-----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, GXbOdCWgTp1GASQ9vnO8PUAuJAPSGwxpLqsRpUaJyQ6Myu6b892oBTKscb2y30LW hjomIjeL0ZtLhIQY/T+P4A== 0000795986-98-000007.txt : 19980814 0000795986-98-000007.hdr.sgml : 19980814 ACCESSION NUMBER: 0000795986-98-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980704 FILED AS OF DATE: 19980813 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: 98684360 BUSINESS ADDRESS: STREET 1: 860 WEST AIRPORT FREEWAY STREET 2: SUITE 301 CITY: HURST STATE: TX ZIP: 76054 BUSINESS PHONE: 8174856663 MAIL ADDRESS: STREET 1: 860 WEST AIRPORT FREEWAY STREET 2: SUITE 301 CITY: HURST STATE: TX ZIP: 76054 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 1-9786 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: (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 122,198,347 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements THERMO INSTRUMENT SYSTEMS INC. Consolidated Balance Sheet (Unaudited) Assets July 4, January 3, (In thousands) 1998 1998 - -------------------------------------------------------------------------- Current Assets: Cash and cash equivalents (includes $560,460 and $283,995 under repurchase agreement with parent company) $ 730,139 $ 468,848 Available-for-sale investments, at quoted market value (amortized cost of $8,228 and $8,287) 9,014 8,328 Accounts receivable, less allowances of $21,406 and $22,786 341,204 364,075 Unbilled contract costs and fees 8,646 9,191 Inventories: Raw materials and supplies 128,500 118,611 Work in process 56,691 52,870 Finished goods 99,363 93,238 Prepaid expenses 23,368 19,292 Prepaid income taxes 57,087 54,915 ---------- ---------- 1,454,012 1,189,368 ---------- ---------- Property, Plant, and Equipment, at Cost 322,939 317,605 Less: Accumulated depreciation and amortization 112,537 97,666 ---------- ---------- 210,402 219,939 ---------- ---------- Other Assets 52,114 45,477 ---------- ---------- Cost in Excess of Net Assets of Acquired Companies (Note 6) 901,009 896,369 ---------- ---------- $2,617,537 $2,351,153 ========== ========== 2 THERMO INSTRUMENT SYSTEMS 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 maturities of long-term obligations (includes $65,000 and $55,000 due to parent company) $ 116,399 $ 116,226 Accounts payable 90,290 97,516 Accrued payroll and employee benefits 45,565 59,745 Accrued income taxes 61,855 61,409 Accrued installation and warranty expenses 38,877 42,404 Accrued acquisition expenses (Note 6) 23,808 33,789 Deferred revenue 45,296 41,759 Other accrued expenses 99,595 101,827 Due to parent company and affiliated companies 9,638 22,027 ---------- ---------- 531,323 576,702 ---------- ---------- Deferred Income Taxes 30,438 30,430 ---------- ---------- Other Deferred Items 28,032 27,273 ---------- ---------- Long-term Obligations: Senior convertible obligations (includes $140,000 due to parent company) 327,292 327,824 Subordinated convertible obligations (Note 2) 404,817 160,547 Other (includes $53,800 and $168,800 due to parent company) 68,655 184,823 ---------- ---------- 800,764 673,194 ---------- ---------- Minority Interest 274,938 165,996 ---------- ---------- Shareholders' Investment: Common stock, $.10 par value, 250,000,000 shares authorized; 122,822,998 and 122,645,040 shares issued 12,282 12,265 Capital in excess of par value 332,886 333,580 Retained earnings 647,350 571,899 Treasury stock at cost, 631,717 and 670,827 shares (7,247) (6,965) Accumulated other comprehensive items (Note 4) (33,229) (33,221) ---------- ---------- 952,042 877,558 ---------- ---------- $2,617,537 $2,351,153 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. 3 THERMO INSTRUMENT SYSTEMS INC. Consolidated Statement of Income (Unaudited) Three Months Ended July 4, June 28, (In thousands except per share amounts) 1998 1997 - -------------------------------------------------------------------------- Revenues $395,392 $405,235 -------- -------- Costs and Operating Expenses: Cost of revenues 204,675 210,494 Selling, general, and administrative expenses 105,944 111,328 Research and development expenses 27,741 27,790 Restructuring and nonrecurring costs (Note 7) 1,423 800 -------- -------- 339,783 350,412 -------- -------- Operating Income 55,609 54,823 Interest Income 9,381 4,453 Interest Expense (includes $3,023 and $5,059 to parent company) (12,134) (11,935) Gain on Issuance of Stock by Subsidiaries (Note 5) 11,063 13,177 -------- -------- Income Before Provision for Income Taxes and Minority Interest Expense 63,919 60,518 Provision for Income Taxes 20,989 20,991 Minority Interest Expense 5,334 2,308 -------- -------- Net Income $ 37,596 $ 37,219 ======== ======== Earnings per Share (Note 3): Basic $ .31 $ .31 ======== ======== Diluted $ .28 $ .28 ======== ======== Weighted Average Shares (Note 3): Basic 122,176 121,527 ======== ======== Diluted 146,644 139,288 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 4 THERMO INSTRUMENT SYSTEMS INC. Consolidated Statement of Income (Unaudited) Six Months Ended July 4, June 28, (In thousands except per share amounts) 1998 1997 - -------------------------------------------------------------------------- Revenues $803,335 $734,355 -------- -------- Costs and Operating Expenses: Cost of revenues 418,884 383,942 Selling, general, and administrative expenses 213,671 200,897 Research and development expenses 56,260 51,197 Restructuring and nonrecurring costs (Note 7) 1,423 800 -------- -------- 690,238 636,836 -------- -------- Operating Income 113,097 97,519 Interest Income 17,550 11,677 Interest Expense (includes $6,454 and $6,618 to parent company) (23,627) (20,395) Gain on Issuance of Stock by Subsidiaries (Note 5) 21,013 25,212 -------- -------- Income Before Provision for Income Taxes and Minority Interest Expense 128,033 114,013 Provision for Income Taxes 42,948 38,761 Minority Interest Expense 9,634 4,446 -------- -------- Net Income $ 75,451 $ 70,806 ======== ======== Earnings per Share (Note 3): Basic $ .62 $ .58 ======== ======== Diluted $ .55 $ .53 ======== ======== Weighted Average Shares (Note 3): Basic 122,121 121,433 ======== ======== Diluted 146,676 139,295 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. 5 THERMO INSTRUMENT SYSTEMS INC. Consolidated Statement of Cash Flows (Unaudited) Six Months Ended July 4, June 28, (In thousands) 1998 1997 - ------------------------------------------------------------------------ Operating Activities: Net income $ 75,451 $ 70,806 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 31,261 26,092 Provision for losses on accounts receivable 661 2,890 Decrease in deferred income taxes - (597) Gain on issuance of stock by subsidiaries (Note 5) (21,013) (25,212) Minority interest expense 9,634 4,446 Other noncash expenses 3,530 2,874 Changes in current accounts, excluding the effects of acquisitions: Accounts receivable 25,565 (9,608) Inventories (17,574) (15,370) Other current assets (5,471) (5,983) Accounts payable (835) 11,425 Other current liabilities (21,349) (24,599) Other (1,376) (18) --------- --------- Net cash provided by operating activities 78,484 37,146 --------- --------- Investing Activities: Acquisitions, net of cash acquired (Note 6) (33,084) (476,420) Payment to affiliated company for acquired business (19,117) - Proceeds from sale and maturities of available-for-sale investments - 5,600 Purchases of property, plant, and equipment (12,361) (10,026) Proceeds from sale of property, plant, and equipment 6,621 4,974 Other, net 1,551 579 --------- --------- Net cash used in investing activities $ (56,390) $(475,293) --------- --------- 6 THERMO INSTRUMENT SYSTEMS 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 subsidiary common stock (Note 5) $ 112,558 $ 58,320 Net proceeds from issuance of subordinated convertible debentures (Note 2) 244,155 - Proceeds from issuance of short-term obligations to parent company - 115,000 Proceeds from issuance of long-term obligations to parent company - 220,000 Repayment of long-term obligation to parent company (Note 2) (105,000) - Decrease in short-term obligations (10,383) (7,550) Repayment of long-term obligations (1,657) (3,930) Other 91 - --------- --------- Net cash provided by financing activities 239,764 381,840 --------- --------- Exchange Rate Effect on Cash (567) (7,053) --------- --------- Increase (Decrease) in Cash and Cash Equivalents 261,291 (63,360) Cash and Cash Equivalents at Beginning of Period 468,848 522,688 --------- --------- Cash and Cash Equivalents at End of Period $ 730,139 $ 459,328 ========= ========= Noncash Activities: Fair value of assets of acquired companies $ 35,982 $ 599,409 Cash paid for acquired companies (33,695) (518,662) Issuance of subsidiary stock options for acquired company - (2,080) --------- --------- Liabilities assumed of acquired companies $ 2,287 $ 78,667 ========= ========= Conversions of Company and subsidiary convertible obligations $ 6,262 $ 3,997 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. 7 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 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. Subordinated Convertible Debentures In January 1998, the Company sold at par value $250.0 million principal amount of 4% subordinated convertible debentures due 2005 for net proceeds of $244.2 million. The debentures are convertible into shares of the Company's common stock at a conversion price of $35.65 per share and are guaranteed on a subordinated basis by Thermo Electron Corporation. The Company used a portion of the proceeds to repay a $105.0 million promissory note to Thermo Electron. The $105.0 million promissory note was classified as long-term in the accompanying 1997 balance sheet, as its repayment was made using the proceeds of debt with a maturity beyond one year. 3. 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 $ 37,596 $ 37,219 $ 75,451 $ 70,806 -------- -------- -------- -------- Weighted average shares 122,176 121,527 122,121 121,433 -------- -------- -------- -------- Basic earnings per share $ .31 $ .31 $ .62 $ .58 ======== ======== ======== ======== 8 3. 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 $ 37,596 $ 37,219 $ 75,451 $ 70,806 Effect of: Convertible obligations 3,476 2,021 6,953 4,051 Majority-owned subsidiaries' dilutive securities (736) (318) (1,643) (753) -------- -------- -------- -------- Income available to common shareholders, as adjusted $ 40,336 $ 38,922 $ 80,761 $ 74,104 -------- -------- -------- -------- Weighted average shares 122,176 121,527 122,121 121,433 Effect of: Convertible obligations 23,446 16,692 23,451 16,760 Stock options 1,022 1,069 1,104 1,102 -------- -------- -------- -------- Weighted average shares, as adjusted 146,644 139,288 146,676 139,295 -------- -------- -------- -------- Diluted earnings per share $ .28 $ .28 $ .55 $ .53 ======== ======== ======== ======== The computation of diluted earnings per share for each period 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 596,000 of such options outstanding, with exercise prices ranging from $29.26 to $31.35 per share. 4. 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 represents 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 $40.7 million and $27.7 million, respectively. During the first six months of 1998 and 1997, the Company's comprehensive income totaled $75.4 million and $51.4 million, respectively. 9 5. Issuance of Stock by Subsidiaries Gain on issuance of stock by subsidiaries in the accompanying statement of income for the six-month period ended July 4, 1998, resulted from the following: Sale of 3,000,000 shares of Thermo BioAnalysis Corporation common stock in a public offering at $18.125 per share for net proceeds of $51.5 million resulted in a gain of $8.3 million. In addition, Thermo BioAnalysis sold 1,000,000 shares of its common stock to Thermo Electron for proceeds, net of commissions, of $17.5 million, for which no gain was recognized. Following the offering, the Company owned 60% of Thermo BioAnalysis' outstanding common stock. Sale of 3,300,000 shares of ONIX Systems Inc. common stock in an initial public offering at $14.50 per share for net proceeds of $43.2 million resulted in a gain of $10.0 million. Following the initial public offering, the Company owned 68% of ONIX Systems' outstanding common stock. Conversion of $1.8 million of Thermo Optek Corporation 5% subordinated convertible debentures, convertible at $13.94 per share, into 127,646 shares of Thermo Optek common stock resulted in a gain of $0.9 million. Following the conversions, the Company owned 91% of Thermo Optek's outstanding common stock. Conversion of $4.0 million of ThermoQuest Corporation 5% subordinated convertible debentures, convertible at $16.50 per share, into 239,393 shares of ThermoQuest common stock resulted in a gain of $1.8 million. Following the conversions, the Company owned 87% of ThermoQuest's outstanding common stock. 6. Acquisitions In June 1998, the Company acquired two businesses that constitute a portion of the environmental group of Smiths Industries plc's Graseby Limited subsidiary for $22.9 million in cash, net of cash acquired. These businesses are based in the United Kingdom and provide particulate-monitoring equipment and systems for the extraction and analysis of samples from industrial smokestacks. During the first six months of 1998, the Company acquired several other businesses for $10.2 million in cash, net of cash acquired. These acquisitions 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 aggregate cost of these acquisitions exceeded the estimated fair value of the acquired net assets by $18.9 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. The Company has gathered no information that indicates the final allocations will differ materially from the preliminary estimates. Pro forma results have not been presented as the results of the acquired businesses were not material to the Company's results of operations. 10 6. Acquisitions (continued) During 1997, the Company undertook a restructuring of Life Sciences International PLC, acquired in March 1997. In March 1998, the Company finalized its plan for restructuring the acquired business. At January 3, 1998, the remaining reserve for restructuring activities totaled $10.2 million. During the first six months of 1998, the Company expended $4.5 million for restructuring costs, primarily for severance. At July 4, 1998, the remaining reserve for restructuring the Life Sciences businesses was $7.4 million, as adjusted for the impact of currency translation, and primarily represents ongoing severance and abandoned-facility payments. During 1996, the Company undertook a restructuring of a substantial portion of the businesses constituting the Scientific Instruments Division of Fisons plc, acquired in March 1996. In March 1997, the Company finalized its plan for restructuring the acquired businesses. At January 3, 1998, the remaining reserve for restructuring activities totaled $11.1 million. During the first six months of 1998, the Company expended $1.2 million for restructuring costs, primarily for severance and abandoned-facility payments. At July 4, 1998, the remaining reserve for restructuring the Fisons businesses was $9.9 million and primarily represents ongoing severance and abandoned-facility payments. 7. Restructuring and Nonrecurring Costs In December 1996, five former employees of the Company's Epsilon Industrial, Inc. subsidiary sought damages in an arbitration proceeding for alleged breaches of agreements entered into with such employees prior to Epsilon's acquisition by the Company. The arbitrators rendered a decision with respect to such claims during the second quarter of 1998 and the Company recorded $1.4 million of nonrecurring costs related to the resolution of this matter. 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. 11 Results of Operations Second Quarter 1998 Compared With Second Quarter 1997 Revenues decreased $9.8 million, or 2%, to $395.4 million in the second quarter of 1998 from $405.2 million in the second quarter of 1997. Revenues decreased primarily due to an $18.4 million decline in sales at ThermoQuest Corporation. ThermoQuest's sales decline resulted principally from a $15.6 million decrease in sales of analytical instruments, of which $9.0 million was attributable to a decline in revenues from Europe and North America, primarily due to orders being received late in the quarter, and $4.0 million was attributable to lower sales in Asia due to unstable economic conditions in that region. The remainder of the decrease in ThermoQuest's sales resulted primarily from the impact of an affiliated company no longer using ThermoQuest's sales offices as a distributor for certain products and the unfavorable effects of currency translation due to the strengthening of the U.S. dollar relative to foreign currencies in countries in which it operates. ThermoQuest's backlog at July 4, 1998, increased by $7.2 million from the end of the first quarter of 1998. In addition, the effect of lower sales at Thermo Optek Corporation, primarily due to lower sales to the semiconductor industry and lower sales in Asia, was offset in part by higher sales at ONIX Systems Inc. due to the inclusion of revenues from acquisitions and increased sales of industry-specific instruments to the production segment of the oil and gas industry. In total, acquisitions added $15.0 million of revenues in 1998 and the unfavorable effects of currency translation decreased revenues by $7.2 million in 1998. The Company's backlog decreased $29.1 million during the first six months of 1998 to $269.8 million. The backlog decreased primarily at Thermo Optek and at ThermoSpectra Corporation and was principally a result of a slowdown in the semiconductor and related industries. 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 unchanged at 48% in the second quarter of 1998 and 1997. Selling, general, and administrative expenses as a percentage of revenues was unchanged at 27% in the second quarter of 1998 and 1997. Research and development expenses as a percentage of revenues was unchanged at 7% in 1998 and 1997. Five former employees of the Company's Epsilon Industrial, Inc. subsidiary had sought damages in an arbitration proceeding for alleged breaches of agreements entered into with such employees prior to Epsilon's acquisition by the Company. The arbitrators rendered a decision 12 Second Quarter 1998 Compared With Second Quarter 1997 (continued) with respect to such claims during the second quarter of 1998 and the Company recorded $1.4 million of nonrecurring costs related to the resolution of this matter (Note 7). Restructuring and nonrecurring costs of $0.8 million in 1997 represents severance for employees terminated during the quarter at one of ThermoSpectra's business units. ThermoSpectra expects to undertake additional restructuring activities during the remainder of 1998 which will result in additional charges. Interest income increased to $9.4 million in the second quarter of 1998 from $4.5 million in the second quarter of 1997, primarily due to interest income earned on invested proceeds from the Company's January 1998 issuance of $250.0 million principal amount of 4% subordinated convertible debentures, offset in part by the use of a portion of the proceeds to repay a $105.0 million promissory note to Thermo Electron Corporation (Note 2). To a lesser extent, interest income increased due to higher invested cash balances as a result of the sale of common stock by the Company's subsidiaries in 1997 and 1998. Interest expense increased slightly to $12.1 million in 1998 from $11.9 million in 1997. 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 subsidiaries upon conversion of convertible debentures, the Company recorded gains of $11.1 million in the second quarter of 1998 (Note 5) and $13.2 million in the second quarter of 1997. 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 was 33% in the second quarter of 1998 and 35% in the second quarter of 1997. Excluding the impact of the nontaxable gains on issuance of stock by subsidiaries in 1998 and 1997, 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. Excluding the impact of the nontaxable gains, the effective tax rate decreased in 1998, primarily due to the lower relative effect of nondeductible amortization of cost in excess of net assets of acquired companies and, to a lesser extent, a decrease in foreign tax losses not benefited. Minority interest expense increased to $5.3 million in the second quarter of 1998 from $2.3 million in the second quarter of 1997, primarily due to the minority interest associated with the Company's 13 Second Quarter 1998 Compared With Second Quarter 1997 (continued) newly public ONIX Systems and Thermo Vision Corporation subsidiaries, the minority interest associated with the earnings of certain of the Life Sciences International PLC businesses sold to ThermoQuest and Thermo Optek in 1997, and the increase in minority ownership as a result of the June 1998 sale of common stock by Thermo BioAnalysis. 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 Revenues increased $69.0 million, or 9%, to $803.3 million in the first six months of 1998 from $734.4 million in the first six months of 1997, due to acquisitions, which included Life Sciences in March 1997. Acquisitions added revenues of $96.6 million in the first six months of 1998. Sales increased at ONIX Systems due to higher sales of industry-specific instruments to the production segment of the oil and gas industry and at Metrika Systems Corporation as a result of higher demand at its finished-materials business and, to a lesser extent, at its raw materials business. The increase in revenues was offset in part by a decrease of $15.7 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. At ThermoQuest, revenues from Asia decreased $12.0 million due to economic uncertainty in that region. Revenues decreased at Thermo Optek due to lower sales to the semiconductor industry and lower sales in Asia. The gross profit margin was unchanged at 48% in the first six months of 1998 and 1997. A decline in the gross profit margin in 1998 due to the inclusion of lower-margin revenues at certain businesses acquired in 1997 was offset by the impact in 1997 of an adjustment to expense of $3.2 million relating to the sale of inventories revalued at the time of the acquisition of Life Sciences. 14 First Six Months 1998 Compared With First Six Months 1997 (continued) Selling, general, and administrative expenses as a percentage of revenues was unchanged at 27% in the first six months of 1998 and 1997. Research and development expenses as a percentage of revenues was unchanged at 7% in 1998 and 1997. Interest income increased to $17.6 million in the first six months of 1998 from $11.7 million in the first six months of 1997, primarily due to the reasons discussed in the results of operations for the second quarter. Interest expense increased to $23.6 million in 1998 from $20.4 million in 1997, primarily due to the issuance of an aggregate $428.8 million of promissory notes to Thermo Electron in 1997 in connection with acquisitions and the January 1998 issuance of the 4% subordinated convertible debentures. As a result of the sale of stock by subsidiaries and issuance of stock by subsidiaries upon conversion of convertible debentures, the Company recorded gains of $21.0 million in the first six months of 1998 (Note 5) and $25.2 million in the first six months of 1997. The effective tax rate was 34% in the first six months of 1998 and 1997. Excluding the impact of the nontaxable gains on issuance of stock by subsidiaries in 1998 and 1997, 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. Excluding the impact of the nontaxable gains, the effective tax rate decreased in 1998, primarily due to the lower relative effect of nondeductible amortization of cost in excess of net assets of acquired companies and, to a lesser extent, a decrease in foreign tax losses not benefited. Minority interest expense increased to $9.6 million in the first six months of 1998 from $4.4 million in the first six months of 1997, primarily due to the minority interest associated with the Company's newly public ONIX Systems, Metrika Systems, and Thermo Vision subsidiaries and the earnings of certain of the Life Sciences businesses sold to ThermoQuest and Thermo Optek in 1997. 15 Liquidity and Capital Resources Consolidated working capital was $922.7 million at July 4, 1998, compared with $612.7 million at January 3, 1998. Included in working capital are cash, cash equivalents, and available-for-sale investments of $739.2 million at July 4, 1998, and $477.2 million at January 3, 1998. Of the $739.2 million balance at July 4, 1998, $471.9 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 $78.5 million in the first six months of 1998. The Company used cash of $21.3 million to reduce other current liabilities, primarily to reduce accrued payroll and related benefits, principally at ThermoQuest, and to make payments for accrued acquisition expenses (Note 6). The Company used cash of $17.6 million to increase inventories, in part at Thermo BioAnalysis as a result of an increase in finished-goods inventory at its liquid-handling business and in part at ThermoQuest to replenish year-end inventory levels at its European sales offices and to build up inventories in preparation for a new product release. Cash flow from operations was improved by a decrease in accounts receivable of $25.6 million, primarily due to lower revenues at ThermoQuest and Thermo Optek, management efforts at Thermo Optek to reduce its investment in accounts receivable, and the timing of cash collections at Metrika Systems. At July 4, 1998, $135.0 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 $56.4 million of cash in the first six months of 1998, including $33.1 million for acquisitions (Note 6). ONIX Systems used $19.1 million of cash to pay Thermo Power Corporation for the Peek Measurement Business, acquired effective November 1997. The Company expended $12.4 million for purchases of property, plant, and equipment and received proceeds of $6.6 million from the sale of property, plant, and equipment. The Company's financing activities provided $239.8 million of cash in the first six months of 1998. Net proceeds from the issuance of Company and subsidiary common stock totaled $112.6 million, which included $112.2 million of net proceeds from the June 1998 sale of Thermo BioAnalysis' common stock and the March 1998 initial public offering of ONIX Systems' common stock (Note 5). In January 1998, the Company sold at par value $250.0 million principal amount of 4% subordinated convertible debentures due 2005 for net proceeds of $244.2 million (Note 2). The Company used a portion of the proceeds to repay a $105.0 million promissory note to Thermo Electron. In July 1998, the Company's Board of Directors authorized the repurchase by the Company of up to 3 million shares of its common stock, through July 1999, in the open market or in negotiated transactions, as well as up to $25 million of the common stock of its subsidiaries. 16 Liquidity and Capital Resources (continued) During the remainder of 1998, the Company plans to make expenditures of approximately $18 million for property, plant, and equipment. Since July 4, 1998, the Company and its majority-owned subsidiaries have expended $44.5 million on acquisitions of businesses and as of August 12, 1998, the Company and its majority-owned subsidiaries had agreements or nonbinding letters of intent to acquire new businesses totaling approximately $32 million. Proposed acquisitions of new businesses are subject to various conditions to closing, and there can be no assurance that all proposed transactions will be consummated. 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 and/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. Market Risk The Company's exposure to market risk from changes in foreign currency exchange rates, interest rates, and equity prices has not changed materially from its exposure at year-end 1997. 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 six directors to a one-year term expiring in 1999. The directors elected at the meeting were: Col. Frank Borman, Dr. George N. Hatsopoulos, Mr. John N. Hatsopoulos, Mr. Earl R. Lewis, Mr. Arvin H. Smith, and Mr. Polyvios C. Vintiadis. Col. Borman received 117,173,601 shares voted in favor of election and 81,202 shares voted against; Dr. G. Hatsopoulos and Mr. J. Hatsopoulos each received 117,181,941 shares voted in favor of election and 72,862 shares voted against; Mr. Lewis received 117,181,993 shares voted in favor of election and 72,810 shares voted against; Mr. Smith received 117,182,066 shares voted in favor of election and 72,737 shares voted against; and Mr. Vintiadis received 117,181,696 shares voted in favor of election and 73,107 shares voted against. No abstentions or broker nonvotes were recorded on the election of directors. 17 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 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. On August 12, 1998, Thermo Electron Corporation, which owns a majority of the Company's outstanding common stock, issued a press release concerning a proposed corporate reorganization involving several of its subsidiaries, including the Company. See Exhibit 99. Item 6 - Exhibits See Exhibit Index on the page immediately preceding exhibits. 18 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. THERMO INSTRUMENT SYSTEMS INC. Paul F. Kelleher --------------------------- Paul F. Kelleher Chief Accounting Officer John N. Hatsopoulos --------------------------- John N. Hatsopoulos Chief Financial Officer and Senior Vice President 19 EXHIBIT INDEX Exhibit Number Description of Exhibit - ------------------------------------------------------------------------ 27 Financial Data Schedule. 99 Thermo Electron Corporation Press Release dated August 12, 1998. 20 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THERMO INSTRUMENT SYSTEMS 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 730,139 9,014 362,610 21,406 284,554 1,454,012 322,939 112,537 2,617,537 531,323 606,964 0 0 12,282 939,760 2,617,537 803,335 803,335 418,884 814,884 56,260 661 23,627 128,033 42,948 75,451 0 0 0 75,451 0.62 0.55
EX-99 3 Investor Contact: 781-622-1111 Media Contact: 781-622-1252 THERMO ELECTRON PROPOSES CORPORATE REORGANIZATION WALTHAM, Mass., August 12, 1998 -- Thermo Electron Corporation (NYSE-TMO) today announced that its board of directors has authorized a proposed corporate reorganization. The goals of the plan are to: *Reduce the complexity of the company's corporate structure, *Consolidate and strategically realign certain businesses to enhance their competitive market positions and improve management coordination, and *Increase the liquidity in the public markets for stock of the company's publicly traded subsidiaries by providing larger market floats. The proposed reorganization is expected to reduce the number of Thermo Electron's majority-owned public subsidiaries from 23 to 15. The company expects to promptly begin implementation of the reorganization, although it may take up to two years to complete all aspects of the plan. George N. Hatsopoulos, chairman of Thermo Electron, said, "We firmly believe that spinouts continue to offer many advantages. The strategy is dynamic - - allowing us to respond to changes in the marketplace and revamp those parts of the structure that no longer meet our goals for a public subsidiary. In some cases, the potential rewards for some of our companies have become out of line with the risks. We will continue to closely monitor the performance of our spinouts to assess their viability in the public markets. I wish to stress that the benefits we anticipate from this reorganization are long term. We do not anticipate any material benefits in the short term." John N. Hatsopoulos, president and chief financial officer of Thermo Electron, added, "Our number one goal for this plan is to simplify our company. We also expect that larger, more closely aligned businesses will strengthen our competitive positions. Larger size should create better liquidity for investors by increasing the public float, and, we believe, keep in proper perspective some of the problems experienced by our smaller subsidiaries." The proposed corporate reorganization is best outlined in four general categories: 1.Reorganization of biomedical businesses. The wholly owned biomedical group of Thermo Electron, called Thermo Biomedical, would be transferred to Thermo Electron's Thermedics subsidiary to better position the company to expand its presence in that marketplace, while creating a focused company for healthcare investors. Thermo Biomedical, which includes Bear Medical Systems Inc.; Bird Products Corporation; Bird Life Design Corporation; Stackhouse Inc.; SensorMedics Corporation; Medical Data Electronics, Inc.; and Nicolet Biomedical Inc., had unaudited 1997 revenues of -more- $232 million. These companies would be transferred from Thermo Electron to Thermedics in exchange for Thermedics shares. 2.Realignment of instrument companies. First, Thermedics' non-biomedical public subsidiaries - Thermo Sentron, Thermedics Detection, and Thermo Voltek (if not sold to an unaffiliated third party) - would be transferred to Thermo Electron's Thermo Instrument Systems subsidiary, creating efficiencies by aligning these industrial instrumentation businesses with the instrument family of companies for a better strategic fit. Thermedics' majority ownership in each of these subsidiaries would be transferred to Thermo Electron for shares of Thermedics common stock held by Thermo Electron. Thermo Electron, in turn, would transfer these equity interests to Thermo Instrument Systems in exchange for cash. If Thermo Voltek is not sold to an unaffiliated third party, it would become a wholly owned subsidiary of Thermo Instrument Systems. Second, two public Thermo Instrument Systems subsidiaries - Metrika Systems and ONIX Systems - and Thermo Sentron, would be merged to form one combined majority-owned public subsidiary of Thermo Instrument Systems. The company believes that the combined entity, with complementary products, technologies, and distribution networks, would be better able to address the market for industrial sensors and advanced process control systems. Shareholders of each of the three companies would receive shares of common stock in the combined entity in exchange for their shares in the subsidiaries. Third, ThermoSpectra, a public subsidiary of Thermo Instrument Systems, along with Thermedics Detection, would be taken private and become wholly owned subsidiaries of Thermo Instrument Systems. ThermoSpectra and Thermedics Detection shareholders would receive cash or Thermo Instrument Systems common stock in exchange for their shares of common stock of ThermoSpectra or Thermedics Detection. 3.Consolidation of industrial outsourcing companies. The public and private subsidiaries of Thermo Electron's Thermo TerraTech subsidiary - Thermo Remediation, The Randers Group, and Thermo EuroTech - would be consolidated into Thermo TerraTech to strengthen the group's ability to compete in the industrial and environmental outsourcing markets, as well as enhance their ability to withstand adverse market conditions. Shareholders of each of these subsidiaries would receive common stock in Thermo TerraTech in exchange for their shares in the subsidiaries. 4.Other strategic reorganizations. Thermo Coleman, a private subsidiary of Thermo Electron, would be merged into Thermo Electron's ThermoTrex subsidiary, consolidating the company's R&D and government-contract work within one entity to offer greater efficiencies and enhance opportunities to develop and commercialize technologies. Thermo Coleman shareholders would receive shares of ThermoTrex common stock in exchange for their Thermo Coleman shares. Also, Thermo Power, a public subsidiary of Thermo Electron, would be taken private and become a wholly owned subsidiary of Thermo Electron. Shareholders of Thermo Power would receive cash or Thermo Electron common stock in exchange for their shares of Thermo Power common stock. -more- All convertible debentures previously issued by subsidiaries that will no longer be majority-owned entities following this reorganization will be assumed by the surviving public parent company, and will be convertible into common stock of that company. Thermo Electron's guarantee of each of these convertible debentures will not be affected by the proposed reorganization. While these transactions will generate numerous costs, including investment banking fees, legal fees, and government filings, the company does not believe that any significant restructuring charges will be necessary. The company also plans to divest of certain non-strategic businesses, totaling approximately $100 million in revenues, that no longer fit its profile for long-term growth potential. Proposed Corporate Reorganization Boldface type indicates public entity (*) *Thermo Electron *Thermo Instrument Thermo Power Thermedics Detection Tecomet ThermoSpectra Peter Brotherhood Thermo Voltek Napco *ThermoQuest *Thermo BioAnalysis *Thermo Ecotek *Thermo Optek *Thermo Vision *Thermo Fibertek *New Co. (Thermo Sentron, *Thermo Fibergen Metrika Systems, ONIX Systems) *Thermo TerraTech *ThermoTrex Thermo Remediation Thermo Coleman Randers Group *Trex Medical Thermo EuroTech *ThermoLase *Thermedics Thermo Biomedical *Thermo Cardiosystems All of these transactions will be subject to numerous conditions, including establishment of prices and exchange ratios, confirmation of anticipated tax consequences, approval by the board of directors (including the independent directors) of each of the affected majority-owned subsidiaries, negotiation and execution of definitive purchase and sale or merger agreements, clearance by the Securities and Exchange Commission of registration statements and/or proxy materials regarding the proposed transactions, and, where appropriate, fairness opinions from investment banking firms. Any such transactions that will involve a public offering of securities will be made only by means of a prospectus. -more- Thermo Electron Corporation is a world leader in analytical and monitoring instruments; biomedical products including heart-assist devices, respiratory-care equipment, and mammo-graphy systems; and paper recycling and papermaking equipment. The company also develops alternative-energy systems and clean fuels, provides a range of services including industrial outsourcing and environmental-liability management, and conducts research and development in advanced imaging, laser communications, and electronic information-management technologies. With annual worldwide sales of $3.6 billion, Thermo Electron has approximately 22,000 employees and operations in 23 countries. Headquarters are in Waltham, Massachusetts. More information is available on the Internet at http://www.thermo.com. This press release contains forward-looking statements that involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth under the heading "Forward-looking Statements" in Exhibit 13 to the company's annual report on Form 10-K, as amended, for the year ended January 3, 1998. These include risks and uncertainties relating to: the company's spinout and acquisition strategies, competition, international operations, technological change, possible changes in governmental regulations, regulatory approval requirements, capital spending and government funding policies, dependence on intellectual property rights, and the potential impact of the year 2000 on processing date-sensitive information. In addition to the foregoing risks, the proposed corporate reorganization is subject to the risk that the contemplated benefits of the plan will not be achieved. -----END PRIVACY-ENHANCED MESSAGE-----