UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 March 29, 2003
[ ] 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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 April 25, 2003
----------------------------- -----------------------------
Common Stock, $1.00 par value 161,749,688
PART I - Financial Information
Item 1 - Financial Statements
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
March 29, December 28,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 249,111 $ 339,038
Short-term available-for-sale investments, at quoted market value
(amortized cost of $313,602 and $493,002) 379,100 536,430
Accounts receivable, less allowances of $25,711 and $25,576 412,411 429,740
Inventories:
Raw materials and supplies 143,704 134,039
Work in process 48,730 50,894
Finished goods (includes $13,534 and $18,982 at customer locations) 149,812 147,871
Deferred tax asset 78,184 79,057
Other current assets (Note 15) 94,717 54,490
---------- ----------
1,555,769 1,771,559
---------- ----------
Property, Plant, and Equipment, at Cost 563,324 553,349
Less: Accumulated depreciation and amortization 290,298 280,441
---------- ----------
273,026 272,908
---------- ----------
Other Assets (Note 10) 158,853 186,390
---------- ----------
Goodwill 1,418,926 1,416,205
---------- ----------
$3,406,574 $3,647,062
========== ==========
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THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Equity
March 29, December 28,
(In thousands except share amounts) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Short-term obligations and current maturities of long-term obligations (Note 15) $ 246,086 $ 484,480
Accounts payable 105,510 111,994
Accrued payroll and employee benefits 74,632 97,856
Accrued income taxes 60,222 44,519
Deferred revenue 70,033 58,490
Accrued restructuring costs (Note 12) 31,806 41,579
Other accrued expenses (Notes 2 and 11) 165,058 170,996
Net liabilities of discontinued operations 77,958 93,806
---------- ----------
831,305 1,103,720
---------- ----------
Long-term Deferred Income Taxes and Other Deferred Items 61,357 58,678
---------- ----------
Long-term Obligations:
Senior notes (Note 10) 142,292 141,032
Subordinated convertible obligations 288,414 304,549
Other 5,157 5,760
---------- ----------
435,863 451,341
---------- ----------
Shareholders' Equity:
Preferred stock, $100 par value, 50,000 shares authorized; none issued Common
stock, $1 par value, 350,000,000 shares authorized; 170,898,573 and 169,952,419
shares issued 170,899 169,952
Capital in excess of par value 1,223,144 1,212,145
Retained earnings 855,838 819,411
Treasury stock at cost, 8,844,614 and 7,098,501 shares (161,005) (129,675)
Deferred compensation (4,705) (4,852)
Accumulated other comprehensive items (Notes 7 and 10) (6,122) (33,658)
---------- ----------
2,078,049 2,033,323
---------- ----------
$3,406,574 $3,647,062
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
----------------------------
March 29, March 30,
(In thousands except per share amounts) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Revenues (Note 4) $500,205 $491,326
-------- --------
Costs and Operating Expenses:
Cost of revenues 276,367 267,670
Selling, general, and administrative expenses 139,119 138,913
Research and development expenses 37,321 39,626
Restructuring and other costs, net (Note 12) 8,102 8,383
-------- --------
460,909 454,592
-------- --------
Operating Income 39,296 36,734
Other Income, Net (Note 5) 5,901 59,921
-------- --------
Income from Continuing Operations Before Provision for Income Taxes and Minority
Interest 45,197 96,655
Provision for Income Taxes (13,806) (33,312)
Minority Interest Income - 331
-------- --------
Income from Continuing Operations 31,391 63,674
Gain on Disposal of Discontinued Operations (net of income tax provision of
$3,564 and $5,593; Note 13) 5,036 51,370
-------- --------
Net Income $ 36,427 $115,044
======== ========
Earnings per Share from Continuing Operations (Note 6):
Basic $ .19 $ .37
======== ========
Diluted $ .19 $ .34
======== ========
Earnings per Share (Note 6):
Basic $ .22 $ .66
======== ========
Diluted $ .22 $ .59
======== ========
Weighted Average Shares (Note 6):
Basic 162,844 174,250
======== ========
Diluted 165,614 204,189
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
----------------------------
March 29, March 30,
(In thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 36,427 $ 115,044
Gain on disposal of discontinued operations (Note 13) (5,036) (51,370)
--------- ---------
Income from continuing operations 31,391 63,674
Adjustments to reconcile income from continuing operations to net cash provided
by (used in) operating activities:
Depreciation and amortization 14,034 14,536
Noncash restructuring and other costs, net (Note 12) 2,974 991
Provision for losses on accounts receivable 661 818
Change in deferred income taxes 1,627 (5,605)
Gain on sale of businesses (262) (2,270)
Gain on investments, net (Note 5) (5,175) (57,953)
Equity in earnings of unconsolidated subsidiaries (Note 5) - (2,169)
Minority interest income - (331)
Other 1,505 2,575
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable 20,984 9,667
Inventories (6,590) (7,100)
Other current assets (8,756) (5,066)
Accounts payable (7,381) (6,833)
Other current liabilities (27,722) (15,169)
--------- ---------
Net cash provided by (used in) continuing operations 17,290 (10,235)
Net cash used in discontinued operations (5,359) (7,877)
--------- ---------
Net cash provided by (used in) operating activities 11,931 (18,112)
--------- ---------
Investing Activities:
Proceeds from maturities of available-for-sale investments 173,848 18,882
Proceeds from sale of available-for-sale investments 10,788 39,237
Purchases of property, plant, and equipment (12,587) (13,466)
Proceeds from sale of property, plant, and equipment 1,236 1,051
Acquisition, net of cash acquired (Note 2) (2,620) -
Proceeds from sale of businesses, net of cash divested 384 3,185
Proceeds from sale of other investments 39 80,595
Acquisition of minority interest of subsidiary - (21,283)
Increase in other assets (528) (5,662)
Other 503 346
--------- ---------
Net cash provided by continuing operations 171,063 102,885
Net cash provided by discontinued operations 1,871 107,540
--------- ---------
Net cash provided by investing activities 172,934 210,425
--------- ---------
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THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Three Months Ended
----------------------------
March 29, March 30,
(In thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Redemption and repayment of long-term obligations $ (1,084) $(457,009)
Purchases of company common stock and subordinated convertible debentures (46,102) (100,036)
Net proceeds from issuance of company common stock 10,540 10,693
Increase (decrease) in short-term notes payable (237,336) 369,162
Other - 293
--------- ---------
Net cash used in continuing operations (273,982) (176,897)
Net cash used in discontinued operations (3,707) (1,789)
--------- ---------
Net cash used in financing activities (277,689) (178,686)
--------- ---------
Exchange Rate Effect on Cash of Continuing Operations 2,950 (746)
Exchange Rate Effect on Cash of Discontinued Operations (82) (60)
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents (89,956) 12,821
Cash and Cash Equivalents at Beginning of Period 339,067 305,200
--------- ---------
249,111 318,021
Cash and Cash Equivalents of Discontinued Operations at End of Period - (3,026)
--------- ---------
Cash and Cash Equivalents at End of Period $ 249,111 $ 314,995
========= =========
Noncash Investing Activities:
Fair value of assets of product line $ 3,063 $ -
Cash paid for product line (2,769) -
--------- ---------
Liabilities assumed of product line $ 294 $ -
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
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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
March 29, 2003, and the results of operations and cash flows for the three-month
periods ended March 29, 2003, and March 30, 2002. 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 28, 2002, 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 28, 2002, filed with the Securities
and Exchange Commission. During the first quarter of 2003, the company changed
its year end to December 31 from the Saturday closest to December 31. This
change is effective in 2003 and thereafter.
2. Acquisitions
In January 2003, the Measurement and Control segment acquired a product
line of emission monitoring products for $2.6 million in cash, net of cash
acquired. The segment recorded $2.5 million of intangible assets consisting of
product technology, which is being amortized over 10 years.
The company has undertaken restructuring activities at acquired
businesses. These activities, which were accounted for in accordance with
Emerging Issues Task Force (EITF) No. 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination," have primarily 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 No. 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
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 2002 $1,319 $ 588 $ 499 $2,406
Payments (559) (97) - (656)
Decrease recorded as a reduction in goodwill and other
intangible assets (155) (401) (2) (558)
Currency translation (2) (58) (2) (62)
------ ------ ------ ------
Balance at March 29, 2003 $ 603 $ 32 $ 495 $1,130
====== ====== ====== ======
The 2002 acquisitions primarily included Thermo CRS and the
radiation-monitoring products business (RMP) of St. Gobain Corporation. The
principal accrued acquisition expenses for 2002 acquisitions were for severance
for approximately 102 employees at the acquired businesses, primarily in
manufacturing, research and development, and
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THERMO ELECTRON CORPORATION
2. Acquisitions (continued)
sales and service; closure of a Thermo CRS manufacturing facility in Austria,
with a lease that expired in 2003 and whose operations were 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. The
company expects to pay amounts accrued for acquisition expenses through the
third quarter of 2003.
A summary of the changes in accrued acquisition expenses for acquisitions
completed before 2002 is as follows:
Abandonment
of Excess
(In thousands) Facilities
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 2002 $6,422
Payments (144)
Currency translation (93)
------
Balance at March 29, 2003 $6,185
======
The remaining accrued acquisition expenses for pre-2002 acquisitions
represent lease obligations for four abandoned operating facilities in England
with leases expiring through 2014.
3. Business Segment Information
Three Months Ended
----------------------------
March 29, March 30,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Revenues:
Life and Laboratory Sciences $299,465 $281,314
Measurement and Control 153,920 151,689
Optical Technologies 50,202 61,553
Intersegment (a) (3,382) (3,230)
-------- --------
$500,205 $491,326
======== ========
Income from Continuing Operations Before Provision for Income Taxes and
Minority Interest:
Life and Laboratory Sciences (b) $ 39,022 $ 42,119
Measurement and Control (c) 10,819 13,831
Optical Technologies (d) (3,677) (11,898)
Intersegment 324 (109)
-------- --------
Total Segment Operating Income (e) 46,488 43,943
Corporate/Other (f) (1,291) 52,712
-------- --------
$ 45,197 $ 96,655
======== ========
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THERMO ELECTRON CORPORATION
3. Business Segment Information (continued)
Three Months Ended
----------------------------
March 29, March 30,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Depreciation:
Life and Laboratory Sciences $ 5,363 $ 5,488
Measurement and Control 2,579 2,922
Optical Technologies 2,963 3,863
Corporate 737 696
-------- --------
$ 11,642 $ 12,969
======== ========
Amortization:
Life and Laboratory Sciences $ 1,588 $ 1,016
Measurement and Control 523 284
Optical Technologies 281 267
-------- --------
$ 2,392 $ 1,567
======== ========
During the first quarter of 2003, the company transferred management
responsibility for several businesses between segments as follows: (1) the
compositional-metrology business was moved to the Life and Laboratory Sciences
segment from the Optical Technologies segment; (2) the ultra-high vacuum systems
and semiconductor testing businesses were moved to the Measurement and Control
segment from the Optical Technologies segment; and (3) Thermo Euroglas was moved
to the Life and Laboratory Sciences segment from the Measurement and Control
segment. In addition to these changes, during the first quarter of 2003, the
company began allocating certain costs to the business segments previously
classified as corporate expenses based on the estimated extent to which the
segment benefited from the cost. Allocated costs principally include e-commerce,
global sourcing, and marketing as well as some legal, human resources, and
information systems costs. 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 costs, net, of $2.6 million in the first
quarter of 2003 and restructuring and other income, net, of $0.3 million in
the first quarter of 2002.
(c) Includes restructuring and other costs, net, of $3.6 million in the first
quarter of 2003 and restructuring and other income, net, of $0.2 million in
the first quarter of 2002.
(d) Includes restructuring and other costs, net, of $1.3 million and $8.3
million in the first quarter of 2003 and 2002, respectively.
(e) Segment operating income is operating income excluding costs incurred at
the company's corporate office that are not allocated to the segments.
(f) Includes corporate general and administrative expenses and other income and
expense. Includes corporate restructuring and other costs of $0.6 million
and $0.7 million in the first quarter of 2003 and 2002, respectively. Other
income, net, includes gains on the sale of shares of FLIR Systems, Inc. of
$3.7 million and $56.3 million in the first quarter of 2003 and 2002,
respectively.
4. Revenue Recognition
In November 2002, the EITF reached a consensus on EITF No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." The company
elected to early adopt the provisions of EITF No. 00-21 and began applying the
consensus prospectively in the first quarter of 2003. Under EITF No. 00-21, the
company recognizes revenue and related costs for arrangements with customers
that have multiple deliverables such as equipment and installation as each of
these is delivered or completed based on their fair value. Previously, when
installation was essential to
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THERMO ELECTRON CORPORATION
4. Revenue Recognition (continued)
functionality and not deemed inconsequential or perfunctory, all revenue was
deferred until completion of installation. Revenues for products sold where
installation was not essential to functionality and was deemed inconsequential
or perfunctory were previously recognized upon shipment with estimated
installation costs accrued. The adoption of EITF No. 00-21 increased revenues
and diluted earnings per share by $7.6 million and $.01, respectively, during
the first quarter of 2003.
5. Other Income, Net
The components of other income, net, in the accompanying statement of
income are as follows:
Three Months Ended
----------------------------
March 29, March 30,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 7,685 $ 14,358
Interest Expense (Note 10) (6,904) (13,479)
Gain on Investments, Net 5,175 57,953
Equity in Earnings of Unconsolidated Subsidiaries - 2,169
Other Items, Net (55) (1,080)
-------- --------
$ 5,901 $ 59,921
======== ========
The company sold 100,000 and 1,250,000 shares of FLIR Systems, Inc.
common stock during the first quarter of 2003 and 2002, respectively, and
realized gains of $3.7 million and $56.3 million, respectively. These gains
included $1.2 million and $14.4 million in the first quarter of 2003 and 2002,
respectively, from the recovery of amounts written down in prior years.
6. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
----------------------------
March 29, March 30,
(In thousands except per share amounts) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 31,391 $ 63,674
Gain on Disposal of Discontinued Operations, Net 5,036 51,370
-------- --------
Net Income for Basic Earnings per Share 36,427 115,044
Effect of Convertible Debentures 52 5,908
-------- --------
Income Available to Common Shareholders, as Adjusted for Diluted
Earnings per Share $ 36,479 $120,952
-------- --------
Basic Weighted Average Shares 162,844 174,250
Effect of:
Stock options 1,653 2,974
Convertible debentures 917 26,965
Contingently issuable shares 200 -
-------- --------
Diluted Weighted Average Shares 165,614 204,189
-------- --------
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THERMO ELECTRON CORPORATION
6. Earnings per Share (continued)
Three Months Ended
----------------------------
March 29, March 30,
(In thousands except per share amounts) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share:
Continuing operations $ .19 $ .37
Discontinued operations .03 .29
-------- --------
$ .22 $ .66
======== ========
Diluted Earnings per Share:
Continuing operations $ .19 $ .34
Discontinued operations .03 .25
-------- --------
$ .22 $ .59
======== ========
Options to purchase 12,139,000 and 7,575,000 shares of common stock were
not included in the computation of diluted earnings per share for the first
quarter of 2003 and 2002, respectively, 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 first quarter of 2003, the company's 3
1/4%, 4%, and 4 3/8% subordinated convertible debentures with principal balances
as of March 29, 2003, of $78.0 million, $210.4 million, and $70.9 million,
respectively, and convertible at $41.84, $35.77, and $111.83 per share,
respectively; and in the first quarter of 2002, the company's 4 3/8%
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' equity in the accompanying balance sheet, including
currency translation adjustments, unrealized net of tax gains and losses on
available-for-sale investments and hedging instruments, and minimum pension
liability adjustment. During the first quarter of 2003 and 2002, the company had
comprehensive income of $67.4 million and $59.4 million, respectively.
Comprehensive income in the first quarter 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.
8. Stock-based Compensation Plans and Pro Forma Stock-based Compensation
Expense
The company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no accounting
recognition is given to stock options granted at fair market value until they
are exercised. Upon exercise, net proceeds, including tax benefits realized, are
credited to shareholders' equity.
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which sets forth a fair-value-based method of
recognizing stock-based compensation expense. As permitted by SFAS No. 123, the
company has elected to continue to apply APB No. 25 to account for its
stock-based compensation plans. Had compensation cost for awards granted after
1994 under the company's stock-based compensation plans been determined based on
the fair value at the
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THERMO ELECTRON CORPORATION
8. Stock-based Compensation Plans and Pro Forma Stock-based Compensation
Expense (continued)
grant dates consistent with the method set forth under SFAS No. 123, the effect
on certain financial information of the company would have been as follows:
Three Months Ended
------------------------
March 29, March 30,
(In thousands except per share amounts) 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations:
As reported $ 31,391 $ 63,674
Add: Stock-based employee compensation expense included in reported
results, net of tax 484 386
Deduct: Total stock-based employee compensation expense determined
under the fair-value-based method for all awards, net of tax (6,561) (7,119)
-------- --------
Pro forma $ 25,314 $ 56,941
======== ========
Basic Earnings per Share from Continuing Operations:
As reported $ .19 $ .37
Pro forma $ .16 $ .33
Diluted Earnings per Share from Continuing Operations:
As reported $ .19 $ .34
Pro forma $ .15 $ .31
Net Income:
As reported $ 36,427 $115,044
Add: Stock-based employee compensation expense included in reported
net income, net of tax 484 386
Deduct: Total stock-based employee compensation expense determined
under the fair-value-based method for all awards, net of tax (6,561) (7,119)
-------- --------
Pro forma $ 30,350 $108,311
======== ========
Basic Earnings per Share:
As reported $ .22 $ .66
Pro forma $ .19 $ .62
Diluted Earnings per Share:
As reported $ .22 $ .59
Pro forma $ .18 $ .56
9. Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs and is effective in 2003. The adoption of this
new standard did not have a material impact on the company's financial
statements.
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THERMO ELECTRON CORPORATION
9. Recent Accounting Pronouncements (continued)
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." The company adopted this standard in the first quarter of 2003.
Under the standard, all of the transactions previously classified by the company
as extraordinary items are no longer treated as such, but instead are reported
in other income, net, in the accompanying statement of income. Prior periods
were restated to conform to this presentation.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which supersedes EITF No. 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 lengthens the timeframe for reporting of expenses relating to
restructuring activities beyond the period in which a plan is initiated. The
company adopted the provisions of this statement for exit or disposal activities
that were initiated in the first quarter of 2003. The provisions of EITF No.
94-3 will continue to apply with regard to the company's restructuring plans
that commenced prior to 2003.
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of FIN No. 45 are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002, while the disclosure requirements became applicable in 2002.
The company is complying with the disclosure requirements of FIN No. 45. The
other requirements did not materially affect the company's financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB 51." The primary objectives of FIN
No. 46 are to provide guidance on the identification of entities for which
control is achieved through means other than through voting rights ("variable
interest entities" or "VIEs") and how to determine when and which business
enterprise should consolidate the VIE. This new model for consolidation applies
to an entity for which either: (a) the equity investors (if any) do not have a
controlling financial interest; or (b) the equity investment at risk is
insufficient to finance that entity's activities without receiving additional
subordinated financial support from other parties. In addition, FIN No. 46
requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a VIE make additional disclosures. The company
is required to apply FIN No. 46 to all new variable interest entities created or
acquired after January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the company is required to apply FIN No. 46
on July 1, 2003. FIN No. 46 did not materially affect the company's financial
statements.
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. 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.
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THERMO ELECTRON CORPORATION
10. Derivative Instruments and Hedging (continued)
The company records its forward currency-exchange contracts at fair value
in its 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 losses and gains on the underlying exposure being
hedged. Cash flows resulting from currency-exchange contracts qualifying as
cash-flow hedges are recorded in the accompanying statement of cash flows in the
same category as the item being hedged. At March 29, 2003, the company had
deferred losses, net of income taxes, relating to forward currency-exchange
contracts of approximately $1.0 million, substantially all of which is expected
to be recognized as expense over the next 12 months to approximately offset
gains on the exposures being hedged. The ineffective portion of the gain or loss
on derivative instruments is recorded in other income, net, in the accompanying
statement of income and is not material.
During 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% (3.46% as of March 29, 2003). 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 $13.6 million at March 29, 2003.
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. Warranty Obligations and Other Indemnifications
Product warranties are included in other accrued expenses in the
accompanying balance sheet. The changes in the carrying amount of product
warranties for the quarter ended March 29, 2003, are as follows:
(In thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 2002 $27,361
Provision charged to income 5,949
Usage (5,325)
Adjustments to previously provided warranties, net (496)
Other, net (a) 205
-------
Balance at March 29, 2003 $27,694
=======
(a) Primarily represents the effects of currency translation.
The company's outstanding indemnification agreements, including letters
of credits and guarantees, have not changed materially from year-end 2002.
12. Restructuring and Other Costs, Net
In response to a continued downturn in markets served by the company,
restructuring actions were initiated in 2002 in a number of business units to
reduce costs principally through headcount reductions and consolidation of
facilities. Certain costs associated with these actions are recorded when
incurred. Further actions were initiated in the first quarter of 2003. The
company expects to incur an additional $4 million of restructuring costs through
the remainder of 2003 for charges associated with these actions that cannot be
recorded until incurred. The company
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THERMO ELECTRON CORPORATION
12. Restructuring and Other Costs, Net (continued)
believes that restructuring actions undertaken in 2002 and 2003 will be
substantially completed in 2003. The company expects to identify additional
sites to consolidate during the remainder of 2003 and will record charges in
connection with any such actions.
During the first quarter of 2003, the company recorded net restructuring
and other costs by segment as follows:
Life and
Laboratory Measurement Optical
(In thousands) Sciences and Control Technologies Corporate Total
- ---------------------------------------------------------------------------------------------------------------------------------
Restructuring and Other Costs, Net $2,573 $ 3,630 $1,294 $ 605 $8,102
====== ======= ====== ====== ======
The components of net restructuring and other costs by segment are as
follows:
Life and Laboratory Sciences
- ----------------------------
The Life and Laboratory Sciences segment recorded $2.6 million of net
restructuring and other charges in the first quarter of 2003. These charges
included $2.7 million of cash costs principally associated with facility
consolidations. The cash costs included $1.0 million of net abandoned-facility
lease costs for facilities described below; $0.7 million of employee-retention
costs at facilities being closed; $0.6 million of severance for 25 employees,
primarily in administrative, sales, and service functions; and $0.4 million of
other cash costs, primarily relocation expenses. The charges for abandoned
facilities include costs of $1.2 million, net of reversals of $0.2 million, and
primarily represent revised estimates of future lease costs for facilities in
Europe that the segment provided for in 2001. The charges for severance are net
of reversals of $0.3 million that the segment had provided in 2002, which are no
longer required due to employee attrition. In addition, the segment recorded a
charge of $0.4 million to write down the carrying value of a building held for
sale to net realizable value, offset by $0.5 million of net gains, primarily
from the sale of a product line.
Measurement and Control
- -----------------------
The Measurement and Control segment recorded $3.6 million of net
restructuring and other charges in the first quarter of 2003. These charges
included $2.0 million of cash costs principally associated with facility
consolidations. The cash costs included $1.1 million of severance for 46
employees across all functions; $0.2 million of employee-retention costs at
facilities being closed; $0.1 million of abandoned-facility lease costs; and
$0.6 million of other cash costs, primarily relocation expenses. The charges for
severance are net of reversals of $0.4 million that the segment had provided
previously, which are no longer required due to employee attrition. In addition,
the segment recorded a charge of $1.6 million, primarily for the writedown of
goodwill in a business held for sale to reduce the carrying value to estimated
disposal value.
Optical Technologies
- --------------------
The Optical Technologies segment recorded $1.3 million of net
restructuring and other charges in the first quarter of 2003. These charges
included $1.0 million for the writedown of a facility held for sale to estimated
disposal value. In addition, the segment recorded $0.3 million of cash costs,
including $0.1 million of severance for 21 employees, primarily in manufacturing
functions; $0.1 million of employee-retention costs at facilities being closed;
and $0.1 million of other cash costs.
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THERMO ELECTRON CORPORATION
12. Restructuring and Other Costs, Net (continued)
Corporate
- ---------
The company recorded $0.6 million of restructuring and other charges at
its corporate office in the first quarter of 2003, 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.
General
- -------
The following table summarizes the company's severance actions in 2003.
Number of
2001 Restructuring Plans Employees
- -------------------------------------------------------------------------------------------------------------------------------
Remaining Terminations at December 28, 2002 30
Terminations Occurring in 2003 (16)
Adjustment to Plan (2)
----
Remaining Terminations at March 29, 2003 12
====
2002 Restructuring Plans
- -------------------------------------------------------------------------------------------------------------------------------
Remaining Terminations at December 28, 2002 311
Terminations Occurring in 2003 (200)
Adjustment to Plan (11)
----
Remaining Terminations at March 29, 2003 100
====
2003 Restructuring Plans
- -------------------------------------------------------------------------------------------------------------------------------
Terminations Announced in 2003 94
Terminations Occurring in 2003 (51)
----
Remaining Terminations at March 29, 2003 43
====
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THERMO ELECTRON CORPORATION
12. Restructuring and Other 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 costs, net, in the accompanying 2003 statement of income
have been summarized in the notes to the table.
Abandonment
Employee of Excess
(In thousands) Severance Retention (a) Facilities Other Total
- --------------------------------------------------------------------------------------------------------------------------------
Pre-2000 Restructuring Plans
Balance at December 28, 2002 $ 264 $ - $ - $ - $ 264
Payments (82) - - - (82)
------- ------- ------- ------- -------
Balance at March 29, 2003 $ 182 $ - $ - $ - $ 182
======= ======= ======= ======= =======
2000 Restructuring Plans
Balance at December 28, 2002 $ 426 $ 233 $ 65 $ 80 $ 804
Payments (45) (39) - (4) (88)
Currency translation 10 - - - 10
------- ------- ------- ------- -------
Balance at March 29, 2003 $ 391 $ 194 $ 65 $ 76 $ 726
======= ======= ======= ======= =======
2001 Restructuring Plans
Balance at December 28, 2002 $ 5,605 $ 417 $11,501 $ 1,665 $19,188
Costs incurred in 2003 5 58 1,103 141 1,307
Reserves reversed (b) (350) (90) (189) (63) (692)
Payments (1,142) (120) (2,919) (223) (4,404)
Currency translation 123 - 73 (1) 195
------- ------- ------- ------- -------
Balance at March 29, 2003 $ 4,241 $ 265 $ 9,569 $ 1,519 $15,594
======= ======= ======= ======= =======
2002 Restructuring Plans
Balance at December 28, 2002 $11,868 $ 967 $ 7,800 $ 688 $21,323
Costs incurred in 2003 942 483 236 897 2,558
Reserves reversed (b) (411) (11) (140) - (562)
Payments (6,311) (772) (1,000) (1,108) (9,191)
Currency translation 147 2 46 22 217
------- ------- ------- ------- -------
Balance at March 29, 2003 $ 6,235 $ 669 $ 6,942 $ 499 $14,345
======= ======= ======= ======= =======
2003 Restructuring Plans
Costs incurred in 2003 (c) $ 1,653 $ 535 $ 75 $ 714 $ 2,977
Payments (799) (535) (75) (609) (2,018)
Currency translation 3 - - (3) -
------- ------- ------- ------- -------
Balance at March 29, 2003 $ 857 $ - $ - $ 102 $ 959
======= ======= ======= ======= =======
(a) Employee-retention costs are accrued ratably over the period through which employees must work to qualify for a payment.
(b) Represents reductions in cost of plans as described in the discussion of restructuring actions by segment.
(c) Excludes net gains of $0.1 million, primarily from the sale of a product line, in the Life and Laboratory Sciences segment and
noncash charges of $1.6 million and $1.0 million in the Measurement and Control and Optical Technologies segments, respectively.
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THERMO ELECTRON CORPORATION
12. Restructuring and Other Costs, Net (continued)
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.
13. Discontinued Operations
During the first quarter of 2003, the company recorded an after-tax gain
on disposal of discontinued operations of $5.0 million, resulting primarily from
the sale of the last remaining business in discontinued operations, Peter
Brotherhood Ltd., and a favorable post-closing adjustment resulting from the
2002 sale of its Trophy Radiologie business.
14. Litigation
Continuing Operations
The company has been named a defendant, along with many other companies,
in a patent-infringement lawsuit brought by the Lemelson Medical, Education &
Research Foundation, L.P. The suit asserts that products manufactured, used, or
sold by the defendants infringe one or more patents related to methods of
machine vision or computer-image analysis. The Lemelson action seeks damages,
including enhanced damages for alleged willful infringement, attorney's fees,
and injunctive relief.
Discontinued Operations
The company's Thermo Coleman Corporation subsidiary has been named as a
defendant in a lawsuit initiated by two former employees. The suit alleges,
among other things, that Thermo Coleman violated the Federal False Claims Act in
connection with the performance of a government contract. The complaint seeks
the award of treble damages in an unspecified amount, plus other penalties. The
amount of billings under the contract activities in question were approximately
$7.6 million. Thermo Coleman sold its core business in 2000, but retained this
litigation as a term of the sale.
The company intends to vigorously defend the unresolved matters in
continuing and discontinued operations described above. In the opinion of
management, an unfavorable outcome in one or both of the unresolved matters
described above could materially affect the company's financial position as well
as its results of operations and cash flows for a particular quarterly or annual
period.
The company's continuing and discontinued operations are a defendant in a
number of other pending legal proceedings incidental to present and former
operations. The company does not expect the outcome of these proceedings, either
individually or in the aggregate, to have a material adverse effect on its
financial position, results of operations, or cash flows.
15. Subsequent Events
In April 2003, the company redeemed all of its outstanding 4 3/8%
subordinated convertible debentures due 2004 with the objective of reducing
interest costs. The principal amount redeemed for these debentures was $70.9
million. 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 balance sheet.
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THERMO ELECTRON CORPORATION
15. Subsequent Events (continued)
In April 2003, the company received cash of $36.7 million, including
$31.0 million of principal payments, plus interest, from Trimble Navigation
Limited as partial and early payment of Trimble's note to the company. The $31.0
million of principal that was paid was reclassified to current assets at March
29, 2003.
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. 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 actual 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's discussion and analysis of its financial condition and
results of operations is based upon its financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
liabilities. On an on-going basis, the company evaluates its estimates,
including those related to bad debts, inventories, intangible assets, warranty
obligations, income taxes, contingencies and litigation, restructuring, and
discontinued operations. The company bases its estimates on historical
experience, current market and economic conditions, and other assumptions that
management believes are reasonable. The results of these estimates form the
basis for judgments about the carrying value of assets and liabilities where the
values are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
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 or
demand varies significantly from expected usage or demand, 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. If the financial condition of the borrower were to
deteriorate, charges to reduce the carrying value of notes receivable
may be necessary.
(d) The company periodically evaluates goodwill for impairment using
market comparables for similar businesses and forecasts of discounted
future cash flows. 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.
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THERMO ELECTRON CORPORATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
- --------------------------------------------------------------------------------
(e) The company reviews other intangible assets for impairment when
indication of potential impairment exists, such as a significant
reduction in 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) In instances where the company sells equipment with a related
installation obligation, the company generally recognizes revenue
related to the equipment when title passes. The company recognizes
revenue related to the installation when it performs the
installation. The allocation of revenue between the equipment and the
installation is based on relative fair value at the time of sale.
Should the fair value of either the equipment or the installation
change, the company's revenue recognition would be affected.
(g) In instances where the company sells equipment with
customer-specified acceptance criteria, the company must assess
whether it can demonstrate adherence to the acceptance criteria prior
to the customer's acceptance testing to determine the timing of
revenue recognition. If the nature of customer-specified acceptance
criteria were to change or grow in complexity such that the company
could not demonstrate adherence, the company would be required to
defer additional revenues upon shipment of its products until
completion of customer acceptance testing.
(h) 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.
(i) 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.
(j) 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.
(k) The company records restructuring charges for asset impairment 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.
(l) The company estimates the expected proceeds from any businesses held
for sale and, when necessary, records losses 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.
Results of Operations
During the first quarter of 2003, the company transferred management
responsibility for several businesses between segments as follows: (1) the
compositional-metrology business was moved to the Life and Laboratory Sciences
segment from the Optical Technologies segment; (2) the ultra-high vacuum systems
and semiconductor testing businesses were moved to the Measurement and Control
segment from the Optical Technologies segment; and (3) Thermo Euroglas was moved
to the Life and Laboratory Sciences segment from the Measurement and Control
segment. In addition to these changes, during the first quarter of 2003, the
company began allocating certain costs to the business segments previously
classified as corporate expenses based on the estimated extent to which the
segment
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THERMO ELECTRON CORPORATION
Results of Operations (continued)
benefited from the cost. Allocated costs principally include e-commerce, global
sourcing, and marketing as well as some legal, human resources, and information
systems costs. Prior-period segment information has been restated to reflect
these changes.
In November 2002, the EITF reached a consensus on EITF No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." The company
elected to early adopt the provisions of EITF No. 00-21 and began applying the
consensus prospectively in the first quarter of 2003. Under EITF No. 00-21, the
company recognizes revenue and related costs for arrangements with customers
that have multiple deliverables such as equipment and installation as each of
these is delivered or completed based on their fair value. Previously, when
installation was essential to functionality and not deemed inconsequential or
perfunctory, all revenue was deferred until completion of installation. Revenues
for products sold where installation was not essential to functionality and was
deemed inconsequential or perfunctory were previously recognized upon shipment
with estimated installation costs accrued. The adoption of EITF No. 00-21
increased revenues and diluted earnings per share by $7.6 million and $.01,
respectively, during the first quarter of 2003.
First Quarter 2003 Compared With First Quarter 2002
- ---------------------------------------------------
Continuing Operations
Sales in the first quarter of 2003 were $500.2 million, an increase of
$8.9 million, or 2%, from the first quarter of 2002. The favorable effects of
currency translation resulted in an increase in revenues of $29.6 million in
2003. Sales increased $1.0 million due to acquisitions, net of divestitures.
Excluding the effect of currency translation, acquisitions, and divestitures
(detailed below by segment), revenues decreased $21.7 million, or 5% (6%
excluding the effect of the adoption of EITF No. 00-21). 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 of countries in which the
company operates.
Operating income was $39.3 million in the first quarter of 2003, compared
with $36.7 million in the first quarter of 2002. Segment operating income
increased to $46.5 million in 2003 from $43.9 million in 2002. (Segment
operating income is operating income excluding costs incurred at the company's
corporate office that are not allocated to the segments as discussed above.)
Operating and segment operating income in the first quarter of 2003 were reduced
by additional charges associated with restructuring plans initiated prior to
2003, other restructuring actions initiated in 2003, and certain other costs,
net (Note 12). Operating and segment operating income in the first quarter of
2002 were reduced by charges associated with a restructuring plan initiated
during the fourth quarter of 2001, other restructuring actions initiated in
2002, and certain other costs, net. The segment restructuring and other items
totaled $7.5 million and $7.7 million in 2003 and 2002, respectively, and are
discussed by segment below and in Note 12. Segment operating income increased
primarily due to a lower cost base following restructuring actions in 2001 and
2002.
In response to a continued downturn in markets served by the company,
restructuring actions were initiated in 2002 in a number of business units to
reduce costs principally through headcount reductions and consolidation of
facilities. Certain costs associated with these actions could not be recorded
until incurred. Further actions were initiated in the first quarter of 2003. The
company expects to incur an additional $4 million of restructuring costs through
the remainder of 2003 for charges associated with these actions that cannot be
recorded until incurred. The company believes that restructuring actions
undertaken in 2002 and 2003 will be substantially completed in 2003. The company
expects to identify additional sites to consolidate during the remainder of 2003
and will record charges in connection with any such actions.
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THERMO ELECTRON CORPORATION
First Quarter 2003 Compared With First Quarter 2002 (continued)
- ---------------------------------------------------
Life and Laboratory Sciences
- ----------------------------
Sales in the Life and Laboratory Sciences segment increased $18.2 million
to $299.5 million in the first quarter of 2003. The favorable effects of
currency translation resulted in an increase in revenues of $21.9 million in
2003. Sales decreased $2.5 million due to product line divestitures, net of
acquisitions. Excluding the effect of currency translation, divestitures, and
acquisitions, revenues decreased $1.2 million, or 0.4% (2% excluding the effect
of the adoption of EITF No. 00-21). A 3% decrease in sales of laboratory
equipment such as concentrators, freezers, and incubators, due primarily to
economic pressures facing customers, was offset in part by higher sales of mass
spectrometry equipment as well as rapid diagnostic tests and pathology products.
Operating income margin decreased to 13.0% in the first quarter of 2003
from 15.0% in the first quarter of 2002. (Operating income margin is segment
operating income divided by segment revenues.) Operating income margin was
affected by $2.6 million of restructuring and other costs, net, in 2003 and
restructuring and other income, net, of $0.3 million in 2002. In addition to the
increase in restructuring and other costs in 2003, the decrease in operating
income margin resulted from higher marketing and selling expenses due to several
key commercial initiatives and a lower operating margin in the Bioscience
Technologies division due to lower sales and $0.7 million of higher amortization
expense. The increase in amortization expense followed the acquisition of CRS
Robotics in the second quarter of 2002. The segment's commercial initiatives
include key customer account management, increased advertising for a branding
transition, and establishment of divisional call centers.
In the first quarter of 2003, the segment recorded restructuring and
other costs, net, of $2.6 million, including $2.7 million of cash costs,
primarily for abandoned facilities, employee retention, and severance at
businesses being consolidated. In addition, the segment recorded a charge of
$0.4 million to write down the carrying value of a building held for sale to net
realizable value, offset by $0.5 million of net gains, primarily from the sale
of a product line (Note 12). Restructuring and other income, net, in 2002
represents a gain of $1.5 million on the sale of a product line, offset by cash
costs of $1.2 million, primarily for employee retention and severance at
businesses being consolidated.
Measurement and Control
- -----------------------
Sales in the Measurement and Control segment increased $2.2 million to
$153.9 million in the first quarter of 2003. The favorable effects of currency
translation resulted in an increase in revenues of $7.5 million in 2003. Sales
increased $4.3 million due to acquisitions, net of divestitures. Excluding the
effect of currency translation, acquisitions, and divestitures, revenues
decreased $9.6 million, or 7%. The decrease was due to economic conditions
facing customers, particularly in the process instruments business where most of
the decrease occurred. The decrease in sales was offset in part by higher
revenues from equipment used in homeland security. The company expects that a
continued downturn in some markets served by the segment will unfavorably affect
the segment's revenue comparisons with corresponding prior-year periods in the
near term. A prolonged downturn could adversely affect the realizability of the
segment's assets, which may result in charges for impairment.
Operating income margin decreased to 7.0% in the first quarter of 2003
from 9.1% in the first quarter of 2002, due to restructuring and other costs,
net, discussed below. Operating income margin was affected by restructuring and
other costs, net, of $3.6 million in 2003 and restructuring and other income,
net, of $0.2 million in 2002. The decrease in operating income margin resulted
from the restructuring and other costs, net, offset in part by the effects of
cost reduction and productivity measures undertaken in 2002, such as facility
consolidations and headcount reductions.
In the first quarter of 2003, the segment recorded restructuring and
other costs, net, of $3.6 million, including cash costs of $2.0 million,
principally for severance and relocation expenses at businesses being
consolidated. In addition, the segment recorded a charge of $1.6 million,
primarily for the writedown of goodwill in a business held for sale to reduce
the carrying value to estimated disposal value (Note 12). Restructuring and
other income, net, in 2002
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THERMO ELECTRON CORPORATION
First Quarter 2003 Compared With First Quarter 2002 (continued)
- ---------------------------------------------------
included gains totaling $1.5 million from the favorable resolution of a dispute
on a business sold in 2000 and the sale of a small business, offset in part by
$1.1 million of cash costs associated with the restructuring actions initiated
in 2001 and a charge of $0.2 million, primarily for asset impairment of a
building held for sale.
Optical Technologies
- --------------------
Sales in the Optical Technologies segment decreased $11.4 million to
$50.2 million in the first quarter of 2003. Sales decreased $0.7 million as a
result of a divesture. Currency translation had a nominal impact on sales.
Excluding the effect of the divesture and currency translation, revenues
decreased $10.7 million, or 18% (22% excluding the effect of the adoption of
EITF No. 00-21). The decrease was due to the severe slowdown in the
semiconductor and other industrial markets that has adversely affected customers
in 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 comparisons with corresponding prior-year periods in the
near term. A prolonged downturn could adversely affect the realizability of the
segment's assets, which may result in charges for impairment.
Operating income margin was negative 7.3% in the first quarter of 2003,
compared with negative 19.3% in the first quarter of 2002. Operating income
margin was affected by restructuring and other costs, net, of $1.3 million and
$8.3 million in 2003 and 2002, respectively. The decrease in the segment's
operating loss was due to lower restructuring and other costs, as well as cost
reduction and productivity measures undertaken in 2002 and the suspension of
telecommunications activities in the second quarter of 2002. These improvements
were offset in part by the impact of lower revenues.
In the first quarter of 2003, the segment recorded $1.3 million of
restructuring and other costs, net, including a charge of $1.0 million for the
writedown of a facility held for sale to estimated disposal value, and $0.3
million of cash costs at businesses being consolidated (Note 12). Restructuring
and other costs, net, in 2002 included $6.8 million of cash costs, primarily for
abandoned leases and severance; $0.7 million of writedowns of abandoned assets;
and a charge of $0.8 million resulting from the options to purchase shares of
Spectra-Physics becoming options to purchase shares of Thermo Electron following
the acquisition of the minority interest in this business in February 2002.
Other Income, Net
- -----------------
The company reported other income, net, of $5.9 million and $59.9 million
in the first quarter of 2003 and 2002, respectively (Note 5). Other income, net,
includes interest income, interest expense, gain on investments, net, equity in
earnings of unconsolidated subsidiaries in 2002, and other items, net. Interest
income decreased to $7.7 million in 2003 from $14.4 million in 2002, primarily
due to lower invested cash balances following the repurchase and redemption of
company securities, the payment of short-term notes payable, and, to a lesser
extent, lower prevailing interest rates. The company expects that the lower
market interest rates existing in 2003 will continue to adversely affect the
yield it earns as maturing investments originally invested at higher rates and
proceeds from the partial repayment of the company's note receivable from
Trimble (Note 15) are reinvested at current lower market rates. Following a
redemption of convertible debentures in April 2003 (Note 15), the repurchase of
$46.1 million of the company's debt and equity securities in the first quarter
of 2003, and ongoing repurchases of its securities in the second quarter of
2003, lower invested cash will also contribute to an expected reduction in
interest income. Interest expense decreased to $6.9 million in 2003 from $13.5
million in 2002 as a result of the redemption, maturity, and repurchase of
debentures, as well as entering into interest-rate swap arrangements, offset in
part by interest on borrowings under securities-lending arrangements. Interest
expense will decrease following the April 2003 redemption discussed above.
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THERMO ELECTRON CORPORATION
First Quarter 2003 Compared With First Quarter 2002 (continued)
- ---------------------------------------------------
During 2003 and 2002, the company had gains on investments, net, of $5.2
million and $58.0 million, respectively. The gains included $3.7 million and
$56.3 million in 2003 and 2002, respectively, from the sale of shares of FLIR
Systems, Inc. Of the total gain from the sale of FLIR shares, $1.2 million and
$14.4 million in 2003 and 2002, respectively, represent a recovery of amounts
written down in prior years. The company recorded income from equity in earnings
of unconsolidated subsidiaries of $2.2 million in 2002, primarily related to the
investment in FLIR. Following the first quarter of 2002, the company
discontinued reporting its share of FLIR's earnings. In addition, during the
first quarter of 2002, the company repurchased and redeemed debentures,
resulting in a charge of $1.1 million.
Provision for Income Taxes
- --------------------------
The company's effective tax rate was 30.5% and 34.5% in the first quarter
of 2003 and 2002, respectively. The effective tax rate decreased in 2003, in
part due to a reorganization of the company's subsidiaries in several European
countries throughout 2002 that resulted in a more tax-efficient corporate
structure and in approximately equal part due to a decrease in 2003 of gains
from the sale of investment securities.
Minority Interest Income
- ------------------------
Minority interest income of $0.3 million in the first quarter of 2002
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.
Contingent Liabilities
- ----------------------
The company is contingently liable with respect to certain lawsuits. An
unfavorable outcome in one or both of the matters described in Note 14 could
materially affect the company's financial position as well as its results of
operations and cash flows for a particular quarterly or annual period.
Income from Continuing Operations
- ---------------------------------
Income from continuing operations was $31.4 million in the first quarter
of 2003, compared with $63.7 million in the first quarter of 2002. Results in
both periods were affected by restructuring, gains on the sale of FLIR shares,
and other items, discussed above.
Discontinued Operations
During the first quarter of 2003, the company recorded an after-tax gain
on disposal of discontinued operations of $5.0 million, resulting primarily from
the sale of the last remaining business in discontinued operations, Peter
Brotherhood Ltd., and a favorable post-closing adjustment resulting from the
2002 sale of its Trophy Radiologie business.
During the first quarter of 2002, the company's discontinued operations
sold 6.9 million shares of Thoratec Corporation stock for net proceeds of $104
million and realized an after-tax gain of $38.4 million. Also in 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, primarily for previously unrecognized tax benefits that were
realized upon the sale.
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THERMO ELECTRON CORPORATION
Liquidity and Capital Resources
First Quarter 2003
- ------------------
Consolidated working capital was $724.5 million at March 29, 2003,
compared with $667.8 million at December 28, 2002. Included in working capital
were cash, cash equivalents, and short-term available-for-sale investments of
$628.2 million at March 29, 2003, compared with $875.5 million at December 28,
2002.
Cash provided by operating activities was $11.9 million during the first
quarter of 2003, including $17.3 million provided by continuing operations and
$5.4 million used by discontinued 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 $10.3 million, net of
taxes, in the first quarter of 2003. Aside from cash used for restructuring
actions, a decrease in other current liabilities used cash of $17.5 million,
including $24.1 million of accrued payroll and employee benefits due to the
timing of payments, offset in part by an increase in deferred revenue. The use
of cash of $5.4 million from discontinued operations was principally due to the
payment of liabilities, including settlement of litigation and lease payments on
abandoned facilities.
In connection with restructuring actions undertaken by continuing
operations, the company had accrued $31.8 million for restructuring costs at
March 29, 2003. The company expects to pay approximately $15.2 million of this
amount for severance, employee retention, and other costs primarily through
2003. The balance of $16.6 million will be paid for lease obligations over the
remaining terms of the leases, with approximately 62% to be paid through 2003
and the remainder through 2012. In addition, at March 29, 2003, the company had
accrued $7.4 million for acquisition expenses. Accrued acquisition expenses
included $1.2 million of severance and relocation obligations, which the company
expects to pay primarily through the third quarter of 2003. The balance
primarily represents abandoned-facility payments that will be paid over the
remaining terms of the leases through 2014.
During the first quarter of 2003, the primary investing activities of the
company's continuing operations, excluding available-for-sale investment
activities, included the purchase of property, plant, equipment and an
acquisition. The company's continuing operations expended $11.4 million for
purchases of property, plant, and equipment, net of dispositions, and $2.6
million for a product line acquisition (Note 2). In April 2003, the company
received cash of $36.7 million, including $31.0 million of principal payments,
plus interest, from Trimble Navigation Limited as partial and early payment of
Trimble's note to the company. The $31.0 million of principal that was paid was
reclassified to current assets at March 29, 2003.
The company's financing activities used $277.7 million of cash during the
first quarter of 2003, including $274.0 million for continuing operations.
During the first quarter of 2003, the company's continuing operations expended
$237.3 million to reduce short-term notes payable. The company's continuing
operations received net proceeds of $10.5 million from the exercise of employee
stock options. During the first quarter of 2003, the company expended $46.1
million to repurchase its debt and equity securities, of which $30.4 million was
used to repurchase 1.7 million shares of the company's common stock. As of March
29, 2003, the company had approximately $114.5 million remaining under Board of
Directors' authorizations to repurchase its own securities. In April 2003, the
company expended $70.9 million for the early redemption of all of its
outstanding 4 3/8% subordinated convertible debentures due 2004. The principal
amount of the debentures was classified as a current liability at December 28,
2002, and March 29, 2003, in anticipation of the early redemption.
The company has no material commitments for purchases of property, plant,
and equipment and expects that for all of 2003, such expenditures will
approximate $55 - $60 million. The company's contractual obligations and other
commercial commitments did not change materially between December 28, 2002 and
March 29, 2003.
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THERMO ELECTRON CORPORATION
Liquidity and Capital Resources (continued)
The company believes that its existing resources, including cash and
investments, future cash flow from operations, and available borrowings under
credit facilities are sufficient to meet the working capital requirements of its
existing businesses for the foreseeable future, including at least the next 24
months.
First Quarter 2002
- ------------------
Operating activities used cash of $18.1 million during the first quarter
of 2002, including $10.2 million for continuing operations and $7.9 million for
discontinued 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 $13.0 million, net of taxes, in the
first quarter of 2002. Aside from cash used for restructuring actions, a
decrease in other current liabilities used $5.5 million of cash, including $6.9
million of accrued interest, principally due to a debt redemption, offset in
part by an increase in deferred revenue. The use of cash of $7.9 million from
discontinued operations was primarily due to the payment of liabilities,
principally for the settlement of litigation.
During the first quarter of 2002, the primary investing activities of the
company's continuing operations, excluding available-for-sale investment
activities, included the sale of other investments, 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 $80.6 million from the
sale of other investments, principally shares of FLIR. In addition, the
company's continuing operations expended $21.3 million to purchase the remaining
minority-owned shares of its Spectra-Physics subsidiary and $12.4 million for
purchases of property, plant, and equipment, net of dispositions. During the
first quarter of 2002, investing activities of the company's discontinued
operations provided $107.5 million of cash, primarily representing proceeds of
$104 million from the sale of Thoratec common stock.
The company's financing activities used $178.7 million of cash during the
first quarter of 2002, including $176.9 million for continuing operations.
During the first quarter of 2002, the company's continuing operations expended
$456.3 million to redeem all of its outstanding 4 1/4% and 4 5/8% subordinated
convertible debentures due 2003. The redemption price was 100% of the principal
amount of the debentures, plus accrued interest. The company increased
short-term notes payable by $369.2 million to partially fund the debt
redemption. During the first quarter of 2002, the company's continuing
operations expended $100.0 million to repurchase its securities and received net
proceeds of $10.7 million from the exercise of employee stock options.
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 2002.
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 and Rule 15d-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 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.
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THERMO ELECTRON CORPORATION
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, we caution readers that the following important
factors, among others, in some cases have affected, and in the future could
affect, our actual results and could cause our actual results in 2003 and beyond
to differ materially from those expressed in any forward-looking statements made
by us.
We must develop new products, adapt to rapid and significant
technological change, and respond to introductions of new products in order to
remain competitive. Our growth strategy includes significant investment in and
expenditures for product development, including in the area of proteomics. We
sell our 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, our products
and services will likely become technologically obsolete over time, in which
case our revenue and operating results would suffer.
Our customers use many of our products to develop, test, and manufacture
their own products. As a result, we must anticipate industry trends and develop
products in advance of the commercialization of our customers' products. If we
fail to adequately predict our customers' needs and future activities, we may
invest heavily in research and development of products and services that do not
lead to significant revenue.
Many of our existing products and those under development are
technologically innovative and require significant planning, design,
development, and testing at the technological, product, and
manufacturing-process levels. These activities require us to make significant
investments.
Products in our 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. Our competitors may adapt more quickly to new
technologies and changes in customers' requirements than we can. The products
that we are currently developing, or those we will develop in the future, may
not be technologically feasible or accepted by the marketplace, and our products
or technologies could become uncompetitive or obsolete.
We sell our products and services to a number of companies that operate
in cyclical industries, which would adversely affect our results of operations
when those industries experience a downturn. The growth and profitability of
some of our businesses depend in part on sales to industries that are subject to
cyclical downturns and are experiencing slowing trends. For example, our Optical
Technologies segment depends in part on sales to the semiconductor industry and
our Measurement and Control segment depends in part on sales to the steel and
cement industries. A continued slowdown in these industries would adversely
affect sales by these segments, which in turn would adversely affect our
revenues and results of operations.
Our business is adversely impacted by the continuing general worldwide
economic slowdown and related uncertainties affecting markets in which we
operate. Continuing adverse economic conditions worldwide could adversely impact
our business in 2003 and beyond, resulting in:
- reduced demand for some of our products;
- increased rate of order cancellations or delays;
- increased risk of excess and obsolete inventories;
- increased pressure on the prices for our products and services; and
- greater difficulty in collecting accounts receivable.
For example, continued softness in the laboratory equipment, industrial
manufacturing, and semiconductor markets could adversely affect our future
operating results.
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
Changes in governmental regulations may reduce demand for our products or
increase our expenses. We compete in many markets in which we and our customers
must comply with federal, state, local, and international regulations, such as
environmental, health and safety, and food and drug regulations. We develop,
configure, and market our products to meet customer needs created by those
regulations. Any significant change in regulations could reduce demand for our
products. For example, many of our 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 most of our products depends on capital spending policies of
our customers and on government funding policies. Our 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.
Our inability to protect our intellectual property could have a material
adverse effect on our business. In addition, third parties may claim that we
infringe their intellectual property, and we could suffer significant litigation
or licensing expense as a result. We place considerable emphasis on obtaining
patent and trade secret protection for significant new technologies, products,
and processes because of the length of time and expense associated with bringing
new products through the development process and into the marketplace. Our
success depends in part on our ability to develop patentable products and obtain
and enforce patent protection for our products both in the United States and in
other countries. We own numerous U.S. and foreign patents, and we intend to file
additional applications, as appropriate, for patents covering our products.
Patents may not be issued for any pending or future patent applications owned by
or licensed to us, and the claims allowed under any issued patents may not be
sufficiently broad to protect our technology. Any issued patents owned by or
licensed to us may be challenged, invalidated, or circumvented, and the rights
under these patents may not provide us with competitive advantages. In addition,
competitors may design around our technology or develop competing technologies.
Intellectual property rights may also be unavailable or limited in some foreign
countries, which could make it easier for competitors to capture increased
market position. We could incur substantial costs to defend ourselves in suits
brought against us or in suits in which we may assert our patent rights against
others. An unfavorable outcome of any such litigation could materially adversely
affect our business and results of operations.
We also rely on trade secrets and proprietary know-how which we seek to
protect our products, in part, by confidentiality agreements with our
collaborators, employees, and consultants. These agreements may be breached and
we may not have adequate remedies for any breach. In addition, our trade secrets
may otherwise become known or be independently developed by our competitors.
Third parties may assert claims against us to the effect that we are
infringing on their intellectual property rights. We could incur substantial
costs and diversion of management resources in defending these claims, which
could have a material adverse effect on our business, financial condition, and
results of operations. In addition, parties making these claims could secure a
judgment awarding substantial damages, as well as injunctive or other equitable
relief, which could effectively block our ability to make, use, sell,
distribute, or market our products and services in the United States or abroad.
In the event that a claim relating to intellectual property is asserted against
us, or third parties not affiliated with us hold pending or issued patents that
relate to our products or technology, we may seek licenses to such intellectual
property or challenge those patents. However, we may be unable to obtain these
licenses on commercially reasonable terms, if at all, and our challenge of the
patents may be unsuccessful. Our failure to obtain the necessary licenses or
other rights could prevent the sale, manufacture, or distribution of our
products and, therefore, could have a material adverse effect on our business,
financial condition, and results of operations.
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
We have retained contingent liabilities from businesses that we have
sold. From 1997 through 2002, we divested over 60 businesses with aggregate
annual revenues in excess of $2 billion. As part of these transactions, we
retained responsibility for some of the contingent liabilities related to these
businesses, such as lawsuits, product liability claims, and potential claims by
buyers that representations and warranties we made about the businesses were
inaccurate. The resolution of these contingencies has not had a material adverse
effect on our results of operations or financial condition; however, we can not
be certain that this favorable pattern will continue.
We face a number of challenges in integrating and consolidating our
businesses. We have historically operated our businesses largely as autonomous,
unaffiliated operations. For the past few years, we have been consolidating our
operations and managing them in a more coordinated manner. The following factors
may make it difficult to successfully complete the integration and consolidation
of our operations:
- Our success in integrating our businesses depends on our ability to
coordinate or consolidate geographically separate organizations and
integrate personnel with different business backgrounds and corporate
cultures.
- Our ability to combine our 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 our
businesses.
Moreover, we may not be able to realize all of the cost savings and other
benefits that we expect to result from the integration and consolidation
process.
Our results could be impacted if we are unable to realize potential
future savings from new sourcing initiatives. As part of our corporate
consolidation over the past two years, we have undertaken significant real
estate consolidations and cost-savings initiatives relating to sourcing
materials and services purchased by us throughout our businesses. While we
anticipate continued significant savings from additional sourcing initiatives
and further real estate consolidations, future savings opportunities may be
fewer and smaller in size, and may be more difficult to achieve.
Implementation of our new branding strategy may be difficult and could
adversely affect our business. We historically operated our business largely as
autonomous, unaffiliated companies and as a result each of our businesses
independently created and developed its own brand names. We are implementing a
new marketing and branding strategy which involves the transition from multiple,
unrelated brands to two brands, Thermo Electron and Spectra-Physics. Several of
our existing brands such as Finnigan, Nicolet, and Oriel command strong market
recognition and customer loyalty. We believe the transition to the two new
brands will enhance and strengthen our collective brand image and brand
awareness across the entire company. Our success in transitioning our brands
depends on many factors, including effective communication of the transition to
our customers, acceptance and recognition by customers of these new brands, and
successful execution of the branding campaign by our marketing and sales teams.
If we are not successful in implementing this strategy and transitioning our
brands, we may experience erosion in our product recognition, brand image and
customer loyalty, and a decrease in demand for our products.
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
It may be difficult for us to implement our strategies for improving
internal growth. Some of the markets in which we compete have been flat or
declining over the past several years. To address this issue, we are pursuing a
number of strategies to improve our internal growth, including:
- finding new markets for our products, including in the area of proteomics;
- developing new applications for our technologies;
- combining sales and marketing operations in appropriate markets to
compete more effectively;
- actively funding research and development;
- commencing key customer initiatives;
- strengthening our presence in selected geographic markets; and
- developing commercial tools and infrastructure to increase and support
cross-selling opportunities of products and services to take advantage
of our breadth in product offerings.
We may not be able to successfully implement these strategies, and these
strategies may not result in the growth of our business.
We have significant international operations, which entail the risk that
exchange rate fluctuations may negatively affect demand for our products and our
profitability. International revenues account for a substantial portion of our
revenues, and we intend to continue expanding our presence in international
markets. In 2002, our international revenues from continuing operations,
including export revenues from the United States, accounted for approximately
52% of our total revenues. International revenues are subject to the risk that
fluctuations in exchange rates may adversely affect product demand and the
profitability in U.S. dollars of products and services provided by us in
international markets, where payment for our products and services is made in
the local currency. For example, while in fiscal 2002, currency translation had
a favorable effect on revenues of our continuing operations of $28.7 million, in
fiscal 2001, the unfavorable effects of currency translation decreased revenues
of our continuing operations by $46.5 million.
We have acquired several companies and businesses; as a result we have
recorded significant goodwill on our balance sheet, which we must continually
evaluate for potential impairment. We have acquired significant intangible
assets, including approximately $1.4 billion of goodwill that we have recorded
on our balance sheet as of March 29, 2003. We assess the realizability of the
goodwill we have on our 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. Our ability to realize
the value of the goodwill will depend on the future cash flows of these
businesses. These cash flows in turn depend in part on how well we have
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 February 27, 2003, the company filed a Current Report on Form 8-K with
respect to the company's financial results for the quarter ended December 28,
2002.
On March 7, 2003, the company filed a Current Report on Form 8-K with
respect to a change in the company's fiscal year from the Saturday nearest
December 31 to December 31 effective for the 2003 fiscal year and beyond.
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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 May 2003.
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
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THERMO ELECTRON CORPORATION
CERTIFICATIONS
I, Marijn E. Dekkers, 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: May 8, 2003
/s/ Marijn E. Dekkers
-------------------------------------
Marijn E. Dekkers
President and Chief Executive Officer
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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: May 8, 2003
/s/ Theo Melas-Kyriazi
-----------------------
Theo Melas-Kyriazi
Chief Financial Officer
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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.
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