-----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, FlS9zMCSYiajh146KpnWdvA1/CzKHn0NGtpdY++c+yi2niFl4s4XTRT8rKpAWIjc eL2Ym9cQrZyWXODrnOgkDA== 0000721356-98-000012.txt : 19980813 0000721356-98-000012.hdr.sgml : 19980813 ACCESSION NUMBER: 0000721356-98-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980704 FILED AS OF DATE: 19980812 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: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09567 FILM NUMBER: 98683713 BUSINESS ADDRESS: STREET 1: 470 WILDWOOD ST STREET 2: P O BOX 2697 CITY: WOBURN STATE: MA ZIP: 01888-1799 BUSINESS PHONE: 7819383786 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 July 4, 1998. [ ] 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: (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 31, 1998 ---------------------------- ---------------------------- Common Stock, $.10 par value 36,789,389 Actual 41,738,108 Pro Forma PART I - FINANCIAL INFORMATION Item 1 - Financial Statements THERMEDICS INC. Consolidated Balance Sheet (Unaudited) Assets July 4, January 3, (In thousands) 1998 1998 - -------------------------------------------------------------------------- Current Assets: Cash and cash equivalents (includes $58,435 and $175,101 under repurchase agreement with parent company) $123,184 $187,012 Short-term available-for-sale investments, at quoted market value (amortized cost of $51,568 and $58,144) 51,682 58,317 Accounts receivable, less allowances of $5,183 and $4,207 63,763 61,488 Inventories: Raw materials and supplies 27,543 23,857 Work in process 19,896 18,218 Finished goods 20,734 17,499 Prepaid income taxes and expenses 13,808 12,769 -------- -------- 320,610 379,160 -------- -------- Property, Plant, and Equipment, at Cost 60,364 55,597 Less: Accumulated depreciation and amortization 37,675 33,986 -------- -------- 22,689 21,611 -------- -------- Long-term Available-for-sale Investments, at Quoted Market Value (amortized cost of $46,625 and $12,655) 46,625 12,665 -------- -------- Other Assets 11,472 12,139 -------- -------- Cost in Excess of Net Assets of Acquired Companies (Note 2) 148,748 110,977 -------- -------- $550,144 $536,552 ======== ======== 2 THERMEDICS INC. Consolidated Balance Sheet (continued) (Unaudited) Liabilities and Shareholders' Investment July 4, January 3, (In thousands except share amounts) 1998 1998 - -------------------------------------------------------------------------- Current Liabilities: Notes payable and current maturity of long-term obligation (includes $21,000 due to Thermo Electron in 1998; Note 2) $ 28,348 $ 7,498 Accounts payable 19,700 18,020 Accrued payroll and employee benefits 10,151 12,576 Accrued commissions 4,160 3,389 Accrued income taxes 9,308 6,815 Accrued warranty costs 5,190 3,784 Other accrued expenses 16,536 15,449 Due to parent company and affiliated companies 2,228 2,266 -------- -------- 95,621 69,797 -------- -------- Deferred Income Taxes and Other Deferred Items 181 177 -------- -------- Long-term Obligations: Subordinated convertible obligations (Note 5) 122,673 142,750 Other 13 21 -------- -------- 122,686 142,771 -------- -------- Minority Interest 89,867 96,461 -------- -------- Shareholders' Investment (Note 3): Common stock, $.10 par value, 100,000,000 shares authorized; 41,738,108 pro forma shares and 36,846,175 shares issued 4,174 3,685 Capital in excess of par value 110,557 113,913 Retained earnings 131,314 116,034 Treasury stock at cost, 68,186 and 134,172 shares (1,488) (3,449) Accumulated other comprehensive items (Note 7) (2,768) (2,837) -------- -------- 241,789 227,346 -------- -------- $550,144 $536,552 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 3 THERMEDICS INC. Consolidated Statement of Income (Unaudited) Three Months Ended ------------------ July 4, June 28, (In thousands except per share amounts) 1998 1997 - -------------------------------------------------------------------------- Revenues $76,711 $75,996 ------- ------- Costs and Operating Expenses: Cost of revenues 38,872 38,140 Selling, general, and administrative expenses 22,421 21,552 Research and development expenses 6,146 6,227 ------- ------- 67,439 65,919 ------- ------- Operating Income 9,272 10,077 Interest Income 3,281 3,305 Interest Expense (includes $77 to related party in 1998; Note 2) (1,233) (714) Gain on Sale of Investments, Net 13 - ------- ------- Income Before Provision for Income Taxes, Minority Interest, and Extraordinary Item 11,333 12,668 Provision for Income Taxes 4,331 5,174 Minority Interest Expense 1,728 1,988 ------- ------- Income Before Extraordinary Item 5,274 5,506 Extraordinary Item, Net of Provision for Income Taxes of $2,312 (Note 5) 3,433 - ------- ------- Net Income $ 8,707 $ 5,506 ======= ======= Earnings per Share (Notes 5 and 6): Basic $ .21 $ .15 ======= ======= Diluted $ .20 $ .14 ======= ======= Weighted Average Shares (Notes 5 and 6): Basic 41,663 36,697 ======= ======= Diluted 43,494 38,884 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 4 THERMEDICS INC. Consolidated Statement of Income (Unaudited) Six Months Ended ------------------ July 4, June 28, (In thousands except per share amounts) 1998 1997 - -------------------------------------------------------------------------- Revenues $152,372 $148,053 -------- -------- Costs and Operating Expenses: Cost of revenues 77,533 75,101 Selling, general, and administrative expenses 43,482 43,516 Research and development expenses 12,775 11,811 -------- -------- 133,790 130,428 -------- -------- Operating Income 18,582 17,625 Interest Income 6,946 5,942 Interest Expense (includes $77 to related party in 1998; Note 2) (2,439) (983) Gain on Issuance of Stock by Subsidiary - 17,075 Gain on Sale of Investments, Net 31 - -------- -------- Income Before Provision for Income Taxes, Minority Interest, and Extraordinary Item 23,120 39,659 Provision for Income Taxes 9,100 8,938 Minority Interest Expense 3,378 3,249 -------- -------- Income Before Extraordinary Item 10,642 27,472 Extraordinary Item, Net of Provision for Income Taxes of $3,092 (Note 5) 4,638 - -------- -------- Net Income $ 15,280 $ 27,472 ======== ======== Earnings per Share (Notes 5 and 6): Basic $ .37 $ .75 ======== ======== Diluted $ .36 $ .71 ======== ======== Weighted Average Shares (Notes 5 and 6): Basic 40,760 36,690 ======== ======== Diluted 42,709 38,920 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 5 THERMEDICS INC. Consolidated Statement of Cash Flows (Unaudited) Six Months Ended -------------------- July 4, June 28, (In thousands) 1998 1997 - ------------------------------------------------------------------------- Operating Activities: Net income $ 15,280 $ 27,472 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,392 5,411 Provision for losses on accounts receivable 391 285 Gain on issuance of stock by subsidiary - (17,075) Gain on sale of investments, net (31) - Gain on repurchase and exchange of subordinated convertible debentures (Note 5) (7,730) - Minority interest expense 3,378 3,249 Other noncash expenses 484 738 Changes in current accounts, excluding the effects of acquisitions: Accounts receivable 4,641 1,293 Inventories (2,338) (5,897) Prepaid income taxes and expenses (597) (568) Accounts payable (1,596) (518) Other current liabilities (3,849) 2,098 Other (335) - --------- --------- Net cash provided by operating activities 13,090 16,488 --------- --------- Investing Activities: Acquisitions, net of cash acquired (Note 2) (44,195) (3,880) Purchases of available-for-sale investments (126,950) (51,900) Proceeds from sale and maturities of available-for-sale investments 99,975 66,920 Purchases of property, plant, and equipment (3,741) (3,573) Other (503) 97 --------- --------- Net cash provided by (used in) investing activities $ (75,414) $ 7,664 --------- --------- 6 THERMEDICS INC. Consolidated Statement of Cash Flows (continued) (Unaudited) Six Months Ended ------------------ July 4, June 28, (In thousands) 1998 1997 - -------------------------------------------------------------------------- Financing Activities: Net proceeds from issuance of Company and subsidiaries' common stock $ 251 $ 28,674 Proceeds from issuance of short-term obligation to Thermo Electron (Note 2) 21,000 - Purchases of Company and subsidiaries' common stock (11,737) (37,429) Net proceeds from issuance of subordinated convertible debentures - 68,139 Repurchase of subordinated convertible debentures (Note 5) (11,384) - Net increase (decrease) in short-term borrowings (186) 853 International Technidyne transfer from parent company - 350 -------- -------- Net cash provided by (used in) financing activities (2,056) 60,587 -------- -------- Exchange Rate Effect on Cash 552 805 -------- -------- Increase (Decrease) in Cash and Cash Equivalents (63,828) 85,544 Cash and Cash Equivalents at Beginning of Period 187,012 82,800 -------- -------- Cash and Cash Equivalents at End of Period $123,184 $168,344 ======== ======== Noncash Activities (Notes 2 and 5): Fair value of assets of acquired companies $ 54,294 $ 6,240 Cash paid for acquired companies acquired (44,195) (4,307) -------- -------- Liabilities assumed of acquired companies $ 10,099 $ 1,933 ======== ======== Conversions of subsidiaries' convertible obligations $ - $ 895 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 7 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 July 4, 1998, the results of operations for the three- and six-month periods ended July 4, 1998, and June 28, 1997, and the cash flows for the six-month periods ended July 4, 1998, and June 28, 1997. Interim results are not necessarily indicative of results for a full year. The consolidated balance sheet presented as of January 3, 1998, 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 3, 1998, filed with the Securities and Exchange Commission. 2. Acquisition On June 12, 1998, the Company's Thermo Sentron Inc. subsidiary acquired the three businesses that constitute the product-monitoring group of Smiths Industries plc's Graseby Limited subsidiary (the product-monitoring businesses) for $44.2 million in cash, net of cash acquired, and the assumption of certain liabilities. The product-monitoring businesses design, manufacture, and distribute specialized packaged-goods equipment, including checkweighers and metal detectors, for the food and pharmaceutical industries. The product-monitoring businesses are based in the United Kingdom and had combined revenues in calendar 1997 of approximately $46.0 million. To partially finance this acquisition, Thermo Sentron borrowed $21.0 million from Thermo Electron Corporation pursuant to a promissory note due December 1998, bearing interest at the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. This acquisition has been accounted for using the purchase method of accounting, and the results of operations of the product-monitoring businesses have been included in the accompanying financial statements from the date of acquisition. The cost of the acquisition exceeded the estimated fair value of the acquired net assets by $38.6 million, which is being amortized over 40 years. Allocation of the purchase price was based on an estimate of the fair value of the net assets acquired and is subject to adjustment upon finalization of the purchase price allocation. The Company has gathered no information that indicates the final allocation will differ materially from the preliminary estimate. Pro forma data has not been presented as the results of the product-monitoring businesses were not material to the Company's results of operations. 8 3. Common Stock On February 5, 1998, the Company's Board of Directors voted to issue 4,880,533 shares of its common stock to Thermo Electron in exchange for 100% of the stock of TMO TCA Holdings Inc., which is the beneficial owner of 3,355,705 shares of common stock of the Company's Thermo Cardiosystems Inc. subsidiary. The Company's issuance of the 4,880,533 shares of its common stock to Thermo Electron is subject to approval by the Company's shareholders. However, because Thermo Electron is the majority shareholder and intends to vote its shares in favor of the transaction, approval is assured and, therefore, the shares are considered to be outstanding as of February 5, 1998, for purposes of computing weighted average shares. The shares of common stock will be exchanged at their respective fair market values as of February 5, 1998. 4. Offer to Acquire the Outstanding Common Stock of Thermo Voltek Corp. On March 31, 1998, the Company proposed to acquire, through a merger, all of the outstanding shares of common stock of Thermo Voltek Corp. (a publicly traded, majority-owned subsidiary) that the Company does not own, at a price of $7.00 per share in cash. In addition, the proposal contemplates the redemption of Thermo Voltek's $5.3 million principal amount of 3 3/4% subordinated convertible debentures due 2000. As of July 4, 1998, the Company owned 67% of the outstanding common stock of Thermo Voltek. In addition, Thermo Electron owns approximately 3% of the outstanding common stock of Thermo Voltek. On March 31, 1998, complaints were filed by certain shareholders of Thermo Voltek, each attempting to act on behalf of Thermo Voltek's public shareholders. The complaints allege, among other things, that the proposed price of $7.00 per share to be paid to the shareholders of Thermo Voltek is unfair and grossly inadequate. Thermo Voltek has appointed a special committee, comprised of its independent directors, to evaluate the proposal with the assistance of a financial advisor, HSBC Securities, Inc., which is also working with the special committee to evaluate alternatives to the proposal, including the possibility of identifying another buyer of Thermo Voltek. The merger is contingent upon, among other things, the negotiation and execution of a definitive merger agreement; receipt by Thermo Voltek's Board of Directors of an opinion by an investment banking firm that the Company's offer is fair to Thermo Voltek's shareholders (other than the Company and Thermo Electron) from a financial point of view; approval by the holders of a majority of Thermo Voltek's shares, excluding the Company and Thermo Electron; the approval of Thermo Voltek's Board of Directors upon recommendation of its special committee; and clearance by the Securities and Exchange Commission of the proxy materials regarding the proposed transaction. 5. Repurchase and Exchange of Subordinated Convertible Debentures In June 1998, the Company offered holders of its noninterest-bearing subordinated convertible debentures due 2003, convertible at $31.125 per share, the opportunity to exchange such debentures for newly issued 2 7/8% subordinated convertible debentures due 2003, convertible at 9 5. Repurchase and Exchange of Subordinated Convertible Debentures (continued) $14.928 per share. Holders of $21.7 million principal amount of outstanding debentures exchanged such debentures for $15.9 million principal amount of newly issued debentures. This transaction resulted in an extraordinary gain of $3.0 million, net of taxes of $2.1 million, in accordance with the provisions of Emerging Issues Task Force Pronouncement No. 96-19. In addition, earlier in the second quarter of 1998, the Company repurchased $2.7 million principal amount of noninterest-bearing subordinated convertible debentures for $2.1 million in cash, resulting in an extraordinary gain of $0.4 million, net of taxes of $0.2 million. During the first quarter of 1998, the Company and a majority-owned subsidiary repurchased $11.5 million principal amount of subordinated convertible debentures for $9.3 million in cash, resulting in an extraordinary gain of $1.2 million, net of taxes of $0.8 million. The extraordinary gains recorded by the Company increased basic and diluted earnings per share by $.08 in the second quarter of 1998 and $.11 in the first six months of 1998. 6. Earnings per Share Basic and diluted earnings per share were calculated as follows: Three Months Ended Six Months Ended ------------------ ------------------- (In thousands except July 4, June 28, July 4, June 28, per share amounts) 1998 1997 1998 1997 - --------------------------------------------------------------------------- Basic Net income $ 8,707 $ 5,506 $15,280 $27,472 ------- ------- ------- ------- Weighted average shares 36,782 36,697 36,764 36,690 Effect of shares issuable in exchange for Thermo Cardiosystems common stock 4,881 - 3,996 - ------- ------- ------- ------- Pro forma basic weighted average shares 41,663 36,697 40,760 36,690 ------- ------- ------- ------- Basic earnings per share $ .21 $ .15 $ .37 $ .75 ======= ======= ======= ======= 10 6. Earnings per Share (continued) Three Months Ended Six Months Ended ------------------ ------------------ (In thousands except July 4, June 28, July 4, June 28, per share amounts) 1998 1997 1998 1997 - -------------------------------------------------------------------------- Diluted Net income $ 8,707 $ 5,506 $15,280 $27,472 Effect of: Convertible obligations 1 - 1 - Majority-owned subsidiaries' dilutive securities (24) (11) (59) (19) ------- ------- ------- ------- Income available to common shareholders, as adjusted $ 8,684 $ 5,495 $15,222 $27,453 ======= ======= ======= ======= Basic weighted average shares 41,663 36,697 40,760 36,690 Effect of: Convertible obligations 1,722 1,989 1,827 1,989 Stock options 109 198 122 241 ------- ------- ------- ------- Pro forma weighted average shares, as adjusted 43,494 38,884 42,709 38,920 ------- ------- ------- ------- Diluted earnings per share $ .20 $ .14 $ .36 $ .71 ======= ======= ======= ======= The computation of diluted earnings per share excludes the effect of assuming the exercise of certain outstanding stock options because the effect would be antidilutive. As of July 4, 1998, there were 1,090,850 of such options outstanding, with exercise prices ranging from $15.52 to $29.73 per share. 7. Comprehensive Income During the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This pronouncement sets forth requirements for disclosure of the Company's comprehensive income and accumulated other comprehensive items. In general, comprehensive income combines net income and "other comprehensive items," which represent certain amounts that are reported as components of shareholders' investment in the accompanying balance sheet, including foreign currency translation adjustments and unrealized net-of-tax gains and losses from available-for-sale investments. During the second quarter of 1998 and 1997, the Company's comprehensive income totaled $8.9 million and $5.6 million, respectively. During the first six months of 1998 and 1997, the Company's comprehensive income totaled $15.3 million and $25.8 million, respectively. 11 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Forward-looking Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the fiscal year ended January 3, 1998, filed with the Securities and Exchange Commission. Overview The Company's business is divided into two segments: Instruments and Other Equipment, and Biomedical Products. The Instruments and Other Equipment segment includes the Company's Thermo Sentron Inc. subsidiary, which develops, manufactures, and sells high-speed precision-weighing and inspection equipment for industrial production and packaging lines; its Thermedics Detection Inc. subsidiary, which develops, manufactures, and markets high-speed detection instruments used in a variety of on-line industrial process applications, security applications, and laboratory analysis; and its Thermo Voltek Corp. subsidiary, which manufactures electronics-test instruments and a range of products related to power amplification, conversion, and quality. On June 12, 1998, Thermo Sentron acquired the three businesses that constitute the product-monitoring group of Smiths Industries plc's Graseby Limited subsidiary (the product-monitoring businesses; Note 2). As part of its Biomedical Products segment, the Company's Thermo Cardiosystems Inc. subsidiary manufactures two implantable left ventricular-assist systems (LVAS): a pneumatic, or air-driven, system and an electric version. 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 1994. Until FDA approval has been obtained, the Company may not earn a profit on the sale in the U.S. of other products, such as the electric LVAS, currently used in clinical studies. Thermo Cardiosystems' International Technidyne Corporation subsidiary 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. The Company also develops and manufactures enteral nutrition-delivery systems and a line of medical-grade polymers used in medical disposables and in nonmedical, industrial applications, including safety glass and automotive coatings. 12 Overview (continued) 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 Second Quarter 1998 Compared With Second Quarter 1997 Total revenues were $76.7 million in the second quarter of 1998, compared with $76.0 million in the second quarter of 1997. Instruments and Other Equipment segment revenues were $56.3 million in 1998, compared with $56.0 million in 1997. An increase of $3.1 million in revenues from Thermo Sentron was offset in part by decreases in revenues of $1.6 million and $1.2 million at Thermedics Detection and Thermo Voltek, respectively. Revenues from Thermo Sentron increased to $21.6 million in the second quarter of 1998 from $18.5 million in the second quarter of 1997, primarily due to the inclusion of $2.6 million of revenues from the acquisitions of Westerland Engineering Ltd. in July 1997, and the product-monitoring businesses on June 12, 1998, and, to a lesser extent, increased product demand. These increases were offset in part by a decrease of $0.7 million due to the impact of a stronger U.S. dollar relative to currencies in foreign countries in which Thermo Sentron operates. Revenues at Thermedics Detection decreased to $24.0 million 1998 from $25.6 million in 1997. Revenues from Thermedics Detection's EGIS(R) explosives-detection systems and related services decreased to $2.2 million in 1998 from $3.1 million in 1997, primarily due to a decline in international demand. Revenues from Thermedics Detection's industrial process instruments and related services decreased to $8.1 million in 1998 from $8.5 million in 1997, primarily as a result of the fulfillment in 1997 of a mandated product-line upgrade for The Coca-Cola Company to its existing installed base of Alexus(R) systems. This decrease was partially offset by an increase in InScan(R) product sales. Revenues from Thermo Voltek decreased to $10.7 million in 1998 from $11.9 million in 1997, primarily due to a decline in demand for electrostatic discharge (ESD) test equipment. Biomedical Products segment revenues increased to $20.4 million in the second quarter of 1998 from $20.0 million in the second quarter of 1997. Revenues from Thermo Cardiosystems increased to $16.1 million in 1998 from $15.9 million in 1997. Increases in revenues from International Technidyne and the air-driven LVAS were offset in part by a decrease in revenues from the electric LVAS. In June 1998, Thermo Cardiosystems 13 Second Quarter 1998 Compared With Second Quarter 1997 (continued) received approval from the FDA for engineering advancements made to the electric LVAS. The FDA also presented additional questions regarding certain other aspects of Thermo Cardiosystems' submission. Thermo Cardiosystems responded to these questions in July 1998 and is currently awaiting the FDA's response. The gross profit margin decreased to 49% in the second quarter of 1998 from 50% in the second quarter of 1997. The gross profit margin for the Instruments and Other Equipment segment decreased to 47% in 1998 from 49% in 1997. This decline was the result of a decrease in higher-margin Alexus service revenues at Thermedics Detection and, to a lesser extent, lower gross profit margins at Thermo Sentron associated with the sale of inventories revalued at the time of the acquisition of the product-monitoring businesses . The gross profit margin for the Biomedical Products segment increased to 55% in the second quarter of 1998 from 52% in the second quarter of 1997. The gross profit margin at Thermo Cardiosystems increased as a result of an increase in revenues from higher-margin International Technidyne products and, to a lesser extent, a shift in the sales mix to higher-margin air-driven LVAS. Selling, general, and administrative expenses as a percentage of revenues increased to 29% in the second quarter of 1998 from 28% in the second quarter of 1997. The increase is primarily due to an increase in marketing efforts at Thermo Cardiosystems due to increased promotional expenses at International Technidyne. This increase was offset in part by a decrease in Thermo Voltek's selling, general, and administrative expenses as a percentage of revenues due to efficiencies gained from operational, organizational, and personnel changes implemented in 1997. Research and development expenses were relatively unchanged at $6.1 million in the second quarter of 1998, compared with $6.2 million in the second quarter of 1997. Increased expenses at Thermo Cardiosystems, primarily due to expenses incurred in association with a clinical trial being conducted by Thermo Cardiosystems to evaluate the electric LVAS as an alternative to medical therapy and, to a lesser extent, expenses associated with the development of Thermo Cardiosystems' HeartMate II system, were more than offset by decreases in research and development expenses at Thermo Voltek and Thermedics Detection due to the completion of certain projects and a reallocation of resources to third-party contracts, respectively. Interest income was $3.3 million in both the second quarter of 1998 and 1997. Interest expense increased to $1.2 million in 1998 from $0.7 million in 1997, primarily as a result of Thermo Cardiosystems' issuance of $70.0 million principal amount of 4 3/4% subordinated convertible debentures in May 1997 and Thermo Sentron's borrowing of $21.0 million from Thermo Electron to partially finance the acquisition of the product-monitoring businesses. 14 Second Quarter 1998 Compared With Second Quarter 1997 (continued) The effective tax rates were 38% and 41% in the second quarter of 1998 and 1997, respectively. 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. The effective tax rate decreased due to a decrease in the relative effect of nondeductible expenses. Minority interest expense decreased to $1.7 million in the second quarter of 1998 from $2.0 million in the second quarter of 1997, primarily due to lower profits at Thermo Cardiosystems and the Company's increased percentage ownership of Thermo Cardiosystems, Thermo Voltek, and Thermedics Detection. This was offset in part by higher profits at Thermo Voltek, and the effect on minority interest of the sale of Orion Research Inc. to Thermedics Detection in May 1998. In June 1998, the Company exchanged $21.7 million principal amount of noninterest-bearing subordinated convertible debentures for $15.9 million principal amount 2 7/8% subordinated convertible debentures due 2003, resulting in an extraordinary gain of $3.0 million, net of taxes of $2.1 million (Note 5). In addition, earlier in the second quarter of 1998, the Company repurchased $2.7 million principal amount of noninterest-bearing subordinated convertible debentures for $2.1 million in cash, resulting in an extraordinary gain of $0.4 million, net of taxes of $0.2 million (Note 5). The Company is currently assessing the potential impact of the year 2000 on the processing of date-sensitive information by the Company's computerized information systems and on products sold as well as products purchased by the Company. The Company believes that its internal information systems and current products are either year 2000 compliant or will be so prior to the year 2000 without incurring material costs. There can be no assurance, however, that the Company will not experience unexpected costs and delays in achieving year 2000 compliance for its internal information systems and current products, which could result in a material adverse effect on the Company's future results of operations. The Company is presently assessing the effect that the year 2000 issue may have on its previously sold products. The Company is also assessing whether its key suppliers are adequately addressing this issue and the effect this might have on the Company. The Company has not completed its analysis and is unable to conclude at this time that the year 2000 issue as it relates to its previously sold products and products purchased from key suppliers is not reasonably likely to have a material adverse effect on the Company's future results of operations. First Six Months 1998 Compared With First Six Months 1997 Total revenues were $152.4 million in the first six months of 1998, compared with $148.1 million in the first six months of 1997. Instruments and Other Equipment segment revenues were $110.4 million in 1998 compared to $109.2 million in 1997. An increase of $4.1 million in revenues from Thermo Sentron was offset in part by a decrease in revenues of $3.5 million at Thermedics Detection. 15 First Six Months 1998 Compared With First Six Months 1997 (continued) Revenues from Thermo Sentron increased to $40.6 million in the first six months of 1998 from $36.5 million in the first six months of 1997, primarily due to the acquisitions of Westerland in July 1997 and the product monitoring businesses on June 12, 1998, and increased product demand. 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 at Thermedics Detection decreased to $47.7 million in 1998 from $51.2 million in 1997. Revenues from Thermedics Detection's industrial process instruments and related services decreased to $15.2 million in 1998 from $19.2 million in 1997, primarily as a result of the fulfillment in 1997 of a mandated product-line upgrade for The Coca-Cola Company to its existing installed base of Alexus systems and a $0.8 million decrease in revenues from moisture analyzers, primarily due to a slowdown in product demand in North America. These decreases in industrial process instruments revenues were offset in part by an increase in revenues from Thermedics Detection's InScan product line. Revenue from EGIS explosives-detection systems and related services increased to $4.6 million in 1998 from $4.2 million in 1997, primarily due to $1.1 million of shipments under a contract with the U.S. Federal Aviation Administration (FAA). Product shipments under this contract were completed in the first quarter of 1998. Revenues from Thermo Voltek were $22.2 million in 1998, compared with $21.6 million in 1997. Increased revenue of $1.0 million due to the acquisition of Milmega Ltd. in April 1997 was offset in part by a decline in demand for ESD test equipment. Biomedical Products segment revenues increased to $42.0 million in the first six months of 1998 from $38.8 million in the first six months of 1997. Revenues from Thermo Cardiosystems increased to $32.6 million in 1998 from $30.8 million in 1997, primarily due to an increase in revenues from International Technidyne and its air-driven LVAS, offset in part by a decrease in revenues from its electric LVAS. In addition, revenues from the Company's Polymer Products division increased $1.0 million due to an increase in demand for its polymer film product line. The gross profit margin was unchanged at 49% in the first six months of 1998 and 1997. The gross profit margin for the Instruments and Other Equipment segment decreased to 47% in 1998 from 48% in 1997. This decrease is the result of a decline in the gross profit margin at Thermedics Detection, primarily due to a decrease in higher-margin service revenues, as well as higher costs relating to Thermedics Detection's service contract with the FAA. The gross profit margin for the Biomedical Products segment increased to 55% in the first six months of 1998 from 53% in the first six months of 1997. The gross profit margin at Thermo Cardiosystems increased as a result of an increase in revenues from higher-margin International Technidyne products and, to a lesser extent, a shift in the sales mix to higher-margin air-driven LVAS. Selling, general, and administrative expenses as a percentage of revenues were unchanged at 29% in the first six months of 1998 and 1997. 16 First Six Months 1998 Compared With First Six Months 1997 (continued) A decrease in Thermo Voltek's selling, general, and administrative expenses as a percentage of revenues due to efficiencies gained from operational, organizational, and personnel changes implemented in 1997 was offset by an increase in selling, general, and administrative expenses at Thermo Cardiosystems due to increased promotional expenses at International Technidyne. Research and development expenses increased to $12.8 million in the first six months of 1998 from $11.8 million in the first six months of 1997. The increase was primarily due to increased expenses at Thermo Cardiosystems in association with a clinical trial being conducted to evaluate the electric LVAS as an alternative to medical therapy and, to a lesser extent, expenses associated with the development of Thermo Cardiosystems' HeartMate II system. Interest income increased to $6.9 million in the first six months of 1998 from $5.9 million in the first six months of 1997, primarily due to higher average invested balances at Thermo Cardiosystems as a result of its issuance of $70.0 million principal amount of 4 3/4% subordinated convertible debentures in May 1997 and at Thermedics Detection as a result of its March 1997 initial public offering of common stock. Interest expense increased to $2.4 million in 1998 from $1.0 million in 1997, primarily as a result of Thermo Cardiosystems' issuance of 4 3/4% subordinated convertible debentures and Thermo Sentron's borrowing from Thermo Electron to partially finance its acquisition of the product-monitoring businesses. During the first six months of 1997, the Company recorded a nontaxable gain on issuance of stock by subsidiary of $17.1 million as a result of the sale of stock by Thermedics Detection. The effective tax rates were 39% and 23% in the first six months of 1998 and 1997, respectively. The effective tax rate in the 1998 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. The effective tax rate in 1997 was below the statutory federal income tax rate primarily due to the nontaxable gain on issuance of stock by subsidiary, 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 increased to $3.4 million in the first six months of 1998 from $3.2 million in the first six months of 1997, primarily due to higher profits at Thermo Voltek, offset in part by the effect on minority interest expense of the Company's increased ownership of Thermo Voltek and Thermo Cardiosystems. In June 1998, the Company exchanged $21.7 million principal amount of noninterest-bearing subordinated convertible debentures for $15.9 million principal amount 2 7/8% subordinated convertible debentures due 2003, resulting in an extraordinary gain of $3.0 million, net of related income taxes of $2.1 million (Note 5). In addition, the Company and a majority-owned subsidiary repurchased $14.2 million principal amount of subordinated convertible debentures for $11.4 million in cash, resulting in an extraordinary gain of $1.6 million, net of related income taxes of $1.0 million (Note 5). 17 Liquidity and Capital Resources Consolidated working capital was $225.0 million at July 4, 1998, compared with $309.4 million at January 3, 1998. Cash, cash equivalents, and short- and long-term available-for-sale investments were $221.5 million at July 4, 1998, compared with $258.0 million at January 3, 1998. Of the $221.5 million balance at July 4, 1998, $191.1 million was held by the Company's majority-owned subsidiaries, and the remainder by the Company and its wholly owned subsidiaries. During the first six months of 1998, $13.1 million of cash was provided by operating activities. Cash of $4.6 million was provided by a decrease in accounts receivable, primarily at Thermo Sentron, Thermo Cardiosystems due to improved collections, and at Thermedics Detection due to a decrease in revenues. This increase in cash was partially offset by cash of $3.8 million used to fund a decrease in other current liabilities, primarily accrued payroll and related benefits. Excluding available-for-sale investment activity, the Company's primary investing activity during the first six months of 1998 was the purchase of the product-monitoring group of Smiths Industries plc's Graseby Limited subsidiary by Thermo Sentron for $44.2 million, net of cash acquired (Note 2). The Company expended $3.7 million for the purchases of property, plant, and equipment during the first six months of 1998. During the remainder of 1998, the Company expects to make capital expenditures of approximately $6.0 million. During the first six months of 1998, the Company's financing activities used cash of $2.1 million. Thermo Sentron borrowed $21.0 million from Thermo Electron to partially finance the acquisition of the product-monitoring businesses. The Company and a majority-owned subsidiary expended $11.4 million for the repurchase of subordinated convertible debentures (Note 5). The Company intends, for the foreseeable future, to maintain at least 50% ownership of its majority-owned subsidiaries. This may require the Company to purchase additional 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. During the first six months of 1998, the Company and certain of its majority-owned subsidiaries expended $8.9 million and $14.2 million, respectively, to purchase securities of the Company and certain of its majority-owned subsidiaries. These purchases were made pursuant to authorizations by the Company and the applicable majority-owned subsidiaries' Boards of Directors. In March 1998, the Company's Board of Directors authorized the repurchase, through March 5, 1999, of up to an additional $10.0 million of its own securities and those of its majority- 18 Liquidity and Capital Resources owned subsidiaries in the open market, or in negotiated transactions. As of July 4, 1998, $0.3 million and $3.7 million remained under the Company's and its majority-owned subsidiaries' authorizations, respectively. Any such purchases 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. In March 1998, the Company proposed to acquire, through a merger, all of the outstanding shares of Thermo Voltek's common stock that the Company does not own, as well as redeem Thermo Voltek's $5.3 million principal amount of 3 3/4% subordinated convertible debentures due 2000. The total transaction cost is estimated to be approximately $27 million, which would be paid from internal funds. While the Company currently has no other 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 that its existing resources are sufficient to meet the capital requirements of its existing operations for the foreseeable future. PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders On June 1, 1998, at the Annual Meeting of Shareholders, the shareholders elected seven incumbent directors to a one-year term expiring in 1999. The Directors elected at the meeting were Peter O. Crisp, Paul F. Ferrari, Dr. George N. Hatsopoulos, John N. Hatsopoulos, John T. Keiser, John W. Wood Jr., and Dr. Nicholas T. Zervas. Mr. Crisp received 34,834,890 shares voted in favor of his election and 535,341 shares voted against. Mr. Ferrari received 34,830,190 shares voted in favor of his election and 540,041 shares voted against. Dr. Hatsopoulos received 34,832,899 shares voted in favor of his election and 537,332 shares voted against. Mr. Hatsopoulos received 34,835,261 shares voted in favor of his election and 534,970 shares voted against. Mr. Keiser received 34,834,065 shares voted in favor of his election and 536,166 shares voted against. Mr. Wood received 34,834,011 shares voted in favor of his election and 536,220 voted against. Dr. Zervas received 34,832,040 shares voted in favor of his election and 538,191 shares voted against. No abstentions or broker nonvotes were recorded on the election of directors. Item 5 - Other Information Pursuant to recent amendments to the rules relating to proxy statements under the Securities Exchange Act of 1934, as amended (the Exchange Act), shareholders of the Company are hereby notified that any shareholder proposal not included in the Company's proxy materials for its 1999 Annual Meeting of Shareholders (the Annual Meeting) in 19 Item 5 - Other Information (continued) accordance with Rule 14a-8 under the Exchange Act will be considered untimely for the purposes of Rules 14a-4 and 14a-5 under the Exchange Act if notice thereof is received by the Company after March 15, 1999. Management proxies will be authorized to exercise discretionary voting authority with respect to any shareholder proposal not included in the Company's proxy materials for the Annual Meeting unless (a) the Company receives notice of such proposal by March 15, 1999, and (b) the conditions set forth in Rule 14a-4(c)(2)(i)-(iii) under the Exchange Act are met. Item 6 - Exhibits See Exhibit Index on the page immediately preceding exhibits. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 12th day of August 1998. THERMEDICS INC. Paul F. Kelleher --------------------------- Paul F. Kelleher Chief Accounting Officer John N. Hatsopoulos --------------------------- John N. Hatsopoulos Chief Financial Officer and Senior Vice President 21 EXHIBIT INDEX Exhibit Number Description of Exhibit - ----------------------------------------------------------------------------- 27 Financial Data Schedule. 22 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED JULY 4, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS JAN-02-1999 JUL-04-1998 123,184 51,682 68,946 5,183 68,173 320,610 60,364 37,675 550,144 95,621 122,686 0 0 4,174 237,615 550,144 152,372 152,372 77,533 77,533 12,775 391 2,439 23,120 9,100 10,642 0 4,638 0 15,280 0.37 0.36
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