UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
AMENDMENT NO. 1 ON FORM 10-Q/A
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended June 29, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-8002
THERMO ELECTRON CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2209186
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at July 26, 2002
----------------------------- ----------------------------
Common Stock, $1.00 par value 166,494,684
This Amendment No. 1 on Form 10-Q/A is being filed to amend and restate Note 14
to the financial statements.
PART I - Financial Information
Item 1 - Financial Statements
-----------------------------
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
June 29, December 29,
(In thousands) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 234,910 $ 297,557
Short-term available-for-sale investments, at quoted market value (amortized
cost of $654,079 and $697,757; Notes 4, 11, and 14) 741,522 744,321
Accounts receivable, less allowances of $26,042 and $26,525 411,146 410,960
Unbilled contract costs and fees 20,824 24,071
Inventories:
Raw materials and supplies 157,865 149,817
Work in process 60,067 56,417
Finished goods (includes $14,491 and $14,918 at customer locations) 142,275 130,807
Deferred tax asset 85,055 82,766
Other current assets 46,081 68,494
---------- ----------
1,899,745 1,965,210
---------- ----------
Property, Plant, and Equipment, at Cost 492,350 482,386
Less: Accumulated depreciation and amortization 221,548 211,674
---------- ----------
270,802 270,712
---------- ----------
Long-term Available-for-sale Investments, at Quoted Market Value (amortized cost
of $5,729) - 9,360
---------- ----------
Other Assets 219,352 231,395
---------- ----------
Goodwill (Notes 2, 8, and 12) 1,406,776 1,348,393
---------- ----------
$3,796,675 $3,825,070
========== ==========
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THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
June 29, December 29,
(In thousands except share amounts) 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Short-term obligations and current maturities of long-term obligations
(Notes 5 and 11) $ 451,748 $ 528,988
Accounts payable 100,315 111,950
Accrued payroll and employee benefits 80,371 92,262
Accrued income taxes 73,151 30,797
Deferred revenue 53,021 48,166
Accrued restructuring costs (Note 13) 43,698 60,685
Other accrued expenses (Note 2) 195,154 203,775
Net liabilities of discontinued operations (Note 14) 81,257 65,416
---------- ----------
1,078,715 1,142,039
---------- ----------
Long-term Deferred Income Taxes and Other Deferred Items 48,176 40,486
---------- ----------
Long-term Obligations:
Senior convertible obligations 121,062 145,414
Senior notes (Note 10) 131,114 128,725
Subordinated convertible obligations 397,139 445,377
Other 6,828 7,986
---------- ----------
656,143 727,502
---------- ----------
Minority Interest (Note 12) - 6,901
---------- ----------
Shareholders' Investment:
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized; 179,003,871 and
199,816,264 shares issued (Note 16) 179,004 199,816
Capital in excess of par value 1,358,475 1,758,567
Retained earnings 693,242 509,681
Treasury stock at cost, 10,441,652 and 23,458,555 shares (Note 16) (198,131) (457,475)
Deferred compensation (2,021) (3,157)
Accumulated other comprehensive items (Notes 7 and 10) (16,928) (99,290)
---------- ----------
2,013,641 1,908,142
---------- ----------
$3,796,675 $3,825,070
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
---------------------------
June 29, June 30,
(In thousands except per share amounts) 2002 2001
-------------------------------------------------------------------------------------------------------------------------------
Revenues $509,113 $542,472
-------- --------
Costs and Operating Expenses:
Cost of revenues (Note 13) 279,325 304,410
Selling, general, and administrative expenses 139,371 155,498
Research and development expenses 39,754 44,706
Restructuring and other unusual costs, net (Note 13) 15,487 23,693
-------- --------
473,937 528,307
-------- --------
Operating Income 35,176 14,165
Other Income (Expense), Net (Notes 4, 10, and 13) 38,289 (148)
-------- --------
Income from Continuing Operations Before Provision for Income Taxes, Minority
Interest, and Extraordinary Item 73,465 14,017
Provision for Income Taxes (23,975) (5,411)
Minority Interest Income - 817
-------- --------
Income from Continuing Operations Before Extraordinary Item 49,490 9,423
Gain on Disposal of Discontinued Operations, Net (represents tax benefit in 2002; net
of income tax provision of $17,259 in 2001; Note 14) 19,000 15,560
-------- --------
Income Before Extraordinary Item 68,490 24,983
Extraordinary Item (net of income tax provision of $14; Note 5) 27 -
-------- --------
Net Income $ 68,517 $ 24,983
======== ========
Earnings per Share from Continuing Operations Before Extraordinary Item (Note 6):
Basic $ .29 $ .05
======== ========
Diluted $ .28 $ .05
======== ========
Earnings per Share (Note 6):
Basic $ .40 $ .14
======== ========
Diluted $ .38 $ .14
======== ========
Weighted Average Shares (Note 6):
Basic 171,122 181,628
======== ========
Diluted 186,740 185,056
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Consolidated Statement of Operations
(Unaudited)
Six Months Ended
-----------------------------
June 29, June 30,
(In thousands except per share amounts) 2002 2001
-------------------------------------------------------------------------------------------------------------------------------
Revenues $1,000,439 $1,115,561
---------- ----------
Costs and Operating Expenses:
Cost of revenues 546,995 622,245
Selling, general, and administrative expenses 278,284 315,665
Research and development expenses 79,380 89,071
Restructuring and other unusual costs, net (Note 13) 23,870 34,575
---------- ----------
928,529 1,061,556
---------- ----------
Operating Income 71,910 54,005
Other Income (Expense), Net (Notes 4, 10, and 13) 99,297 (3,894)
---------- ----------
Income from Continuing Operations Before Provision for Income Taxes, Minority
Interest, Extraordinary Item, and Cumulative Effect of Change in Accounting
Principle 171,207 50,111
Provision for Income Taxes (57,667) (19,668)
Minority Interest Income 331 799
---------- ----------
Income from Continuing Operations Before Extraordinary Item and Cumulative Effect of
Change in Accounting Principle 113,871 31,242
Gain (Loss) on Disposal of Discontinued Operations, Net (includes tax benefit of
$13,408 in 2002; net of tax benefit of $22,741 in 2001; Note 14) 70,370 (50,440)
---------- ----------
Income (Loss) Before Extraordinary Item and Cumulative Effect of Change in
Accounting Principle 184,241 (19,198)
Extraordinary Item (net of income tax benefit of $366; Note 5) (680) -
---------- ----------
Income (Loss) Before Cumulative Effect of Change in Accounting Principle 183,561 (19,198)
Cumulative Effect of Change in Accounting Principle (net of income tax benefit
and minority interest of $663) - (994)
---------- ----------
Net Income (Loss) $ 183,561 $ (20,192)
========== ==========
Earnings per Share from Continuing Operations Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle (Note 6):
Basic $ .66 $ .17
========== ==========
Diluted $ .63 $ .17
========== ==========
Earnings (Loss) per Share (Note 6):
Basic $ 1.06 $ (.11)
========== ==========
Diluted $ .98 $ (.11)
========== ==========
Weighted Average Shares (Note 6):
Basic 172,686 182,242
========== ==========
Diluted 195,464 186,117
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
----------------------------
June 29, June 30,
(In thousands) 2002 2001
-------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income (loss) $ 183,561 $ (20,192)
(Gain) loss on disposal of discontinued operations, net (Note 14) (70,370) 50,440
--------- ---------
Income from continuing operations 113,191 30,248
Adjustments to reconcile income from continuing operations to net cash provided
by (used in) operating activities:
Depreciation and amortization (Note 8) 28,372 48,536
Noncash restructuring and other unusual costs, net (Note 13) 9,653 28,383
Provision for losses on accounts receivable 1,447 1,591
Minority interest income (331) (799)
Equity in earnings of unconsolidated subsidiaries (Note 4) (2,169) (1,260)
Cumulative effect of change in accounting principle, net of income tax
benefit and minority interest - 994
Change in deferred income taxes (12,430) (82)
Gain on sale of businesses (2,629) 19
(Gain) loss on investments, net (Note 4) (93,986) 807
Extraordinary item, net of income taxes (Note 5) 680 -
Other noncash items, net 3,058 4,066
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable 18,177 (1,869)
Inventories (3,414) (25,986)
Other current assets (2,062) (17,186)
Accounts payable (16,504) (14,206)
Other current liabilities (39,478) 9,532
--------- ---------
Net cash provided by continuing operations 1,575 62,788
Net cash provided by (used in) discontinued operations (50,667) 38,136
--------- ---------
Net cash provided by (used in) operating activities (49,092) 100,924
--------- ---------
Investing Activities:
Purchases of available-for-sale investments - (469,132)
Proceeds from sale of available-for-sale investments (Note 4) 80,627 50,762
Proceeds from maturities of available-for-sale investments 68,172 176,358
Proceeds from sale of other investments (Note 4) 65,167 -
Purchases of property, plant, and equipment (26,601) (46,657)
Proceeds from sale of property, plant, and equipment 6,673 10,284
Acquisition of minority interest of subsidiary (Note 12) (22,022) -
Acquisitions, net of cash acquired (Note 2) (46,193) (14,129)
Collection of note receivables 48,630 -
Proceeds from sale of businesses, net of cash divested 4,674 16,789
Advance to affiliates - (32,266)
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THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
----------------------------
June 29, June 30,
(In thousands) 2002 2001
-------------------------------------------------------------------------------------------------------------------------------
Investing Activities (continued):
Increase in other assets $ (6,981) $ (2,668)
Other 1,919 1,804
--------- ---------
Net cash provided by (used in) continuing operations 174,065 (308,855)
Net cash provided by discontinued operations 106,397 379,528
--------- ---------
Net cash provided by investing activities 280,462 70,673
--------- ---------
Financing Activities:
Redemption and repayment of long-term obligations (Note 5) (459,398) (23,397)
Net proceeds from issuance of Company and subsidiary common stock 12,542 34,225
Purchases of Company common stock and subordinated convertible debentures (Note 5) (208,507) (97,810)
Increase (decrease) in short-term notes payable (Note 11) 345,937 (5,284)
Other 2,958 411
--------- ---------
Net cash used in continuing operations (306,468) (91,855)
Net cash provided by (used in) discontinued operations 86 (39,297)
--------- ---------
Net cash used in financing activities (306,382) (131,152)
--------- ---------
Exchange Rate Effect on Cash of Continuing Operations 8,324 (4,067)
Exchange Rate Effect on Cash of Discontinued Operations (179) (363)
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents (66,867) 36,015
Cash and Cash Equivalents at Beginning of Period 305,200 636,252
--------- ---------
238,333 672,267
Cash and Cash Equivalents of Discontinued Operations at End of Period (3,423) (165,916)
--------- ---------
Cash and Cash Equivalents at End of Period $ 234,910 $ 506,351
========= =========
Noncash Activities:
Fair value of assets of acquired businesses $ 56,636 $ 18,161
Cash paid for acquired businesses (46,335) (14,834)
--------- ---------
Liabilities assumed of acquired businesses $ 10,301 $ 3,327
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been
prepared by Thermo Electron Corporation (the Company), are unaudited and, in the
opinion of management, reflect all adjustments of a normal recurring nature
necessary for a fair statement of the financial position at June 29, 2002, the
results of operations for the three- and six-month periods ended June 29, 2002,
and June 30, 2001, and the cash flows for the six-month periods ended June 29,
2002, and June 30, 2001. Prior-period amounts have been reclassified to conform
to the presentation in the current financial statements. Interim results are not
necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 29, 2001, has
been derived from the audited consolidated financial statements as of that date.
The consolidated financial statements and notes are presented as permitted by
Form 10-Q and do not contain all of the information that is included in the
annual financial statements and notes of the Company. The consolidated financial
statements and notes included in this report should be read in conjunction with
the financial statements and notes included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 29, 2001, filed with the Securities
and Exchange Commission (SEC).
2. Acquisitions
In April 2002, the Company's Life and Laboratory Sciences segment
acquired 11,265,873 shares (or approximately 97%) of CRS Robotics Corporation
(CRS), a Toronto Stock Exchange-listed company, for 5.75 Canadian dollars per
share (approximately $3.68 per share) in completion of the Company's cash tender
offer to acquire all of the outstanding shares of CRS. In May 2002, the segment
completed the acquisition of the remaining CRS shares outstanding and
subsequently renamed the business Thermo CRS. The aggregate purchase price was
approximately $42 million, including related expenses. Thermo CRS is a global
supplier of lab automation robotics, software, and equipment to the
drug-discovery market. The purchase price exceeded the fair value of the
acquired net assets and, accordingly, $23.7 million has been allocated as
goodwill. In addition, during the second quarter of 2002, the Company acquired a
product line of microbeam X-ray fluorescence (XRF) metrology tools for
approximately $4 million in cash. Allocation of the purchase price for these
acquisitions was based on estimates of the fair value of the net assets acquired
and is subject to adjustment upon finalization of the purchase price allocation.
The Company has gathered no information that indicates the final purchase price
allocation will differ materially from the preliminary estimates. The results of
operations of the acquisitions are included in the Company's consolidated
financial statements from the respective dates of acquisition. Pro forma results
are not presented as the acquisitions did not materially affect the Company's
results of operations.
The Company has undertaken restructuring activities at acquired
businesses. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily
have included reductions in staffing levels and the abandonment of excess
facilities. In connection with these restructuring activities, as part of the
cost of acquisitions, the Company established reserves, primarily for severance
and excess facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. Accrued acquisition expenses are included in other accrued
expenses in the accompanying balance sheet.
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THERMO ELECTRON CORPORATION
2. Acquisitions (continued)
A summary of the changes in accrued acquisition expenses for acquisitions
completed during 2002 is as follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
-------------------------------------------------------------------------------------------------------------------------------
Reserves established $ 739 $ 509 $ 21 $1,269
Payments (241) - - (241)
Currency translation 36 57 2 95
------ ------ ------ ------
Balance at June 29, 2002 $ 534 $ 566 $ 23 $1,123
====== ====== ====== ======
The principal accrued acquisition expenses for 2002 acquisitions were for
severance for approximately 40 acquired employees, primarily in manufacturing
and research and development, and for closure of a Thermo CRS manufacturing
facility in Austria, with a lease expiring in 2005. The operations of this
facility will be consolidated into existing facilities in Canada.
A summary of the changes in accrued acquisition expenses for acquisitions
completed before and during 1999 is as follows:
1999 Acquisitions
---------------------------------------------
Abandonment
of Excess Pre-1999
(In thousands) Severance Facilities Other Acquisitions Total
-------------------------------------------------------------------------------------------------------------------------------
Balance at December 29, 2001 $ 626 $ 10 $ 131 $6,216 $6,983
Payments (21) (11) (74) (290) (396)
Decrease recorded as a reduction in
other intangible assets (300) - - - (300)
Decrease recorded as a reduction in
goodwill (29) - (74) - (103)
Currency translation 41 1 17 346 405
------ ------ ------ ------ ------
Balance at June 29, 2002 $ 317 $ - $ - $6,272 $6,589
====== ====== ====== ====== ======
The remaining accrued acquisition expenses for pre-1999 acquisitions
represent lease obligations for four operating facilities in England with leases
expiring through 2014.
The principal accrued acquisition expenses for 1999 acquisitions were for
severance for approximately 175 employees across all functions and for abandoned
facilities, primarily at Spectra-Physics AB. The amounts captioned as "other"
primarily represent relocation, contract termination, and other exit costs. The
Company expects to pay amounts accrued for acquisition expenses primarily
through 2002. The Company finalized its restructuring plans for Spectra-Physics
and other 1999 acquisitions in 1999 and 2000.
The Company did not establish material reserves for restructuring
businesses acquired in 2000 or 2001.
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THERMO ELECTRON CORPORATION
3. Business Segment Information
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 29, June 30, June 29, June 30,
(In thousands) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Revenues:
Life and Laboratory Sciences $ 275,007 $ 270,669 $ 543,095 $ 545,523
Measurement and Control 147,654 171,432 293,399 362,746
Optical Technologies 88,596 103,906 168,547 213,629
Intersegment (a) (2,144) (3,535) (4,602) (6,337)
---------- ---------- ---------- ----------
$ 509,113 $ 542,472 $1,000,439 $1,115,561
========== ========== ========== ==========
Income from Continuing Operations Before Provision for
Income Taxes, Minority Interest, Extraordinary Item, and
Cumulative Effect of Change in Accounting Principle:
Life and Laboratory Sciences (b) $ 41,865 $ 24,442 $ 85,953 $ 58,898
Measurement and Control (c) 14,211 3,426 28,878 13,174
Optical Technologies (d) (9,271) (934) (19,467) 6,961
---------- ---------- ---------- ----------
Total Segment Operating Income (e) 46,805 26,934 95,364 79,033
Corporate/Other (f) 26,660 (12,917) 75,843 (28,922)
---------- ---------- ---------- ----------
$ 73,465 $ 14,017 $ 171,207 $ 50,111
========== ========== ========== ==========
Depreciation:
Life and Laboratory Sciences $ 5,223 $ 5,348 $ 10,462 $ 10,419
Measurement and Control 2,580 3,007 5,306 6,227
Optical Technologies 3,577 3,812 7,884 7,372
Corporate 727 551 1,424 895
---------- ---------- ---------- ----------
$ 12,107 $ 12,718 $ 25,076 $ 24,913
========== ========== ========== ==========
Amortization (Note 8):
Life and Laboratory Sciences $ 1,101 $ 6,961 $ 2,070 $ 13,868
Measurement and Control 277 3,429 558 6,784
Optical Technologies 351 1,486 668 2,971
---------- ---------- ---------- ----------
$ 1,729 $ 11,876 $ 3,296 $ 23,623
========== ========== ========== ==========
During the first six months of 2002, the Company transferred management
responsibility for several businesses between segments as follows: (1) the
spectroscopy businesses were moved to the renamed Life and Laboratory Sciences
segment from the Measurement and Control segment; (2) the temperature-control
businesses were moved to the Measurement and Control segment from the Optical
Technologies segment; (3) the electrochemistry products business was moved to
the Measurement and Control segment from the Life and Laboratory Sciences
segment; and (4) the Thermo Projects unit was moved from a separate segment
(previously included as "Other") to the Life and Laboratory Sciences segment.
Prior-period segment information has been restated to reflect these changes.
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THERMO ELECTRON CORPORATION
3. Business Segment Information (continued)
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Includes restructuring and other unusual costs, net, of $3.6 million, $10.3
million, $3.3 million, and $13.1 million
in the second quarter of 2002 and 2001 and first six months of 2002 and
2001, respectively.
(c) Includes restructuring and other unusual costs, net, of $1.1 million, $14.9
million, $0.9 million, and $20.9 million in the second quarter of 2002 and
2001 and first six months of 2002 and 2001, respectively.
(d) Includes restructuring and other unusual costs, net, of $11.4 million, $8.5
million, $19.7 million, and $8.9 million in the second quarter of 2002 and
2001 and first six months of 2002 and 2001, respectively.
(e) Segment operating income is income before corporate general and
administrative expenses, other income and expense, minority interest
income, income taxes, extraordinary item, and cumulative effect of change
in accounting principle.
(f) Includes corporate general and administrative expenses and other income and
expense. Includes corporate restructuring and other unusual costs of $0.9
million, $3.3 million, $1.6 million, and $4.9 million in the second quarter
of 2002 and 2001 and first six months of 2002 and 2001, respectively. Other
income, net, in the second quarter and first six months of 2002 includes
gains of $31.6 million and $87.9 million, respectively, on sales of shares
of FLIR Systems, Inc. Other expense, net, in the first six months of 2001
includes a charge of $2.0 million for impairment of an available-for-sale
investment.
4. Other Income (Expense), Net
The components of other income (expense), net, in the accompanying
statement of operations are as follows:
Three Months Ended Six Months Ended
---------------------- ----------------------
June 29, June 30, June 29, June 30,
(In thousands) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 12,621 $ 15,776 $ 26,979 $ 33,450
Interest Expense (Note 10) (10,216) (18,533) (23,695) (37,976)
Equity in Earnings of Unconsolidated Subsidiaries - 1,051 2,169 1,260
Gain (Loss) on Investments, Net 36,033 1,345 93,986 (807)
Other Items, Net (149) 213 (142) 179
-------- -------- -------- --------
$ 38,289 $ (148) $ 99,297 $ (3,894)
======== ======== ======== ========
The Company sold 756,000 and 2,006,000 shares of FLIR Systems, Inc.
common stock during the second quarter and first six months of 2002,
respectively, and realized gains of $31.6 million and $87.9 million, including
$8.8 million and $23.2 million from the recovery of amounts written down in
prior years. The Company historically reported its pro-rata share of FLIR's
results on a one-quarter lag. In December 2001, following a sale of shares, the
Company's ownership of FLIR fell below 20%. In the first quarter of 2002, the
Company recorded its share of FLIR's fourth quarter 2001 earnings through the
date on which the Company's ownership fell below 20%. The Company's share of
such earnings totaled $2.1 million. As of March 30, 2002, the Company accounts
for its investment in FLIR as an available-for-sale security and no longer
records its share of FLIR's earnings. As an available-for-sale security, the
investment in FLIR is recorded at quoted market value in current assets and
unrealized gains or losses are recorded as a part of accumulated other
comprehensive items in the accompanying 2002 balance sheet.
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THERMO ELECTRON CORPORATION
5. Redemption and Repurchase of Subordinated Convertible Debentures and
Extraordinary Item
In March 2002, the Company redeemed all of its outstanding 4 1/4% and 4
5/8% subordinated convertible debentures due 2003 with the objective of
minimizing interest costs. The principal amounts redeemed for the 4 1/4% and 4
5/8% debentures were $398.4 million and $57.9 million, respectively. The
redemption price was 100% of the principal amount of the debentures, plus
accrued interest. During the first six months of 2002, the Company repurchased
$41.6 million principal amount of its other subordinated convertible debentures
for $41.2 million in cash. These transactions resulted in net extraordinary
charges of $0.7 million for the first six months of 2002, net of taxes of $0.4
million.
6. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended Six Months Ended
---------------------- ----------------------
June 29, June 30, June 29, June 30,
(In thousands except per share amounts) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle $ 49,490 $ 9,423 $113,871 $ 31,242
Gain (Loss) on Disposal of Discontinued Operations, Net 19,000 15,560 70,370 (50,440)
Extraordinary Item 27 - (680) -
Cumulative Effect of Change in Accounting Principle - - - (994)
-------- -------- -------- --------
Net Income (Loss) for Basic Earnings (Loss) per Share 68,517 24,983 183,561 (20,192)
Effect of Convertible Debentures 3,011 - 8,919 -
-------- -------- -------- --------
Income (Loss) Available to Common Shareholders, as Adjusted for
Diluted Earnings (Loss) per Share $ 71,528 $ 24,983 $192,480 $(20,192)
-------- -------- -------- --------
Basic Weighted Average Shares 171,122 181,628 172,686 182,242
Effect of:
Stock options 2,054 2,996 2,514 3,415
Convertible debentures 13,564 432 20,264 460
-------- -------- -------- --------
Diluted Weighted Average Shares 186,740 185,056 195,464 186,117
-------- -------- -------- --------
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THERMO ELECTRON CORPORATION
6. Earnings (Loss) per Share (continued)
Three Months Ended Six Months Ended
---------------------- ----------------------
June 29, June 30, June 29, June 30,
(In thousands except per share amounts) 2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share:
Continuing operations before extraordinary item and cumulative
effect of change in accounting principle $ .29 $ .05 $ .66 $ .17
Discontinued operations .11 .09 .41 (.28)
Extraordinary item - - - -
Cumulative effect of change in accounting principle - - - (.01)
-------- -------- -------- --------
$ .40 $ .14 $ 1.06 $ (.11)
======== ======== ======== ========
Diluted Earnings (Loss) per Share:
Continuing operations before extraordinary item and cumulative
effect of change in accounting principle $ .28 $ .05 $ .63 $ .17
Discontinued operations .10 .08 .36 (.27)
Extraordinary item - - - -
Cumulative effect of change in accounting principle - - - (.01)
-------- -------- -------- -------
$ .38 $ .14 $ .98 $ (.11)
======== ======== ======== ========
Options to purchase 10,898,000 and 4,890,000 shares of common stock for
the second quarter of 2002 and 2001, respectively, and 9,237,000 and 3,855,000
shares of common stock for the first six months of 2002 and 2001, respectively,
were not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price for the
common stock and their effect would have been antidilutive.
The computation of diluted earnings per share for the second quarter and
first six months of 2002 excludes the effect of assuming the conversion of the
Company's 4 3/8% subordinated convertible debentures, with a principal balance
of $74,618,000 as of June 29, 2002, and convertible at $111.83 per share,
because the effect would be antidilutive. The computation of diluted earnings
per share for the second quarter and first six months of 2001 excludes the
effect of assuming the conversion of the Company's subordinated convertible
debentures, except for the Company's 0% subordinated convertible debentures,
because the effect would be antidilutive.
7. Comprehensive Income
Comprehensive income combines net income and other comprehensive items,
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including
currency-translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments and hedging instruments (Note 10). During the
second quarter of 2002 and 2001, the Company had comprehensive income of $95.9
million and $14.6 million, respectively. During the first six months of 2002 and
2001, the Company had comprehensive income of $155.3 million and a comprehensive
loss of $50.3 million, respectively. Comprehensive income in the first six
months of 2002 excludes the effect on unrealized gains of $111 million that
existed at the date the Company reclassified equity interests in FLIR and
Thoratec Corporation to available-for-sale investments (Notes 4 and 14).
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THERMO ELECTRON CORPORATION
8. Recent Accounting Pronouncements and Pro Forma Results
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." The Company adopted the requirements of SFAS No. 142
effective December 30, 2001. SFAS No. 142 requires companies to cease
amortization of all goodwill. SFAS No. 142 also requires companies to annually
test goodwill for impairment and to perform an initial test in the year of
adoption. The Company has completed this initial test and determined that no
impairment of goodwill existed at the adoption date. Goodwill amortization for
the second quarter and first six months of 2001, was $10.1 million and $20.1
million, respectively. Pro forma results for the second quarter and first six
months of 2001, as if the standard had been adopted at the beginning of 2001,
are as follows:
Three Six
Months Months
Ended Ended
June 30, June 30,
(In thousands except per share amounts) 2001 2001
--------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle:
As reported $ 9,423 $ 31,242
Pro forma 18,768 49,556
Basic Earnings per Share from Continuing Operations Before Extraordinary Item
and Cumulative Effect of Change in Accounting Principle:
As reported .05 .17
Pro forma .10 .27
Diluted Earnings per Share from Continuing Operations Before Extraordinary Item
and Cumulative Effect of Change in Accounting Principle:
As reported .05 .17
Pro forma .10 .27
Net Income (Loss):
As reported $ 24,983 $(20,192)
Pro forma 34,328 (1,878)
Basic Income (Loss) per Share:
As reported .14 (.11)
Pro forma .19 (.01)
Diluted Income (Loss) per Share:
As reported .14 (.11)
Pro forma .19 (.01)
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." The standard provides guidance on
measuring impairment of long-lived assets and applying discontinued operations
accounting upon adoption. The Company adopted the standard during the first
quarter of 2002. Adoption of the standard did not materially affect the
Company's financial statements.
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THERMO ELECTRON CORPORATION
8. Recent Accounting Pronouncements and Pro Forma Results (continued)
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Adoption of the standard is generally required in the fiscal year
beginning after May 15, 2002. Under the standard, transactions currently
classified by the Company as extraordinary items will no longer be treated as
such but instead will be reported as other nonoperating income or expenses.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which supersedes EITF 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." The
standard affects the accounting for restructuring charges and related
activities. The provisions of this statement are required to be adopted for exit
or disposal activities that are initiated after December 31, 2002. The
provisions of EITF 94-3 will continue to apply with regard to the Company's
previously announced restructuring plans.
9. Note Receivable
In July 2000, the Company completed the sale of its wholly owned Spectra
Precision businesses to Trimble Navigation Limited for $208.1 million in net
cash proceeds and $80.0 million in seller debt financing at an initial interest
rate of 10%. The note from the buyer called for repayment in two equal, annual
installments beginning in July 2001, but permitted extension of maturity under
certain conditions. Trimble elected to defer the note payment due in July 2001,
and in March 2002, the Company and Trimble negotiated a change in terms. Under
the revised terms, Trimble paid $12 million of principal, together with $10
million of accrued interest. Maturity for the remaining balance was extended to
July 2004, and the amended note carries an interest rate of 10.41% and has
provisions that require earlier repayment under certain conditions. In addition,
the Company obtained warrants to purchase up to 376,233 shares of Trimble at
$15.11 per share, of which 200,000 shares are exercisable immediately through
2007 and the balance of which becomes exercisable for five-year terms at various
times for as long as the note remains outstanding. Spectra Precision, formerly
part of the Measurement and Control segment, was acquired as part of
Spectra-Physics AB and provides the construction, surveying, and heavy-machine
industries with precision-positioning equipment.
10. Derivative Instruments and Hedging
The Company uses forward currency exchange contracts primarily to hedge
certain operational (cash-flow hedges) and balance sheet (fair-value hedges)
exposures resulting from changes in currency exchange rates. Such exposures
result from sales that are denominated in currencies other than the functional
currencies of the respective operations. The Company enters into these currency
exchange contracts to hedge anticipated product sales and recorded accounts
receivable made in the normal course of business, and accordingly, the hedges
are not speculative in nature. As part of the Company's overall strategy to
manage the level of exposure to the risk of currency exchange fluctuations, some
operating units hedge a portion of their currency exposures anticipated over the
ensuing 12-month period, using exchange contracts that have maturities of 12
months or less. The Company does not hold or engage in transactions involving
derivative instruments for purposes other than risk management.
The Company records its forward currency exchange contracts at fair value
in its consolidated balance sheet as other current assets or other accrued
expenses and, for cash-flow hedges, the related gains or losses on these
contracts are deferred as a component of accumulated other comprehensive items
in the accompanying balance sheet. These deferred gains and losses are
recognized in income in the period in which the underlying anticipated
transaction occurs. At June 29, 2002, the Company had deferred losses, net of
income taxes, relating to forward currency exchange contracts of approximately
$2.4 million, substantially all of which is expected to be recognized as expense
over the next 12 months. Unrealized gains and losses resulting from the impact
of currency exchange rate movements on fair-value hedges are recognized in
earnings in the period in which the exchange rates change and offset the
currency gains and losses on the underlying exposure being hedged.
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THERMO ELECTRON CORPORATION
10. Derivative Instruments and Hedging (continued)
During the first quarter of 2002, the Company entered into interest rate
swap arrangements for its $128.7 million principal amount 7.625% senior notes,
due in 2008, with the objective of minimizing 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% (4.09% as of June 29, 2002). The
swaps have terms expiring at the maturity of the debt. The swaps are designated
as fair-value hedges and as such, are carried at fair value. Changes in the fair
value of these swaps and the changes in the fair value of the debt that result
from changes in LIBOR are recorded in interest expense in the accompanying
statement of operations. The swap arrangements are with different counterparties
than the holders of the underlying debt. Management believes that any credit
risk associated with the swaps is remote based on the creditworthiness of the
financial institutions issuing the swaps.
11. Securities-Lending Agreements
In connection with the March 2002 debt redemption discussed in Note 5,
the Company entered into securities-lending agreements with third parties under
which the Company may borrow funds for short-term needs. Borrowings are
collateralized by available-for-sale investments. As of June 29, 2002, the
Company had outstanding borrowings of $337.4 million under these arrangements
with maturities between July and October 2002. The proceeds of the borrowings
were used to partially fund the debt redemption discussed in Note 5. The
borrowings carried a weighted average interest rate of 2.2% at June 29, 2002.
The Company has pledged $354.3 million of available-for-sale securities in the
accompanying 2002 balance sheet as collateral for such borrowings.
12. Purchase of Minority Interest in Spectra-Physics
Following the completion of a cash tender offer in December 2001 for all
of the shares of Spectra-Physics it did not previously own, the Company
completed a short-form merger with Spectra-Physics in February 2002. After the
merger, Spectra-Physics was no longer publicly traded and became a wholly owned
subsidiary of the Company. The Company expended $22.0 million of cash to
complete the purchase of the minority interest and recorded an increase in
goodwill of $15.6 million. Options to purchase shares of Spectra-Physics were
exchanged for options to purchase 2,241,598 shares of Thermo Electron common
stock. The exchange of options was accounted for in accordance with the
methodology set forth in FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" (Note 13).
13. Restructuring and Other Unusual Costs, Net
In response to a downturn in telecommunications, semiconductor, and other
markets served by the Company's businesses and in an effort to further integrate
business units, the Company initiated restructuring actions in the second
quarter of 2001 in a number of business units to reduce costs and shed
unproductive assets. Further actions were initiated in the fourth quarter of
2001 and in the first half of 2002. The restructuring and related actions
primarily consisted of headcount reductions, writedowns of telecommunication
equipment and excess telecommunication inventories at Spectra-Physics,
discontinuance of a number of mature or unprofitable product lines, and
consolidation of facilities to streamline operations and reduce costs. The
Company expects to incur an additional $3 million of restructuring costs in the
third quarter of 2002 and thereafter for charges associated with these actions
that cannot be recorded until incurred. The Company expects that the
restructuring actions undertaken in 2001 and 2002 will be substantially
completed by the end of 2002.
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THERMO ELECTRON CORPORATION
13. Restructuring and Other Unusual Costs, Net (continued)
During the second quarter of 2002, the Company recorded net restructuring
and other charges by segment as follows:
Life and
Laboratory Measurement Optical
(In thousands) Sciences and Control Technologies Corporate Total
---------------------------------------------------------------------------------------------------------------------------------
Cost of Revenues $ 569 $ - $ 982 $ - $ 1,551
Restructuring and Other Unusual
Costs, Net 3,027 1,115 10,445 900 15,487
------- ------- ------- ------- -------
$ 3,596 $ 1,115 $11,427 $ 900 $17,038
======= ======= ======= ======= =======
During the first six months of 2002, the Company recorded net restructuring and other charges by segment as follows:
Life and
Laboratory Measurement Optical
(In thousands) Sciences and Control Technologies Corporate Total
---------------------------------------------------------------------------------------------------------------------------------
Cost of Revenues $ 569 $ - $ 982 $ - $ 1,551
Restructuring and Other Unusual
Costs, Net 2,710 867 18,703 1,590 23,870
------- ------- ------- ------- -------
$ 3,279 $ 867 $19,685 $ 1,590 $25,421
======= ======= ======= ======= =======
The components of net restructuring and other charges by segment are as
follows:
Life and Laboratory Sciences
The Life and Laboratory Sciences segment recorded $3.6 million of net
restructuring and other charges in the second quarter of 2002. The segment
recorded $0.6 million of charges to cost of revenues, which consisted of $0.4
million for a discontinued product line and $0.2 million for the sale of
inventory revalued at the date of acquisition. The segment also recorded $3.0
million of restructuring and other unusual costs, including $2.4 million of cash
costs principally associated with facility consolidations. The cash costs
included $0.7 million of severance for 12 employees across all functions; $0.7
million of pension costs for terminated employees that was accrued as a pension
liability; $0.4 million of employee-retention costs; $0.1 million of
abandoned-facility lease costs; and $0.5 million of other cash costs, primarily
relocation expenses. In addition, the segment sold two small operating units and
a building for a net loss of $0.5 million and had other asset writedowns of $0.1
million.
In the first quarter of 2002, this segment recorded $0.3 million of other
unusual income, net. The unusual income included a gain on the sale of a product
line of $1.5 million. This gain was offset by cash costs of $1.2 million
associated with the restructuring actions initiated in 2001, including $0.6
million of employee-retention costs; $0.4 million of severance for eight
employees, primarily in administrative and sales functions; and $0.2 million of
other cash costs, primarily relocation costs.
Measurement and Control
The Measurement and Control segment recorded $1.1 million of net
restructuring and other charges in the second quarter of 2002. These charges
included $2.2 million of cash costs principally associated with facility
consolidations, including $0.7 million of relocation costs; $0.7 million of
employee-retention costs; $0.6 million of severance; and $0.2 million of
abandoned-facility lease costs. These costs were offset in part by $1.1 million
of net gains on the sale of a small business unit and a building.
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THERMO ELECTRON CORPORATION
13. Restructuring and Other Unusual Costs, Net (continued)
In the first quarter of 2002, this segment recorded $0.2 million of other
unusual income, net. The unusual income included gains of $1.5 million from the
favorable resolution of a dispute on a business sold in 2000 and the sale of a
small business unit in 2002. These gains were offset by $1.1 million of cash
costs associated with the restructuring actions initiated in 2001, including
$0.5 million of severance; $0.1 million of employee-retention costs; and $0.5
million of other cash costs, primarily relocation and contract-termination
costs. The charge also included $0.2 million of asset writedowns, primarily for
asset impairment of a building held for sale.
Optical Technologies
The Optical Technologies segment recorded $11.4 million of net
restructuring and other charges in the second quarter of 2002. The segment
recorded $1.0 million of charges to cost of revenues, including $0.7 million for
a discontinued product line and the balance for the sale of inventory revalued
at the date of acquisition. The segment also recorded $10.4 million of
restructuring and other unusual costs, including $5.5 million of asset
writedowns and $4.9 million of cash costs. The cash costs included $3.2 million
of severance for 117 employees across all functions; $1.0 million for
abandoned-equipment leases; and $0.7 million for the settlement of litigation
(Note 15). The asset writedowns included $5.3 million of abandoned
telecommunications equipment and $0.2 million of goodwill on a small business
held for sale. Following actions in the first and second quarter of 2002, the
Company has suspended initiatives for products that address telecom markets
based on the continuing economic downturn in these markets.
In the first quarter of 2002, this segment recorded $8.3 million of
restructuring and other charges. These charges included $6.8 million of cash
costs at Spectra-Physics, including $4.5 million of lease costs, primarily for
abandoned equipment; $2.1 million of severance for 76 employees across all
functions; $0.1 million of employee-retention costs; and $0.1 million of other
cash costs. The charges also included $0.7 million of asset writeoffs for
abandoned manufacturing equipment and $0.8 million resulting from the exchange
of options to purchase shares of Spectra-Physics for options to purchase shares
of Thermo Electron following the acquisition of the minority interest in this
business in February 2002 (Note 12).
Corporate
The Company recorded $0.9 million of restructuring and other charges at
its corporate office in the second quarter of 2002, primarily for third-party
advisory fees associated with the Company's reorganization plan. While the
Company no longer has any public subsidiaries, it has numerous subsidiaries
through which the formerly public subsidiaries conducted business. The
third-party advisory fees are being incurred to simplify this legal structure.
In the first quarter of 2002, the Company recorded $0.7 million of
restructuring and other charges at its corporate office, all of which were cash
costs. This amount included $0.6 million of third-party advisory fees associated
with the Company's reorganization plan; and $0.1 million of severance for three
employees.
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THERMO ELECTRON CORPORATION
13. Restructuring and Other Unusual Costs, Net (continued)
General
The following table summarizes the Company's severance actions in 2001
and 2002.
Number of
2000 Restructuring Plans Employees
-------------------------------------------------------------------------------------------------------------------------------
Remaining Terminations at December 30, 2000 80
Additional Terminations Announced in 2001 16
Terminations Occurring in 2001 (91)
Adjustment to Plan (1)
------
Remaining Terminations at December 29, 2001 4
Terminations Occurring in 2002 (4)
------
Remaining Terminations at June 29, 2002 -
======
2001 Restructuring Plans
-------------------------------------------------------------------------------------------------------------------------------
Terminations Announced in 2001 1,714
Terminations Occurring in 2001 (1,001)
------
Remaining Terminations at December 29, 2001 713
Additional Terminations Announced in 2002 221
Terminations Occurring in 2002 (679)
------
Remaining Terminations at June 29, 2002 255
======
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13. Restructuring and Other Unusual Costs, Net (continued)
The following table summarizes the cash components of the Company's
restructuring plans. The noncash components and other amounts reported as
restructuring and other unusual costs, net, in the accompanying 2002 statement
of operations have been summarized in the notes to the table.
Abandonment
Employee of Excess
(In thousands) Severance Retention (a) Facilities Other Total
--------------------------------------------------------------------------------------------------------------------------------
1998 Restructuring Plans
Balance at December 29, 2001 $ - $ - $ - $ 506 $ 506
Transfer to accrued pension costs (b) - - - (534) (534)
Currency translation - - - 28 28
-------- -------- -------- -------- --------
Balance at June 29, 2002 $ - $ - $ - $ - $ -
======== ======== ======== ======== ========
1999 Restructuring Plans
Balance at December 29, 2001 $ 571 $ - $ - $ - $ 571
Payments (157) - - - (157)
-------- -------- -------- -------- --------
Balance at June 29, 2002 $ 414 $ - $ - $ - $ 414
======== ======== ======== ======== ========
2000 Restructuring Plans
Balance at December 29, 2001 $ 1,588 $ 6,287 $ 1,866 $ 1,200 $ 10,941
Costs incurred in 2002 - - - 1,406 1,406
Payments (999) (6,015) (337) (2,409) (9,760)
Currency translation 104 - 71 2 177
-------- -------- -------- -------- --------
Balance at June 29, 2002 $ 693 $ 272 $ 1,600 $ 199 $ 2,764
======== ======== ======== ======== ========
2001 Restructuring Plans
Balance at December 29, 2001 $ 26,092 $ 143 $ 19,765 $ 2,667 $ 48,667
Costs incurred in 2002 (c) 8,158 1,780 4,895 3,093 17,926
Reserves reversed (489) (4) (102) (78) (673)
Payments (19,291) (1,630) (3,162) (3,239) (27,322)
Currency translation 1,406 28 423 65 1,922
-------- -------- -------- -------- --------
Balance at June 29, 2002 $ 15,876 $ 317 $ 21,819 $ 2,508 $ 40,520
======== ======== ======== ======== ========
(a) Employee-retention costs are accrued ratably over the period through which
employees must work to qualify for a payment. The 2000 awards were based on
specified percentages of employees' salaries and were generally awarded to
help ensure continued employment at least through completion of the
Company's reorganization plan.
(b) Balance of accrued restructuring costs from 1998 plans related to pension
liability associated with employees terminated in 1998, which was
transferred to accrued pension costs in 2002.
(c) Excludes net gains of $0.9 million and $2.4 million in the Life and
Laboratory Sciences and Measurement and Control segments, respectively;
noncash charges of $7.0 million in the Optical Technologies segment; a cash
charge of $0.7 million recorded in accrued pension costs in the Life and
Laboratory Sciences segment; and loss on litigation of $0.7 million in the
Optical Technologies segment.
The Company expects to pay accrued restructuring costs as follows:
severance, employee-retention obligations, and other costs, which primarily
represent cancellation/termination fees, primarily in 2002; and
abandoned-facility payments, over lease terms expiring through 2012.
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14. Discontinued Operations
Net liabilities of discontinued operations in the accompanying 2002
balance sheet principally represents remaining obligations of the discontinued
businesses, including severance, lease, litigation, and other obligations,
offset by the net assets of two remaining operating units held for sale. These
two businesses have aggregate annual revenues of approximately $90 million.
During the second quarter and first six months of 2002, the Company's
discontinued operations had revenues of $24.1 million and $44.4 million,
respectively, and operating income, of $2.4 million and $4.2 million,
respectively. During the second quarter and first six months of 2001, the
Company's discontinued operations had revenues of $216.3 million and $438.1
million, respectively, and operating income of $24.6 million and $34.8 million,
respectively.
Thermo Cardiosystems
The Company announced in January 2000 that Thermo Cardiosystems Inc. and
all of the Company's noninstrument businesses other than Thermo Ecotek were to
be sold or spun-off. These divestitures totaled approximately 40 businesses with
revenues of $1.8 billion. (The Company later sold Thermo Ecotek as well).
Accordingly, the Company treated the divestiture of these businesses together
with Thermo Cardiosystems as discontinued operations in its financial
statements.
In February 2001, the Company sold Thermo Cardiosystems to Thoratec in
exchange for 19.3 million shares of Thoratec common stock, a 34% interest, which
had a market value of $11.56 per share on the date of the transaction. Certain
restrictions limited the timing of the Company's ability to sell these shares,
although the restrictions fully lapse in August 2002. The Company continued to
account for the sale of Thermo Cardiosystems and the ownership of the Thoratec
shares as discontinued operations. The Company recorded an after-tax charge of
$66.0 million in the first quarter of 2001 for a decline in market value of
Thoratec common stock as a loss on disposal of discontinued operations and
thereafter carried the shares at a new cost basis of $6.50 per share. In
February 2002, the Company sold 6.9 million shares of Thoratec for net proceeds
of $105 million, and realized an after-tax gain of $38.4 million as a gain on
disposal of discontinued operations. Following the sale of shares in 2002, the
Company owned less than 20% of Thoratec's outstanding shares and, pursuant to
SFAS No. 115, began accounting for its investment as an available-for-sale
security in continuing operations in the first quarter of 2002. As such, the
investment is recorded at quoted market value in current assets and unrealized
gains or losses are recorded as a part of accumulated other comprehensive items
in the accompanying 2002 balance sheet. As of June 29, 2002, the Company held
7.7 million shares of Thoratec with a market value of $69 million, substantially
all of which were restricted from trading until August 2002.
The SEC has announced that it is reviewing the 10-K filings of Fortune
500 and other large companies. In July 2002, as part of such a review, the
Company received a "comment" letter from the staff of the SEC concerning the
Company's 2001 Form 10-K. In its comment letter, the SEC staff inquired about
the accounting for the investment in Thoratec, the related writedown of that
investment recorded in March 2001 following a significant decline in its market
value, and the treatment of Thermo Cardiosystems as a discontinued operation.
The Company responded to the SEC staff's questions and on August 14, 2002, the
SEC staff notified the Company that it completed its review without requiring
any change to the Company's previously reported results.
Power-Generation Business
In March 2002, the Company sold the last remaining component of its
former power-generation business and realized a gain from the disposition
totaling $13.0 million, principally for previously unrecognized tax benefits
that were realized upon the sale.
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14. Discontinued Operations (continued)
Other
As a result of new tax regulations concerning deductible losses from
divested businesses, the Company revised its estimate of the tax consequences of
business disposals in discontinued operations and recorded a tax benefit of
$19.0 million in the second quarter of 2002.
15. Litigation
Continuing Operations
During the second quarter of 2002, the Company settled a
patent-infringement matter that Rockwell International Corp. had brought against
Spectra-Physics and its Opto Power subsidiary. Under the settlement, the Company
paid Rockwell $4.0 million. The settlement was charged against a reserve
established for this matter except for $0.7 million that was included in
restructuring and other unusual costs in the second quarter of 2002 (Note 13).
Discontinued Operations
During the second quarter of 2002, the Company settled a
patent-infringement matter that Fischer Imaging Corporation had brought against
the Company's former Trex Medical subsidiary. The Company sold Trex Medical in
2000 but retained this obligation as a term of the sale. Under the settlement,
the Company paid Fischer $25 million and agreed to pay an additional $7.2
million over eight years. The portion of the settlement that was paid was
charged against a reserve established for this matter. The balance of the amount
to be paid will also be charged against the reserve as paid.
16. Common Stock
During the second quarter of 2002, the Company restored 22,000,000 shares
of common stock to authorized but unissued status, which had been held in
treasury stock.
17. Subsequent Events
Acquisition
In July 2002, the Measurement and Control segment acquired the
radiation-monitoring products business (RMP) of Saint-Gobain for $30 million in
cash. RMP is a major supplier of radiation safety, security, and industrial
equipment to the U.S. market, and the leader in personal radiation monitoring in
the United Kingdom.
Divestitures
In July 2002, the Measurement and Control segment completed the sale of
its Thermo Nobel and Thermo BLH subsidiaries for $18.5 million in cash. These
businesses are engaged in the production and sale of weighing systems,
instruments, and components and were deemed noncore businesses and placed for
sale in 2001.
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
--------------------------------------------------------------------------------
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. While the Company may elect to update forward-looking statements in
the future, it specifically disclaims any obligation to do so, even if the
Company's estimates change, and readers should not rely on those forward-looking
statements as representing the Company's views as of any date subsequent to the
date of the filing of this Quarterly Report. There are a number of important
factors that could cause the results of the Company to differ materially from
those indicated by such forward-looking statements, including those detailed
under the heading "Forward-looking Statements" in this report on Form 10-Q/A.
Results of Operations
During the first six months of 2002, the Company transferred management
responsibility for several businesses as follows: (1) the spectroscopy
businesses were moved to the renamed Life and Laboratory Sciences segment from
the Measurement and Control segment; (2) the temperature-control businesses were
moved to the Measurement and Control segment from the Optical Technologies
segment; (3) the electrochemistry products business was moved to the Measurement
and Control segment from the Life and Laboratory Sciences segment; and (4) the
Company's Thermo Projects unit was moved from a separate segment (previously
included as "Other") to the Life and Laboratory Sciences segment. Prior-period
segment results have been restated to reflect these changes.
Second Quarter 2002 Compared With Second Quarter 2001
Continuing Operations
Sales in the second quarter of 2002 were $509.1 million, a decrease of
$33.4 million from the second quarter of 2001. Excluding the effect of
acquisitions, divestitures, and currency translation, revenues decreased $33.5
million, or 6%. Currency translation had a favorable effect on revenues as
discussed below by segment, due to the weakening of the U.S. dollar relative to
currencies in certain of the countries in which the Company operates.
Operating income was $35.2 million in the second quarter of 2002,
compared with $14.2 million in the second quarter of 2001. Segment operating
income increased to $46.8 million in 2002 from $26.9 million in 2001. (Segment
operating income is operating income excluding costs incurred at the Company's
corporate office.) Operating and segment operating income in the second quarter
of 2002 were affected by charges associated with a restructuring plan
initiated during the fourth quarter of 2001, other restructuring actions
initiated in 2002, and certain other unusual income/costs, net (Note 13).
Operating and segment operating income in the second quarter of 2001 were
affected by charges associated with a restructuring plan initiated during the
quarter and certain other unusual charges. The unusual items in both periods are
discussed by segment below. Excluding these unusual costs, which totaled $16.1
million in 2002 and $33.6 million in 2001, segment operating income was $62.9
million in 2002 and $60.5 million in 2001. The 2001 period included $10.1
million of goodwill amortization. Amortization of goodwill ceased following the
adoption of Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets," effective in 2002 (Note 8). Excluding
goodwill amortization and unusual items, segment operating income totaled $70.6
million in 2001. Segment operating income excluding goodwill amortization and
unusual items decreased due to lower revenues and profitability at certain
businesses discussed below.
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THERMO ELECTRON CORPORATION
Second Quarter 2002 Compared With Second Quarter 2001 (continued)
The Company believes the following represent its critical accounting
policies and estimates used in the preparation of its financial statements. a)
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to pay amounts due. If the
financial condition of the Company's customers were to deteriorate, reducing
their ability to make payments, additional allowances would be required. b) The
Company writes down its inventories for estimated obsolescence for differences
between the cost and estimated net realizable value based on recent usage and
expected demand. If ultimate usage varies significantly from expected usage,
additional writedowns may be required. c) The Company assesses the realizability
of its notes receivable based on judgments concerning the borrower's ability to
make the required payments and the value of collateral, if any. If the financial
condition of the borrower or the value of the collateral were to deteriorate,
charges to reduce the carrying value of notes receivable may be necessary. d)
The Company periodically evaluates goodwill for impairment under the guidelines
of SFAS No. 142. Should the fair value of the Company's goodwill decline because
of reduced operating performance, market declines, or other indicators of
impairment, charges for impairment of goodwill may be necessary. e) The Company
periodically reviews other intangible assets for impairment based on estimated
future cash flows associated with the assets. Should future cash flows decline
significantly from estimated amounts, charges for impairment of other intangible
assets may be necessary. f) At the time the Company recognizes revenue it
provides for the estimated cost of product warranties based primarily on
historical experience. Should product failure rates or the actual cost of
correcting product failures vary from estimates, revisions to the estimated
warranty liability would be necessary. g) The Company estimates the degree to
which tax assets and loss carryforwards will result in a benefit based on
expected profitability by tax jurisdiction and provides a valuation allowance
for tax assets and loss carryforwards that it believes will more likely than not
go unused. Should the Company's actual future taxable income by tax jurisdiction
vary from estimates, additional allowances may be necessary. h) The Company
estimates losses on contingencies and litigation and provides a reserve for
these losses. Should the ultimate losses on contingencies and litigation vary
from estimates, adjustments to those reserves may be required. i) The Company
recorded restructuring charges for asset impairment in 2001 based on estimated
future cash flows associated with the equipment and for the cost of vacating
facilities based on expected sub-rental income. Should actual cash flows
associated with impaired equipment and sub-rental income from vacated facilities
vary from estimated amounts, additional charges may be required. j) The Company
estimates the expected proceeds from the sale of its discontinued businesses and
recorded losses in 1999-2001 to reduce the carrying value of these businesses to
estimated realizable value. Should the actual proceeds vary from estimates,
actual results could differ from expected amounts.
Life and Laboratory Sciences
Sales in the Life and Laboratory Sciences segment increased $4.3 million
to $275.0 million in the second quarter of 2002. The favorable effects of
currency translation resulted in an increase in revenues of $5.3 million in
2002. Sales increased $0.9 million due to an acquisition, net of divestitures.
Excluding the effect of currency translation, divestitures, and an acquisition,
revenues decreased $1.8 million, or 1%. Weakened demand for spectroscopy
instruments and sample-preparation products was substantially offset by strong
sales of mass spectrometry equipment as well as increased sales of histology and
cytology products.
Operating income margin increased to 15.2% in the second quarter of 2002
from 9.0% in the second quarter of 2001. The segment's margin increased
primarily due to ceasing goodwill amortization due to the adoption of SFAS No.
142 in 2002 and the inclusion of unusual costs in the 2001 period. Excluding
restructuring and unusual costs, net, of $3.6 million in 2002 and $10.3 million
in 2001, and goodwill amortization of $5.9 million in 2001, operating income
margin was 16.5% in 2002 and 15.0% in 2001. Cost reduction and productivity
measures undertaken in 2001 and 2002 contributed to the improved margin. In the
second quarter of 2002, the segment recorded restructuring and unusual cash
costs of $2.4 million, primarily for employee retention and severance at
businesses being consolidated. In addition, the segment sold two small operating
units and a building for a net loss of $0.5 million and had other asset
writedowns of $0.1 million. Also in 2002, the segment recorded charges to cost
of revenues of $0.6 million, principally for a discontinued product line (Note
13). Restructuring and unusual costs in 2001 represent cash costs of $4.7
million, primarily for severance and abandoned facilities; $3.4 million of
charges to cost of revenues, principally for discontinued product lines; and
$2.2 million of asset writedowns.
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THERMO ELECTRON CORPORATION
Second Quarter 2002 Compared With Second Quarter 2001 (continued)
Measurement and Control
Sales in the Measurement and Control segment decreased $23.8 million to
$147.7 million in the second quarter of 2002. Sales decreased $8.6 million due
to divestitures. The favorable effects of currency translation resulted in an
increase in revenues of $2.4 million in 2002. Excluding the effect of
divestitures and currency translation, revenues decreased $17.5 million, or 11%.
The decrease was due to a decline in revenues in each of the segment's principal
businesses due to economic conditions facing customers, particularly in the
semiconductor, energy, and steel industries. The Company expects that a
continued downturn in markets served by the segment will unfavorably affect the
segment's revenue comparisons with corresponding prior-year periods for at least
the near-term.
The principal divestitures by the segment referenced above included the
August 2001 sale of its Pharos Marine unit, which manufactures and sells
marine-navigation equipment and systems and the July 2001 sale of its
ThermoMicroscopes unit, a manufacturer of scanning probe microscopes.
Operating income margin increased to 9.6% in the second quarter of 2002
from 2.0% in the second quarter of 2001, primarily due to restructuring and
unusual costs in 2001 and ceasing amortization of goodwill due to the adoption
of SFAS No. 142 in 2002. Operating income margin, excluding restructuring and
unusual costs, net, of $1.1 million in 2002 and $14.9 million in 2001, and
goodwill amortization of $3.1 million in 2001, decreased to 10.4% in 2002 from
12.5% in 2001. The decrease in operating income margin resulted primarily from
lower revenues, offset in part by the effects of cost reduction and productivity
measures undertaken in 2001. In the second quarter of 2002, the segment recorded
restructuring and unusual costs, net, of $1.1 million, including cash costs of
$2.2 million, principally for severance, employee retention, relocation, and
other costs of facility consolidations. These costs were offset in part by $1.1
million of net gains on the sale of a small business unit and a building (Note
13). Restructuring and unusual costs, net, in 2001 included cash costs of $8.0
million, primarily for severance and abandoned facilities; $3.3 million of
charges to cost of revenues principally for discontinued product lines; $1.6
million as a revision to the estimated loss recorded in the first quarter of
2001 for the disposal of ThermoMicroscopes; $1.5 million of asset writedowns;
and $0.5 million for a post-closing adjustment on two businesses sold in 2000.
Optical Technologies
Sales in the Optical Technologies segment decreased $15.3 million to
$88.6 million in the second quarter of 2002. The unfavorable effects of currency
translation resulted in a decrease in revenues of $0.4 million in 2002. Sales
increased $0.6 million due to the acquisition of a product line, net of a
divestiture. Excluding the effect of currency translation, an acquisition, and a
divestiture, revenues decreased $15.5 million, or 15%. The decrease was due to
the severe slowdown in the semiconductor and telecommunication industries that
has adversely affected a number of the segment's businesses. These industries
are highly cyclical and have experienced downturns that began in 2001. The
Company expects that the slowdowns in semiconductor and telecommunication
markets will continue to result in unfavorable revenue and profitability
comparisons with corresponding prior-year periods for at least the near-term. A
prolonged downturn could adversely affect the realizability of the segment's
inventories, which would result in charges for impairment.
The segment's backlog decreased 8% during the first six months of 2002 to
$143.0 million from year-end 2001. Having completed the acquisition of the
minority interest in Spectra-Physics (Note 12), the Company expects in the third
quarter of 2002 to conform Spectra-Physics' policy concerning the determination
of backlog from its current and historical practice of including orders expected
to ship within 12 months to the prevailing practice at the Company's other
businesses of including in backlog orders expected to ship within six months.
The Company expects that the conforming adjustment will reduce the segment's
backlog by approximately $37-$42 million as of June 29, 2002, and by a
comparable amount at December 29, 2001.
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THERMO ELECTRON CORPORATION
Second Quarter 2002 Compared With Second Quarter 2001 (continued)
Operating income margin was negative 10.5% in the second quarter of 2002,
compared with negative 0.9% in the second quarter of 2001. Excluding
restructuring and unusual costs, net, of $11.4 million in 2002 and $8.5 million
in 2001, and goodwill amortization of $1.1 million in 2001, operating income
margin was 2.4% in 2002 and 8.4% in 2001. The decrease in operating income
margin was due to lower revenues at each of the segment's principal businesses.
In the second quarter of 2002, the segment recorded restructuring and
unusual charges of $11.4 million, including $4.9 million of cash costs
principally for severance and abandoned-equipment leases as well as $0.7 million
for the settlement of litigation (Note 15). In addition, this segment wrote off
assets totaling $5.5 million, including $5.3 million of abandoned
telecommunications equipment and $0.2 million of goodwill on a small business
held for sale. The segment also recorded $1.0 million of charges to cost of
revenues, principally for a discontinued product line (Note 13). Restructuring
and unusual costs, net, in 2001 include $6.6 million of charges to cost of
revenues for inventories; $2.2 million of cash costs for severance, abandoned
facilities, and other exit costs; and income of $0.3 million from the sale of a
facility.
Other Income (Expense), Net
The Company reported other income, net, of $38.3 million in the second
quarter of 2002 and other expense, net, of $0.1 million in the second quarter of
2001 (Note 4). Other income (expense), net, includes interest income, interest
expense, equity in earnings of unconsolidated subsidiaries in 2001, gain (loss)
on investments, net, and other items, net. Interest income decreased to $12.6
million in 2002 from $15.8 million in 2001, primarily due to lower invested cash
balances following the repurchase of Company securities and the acquisition of
the minority interest in Spectra-Physics. The Company expects that a trend of
lower market interest rates in 2002 will continue to adversely affect the yield
it earns as maturing investments are reinvested at lower market rates. Interest
expense decreased to $10.2 million in 2002 from $18.5 million in 2001, as a
result of the redemption, maturity, and repurchase of debentures, offset in part
by interest on borrowings under securities-lending arrangements (Note 11).
During 2002 and 2001, the Company had gains on sale of investments, net,
of $36.0 million and $1.3 million, respectively. The 2002 gain includes $31.6
million from the sale of 756,000 shares of FLIR Systems, Inc. Of the total gain
from the sale of FLIR shares, $8.8 million represents a recovery of previous
writedowns on the shares that were sold during the period. The Company recorded
income from equity in earnings of unconsolidated subsidiaries of $1.1 million in
2001, which primarily relates to the investment in FLIR. Following a reduction
in the Company's percentage ownership of FLIR to less than 20%, the Company no
longer reports its pro-rata share of FLIR's earnings but instead accounts for
its remaining investment as an available-for-sale security (Note 4).
Provision for Income Taxes
The Company's effective tax rate was 32.6% and 38.6% in the second
quarter of 2002 and 2001, respectively. Excluding restructuring and unusual
costs or income, the effective tax rate was 31.8% and 38.6% in 2002 and 2001,
respectively. The effective tax rate decreased in 2002, primarily due to the
absence of nondeductible goodwill amortization following the adoption of SFAS
No. 142 and, to a lesser extent, a reorganization in Europe that resulted in a
more tax-efficient corporate structure. The effective tax rate exceeded the
statutory federal income tax rate in 2001 due to the impact of state income
taxes and nondeductible expenses, which included goodwill amortization.
Excluding restructuring and unusual costs or income, and the amortization of
goodwill, the effective tax rate was 33.5% in the second quarter of 2001.
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THERMO ELECTRON CORPORATION
Second Quarter 2002 Compared With Second Quarter 2001 (continued)
Minority Interest Income
The Company recorded minority interest income of $0.8 million in the
second quarter of 2001, representing minority shareholders' allocable share of a
loss at Spectra-Physics. Following the acquisition of the minority interest in
Spectra-Physics in February 2002 (Note 12), the Company has no minority interest
income or expense.
Income from Continuing Operations
Income from continuing operations before extraordinary item was $49.5
million in the second quarter of 2002, compared with $9.4 million in the second
quarter of 2001. Results in both periods were affected by unusual items,
discussed above. Excluding the unusual items in both periods, income from
continuing operations before extraordinary item increased to $40.2 million in
2002 from $31.4 million in 2001 due to the absence of goodwill amortization in
2002, offset in part by the reasons discussed above.
Discontinued Operations
As a result of new tax regulations concerning deductible losses from
divested businesses, the Company revised its estimate of the tax consequences of
business disposals in discontinued operations and recorded a tax benefit of
$19.0 million in the second quarter of 2002.
The Company sold a substantial portion of its discontinued
power-generation business during the second quarter of 2001 for $238 million and
realized a net of tax gain of $15.6 million on the disposition.
First Six Months 2002 Compared With First Six Months 2001
Continuing Operations
Sales in the first six months of 2002 were $1.000 billion, a decrease of
$115.1 million from the first six months of 2001. Excluding the effect of
acquisitions, divestitures, and currency translation, revenues decreased $83.1
million, or 8%. Currency translation had a net unfavorable effect on revenues in
the six-month period as discussed below by segment, due to the strengthening of
the U.S. dollar relative to other currencies of countries in which the Company
operates.
Operating income was $71.9 million in the first six months of 2002,
compared with $54.0 million in the first six months of 2001. Segment operating
income increased to $95.4 million in 2002 from $79.0 million in 2001. Operating
and segment operating income in the first six months of 2002 were affected by
charges associated with a restructuring plan initiated during the fourth quarter
of 2001, other restructuring actions initiated in 2002, and certain other
unusual income/costs, net (Note 13). Operating and segment operating income in
the first six months of 2001 were affected by charges associated with a
restructuring plan initiated during the second quarter and certain other unusual
charges, net. The unusual items in both periods are discussed by segment below.
Excluding these unusual costs, which totaled $23.9 million in 2002 and $43.0
million in 2001, segment operating income was $119.2 million in 2002 and $122.0
million in 2001. The 2001 period included $20.1 million of goodwill
amortization. Amortization of goodwill ceased following the adoption of SFAS No.
142, effective in 2002 (Note 8). Excluding goodwill amortization and unusual
items, segment operating income totaled $142.1 million in 2001. Segment
operating income excluding goodwill amortization and unusual items decreased in
2002 due to lower revenues and profitability at certain businesses discussed
below.
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THERMO ELECTRON CORPORATION
First Six Months 2002 Compared With First Six Months 2001 (continued)
Life and Laboratory Sciences
Sales in the Life and Laboratory Sciences segment decreased $2.4 million
to $543.1 million in the first six months of 2002. The unfavorable effects of
currency translation resulted in a decrease in revenues of $1.0 million in 2002.
Sales decreased $0.2 million due to divestitures, net of acquisitions. Excluding
the effect of currency translation, divestitures, and acquisitions, revenues
decreased $1.3 million. Weakened demand for spectroscopy instruments and
sample-preparation products was substantially offset by strong sales of mass
spectrometry equipment as well as increased sales of histology and cytology
products.
Operating income margin increased to 15.8% in the first six months of
2002 from 10.8% in the first six months of 2001. The segment's margin increased
primarily due to ceasing goodwill amortization due to the adoption of SFAS No.
142 in 2002 and the inclusion of unusual costs in the 2001 period. Excluding
restructuring and unusual costs, net, of $3.3 million in 2002 and $13.1 million
in 2001, and goodwill amortization of $11.8 million in 2001, operating income
margin was 16.4% in 2002 and 15.4% in 2001. Cost reduction and productivity
measures undertaken in 2001 and 2002 contributed to the improved margin. In the
first six months of 2002, the segment recorded restructuring and unusual cash
costs of $3.6 million, primarily for employee retention and severance at
businesses being consolidated, and charges to cost of revenues of $0.6 million,
principally for a discontinued product line. In addition, the segment wrote down
$0.1 million of fixed assets and realized a net gain of $1.0 million on the sale
of a product line, two small business units, and a building (Note 13).
Restructuring and unusual costs, net, in 2001 included cash costs of $4.6
million, primarily for severance and abandoned facilities; $3.4 million of
charges to cost of revenues, principally for discontinued product lines; a
charge of $3.4 million for the writeoff of in-process research and development
at an acquired business; $2.2 million of asset writedowns; and a $0.5 million
gain on the sale of product line.
Measurement and Control
Sales in the Measurement and Control segment decreased $69.3 million to
$293.4 million in the first six months of 2002. Sales decreased $30.1 million
due to divestitures, net of an acquisition. The favorable effects of currency
translation resulted in an increase in revenues of $0.2 million in 2002.
Excluding the effect of divestitures, an acquisition, and currency translation,
revenues decreased $39.5 million, or 12%. The decrease was due to a decline in
revenues in each of the segment's principal businesses due to economic
conditions facing customers, particularly in the semiconductor, energy, and
steel industries.
The principal divestitures referenced above included the businesses
discussed in the results of the second quarter and the April 2001 sale of the
CAC and Mid South businesses, which provide the oil and gas industry with
wellhead safety and control products.
Operating income margin increased to 9.8% in the first six months of 2002
from 3.6% in the first six months of 2001, primarily due to restructuring and
unusual costs in 2001 and ceasing amortization of goodwill due to the adoption
of SFAS No. 142 in 2002. Operating income margin, excluding restructuring and
unusual costs, net, of $0.9 million in 2002 and $20.9 million in 2001, and
goodwill amortization of $6.1 million in 2001, decreased to 10.1% in 2002 from
11.1% in 2001. The decrease in operating income margin resulted primarily from
the decrease in revenues, offset in part by the effects of cost reduction and
productivity measures undertaken in 2001 and 2002. In the first six months of
2002, the segment recorded restructuring and unusual costs, net, of $0.9
million, including $3.3 million of cash costs associated with the restructuring
actions initiated in 2001 and gains totaling $2.6 million from the favorable
resolution of a dispute on a business sold in 2000 and the sale of two small
business units and a building, offset in part by and a charge of $0.2 million,
primarily for asset impairment of a building held for sale (Note 13).
Restructuring and unusual costs, net, in 2001 include $8.2 million of cash
costs, primarily for severance and abandoned facilities; charges of $6.4 million
to reduce the carrying value of ThermoMicroscopes to disposal value; $3.3
million of charges to cost of revenues, principally for discontinued product
lines; $1.5 million of asset writedowns; $1.0 million for impairment of a note
receivable; and $0.5 million for a post-closing adjustment on two businesses
sold in 2000.
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THERMO ELECTRON CORPORATION
First Six Months 2002 Compared With First Six Months 2001 (continued)
Optical Technologies
Sales in the Optical Technologies segment decreased $45.1 million to
$168.5 million in the first six months of 2002. The unfavorable effects of
currency translation resulted in a decrease in revenues of $1.4 million in 2002.
Sales increased $0.4 million due to the acquisition of a product line, net of a
divestiture. Excluding the effect of currency translation, an acquisition, and a
divestiture, revenues decreased $44.1 million, or 21%. The decrease was due to a
severe slowdown in the semiconductor and telecommunication industries that has
adversely affected a number of the segment's businesses. These industries are
highly cyclical and have experienced downturns that began in 2001.
Operating income margin was negative 11.5% in the first six months of
2002, compared with positive 3.3% in the first six months of 2001. Excluding
restructuring and unusual costs, net, of $19.7 million in 2002 and $8.9 million
in 2001, and goodwill amortization of $2.3 million in 2001, operating income
margin was 0.1% in 2002 and 8.5% in 2001. The decrease in operating income
margin was due to lower revenues at each of the segment's principal businesses
and in particular at Spectra-Physics, where the decline in revenues led to
operating losses. The Company initiated additional restructuring actions at
Spectra-Physics in 2002, following those announced in the fourth quarter of
2001. These actions are discussed below and in Note 13.
In the first six months of 2002, the segment recorded restructuring and
unusual charges of $19.7 million, including $11.7 million of cash costs
principally for abandoned-equipment leases and severance associated with
suspended telecom initiatives (Note 13). The cash costs include $0.7 million for
the settlement of litigation (Note 15). In addition, this segment wrote off
assets totaling $6.2 million, including $6.0 million of abandoned fixed assets
and $0.2 million of goodwill at a business held for sale. The segment also
recorded a charge of $0.8 million resulting from the exchange of options to
purchase shares of Spectra-Physics for options to purchase shares of Thermo
Electron following the acquisition of the minority interest in this business in
February 2002 (Note 12). During the first six months of 2002, the segment
recorded $1.0 million of charges to cost of revenues, principally for
discontinued product lines. Restructuring and unusual costs, net, in 2001
included $6.6 million of charges to cost of revenues for provisions for
inventories; $2.2 million of cash costs for severance, abandoned facilities, and
other exit costs; a $0.4 million charge to write off costs associated with a
cancelled financing at Spectra-Physics, and $0.3 million of income from the sale
of a facility.
Other Income (Expense), Net
The Company reported other income, net, of $99.3 million in the first six
months of 2002 and other expense, net, of $3.9 million in the first six months
of 2001 (Note 4). Interest income decreased to $27.0 million in 2002 from $33.5
million in 2001, primarily due to lower invested cash balances following the
repurchase of Company securities and the acquisition of the minority interest in
Spectra-Physics. Interest expense decreased to $23.7 million in 2002 from $38.0
million in 2001, as a result of the redemption, maturity, and repurchase of
debentures as well as entering into an interest rate swap arrangement (Note 10),
offset in part by interest on borrowings under securities-lending arrangements
(Note 11).
During 2002, the Company had gains on sale of investments, net, of $94.0
million, compared with a loss on investments, net, of $0.8 million in 2001. The
2002 gain includes $87.9 million from the sale of 2,006,000 shares of FLIR. Of
the total gain from the sale of FLIR shares, $23.2 million represents a recovery
of previous writedowns on the shares that were sold during the period. Of the
loss on investments recorded in 2001, $2.0 million arose as a result of
impairment of an available-for-sale security that the Company deemed other than
temporary. The security was a preacquisition asset of an acquired business. The
Company recorded income from equity in earnings of unconsolidated subsidiaries
of $2.2 million in 2002 and $1.3 million in 2001, which primarily related to the
investment in FLIR through the first quarter of 2002.
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THERMO ELECTRON CORPORATION
First Six Months 2002 Compared With First Six Months 2001 (continued)
Provision for Income Taxes
The Company's effective tax rate was 33.7% and 39.2% in the first six
months of 2002 and 2001, respectively. Excluding restructuring and unusual costs
or income, the effective tax rate was 32.4% and 39.0% in 2002 and 2001,
respectively. The effective tax rate decreased in 2002, primarily due to the
absence of nondeductible goodwill amortization following the adoption of SFAS
No. 142 and, to a lesser extent, a reorganization in Europe that resulted in a
more tax-efficient corporate structure. The effective tax rate exceeded the
statutory federal income tax rate in 2001 due to the impact of state income
taxes and nondeductible expenses, which included goodwill amortization.
Excluding restructuring and unusual costs or income, and the amortization of
goodwill, the effective tax rate was 34.0% in the first six months of 2001.
Minority Interest Income
The Company recorded minority interest income of $0.3 million and $0.8
million in the first six months of 2002 and 2001, respectively, representing
minority shareholders' allocable share of losses at Spectra-Physics through the
date on which the Company acquired the minority interest in this subsidiary in
February 2002 (Note 12).
Income from Continuing Operations
Income from continuing operations before extraordinary item was $113.9
million in the first six months of 2002, compared with $31.2 million in the
first six months of 2001. Results in both periods were affected by unusual
items, discussed above. Excluding the unusual items in both periods, income from
continuing operations before extraordinary item increased to $73.9 million in
2002 from $60.9 million in 2001 due to the absence of goodwill amortization in
2002, offset in part by the reasons discussed above.
Extraordinary Item
The Company repurchased and redeemed debentures during the first six
months of 2002, resulting in an extraordinary charge of $0.7 million, net of tax
(Note 5).
Cumulative Effect of Change in Accounting Principle
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, in the first quarter of 2001 and recorded
an after-tax charge of $1.0 million representing the cumulative effect of the
change in accounting principle.
Discontinued Operations
During the first quarter of 2002, the Company sold the last remaining
component of its former power-generation business and realized a gain from the
disposition totaling $13.0 million, principally for previously unrecognized tax
benefits that were realized upon the sale. As a result of new tax regulations
concerning deductible losses from divested businesses, the Company revised its
estimate of the tax consequences of business disposals in discontinued
operations and recorded a tax benefit of $19.0 million in the second quarter of
2002.
In February 2001, the Company sold Thermo Cardiosystems Inc. to Thoratec
Corporation in exchange for 19.3 million shares of Thoratec common stock.
Certain restrictions limit the timing of the Company's ability to sell these
shares, although the restrictions fully lapse in August 2002. The Company
recorded an after-tax charge of $66.0 million in the first quarter of 2001 for a
decline in market value of Thoratec common stock as a loss on disposal of
discontinued operations. During the first quarter of 2002, the Company sold 6.9
million shares of Thoratec for net
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THERMO ELECTRON CORPORATION
First Six Months 2002 Compared With First Six Months 2001 (continued)
proceeds of $105 million, and realized an after-tax gain of $38.4 million as a
gain on disposal of discontinued operations. Following the sale of shares in
2002, the Company owned less than 20% of Thoratec's outstanding shares and began
accounting for its investment as an available-for-sale security in continuing
operations in the first quarter of 2002 with unrealized gains or losses recorded
as part of accumulated other comprehensive items in the accompanying 2002
balance sheet (Note 14).
The Company sold a substantial portion of its discontinued
power-generation business in June 2001 for $238 million and realized a net of
tax gain of $15.6 million on the disposition.
Liquidity and Capital Resources
Consolidated working capital was $821.0 million at June 29, 2002,
compared with $823.2 million at December 29, 2001. Included in working capital
were cash, cash equivalents, and short-term available-for-sale investments of
$976.4 million at June 29, 2002, compared with $1.042 billion at December 29,
2001. In addition, the Company had $9.4 million of long-term available-for-sale
investments at December 29, 2001.
Operating activities used cash of $49.1 million during the first six
months of 2002. The use of $50.7 million of cash by discontinued operations was
offset in part by cash of $1.6 million provided by continuing operations. A
decrease in other current liabilities used $39.5 million of cash from continuing
operations, including $17.0 million for restructuring actions, $11.9 million of
accrued payroll and employee benefits due to timing of payments, and $8.1
million of accrued interest, principally due to the debt redemption discussed in
Note 5. The Company's cash flow from continuing operations in the first six
months of 2002 was reduced by income tax payments of approximately $34 million
related to gains from the sale of investments. The principal cash outflows from
discontinued operations were the payment of liabilities including the settlement
of litigation (Note 15).
In connection with certain restructuring actions undertaken by the
Company's continuing operations, the Company had accrued $43.7 million for
restructuring costs at June 29, 2002. The Company expects to pay approximately
$20 million of this amount for severance, employee retention, lease obligations,
and other costs primarily through 2002. The balance will be paid through the
expiration of additional lease obligations through 2012. In addition, at June
29, 2002, the Company had accrued $7.8 million for acquisition expenses. Accrued
acquisition expenses included $0.9 million of severance obligations, which the
Company expects to pay primarily through 2002. The balance primarily represents
abandoned-facility payments and will be paid over the remaining terms of the
leases through 2014.
During the first six months of 2002, the primary investing activities of
the Company's continuing operations, excluding available-for-sale investment
activities, included the sale of other investments, acquisitions, the collection
of notes receivable, the purchase of shares of a majority-owned subsidiary, and
the purchase of property, plant, and equipment. The Company's continuing
operations received proceeds of $65.2 million from the sale of other
investments, principally shares of FLIR (Note 4). In addition, the Company's
continuing operations expended $46.2 million for acquisitions (Note 2), $22.0
million to purchase the remaining minority-owned shares of its Spectra-Physics
subsidiary (Note 12), and $19.9 million for purchases of property, plant, and
equipment, net of dispositions. The Company's continuing operations collected
$48.6 million from notes receivable, principally the repayment of Viasys
Healthcare Inc.'s $33.4 million principal amount note in May 2002 and repayments
from Trimble Navigation Limited in March 2002 (Note 9). In July 2002, the
Company acquired the radiation-monitoring products business of Saint-Gobain for
$30 million in cash and sold its Thermo BLH and Thermo Nobel businesses for
$18.5 million in cash (Note 17). During the first six months of 2002, investing
activities of the Company's discontinued operations provided $106.4 million of
cash, primarily representing proceeds of $105 million from the sale of Thoratec
common stock (Note 14).
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THERMO ELECTRON CORPORATION
Liquidity and Capital Resources (continued)
The Company's financing activities used $306.4 million of cash during the
first six months of 2002, including $306.5 million for continuing operations.
During the first six months of 2002, the Company's continuing operations
expended $456.3 million to redeem all of its outstanding 4 1/4% and 4 5/8%
subordinated convertible debentures due 2003. The redemption price was 100% of
the principal amount of the debentures, plus accrued interest. The Company
increased short-term notes payable by $345.9 million, primarily to partially
fund the debt redemption (Note 11). The Company's continuing operations received
net proceeds of $12.5 million from the exercise of employee stock options.
During the first six months of 2002, the Company expended $208.5 million to
repurchase its securities. As of June 29, 2002, the Company had approximately
$80 million remaining under Board of Directors' authorizations to repurchase its
own securities.
The Company has no material commitments for purchases of property, plant,
and equipment and expects that for all of 2002, such expenditures will
approximate $50 - $60 million.
As of June 29, 2002, the Company's net debt (debt, net of cash and
available-for-sale investments) totaled $131 million. The Company's net
debt/liquidity position in the future will be primarily affected by the level of
cash flow from operations and the amount of cash expended on acquisitions and
repurchases of the Company's securities. The Company believes that its existing
resources together with cash it expects to generate from operations are
sufficient to meet the working capital requirements of its existing businesses
for the foreseeable future, including at least the next 24 months.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk from changes in interest rates,
currency exchange rates, and equity prices has not changed materially from its
exposure at year-end 2001, except that a 10% decrease in market interest rates
at June 29, 2002, would result in a negative impact to the Company of $1 million
on the net fair value of its interest-sensitive financial instruments; a 10%
decrease in market equity prices at June 29, 2002, would result in a negative
impact to the Company of $12 million on the net fair value of its
price-sensitive equity financial instruments; and a 100-basis point increase in
90-day LIBOR at June 29, 2002, would increase the Company's annual pre-tax
interest expense by $3 million.
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Thermo Electron wishes to caution readers that
the following important factors, among others, in some cases have affected, and
in the future could affect, Thermo Electron's actual results and could cause its
actual results in 2002 and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, Thermo Electron.
Thermo Electron must develop new products, adapt to rapid and significant
technological change, and respond to introductions of new products in order to
remain competitive. Thermo Electron's growth strategy includes significant
investment in and expenditures for product development, including in the area of
proteomics. Thermo Electron sells its products in several industries that are
characterized by rapid and significant technological changes, frequent new
product and service introductions, and enhancements and evolving industry
standards. Without the timely introduction of new products, services, and
enhancements, Thermo Electron's products and services will likely become
technologically obsolete over time, in which case its revenue and operating
results would suffer.
Thermo Electron's customers use many of its products to develop, test,
and manufacture their own products. As a result, Thermo Electron must anticipate
industry trends and develop products in advance of the commercialization of its
customers' products. If it fails to adequately predict its customers' needs and
future activities, Thermo Electron may invest heavily in research and
development of products and services that do not lead to significant revenue.
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
Many of its products and products under development are technologically
innovative and require significant planning, design, development, and testing at
the technological, product, and manufacturing-process levels. These activities
require Thermo Electron to make significant investments.
Products in Thermo Electron's markets undergo rapid and significant
technological change because of quickly changing industry standards and the
introduction of new products and technologies that make existing products and
technologies uncompetitive or obsolete. Thermo Electron's competitors may adapt
more quickly to new technologies and changes in customers' requirements than
Thermo Electron can. The products Thermo Electron is currently developing, or
those it will develop in the future, may not be technologically feasible or
accepted by the marketplace, and its products or technologies could become
uncompetitive or obsolete.
Thermo Electron sells its products and services to a number of companies
that operate in cyclical industries, which could adversely affect its results of
operations when those industries experience a downturn. The growth and
profitability of certain of Thermo Electron's businesses depend in part on sales
to industries that are subject to cyclical downturns and are experiencing
slowing trends. For example, Thermo Electron's Optical Technologies segment
depends in part on sales to the semiconductor industry and the growth and
profitability of Thermo Electron's Measurement and Control segment depends in
part on sales to the steel and cement industries. A prolonged slowdown in these
industries would adversely affect sales by these segments, which in turn could
adversely affect Thermo Electron's revenues and results of operations.
Changes in governmental regulations may reduce demand for Thermo
Electron's products or increase its expenses. Thermo Electron competes in many
markets in which it and its customers must comply with federal, state, local,
and international regulations, such as environmental, health and safety, and
food and drug regulations. Thermo Electron develops, configures, and markets its
products to meet customer needs created by those regulations. Any significant
change in regulations could reduce demand for Thermo Electron's products. For
example, many of Thermo Electron's instruments are marketed to the
pharmaceutical industry for use in discovering and developing drugs. Changes in
the U.S. Food and Drug Administration's regulation of the drug discovery and
development process could have an adverse effect on the demand for these
products.
Demand for some of Thermo Electron's products depends on capital spending
policies of its customers and on government funding policies. Thermo Electron's
customers include manufacturers of semiconductors and products incorporating
semiconductors, pharmaceutical and chemical companies, laboratories,
universities, healthcare providers, government agencies, and public and private
research institutions. Many factors, including public policy spending
priorities, available resources, and 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. For example, as a
result of the continuing recession, a customer of Thermo Electron's Optical
Technologies segment has reduced its capital expenditure budget and cancelled
$1.0 million in laser orders.
Thermo Electron faces a number of challenges in integrating its
businesses. Thermo Electron has historically operated its businesses largely as
autonomous, unaffiliated operations. As part of its reorganization, Thermo
Electron has begun to manage these operations in a more coordinated manner. The
following factors may make it difficult to successfully integrate and
consolidate Thermo Electron's operations:
- Thermo Electron's success in integrating these businesses depends on
its ability to coordinate geographically separate organizations and integrate
personnel with different business backgrounds and corporate cultures.
- Thermo Electron's ability to combine these businesses requires
coordination of previously autonomous administrative, sales and marketing,
distribution, and accounting and finance functions, and expansion and
integration of information and management systems.
- The integration process could be disruptive to Thermo Electron's
businesses.
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
Moreover, Thermo Electron may not be able to realize all of the cost
savings and other benefits that it expects to result from the integration
process.
It may be difficult for Thermo Electron to expand because some of the
markets for its products are not growing. Some of the markets in which Thermo
Electron competes have been flat or declining over the past several years. To
address this issue, Thermo Electron is pursuing a number of strategies to
improve its internal growth, including:
- finding new markets for its products, including in the area of
proteomics;
- developing new applications for its technologies;
- combining sales and marketing operations in appropriate markets to
compete more effectively;
- actively funding research and development; and
- strengthening its presence in selected geographic markets.
Thermo Electron may not be able to successfully implement these
strategies, and these strategies may not result in growth of Thermo Electron's
business.
As a result of the spin-off of Kadant, Thermo Electron remains as the
guarantor of indebtedness issued by Kadant even though Thermo Electron no longer
controls Kadant's business or operations. Thermo Electron has guaranteed the
payment of principal and interest on $153 million principal amount of debentures
issued by Kadant, the outstanding principal balance of which was $88.3 million
as of June 29, 2002. These debentures mature in July 2004. Thermo Electron
remains liable as a guarantor for this obligation following the spin-off,
although it no longer controls the business or operations of Kadant.
Thermo Electron has significant international operations, which entail
the risk that exchange rate fluctuations may negatively affect demand for its
products and its profitability. International revenues account for a substantial
portion of Thermo Electron's revenues, and Thermo Electron intends to continue
expanding its presence in international markets. In 2001, Thermo Electron's
international revenues from continuing operations, including export revenues
from the United States, accounted for approximately 50% of its total revenues.
International revenues are subject to the risk that changes in exchange rates
may adversely affect product demand and the profitability in U.S. dollars of
products and services provided by Thermo Electron in international markets,
where payment for Thermo Electron's products and services is made in the local
currency. For example, in fiscal 2001, the unfavorable effects of currency
translation decreased revenues of Thermo Electron's continuing operations by
$46.5 million.
Thermo Electron has acquired several companies and businesses; as a
result it has recorded significant goodwill on its balance sheet, which it must
continually evaluate for potential impairment. Thermo Electron has acquired
significant intangible assets, including approximately $1.4 billion of goodwill
that it has recorded on its balance sheet as of June 29, 2002. Thermo Electron
assesses the future useful life of the goodwill it has on its books whenever
events or changes in circumstances indicate that the current useful life has
diminished. These events or circumstances generally include operating losses or
a significant decline in earnings associated with the acquired business or
asset. Thermo Electron's ability to realize the value of the goodwill that it
has recorded as a result of its acquisition of the minority interests in its
formerly publicly-traded subsidiaries will depend on the future cash flows of
these businesses. These cash flows in turn depend in part on how well Thermo
Electron has integrated these businesses.
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THERMO ELECTRON CORPORATION
Item 4 - Submission of Matters to a Vote of Security Holders
On May 15, 2002, at the Annual Meeting of Stockholders, the stockholders
elected three incumbent directors to a three-year term expiring in 2005. The
directors elected at the meeting were: John L. LaMattina, Michael E. Porter,
and Richard F. Syron. Dr. LaMattina received 147,400,870 shares voted in favor
of his election and 1,987,215 shares were withheld. Dr. Porter received
147,414,420 shares voted in favor of his election and 1,973,665 shares were
withheld. Mr. Syron received 147,398,847 shares voted in favor of his election
and 1,989,238 shares were withheld. No abstentions or broker "non-votes" were
recorded on the election of directors.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index on page immediately preceding exhibits.
(b) Reports on Form 8-K
On June 4, 2002, the Company filed a Current Report on Form 8-K with
respect to the change in certifying accountant for the Company's 401(k) plan.
On June 21, 2002, the Company filed a Current Report on Form 8-K with
respect to the change in certifying accountant for the Company.
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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 14th day of August 2002.
THERMO ELECTRON CORPORATION
/s/ Theo Melas-Kyriazi
---------------------------------------------------------
Theo Melas-Kyriazi
Vice President and Chief Financial Officer
/s/ Peter E. Hornstra
---------------------------------------------------------
Peter E. Hornstra
Corporate Controller and Chief Accounting Officer
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THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description
--------------------------------------------------------------------------------
10.1* Master Securities Loan Agreement between Thermo Electron Corporation
and JPMorgan Chase Bank.
10.2* Master Securities Loan Agreement between Thermo Electron Corporation
and ABN AMRO Inc.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
*Previously filed on Form 10-Q for the quarter ended June 29, 2002, filed
August 13, 2002.
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