UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended September 29, 2001
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-8002
THERMO ELECTRON CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2209186
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at October 26, 2001
Common Stock, $1.00 par value 177,790,684
PART I - Financial Information
Item 1 - Financial Statements
- -----------------------------
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
September 29, December 30,
(In thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 340,188 $ 505,524
Short-term available-for-sale investments, at quoted market
value (amortized cost of $861,165 and $510,312) 893,037 521,329
Accounts receivable, less allowances of $28,090 and $30,593 412,346 431,476
Unbilled contract costs and fees 24,523 18,520
Inventories:
Raw materials and supplies 159,751 169,885
Work in process 69,311 65,625
Finished goods (includes $18,515 and $33,605 at customer locations) 162,368 158,642
Deferred tax asset 156,236 148,051
Advance receivable from affiliate 34,111 -
Other current assets 41,705 75,007
Net assets of discontinued operations (Note 8) 28,312 371,470
---------- ----------
2,321,888 2,465,529
---------- ----------
Property, Plant, and Equipment, at Cost 503,542 484,555
Less: Accumulated depreciation and amortization 210,096 198,677
---------- ----------
293,446 285,878
---------- ----------
Long-term Available-for-sale Investments, at Quoted Market Value
(amortized cost of $6,086 and $9,883) 10,903 17,110
---------- ----------
Other Assets 219,465 183,974
---------- ----------
Goodwill 1,332,771 1,378,663
---------- ----------
Long-term Net Assets of Discontinued Operations (Note 8) 197,396 531,823
---------- ----------
$4,375,869 $4,862,977
========== ==========
<
2
>
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
September 29, December 30,
(In thousands except share amounts) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Current Liabilities:
Short-term obligations and current maturities of long-term obligations $ 96,050 $ 103,356
Advance payable to affiliates - 16,088
Accounts payable 115,610 139,662
Accrued payroll and employee benefits 76,137 78,483
Accrued income taxes 109,889 95,344
Deferred revenue 48,433 50,341
Accrued installation and warranty costs 33,660 37,058
Other accrued expenses (Notes 6 and 7) 218,891 208,219
---------- ----------
698,670 728,551
---------- ----------
Deferred Income Taxes and Other Deferred Items 48,213 47,230
---------- ----------
Long-term Obligations:
Senior convertible obligations 165,535 172,500
Senior notes 134,150 150,000
Subordinated convertible obligations 1,048,519 1,177,565
Other 9,072 28,418
---------- ----------
1,357,276 1,528,483
---------- ----------
Minority Interest 24,751 24,737
---------- ----------
Shareholders' Investment:
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized;
198,930,918 and 195,877,421 shares issued 198,931 195,877
Capital in excess of par value 1,732,508 1,681,452
Retained earnings (Note 8) 814,548 1,005,857
Treasury stock at cost, 21,263,983 and 13,708,863 shares (408,409) (246,228)
Deferred compensation (4,090) (6,640)
Accumulated other comprehensive items (Notes 2 and 9) (86,529) (96,342)
---------- ----------
2,246,959 2,533,976
---------- ----------
$4,375,869 $4,862,977
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
<
3
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
----------------------------
September 29, September 30,
(In thousands except per share amounts) 2001 2000
- --------------------------------------------------------------------------------------------------------
Revenues $512,941 $546,949
-------- --------
Costs and Operating Expenses:
Cost of revenues 284,455 320,601
Selling, general, and administrative expenses 148,318 152,987
Research and development expenses 41,962 40,611
Restructuring and other unusual costs (income), net (Note 7) 9,571 (76,781)
-------- --------
484,306 437,418
-------- --------
Operating Income 28,635 109,531
Other Income (Expense), Net (Note 3) 11,605 (36,377)
-------- --------
Income from Continuing Operations Before Provision for Income Taxes,
Minority Interest, and Extraordinary Item 40,240 73,154
Provision for Income Taxes (15,090) (66,043)
Minority Interest Income 527 170
-------- --------
Income from Continuing Operations Before Extraordinary Item 25,677 7,281
Income from Discontinued Operations (net of income tax provision and
minority interest of $4,090; Note 8) - 4,998
-------- --------
Income Before Extraordinary Item 25,677 12,279
Extraordinary Item (net of income tax provision of $362; Note 11) 602 -
-------- --------
Net Income $ 26,279 $ 12,279
======== ========
Earnings per Share from Continuing Operations Before Extraordinary Item
(Note 4):
Basic $ .14 $ .04
======== ========
Diluted $ .14 $ .04
======== ========
Earnings per Share (Note 4):
Basic $ .15 $ .07
======== ========
Diluted $ .14 $ .07
======== ========
Weighted Average Shares (Note 4):
Basic 180,280 175,978
======== ========
Diluted 182,823 180,440
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
<
4
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
----------------------------
September 29, September 30,
(In thousands except per share amounts) 2001 2000
- --------------------------------------------------------------------------------------------------------
Revenues $1,628,502 $1,703,503
---------- ----------
Costs and Operating Expenses:
Cost of revenues 906,700 942,311
Selling, general, and administrative expenses 463,983 489,641
Research and development expenses 131,033 135,157
Restructuring and other unusual costs (income), net (Note 7) 44,146 (85,763)
---------- ----------
1,545,862 1,481,346
---------- ----------
Operating Income 82,640 222,157
Other Income (Expense), Net (Note 3) 7,711 (68,680)
---------- ----------
Income from Continuing Operations Before Provision for Income Taxes,
Minority Interest, Extraordinary Item, and Cumulative Effect of Change
in Accounting Principle 90,351 153,477
Provision for Income Taxes (34,758) (99,968)
Minority Interest Income (Expense) 1,326 (10,051)
---------- ----------
Income from Continuing Operations Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle 56,919 43,458
Income from Discontinued Operations (net of income tax provision and
minority interest of $8,287; Note 8) - 9,016
Provision for Loss on Disposal of Discontinued Operations, Net (net of
income tax benefit of $22,741; Note 8) (50,440) -
---------- ----------
Income Before Extraordinary Item and Cumulative Effect of Change in
Accounting Principle 6,479 52,474
Extraordinary Item (net of income tax provision of $362 and $333; (Note 11) 602 532
---------- ----------
Income Before Cumulative Effect of Change in Accounting Principle 7,081 53,006
Cumulative Effect of Change in Accounting Principle (net of income
tax benefit and minority interest of $663 and $8,986; Note 9) (994) (12,918)
---------- ----------
Net Income $ 6,087 $ 40,088
========== ==========
Earnings per Share from Continuing Operations Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle (Note 4):
Basic $ .31 $ .27
========== ==========
Diluted $ .31 $ .25
========== ==========
Earnings per Share (Note 4):
Basic $ .03 $ .25
========== ==========
Diluted $ .03 $ .23
========== ==========
Weighted Average Shares (Note 4):
Basic 181,588 162,937
========== ==========
Diluted 185,019 165,224
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
<
5
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
----------------------------
September 29, September 30,
(In thousands) 2001 2000
- --------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 6,087 $ 40,088
Income from discontinued operations (Note 8) - (9,016)
Provision for loss on disposal of discontinued operations (Note 8) 50,440 -
--------- ---------
Income from continuing operations 56,527 31,072
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 74,080 74,593
Noncash restructuring and other unusual costs, net (Note 7) 8,421 21,934
Provision for losses on accounts receivable 3,028 4,609
Minority interest (income) expense (1,326) 10,051
Equity in (earnings) losses of unconsolidated subsidiaries (Note 7) (2,911) 41,089
Cumulative effect of change in accounting principle, net of
income tax benefit and minority interest (Note 9) 994 12,918
Change in deferred income taxes (7,235) 2,994
(Gain) loss on sale of businesses 11,443 (127,533)
Gain on investments, net (8,518) (6,601)
Extraordinary item, net of income taxes (Note 11) (602) (532)
Other noncash items, net 19,773 26,083
Other unusual income (511) (4,372)
Changes in current accounts, excluding the effects of acquisitions
and dispositions:
Accounts receivable (8,728) (7,912)
Inventories (27,321) (71,314)
Other current assets (19,873) (7,487)
Accounts payable (17,007) 6,500
Other current liabilities 24,458 (21,319)
--------- ---------
Net cash provided by (used in) continuing operations 104,692 (15,227)
Net cash provided by discontinued operations 21,422 130,022
--------- ---------
Net cash provided by operating activities 126,114 114,795
--------- ---------
Investing Activities:
Acquisitions, net of cash acquired (14,129) (15,769)
Acquisition of minority interests of subsidiaries - (303,390)
Proceeds from sale of businesses, net of cash divested 46,767 253,184
Purchases of available-for-sale investments (835,451) (331,641)
Proceeds from sale of available-for-sale investments 270,696 113,220
Proceeds from maturities of available-for-sale investments 217,618 344,109
Purchases of property, plant, and equipment (66,002) (49,387)
Proceeds from sale of property, plant, and equipment 10,976 20,809
Advance to affiliates (50,199) (96,571)
<
6
>
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
----------------------------
September 29, September 30,
(In thousands) 2001 2000
- --------------------------------------------------------------------------------------------------------
Investing Activities (continued):
Increase in other assets $ (4,312) $ (2,146)
Other 7,974 14,507
--------- ---------
Net cash used in continuing operations (416,062) (53,075)
Net cash provided by discontinued operations 477,368 269,836
--------- ---------
Net cash provided by investing activities 61,306 216,761
--------- ---------
Financing Activities:
Repayment of long-term obligations (40,186) (165,956)
Net proceeds from issuance of long-term obligations 253 7,071
Net proceeds from issuance of Company and subsidiary common stock 46,427 24,987
Purchases and redemption of Company and subsidiary common stock
and subordinated convertible debentures (307,530) (43,787)
Increase in short-term notes payable 18,308 8,554
Other (2,319) (2,153)
--------- ---------
Net cash used in continuing operations (285,047) (171,284)
Net cash provided by (used in) discontinued operations (191,073) 5,890
--------- ---------
Net cash used in financing activities (476,120) (165,394)
--------- ---------
Exchange Rate Effect on Cash of Continuing Operations 1,331 (9,141)
Exchange Rate Effect on Cash of Discontinued Operations 4,953 (8,114)
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents (282,416) 148,907
Cash and Cash Equivalents at Beginning of Period 636,252 357,215
--------- ---------
353,836 506,122
Cash and Cash Equivalents of Discontinued Operations at End of Period (13,648) (194,587)
--------- ---------
Cash and Cash Equivalents at End of Period $ 340,188 $ 311,535
========= =========
Noncash Activities:
Fair value of assets of acquired companies $ 18,161 $ 24,996
Cash paid for acquired companies (14,834) (17,272)
--------- ---------
Liabilities assumed of acquired companies $ 3,327 $ 7,724
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
<
7
>
THERMO ELECTRON CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Electron Corporation (the Company) without audit and, in the opinion
of management, reflect all adjustments of a normal recurring nature necessary
for a fair statement of the financial position at September 29, 2001, the
results of operations for the three- and nine-month periods ended September 29,
2001, and September 30, 2000, and the cash flows for the nine-month periods
ended September 29, 2001, and September 30, 2000. Certain prior-period amounts
have been reclassified to conform to the presentation in the current financial
statements. Interim results are not necessarily indicative of results for a full
year.
Historical financial results have been restated to reflect the Company's
power generation business as discontinued operations (Note 8). Historical
results have also been restated to reflect the Company's adoption of Securities
and Exchange Commission (SEC) Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." The consolidated balance sheet presented
as of December 30, 2000, has been derived from the consolidated financial
statements that have been audited by the Company's independent public
accountants. The consolidated financial statements and notes are presented as
permitted by Form 10-Q and do not contain certain information included in the
annual financial statements and notes of the Company. The consolidated financial
statements and notes included herein 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 30, 2000, filed with the SEC.
2. 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 foreign
currency translation adjustments, unrealized net of tax gains and losses on
available-for-sale investments, and, in 2001, unrealized net of tax gains and
losses on derivative instruments (Note 9). During the third quarter of 2001 and
2000, the Company had comprehensive income of $66.3 million and a comprehensive
loss of $16.2 million, respectively. During the first nine months of 2001 and
2000, the Company had comprehensive income of $16.0 million and a comprehensive
loss of $8.0 million, respectively.
3. Other Income (Expense), Net
The components of other income (expense), net, in the accompanying
statement of income are as follows:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 29, September 30, September 29, September 30,
(In thousands) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------
Interest Income $ 19,331 $ 9,970 $ 54,189 $ 27,574
Interest Expense (18,353) (20,493) (57,737) (65,145)
Equity in Earnings (Losses) of Unconsolidated
Subsidiaries 1,651 (26,027) 2,911 (41,089)
Gain on Investments, Net (Note 7) 9,325 229 8,518 6,601
Other Items, Net (349) (56) (170) 3,379
-------- -------- -------- --------
$ 11,605 $(36,377) $ 7,711 $(68,680)
======== ======== ======== ========
<
8
>
THERMO ELECTRON CORPORATION
4. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 29, September 30, September 29, September 30,
(In thousands except per share amounts) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------
Basic
Income from Continuing Operations Before
Extraordinary Item and Cumulative Effect
of Change in Accounting Principle $ 25,677 $ 7,281 $ 56,919 $ 43,458
Income from Discontinued Operations - 4,998 - 9,016
Loss on Disposal of Discontinued Operations, Net - - (50,440) -
Extraordinary Item 602 - 602 532
Cumulative Effect of Change in Accounting
Principle - - (994) (12,918)
-------- -------- -------- --------
Net Income $ 26,279 $ 12,279 $ 6,087 $ 40,088
-------- -------- -------- --------
Weighted Average Shares 180,280 175,978 181,588 162,937
-------- -------- -------- --------
Basic Earnings per Share:
Continuing operations before extraordinary
item and cumulative effect of change in
accounting principle $ .14 $ .04 $ .31 $ .27
Discontinued operations - .03 (.28) .06
Extraordinary item - - - -
Cumulative effect of change in accounting
principle - - (.01) (.08)
-------- -------- -------- --------
$ .15 $ .07 $ .03 $ .25
======== ======== ======== ========
<
9
>
THERMO ELECTRON CORPORATION
4. Earnings per Share (continued)
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 29, September 30, September 29, September 30,
(In thousands except per share amounts) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------
Diluted
Income from Continuing Operations Before
Extraordinary Item and Cumulative Effect
of Change in Accounting Principle $ 25,677 $ 7,281 $ 56,919 $ 43,458
Income from Discontinued Operations - 4,998 - 9,016
Loss on Disposal of Discontinued Operations,
Net - - (50,440) -
Extraordinary Item 602 - 602 532
Cumulative Effect of Change in Accounting
Principle - - (994) (12,918)
-------- -------- -------- ---------
Net Income 26,279 12,279 6,087 40,088
Effect of:
Majority-owned subsidiaries' dilutive
securities - continuing operations - - - (1,331)
Majority-owned subsidiaries' dilutive
securities - discontinued operations - (86) - (113)
-------- -------- -------- ---------
Income Available to Common
Shareholders, as Adjusted $ 26,279 $ 12,193 $ 6,087 $ 38,644
-------- -------- -------- ---------
Weighted Average Shares 180,280 175,978 181,588 162,937
Effect of:
Stock options 2,098 3,997 2,976 2,132
Convertible debentures 445 465 455 155
-------- -------- -------- ---------
Weighted Average Shares, as Adjusted 182,823 180,440 185,019 165,224
-------- -------- -------- ---------
Diluted Earnings per Share:
Continuing operations before
extraordinary item and cumulative
effect of change in accounting
principle $ .14 $ .04 $ .31 $ .25
Discontinued operations - .03 (.27) .05
Extraordinary item - - - -
Cumulative effect of change in accounting
principle - - (.01) (.08)
-------- -------- ------- --------
$ .14 $ .07 $ .03 $ .23
======== ======== ======== =========
Options to purchase 6,825,000 and 3,800,000 shares of common stock for the
third quarter of 2001 and 2000, respectively, and 4,845,000 and 5,283,000 shares
of common stock for the first nine months of 2001 and 2000, 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.
<
10
>
THERMO ELECTRON CORPORATION
4. Earnings per Share (continued)
The computation of diluted earnings per share for all periods excludes the
effect of assuming the conversion of the following of the Company's subordinated
convertible debentures because the effect would be antidilutive:
Conversion
Price per
Share at
Principal Interest September 29,
Amount Rate 2001
-------------------------------------------
(In thousands)
$478,695 4 1/4% $ 36.02
239,934 4% 39.97
165,535 4 1/2% 38.63
79,092 4 5/8% 38.41
90,523 4 3/8% 125.51
78,048 3 1/4% 46.75
35,029 4 7/8% 36.48
15,778 2 7/8% 31.61
As a result of the spinoff to shareholders discussed in Note 8, in July
2001 the conversion price of each of the Company's convertible debentures was
reduced to 95.3% of the conversion price prior to the spinoff.
5. Business Segment Information
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 29, September 30, September 29, September 30,
(In thousands) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------
Revenues:
Life Sciences $ 200,619 $ 189,911 $ 612,349 $ 571,240
Optical Technologies 119,373 129,605 398,298 352,528
Measurement and Control 196,050 232,017 629,775 793,234
Intersegment (a) (3,101) (4,584) (11,920) (13,499)
---------- ---------- ---------- ----------
$ 512,941 $ 546,949 $1,628,502 $1,703,503
========== ========== ========== ==========
Income from Continuing Operations Before
Provision for Income Taxes, Minority Interest,
Extraordinary Item, and Cumulative Effect of
Change in Accounting Principle:
Life Sciences (b) $ 24,080 $ 8,434 $ 65,963 $ 60,932
Optical Technologies (c) (188) 3,697 12,239 20,572
Measurement and Control (d) 16,207 110,126 40,930 173,303
---------- ---------- ---------- ----------
Total segment income (e) 40,099 122,257 119,132 254,807
Corporate and Other (f) 141 (49,103) (28,781) (101,330)
---------- ---------- ---------- ----------
$ 40,240 $ 73,154 $ 90,351 $ 153,477
========== ========== ========== ==========
<
11
>
THERMO ELECTRON CORPORATION
5. Business Segment Information (continued)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 29, September 30, September 29, September 30,
(In thousands) 2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------
Depreciation:
Life Sciences $ 4,257 $ 4,518 $ 12,373 $ 12,407
Optical Technologies 4,799 3,848 13,781 11,180
Measurement and Control 4,044 5,872 10,964 17,121
Corporate 602 289 1,497 912
---------- ---------- ---------- ----------
$ 13,702 $ 14,527 $ 38,615 $ 41,620
========== ========== ========== ==========
Amortization:
Life Sciences $ 5,776 $ 5,490 $ 17,236 $ 13,935
Optical Technologies 1,923 1,782 5,723 4,448
Measurement and Control 4,143 4,839 12,506 14,089
Corporate - - - 501
---------- ---------- ---------- ----------
$ 11,842 $ 12,111 $ 35,465 $ 32,973
========== ========== ========== ==========
During the third quarter of 2001, the Company transferred management
responsibility for its Thermo KeyTek business to the Optical Technologies
segment from the Measurement and Control segment. Prior period segment
information has been restated to reflect this change.
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Includes restructuring and other unusual costs of $0.3 million and $11.5
million in the third quarter and first nine months of 2001, respectively,
and $16.2 million in the third quarter and first nine months of 2000,
respectively.
(c) Includes restructuring and other unusual costs, net, of $2.3 million and
$13.7 million in the third quarter and first nine months of 2001,
respectively, and $6.3 million in the third quarter and first nine months of
2000, respectively.
(d) Includes restructuring and other unusual costs of $4.8 million and $25.2
million in the third quarter and first nine months of 2001, respectively,
and restructuring and other unusual income, net, of $85.4 million and $98.2
million in the third quarter and first nine months of 2000, respectively.
(e) Segment income is income before corporate general and administrative
expenses, other income and expense, minority interest expense, income taxes,
and extraordinary item.
(f) Includes corporate, general, and administrative expenses and other income
and expense. Includes corporate restructuring and other unusual costs, net,
of $2.2 million, $5.4 million, $7.1 million, and $9.2 million in the third
quarter of 2001 and 2000 and first nine months of 2001 and 2000,
respectively. Other income, net, in the third quarter of 2001 includes a
gain of $8.6 million on sale of shares of FLIR Systems, Inc. Other income,
net, in the first nine months of 2001 includes the gain from the sale of
FLIR shares and a charge of $2.0 million for impairment of an
available-for-sale investment. Other expense, net, in the third quarter and
first nine months of 2000 includes a charge of $26.1 million and $41.4
million, respectively, related to the Company's investment in FLIR, which is
accounted for under the equity method, and other unusual income of $0.6
million and $4.0 million, respectively, related to a subsidiary's early
adoption of SFAS No. 133.
<
12
>
THERMO ELECTRON CORPORATION
6. Accrued Acquisition Expenses
The Company has undertaken restructuring activities at certain 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.
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 30, 2000 $ 1,846 $ 510 $ 513 $ 7,167 $10,036
Payments (461) (150) (134) (602) (1,347)
Currency translation (12) (3) (4) (71) (90)
------- ------- ------- ------- -------
Balance at September 29, 2001 $ 1,373 $ 357 $ 375 $ 6,494 $ 8,599
======= ======= ======= ======= =======
The remaining accrued acquisition expenses for pre-1999 acquisitions
primarily 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 abandoned facilities at
Spectra-Physics include operating facilities in Sweden, Germany, and France with
obligations primarily through 2001. 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 2001.
The Company finalized its restructuring plans for Spectra-Physics and other 1999
acquisitions in 1999 and 2000.
The Company has not established material reserves for restructuring
businesses acquired in 2000 or the first nine months of 2001.
7. Restructuring and Other Unusual Costs (Income), Net
In response to a downturn in telecommunications, semiconductor, and other
markets served by the Company's businesses, the Company initiated restructuring
actions in the second quarter of 2001 in a number of business units to reduce
costs and shed unproductive assets. The restructuring and related actions
primarily consist of headcount reductions, discontinuing certain mature or
unprofitable product lines, providing a reserve for excess telecommunication
inventories at Spectra-Physics, Inc. (formerly Spectra-Physics Lasers, Inc.),
and consolidation of facilities to streamline operations and reduce costs. The
Company expects to incur an additional $1.6 million of restructuring costs in
the remainder of 2001 for charges that can not be recorded until incurred. The
Company expects that the restructuring actions initiated in the second quarter
of 2001 will be substantially completed by the end of 2001. The Company is
evaluating additional restructuring actions that it may undertake in the fourth
quarter of 2001, including its plan to eliminate up to 500 positions. The
Company has not finalized its plans nor quantified the expected cost of any such
actions.
<
13
>
THERMO ELECTRON CORPORATION
7. Restructuring and Other Unusual Costs (Income), Net (continued)
The Company recorded restructuring and other unusual charges, net, of $9.6
million during the third quarter of 2001, as detailed by segment below:
Measurement
Optical and
(In thousands) Life Sciences Technologies (a) Control Corporate Total
- ---------------------------------------------------------------------------------------------------------
Restructuring and Other
Unusual Costs, Net $ 329 $ 2,274 $ 4,789 $ 2,179 $ 9,571
======= ======= ======= ======= =======
The Company recorded restructuring and other unusual charges, net, of
$59.4 million during the first nine months of 2001, as detailed by segment
below:
Measurement
Optical and
(In thousands) Life Sciences Technologies (a) Control Corporate Total
- ---------------------------------------------------------------------------------------------------------
Cost of Revenues $ 1,838 $ 6,963 $ 4,476 $ - $13,277
Restructuring and Other
Unusual Costs, Net 9,630 6,723 20,739 7,054 44,146
Loss on Investments - - 1,983 - 1,983
------- ------- ------- ------- -------
$11,468 $13,686 $27,198 $ 7,054 $59,406
======= ======= ======= ======= =======
(a) During the third quarter of 2001, the Optical Technologies segment sold
350,000 shares of FLIR and recorded a gain of $8.6 million, including $4.5
million representing a recovery of amounts previously written down in 1999
and 2000. The gain was recorded in other income (expense), net, in the
accompanying 2001 statement of income.
The components of restructuring and unusual costs by segment are as
follows:
Life Sciences
- -------------
The Life Sciences segment recorded $0.3 million of restructuring and other
unusual costs, net, in the third quarter of 2001. The restructuring and other
unusual costs consisted of cash costs, primarily severance charges in addition
to those recorded in the second quarter of 2001.
In the second quarter of 2001, this segment recorded $7.8 million of
restructuring and other unusual costs. The segment recorded $1.8 million of
charges to cost of revenues, primarily for discontinued product lines, and $6.0
million of other costs. The other restructuring and unusual costs include $3.8
million of cash costs including $3.1 million for severance for 88 employees
across all functions, $0.6 million of ongoing lease costs through 2007 for
facilities described below, and $0.1 million of other costs. The charge also
includes $2.2 million of asset writedowns. The asset writedowns principally
include $1.8 million of goodwill and other intangibles for a small business unit
that was closed and $0.4 million of assets at facilities being closed. The
facility consolidations include closure of sales and service offices in Florida
and the United Kingdom and the transfer of their activities to other offices,
consolidation of two German factories into one facility, and relocation of a
factory to other facilities within Finland. Of the employees to be terminated,
76 had been severed as of September 29, 2001.
<
14
>
THERMO ELECTRON CORPORATION
7. Restructuring and Other Unusual Costs (Income), Net (continued)
In the first quarter of 2001, this segment recorded $3.3 million of
restructuring and other unusual costs, net. The restructuring and unusual costs
consisted of a charge of $3.4 million to write off in-process research and
development costs at an acquired business. This amount was determined through
established valuation techniques and was charged to expense upon acquisition
because technological feasibility had not been established and no future
alternative uses existed. This segment also recorded the reversal of $0.1
million of previously established reserves due to the settlement of certain
severance matters for less than had been accrued.
Optical Technologies
- --------------------
The Optical Technologies segment recorded $2.3 million of restructuring
and other unusual costs in the third quarter of 2001. The restructuring and
other unusual costs include $1.8 million of cash costs, including $1.6 million
for severance for 100 employees, primarily in manufacturing positions, and $0.2
million of other cash costs. The segment also recorded a $0.4 million loss on
the sale of a small business unit, and a $0.1 million asset writedown associated
with abandoned property.
In the second quarter of 2001, this segment recorded $11.0 million of
restructuring and other unusual costs, net. The segment recorded $7.0 million of
charges to cost of revenues, primarily for excess telecommunication inventories
at Spectra-Physics and discontinued product lines, and $4.0 million of other
costs, net. The excess telecommunication inventories resulted from a severe
slowdown in this market and the writedown reduced the carrying value of the
inventories to net realizable value. The other restructuring and unusual costs
include $3.7 million of cash costs, including $1.6 million for severance for 313
employees, primarily in manufacturing positions; $0.3 million of ongoing lease
costs through 2004 for facilities described below; and $1.8 million of other
exit costs. The other exit costs primarily represent cancellation fees for fixed
asset purchases and termination of distributor agreements. The segment also
recorded $0.6 million of asset writedowns, principally at facilities being
closed, and a gain on the sale of a facility of $0.3 million. The facility
consolidations include closure of sales offices in New Jersey, France, and
Germany and the transfer of their activities to other offices, and the
consolidation of distribution facilities within Europe. Of the employees
announced for termination in the second and third quarters of 2001, 326 had been
severed as of September 29, 2001.
In the first quarter of 2001, this segment recorded $0.5 million of
restructuring and unusual costs. The costs are primarily associated with an
abandoned financing at Spectra-Physics.
Measurement and Control
- -----------------------
The Measurement and Control segment recorded $4.8 million of restructuring
and other unusual costs, net, in the third quarter of 2001. The restructuring
and other unusual costs, net, include a $4.7 million net loss on the sale of
businesses, principally the segment's Pharos Marine unit, a marine navigation
equipment business. The segment also recorded $0.1 million of cash costs,
primarily for abandoned facilities.
In the second quarter of 2001, the segment recorded $14.8 million of
restructuring and other unusual costs. The segment recorded $4.5 million of
charges to cost of revenues, primarily for discontinued product lines, and $10.4
million of other costs. The other restructuring and unusual costs include $7.3
million of cash costs, including $5.2 million for severance for 169 employees
across all functions; $1.7 million of ongoing lease costs through 2004 for
facilities described below; and $0.4 million of other costs. The charge also
includes $2.5 million of asset writedowns and $0.5 million related to a
post-closing adjustment on two businesses sold in 2000. The asset writedowns
principally include $1.6 million of goodwill for an adjustment to a writedown
recorded in the first quarter of 2001 for the planned disposal of
ThermoMicroscopes and $0.9 million of assets at facilities being closed.
ThermoMicroscopes manufactures scanning probe microscopes and is a noncore
business that was sold in July 2001. The facility consolidations include closure
of a sales office in Sweden and the transfer of its activities to another
office, consolidation of two sales offices in the United Kingdom into one
office, and consolidation of manufacturing facilities within the United States
and the United Kingdom. Of the employees to be terminated, 89 had been severed
as of September 29, 2001.
<
15
>
THERMO ELECTRON CORPORATION
7. Restructuring and Other Unusual Costs (Income), Net (continued)
In the first quarter of 2001, this segment recorded $5.6 million of
restructuring and unusual costs, net. The segment recorded charges of $4.8
million for a writedown of goodwill to reduce the carrying value of
ThermoMicroscopes to estimated disposal value; $1.0 million for impairment of a
note receivable that was a pre-acquisition asset of a business acquired in 1999;
and $0.3 million of cash costs, primarily representing severance for 16
employees terminated in the first quarter of 2001 across all functions at the
segment's business that manufactures and sells quality control systems. The
segment also recorded a gain of $0.5 million on the sale of a product line.
This segment also recorded $2.0 million of other nonoperating charges in
the first quarter of 2001 to write down an available-for-sale investment that
was a pre-acquisition asset of a business acquired in 1999, due to an impairment
that the Company deemed other than temporary based upon recent market prices.
Corporate
- ---------
The Company recorded $2.2 million of restructuring and unusual costs at
its corporate office in the third quarter of 2001, all of which were cash costs.
This amount included $1.4 million of investment banking, consulting, and legal
fees associated with the Company's reorganization plan; and $0.8 million of
employee retention costs that are being accrued ratably over the period through
which the employees must work to qualify for a payment.
In the second quarter of 2001, the Company recorded $3.3 million of
restructuring and unusual costs at its corporate office. This amount included
$3.1 million of cash costs, including $1.4 million for severance for 5
employees, all of whom were terminated as of June 30, 2001; $0.9 million of
investment banking, consulting, and legal fees associated with the Company's
reorganization plan; and $0.8 million of employee retention costs. The charge
also includes $0.2 million of noncash severance costs.
In the first quarter of 2001, the Company recorded $1.5 million of
restructuring and unusual costs at its corporate office. This amount included
$0.7 million of investment banking, consulting, and legal fees associated with
the Company's reorganization plan and $0.8 million of employee retention costs.
General
- -------
The following table summarizes the severance actions of the Company in
2000 and 2001.
Number of
2000 Restructuring Plans Employees
- ---------------------------------------------------------------------------------------------------------
Terminations Announced in 2000 249
Terminations Occurring in 2000 (168)
Adjustment to Plan (1)
-----
Remaining Terminations at December 30, 2000 80
Additional Terminations Announced in 2001 16
Terminations Occurring in 2001 (90)
Adjustment to Plan (1)
-----
Remaining Terminations at September 29, 2001 5
=====
2001 Restructuring Plans
- ---------------------------------------------------------------------------------------------------------
Terminations Announced in 2001 675
Terminations Occurring in 2001 (496)
-----
Remaining Terminations at September 29, 2001 179
=====
<
16
>
THERMO ELECTRON CORPORATION
7. Restructuring and Other Unusual Costs (Income), Net (continued)
The following tables summarize the cash components of the Company's
restructuring plans. The noncash components and other amounts reported as
restructuring and other unusual costs (income), net, in the accompanying 2001
statement of income have been summarized in the notes to the tables. Accrued
restructuring costs are included in other accrued expenses in the accompanying
balance sheet.
Abandonment
Employee of Excess
(In thousands) Severance Retention (a) Facilities Other Total
- ---------------------------------------------------------------------------------------------------------
1998 Restructuring Plans
Balance at December 30, 2000 $ 97 $ - $ - $ 520 $ 617
Payments (90) - - - (90)
Currency translation (7) - - (4) (11)
-------- -------- -------- -------- --------
Balance at September 29, 2001 $ - $ - $ - $ 516 $ 516
======== ======== ======== ======== ========
1999 Restructuring Plans
Balance at December 30, 2000 $ 886 $ - $ - $ - $ 886
Payments (241) - - - (241)
-------- -------- -------- -------- --------
Balance at September 29, 2001 $ 645 $ - $ - $ - $ 645
======== ======== ======== ======== ========
2000 Restructuring Plans
Balance at December 30, 2000 $ 3,824 $ 3,283 $ 2,820 $ 9,594 $ 19,521
Costs incurred in 2001 241 2,383 21 3,060 5,705
Reserves reversed (105) - (21) - (126)
Payments (2,209) (224) (742) (12,330) (15,505)
Currency translation 44 - 3 (72) (25)
-------- -------- -------- -------- --------
Balance at September 29, 2001 $ 1,795 $ 5,442 $ 2,081 $ 252 $ 9,570
======== ======== ======== ======== ========
2001 Restructuring Plans
Costs incurred in 2001 (b) $ 13,216 $ 163 $ 2,744 $ 2,316 $ 18,439
Payments (6,948) (29) (331) (855) (8,163)
Currency translation 276 14 49 13 352
-------- -------- -------- -------- --------
Balance at September 29, 2001 $ 6,544 $ 148 $ 2,462 $ 1,474 $ 10,628
======== ======== ======== ======== ========
(a) Employee retention costs are accrued ratably over the period through which
employees must work to qualify for a payment. The 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) Excludes noncash charges, net, of $5.6 million, $1.2 million, $13.1 million,
and $0.2 million in the Life Sciences, Optical Technologies, and Measurement
and Control segments, and at the corporate office, respectively.
The Company expects to pay accrued restructuring costs as follows:
severance, primarily in 2001; employee retention obligations, primarily in 2001
and January 2002; abandoned-facility payments, over lease terms expiring through
2007; and other costs through 2002.
<
17
>
THERMO ELECTRON CORPORATION
8. Discontinued Operations
Power Generation and Other Discontinued Businesses
In February 2001, the Company entered into a definitive agreement to sell
its power generation business. In June and July 2001, the Company sold the chief
components of this business for proceeds of $249 million, net of cash divested.
The Company realized a gain on disposition of $15.6 million, net of tax. In
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
30 concerning reporting the effects of disposal of a segment of a business, the
Company has classified the results of this business as discontinued in the
accompanying 2000 statement of income. In addition, the net assets of this
business together with businesses previously announced as discontinued in early
2000 are classified as net assets of discontinued operations in the accompanying
balance sheet. Current net assets of discontinued operations primarily consist
of cash, inventories, and accounts receivable, net of certain liabilities,
primarily accrued expenses and accounts payable. Long-term net assets of
discontinued operations primarily consist of shares of common stock of Thoratec
Corporation (see below), machinery and equipment, and goodwill.
Summary operating results of the power generation business were as
follows:
Three Nine
Months Months
Ended Ended
September 30, September 30,
(In thousands) 2000 2000
- --------------------------------------------------------------------------------------------------------
Revenues $34,340 $86,656
Costs and Expenses 25,252 69,353
------- -------
Income from Discontinued Operations Before Provision for Income Taxes
and Minority Interest 9,088 17,303
Provision for Income Taxes (3,545) (6,731)
Minority Interest Expense (545) (1,556)
------- -------
Income from Discontinued Operations $ 4,998 $ 9,016
======= =======
During the third quarter and first nine months of 2001, the Company's
discontinued operations had revenues of $132.0 million and $570.1 million,
respectively, and operating income of $10.7 million and $45.5 million,
respectively. During the third quarter and first nine months of 2000, the
Company's discontinued operations, other than the power generation business
detailed above, had revenues of $360.4 million and $1,162.1 million,
respectively, and an operating loss of $5.4 million and operating income of
$31.6 million, respectively. A substantial majority of the businesses announced
for sale have been sold as of September 29, 2001. Three small operating units
remained for sale at that date.
Spinoffs
On July 9, 2001, the Company's Board of Directors approved the spinoff of
the Company's 91%-owned Kadant Inc. subsidiary as a dividend to the Company's
shareholders. On August 8, 2001, the Company distributed all of its shares of
Kadant to the Company's shareholders of record as of July 30, 2001. Immediately
after the distribution, the Company no longer owned shares of Kadant. The
Company received a ruling from the Internal Revenue Service (IRS) that the
dividend of Kadant shares qualifies in large part as a tax-free distribution for
U.S. federal income tax purposes. Approximately 8% of the shares distributed to
each shareholder are taxable because the Company purchased them during the past
five years. Cash distributed in lieu of fractional shares is also taxable. The
stock dividend resulted in a reduction of net assets of discontinued operations
and retained earnings of $197 million.
<
18
>
THERMO ELECTRON CORPORATION
8. Discontinued Operations (continued)
In connection with the spinoff, the Company and Kadant entered into a plan
and agreement of distribution. The agreement provides for, among other things,
the Company to continue to guarantee Kadant's $153.0 million principal amount
subordinated convertible debentures due 2004. The agreement also provides for
restrictions relating to Kadant's ability to use cash or incur debt during the
time that the Company guarantees these obligations.
On October 11, 2001, the Company's Board of Directors approved the spinoff
of the Company's wholly owned Viasys Healthcare Inc. subsidiary as a dividend to
the Company's shareholders. On November 15, 2001, the Company will distribute
all of its shares of Viasys Healthcare to the Company's shareholders of record
as of November 7, 2001. Immediately after the planned distribution, the Company
will no longer own shares of Viasys Healthcare. The Company received a ruling
from the IRS that the dividend of Viasys Healthcare shares will qualify as a
tax-free distribution for U.S. federal income tax purposes, except that the cash
received in lieu of fractional shares will be taxable. The stock dividend will
result in a reduction of net assets of discontinued operations and retained
earnings of approximately $300 million.
The intrinsic value of the options issued under the Company's employee
stock plans prior to the spinoffs is being maintained following the spinoffs in
accordance with the methodology set forth in Financial Accounting Standards
Board (FASB) Interpretation No. 44 "Accounting for Certain Transactions
Involving Stock Compensation."
Thermo Cardiosystems
In February 2001, the Company sold Thermo Cardiosystems Inc. to Thoratec
in exchange for 19.3 million shares of Thoratec common stock. Certain
restrictions limit the Company's ability to sell these shares, although the
restrictions fully lapse in August 2002. Subsequent to receipt of the Thoratec
common stock, the market value of the shares declined significantly at the same
time as a downturn in major equity markets. The Company recorded an after-tax
charge of $66.0 million in the first quarter of 2001 for the decline in market
value of Thoratec common stock as a loss on disposal of discontinued operations.
Further changes in the market value of Thoratec common stock may materially
affect the ultimate proceeds from the disposal of discontinued operations.
Excluding potential changes in the market value of Thoratec common stock, the
Company is not currently aware of any known trends, events, or other
uncertainties involving discontinued operations that it expects will cause the
ultimate loss on disposal of discontinued operations to differ materially from
the amounts recorded to date. Any difference from the amounts recorded would be
reported as an adjustment to the ultimate loss on disposal of discontinued
operations. In the third quarter of 2001, the Company completed the sale of 4.7
million shares of Thoratec for proceeds of $75.5 million, of which $5.9 million
was received in early October 2001.
9. Derivative Instruments and Hedging
Effective in the first quarter of 2001, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended, requires that all
derivatives, including forward currency exchange contracts, be recognized on the
balance sheet at fair value. Derivatives that are not hedges must be recorded at
fair value through earnings. If a derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of the derivative are either offset
against the change in fair value of the hedged item through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The Company immediately records in earnings the extent to which a
hedge is not effective in achieving offsetting changes in fair value. Adoption
of SFAS No. 133 in the first quarter of 2001 resulted in a charge representing
the cumulative effect of the change in accounting principle on periods prior to
2001 that increased net loss by $1.0 million.
<
19
>
THERMO ELECTRON CORPORATION
9. Derivative Instruments and Hedging (continued)
Forward currency exchange contracts are used by the Company 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, certain operating units hedge a portion of their currency
exposures anticipated over the ensuing twelve month period, using exchange
contracts that have maturities of twelve 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 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
September 29, 2001, the Company had deferred gains, net of income taxes,
relating to foreign currency contracts of approximately $0.3 million,
substantially all of which is expected to be recognized as income over the next
twelve 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.
10. Recent Accounting Pronouncements
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." Adoption of the standard is
required no later than the first quarter of 2002. The Company is evaluating the
timing and impact of adoption of this standard and has not yet determined the
effect of adoption on its financial statements.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." The Company will adopt the requirements of SFAS No. 142 effective
December 30, 2001, unless earlier required. SFAS No. 142 requires companies to
test all goodwill for impairment and to cease amortization of this asset. The
provisions of SFAS No. 142 apply to all goodwill regardless of when it was
acquired. The Company is evaluating the impact of adoption of this standard and
has not yet determined the full effect of adoption on its financial statements.
Amortization of goodwill for the three- and nine-month periods ended September
29, 2001, was $10.1 million and $30.3 million, respectively.
11. Extraordinary Item
During the third quarter of 2001, the Company repurchased $131.8 million
principal amount of its subordinated convertible debentures for $130.8 million
in cash, resulting in an extraordinary gain of $0.6 million, net of taxes of
$0.4 million.
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
<
20
>
THERMO ELECTRON CORPORATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
- --------------------------------------------------------------------------------
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 Exhibit 13 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 30, 2000, filed with the Securities
and Exchange Commission (SEC).
Results of Operations
Third Quarter 2001 Compared With Third Quarter 2000
- ---------------------------------------------------
Continuing Operations
Sales in the third quarter of 2001 were $512.9 million, a decrease of
$34.0 million from the third quarter of 2000. Excluding the effect of
acquisitions, divestitures, and currency translation, revenues decreased $5.7
million, or 1%. Currency translation had an unfavorable effect on revenues 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 $28.6 million in 2001, compared with $109.5 million
in 2000. Segment income decreased to $40.1 million in 2001 from $122.3 million
in 2000. (Segment income is operating income excluding corporate general and
administrative expenses and corporate restructuring and other unusual items,
net.) Operating and segment income in the third quarter of 2001 were affected by
charges associated with a restructuring plan initiated during the second quarter
and certain other unusual charges (Note 7). Operating and segment income in the
third quarter of 2000 were affected by a gain from the sale of a business,
offset in part by restructuring and other unusual costs as well as a $1.7
million operating loss for the business that was sold. Excluding these unusual
items, which totaled $7.4 million of expense in 2001 and $61.2 million of income
in 2000, segment income was $47.5 million in 2001 and $61.1 million in 2000. The
unusual items in both periods are discussed below. Segment income excluding
unusual items decreased due to lower revenue and profitability at certain
businesses discussed below. During the third quarter of 2001, the Company
transferred management responsibility for its Thermo KeyTek business to the
Optical Technologies segment from the Measurement and Control segment. Prior
period segment results have been restated to reflect this change.
Life Sciences
- -------------
Sales in the Life Sciences segment increased $10.7 million to $200.6
million in the third quarter of 2001. Sales increased $3.2 million due to
acquisitions. The unfavorable effects of currency translation resulted in a
decrease in revenues of $3.2 million in 2001. Excluding the effect of
acquisitions and currency translation, revenues increased $10.7 million, or 6%.
Growth in each of the segment's major business units contributed to the sales
increase, particularly demand for clinical diagnostic products and mass
spectrometry equipment, including ion trap instruments and triple quadrupole
mass spectrometers used in proteomics and drug discovery research.
Segment income margin increased to 12.0% in the third quarter of 2001 from
4.4% in the third quarter of 2000. The segment's margin increased primarily due
to restructuring and unusual charges recorded in 2000, discussed below.
Excluding restructuring and unusual costs of $0.3 million in 2001 and $16.2
million in 2000, segment income margin was 12.2% in 2001 and 12.9% in 2000.
Lower profitability due to research and development expenditures on proteomics
initiatives was offset in part by the effect of higher revenues at the
businesses discussed above. In the third quarter of 2001, the segment recorded
cash costs of $0.3 million, primarily for severance (Note 7). Restructuring
costs in 2000 represent $8.4 million of provision for inventories and
warranties, $1.4 million of asset writedowns, $5.1 million of cash costs for
severance and abandoned facilities, and $1.3 million of other cash costs.
<
21
>
THERMO ELECTRON CORPORATION
Third Quarter 2001 Compared With Third Quarter 2000 (continued)
- ---------------------------------------------------
Optical Technologies
- --------------------
Sales in the Optical Technologies segment decreased $10.2 million to
$119.4 million in the third quarter of 2001. The unfavorable effects of currency
translation resulted in a decrease in revenues of $0.9 million in 2001. Sales
increased $0.6 million due to acquisitions, net of a divestiture. Excluding the
effect of acquisitions, a divestiture, and currency translation, revenues
decreased $9.9 million, or 8%. The decrease in revenues was due in part to $8.3
million of lower sales of temperature control products due to a severe slowdown
in the semiconductor industry. This market, together with the telecommunications
sector, are cyclical industries that have experienced downturns in 2001. These
downturns also led to lower sales of other equipment and components sold to
these industries, offset in part by $3.9 million of higher demand for
semiconductor-based lasers used in industrial, research and development, and
life sciences applications. The Company expects that the slowdowns in
semiconductor and telecommunication markets will continue to unfavorably affect
the segment's comparative results in the fourth quarter of 2001. Excluding
divestitures, the segment's backlog has decreased 18% since year-end 2000 to
$212.4 million.
Segment income margin was negative 0.2% in the third quarter of 2001,
compared with 2.9% in the third quarter of 2000. Excluding restructuring and
unusual costs, net, of $2.3 million in 2001 and $6.3 million in 2000, segment
income margin was 1.7% in 2001 and 7.7% in 2000. The decrease in segment income
margin was due to a lower contribution towards fixed costs resulting from a
decline in revenues and $3.0 million of higher operating losses at
Spectra-Physics, Inc. The increase in losses at Spectra-Physics was due to
telecom product introductions and associated start-up costs. In the third
quarter of 2001, the segment recorded charges of $2.3 million, including $1.8
million of cash costs, primarily for severance, $0.4 million of loss on the sale
of a small business unit, and $0.1 million of asset writedowns associated with
abandoned property (Note 7). Restructuring costs in 2000 represent $2.9 million
in provisions for inventories and warranties, a $1.5 million writeoff of
in-process research and development at an acquired business, $1.2 million of
other cash costs, a $0.6 million writedown of goodwill on a business held for
sale, and $0.1 million of asset writedowns.
Measurement and Control
- -----------------------
Sales in the Measurement and Control segment decreased $36.0 million to
$196.1 million in the third quarter of 2001. Sales decreased $25.4 million due
to divestitures. The segment's divestitures that affected the comparison
primarily included the Spectra Precision businesses in July 2000 and several
businesses sold in 2001, discussed below. The unfavorable effects of currency
translation resulted in a decrease in revenues of $2.6 million in 2001.
Excluding the effect of divestitures and currency translation, revenues
decreased $8.0 million, or 4%. The decrease was primarily due to lower sales of
process instruments, including reduced shipments to U.S. steel manufacturers as
a result of a slowdown in that industry and lower sales of weighing and
inspection equipment due to competitive pressures. This decrease in revenues was
offset in part by $1.9 million of higher sales of environmental-monitoring
equipment due in part to demand from the construction industry and upgrades of
power plants. A downturn in certain markets served by the segment will continue
to unfavorably affect the segment's comparative results in the fourth quarter of
2001. Excluding divestitures, the segment's backlog has decreased 16% since
year-end 2000 to $141.0 million.
In August 2001, the segment sold its Pharos Marine unit, which
manufactures and sells marine navigation equipment and systems. In July 2001,
the segment sold its ThermoMicroscopes unit, a manufacturer of scanning probe
microscopes. In April 2001, the segment sold its CAC and Mid South businesses,
which provide the oil and gas industry with wellhead safety and control
products. The businesses were sold for net proceeds of $46 million and were
cyclical and/or noncore units. The businesses had aggregate revenues and segment
income before restructuring and unusual costs of $31.3 million and $3.4 million,
respectively, in the first nine months of 2001, and aggregate revenues and
segment loss before restructuring costs and unusual income, net, of $70.6
million and $2.1 million, respectively, in the full year 2000.
<
22
>
THERMO ELECTRON CORPORATION
Third Quarter 2001 Compared With Third Quarter 2000 (continued)
- ---------------------------------------------------
Segment income margin decreased to 8.3% in the third quarter of 2001 from
47.5% in the third quarter of 2000, primarily due to restructuring and unusual
income, net, in 2000. Segment income margin, excluding restructuring and unusual
costs of $4.8 million in 2001 and restructuring and unusual income, net, of
$85.4 million and a $1.7 million operating loss in the period of sale of a
divested business in 2000, decreased to 10.7% in 2001 from 11.7% in 2000. The
decrease in segment income margin resulted primarily from lower revenues at
certain of the businesses discussed above and lower contribution towards fixed
costs, offset in part by cost reduction measures initiated in the fall of 2000
and in the second quarter of 2001. In the third quarter of 2001, the segment
recorded charges of $4.8 million, net, including a $4.7 million loss, net, on
the sale of businesses, principally the segment's Pharos Marine unit. In
addition, the segment recorded cash costs of $0.1 million, primarily for
abandoned facilities (Note 7). Restructuring and unusual income, net, of $85.4
million in 2000 represents a gain on the sale of a business of $115.4 million,
offset by $8.0 million of provision for inventories, $14.2 million of asset
writedowns, $2.4 million for the writedown of goodwill, and $5.4 million of cash
costs, primarily for severance and abandoned facilities.
Other Income (Expense), Net
- ---------------------------
The Company reported other income, net, of $11.6 million in the third
quarter of 2001 and other expense, net, of $36.4 million in the third quarter of
2000 (Note 3). Other income and expense, net, includes interest income, interest
expense, equity in earnings (losses) of unconsolidated subsidiaries, gain on
investments, net, and other items, net. Interest income increased to $19.3
million in 2001 from $10.0 million in 2000, primarily due to investment of the
proceeds from the sale of businesses, including discontinued operations, offset
in part by cash used for the repurchase of Company common stock and debentures
and lower market interest rates. The Company expects that a trend of lower
market interest rates in 2001 will continue to adversely affect the yield it
earns from investments. Interest expense decreased to $18.4 million in 2001 from
$20.5 million in 2000, as a result of the maturity and repurchase of debentures.
The Company recorded income from equity in earnings of unconsolidated
subsidiaries of $1.7 million in 2001, compared with a loss of $26.0 million in
2000. Equity in earnings of unconsolidated subsidiaries primarily relates to an
investment in FLIR Systems, Inc., which undertook significant restructuring
actions in 2000. During 2001, the Company had a gain on sale of investments,
net, of $9.3 million, compared with gains of $0.2 million in 2000. The 2001 gain
includes $8.6 million from the sale of 350,000 shares of FLIR. Of the total gain
from the sale of FLIR, $4.5 million represents a recovery of previous writedowns
on the FLIR shares that were sold during the period. The Company had $0.3
million and $0.1 million of net currency losses in 2001 and 2000, respectively.
Provision for Income Taxes
- --------------------------
The Company's effective tax rate was 37.5% and 90.3% in the third quarter
of 2001 and 2000, respectively. The effective tax rate in 2000 includes the
effect of the sale of the Spectra Precision businesses, which had a lower tax
basis than book basis, resulting in a significant tax gain on the sale.
Excluding the tax effect of restructuring and unusual costs or income, the
effective tax rate was 37.5% and 38.9% in 2001 and 2000, respectively. The
effective tax rate exceeded the statutory federal income tax rate in both
periods due to the impact of state income taxes and nondeductible expenses,
including amortization of goodwill.
Minority Interest Income
- ------------------------
The Company recorded minority interest income of $0.5 million and $0.2
million in the third quarter of 2001 and 2000, respectively, representing
minority shareholders' allocable share of losses at Spectra-Physics.
<
23
>
THERMO ELECTRON CORPORATION
Third Quarter 2001 Compared With Third Quarter 2000 (continued)
- ---------------------------------------------------
Income from Continuing Operations
- ---------------------------------
Income from continuing operations before extraordinary item was $25.7
million in the third quarter of 2001, compared with $7.3 million in the third
quarter of 2000. 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 $28.8 million in
2001 from $26.2 million in 2000 due to the reasons discussed above.
Extraordinary Item
- ------------------
The Company repurchased debentures during the third quarter of 2001,
resulting in an extraordinary gain of $0.6 million, net of tax (Note 11).
Litigation and Related Contingency
- ----------------------------------
The Company's Thermo Finnigan subsidiary was involved in a patent dispute
with Bruker Daltonics, Inc. and Agilent, Inc. This matter was settled during
the third quarter of 2001 with no payments by any of the parties.
Discontinued Operations
The Company's power generation business had income of $5.0 million in the
third quarter of 2000, net of taxes and minority interest. The chief components
of this business were sold in June and July 2001 (Note 8).
First Nine Months 2001 Compared With First Nine Months 2000
- -----------------------------------------------------------
Continuing Operations
Sales in the first nine months of 2001 were $1.629 billion, a decrease of
$75.0 million from the first nine months of 2000. Excluding the effect of
acquisitions, divestitures, and foreign currency translation, revenues increased
$116.2 million, or 8%. Foreign currency translation had an unfavorable effect on
revenues 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 $82.6 million in 2001, compared with $222.2 million
in 2000. Segment income decreased to $119.1 million in 2001 from $254.8 million
in 2000. Operating and segment income in 2001 were affected by restructuring and
other unusual costs (Note 7). Operating and segment income in 2000 were affected
by a gain from the sale of a business, offset in part by restructuring and other
unusual costs as well as a $1.7 million operating loss in the third quarter at a
business that was sold. Excluding these unusual items, which totaled $50.4
million of expense in 2001 and $74.0 million of income in 2000, segment income
was $169.5 million in 2001 and $180.8 million in 2000. The unusual items in both
periods are discussed below. Segment income excluding unusual items decreased
due to a reduction in segment income of $13.1 million from businesses divested.
The Company also recorded $2.3 million of incremental amortization expense in
2001, which resulted primarily from the purchase of the minority interests of
formerly public subsidiaries, offset in part by lower amortization expense
following certain divestitures. These decreases in segment income were offset in
part by profitability growth at certain businesses discussed below.
The Company undertook restructuring actions in the second quarter of 2001
to reduce costs in businesses affected by a severe slowdown in the
telecommunications and semiconductor industries as well as other market sectors
hurt by a slowing economy, including the U.S. steel industry. In addition to the
actions to reduce costs, the Company recorded a provision for inventories to
discontinue certain mature or unprofitable product lines and inventories made
redundant by combining businesses and for excess telecommunication inventories
at Spectra-Physics. The unusual
<
24
>
THERMO ELECTRON CORPORATION
First Nine Months 2001 Compared With First Nine Months 2000 (continued)
- -----------------------------------------------------------
items in both periods are discussed below and in more detail in Note 7. The
Company expects that the restructuring actions will result in annual cost
reductions of $25 million generally beginning in the fourth quarter of 2001 and
in 2002, including $4 million in the Life Sciences segment, $12 million in the
Optical Technologies segment, $7 million in the Measurement and Control segment,
and $2 million at the Company's corporate office. The Company is evaluating
additional restructuring actions that it may undertake in the fourth quarter of
2001, including its plan to eliminate up to 500 positions. The Company has not
finalized its plans nor quantified the expected cost of any such actions.
Life Sciences
- -------------
Sales in the Life Sciences segment increased $41.1 million to $612.3
million in the first nine months of 2001. Sales increased $11.2 million due to
acquisitions. The unfavorable effects of currency translation resulted in a
decrease in revenues of $19.2 million in 2001. Excluding the effect of
acquisitions and currency translation, revenues increased $49.1 million, or 9%.
Each of the segment's major business units contributed to the sales increase
with three quarters of the growth split approximately evenly among sales of
biosciences equipment and mass spectrometry products. The increase in sales of
biosciences equipment included sample-preparation equipment and microplate and
liquid handling products due to strong demand from the drug discovery market and
expanded distribution channels. Higher sales of mass spectrometers resulted
primarily from strong sales of ion trap instruments used in proteomics and drug
discovery research. In addition, the segment had higher revenues from clinical
diagnostic products, including rapid diagnostic tests.
Segment income margin increased to 10.8% in the first nine months of 2001
from 10.7% in the first nine months of 2000. The segment's margin in both
periods was affected by restructuring and unusual charges, discussed below.
Excluding restructuring and unusual costs, net, of $11.5 million in 2001 and
$16.2 million in 2000, segment income margin was 12.6% in 2001 and 13.5% in
2000. The decrease in segment income margin was primarily due to an increase in
goodwill amortization as a result of the purchase of the minority interests of
formerly public subsidiaries. Excluding the additional amortization expense and
the restructuring and unusual charges, segment income margin was 13.2% in 2001.
Lower profitability due to research and development expenditures on proteomics
initiatives was offset in part by the effect of higher revenues at the
businesses discussed above. In the first nine months of 2001, the segment
recorded charges of $11.5 million, including cash costs of $4.0 million for
severance and abandoned facilities, $2.2 million of asset writedowns, and $1.8
million of provision for inventories. The segment also recorded a charge of $3.4
million for the writeoff of in-process research and development at an acquired
business. The Company does not expect that the effort required to complete the
products in development at the acquired business will materially affect the
segment's future results of operations (Note 7). Restructuring costs in 2000
represent $8.4 million of provision for inventories and warranties, $1.4 million
of asset writedowns, $5.1 million of cash costs for severance and abandoned
facilities, and $1.3 million of other cash costs.
Optical Technologies
- --------------------
Sales in the Optical Technologies segment increased $45.8 million to
$398.3 million in the first nine months of 2001. Sales increased $1.9 million
from acquisitions, net of a divestiture. The unfavorable effects of currency
translation resulted in a decrease in revenues of $8.0 million in 2001.
Excluding the effect of acquisitions, a divestiture, and currency translation,
revenues increased $51.9 million, or 15%. The increase in revenues was due in
part to $32.6 million of increased demand for semiconductor-based lasers used in
industrial, research and development, and life sciences applications. The
balance of the increase was due to higher sales in the first half of 2001 of
molecular beam epitaxy systems and components to the semiconductor industry and,
to a lesser extent, increased sales of photonics products including gratings and
other optical components used in systems for lithography and telecommunication
devices.
<
25
>
THERMO ELECTRON CORPORATION
First Nine Months 2001 Compared With First Nine Months 2000 (continued)
- -----------------------------------------------------------
Segment income margin was 3.1% in the first nine months of 2001 and 5.8%
in the first nine months of 2000. Excluding restructuring and unusual costs of
$13.7 million in 2001 and $6.3 million in 2000, segment income margin was 6.5%
in 2001 and 7.6% in 2000. The decrease in segment income margin excluding
unusual costs was primarily due to $3.3 million of operating losses at
Spectra-Physics from its telecom product introductions and associated start-up
costs. In addition, the segment recorded $1.0 million of higher goodwill
amortization in 2001 following the purchase of the minority interests of
formerly public subsidiaries. In the first nine months of 2001, the segment
recorded net charges of $13.7 million, including $7.0 million of provisions for
inventories, $5.5 million of cash costs for severance, abandoned facilities, and
other costs, $1.1 million of asset writedowns, and a loss of $0.1 million, net,
from the sale of assets (Note 7). Restructuring costs in 2000 represent $2.9
million in provisions for inventories and warranties, a $1.5 million writeoff of
in-process research and development at an acquired business, $1.2 million of
other cash costs, a $0.6 million writedown of goodwill on a business held for
sale, and $0.1 million of asset writedowns.
Measurement and Control
- -----------------------
Sales in the Measurement and Control segment decreased $163.5 million to
$629.8 million in the first nine months of 2001. Sales decreased $159.3 million
due to divestitures, net of an acquisition. The unfavorable effects of currency
translation resulted in a decrease in revenues of $17.8 million in 2001.
Excluding the effect of divestitures, an acquisition, and currency translation,
revenues increased $13.6 million, or 2%. Revenues from the sale of environmental
monitoring equipment increased $9.5 million due in part to demand from the
construction industry and upgrades of power plants. In addition, revenues from
the sale of spectroscopy instruments increased due to higher shipments following
the release of new products. These increases were offset in part by $7.3 million
of lower sales of process instruments. The lower sales of process instruments
primarily included weighing and inspection equipment due to competitive
pressures and equipment sold to the U.S. steel industry due to a downturn in
that market. In April 2001, the segment sold businesses that contributed $4.4
million of the sector's internal revenue growth in the first nine months of
2001.
Segment income margin decreased to 6.5% in the first nine months of 2001
from 21.8% in the first nine months of 2000, primarily due to restructuring and
unusual charges, net, in 2001 and unusual income, net, in 2000. Segment income
margin, excluding restructuring and unusual costs, net, of $25.2 million in 2001
and unusual income, net, of $98.2 million in 2000, and a $1.7 million third
quarter operating loss in 2000 for a business divested in that period, increased
to 10.5% in 2001 from 9.7% in 2000. The increase in segment income margin
resulted primarily from higher revenues at certain of the businesses discussed
above together with cost reduction measures initiated in 2000 and 2001. These
improvements were offset in part by lower profitability at the business units
discussed above that had declining revenues. In the first nine months of 2001,
the segment recorded charges of $25.2 million, including $11.0 million, net, for
the loss on sale of businesses or writedowns of businesses subsequently sold;
cash costs of $7.8 million for severance, abandoned facilities, and other exit
costs; $4.5 million of provisions for inventories; and $1.9 million of asset
writedowns (Note 7). The businesses for which the segment recorded a loss on or
prior to sale were ThermoMicroscopes and Pharos Marine. Unusual income, net, of
$98.2 million in 2000 includes a gain of $127.9 million on the sale of
businesses, offset in part by restructuring and other unusual charges taken in
the third quarter.
Other Income (Expense), Net
- ---------------------------
The Company reported other income, net, of $7.7 million and other expense,
net, of $68.7 million in the first nine months of 2001 and 2000, respectively
(Note 3). Interest income increased to $54.2 million in 2001 from $27.6 million
in 2000, primarily due to proceeds from the sale of businesses, including
discontinued operations, offset in part by cash used in 2000 for the purchase of
the minority interests of formerly public subsidiaries and in 2001 for
repurchases of the Company's debt and equity securities. Interest expense
decreased to $57.7 million in 2001 from $65.1 million in 2000, as a result of
the maturity and repurchase of debentures.
<
26
>
THERMO ELECTRON CORPORATION
First Nine Months 2001 Compared With First Nine Months 2000 (continued)
- -----------------------------------------------------------
The Company recorded income from equity in earnings of unconsolidated
subsidiaries of $2.9 million in 2001 and incurred a net loss of $41.1 million in
2000, primarily related to its investment in FLIR, which undertook significant
restructuring actions in 2000. The Company had gains on investments, net, of
$8.5 million and $6.6 million in 2000. The gain in 2001 includes $8.6 million
from the sale of 350,000 shares of FLIR. Of the total gain from the sale of
FLIR, $4.5 million represents a recovery of previous writedowns of FLIR. The
gain in 2001 was reduced by a charge of $2.0 million to write down an
available-for-sale investment due to impairment that the Company deemed other
than temporary. In 2000, other expense, net, also includes $3.4 million of net
currency gains, primarily resulting from hedging activities at Spectra-Physics,
which elected early adoption of Statement of Financial Accounting Standards
(SFAS) No. 133 "Accounting for Derivative Instruments and Hedging Activities."
Provision for Income Taxes
- --------------------------
The Company's effective tax rate was 38.5% and 65.1% in the first nine
months of 2001 and 2000, respectively. Excluding the tax effect of restructuring
and unusual costs or income, the effective tax rate was 38.6% and 39.5% in 2001
and 2000, respectively. The effective tax rate exceeded the statutory federal
income tax rate in both periods due to the impact of state income taxes and
nondeductible expenses, including amortization of goodwill.
Minority Interest Income (Expense)
- ----------------------------------
The Company recorded minority interest income of $1.3 million in the first
nine months of 2001 and minority interest expense of $10.1 million in the first
nine months of 2000, representing minority shareholders' allocable share of
subsidiary losses or earnings. Minority interest expense decreased due to the
purchase in 2000 of the minority interest in all of the Company's formerly
public subsidiaries in continuing operations except Spectra-Physics. In 2001,
Spectra-Physics incurred a loss and minority interest income represents the
minority shareholders' share of the loss.
Income from Continuing Operations
- ---------------------------------
Income from continuing operations before extraordinary item and cumulative
change in accounting principle was $56.9 million in the first nine months of
2001, compared with $43.5 million in the first nine months of 2000. Results were
affected by unusual items, discussed above. Excluding unusual items in both
periods, income from continuing operations before extraordinary item and
cumulative change in accounting principle increased to $89.7 million in 2001
from $65.8 million in 2000 due to the improvements discussed above.
Cumulative Effect of Change in Accounting Principle
- ---------------------------------------------------
The Company adopted SFAS No. 133, as amended, in the first quarter of 2001
and recorded a charge representing the cumulative effect of the change in
accounting principle of $1.0 million, net of an income tax benefit of $0.7
million. In addition, in accordance with the requirements of SEC Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements," the
Company adopted the pronouncement as of January 2, 2000, and recorded a charge
in the first quarter of 2000 representing the cumulative effect of the change in
accounting principle of $12.9 million, net of an income tax benefit of $8.5
million and minority interest of $0.5 million.
Discontinued Operations
- -----------------------
In February 2001, the Company sold Thermo Cardiosystems to Thoratec
Corporation in exchange for 19.3 million shares of Thoratec common stock.
Certain restrictions limit 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 the decline in market
value of Thoratec common stock as a loss on disposal of discontinued operations.
Further changes in the market value of Thoratec common stock may materially
affect the ultimate
<
27
>
THERMO ELECTRON CORPORATION
First Nine Months 2001 Compared With First Nine Months 2000 (continued)
- -----------------------------------------------------------
proceeds from the disposal of discontinued operations. Excluding potential
changes in the market value of Thoratec common stock, the Company is not
currently aware of any known trends, events, or other uncertainties involving
discontinued operations that it expects will cause the ultimate loss on disposal
of discontinued operations to differ materially from the amounts recorded to
date. Any difference from the amounts recorded would be reported as an
adjustment to the ultimate loss on disposal of discontinued operations. In the
third quarter of 2001, the Company completed the sale of 4.7 million shares of
Thoratec for proceeds of $75.5 million, of which $5.9 million was received in
early October 2001. The Company sold the chief components of its discontinued
power generation business in June and July 2001 for proceeds of $249 million,
net of cash divested, and realized a net of tax gain of $15.6 million on the
disposition. The power generation business had income of $9.0 million in the
first nine months of 2000, net of taxes and minority interest.
Liquidity and Capital Resources
Consolidated working capital was $1.62 billion at September 29, 2001,
compared with $1.74 billion at December 30, 2000. Included in working capital
were cash, cash equivalents, and short-term available-for-sale investments of
$1.23 billion at September 29, 2001, compared with $1.03 billion at December 30,
2000. In addition, the Company had $10.9 million of long-term available-for-sale
investments at September 29, 2001, compared with $17.1 million at December 30,
2000.
Cash provided by operating activities was $126.1 million during the first
nine months of 2001, including $104.7 million from continuing operations. Cash
of $27.3 million was used to fund an increase in inventories. Approximately half
of the increase in inventories was at the Measurement and Control segment due to
new product introductions in certain units and lower than anticipated shipments
in other units. An increase in other current liabilities provided $24.5 million
of cash, including $15.4 million of accrued income taxes and $10.1 million of
accrued interest, due to the timing of payments. In connection with certain
restructuring actions undertaken by the Company's continuing operations, the
Company had accrued $21.4 million for restructuring and unusual costs at
September 29, 2001. The Company expects to pay $16.9 million of this amount for
severance, employee retention, and other costs primarily through January 2002.
The remaining balance of $4.5 million will be paid through the expiration of
lease obligations in 2007. In addition, at September 29, 2001, the Company had
accrued $8.7 million for acquisition expenses. Accrued acquisition expenses
includes $1.4 million of severance obligations, which the Company expects to pay
primarily through 2001. The balance, which primarily represents
abandoned-facility payments, will be paid over the remaining terms of the leases
through 2014.
During the first nine months of 2001, the primary investing activities of
the Company's continuing operations, excluding available-for-sale investment
activities, included the purchase of property, plant, and equipment, the sale of
businesses, and acquisitions. The Company's continuing operations expended $55.0
million, net of dispositions, for purchases of property, plant, and equipment
and $14.1 million, net of cash acquired, for acquisitions. In addition, in the
first nine months of 2001, the Company's continuing operations sold businesses
for aggregate proceeds, net of cash divested, of $46.8 million. During the first
nine months of 2001, investing activities of the Company's discontinued
operations provided $477.4 million of cash, primarily representing proceeds, net
of cash divested, of $347.0 million from the sale of businesses and proceeds of
$69.6 million from the sale of Thoratec common stock.
The Company's financing activities used $476.1 million of cash during the
first nine months of 2001, including $285.0 million for continuing operations.
During the first nine months of 2001, the Company's continuing operations
expended $40.2 million for the repayment of long-term obligations and received
net proceeds of $46.4 million from the exercise of employee stock options.
During the first nine months of 2001, the Company expended $307.5 million to
repurchase its securities. As of September 29, 2001, the Company had $2 million
remaining under Board of Directors' authorizations to repurchase its own
securities. In October and November 2001, the Company's Board of Directors
authorized the repurchase of two additional $100 million tranches of its own
securities through October 10,
<
28
>
THERMO ELECTRON CORPORATION
Liquidity and Capital Resources (continued)
2002 and November 6, 2002. Such purchases may be made in the open market, or in
negotiated transactions. During the first nine months of 2001, the financing
activities of the Company's discontinued operations used $191.1 million of cash,
including cash at the Company's Kadant subsidiary, which was spun off in August
2001 (Note 8), and the repayment of debt.
The Company has no material commitments for purchases of property, plant,
and equipment and expects that for 2001, such expenditures will approximate $85
- - 90 million.
The Company believes that its existing resources 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,
foreign currency exchange rates, and equity prices has not changed materially
from its exposure at year-end 2000, except that the Company owns 14.6 million
shares of Thoratec common stock from the sale of Thermo Cardiosystems (Note 8).
During the first quarter of 2001, the Company recorded a writedown of its
carrying value of the Thoratec shares due to a decline in Thoratec's market
value. Thoratec's market value per share increased significantly in the second
quarter. As a result of the increase in market value of Thoratec shares, a 10%
decline in the market value of Thoratec shares at September 29, 2001, will not
result in an additional loss from discontinued operations. The ultimate proceeds
from the disposition of discontinued operations, however, may be materially
affected by changes in the market value of Thoratec common stock. A 10% decline
in the market value of Thoratec common stock at September 29, 2001, would result
in a reduction in the after-tax proceeds from the disposal of discontinued
operations of $15 million.
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 July 12, 2001, the Company filed a Current Report on Form 8-K with
respect to the Board of Director's approval of the distribution of all the
shares of common stock of Kadant Inc. held by the Company to holders of record
of the Company's common stock as of July 30, 2001.
On August 6, 2001, the Company filed a Current Report on Form 8-K with
respect to the Information Statement detailing the distribution of the shares of
common stock of Kadant Inc. held by the Company.
On August 6, 2001, the Company filed a Current Report on Form 8-K with
respect to the Company's financial results for the quarter ended June 30, 2001.
On August 9, 2001, the Company filed a Current Report on Form 8-K with
respect to the distribution on August 8, 2001, of 0.0612 of a share of common
stock of Kadant Inc. as a dividend on each share of the Company's common stock
outstanding as of July 30, 2001.
<
29
>
THERMO ELECTRON CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 9th day of November 2001.
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
<
30
>
THERMO ELECTRON CORPORATION
Exhibit Index
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
10.1 Executive Severance Agreement dated as of September 21, 2001, by
and between the Registrant and Brian D. Holt.
10.2 Executive Severance Agreement dated as of October 30, 2001, by
and between the Registrant and Colin Maddix.