-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FyL7jZDDtdJwuzpQHUObIusXwpyDfwPtPWRl+UsMThGXZ0VlKielQag98h9uk0IA qHLselOyjJl3PPs2yow2gw== 0000721356-97-000035.txt : 19971105 0000721356-97-000035.hdr.sgml : 19971105 ACCESSION NUMBER: 0000721356-97-000035 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971104 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERMEDICS INC CENTRAL INDEX KEY: 0000721356 STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590] IRS NUMBER: 042788806 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09567 FILM NUMBER: 97707645 BUSINESS ADDRESS: STREET 1: 470 WILDWOOD ST STREET 2: P O BOX 2697 CITY: WOBURN STATE: MA ZIP: 01888-1799 BUSINESS PHONE: 6176221000 MAIL ADDRESS: STREET 1: 81 WYMAN STREET STREET 2: P.O. BOX 9046 CITY: WALTHAM STATE: MA ZIP: 02254 10-Q 1 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 September 27, 1997. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Commission File Number 1-9567 THERMEDICS INC. (Exact name of Registrant as specified in its charter) Massachusetts 04-2788806 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 470 Wildwood Street, P.O. Box 2999 Woburn, Massachusetts 01888-1799 (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 September 27, 1997 ---------------------------- --------------------------------- Common Stock, $.10 par value 36,711,806 PAGE PART I - FINANCIAL INFORMATION Item 1 - Financial Statements THERMEDICS INC. Consolidated Balance Sheet (Unaudited) Assets September 27, December 28, (In thousands) 1997 1996 ----------------------------------------------------------------------- Current Assets: Cash and cash equivalents $165,419 $ 82,800 Short-term available-for-sale investments, at quoted market value (amortized cost of $60,291 and $64,950; includes $1,937 of related-party investments in 1996) 60,404 65,054 Accounts receivable, less allowances of $4,151 and $4,641 62,651 62,783 Inventories: Raw materials and supplies 25,116 28,210 Work in process 19,282 10,719 Finished goods 17,107 15,301 Prepaid income taxes and expenses 15,329 14,713 -------- -------- 365,308 279,580 -------- -------- Property, Plant, and Equipment, at Cost 53,917 48,892 Less: Accumulated depreciation and amortization 32,385 27,342 -------- -------- 21,532 21,550 -------- -------- Long-term Available-for-sale Investments, at Quoted Market Value (amortized cost of $23,392 and $33,929) 23,444 33,920 -------- -------- Other Assets 9,992 7,885 -------- -------- Cost in Excess of Net Assets of Acquired Companies (Note 2) 115,325 113,764 -------- -------- $535,601 $456,699 ======== ======== 2PAGE THERMEDICS INC. Consolidated Balance Sheet (continued) (Unaudited) Liabilities and Shareholders' Investment September 27, December 28, (In thousands except share amounts) 1997 1996 ------------------------------------------------------------------------ Current Liabilities: Notes payable and current maturities of long-term obligations $ 7,491 $ 9,017 Accounts payable 18,738 19,615 Accrued payroll and employee benefits 11,232 11,951 Deferred revenue 2,243 1,397 Accrued income taxes 10,881 5,438 Accrued warranty costs 3,843 3,971 Other accrued expenses 18,894 18,421 Due to parent company and affiliated companies 2,661 1,600 -------- -------- 75,983 71,410 -------- -------- Deferred Income Taxes and Other Deferred Items 1,251 1,382 -------- -------- Long-term Obligations: Subordinated convertible obligations (Note 4) 143,450 74,345 Other 14 14 -------- -------- 143,464 74,359 -------- -------- Minority Interest 94,307 97,966 -------- -------- Shareholders' Investment: Common stock, $.10 par value, 100,000,000 shares authorized; 36,846,175 and 36,842,500 shares issued 3,685 3,684 Capital in excess of par value 114,264 138,433 Retained earnings 108,678 74,542 Treasury stock at cost, 134,369 and 166,144 shares (3,728) (4,729) Cumulative translation adjustment (2,409) (409) Net unrealized gain on available-for-sale investments 106 61 -------- -------- 220,596 211,582 -------- -------- $535,601 $456,699 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 3PAGE THERMEDICS INC. Consolidated Statement of Income (Unaudited) Three Months Ended --------------------------- September 27, September 28, (In thousands except per share amounts) 1997 1996 ------------------------------------------------------------------------ Revenues $76,217 $74,202 ------- ------- Costs and Operating Expenses: Cost of revenues 38,433 36,534 Selling, general, and administrative expenses 20,335 20,290 Research and development expenses 5,941 5,464 ------- ------- 64,709 62,288 ------- ------- Operating Income 11,508 11,914 Interest Income 3,531 3,201 Interest Expense (1,202) (993) Gain on Sale of Investments 427 685 ------- ------- Income Before Provision for Income Taxes and Minority Interest 14,264 14,807 Provision for Income Taxes 5,453 5,569 Minority Interest Expense 2,147 2,879 ------- ------- Net Income $ 6,664 $ 6,359 ======= ======= Earnings per Share $ .17 $ .16 ======= ======= Weighted Average Shares 38,898 39,072 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 4PAGE THERMEDICS INC. Consolidated Statement of Income (Unaudited) Nine Months Ended ----------------------------- September 27, September 28, (In thousands except per share amounts) 1997 1996 ------------------------------------------------------------------------ Revenues $224,270 $214,290 -------- -------- Costs and Operating Expenses: Cost of revenues 113,534 109,316 Selling, general, and administrative expenses 63,851 62,708 Research and development expenses 17,752 15,826 Nonrecurring costs - 12,728 -------- -------- 195,137 200,578 -------- -------- Operating Income 29,133 13,712 Interest Income 9,473 8,162 Interest Expense (2,185) (3,530) Gain on Issuance of Stock by Subsidiaries (Note 3) 17,075 20,485 Gain on Sale of Investments 427 753 -------- -------- Income Before Provision for Income Taxes and Minority Interest 53,923 39,582 Provision for Income Taxes 14,391 10,629 Minority Interest Expense 5,396 7,583 -------- -------- Net Income $ 34,136 $ 21,370 ======== ======== Earnings per Share $ .88 $ .57 ======== ======== Weighted Average Shares 38,913 37,773 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 5PAGE THERMEDICS INC. Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended ---------------------------- September 27, September 28, (In thousands) 1997 1996 ------------------------------------------------------------------------ Operating Activities: Net income $34,136 $21,370 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,287 8,349 Provision for losses on accounts receivable 486 883 Nonrecurring costs - 12,728 Gain on issuance of stock by subsidiaries (Note 3) (17,075) (20,485) Gain on sale of investments (427) (753) Minority interest expense 5,396 7,583 Other noncash expenses 698 505 Decrease in deferred income taxes - (32) Changes in current accounts, excluding the effects of acquisitions: Accounts receivable (478) (8,677) Inventories (7,490) (1,241) Prepaid income taxes and expenses (713) (234) Accounts payable (952) (495) Other current liabilities 4,577 1,584 ------- -------- Net cash provided by operating activities 26,445 21,085 ------- -------- Investing Activities: Acquisitions, net of cash acquired (Note 2) (5,658) (32,594) Acquisition of product line - (4,437) Proceeds from sale and maturities of available-for-sale investments 86,884 95,318 Purchases of available-for-sale investments (71,900) (74,353) Purchases of property, plant, and equipment (5,015) (5,834) Other 117 (69) ------- -------- Net cash provided by (used in) investing activities $ 4,428 $(21,969) ------- -------- 6PAGE THERMEDICS INC. Consolidated Statement of Cash Flows (continued) (Unaudited) Nine Months Ended ---------------------------- September 27, September 28, (In thousands) 1997 1996 ------------------------------------------------------------------------ Financing Activities: Net proceeds from issuance of Company and subsidiary common stock (Note 3) $28,929 $ 46,923 Net proceeds from issuance of subordinated convertible debentures (Note 4) 68,030 63,205 Purchases of Company and subsidiaries' common stock (49,055) (9,695) International Technidyne transfer (to) from parent company 350 (5,101) Proceeds from issuance of note payable to parent company - 15,000 Repayment of notes payable to parent company - (53,000) Repayment and repurchase of long-term obligations - (2,432) Net increase (decrease) in short-term borrowings 2,705 (1,944) -------- -------- Net cash provided by financing activities 50,959 52,956 -------- -------- Exchange Rate Effect on Cash 787 (296) -------- -------- Increase in Cash and Cash Equivalents 82,619 51,776 Cash and Cash Equivalents at Beginning of Period 82,800 37,413 -------- -------- Cash and Cash Equivalents at End of Period $165,419 $ 89,189 ======== ======== Noncash Activities: Fair value of assets of acquired companies $ 9,306 $ 39,279 Cash paid for acquired companies (6,268) (33,562) -------- -------- Liabilities assumed of acquired companies $ 3,038 $ 5,717 ======== ======== Conversions of the Company's and subsidiaries' subordinated convertible obligations $ 4,650 $ 27,415 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 7PAGE THERMEDICS INC. Notes to Consolidated Financial Statements 1. General The interim consolidated financial statements presented have been prepared by Thermedics 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 September 27, 1997, the results of operations for the three- and nine-month periods ended September 27, 1997, and September 28, 1996, and the cash flows for the nine-month periods ended September 27, 1997, and September 28, 1996. Interim results are not necessarily indicative of results for a full year. Historical financial results have been restated to include International Technidyne Corporation (International Technidyne), which was acquired by the Company's majority-owned Thermo Cardiosystems Inc. (Thermo Cardiosystems) subsidiary, in a transaction accounted for in a manner similar to a pooling of interests (Note 2). 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, as amended, for the fiscal year ended December 28, 1996, filed with the Securities and Exchange Commission. 2. Acquisitions In March 1997, Thermo Cardiosystems announced its intention to acquire International Technidyne from Thermo Electron Corporation (Thermo Electron), the Company's parent company, in a merger in which approximately 3,356,000 shares of Thermo Cardiosystems' common stock would be issued in exchange for all of the outstanding shares of International Technidyne. On May 2, 1997, the transaction was completed, subject to Thermo Cardiosystems' shareholder approval of the issuance of the 3,355,705 Thermo Cardiosystems' shares to Thermo Electron in the merger. International Technidyne is a leading manufacturer of near-patient, whole-blood, coagulation-testing equipment and related disposables, and also manufactures premium-quality, single-use, skin-incision devices. In 1996, International Technidyne's revenues and net income were $34.0 million and $4.7 million, respectively. Because Thermo Cardiosystems and International Technidyne were deemed for accounting purposes to be under control of their common majority owner, Thermo Electron, the transaction has been accounted for at historical cost in a manner similar to a pooling of interests. Accordingly, all historical financial information presented has been restated to reflect the acquisition of International Technidyne. The 3,355,705 shares of Thermo Cardiosystems' common stock issuable in exchange for International Technidyne will not be issued until the listing of such shares for trading upon the American Stock Exchange has been approved by Thermo Cardiosystems' shareholders. Because the Company is the majority shareholder and intends to vote its shares in favor of such listing, the approval is assured and, therefore, the acquisition is 8PAGE THERMEDICS INC. 2. Acquisitions (continued) considered to have been completed as of January 1, 1996. Revenues and net income as previously reported for the separate entities prior to the acquisition and as restated for the combined company are as follows: Three Months Ended Nine Months Ended (In thousands) September 28, 1996 September 28, 1996 ------------------------------------------------------------------------ Revenues: Historical $ 65,712 $188,624 International Technidyne 8,490 25,666 -------- -------- $ 74,202 $214,290 ======== ======== Net Income: Historical $ 5,767 $ 19,694 International Technidyne 1,200 3,394 Minority interest expense (608) (1,718) -------- -------- $ 6,359 $ 21,370 ======== ======== During the first nine months of 1997, two of the Company's majority-owned subsidiaries made other acquisitions for an aggregate cost of approximately $6.3 million in cash. These acquisitions have been accounted for using the purchase method of accounting and their results of operations have been included in the accompanying financial statements from their respective dates of acquisition. The aggregate cost of these acquisitions exceeded the estimated fair value of the acquired net assets by $4.8 million, which is being amortized over 40 years. Allocation of the purchase price for these acquisitions was based on estimates of the fair value of the net assets acquired and is subject to adjustment upon finalization of the purchase price allocation. Pro forma data is not presented since these acquisitions were not material to the Company's results of operations. 3. Issuance of Stock by Subsidiary In March 1997, the Company's Thermedics Detection Inc. (Thermedics Detection) subsidiary issued 2,671,292 shares of its common stock in an initial public offering at $11.50 per share, for net proceeds of approximately $28.1 million, resulting in a gain of $17.1 million. Following the initial public offering, the Company owned 75% of Thermedics Detection's outstanding common stock. 4. Subsidiary Subordinated Convertible Debenture Offering In May 1997, Thermo Cardiosystems issued and sold at par $70.0 million principal amount of 4 3/4% subordinated convertible debentures due 2004 for net proceeds of $68.0 million. The debentures are convertible into shares of Thermo Cardiosystems common stock at a conversion price of $31.415 per share and are guaranteed on a subordinated basis by Thermo Electron. The Company has agreed to reimburse Thermo Electron in the event Thermo Electron is required to make a payment under the guarantee. 9PAGE THERMEDICS INC. 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 "Forward-looking Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K, as amended, for the fiscal year ended December 28, 1996, filed with the Securities and Exchange Commission. Overview The Company's business can be divided into two segments: Instruments and Other Equipment, and Biomedical Products. The Instruments and Other Equipment segment includes the Company's Thermo Sentron Inc. (Thermo Sentron) subsidiary, which designs, develops, manufactures, and sells high-speed precision-weighing and inspection equipment for industrial production and packaging lines; its Orion laboratory products division (Orion), which manufactures electrochemistry, microweighing, process, and other instruments used to analyze the chemical composition of foods, beverages, and pharmaceuticals, and to detect contaminants in high-purity water; its Thermedics Detection Inc. (Thermedics Detection) subsidiary, which develops, manufactures, and markets high-speed detection instruments used in on-line industrial process applications, explosives detection, and laboratory analysis; and its Thermo Voltek Corp. (Thermo Voltek) subsidiary, which manufactures electromagnetic compatibility (EMC) test instruments, high-voltage power-conversion systems, programmable power amplifiers, and radio frequency power amplifiers. As part of its Biomedical Products segment, the Company's Thermo Cardiosystems Inc. (Thermo Cardiosystems) subsidiary manufactures implantable left ventricular-assist systems (LVAS). Thermo Cardiosystems' electric LVAS is being used in Europe as a bridge to transplant and as an alternative to medical therapy. According to terms set by the U.S. Food and Drug Administration (FDA), no profit can be earned from the sale of an LVAS in the U.S. until the FDA has approved the device for commercial sale. With the FDA's approval, the Company began earning a profit on the sale of its air-driven LVAS in the fourth quarter of 1994. Until FDA approval is obtained, the Company may not earn a profit on the sale in the U.S. of other products, such as the electric LVAS, which is currently being used for clinical studies in the U.S. Thermo Cardiosystems' International Technidyne Corporation (International Technidyne) subsidiary (Note 2) is a leading manufacturer of near-patient, whole-blood, coagulation-testing equipment and related disposables and 10PAGE THERMEDICS INC. Overview (continued) also manufactures premium-quality, single-use, skin-incision devices. In addition, the Company develops and manufactures enteral nutrition- delivery systems and a line of medical-grade polymers used in medical disposables and nonmedical, industrial applications, including safety glass and automotive coatings. A significant amount of the Company's revenues is derived from sales of products outside of the U.S. through export sales and sales by the Company's foreign subsidiaries. The Company expects an increase in the percentage of revenues derived from international operations. 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 between the U.S. dollar and foreign currencies. Where appropriate, the Company uses forward contracts to reduce its exposure to currency fluctuations. Results of Operations Third Quarter 1997 Compared With Third Quarter 1996 Total revenues in the third quarter of 1997 were $76.2 million, compared with $74.2 million in the third quarter of 1996. Instruments and Other Equipment segment revenues increased to $56.9 million in 1997 from $54.4 million in 1996, primarily due to increases in revenues of $1.5 million, $2.0 million, and $0.6 million at Thermedics Detection, Thermo Sentron, and Orion, respectively, offset in part by a $1.7 million decrease in revenues at Thermo Voltek. Revenues at Thermedics Detection increased to $12.6 million in 1997 from $11.1 million in 1996. Revenues from Thermedics Detection's process detection instruments and related services increased to $5.0 million in 1997 from $4.1 million in 1996, primarily as a result of Alexus revenues 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 its InScan systems, introduced in early 1996. This increase was offset in part by a decrease in demand from The Coca-Cola Company for new Alexus installations in 1997. Revenues from the mandated product-line upgrade are expected to continue through the fourth quarter of 1997. Revenues from Thermedics Detection's EGIS(R) explosives-detection systems and related services increased to $2.8 million in 1997 from $1.7 million in 1996, primarily due to $1.5 million of shipments under a $5.8 million contract with the U.S. Federal Aviation Administration (FAA), which was awarded to Thermedics Detection in May 1997, offset in part by a decrease in overseas demand in 1997. Product shipments from this contract are expected to continue through the first quarter of 1998. Revenues from Thermedics Detection's Moisture Systems subsidiary, acquired in the first quarter of 1996, decreased $0.8 million, primarily due to a slowdown in product demand in Europe. Revenues from Thermo Sentron increased to $19.5 million in 1997 from $17.5 million in 1996, primarily due to an increase of $1.7 million related to an increase in product demand. In addition, revenues increased $1.2 million due to acquisitions. These increases were offset in part by a decrease of $0.9 million due to the impact of a stronger U.S. dollar 11PAGE THERMEDICS INC. Third Quarter 1997 Compared With Third Quarter 1996 (continued) relative to foreign currencies in which Thermo Sentron operates. Revenues from Thermo Voltek decreased to $11.1 million in 1997 from $12.8 million in 1996, primarily due to lower demand for EMC test products, offset in part by an increase in revenues of $0.7 million due to acquisitions. Biomedical Products segment revenues decreased slightly to $19.4 million in the third quarter of 1997 from $19.8 million in the third quarter of 1996. Revenues from Thermo Cardiosystems decreased to $14.7 million in 1997 from $16.1 million in 1996, primarily due to decreases of $2.0 million and $0.6 million in revenues from its air-driven and electric LVAS, respectively. The Company expects that sales from Thermo Cardiosystems' LVAS will stabilize at approximately current levels until the electric system is approved in the U.S. for commercial sale. The Company believes that this approval could occur during 1997; however, there can be no assurance that Thermo Cardiosystems will receive this approval within the expected time period, or at all. This decrease in revenues was offset in part by an increase of $0.6 million in revenues from International Technidyne, as well as the inclusion of $0.4 million in revenues from an acquisition. In addition, revenues from the Company's Polymer Products division increased $0.8 million due to an increase in demand for its polymer film product line. The gross profit margin was 50% in the third quarter of 1997, compared with 51% in the third quarter of 1996. The gross profit margin for the Instruments and Other Equipment segment remained unchanged at 48% in 1997 and 1996. The gross profit margin decreased at Thermo Voltek, primarily due to lower sales of certain higher-margin EMC test products, as well as the effect of the decline in Thermo Voltek's total revenues, offset in part by a nonrecurring expense adjustment of $0.1 million in 1996, for inventory revalued at the time of certain acquisitions. The decrease at Thermo Voltek was also offset in part by higher gross profit margins at Orion. The gross profit margin for the Biomedical Products segment decreased to 54% in the third quarter of 1997 from 57% in the third quarter of 1996. This decrease was primarily due to a decline in the gross profit margin at Thermo Cardiosystems as a result of a shift in the sales mix to lower-margin electric LVAS systems and, to a lesser extent, the inclusion of low-margin revenues from an acquisition, offset in part by improved gross profit margins at International Technidyne due to manufacturing efficiencies. In addition, the gross profit margin decreased at the Company's Polymer Products division due to start-up cost associated with its polymer film product line. Selling, general, and administrative expenses as a percentage of revenues remained unchanged at 27% in the third quarter of 1997 and 1996. Thermo Cardiosystems' selling, general, and administrative expenses as a percentage of revenues increased due to an increase in its LVAS sales force, as well as an increase in sales personnel and promotional expenses at International Technidyne. Selling, general, and administrative expenses as a percentage of revenues at Thermo Voltek increased primarily due to lower revenues. These increases were offset primarily by the effect of increased revenues at Thermedics Detection and Orion. 12PAGE THERMEDICS INC. Third Quarter 1997 Compared With Third Quarter 1996 (continued) Research and development expenses as a percentage of revenues increased to 7.8% in the third quarter of 1997 from 7.4% in the third quarter of 1996, primarily due to increased expenses at Orion and Thermo Cardiosystems. Interest income increased to $3.5 million in the third quarter of 1997 from $3.2 million in the third quarter of 1996, primarily due to higher average invested balances at Thermo Cardiosystems as a result of its May 1997 issuance of 4 3/4% subordinated convertible debentures (Note 4), and Thermedics Detection as a result of its March 1997 initial public offering of common stock (Note 3). Interest expense increased to $1.2 million in the third quarter of 1997 from $1.0 million in the third quarter of 1996, as a result of Thermo Cardiosystems' issuance of debentures, offset in part by the repayment of $53.0 million of notes payable to Thermo Electron Corporation (Thermo Electron) in September 1996 and conversions of subordinated convertible obligations. The effective tax rates were 38% in the third quarter of 1997 and 1996. The effective tax rates exceeded the statutory federal income tax rate primarily due to the impact of state income taxes and nondeductible amortization of cost in excess of net assets of acquired companies. Minority interest expense decreased to $2.1 million in the third quarter of 1997 from $2.9 million in the third quarter of 1996, primarily due to lower profits at Thermo Cardiosystems and Thermo Voltek, offset in part by the minority interest expense associated with Thermedics Detection (Note 3). First Nine Months 1997 Compared With First Nine Months 1996 Total revenues in the first nine months of 1997 were $224.3 million, compared with $214.3 million in the first nine months of 1996. Instruments and Other Equipment segment revenues increased to $166.1 million in 1997 from $155.9 million in 1996, primarily due to increases in revenues of $6.9 million, $4.4 million, and $1.8 million at Thermedics Detection, Thermo Sentron, and Orion, respectively, offset in part by a $2.6 million decrease in revenues at Thermo Voltek. Revenues at Thermedics Detection increased to $37.5 million in 1997 from $30.6 million in 1996. Revenues from Thermedics Detection's process detection instruments and related services increased to $16.5 million in 1997 from $10.7 million in 1996, primarily as a result of 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 its InScan systems, introduced in early 1996. Revenues from Thermedics Detection's EGIS explosives-detection systems and related services increased to $7.0 million in 1997 from $6.0 million in 1996, primarily due to $1.5 million of shipments under the contract with the 13PAGE THERMEDICS INC. First Nine Months 1997 Compared With First Nine Months 1996 (continued) FAA, offset in part by a decrease in overseas demand in 1997. Revenues from Thermo Sentron increased to $56.0 million in 1997 from $51.5 million in 1996, primarily due to an increase of $3.5 million related to an increase in product demand. Thermo Sentron's revenues also increased by $2.6 million due to acquisitions. These increases were offset in part by a decrease of $1.6 million due to the impact of a stronger U.S. dollar relative to currencies in foreign countries in which Thermo Sentron operates. Revenues from Thermo Voltek decreased to $32.7 million in 1997 from $35.3 million in 1996, primarily due to a lower demand for EMC test products, including a decline in the component-reliability market for electrostatic discharge test equipment caused by a slowdown in capital expenditures by the semiconductor industry. These decreases in revenues at Thermo Voltek were offset in part by an increase in revenues of $4.8 million due to acquisitions. Biomedical Products segment revenues decreased slightly to $58.2 million in the first nine months of 1997 from $58.4 million in the first nine months of 1996. Revenues from Thermo Cardiosystems decreased to $45.6 million in 1997 from $47.4 million in 1996, primarily due to a $4.7 million decrease in revenues from its air-driven LVAS, offset in part by a $1.2 million increase in revenues from its electric LVAS. The decrease in revenues in 1997 was also offset in part by the inclusion of $1.6 million in revenues from an acquisition. In addition, revenues from International Technidyne increased $0.5 million during the first nine months of 1997. Revenues from the Company's Polymer Products division also increased $1.4 million due to an increase in demand. The gross profit margin was 49% in the first nine months of 1997 and 1996. The gross profit margin for the Instruments and Other Equipment segment increased to 48% in 1997 from 47% in 1996, due to improvements at Thermedics Detection as a result of a charge for inventory obsolescence in the 1996 period in connection with planned product changes, and, to a lesser extent, field service efficiencies, and a change in sales mix to higher-margin revenues at Moisture Systems. In addition, the gross profit margin improved at Orion in 1997. These increases were offset in part by a decrease in the gross profit margin at Thermo Voltek, primarily due to a decrease in the sale of certain higher-margin EMC test products, as well as the effect of a decrease in total revenues, offset in part by the inclusion of higher-margin revenues from an acquisition. The gross profit margin for the Biomedical Products segment decreased to 53% in the first nine months of 1997 from 55% in the first nine months of 1996. The gross profit margin at Thermo Cardiosystems decreased due to the reasons discussed in the results of operations for the third quarter and, to a lesser extent, increased warranty costs due to a company-initiated modification of certain of its systems, completed in the first quarter of 1997. Thermo Cardiosystems announced an overall price increase of approximately 10% in the electric LVAS product line effective June 28, 1997, to help offset increased production costs. These decreases were offset in part by an increase in the gross profit margin at International Technidyne due to the reason discussed in the results of operations for the third quarter, and at the Company's Polymer Products division due in part to the effect of establishing certain inventory and related reserves in the 1996 period. 14PAGE THERMEDICS INC. First Nine Months 1997 Compared With First Nine Months 1996 (continued) Selling, general, and administrative expenses as a percentage of revenues decreased to 28% in the first nine months of 1997 from 29% in the first nine months of 1996. Selling, general, and administrative expenses as a percentage of revenues decreased at Thermedics Detection due to nonrecurring costs in the 1996 period, offset in part by increased selling expenses as Thermedics Detection develops a sales force for its InScan and Flash-GC systems. Selling, general, and administrative expenses as a percentage of revenues increased at Thermo Cardiosystems due to the reasons discussed in the results of operations for the third quarter. Selling, general, and administrative expenses as a percentage of revenues also increased at Thermo Voltek due to the effect of a decrease in revenues and severance and related costs incurred as part of a continuing evaluation of its lines of business, with the goal of improving profitability. These increases were offset in part by the effect of two acquisitions at Thermo Voltek, which have lower costs as a percentage of revenues. Research and development expenses as a percentage of revenues increased to 7.9% in the first nine months of 1997 from 7.4% in the first nine months of 1996, primarily due to increased research and development expenses at Orion and Thermo Cardiosystems. In the second quarter of 1996, the Company recorded nonrecurring expenses of $12.7 million for the write-off of cost in excess of net assets of acquired company and certain other intangible assets associated with its Corpak subsidiary. Interest income increased to $9.5 million in the first nine months of 1997 from $8.2 million in the first nine months of 1996, due to higher average invested balances at Thermedics Detection and Thermo Sentron as a result of their initial public offerings of common stock in March 1997 and April 1996, respectively, and at Thermo Cardiosystems as a result of the issuance of the 4 3/4% subordinated convertible debentures in May 1997 (Note 4). Interest expense decreased to $2.2 million in the first nine months of 1997 from $3.5 million in the first nine months of 1996, primarily due to the repayment of $53.0 million of notes payable to Thermo Electron in September 1996, conversions of subordinated convertible obligations, and a reduction in short-term borrowings at Thermo Sentron, offset in part by Thermo Cardiosystems' issuance of debentures. The Company has adopted a strategy of spinning out certain of its businesses into separate subsidiaries and having these subsidiaries sell a minority interest to outside investors. The Company believes that this strategy provides additional motivation and incentives for the management of the subsidiaries through the establishment of subsidiary-level stock option incentive programs, as well as capital to support the subsidiaries' growth. As a result of the sale of stock by subsidiaries, the Company recorded gains of approximately $17.1 million and $20.5 million in the first nine months of 1997 and 1996, respectively (Note 3). The size and timing of these transactions are dependent on market and other conditions that are beyond the Company's control. Accordingly, 15PAGE THERMEDICS INC. First Nine Months 1997 Compared With First Nine Months 1996 (continued) there can be no assurance that the Company will be able to realize gains from such transactions in the future. The effective tax rates were 27% in the first nine months of 1997 and 1996. The effective tax rates were below the statutory federal income tax rate primarily due to nontaxable gains on issuance of stock by subsidiaries, offset in part by the impact of state income taxes and nondeductible amortization of cost in excess of net assets of acquired companies. Minority interest expense decreased to $5.4 million in the first nine months of 1997 from $7.6 million in the first nine months of 1996, primarily due to lower profits at Thermo Cardiosystems and Thermo Voltek, offset in part by the minority interest associated with Thermedics Detection (Note 3) and Thermo Sentron. Liquidity and Capital Resources Consolidated working capital was $289.3 million at September 27, 1997, compared with $208.2 million at December 28, 1996. Included in working capital were cash, cash equivalents, and short- and long-term available-for-sale investments of $249.3 million at September 27, 1997, compared with $181.8 million at December 28, 1996. Of the $249.3 million balance at September 27, 1997, $124.9 million was held by Thermo Cardiosystems, $43.4 million by Thermedics Detection, $38.6 million by Thermo Sentron, $18.7 million by Thermo Voltek, and the remainder by the Company and its wholly owned subsidiaries. During the first nine months of 1997, $26.4 million of cash was provided by operating activities. Cash of $4.6 million, provided by an increase in other current liabilities, was more than offset by cash of $7.5 million used to fund an increase in inventories. The increase in inventories occurred primarily due to expected future shipments for an order received from the FAA at Thermedics Detection and an increase in production of the electric LVAS at Thermo Cardiosystems. Excluding purchases, sales, and maturities of available-for-sale investments, the Company's primary investing activities during the first nine months of 1997 included $5.7 million for acquisitions (Note 2) and $5.0 million for purchases of property, plant, and equipment. During the remainder of 1997, the Company expects to make capital expenditures of approximately $2.0 million. During the first nine months of 1997, the Company's financing activities provided $51.0 million in cash. In March 1997, Thermedics Detection issued shares of its common stock in an initial public offering for net proceeds of approximately $28.1 million (Note 3). In addition, in May 1997, Thermo Cardiosystems issued and sold $70.0 million principal amount of 4 3/4% subordinated convertible debentures due 2004 for net proceeds of $68.0 million (Note 4). The Company intends, for the foreseeable future, to maintain at least 50% ownership of Thermo Cardiosystems, Thermo Voltek, Thermo Sentron, and Thermedics Detection. This may require the Company to purchase additional 16PAGE THERMEDICS INC. Liquidity and Capital Resources (continued) shares of common stock or, if applicable, convertible debentures (which are then converted) of these companies from time to time, as the number of these companies' outstanding shares increases, whether as a result of conversion of convertible notes or exercise of stock options issued by them, or otherwise. These or any other purchases may be made (i) in the open market or in negotiated transactions, (ii) directly from Thermo Electron or the relevant subsidiary, or (iii) in the case of Thermo Voltek, pursuant to the conversion of all or part of its subordinated convertible notes held by the Company. Through a series of actions commencing in June 1996, the Company's Board of Directors has authorized the repurchase, through various dates, of up to $15.0 million of securities of the Company or its subsidiaries and up to an additional $15.0 million of the securities of Thermo Voltek. Through September 27, 1997, the Company had expended $17.3 million under these authorizations, including $7.3 million expended in the first nine months of 1997. Any repurchases under the Company's authorizations are funded from working capital. Through a series of actions commencing in August 1996, Thermo Cardiosystems' Board of Directors has authorized the repurchase, through various dates, of up to $50.0 million of its own securities in the open market, or in negotiated transactions. Through September 27, 1997, Thermo Cardiosystems had expended $38.4 million under these authorizations. Of this amount, $32.8 million was expended during the first nine months of 1997. Any repurchases under the Thermo Cardiosystems' authorizations are funded from working capital. Thermo Voltek's Board of Directors has authorized the repurchase, through April 17, 1998, of up to $10.0 million of its own securities. During the first nine months of 1997, Thermo Voltek had expended $9.0 million under this authorization. Any repurchases under Thermo Voltek's authorization are funded from working capital. The Company expects to continue to pursue its strategy of expanding its business both through the continued development, manufacture, and sale of new products, and through the possible acquisition of companies that will provide additional marketing or manufacturing capabilities and new products. While the Company currently has no agreements to make any acquisitions, it expects that it would finance any acquisitions through a combination of internal funds, additional debt or equity financing from the capital markets, or short-term borrowings from Thermo Electron, although its has no agreement with Thermo Electron that assures 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. PART II - OTHER INFORMATION Item 6 - Exhibits See Exhibit Index on the page immediately preceding exhibits. 17PAGE THERMEDICS 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 4th day of November 1997. THERMEDICS INC. Paul F. Kelleher ------------------------ Paul F. Kelleher Chief Accounting Officer John N. Hatsopoulos ------------------------ John N. Hatsopoulos Vice President and Chief Financial Officer 18PAGE THERMEDICS INC. EXHIBIT INDEX Exhibit Number Document ------------------------------------------------------------------------ 11 Statement re: Computation of Earnings per Share.. 27 Financial Data Schedule. EX-11 2 Exhibit 11 THERMEDICS INC. Computation of Earnings per Share Three Months Ended ---------------------------- September 27, September 28, 1997 1996 -------------------------------------------------------------------------- Computation of Primary Earnings per Share: Net Income (a) $ 6,664,000 $ 6,359,000 ----------- ----------- Shares: Weighted average shares outstanding 36,703,541 36,645,979 Add: Shares issuable from assumed exercise of options (as determined by the application of the treasury stock method) 205,186 437,281 Shares issuable from assumed conversion of subordinated convertible debentures 1,988,984 1,988,984 ----------- ----------- Weighted average shares outstanding, as adjusted (b) 38,897,711 39,072,244 ----------- ----------- Primary Earnings per Share (a) / (b) $ .17 $ .16 =========== =========== PAGE Exhibit 11 THERMEDICS INC. Computation of Earnings per Share Nine Months Ended ---------------------------- September 27, September 28, 1997 1996 -------------------------------------------------------------------------- Computation of Primary Earnings per Share: Net Income (a) $34,136,000 $21,370,000 ----------- ----------- Shares: Weighted average shares outstanding 36,694,755 36,333,577 Add: Shares issuable from assumed exercise of options (as determined by the application of the treasury stock method) 229,093 470,830 Shares issuable from assumed conversion of subordinated convertible debentures 1,988,984 968,993 ----------- ----------- Weighted average shares outstanding, as adjusted (b) 38,912,832 37,773,400 ----------- ----------- Primary Earnings per Share (a) / (b) $ .88 $ .57 =========== =========== EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFEENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-03-1998 SEP-27-1997 165,419 60,404 66,802 4,151 61,505 365,308 53,917 32,385 535,601 75,983 143,464 0 0 3,685 216,911 535,601 224,270 224,270 113,534 113,534 17,752 486 2,185 53,923 14,391 34,136 0 0 0 34,136 .88 0
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