How much of Thermo Electron's 1995 profit came from one-time gains on subsidiary stock sales?

Gains on issuance of stock by subsidiaries were $80.8 million in 1995, compared with $25.3 million in 1994. These gains arise when majority-owned subsidiaries sell shares above book value, and they are nontaxable. They represented roughly 36% of 1995 pre-tax income, so investors should evaluate operating earnings separately. The company states that there can be no assurance such gains will continue.

What are the main risks to earnings in 1996?

Key risks include the expected expensing of reserve funding at the Woodland, California power plant beginning in the third quarter of 1996, which the company expects will reduce that plant's results to about breakeven. Coleman Research's backlog decline could reduce revenue. Litigation includes a $25 million claim against the company over an alternative-energy facility and an appeal of the $11 million Napco verdict, and Napco has filed for bankruptcy. Dade County cogeneration matters could also lead to refunds or liabilities if a settlement is not approved.

What is the Fisons acquisition and how will it affect the company?

Thermo Instrument, a subsidiary, agreed to acquire the Scientific Instruments Division of Fisons plc. After FTC and U.K. antitrust clearances, the modified deal is expected to cost slightly less than 150 million pounds sterling and excludes the mass spectrometer businesses. It remained subject to third-party consents and other closing conditions as of the filing. Management has not described the expected earnings impact in this filing.

Does the company pay dividends, and how is its capital structure financed?

The company has never paid cash dividends and does not expect to in the foreseeable future, choosing to reinvest earnings. It financed growth with convertible debentures at both parent and subsidiary levels, with $1.12 billion of long-term obligations at year-end 1995, and with stock issuances of $173.3 million. Subsidiary convertible debentures are guaranteed by the parent, and a change in control could trigger put rights and exchanges into parent stock.

TMO 10-K FY1995 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 13, 1996. Cited figures are marked; the original filing is the authoritative source.

Thermo Electron Corporation (NYSE: TMO, now part of Thermo Fisher Scientific) reported fiscal 1995 revenue of $2.21 billion^a, up 28% from $1.73 billion, and net income of $140.1 million, up 34% from $104.7 million.

Primary EPS was $1.67^b and fully diluted EPS was $1.48. Operating income rose 24% to $225.5 million after $21.9 million of restructuring and nonrecurring charges. Growth came from acquisitions, organic gains in Instruments and Biomedical Products, and a 42% jump in Biomedical sales.

Investors should note that earnings quality depends heavily on "gain on issuance of stock by subsidiaries" ($80.8 million^c in 1995, versus $25.3 million in 1994), which the company itself warns may not recur. Those gains are nontaxable and make up a large share of reported pre-tax income. The balance sheet strengthened, with cash and short-term investments of $1.06 billion and working capital of $1.31 billion.

The company also issued $585 million^d of 4.25% subordinated convertible debentures in January 1996, which will raise long-term debt. Total assets reached $3.74 billion. Backlog declined to $687 million from $738 million, and Coleman Research's backlog fell, which could weigh on 1996 revenue.

Risks include a waste-recycling facility write-off, a Woodland, California power plant that is expected to fall to roughly breakeven from the third quarter of 1996, litigation (including the Dade County cogeneration joint venture and a $25 million developer suit), and a pending Fisons scientific instruments acquisition of roughly 150 million pounds sterling. The company has a decentralized model of majority-owned public and private subsidiaries that sell minority stakes to outside investors.

Management says this spinout strategy motivates subsidiary management and supports growth. The model also means that parent-level cash is not always fully accessible, and the company has no plans to pay cash dividends.

02—Key points

Key Highlights

Revenue rose 28% to $2,207.4 million in 1995, driven by acquisitions and growth in Instruments ($782.7 million) and Biomedical Products (up 42% to $255.8 million).
Net income grew 34% to $140.1 million; fully diluted EPS was $1.48 versus $1.20 in 1994.
Gains on subsidiary stock issuances totaled $80.8 million, about 36% of pre-tax income of $299.5 million, and are nontaxable and not guaranteed to recur.
Segment income before restructuring charges rose 31% to $270.1 million, although the Instruments margin fell to 14.5% from 16.2%.
Backlog fell to $687.2 million from $738.2 million, with declines in Advanced Technologies and Process Equipment.
A $585 million convertible debenture issue in January 1996 and a $1.06 billion cash and short-term investment position give the company significant liquidity, but total long-term obligations were $1.12 billion at year-end.
The company has no plans to pay cash dividends, reinvesting earnings to fund growth, and it has about 14,400 employees and 16 subsidiaries with minority public or private ownership.

03—Questions

Frequently Asked Questions

How much of Thermo Electron's 1995 profit came from one-time gains on subsidiary stock sales?
Gains on issuance of stock by subsidiaries were $80.8 million in 1995, compared with $25.3 million in 1994. These gains arise when majority-owned subsidiaries sell shares above book value, and they are nontaxable. They represented roughly 36% of 1995 pre-tax income, so investors should evaluate operating earnings separately. The company states that there can be no assurance such gains will continue.
What are the main risks to earnings in 1996?
Key risks include the expected expensing of reserve funding at the Woodland, California power plant beginning in the third quarter of 1996, which the company expects will reduce that plant's results to about breakeven. Coleman Research's backlog decline could reduce revenue. Litigation includes a $25 million claim against the company over an alternative-energy facility and an appeal of the $11 million Napco verdict, and Napco has filed for bankruptcy. Dade County cogeneration matters could also lead to refunds or liabilities if a settlement is not approved.
What is the Fisons acquisition and how will it affect the company?
Thermo Instrument, a subsidiary, agreed to acquire the Scientific Instruments Division of Fisons plc. After FTC and U.K. antitrust clearances, the modified deal is expected to cost slightly less than 150 million pounds sterling and excludes the mass spectrometer businesses. It remained subject to third-party consents and other closing conditions as of the filing. Management has not described the expected earnings impact in this filing.
Does the company pay dividends, and how is its capital structure financed?
The company has never paid cash dividends and does not expect to in the foreseeable future, choosing to reinvest earnings. It financed growth with convertible debentures at both parent and subsidiary levels, with $1.12 billion of long-term obligations at year-end 1995, and with stock issuances of $173.3 million. Subsidiary convertible debentures are guaranteed by the parent, and a change in control could trigger put rights and exchanges into parent stock.

04—Continue

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