-----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, BtLjl829WxU+Pl94GMyBtIaO3VN2aAHPyu5qmHUWmVSgyjuz8wj4rV3QA+grbTjc 7jU0VQWM3lyWcSPV8nWcPg== 0000721356-98-000018.txt : 19981110 0000721356-98-000018.hdr.sgml : 19981110 ACCESSION NUMBER: 0000721356-98-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981003 FILED AS OF DATE: 19981109 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: 98740901 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 October 3, 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 October 30, 1998 ---------------------------- ------------------------------- Common Stock, $.10 par value 36,809,777 Actual 41,690,310 Pro Forma PART I - FINANCIAL INFORMATION Item 1 - Financial Statements - ----------------------------- THERMEDICS INC. Consolidated Balance Sheet (Unaudited) Assets October 3, January 3, (In thousands) 1998 1998 - -------------------------------------------------------------------------- Current Assets: Cash and cash equivalents (includes $71,868 and $175,101 under repurchase agreement with parent company) $119,543 $187,012 Short-term available-for-sale investments, at quoted market value (amortized cost of $74,029 and $58,144) 74,152 58,317 Accounts receivable, less allowances of $5,049 and $4,207 62,616 61,488 Inventories: Raw materials and supplies 26,746 23,857 Work in process 18,018 18,218 Finished goods 20,699 17,499 Prepaid income taxes and expenses 15,772 12,769 -------- -------- 337,546 379,160 -------- -------- Property, Plant, and Equipment, at Cost 62,089 55,597 Less: Accumulated depreciation and amortization 39,687 33,986 -------- -------- 22,402 21,611 -------- -------- Long-term Available-for-sale Investments, at Quoted Market Value (amortized cost of $38,860 and $12,655) 38,901 12,665 -------- -------- Other Assets 11,470 12,139 -------- -------- Cost in Excess of Net Assets of Acquired Companies (Note 2) 148,700 110,977 -------- -------- $559,019 $536,552 ======== ======== 2 THERMEDICS INC. Consolidated Balance Sheet (continued) (Unaudited) Liabilities and Shareholders' Investment October 3, January 3, (In thousands except share amounts) 1998 1998 - -------------------------------------------------------------------------- Current Liabilities: Notes payable and current maturity of long-term obligation (includes $21,000 to parent company at October 3, 1998) $ 27,885 $ 7,498 Accounts payable 18,564 18,020 Accrued payroll and employee benefits 12,350 12,576 Accrued income taxes 12,099 6,815 Accrued warranty costs 5,089 3,784 Other accrued expenses 26,953 18,838 Due to parent company and affiliated companies 2,010 2,266 -------- -------- 104,950 69,797 -------- -------- Deferred Income Taxes and Other Deferred Items 183 177 -------- -------- Long-term Obligations: Subordinated convertible obligations (Note 5) 122,673 142,750 Other 5 21 -------- -------- 122,678 142,771 -------- -------- Minority Interest 87,600 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 106,352 113,913 Retained earnings 135,592 116,034 Treasury stock at cost, 47,798 and 134,172 shares (1,036) (3,449) Accumulated other comprehensive items (Note 7) (1,474) (2,837) -------- -------- 243,608 227,346 -------- -------- $559,019 $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 ------------------------- October 3, September 27, (In thousands except per share amounts) 1998 1997 - -------------------------------------------------------------------------- Revenues $81,515 $76,217 ------- ------- Costs and Operating Expenses: Cost of revenues 44,061 38,433 Selling, general, and administrative expenses 23,189 20,335 Research and development expenses 6,768 5,941 ------- ------- 74,018 64,709 ------- ------- Operating Income 7,497 11,508 Interest Income 3,099 3,531 Interest Expense (includes $304 to parent company in 1998) (1,628) (1,202) Gain on Sale of Investments, Net - 427 ------- ------- Income Before Provision for Income Taxes and Minority Interest 8,968 14,264 Provision for Income Taxes 3,504 5,453 Minority Interest Expense 1,186 2,147 ------- ------- Net Income $ 4,278 $ 6,664 ======= ======= Earnings per Share (Note 6): Basic $ .10 $ .18 ======= ======= Diluted $ .10 $ .17 ======= ======= Weighted Average Shares (Note 6): Basic 41,675 36,704 ======= ======= Diluted 43,764 38,898 ======= ======= The accompanying notes are an integral part of these consolidated financial statements. 4 THERMEDICS INC. Consolidated Statement of Income (Unaudited) Nine Months Ended ------------------------- October 3, September 27, (In thousands except per share amounts) 1998 1997 - -------------------------------------------------------------------------- Revenues $233,887 $224,270 -------- -------- Costs and Operating Expenses: Cost of revenues 121,594 113,534 Selling, general, and administrative expenses 66,671 63,851 Research and development expenses 19,543 17,752 -------- -------- 207,808 195,137 -------- -------- Operating Income 26,079 29,133 Interest Income 10,045 9,473 Interest Expense (includes $384 to parent company in 1998) (4,067) (2,185) Gain on Issuance of Stock by Subsidiary - 17,075 Gain on Sale of Investments, Net 31 427 -------- -------- Income Before Provision for Income Taxes, Minority Interest, and Extraordinary Item 32,088 53,923 Provision for Income Taxes 12,604 14,391 Minority Interest Expense 4,564 5,396 -------- -------- Income Before Extraordinary Item 14,920 34,136 Extraordinary Item, Net of Provision for Income Taxes of $3,092 (Note 5) 4,638 - -------- -------- Net Income $ 19,558 $ 34,136 ======== ======== Earnings per Share (Notes 5 and 6): Basic $ .48 $ .93 ======== ======== Diluted $ .46 $ .88 ======== ======== Weighted Average Shares (Notes 5 and 6): Basic 41,065 36,695 ======== ======== Diluted 43,061 38,913 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 5 THERMEDICS INC. Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended -------------------------- October 3, September 27, (In thousands) 1998 1997 - -------------------------------------------------------------------------- Operating Activities: Net income $ 19,558 $ 34,136 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,481 8,287 Provision for losses on accounts receivable 569 486 Gain on issuance of stock by subsidiary - (17,075) Gain on sale of investments, net (31) (427) Minority interest expense 4,564 5,396 Gain on repurchase and exchange of subordinated convertible debentures (Note 5) (7,730) - Other noncash expenses 712 698 Changes in current accounts, excluding the effects of acquisitions: Accounts receivable 5,464 (478) Inventories 545 (7,490) Prepaid income taxes and expenses (681) (713) Accounts payable (2,358) (952) Other current liabilities 1,045 4,577 Other (332) - --------- --------- Net cash provided by operating activities 29,806 26,445 --------- --------- Investing Activities: Acquisitions, net of cash acquired (Note 2) (44,196) (5,658) Purchases of available-for-sale investments (169,235) (71,900) Proceeds from sale and maturities of available-for-sale investments 127,560 86,884 Purchases of property, plant, and equipment (5,525) (5,015) Other (653) 117 --------- --------- Net cash provided by (used in) investing activities $ (92,049) $ 4,428 --------- --------- 6 THERMEDICS INC. Consolidated Statement of Cash Flows (continued) (Unaudited) Nine Months Ended ------------------------- October 3, September 27, (In thousands) 1998 1997 - -------------------------------------------------------------------------- Financing Activities: Net proceeds from issuance of Company and subsidiaries' common stock $ 438 $ 28,929 Proceeds from issuance of short-term obligation to Thermo Electron (Note 2) 21,000 - Purchases of Company and subsidiaries' common stock (14,744) (49,055) Net proceeds from issuance of subordinated convertible debentures - 68,030 Repurchase of subordinated convertible debentures (Note 5) (11,384) - Net increase (decrease) in short-term borrowings (1,000) 2,705 International Technidyne transfer from parent company - 350 --------- --------- Net cash provided by (used in) financing activities (5,690) 50,959 --------- --------- Exchange Rate Effect on Cash 464 787 --------- --------- Increase (Decrease) in Cash and Cash Equivalents (67,469) 82,619 Cash and Cash Equivalents at Beginning of Period 187,012 82,800 --------- --------- Cash and Cash Equivalents at End of Period $ 119,543 $ 165,419 ========= ========= Noncash Activities (Note 2): Fair value of assets of acquired companies $ 56,433 $ 9,306 Cash paid for acquired companies acquired (44,196) (6,268) --------- --------- Liabilities assumed of acquired companies $ 12,237 $ 3,038 ========= ========= Conversions of subsidiaries' convertible obligations $ - $ 4,650 ========= ========= 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 October 3, 1998, the results of operations for the three- and nine-month periods ended October 3, 1998, and September 27, 1997, and the cash flows for the nine-month periods ended October 3, 1998, and September 27, 1997. Interim results are not necessarily indicative of results for a full year. 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 constituted 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 $39.0 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. To date, the Company has gathered no information that indicates the final purchase price 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, other than shares owned by Thermo Electron, 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 October 3, 1998, the Company owned 66% 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 appointed a special committee, comprised of its independent directors, to evaluate the proposal with the assistance of a financial advisor, HSBC Securities, Inc. In September 1998, Thermo Voltek's Board of Directors, upon recommendation of the special committee, voted to proceed with the Company's proposal. The merger is still subject to, among other things, the negotiation and execution of a definitive merger agreement; approval by the holders of a majority of Thermo Voltek's shares, excluding the Company and Thermo Electron; 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 $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 9 5. Repurchase and Exchange of Subordinated Convertible Debentures (continued) 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 its 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 $.11 in the first nine months of 1998. 6. Earnings per Share Basic and diluted earnings per share were calculated as follows: Three Months Ended Nine Months Ended ------------------ ------------------ (In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27, per share amounts) 1998 1997 1998 1997 - -------------------------------------------------------------------------- Basic Net Income $ 4,278 $ 6,664 $19,558 $34,136 ------- ------- ------- ------- Weighted Average Shares 36,794 36,704 36,774 36,695 Effect of Shares Issuable in Exchange for Thermo Cardiosystems Common Stock 4,881 - 4,291 - ------- ------- ------- ------- Pro Forma Basic Weighted Average Shares 41,675 36,704 41,065 36,695 ------- ------- ------- ------- Basic Earnings per Share $ .10 $ .18 $ .48 $ .93 ======= ======= ======= ======= 10 6. Earnings per Share (continued) Three Months Ended Nine Months Ended ------------------ ------------------ (In thousands except Oct. 3, Sept. 27, Oct. 3, Sept. 27, per share amounts) 1998 1997 1998 1997 - -------------------------------------------------------------------------- Diluted Net Income $ 4,278 $ 6,664 $19,558 $34,136 Effect of: Convertible obligations 68 - 70 - Majority-owned subsidiaries' dilutive securities (6) (14) (24) (30) ------- ------- ------- ------- Income Available to Common Shareholders, as Adjusted $ 4,340 $ 6,650 $19,604 $34,106 ------- ------- ------- ------- Pro Forma Basic Weighted Average Shares 41,675 36,704 41,065 36,695 Effect of: Convertible obligations 2,028 1,989 1,894 1,989 Stock options 61 205 102 229 ------- ------- ------- ------- Pro Forma Weighted Average Shares, as Adjusted 43,764 38,898 43,061 38,913 ------- ------- ------- ------- Diluted Earnings per Share $ .10 $ .17 $ .46 $ .88 ======= ======= ======= ======= 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 October 3, 1998, there were 1,366,650 such options outstanding, with exercise prices ranging from $12.43 to $29.73 per share. 7. Comprehensive Income During the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This pronouncement sets forth requirements for disclosure of the Company's comprehensive income and accumulated other comprehensive items. In general, comprehensive income combines net income and "other comprehensive items," which 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 third quarter of 1998 and 1997, the Company's comprehensive income totaled $5.3 million and $6.3 million, respectively. During the first nine months of 1998 and 1997, the Company's comprehensive income totaled $20.6 million and $32.1 million, respectively. 11 8. Proposed Reorganization On August 12, 1998, Thermo Electron announced a proposed reorganization involving certain of Thermo Electron's subsidiaries, including the Company. Under this plan, the Company may acquire Thermo Electron's wholly owned biomedical group for shares of Company common stock. In addition, the Company's equity interests in Thermo Sentron Inc., Thermedics Detection Inc., and Thermo Voltek Corp. subsidiaries may be transferred to Thermo Electron for shares of common stock of the Company. Thermo Electron may, in turn, transfer such equity interests in Thermo Sentron and Thermedics Detection to Thermo Instrument, in exchange for cash. The proposed transactions are subject to a number of conditions, as outlined in the Company's current Report on Form 8-K for events occurring on August 12, 1998, filed with the Securities and Exchange Commission. 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 packaging lines in the food, pharmaceutical, and other diverse industries, and for producers of bulk materials; its Thermedics Detection Inc. subsidiary, which develops, manufactures, and markets high-speed detection instruments used in a variety of on-line industrial process and quality-control applications, security applications, and laboratory analyses; and its Thermo Voltek Corp. subsidiary, which manufactures a range of products related to power amplification and conversion, as well as instruments that test electronic systems and components. On June 12, 1998, Thermo Sentron acquired the three businesses that constituted the product-monitoring group of Smiths Industries plc's Graseby Limited subsidiary (the product-monitoring businesses; Note 2). 12 Overview (continued) 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 to provide long-term cardiac support for patients not eligible for a heart transplant. 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. In September 1998, the Company announced that the FDA granted approval for commercial sale in the U.S. of the electric LVAS as a bridge to transplant, and as a result Thermo Cardiosystems has become eligible to earn a profit on the sale of the electric LVAS. Until FDA approval has been obtained, the Company may not earn a profit on the sale in the U.S. of other products 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. 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 1998 Compared With Third Quarter 1997 Total revenues were $81.5 million in the third quarter of 1998, compared with $76.2 million in the third quarter of 1997. Instruments and Other Equipment segment revenues were $61.3 million in 1998, compared with $56.9 million in 1997. An increase of $9.6 million in revenues from Thermo Sentron was offset in part by decreases in revenues of $2.7 million and $2.5 million at Thermedics Detection and Thermo Voltek, respectively. Revenues from Thermo Sentron increased to $29.1 million in the third quarter of 1998 from $19.5 million in the third quarter of 1997, primarily due to the inclusion of $11.0 million of revenues from the acquisition of the product-monitoring businesses on June 12, 1998. This increase was offset in part by a decrease of $0.9 million due to a decrease in demand in Asia and Europe. Revenues at Thermedics Detection 13 Third Quarter 1998 Compared With Third Quarter 1997 (continued) decreased to $23.6 million in 1998 from $26.2 million in 1997. Revenues from Thermedics Detection's laboratory products instruments and related services decreased to $13.0 million in 1998 from $14.1 million in 1997, primarily due to a decrease in worldwide demand. Revenues from Thermedics Detection's industrial process instruments and related services decreased to $7.9 million in 1998 from $9.0 million in 1997, primarily due to a decrease in large corporate orders for near-infrared analyzers and related products. Revenues from Thermedics Detection's EGIS(R) explosives-detection systems and related services decreased to $2.4 million in 1998 from $2.8 million in 1997, primarily due to a decline in international demand. Revenues from Thermo Voltek decreased to $8.7 million in 1998 from $11.1 million in 1997, primarily due to a decline in demand for certain lower-margin products in Europe and for electrostatic discharge (ESD) test equipment for the semiconductor industry in Asia. Biomedical Products segment revenues increased to $20.2 million in the third quarter of 1998 from $19.4 million in the third quarter of 1997. Revenues from Thermo Cardiosystems increased to $15.8 million in 1998 from $14.7 million in 1997. An increase in revenues from sales of the electric LVAS were offset in part by a slight decrease in revenues from International Technidyne. The gross profit margin decreased to 46% in the third quarter of 1998 from 50% in the third quarter of 1997. The gross profit margin for the Instruments and Other Equipment segment decreased to 44% in 1998 from 48% in 1997. This decline was primarily the result of the inclusion of lower-margin revenues from the product-monitoring businesses at Thermo Sentron and a decrease in sales of high-margin ESD test equipment at Thermo Voltek. The gross profit margin for the Biomedical Products segment decreased to 52% in the third quarter of 1998 from 54% in the third quarter of 1997. The gross profit margin at Thermo Cardiosystems decreased primarily due to an increase in lower-margin electric LVAS revenues. As a result of the FDA's approval of the electric LVAS, Thermo Cardiosystems has announced a 13% price increase in the electric LVAS product line in the U.S., effective November 1, 1998. Selling, general, and administrative expenses as a percentage of revenues increased to 28% in the third quarter of 1998 from 27% in the third quarter of 1997. The increase is primarily due to a decrease in revenues at Thermedics Detection and Thermo Voltek and, to a lesser extent, an increase in sales and marketing staff at Thermo Cardiosystems in anticipation of increased electric LVAS sales following the FDA approval. Research and development expenses increased to $6.8 million in the third quarter of 1998 from $5.9 million in the third quarter of 1997. The increase reflects increased expenses at Thermo Cardiosystems, primarily due to costs associated with a clinical trial being conducted by Thermo Cardiosystems to evaluate the electric LVAS as a long-term cardiac support for patients not eligible for a heart transplant and, to a lesser extent, costs associated with the development of Thermo Cardiosystems' 14 Third Quarter 1998 Compared With Third Quarter 1997 (continued) HeartMate II system. In addition, research and development expenses increased at Thermo Sentron due to the inclusion of expenses from the product-monitoring businesses. Interest income decreased to $3.1 million in the third quarter of 1998 from $3.5 million in the third quarter of 1997, primarily due to lower average invested balances as a result of Thermo Sentron's acquisition of the product-monitoring businesses and cash expended to repurchase securities of the Company and certain of its majority-owned subsidiaries. Interest expense increased to $1.6 million in 1998 from $1.2 million in 1997, primarily as a result of interest expense on borrowings at Thermo Sentron used to partially finance the acquisition of the product-monitoring businesses. The effective tax rates were 39% and 38% in the third 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. Minority interest expense decreased to $1.2 million in the third quarter of 1998 from $2.1 million in the third quarter of 1997, primarily due to lower profits at the Company's majority-owned subsidiaries and the Company's increased ownership of Thermo Cardiosystems (Note 3). First Nine Months 1998 Compared With First Nine Months 1997 Total revenues were $233.9 million in the first nine months of 1998, compared with $224.3 million in the first nine months of 1997. Instruments and Other Equipment segment revenues were $171.7 million in 1998, compared with $166.1 million in 1997. An increase of $13.7 million in revenues from Thermo Sentron was offset in part by decreases in revenues of $6.2 million and $1.9 million at Thermedics Detection and Thermo Voltek, respectively. Revenues from Thermo Sentron increased to $69.7 million in the first nine months of 1998 from $56.0 million in the first nine months of 1997. Thermo Sentron's revenues increased $14.5 million as a result of acquisitions and, to a lesser extent, increased product demand. These increases were offset in part by a decrease in revenues of $2.1 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 $71.2 million in 1998 from $77.4 million in 1997. Revenues from Thermedics Detection's industrial process instruments and related services decreased to $23.1 million in 1998 from $28.1 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, offset in part by an increase in InScan(R) product sales in 1998. Revenues from Thermedics Detection's EGIS explosives-detection systems and related services decreased slightly to $6.9 million in 1998 from $7.0 million in 1997. Revenues from Thermo Voltek decreased to $30.8 million in 1998 from $32.7 million in 1997, 15 First Nine Months 1998 Compared With First Nine Months 1997 (continued) primarily due to lower demand for certain lower-margin products in Europe and lower sales of high-margin ESD test equipment for the semiconductor industry, due in part to Asian economic conditions. Biomedical Products segment revenues increased to $62.2 million in the first nine months of 1998 from $58.2 million in the first nine months of 1997. Revenues from Thermo Cardiosystems increased to $48.4 million in 1998 from $45.6 million in 1997, primarily due to an increase in revenues from its air-driven LVAS and International Technidyne. The gross profit margin decreased to 48% in the first nine months of 1998 from 49% in the first nine months of 1997. The gross profit margin for the Instruments and Other Equipment segment decreased to 46% in 1998 from 48% in 1997. This decrease is primarily the result of the inclusion of lower-margin revenues from the product-monitoring businesses at Thermo Sentron. The gross profit margin for the Biomedical Products segment increased to 54% in the first nine months of 1998 from 53% in the first nine months of 1997. The gross profit margin at Thermo Cardiosystems increased as a result of an increase in revenues from the higher-margin air-driven LVAS and, to a lesser extent, an increase in revenues from higher-margin International Technidyne products. Selling, general, and administrative expenses as a percentage of revenues were unchanged at 28.5% in the first nine months of 1998 and 1997. A decrease in selling, general, and administrative expenses as a percentage of revenues at Thermo Voltek 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 the reasons discussed in the results of operations for the third quarter. Research and development expenses increased to $19.5 million in the first nine months of 1998 from $17.8 million in the first nine months of 1997, primarily due to the reasons discussed in the results of operations for the third quarter. Interest income increased to $10.0 million in the first nine months of 1998 from $9.5 million in the first nine months of 1997, primarily due to higher average invested balances as a result of Thermo Cardiosystems' issuance of $70.0 million principal amount of 4 3/4% subordinated convertible debentures in May 1997 and Thermedics Detection's March 1997 initial public offering of common stock. These increases were offset by decreased interest income due to lower average invested balances at Thermo Sentron due to cash expended for the acquisition of the product-monitoring businesses and cash expended to repurchase securities of the Company and certain of its majority-owned subsidiaries. Interest expense increased to $4.1 million in 1998 from $2.2 million in 1997, primarily as a result of Thermo Cardiosystems' issuance of 4 3/4% subordinated convertible debentures and interest expense at Thermo Sentron on borrowings used to partially finance the acquisition of the product-monitoring businesses. 16 First Nine Months 1998 Compared With First Nine Months 1997 (continued) During the first nine months of 1997, the Company recorded a gain on the issuance of stock by subsidiary of $17.1 million as a result of Thermedics Detection's March 1997 initial public offering of common stock. The effective tax rates were 39% and 27% in the first nine months of 1998 and 1997, respectively. The effective tax rate in 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 decreased to $4.6 million in the first nine months of 1998 from $5.4 million in the first nine months of 1997, primarily due to lower profits at certain of the Company's majority-owned subsidiaries and the Company's increased ownership of Thermo Cardiosystems (Note 3). 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. 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 taxes of $1.0 million (Note 5). Liquidity and Capital Resources Consolidated working capital was $232.6 million at October 3, 1998, compared with $309.4 million at January 3, 1998. Cash, cash equivalents, and short- and long-term available-for-sale investments were $232.6 million at October 3, 1998, compared with $258.0 million at January 3, 1998. Of the $232.6 million balance at October 3, 1998, $198.7 million was held by the Company's majority-owned subsidiaries, and the remainder by the Company and its wholly owned subsidiaries. During the first nine months of 1998, $29.8 million of cash was provided by operating activities. Cash of $5.5 million was provided by a decrease in accounts receivable, primarily due to decreased revenues at certain of the Company's majority-owned subsidiaries. This increase was offset in part by the use of cash of $2.4 million to fund a decrease in accounts payable. Excluding available-for-sale investment activity, the Company's primary investing activity during the first nine 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 17 Liquidity and Capital Resources (continued) cash acquired (Note 2). The Company expended $5.5 million for the purchase of property, plant, and equipment during the first nine months of 1998. During the remainder of 1998, the Company expects to make capital expenditures of approximately $3.0 million. During the first nine months of 1998, the Company's financing activities used cash of $5.7 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). During the first nine months of 1998, the Company and certain of its majority-owned subsidiaries expended $9.9 million and $16.2 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-owned subsidiaries in the open market, or in negotiated transactions. As of October 3, 1998, $0.3 million and $18.6 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, other than shares owned by Thermo Electron, 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 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. Year 2000 The Company continues to assess the potential impact of the year 2000 on the Company's internal business systems, products, and operations. The Company's year 2000 initiatives include (i) testing and upgrading internal business systems and facilities; (ii) testing and developing necessary upgrades for the Company's current products and certain discontinued products; (iii) contacting key suppliers, vendors, and customers to determine their year 2000 compliance status; and (iv) developing contingency plans. 18 Year 2000 (continued) The Company's State of Readiness The Company has tested and evaluated its critical information technology systems for year 2000 compliance, including its significant computer systems, software applications, and related equipment. The Company is currently in the process of upgrading or replacing its noncompliant systems. The Company expects that all of its material information technology systems will be year 2000 compliant by the end of 1999. The Company is also evaluating the potential year 2000 impact on its facilities, including its buildings and utility systems. Any problems that are identified will be prioritized and remediated based on their assigned priority. The Company will continue periodic testing of its critical internal business systems and facilities in an effort to minimize operating disruptions due to year 2000 issues. The Company believes that all of the material products that it currently manufactures and sells are year 2000 compliant. However, as many of the Company's products are complex, interact with third-party products, and operate on computer systems that are not under the Company's control, there can be no assurance that the Company has identified all of the year 2000 problems with its current products. The Company believes that certain of its older products, which it no longer manufactures or sells, may not be year 2000 compliant. The Company is continuing to test and evaluate such products and may offer upgrades or alternative products where reasonably practicable. The Company is in the process of identifying and contacting suppliers, vendors, and customers that are believed to be significant to the Company's business operations in order to assess their year 2000 readiness. As part of this effort, the Company has developed and is distributing questionnaires relating to year 2000 compliance to its significant suppliers, vendors, and customers. The Company intends to follow-up and monitor the year 2000 compliant progress of significant suppliers, vendors, and customers that indicate that they are not year 2000 compliant or that do not respond to the Company's questionnaires. Contingency Plan The Company intends to develop a contingency plan that will allow its primary business operations to continue despite disruptions due to year 2000 problems. This plan may include identifying and securing other suppliers, increasing inventories, and modifying production facilities and schedules. As the Company continues to evaluate the year 2000 readiness of its business systems and facilities, products and significant suppliers, vendors, and customers, it will modify and adjust its contingency plan as may be required. 19 Year 2000 (continued) Estimated Costs to Address the Company's Year 2000 Issues To date, costs incurred in connection with the year 2000 issue have not been material. The Company does not expect total year 2000 remediation costs to be material, but there can be no assurance that the Company will not encounter unexpected costs or delays in achieving year 2000 compliance. Risks of the Company's Year 2000 Issues While the Company is attempting to minimize any negative consequences arising from the year 2000 issue, there can be no assurance that year 2000 problems will not have a material adverse impact on the Company's business, operations, or financial condition. While the Company expects that upgrades to its internal business systems will be completed in a timely fashion, there can be no assurance that the Company will not encounter unexpected costs or delays. Despite its efforts to ensure that its material current products are year 2000 compliant, the Company may see an increase in warranty and other claims, especially those related to Company products that incorporate, or operate using, third-party software or hardware. In addition, certain of the Company's older products, which it no longer manufactures or sells, may not be year 2000 compliant, which may expose the Company to claims. If any of the Company's material suppliers, vendors, or customers experience business disruptions due to year 2000 issues, the Company might also be materially adversely affected. The Company's research and development, production, distribution, financial, administrative, and communications operations might be disrupted. There is expected to be a significant amount of litigation relating to the year 2000 issue and there can be no assurance that the Company will not incur material costs in defending or bringing lawsuits. Any unexpected costs or delays arising from the year 2000 issue could have a significant adverse impact on the Company's business, operations, and financial condition. 20 PART II - OTHER INFORMATION Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits See Exhibit Index on the page immediately preceding exhibits. (b) Reports on Form 8-K On August 13, 1998, the Company filed a Current Report on Form 8-K dated August 12, 1998, with respect to a proposed reorganization by the Company's parent organization, Thermo Electron Corporation, involving certain of Thermo Electron's subsidiaries, including the Company. On September 30, 1998, the Company filed a Current Report on Form 8-K dated September 29, 1998, with respect to FDA approval of Thermo Cardiosystems' electric LVAS. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 9th day of November 1998. THERMEDICS INC. Paul F. Kelleher --------------------------- Paul F. Kelleher Chief Accounting Officer John N. Hatsopoulos --------------------------- John N. Hatsopoulos Chief Financial Officer and Senior Vice President 22 EXHIBIT INDEX Exhibit Number Description of Exhibit - ---------------------------------------------------------------------- 27 Financial Data Schedule. EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMEDICS INC.'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED OCTOBER 3, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-02-1999 OCT-03-1998 119,543 74,152 67,665 5,049 65,463 337,546 62,089 39,687 559,019 104,950 122,678 0 0 4,174 239,434 559,019 233,887 233,887 121,594 121,594 19,543 569 4,067 32,088 12,604 14,920 0 4,638 0 19,558 0.48 0.46
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