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 June 28, 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 July 25, 2003
----------------------------- ----------------------------
Common Stock, $1.00 par value 162,284,423
PART I - Financial Information
Item 1 - Financial Statements
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
June 28, December 28,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 264,442 $ 339,038
Short-term available-for-sale investments, at quoted market value (amortized
cost of $208,616 and $493,002) 281,918 536,430
Accounts receivable, less allowances of $26,703 and $25,576 405,598 429,740
Inventories:
Raw materials and supplies 142,365 134,039
Work in process 52,763 50,894
Finished goods (includes $9,122 and $18,982 at customer locations) 148,148 147,871
Deferred tax assets 86,088 79,057
Other current assets 57,703 54,490
---------- ----------
1,439,025 1,771,559
---------- ----------
Property, Plant, and Equipment, at Cost 571,513 553,349
Less: Accumulated depreciation and amortization 297,829 280,441
---------- ----------
273,684 272,908
---------- ----------
Other Assets (Notes 10 and 11) 123,108 186,390
---------- ----------
Goodwill 1,444,054 1,416,205
---------- ----------
$3,279,871 $3,647,062
========== ==========
<
2
>
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Equity
June 28, December 28,
(In thousands except share amounts) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Short-term obligations and current maturities of long-term obligations (Note 18) $ 228,786 $ 484,480
Accounts payable 93,863 111,994
Accrued payroll and employee benefits 80,708 97,856
Accrued income taxes 64,568 44,519
Deferred revenue 65,977 58,490
Accrued restructuring costs (Note 14) 25,272 41,579
Other accrued expenses (Notes 2 and 12) 165,794 170,996
Net liabilities of discontinued operations 75,390 93,806
---------- ----------
800,358 1,103,720
---------- ----------
Long-term Deferred Income Taxes and Other Long-term Liabilities 65,823 58,678
---------- ----------
Long-term Obligations:
Senior notes (Note 11) 143,995 141,032
Subordinated convertible obligations 77,375 304,549
Other 5,222 5,760
---------- ----------
226,592 451,341
---------- ----------
Shareholders' Equity:
Preferred stock, $100 par value, 50,000 shares authorized; none issued Common
stock, $1 par value, 350,000,000 shares authorized; 171,880,812 and 169,952,419
shares issued 171,881 169,952
Capital in excess of par value 1,235,499 1,212,145
Retained earnings 908,977 819,411
Treasury stock at cost, 9,666,873 and 7,098,501 shares (175,962) (129,675)
Deferred compensation (4,065) (4,852)
Accumulated other comprehensive items (Notes 7 and 11) 50,768 (33,658)
---------- ----------
2,187,098 2,033,323
---------- ----------
$3,279,871 $3,647,062
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
<
3
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
---------------------------
June 28, June 29,
(In thousands except per share amounts) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $516,405 $509,113
-------- --------
Costs and Operating Expenses:
Cost of revenues 283,260 279,325
Selling, general, and administrative expenses 142,859 139,371
Research and development expenses 37,132 39,754
Restructuring and other costs, net (Note 14) 4,872 15,487
-------- --------
468,123 473,937
-------- --------
Operating Income 48,282 35,176
Other Income, Net (Note 5) 12,195 38,330
-------- --------
Income from Continuing Operations Before Provision for Income Taxes 60,477 73,506
Provision for Income Taxes (Note 15) (7,338) (23,989)
-------- --------
Income from Continuing Operations 53,139 49,517
Gain on Disposal of Discontinued Operations (represents tax benefit in 2002) - 19,000
-------- --------
Net Income $ 53,139 $ 68,517
======== ========
Earnings per Share from Continuing Operations (Note 6):
Basic $ .33 $ .29
======== ========
Diluted $ .32 $ .28
======== ========
Earnings per Share (Note 6):
Basic $ .33 $ .40
======== ========
Diluted $ .32 $ .38
======== ========
Weighted Average Shares (Note 6):
Basic 162,048 171,122
======== ========
Diluted 172,459 186,740
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
<
4
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Six Months Ended
-----------------------------
June 28, June 29,
(In thousands except per share amounts) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Revenues (Note 4) $1,016,610 $1,000,439
---------- ----------
Costs and Operating Expenses:
Cost of revenues 559,627 546,995
Selling, general, and administrative expenses 281,978 278,284
Research and development expenses 74,453 79,380
Restructuring and other costs, net (Note 14) 12,974 23,870
---------- ----------
929,032 928,529
---------- ----------
Operating Income 87,578 71,910
Other Income, Net (Note 5) 18,096 98,251
---------- ----------
Income from Continuing Operations Before Provision for Income Taxes and
Minority Interest 105,674 170,161
Provision for Income Taxes (Note 15) (21,144) (57,301)
Minority Interest Income - 331
---------- ----------
Income from Continuing Operations 84,530 113,191
Gain on Disposal of Discontinued Operations (net of income tax provision of
$3,564 in 2003; includes tax benefit of $13,408 in 2002; Note 16) 5,036 70,370
---------- ----------
Net Income $ 89,566 $ 183,561
========== ==========
Earnings per Share from Continuing Operations (Note 6):
Basic $ .52 $ .66
========== ==========
Diluted $ .51 $ .62
========== ==========
Earnings per Share (Note 6):
Basic $ .55 $ 1.06
========== ==========
Diluted $ .54 $ .98
========== ==========
Weighted Average Shares (Note 6):
Basic 162,446 172,686
========== ==========
Diluted 172,977 195,464
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
<
5
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
----------------------------
June 28, June 29,
(In thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 89,566 $ 183,561
Gain on disposal of discontinued operations (Note 16) (5,036) (70,370)
--------- ---------
Income from continuing operations 84,530 113,191
Adjustments to reconcile income from continuing operations to net cash provided
by (used in) operating activities:
Depreciation and amortization 29,054 28,372
Noncash restructuring and other costs, net (Note 14) 1,957 9,653
Provision for losses on accounts receivable 1,966 1,447
Change in deferred income taxes (6,397) (12,430)
Gain on sale of businesses (342) (2,629)
Gain on investments, net (Note 5) (15,989) (93,986)
Equity in earnings of unconsolidated subsidiaries (Note 5) (145) (2,169)
Minority interest income - (331)
Other 3,506 3,738
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable 39,657 18,177
Inventories 4,833 (3,414)
Other current assets (2,388) (2,062)
Accounts payable (22,144) (16,504)
Other current liabilities (47,791) (39,478)
--------- ---------
Net cash provided by continuing operations 70,307 1,575
Net cash used in discontinued operations (4,242) (50,667)
--------- ---------
Net cash provided by (used in) operating activities 66,065 (49,092)
--------- ---------
Investing Activities:
Proceeds from maturities of available-for-sale investments 276,693 68,172
Proceeds from sale of available-for-sale investments 24,898 80,627
Purchases of available-for-sale investments (171) -
Purchases of property, plant, and equipment (22,239) (26,601)
Proceeds from sale of property, plant, and equipment 6,289 6,673
Acquisitions, net of cash acquired (Note 2) (3,120) (46,193)
Proceeds from sale of businesses, net of cash divested 384 4,674
Proceeds from sale of other investments 841 65,167
Collection of note receivable 69,136 48,630
Acquisition of minority interest of subsidiary - (22,022)
Increase in other assets (1,792) (6,981)
Other 1,135 1,919
--------- ---------
Net cash provided by continuing operations 352,054 174,065
Net cash provided by discontinued operations 1,745 106,397
--------- ---------
Net cash provided by investing activities 353,799 280,462
--------- ---------
<
6
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
----------------------------
June 28, June 29,
(In thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Redemption and repayment of long-term obligations (Note 13) $ (72,090) $(459,398)
Purchases of company common stock and subordinated convertible debentures (74,113) (208,507)
Net proceeds from issuance of company common stock 22,337 12,542
Increase (decrease) in short-term notes payable (381,832) 345,937
Other 35 2,958
--------- ---------
Net cash used in continuing operations (505,663) (306,468)
Net cash provided by (used in) discontinued operations (3,708) 86
--------- ---------
Net cash used in financing activities (509,371) (306,382)
--------- ---------
Exchange Rate Effect on Cash of Continuing Operations 14,902 8,324
Exchange Rate Effect on Cash of Discontinued Operations (20) (179)
--------- ---------
Decrease in Cash and Cash Equivalents (74,625) (66,867)
Cash and Cash Equivalents at Beginning of Period 339,067 305,200
--------- ---------
264,442 238,333
Cash and Cash Equivalents of Discontinued Operations at End of Period - (3,423)
--------- ---------
Cash and Cash Equivalents at End of Period $ 264,442 $ 234,910
========= =========
Noncash Investing Activities:
Fair value of assets of acquired businesses and product lines $ 4,845 $ 56,636
Cash paid for acquired businesses and product lines (3,269) (46,335)
--------- ---------
Liabilities assumed of acquired businesses and product lines $ 1,576 $ 10,301
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
<
7
>
THERMO ELECTRON CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been
prepared by Thermo Electron Corporation (the company or the Registrant), are
unaudited and, in the opinion of management, reflect all adjustments of a normal
recurring nature necessary for a fair statement of the financial position at
June 28, 2003, the results of operations for the three- and six-month periods
ended June 28, 2003, and June 29, 2002, and the cash flows for the six-month
periods ended June 28, 2003, and June 29, 2002. Certain 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 (SEC). 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 instruments for $2.6 million in cash, net of cash
acquired. In June 2003, the segment acquired a product line of online rheology
instruments for $0.5 million in cash. The segment recorded $2.6 million of
intangible assets related to these acquisitions consisting of product
technology, which is being amortized over 10 years. Intangible assets are
included in other assets in the accompanying balance sheet.
The company has undertaken restructuring activities at acquired
businesses. These activities, which were accounted for in accordance with
Emerging Issues Task Force Issue (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 (580) (121) (15) (716)
Decrease recorded as a reduction in goodwill and other
intangible assets (155) (401) - (556)
Currency translation 37 (47) 13 3
------ ------ ------ ------
Balance at June 28, 2003 $ 621 $ 19 $ 497 $1,137
====== ====== ====== ======
<
8
>
THERMO ELECTRON CORPORATION
2. Acquisitions (continued)
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 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. Upon finalization of restructuring plans or
settlement of obligations for less than the expected amount, any excess reserves
are reversed with a corresponding decrease in goodwill or other intangible
assets when no goodwill exists. The company expects to pay amounts accrued for
acquisition expenses primarily through 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 (364)
Currency translation 317
------
Balance at June 28, 2003 $6,375
======
The remaining accrued acquisition expenses for pre-2002 acquisitions
represent lease obligations for four abandoned operating facilities in the
United Kingdom with leases expiring through 2014.
3. Business Segment Information
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 28, June 29, June 28, June 29,
(In thousands) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Life and Laboratory Sciences $ 313,791 $ 290,191 $ 613,256 $ 571,505
Measurement and Control 152,394 153,514 306,314 305,203
Optical Technologies 52,598 68,177 102,800 129,730
Intersegment (a) (2,378) (2,769) (5,760) (5,999)
---------- ---------- ---------- ----------
$ 516,405 $ 509,113 $1,016,610 $1,000,439
========== ========== ========== ==========
Income from Continuing Operations Before Provision
for Income Taxes and Minority Interest:
Life and Laboratory Sciences (b) $ 43,886 $ 40,420 $ 82,908 $ 82,539
Measurement and Control (c) 13,375 13,472 24,194 27,303
Optical Technologies (d) (1,831) (11,605) (5,508) (23,503)
Intersegment - 511 324 402
---------- ---------- ---------- ----------
Total Segment Operating Income (e) 55,430 42,798 101,918 86,741
Corporate/Other (f) 5,047 30,708 3,756 83,420
---------- ---------- ---------- ----------
$ 60,477 $ 73,506 $ 105,674 $ 170,161
========== ========== ========== ==========
<
9
>
THERMO ELECTRON CORPORATION
3. Business Segment Information (continued)
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 28, June 29, June 28, June 29,
(In thousands) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Depreciation:
Life and Laboratory Sciences $ 6,223 $ 5,465 $ 11,586 $ 10,953
Measurement and Control 2,719 2,871 5,298 5,793
Optical Technologies 2,741 3,044 5,704 6,907
Corporate 797 727 1,534 1,423
---------- ---------- ---------- ----------
$ 12,480 $ 12,107 $ 24,122 $ 25,076
========== ========== ========== ==========
Amortization:
Life and Laboratory Sciences $ 1,657 $ 1,181 $ 3,245 $ 2,197
Measurement and Control 676 280 1,199 564
Optical Technologies 207 268 488 535
---------- ---------- ---------- ----------
$ 2,540 $ 1,729 $ 4,932 $ 3,296
========== ========== ========== ==========
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 $3.9 million, $4.0 million,
$6.5 million, and $3.6 million in the second quarter of 2003 and 2002 and
the first six months of 2003 and 2002, respectively.
(c) Includes restructuring and other income, net, of $0.2 million in the second
quarter of 2003, and restructuring and other costs, net, of $1.1 million,
$3.5 million, and $0.9 million in the second quarter of 2002 and the first
six months of 2003 and 2002, respectively.
(d) Includes restructuring and other costs, net, of $0.4 million, $11.0
million, $1.7 million, and $19.3 million in the second quarter of 2003 and
2002 and the first six months 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 $0.8 million,
$0.9 million, $1.4 million, and $1.6 million in the second quarter of 2003
and 2002 and the first six months of 2003 and 2002, respectively. Other
income, net, includes gains on the sale of shares of FLIR Systems, Inc. of
$10.0 million, $31.6 million, $13.7 million, and $87.9 million in the
second quarter of 2003 and 2002 and the first six months of 2003 and 2002,
respectively.
<
10
>
THERMO ELECTRON CORPORATION
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 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 Six Months Ended
--------------------------- ---------------------------
June 28, June 29, June 28, June 29,
(In thousands) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 7,077 $ 12,621 $ 14,762 $ 26,979
Interest Expense (Note 11) (5,433) (10,216) (12,337) (23,695)
Gain on Investments, Net 10,814 36,033 15,989 93,986
Equity in Earnings of Unconsolidated Subsidiaries 145 - 145 2,169
Other Items, Net (408) (108) (463) (1,188)
-------- -------- -------- --------
$ 12,195 $ 38,330 $ 18,096 $ 98,251
======== ======== ======== ========
The company sold 234,175, 756,000, 334,175, and 2,006,000 shares of FLIR
Systems, Inc. common stock during the second quarter of 2003 and 2002 and the
first six months of 2003 and 2002, respectively, and realized gains of $10.0
million, $31.6 million, $13.7 million, and $87.9 million, respectively. These
gains included $2.7 million, $8.8 million, $3.9 million, and $23.2 million in
the second quarter of 2003 and 2002 and the first six months of 2003 and 2002,
respectively, from the recovery of amounts written down in prior years. At June
28, 2003, the company no longer owns shares of FLIR.
<
11
>
THERMO ELECTRON CORPORATION
6. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 28, June 29, June 28, June 29,
(In thousands except per share amounts) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 53,139 $ 49,517 $ 84,530 $113,191
Gain on Disposal of Discontinued Operations, Net - 19,000 5,036 70,370
-------- -------- -------- --------
Net Income for Basic Earnings per Share 53,139 68,517 89,566 183,561
Effect of Convertible Debentures 1,745 3,011 3,546 8,919
-------- -------- -------- --------
Income Available to Common Shareholders, as
Adjusted for Diluted Earnings per Share $ 54,884 $ 71,528 $ 93,112 $192,480
-------- -------- -------- --------
Basic Weighted Average Shares 162,048 171,122 162,446 172,686
Effect of:
Stock options 1,876 2,054 1,764 2,514
Convertible debentures 8,335 13,564 8,567 20,264
Contingently issuable shares 200 - 200 -
-------- -------- -------- --------
Diluted Weighted Average Shares 172,459 186,740 172,977 195,464
-------- -------- -------- --------
Basic Earnings per Share:
Continuing operations $ .33 $ .29 $ .52 $ .66
Discontinued operations - .11 .03 .41
-------- -------- -------- --------
$ .33 $ .40 $ .55 $ 1.06
======== ======== ======== ========
Diluted Earnings per Share:
Continuing operations $ .32 $ .28 $ .51 $ .62
Discontinued operations - .10 .03 .36
-------- -------- -------- --------
$ .32 $ .38 $ .54 $ .98
======== ======== ======== ========
Options to purchase 7,480,000, 10,898,000, 9,810,000, and 9,237,000
shares of common stock for the second quarter of 2003 and 2002 and the first six
months of 2003 and 2002, respectively, were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price for the common stock and their effect would have
been antidilutive.
The computation of diluted earnings per share for the reported periods
excludes the effect of assuming the conversion of the company's 4 3/8%
subordinated convertible debentures, convertible at $111.83 per share, because
the effect would be antidilutive. These debentures were redeemed in April 2003
(Note 13).
<
12
>
THERMO ELECTRON CORPORATION
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 gains and losses, net of tax, on
available-for-sale investments and hedging instruments, and minimum pension
liability adjustment. During the second quarter of 2003 and 2002, the company
had comprehensive income of $118.0 million and $121.7 million, respectively.
During the first six months of 2003 and 2002, the company had comprehensive
income of $185.4 million and $181.1 million, respectively. Comprehensive income
in the first six months of 2002 excludes the effect of unrealized gains of $111
million that existed at the date the company reclassified equity interests in
FLIR and Thoratec Corporation to available-for-sale investments. The change in
accumulated other comprehensive items between December 28, 2002 and June 28,
2003 was principally due to a change in cumulative translation adjustment due to
the weakening of the U.S. dollar relative to the currencies of the company's
non-U.S. subsidiaries.
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 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 Six Months Ended
------------------------- -------------------------
June 28, June 29, June 28, June 29,
(In thousands except per share amounts) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations:
As reported $ 53,139 $ 49,517 $ 84,530 $113,191
Add: Stock-based employee compensation expense included
in reported results, net of tax 469 364 953 750
Deduct: Total stock-based employee compensation expense
determined under the fair-value-based method for all
awards, net of tax (6,534) (6,255) (13,253) (13,251)
-------- -------- -------- --------
Pro forma $ 47,074 $ 43,626 $ 72,230 $100,690
======== ======== ======== ========
<
13
>
THERMO ELECTRON CORPORATION
8. Stock-based Compensation Plans and Pro Forma Stock-based Compensation
Expense (continued)
Three Months Ended Six Months Ended
------------------------- -------------------------
June 28, June 29, June 28, June 29,
(In thousands except per share amounts) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share from Continuing
Operations:
As reported $ .33 $ .29 $ .52 $ .66
Pro forma $ .29 $ .25 $ .44 $ .58
Diluted Earnings per Share from Continuing
Operations:
As reported $ .32 $ .28 $ .51 $ .62
Pro forma $ .28 $ .25 $ .44 $ .56
Net Income:
As reported $ 53,139 $ 68,517 $ 89,566 $183,561
Add: Stock-based employee compensation expense included in
reported net income, net of tax 469 364 953 750
Deduct: Total stock-based employee compensation expense
determined under the fair-value-based method for all
awards, net of tax (6,534) (6,255) (13,253) (13,251)
-------- -------- -------- --------
Pro forma $ 47,074 $ 62,626 $ 77,266 $171,060
======== ======== ======== ========
Basic Earnings per Share:
As reported $ .33 $ .40 $ .55 $ 1.06
Pro forma $ .29 $ .37 $ .48 $ .99
Diluted Earnings per Share:
As reported $ .32 $ .38 $ .54 $ .98
Pro forma $ .28 $ .35 $ .47 $ .92
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.
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.
<
14
>
THERMO ELECTRON CORPORATION
9. Recent Accounting Pronouncements (continued)
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 2003. The provisions of EITF No. 94-3 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 became
applicable for guarantees issued or modified after December 31, 2002. The
company is complying with the requirements of FIN No. 45, the adoption of which
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 June 29, 2003. FIN No. 46 did not materially affect the company's financial
statements.
10. Note Receivable
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. In June
2003, Trimble paid the company $39.0 million in cash including the remaining
principal balance of the note of $38.2 million plus interest.
11. 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.
<
15
>
THERMO ELECTRON CORPORATION
11. 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 June 28, 2003, the company had
deferred losses, net of income taxes, relating to forward currency-exchange
contracts of approximately $1.9 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% (3.31% as of June 28, 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 $15.3 million at June 28, 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.
12. Warranty Obligations
Product warranties are included in other accrued expenses in the
accompanying balance sheet. A summary of the changes in the carrying amount of
product warranties is as follows:
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 2002 $ 27,361
Provision charged to income 11,616
Usage (10,387)
Adjustments to previously provided warranties, net (1,083)
Other, net (a) 1,300
--------
Balance at June 28, 2003 $ 28,807
========
(a) Primarily represents the effects of currency translation.
13. Redemption of Subordinated Convertible Debentures
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 (Note 18).
<
16
>
THERMO ELECTRON CORPORATION
14. Restructuring and Other Costs, Net
In response to a continued downturn in markets served by the company and
in connection with the company's overall reorganization, restructuring actions
were initiated in 2002 in a number of business units to reduce costs and
redundancies, 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 six months of 2003. The
company expects to incur an additional $8 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 to date 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. Although
the company has not finalized its plans by segment, to date it has identified
actions with estimated costs of approximately $8 million and expects to identify
additional actions during the second half of 2003. The company expects that the
actions initiated during the remainder of 2003 will be substantially completed
in 2004.
During the second 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 $ 3,908 $ (177) $ 358 $ 783 $ 4,872
======= ======= ======= ======= =======
During the first six months 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 $ 6,481 $ 3,453 $ 1,652 $ 1,388 $12,974
======= ======= ======= ======= =======
The components of net restructuring and other costs by segment are as follows:
Life and Laboratory Sciences
- ----------------------------
The Life and Laboratory Sciences segment recorded $3.9 million of net
restructuring and other charges in the second quarter of 2003, substantially all
of which were cash costs. The cash costs included $2.5 million of severance for
220 employees across all functions; $0.7 million of employee-retention costs at
facilities being closed; $0.2 million of net abandoned-facility lease costs for
facilities described below; and $0.5 million of other cash costs, primarily
relocation expenses. The charges for severance are net of reversals of $0.5
million that the segment had provided primarily in 2001, which were not required
due to employee attrition. The charges for abandoned facilities included costs
of $0.6 million, primarily for consolidation of distribution facilities in
Japan, and are net of reversals of $0.4 million, which represent revised
estimates of future lease costs for facilities that the segment abandoned prior
to 2003.
In the first quarter of 2003, this segment recorded $2.6 million of net
restructuring and other charges. 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
<
17
>
THERMO ELECTRON CORPORATION
14. Restructuring and Other Costs, Net (continued)
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 $0.2 million of net
restructuring and other income in the second quarter of 2003. Net restructuring
and other income included a gain of $2.1 million on the sale of a building in
Germany. The gain was offset by $1.9 million of restructuring and other charges,
including $1.6 million of cash costs principally associated with facility
consolidations. The cash costs included $0.8 million of severance for 17
employees across all functions; $0.2 million of employee-retention costs at
facilities being closed; $0.1 million of net abandoned-facility lease costs for
facilities described below; and $0.5 million of other cash costs, primarily
relocation expenses. The charges for severance are net of reversals of $0.3
million that the segment had provided primarily in 2001, which were not required
due to employee attrition. The charges for abandoned facilities included costs
of $0.2 million, primarily for the consolidation of manufacturing facilities in
Massachusetts, and are net of reversals of $0.1 million, which represent revised
estimates of future lease costs for facilities that the segment abandoned in
2001 and 2002. In addition, the segment recorded a charge of $0.3 million for
the writedown of assets at facilities being consolidated.
In the first quarter of 2003, this segment recorded $3.6 million of net
restructuring and other charges. 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 $0.4 million of net
restructuring and other charges in the second quarter of 2003. These charges
included $0.9 million of cash costs principally associated with facility
consolidations. The cash costs included $0.7 million of severance for 65
employees across all functions and $0.2 million of employee-retention costs at
facilities being closed. In addition, the segment recorded writedowns of $0.2
million for abandoned assets, net of recoveries. These charges were offset by a
gain of $0.7 million for the reversal of contract cancellation fees provided for
in 2001 that were disputed and ultimately not required.
In the first quarter of 2003, this segment recorded $1.3 million of net
restructuring and other charges. 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.
<
18
>
THERMO ELECTRON CORPORATION
14. Restructuring and Other Costs, Net (continued)
Corporate
- ---------
The company recorded $0.8 million of restructuring and other charges at
its corporate office in the second 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.
In the first quarter of 2003, the company recorded $0.6 million of
restructuring and other charges at its corporate office, all of which were cash
costs, primarily for third-party advisory fees.
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 to Date in 2003 (28)
Adjustment to Plan (2)
----
Remaining Terminations at June 28, 2003 -
====
2002 Restructuring Plans
- -------------------------------------------------------------------------------------------------------------------------------
Remaining Terminations at December 28, 2002 311
Terminations Occurring to Date in 2003 (266)
Adjustment to Plan (10)
----
Remaining Terminations at June 28, 2003 35
====
2003 Restructuring Plans
- -------------------------------------------------------------------------------------------------------------------------------
Terminations Announced in 2003 398
Terminations Occurring to Date in 2003 (306)
----
Remaining Terminations at June 28, 2003 92
====
<
19
>
THERMO ELECTRON CORPORATION
14. 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 (158) - - - (158)
-------- -------- -------- -------- --------
Balance at June 28, 2003 $ 106 $ - $ - $ - $ 106
======== ======== ======== ======== ========
2000 Restructuring Plans
Balance at December 28, 2002 $ 426 $ 233 $ 65 $ 80 $ 804
Reserves reversed (b) (93) - (68) (75) (236)
Transfer to accrued pension costs (c) (290) - - - (290)
Payments (76) (76) - (5) (157)
Currency translation 33 - 3 - 36
-------- -------- -------- -------- --------
Balance at June 28, 2003 $ - $ 157 $ - $ - $ 157
======== ======== ======== ======== ========
2001 Restructuring Plans
Balance at December 28, 2002 $ 5,605 $ 417 $ 11,501 $ 1,665 $ 19,188
Costs incurred in 2003 11 115 1,316 216 1,658
Reserves reversed (b) (907) (90) (497) (787) (2,281)
Payments (1,680) (175) (4,869) (558) (7,282)
Currency translation 404 - 459 14 877
-------- -------- -------- -------- --------
Balance at June 28, 2003 $ 3,433 $ 267 $ 7,910 $ 550 $ 12,160
======== ======== ======== ======== ========
2002 Restructuring Plans
Balance at December 28, 2002 $ 11,868 $ 967 $ 7,800 $ 688 $ 21,323
Costs incurred in 2003 989 1,349 425 1,590 4,353
Reserves reversed (b) (485) (9) (332) - (826)
Payments (9,199) (1,485) (2,654) (2,188) (15,526)
Currency translation 644 21 204 105 974
-------- -------- -------- -------- --------
Balance at June 28, 2003 $ 3,817 $ 843 $ 5,443 $ 195 $ 10,298
======== ======== ======== ======== ========
2003 Restructuring Plans
Costs incurred in 2003 (d) $ 6,565 $ 592 $ 533 $ 1,688 $ 9,378
Reserves reversed (b) (39) - - - (39)
Payments (4,203) (590) (464) (1,678) (6,935)
Currency translation 100 - 11 36 147
-------- -------- -------- -------- --------
Balance at June 28, 2003 $ 2,423 $ 2 $ 80 $ 46 $ 2,551
======== ======== ======== ======== ========
<
20
>
THERMO ELECTRON CORPORATION
14. Restructuring and Other Costs, Net (continued)
(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) Balance of accrued restructuring costs for severance from 2000 plans
related to pension liability associated with employees terminated in 2000,
which was transferred to accrued pension costs in 2003.
(d) Excludes net gains of $0.1 million, primarily from the sale of a product
line, in the Life and Laboratory Sciences segment; net gains of $0.1
million, primarily from the sale of a building, offset by a writedown of a
company held for sale, in the Measurement and Control segment; and noncash
charges of $1.2 million in the Optical Technologies segment.
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.
15. Provision for Income Taxes
The company reversed a tax valuation allowance in the second quarter of
2003 totaling $9.0 million, which reduced the company's income tax provision.
The valuation allowance related to foreign tax credit carryforwards that the
company expects will more likely than not be used following tax planning actions
undertaken during the second quarter. The benefit was recorded in accordance
with SFAS No. 109, "Accounting for Income Taxes."
16. 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.
17. 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.
<
21
>
THERMO ELECTRON CORPORATION
17. Litigation (continued)
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 have a material adverse effect on 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.
18. Subsequent Event
In July 2003, the company redeemed all of its outstanding 4% subordinated
convertible debentures due 2005 with the objective of reducing interest costs.
The principal amount redeemed for these debentures was $197.1 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 2003 balance sheet.
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.
<
22
>
THERMO ELECTRON CORPORATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
- --------------------------------------------------------------------------------
(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 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.
(d) The company reviews other long-lived 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 long-lived assets may be necessary.
(e) 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.
(f) 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.
(g) 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.
(h) 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. If it becomes more likely than not that a
tax asset or loss carryforward will be used, the company reverses the
related valuation allowance. Should the company's actual future
taxable income by tax jurisdiction vary from estimates, additional
allowances or reversals thereof may be necessary.
(i) 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.
(j) The company records restructuring charges for the cost of vacating
facilities based on expected sub-rental income. Should actual cash
flows associated with sub-rental income from vacated facilities vary
from estimated amounts, adjustments may be required.
(k) 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 or estimated proceeds, which would include post-closing
purchase price adjustments, vary from current estimates, results
could differ from expected amounts.
<
23
>
THERMO ELECTRON CORPORATION
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 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.
Second Quarter 2003 Compared With Second Quarter 2002
- -----------------------------------------------------
Continuing Operations
Sales in the second quarter of 2003 were $516.4 million, an increase of
$7.3 million, or 1%, from the second quarter of 2002. The favorable effects of
currency translation resulted in an increase in revenues of $32.9 million in
2003. Sales decreased $0.9 million due to divestitures, net of acquisitions. In
addition to the changes in revenue resulting from currency translation,
acquisitions, and divestitures, revenues decreased $24.7 million, or 5%,
primarily due to lower demand in both the Optical Technologies and Measurement
and Control segments, as detailed below. 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 $48.3 million in the second quarter of 2003,
compared with $35.2 million in the second quarter of 2002. Segment operating
income increased to $55.4 million in 2003 from $42.8 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 second quarter of 2003 were
reduced by additional charges associated with restructuring plans initiated
prior to 2003 and other restructuring actions initiated in 2003, offset by
certain other income, net (Note 14). Operating and segment operating income in
the second quarter of 2002 were reduced by additional charges associated with a
restructuring plan initiated during the fourth quarter of 2001, other
restructuring actions initiated in 2002, and certain other costs, net. The
segment restructuring and other items totaled $4.1 million and $16.1 million in
2003 and 2002, respectively, and are discussed by segment below. Segment
operating income increased primarily due to lower restructuring and other costs,
net, in 2003 and, to a lesser extent, a lower cost base following recent
restructuring actions. Among the actions contributing to a lower cost base is
lower spending on research and development activities, which declined 7% to
$37.1 million in the second quarter of 2003. The company has focused its
spending on those projects with the highest estimated returns and expects to
continue spending on research and development at a rate of 7-7.5% of revenues
for at least the near term.
In response to a continued downturn in markets served by the company and
in connection with the company's overall reorganization, restructuring actions
were initiated in 2002 in a number of business units to reduce costs and
redundancies, 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 six months of 2003.
The company expects to incur an additional $8 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 to date 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.
Although the company has not finalized its plans by segment, to date it has
identified actions with estimated costs of approximately $8 million and expects
to identify additional actions during the second half of 2003. The company
expects that the actions initiated during the remainder of 2003 will be
substantially completed in 2004.
<
24
>
THERMO ELECTRON CORPORATION
Second Quarter 2003 Compared With Second Quarter 2002 (continued)
- -----------------------------------------------------
Life and Laboratory Sciences
- ----------------------------
Sales in the Life and Laboratory Sciences segment increased $23.6 million
to $313.8 million in the second quarter of 2003. The favorable effects of
currency translation resulted in an increase in revenues of $23.5 million in
2003. Sales decreased $3.5 million due to product line divestitures, net of
acquisitions. In addition to the changes in revenue resulting from currency
translation, acquisitions, and divestitures, revenues increased $3.6 million, or
1%, primarily due to higher demand. An increase in sales of mass spectrometry
equipment as well as rapid diagnostic tests and pathology products was offset in
part by a 2% decrease in sales of laboratory equipment such as concentrators,
freezers, and incubators, primarily due to economic pressures facing customers.
Operating income margin increased to 14.0% in the second quarter of 2003
from 13.9% in the second quarter of 2002. (Operating income margin is segment
operating income divided by segment revenues.) Operating income margin was
affected by restructuring and other costs, net, of $3.9 million and $4.0 million
in 2003 and 2002, respectively. An improvement in operating income of $1.4
million at a small business unit that had a loss in 2002 and, to a lesser
extent, the effect of higher revenues were offset in part by higher marketing
and selling expenses due to several key commercial initiatives and a lower
operating margin in the Bioscience Technologies division primarily due to $0.6
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 second quarter of 2003, the segment recorded restructuring and
other costs, net, of $3.9 million, substantially all of which were cash costs,
primarily for severance, employee retention, abandoned facilities, and
relocation expenses at businesses being consolidated (Note 14). Restructuring
and other income, net, in 2002 included $2.6 million of cash costs, primarily
for severance, employee retention, and relocation expenses at businesses being
consolidated. In addition, the segment sold two small operating units and a
building for a net loss of $0.5 million and had other asset writedowns of $0.1
million. Also in 2002, the segment recorded charges to cost of revenues of $0.8
million for discontinued product lines and the sale of inventories revalued at
the date of acquisition.
Measurement and Control
- -----------------------
Sales in the Measurement and Control segment decreased $1.1 million to
$152.4 million in the second quarter of 2003. The favorable effects of currency
translation resulted in an increase in revenues of $8.5 million in 2003. Sales
increased $3.4 million due to acquisitions, net of divestitures. In addition to
the changes in revenue resulting from currency translation, acquisitions, and
divestitures, revenues decreased $13.0 million, or 9%, primarily due to weaker
demand. The weaker demand was primarily due to economic conditions facing
customers, particularly in the process instruments business where over half of
the decrease occurred and, to a lesser extent, in sales of equipment used in
semiconductor manufacturing. The decrease in sales was offset in part by higher
revenues from equipment used in homeland security. During the first six months
of 2003, the segment's backlog decreased 6% to $100.4 million. 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 remained flat at 8.8% in the second quarter of
2003 and 2002. Operating income margin was affected by restructuring and other
income, net, of $0.2 million in 2003 and restructuring and other costs, net, of
$1.1 million in 2002. The favorable impact of a $2.1 million gain on the sale of
a building in the second quarter of 2003 was offset by the effect on margin of
lower revenues in the quarter.
<
25
>
THERMO ELECTRON CORPORATION
Second Quarter 2003 Compared With Second Quarter 2002 (continued)
- -----------------------------------------------------
In the second quarter of 2003, the segment recorded restructuring and
other income, net, of $0.2 million, including a gain of $2.1 million on the sale
of a building, offset by $1.9 million of restructuring and other charges.
Restructuring and other charges included $1.6 million of cash costs, primarily
for severance, employee retention, abandoned facilities, and relocation expenses
at businesses being consolidated. In addition, the segment recorded a charge of
$0.3 million for the writedown of assets at facilities being consolidated (Note
14). Restructuring and other costs, net, in 2002 included cash costs of $2.2
million, principally for severance, employee retention, relocation, and other
costs of facility consolidations. These costs were offset in part by $1.1
million of net gains on the sale of a small business unit and a building.
Optical Technologies
- --------------------
Sales in the Optical Technologies segment decreased $15.6 million to
$52.6 million in the second quarter of 2003. The favorable effects of currency
translation resulted in an increase in revenues of $1.0 million in 2003. Sales
decreased $0.9 million as a result of a divestiture. In addition to the changes
in revenue resulting from currency translation and a divestiture, revenues
decreased $15.7 million, or 23%, primarily due to weaker demand. The weaker
demand was primarily 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. During the first six months of 2003, the segment's backlog
decreased 7% to $52.1 million. The company expects that the slowdowns in
semiconductor and other industrial markets will continue to result in
unfavorable revenue and profitability comparisons with corresponding prior-year
periods 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 3.5% in the second quarter of 2003,
compared with negative 17.0% in the second quarter of 2002. Operating income
margin was affected by restructuring and other costs, net, of $0.4 million and
$11.0 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 second quarter of
2003.
In the second quarter of 2003, the segment recorded $0.4 million of
restructuring and other costs, net, including cash costs of $0.9 million,
principally for severance and employee-retention costs at businesses being
consolidated. In addition, the segment recorded asset writedowns of $0.2 million
for abandoned assets, net of recoveries. These charges were offset by a gain of
$0.7 million for the reversal of contract cancellation fees that were disputed
and ultimately not required (Note 14). Restructuring and other costs, net, in
2002 included $4.8 million of cash costs, principally for severance and
abandoned-equipment leases as well as $0.7 million for the settlement of
litigation. In addition, the segment wrote off assets totaling $5.5 million,
including $5.3 million of abandoned telecommunications equipment and $0.2
million of goodwill on a small business held for sale. The segment also recorded
$0.7 million of charges to cost of revenues, principally for a discontinued
product line.
The segment is negotiating the sale of a noncore product line and has
signed a nonbinding letter of intent with a prospective buyer. Were the sale to
occur, the segment expects to record a loss on the disposal of approximately $5
million in addition to approximately $3 million for abandoned lease commitments.
There can be no assurance the sale will close pursuant to the negotiated terms
or at all.
Other Income, Net
- -----------------
The company reported other income, net, of $12.2 million and $38.3
million in the second 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, and other items, net.
Interest income decreased to $7.1 million in
<
26
>
THERMO ELECTRON CORPORATION
Second Quarter 2003 Compared With Second Quarter 2002 (continued)
- -----------------------------------------------------
2003 from $12.6 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 short-term 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
repayment of the company's note receivable from Trimble (Note 10) are reinvested
at current lower market rates. Following redemptions of convertible debentures
in April 2003 (Note 13) and July 2003 (Note 18) and the repurchase of $74.1
million of the company's debt and equity securities in the first six months of
2003, lower invested cash will also contribute to an expected reduction in
interest income. Interest expense decreased to $5.4 million in 2003 from $10.2
million in 2002 as a result of the redemption, maturity, and repurchase of
debentures, offset in part by interest on borrowings under securities-lending
arrangements. The company expects that interest expense will exceed interest
income beginning in the third quarter of 2003.
During 2003 and 2002, the company had gains on investments, net, of $10.8
million and $36.0 million, respectively. The gains included $10.0 million and
$31.6 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, $2.7 million and
$8.8 million in 2003 and 2002, respectively, represent a recovery of amounts
written down in prior years. At June 28, 2003, the company no longer owns shares
of FLIR.
Provision for Income Taxes
- --------------------------
The company's effective tax rate was 12.1% and 32.6% in the second
quarter of 2003 and 2002, respectively. The effective tax rate decreased in 2003
primarily due to $9.0 million of tax benefit from the reversal of a valuation
allowance due to expected utilization of foreign tax credit carryforwards that
has been recorded as a discrete event in the second quarter of 2003 (Note 15).
The company undertook tax planning actions during the quarter to make the
realizability of this asset more likely than not and as a result recorded the
benefit in accordance with SFAS No. 109, "Accounting for Income Taxes." This
benefit reduced the tax rate in the second quarter of 2003 by 15.0 percentage
points. The decrease was also due in part to the full-year impact on the 2003
effective tax rate from a reorganization of the company's subsidiaries in
several European countries throughout 2002 that resulted in a more tax-efficient
corporate structure and to a decrease in 2003 of gains from the sale of
investment securities. In addition, the company reduced the estimate of its
effective tax rate in 2003 based on tax planning, including expected
repatriation of cash from non-U.S. subsidiaries, resulting in foreign tax
credits.
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 17 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 $53.1 million in the second quarter
of 2003, compared with $49.5 million in the second 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 second quarter of 2002, as a result of new tax regulations
concerning deductible losses from divested businesses, the company revised its
estimate of the tax consequences of business disposals in discontinued
operations and recorded a tax benefit of $19.0 million.
<
27
>
THERMO ELECTRON CORPORATION
First Six Months 2003 Compared With First Six Months 2002
- ---------------------------------------------------------
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. Where EITF No. 00-21 has had an
impact, the company has presented below its percentage revenue changes between
2002 and 2003 both including and excluding the effect on the first quarter of
2003 of the adoption of EITF No. 00-21.
Continuing Operations
Sales in the first six months of 2003 were $1.017 billion, an increase of
$16.2 million from the first six months of 2002. The favorable effects of
currency translation resulted in an increase in revenues of $62.5 million in
2003. Acquisitions, net of divestitures, had a nominal impact on sales. In
addition to the changes in revenue resulting from currency translation,
acquisitions, and divestitures, revenues decreased $46.3 million, or 5% (6%
excluding the effect of the adoption of EITF No. 00-21), primarily due to lower
demand in both the Optical Technologies and Measurement and Control segments, as
detailed below. 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 $87.6 million in the first six months of 2003,
compared with $71.9 million in the first six months of 2002. Segment operating
income increased to $101.9 million in 2003 from $86.7 million in 2002. Operating
and segment operating income in the first six months 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 14). Operating and segment operating income in the first six months 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 $11.6 million and $23.8 million in 2003 and 2002, respectively, and are
discussed by segment below. Segment operating income increased primarily due to
lower restructuring and other costs, net, in 2003 and, to a lesser extent, a
lower cost base following recent restructuring actions. Among the actions
contributing to a lower cost base is lower spending on research and development
activities, which decreased 6% to $74.5 million in the first six months of 2003
as the company focuses on those projects with the highest estimated returns.
Life and Laboratory Sciences
- ----------------------------
Sales in the Life and Laboratory Sciences segment increased $41.8 million
to $613.3 million in the first six months of 2003. The favorable effects of
currency translation resulted in an increase in revenues of $45.4 million in
2003. Sales decreased $6.0 million due to product line divestitures, net of
acquisitions. In addition to the changes in revenue resulting from currency
translation, acquisitions, and divestitures, revenues increased $2.4 million, or
0.4% (a decrease of 0.5% excluding the effect of the adoption of EITF No.
00-21). Higher sales of mass spectrometry equipment as well as rapid diagnostic
tests and pathology products were substantially offset by a 3% decrease in sales
of laboratory equipment such as concentrators, freezers, and incubators,
primarily due to economic pressures facing customers.
<
28
>
THERMO ELECTRON CORPORATION
First Six Months 2003 Compared With First Six Months 2002 (continued)
- ---------------------------------------------------------
Operating income margin decreased to 13.5% in the first six months of
2003 from 14.4% in the first six months of 2002. Operating income margin was
affected by restructuring and other costs, net, of $6.5 million and $3.6 million
in 2003 and 2002, respectively. 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 $1.2 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 six months of 2003, the segment recorded restructuring and
other costs, net, of $6.5 million, including $6.6 million of cash costs,
primarily for severance, employee retention, abandoned facilities, and
relocation expenses 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 14). Restructuring and other
income, net, in 2002 included $3.7 million of cash costs, primarily for
severance and employee retention at businesses being consolidated and charges to
costs of revenue of $0.8 million for discontinued product lines and the sale of
inventories revalued at the date of acquisition. In addition, the segment wrote
down $0.1 million of fixed assets and realized a net gain of $1.0 million on the
sale of a product line, two small business units, and a building.
Measurement and Control
- -----------------------
Sales in the Measurement and Control segment increased $1.1 million to
$306.3 million in the first six months of 2003. The favorable effects of
currency translation resulted in an increase in revenues of $16.0 million in
2003. Sales increased $7.7 million due to acquisitions, net of divestitures. In
addition to the changes in revenue resulting from currency translation,
acquisitions, and divestitures, revenues decreased $22.6 million, or 8%,
primarily due to weaker demand. The weaker demand was primarily due to economic
conditions facing customers, particularly in the process instruments business
where over two-thirds of the decrease occurred. The decrease in sales was offset
in part by higher revenues from equipment used in homeland security.
Operating income margin decreased to 7.9% in the first six months of 2003
from 8.9% in the first six months of 2002. Operating income margin was affected
by restructuring and other costs, net, of $3.5 million and $0.9 million in 2003
and 2002, respectively. The decrease in operating income margin resulted
primarily from the increase in restructuring and other costs.
In the first six months of 2003, the segment recorded restructuring and
other costs, net, of $3.5 million, including cash costs of $3.6 million,
principally for severance, employee retention, abandoned facilities, and
relocation expenses at businesses being consolidated. In addition, the segment
recorded charges of $2.0 million, primarily for the writedown of goodwill in a
business held for sale to reduce the carrying value to estimated disposal value,
and for the writedown of assets at facilities being consolidated, offset by a
gain of $2.1 million on the sale of a building (Note 14). Restructuring and
other income, net, in 2002 included $3.3 million of cash costs associated with
the restructuring actions initiated in 2001 and gains totaling $2.6 million from
the favorable resolution of a dispute on a business sold in 2000 and the sale of
two small business units and a building, offset in part by a charge of $0.2
million, primarily for asset impairment of a building held for sale.
<
29
>
THERMO ELECTRON CORPORATION
First Six Months 2003 Compared With First Six Months 2002 (continued)
- ---------------------------------------------------------
Optical Technologies
- --------------------
Sales in the Optical Technologies segment decreased $26.9 million to
$102.8 million in the first six months of 2003. The favorable effects of
currency translation resulted in an increase in revenues of $1.1 million in
2003. Sales decreased $1.5 million as a result of a divestiture. In addition to
the changes in revenue resulting from currency translation and a divestiture,
revenues decreased $26.5 million, or 21% (22% excluding the effect of the
adoption of EITF No. 00-21) primarily due to weaker demand. The weaker demand
was primarily 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.
Operating income margin was negative 5.4% in the first six months of
2003, compared with negative 18.1% in the first six months of 2002. Operating
income margin was affected by restructuring and other costs, net, of $1.7
million and $19.3 million in 2003 and 2002, respectively. The decrease in the
segment's operating loss was principally due to lower restructuring and other
costs and, to a lesser extent, 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 six months of 2003, the segment recorded $1.7 million of
restructuring and other costs, net, including cash costs of $1.2 million,
principally for severance and employee retention at businesses being
consolidated. In addition, the segment recorded a charge of $1.0 million for the
writedown of a facility held for sale to estimated disposal value, and
writedowns of $0.2 million for abandoned assets, net of recoveries. These
charges were offset by a gain of $0.7 million for the reversal of contract
cancellation fees that were disputed and ultimately not required (Note 14).
Restructuring and other costs, net, in 2002 included $11.5 million of cash costs
principally for abandoned-equipment leases and severance associated with
suspended telecom initiatives. The cash costs also included $0.7 million for the
settlement of litigation. In addition, this segment wrote off assets totaling
$6.2 million, including $6.0 million of abandoned fixed assets and $0.2 million
of goodwill at a business held for sale. This segment also recorded a charge of
$0.8 million resulting from employee 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.
During the first six months of 2002, the segment also recorded $0.8 million of
charges to cost of revenues for discontinued product lines.
Other Income, Net
- -----------------
The company reported other income, net, of $18.1 million and $98.3
million in the first six months of 2003 and 2002, respectively (Note 5).
Interest income decreased to $14.8 million in 2003 from $27.0 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. Interest expense decreased
to $12.3 million in 2003 from $23.7 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.
During 2003 and 2002, the company had gains on investments, net, of $16.0
million and $94.0 million, respectively. The gains included $13.7 million and
$87.9 million in 2003 and 2002, respectively, from the sale of shares of FLIR.
Of the total gain from the sale of FLIR shares, $3.9 million and $23.2 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 six months of 2002, the company repurchased and redeemed debentures,
resulting in a charge of $1.0 million.
<
30
>
THERMO ELECTRON CORPORATION
First Six Months 2003 Compared With First Six Months 2002 (continued)
- ---------------------------------------------------------
Provision for Income Taxes
- --------------------------
The company's effective tax rate was 20.0% and 33.7% in the first six
months of 2003 and 2002, respectively. The effective tax rate decreased in 2003
primarily due to $9.0 million of tax benefit from the reversal of a valuation
allowance due to expected utilization of foreign tax credit carryforwards as
discussed in the results for the second quarter of 2003 (Note 15). The decrease
was also due in part to the full-year impact on the 2003 effective tax rate from
a reorganization of the company's subsidiaries in several European countries
throughout 2002 that resulted in a more tax-efficient corporate structure and
from a decrease in 2003 of gains from the sale of investment securities. In
addition, the company reduced the estimate of its effective tax rate in 2003
based on tax planning including expected repatriation of cash from non-U.S.
subsidiaries, resulting in foreign tax credits.
Minority Interest Income
- ------------------------
Minority interest income of $0.3 million in the first six months 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.
Income from Continuing Operations
- ---------------------------------
Income from continuing operations was $84.5 million in the first six
months of 2003, compared with $113.2 million in the first six months 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 six months 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.
In February 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. As a result of new tax regulations
concerning deductible losses from divested businesses, the company revised its
estimate of the tax consequences of business disposals in discontinued
operations and recorded a tax benefit of $19.0 million in the first six months
of 2002. In addition, 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.
Liquidity and Capital Resources
First Six Months 2003
- ---------------------
Consolidated working capital was $638.7 million at June 28, 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
$546.4 million at June 28, 2003, compared with $875.5 million at December 28,
2002. This decrease was due to cash of $509.4 million used in financing
activities, offset in part by cash provided by operating and investing
activities, as discussed below.
<
31
>
THERMO ELECTRON CORPORATION
Liquidity and Capital Resources (continued)
Cash provided by operating activities was $66.1 million during the first
six months of 2003, including $70.3 million provided by continuing operations
and $4.2 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 $19.5
million, net of taxes, in the first six months of 2003. Aside from cash used for
restructuring actions, a decrease in other current liabilities used cash of
$30.0 million, including $20.6 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 $4.2 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 $25.3 million for restructuring costs at
June 28, 2003. The company expects to pay approximately $11.8 million of this
amount for severance, employee retention, and other costs primarily through the
remainder of 2003. The balance of $13.5 million will be paid for lease
obligations over the remaining terms of the leases, with approximately 71% to be
paid through 2004 and the remainder through 2012. In addition, at June 28, 2003,
the company had accrued $7.5 million for acquisition expenses. Accrued
acquisition expenses included $1.1 million of severance and relocation
obligations, which the company expects to pay primarily through 2003. The
balance primarily represents abandoned-facility payments that will be paid over
the remaining terms of the leases through 2014.
During the first six months 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 collection
of a note receivable. The company's continuing operations expended $16.0 million
for purchases of property, plant, and equipment, net of dispositions. In April
and June 2003, the company received aggregate cash payments of $75.6 million,
including $69.1 million of principal payments, plus interest, from Trimble
Navigation Limited as complete and early payment of Trimble's note to the
company. In addition, the company expended $3.1 million, net of cash acquired,
for product line acquisitions (Note 2).
The company's financing activities used $509.4 million of cash during the
first six months of 2003, including $505.7 million for continuing operations.
During the first six months of 2003, the company's continuing operations
expended $381.8 million to reduce short-term notes payable. The company's
continuing operations received net proceeds of $22.3 million from the exercise
of employee stock options. During the first six months of 2003, the company
expended $145.0 million to redeem and repurchase its debt securities (Note 13)
and repurchase its equity securities, of which $43.9 million was used to
repurchase 2.4 million shares of the company's common stock. As of June 28,
2003, the company had approximately $87.2 million remaining under Board of
Directors' authorizations to repurchase its own securities. In July 2003, the
company expended $197.1 million for the early redemption of all of its
outstanding 4% subordinated convertible debentures due 2005. Accordingly, the
obligations have been presented as current liabilities in the accompanying 2003
balance sheet (Note 18). The repurchases and redemptions of debt have been made
with the objective of reducing interest costs.
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
June 28, 2003.
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.
<
32
>
THERMO ELECTRON CORPORATION
Liquidity and Capital Resources (continued)
First Six Months 2002
- ---------------------
Cash used by operating activities was $49.1 million during the first six
months of 2002, including $1.6 million provided by continuing operations and
$50.7 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 $23.8
million, net of taxes, in the first six months of 2002. Aside from cash used for
restructuring actions, a decrease in other current liabilities used cash of
$21.3 million, including $15.5 million of accrued payroll and employee benefits
due to timing of payments, and $8.3 million of accrued interest, principally due
to a debt redemption. The company's cash flow from continuing operations in the
first six months of 2002 was reduced by income tax payments of approximately $34
million related to gains from the sale of investments. The use of cash of $50.7
million from discontinued operations was principally due to the payment of
liabilities, including the settlement of litigation.
During the first six months of 2002, the primary investing activities of
the company's continuing operations, excluding available-for-sale investment
activities, included the sale of other investments, acquisitions, the collection
of notes receivable, the purchase of shares of a majority-owned subsidiary, and
the purchase of property, plant, and equipment. The company's continuing
operations received proceeds of $65.2 million from the sale of other
investments, principally shares of FLIR. In addition, the company's continuing
operations expended $46.2 million for acquisitions, $22.0 million to purchase
the remaining minority-owned shares of its Spectra-Physics subsidiary, and $19.9
million for purchases of property, plant, and equipment, net of dispositions.
The company's continuing operations collected $48.6 million from notes
receivable, principally the repayment of Viasys Healthcare Inc.'s $33.4 million
principal amount note in May 2002 and repayments from Trimble in March 2002.
During the first six months of 2002, investing activities of the company's
discontinued operations provided $106.4 million of cash, primarily representing
proceeds of $105 million from the sale of Thoratec common stock.
The company's financing activities used $306.4 million of cash during the
first six months of 2002, substantially all for continuing operations. During
the first six months 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 $345.9 million, primarily to partially fund the debt
redemption. The company's continuing operations received net proceeds of $12.5
million from the exercise of employee stock options. During the first six months
of 2002, the company expended $208.5 million to repurchase its securities.
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, with the participation of the company's chief
executive officer and chief financial officer, evaluated the effectiveness of
the company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of June 28, 2003. Based on this evaluation,
the company's chief executive officer and chief financial officer concluded
that, as of June 28, 2003, the company's disclosure controls and procedures were
effective in providing reasonable assurance that information required to be
disclosed by the company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
There have been no changes in the company's internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
during the fiscal quarter ended June 28, 2003 that have materially affected or
are reasonably likely to materially affect the company's internal control over
financial reporting.
<
33
>
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.
<
34
>
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.
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
<
35
>
THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
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.
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.
<
36
>
THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
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 June 28, 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 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At the Annual Meeting of Stockholders on May 14, 2003, the stockholders
elected two incumbent directors to a three-year term expiring in 2006. The
directors elected at the meeting were Jim P. Manzi and Elaine S. Ullian. Mr.
Manzi received 139,085,560 votes in favor of his election and 10,488,204 votes
were withheld. Ms. Ullian received 146,021,698 votes in favor of her election
and 3,552,066 votes were withheld. No abstentions or broker "non-votes" were
recorded on the election of directors.
At the Annual Meeting, the stockholders also approved the company's
Annual Incentive Award Plan, as follows: 142,434,182 shares were voted in favor
of the proposal, 5,909,802 shares were voted against, 1,229,780 shares
abstained, and no broker "non-votes" were recorded on the proposal. The
stockholders also approved a stockholder proposal to request the Board of
Directors to establish a policy of expensing in the company's annual income
statement the costs of all future stock options issued by the company, as
follows: 77,700,876 shares were voted in favor of the proposal, 52,389,055
shares were voted against, 3,006,357 shares abstained, and 16,477,476 broker
"non-votes" were recorded on the proposal. The Board of Directors is currently
reviewing the matter of expensing stock options and a decision is expected by
the end of 2003.
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 April 24, 2003, the company furnished a Current Report on Form 8-K
with respect to the company's financial results for the quarter ended March 29,
2003.
<
37
>
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 7th day of August 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
<
38
>
THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
3.1 By-laws of the Registrant, as amended and effective as of May
15, 2003.
10.1 Thermo Electron Corporation 2000 Employees Equity Incentive
Plan, as amended and restated as of May 15, 2003.
10.2 Thermo Electron Corporation Directors Stock Option Plan, as
amended and restated as of May 15, 2003.
10.3 Thermo Electron Corporation 2003 Annual Incentive Award Plan,
effective May 14, 2003 (filed as Appendix B to the
Registrant's Definitive Proxy on Schedule 14A for the 2003
Annual Shareholders Meeting [File No. 1-8002] and incorporated
in this document by reference).
99.1 Certification of Chief Executive Officer required by Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer required by Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
99.3 Certification of Chief Executive Officer required by Exchange
Act Rules 13a-14(b) and 15d-14(b), as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
99.4 Certification of Chief Financial Officer required by Exchange
Act Rules 13a-14(b) and 15d-14(b), as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
*Certification is not deemed "filed" for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liability of that section. Such certification
is not deemed to be incorporated by reference into any filing under the
Securities Act or the Exchange Act, except to the extent that the registrant
specifically incorporates it by reference.
<
39
>