UNITED STATES
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 28, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-8002
THERMO ELECTRON CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2209186
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(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 and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at October 25, 2002
----------------------------- -------------------------------
Common Stock, $1.00 par value 163,518,507
PART I - Financial Information
Item 1 - Financial Statements
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
September 28, December 29,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 233,604 $ 297,557
Short-term available-for-sale investments, at quoted market value (amortized
cost of $564,213 and $697,757; Notes 4, 11, and 14) 622,653 744,321
Accounts receivable, less allowances of $26,123 and $26,525 413,726 410,960
Unbilled contract costs and fees 16,595 24,071
Inventories:
Raw materials and supplies 151,540 149,817
Work in process 55,025 56,417
Finished goods (includes $16,293 and $14,918 at customer locations) 146,853 130,807
Deferred tax asset 90,106 82,766
Other current assets 53,580 68,494
---------- ----------
1,783,682 1,965,210
---------- ----------
Property, Plant, and Equipment, at Cost 499,566 482,386
Less: Accumulated depreciation and amortization 227,917 211,674
---------- ----------
271,649 270,712
---------- ----------
Long-term Available-for-sale Investments, at Quoted Market Value (amortized cost
of $5,729) - 9,360
---------- ----------
Other Assets (Notes 9 and 10) 201,556 231,395
---------- ----------
Goodwill (Notes 2, 8, and 12) 1,416,979 1,348,393
---------- ----------
$3,673,866 $3,825,070
========== ==========
<
2
>
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
September 28, December 29,
(In thousands except share amounts) 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Short-term obligations and current maturities of long-term obligations
(Notes 5, 11, and 17) $ 513,975 $ 528,988
Accounts payable 101,565 111,950
Accrued payroll and employee benefits 84,260 92,262
Accrued income taxes 77,492 30,797
Deferred revenue 57,675 48,166
Accrued restructuring costs (Note 13) 44,161 60,685
Other accrued expenses (Note 2) 178,519 203,775
Net liabilities of discontinued operations (Note 14) 78,146 65,416
---------- ----------
1,135,793 1,142,039
---------- ----------
Long-term Deferred Income Taxes and Other Deferred Items 45,722 40,486
---------- ----------
Long-term Obligations (Note 17):
Senior convertible obligations - 145,414
Senior notes (Note 10) 142,030 128,725
Subordinated convertible obligations 381,079 445,377
Other 6,272 7,986
---------- ----------
529,381 727,502
---------- ----------
Minority Interest (Note 12) - 6,901
---------- ----------
Shareholders' Investment:
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized; 179,229,410 and
199,816,264 shares issued (Note 16) 179,229 199,816
Capital in excess of par value 1,360,919 1,758,567
Retained earnings 732,259 509,681
Treasury stock at cost, 15,094,603 and 23,458,555 shares (Note 16) (273,998) (457,475)
Deferred compensation (1,566) (3,157)
Accumulated other comprehensive items (Notes 7 and 10) (33,873) (99,290)
---------- ----------
1,962,970 1,908,142
---------- ----------
$3,673,866 $3,825,070
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
<
3
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
--------------------------------
September 28, September 29,
(In thousands except per share amounts) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $517,171 $512,941
-------- --------
Costs and Operating Expenses:
Cost of revenues (Note 13) 288,514 284,455
Selling, general, and administrative expenses 139,326 148,318
Research and development expenses 37,553 41,962
Restructuring and other unusual costs, net (Note 13) 6,907 9,571
-------- --------
472,300 484,306
-------- --------
Operating Income 44,871 28,635
Other Income, Net (Notes 4 and 10) 11,738 11,605
-------- --------
Income Before Provision for Income Taxes, Minority Interest, and Extraordinary Item 56,609 40,240
Provision for Income Taxes (17,626) (15,090)
Minority Interest Income - 527
-------- --------
Income Before Extraordinary Item 38,983 25,677
Extraordinary Item (net of income tax provision of $18 and $362; Notes 5 and 8) 34 602
-------- --------
Net Income $ 39,017 $ 26,279
======== ========
Earnings per Share Before Extraordinary Item (Note 6):
Basic $ .24 $ .14
======== ========
Diluted $ .23 $ .14
======== ========
Earnings per Share (Note 6):
Basic $ .24 $ .15
======== ========
Diluted $ .23 $ .14
======== ========
Weighted Average Shares (Note 6):
Basic 165,701 180,280
======== ========
Diluted 176,342 182,823
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
<
4
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
--------------------------------
September 28, September 29,
(In thousands except per share amounts) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $1,517,610 $1,628,502
---------- ----------
Costs and Operating Expenses:
Cost of revenues (Note 13) 835,509 906,700
Selling, general, and administrative expenses 417,610 463,983
Research and development expenses 116,933 131,033
Restructuring and other unusual costs, net (Note 13) 30,777 44,146
---------- ----------
1,400,829 1,545,862
---------- ----------
Operating Income 116,781 82,640
Other Income, Net (Notes 4 and 10) 111,035 7,711
---------- ----------
Income from Continuing Operations Before Provision for Income Taxes, Minority
Interest, Extraordinary Item, and Cumulative Effect of Change in Accounting
Principle 227,816 90,351
Provision for Income Taxes (75,293) (34,758)
Minority Interest Income 331 1,326
---------- ----------
Income from Continuing Operations Before Extraordinary Item and Cumulative Effect of
Change in Accounting Principle 152,854 56,919
Gain (Loss) on Disposal of Discontinued Operations, Net (includes tax benefit of
$13,408 in 2002; net of tax benefit of $22,741 in 2001; Note 14) 70,370 (50,440)
---------- ----------
Income Before Extraordinary Item and Cumulative Effect of Change in Accounting
Principle 223,224 6,479
Extraordinary Item (net of income tax benefit of $348 and income tax provision
of $362; Notes 5 and 8) (646) 602
---------- ----------
Income Before Cumulative Effect of Change in Accounting Principle 222,578 7,081
Cumulative Effect of Change in Accounting Principle (net of income tax benefit
and minority interest of $663) - (994)
---------- ----------
Net Income $ 222,578 $ 6,087
========== ==========
Earnings per Share from Continuing Operations Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle (Note 6):
Basic $ .90 $ .31
========== ==========
Diluted $ .86 $ .31
========== ==========
Earnings per Share (Note 6):
Basic $ 1.31 $ .03
========== ==========
Diluted $ 1.23 $ .03
========== ==========
Weighted Average Shares (Note 6):
Basic 170,358 181,588
========== ==========
Diluted 190,399 185,019
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
<
5
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
--------------------------------
September 28, September 29,
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 222,578 $ 6,087
(Gain) loss on disposal of discontinued operations, net (Note 14) (70,370) 50,440
--------- ---------
Income from continuing operations 152,208 56,527
Adjustments to reconcile income from continuing operations to net cash provided
by (used in) operating activities:
Depreciation and amortization (Note 8) 42,199 74,080
Noncash restructuring and other unusual costs, net (Note 13) 10,070 21,698
Provision for losses on accounts receivable 2,015 3,028
Minority interest income (331) (1,326)
Equity in earnings of unconsolidated subsidiaries (Note 4) (2,169) (2,911)
Cumulative effect of change in accounting principle, net of income tax
benefit and minority interest - 994
Change in deferred income taxes (6,183) (7,235)
(Gain) loss on sale of businesses (8,544) 11,443
Gain on investments, net (Note 4) (103,381) (8,518)
Extraordinary item, net of income taxes (Note 5) 646 (602)
Other noncash items, net 4,611 6,496
Other unusual income (782) (511)
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable 15,612 (8,728)
Inventories 4,962 (27,321)
Other current assets (4,900) (19,873)
Accounts payable (15,465) (17,007)
Other current liabilities (38,251) 24,458
--------- ---------
Net cash provided by continuing operations 52,317 104,692
Net cash provided by (used in) discontinued operations (53,594) 21,422
--------- ---------
Net cash provided by (used in) operating activities (1,277) 126,114
--------- ---------
Investing Activities:
Purchases of available-for-sale investments - (616,061)
Proceeds from sale of available-for-sale investments (Note 4) 96,247 51,306
Proceeds from maturities of available-for-sale investments 151,812 217,618
Proceeds from sale of other investments (Note 4) 65,251 -
Purchases of property, plant, and equipment (36,183) (66,002)
Proceeds from sale of property, plant, and equipment 8,779 10,976
Acquisition of minority interest of subsidiary (Note 12) (22,076) -
Acquisitions, net of cash acquired (Note 2) (78,259) (14,129)
Collection of note receivables 73,980 -
<
6
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
--------------------------------
September 28, September 29,
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
Investing Activities (continued):
Proceeds from sale of businesses, net of cash divested (Note 2) $ 24,405 $ 46,767
Advance to affiliates - (50,199)
Increase in other assets (7,707) (4,312)
Other 2,792 7,974
--------- ---------
Net cash provided by (used in) continuing operations 279,041 (416,062)
Net cash provided by discontinued operations 106,031 477,368
--------- ---------
Net cash provided by investing activities 385,072 61,306
--------- ---------
Financing Activities:
Redemption and repayment of long-term obligations (Note 5) (462,101) (40,186)
Net proceeds from issuance of Company and subsidiary common stock 15,032 46,427
Purchases of Company common stock and subordinated convertible debentures (Note 5) (292,688) (307,530)
Increase in short-term notes payable (Note 11) 276,479 18,308
Other 2,967 (2,066)
--------- ---------
Net cash used in continuing operations (460,311) (285,047)
Net cash provided by (used in) discontinued operations 371 (191,073)
--------- ---------
Net cash used in financing activities (459,940) (476,120)
--------- ---------
Exchange Rate Effect on Cash of Continuing Operations 8,650 1,331
Exchange Rate Effect on Cash of Discontinued Operations 328 4,953
--------- ---------
Decrease in Cash and Cash Equivalents (67,167) (282,416)
Cash and Cash Equivalents at Beginning of Period 305,200 636,252
--------- ---------
238,033 353,836
Cash and Cash Equivalents of Discontinued Operations at End of Period (4,429) (13,648)
--------- ---------
Cash and Cash Equivalents at End of Period $ 233,604 $ 340,188
========= =========
Noncash Investing Activities:
Fair value of assets of acquired businesses $ 94,668 $ 18,161
Cash paid for acquired businesses (78,401) (14,834)
--------- ---------
Liabilities assumed of acquired businesses $ 16,267 $ 3,327
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
<
7
>
THERMO ELECTRON CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been
prepared by Thermo Electron Corporation (the Company or the Registrant), are
unaudited 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 28, 2002, the results of operations for the three- and nine-month
periods ended September 28, 2002, and September 29, 2001, and the cash flows for
the nine-month periods ended September 28, 2002, and September 29, 2001.
Prior-period amounts have been reclassified to conform to the presentation in
the current financial statements. Interim results are not necessarily indicative
of results for a full year.
The consolidated balance sheet presented as of December 29, 2001, has
been derived from the audited consolidated financial statements as of that date.
The consolidated financial statements and notes are presented as permitted by
Form 10-Q and do not contain all of the information that is included in the
annual financial statements and notes of the Company. The consolidated financial
statements and notes included in this report 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 December 29, 2001, filed with the Securities
and Exchange Commission.
2. Acquisitions and Dispositions
Acquisitions
In July 2002, the Measurement and Control segment acquired the
radiation-monitoring products business (RMP) of Saint-Gobain Corporation. The
aggregate purchase price was approximately $31 million in cash, net of cash
acquired. The purchase price exceeded the fair value of the acquired net assets
and, accordingly, approximately $12 million has been allocated as goodwill. RMP
is a major supplier of radiation safety, security, and industrial equipment to
the U.S. market, and the leader in personal radiation monitoring in the United
Kingdom.
In April 2002, the Life and Laboratory Sciences segment acquired
11,265,873 shares (or approximately 97%) of CRS Robotics Corporation (CRS), a
Toronto Stock Exchange-listed company, for 5.75 Canadian dollars per share
(approximately $3.68 per share) as a result of the Company's cash tender offer
to acquire all of the outstanding shares of CRS. In May 2002, the segment
completed the acquisition of the remaining CRS shares outstanding and
subsequently renamed the business Thermo CRS. The aggregate purchase price was
approximately $43 million in cash, net of cash acquired. The purchase price
exceeded the fair value of the acquired net assets and, accordingly,
approximately $25 million has been allocated as goodwill. Thermo CRS is a global
supplier of lab automation robotics, software, and equipment to the
drug-discovery market. In addition, in May 2002, the Optical Technologies
segment acquired a product line of microbeam X-ray fluorescence (XRF) metrology
tools for approximately $4 million in cash.
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 purchase price allocation will
differ materially from the preliminary estimates except that, in the fourth
quarter of 2002, the Company expects the final purchase price allocation for RMP
to result in a reallocation between goodwill and other identifiable intangible
assets following completion of a valuation. The results of operations of the
acquisitions are included in the Company's consolidated financial statements
from the respective dates of acquisition. Pro forma results are not presented as
the acquisitions did not materially affect the Company's results of operations.
<
8
>
THERMO ELECTRON CORPORATION
2. Acquisitions and Dispositions (continued)
The Company has undertaken restructuring activities at acquired
businesses. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3,
"Recognition of Liabilities in Connection with a Purchase Business Combination,"
primarily have included reductions in staffing levels and the abandonment of
excess facilities. In connection with these restructuring activities, as part of
the cost of acquisitions, the Company established reserves, primarily for
severance and excess facilities. In accordance with EITF 95-3, the Company
finalizes its restructuring plans no later than one year from the respective
dates of the acquisitions. Accrued acquisition expenses are included in other
accrued expenses in the accompanying balance sheet.
A summary of the changes in accrued acquisition expenses for acquisitions
completed during 2002 is as follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- -------------------------------------------------------------------------------------------------------------------------------
Reserves established $1,619 $ 509 $ 515 $2,643
Payments (335) - (28) (363)
Currency translation 27 50 7 84
------ ------ ------ ------
Balance at September 28, 2002 $1,311 $ 559 $ 494 $2,364
====== ====== ====== ======
The principal accrued acquisition expenses for 2002 acquisitions were for
severance for approximately 98 employees at the acquired businesses, primarily
in manufacturing, research and development, and sales and service; closure of a
Thermo CRS manufacturing facility in Austria, with a lease expiring in 2005,
that will be consolidated into other existing facilities; and relocation of RMP
employees from the seller's operations in Ohio and the United Kingdom to the
Company's facilities. Excluding the lease obligation, the Company expects to pay
amounts accrued for acquisition expenses through mid-2003.
A summary of the changes in accrued acquisition expenses for acquisitions
completed before and during 1999 is as follows:
1999 Acquisitions
----------------------------------------------
Abandonment
of Excess Pre-1999
(In thousands) Severance Facilities Other Acquisitions Total
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 29, 2001 $ 626 $ 10 $ 131 $6,216 $6,983
Payments (204) (11) (74) (305) (594)
Decrease recorded as a reduction in
other intangible assets (300) - - - (300)
Decrease recorded as a reduction in
goodwill (29) - (74) - (103)
Currency translation 37 1 17 493 548
------ ------ ------ ------ ------
Balance at September 28, 2002 $ 130 $ - $ - $6,404 $6,534
====== ====== ====== ====== ======
The remaining accrued acquisition expenses for pre-1999 acquisitions
represent lease obligations for four abandoned operating facilities in England
with leases expiring through 2014.
The principal accrued acquisition expenses for 1999 acquisitions were for
severance for approximately 175 employees across all functions and for abandoned
facilities, primarily at Spectra-Physics AB. The amounts captioned as "other"
primarily represent relocation, contract termination, and other exit costs. The
Company expects to pay amounts accrued for acquisition expenses primarily
through 2002. The Company finalized its restructuring plans for Spectra-Physics
and other 1999 acquisitions in 1999 and 2000.
The Company did not establish material reserves for restructuring
businesses acquired in 2000 or 2001.
<
9
>
THERMO ELECTRON CORPORATION
2. Acquisitions and Dispositions (continued)
Dispositions
In July 2002, the Measurement and Control segment sold its Thermo BLH and
Thermo Nobel subsidiaries for net proceeds of $17.7 million in cash. These
businesses are engaged in the production and sale of strain-gauges and were
deemed noncore businesses and placed for sale in 2001. In the first nine months
of 2002, the Company also sold several small, noncore businesses and product
lines for net proceeds of $6.7 million in cash. As a result of all 2002
dispositions, the Company recorded $8.5 million of net pretax gains, which are
included in restructuring and other unusual costs, net, in the accompanying
statement of income.
3. Business Segment Information
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 28, September 29, September 28, September 29,
(In thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Revenues:
Life and Laboratory Sciences $ 282,239 $ 263,415 $ 825,334 $ 808,938
Measurement and Control 150,127 158,070 443,526 520,816
Optical Technologies 87,372 93,469 255,919 307,098
Intersegment (a) (2,567) (2,013) (7,169) (8,350)
---------- ---------- ---------- ----------
$ 517,171 $ 512,941 $1,517,610 $1,628,502
========== ========== ========== ==========
Income from Continuing Operations Before
Provision for Income Taxes, Minority Interest,
Extraordinary Item, and Cumulative Effect of
Change in Accounting Principle:
Life and Laboratory Sciences (b) $ 43,859 $ 32,853 $ 129,812 $ 91,751
Measurement and Control (c) 10,539 8,950 39,417 22,124
Optical Technologies (d) 1,674 (1,704) (17,793) 5,257
---------- ---------- ---------- ----------
Total Segment Operating Income (e) 56,072 40,099 151,436 119,132
Corporate/Other (f) 537 141 76,380 (28,781)
---------- ---------- ---------- ----------
$ 56,609 $ 40,240 $ 227,816 $ 90,351
========== ========== ========== ==========
Depreciation:
Life and Laboratory Sciences $ 4,992 $ 5,342 $ 15,454 $ 15,761
Measurement and Control 2,489 3,700 7,795 9,927
Optical Technologies 3,404 4,058 11,288 11,430
Corporate 730 602 2,154 1,497
---------- ---------- ---------- ----------
$ 11,615 $ 13,702 $ 36,691 $ 38,615
========== ========== ========== ==========
Amortization (Note 8):
Life and Laboratory Sciences $ 1,571 $ 6,980 $ 3,641 $ 20,847
Measurement and Control 282 3,357 840 10,141
Optical Technologies 359 1,506 1,027 4,477
---------- ---------- ---------- ----------
$ 2,212 $ 11,843 $ 5,508 $ 35,465
========== ========== ========== ==========
<
10
>
THERMO ELECTRON CORPORATION
3. Business Segment Information (continued)
During the first nine months of 2002, the Company transferred management
responsibility for several businesses between segments as follows: (1) the
spectroscopy businesses were moved to the renamed Life and Laboratory Sciences
segment from the Measurement and Control segment; (2) the temperature-control
businesses were moved to the Measurement and Control segment from the Optical
Technologies segment; (3) the electrochemistry products business was moved to
the Measurement and Control segment from the Life and Laboratory Sciences
segment; and (4) the Thermo Projects unit was moved from a separate segment
(previously included as "Other") to the Life and Laboratory Sciences segment.
Prior-period segment information has been restated to reflect these changes.
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Includes restructuring and other unusual costs, net, of $3.0 million, $6.3
million, and $12.9 million in the third quarter of 2002 and first nine
months of 2002 and 2001, respectively, and restructuring and other unusual
income, net, of $0.2 million in the third quarter of 2001.
(c) Includes restructuring and other unusual costs, net, of $5.0 million, $5.9
million, $5.9 million, and $26.9 million in the third quarter of 2002 and
2001 and first nine months of 2002 and 2001, respectively.
(d) Includes restructuring and other unusual costs, net, of $1.6 million, $19.7
million, and $10.6 million in the third quarter of 2001 and first nine
months of 2002 and 2001, respectively.
(e) Segment operating income is operating income excluding costs incurred at
the Company's corporate office.
(f) Includes corporate general and administrative expenses and other income and
expense. Includes corporate restructuring and other unusual costs of $0.6
million, $2.2 million, $2.1 million, and $7.1 million in the third quarter
of 2002 and 2001 and first nine months of 2002 and 2001, respectively.
Other income, net, includes gains on the sale of shares of FLIR Systems,
Inc. of $6.6 million and $94.5 million in the third quarter and first nine
months of 2002, respectively, and $8.6 million in the third quarter and
first nine months of 2001, and includes a charge of $2.0 million for
impairment of an available-for-sale investment in the first nine months of
2001.
4. Other Income, Net
The components of other income, net, in the accompanying statement of
income are as follows:
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 28, September 29, September 28, September 29,
(In thousands) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 11,210 $ 18,733 $ 38,189 $ 52,183
Interest Expense (Note 10) (8,864) (17,755) (32,559) (55,731)
Equity in Earnings of Unconsolidated Subsidiaries - 1,651 2,169 2,911
Gain on Investments, Net 9,395 9,325 103,381 8,518
Other Items, Net (3) (349) (145) (170)
-------- -------- -------- --------
$ 11,738 $ 11,605 $111,035 $ 7,711
======== ======== ======== ========
The Company sold 194,000 and 2,200,000 shares of FLIR Systems, Inc.
common stock during the third quarter and first nine months of 2002,
respectively, and 350,000 shares during the third quarter and first nine months
of 2001. The Company realized gains of $6.6 million and $94.5 million during the
third quarter and first nine months of 2002, respectively, and $8.6 million
during the third quarter and first nine months of 2001. These gains included
$2.3 million and $25.5 million in the third quarter and first nine months of
2002, respectively, and $4.5 million in the third quarter and first nine months
of 2001 from the recovery of amounts written down in prior years. The Company
<
11
>
THERMO ELECTRON CORPORATION
4. Other Income, Net (continued)
historically reported its pro-rata share of FLIR's results on a one-quarter lag.
In December 2001, following a sale of shares, the Company's ownership of FLIR
fell below 20%. In the first quarter of 2002, the Company recorded $2.1 million
of income as its share of FLIR's fourth quarter 2001 earnings through the date
on which the Company's ownership fell below 20%. Effective March 30, 2002, the
Company accounts for its investment in FLIR as an available-for-sale security
and no longer records its share of FLIR's earnings. As an available-for-sale
security, the investment in FLIR is recorded at quoted market value in current
assets and unrealized gains or losses are recorded as a part of accumulated
other comprehensive items in the accompanying 2002 balance sheet.
5. Redemption and Repurchase of Subordinated Convertible Debentures and
Extraordinary Item
In March 2002, the Company redeemed all of its outstanding 4 1/4% and 4
5/8% subordinated convertible debentures due 2003 with the objective of reducing
interest costs. The principal amounts redeemed for the 4 1/4% and 4 5/8%
debentures were $398.4 million and $57.9 million, respectively. The redemption
price was 100% of the principal amount of the debentures plus accrued interest.
During the first nine months of 2002, the Company also repurchased $44.3 million
principal amount of its subordinated convertible debentures for $43.9 million in
cash. The redemptions and repurchases resulted in a net extraordinary charge of
$0.6 million, net of taxes of $0.3 million. The Company redeemed additional
debentures in October 2002 (Note 17). Effective in 2003, gains or losses
resulting from the repurchase or redemption of the Company's debentures will be
reported as other nonoperating income or expense and prior periods will be
restated to conform to this presentation (Note 8).
6. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 28, September 29, September 28, September 29,
(In thousands except per share amounts) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before
Extraordinary Item and Cumulative Effect of
Change in Accounting Principle $ 38,983 $ 25,677 $152,854 $ 56,919
Gain (Loss) on Disposal of Discontinued Operations, Net - - 70,370 (50,440)
Extraordinary Item 34 602 (646) 602
Cumulative Effect of Change in Accounting Principle - - - (994)
-------- -------- -------- --------
Net Income for Basic Earnings per Share 39,017 26,279 222,578 6,087
Effect of Convertible Debentures 1,938 - 11,832 -
-------- -------- -------- --------
Income Available to Common Shareholders, as
Adjusted for Diluted Earnings per Share $ 40,955 $ 26,279 $234,410 $ 6,087
-------- -------- -------- --------
Basic Weighted Average Shares 165,701 180,280 170,358 181,588
Effect of:
Stock options 1,396 2,098 2,141 2,976
Convertible debentures 9,245 445 17,900 455
-------- -------- -------- --------
Diluted Weighted Average Shares 176,342 182,823 190,399 185,019
-------- -------- -------- --------
<
12
>
THERMO ELECTRON CORPORATION
6. Earnings per Share (continued)
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 28, September 29, September 28, September 29,
(In thousands except per share amounts) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share:
Continuing operations before extraordinary item
and cumulative effect of change in accounting
principle $ .24 $ .14 $ .90 $ .31
Discontinued operations - - .41 (.28)
Extraordinary item - - - -
Cumulative effect of change in accounting
principle - - - (.01)
-------- -------- -------- --------
$ .24 $ .15 $ 1.31 $ .03
======== ======== ======== ========
Diluted Earnings per Share:
Continuing operations before extraordinary item
and cumulative effect of change in accounting
principle $ .23 $ .14 $ .86 $ .31
Discontinued operations - - .37 (.27)
Extraordinary item - - - -
Cumulative effect of change in accounting principle - - - (.01)
-------- -------- -------- --------
$ .23 $ .14 $ 1.23 $ .03
======== ======== ======== ========
Options to purchase 12,111,000 and 6,825,000 shares of common stock for
the third quarter of 2002 and 2001, respectively, and 10,195,000 and 4,845,000
shares of common stock for the first nine months of 2002 and 2001, respectively,
were not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price for the
common stock and their effect would have been antidilutive.
The computation of diluted earnings per share excludes the effect of
assuming the conversion of the following convertible debentures because the
effect would be antidilutive: in the third quarter of 2002, the Company's 4 3/8%
and 4 7/8% subordinated convertible debentures and 4 1/2% senior convertible
debentures with principal balances, as of September 28, 2002, of $71.9 million,
$13.3 million, and $121.1 million, respectively, and convertible at $111.83,
$32.50, and $34.42 per share, respectively; in the first nine months of 2002,
the Company's 4 3/8% subordinated convertible debentures; and in the third
quarter and first nine months of 2001, all convertible debentures are excluded
except the Company's 0% subordinated convertible debentures.
7. Comprehensive Income
Comprehensive income combines net income and other comprehensive items.
Other comprehensive items represents certain amounts that are reported as
components of shareholders' investment in the accompanying balance sheet,
including currency-translation adjustments and unrealized net of tax gains and
losses on available-for-sale investments and hedging instruments (Note 10).
During the third quarter of 2002 and 2001, the Company had comprehensive income
of $22.1 million and $66.3 million, respectively. During the first nine months
of 2002 and 2001, the Company had comprehensive income of $177.3 million and
$16.0 million, respectively. Comprehensive income in the first nine months of
2002 excludes the effect of unrealized gains of $111 million that existed at the
date the Company reclassified equity interests in FLIR and Thoratec Corporation
to available-for-sale investments (Notes 4 and 14).
<
13
>
THERMO ELECTRON CORPORATION
8. Recent Accounting Pronouncements and Pro Forma Results
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." The Company adopted the requirements of SFAS No. 142
effective December 30, 2001. SFAS No. 142 requires companies to cease
amortization of all goodwill, and also requires companies to annually test
goodwill for impairment and to perform an initial test in the year of adoption.
The Company completed this initial test and determined that no impairment of
goodwill existed at the adoption date. Goodwill amortization for the third
quarter and first nine months of 2001, was $10.1 million and $30.3 million,
respectively. Pro forma results for the third quarter and first nine months of
2001, as if the standard had been adopted at the beginning of 2001, are as
follows:
Three Nine
Months Months
Ended Ended
September 29, September 29,
(In thousands except per share amounts) 2001 2001
- --------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Extraordinary Item and Cumulative Effect of Change
in Accounting Principle:
As reported $25,677 $56,919
Pro forma 35,045 84,601
Basic Earnings per Share from Continuing Operations Before Extraordinary Item
and Cumulative Effect of Change in Accounting Principle:
As reported .14 .31
Pro forma .19 .47
Diluted Earnings per Share from Continuing Operations Before Extraordinary Item
and Cumulative Effect of Change in Accounting Principle:
As reported .14 .31
Pro forma .19 .46
Net Income:
As reported $26,279 $ 6,087
Pro forma 35,647 33,769
Basic Earnings per Share:
As reported .15 .03
Pro forma .20 .19
Diluted Earnings per Share:
As reported .14 .03
Pro forma .19 .18
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." The standard provides guidance on
measuring impairment of long-lived assets and applying discontinued operations
accounting upon adoption. The Company adopted the standard during the first
quarter of 2002. Adoption of the standard did not materially affect the
Company's financial statements.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Adoption of the standard is generally required in 2003. Under the
standard, all of the transactions currently classified by the Company as
extraordinary items will no longer be treated as such, but instead will be
reported as other nonoperating income or expense. Prior periods will be restated
to conform to this presentation.
<
14
>
THERMO ELECTRON CORPORATION
8. Recent Accounting Pronouncements and Pro Forma Results (continued)
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which supersedes EITF 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." The
standard affects the accounting for restructuring charges and related activities
and generally will lengthen the timeframe for reporting of expenses relating to
restructuring activities beyond the period in which a plan is initiated. The
provisions of this statement are required to be adopted for exit or disposal
activities that are initiated after December 28, 2002. The provisions of EITF
94-3 will continue to apply with regard to the Company's previously announced
restructuring plans.
9. Note Receivable
In July 2000, the Company completed the sale of its wholly owned Spectra
Precision businesses to Trimble Navigation Limited for $208.1 million in net
cash proceeds and $80.0 million in seller debt financing at an initial interest
rate of 10%. The note from the buyer called for repayment in two equal, annual
installments beginning in July 2001, but permitted extension of maturity under
certain conditions. Trimble elected to defer the note payment due in July 2001,
and the Company and Trimble negotiated a change in terms in March 2002. Under
the revised terms, Trimble paid $12 million of principal, together with $10
million of accrued interest. Maturity for the remaining balance was extended to
July 2004, and the amended note carries an interest rate of 10.41% and has
provisions that require earlier repayment under certain conditions. Interest on
the note is added to the note's principal balance if payment of the interest
would cause Trimble to violate covenants under its primary bank agreements. As
of September 28, 2002, the principal balance of the note had increased to $69.1
million as a result of this provision. The note is included in other assets in
the accompanying balance sheet. In addition, the Company obtained warrants to
purchase up to 376,233 shares of Trimble, of which 200,000 shares were
exercisable immediately at $15.11 per share through 2007, and the balance of
which becomes exercisable for five-year terms at various times and prices
depending on the outstanding balance of the note. At September 28, 2002,
warrants to purchase an additional 17,364 shares had become exercisable at
$14.46 per share. Spectra Precision, formerly part of the Measurement and
Control segment, was acquired as part of Spectra-Physics AB and provides the
construction, surveying, and heavy-machine industries with precision-positioning
equipment.
10. Derivative Instruments and Hedging
The Company uses forward currency-exchange contracts primarily to hedge
certain operational (cash-flow hedges) and balance sheet (fair-value hedges)
exposures resulting from changes in currency exchange rates. Such exposures
result from sales that are denominated in currencies other than the functional
currencies of the respective operations. The Company enters into these
currency-exchange contracts to hedge anticipated product sales and recorded
accounts receivable made in the normal course of business, and accordingly, the
hedges are not speculative in nature. As part of the Company's overall strategy
to manage the level of exposure to the risk of currency-exchange fluctuations,
some operating units hedge a portion of their currency exposures anticipated
over the ensuing 12-month period, using exchange contracts that have maturities
of 12 months or less. The Company does not hold or engage in transactions
involving derivative instruments for purposes other than risk management.
The Company records its forward currency-exchange contracts at fair value
in its consolidated balance sheet as other current assets or other accrued
expenses and, for cash-flow hedges, the related gains or losses on these
contracts are deferred as a component of accumulated other comprehensive items
in the accompanying balance sheet. These deferred gains and losses are
recognized in income in the period in which the underlying anticipated
transaction occurs. Unrealized gains and losses resulting from the impact of
currency-exchange rate movements on fair-value hedges are recognized in earnings
in the period in which the exchange rates change and offset the currency gains
and losses on the underlying exposure being hedged. At September 28, 2002, the
Company had deferred losses, net of income taxes, related to forward
currency-exchange contracts of approximately $1.3 million, substantially all of
which is expected to be recognized as expense over the next 12 months as an
approximate equivalent offset to gains on the exposures being hedged.
<
15
>
THERMO ELECTRON CORPORATION
10. Derivative Instruments and Hedging (continued)
During the first quarter of 2002, the Company entered into interest-rate
swap arrangements for its $128.7 million principal amount 7.625% senior notes,
due in 2008, with the objective of reducing interest costs. The arrangements
provide that the Company will receive a fixed interest rate of 7.625%, and will
pay a variable rate of 90-day LIBOR plus 2.19% (3.93% as of September 28, 2002).
The swaps have terms expiring at the maturity of the debt. The swaps are
designated as fair-value hedges and as such, are carried at fair value, which
resulted in an increase in other long-term assets and long-term debt of $13.3
million at September 28, 2002. The swap arrangements are with different
counterparties than the holders of the underlying debt. Management believes that
any credit risk associated with the swaps is remote based on the
creditworthiness of the financial institutions issuing the swaps.
11. Securities-Lending Agreements
In connection with the March 2002 debt redemption discussed in Note 5,
the Company entered into securities-lending agreements with third parties under
which the Company may borrow funds for short-term needs. Borrowings are
collateralized by available-for-sale investments. As of September 28, 2002, the
Company had outstanding borrowings of $269.0 million under these arrangements
with maturities between October 2002 and June 2003 and a weighted average
interest rate of 1.9%. The proceeds of the borrowings were used to partially
fund the debt redemption discussed in Note 5. The Company has pledged $282.4
million of available-for-sale securities in the accompanying 2002 balance sheet
as collateral for such borrowings.
12. Purchase of Minority Interest in Spectra-Physics
Following the completion of a cash tender offer in December 2001 for all
of the shares of Spectra-Physics it did not previously own, the Company
completed a short-form merger with Spectra-Physics in February 2002. After the
merger, Spectra-Physics was no longer publicly traded and became a wholly owned
subsidiary of the Company. The Company expended $22.1 million of cash to
complete the purchase of the minority interest and recorded an increase in
goodwill of $15.6 million. Options to purchase shares of Spectra-Physics were
exchanged for options to purchase 2,241,598 shares of Thermo Electron common
stock. The exchange of options was accounted for in accordance with the
methodology set forth in FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" (Note 13).
13. Restructuring and Other Unusual Costs, Net
In response to a downturn in telecommunications, semiconductor, and other
markets served by the Company's businesses and in an effort to further integrate
business units and reduce the number of real estate locations, the Company
initiated restructuring actions in the second quarter of 2001 in a number of
business units to reduce costs and shed unproductive assets. In response to a
continued downturn in markets served by the Company, further actions were
initiated in the fourth quarter of 2001 and in the first nine months of 2002.
The restructuring and related actions primarily consisted of headcount
reductions, writedowns of production equipment for telecommunications products
and excess telecommunication inventories at Spectra-Physics, discontinuation of
a number of mature or unprofitable product lines, and consolidation of
facilities to streamline operations and reduce costs. The Company expects to
incur an additional $3 million of restructuring costs in the fourth quarter of
2002 and in 2003 for charges associated with these actions that cannot be
recorded until incurred, such as relocation and moving costs. In addition,
efforts to reduce the Company's cost structure continue and the Company expects
to record approximately $20 million of additional restructuring costs in the
fourth quarter of 2002 pertaining to facility consolidations and workforce
reductions. The Company expects that the restructuring actions undertaken in
2001 and early 2002 will be substantially completed by the end of 2002, and that
the actions undertaken in the third and fourth quarters of 2002 will be
completed by mid-2003. The Company expects to identify additional sites to
consolidate in 2003 and will record charges in connection with any such actions.
<
16
>
THERMO ELECTRON CORPORATION
13. Restructuring and Other Unusual Costs, Net (continued)
During the third quarter of 2002, the Company recorded net restructuring
and other charges (income) by segment as follows:
Life and
Laboratory Measurement Optical
(In thousands) Sciences and Control Technologies Corporate Total
- ---------------------------------------------------------------------------------------------------------------------------------
Cost of Revenues $ 143 $ 1,330 $ 253 $ - $ 1,726
Restructuring and Other Unusual Costs
(Income), Net 2,903 3,711 (260) 553 6,907
------- ------- ------- ------- -------
$ 3,046 $ 5,041 $ (7) $ 553 $ 8,633
======= ======= ======= ======= =======
During the first nine months of 2002, the Company recorded net restructuring
and other charges by segment as follows:
Life and
Laboratory Measurement Optical
(In thousands) Sciences and Control Technologies Corporate Total
- ---------------------------------------------------------------------------------------------------------------------------------
Cost of Revenues $ 712 $ 1,330 $ 1,235 $ - $ 3,277
Restructuring and Other Unusual
Costs, Net 5,613 4,578 18,443 2,143 30,777
------- ------- ------- ------- -------
$ 6,325 $ 5,908 $19,678 $ 2,143 $34,054
======= ======= ======= ======= =======
The components of net restructuring and other charges (income) by segment
are as follows:
Life and Laboratory Sciences
- ----------------------------
The Life and Laboratory Sciences segment recorded $3.0 million of net
restructuring and other charges in the third quarter of 2002. The segment
recorded $0.1 million of charges to cost of revenues for the sale of inventory
revalued at the date of acquisition. The segment also recorded $2.9 million of
restructuring and other unusual costs, net, including $2.6 million of cash costs
principally associated with facility consolidations. The cash costs included
$1.5 million of severance for 100 employees across all functions; $0.3 million
of net abandoned-facility lease costs for facilities described below; $0.1
million of employee-retention costs; and $0.7 million of other cash costs,
primarily relocation expenses. The abandoned-facility costs included $1.6
million of additional expense related to a facility in Finland that was
abandoned in 2001, at which time the segment recorded estimated abandonment
cost. The segment has been unable to sublease the space and has reserved the
remaining obligation through the expiration of the lease in 2005. Certain other
office and manufacturing space in Massachusetts that was abandoned and reserved
for in 2001 will become occupied by the Company's Measurement and Control
segment, and consequently, the remaining reserve for abandonment of $1.5 million
has been reversed. In addition to these adjustments, the Life and Laboratory
Sciences segment recorded $0.2 million of costs for the abandonment of a
facility in Texas. In addition, the segment had asset writedowns of $0.3 million
associated with the facility consolidations.
In the second quarter of 2002, this segment recorded $3.6 million of net
restructuring and other charges. The segment recorded $0.6 million of charges to
cost of revenues, which consisted of $0.4 million for a discontinued product
line and $0.2 million for the sale of inventory revalued at the date of
acquisition. The segment also recorded $3.0 million of restructuring and other
unusual costs, including $2.4 million of cash costs principally associated with
facility consolidations. The cash costs included $0.7 million of severance for
12 employees across all functions;
<
17
>
THERMO ELECTRON CORPORATION
13. Restructuring and Other Unusual Costs, Net (continued)
$0.7 million of pension costs for terminated employees that was accrued as a
pension liability; $0.4 million of employee-retention costs; $0.1 million of
abandoned-facility lease costs; and $0.5 million of other cash costs, primarily
relocation expenses. In addition, the segment sold two small operating units and
a building for a net loss of $0.5 million and had other asset writedowns of $0.1
million.
In the first quarter of 2002, this segment recorded $0.3 million of other
unusual income, net. The unusual income included a gain on the sale of a product
line of $1.5 million. This gain was offset by cash costs of $1.2 million
associated with the restructuring actions initiated in 2001, including $0.6
million of employee-retention costs; $0.4 million of severance for eight
employees, primarily in administrative and sales functions; and $0.2 million of
other cash costs, primarily relocation expenses.
Measurement and Control
- -----------------------
The Measurement and Control segment recorded $5.0 million of net
restructuring and other charges in the third quarter of 2002. The segment
recorded $1.3 million of charges to cost of revenues for the sale of inventory
revalued at the date of acquisition. The segment also recorded $3.7 million of
restructuring and other unusual costs, net, including $9.9 million of cash costs
principally associated with facility consolidations. The cash costs included
$5.6 million of severance for 230 employees across all functions; $3.3 million
of abandoned-facility lease costs for facilities described below; $0.2 million
of employee-retention costs; and $0.8 million of other cash costs, primarily
relocation expenses. The charges for severance and abandoned facilities are net
of reversals of $1.5 million and $0.6 million, respectively, that the segment
had provided in 2001. Of the amounts reversed, $1.6 million had been initially
provided in 2001 to downsize the segment's operations in Maryland. During the
third quarter of 2002, following a change in that operation's management, the
2001 plan to restructure the Maryland operations was substantially revised to
include closure of the plant. The amounts provided in 2001 were reversed and all
of the actions contemplated in the 2001 plan are components of the expanded 2002
plan, recorded in the third quarter of 2002. The remainder of the 2001 plan
reserves that were reversed were not required primarily due to employee
attrition and favorable settlement of lease obligations. The facility
consolidations in the 2002 plan include closure of five manufacturing facilities
in the United States and the transfer of their activities to other locations. In
addition, the segment recorded $6.2 million of net gains, primarily on the sales
of businesses, principally its Thermo BLH and Thermo Nobel subsidiaries (Note
2).
In the second quarter of 2002, this segment recorded $1.1 million of net
restructuring and other charges. These charges included $2.2 million of cash
costs principally associated with facility consolidations, including $0.7
million of relocation costs; $0.7 million of employee-retention costs; $0.6
million of severance; and $0.2 million of abandoned-facility lease costs. These
costs were offset in part by $1.1 million of net gains on the sale of a small
business unit and a building.
In the first quarter of 2002, this segment recorded $0.2 million of other
unusual income, net. The unusual income included gains of $1.5 million from the
favorable resolution of a dispute on a business sold in 2000, and the sale of a
small business unit in 2002. These gains were offset by $1.1 million of cash
costs associated with the restructuring actions initiated in 2001, including
$0.5 million of severance; $0.1 million of employee-retention costs; and $0.5
million of other cash costs, primarily relocation and contract-termination
costs. The gain was also offset by $0.2 million of asset writedowns, primarily
for asset impairment of a building held for sale.
Optical Technologies
- --------------------
The Optical Technologies segment recorded a nominal amount of other
unusual income, net, in the third quarter of 2002. The segment recorded $0.3
million of charges to cost of revenues for the sale of inventory revalued at the
date of acquisition. The segment also recorded $0.3 million of unusual income,
including $0.5 million of proceeds from the disposal of assets that were
previously written down and the reversal of $0.5 million of severance reserves
previously established in 2001, due to employee attrition, offset by $0.6
million of cash costs, primarily for severance for 78 employees across all
functions, and a $0.1 million loss on the sale of a small business unit.
<
18
>
THERMO ELECTRON CORPORATION
13. Restructuring and Other Unusual Costs, Net (continued)
In the second quarter of 2002, this segment recorded $11.4 million of net
restructuring and other charges. The segment recorded $1.0 million of charges to
cost of revenues, including $0.7 million for a discontinued product line and the
balance for the sale of inventory revalued at the date of acquisition. The
segment also recorded $10.4 million of restructuring and other unusual costs,
including $5.5 million of asset writedowns and $4.9 million of cash costs. The
cash costs included $3.2 million of severance for 117 employees across all
functions; $1.0 million for abandoned-equipment leases; and $0.7 million for the
settlement of litigation (Note 15). The asset writedowns included $5.3 million
of abandoned telecommunications equipment and $0.2 million of goodwill on a
small business that was subsequently sold. Following actions in the first and
second quarter of 2002, the Company has suspended initiatives for products that
address telecom markets based on the continuing economic downturn in these
markets.
In the first quarter of 2002, this segment recorded $8.3 million of
restructuring and other charges. These charges included $6.8 million of cash
costs at Spectra-Physics, including $4.5 million of lease costs, primarily for
abandoned equipment; $2.1 million of severance for 76 employees across all
functions; $0.1 million of employee-retention costs; and $0.1 million of other
cash costs. The charges also included $0.7 million of asset writeoffs for
abandoned manufacturing equipment and $0.8 million resulting from the exchange
of options to purchase shares of Spectra-Physics for options to purchase shares
of Thermo Electron following the acquisition of the minority interest in this
business in February 2002 (Note 12).
Corporate
- ---------
The Company recorded $0.6 million of restructuring and other charges at
its corporate office in the third quarter of 2002, all of which were cash costs,
primarily for third-party advisory fees. While the Company no longer has any
public subsidiaries, it has numerous non-U.S. subsidiaries through which the
formerly public subsidiaries conducted business. The third-party advisory fees
are being incurred to simplify this legal structure.
In the second quarter of 2002, the Company recorded $0.9 million of
restructuring and other charges at its corporate office, all of which were cash
costs, primarily for third-party advisory fees discussed above.
In the first quarter of 2002, the Company recorded $0.7 million of
restructuring and other charges at its corporate office, all of which were cash
costs. This amount included $0.6 million of third-party advisory fees discussed
above and $0.1 million of severance for three employees.
<
19
>
THERMO ELECTRON CORPORATION
13. Restructuring and Other Unusual Costs, Net (continued)
General
- -------
The following table summarizes the Company's severance actions in 2001
and 2002.
Number of
2000 Restructuring Plans Employees
- -------------------------------------------------------------------------------------------------------------------------------
Remaining Terminations at December 30, 2000 80
Additional Terminations Announced in 2001 16
Terminations Occurring in 2001 (91)
Adjustment to Plan (1)
------
Remaining Terminations at December 29, 2001 4
Terminations Occurring in 2002 (4)
------
Remaining Terminations at September 28, 2002 -
======
2001 Restructuring Plans
- -------------------------------------------------------------------------------------------------------------------------------
Terminations Announced in 2001 1,714
Terminations Occurring in 2001 (1,001)
------
Remaining Terminations at December 29, 2001 713
Additional Terminations Announced in 2002 224
Terminations Occurring in 2002 (813)
Adjustment to Plan (41)
------
Remaining Terminations at September 28, 2002 83
======
2002 Restructuring Plans
- -------------------------------------------------------------------------------------------------------------------------------
Terminations Announced in 2002 406
Terminations Occurring in 2002 (181)
------
Remaining Terminations at September 28, 2002 225
======
<
20
>
THERMO ELECTRON CORPORATION
13. Restructuring and Other Unusual Costs, Net (continued)
The following table summarizes the cash components of the Company's
restructuring plans. The noncash components and other amounts reported as
restructuring and other unusual costs, net, in the accompanying 2002 statement
of income have been summarized in the notes to the table.
Abandonment
Employee of Excess
(In thousands) Severance Retention (a) Facilities Other Total
- --------------------------------------------------------------------------------------------------------------------------------
1998 Restructuring Plans
Balance at December 29, 2001 $ - $ - $ - $ 506 $ 506
Transfer to accrued pension costs (b) - - - (534) (534)
Currency translation - - - 28 28
-------- -------- -------- -------- --------
Balance at September 28, 2002 $ - $ - $ - $ - $ -
======== ======== ======== ======== ========
1999 Restructuring Plans
Balance at December 29, 2001 $ 571 $ - $ - $ - $ 571
Payments (232) - - - (232)
-------- -------- -------- -------- --------
Balance at September 28, 2002 $ 339 $ - $ - $ - $ 339
======== ======== ======== ======== ========
2000 Restructuring Plans
Balance at December 29, 2001 $ 1,588 $ 6,287 $ 1,866 $ 1,200 $ 10,941
Reserves reversed (27) - (192) (20) (239)
Payments (1,164) (6,015) (881) (1,003) (9,063)
Currency translation 92 - 95 3 190
-------- -------- -------- -------- --------
Balance at September 28, 2002 $ 489 $ 272 $ 888 $ 180 $ 1,829
======== ======== ======== ======== ========
2001 Restructuring Plans
Balance at December 29, 2001 $ 26,092 $ 143 $ 19,765 $ 2,667 $ 48,667
Costs incurred in 2002 (c) 8,824 1,955 6,999 3,616 21,394
Reserves reversed (d) (2,796) (82) (2,175) (224) (5,277)
Payments (24,041) (1,701) (5,610) (4,289) (35,641)
Currency translation 1,428 16 461 84 1,989
-------- -------- -------- -------- --------
Balance at September 28, 2002 $ 9,507 $ 331 $ 19,440 $ 1,854 $ 31,132
======== ======== ======== ======== ========
2002 Restructuring Plans
Costs incurred in 2002 (e) $ 8,811 $ 205 $ 3,766 $ 3,169 $ 15,951
Payments (1,847) - (180) (3,055) (5,082)
Currency translation (5) - (1) (2) (8)
-------- -------- -------- -------- --------
Balance at September 28, 2002 $ 6,959 $ 205 $ 3,585 $ 112 $ 10,861
======== ======== ======== ======== ========
(a) Employee-retention costs are accrued ratably over the period through which
employees must work to qualify for a payment. The 2000 awards were based on
specified percentages of employees' salaries and were generally awarded to
help ensure continued employment at least through completion of the
Company's reorganization plan.
<
21
>
THERMO ELECTRON CORPORATION
13. Restructuring and Other Unusual Costs, Net (continued)
(b) Balance of accrued restructuring costs from 1998 plans related to pension
liability associated with employees terminated in 1998, which was
transferred to accrued pension costs in 2002.
(c) Excludes net gains from sale of businesses and other assets of $0.9 million
and $2.4 million in the Life and Laboratory Sciences and Measurement and
Control segments, respectively; noncash charges of $7.0 million in the
Optical Technologies segment; a cash charge of $0.7 million recorded in
accrued pension costs in the Life and Laboratory Sciences segment; and loss
on litigation of $0.7 million in the Optical Technologies segment.
(d) Represents reductions in cost of plans as described in the discussion of
restructuring actions by segment.
(e) Excludes noncash charges of $0.4 million in the Life and Laboratory
Sciences segment and net gains from sale of businesses and other assets of
$6.2 million and $0.5 million in the Measurement and Control and Optical
Technologies segments, respectively.
The Company expects to pay accrued restructuring costs as follows:
severance, employee-retention obligations, and other costs, which primarily
represent cancellation/termination fees, primarily through 2003; and
abandoned-facility payments, over lease terms expiring through 2012.
14. Discontinued Operations
The Company announced in January 2000 that all of its noninstrument
businesses other than Thermo Ecotek, the Company's power-generation business,
were to be sold or spun-off. These divestitures totaled approximately 40
businesses with revenues of $1.8 billion. The Company later sold Thermo Ecotek
as well. Accordingly, the Company treated the divestiture of these businesses as
discontinued operations in its financial statements.
Net liabilities of discontinued operations in the accompanying 2002
balance sheet principally represents remaining obligations of the discontinued
businesses, including severance, lease, litigation, and other obligations,
offset by the net assets of two remaining operating units held for sale. These
two businesses have aggregate annual revenues of approximately $90 million.
During the third quarter and first nine months of 2002, the Company's
discontinued operations had revenues of $18.1 million and $62.5 million,
respectively, and operating income of $0.8 million and $5.0 million,
respectively. During the third quarter and first nine months of 2001, the
Company's discontinued operations had revenues of $132.0 million and $570.1
million, respectively, and operating income of $10.7 million and $45.5 million,
respectively.
Thermo Cardiosystems
In February 2001, the Company sold Thermo Cardiosystems to Thoratec in
exchange for 19.3 million shares of Thoratec common stock, a 34% interest, which
had a market value of $11.56 per share on the date of the transaction. Certain
restrictions, which lapsed in August 2002, limited the timing of the Company's
ability to sell these shares. The Company accounted for the sale of Thermo
Cardiosystems and the ownership of the Thoratec shares as discontinued
operations. The Company recorded an after-tax charge of $66.0 million in the
first quarter of 2001 for a decline in market value of Thoratec common stock as
a loss on disposal of discontinued operations, and thereafter, carried the
shares at a new cost basis of $6.50 per share. In February 2002, the Company
sold 6.9 million shares of Thoratec for net proceeds of $105 million, and
realized an after-tax gain of $38.4 million as a gain on disposal of
discontinued operations. Following the sale of shares in 2002, the Company owned
less than 20% of Thoratec's outstanding shares and, pursuant to SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," began
accounting for its investment as an available-for-sale security in continuing
operations in the first quarter of 2002. As such, the investment is recorded at
quoted market value in current assets, and unrealized gains or losses are
recorded as a part of accumulated other comprehensive items in the accompanying
2002 balance sheet. As of September 28, 2002, the Company held 7.7 million
shares of Thoratec with a market value of $60 million.
<
22
>
THERMO ELECTRON CORPORATION
14. Discontinued Operations (continued)
Power-Generation Business
In March 2002, the Company sold the last remaining component of its
former power-generation business and realized a gain from the disposition
totaling $13.0 million, principally for previously unrecognized tax benefits
that were realized upon the sale.
Other
As a result of new tax regulations concerning deductible losses from
divested businesses, the Company revised its estimate of the tax consequences of
business disposals in discontinued operations and recorded a tax benefit of
$19.0 million in the second quarter of 2002.
15. Litigation
Continuing Operations
During the second quarter of 2002, the Company settled a
patent-infringement matter that Rockwell International Corp. had brought against
Spectra-Physics and its Opto Power subsidiary. Under the settlement, the Company
paid Rockwell $4.0 million. The settlement was charged against a reserve
established for this matter except for $0.7 million that was included in
restructuring and other unusual costs in the second quarter of 2002 (Note 13).
Discontinued Operations
During the second quarter of 2002, the Company settled a
patent-infringement matter that Fischer Imaging Corporation had brought against
the Company's former Trex Medical subsidiary. The Company sold Trex Medical in
2000, but retained this obligation as a term of the sale. Under the settlement,
the Company paid Fischer $25 million and agreed to pay an additional $7.2
million over eight years. The portion of the settlement that was paid was
charged against a reserve established for this matter. The balance of the amount
to be paid will also be charged against the reserve as paid.
16. Common Stock
During the second quarter of 2002, the Company restored 22,000,000 shares
of common stock to authorized but unissued status, which had been held in
treasury stock.
17. Subsequent Event
In October 2002, the Company redeemed all of its outstanding 4 1/2%
senior convertible debentures due 2003 and 4 7/8% subordinated convertible
debentures due 2004 with the objective of reducing interest costs. The principal
amounts redeemed for the 4 1/2% and 4 7/8% debentures were $121.1 million and
$13.3 million, respectively. The redemption price was 100% of the principal
amount of the debentures, plus accrued interest. Accordingly, the obligations
have been presented as current liabilities in the accompanying 2002 balance
sheet. Borrowings under the Company's securities-lending agreements (Note 11)
were used to partially fund the debt redemption.
<
23
>
THERMO ELECTRON CORPORATION
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. While the Company may elect to update forward-looking statements in
the future, it specifically disclaims any obligation to do so, even if the
Company's estimates change, and readers should not rely on those forward-looking
statements as representing the Company's views as of any date subsequent to the
date of the filing of this Quarterly Report. 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 this report on Form 10-Q.
The Company believes the following represent its critical accounting
policies and estimates used in the preparation of its financial statements:
a) The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to pay amounts
due. If the financial condition of the Company's customers were to
deteriorate, reducing their ability to make payments, additional
allowances would be required.
b) The Company writes down its inventories for estimated obsolescence
for differences between the cost and estimated net realizable value
based on recent usage and expected demand. If ultimate usage varies
significantly from expected usage, additional writedowns may be
required.
c) The Company assesses the realizability of its notes receivable based
on judgments concerning the borrower's ability to make the required
payments and the value of collateral, if any. If the financial
condition of the borrower or the value of the collateral were to
deteriorate, charges to reduce the carrying value of notes receivable
may be necessary.
d) The Company periodically evaluates goodwill for impairment under the
guidelines of SFAS No. 142. Should the fair value of the Company's
goodwill decline because of reduced operating performance, market
declines, or other indicators of impairment, charges for impairment
of goodwill may be necessary.
e) The Company periodically reviews other intangible assets for
impairment based on estimated future cash flows associated with the
assets. Should future cash flows decline significantly from estimated
amounts, charges for impairment of other intangible assets may be
necessary.
f) At the time the Company recognizes revenue it provides for the
estimated cost of product warranties based primarily on historical
experience. Should product failure rates or the actual cost of
correcting product failures vary from estimates, revisions to the
estimated warranty liability would be necessary.
g) The Company estimates the degree to which tax assets and loss
carryforwards will result in a benefit based on expected
profitability by tax jurisdiction and provides a valuation allowance
for tax assets and loss carryforwards that it believes will more
likely than not go unused. Should the Company's actual future taxable
income by tax jurisdiction vary from estimates, additional allowances
may be necessary.
h) The Company estimates losses on contingencies and litigation and
provides a reserve for these losses. Should the ultimate losses on
contingencies and litigation vary from estimates, adjustments to
those reserves may be required.
i) The Company recorded restructuring charges for asset impairment in
2001 and 2002 based on estimated future cash flows associated with
the equipment and for the cost of vacating facilities based on
expected sub-rental income. Should actual cash flows associated with
impaired equipment and sub-rental income from vacated facilities vary
from estimated amounts, adjustments may be required.
j) The Company estimates the expected proceeds from the sale of its
discontinued businesses, and recorded losses in 1999-2001 to reduce
the carrying value of these businesses to estimated realizable value.
Should the actual proceeds, which would include post-closing purchase
price adjustments, vary from estimates, actual results could differ
from expected amounts.
<
24
>
THERMO ELECTRON CORPORATION
Results of Operations
During the first nine months of 2002, the Company transferred management
responsibility for several businesses as follows: (1) the spectroscopy
businesses were moved to the renamed Life and Laboratory Sciences segment from
the Measurement and Control segment; (2) the temperature-control businesses were
moved to the Measurement and Control segment from the Optical Technologies
segment; (3) the electrochemistry products business was moved to the Measurement
and Control segment from the Life and Laboratory Sciences segment; and (4) the
Company's Thermo Projects unit was moved from a separate segment (previously
included as "Other") to the Life and Laboratory Sciences segment. Prior-period
segment results have been restated to reflect these changes.
Third Quarter 2002 Compared With Third Quarter 2001
- ---------------------------------------------------
Continuing Operations
Sales in the third quarter of 2002 were $517.2 million, an increase of
$4.2 million from the third quarter of 2001. Excluding the effect of
acquisitions, divestitures, and currency translation, revenues decreased $9.0
million, or 2%. Currency translation had a net favorable effect on revenues as
discussed below by segment, due to the weakening of the U.S. dollar relative to
currencies in countries in which the Company operates.
Operating income was $44.9 million in the third quarter of 2002, compared
with $28.6 million in the third quarter of 2001. Segment operating income
increased to $56.1 million in 2002 from $40.1 million in 2001. (Segment
operating income is operating income excluding costs incurred at the Company's
corporate office.) Operating and segment operating income in the third quarter
of 2002 were reduced by additional charges associated with a restructuring plan
initiated during the fourth quarter of 2001, other restructuring actions
initiated in 2002, and certain other unusual costs, net (Note 13). Operating and
segment operating income in the third quarter of 2001 were reduced by charges
associated with a restructuring plan initiated during the second quarter of 2001
and certain other unusual charges. The unusual items in both periods are
discussed by segment below. Excluding these unusual costs, which totaled $8.1
million in 2002 and $7.4 million in 2001, segment operating income was $64.2
million in 2002 and $47.5 million in 2001. The 2001 period included $10.1
million of goodwill amortization. Amortization of goodwill ceased following the
adoption of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," effective in 2002 (Note 8). Excluding
goodwill amortization and unusual items, segment operating income totaled $57.6
million in 2001. Segment operating income, excluding goodwill amortization and
unusual items, increased primarily due to a lower cost base following
restructuring actions in 2001 and 2002.
In response to a downturn in telecommunications, semiconductor, and other
markets served by the Company's businesses and in an effort to further integrate
business units and reduce the number of real estate locations, the Company
initiated restructuring actions in the second quarter of 2001 in a number of
business units to reduce costs and shed unproductive assets. In response to a
continued downturn in markets served by the Company, further actions were
initiated in the fourth quarter of 2001 and in the first nine months of 2002.
The restructuring and related actions primarily consisted of headcount
reductions, writedowns of production equipment for telecommunications products
and excess telecommunication inventories at Spectra-Physics, discontinuation of
a number of mature or unprofitable product lines, and consolidation of
facilities to streamline operations and reduce costs. The Company expects to
incur an additional $3 million of restructuring costs in the fourth quarter of
2002 and in 2003 for charges associated with these actions that cannot be
recorded until incurred, such as relocation and moving costs. In addition,
efforts to reduce the Company's cost structure continue and the Company expects
to record approximately $20 million of additional restructuring costs in the
fourth quarter of 2002 pertaining to facility consolidations and workforce
reductions. The Company expects that the restructuring actions undertaken in
2001 and early 2002 will be substantially completed by the end of 2002, and that
the actions undertaken in the third and fourth quarters of 2002 will be
completed by mid-2003. The Company expects to identify additional sites to
consolidate in 2003 and will record charges in connection with any such actions.
<
25
>
THERMO ELECTRON CORPORATION
Third Quarter 2002 Compared With Third Quarter 2001 (continued)
- ---------------------------------------------------
Life and Laboratory Sciences
- ----------------------------
Sales in the Life and Laboratory Sciences segment increased $18.8 million
to $282.2 million in the third quarter of 2002. The favorable effects of
currency translation resulted in an increase in revenues of $8.5 million in
2002. Sales increased $1.4 million due to an acquisition, net of divestitures.
Excluding the effect of currency translation, an acquisition, and divestitures,
revenues increased $8.9 million, or 3%. The segment has experienced continued
sales growth of high-end technology mass spectrometry equipment and slightly
lower sales of other products where downturns in customers' markets have slowed
spending. Many pharmaceutical customers, for example, have slowed capital
spending and are delaying purchases except for equipment where technology
advances may provide competitive advantage.
Operating income margin increased to 15.5% in the third quarter of 2002
from 12.5% in the third quarter of 2001. The segment's margin increased
primarily due to the discontinuation of goodwill amortization as a result of the
adoption of SFAS No. 142 in 2002, offset in part by the inclusion of unusual
costs in the 2002 period. Excluding restructuring and unusual costs, net, of
$3.0 million in 2002, restructuring and unusual income, net, of $0.2 million in
2001, and goodwill amortization of $6.0 million in 2001, operating income margin
was 16.6% in 2002 and 14.7% in 2001. The increase in operating income margin
resulted primarily from higher revenues and cost reduction and productivity
measures undertaken in 2001 and 2002.
In the third quarter of 2002, the segment recorded restructuring and
unusual cash costs, net, of $2.6 million, primarily for severance and relocation
expenses at businesses being consolidated. In addition, the segment recorded
asset writedowns of $0.3 million associated with facility consolidations and
charges to cost of revenues of $0.1 million for the sale of inventory revalued
at the date of acquisition (Note 13). Restructuring and unusual income, net, in
2001 represents a gain of $0.5 million on the sale of a small business unit,
offset by cash costs of $0.3 million, primarily for severance.
Measurement and Control
- -----------------------
Sales in the Measurement and Control segment decreased $7.9 million to
$150.1 million in the third quarter of 2002. The favorable effects of currency
translation resulted in an increase in revenues of $3.7 million in 2002. Sales
increased $0.2 million due to an acquisition, net of divestitures (Note 2).
Excluding the effect of an acquisition, divestitures, and currency translation,
revenues decreased $11.8 million, or 8%. The decrease was due to a decline in
revenues in each of the segment's principal businesses primarily from economic
conditions facing customers, particularly in the semiconductor, energy, and
steel industries. The Company expects that a continued downturn in markets
served by the segment will unfavorably affect the segment's revenue comparisons
with corresponding prior-year periods for at least the near-term. Recent order
growth of explosives- and radiation-detection products will offset in part the
revenue decline in the segment's other businesses. The magnitude of the
mitigating effect of these recent orders in future quarters will depend on when
the corresponding sales occur.
Operating income margin increased to 7.0% in the third quarter of 2002
from 5.7% in the third quarter of 2001, primarily due to restructuring and
unusual costs in 2001 and the discontinuation of goodwill amortization as a
result of the adoption of SFAS No. 142 in 2002. Operating income margin,
excluding restructuring and unusual costs, net, of $5.0 million in 2002 and $5.9
million in 2001, and goodwill amortization of $3.0 million in 2001, decreased to
10.4% in 2002 from 11.3% in 2001. The decrease in operating income margin
resulted primarily from lower revenues, offset in part by the effects of cost
reduction and productivity measures undertaken in 2001.
In the third quarter of 2002, the segment recorded restructuring and
unusual costs, net, of $5.0 million, including cash costs of $9.9 million,
principally for severance and abandoned facilities. In addition, the segment
recorded $6.2 million of net gains, primarily on the sales of businesses,
principally the July 2002 sale of Thermo BLH and Thermo Nobel (Note 2). In 2002,
the segment recorded charges to cost of revenues of $1.3 million for the sale of
inventory revalued at the date of acquisition (Note 13). Restructuring and
unusual costs, net, in 2001 included a $5.2 million loss on the sale of the
segment's Pharos Marine unit, and cash costs of $0.7 million, primarily for
severance.
<
26
>
THERMO ELECTRON CORPORATION
Third Quarter 2002 Compared With Third Quarter 2001 (continued)
- ---------------------------------------------------
Optical Technologies
- --------------------
Sales in the Optical Technologies segment decreased $6.1 million to $87.4
million in the third quarter of 2002. The unfavorable effects of currency
translation resulted in a decrease in revenues of $0.6 million in 2002. Sales
increased $0.1 million due to the acquisition of a product line, net of
divestitures. Excluding the effect of currency translation, an acquisition, and
divestitures, revenues decreased $5.6 million, or 6%. The decrease was due to
the severe slowdown in the semiconductor and other industrial markets that has
adversely affected customers in a number of the segment's businesses. These
industries are highly cyclical and have experienced downturns that began in
2001. The Company expects that the slowdowns in semiconductor and other
industrial markets will continue to result in unfavorable revenue and
profitability comparisons with corresponding prior-year periods for at least the
near-term. A prolonged downturn could adversely affect the realizability of the
segment's inventories, which would result in charges for impairment.
In the third quarter of 2002, the Company conformed Spectra-Physics'
backlog policy to the prevailing practice at the Company's other businesses of
including in backlog only product orders that are expected to ship within six
months. Spectra-Physics' historical practice had been to include orders expected
to ship within 12 months. This change resulted in a reduction of backlog of
$39.3 million. Excluding the effect of this change, the segment's backlog
decreased 27% during the first nine months of 2002, and totaled $84.4 million as
of September 28, 2002.
Operating income margin was 1.9% in the third quarter of 2002, compared
with negative 1.8% in the third quarter of 2001. Excluding nominal restructuring
and unusual income, net, in 2002, restructuring and unusual costs, net, of $1.6
million in 2001, and goodwill amortization of $1.1 million in 2001, operating
income margin was 1.9% in 2002 and 1.1% in 2001. The increase in operating
income margin was due to cost reduction and productivity measures undertaken in
2001 and 2002 and the suspension of telecommunications activities in the second
quarter of 2002, offset in part by the impact of lower revenues and an operating
loss at Spectra-Physics.
In the third quarter of 2002, the segment recorded $0.3 million of
unusual income, net, including $0.5 million of proceeds from the disposal of
assets that were previously written down and the reversal of $0.5 million of
severance reserves previously established in 2001, offset by $0.6 million of
cash costs, primarily for severance, and a $0.1 million loss on the sale of a
small business unit. In addition, the segment recorded charges to cost of
revenues of $0.3 million for the sale of inventory revalued at the date of
acquisition. Restructuring and unusual costs, net, in 2001 included $1.1 million
of cash costs, primarily for severance; $0.4 million of loss on the sale of a
small business unit; and $0.1 million of asset writedowns.
Other Income, Net
- -----------------
The Company reported other income, net, of $11.7 million and $11.6
million in the third quarter of 2002 and 2001, respectively (Note 4). Other
income, net, includes interest income, interest expense, equity in earnings of
unconsolidated subsidiaries in 2001, gain on investments, net, and other items,
net. Interest income decreased to $11.2 million in 2002 from $18.7 million in
2001, primarily due to lower invested cash balances following the repurchase of
Company securities, acquisitions (Notes 2 and 12), and, to a lesser extent,
lower prevailing interest rates. The Company expects that a trend of lower
market interest rates in 2002 will continue to adversely affect the yield it
earns as maturing investments are reinvested at lower market rates. Following a
redemption of convertible debentures in October 2002 (Note 17), $74 million of
repurchases of the Company's common stock in the third quarter of 2002, and
ongoing repurchases of common stock in the fourth quarter of 2002, lower
invested cash will also contribute to an expected reduction in interest income.
Interest expense decreased to $8.9 million in 2002 from $17.8 million in 2001,
as a result of the redemption, maturity, and repurchase of debentures, as well
as entering into an interest-rate swap arrangement (Note 10), offset in part by
interest on borrowings under securities-lending arrangements (Note 11). Interest
expense will decrease following the October 2002 redemption discussed above.
<
27
>
THERMO ELECTRON CORPORATION
Third Quarter 2002 Compared With Third Quarter 2001 (continued)
- ---------------------------------------------------
During 2002 and 2001, the Company had gains on investments, net, of $9.4
million and $9.3 million, respectively. The gains included $6.6 million and $8.6
million in 2002 and 2001, respectively, from the sale of 194,000 and 350,000
shares, respectively, of FLIR Systems, Inc. Of the total gain from the sale of
FLIR shares, $2.3 million and $4.5 million in 2002 and 2001, respectively,
represent a recovery of previous writedowns on the shares that were sold during
these periods. The Company recorded income from equity in earnings of
unconsolidated subsidiaries of $1.7 million in 2001, which primarily relates to
the investment in FLIR. Following a reduction in the Company's percentage
ownership of FLIR to less than 20%, the Company no longer reports its pro-rata
share of FLIR's earnings but instead accounts for its remaining investment as an
available-for-sale security (Note 4).
Provision for Income Taxes
- --------------------------
The Company's effective tax rate was 31.1% and 37.5% in the third quarter
of 2002 and 2001, respectively. Excluding restructuring and unusual costs or
income, the effective tax rate was 30.5% and 37.5% in 2002 and 2001,
respectively. The effective tax rate decreased in 2002, primarily due to the
absence of nondeductible goodwill amortization following the adoption of SFAS
No. 142 and, to a lesser extent, a reorganization of the Company's subsidiaries
in several European countries that resulted in a more tax-efficient corporate
structure. The effective tax rate exceeded the statutory federal income tax rate
in 2001 due to the impact of state income taxes and nondeductible expenses,
which included goodwill amortization. Excluding restructuring and unusual costs
or income, and the amortization of goodwill, the effective tax rate was 31.6% in
the third quarter of 2001.
Minority Interest Income
- ------------------------
Minority interest income of $0.5 million in the third quarter of 2001,
represents minority shareholders' allocable share of a loss at Spectra-Physics.
Following the acquisition of the minority interest in Spectra-Physics in
February 2002 (Note 12), the Company has no minority interest income or expense.
First Nine Months 2002 Compared With First Nine Months 2001
- -----------------------------------------------------------
Continuing Operations
Sales in the first nine months of 2002 were $1.518 billion, a decrease of
$110.9 million from the first nine months of 2001. Excluding the effect of
acquisitions, divestitures, and currency translation, revenues decreased $92.1
million, or 6%. Currency translation had a favorable effect on revenues as
discussed below by segment, due to the weakening of the U.S. dollar relative to
currencies of countries in which the Company operates.
Operating income was $116.8 million in the first nine months of 2002,
compared with $82.6 million in the first nine months of 2001. Segment operating
income increased to $151.4 million in 2002 from $119.1 million in 2001.
Operating and segment operating income in the first nine months of 2002 were
reduced by additional charges associated with a restructuring plan initiated
during the fourth quarter of 2001, other restructuring actions initiated in
2002, and certain other unusual costs, net (Note 13). Operating and segment
operating income in the first nine months of 2001 were reduced by charges
associated with a restructuring plan initiated during the second quarter of 2001
and certain other unusual charges, net. The unusual items in both periods are
discussed by segment below. Excluding these unusual costs, which totaled $31.9
million in 2002 and $50.4 million in 2001, segment operating income was $183.3
million in 2002 and $169.5 million in 2001. The 2001 period included $30.3
million of goodwill amortization. Amortization of goodwill ceased following the
adoption of SFAS No. 142, effective in 2002 (Note 8). Excluding goodwill
amortization and unusual items, segment operating income totaled $199.8 million
in 2001. Segment operating income excluding goodwill amortization and unusual
items decreased in 2002 due to lower revenues and the resulting reduced
profitability at a number of businesses, discussed below.
<
28
>
THERMO ELECTRON CORPORATION
First Nine Months 2002 Compared With First Nine Months 2001 (continued)
- -----------------------------------------------------------
Life and Laboratory Sciences
- ----------------------------
Sales in the Life and Laboratory Sciences segment increased $16.4 million
to $825.3 million in the first nine months of 2002. The favorable effects of
currency translation resulted in an increase in revenues of $7.5 million in
2002. Sales increased $1.3 million due to acquisitions, net of divestitures.
Excluding the effect of currency translation, acquisitions, and divestitures,
revenues increased $7.6 million, or 1%. Increased demand for mass spectrometry
equipment and histology and cytology products was offset in part by weakened
demand for spectroscopy instruments and sample-preparation products, primarily
due to lower capital spending as discussed in the results for the third quarter.
Operating income margin increased to 15.7% in the first nine months of
2002 from 11.3% in the first nine months of 2001. The segment's margin increased
primarily due to the discontinuation of goodwill amortization as a result of the
adoption of SFAS No. 142 in 2002 and higher unusual costs in the 2001 period,
compared with the 2002 period. Excluding restructuring and unusual costs, net,
of $6.3 million in 2002, and $12.9 million in 2001, and goodwill amortization of
$17.7 million in 2001, operating income margin was 16.5% in 2002 and 15.1% in
2001. The increase in operating income margin resulted primarily from cost
reduction and productivity measures undertaken in 2001 and 2002 and, to a lesser
extent, higher revenues.
In the first nine months of 2002, the segment recorded restructuring and
unusual cash costs, net, of $6.1 million, primarily for severance and employee
retention at businesses being consolidated, and charges to cost of revenues of
$0.7 million for a discontinued product line and the sale of inventory revalued
at the date of acquisition. In addition, the segment wrote down $0.4 million of
fixed assets and realized a net gain of $0.9 million on the sale of a product
line, two small business units, and a building (Note 13). Restructuring and
unusual costs, net, in 2001 included cash costs of $4.8 million, primarily for
severance and abandoned facilities; $3.4 million of charges to cost of revenues,
principally for discontinued product lines; a charge of $3.4 million for the
writeoff of in-process research and development at an acquired business; $2.3
million of asset writedowns; and $1.0 million of gains on the sale of a small
business unit and a product line.
Measurement and Control
- -----------------------
Sales in the Measurement and Control segment decreased $77.3 million to
$443.5 million in the first nine months of 2002. Sales decreased $29.9 million
due to divestitures, net of acquisitions. The favorable effects of currency
translation resulted in an increase in revenues of $3.9 million in 2002.
Excluding the effect of divestitures, acquisitions, and currency translation,
revenues decreased $51.3 million, or 11%. The decrease was due to a decline in
revenues in each of the segment's principal businesses due to economic
conditions facing customers, particularly in the semiconductor, energy, and
steel industries.
The principal divestitures by the segment included the July 2002 sale of
Thermo BLH and Thermo Nobel, which manufacture and sell strain-gauges and were
placed for sale in 2001 (Note 2); the August 2001 sale of its Pharos Marine
unit, which manufactures and sells marine-navigation equipment; the April 2001
sale of the CAC and Mid South businesses, which provide the oil and gas industry
with wellhead safety and control products; and the July 2001 sale of its
ThermoMicroscopes unit, a manufacturer of scanning probe microscopes.
Operating income margin increased to 8.9% in the first nine months of
2002 from 4.2% in the first nine months of 2001, primarily due to significant
restructuring and unusual costs in 2001, and the discontinuation of goodwill
amortization as a result of the adoption of SFAS No. 142 in 2002. Operating
income margin, excluding restructuring and unusual costs, net, of $5.9 million
in 2002 and $26.9 million in 2001, and goodwill amortization of $9.1 million in
2001, decreased to 10.2% in 2002 from 11.2% in 2001. The decrease in operating
income margin resulted primarily from the decrease in revenues, offset in part
by the effects of cost reduction and productivity measures undertaken in 2001
and 2002.
<
29
>
THERMO ELECTRON CORPORATION
First Nine Months 2002 Compared With First Nine Months 2001 (continued)
- -----------------------------------------------------------
In the first nine months of 2002, the segment recorded restructuring and
unusual charges, net, of $5.9 million, including $13.1 million of cash costs,
principally for severance and abandoned facilities. In addition, the segment
recorded net gains of $8.5 million from the sale of businesses, including Thermo
BLH and Thermo Nobel, the resolution of disputes on businesses previously sold,
and the sale of a building. In 2002, the segment recorded charges to cost of
revenues of $1.3 million for the sale of inventory revalued at the date of
acquisition (Note 13). Restructuring and unusual costs, net, in 2001 included
$11.5 million, net, for the loss on sale of businesses or writedowns of
businesses subsequently sold; $9.0 million of cash costs, primarily for
severance and abandoned facilities; $3.3 million of charges to cost of revenues,
principally for discontinued product lines; $1.5 million of asset writedowns;
$1.0 million for impairment of a note receivable; $0.5 million for a
post-closing adjustment on two businesses sold in 2000; and $0.1 million of
other costs.
Optical Technologies
- --------------------
Sales in the Optical Technologies segment decreased $51.2 million to
$255.9 million in the first nine months of 2002. The unfavorable effects of
currency translation resulted in a decrease in revenues of $2.1 million in 2002.
Sales increased $0.5 million due to the acquisition of a product line, net of
divestitures. Excluding the effect of currency translation, an acquisition, and
divestitures, revenues decreased $49.6 million, or 16%. The decrease was due to
a severe slowdown in the semiconductor and other industrial markets that has
adversely affected all of the segment's principal businesses. The semiconductor
industry is highly cyclical and is experiencing a downturn that began in 2001.
Operating income margin was negative 7.0% in the first nine months of
2002, compared with positive 1.7% in the first nine months of 2001. Excluding
restructuring and unusual costs, net, of $19.7 million in 2002 and $10.6 million
in 2001, and goodwill amortization of $3.4 million in 2001, operating income
margin was 0.7% in 2002 and 6.3% in 2001. The decrease in operating income
margin was due to lower revenues at each of the segment's principal businesses
and in particular at the lasers business (Spectra-Physics), where the decline in
revenues led to operating losses. The Company initiated additional restructuring
actions in this business in 2002, following those announced in the fourth
quarter of 2001. These actions are discussed below and in Note 13.
In the first nine months of 2002, the segment recorded restructuring and
unusual charges, net, of $19.7 million, including $11.9 million of cash costs,
principally for severance and abandoned-equipment leases associated with
suspended telecom initiatives. The cash costs included $0.7 million for the
settlement of litigation (Note 15). In addition, this segment wrote off assets
totaling $5.7 million, including $5.5 million of abandoned fixed assets and $0.2
million of goodwill at a business that was subsequently sold. The segment also
recorded a charge of $0.8 million resulting from the exchange of options to
purchase shares of Spectra-Physics for options to purchase shares of Thermo
Electron following the acquisition of the minority interest in this business in
February 2002 (Note 12). In 2002, the segment also recorded a $0.1 million loss
on the sale of a small business unit and $1.2 million of charges to cost of
revenues, principally for discontinued product lines and inventory revalued at
the date of acquisition (Note 13). Restructuring and unusual costs, net, in 2001
included $6.6 million of charges to cost of revenues for provisions for
inventories; $3.4 million of cash costs for severance, abandoned facilities, and
other exit costs; a $0.4 million charge to write off costs associated with a
cancelled financing at Spectra-Physics; $0.1 million of net loss on the sale of
a small business unit and a facility; and $0.1 million of asset writedowns.
Other Income, Net
- -----------------
The Company reported other income, net, of $111.0 million and $7.7
million in the first nine months of 2002 and 2001, respectively (Note 4).
Interest income decreased to $38.2 million in 2002 from $52.2 million in 2001,
primarily due to lower invested cash balances following the repurchase of
Company securities, acquisitions (Notes 2 and 12), and, to a lesser extent,
lower prevailing interest rates. Interest expense decreased to $32.6 million in
2002 from $55.7 million in 2001 as a result of the redemption, maturity, and
repurchase of debentures, as well as entering into an interest-rate swap
arrangement (Note 10), offset in part by interest on borrowings under
securities-lending arrangements (Note 11).
<
30
>
THERMO ELECTRON CORPORATION
First Nine Months 2002 Compared With First Nine Months 2001 (continued)
- -----------------------------------------------------------
During 2002 and 2001, the Company had gains on investments, net, of
$103.4 million and $8.5 million, respectively. The gains included $94.5 million
and $8.6 million in 2002 and 2001, respectively, from the sale of 2,200,000 and
350,000 shares, respectively, of FLIR. Of the total gain from the sale of FLIR
shares, $25.5 million and $4.5 million in 2002 and 2001, respectively, represent
a recovery of previous writedowns on the shares that were sold during these
periods. The gains in 2001 were reduced by a charge of $2.0 million as a result
of impairment of an available-for-sale security that the Company deemed other
than temporary. The security was a preacquisition asset of an acquired business.
The Company recorded income from equity in earnings of unconsolidated
subsidiaries of $2.2 million in 2002 and $2.9 million in 2001, which primarily
related to the investment in FLIR through the first quarter of 2002 (Note 4).
Provision for Income Taxes
- --------------------------
The Company's effective tax rate was 33.0% and 38.5% in the first nine
months of 2002 and 2001, respectively. Excluding restructuring and unusual costs
or income, the effective tax rate was 31.7% and 38.6% in 2002 and 2001,
respectively. The effective tax rate decreased in 2002, primarily due to the
absence of nondeductible goodwill amortization following the adoption of SFAS
No. 142 and, to a lesser extent, a reorganization of the Company's subsidiaries
in several European countries that resulted in a more tax-efficient corporate
structure. The effective tax rate exceeded the statutory federal income tax rate
in 2001 due to the impact of state income taxes and nondeductible expenses,
which included goodwill amortization. Excluding restructuring and unusual costs
or income, and the amortization of goodwill, the effective tax rate was 33.3% in
the first nine months of 2001.
Minority Interest Income
- ------------------------
Minority interest income of $0.3 million and $1.3 million in the first
nine months of 2002 and 2001, respectively, represents minority shareholders'
allocable share of losses at Spectra-Physics through the date on which the
Company acquired the minority interest in this subsidiary in February 2002 (Note
12).
Income from Continuing Operations
- ---------------------------------
Income from continuing operations before extraordinary item and
cumulative effect of change in accounting principle was $152.9 million in the
first nine months of 2002, compared with $56.9 million in the first nine months
of 2001. Results in both periods were affected by unusual items, discussed
above. Excluding the unusual items in both periods, income from continuing
operations before extraordinary item and cumulative effect of change in
accounting principle increased to $114.6 million in 2002 from $87.1 million in
2001 due to the absence of goodwill amortization in 2002, offset in part by the
reasons discussed above.
Extraordinary Item
- ------------------
The Company repurchased and redeemed debentures during the first nine
months of 2002 and 2001, resulting in an extraordinary charge of $0.6 million,
net of tax, in 2002, and an extraordinary gain of $0.6 million, net of tax, in
2001 (Note 5).
Cumulative Effect of Change in Accounting Principle
- ---------------------------------------------------
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, in the first quarter of 2001, and recorded
an after-tax charge of $1.0 million representing the cumulative effect of the
change in accounting principle.
<
31
>
THERMO ELECTRON CORPORATION
First Nine Months 2002 Compared With First Nine Months 2001 (continued)
- -----------------------------------------------------------
Discontinued Operations
During the first quarter of 2002, the Company sold the last remaining
component of its former power-generation business and realized a gain from the
disposition totaling $13.0 million, principally for previously unrecognized tax
benefits that were realized upon the sale. In addition, as a result of new tax
regulations concerning deductible losses from divested businesses, the Company
revised its estimate of the tax consequences of business disposals in
discontinued operations and recorded a tax benefit of $19.0 million in the
second quarter of 2002.
In February 2001, the Company sold Thermo Cardiosystems Inc. to Thoratec
Corporation in exchange for 19.3 million shares of Thoratec common stock.
Certain restrictions, which lapsed in August 2002, limited the timing of the
Company's ability to sell these shares. The Company recorded an after-tax charge
of $66.0 million in the first quarter of 2001 for a decline in market value of
Thoratec common stock as a loss on disposal of discontinued operations. During
the first quarter of 2002, the Company sold 6.9 million shares of Thoratec for
net proceeds of $105 million, and realized an after-tax gain of $38.4 million as
a gain on disposal of discontinued operations. Following the sale of shares in
2002, the Company owned less than 20% of Thoratec's outstanding shares and began
accounting for its investment as an available-for-sale security in continuing
operations in the first quarter of 2002 with unrealized gains or losses recorded
as part of accumulated other comprehensive items in the accompanying 2002
balance sheet (Note 14).
In June 2001, the Company sold a substantial portion of its discontinued
power-generation business for $238 million and realized a net of tax gain of
$15.6 million on the disposition.
Liquidity and Capital Resources
Consolidated working capital was $647.9 million at September 28, 2002,
compared with $823.2 million at December 29, 2001. Included in working capital
were cash, cash equivalents, and short-term available-for-sale investments of
$856.3 million at September 28, 2002, compared with $1.042 billion at December
29, 2001. In addition, the Company had $9.4 million of long-term
available-for-sale investments at December 29, 2001.
Operating activities used cash of $1.3 million during the first nine
months of 2002. The use of $53.6 million of cash by discontinued operations was
substantially offset by cash of $52.3 million provided by continuing operations.
Payments for restructuring actions of the Company's continuing operations,
principally severance, lease costs, and other expenses of real estate
consolidation, used cash of $50.0 million in the first nine months of 2002.
Aside from cash used for restructuring actions, a decrease in other current
liabilities used cash of $20.3 million, including $11.4 million of accrued
payroll and employee benefits due to timing of payments, and $8.8 million of
accrued interest, principally due to the debt redemption discussed in Note 5.
The Company's cash flow from continuing operations in the first nine months of
2002 was reduced by income tax payments of approximately $34 million related to
gains on investments. The principal cash outflows from discontinued operations
were the payment of liabilities, primarily for the settlement of litigation,
including a patent-infringement matter (Note 15).
In connection with restructuring actions undertaken by the Company's
continuing operations, the Company had accrued $44.2 million for restructuring
costs at September 28, 2002. The Company expects to pay approximately $20.3
million of this amount for severance, employee retention, and other costs
primarily through 2003. The balance of $23.9 million will be paid for lease
obligations over the remaining terms of the leases, with approximately 60% to be
paid through 2003 and the remainder through 2012. In addition, at September 28,
2002, the Company had accrued $8.9 million for acquisition expenses. Accrued
acquisition expenses included $1.9 million of severance and relocation
obligations, which the Company expects to pay primarily through mid-2003. The
balance primarily represents abandoned-facility payments and will be paid over
the remaining terms of the leases through 2014.
<
32
>
THERMO ELECTRON CORPORATION
Liquidity and Capital Resources (continued)
During the first nine months of 2002, the primary investing activities of
the Company's continuing operations, excluding available-for-sale investment
activities, included the sale of other investments, acquisitions and
divestitures, the collection of notes receivable, the purchase of shares of a
majority-owned subsidiary, and the purchase of property, plant, and equipment.
The Company's continuing operations received proceeds of $65.3 million from the
sale of other investments, principally shares of FLIR (Note 4), and proceeds of
$24.4 million from the sale of businesses net of cash divested (Note 2). In
addition, the Company's continuing operations expended $78.3 million for
acquisitions (Note 2), $22.1 million to purchase the remaining minority-owned
shares of its Spectra-Physics subsidiary (Note 12), and $27.4 million for
purchases of property, plant, and equipment, net of dispositions. The Company's
continuing operations collected $74.0 million from notes receivable, which
included the repayment of Viasys Healthcare Inc.'s $33.4 million principal
amount note in May 2002, the August 2002 repayment of a $25.0 million principal
amount note receivable related to the sale of a business in 2000, and partial
repayment from Trimble Navigation Limited in March 2002 (Note 9). During the
first nine months of 2002, investing activities of the Company's discontinued
operations provided $106.0 million of cash, primarily representing proceeds of
$105 million from the sale of Thoratec common stock (Note 14).
The Company's financing activities used $459.9 million of cash during the
first nine months of 2002, including $460.3 million for continuing operations.
During the first nine months of 2002, the Company's continuing operations
expended $456.3 million to redeem the principal amount of its outstanding 4 1/4%
and 4 5/8% subordinated convertible debentures due 2003 and increased short-term
notes payable by $276.5 million to partially fund the debt redemption (Note 11).
The Company's continuing operations received net proceeds of $15.0 million from
the exercise of employee stock options. During the first nine months of 2002,
the Company expended $292.7 million to repurchase its securities. As of
September 28, 2002, the Company had approximately $101 million remaining under
Board of Directors' authorizations to repurchase its own securities.
In October 2002, the Company redeemed all of its outstanding 4 1/2%
senior convertible debentures due 2003 and 4 7/8% subordinated convertible
debentures due 2004, with the objective of reducing interest costs. The
principal amounts redeemed for the 4 1/2% and 4 7/8% debentures were $121.1
million and $13.3 million, respectively. The redemption price was 100% of the
principal amount of the debentures, plus accrued interest (Note 17).
The Company has no material commitments for purchases of property, plant,
and equipment and expects that for all of 2002, such expenditures will
approximate $50 - $55 million.
As of September 28, 2002, the Company's net debt (debt, net of cash and
available-for-sale investments) totaled $187 million. The Company's net
debt/liquidity position in the future will be primarily affected by the level of
cash flow from operations and the amount of cash expended on acquisitions and
repurchases of the Company's securities. The Company believes that its existing
resources together with cash it expects to generate from operations are
sufficient to meet the working capital requirements of its existing businesses
for the foreseeable future, including at least the next 24 months.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company's exposure to market risk from changes in interest rates,
currency exchange rates, and equity prices has not changed materially from its
exposure at year-end 2001, except that a 10% decrease in market interest rates
at September 28, 2002, would result in a negative impact to the Company of $2
million on the net fair value of its interest-sensitive financial instruments; a
10% decrease in market equity prices at September 28, 2002, would result in a
negative impact to the Company of $11 million on the net fair value of its
price-sensitive equity financial instruments; and a 100-basis point increase in
90-day LIBOR at September 28, 2002, would increase the Company's annual pre-tax
interest expense by $2 million.
<
33
>
THERMO ELECTRON CORPORATION
Item 4 - Controls and Procedures
- --------------------------------
The Company's management, including its Chief Executive Officer and Chief
Financial Officer, has conducted an evaluation of the effectiveness of
disclosure controls and procedures within ninety days of the filing of this
report pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the disclosure
controls and procedures are effective in ensuring that information required to
be disclosed in the reports that the Company files or submits under the Exchange
Act is recorded, processed, summarized, and reported within the time periods
specified in Securities and Exchange Commission (SEC) rules and forms. There
have been no significant changes in internal controls, or in factors that could
significantly affect internal controls, subsequent to the date the Company's
management, including its Chief Executive Officer and Chief Financial Officer,
completed its evaluation.
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Thermo Electron wishes to caution readers that
the following important factors, among others, in some cases have affected, and
in the future could affect, Thermo Electron's actual results and could cause its
actual results in 2002 and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, Thermo Electron.
Thermo Electron must develop new products, adapt to rapid and significant
technological change, and respond to introductions of new products in order to
remain competitive. Thermo Electron's growth strategy includes significant
investment in and expenditures for product development, including in the area of
proteomics. Thermo Electron sells its products in several industries that are
characterized by rapid and significant technological changes, frequent new
product and service introductions, and enhancements and evolving industry
standards. Without the timely introduction of new products, services, and
enhancements, Thermo Electron's products and services will likely become
technologically obsolete over time, in which case its revenue and operating
results would suffer.
Thermo Electron's customers use many of its products to develop, test,
and manufacture their own products. As a result, Thermo Electron must anticipate
industry trends and develop products in advance of the commercialization of its
customers' products. If it fails to adequately predict its customers' needs and
future activities, Thermo Electron may invest heavily in research and
development of products and services that do not lead to significant revenue.
Many of its products and products under development are technologically
innovative and require significant planning, design, development, and testing at
the technological, product, and manufacturing-process levels. These activities
require Thermo Electron to make significant investments.
Products in Thermo Electron's markets undergo rapid and significant
technological change because of quickly changing industry standards and the
introduction of new products and technologies that make existing products and
technologies uncompetitive or obsolete. Thermo Electron's competitors may adapt
more quickly to new technologies and changes in customers' requirements than
Thermo Electron can. The products Thermo Electron is currently developing, or
those it will develop in the future, may not be technologically feasible or
accepted by the marketplace, and its products or technologies could become
uncompetitive or obsolete.
Thermo Electron sells its products and services to a number of companies
that operate in cyclical industries, which could adversely affect its results of
operations when those industries experience a downturn. The growth and
profitability of certain of Thermo Electron's businesses depend in part on sales
to industries that are subject to cyclical downturns and are experiencing
slowing trends. For example, Thermo Electron's Optical Technologies segment
depends in part on sales to the semiconductor industry and the growth and
profitability of Thermo Electron's Measurement and Control segment depends in
part on sales to the steel and cement industries. A prolonged slowdown in these
industries would adversely affect sales by these segments, which in turn could
adversely affect Thermo Electron's revenues and results of operations.
<
34
>
THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
Changes in governmental regulations may reduce demand for Thermo
Electron's products or increase its expenses. Thermo Electron competes in many
markets in which it and its customers must comply with federal, state, local,
and international regulations, such as environmental, health and safety, and
food and drug regulations. Thermo Electron develops, configures, and markets its
products to meet customer needs created by those regulations. Any significant
change in regulations could reduce demand for Thermo Electron's products. For
example, many of Thermo Electron's instruments are marketed to the
pharmaceutical industry for use in discovering and developing drugs. Changes in
the U.S. Food and Drug Administration's regulation of the drug discovery and
development process could have an adverse effect on the demand for these
products.
Demand for some of Thermo Electron's products depends on capital spending
policies of its customers and on government funding policies. Thermo Electron's
customers include manufacturers of semiconductors and products incorporating
semiconductors, pharmaceutical and chemical companies, laboratories,
universities, healthcare providers, government agencies, and public and private
research institutions. Many factors, including public policy spending
priorities, available resources, and product and economic cycles, have a
significant effect on the capital spending policies of these entities. These
policies in turn can have a significant effect on the demand for our products.
Thermo Electron faces a number of challenges in integrating and
consolidating its businesses. Thermo Electron has historically operated its
businesses largely as autonomous, unaffiliated operations. Thermo Electron is
consolidating its operations and managing them in a more coordinated manner. The
following factors may make it difficult to successfully integrate and
consolidate Thermo Electron's operations:
- Thermo Electron's success in integrating these businesses depends on
its ability to coordinate or consolidate geographically separate organizations
and integrate personnel with different business backgrounds and corporate
cultures.
- Thermo Electron's ability to combine these businesses requires
coordination of previously autonomous administrative, sales and marketing,
distribution, and accounting and finance functions, and expansion and
integration of information and management systems.
- The integration and consolidation process could be disruptive to Thermo
Electron's businesses.
Moreover, Thermo Electron may not be able to realize all of the cost
savings and other benefits that it expects to result from the integration and
consolidation process.
It may be difficult for Thermo Electron to implement its strategies for
improving internal growth. Some of the markets in which Thermo Electron competes
have been flat or declining over the past several years. To address this issue,
Thermo Electron is pursuing a number of strategies to improve its internal
growth, including:
- finding new markets for its products, including in the area of
proteomics;
- developing new applications for its technologies;
- combining sales and marketing operations in appropriate markets to
compete more effectively;
- actively funding research and development; and
- strengthening its presence in selected geographic markets.
Thermo Electron may not be able to successfully implement these
strategies, and these strategies may not result in growth of Thermo Electron's
business.
<
35
>
THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
As a result of the spin-off of Kadant, Thermo Electron remains as the
guarantor of indebtedness issued by Kadant even though Thermo Electron no longer
controls Kadant's business or operations. Thermo Electron has guaranteed the
payment of principal and interest on debentures issued by Kadant, the
outstanding principal balance of which was $86.2 million as of September 28,
2002. These debentures mature in July 2004. Thermo Electron remains liable as a
guarantor for this obligation following the spin-off.
Thermo Electron has significant international operations, which entail
the risk that exchange rate fluctuations may negatively affect demand for its
products and its profitability. International revenues account for a substantial
portion of Thermo Electron's revenues, and Thermo Electron intends to continue
expanding its presence in international markets. In 2001, Thermo Electron's
international revenues from continuing operations, including export revenues
from the United States, accounted for approximately 50% of its total revenues.
International revenues are subject to the risk that changes in exchange rates
may adversely affect product demand and the profitability in U.S. dollars of
products and services provided by Thermo Electron in international markets,
where payment for Thermo Electron's products and services is made in the local
currency. For example, in fiscal 2001, the unfavorable effects of currency
translation decreased revenues of Thermo Electron's continuing operations by
$46.5 million.
Thermo Electron has acquired several companies and businesses; as a
result it has recorded significant goodwill on its balance sheet, which it must
continually evaluate for potential impairment. Thermo Electron has acquired
significant intangible assets, including approximately $1.4 billion of goodwill
that it has recorded on its balance sheet as of September 28, 2002. Thermo
Electron assesses the realizability of the goodwill it has on its books annually
as well as whenever events or changes in circumstances indicate that the
goodwill may be impaired. These events or circumstances generally include
operating losses or a significant decline in earnings associated with the
acquired business or asset. Thermo Electron's ability to realize the value of
the goodwill that it has recorded as a result of its acquisition of the minority
interests in its formerly publicly-traded subsidiaries will depend on the future
cash flows of these businesses. These cash flows in turn depend in part on how
well Thermo Electron has integrated these businesses.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
See Exhibit Index on page immediately preceding exhibits.
(b) Report on Form 8-K
On September 4, 2002, the Company filed a Current Report on Form 8-K with
respect to the submission of sworn statements to the SEC pursuant to SEC Order
No. 4-460.
<
36
>
THERMO ELECTRON CORPORATION
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 8th day of November 2002.
THERMO ELECTRON CORPORATION
/s/ Theo Melas-Kyriazi
-------------------------------------------------
Theo Melas-Kyriazi
Vice President and Chief Financial Officer
/s/ Peter E. Hornstra
-------------------------------------------------
Peter E. Hornstra
Corporate Controller and Chief Accounting Officer
<
37
>
THERMO ELECTRON CORPORATION
CERTIFICATIONS
I, Richard F. Syron, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Thermo Electron
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
/s/ Richard F. Syron
-----------------------
Richard F. Syron
Chief Executive Officer
<
38
>
THERMO ELECTRON CORPORATION
I, Theo Melas-Kyriazi, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Thermo Electron
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 8, 2002
/s/ Theo Melas-Kyriazi
-----------------------
Theo Melas-Kyriazi
Chief Financial Officer
<
39
>
THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
<
40
>