-----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, UnHFAtSQ6qY5beXA1SZApuS5/LjRaGhPL4tuZR7mcfchk1XSxJ+3v7LwG4kP7k8a tH57XtC0Q3PLSSZsas1R7A== 0000795986-97-000020.txt : 19971106 0000795986-97-000020.hdr.sgml : 19971106 ACCESSION NUMBER: 0000795986-97-000020 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971105 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: THERMO INSTRUMENT SYSTEMS INC CENTRAL INDEX KEY: 0000795986 STANDARD INDUSTRIAL CLASSIFICATION: MEASURING & CONTROLLING DEVICES, NEC [3829] IRS NUMBER: 042925809 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09786 FILM NUMBER: 97708427 BUSINESS ADDRESS: STREET 1: 1275 HAMMERWOOD AVE CITY: SUNNYVALE STATE: CA ZIP: 94089 BUSINESS PHONE: 6176221000 MAIL ADDRESS: STREET 1: 81 WYMAN STREET CITY: WALTHAM STATE: MA ZIP: 02254 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------------------------------------ FORM 10-Q (mark one) [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended September 27, 1997. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Commission File Number 1-9786 THERMO INSTRUMENT SYSTEMS INC. (Exact name of Registrant as specified in its charter) Delaware 04-2925809 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 860 West Airport Freeway Suite 301 Hurst, Texas 76054 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 622-1000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at September 27, 1997 ---------------------------- --------------------------------- Common Stock, $.10 par value 121,623,296 PAGE PART I - FINANCIAL INFORMATION Item 1 - Financial Statements THERMO INSTRUMENT SYSTEMS INC. Consolidated Balance Sheet (Unaudited) Assets September 27, December 28, (In thousands) 1997 1996 ------------------------------------------------------------------------ Current Assets: Cash and cash equivalents $ 377,445 $ 522,688 Available-for-sale investments, at quoted market value (amortized cost of $10,931 and $7,430) 10,949 7,452 Accounts receivable, less allowances of $23,936 and $16,981 363,506 303,331 Unbilled contract costs and fees 12,371 6,043 Inventories: Raw materials and supplies 122,621 95,920 Work in process 59,106 47,518 Finished goods 96,870 70,245 Prepaid expenses 21,807 13,417 Prepaid income taxes 70,245 58,296 ---------- ---------- 1,134,920 1,124,910 ---------- ---------- Property, Plant, and Equipment, at Cost 315,726 250,976 Less: Accumulated depreciation and amortization 92,105 72,313 ---------- ---------- 223,621 178,663 ---------- ---------- Patents and Other Assets 29,495 32,454 ---------- ---------- Cost in Excess of Net Assets of Acquired Companies (Note 3) 919,456 588,373 ---------- ---------- $2,307,492 $1,924,400 ========== ========== 2PAGE THERMO INSTRUMENT SYSTEMS INC. Consolidated Balance Sheet (continued) (Unaudited) Liabilities and Shareholders' Investment September 27, December 28, (In thousands except share amounts) 1997 1996 ------------------------------------------------------------------------ Current Liabilities: Notes payable (includes $55,000 due to parent company in 1997; Note 3) $ 129,918 $ 89,462 Accounts payable 92,649 83,161 Accrued payroll and employee benefits 59,462 51,728 Accrued income taxes 72,438 39,686 Accrued installation and warranty expenses 46,760 44,211 Accrued acquisition expenses (Note 3) 22,009 30,025 Deferred revenue 39,373 35,959 Other accrued expenses 114,576 101,646 Due to parent company 10,196 12,329 ---------- ---------- 587,381 488,207 ---------- ---------- Deferred Income Taxes 20,080 20,710 ---------- ---------- Other Deferred Items 27,273 29,805 ---------- ---------- Long-term Obligations: Senior convertible obligations (includes $140,000 due to parent company) 330,784 334,781 Subordinated convertible obligations 180,500 192,500 Other (includes $168,800 and $15,000 due to parent company; Note 3) 186,009 26,933 ---------- ---------- 697,293 554,214 ---------- ---------- Minority Interest 146,535 85,197 ---------- ---------- Shareholders' Investment (Note 6): Common stock, $.10 par value, 250,000,000 shares authorized; 122,391,652 and 97,674,228 shares issued 12,239 9,767 Capital in excess of par value 320,483 319,464 Retained earnings 532,720 424,641 Treasury stock at cost, 768,356 and 750,055 shares (7,435) (8,679) Cumulative translation adjustment (29,089) 1,060 Net unrealized gain on available-for-sale investments 12 14 ---------- ---------- 828,930 746,267 ---------- ---------- $2,307,492 $1,924,400 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 3PAGE THERMO INSTRUMENT SYSTEMS INC. Consolidated Statement of Income (Unaudited) Three Months Ended ---------------------------- September 27, September 28, (In thousands except per share amounts) 1997 1996 ------------------------------------------------------------------------ Revenues $403,900 $315,292 -------- -------- Costs and Operating Expenses: Cost of revenues 214,999 167,489 Selling, general, and administrative expenses 105,080 90,087 Research and development expenses 27,407 22,197 -------- -------- 347,486 279,773 -------- -------- Operating Income 56,414 35,519 Interest Income 6,864 4,821 Interest Expense (includes $6,574 and $2,502 to parent company) (13,448) (7,248) Gain on Issuance of Stock by Subsidiaries (Note 4) 12,659 11,350 -------- -------- Income Before Provision for Income Taxes and Minority Interest Expense 62,489 44,442 Provision for Income Taxes 21,919 12,351 Minority Interest Expense 3,297 1,570 -------- -------- Net Income $ 37,273 $ 30,521 ======== ======== Earnings per Share: Primary $ .31 $ .25 ======== ======== Fully diluted $ .28 $ .23 ======== ======== Weighted Average Shares: Primary 121,585 120,748 ======== ======== Fully diluted 139,611 134,334 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 4PAGE THERMO INSTRUMENT SYSTEMS INC. Consolidated Statement of Income (Unaudited) Nine Months Ended ---------------------------- September 27, September 28, (In thousands except per share amounts) 1997 1996 ------------------------------------------------------------------------ Revenues $1,138,255 $ 862,415 ---------- ---------- Costs and Operating Expenses: Cost of revenues 598,941 462,724 Selling, general, and administrative expenses 305,977 250,852 Research and development expenses 78,604 61,969 Nonrecurring costs (Note 5) 800 3,500 ---------- ---------- 984,322 779,045 ---------- ---------- Operating Income 153,933 83,370 Interest Income 18,541 14,171 Interest Expense (includes $13,192 and $6,562 to parent company) (33,843) (20,765) Gain on Issuance of Stock by Subsidiaries (Note 4) 37,871 61,133 ---------- ---------- Income Before Provision for Income Taxes and Minority Interest Expense 176,502 137,909 Provision for Income Taxes 60,680 34,807 Minority Interest Expense 7,743 3,242 ---------- ---------- Net Income $ 108,079 $ 99,860 ========== ========== Earnings per Share: Primary $ .89 $ .85 ========== ========== Fully diluted $ .82 $ .77 ========== ========== Weighted Average Shares: Primary 121,483 118,145 ========== ========== Fully diluted 139,555 134,263 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 5PAGE THERMO INSTRUMENT SYSTEMS INC. Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended ----------------------------- September 27, September 28, (In thousands) 1997 1996 ------------------------------------------------------------------------ Operating Activities: Net income $ 108,079 $ 99,860 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 41,822 34,164 Provision for losses on accounts receivable 3,607 2,140 Nonrecurring costs (Note 5) 800 3,500 Gain on issuance of stock by subsidiaries (Note 4) (37,871) (61,133) Minority interest expense 7,743 3,242 Decrease in deferred income taxes (650) (265) Other noncash expenses 4,855 3,871 Changes in current accounts, excluding the effects of acquisitions: Accounts receivable (22,770) 12,280 Inventories (12,163) (3,064) Other current assets (1,443) (946) Accounts payable (3,271) (15,715) Other current liabilities (6,620) (23,262) Other (111) 254 --------- --------- Net cash provided by operating activities 82,007 54,926 --------- --------- Investing Activities: Acquisitions, net of cash acquired (Note 3) (482,784) (242,935) Purchases of available-for-sale investments (9,000) (10,250) Proceeds from sale and maturities of available-for-sale investments 5,600 - Purchases of property, plant, and equipment (21,292) (14,835) Proceeds from sale of property, plant, and equipment 6,732 3,682 Other 660 4 --------- --------- Net cash used in investing activities (500,084) (264,334) --------- --------- Financing Activities: Net proceeds from issuance of Company and subsidiaries' common stock (Note 4) 78,756 109,974 Proceeds from issuance of short- and long-term obligations to parent company (Note 3) 428,800 110,000 Repayment of short- and long-term obligations to parent company (Note 3) (220,000) (30,000) Decrease in short-term obligations (5,719) (10,317) Repayment of long-term obligations (4,492) (4,892) --------- --------- Net cash provided by financing activities $ 277,345 $ 174,765 --------- --------- 6PAGE THERMO INSTRUMENT SYSTEMS INC. Consolidated Statement of Cash Flows (continued) (Unaudited) Nine Months Ended ----------------------------- September 27, September 28, (In thousands) 1997 1996 ------------------------------------------------------------------------ Exchange Rate Effect on Cash $ (4,511) $ 1,770 --------- --------- Decrease in Cash and Cash Equivalents (145,243) (32,873) Cash and Cash Equivalents at Beginning of Period 522,688 395,233 --------- --------- Cash and Cash Equivalents at End of Period $ 377,445 $ 362,360 ========= ========= Noncash Activities: Fair value of assets of acquired companies $ 624,805 $ 471,509 Cash paid for acquired companies (533,965) (253,069) Issuance of subsidiary stock options for acquired company (1,693) - --------- --------- Liabilities assumed of acquired companies $ 89,147 $ 218,440 ========= ========= Conversions of the Company's and subsidiary convertible obligations $ 15,997 $ 64,576 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 7PAGE THERMO INSTRUMENT SYSTEMS INC. Notes to Consolidated Financial Statements 1. General The interim consolidated financial statements presented have been prepared by Thermo Instrument Systems Inc. (the Company) without audit and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the financial position at September 27, 1997, the results of operations for the three- and nine-month periods ended September 27, 1997, and September 28, 1996, and the cash flows for the nine-month periods ended September 27, 1997, and September 28, 1996. Interim results are not necessarily indicative of results for a full year. The consolidated balance sheet presented as of December 28, 1996, has been derived from the consolidated financial statements that have been audited by the Company's independent public accountants. The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the annual financial statements and notes of the Company. The consolidated financial statements and notes included herein should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K, as amended, for the fiscal year ended December 28, 1996, filed with the Securities and Exchange Commission. 2. Presentation Certain amounts in 1996 have been reclassified to conform to the presentation in the 1997 financial statements. 3. Acquisitions In March 1997, the Company acquired 95% of Life Sciences International PLC (Life Sciences), a London Stock Exchange-listed company. Subsequently, the Company acquired the remaining shares of Life Sciences' capital stock. The aggregate purchase price for Life Sciences was approximately $448.3 million, net of $50.7 million of cash acquired. The purchase price includes the repayment of $105.0 million of Life Sciences' bank debt. Life Sciences manufactures laboratory science equipment, appliances, instruments, consumables, and reagents for the research, clinical, and industrial markets. In March 1997, to partially finance the acquisition of Life Sciences, the Company borrowed $210.0 million from Thermo Electron Corporation (Thermo Electron) pursuant to a promissory note due March 1999. In September 1997, the Company repaid $105.0 million of this promissory note. In June 1997, to finance the repayment of Life Sciences' debt, the Company borrowed $115.0 million from Thermo Electron pursuant to a promissory note, which was repaid in September 1997. In connection with the Company's Thermo Optek Corporation (Thermo Optek) subsidiary's acquisition of Spectronic Instruments, Inc. (Spectronic) and VG Systems Limited (VG Systems) from the Company, Thermo Optek borrowed $40.0 million from Thermo Electron pursuant to a promissory note due July 1998. Spectronic is a former subsidiary of Life Sciences and VG Systems is a business formerly part of the Scientific Instruments Division of 8PAGE THERMO INSTRUMENT SYSTEMS INC. 3. Acquisitions (continued) Fisons plc (Fisons), a substantial portion of which was acquired by the Company in March 1996. In connection with the Company's ThermoSpectra Corporation (ThermoSpectra) subsidiary's acquisition of the NESLAB Instruments, Inc. (NESLAB) businesses of Life Sciences from the Company, ThermoSpectra borrowed $45.0 million from Thermo Electron pursuant to a promissory note due July 1999. The promissory notes bear interest at the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. During the first nine months of 1997, the Company made several other acquisitions for approximately $35.0 million in cash, including the repayment of $1.3 million of bank debt, and the issuance of subsidiary stock options valued at an aggregate $1.7 million. During the first nine months of 1997, ThermoSpectra borrowed $10.0 million and $5.0 million from Thermo Electron pursuant to promissory notes due March 1999 and July 1999, respectively, and Thermo Vision Corporation, a subsidiary of Thermo Optek, borrowed $3.8 million from Thermo Electron pursuant to a promissory note due July 2000. The promissory notes bear interest at the 90-day Commercial Paper Composite Rate plus 25 basis points, set at the beginning of each quarter. The acquisitions completed in the first nine months of 1997 have been accounted for using the purchase method of accounting and their results have been included in the accompanying financial statements from their respective dates of acquisition. The cost of these acquisitions exceeded the estimated fair value of the acquired net assets by $363.5 million, which is being amortized over 40 years. Allocation of the purchase price for these acquisitions was based on estimates of the fair value of the net assets acquired and is subject to adjustment upon finalization of the purchase price allocation. Based on unaudited data, the following table presents selected financial information for the Company and Life Sciences on a pro forma basis, assuming the companies had been combined since the beginning of 1996. The effect of the acquisitions not included in the pro forma data was not material to the Company's results of operations. Three Nine Months Ended Months Ended ------------- ---------------------------- (In thousands except September 28, September 27, September 28, per share amounts) 1996 1997 1996 ------------------------------------------------------------------------ Revenues $ 396,816 $1,191,027 $1,119,249 Net income 30,008 92,811 98,487 Earnings per share: Primary .25 .76 .83 Fully diluted .23 .71 .76 The pro forma results are not necessarily indicative of future operations or the actual results that would have occurred had the acquisition of Life Sciences been made at the beginning of 1996. 9PAGE THERMO INSTRUMENT SYSTEMS INC. 3. Acquisitions (continued) During 1996, the Company had undertaken a restructuring of a substantial portion of the businesses constituting the Scientific Instruments Division of Fisons, acquired in March 1996. During the first nine months of 1997, the Company expended $13.4 million for restructuring costs, primarily for severance and abandoned-facility payments. In connection with finalizing its restructuring plans for the businesses acquired from Fisons, the Company recorded an additional $8.1 million of acquisition reserves in the first quarter of 1997, primarily for the abandonment of excess facilities, as well as for severance pay. This amount was recorded as an increase in cost in excess of net assets of acquired companies. The remaining reserve for restructuring these businesses was $12.1 million at September 27, 1997, which primarily represents ongoing severance and abandoned-facility payments. As of September 27, 1997, the Company has accrued $22.0 million in connection with restructuring activities of all of its acquisitions, including the businesses acquired from Fisons. 4. Issuance of Stock by Subsidiaries In March 1997, the Company's ThermoQuest Corporation (ThermoQuest) subsidiary sold 1,768,500 shares of its common stock at $15.00 per share for net proceeds of $24.8 million, resulting in a gain of $12.0 million. In August and September 1997, $12.0 million aggregate principal amount of ThermoQuest's subordinated convertible debentures, convertible at $16.50 per share, was converted into 727,272 shares of ThermoQuest's common stock, resulting in a gain of $6.1 million. Following the sale of stock and the conversions, the Company owned 88% of ThermoQuest's outstanding common stock. In June 1997, the Company's Metrika Systems Corporation (Metrika Systems) subsidiary sold 2,300,000 shares of its common stock in an initial public offering at $15.50 per share for net proceeds of $32.5 million, resulting in a gain of $13.2 million. Following the initial public offering, the Company owned 60% of Metrika Systems' outstanding common stock. In September 1997, the Company's ONIX Systems Inc. (ONIX Systems) subsidiary sold 2,210,521 shares of its common stock in a private placement at $9.50 per share for net proceeds of $19.6 million, resulting in a gain of $6.6 million. Following the private placement, the Company owned 88% of ONIX Systems' outstanding common stock. 5. Nonrecurring Costs In the second quarter of 1997, ThermoSpectra incurred an $0.8 million charge related to severance costs for employees terminated during the quarter at one of its business units. 10PAGE THERMO INSTRUMENT SYSTEMS INC. 6. Stock Split In October 1997, the Company declared a five-for-four stock split in the form of a 25% stock dividend, distributed on October 31, 1997, to shareholders of record as of October 20, 1997. All share and per share information, except for share information in the accompanying 1996 balance sheet, has been restated to reflect the stock split. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause the results of the Company to differ materially from those indicated by such forward-looking statements, including those detailed under the caption "Forward-looking Statements" in Exhibit 13 to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996, filed with the Securities and Exchange Commission. Results of Operations Third Quarter 1997 Compared With Third Quarter 1996 Revenues increased $88.6 million, or 28%, to $403.9 million in the third quarter of 1997 from $315.3 million in the third quarter of 1996, due to acquisitions, which included Life Sciences in March 1997 (Note 3). Acquisitions added revenues of $94.5 million in the third quarter of 1997. In addition, revenues from Thermo Optek's and, to a lesser extent, ThermoSpectra's existing businesses increased primarily due to greater product demand. The increase in revenues was offset in part by a decrease of $13.7 million in revenues due to the unfavorable effects of currency translation as a result of the strengthening of the U.S. dollar relative to foreign currencies in countries in which the Company operates. International sales account for a significant portion of the Company's total revenues. Although the Company seeks to charge its customers in the same currency as its operating costs, the Company's financial performance and competitive position can be affected by currency exchange rate fluctuations. Where appropriate, the Company uses forward exchange contracts to reduce its exposure to currency fluctuations. The gross profit margin was 46.8% in the third quarter of 1997, compared with 46.9% in the third quarter of 1996. Margin improvements at certain of the businesses acquired from Fisons in 1996 were offset by a decline in ThermoSpectra's gross profit margin, primarily as a result of a one-time inventory write-off and change in sales mix at one of its subsidiaries, as well as lower margins at an acquired business. 11PAGE THERMO INSTRUMENT SYSTEMS INC. Third Quarter 1997 Compared With Third Quarter 1996 (continued) Selling, general, and administrative expenses as a percentage of revenues decreased to 26% in the third quarter of 1997 from 29% in the third quarter of 1996, primarily due to efforts to reduce selling and administrative costs at certain acquired businesses and, to a lesser extent, lower selling costs associated with certain of the businesses acquired from Life Sciences. Research and development expenses as a percentage of revenues remained relatively unchanged at 6.8% in 1997, compared with 7.0% in 1996. Interest income increased to $6.9 million in the third quarter of 1997 from $4.8 million in the third quarter of 1996, due to interest income earned on invested proceeds from the issuance of $172.5 million principal amount of 4 1/2% senior convertible debentures by the Company in October 1996 and, to a lesser extent, from the sale of common stock by the Company's subsidiaries in 1997 and late 1996. The increase in interest income was offset in part by a reduction in cash as a result of acquisitions. Interest expense increased to $13.4 million in 1997 from $7.2 million in 1996, primarily due to the issuance of an aggregate $428.8 million of promissory notes to Thermo Electron in 1997 in connection with acquisitions (Note 3) and the issuance of 4 1/2% senior convertible debentures by the Company in October 1996. In September 1997, the Company repaid $220.0 million of its outstanding promissory notes to Thermo Electron (Note 3). The Company has adopted a strategy of spinning out certain of its businesses into separate subsidiaries and having these subsidiaries sell a minority interest to outside investors. The Company believes that this strategy provides additional motivation and incentives for the management of the subsidiaries through the establishment of subsidiary-level stock option programs, as well as capital to support the subsidiaries' growth. As a result of the sale of stock by subsidiaries and issuance of stock by a subsidiary upon conversion of convertible debentures, the Company recorded gains of $12.7 million and $11.4 million in the third quarter of 1997 and 1996, respectively (Note 4). The size and timing of these transactions are dependent on market and other conditions that are beyond the Company's control. Accordingly, there can be no assurance that the Company will be able to realize gains from such transactions in the future. The effective tax rate increased to 35% in the third quarter of 1997 from 28% in the third quarter of 1996, primarily due to higher nondeductible amortization of cost in excess of net assets of acquired companies as a result of the acquisition of Life Sciences in March 1997 and, in the 1996 period, the effect of conforming the effective tax rate to the anticipated rate for the full year. Excluding the impact of the nontaxable gain on issuance of stock by subsidiaries in 1997 and 1996, the effective tax rates in both periods exceeded the statutory federal income tax rate due to nondeductible amortization of cost in excess of net assets of acquired companies, the inability to provide a tax benefit on losses incurred at certain foreign subsidiaries, and the impact of state income taxes. 12PAGE THERMO INSTRUMENT SYSTEMS INC. Third Quarter 1997 Compared With Third Quarter 1996 (continued) Minority interest expense increased to $3.3 million in the third quarter of 1997 from $1.6 million in the third quarter of 1996, primarily due to minority interest associated with the Company's newly public Metrika Systems subsidiary and higher earnings at Thermo BioAnalysis Corporation (Thermo BioAnalysis), Thermo Optek, and ThermoQuest. These increases were offset in part by lower earnings at ThermoSpectra. First Nine Months 1997 Compared With First Nine Months 1996 Revenues increased $275.8 million, or 32%, to $1,138.3 million in the first nine months of 1997 from $862.4 million in the first nine months of 1996, due to acquisitions, which included Life Sciences in March 1997 (Note 3) and a substantial portion of the businesses comprising the Scientific Instruments Division of Fisons in late March 1996. Acquisitions added revenues of $293.0 million in the first nine months of 1997. The increase in revenues from acquisitions was offset in part by a decrease of $29.2 million in revenues due to the unfavorable effects of currency translation as a result of the strengthening of the U.S. dollar relative to foreign currencies in countries in which the Company operates. An increase in revenues from ThermoQuest's existing mass spectrometry business, partly as a result of the continued success of a new product introduced in the first quarter of 1996, was offset in part by a decrease in revenues at certain of the Company's other existing businesses, principally at Thermo Optek. Revenues from Thermo Optek's existing businesses decreased due to the inclusion in 1996 of several large nonrecurring sales to the Chinese and Japanese governments and the elimination of certain unprofitable acquired product lines, offset in part by greater demand at two of its business units. The gross profit margin increased to 47.4% in the first nine months of 1997 from 46.3% in the first nine months of 1996. The increase was primarily due to margin improvements at certain of the businesses acquired from Fisons in 1996 and an increase in ThermoQuest's gross profit margin as a result of the increase in sales of higher-margin mass spectrometry products. These increases were offset in part by the inclusion of lower-margin revenues from acquired businesses, including Life Sciences, which recorded an adjustment to expense of $3.2 million in the first nine months of 1997 relating to the revaluation of the finished-goods inventories acquired by the Company, and, to a lesser extent, a decrease in the gross profit margin at ThermoSpectra as discussed in the results of operations for the third quarter. The 1996 period included an adjustment to expense of $2.0 million for inventories revalued with the acquisition of the Fisons businesses. Selling, general, and administrative expenses as a percentage of revenues decreased to 27% in the first nine months of 1997 from 29% in the first nine months of 1996, primarily due to the reasons discussed in the results of operations for the third quarter. Research and development expenses as a percentage of revenues remained relatively unchanged at 6.9% in 1997, compared with 7.2% in 1996. Nonrecurring costs in the first nine months of 1997 represents severance costs for employees terminated during the second quarter at one 13PAGE THERMO INSTRUMENT SYSTEMS INC. First Nine Months 1997 Compared With First Nine Months 1996 (continued) of ThermoSpectra's business units. Nonrecurring costs in the first nine months of 1996 represents a write-off in the first quarter of acquired technology in connection with the acquisition of a significant portion of the businesses constituting the Scientific Instruments Division of Fisons. Interest income increased to $18.5 million in the first nine months of 1997 from $14.2 million in the first nine months of 1996, due to interest income earned on invested proceeds from the issuance of $172.5 million principal amount of 4 1/2% senior convertible debentures by the Company in October 1996 and, to a lesser extent, from the sale of common stock by the Company's subsidiaries in 1997 and 1996. The increase in interest income was offset in part by a reduction in cash as a result of acquisitions. Interest expense increased to $33.8 million in 1997 from $20.8 million in 1996, primarily due to the issuance of an aggregate $428.8 million of promissory notes to Thermo Electron in connection with acquisitions (Note 3), the issuance of 4 1/2% senior convertible debentures by the Company in October 1996 and, to a lesser extent, the inclusion of interest expense on debt assumed in connection with the Fisons and Life Sciences acquisitions, which has subsequently been repaid. In September 1997, the Company repaid $220.0 million of its outstanding promissory notes to Thermo Electron (Note 3). The increases in interest expense were offset in part by the conversion of a portion of the Company's convertible obligations into common stock of the Company. As a result of the sale of stock by subsidiaries and issuance of stock by a subsidiary upon conversion of convertible debentures, the Company recorded gains of $37.9 million and $61.1 million in the first nine months of 1997 and 1996, respectively (Note 4). The effective tax rate increased to 34% in the first nine months of 1997 from 25% in the first nine months of 1996, primarily due to a lower nontaxable gain on issuance of stock by subsidiaries in 1997. Excluding the impact of the gain on issuance of stock by subsidiaries in 1997 and 1996, the effective tax rates in both periods exceeded the statutory federal income tax rate due to nondeductible amortization of cost in excess of net assets of acquired companies, the inability to provide a tax benefit on losses incurred at certain foreign subsidiaries, the impact of state income taxes, and in 1996, the write-off of acquired technology in connection with the acquisition of the businesses from Fisons. Minority interest expense increased to $7.7 million in the first nine months of 1997 from $3.2 million in the first nine months of 1996, primarily due to higher earnings at Thermo BioAnalysis and ThermoQuest and, to a lesser extent, minority interest associated with the Company's newly public Metrika Systems and Thermo Optek subsidiaries. These increases were offset in part by lower earnings at ThermoSpectra. 14PAGE THERMO INSTRUMENT SYSTEMS INC. Liquidity and Capital Resources Consolidated working capital was $547.5 million at September 27, 1997, compared with $636.7 million at December 28, 1996. Included in working capital are cash, cash equivalents, and available-for-sale investments of $388.4 million at September 27, 1997, and $530.1 million at December 28, 1996. Of the $388.4 million balance at September 27, 1997, $237.2 million was held by the Company's majority-owned subsidiaries and the balance was held by the Company and its wholly owned subsidiaries. The Company's operating activities provided cash of $82.0 million in the first nine months of 1997. Accounts receivable increased $22.8 million primarily due to increased shipments at the end of the third quarter of 1997 by ThermoQuest and a competitive trend to commercial terms of 30 days from ThermoQuest's past practice of generally obtaining deposits on certain systems. At September 27, 1997, $120.5 million of the Company's cash and cash equivalents was held by its foreign subsidiaries. While this cash can be used outside of the United States, including for acquisitions, repatriation of this cash into the United States would be subject to foreign withholding taxes and could also be subject to a United States tax. The Company's investing activities used $500.1 million of cash in the first nine months of 1997. The Company expended $482.8 million, net of cash acquired, for acquisitions, including the repayment of $106.3 million of bank debt (Note 3), and $21.3 million for purchases of property, plant, and equipment. The Company recorded proceeds of $6.7 million from the sale of property, plant, and equipment. The Company's financing activities provided $277.3 million of cash in the first nine months of 1997. During the first nine months of 1997, to partially finance acquisitions, the Company and its majority-owned subsidiaries borrowed an aggregate $428.8 million from Thermo Electron pursuant to promissory notes with various dates of maturity (Note 3). In September 1997, the Company repaid $220.0 million of its outstanding promissory notes to Thermo Electron (Note 3). Net proceeds from the issuance of Company and subsidiary common stock totaled $78.8 million (Note 4). During the fourth quarter of 1997, the Company plans to make expenditures of approximately $10 million for property, plant, and equipment. The Company believes that its existing resources are sufficient to meet the capital requirements of its existing operations for the foreseeable future. The Company has historically complemented internal development with acquisitions of businesses or technologies that extend the Company's presence in current markets or provide opportunities to enter and compete effectively in new markets. The Company will consider making acquisitions of such businesses or technologies that are consistent with its plans for strategic growth. The Company expects that it will finance these acquisitions through a combination of internal funds, additional debt or equity financing from the capital markets, or short-term borrowings from Thermo Electron, although there is no agreement with Thermo Electron to ensure that funds will be available on acceptable terms or at all. 15PAGE THERMO INSTRUMENT SYSTEMS INC. PART II - OTHER INFORMATION Item 6 - Exhibits See Exhibit Index on the page immediately preceding exhibits. 16PAGE THERMO INSTRUMENT SYSTEMS INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 5th day of November 1997. THERMO INSTRUMENT SYSTEMS INC. Paul F. Kelleher -------------------------------- Paul F. Kelleher Chief Accounting Officer John N. Hatsopoulos -------------------------------- John N. Hatsopoulos Vice President and Chief Financial Officer 17PAGE THERMO INSTRUMENT SYSTEMS INC. EXHIBIT INDEX Exhibit Number Description of Exhibit ------------------------------------------------------------------------ 10.1 $3,800,000 Promissory Note dated as of July 14, 1997, issued by Thermo Vision Corporation to Thermo Electron Corporation (filed as Exhibit 10 to Thermo Optek Corporation's Quarterly Report on Form 10-Q for the Quarter Ended September 27, 1997 [File No. 1-11757] and incorporated herein by reference). 10.2 $45,000,000 Promissory Note dated as of September 12, 1997, issued by ThermoSpectra Corporation to Thermo Electron Corporation (filed as Exhibit 10 to ThermoSpectra Corporation's Quarterly Report on Form 10-Q for the Quarter Ended September 27, 1997 [File No. 1-13876] and incorporated herein by reference). 11 Statement re: Computation of Earnings per Share. 27 Financial Data Schedule. EX-11 2 Exhibit 11 THERMO INSTRUMENT SYSTEMS INC. Computation of Earnings per Share Three Months Ended ------------------------------ September 27, September 28, 1997 1996 ------------------------------------------------------------------------ Computation of Fully Diluted Earnings per Share: Income: Net income $ 37,273,000 $ 30,521,000 Add: Convertible debt interest, net of tax 2,021,000 920,000 ------------ ------------ Income applicable to common stock assuming full dilution (a) $ 39,294,000 $ 31,441,000 ------------ ------------ Shares: Weighted average shares outstanding 121,584,875 120,748,062 Add: Shares issuable from assumed conversion of convertible debt 16,691,527 12,280,635 Shares issuable from assumed exercise of options (as determined by the application of the treasury stock method) 1,334,855 1,305,202 ------------ ------------ Weighted average shares outstanding, as adjusted (b) 139,611,257 134,333,899 ------------ ------------ Fully Diluted Earnings per Share (a)/(b) $ .28 $ .23 ============ ============ PAGE Exhibit 11 THERMO INSTRUMENT SYSTEMS INC. Computation of Earnings per Share Nine Months Ended ------------------------------ September 27, September 28, 1997 1996 ------------------------------------------------------------------------ Computation of Fully Diluted Earnings per Share: Income: Net income $108,079,000 $ 99,860,000 Add: Convertible debt interest, net of tax 6,072,000 3,324,000 ------------ ------------ Income applicable to common stock assuming full dilution (a) $114,151,000 $103,184,000 ------------ ------------ Shares: Weighted average shares outstanding 121,483,470 118,144,645 Add: Shares issuable from assumed conversion of convertible debt 16,736,915 14,813,011 Shares issuable from assumed exercise of options (as determined by the application of the treasury stock method) 1,334,855 1,305,202 ------------ ------------ Weighted average shares outstanding, as adjusted (b) 139,555,240 134,262,858 ------------ ------------ Fully Diluted Earnings per Share (a)/(b) $ .82 $ .77 ============ ============ EX-27 3
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO INSTRUMENT SYSTEMS INC.'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS JAN-03-1998 SEP-27-1997 377,445 10,949 387,442 23,936 278,597 1,134,920 315,726 92,105 2,307,492 587,381 388,493 0 0 12,239 816,691 2,307,492 1,138,255 1,138,255 598,941 598,941 79,404 3,607 33,843 176,502 60,680 108,079 0 0 0 108,079 .89 .82 REFLECTS A FIVE - FOR - FOUR STOCK SPLIT EFFECTIVE OCTOBER 31, 1997. PREVIOUSLY FILED FINANCIAL DATA SCHEDULES WILL NOT BE RESTATED
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