Back to GetFilings.com
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 September 27, 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 October 24, 2003
----------------------------- -------------------------------
Common Stock, $1.00 par value 162,822,224
PART I - Financial Information
Item 1 - Financial Statements
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
September 27, December 28,
(In thousands) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 207,546 $ 339,038
Short-term available-for-sale investments, at quoted market value
(amortized cost of $113,185 and $493,002) 185,840 536,430
Accounts receivable, less allowances of $26,896 and $25,576 423,945 429,740
Inventories:
Raw materials and supplies 140,020 134,039
Work in process 51,037 50,894
Finished goods (includes $8,310 and $18,982 at customer locations) 147,382 147,871
Deferred tax assets 78,914 79,057
Other current assets 63,066 54,490
---------- ----------
1,297,750 1,771,559
---------- ----------
Property, Plant, and Equipment, at Cost 570,603 553,349
Less: Accumulated depreciation and amortization 303,246 280,441
---------- ----------
267,357 272,908
---------- ----------
Other Assets (Notes 10 and 11) 116,693 186,390
---------- ----------
Goodwill 1,440,986 1,416,205
---------- ----------
$3,122,786 $3,647,062
========== ==========
<
2
>
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Equity
September 27, December 28,
(In thousands except share amounts) 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Short-term obligations and current maturities of long-term obligations $ 36,165 $ 484,480
Accounts payable 94,054 111,994
Accrued payroll and employee benefits 89,539 97,856
Accrued income taxes 53,423 44,519
Deferred revenue 62,484 58,490
Accrued restructuring costs (Note 14) 21,906 41,579
Other accrued expenses (Notes 2 and 12) 168,631 170,996
Net liabilities of discontinued operations 68,048 93,806
---------- ----------
594,250 1,103,720
---------- ----------
Long-term Deferred Income Taxes and Other Long-term Liabilities 69,118 58,678
---------- ----------
Long-term Obligations:
Senior notes (Note 11) 141,468 141,032
Subordinated convertible obligations (Note 13) 77,375 304,549
Other 5,105 5,760
---------- ----------
223,948 451,341
---------- ----------
Shareholders' Equity:
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized; 173,067,334
and 169,952,419 shares issued 173,067 169,952
Capital in excess of par value 1,249,369 1,212,145
Retained earnings 957,492 819,411
Treasury stock at cost, 10,207,125 and 7,098,501 shares (187,798) (129,675)
Deferred compensation (3,565) (4,852)
Accumulated other comprehensive items (Notes 7 and 11) 46,905 (33,658)
---------- ----------
2,235,470 2,033,323
---------- ----------
$3,122,786 $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
--------------------------------
September 27, September 28,
(In thousands except per share amounts) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $497,116 $517,171
-------- --------
Costs and Operating Expenses:
Cost of revenues 271,213 288,514
Selling, general, and administrative expenses 134,349 139,326
Research and development expenses 34,900 37,553
Restructuring and other costs, net (Note 14) 14,273 6,907
-------- --------
454,735 472,300
-------- --------
Operating Income 42,381 44,871
Other Income, Net (Note 5) 10,004 11,790
-------- --------
Income from Continuing Operations Before Provision for Income Taxes 52,385 56,661
Provision for Income Taxes (13,388) (17,644)
-------- --------
Income from Continuing Operations 38,997 39,017
Gain on Disposal of Discontinued Operations (includes tax benefit
of $2,600; Note 16) 9,518 -
-------- --------
Net Income $ 48,515 $ 39,017
======== ========
Earnings per Share from Continuing Operations (Note 6):
Basic $ .24 $ .24
======== ========
Diluted $ .24 $ .23
======== ========
Earnings per Share (Note 6):
Basic $ .30 $ .24
======== ========
Diluted $ .29 $ .23
======== ========
Weighted Average Shares (Note 6):
Basic 162,531 165,701
======== ========
Diluted 169,155 176,342
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
<
4
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
--------------------------------
September 27, September 28,
(In thousands except per share amounts) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Revenues (Note 4) $1,513,726 $1,517,610
---------- ----------
Costs and Operating Expenses:
Cost of revenues 830,840 835,509
Selling, general, and administrative expenses 416,327 417,610
Research and development expenses 109,353 116,933
Restructuring and other costs, net (Note 14) 27,247 30,777
---------- ----------
1,383,767 1,400,829
---------- ----------
Operating Income 129,959 116,781
Other Income, Net (Note 5) 28,100 110,041
---------- ----------
Income from Continuing Operations Before Provision for Income Taxes and
Minority Interest 158,059 226,822
Provision for Income Taxes (Note 15) (34,532) (74,945)
Minority Interest Income - 331
---------- ----------
Income from Continuing Operations 123,527 152,208
Gain on Disposal of Discontinued Operations (net of income tax provision
of $964 in 2003; includes tax benefit of $13,408 in 2002; Note 16) 14,554 70,370
---------- ----------
Net Income $ 138,081 $ 222,578
========== ==========
Earnings per Share from Continuing Operations (Note 6):
Basic $ .76 $ .89
========== ==========
Diluted $ .75 $ .86
========== ==========
Earnings per Share (Note 6):
Basic $ .85 $ 1.31
========== ==========
Diluted $ .83 $ 1.23
========== ==========
Weighted Average Shares (Note 6):
Basic 162,474 170,358
========== ==========
Diluted 171,703 190,399
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
<
5
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
--------------------------------
September 27, September 28,
(In thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 138,081 $ 222,578
Gain on disposal of discontinued operations (Note 16) (14,554) (70,370)
--------- ---------
Income from continuing operations 123,527 152,208
Adjustments to reconcile income from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 43,586 42,199
Noncash restructuring and other costs, net (Note 14) 6,821 10,070
Provision for losses on accounts receivable 3,352 2,015
Change in deferred income taxes 2,637 (6,183)
Gain on sale of businesses (253) (8,544)
Gain on investments, net (Note 5) (28,603) (103,381)
Equity in earnings of unconsolidated subsidiaries (Note 5) (416) (2,169)
Minority interest income - (331)
Other 5,416 4,475
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable 21,467 15,612
Inventories 8,787 4,962
Other current assets (9,466) (4,900)
Accounts payable (21,797) (15,465)
Other current liabilities (46,287) (34,152)
--------- ---------
Net cash provided by continuing operations 108,771 56,416
Net cash used in discontinued operations (5,961) (53,594)
--------- ---------
Net cash provided by (used in) operating activities 102,810 2,822
--------- ---------
Investing Activities:
Proceeds from maturities of available-for-sale investments 308,568 151,812
Proceeds from sale of available-for-sale investments 102,162 96,247
Purchases of property, plant, and equipment (31,449) (36,183)
Proceeds from sale of property, plant, and equipment 6,309 8,779
Acquisitions, net of cash acquired (Note 2) (3,120) (78,259)
Proceeds from sale of businesses, net of cash divested 559 24,405
Proceeds from sale of other investments 1,961 65,251
Collection of note receivable 69,136 73,980
Acquisition of minority interest of subsidiary - (22,076)
Increase in other assets (5,092) (11,806)
Other 969 2,792
--------- ---------
Net cash provided by continuing operations 450,003 274,942
Net cash provided by discontinued operations 3,037 106,031
--------- ---------
Net cash provided by investing activities 453,040 380,973
--------- ---------
<
6
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
--------------------------------
September 27, September 28,
(In thousands) 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Redemption and repayment of long-term obligations (Note 13) $(269,812) $(462,101)
Purchases of company common stock and subordinated convertible debentures
(84,135) (292,688)
Net proceeds from issuance of company common stock 35,456 15,032
Increase (decrease) in short-term notes payable (375,564) 276,479
Other (38) 2,967
--------- ---------
Net cash used in continuing operations (694,093) (460,311)
Net cash provided by (used in) discontinued operations (3,708) 371
--------- ---------
Net cash used in financing activities (697,801) (459,940)
--------- ---------
Exchange Rate Effect on Cash of Continuing Operations 10,453 8,650
Exchange Rate Effect on Cash of Discontinued Operations (23) 328
--------- ---------
Decrease in Cash and Cash Equivalents (131,521) (67,167)
Cash and Cash Equivalents at Beginning of Period 339,067 305,200
--------- ---------
207,546 238,033
Cash and Cash Equivalents of Discontinued Operations at End of Period - (4,429)
--------- ---------
Cash and Cash Equivalents at End of Period $ 207,546 $ 233,604
========= =========
Noncash Investing Activities:
Fair value of assets of acquired businesses and product lines $ 4,845 $ 94,668
Cash paid for acquired businesses and product lines (3,269) (78,401)
--------- ---------
Liabilities assumed of acquired businesses and product lines $ 1,576 $ 16,267
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
<
7
>
THERMO ELECTRON CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been
prepared by Thermo Electron Corporation (the company or the Registrant), are
unaudited and, in the opinion of management, reflect all adjustments of a normal
recurring nature necessary for a fair statement of the financial position at
September 27, 2003, the results of operations for the three- and nine-month
periods ended September 27, 2003, and September 28, 2002, and the cash flows for
the nine-month periods ended September 27, 2003, and September 28, 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. In September 2003,
the company announced that it had reached agreement for its Life and Laboratory
Sciences segment to acquire Jouan SA, a manufacturer of laboratory equipment,
for 110.9 million euros and the assumption of approximately 7.1 million euros of
consolidated net debt. The acquisition is subject to various regulatory
approvals. The company expects to complete the acquisition before the end of
2003.
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.
No material acquisition expenses have been recorded for acquisitions
completed in 2003. 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 (888) (120) (124) (1,132)
Decrease recorded as a reduction in goodwill and
other intangible assets (453) (401) (175) (1,029)
Currency translation 34 (48) 10 (4)
------- ------- -------- -------
Balance at September 27, 2003 $ 12 $ 19 $ 210 $ 241
======= ======= ======= =======
<
8
>
THERMO ELECTRON CORPORATION
2. Acquisitions (continued)
The 2002 acquisitions primarily included CRS Robotics Corporation (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 (490)
Currency translation 266
------
Balance at September 27, 2003 $6,198
======
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 Nine Months Ended
-------------------------------- --------------------------------
September 27, September 28, September 27, September 28,
(In thousands) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Life and Laboratory Sciences $ 301,451 $ 300,040 $ 914,707 $ 871,545
Measurement and Control 146,667 155,176 452,981 460,379
Optical Technologies 52,141 64,910 154,941 194,640
Intersegment (a) (3,143) (2,955) (8,903) (8,954)
---------- ---------- ---------- ----------
$ 497,116 $ 517,171 $1,513,726 $1,517,610
========== ========== ========== ==========
Income from Continuing Operations Before Provision
for Income Taxes and Minority Interest:
Life and Laboratory Sciences (b) $ 43,674 $ 42,771 $ 126,582 $ 125,310
Measurement and Control (c) 10,882 8,762 35,076 36,065
Optical Technologies (d) (5,376) 274 (10,884) (23,229)
Intersegment - (130) 324 272
---------- ---------- ---------- ----------
Total Operating Income - Segments 49,180 51,677 151,098 138,418
Corporate/Other (e) 3,205 4,984 6,961 88,404
---------- ---------- ---------- ----------
$ 52,385 $ 56,661 $ 158,059 $ 226,822
========== ========== ========== ==========
<
9
>
THERMO ELECTRON CORPORATION
3. Business Segment Information (continued)
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 27, September 28, September 27, September 28,
(In thousands) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Depreciation:
Life and Laboratory Sciences $ 5,873 $ 5,260 $ 17,459 $ 16,213
Measurement and Control 2,382 2,723 7,680 8,516
Optical Technologies 2,965 2,901 8,669 9,808
Corporate 842 731 2,376 2,154
--------- --------- ---------- ----------
$ 12,062 $ 11,615 $ 36,184 $ 36,691
========= ========= ========== ==========
Amortization:
Life and Laboratory Sciences $ 1,662 $ 1,659 $ 4,907 $ 3,856
Measurement and Control 600 286 1,799 850
Optical Technologies 208 267 696 802
--------- --------- ---------- ----------
$ 2,470 $ 2,212 $ 7,402 $ 5,508
========= ========= ========== ==========
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 conformed
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 $4.9 million, $3.5 million,
$11.4 million, and $7.1 million in the third quarter of 2003 and 2002 and
the first nine months of 2003 and 2002, respectively.
(c) Includes restructuring and other costs, net, of $2.7 million, $5.6 million,
$6.1 million, and $6.5 million in the third quarter of 2003 and 2002 and
the first nine months of 2003 and 2002, respectively.
(d) Includes restructuring and other costs, net, of $5.8 million, $7.4 million,
and $18.3 million in the third quarter of 2003 and the first nine months of
2003 and 2002, respectively, and restructuring and other income, net, of
$1.0 million in the third quarter of 2002.
(e) Includes corporate general and administrative expenses and other income and
expense. Includes corporate restructuring and other costs of $1.0 million,
$0.6 million, $2.4 million, and $2.1 million in the third quarter of 2003
and 2002 and the first nine months of 2003 and 2002, respectively. Other
income, net, includes gains on the sale of shares of Thoratec Corporation
of $10.3 million in the third quarter and first nine months of 2003, and
gains on the sale of shares of FLIR Systems, Inc. of $6.6 million, $13.7
million, and $94.5 million in the third quarter of 2002 and the first nine
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 Nine Months Ended
-------------------------------- --------------------------------
September 27, September 28, September 27, September 28,
(In thousands) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 2,909 $ 11,210 $ 17,671 $ 38,189
Interest Expense (Note 11) (3,551) (8,864) (15,888) (32,559)
Gain on Investments, Net 12,614 9,395 28,603 103,381
Equity in Earnings of Unconsolidated Subsidiaries 271 - 416 2,169
Other Items, Net (2,239) 49 (2,702) (1,139)
-------- -------- -------- --------
$ 10,004 $ 11,790 $ 28,100 $110,041
======== ======== ======== ========
The company sold 1,000,000 shares of Thoratec Corporation common stock
during the third quarter of 2003 and realized a gain of $10.3 million. In
addition, the company sold 194,000, 334,175, and 2,200,000 shares of FLIR
Systems, Inc. common stock during the third quarter of 2002 and the first nine
months of 2003 and 2002, respectively, and realized gains of $6.6 million, $13.7
million, and $94.5 million, respectively. These gains included $2.3 million,
$3.9 million, and $25.5 million in the third quarter of 2002 and the first nine
months of 2003 and 2002, respectively, from the recovery of amounts written down
in prior years. At September 27, 2003, the company owns 6.7 million shares of
Thoratec with a fair market value of $108 million and 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 Nine Months Ended
-------------------------------- --------------------------------
September 27, September 28, September 27, September 28,
(In thousands except per share amounts) 2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 38,997 $ 39,017 $123,527 $152,208
Gain on Disposal of Discontinued Operations, Net 9,518 - 14,554 70,370
-------- -------- -------- --------
Net Income for Basic Earnings per Share 48,515 39,017 138,081 222,578
Effect of Convertible Debentures 871 1,938 4,417 11,832
-------- -------- -------- --------
Income Available to Common Shareholders, as
Adjusted for Diluted Earnings per Share $ 49,386 $ 40,955 $142,498 $234,410
-------- -------- -------- --------
Basic Weighted Average Shares 162,531 165,701 162,474 170,358
Effect of:
Stock options 2,455 1,396 1,995 2,141
Convertible debentures 3,969 9,245 7,034 17,900
Contingently issuable shares 200 - 200 -
-------- -------- -------- --------
Diluted Weighted Average Shares 169,155 176,342 171,703 190,399
-------- -------- -------- --------
Basic Earnings per Share:
Continuing operations $ .24 $ .24 $ .76 $ .89
Discontinued operations .06 - .09 .41
-------- -------- -------- --------
$ .30 $ .24 $ .85 $ 1.31
======== ======== ======== ========
Diluted Earnings per Share:
Continuing operations $ .24 $ .23 $ .75 $ .86
Discontinued operations .06 - .08 .37
-------- -------- -------- --------
$ .29 $ .23 $ .83 $ 1.23
======== ======== ======== ========
Options to purchase 4,753,000, 12,111,000, 8,124,000, and 10,195,000
shares of common stock for the third quarter of 2003 and 2002 and the first nine
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 excludes the effect of
assuming the conversion of the following convertible debentures because the
effect would be antidilutive: in the first nine months of 2003 and 2002, the
company's 4 3/8% subordinated convertible debentures; and in the third quarter
of 2002, the company's 4 3/8% and 4 7/8% subordinated convertible debentures and
4 1/2% senior convertible debentures. The company's 4 3/8% and 4 7/8%
subordinated convertible debentures and 4 1/2% senior convertible debentures
were convertible at $111.83, $32.50, and $34.42 per share, respectively. These
debentures were no longer outstanding at September 27, 2003, having previously
been redeemed. In the third quarter of 2003, there were no convertible
debentures outstanding that if converted would be antidilutive.
<
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 third quarter of 2003 and 2002, the company had
comprehensive income of $51.2 million and $28.7 million, respectively. During
the first nine months of 2003 and 2002, the company had comprehensive income of
$236.6 million and $209.9 million, respectively. Comprehensive income in the
first nine months of 2002 excludes the effect of unrealized gains of $111
million that existed at the date the company reclassified equity interests in
FLIR and Thoratec Corporation to available-for-sale investments. The change in
accumulated other comprehensive items between December 28, 2002 and September
27, 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 Nine Months Ended
-------------------------------- --------------------------------
September 27, September 28, September 27, September 28,
(In thousands except per share amounts) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations:
As reported $ 38,997 $ 39,017 $123,527 $152,208
Add: Stock-based employee compensation expense
included in reported results, net of tax 378 313 1,331 1,063
Deduct: Total stock-based employee compensation
expense determined under the fair-value-based
method for all awards, net of tax (5,759) (5,880) (18,992) (19,131)
-------- -------- -------- --------
Pro forma $ 33,616 $ 33,450 $105,866 $134,140
======== ======== ======== ========
<
13
>
THERMO ELECTRON CORPORATION
8. Stock-based Compensation Plans and Pro Forma Stock-based Compensation
Expense (continued)
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
September 27, September 28, September 27, September 28,
(In thousands except per share amounts) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share from Continuing Operations:
As reported $ .24 $ .24 $ .76 $ .89
Pro forma $ .21 $ .20 $ .65 $ .79
Diluted Earnings per Share from Continuing
Operations:
As reported $ .24 $ .23 $ .75 $ .86
Pro forma $ .20 $ .20 $ .64 $ .77
Net Income:
As reported $ 48,515 $ 39,017 $138,081 $222,578
Add: Stock-based employee compensation expense
included in reported net income, net of tax 378 313 1,331 1,063
Deduct: Total stock-based employee compensation
expense determined under the fair-value-based
method for all awards, net of tax (5,759) (5,880) (18,992) (19,131)
-------- -------- -------- --------
Pro forma $ 43,134 $ 33,450 $120,420 $204,510
======== ======== ======== ========
Basic Earnings per Share:
As reported $ .30 $ .24 $ .85 $ 1.31
Pro forma $ .27 $ .20 $ .74 $ 1.20
Diluted Earnings per Share:
As reported $ .29 $ .23 $ .83 $ 1.23
Pro forma $ .26 $ .20 $ .73 $ 1.14
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 period
results were reclassified 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 will be required to apply FIN
No. 46 on December 31, 2003. The company does not expect FIN No. 46 will
materially affect its 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 September 27, 2003, the company had
deferred losses, net of income taxes, relating to forward currency-exchange
contracts of approximately $2.1 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% (3.36% as of September 27, 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 $12.7 million at September 27,
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 19,282
Usage (17,027)
Adjustments to previously provided warranties, net (2,498)
Other, net (a) 1,304
--------
Balance at September 27, 2003 $ 28,422
========
(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.
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.
These transactions resulted in a charge of $1.0 million in the first nine
months of 2003, included in other income, net, in the accompanying statement of
income.
<
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 nine months of 2003. The
company expects to incur an additional $8 - $10 million of restructuring costs
through the remainder of 2003 and in 2004 for charges associated with these
actions that cannot be recorded until incurred and for new actions being
undertaken in the fourth quarter of 2003. The company believes that
restructuring actions undertaken in 2002 and the first half of 2003 will be
substantially completed in 2003 and that the actions undertaken in the second
half of 2003 will be substantially completed in 2004.
During the third 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 $ 4,870 $ 2,662 $ 5,770 $ 971 $14,273
======= ======= ======= ======= =======
During the first nine 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 $11,351 $ 6,115 $ 7,422 $ 2,359 $27,247
======= ======= ======= ======= =======
The components of net restructuring and other costs by segment are as
follows:
Life and Laboratory Sciences
- ----------------------------
The Life and Laboratory Sciences segment recorded $4.9 million of net
restructuring and other charges in the third quarter of 2003, substantially all
of which were cash costs principally associated with facility consolidations.
The cash costs included $3.5 million of severance for 71 employees across all
functions; $0.7 million of net abandoned-facility lease costs for facilities
described below; $0.1 million of employee-retention costs at facilities being
closed; and $0.6 million of other cash costs, primarily relocation expenses. The
charges for abandoned facilities are primarily for the closure of a
manufacturing facility in the United Kingdom, the activities of which were
transferred to a facility in the United States, and revised estimates of future
lease costs for two sales offices in the United Kingdom that were abandoned in
2001.
In the second quarter of 2003, this segment recorded $3.9 million of net
restructuring and other charges, 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.
<
17
>
THERMO ELECTRON CORPORATION
14. Restructuring and Other Costs, Net (continued)
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 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 $2.7 million of net
restructuring and other charges in the third quarter of 2003, all of which were
cash costs principally associated with facility consolidations. The cash costs
included $1.9 million of severance for 41 employees across all functions; $0.3
million of abandoned-facility lease costs for facilities described below; $0.1
million of employee-retention costs at facilities being closed; and $0.4 million
of other cash costs, primarily relocation expenses. The charges for abandoned
facilities are primarily for the closure of a sales office in the Netherlands,
the activities of which were transferred to other facilities in the region, and
other occupancy costs at facilities previously abandoned.
In the second quarter of 2003, this segment recorded $0.2 million of net
restructuring and other income. 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 related to the segment's test
and measurement business to reduce the carrying value of the business to
estimated disposal value. The test and measurement business was sold in October
2003 (Note 18).
Optical Technologies
- --------------------
The Optical Technologies segment recorded $5.8 million of net
restructuring and other charges in the third quarter of 2003. These charges
included a charge of $4.7 million for the writedown of the segment's molecular
beam epitaxy product line that was sold in October 2003. The writedown was to
reduce the carrying value of the product line assets to disposal value and
primarily consisted of fixed assets. In addition, the segment recorded $0.8
million of cash costs principally associated with facility consolidations. The
cash costs included $0.5 million of net abandoned-facility lease costs for
<
18
>
THERMO ELECTRON CORPORATION
14. Restructuring and Other Costs, Net (continued)
facilities described below; $0.2 million of severance for 23 employees across
all functions; and $0.1 million of employee-retention costs at facilities being
closed. The charges for abandoned facilities included costs of $0.8 million for
the consolidation of manufacturing facilities in California and Massachusetts,
and are net of reversals of $0.3 million for the favorable settlement of lease
obligations on abandoned equipment. The charges for severance are net of
reversals of $0.3 million, primarily for the favorable resolution of accrued
amounts that were in dispute. In addition, the segment recorded writedowns of
$0.3 million for abandoned fixed assets.
In the second quarter of 2003, this segment recorded $0.4 million of net
restructuring and other charges. 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.
Corporate
- ---------
The company recorded $1.0 million of corporate restructuring and other
charges in the third quarter of 2003, all of which were cash costs. The cash
costs included $0.4 million of third-party advisory fees, $0.3 million of
severance for 6 administrative employees, and $0.3 million of relocation
expenses for the consolidation of administrative facilities in France. While the
company no longer has any public subsidiaries, it has numerous non-U.S.
subsidiaries through which the formerly public subsidiaries conducted business.
The third-party advisory fees are being incurred to simplify this legal
structure.
In the second quarter of 2003, the company recorded $0.8 million of
restructuring and other charges at its corporate office, all of which were cash
costs, primarily for third-party advisory fees.
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 September 27, 2003 -
====
<
19
>
THERMO ELECTRON CORPORATION
14. Restructuring and Other Costs, Net (continued)
2002 Restructuring Plans
- -------------------------------------------------------------------------------------------
Remaining Terminations at December 28, 2002 311
Terminations Occurring to Date in 2003 (286)
Adjustment to Plan (10)
----
Remaining Terminations at September 27, 2003 15
====
2003 Restructuring Plans
- -------------------------------------------------------------------------------------------
Terminations Announced in 2003 539
Terminations Occurring to Date in 2003 (425)
----
Remaining Terminations at September 27, 2003 114
====
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 (221) - - - (221)
-------- -------- -------- -------- --------
Balance at September 27, 2003 $ 43 $ - $ - $ - $ 43
======== ======== ======== ======== ========
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) (140) - (5) (221)
Currency translation 33 - 3 - 36
-------- -------- -------- -------- --------
Balance at September 27, 2003 $ - $ 93 $ - $ - $ 93
======== ======== ======== ======== ========
2001 Restructuring Plans
Balance at December 28, 2002 $ 5,605 $ 417 $ 11,501 $ 1,665 $ 19,188
Costs incurred in 2003 100 115 1,672 208 2,095
Reserves reversed (b) (1,245) (90) (882) (814) (3,031)
Payments (2,083) (413) (6,058) (618) (9,172)
Currency translation 384 - 428 14 826
-------- -------- -------- -------- --------
Balance at September 27, 2003 $ 2,761 $ 29 $ 6,661 $ 455 $ 9,906
======== ======== ======== ======== ========
<
20
>
THERMO ELECTRON CORPORATION
14. Restructuring and Other Costs, Net (continued)
Abandonment
Employee of Excess
(In thousands) Severance Retention (a) Facilities Other Total
- --------------------------------------------------------------------------------------------------------------------------------
2002 Restructuring Plans
Balance at December 28, 2002 $ 11,868 $ 967 $ 7,800 $ 688 $ 21,323
Costs incurred in 2003 1,946 1,421 471 1,858 5,696
Reserves reversed (b) (645) (56) (332) - (1,033)
Payments (10,610) (2,008) (3,731) (2,475) (18,824)
Currency translation 625 18 219 102 964
-------- -------- -------- -------- --------
Balance at September 27, 2003 $ 3,184 $ 342 $ 4,427 $ 173 $ 8,126
======== ======== ======== ======== ========
2003 Restructuring Plans
Costs incurred in 2003 (d) $ 12,240 $ 836 $ 2,789 $ 3,492 $ 19,357
Reserves reversed (b) (414) - (819) (263) (1,496)
Payments (9,283) (656) (1,324) (3,125) (14,388)
Currency translation 178 2 36 49 265
-------- -------- -------- -------- --------
Balance at September 27, 2003 $ 2,721 $ 182 $ 682 $ 153 $ 3,738
======== ======== ======== ======== ========
(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 $0.2 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 to
disposal value of a business sold in October 2003, in the Measurement and
Control segment; and noncash charges of $6.1 million, primarily from the
writedown to disposal value of a product line sold in October 2003 and a
building held for sale, in the Optical Technologies segment.
The company expects to pay accrued restructuring costs as follows:
severance, employee-retention obligations, and other costs, which principally
consist of cancellation/termination fees, primarily through 2004; 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.
16. Discontinued Operations
During the third quarter of 2003, the company had a gain on disposal of
discontinued operations of $9.5 million. The company resolved several disputes
and related claims in the quarter that it had retained following the sale of
businesses in its discontinued operations. In connection with the resolution of
these matters on favorable terms relative to the damages claimed and amount of
established reserves, the company's pre-tax gain on disposal of the related
businesses increased by $6.9 million. The company recorded a tax provision of
$2.5 million on this gain. In addition, the company realized $5.1 million of
additional tax benefits from the disposal of businesses sold prior to 2003,
principally foreign tax credits.
<
21
>
THERMO ELECTRON CORPORATION
16. Discontinued Operations (continued)
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.
The company intends to vigorously defend this matter. In the opinion of
management, an unfavorable outcome 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 quarter or annual period.
Discontinued Operations
The company's Thermo Coleman Corporation subsidiary was named a defendant
in a lawsuit initiated by two former employees. The suit alleged, among other
things, that Thermo Coleman violated the Federal False Claims Act in connection
with the performance of a government contract. The complaint sought the award of
treble damages in an unspecified amount, plus other penalties. Thermo Coleman
sold its core business in 2000, but retained this litigation as a term of the
sale. This matter was dismissed in October 2003 and in connection with a
settlement agreement among the former employees, the company, and other
defendants, the company agreed to make a payment of $450,000.
The company's continuing and discontinued operations are defendants 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 Events
Divestitures
In October 2003, the Measurement and Control segment sold its test and
measurement business to SPX Corporation. Also in October 2003, the Optical
Technologies segment sold its molecular beam epitaxy (MBE) product line to
Oxford Instruments PLC. Aggregate proceeds from these transactions were $23.8
million in cash, subject to post-closing adjustments. In the first nine months
of 2003, the test and measurement business had revenues of $19.4 million and an
operating loss of $0.9 million, including a $1.6 million writedown to estimated
disposal value. In the first nine months of 2003, the MBE product line had
revenues of $5.3 million and an operating loss of $6.0 million, including a
writedown of $4.7 million to disposal value (Note 14).
Acquisitions
In October 2003, the Measurement and Control segment acquired the
electronic personal dosimetry business of Siemens plc for approximately $4.5
million in cash, subject to a post-closing adjustment.
In November 2003, the Life and Laboratory Sciences segment acquired
Laboratory Management Services, Inc., a supplier of regulatory instrument and
consulting services to the pharmaceutical and related industries, for $5 million
in cash and up to $4 million of additional consideration through 2005 based on
post-acquisition results of the acquired business. The purchase price is subject
to a post-closing adjustment.
<
22
>
THERMO ELECTRON CORPORATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. Any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," "seeks," "estimates," and
similar expressions are intended to identify forward-looking statements. While
the company may elect to update forward-looking statements in the future, it
specifically disclaims any obligation to do so, even if the company's estimates
change, and readers should not rely on those forward-looking statements as
representing the company's views as of any date subsequent to the date of the
filing of this Quarterly Report. There are a number of important factors that
could cause the actual results of the company to differ materially from those
indicated by such forward-looking statements, including those detailed under the
heading "Forward-looking Statements" in this report on Form 10-Q.
The company's discussion and analysis of its financial condition and
results of operations is based upon its financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
liabilities. On an on-going basis, the company evaluates its estimates,
including those related to bad debts, inventories, intangible assets, warranty
obligations, income taxes, contingencies and litigation, restructuring, and
discontinued operations. The company bases its estimates on historical
experience, current market and economic conditions, and other assumptions that
management believes are reasonable. The results of these estimates form the
basis for judgments about the carrying value of assets and liabilities where the
values are not readily apparent from other sources. Actual results may differ
from these estimates under different assumptions or conditions.
The company believes the following represent its critical accounting
policies and estimates used in the preparation of its financial statements:
(a) The company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to pay amounts
due. If the financial condition of the company's customers were to
deteriorate, reducing their ability to make payments, additional
allowances would be required.
(b) The company writes down its inventories for estimated obsolescence
for differences between the cost and estimated net realizable value
based on recent usage and expected demand. If ultimate usage or
demand varies significantly from expected usage or demand, additional
writedowns may be required.
(c) The company periodically evaluates goodwill for impairment using
market comparables for similar businesses or 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.
<
23
>
THERMO ELECTRON CORPORATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
- --------------------------------------------------------------------------------
(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.
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 conformed
to reflect these changes.
<
24
>
THERMO ELECTRON CORPORATION
Third Quarter 2003 Compared With Third Quarter 2002
- ---------------------------------------------------
Continuing Operations
Sales in the third quarter of 2003 were $497.1 million, a decrease of
$20.1 million, or 4%, from the third quarter of 2002. The favorable effects of
currency translation resulted in an increase in revenues of $20.2 million in
2003. Sales decreased $4.1 million due to divestitures, net of acquisitions. In
addition to the changes in revenue resulting from currency translation,
acquisitions, and divestitures, revenues decreased $36.2 million, or 7%,
primarily due to lower demand, as detailed below.
Operating income was $42.4 million in the third quarter of 2003, compared
with $44.9 million in the third quarter of 2002. Operating income in the third
quarter of 2003 was 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 income in the third quarter of
2002 was reduced by charges associated with restructuring plans initiated during
2001 and 2002, and certain other costs, net. The restructuring and other items
totaled $14.3 million and $6.9 million in 2003 and 2002, respectively, and are
discussed by segment below. Operating income decreased primarily due to higher
restructuring and other costs, net, in 2003, offset by a lower cost base
following recent restructuring actions. Among the factors contributing to a
lower cost base is lower spending for selling, general and administrative
expenses, which decreased 4% to $134.3 million in the third quarter of 2003,
primarily due to cost reduction measures including facility consolidations. In
addition, spending on research and development activities declined 7% to $34.9
million in the third 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 an annual 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 are recorded when
incurred. Further actions were initiated in the first nine months of 2003. The
company expects to incur an additional $8 - $10 million of restructuring costs
through the remainder of 2003 and in 2004 for charges associated with these
actions that cannot be recorded until incurred and for new actions being
undertaken in the fourth quarter of 2003. The company believes that
restructuring actions undertaken in 2002 and the first half of 2003 will be
substantially completed in 2003 and that the actions undertaken in the second
half of 2003 will be substantially completed in 2004.
Life and Laboratory Sciences
- ----------------------------
Sales in the Life and Laboratory Sciences segment increased $1.4 million
to $301.5 million in the third quarter of 2003. The favorable effects of
currency translation resulted in an increase in revenues of $13.7 million in
2003. Sales decreased $2.9 million due to product line divestitures. In addition
to the changes in revenue resulting from currency translation and divestitures,
revenues decreased $9.4 million, or 3%, primarily due to lower demand. A $16.7
million decrease in sales of instrumentation and scientific equipment,
principally due to a downturn in demand from industrial markets, was offset in
part by increased revenues from the segment's other products including clinical
diagnostic and laboratory informatics tools. The company believes that the
economic downturn in the manufacturing sector has affected the buying patterns
of industrial customers, resulting in lower expenditures on capital spending.
Operating income margin increased to 14.5% in the third quarter of 2003
from 14.3% in the third quarter of 2002. (Operating income margin is operating
income divided by revenues.) Operating income margin was affected by
restructuring and other costs, net, of $4.9 million and $3.5 million in 2003 and
2002, respectively. The improved margin resulted from cost savings from material
sourcing and facility consolidations and, to a lesser extent, a $1.6 million
improvement in operating income at a small business unit that had a loss in
2002. These improvements were offset in part by $1.4 million of higher
restructuring and other costs and, to a lesser extent, higher marketing and
selling expenses due to several key commercial initiatives. The segment's
commercial initiatives include key customer account management, increased
advertising for a branding transition, and establishment of divisional call
centers.
<
25
>
THERMO ELECTRON CORPORATION
Third Quarter 2003 Compared With Third Quarter 2002 (continued)
- ---------------------------------------------------
In the third quarter of 2003, the segment recorded restructuring and
other costs, net, of $4.9 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 costs, net, in 2002 included $2.7 million of cash costs, primarily for
severance, abandoned facilities, and relocation expenses at businesses being
consolidated. In addition, the segment recorded charges to cost of revenues of
$0.4 million for discontinued product lines and the sale of inventories revalued
at the date of acquisition, and $0.4 million of other charges, primarily for
asset writedowns associated with facility consolidations.
Measurement and Control
- -----------------------
Sales in the Measurement and Control segment decreased $8.5 million, or
5%, to $146.7 million in the third quarter of 2003. The favorable effects of
currency translation resulted in an increase in revenues of $5.5 million in
2003. Sales decreased $1.2 million due to divestitures, net of an acquisition.
In addition to the changes in revenue resulting from currency translation,
divestitures, and an acquisition, revenues decreased $12.8 million, or 8%,
primarily due to weaker demand. The decrease in sales occurred primarily due to
weaker demand in the process instruments and control technologies businesses,
which had revenue declines approximately equal to one another. The weaker demand
was primarily due to the continuing slowdown in the semiconductor and other
industrial markets that has adversely affected customers in some of the
segment's businesses. The decrease in revenues was offset in part by slightly
higher revenues from the segment's environmental instruments business, primarily
due to increased sales of equipment used in homeland security. The company
expects that the inclusion of $26.8 million of revenues in the fourth quarter of
2002 from the sale of explosives-detection equipment under a single order from
the U.S. government and a continuing downturn in some markets served by the
segment will unfavorably affect the segment's revenue comparisons with
corresponding prior-year periods through at least the fourth quarter of 2003. A
prolonged downturn could adversely affect the realizability of the segment's
assets, which may result in charges for impairment. As of September 27, 2003,
the segment's goodwill totaled $419 million.
Operating income margin increased to 7.4% in the third quarter of 2003
from 5.6% in the third quarter of 2002. Operating income margin was affected by
restructuring and other costs, net, of $2.7 million in 2003 and $5.6 million in
2002. The increase in the segment's operating income margin was due to $2.9
million of lower restructuring and other costs, net, and a reduction in
operating costs following restructuring actions in 2002 and 2003, offset in part
by the effect on operating income margin of lower revenues.
In the third quarter of 2003, the segment recorded restructuring and
other costs, net, of $2.7 million, all of which were cash costs, primarily for
severance, abandoned facilities, and relocation expenses at businesses being
consolidated (Note 14). Restructuring and other costs, net, in 2002 included
cash costs of $10.4 million, principally for severance, abandoned facilities,
relocation, and other costs of facility consolidations. The segment also
recorded charges to cost of revenues of $1.3 million for the sale of inventory
revalued at the date of acquisition. These costs were offset by $6.1 million of
net gains, primarily on the sales of businesses, principally the July 2002 sale
of Thermo BLH and Thermo Nobel.
Optical Technologies
- --------------------
Sales in the Optical Technologies segment decreased $12.8 million, or
20%, to $52.1 million in the third quarter of 2003. The favorable effects of
currency translation resulted in an increase in revenues of $1.0 million in
2003. In addition to the change in revenue resulting from currency translation,
revenues decreased $13.8 million, or 21%, primarily due to weaker demand. The
weaker demand was primarily due to the continuing slowdown in the semiconductor
and other industrial markets that has adversely affected the segment's
customers. These industries are highly cyclical and have experienced downturns
that began in 2001. Research funding for the scientific laser market has also
remained slow and this, together with the downturn in industrial markets, has
heightened competition in sales to academic and research customers. During the
<
26
>
THERMO ELECTRON CORPORATION
Third Quarter 2003 Compared With Third Quarter 2002 (continued)
- ---------------------------------------------------
first nine months of 2003, the segment's backlog decreased 4% to $53.3 million.
The company expects that the slowdowns in semiconductor and other industrial
markets will continue to result in unfavorable revenue comparisons with
corresponding prior-year periods through at least the fourth quarter of 2003. A
prolonged downturn could adversely affect the realizability of the segment's
assets, which may result in charges for impairment. As of September 27, 2003,
the segment's goodwill totaled $122 million.
Operating income margin was negative 10.3% in the third quarter of 2003,
compared with 0.4% in the third quarter of 2002. Operating income margin was
affected by restructuring and other costs, net, of $5.8 million in 2003 and
restructuring and other income, net, of $1.0 million in 2002. The decrease in
the segment's operating income margin was due to higher restructuring and other
costs, offset in part by lower operating costs following restructuring actions
in 2002 and 2003.
In the third quarter of 2003, the segment recorded $5.8 million of
restructuring and other costs, net. These costs included a charge of $4.7
million for the writedown of a noncore product line that was sold in October
2003. In addition, the segment recorded cash costs of $0.8 million, principally
for abandoned facilities and severance costs at businesses being consolidated.
These charges are net of a gain of $0.3 million from favorable negotiations
concerning leases for abandoned equipment. The segment also recorded asset
writedowns of $0.3 million for abandoned assets (Note 14). In connection with
the sale of a noncore product line in October 2003, discussed above, the segment
abandoned a manufacturing facility in the U.K. and expects to record a related
charge in the fourth quarter of 2003 of approximately $2 million for future
lease obligations. Restructuring and other income, net, in 2002 included the
reversal of $0.6 million of severance reserves previously established in 2001
that were ultimately not required due to attrition and $0.5 million of proceeds
from the disposal of assets that were previously written down, offset by a $0.1
million loss on the sale of a small business unit.
Other Income, Net
- -----------------
The company reported other income, net, of $10.0 million and $11.8
million in the third 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 $2.9 million in 2003 from $11.2 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 are reinvested at current lower market rates. Following
redemptions of convertible debentures in April and July 2003 (Note 13) and the
repurchase of $84.1 million of the company's debt and equity securities in the
first nine months of 2003, lower invested cash will also contribute to an
expected reduction in interest income. Interest expense decreased to $3.6
million in 2003 from $8.9 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.
During 2003 and 2002, the company had gains on investments, net, of $12.6
million and $9.4 million, respectively. The gains included $10.3 million in 2003
from the sale of shares of Thoratec Corporation, and $6.6 million in 2002 from
the sale of shares of FLIR Systems, Inc. Of the total gain from the sale of FLIR
shares, $2.3 million represents a recovery of amounts written down in prior
years. At September 27, 2003, the company owns 6.7 million shares of Thoratec
common stock with a fair market value of $108 million and no longer owns shares
of FLIR. In addition, during the third quarter of 2003, the company redeemed
debentures, resulting in a charge of $1.0 million (Note 13).
<
27
>
THERMO ELECTRON CORPORATION
Third Quarter 2003 Compared With Third Quarter 2002 (continued)
- ---------------------------------------------------
Provision for Income Taxes
- --------------------------
The company's effective tax rate was 25.6% and 31.1% in the third quarter
of 2003 and 2002, respectively. The effective tax rate for the third quarter of
2003 includes a reduction of 2.0% to adjust the year-to-date rate to the
expected rate for the full year before the effect of the reversal of $9.0
million of valuation allowance (Note 15). The effective tax rate decreased in
2003 primarily due 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. In
addition, the company reduced the estimate of its effective tax rate in 2003
based on tax planning, including 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 the matter 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 flat at $39.0 million in the third
quarter of 2003 and 2002, respectively. Results in both periods were affected by
restructuring, gains on the sale of Thoratec and FLIR shares, and other items,
discussed above.
Discontinued Operations
During the third quarter of 2003, the company had a gain on disposal of
discontinued operations of $9.5 million. The company resolved several disputes
and related claims in the quarter that it had retained following the sale of
businesses in its discontinued operations. In connection with the resolution of
these matters on favorable terms relative to the damages claimed and amount of
established reserves, the company's pre-tax gain on disposal of the related
businesses increased by $6.9 million. The company recorded a tax provision of
$2.5 million on this gain. In addition, the company realized $5.1 million of
additional tax benefits from the disposal of businesses sold prior to 2003,
principally foreign tax credits.
First Nine Months 2003 Compared With First Nine 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.
<
28
>
THERMO ELECTRON CORPORATION
First Nine Months 2003 Compared With First Nine Months 2002 (continued)
- -----------------------------------------------------------
Continuing Operations
Sales in the first nine months of 2003 were $1.514 billion, a decrease of
$3.9 million from the first nine months of 2002. The favorable effects of
currency translation resulted in an increase in revenues of $82.7 million in
2003. Sales decreased $4.1 million due to divestitures, net of acquisitions. In
addition to the changes in revenue resulting from currency translation,
acquisitions, and divestitures, revenues decreased $82.5 million, or 6%,
primarily due to lower demand, as detailed below.
Operating income was $130.0 million in the first nine months of 2003,
compared with $116.8 million in the first nine months of 2002. Operating income
in the first nine months of 2003 was 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 income in
the first nine months of 2002 was reduced by charges associated with
restructuring plans initiated during 2001 and 2002, and certain other costs,
net. The restructuring and other items totaled $27.2 million and $30.8 million
in 2003 and 2002, respectively, and are discussed by segment below. Operating
income increased primarily due to a lower cost base following recent
restructuring actions and, to a lesser extent, lower restructuring and other
costs, net, in 2003. Among the actions contributing to a lower cost base is
lower spending on research and development activities, which decreased 6% to
$109.4 million in the first nine 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 $43.2
million, or 5%, to $914.7 million in the first nine months of 2003. The
favorable effects of currency translation resulted in an increase in revenues of
$59.1 million in 2003. Sales decreased $9.0 million due to product line
divestitures, net of acquisitions. In addition to the changes in revenue
resulting from currency translation, acquisitions, and divestitures, revenues
decreased $6.9 million, or 1%. An $18.1 million decrease in sales of
instrumentation and scientific equipment, principally due to a downturn in
demand from industrial markets, was offset in part by increased sales of the
segment's other products including clinical diagnostic and laboratory
informatics tools.
Operating income margin decreased to 13.8% in the first nine months of
2003 from 14.4% in the first nine months of 2002. Operating income margin was
affected by restructuring and other costs, net, of $11.4 million and $7.1
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. The segment's commercial initiatives include key
customer account management, increased advertising costs for a branding
transition, and establishment of divisional call centers.
In the first nine months of 2003, the segment recorded restructuring and
other costs, net, of $11.4 million, including $11.5 million of cash costs,
primarily for severance, abandoned facilities, employee retention, 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
costs, net, in 2002 included $6.4 million of cash costs, primarily for severance
and employee retention at businesses being consolidated and charges to costs of
revenue of $1.2 million for discontinued product lines and the sale of
inventories revalued at the date of acquisition. In addition, the segment wrote
down $0.4 million of fixed assets and realized a net gain of $0.9 million on the
sale of a product line, two small business units, and a building.
<
29
>
THERMO ELECTRON CORPORATION
First Nine Months 2003 Compared With First Nine Months 2002 (continued)
- -----------------------------------------------------------
Measurement and Control
- -----------------------
Sales in the Measurement and Control segment decreased $7.4 million, or
2%, to $453.0 million in the first nine months of 2003. The favorable effects of
currency translation resulted in an increase in revenues of $21.6 million in
2003. Sales increased $6.4 million due to acquisitions, net of divestitures. In
addition to the changes in revenue resulting from currency translation,
acquisitions, and divestitures, revenues decreased $35.4 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 approximately 60% 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 7.7% in the first nine months of
2003 from 7.8% in the first nine months of 2002. Operating income margin was
affected by restructuring and other costs, net, of $6.1 million and $6.5 million
in 2003 and 2002, respectively. The decrease in operating income margin resulted
primarily from the effect of lower revenues, offset in part by cost reduction
measures following restructuring actions in 2002 and 2003 and, to a lesser
extent, $0.4 million of lower restructuring and other costs, net.
In the first nine months of 2003, the segment recorded restructuring and
other costs, net, of $6.1 million, including cash costs of $6.2 million,
principally for severance, abandoned facilities, employee retention, and
relocation expenses at businesses being consolidated. In addition, the segment
recorded charges of $2.0 million, primarily for the writedown of goodwill in the
test and measurement business 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 costs, net, in 2002 included $13.7 million of cash costs principally for
severance and abandoned facilities, and net gains totaling $8.5 million from the
sale of businesses, including Thermo BLH and Thermo Nobel, the favorable
resolution of a dispute on a business sold in 2000 and the sale of two small
business units and a building. In addition, the segment recorded charges to cost
of revenues of $1.3 million for the sale of inventory revalued at the date of
acquisition.
Optical Technologies
- --------------------
Sales in the Optical Technologies segment decreased $39.7 million to
$154.9 million in the first nine months of 2003. The favorable effects of
currency translation resulted in an increase in revenues of $2.0 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 $40.2 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 7.0% in the first nine months of
2003, compared with negative 11.9% in the first nine months of 2002. Operating
income margin was affected by restructuring and other costs, net, of $7.4
million and $18.3 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 nine months of 2003, the segment recorded $7.4 million of
restructuring and other costs, net. These costs included a charge of $4.7
million for the writedown of a noncore product line that was sold in October
2003. In addition, the segment recorded cash costs of $2.2 million, principally
for severance, abandoned facilities, 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 $0.5 million for abandoned assets, net of recoveries. These
<
30
>
THERMO ELECTRON CORPORATION
First Nine Months 2003 Compared With First Nine Months 2002 (continued)
- -----------------------------------------------------------
charges were offset by a gain of $1.0 million for the reversal of contract
cancellation fees that were disputed and ultimately not required and the
favorable settlement of abandoned equipment lease obligations (Note 14).
Restructuring and other costs, net, in 2002 included $11.1 million of cash costs
principally for severance and abandoned-equipment leases 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
$5.7 million, including $5.5 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 nine months of 2002, the segment also recorded $0.7 million of charges
to cost of revenues for discontinued product lines.
Other Income, Net
- -----------------
The company reported other income, net, of $28.1 million and $110.0
million in the first nine months of 2003 and 2002, respectively (Note 5).
Interest income decreased to $17.7 million in 2003 from $38.2 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 $15.9 million in 2003 from $32.6 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 $28.6
million and $103.4 million, respectively. The gains included $10.3 million in
2003 from the sale of shares of Thoratec and $13.7 million and $94.5 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 $25.5 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, the company repurchased and redeemed debentures,
resulting in charges of $1.0 million during the first nine months of 2003 and
2002, respectively.
Provision for Income Taxes
- --------------------------
The company's effective tax rate was 21.8% and 33.0% in the first nine
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 (Note
15). This tax benefit reduced the company's 2003 effective tax rate by 5.8%. 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 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 nine 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.
<
31
>
THERMO ELECTRON CORPORATION
First Nine Months 2003 Compared With First Nine Months 2002 (continued)
- -----------------------------------------------------------
Income from Continuing Operations
- ---------------------------------
Income from continuing operations was $123.5 million in the first nine
months of 2003, compared with $152.2 million in the first nine months of 2002.
Results in both periods were affected by restructuring, gains on the sale of
Thoratec and FLIR shares, and other items, discussed above.
Discontinued Operations
During the first quarter of 2003, the company recorded an after-tax gain
on disposal of discontinued operations of $5.0 million, resulting primarily from
the sale of the last remaining business in discontinued operations, Peter
Brotherhood Ltd., and a favorable post-closing adjustment resulting from the
2002 sale of its Trophy Radiologie business.
During the third quarter of 2003, the company had a gain on disposal of
discontinued operations of $9.5 million. The company resolved several disputes
and related claims in the quarter that it had retained following the sale of
businesses in its discontinued operations. In connection with the resolution of
these matters on favorable terms relative to the damages claimed and amount of
established reserves, the company's pre-tax gain on disposal of the related
businesses increased by $6.9 million. The company recorded a tax provision of
$2.5 million on this gain. In addition, the company realized $5.1 million of
additional tax benefits from the disposal of businesses sold prior to 2003,
principally foreign tax credits.
In February 2002, the company's discontinued operations sold 6.9 million
shares of Thoratec 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 Nine Months 2003
- ----------------------
Consolidated working capital was $703.5 million at September 27, 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
$393.4 million at September 27, 2003, compared with $875.5 million at December
28, 2002. This decrease was due to cash of $697.8 million used in financing
activities, offset in part by cash provided by operating and investing
activities, as discussed below.
Cash provided by operating activities was $102.8 million during the first
nine months of 2003, including $108.8 million provided by continuing operations
and $6.0 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 $27.8
million, net of taxes, in the first nine months of 2003. Aside from cash used
for restructuring actions, a decrease in other current liabilities used cash of
$25.2 million, including $11.7 million of accrued payroll and employee benefits
due to the timing of payments and $11.4 million for accrued income taxes. The
use of cash of $6.0 million for discontinued operations was principally due to
the payment of liabilities, including settlement of litigation and lease
payments on abandoned facilities.
<
32
>
THERMO ELECTRON CORPORATION
Liquidity and Capital Resources (continued)
In connection with restructuring actions undertaken by continuing
operations, the company had accrued $21.9 million for restructuring costs at
September 27, 2003. The company expects to pay approximately $10.1 million of
this amount for severance, employee retention, and other costs primarily through
2004. The balance of $11.8 million will be paid for lease obligations over the
remaining terms of the leases, with approximately three-quarters to be paid
through 2004 and the remainder through 2012. In addition, at September 27, 2003,
the company had accrued $6.4 million for acquisition expenses. Accrued
acquisition expenses included $0.2 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 nine 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 $31.4 million
for purchases of property, plant, and equipment, and received proceeds from
dispositions of $6.3 million. 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). In
October 2003, the company sold a business and a product line for aggregate
proceeds of $23.8 million in cash. In October and November 2003, the company
acquired two businesses for $9.5 million in cash (Note 18).
The company's financing activities used $697.8 million of cash during the
first nine months of 2003, including $694.1 million for continuing operations.
During the first nine months of 2003, the company's continuing operations
expended $375.6 million to reduce short-term notes payable. The company's
continuing operations received net proceeds of $35.5 million from the exercise
of employee stock options. During the first nine months of 2003, the company
expended $352.2 million to redeem and repurchase its debt securities (Note 13)
and repurchase its equity securities, of which $53.7 million was used to
repurchase 2.8 million shares of the company's common stock. As of September 27,
2003, the company had approximately $77.4 million remaining under Board of
Directors' authorizations to repurchase its own securities. 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 $45 - $50 million. The company's contractual obligations and other
commercial commitments did not change materially between December 28, 2002 and
September 27, 2003.
The company has reached an agreement to acquire Jouan SA (Note 2) for
110.9 million euros and the assumption of approximately 7.1 million euros of
consolidated net debt. Completion of the acquisition is subject to various
regulatory approvals and is expected to occur before the end of 2003. The
company expects to finance the acquisition with existing cash balances and, if
necessary, borrowings under its revolving credit facility.
The company believes that its existing resources, including cash and
investments, future cash flow from operations, and available borrowings under
credit facilities are sufficient to meet the working capital requirements of its
existing businesses for the foreseeable future, including at least the next 24
months.
First Nine Months 2002
- ----------------------
Cash used by operating activities was $1.3 million during the first nine
months of 2002, including $52.3 million provided by continuing operations and
$53.6 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 $50.0
million, net of taxes, in the first nine months of 2002. Aside from cash used
for restructuring actions, a decrease in other current liabilities used cash of
$20.3 million, including $11.4 million of accrued payroll and employee benefits
due to timing of payments, and $8.8 million of accrued interest, principally due
<
33
>
THERMO ELECTRON CORPORATION
Liquidity and Capital Resources (continued)
to a debt redemption. The company's cash flow from continuing operations in the
first nine months of 2002 was reduced by income tax payments of approximately
$34 million related to gains from the sale of investments. The use of cash of
$53.6 million from discontinued operations was principally due to the payment of
liabilities, including the settlement of litigation.
During the first nine months of 2002, the primary investing activities of
the company's continuing operations, excluding available-for-sale investment
activities, included the sale of other investments, acquisitions, the collection
of notes receivable, the purchase of shares of a majority-owned subsidiary, and
the purchase of property, plant, and equipment. The company's continuing
operations received proceeds of $65.3 million from the sale of other
investments, principally shares of FLIR. In addition, the company's continuing
operations expended $78.3 million for acquisitions, $22.1 million to purchase
the remaining minority-owned shares of its Spectra-Physics subsidiary, and $36.2
million for purchases of property, plant, and equipment. The company's
continuing operations collected $74.0 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 nine months
of 2002, investing activities of the company's discontinued operations provided
$106.0 million of cash, primarily representing proceeds of $105 million from the
sale of Thoratec common stock.
The company's financing activities used $459.9 million of cash during the
first nine months of 2002, substantially all for continuing operations. During
the first nine 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 and expended $5.8 million for repayments of
other long-term obligations. The redemption price was 100% of the principal
amount of the debentures, plus accrued interest. The company increased
short-term notes payable by $276.5 million, primarily to partially fund the debt
redemption. During the first nine months of 2002, the company's continuing
operations received net proceeds of $15.0 million from the exercise of employee
stock options and expended $292.7 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 September 27, 2003. Based on this
evaluation, the company's chief executive officer and chief financial officer
concluded that, as of September 27, 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 September 27, 2003 that have materially affected
or are reasonably likely to materially affect the company's internal control
over financial reporting.
<
34
>
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 cement
industry. 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 economic
slowdown and related uncertainties affecting markets in which we operate.
Continuing adverse economic conditions could adversely impact our business,
resulting in:
- reduced demand for some of our products;
- 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.
<
35
>
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.
<
36
>
THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
We have retained contingent liabilities from businesses that we have
sold. From 1997 through 2002, we divested over 60 businesses with aggregate
annual revenues in excess of $2 billion. As part of these transactions, we
retained responsibility for some of the contingent liabilities related to these
businesses, such as lawsuits, product liability claims, and potential claims by
buyers that representations and warranties we made about the businesses were
inaccurate. The resolution of these contingencies has not had a material adverse
effect on our results of operations or financial condition; however, we can not
be certain that this favorable pattern will continue.
We face a number of challenges in integrating and consolidating our
businesses. We have historically operated our businesses largely as autonomous,
unaffiliated operations. For the past few years, we have been consolidating our
operations and managing them in a more coordinated manner. The following factors
may make it difficult to successfully complete the integration and consolidation
of our operations:
- Our success in integrating our businesses depends on our ability to
coordinate or consolidate geographically separate organizations and
integrate personnel with different business backgrounds and corporate
cultures.
- Our ability to combine our businesses requires coordination of
previously autonomous administrative, sales and marketing,
distribution, and accounting and finance functions, and expansion and
integration of information and management systems.
- The integration and consolidation process could be disruptive to our
businesses.
Moreover, we may not be able to realize all of the cost savings and other
benefits that we expect to result from the integration and consolidation
process.
Our results could be impacted if we are unable to realize potential
future savings from new sourcing initiatives. As part of our corporate
consolidation over the past two years, we have undertaken significant
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, 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 and expanding our service
offerings;
- developing new applications for our technologies;
- combining sales and marketing operations in appropriate markets to
compete more effectively;
- 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.
<
37
>
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 September 27, 2003. We assess the realizability of
the goodwill we have on our books annually as well as whenever events or changes
in circumstances indicate that the goodwill may be impaired. These events or
circumstances generally include operating losses or a significant decline in
earnings associated with the acquired business or asset. Our ability to realize
the value of the goodwill will depend on the future cash flows of these
businesses. These cash flows in turn depend in part on how well we have
integrated these businesses.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
See Exhibit Index on page immediately preceding exhibits.
(b) Report on Form 8-K
On July 23, 2003, the company furnished a Current Report on Form 8-K with
respect to the company's financial results for the quarter ended June 28, 2003.
<
38
>
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 6th day of November 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
<
39
>
THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
31.1 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.
31.2 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.
32.1 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.*
32.2 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.
<
40
>