How strong was Thermo Electron's 1997 earnings growth, and how much of it came from core operations?

Net income rose 25% to $239.3 million, and operating income rose 65% to $405.8 million, which is the better measure of core operating performance. Reported earnings include $80.1 million of nonoperating gains from subsidiary stock issuances, which are less predictable and depend on market conditions. Part of the operating improvement came from acquisitions, and 1996 operating income was depressed by restructuring charges of $37.6 million.

What is the risk that the subsidiary-stock gain model could change?

The company disclosed that the FASB was considering a Proposed Statement on consolidation policy that would treat subsidiary stock sales that do not result in loss of control as equity transactions, with no gain recorded. The timing and content of any final standard were uncertain, so reported earnings could look materially different if it is adopted.

Is the company's debt load a concern for investors?

Long-term obligations rose to $1.74 billion, and the company issued $250 million of 4% convertible debentures in January 1998. Most debt is convertible into common stock of the parent or subsidiaries, and the fair value of convertible obligations ($1.86 billion) exceeded carrying value ($1.66 billion), reflecting share prices above conversion prices. Management also stated it intends to keep parent or subsidiary ownership above certain thresholds, which may require ongoing share purchases of about $311 million in 1997.

What are the most significant disclosed legal and operational risks?

Key items include an arbitration claim by five former Epsilon employees seeking $27-46 million plus punitive damages, an ITC and district court patent dispute between ThermoQuest's Finnigan unit and Bruker that includes antitrust counterclaims, a qui tam False Claims Act suit against Thermo Coleman, and a potential material impact from Thermo Ecotek's exposure to PSNH's possible bankruptcy. Management said the ultimate liability from these matters was not expected to be material to financial position, though results could be materially affected in a given period.

TMO 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 12, 1998. Cited figures are marked; the original filing is the authoritative source.

Thermo Electron Corporation (NYSE: TMO) reported fiscal 1997 (53 weeks ended January 3, 1998) revenue of $3.56 billion^a, up 21% from $2.93 billion in 1996, with operating income up 65% to $405.8 million and net income up 25% to $239.3 million.

Diluted EPS rose to $1.41^b from $1.17. Growth was driven largely by acquisitions, most notably Life Sciences International (Instruments) and Peek plc (Alternative-energy Systems), with the Instruments segment contributing the bulk of revenue growth (sales up 32% to $1.59 billion) and segment income up sharply. Backlog reached $895.5 million, up about 10% year over year.

Investors should note the quality of earnings. Net income includes $80.1 million^c of non-operating gains from subsidiaries issuing stock, down from $126.6 million in 1996, and such gains have been a substantial part of reported profits in certain periods. The company's model relies on a spinout strategy in which majority-owned public subsidiaries sell minority stakes, which creates gains but also means a large share of cash ($1.33 billion of $1.59 billion in cash and investments) sits in subsidiaries that are not wholly owned.

Long-term obligations rose to $1.74 billion^d, largely in convertible debentures issued by the parent and its subsidiaries, and the company disclosed a pending FASB proposal that could eliminate subsidiary-stock issuance gains. Several risks were disclosed: Thermo Ecotek faces uncertainty from New Hampshire utility deregulation and operational problems at its Gillette coal-beneficiation plant; the Thermo Cardiosystems LVAS sales decline awaits FDA approval; ThermoLase is posting growing losses; and there are pending litigation matters, including an arbitration with former Epsilon employees claiming $27-46 million in damages and a patent dispute involving ThermoQuest. The company has never paid cash dividends.

02—Key points

Key Highlights

Revenue grew 21% to $3.56 billion in fiscal 1997, driven by acquisitions and a 32% rise in Instruments segment sales to $1.59 billion.
Operating income rose 65% to $405.8 million, and net income increased 25% to $239.3 million; diluted EPS was $1.41 versus $1.17 in 1996.
Non-operating gains from subsidiary stock issuances totaled $80.1 million (vs. $126.6 million in 1996), a significant but declining component of reported earnings.
Backlog of firm orders reached $895.5 million at year-end 1997, up from $811.9 million, with management expecting substantially all to be filled in 1998.
Long-term obligations increased to $1.74 billion from $1.55 billion, largely from convertible debentures issued by the parent and majority-owned subsidiaries.
The spinout strategy means most cash is held by majority-owned subsidiaries: $1.33 billion of $1.59 billion in cash and investments, which may limit parent-level access to liquidity.
Key risks include the FASB consolidation proposal that could end subsidiary-stock gain recognition, Thermo Ecotek's New Hampshire and Gillette exposures, and pending litigation with an estimated $27-46 million claim from former Epsilon employees.

03—Questions

Frequently Asked Questions

How strong was Thermo Electron's 1997 earnings growth, and how much of it came from core operations?
Net income rose 25% to $239.3 million, and operating income rose 65% to $405.8 million, which is the better measure of core operating performance. Reported earnings include $80.1 million of nonoperating gains from subsidiary stock issuances, which are less predictable and depend on market conditions. Part of the operating improvement came from acquisitions, and 1996 operating income was depressed by restructuring charges of $37.6 million.
What is the risk that the subsidiary-stock gain model could change?
The company disclosed that the FASB was considering a Proposed Statement on consolidation policy that would treat subsidiary stock sales that do not result in loss of control as equity transactions, with no gain recorded. The timing and content of any final standard were uncertain, so reported earnings could look materially different if it is adopted.
Is the company's debt load a concern for investors?
Long-term obligations rose to $1.74 billion, and the company issued $250 million of 4% convertible debentures in January 1998. Most debt is convertible into common stock of the parent or subsidiaries, and the fair value of convertible obligations ($1.86 billion) exceeded carrying value ($1.66 billion), reflecting share prices above conversion prices. Management also stated it intends to keep parent or subsidiary ownership above certain thresholds, which may require ongoing share purchases of about $311 million in 1997.
What are the most significant disclosed legal and operational risks?
Key items include an arbitration claim by five former Epsilon employees seeking $27-46 million plus punitive damages, an ITC and district court patent dispute between ThermoQuest's Finnigan unit and Bruker that includes antitrust counterclaims, a qui tam False Claims Act suit against Thermo Coleman, and a potential material impact from Thermo Ecotek's exposure to PSNH's possible bankruptcy. Management said the ultimate liability from these matters was not expected to be material to financial position, though results could be materially affected in a given period.

04—Continue

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