security screening applications, and for forensics and search applications. Historically, the Company's principal product lines were process detection systems, including Alexus(R) systems used to assure the quality of refillable plastic containers, and EGIS(R) explosives detectors. The Company expanded its product lines to include moisture analysis equipment through its acquisition of Moisture Systems Corporation and Rutter & Co. B.V. (collectively, Moisture Systems) in January 1996, and also introduced its InScan(TM) high-speed X-ray imaging systems (InScan systems) and Flash-GC(TM) gas chromatography systems (Flash-GC systems) in 1996. The Company has also recently introduced Rampart(TM), the latest portable trace-detection system that incorporates the advanced Flash-GC technology in tandem with a highly sensitive chemiluminescence detector. The Company also performs contract research and development services for government and industry customers and earns service revenues through long-term contracts. A substantial portion of the Company's sales are derived from sales of products outside the United States, through export sales and sales by the Company's foreign subsidiaries. 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. The Company expects an increase in the percentage of its revenues derived from international operations. Results of Operations Second Quarter 1997 Compared With Second Quarter 1996 Revenues in the second quarter of 1997 increased 23% to $12.4 million from $10.1 million in the second quarter of 1996. Product revenues increased 30% to $8.8 million in 1997 from $6.7 million in 1996, while service revenues increased 7% to $3.6 million in 1997 from $3.4 million in 1996. Revenues from the Company's process detection instruments and related services increased to $4.9 million in 1997 from $3.7 million in 1996, primarily due to Alexus revenues of $1.9 million from the continued fulfillment of a mandated product-line upgrade from The Coca-Cola Company to its existing installed base and, to a lesser extent, increased shipments of the Company's InScan systems, which were introduced in 1996. 8PAGE THERMEDICS DETECTION INC. Second Quarter 1997 Compared With Second Quarter 1996 (continued) Revenues from the mandated product-line upgrade are expected to continue through the third quarter of 1997. These increases were offset in part by a decrease in international plant expansions and, in turn, demand for the Alexus line of products from customers other than The Coca-Cola Company. Revenues from the Company's EGIS explosives-detection systems and related services increased to $3.1 million in 1997 from $1.5 million in 1996, primarily due to continued international shipments of the EGIS systems to provide security measures overseas. In May 1997, the Company was awarded a $5.8 million contract for its EGIS systems from the Federal Aviation Administration. No revenues were recognized under this contract during the second quarter of 1997. Revenues from the Company's Moisture Systems subsidiary decreased to $3.6 million in 1997 from $4.4 million in 1996, primarily due to a slowdown in product demand in Europe. The gross profit margin increased to 53% in the second quarter of 1997 from 40% in the second quarter of 1996. The gross profit margin on product revenues increased to 55% in 1997 from 38% in 1996, primarily due to a charge of $0.8 million in the second quarter of 1996 as a result of obsolescence created by planned product changes and, to a lesser extent, a change in product mix to higher-margin revenues from Moisture Systems. The gross profit margin on service revenues increased to 46% in 1997 from 44% in 1996, primarily due to increased field service efficiencies. Selling, general, and administrative expenses as a percentage of revenues decreased to 25% in the second quarter of 1997 from 45% in the second quarter of 1996. The decline was primarily due to nonrecurring costs of $0.4 million in the 1996 period related to a reduction in personnel and a reduction in leased space in response to lower sales volume of process detection instruments and, to a lesser extent, an increase in revenues in 1997. This decrease was offset in part by increased selling expense as the Company develops a sales force for its InScan and Flash-GC systems. Research and development expenses remained unchanged at $1.4 million in the second quarter of 1997 and 1996, respectively. Interest income increased to $0.7 million in the second quarter of 1997 from $0.1 million in the second quarter of 1996, primarily due to interest income earned on invested proceeds from the Company's March 1997 initial public offering (Note 2). Interest expense, related party, of $0.3 million in the second quarter of 1997 and 1996 reflects the issuance of a $21.2 million promissory note to Thermedics Inc. (Thermedics) in connection with the January 1996 acquisition of Moisture Systems. This note is due March 1998, and bears interest at the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. The effective tax rates were 40% and 39% in the second quarter of 1997 and 1996, respectively. The effective tax rates in both periods exceeded the statutory federal income tax rate primarily due to the impact of state income taxes. The effective tax rate increased in 1997 due to a change in the mix of income within foreign jurisdictions. 9PAGE THERMEDICS DETECTION INC. First Six Months 1997 Compared With First Six Months 1996 Revenues in the first six months of 1997 increased 28% to $24.8 million from $19.4 million in the first six months of 1996. Product revenues increased 34% to $17.8 million in 1997 from $13.3 million in 1996, while service revenues increased 13% to $7.0 million in 1997 from $6.2 million in 1996. Revenues from the Company's process detection instruments and related services increased to $11.5 million in 1997 from $6.7 million in 1996, primarily due to $4.1 million from the continued fulfillment of a mandated product-line upgrade from The Coca-Cola Company to its existing installed base and, to a lesser extent, increased shipments of the Company's InScan systems, which were introduced in 1996. Revenues from the Company's EGIS explosives-detection systems and related services remained relatively unchanged at $4.2 million in 1997 and $4.4 million in 1996. Revenues from the Company's Moisture Systems subsidiary, acquired in January 1996, increased to $7.7 million in 1997 from $7.3 million in 1996, primarily due to the inclusion of revenues for the full six months in 1997, offset in part by lower revenues in 1997 due to a slowdown in product demand in Europe. The gross profit margin increased to 52% in the first six months of 1997 from 42% in the first six months of 1996. The gross profit margin on product revenues increased to 52% in 1997 from 42% in 1996, primarily due to the inclusion of an $0.8 million charge in the second quarter of 1996 as a result of obsolescence created by planned product changes, as well as the inclusion of higher-margin revenues from Moisture Systems for the full six months of 1997. The gross profit margin on service revenues increased to 51% in 1997 from 43% in 1996, primarily due to increased field service efficiencies and, to a lesser extent, the inclusion of higher-margin service revenues from Moisture Systems for the full six months of 1997. Selling, general, and administrative expenses as a percentage of revenues decreased to 26% in the first six months of 1997 from 43% in the first six months of 1996. The decline was primarily due to nonrecurring costs in the 1996 period related to a reduction in personnel, a reduction in leased space, and other adjustments in response to lower sales volume of process detection instruments and, to a lesser extent, an increase in revenues in 1997. This decrease was offset in part by increased selling expenses as the Company develops a sales force for its InScan and Flash-GC systems. Research and development expenses remained relatively unchanged at $2.4 million in the first six months of 1997 and 1996, respectively. Interest income increased to $0.9 million in the first six months of 1997 from $0.1 million in the first six months of 1996, primarily due to the reason discussed in the results of operations for the second quarter. Interest expense, related party, of $0.6 million and $0.5 million in the first six months of 1997 and 1996, respectively, remained relatively unchanged. The related debt was discussed in the results of operations for the second quarter. 10PAGE THERMEDICS DETECTION INC. First Six Months 1997 Compared With First Six Months 1996 (continued) The effective tax rates were 40% and 38% in the first six months of 1997 and 1996, respectively. The effective tax rates in both periods exceeded the statutory federal income tax rate primarily due to the impact of state income taxes. The effective tax rate increased in 1997 due to a change in the mix of income within foreign tax jurisdictions. Liquidity and Capital Resources Consolidated working capital was $32.9 million at June 28, 1997, compared with $23.4 million at December 28, 1996. Cash and cash equivalents were $45.7 million at June 28, 1997, compared with $13.5 million at December 28, 1996. During the first six months of 1997, $4.4 million of cash was provided by operating activities. During this period, cash of $2.3 million was used to fund an increase in inventories resulting from an order received from the FAA. This use of cash was more than offset by cash of $2.6 million provided by an increase in other current liabilities, including $0.8 million of customer deposits, primarily relating to the mandated product-line upgrade from The Coca-Cola Company. During the first six months of 1997, the Company expended $0.4 million on purchases of property, plant, and equipment. During the remainder of 1997, the Company expects to make capital expenditures of approximately $0.1 million. In March 1997, the Company sold 2,671,292 shares of its common stock in an initial public offering at $11.50 per share for net proceeds of $28.1 million (Note 2). Although the Company expects to have positive cash flow from its existing operations, the Company anticipates it will require significant amounts of cash for the possible acquisition of complementary businesses and technologies. While the Company currently has no agreement to make an acquisition, it expects that it would finance any acquisitions through a combination of internal funds, additional debt or equity financing, and/or short-term borrowings from Thermedics or Thermo Electron Corporation, although it has no agreement with these companies to ensure that funds will be available on acceptable terms or at all. The Company believes that its existing resources are sufficient to meet the capital requirements of its existing businesses for the foreseeable future. PART II - OTHER INFORMATION Item 6 - Exhibits See Exhibit Index on the page immediately preceding exhibits. 11PAGE THERMEDICS DETECTION INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 5th day of August 1997. THERMEDICS DETECTION INC. Paul F. Kelleher --------------------- Paul F. Kelleher Chief Accounting Officer John N. Hatsopoulos --------------------- John N. Hatsopoulos Vice President and Chief Financial Officer 12PAGE THERMEDICS DETECTION INC. EXHIBIT INDEX Exhibit Number Description of Exhibit ------------------------------------------------------------------------ 11 Statement re: Computation of Earnings (Loss) per Share. 27 Financial Data Schedule.