Exhibit 13
Thermo Electron Corporation
Consolidated Financial Statements
2001
Thermo Electron Corporation 2001 Financial Statements
Consolidated Statement of Operations
(In thousands except per share amounts) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------
Revenues (Notes 3 and 16) $2,188,210 $2,280,522 $2,294,620
---------- ---------- ----------
Costs and Operating Expenses:
Cost of revenues (Note 15) 1,229,588 1,258,686 1,245,773
Selling, general, and administrative expenses 620,104 646,920 658,297
Research and development expenses 171,614 176,756 171,100
Restructuring and other unusual costs (income), net (Note 15) 132,702 (67,855) 37,346
---------- ---------- ----------
2,154,008 2,014,507 2,112,516
---------- ---------- ----------
Operating Income 34,202 266,015 182,104
Other Income (Expense), Net (Notes 4 and 15) 36,479 (81,184) (57,345)
---------- ---------- ----------
Income from Continuing Operations Before Provision for Income Taxes,
Minority Interest, Extraordinary Item, and Cumulative Effect of
Change in Accounting Principle 70,681 184,831 124,759
Provision for Income Taxes (Note 6) (26,929) (112,217) (64,428)
Minority Interest Income (Expense) 5,840 (10,567) (23,048)
---------- ---------- ----------
Income from Continuing Operations Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle 49,592 62,047 37,283
Income (Loss) from Discontinued Operations (net of income tax provision
(benefit) and minority interest of $12,249 and $(107,089); Note 17) - 14,228 (163,325)
Provision for Loss on Disposal of Discontinued Operations, Net (net of
income tax provision (benefit) of $(22,741), $(104,000), and $174,000;
Note 17) (50,440) (100,000) (50,000)
---------- ---------- ----------
Loss Before Extraordinary Item and Cumulative Effect of Change in
Accounting Principle (848) (23,725) (176,042)
Extraordinary Item (net of income tax provision and minority interest of
$637, $333, and $900; Note 10) 1,061 532 1,469
---------- ---------- ----------
Income (Loss) Before Cumulative Effect of Change in Accounting Principle 213 (23,193) (174,573)
Cumulative Effect of Change in Accounting Principle (net of income
tax benefit and minority interest of $663 and $8,986; Notes 1 and 16) (994) (12,918) -
---------- ---------- ----------
Net Loss $ (781) $ (36,111) $ (174,573)
========== ========== ==========
Earnings per Share from Continuing Operations Before Extraordinary
Item and Cumulative Effect of Change in Accounting Principle (Note 7)
Basic $ .27 $ .37 $ .24
========== ========== ==========
Diluted $ .27 $ .36 $ .22
========== ========== ==========
Loss per Share (Note 7)
Basic $ - $ (.22) $ (1.10)
========== ========== ==========
Diluted $ - $ (.22) $ (1.12)
========== ========== ==========
Weighted Average Shares (Note 7)
Basic 180,560 167,462 157,987
========== ========== ==========
Diluted 183,916 170,519 158,223
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
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Thermo Electron Corporation 2001 Financial Statements
Consolidated Balance Sheet
(In thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 297,557 $ 505,524
Short-term available-for-sale investments, at quoted market value
(amortized cost of $697,757 and $510,312; Notes 9 and 15) 744,321 521,329
Accounts receivable, less allowances of $26,525 and $30,593 410,960 431,476
Unbilled contract costs and fees 24,071 18,520
Inventories (Note 15) 337,041 394,152
Deferred tax asset (Note 6) 82,766 148,051
Other current assets 68,494 75,007
Net assets of discontinued operations (Note 17) - 371,470
---------- ----------
1,965,210 2,465,529
---------- ----------
Property, Plant, and Equipment, at Cost, Net (Note 15) 270,712 285,878
---------- ----------
Long-term Available-for-sale Investments, at Quoted Market Value
(amortized cost of $5,729 and $9,883; Notes 9 and 15) 9,360 17,110
---------- ----------
Other Assets (Notes 2 and 15) 231,395 183,974
---------- ----------
Goodwill (Notes 2, 6, and 15) 1,348,393 1,378,663
---------- ----------
Long-term Net Assets of Discontinued Operations (Note 17) - 531,823
---------- ----------
$3,825,070 $4,862,977
========== ==========
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Thermo Electron Corporation 2001 Financial Statements
Consolidated Balance Sheet (continued)
(In thousands except share amounts) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Investment
Current Liabilities:
Short-term obligations and current maturities of long-term
obligations (Notes 10 and 19) $ 528,988 $ 103,356
Advance payable to affiliates (Note 10) - 16,088
Accounts payable 111,950 139,662
Accrued payroll and employee benefits 79,403 78,483
Accrued income taxes 30,797 95,344
Deferred revenue 48,166 50,341
Accrued installation and warranty costs 33,024 37,058
Accrued restructuring costs (Note 15) 60,685 21,024
Other accrued expenses (Note 2) 183,610 187,195
Net liabilities of discontinued operations (Note 17) 65,416 -
---------- ----------
1,142,039 728,551
---------- ----------
Deferred Income Taxes (Note 6) 7,907 10,691
---------- ----------
Other Deferred Items 32,579 36,539
---------- ----------
Long-term Obligations (Notes 10 and 19):
Senior convertible obligations 145,414 172,500
Senior notes 128,725 150,000
Subordinated convertible obligations 445,377 1,177,565
Other 7,986 28,418
---------- ----------
727,502 1,528,483
---------- ----------
Minority Interest (Note 17) 6,901 24,737
---------- ----------
Commitments and Contingencies (Note 11)
Shareholders' Investment (Notes 5 and 12):
Preferred stock, $100 par value, 50,000 shares authorized; none issued Common
stock, $1 par value, 350,000,000 shares authorized; 199,816,264 and
195,877,421 shares issued 199,816 195,877
Capital in excess of par value 1,758,567 1,681,452
Retained earnings (Note 17) 509,681 1,005,857
Treasury stock at cost, 23,458,555 and 13,708,863 shares (457,475) (246,228)
Deferred compensation (3,157) (6,640)
Accumulated other comprehensive items (Note 8) (99,290) (96,342)
---------- ----------
1,908,142 2,533,976
---------- ----------
$3,825,070 $4,862,977
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
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Thermo Electron Corporation 2001 Financial Statements
Consolidated Statement of Cash Flows
(In thousands) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Operating Activities
Net loss $ (781) $ (36,111) $(174,573)
Adjustments to reconcile net loss to income from
continuing operations:
(Income) loss from discontinued operations (Note 17) - (14,228) 163,325
Provision for loss on disposal of discontinued
operations, net (Note 17) 50,440 100,000 50,000
--------- --------- ---------
Income from continuing operations 49,659 49,661 38,752
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 98,521 97,486 91,429
Noncash restructuring and other unusual costs, net (Note 15) 41,144 22,865 30,214
Provision for losses on accounts receivable 6,316 9,264 8,614
Minority interest (income) expense (5,840) 10,567 23,048
Equity in (earnings) loss of unconsolidated subsidiaries
(Note 15) (4,699) 47,315 7,274
Cumulative effect of change in accounting principle, net
of income taxes and minority interest (Notes 1 and 16) 994 12,918 -
Change in deferred income taxes (16,751) (39,700) (28,378)
Loss (gain) on sale of businesses (Notes 2 and 15) 10,943 (126,330) -
Gain on investments, net (Notes 9 and 15) (35,579) (6,849) (3,662)
Extraordinary item, net of income taxes and minority
interest (Note 10) (1,061) (532) (1,469)
Other noncash items, net 34,264 29,213 17,675
Other unusual income (511) (4,372) -
Changes in current accounts, excluding the effects
of acquisitions and dispositions:
Accounts receivable (19,041) (27,395) (19,737)
Inventories 7,724 (77,356) 14,260
Other current assets (13,097) (4,710) (8,800)
Accounts payable (19,082) 17,742 2,012
Other current liabilities 50,472 47,982 17,499
--------- --------- ---------
Net cash provided by continuing operations 184,376 57,769 188,731
Net cash provided by discontinued operations 4,025 142,152 148,390
--------- --------- ---------
Net cash provided by operating activities 188,401 199,921 337,121
--------- --------- ---------
Investing Activities
Purchases of available-for-sale investments (969,267) (473,576) (554,870)
Proceeds from sale of available-for-sale investments 536,966 113,220 281,451
Proceeds from maturities of available-for-sale investments 250,345 403,134 794,288
Proceeds from sale of other investments 43,255 6,367 3,775
Purchases of property, plant, and equipment (84,799) (74,039) (61,238)
Proceeds from sale of property, plant, and equipment 11,638 21,828 9,604
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Thermo Electron Corporation 2001 Financial Statements
Consolidated Statement of Cash Flows (continued)
(In thousands) 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------
Investing Activities (continued)
Acquisitions, net of cash acquired (Note 2) $ (14,130) $ (15,808) $(344,615)
Acquisition of minority interests of subsidiaries (Note 17) (69,528) (307,166) (43,176)
Proceeds from sale of businesses, net of cash divested (Note 2) 46,767 253,583 61
Advance (to) from affiliates (16,088) (96,434) 8,633
Refund of acquisition purchase price - - 8,969
Increase in other assets (5,077) (3,954) (4,797)
Other (1,580) 7,826 2,181
--------- --------- ---------
Net cash provided by (used in) continuing operations (271,498) (165,019) 100,266
Net cash provided by (used in) discontinued operations 447,654 394,596 (173,834)
--------- --------- ---------
Net cash provided by (used in) investing activities 176,156 229,577 (73,568)
--------- --------- ---------
Financing Activities
Purchases and redemption of Company and subsidiary common
stock and subordinated convertible debentures (Note 10) (511,393) (43,787) (190,412)
Net proceeds from issuance of Company and subsidiary
common stock (Notes 5 and 12) 69,873 58,466 14,896
Repayment of long-term obligations (43,129) (161,191) (40,283)
Net proceeds from issuance of long-term obligations 249 14,577 16,813
Increase (decrease) in short-term notes payable (16,870) (19,183) 25,373
Other (1,760) (4,377) (6,669)
--------- --------- ---------
Net cash used in continuing operations (503,030) (155,495) (180,282)
Net cash provided by (used in) discontinued operations (193,283) 17,914 (106,601)
--------- --------- ---------
Net cash used in financing activities (696,313) (137,581) (286,883)
--------- --------- ---------
Exchange Rate Effect on Cash of Continuing Operations (3,760) (2,883) (12,242)
Exchange Rate Effect on Cash of Discontinued Operations 4,464 (9,997) (3,883)
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents (331,052) 279,037 (39,455)
Cash and Cash Equivalents at Beginning of Year 636,252 357,215 396,670
--------- --------- ---------
305,200 636,252 357,215
Cash and Cash Equivalents of Discontinued Operations at
End of Year (7,643) (130,728) (119,371)
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 297,557 $ 505,524 $ 237,844
========= ========= =========
See Note 14 for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial statements.
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Thermo Electron Corporation 2001 Financial Statements
Consolidated Statement of Comprehensive Loss and Shareholders' Investment
(In thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Comprehensive Loss
Net Loss $ (781) $ (36,111) $ (174,573)
---------- ---------- ----------
Other Comprehensive Items (Note 8):
Currency translation adjustment (24,606) (44,975) (50,979)
Unrealized gains on available-for-sale investments, net of
reclassification adjustment 20,320 4,558 4,651
Unrealized gains on hedging instruments, net of
reclassification adjustment 1,338 - -
---------- ---------- ----------
(2,948) (40,417) (46,328)
Minority interest (81) 5,188 9,439
---------- ---------- ----------
(3,029) (35,229) (36,889)
---------- ---------- ----------
$ (3,810) $ (71,340) $ (211,462)
========== ========== ==========
Shareholders' Investment
Common Stock, $1 Par Value:
Balance at beginning of year $ 195,877 $ 167,433 $ 166,971
Acquisition of minority interests of subsidiaries (Note 17) - 22,553 -
Issuance of stock under employees' and directors' stock plans 3,939 5,891 462
---------- ---------- ----------
Balance at end of year 199,816 195,877 167,433
---------- ---------- ----------
Capital in Excess of Par Value:
Balance at beginning of year 1,681,452 1,052,837 1,033,799
Acquisition of minority interests of subsidiaries (Note 17) - 541,434 -
Activity under employees' and directors' stock plans 56,542 84,840 4,093
Tax benefit related to employees' and directors' stock plans 9,461 18,000 1,645
Effect of subsidiaries' equity transactions 11,112 (15,659) 13,300
---------- ---------- ----------
Balance at end of year 1,758,567 1,681,452 1,052,837
---------- ---------- ----------
Retained Earnings:
Balance at beginning of year 1,005,857 1,041,968 1,216,541
Distribution of Kadant and Viasys Healthcare subsidiaries
to shareholders (Note 17) (495,395) - -
Net loss (781) (36,111) (174,573)
---------- ---------- ----------
Balance at end of year $ 509,681 $1,005,857 $1,041,968
---------- ---------- ----------
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Thermo Electron Corporation 2001 Financial Statements
Consolidated Statement of Comprehensive Loss and Shareholders' Investment (continued)
(In thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Treasury Stock:
Balance at beginning of year $ (246,228) $ (189,646) $ (151,643)
Purchases of Company common stock (196,544) (22,826) (44,758)
Activity under employees' and directors' stock plans (12,305) (26,590) 6,755
Receipt of Company common stock as repayment of notes receivable (2,398) (6,155) -
Receipt of Company common stock in connection with sale of
business - (1,011) -
---------- ---------- ----------
Balance at end of year (457,475) (246,228) (189,646)
---------- ---------- ----------
Deferred Compensation (Note 5):
Balance at beginning of year (6,640) (3,149) -
Awards under employees' stock plans (429) (7,818) (4,061)
Amortization of deferred compensation 3,700 3,725 912
Forfeitures under employees' stock plans 212 602 -
---------- ---------- ----------
Balance at end of year (3,157) (6,640) (3,149)
---------- ---------- ----------
Accumulated Other Comprehensive Items (Note 8):
Balance at beginning of year (96,342) (55,925) (9,597)
Other comprehensive items (2,948) (40,417) (46,328)
---------- ---------- ----------
Balance at end of year (99,290) (96,342) (55,925)
---------- ---------- ----------
$1,908,142 $2,533,976 $2,013,518
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Nature of Operations
Thermo Electron Corporation (the Company) is a global leader in the
development, manufacture, and sale of technology-based instrument systems,
components, and solutions used in virtually every industry to monitor, collect,
and analyze data to provide knowledge for the user. For example, the Company's
powerful analysis technologies help biotech researchers sift through data to
make the discoveries that will fight disease or prolong life; allow
telecommunications equipment manufacturers to fabricate components required to
increase the speed and quality of communications; and monitor and control
industrial processes on-line to ensure that critical quality standards are met
efficiently and safely.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company
and its majority- and wholly owned subsidiaries. All material intercompany
accounts and transactions have been eliminated. The Company accounts for
investments in businesses in which it owns between 20% and 50% using the equity
method.
Presentation
During 2000 and 2001, the Company completed the principal aspects of a
major corporate reorganization. As part of this reorganization, the Company spun
off two businesses and sold a number of operating units. In addition, the
Company has taken private all of its majority-owned subsidiaries in its
continuing operations including Spectra-Physics, Inc. (formerly Spectra-Physics
Lasers, Inc.), which was effected in February 2002 (Note 19). The results of
operations of certain major lines of business that have been spun off or that
have been or will be sold have been classified as discontinued operations in the
accompanying financial statements (Note 17).
Fiscal Year
The Company has adopted a fiscal year ending the Saturday nearest December
31. References to 2001, 2000, and 1999 are for the fiscal years ended December
29, 2001, December 30, 2000, and January 1, 2000, respectively.
Revenue Recognition
Prior to 2000, the Company generally recognized revenues upon shipment of
its products. During the fourth quarter of 2000, effective as of January 2,
2000, the Company adopted Securities and Exchange Commission (SEC) Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." Under SAB No. 101, when the terms of sale include customer
acceptance provisions, and compliance with those provisions can not be
demonstrated until customer use, revenues are recognized upon acceptance.
Revenues for products that require installation for which the installation is
essential to functionality or is not deemed inconsequential or perfunctory are
recognized upon completion of installation. Revenues for products sold where
installation is not essential to functionality and is deemed inconsequential or
perfunctory are recognized upon shipment with estimated installation costs
accrued (Note 16).
In restating quarterly results for 2000 to comply with SAB No. 101, the
Company included adjustments to record amounts billed to customers for shipping
and handling costs as revenues with the associated costs reported as cost of
revenues. Previously, amounts billed to customers for shipping and handling had
generally been reported as an offset to the related cost. Periods prior to 2000
were not restated for shipping and handling costs due to immateriality.
The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to pay amounts due. The
Company provides a reserve for its estimate of warranty costs at the time
revenue is recognized. Deferred revenue in the accompanying balance sheet
consists primarily of unearned revenue on service contracts. Substantially all
of the deferred revenue in the accompanying 2001 balance sheet will be
recognized within one year.
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
- --------------------------------------------------------------------------------
Stock-based Compensation Plans
The Company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans (Note 5). Accordingly, no
accounting recognition is given to stock options granted at fair market value
until they are exercised. Upon exercise, net proceeds, including tax benefits
realized, are credited to shareholders' investment.
Income Taxes
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
based on the expected future tax consequences of differences between the
financial statement basis and the tax basis of assets and liabilities,
calculated using enacted tax rates in effect for the year in which the
differences are expected to be reflected in the tax return.
Earnings (Loss) per Share
Basic earnings (loss) per share has been computed by dividing net income
(loss) by the weighted average number of shares outstanding during the year.
Except where the result would be antidilutive to income from continuing
operations, diluted earnings (loss) per share has been computed assuming the
conversion of convertible obligations and the elimination of the related
interest expense, and the exercise of stock options, as well as their related
income tax effects (Note 7).
Cash and Cash Equivalents
Cash equivalents consists principally of money market funds, commercial
paper, and other marketable securities purchased with an original maturity of
three months or less. These investments are carried at cost, which approximates
market value.
Available-for-sale Investments
The Company's marketable debt and equity securities are considered
available-for-sale investments in the accompanying balance sheet and are carried
at market value, with the difference between cost and market value, net of
related tax effects, recorded in the "Accumulated other comprehensive items"
component of shareholders' investment (Note 9).
Inventories
Inventories are stated at the lower of cost (on a first-in, first-out or
weighted average basis) or net realizable value and include materials, labor,
and manufacturing overhead. The components of inventories are as follows:
(In thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Raw Materials and Supplies $137,622 $169,885
Work in Progress 60,220 65,625
Finished Goods (includes $14,918 and $33,605 at customer locations) 139,199 158,642
-------- --------
$337,041 $394,152
======== ========
The Company periodically reviews its quantities of inventories on hand and
compares these amounts to expected usage of each particular product or product
line. The Company records as a charge to cost of revenues any amounts required
to reduce the carrying value of inventories to net realizable value (Note 15).
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
- --------------------------------------------------------------------------------
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while maintenance
and repairs are charged to expense as incurred. The Company provides for
depreciation and amortization using the straight-line method over the estimated
useful lives of the property as follows: buildings and improvements, 2 to 40
years; machinery and equipment, 1 to 15 years; and leasehold improvements, the
shorter of the term of the lease or the life of the asset. Property, plant, and
equipment consists of the following:
(In thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Land $ 33,099 $ 40,292
Buildings and Improvements 142,697 143,012
Machinery, Equipment, and Leasehold Improvements 306,590 301,251
-------- --------
482,386 484,555
Less: Accumulated Depreciation and Amortization 211,674 198,677
-------- --------
$270,712 $285,878
======== ========
Other Assets
Other assets in the accompanying balance sheet includes intangible assets,
notes receivable, deferred debt expense, prepaid pension costs, an equity method
investment in FLIR Systems, Inc., and other assets. Intangible assets include
the costs of acquired trademarks, patents, product technology, and other
specifically identifiable intangible assets and are being amortized using the
straight-line method over their estimated useful lives, which range from 2 to 20
years. Intangible assets were $40.1 million and $46.8 million, net of
accumulated amortization of $43.0 million and $36.1 million, at year-end 2001
and 2000, respectively.
Goodwill
Goodwill was amortized through December 29, 2001, using the straight-line
method over periods ranging from 5 to 40 years. Accumulated amortization was
$233.0 million and $192.8 million at year-end 2001 and 2000, respectively. The
Company assesses the future useful life of this and other noncurrent assets
whenever events or changes in circumstances indicate that the current useful
life has diminished. Such events or circumstances generally include the
occurrence of operating losses or a significant decline in earnings associated
with the acquired business or asset. The Company considers the future
undiscounted cash flows of the acquired companies in assessing the
recoverability of this asset. The Company assesses cash flows before interest
charges, and when impairment is indicated, writes the asset down to fair value.
If quoted market values are not available, the Company estimates fair value by
calculating the present value of future cash flows. If impairment has occurred,
any excess of carrying value over fair value is recorded as a loss (Note 15).
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, "Goodwill and Other Intangible Assets." The Company will adopt the
requirements of SFAS No. 142 effective December 30, 2001. SFAS No. 142 requires
companies to test all goodwill for impairment by June 29, 2002, and to cease
amortization of this asset in 2002. The provisions of SFAS No. 142 apply to all
goodwill regardless of when it was acquired. While the Company is in the process
of completing its testing of goodwill for impairment, it does not expect a
material charge for impairment based on its preliminary review. Amortization of
goodwill totaled $40.2 million, $37.9 million, and $34.4 million in 2001, 2000,
and 1999, respectively.
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
- --------------------------------------------------------------------------------
Currency Translation
All assets and liabilities of the Company's non-U.S. subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' investment.
Currency transaction gains and losses are included in the accompanying statement
of operations and are not material for the three years presented.
Forward Contracts
Effective in the first quarter of 2001, the Company adopted 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 or cash flows. Adoption of SFAS No. 133 in the first
quarter of 2001 resulted in the deferral of a gain of $1.0 million, net of tax
and minority interest, and a corresponding loss on periods prior to 2001, which
was classified as "Cumulative effect of the change in accounting principle" in
the accompanying 2001 statement of operations. This deferred gain related to
forward currency exchange contracts that were marked to market through earnings
prior to the adoption of SFAS No. 133. The entire deferred gain recorded upon
adoption was reclassified into earnings during 2001 as the underlying hedged
transactions occurred.
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. These contracts principally
hedge transactions denominated in U.S. dollars, Euros, British pounds sterling,
Japanese yen, French francs, Swiss francs, German marks, Swedish krona, and
Netherland guilders. 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
enter into cash-flow hedges for a portion of their currency exposures
anticipated over the ensuing 12-month period, using exchange contracts that have
maturities of 12 months or less. The Company does not hold or engage in
transactions involving derivative instruments for purposes other than risk
management.
The Company records its forward currency exchange contracts at fair value
in its 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 hedged transaction occurs. At December 29, 2001, the Company had
deferred gains, net of income taxes, relating to currency exchange contracts of
approximately $1.3 million, substantially all of which is expected to be
recognized as income over the next 12 months when the hedged transactions,
principally anticipated sales, transpire. 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.
The ineffective portion of the gain or loss on derivative instruments is
recorded in other income (expense), net, in the accompanying 2001 statement of
operations and is not material.
See Note 15 for the effect in 1999 and 2000 of a majority-owned
subsidiary's early adoption of SFAS No. 133.
Prior to adoption of SFAS No. 133, gains and losses arising from forward
currency exchange contracts were recognized as offsets to gains and losses
resulting from the transactions being hedged.
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
- --------------------------------------------------------------------------------
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 in the first quarter of 2002. The Company does not expect adoption of
SFAS No. 144 to materially affect its financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. In addition, significant estimates were made in determining
the loss on disposition of the Company's discontinued operations (Note 17), in
estimating future cash flows to quantify impairment of assets, and in
determining the ultimate loss from abandoning leases at facilities being exited
(Note 15). Actual results could differ from those estimates.
2. Acquisitions and Dispositions
- --------------------------------------------------------------------------------
Acquisitions
In 2001 and 2000, the Company made several acquisitions for $14.1 million
and $15.8 million in cash, net of cash acquired, respectively.
In February 1999, the Company acquired 17,494,684 shares (or approximately
99%) of Spectra-Physics AB, a Stockholm Stock Exchange-listed company, for
approximately 160 Swedish krona per share (approximately $20 per share) in
completion of the Company's cash tender offer to acquire all of the outstanding
shares of Spectra-Physics AB. In March 2000, the Company completed the
acquisition of the remaining Spectra-Physics AB shares outstanding pursuant to
the compulsory acquisition rules applicable to Swedish companies. As part of the
acquisition of Spectra-Physics AB, the Company acquired Spectra-Physics AB's
majority-owned public subsidiary, Spectra-Physics, Inc. The aggregate purchase
price was approximately $351.5 million, including related expenses. On the date
of acquisition, Spectra-Physics AB had $39.1 million of cash, which included
$30.5 million held by Spectra-Physics. Spectra-Physics AB manufactures a wide
range of laser-based instrumentation systems, primarily for the process-control,
industrial measurement, research, commercial, and government markets.
In connection with the acquisition of Spectra-Physics AB, the Company
acquired 4,162,000 shares of FLIR common stock. FLIR designs, manufactures, and
markets thermal imaging and broadcast camera systems that detect infrared
radiation or heat emitted directly by all objects and materials. The Company
accounts for its investment in FLIR using the equity method with a one quarter
lag to ensure the availability of FLIR's operating results in time to enable the
Company to include its pro rata share of FLIR's results with its own. During
1999, FLIR consummated a pooling-of-interests transaction that decreased the
Company's pro rata share of FLIR's equity from 34.6% to 29.4%. During 2000, the
Company recorded a charge to reflect an impairment of its investment in FLIR
that was deemed to be other than temporary (Note 15). During 2001, the Company
sold 1,150,000 shares of FLIR bringing its ownership of FLIR to 18.2% as of
December 29, 2001 (Note 15). The investment in FLIR is included in other assets
in the accompanying balance sheet.
<
13
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
2. Acquisitions and Dispositions (continued)
- --------------------------------------------------------------------------------
Summary unaudited financial information for FLIR as of and for the 12
months ended September 30, 2001 and 2000, is as follows:
(In thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Current Assets $118,093 $114,494
Noncurrent Assets 43,903 51,439
-------- --------
Total Assets $161,996 $165,933
======== ========
Current Liabilities $103,804 $132,917
Noncurrent Liabilities 8,948 4,251
Shareholders' Equity 49,244 28,765
-------- --------
Total Liabilities and Shareholders' Equity $161,996 $165,933
======== ========
Twelve Months Ended
-----------------------------
September 30, September 30,
(In thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Revenues $206,573 $181,562
Cost of Revenues 95,587 114,211
-------- --------
Gross Profit $110,986 $ 67,351
======== ========
Net Earnings (Loss) $ 18,247 $(59,992)
======== ========
In 1999, in addition to the acquisition of Spectra-Physics AB, the Company
and its formerly majority-owned subsidiaries made several other acquisitions for
$32.2 million in cash, net of cash acquired.
These acquisitions have been accounted for using the purchase method of
accounting, and the acquired companies' results have been included in the
accompanying financial statements from their respective dates of acquisition.
The aggregate cost of the acquisitions in 2001, 2000, and 1999 exceeded the
estimated fair value of the acquired net assets by $200.1 million, which was
amortized principally over 40 years through 2001. Allocation of the purchase
price for these acquisitions was based on estimates of the fair value of the net
assets acquired and, for acquisitions completed in 2001, is subject to
adjustment upon finalization of the purchase price allocation. The Company has
gathered no information that indicates the final purchase price allocations will
differ materially from the preliminary estimates. Pro forma data is not
presented since the acquisitions were not material to the Company's results of
operations individually or in the aggregate.
In connection with its acquisitions, the Company has undertaken
restructuring activities at the acquired businesses. The Company's restructuring
activities, which were accounted for in accordance with Emerging Issues Task
Force Pronouncement (EITF) 95-3, have primarily included reductions in staffing
levels and the abandonment of excess facilities. In connection with these
restructuring activities, as part of the cost of the acquisitions, the Company
established reserves as detailed below, 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.
<
14
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
2. Acquisitions and Dispositions (continued)
- --------------------------------------------------------------------------------
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 January 2, 1999 $ - $ - $ - $16,284 $16,284
Reserves established 9,464 1,355 3,364 3,069 17,252
Payments (3,899) (71) (957) (6,612) (11,539)
Decrease recorded as a
reduction in goodwill - - - (1,521) (1,521)
Currency translation (303) (111) (74) (543) (1,031)
------- ------- ------- ------- -------
Balance at January 1, 2000 5,262 1,173 2,333 10,677 19,445
Reserves established 90 111 - - 201
Payments (2,767) (420) (761) (2,383) (6,331)
Decrease recorded as a
reduction in goodwill (213) - - (298) (511)
Reserves of businesses sold (715) (154) (999) - (1,868)
Currency translation 189 (200) (60) (829) (900)
------- ------- ------- ------- -------
Balance at December 30, 2000 1,846 510 513 7,167 10,036
Payments (467) (291) (358) (747) (1,863)
Decrease recorded as a reduction
in other intangible assets (720) (194) - - (914)
Currency translation (33) (15) (24) (204) (276)
------- ------- ------ ------- -------
Balance at December 29, 2001 $ 626 $ 10 $ 131 $ 6,216 $ 6,983
======= ======= ====== ======= =======
The principal acquisition expenses for pre-1999 acquisitions were for
severance for 601 employees across all functions and for abandoned facilities,
primarily related to the Company's acquisitions of the product-monitoring
businesses of Graseby Limited and Life Sciences International PLC. The abandoned
facilities include two operating facilities in North America with leases that
expired in 2001 and four operating facilities in England with leases expiring
through 2014.
The principal 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 that principally expired in 2001. The amounts captioned as "other"
primarily represent employee relocation, contract termination, and other exit
costs. The Company expects to pay amounts accrued for severance, abandoned
facilities, and other primarily through 2002. The Company finalized its
restructuring plans for Spectra-Physics AB and other 1999 acquisitions in 1999
and 2000. Upon finalization of restructuring plans or settlement of obligations
for less than the expected amount, any excess reserves have been reversed with a
corresponding decrease in goodwill or other intangible assets.
The Company has not established material reserves for restructuring
businesses acquired in 2000 or 2001.
<
15
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
2. Acquisitions and Dispositions (continued)
- --------------------------------------------------------------------------------
Dispositions
In 2001, the Company's continuing operations sold several noncore
businesses for net cash proceeds of $46.8 million and recorded $10.9 million of
pretax losses on sale, which is included in restructuring and other unusual
costs (income), net, in the accompanying statement of operations.
On July 14, 2000, the Company completed the sale of its wholly owned
Spectra Precision businesses to Trimble Navigation Limited for $208.1 million in
net cash proceeds and $80.0 million in seller debt financing at an initial
interest rate of 10%. The note from the buyer called for repayment in two equal,
annual installments beginning in July 2001, but permitted extension of maturity
under certain conditions. The buyer elected to defer payment of the portion of
the note that was due in July 2001. Trimble has advised the Company that the
terms of its senior bank debt will preclude repayment of the note at its
maturity in July 2002. The Company is in negotiation with Trimble to amend the
terms of the note. As a result, the Company has classified the note as
noncurrent in the accompanying 2001 balance sheet. Spectra Precision, formerly
part of the Measurement and Control segment, was acquired as part of
Spectra-Physics AB and provides the construction, surveying, and heavy machine
industries with precision-positioning equipment.
In 2000, the Company's continuing operations sold several other noncore
businesses for net cash proceeds of $45.5 million. The Company realized
aggregate pretax gains of $126.3 million in 2000 from the sale of businesses,
which are included in restructuring and other unusual costs (income), net, in
the accompanying statement of operations. The businesses that were sold in 2001
and 2000 were part of an effort to focus on potentially higher-growth
opportunities in the Life Sciences and Optical Technologies segments.
3. Business Segment and Geographical Information
- --------------------------------------------------------------------------------
The Company's businesses are managed in three segments:
- Life Sciences: serves the pharmaceutical and biotechnology industries
with tools that enable drug discovery and life science research. The
Company also serves the healthcare market with rapid point-of-care
diagnostic tests and clinical laboratory automation products.
- Optical Technologies: provides photonic components and devices used in
applications ranging from medical diagnostics and analytical
instrumentation to scientific research, industrial manufacturing, and
telecommunications equipment. In addition, the Company supplies
semiconductor manufacturing and testing instruments and precision
temperature-control systems.
- Measurement and Control: helps manufacturing customers increase quality
and improve productivity with analytical tools and on-line process
instruments. The Company's instruments also help protect workers and
the environment.
<
16
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
3. Business Segment and Geographical Information (continued)
- --------------------------------------------------------------------------------
During 2001, the Company moved its Thermo KeyTek unit from the Measurement
and Control segment to the Optical Technologies segment and moved its Thermo
Projects unit (the principal operating business of which was acquired in early
2001) from the Life Sciences segment to a separate segment (included as "Other"
below) due to organizational changes. Prior periods have been restated to
conform to this presentation where applicable.
(In thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Business Segment Information
Revenues:
Life Sciences $ 834,164 $ 779,978 $ 764,408
Optical Technologies 526,353 496,307 406,818
Measurement and Control 831,345 1,021,040 1,148,083
Other 12,130 41 228
Intersegment (a) (15,782) (16,844) (24,917)
---------- ---------- ----------
$ 2,188,210 $2,280,522 $ 2,294,620
=========== ========== ===========
Income from Continuing Operations Before Provision for Income
Taxes, Minority Interest, Extraordinary Item, and Cumulative
Effect of Change in Accounting Principle:
Life Sciences (b) $ 82,245 $ 93,207 $ 118,712
Optical Technologies (c) (30,091) 36,307 25,110
Measurement and Control (d) 32,892 191,611 76,922
Other 122 (1,345) (1,512)
---------- ---------- ----------
Total Segment Income (e) 85,168 319,780 219,232
Corporate/Other (f) (14,487) (134,949) (94,473)
---------- ---------- ----------
$ 70,681 $ 184,831 $ 124,759
========== ========== ==========
Total Assets:
Life Sciences $1,155,286 $1,217,767 $1,150,532
Optical Technologies 649,511 624,128 514,584
Measurement and Control 1,297,908 1,342,284 1,503,129
Corporate/Other (g) 722,365 775,505 444,500
Net Assets of Discontinued Operations - 903,293 1,459,012
---------- ---------- ----------
$3,825,070 $4,862,977 $5,071,757
========== ========== ==========
Depreciation:
Life Sciences $ 16,504 $ 16,091 $ 15,669
Optical Technologies 17,712 15,055 12,558
Measurement and Control 15,039 20,579 21,892
Corporate/Other 2,173 1,189 1,231
---------- ---------- ----------
$ 51,428 $ 52,914 $ 51,350
========== ========== ==========
<
17
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
3. Business Segment and Geographical Information (continued)
- --------------------------------------------------------------------------------
(In thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Amortization:
Life Sciences $ 22,879 $ 19,418 $ 14,965
Optical Technologies 7,571 6,337 4,287
Measurement and Control 16,435 18,317 19,957
Corporate/Other 208 500 870
---------- ---------- ----------
$ 47,093 $ 44,572 $ 40,079
========== ========== ==========
Capital Expenditures:
Life Sciences $ 22,849 $ 18,849 $ 14,493
Optical Technologies 41,378 32,209 18,737
Measurement and Control 14,474 21,378 22,183
Corporate/Other 6,098 1,603 5,825
---------- ---------- ----------
$ 84,799 $ 74,039 $ 61,238
========== ========== ==========
Geographical Information
Revenues (h):
United States $1,480,033 $1,574,737 $1,522,610
England 315,033 311,660 339,151
Other 677,461 712,154 779,396
Transfers among geographical areas (a) (284,317) (318,029) (346,537)
---------- ---------- ----------
$2,188,210 $2,280,522 $2,294,620
========== ========== ==========
Long-lived Assets (i):
United States $ 199,111 $ 222,169 $ 206,409
Sweden 354 262 66,339
Other 92,457 88,846 122,723
---------- ---------- ----------
$ 291,922 $ 311,277 $ 395,471
========== ========== ==========
Export Sales Included in United States Revenues Above (j) $ 386,799 $ 436,378 $ 435,558
========== ========== ==========
(a) Intersegment sales and transfers among geographical areas are accounted for at prices that are
representative of transactions with unaffiliated parties.
(b) Includes restructuring and other unusual costs, net, of $30.3 million and $16.3 million in 2001 and
2000, respectively, and restructuring and other unusual income of $0.3 million in 1999.
(c) Includes restructuring and other unusual costs of $61.5 million, $6.5 million, and $11.2 million in
2001, 2000, and 1999, respectively.
(d) Includes restructuring and other unusual costs, net, of $55.4 million and $30.1 million in 2001 and
1999, respectively, and restructuring and other unusual income, net, of $91.9 million in 2000.
(e) Segment income is income before corporate general and administrative expenses, other income and
expense, minority interest expense, income taxes, extraordinary item, and cumulative effect of change
in accounting principle.
<
18
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
3. Business Segment and Geographical Information (continued)
- --------------------------------------------------------------------------------
(f) Includes corporate general and administrative expenses and other income and expense. Includes
restructuring and other unusual costs of $11.5 million, $20.5 million, and $5.7 million at the
Company's corporate office in 2001, 2000, and 1999, respectively. Other income and expense includes
$35.1 million of income in 2001 and $45.1 million and $13.4 million of charges in 2000 and 1999,
respectively, primarily related to the Company's investment in FLIR; and other expense of $2.8 million
and $3.6 million for impairment of investments in 2001 and 1999, respectively.
(g) Primarily cash and cash equivalents, short- and long-term investments, and property and equipment at
the Company's corporate office.
(h) Revenues are attributed to countries based on selling location.
(i) Includes property, plant, and equipment, net, and other long-term tangible assets.
(j) In general, export revenues are denominated in U.S. dollars.
4. Other Income (Expense), Net
- --------------------------------------------------------------------------------
The components of other income (expense), net, in the accompanying
statement of operations are as follows:
(In thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Interest Income $ 68,490 $ 40,151 $ 40,837
Interest Expense (71,769) (83,142) (91,861)
Equity in Earnings (Loss) of Unconsolidated Subsidiaries (Note 15) 4,699 (47,315) (7,274)
Gain on Investments, Net (Notes 9 and 15) 35,579 6,849 3,662
Other Items, Net (520) 2,273 (2,709)
-------- -------- --------
$ 36,479 $(81,184) $(57,345)
======== ======== ========
5. Employee Benefit Plans
- --------------------------------------------------------------------------------
Stock-based Compensation Plans
Stock Option Plans
- ------------------
The Company has stock-based compensation plans for its key employees,
directors, and others. These plans permit the grant of a variety of stock and
stock-based awards as determined by the human resources committee of the
Company's Board of Directors (the Board Committee) or by the Company's chief
executive officer in limited circumstances, including restricted stock, stock
options, stock bonus shares, or performance-based shares. Generally, options
granted prior to July 2000 under these plans are exercisable immediately, but
are subject to certain transfer restrictions and the right of the Company to
repurchase shares issued upon exercise of the options at the exercise price,
upon certain events, primarily cessation of employment. The restrictions and
repurchase rights may lapse over periods ranging from 0-10 years, depending on
the term of the option, which may range from 3-12 years. Options granted in or
after July 2000 under these plans generally vest ratably over three years,
assuming continued employment with certain exceptions. Upon a change in control
of the Company, all options, regardless of grant date, become immediately
exercisable and cease to be subject to transfer restrictions and the Company's
repurchase rights. Nonqualified options are generally granted at fair market
value, although options may be granted at a price at or above 85% of the fair
market value on the date of grant. Incentive stock options must be granted at
not less than the fair market value of the Company's stock on the date of grant.
Generally, stock options have been granted at fair market value. The Company
also has a directors' stock option plan that provides for the annual grant of
stock options of the Company to outside directors pursuant to a formula approved
by the Company's shareholders. Options awarded under this plan are immediately
exercisable and expire three to seven years after the date of grant.
<
19
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
- --------------------------------------------------------------------------------
In August and November 2001, the Company distributed all of its shares of
two subsidiaries to the Company's shareholders (Note 17). The intrinsic value of
the options issued under the Company's employee stock plans prior to the
spinoffs was maintained following the spinoffs in accordance with the
methodology set forth in FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." The data in the accompanying tables
has been adjusted to reflect the spinoffs. Options to purchase 908,000 shares of
Company common stock held by employees of the spun off businesses were cancelled
at the spin off dates. These employees received equivalent options in stock of
the respective spunoff business.
In 2001, 2000, and 1999, the Company awarded 17,120, 372,800, and 193,000
shares, respectively, of restricted Company common stock with an aggregate value
of $0.4 million, $7.8 million, and $3.5 million, respectively, to certain key
employees. The shares generally vest over three years, assuming continued
employment, with some exceptions. Also in 1999, some of the Company's formerly
majority-owned subsidiaries awarded shares of restricted common stock of their
respective companies. The shares of subsidiary common stock had the same terms
as the Company's restricted common stock and had an aggregate value of $0.6
million. During 2000, the restricted common stock of the Company's formerly
majority-owned subsidiaries was converted into 100,715 shares of restricted
Company common stock with the same terms. The Company has recorded the fair
value of the restricted stock as deferred compensation in the accompanying
balance sheet and is amortizing the amount over the vesting periods.
A summary of the Company's stock option activity is as follows:
2001 2000 1999
---------------- ---------------- -----------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------
Options Outstanding, Beginning of Year 24,579 $16.62 15,849 $16.86 11,528 $19.24
Granted 3,086 22.00 2,595 18.49 3,961 14.47
Assumed in mergers with subsidiaries (Note 17) - - 16,221 14.62 1,875 9.98
Exercised (4,258) 13.16 (5,915) 13.53 (444) 10.81
Forfeited (2,836) 19.27 (4,171) 15.25 (1,071) 24.07
Canceled due to spinoffs (908) 17.53 - - - -
------ ------ ------
Options Outstanding, End of Year 19,663 $17.78 24,579 $16.62 15,849 $16.86
====== ====== ====== ====== ====== ======
Options Exercisable 15,612 $16.83 23,120 $16.41 15,849 $16.86
====== ====== ====== ====== ====== ======
Options Available for Grant 8,234 3,826 5,531
====== ====== ======
<
20
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
- --------------------------------------------------------------------------------
A summary of the status of the Company's stock options at December 29,
2001, is as follows:
Options Outstanding
------------------------------------------------------
Range of Exercise Prices Number Weighted Weighted
of Average Average
Shares Remaining Exercise
(In thousands) Contractual Life Price
- ---------------------------------------------------------------------------------------------------------
$ 3.36 - $ 15.84 8,998 6.0 years $11.79
15.85 - 28.33 8,918 5.4 years 20.39
28.34 - 40.82 1,649 7.1 years 32.54
40.83 - 195.11 98 7.4 years 83.34
------
$ 3.36 - $195.11 19,663 5.8 years $17.78
======
Employee Stock Purchase Plan
- ----------------------------
Qualifying employees are eligible to participate in an employee stock
purchase plan sponsored by the Company. Under this program, shares of the
Company's common stock may be purchased at 85% of the lower of the fair market
value at the beginning or end of the purchase period, and the shares purchased
are subject to a one-year resale restriction. Shares are purchased through
payroll deductions of up to 10% of each participating employee's gross wages.
Prior to the 2000 plan year, participants of employee stock purchase programs
sponsored by the Company's formerly majority-owned public subsidiaries could
also elect to purchase shares of the common stock of the subsidiary at which
they are employed under the same general terms described above. During 2001,
2000, and 1999, the Company issued 184,000 shares, 693,000 shares, and 415,000
shares, respectively, of its common stock under this plan.
<
21
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
- ----------------------------------------------------------------------------------------------------------
Pro Forma Stock-based Compensation Expense
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-based
Compensation," which sets forth a fair-value based method of recognizing
stock-based compensation expense. As permitted by SFAS No. 123, the Company has
elected to continue to apply APB No. 25 to account for its stock-based
compensation plans. Had compensation cost for awards granted after 1994 under
the Company's stock-based compensation plans been determined based on the fair
value at the grant dates consistent with the method set forth under SFAS No.
123, the effect on certain financial information of the Company would have been
as follows:
(In thousands except per share amounts) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle:
As reported $ 49,592 $ 62,047 $ 37,283
Pro forma 30,159 45,965 25,281
Basic Earnings per Share from Continuing Operations Before
Extraordinary Item and Cumulative Effect of Change in Accounting
Principle:
As reported .27 .37 .24
Pro forma .17 .27 .16
Diluted Earnings per Share from Continuing Operations Before
Extraordinary Item and Cumulative Effect of Change in Accounting
Principle:
As reported .27 .36 .22
Pro forma .16 .26 .14
Net Loss:
As reported $ (781) $ (36,111) $(174,573)
Pro forma (20,214) (52,131) (201,186)
Basic Loss per Share:
As reported - (.22) (1.10)
Pro forma (.11) (.31) (1.27)
Diluted Loss per Share:
As reported - (.22) (1.12)
Pro forma (.11) (.31) (1.29)
Pro forma compensation expense for options granted is reflected over the
vesting period; therefore, future pro forma compensation expense may be greater
as additional options are granted.
The weighted average fair value per share of options granted was $9.85,
$6.58, and $4.82 in 2001, 2000, and 1999, respectively. The fair value of each
option grant was estimated on the grant date using the Black-Scholes
option-pricing model with the following weighted-average assumptions:
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Volatility 45% 35% 32%
Risk-free Interest Rate 4.1% 4.9% 5.6%
Expected Life of Options 5.0 years 3.9 years 3.9 years
<
22
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
- --------------------------------------------------------------------------------
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options, which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
401(k) Savings Plan and Other Defined Contribution Plans
The Company's 401(k) savings plan covers the majority of the Company's
eligible full-time U.S. employees. Contributions to the plan are made by both
the employee and the Company. Company contributions are based on the level of
employee contributions.
Certain of the Company's subsidiaries offer retirement plans in lieu of
participation in the Company's principal 401(k) savings plan. Company
contributions to these plans are based on formulas determined by the Company.
For these plans, the Company contributed and charged to expense $19.0
million, $18.0 million, and $15.2 million in 2001, 2000, and 1999, respectively.
Defined Benefit Pension Plans
Two of the Company's German subsidiaries and one of its U.K. subsidiaries
have defined benefit pension plans covering substantially all full-time
employees at the respective subsidiaries. One of the German subsidiaries' plans
is unfunded, as permitted under the plan and applicable laws. Net periodic
benefit costs for the plans in aggregate included the following components:
(In thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Service Cost $ 2,615 $ 2,238 $ 2,639
Interest Cost on Benefit Obligation 3,941 3,834 3,899
Expected Return on Plan Assets (4,951) (5,793) (5,264)
Recognized Net Actuarial Gain (19) (180) (34)
Amortization of Unrecognized Gain - (2) (23)
Amortization of Unrecognized Initial Obligation 35 36 41
------- ------- -------
$ 1,621 $ 133 $ 1,258
======= ======= =======
The activity under the Company's defined benefit plans is as follows:
(In thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation, beginning of year $73,772 $71,762
Service cost 2,615 2,238
Interest cost 3,941 3,834
Benefits paid (2,212) (1,878)
Actuarial (gain) loss (8,358) 3,525
Currency translation (2,589) (5,709)
------- -------
Benefit obligation, end of year $67,169 $73,772
------- -------
<
23
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
5. Employee Benefit Plans (continued)
- --------------------------------------------------------------------------------
(In thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Change in Plan Assets:
Fair value of plan assets, beginning of year $76,579 $89,393
Company contributions 580 518
Benefits paid (2,212) (1,878)
Actual loss on plan assets (10,064) (4,505)
Currency translation (2,328) (6,949)
------- -------
Fair value of plan assets, end of year 62,555 76,579
------- -------
Funded Status (4,614) 2,807
Unrecognized Net Actuarial Loss 7,126 252
Unrecognized Initial Obligation 67 107
------- -------
Prepaid Pension Costs $ 2,579 $ 3,166
======= =======
The aggregate projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for the pension plans with accumulated
benefit obligations in excess of plan assets were $18.5 million, $13.9 million,
and $5.6 million, respectively, at year-end 2001 and $18.0 million, $14.2
million, and $5.7 million, respectively, at year-end 2000.
The weighted average rates used to determine the net periodic benefit
costs were as follows:
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Discount Rate 6.1% 5.6% 5.1%
Rate of Increase in Salary Levels 4.4% 4.4% 4.4%
Expected Long-term Rate of Return on Assets 7.0% 6.9% 6.9%
6. Income Taxes
- --------------------------------------------------------------------------------
The components of income from continuing operations before provision for
income taxes, minority interest, extraordinary item, and cumulative effect of
change in accounting principle are as follows:
(In thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
U.S. $ 5,745 $ 91,342 $ 39,761
Non-U.S. 64,936 93,489 84,998
-------- -------- --------
$ 70,681 $184,831 $124,759
======== ======== ========
<
24
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
6. Income Taxes (continued)
- --------------------------------------------------------------------------------
The components of the provision for income taxes of continuing operations
are as follows:
(In thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Currently Payable:
Federal $ 11,117 $ 55,819 $ 25,102
Non-U.S. 23,572 53,586 40,417
State 3,318 8,311 6,364
--------- --------- ---------
38,007 117,716 71,883
--------- --------- ---------
Net Deferred (Prepaid):
Federal (12,787) (635) (6,197)
Non-U.S. 2,667 (4,535) 520
State (958) (329) (1,778)
--------- --------- ---------
(11,078) (5,499) (7,455)
--------- --------- ---------
$ 26,929 $ 112,217 $ 64,428
========= ========= =========
The total provision for income taxes included in the accompanying
statement of operations is as follows:
(In thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Continuing Operations $ 26,929 $ 112,217 $ 64,428
Discontinued Operations - 10,427 (54,807)
Provision for Loss on Disposal of Discontinued Operations (22,741) (104,000) 174,000
Extraordinary Item 637 333 900
Cumulative Effect of Change in Accounting Principle (663) (8,543) -
--------- --------- ---------
$ 4,162 $ 10,434 $ 184,521
========= ========= =========
The Company and its formerly majority-owned subsidiaries receive a tax
deduction upon the exercise of nonqualified stock options by employees for the
difference between the exercise price and the market price of the underlying
common stock on the date of exercise. The provision for income taxes that is
currently payable does not reflect $9.5 million, $18.0 million, and $2.7 million
of such benefits of the Company and its formerly majority-owned subsidiaries
that have been allocated to capital in excess of par value, directly or through
the effect of majority-owned subsidiaries' equity transactions, in 2001, 2000,
and 1999, respectively. In addition, the provision for income taxes that is
currently payable does not reflect $19.0 million and $3.5 million of tax
benefits used to reduce goodwill in 2000 and 1999, respectively.
<
25
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
6. Income Taxes (continued)
- --------------------------------------------------------------------------------
The provision for income taxes in the accompanying statement of operations
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income from continuing operations before provision for income
taxes, minority interest, extraordinary item, and cumulative effect of change in
accounting principle due to the following:
(In thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Provision for Income Taxes at Statutory Rate $ 24,738 $ 64,691 $ 43,666
Increases (Decreases) Resulting From:
Goodwill of businesses sold - 30,190 -
Amortization and write off of goodwill 13,095 11,330 16,648
Writedown and equity in loss of unconsolidated subsidiary - 12,062 -
Foreign sales corporation (2,401) (7,325) (3,558)
Federal tax credits (2,955) (4,113) (3,697)
State income taxes, net of federal tax 1,535 5,188 2,979
Non-U.S. tax rate and tax law differential (1,017) 301 6,771
Nondeductible expenses 926 1,347 2,246
Losses not benefited in the year they occurred (4,687) 1,005 1,235
Other, net (2,305) (2,459) (1,862)
-------- -------- --------
$ 26,929 $112,217 $ 64,428
======== ======== ========
Net deferred tax asset in the accompanying balance sheet consists of the
following:
(In thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Deferred Tax Asset (Liability):
Net operating loss and credit carryforwards $ 46,568 $ 94,874
Reserves and accruals 52,234 55,460
Inventory basis difference 39,246 34,322
Accrued compensation 10,952 12,097
Depreciation and amortization 11,299 (5,621)
Available-for-sale investments (18,114) (8,044)
Other, net (2,750) 1,102
-------- --------
139,435 184,190
Less: Valuation allowance 45,370 54,874
-------- --------
$ 94,065 $129,316
======== ========
The valuation allowance primarily relates to the uncertainty surrounding
the realization of acquired tax loss and credit carryforwards. Any tax benefit
resulting from the use of acquired loss carryforwards is used to reduce
goodwill.
At year-end 2001, the Company had federal, state, and non-U.S. net
operating loss carryforwards of $8 million, $327 million, and $116 million,
respectively. Use of the carryforwards is limited based on the future income of
certain subsidiaries. The federal and state net operating loss carryforwards
expire in the years 2002 through 2021. Of the non-U.S. net operating loss
carryforwards, $11 million expire in the years 2002 through 2015, and the
remainder do not expire.
<
26
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
6. Income Taxes (continued)
- --------------------------------------------------------------------------------
A provision has not been made for U.S. or additional non-U.S. taxes on
$514 million of undistributed earnings of international subsidiaries that could
be subject to taxation if remitted to the U.S. because the Company plans to keep
these amounts permanently reinvested overseas.
7. Earnings (Loss) per Share
- --------------------------------------------------------------------------------
(In thousands except per share amounts) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Basic
Income from Continuing Operations Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle $ 49,592 $ 62,047 $ 37,283
Income (Loss) from Discontinued Operations - 14,228 (163,325)
Provision for Loss on Disposal of Discontinued Operations, Net (50,440) (100,000) (50,000)
Extraordinary Item 1,061 532 1,469
Cumulative Effect of Change in Accounting Principle (994) (12,918) -
--------- --------- ---------
Net Loss $ (781) $ (36,111) $(174,573)
--------- --------- ---------
Weighted Average Shares 180,560 167,462 157,987
--------- --------- ---------
Basic Earnings (Loss) per Share:
Continuing operations before extraordinary item and cumulative
effect of change in accounting principle $ .27 $ .37 $ .24
Discontinued operations (.28) (.51) (1.35)
Extraordinary item .01 - .01
Cumulative effect of change in accounting principle (.01) (.08) -
--------- --------- ---------
$ - $ (.22) $ (1.10)
========= ========= =========
<
27
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
7. Earnings (Loss) per Share (continued)
- --------------------------------------------------------------------------------
(In thousands except per share amounts) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Diluted
Income from Continuing Operations Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle $ 49,592 $ 62,047 $ 37,283
Income (Loss) from Discontinued Operations - 14,228 (163,325)
Provision for Loss on Disposal of Discontinued Operations, Net (50,440) (100,000) (50,000)
Extraordinary Item 1,061 532 1,469
Cumulative Effect of Change in Accounting Principle (994) (12,918) -
--------- --------- ---------
Net Loss (781) (36,111) (174,573)
Effect of:
Majority-owned subsidiaries' dilutive securities - continuing
operations - (1,331) (3,071)
Majority-owned subsidiaries' dilutive securities - discontinued
operations - (113) (145)
--------- --------- ---------
Loss Available to Common Shareholders, as Adjusted $ (781) $ (37,555) $(177,789)
--------- --------- ---------
Weighted Average Shares 180,560 167,462 157,987
Effect of:
Stock options 2,893 2,819 236
Convertible obligations 463 238 -
--------- --------- ---------
Weighted Average Shares, as Adjusted 183,916 170,519 158,223
--------- --------- ---------
Diluted Earnings (Loss) per Share:
Continuing operations before extraordinary item and cumulative
effect of change in accounting principle $ .27 $ .36 $ .22
Discontinued operations (.27) (.50) (1.35)
Extraordinary item .01 - .01
Cumulative effect of change in accounting principle (.01) (.08) -
--------- --------- ---------
$ - $ (.22) $ (1.12)
========= ========= =========
Options to purchase 4,755,000, 4,726,000, and 12,200,000 shares of common
stock were not included in the computation of diluted earnings (loss) per share
for 2001, 2000, and 1999, respectively, because the options' exercise prices
were greater than the average market price for the common stock and their effect
would have been antidilutive.
<
28
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
7. Earnings (Loss) per Share (continued)
- --------------------------------------------------------------------------------
During 2000, convertible obligations of some of the Company's formerly
public subsidiaries became convertible into Company common stock (Note 17). The
computation of diluted earnings (loss) per share for 2001 and 2000 excludes the
effect of assuming the conversion of the following of the Company's subordinated
convertible debentures because the effect would be antidilutive:
Conversion
Principal Interest Price per
Amount Rate Share
----------------------------------------
(In thousands)
$398,498 4 1/4% $ 32.09
231,508 4% 35.77
145,414 4 1/2% 34.42
78,048 3 1/4% 41.84
75,168 4 3/8% 111.83
69,614 4 5/8% 34.22
17,650 4 7/8% 32.50
11,583 2 7/8% 28.16
The computation of diluted earnings (loss) per share for 1999 excludes the
effect of assuming the conversion of the Company's 4 1/4% subordinated
convertible debentures, convertible at $32.09 per share, because the effect
would be antidilutive. In addition, the computation of diluted earnings (loss)
per share for 1999 excludes the effect of assuming the repurchase of 2,367,000
shares of Company common stock at a weighted average exercise price of $14.06
per share in connection with put options (Note 12) because the effect would be
antidilutive.
8. Comprehensive Loss
- --------------------------------------------------------------------------------
Comprehensive loss combines net loss and "other comprehensive items,"
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including currency
translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments and hedging instruments.
Accumulated other comprehensive items in the accompanying balance sheet
consists of the following:
(In thousands) 2001 2000
- ----------------------------------------------------------------------------------------------------------
Cumulative Translation Adjustment $(132,709) $(108,103)
Net Unrealized Gains on Available-for-sale Investments 32,081 11,761
Net Unrealized Gains on Hedging Instruments 1,338 -
--------- ---------
$ (99,290) $ (96,342)
========= =========
<
29
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
8. Comprehensive Loss (continued)
- --------------------------------------------------------------------------------
The change in unrealized gains on available-for-sale investments, a
component of other comprehensive items in the accompanying statement of
comprehensive loss and shareholders' investment, includes the following:
(In thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Unrealized Holding Gains Arising During the Year (net of
income tax provision of $12,136, $5,257, and $3,956) $21,077 $ 8,668 $ 6,848
Reclassification Adjustment for Gains Included in Net Loss
(net of income tax provision of $505, $2,739, and $1,465) (757) (4,110) (2,197)
------- ------- -------
Net Unrealized Gains (net of income tax provision of $11,631,
$2,518, and $2,491) $20,320 $ 4,558 $ 4,651
======= ======= =======
The change in unrealized gains on hedging instruments, a component of
other comprehensive items in the accompanying statement of comprehensive loss
and shareholders' investment, includes the following:
(In thousands) 2001
- ----------------------------------------------------------------------------------------------------------
Unrealized Holding Gains Arising During the Year (net of
income tax provision of $2,861) $ 4,330
Reclassification Adjustment for Gains Included in Net Loss
(net of income tax provision of $1,995) (2,992)
-------
Net Unrealized Gains (net of income tax provision of $866) $ 1,338
=======
9. Available-for-sale Investments
- --------------------------------------------------------------------------------
The aggregate market value, cost basis, and gross unrealized gains and
losses of short- and long-term available-for-sale investments by major security
type are as follows:
Gross Gross
Market Cost Unrealized Unrealized
(In thousands) Value Basis Gains Losses
- ---------------------------------------------------------------------------------------------------------
2001
Corporate Bonds and Notes $682,520 $666,432 $ 16,372 $ (284)
Other 71,161 37,054 34,231 (124)
-------- -------- -------- --------
$753,681 $703,486 $ 50,603 $ (408)
======== ======== ======== ========
2000
Corporate Bonds and Notes $434,140 $431,553 $ 2,749 $ (162)
U.S. Government-agency Securities 42,475 42,318 222 (65)
Other 61,824 46,324 17,633 (2,133)
-------- -------- -------- --------
$538,439 $520,195 $ 20,604 $ (2,360)
======== ======== ======== ========
<
30
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
9. Available-for-sale Investments (continued)
- --------------------------------------------------------------------------------
Short- and long-term available-for-sale investments in the accompanying
2001 balance sheet include equity securities of $54.6 million and debt
securities of $246.8 million with contractual maturities of one year or less and
$452.3 million with contractual maturities of more than one year through five
years. Actual maturities may differ from contractual maturities as a result of
the Company's intent to sell these securities prior to maturity and as a result
of put and call features of the securities that enable either the Company, the
issuer, or both to redeem these securities at an earlier date.
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains and losses recorded in the
accompanying statement of operations. The net gain on the sale of
available-for-sale investments resulted from gross realized gains of $5.0
million, $9.3 million, and $7.6 million and gross realized losses of $3.7
million, $2.5 million, and $3.9 million in 2001, 2000, and 1999, respectively.
10. Long-term Obligations and Other Financing Arrangements
- --------------------------------------------------------------------------------
(In thousands except per share amounts) 2001 2000
- ----------------------------------------------------------------------------------------------------------
4 1/2% Senior Convertible Debentures, Due 2003, Convertible at $34.42 per Share $ 145,414 $ 172,500
7 5/8% Senior Notes, Due 2008 128,725 150,000
4 1/4% Subordinated Convertible Debentures, Due 2003, Convertible at $32.09
per Share (called for redemption in March 2002; Note 19) 398,498 561,563
4% Subordinated Convertible Debentures, Due 2005, Convertible at $35.77 per
Share 231,508 247,000
3 1/4% Subordinated Convertible Debentures, Due 2007, Convertible at $41.84 per
Share 78,048 78,048
4 3/8% Subordinated Convertible Debentures, Due 2004, Convertible at $111.83 per
Share 75,168 98,310
4 5/8% Subordinated Convertible Debentures, Due 2003, Convertible at $34.22
per Share (called for redemption in March 2002; Note 19) 69,614 110,191
Noninterest-bearing Subordinated Convertible Debentures, Due 2003, Convertible
at $61.67 per Share 31,420 31,565
4 7/8% Subordinated Convertible Debentures, Due 2004, Convertible at $32.50 per
Share 17,650 35,029
2 7/8% Subordinated Convertible Debentures, Due 2003, Convertible at $28.16 per
Share 11,583 15,859
2 1/2% Subordinated Convertible Debentures, Due 2001, Convertible into Shares
of Subsidiary Common Stock - 4,787
Noninterest-bearing Subordinated Convertible Debentures, Due 2001, Convertible
at $26.74 per Share - 1,680
Other 10,303 44,361
---------- ----------
1,197,931 1,550,893
Less: Current Maturities 470,429 22,410
---------- ----------
$ 727,502 $1,528,483
========== ==========
As a result of the spinoffs to shareholders discussed in Note 17, the
conversion price of each of the Company's convertible debentures was reduced in
2001 to approximately 85% of the conversion price at December 30, 2000, in
accordance with the terms of the convertible debentures.
<
31
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
10. Long-term Obligations and Other Financing Arrangements (continued)
- --------------------------------------------------------------------------------
Outstanding debentures issued by subsidiaries that were taken private in
transactions in which the consideration paid to stockholders of the subsidiary
was Thermo Electron common stock have become convertible into the Company's
common stock. Outstanding debentures issued by subsidiaries that have been taken
private in transactions in which the consideration paid to stockholders of the
subsidiary was cash became convertible into an amount based on the same cash
consideration payable in the merger transactions. Holders of such debentures had
the right to cause the debentures to be redeemed 90 days following the effective
date of the merger (Note 17). The interest cost of this debt has been included
as interest expense of continuing operations in the accompanying statement of
operations. No allocation of interest expense for debt of the Company's
continuing operations has been made to discontinued operations.
The annual requirements for long-term obligations are as follows:
(In thousands)
- ----------------------------------------------------------------------------------------------------------
2002 $ 470,429
2003 190,871
2004 93,723
2005 232,084
2006 346
2007 and thereafter 210,478
----------
$1,197,931
==========
See Note 13 for fair value information pertaining to the Company's
long-term obligations. Short-term obligations and current maturities of
long-term obligations in the accompanying balance
sheet includes $58.5 million and $80.9 million in 2001 and 2000, respectively,
of short-term bank borrowings and borrowings under lines of credit of certain of
the Company's subsidiaries. The weighted average interest rate for these
borrowings was 3.1% and 4.7% at year-end 2001 and 2000, respectively. Unused
lines of credit were $189 million as of year-end 2001. The unused lines of
credit generally provide for short-term unsecured borrowings outside the United
States at various interest rates.
Repurchases of subordinated convertible debentures for less than the par
value resulted in extraordinary gains of $1.1 million, $0.5 million, and $1.5
million in 2001, 2000, and 1999, respectively. The gains are net of taxes of
$0.6 million, $0.3 million, and $0.9 million in 2001, 2000, and 1999,
respectively.
The Company has a cash-management arrangement in which some of its
subsidiaries participate, including some operating units of discontinued
operations. Amounts invested in this arrangement by the Company's discontinued
operations were classified as "Advance payable to affiliates" in the
accompanying 2000 balance sheet.
Long-term net assets of discontinued operations in 2000 includes $153.0
million principal amount of 4 1/2% subordinated debentures due 2004 and
convertible into shares of Kadant Inc. common stock at $60.50 per share. The net
assets of discontinued operations at year-end 2000 also reflects $17.0 million
of redeemable stock obligations of Thermo Fibergen Inc., that were redeemed in
2001. The Company remains a guarantor of the Kadant debentures following the
spin off of Kadant and its Thermo Fibergen subsidiary in August 2001 (Note 17).
Long-term net assets of discontinued operations at year-end 2000 also
includes $54.8 million principal amount of 4 3/4% subordinated convertible
debentures of Thermo Cardiosystems Inc., due 2004. In February 2001, the Company
sold Thermo Cardiosystems to Thoratec Corporation. Under the terms of the sale,
Thermo Cardiosystems' 4 3/4% subordinated convertible debentures were assumed by
Thoratec and became convertible into shares of Thoratec common stock. The
debentures remained outstanding through March 11, 2002, when they were redeemed
by Thoratec. Thermo Electron remained a guarantor of these obligations until
redemption occurred. Thoratec had posted a bank letter of credit naming the
fiscal agent of the debentures as beneficiary to secure the Company's position
as guarantor of the obligations.
<
32
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
11. Commitments and Contingencies
- --------------------------------------------------------------------------------
Operating Leases
The Company leases portions of its office and operating facilities under
various operating lease arrangements. Income from continuing operations includes
expenses from operating leases of $43.9 million, $42.2 million, and $43.4
million in 2001, 2000, and 1999, respectively. Future minimum payments due under
noncancelable operating leases at December 29, 2001, are $36.3 million in 2002,
$32.5 million in 2003, $28.3 million in 2004, $21.6 million in 2005, $14.3
million in 2006, and $60.6 million in 2007 and thereafter. Total future minimum
lease payments are $193.6 million.
Letters of Credit
Outstanding letters of credit, principally relating to performance bonds,
totaled $44.4 million at December 29, 2001.
Litigation and Related Contingencies
Continuing Operations
The Company has been named a defendant, along with many other companies,
in a patent-infringement lawsuit brought by the Lemelson Medical, Education &
Research Foundation, L.P. The suit asserts that products manufactured, used, or
sold by the defendants infringe one or more patents related to methods of
machine vision or computer-image analysis. Also, Spectra-Physics and its Opto
Power subsidiary have been sued for patent infringement by Rockwell
International Corp. The suit claims that Spectra-Physics and Opto Power
infringed a patent for the manufacture of a film used in semiconductor
applications. Both the Lemelson and Rockwell actions seek damages, including
enhanced damages for alleged willful infringement and attorney's fees, and
Lemelson seeks injunctive relief.
Discontinued Operations
The Company's Trex Medical Corporation subsidiary is a defendant in a
lawsuit brought by Fischer Imaging Corporation, which alleges that the prone
breast-biopsy systems of the Lorad division of Trex Medical infringe Fischer's
patents on a precision mammographic needle-biopsy system and a motorized
mammographic biopsy apparatus. Lorad's cumulative revenues from these products
totaled approximately $167 million through September 30, 2000. Trex Medical sold
this business in 2000 but retained this litigation as a term of the sale.
Subject to certain limitations, the Company is required to indemnify the buyer
with respect to claims by Fischer that post-closing sales of these products
infringe Fischer's patents.
The Company's Thermo Coleman Corporation subsidiary has been named as a
defendant in a lawsuit initiated by two former employees. The suit alleges,
among other things, that Thermo Coleman violated the Federal False Claims Act in
connection with the performance of a government contract. The complaint seeks
the award of treble damages in an unspecified amount, plus other penalties. The
amount of billings under the contract activities in question were approximately
$7.6 million. Thermo Coleman sold its core business in 2000, but retained this
litigation as a term of the sale.
The Company is a defendant in a lawsuit alleging breach of contract and
fraud in connection with the Company's sale in 2000 of its former Peek, Ltd.
subsidiary for $128 million. The suit alleges that the Company misrepresented
and concealed facts concerning Peek's earnings, assets, and liabilities, as a
result of which the plaintiffs seek damages.
The Company intends to vigorously defend the matters in continuing and
discontinued operations described above. In the opinion of management, an
unfavorable outcome in one or more of the matters described above could
materially affect the Company's financial position as well as its results of
operations and cash flows for a particular quarter or annual period.
<
33
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
11. Commitments and Contingencies (continued)
- --------------------------------------------------------------------------------
The Company's continuing and discontinued operations are a defendant in a
number of other pending legal proceedings incidental to present and former
operations. The Company does not expect the outcome of these proceedings, either
individually or in the aggregate, to have a material adverse effect on its
financial position, results of operations, or cash flows.
12. Common and Preferred Stock
- --------------------------------------------------------------------------------
At December 29, 2001, the Company had reserved 58,892,617 unissued shares
of its common stock for possible issuance under stock-based compensation plans
and for possible conversion of the Company's convertible debentures.
The Company has 50,000 shares of authorized but unissued $100 par value
preferred stock.
In 2000, the Company issued 22.6 million shares of its common stock valued
at $448.7 million to complete mergers with several of its formerly majority-
owned subsidiaries (Note 17).
During 1998 and 1999, in a series of transactions with an institutional
counterparty, the Company sold put options and purchased call options. No cash
was exchanged as a result of these transactions. The Company had the right to
settle the put options by physical settlement of the options or by net share
settlement using shares of the Company's common stock. During 2000, the Company
purchased 1,183,500 shares of its common stock under the call options for $17.5
million. During 1999, the Company purchased 1,536,000 shares of its common stock
under the put options for $24.6 million. During 1999 and 2000, put options for
4,165,000 shares expired. No remaining obligation under the put options existed
at year-end 2000 or 2001.
The Company has distributed rights under a shareholder rights plan adopted
by the Company's Board of Directors to holders of outstanding shares of the
Company's common stock. Each right entitles the holder to purchase one
ten-thousandth of a share (a Unit) of Series B Junior Participating Preferred
Stock, $100 par value, at a purchase price of $250 per Unit, subject to
adjustment. The rights will not be exercisable until the earlier of (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons (an Acquiring Person) has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of common
stock (the Stock Acquisition Date), or (ii) 10 business days following the
commencement of a tender offer or exchange offer for 15% or more of the
outstanding shares of common stock.
In the event that a person becomes the beneficial owner of 15% or more of
the outstanding shares of common stock, except pursuant to an offer for all
outstanding shares of common stock approved by at least a majority of the
members of the Board of Directors, each holder of a right (except for the
Acquiring Person) will thereafter have the right to receive, upon exercise, that
number of shares of common stock that equals the exercise price of the right
divided by one-half of the current market price of the common stock. In the
event that, at any time after any person has become an Acquiring Person, (i) the
Company is acquired in a merger or other business combination transaction in
which the Company is not the surviving corporation or its common stock is
changed or exchanged (other than a merger that follows an offer approved by the
Board of Directors), or (ii) 50% or more of the Company's assets or earning
power is sold or transferred, each holder of a right (except for the Acquiring
Person) shall thereafter have the right to receive, upon exercise, the number of
shares of common stock of the acquiring company that equals the exercise price
of the right divided by one half of the current market price of such common
stock.
At any time until 10 days following the Stock Acquisition Date, the
Company may redeem the rights in whole, but not in part, at a price of $.01 per
right (payable in cash or stock). The rights expire on January 29, 2006, unless
earlier redeemed or exchanged.
<
34
>
Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
13. Fair Value of Financial Instruments
- --------------------------------------------------------------------------------
The Company's financial instruments consist mainly of cash and cash
equivalents, available-for-sale investments, accounts receivable, short-term
obligations and current maturities of long-term obligations, advance payable to
affiliates, accounts payable, common stock subject to redemption, long-term
obligations, and forward currency exchange contracts. The carrying amounts of
cash and cash equivalents, accounts receivable, short-term obligations and
current maturities of long-term obligations (excluding convertible obligations),
advance payable to affiliates, and accounts payable approximate fair value due
to their short-term nature.
Available-for-sale investments are carried at fair value in the
accompanying balance sheet. The fair values were determined based on quoted
market prices (Note 9).
The carrying amount and fair value of the Company's long-term obligations,
common stock subject to redemption, and forward currency exchange contracts are
as follows:
2001 2000
------------------------ -----------------------
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------
Current Maturities of Convertible Obligations $ 468,112 $ 466,720 $ 6,467 $ 6,450
========== ========== ========== ==========
Common Stock Subject to Redemption $ - $ - $ 7,692 $ 7,692
========== ========== ========== ==========
Long-term Obligations:
Convertible obligations $ 590,791 $ 562,264 $1,350,065 $1,283,979
Other 136,711 140,006 178,418 180,268
---------- ---------- ---------- ----------
$ 727,502 $ 702,270 $1,528,483 $1,464,247
========== ========== ========== ==========
Forward Currency Exchange Contracts Receivable $ 3,585 $ 3,585 $ 1,936 $ 2,149
The fair value of long-term obligations was determined based on quoted
market prices and on borrowing rates available to the Company at the respective
year ends. The fair value of common stock subject to redemption was determined
based upon quoted market prices.
The notional amounts of forward currency exchange contracts outstanding
totaled $90.1 million and $122.1 million at year-end 2001 and 2000,
respectively. The fair value of such contracts is the estimated amount that the
Company would receive upon termination of the contracts, taking into account the
change in currency exchange rates.
<
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
14. Supplemental Cash Flow Information
- --------------------------------------------------------------------------------
(In thousands) 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------
Cash Paid For
Interest $ 61,797 $ 84,380 $ 93,070
========= ========= =========
Income taxes $ 44,822 $ 93,136 $ 71,637
========= ========= =========
Noncash Activities
Receipt of note in connection with sale of business (Note 2) $ - $ 80,000 $ -
========= ========= =========
Conversions of Company and subsidiary convertible
obligations $ - $ - $ 9,277
========= ========= =========
Issuance of Company common stock in exchange for
minority interests of subsidiaries (Note 17) $ - $ 448,747 $ -
========= ========= =========
Fair value of assets of acquired companies $ 18,161 $ 25,114 $ 604,114
Cash paid for acquired companies (14,834) (17,311) (385,260)
Issuance of short- and long-term obligations for
acquired company - - (14,852)
--------- --------- ---------
Liabilities assumed of acquired companies $ 3,327 $ 7,803 $ 204,002
========= ========= =========
15. Restructuring and Other Unusual Costs (Income), Net
- --------------------------------------------------------------------------------
2001
In response to a downturn in telecommunications, semiconductor, and other
markets served by the Company's businesses and in an effort to further integrate
business units, the Company initiated restructuring actions in the second
quarter of 2001 in a number of business units to reduce costs and shed
unproductive assets. Further actions were initiated in the fourth quarter of
2001. The restructuring and related actions primarily consist of headcount
reductions, writedowns of telecommunication equipment and excess
telecommunication inventories at Spectra-Physics, discontinuing a number of
mature or unprofitable product lines, and consolidation of facilities to
streamline operations and reduce costs. During 2001, the Company recorded $158.8
million of restructuring and unusual charges primarily associated with these
actions, including $26.1 million of charges to cost of revenues. In addition,
the Company recorded $2.8 million of other nonoperating charges during 2001.
These charges are detailed by segment below. The Company expects to incur an
additional $11 million of restructuring costs in 2002 for charges associated
with these actions that cannot be recorded until incurred. The Company expects
that the restructuring actions undertaken in 2001 will be substantially
completed by the third quarter of 2002.
<
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
15. Restructuring and Other Unusual Costs (Income), Net (continued)
- --------------------------------------------------------------------------------
The Company recorded charges by segment for 2001 as follows:
Optical Measurement
(In thousands) Life Sciences Technologies (a) and Control Corporate Total
- ----------------------------------------------------------------------------------------------------------
Cost of Revenues $ 4,412 $ 11,753 $ 9,930 $ - $ 26,095
Restructuring and Other
Unusual Costs, Net 25,906 49,779 45,499 11,518 132,702
Loss on Investments - 801 1,983 - 2,784
-------- -------- -------- -------- --------
$ 30,318 $ 62,333 $ 57,412 $ 11,518 $161,581
======== ======== ======== ======== ========
(a) Excludes a gain of $35.1 million on the sale of 1,150,000 shares of FLIR, including $14.2 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 operations.
The components of restructuring and other unusual costs by segment are as
follows:
Life Sciences
- -------------
The Life Sciences segment recorded $30.3 million of restructuring and
unusual costs, net, in 2001. The segment recorded charges to cost of revenues of
$4.4 million, primarily for discontinued product lines, and $25.9 million of
other costs. The other restructuring and unusual costs consist of $15.1 million
of cash costs, including $11.1 million of severance for 342 employees across all
functions; $3.6 million of ongoing lease costs through 2012 for facilities
described below; and $0.4 million of other costs. A total of 128 employees were
terminated as of December 29, 2001. The charge also includes a $3.4 million
writeoff of in-process research and development costs at an acquired business,
$6.7 million of asset writedowns, and $0.7 million of noncash severance costs.
The writeoff of in-process research and development 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. The asset writedowns principally include $4.7 million
of goodwill for business units that were or will be closed and $2.0 million of
fixed assets at facilities being consolidated. The facility consolidations
include closure of 11 sales and service offices, including 10 in Europe and one
in the United States, and the closure of seven factories, including five in
Europe and two in the United States. The activities of these sales and service
offices and factories are being transferred to other facilities in those
regions.
Optical Technologies
- --------------------
The Optical Technologies segment recorded $61.5 million of restructuring
and unusual costs, net, in 2001. The segment recorded charges to cost of
revenues of $11.8 million, primarily for excess telecommunication inventories at
Spectra-Physics and discontinued product lines, and $49.8 million of other
costs. The excess telecommunication inventories resulted from a severe slowdown
in this market and the writedown reduced the carrying value of these and other
inventories to estimated net realizable value. The other restructuring and
unusual costs consist of $25.2 million of cash costs, including $7.6 million of
severance for 614 employees, primarily in manufacturing positions; $7.0 million
for leases on abandoned equipment; $5.9 million of loss on litigation; $1.4
million of ongoing lease costs through 2005 for facilities described below; and
$3.3 million of other cash costs. A total of 599 employees were terminated as of
December 29, 2001. The other cash costs primarily represent cancellation fees
for fixed asset purchases and termination of distributor agreements. The segment
also recorded $24.6 million of asset writedowns. The asset writedowns include
$22.0 million of fixed assets, principally equipment used in telecommunication
<
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
15. Restructuring and Other Unusual Costs (Income), Net (continued)
- --------------------------------------------------------------------------------
manufacturing for which estimated future cash flows are not sufficient to
recover the carrying value. The asset writedowns also include $2.2 million of
goodwill to reduce the carrying value of two small business units that are held
for sale to their estimated disposal value and $0.4 million of costs associated
with an abandoned financing at Spectra-Physics. The facility consolidations
include closure of six sales and service offices, including four in Europe and
two in the United States, the closure of three factories in the United States,
and the closure of two distribution facilities in Europe. The activities of
these sales and service offices, factories, and distribution facilities are
being transferred to other facilities in those regions.
This segment also recorded $0.8 million of other nonoperating charges in
2001 to writedown an investment to its market value due to an impairment that
the Company deemed other than temporary.
Measurement and Control
- -----------------------
The Measurement and Control segment recorded $55.4 million of
restructuring and unusual costs, net, in 2001. The segment recorded charges to
cost of revenues of $9.9 million, primarily for discontinued product lines, and
$45.5 million of other costs, net. The other restructuring and unusual costs
consist of $30.0 million of cash costs, including $19.4 million of severance for
629 employees across all functions; $8.9 million of ongoing lease costs through
2011 for facilities described below; and $1.7 million of other cash costs. A
total of 256 employees were terminated as of December 29, 2001. The charge also
includes $11.0 million, net, of loss on the sale of businesses and writedowns of
goodwill for businesses subsequently sold, $5.5 million of asset writedowns, and
$0.1 million of other costs, offset in part by $1.1 million of gain on the sale
of a building. The principal businesses that were sold that resulted in losses
included Pharos Marine, a marine navigation unit, in August 2001, and
ThermoMicroscopes, a manufacturer of scanning probe microscopes, in July 2001.
These units were noncore businesses. The asset writedowns include $4.5 million
of assets at facilities being closed, including $3.9 million of fixed assets and
$0.6 million of goodwill and other assets, and $1.0 million for impairment of a
note receivable that was a preacquisition asset of a business acquired in 1999.
The facility consolidations include closure of 15 sales and service offices, all
of which are located in Europe, and the closure of 16 factories, including 10 in
the United States, five in Europe, and one in Canada. The activities of these
sales and service offices and facilities are being transferred to other
facilities in those regions.
This segment also recorded $2.0 million of other nonoperating charges in
2001 to writedown to its market value an available-for-sale investment that was
a preacquisition asset of a business acquired in 1999, due to an impairment that
the Company deemed other than temporary.
Corporate
- ---------
The Company recorded $11.5 million of restructuring and unusual costs at
its corporate office in 2001. This amount includes $11.3 million of cash costs,
including $5.9 million of investment banking, consulting, and legal fees
associated with the Company's reorganization plan; $3.5 million of
employee-retention costs that was accrued ratably through 2001, the period
through which the employees had to work to qualify for a payment; and $1.9
million for severance for 21 employees. A total of 18 employees were terminated
as of December 29, 2001. The charge also includes $0.2 million of noncash
severance costs.
2000
As a result of a review of existing businesses following the appointment
of a new president and chief operating officer in July 2000, the Company
commenced a restructuring of a number of business units to reduce costs and shed
unproductive assets. The restructuring primarily consisted of headcount
reductions, discontinuing a number of mature or unprofitable product lines, and
consolidation of facilities to streamline operations and reduce costs. During
2000, the Company recorded $81.4 million of restructuring and unusual charges
primarily associated with these actions, including $19.3 million of charges to
cost of revenues. These charges are detailed by segment below. In addition, the
Company recorded other unusual income, net, of $130.0 million and nonoperating
charges of $45.1 million during 2000, as detailed by segment below.
<
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
15. Restructuring and Other Unusual Costs (Income), Net (continued)
- --------------------------------------------------------------------------------
The Company recorded charges (income) by segment for 2000 as follows:
Optical Measurement
(In thousands) Life Sciences Technologies and Control (a) Corporate Total
- ----------------------------------------------------------------------------------------------------------
Cost of Revenues $ 8,369 $ 2,916 $ 8,000 $ - $ 19,285
Restructuring and Other
Unusual Costs (Income), Net 7,939 3,600 (99,890) 20,496 (67,855)
Equity in Loss of
Unconsolidated
Subsidiaries - 47,421 - - 47,421
Other Income, Net - (2,281) - - (2,281)
-------- -------- -------- -------- --------
$ 16,308 $ 51,656 $(91,890) $ 20,496 $ (3,430)
======== ======== ======== ======== ========
(a) Excludes an operating loss of $1.7 million at the Spectra Precision businesses in the third quarter of
2000 prior to their sale (Note 2).
The components of restructuring and other unusual costs (income) by
segment are as follows:
Life Sciences
- -------------
The Life Sciences segment recorded $16.3 million of restructuring and
unusual costs in 2000. The segment recorded charges to cost of revenues of $8.4
million, primarily for discontinued product lines, and $7.9 million of other
costs. The other restructuring and unusual costs consisted of $6.5 million of
cash costs, including $4.0 million of severance for 78 employees across all
functions; $1.1 million for ongoing lease costs through 2003 for facilities
described below; $0.8 million of provisions for two lawsuits; and $0.6 million
for other exit costs. The segment also recorded $1.4 million of asset writedowns
in connection with the closure of a small business and the consolidation and
abandonment of facilities. The asset writedowns included $0.7 million of
goodwill and $0.7 million of fixed assets. The facility consolidations included
closure of sales offices in Spain, Belgium, and Japan and the transfer of their
activities to other offices, consolidation of two German units into one
facility, and relocation of a unit to other facilities within Colorado.
Optical Technologies
- --------------------
The Optical Technologies segment recorded $6.5 million of restructuring
and unusual costs in 2000. The segment recorded charges to cost of revenues of
$2.9 million, primarily for discontinued product lines, and $3.6 million of
other costs. The other restructuring and unusual costs consisted of a charge of
$1.5 million for in-process research and development in connection with an
acquisition; $0.9 million of asset writedowns; and $1.2 million of cash costs,
including $0.3 million of severance for 22 employees across all functions, $0.4
million for ongoing lease costs, and $0.5 million of other exit costs. The asset
writedowns primarily consisted of charges to reduce the carrying value of a
small business unit that was held for sale to estimated disposal value and
included $0.7 million of goodwill and $0.2 million of fixed assets. The lease
costs related to the closure of a facility in California with lease payments
that ceased in 2000.
<
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
15. Restructuring and Other Unusual Costs (Income), Net (continued)
- --------------------------------------------------------------------------------
The Optical Technologies segment also recorded a charge of $23.7 million
in 2000 to write down the carrying value of its equity method investment in FLIR
(Note 2) based on a decline in the market value of FLIR shares that the Company
deemed other than temporary. The segment also recorded other noncash charges of
$23.7 million in 2000, representing the Company's pro rata share of FLIR's
losses. Both of these charges were recorded to equity in earnings (loss) of
unconsolidated subsidiaries, a component of other income (expense), net, in the
accompanying statement of operations.
Prior to its acquisition by the Company, Spectra-Physics elected early
adoption of SFAS No. 133. Under SFAS No. 133, Spectra-Physics is permitted under
certain conditions to enter into currency exchange contracts to hedge probable
anticipated transactions without recording gains and losses on such contracts in
income. The Company did not adopt SFAS No. 133 until 2001 and through 2000
accounted for hedging transactions under SFAS No. 52. Under SFAS No. 52, such
contracts are deemed to be speculative hedges and must be marked to market with
the resulting gain or loss reported as a component of the Company's results of
operations. During 2000, the Company recorded income on currency exchange
contracts entered into by Spectra-Physics of $2.3 million, which is included in
other income (expense), net, in the accompanying statement of operations.
Measurement and Control
- -----------------------
The Measurement and Control segment recorded $91.9 million of
restructuring and unusual income, net, in 2000. The segment recorded charges to
cost of revenues of $8.0 million, primarily for discontinued product lines, and
recorded $99.9 million of other unusual income, net. The segment had a net gain
of $126.3 million on the sale of several businesses, primarily Spectra Precision
(Note 2), Nicolet Imaging Systems (NIS), and Sierra Research and Technology Inc.
(SRT). NIS and SRT manufacture products that include imaging systems used in
assembling complex printed circuit boards and in airbag manufacturing. Spectra
Precision, NIS, and SRT had aggregate revenues and operating income of $125.7
million and $11.0 million, respectively, in 2000 through their respective
disposal dates. The segment also recorded charges of $20.6 million for asset
writedowns to reduce the carrying value of businesses held for sale to estimated
disposal value and for fixed assets unique to certain discontinued products and
$6.4 million of cash costs. The cash costs included $3.0 million of severance
for 128 employees across all functions, $2.4 million of lease costs through
2001, and $1.0 million of other exit costs, primarily employee retention and
relocation costs incurred in 2000. The lease costs included amounts for the
closure of sales offices in Norway, New Zealand, and Germany, and a
manufacturing operation in the U.K. The asset writedowns included $17.6 million
of goodwill, $2.8 million of fixed assets, and $0.2 million of other assets. The
businesses held for sale primarily included CAC Inc. and the Mid South
Companies, which provide the oil and gas industry with wellhead safety and
control products; the Test and Measurement business, which manufactures and
sells data acquisition systems, digital oscilloscopes, and recorders; and Pharos
Marine. The segment also had unusual income of $0.6 million in 2000, primarily
representing a gain on the termination of a lease.
Corporate
- ---------
The Company recorded $20.5 million of restructuring and unusual costs,
net, at its corporate office in 2000. This amount included $16.1 million of
investment banking, consulting, and legal fees associated with the Company's
reorganization plan; $3.6 million of employee-retention costs that was accrued
ratably over the period through which the employees had to work to qualify for a
payment; $3.0 million of severance for 21 employees; and $1.6 million of noncash
costs. The Company also recorded unusual income of $3.8 million, representing a
gain from the sale of an office building adjacent to the Company's corporate
office.
<
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
15. Restructuring and Other Unusual Costs (Income), Net (continued)
- --------------------------------------------------------------------------------
1999
During 1999, the Company recorded restructuring and unusual costs of $46.8
million and other nonoperating charges of $18.4 million in connection with broad
scale restructuring actions affecting a number of business units. Restructuring
and other unusual costs, net, included $37.7 million of restructuring costs,
$0.3 million of other unusual income, net, and $9.4 million of charges to cost
of revenues. The Company also recorded $17.0 million of other nonoperating
charges and $1.4 million of income tax expense. These charges are detailed by
segment below.
The Company recorded charges (income) by segment for 1999 as follows:
Life Optical Measurement
(In thousands) Sciences Technologies and Control Corporate Total
- ----------------------------------------------------------------------------------------------------------
Cost of Revenues $ - $ 4,072 $ 5,354 $ - $ 9,426
Restructuring and Other Unusual
Costs (Income), Net (326) 7,166 24,761 5,745 37,346
Equity in Loss of Unconsolidated
Subsidiaries - 11,066 - - 11,066
Other Expense, Net - 2,316 - 3,609 5,925
Income Tax Expense - - 1,409 - 1,409
------- ------- ------- ------- -------
$ (326) $24,620 $31,524 $ 9,354 $65,172
======= ======= ======= ======= =======
The components of restructuring and unusual costs (income) by segment are
as follows:
Life Sciences
- -------------
During 1999, the Life Sciences segment settled certain severance matters
for less than had been previously accrued and, as a result, reversed $0.3
million of previously established reserves.
Optical Technologies
- --------------------
During 1999, the Optical Technologies segment recorded restructuring and
unusual costs of $11.2 million. The restructuring and unusual costs included
$6.0 million of goodwill impairment in connection with the planned sale of the
Company's power electronics and test-equipment business; $3.2 million of charges
to cost of revenues for the sale of inventories revalued at the date of
acquisition; $1.0 million of facility closing costs and severance associated
with a restructuring plan undertaken in 1998 and completed in 1999; $0.9 million
of inventory provisions that resulted from exiting and reengineering certain
product lines; and $0.1 million of other costs. The Company sold the operating
units of the power electronics and test-equipment business in 2000 and 2001
except for its Thermo KeyTek unit, which it decided to retain. The other
components of the power electronics and test-equipment business were part of the
Measurement and Control segment.
The Optical Technologies segment also recorded $13.4 million of
nonoperating charges in 1999. During the first calendar quarter of 1999, FLIR
recorded a loss in connection with a pooling-of-interests transaction and
certain restructuring actions. The Company recorded its pro rata share of this
loss, $5.1 million, in equity in earnings (loss) of unconsolidated subsidiaries,
a component of other income (expense), net, in the accompanying statement of
operations. In addition, as a result of the pooling consummated by FLIR and
related issuance of FLIR shares in March 1999, the Company's pro rata share of
FLIR's equity decreased to 29.4% from 34.6% prior to the transaction. This
decrease totaled $6.0 million and was recorded as a loss in equity in earnings
(loss) of unconsolidated subsidiaries in the accompanying statement of
operations, pursuant to SAB No. 51, "Accounting for Sales of Stock by a
Subsidiary." In addition, during 1999, the Optical Technologies segment recorded
a loss of $2.3 million on currency exchange contracts accounted for under SFAS
No. 133 by Spectra-Physics.
<
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
15. Restructuring and Other Unusual Costs (Income), Net (continued)
- --------------------------------------------------------------------------------
Measurement and Control
- -----------------------
During 1999, the Measurement and Control segment recorded restructuring
and unusual costs of $30.1 million and other nonoperating charges of $1.4
million. The Company recorded restructuring costs of $24.8 million and a tax
asset writeoff of $1.4 million, related to a decision to sell its power
electronics and test-equipment business. The planned sale of the power
electronics and test-equipment businesses followed a period of declining sales
and profitability in these units. These businesses are dependent on the cyclical
nature of the semiconductor industry and have lower growth prospects than other
businesses held by the Company. As a result, the Company decided to sell these
units. Restructuring costs included $22.6 million to write off related goodwill
to reduce the carrying value of the business to the estimated proceeds from its
sale. In addition, restructuring costs included a charge of $1.6 million
recorded to write off the Company's remaining net investment in a subsidiary of
the power electronics and test-equipment business, which the Company transferred
to a buyer in consideration for a release from certain contractual obligations,
primarily ongoing lease obligations. The tax writeoff represented a deferred tax
asset that was not realized as a result of exiting this business. Revenues and
operating losses, excluding restructuring and related costs, of the power
electronics and test-equipment business were $16.0 million and $1.4 million,
respectively, for 1999. The Company also recorded other unusual costs of $0.6
million, net, in 1999 at the power electronics and test-equipment business. As
of December 29, 2001, all of the principal operating units of this business had
been sold.
The Measurement and Control segment's unusual charges also included a
charge to cost of revenues of $3.5 million relating to the sale of inventories
at some Spectra-Physics AB units that were revalued at the date of their
acquisition, and $1.9 million for inventories deemed excessive based on low
demand at the segment's quality assurance and security products business.
Corporate
- ---------
During 1999, the Company recorded $5.7 million of restructuring and
unusual costs and $3.6 million of other nonoperating charges. Restructuring
costs consisted of $4.9 million for severance costs for seven senior-level
employees and $0.8 million of legal and advisory costs related to the Company's
reorganization. The Company also recorded $3.6 million of other nonoperating
charges to write down available-for-sale investments due to impairment that the
Company deemed other than temporary based upon market prices. These charges are
included in gain on investments, net, a component of other income (expense),
net, in the accompanying statement of operations.
<
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
15. Restructuring and Other Unusual Costs (Income), Net (continued)
- --------------------------------------------------------------------------------
The following table summarizes the severance actions of the Company in
1999, 2000, and 2001.
Number of
Employees
- ----------------------------------------------------------------------------------------------------------
1999 Restructuring Plans
Terminations Announced in 1999 38
Terminations Occurring in 1999 (38)
------
Remaining Terminations at January 1, 2000 -
======
2000 Restructuring Plans
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 (91)
Adjustment to Plan (1)
------
Remaining Terminations at December 29, 2001 4
======
2001 Restructuring Plans
Terminations Announced in 2001 1,606
Terminations Occurring in 2001 (1,001)
------
Remaining Terminations at December 29, 2001 605
======
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
15. Restructuring and Other Unusual Costs (Income), Net (continued)
- --------------------------------------------------------------------------------
The following table summarizes the cash components of the Company's
restructuring plans. The noncash components and other amounts reported as
restructuring and unusual costs (income), net, in the accompanying statement of
operations have been summarized in the notes to the tables.
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ----------------------------------------------------------------------------------------------------------
Pre-1999 Restructuring Plans
Balance at January 2, 1999 $ 9,281 $ 1,263 $ 776 $ 11,320
Costs incurred in 1999 (b) 1,486 1,280 652 3,418
1999 usage (7,205) (2,046) (838) (10,089)
Reserves reversed (c) (2,101) (217) - (2,318)
Currency translation (568) (55) (26) (649)
-------- -------- -------- --------
Balance at January 1, 2000 893 225 564 1,682
Costs incurred in 2000 - 144 - 144
2000 usage (774) (284) - (1,058)
Reserves reversed - (84) - (84)
Currency translation (22) (1) (44) (67)
-------- -------- -------- --------
Balance at December 30, 2000 97 - 520 617
2001 usage (90) - - (90)
Currency translation (7) - (14) (21)
-------- -------- -------- --------
Balance at December 29, 2001 $ - $ - $ 506 $ 506
======== ======== ======== ========
1999 Restructuring Plans
Costs incurred in 1999 (d) $ 3,938 $ - $ 893 $ 4,831
1999 usage (195) - (893) (1,088)
-------- -------- -------- --------
Balance at January 1, 2000 3,743 - - 3,743
2000 usage (2,851) - - (2,851)
Reserves reversed (6) - - (6)
-------- -------- -------- --------
Balance at December 30, 2000 886 - - 886
2001 usage (315) - - (315)
-------- -------- -------- --------
Balance at December 29, 2001 $ 571 $ - $ - $ 571
======== ======== ======== ========
<
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
15. Restructuring and Other Unusual Costs (Income), Net (continued)
- --------------------------------------------------------------------------------
Abandonment
Employee of Excess
(In thousands) Severance Retention (a) Facilities Other Total
- ----------------------------------------------------------------------------------------------------------
2000 Restructuring Plans
Costs incurred in 2000 (e) $ 10,469 $ 4,116 $ 3,818 $ 17,533 $ 35,936
2000 usage (6,488) (830) (1,031) (7,958) (16,307)
Reserves reversed (205) - - - (205)
Currency translation 48 (3) 33 19 97
--------- --------- --------- -------- ---------
Balance at December 30, 2000 3,824 3,283 2,820 9,594 19,521
Costs incurred in 2001 328 3,472 21 5,963 9,784
2001 usage (2,415) (468) (909) (14,277) (18,069)
Reserves reversed (105) - (21) - (126)
Currency translation (44) - (45) (80) (169)
--------- --------- --------- -------- ---------
Balance at December 29, 2001 $ 1,588 $ 6,287 $ 1,866 $ 1,200 $ 10,941
========= ========= ========= ======== =========
2001 Restructuring Plans
Costs incurred in 2001 (f) $ 40,076 $ 297 $ 21,058 $ 5,099 $ 66,530
2001 usage (13,585) (155) (1,180) (2,353) (17,273)
Reserves reversed (385) - (182) (90) (657)
Currency translation (14) 1 69 11 67
--------- --------- --------- -------- ---------
Balance at December 29, 2001 $ 26,092 $ 143 $ 19,765 $ 2,667 $ 48,667
========= ========= ========= ======== =========
(a) Employee retention costs were accrued ratably over the period through which the employees had to 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 in January 2002.
(b) Excludes a noncash charge of $0.1 million in the Measurement and Control segment.
(c) Reflects reversals of previously recorded restructuring costs of $0.3 million and $2.0 million
in the Life Sciences and Measurement and Control segments, respectively, due to attrition and sale
of businesses.
(d) Excludes noncash charges, net, of $6.0 million, $24.2 million, and $0.9 million in the Optical
Technologies and Measurement and Control segments and at the Company's corporate office,
respectively. Also excludes unusual costs of $0.3 million in the Measurement and Control segment.
(e) Excludes noncash charges, net, of $1.4 million and $2.4 million in the Life Sciences and Optical
Technologies segments, respectively, and noncash income, net, of $106.3 million and $2.2 million in
the Measurement and Control segment and at the Company's corporate office, respectively. Also,
excludes $0.8 million of cash costs in the Life Sciences segment related to two lawsuits.
(f) Excludes noncash charges, net, of $10.8 million, $24.6 million, $15.5 million, and $0.2 million in
the Life Sciences, Optical Technologies, and Measurement and Control segments, and at the Company's
corporate office, respectively, and loss on litigation of $5.9 million in the Optical Technologies
sector.
The Company's continuing operations expect to pay accrued restructuring
costs as follows: severance, primarily in 2002; employee retention obligations,
primarily in 2002; abandoned-facility payments, over lease terms expiring
through 2012; and other costs, which primarily represent
cancellation/termination fees, in 2002.
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
16. Adoption of SAB No. 101
- --------------------------------------------------------------------------------
In December 1999, the SEC issued SAB No. 101, "Revenue Recognition in
Financial Statements," which established criteria for recording revenue when the
terms of the sale include customer acceptance provisions or an obligation of the
seller to install the product. In instances where these terms exist and the
Company is unable to demonstrate that the customer's acceptance criteria has
been met prior to customer use or when the installation is essential to
functionality or is not deemed inconsequential or perfunctory, SAB No. 101
requires that revenue recognition occur at completion of installation and/or
upon customer acceptance. In accordance with the requirements of SAB No. 101,
the Company adopted the pronouncement as of January 2, 2000, and recorded the
cumulative effect of the change in accounting principle on periods prior to 2000
in the restated results for the first quarter of 2000. The cumulative effect on
net income totaled $12.9 million, net of an income tax benefit of $8.5 million
and minority interest of $0.5 million. Revenues of $41.3 million in 2000 (as
restated for the adoption of SAB No. 101) related to shipments that occurred in
1999 but for which installation and/or acceptance did not occur until 2000.
These revenues were recorded in 1999 prior to the adoption of SAB No. 101 and
thus were a component in the determination of the cumulative effect of the
change in accounting principle for periods prior to 2000. The Company has not
provided pro forma data for 1999 as the amounts are not readily determinable
based on the nature of the revenue adjustments required by SAB No. 101.
17. Reorganization and Discontinued Operations
- --------------------------------------------------------------------------------
Reorganization
During 2000 and 2001, the Company completed the principal aspects of a
major corporate reorganization. The reorganization split the Company into three
independent public entities and resulted in the divestiture of a number of
businesses. The Company spun off as a dividend to Company shareholders Kadant
Inc. and Viasys Healthcare Inc. in August and November 2001, respectively. The
Company's continuing operations solely include its instrument businesses.
During 1999 and 2000, the Company acquired the minority interest in
certain of its privately held subsidiaries and all of its formerly publicly held
subsidiaries other than Spectra-Physics, Thermo Cardiosystems, Kadant, and
Thermo Fibergen. In connection with these acquisitions, the Company expended
$368.6 million and $43.2 million of cash in 2000 and 1999, respectively, and
issued 22.6 million shares of its common stock valued at $448.7 million in 2000.
In addition, the stock options of the subsidiaries were converted into stock
options that are exercisable into 13.9 million shares of Company common stock.
The stock options had a fair value of $115.3 million. As a result of the
completion of the cash tender offers and other repurchases, exchange offers, and
stock option conversions, the Company recorded an increase in goodwill of
approximately $380 million in 2000. In 2001, the Company increased its ownership
in Spectra-Physics to 93.6% through a cash tender offer. In connection with this
offer, the Company expended $63.6 million in 2001 and recorded an increase in
goodwill of $42.1 million (Note 19).
As a result of the completion of the exchange offers for its formerly
majority-owned subsidiaries, Thermo Instrument Systems Inc., Thermedics Inc.,
Thermo Ecotek Corporation, ThermoLase Corporation, ThermoTrex Corporation, and
Thermo TerraTech Inc., $790.2 million principal amount of convertible
obligations of these subsidiaries became obligations convertible into Company
common stock.
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
17. Reorganization and Discontinued Operations (continued)
- --------------------------------------------------------------------------------
Details of the transactions summarized above are as follows:
Continuing Operations
2001
The Company completed a cash tender offer of $17.50 per share for
Spectra-Physics, which brought its ownership to 93.6% (Note 19).
2000
Thermo Instrument completed a merger with Thermo Vision Corporation
pursuant to which Thermo Instrument acquired, for $7.00 per share in cash, all
of the outstanding shares of common stock of Thermo Vision not already owned by
Thermo Instrument or the Company. The common stock of Thermo Vision ceased to be
publicly traded.
Thermo Instrument completed cash tender offers of $28.00 per share for
Thermo BioAnalysis Corporation, $9.00 per share for Metrika Systems Corporation,
and $9.00 per share for ONIX Systems Inc. in order to bring its and the
Company's collective ownership of these businesses to at least 90%.
Subsequently, Thermo Instrument completed the acquisition of the outstanding
minority interest in each of these companies through short-form mergers at the
same prices as the tender offers and their common stock ceased to be publicly
traded. Because Thermo Instrument owned more than 90% of the outstanding shares
of Thermo Optek Corporation and ThermoQuest Corporation common stock, each of
these companies were repurchased through short-form mergers at $15.00 and $17.00
per share, respectively, and their common stock ceased to be publicly traded.
Thermedics completed cash tender offers of $8.00 and $15.50 per share for
Thermedics Detection Inc. and Thermo Sentron Inc., respectively, in order to
bring its and the Company's collective ownership of these businesses to at least
90%. Subsequently, Thermedics completed the acquisition of the outstanding
minority interest in each of these companies through short-form mergers at the
same prices as the tender offers and their common stock ceased to be publicly
traded.
The Company completed an exchange offer for Thermo Instrument in which
shares of Company common stock were offered to Thermo Instrument shareholders in
exchange for their shares in order to bring the Company's ownership in Thermo
Instrument to at least 90%. The exchange ratio for Thermo Instrument was 0.85
shares of Company common stock for each share of Thermo Instrument common stock.
Subsequently, Thermo Instrument was spun into the Company through a short-form
merger at the same exchange ratio that was offered in the exchange offer and its
common stock ceased to be publicly traded. As a result of the completion of the
merger with Thermo Instrument, the Company issued 12.6 million shares of its
common stock valued at $265.9 million.
1999
Thermedics completed a merger with Thermo Voltek Corp. pursuant to which
Thermedics acquired, for $7.00 per share in cash, all of the outstanding shares
of common stock of Thermo Voltek not already owned by Thermedics or the Company.
The common stock of Thermo Voltek ceased to be publicly traded.
Thermo Instrument completed a merger with ThermoSpectra Corporation
pursuant to which Thermo Instrument acquired, for $16.00 per share in cash, all
of the outstanding shares of common stock of ThermoSpectra not already owned by
Thermo Instrument or the Company. The common stock of ThermoSpectra ceased to be
publicly traded.
Discontinued Operations
2000
The Company completed a merger with Thermedics pursuant to which the
Company acquired all of Thermedics' outstanding shares of common stock not
already owned by the Company in exchange for Company common stock at a ratio of
0.45 shares for each share of Thermedics common stock. The common stock of
Thermedics ceased to be publicly traded.
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
17. Reorganization and Discontinued Operations (continued)
- --------------------------------------------------------------------------------
The Company completed a merger with Thermo TerraTech pursuant to which the
Company acquired all of Thermo TerraTech's outstanding shares of common stock
not already owned by the Company in exchange for Company common stock at a ratio
of 0.3945 shares for each share of Thermo TerraTech common stock. The common
stock of Thermo TerraTech ceased to be publicly traded.
The Company completed a merger with ThermoLase pursuant to which the
Company acquired all of ThermoLase's outstanding shares of common stock not
already owned by ThermoTrex or the Company in exchange for Company common stock
at a ratio of 0.132 shares for each share of ThermoLase common stock. The common
stock of ThermoLase ceased to be publicly traded. In addition, under the
agreement, units of ThermoLase were modified so that each unit consisted of a
fractional share of Company common stock. The units were redeemed in April 2001
for cash of $7.5 million.
The Company completed a merger with ThermoTrex pursuant to which the
Company acquired all of ThermoTrex's outstanding shares of common stock not
already owned by the Company in exchange for Company common stock at a ratio of
0.5503 shares for each share of ThermoTrex common stock. The common stock of
ThermoTrex ceased to be publicly traded.
The Company completed a cash tender offer of $2.15 per share for Trex
Medical to bring its ownership of this business to at least 90%. Subsequently,
the Company completed the acquisition of the outstanding minority interest in
Trex Medical through a short-form merger at the same price as the tender offer
and the common stock of Trex Medical ceased to be publicly traded.
The Company completed mergers with ThermoRetec Corporation and The Randers
Killam Group Inc. pursuant to which the Company acquired, for $7.00 and $4.50
per share in cash, respectively, all of the outstanding shares of common stock
of ThermoRetec and Randers Killam not already owned by Thermo TerraTech or the
Company. The common stock of each of ThermoRetec and Randers Killam ceased to be
publicly traded.
Because the Company owned more than 90% of the outstanding shares of
Thermo Ecotek, the Company repurchased Thermo Ecotek through a short-form
merger. Thermo Ecotek shareholders received 0.431 shares of Company common stock
for each share of Thermo Ecotek common stock. The common stock of Thermo Ecotek
ceased to be publicly traded.
As a result of the completion of the mergers with Thermedics, Thermo
TerraTech, ThermoLase, ThermoTrex, and Thermo Ecotek, the Company issued 10.0
million shares of its common stock valued at $182.8 million.
1999
The Company completed a merger with Thermo Power Corporation pursuant to
which the Company acquired, for $12.00 per share in cash, all of the outstanding
shares of common stock of Thermo Power not already owned by the Company. The
common stock of Thermo Power ceased to be publicly traded.
Discontinued Operations
In January 2000, the Company also announced its intention to sell several
of its businesses. These businesses, together with the businesses spun off,
constituted the Company's former Biomedical and Emerging Technologies and
Resource Recovery segments as well as the Company's environmental businesses,
and Thermo Power. In addition, in June and July 2001, the Company sold its power
generation business. In accordance with the provisions of APB No. 30 concerning
reporting the effects of disposal of a segment of a business, the Company
classified the results of these businesses, as well as the results of the
businesses spun off as dividends (collectively, "the discontinued businesses"),
as discontinued operations in the accompanying statement of operations. In
addition, the net assets of the discontinued businesses were classified as net
assets of discontinued operations in the accompanying 2000 balance sheet. In
2001, net liabilities of discontinued operations principally represent remaining
obligations of the discontinued businesses including severance, lease,
litigation, and tax obligations, net of the carrying value of 14.6 million
shares of Thoratec common stock, and the net assets of three remaining operating
units held for sale. Current net assets of discontinued
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
17. Reorganization and Discontinued Operations (continued)
- --------------------------------------------------------------------------------
operations in 2000 primarily consisted of cash, inventories, and accounts
receivable, net of certain liabilities, primarily accrued expenses and accounts
payable. Long-term net assets of discontinued operations primarily consisted of
shares of common stock of Thoratec (see below), machinery and equipment, and
goodwill as well as subordinated convertible debentures of Thermo Cardiosystems
and Kadant (Note 10).
Summary operating results for 1999 of the businesses discontinued in
January 2000 and for 1999 and 2000 for the power generation business, were as
follows:
(In thousands) 2000 1999
- ----------------------------------------------------------------------------------------------------------
Revenues $ 120,256 $2,009,130
Costs and Expenses 93,779 2,280,192
---------- ----------
Income (Loss) from Discontinued Operations Before Income
Taxes, Minority Interest, and Extraordinary Item 26,477 (271,062)
Income Tax (Provision) Benefit (10,427) 54,807
Minority Interest (Expense) Income (1,822) 52,282
---------- ----------
Income (Loss) from Discontinued Operations Before
Extraordinary Item 14,228 (163,973)
Extraordinary Item, Net of Income Taxes and Minority Interest - 648
---------- ----------
Income (Loss) from Discontinued Operations $ 14,228 $ (163,325)
========== ==========
During 2001, the Company's discontinued operations had revenues and
operating income of $658.3 million and $50.4 million, respectively. During 2000,
the Company's discontinued operations (excluding the power generation business)
had revenues and an operating loss of $1.49 billion and $40.2 million,
respectively. The Company received proceeds from the sale of discontinued
businesses of $347.8 million and $390.1 million in 2001 and 2000, respectively.
In 1999, the Company recorded a charge of $50 million, including a provision for
income taxes of $174 million, for the estimated loss on disposal of the
discontinued businesses. The charge was determined using management's best
estimate of the selling prices of the businesses and their estimated results
through the dates of sale. In 2000, the Company recorded an additional charge of
$100 million, net of an income tax benefit of $104 million, for changes in the
actual and estimated proceeds of businesses discontinued in 2000. Of the
businesses announced for sale, all but three with aggregate revenues of
approximately $100 million have been sold as of December 29, 2001.
Spinoffs
On July 9, 2001, the Company's Board of Directors approved the spinoff of
the Company's 91%-owned Kadant subsidiary as a dividend to the Company's
shareholders. On August 8, 2001, the Company distributed all of its shares of
Kadant to Thermo Electron 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.
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
17. Reorganization and 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 requires Kadant to
maintain certain financial ratios 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 distributed all of
its shares of Viasys Healthcare to Thermo Electron shareholders of record as of
November 7, 2001. Immediately after the planned distribution, the Company no
longer owned shares of Viasys Healthcare. The Company received a ruling from the
IRS that the dividend of Viasys Healthcare shares qualifies as a tax-free
distribution for U.S. federal income tax purposes, except that the cash received
in lieu of fractional shares is taxable. The stock dividend resulted in a
reduction of net assets of discontinued operations and retained earnings of $298
million.
The ruling from the IRS requires that the spinoffs raise additional equity
capital in public offerings within one year of their spinoffs.
Thermo Cardiosystems
In February 2001, the Company sold Thermo Cardiosystems 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
2001, the Company completed the sale of 4.7 million shares of Thoratec for
proceeds of $75.5 million. In February 2002, the Company completed the sale of
6.9 million shares of Thoratec for proceeds of approximately $105 million.
Power Generation Business
In June and July 2001, the Company sold the chief components of the power
generation business for proceeds of $249 million, net of cash divested. The
Company realized a gain on disposition of $15.6 million, net of tax.
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
18. Unaudited Quarterly Information
- --------------------------------------------------------------------------------
2001 (In thousands except per share amounts) First (a) Second (b) Third (c) Fourth (d)
- ----------------------------------------------------------------------------------------------------------
Revenues $573,089 $542,472 $512,941 $559,708
Gross Profit 255,254 238,062 228,486 236,820
Income from Continuing Operations Before Extraordinary
Item and Cumulative Effect of Change in Accounting
Principle 21,819 9,423 25,677 (7,327)
Income (Loss) Before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle (44,181) 24,983 25,677 (7,327)
Net Income (Loss) (e) (45,175) 24,983 26,279 (6,868)
Earnings (Loss) per Share from Continuing Operations
Before Extraordinary Item and Cumulative Effect of
Change in Accounting Principle:
Basic .12 .05 .14 (.04)
Diluted .12 .05 .14 (.04)
Earnings (Loss) per Share (e):
Basic (.25) .14 .15 (.04)
Diluted (.24) .14 .14 (.04)
2000 (In thousands except per share amounts) First (f) Second (g) Third (h) Fourth (i)
- ----------------------------------------------------------------------------------------------------------
Revenues $576,604 $579,950 $546,949 $577,019
Gross Profit 268,595 266,249 226,348 260,644
Income from Continuing Operations Before Extraordinary
Item and Cumulative Effect of Change in Accounting
Principle 14,479 21,698 7,281 18,589
Income (Loss) Before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle 15,940 24,255 12,279 (76,199)
Net Income (Loss) (j) 3,554 24,255 12,279 (76,199)
Earnings per Share from Continuing Operations Before
Extraordinary Item and Cumulative Effect of Change in
Accounting Principle:
Basic .09 .14 .04 .10
Diluted .09 .13 .04 .10
Earnings (Loss) per Share (j):
Basic .02 .16 .07 (.42)
Diluted .02 .15 .07 (.41)
Amounts reflect aggregate restructuring and unusual items, net, and nonoperating items, net, as follows:
(a) Costs of $12.9 million, a net of tax charge of $66.0 million related to the Company's discontinued
operations, and a $1.0 million charge for the cumulative effect of change in accounting principle for
the adoption of SFAS No. 133.
(b) Costs of $37.0 million and a net of tax gain of $15.6 million related to the Company's discontinued
operations.
(c) Costs of $9.6 million and gains of $8.6 million from the sale of shares of FLIR.
(d) Costs of $102.2 million and gains of $26.5 million from the sale of shares of FLIR.
(e) Extraordinary item, net of taxes, of $0.6 million and $0.5 million in the third and fourth quarters,
respectively.
(f) Costs of $4.3 million and a $12.9 million charge for the cumulative effect of change in accounting
principle for the adoption of SAB No. 101.
(g) Income of $1.5 million.
(h) Income of $31.9 million. In July 2000, the Company sold its Spectra-Precision businesses.
(i) Costs of $25.7 million and a net of tax charge of $100 million related to the Company's discontinued
operations.
(j) Extraordinary item, net of taxes, of $0.5 million in the first quarter.
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Thermo Electron Corporation 2001 Financial Statements
Notes to Consolidated Financial Statements
19. Subsequent Events
- --------------------------------------------------------------------------------
Purchase of Minority Interest in Spectra-Physics
Following the completion of a cash tender offer in December 2001 for all
of the shares of Spectra-Physics it did not previously own, the Company
completed a short-form merger with Spectra-Physics in February 2002. Following
the merger, Spectra-Physics was no longer publicly traded and became a wholly
owned subsidiary of the Company.
Redemption of Subordinated Convertible Debentures
In February 2002, the Company announced that on March 21, 2002, it will
redeem all of its outstanding 4 1/4% and 4 5/8% subordinated convertible
debentures due 2003. As of December 29, 2001, the principal amount outstanding
for the 4 1/4% and 4 5/8% debentures was $398.5 million and $69.6 million,
respectively. The redemption price is 100% of the principal amount of the
debentures, plus accrued interest. Accordingly, the obligations have been
presented as current liabilities in the accompanying 2001 balance sheet.
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Thermo Electron Corporation 2001 Financial Statements
Report of Independent Public Accountants
To the Shareholders and Board of Directors of Thermo Electron Corporation:
We have audited the accompanying consolidated balance sheets of Thermo
Electron Corporation (a Delaware corporation) and subsidiaries as of December
29, 2001, and December 30, 2000, and the related consolidated statements of
operations, cash flows, and comprehensive loss and shareholders' investment for
each of the three years in the period ended December 29, 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Thermo
Electron Corporation and subsidiaries as of December 29, 2001, and December 30,
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 29, 2001, in conformity with accounting
principles generally accepted in the United States.
As explained in Note 1 to the consolidated financial statements, effective
December 31, 2000, the Company changed its method of accounting for derivative
instruments and hedging activities through the adoption of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended. As explained in Notes 1 and 16 to the
consolidated financial statements, effective January 2, 2000, the Company
changed its method of accounting for revenue recognition on certain product
shipments through the adoption of Staff Accounting Bulletin No. 101 "Revenue
Recognition in Financial Statements."
Arthur Andersen LLP
Boston, Massachusetts
February 7, 2002 (except
with respect to the
matters discussed in
Note 19, as to which the
date is February 25, 2002)
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Thermo Electron Corporation 2001 Financial Statements
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. 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 immediately after this Management's
Discussion and Analysis of Financial Condition and Results of Operations under
the heading "Forward-looking Statements."
Overview
- --------------------------------------------------------------------------------
The Company develops and manufactures a broad range of products that are
sold worldwide. The Company expands the product lines and services it offers by
developing and commercializing its own core technologies and by making strategic
acquisitions of complementary businesses. In January 2000, the Company announced
a major reorganization plan under which it planned to sell or spin off many
noncore businesses. As a result of these actions, the Company's continuing
operations solely include its instrument businesses. The results of the
businesses that have been spun off or have been or will be sold have been
presented as discontinued operations in the accompanying financial statements.
The Company's continuing operations fall into three principal business segments:
Life Sciences, Optical Technologies, and Measurement and Control.
The Company's discussion and analysis of its financial condition and
results of operations is based upon its financial statements, which have been
prepared in accordance with generally accepted accounting principles. The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses, and related disclosure of contingent liabilities. On an on-going
basis, the Company evaluates its estimates, including those related to bad
debts, inventories, intangible assets, warranty obligations, income taxes,
contingencies and litigation, restructuring, and discontinued operations. The
Company bases its estimates on historical experience, current market and
economic conditions, and other assumptions that management believes are
reasonable. The results of these estimates form the basis for judgments about
the carrying value of assets and liabilities where the values are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions.
The Company believes the following represent its critical accounting
policies and estimates used in the preparation of its financial statements. a)
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to pay amounts due. If the
financial condition of the Company's customers were to deteriorate, reducing
their ability to make payments, additional allowances would be required. b) The
Company writes down its inventories for estimated obsolescence for differences
between the cost and estimated net realizable value based on recent usage and
expected demand. If ultimate usage varies significantly from expected usage,
additional writedowns may be required. c) The Company periodically reviews
intangible assets including goodwill for impairment based on estimated future
cash flows associated with the assets. Should future cash flows decline
significantly from estimated amounts, charges for impairment of intangible
assets may be necessary. d) At the time the Company recognizes revenue it
provides for the estimated cost of product warranties based primarily on
historical experience. Should product failure rates or the actual cost of
correcting product failures vary from estimates, revisions to the estimated
warranty liability would be necessary. e) The Company estimates the degree to
which tax assets and loss carryforwards will result in a benefit based on
expected profitability by tax jurisdiction and provides a valuation allowance
for tax assets and loss carryforwards that it believes will more likely than not
go unused. Should the Company's actual future taxable income by tax jurisdiction
vary from estimates, additional allowances may be necessary. f) The Company
estimates losses on contingencies and litigation and provides a reserve for
these losses. Should the ultimate losses on contingencies and litigation vary
from estimates, additional charges may be required. g) The Company recorded
restructuring charges for asset impairment in 2001 based on estimated future
cash flows
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Thermo Electron Corporation 2001 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Overview (continued)
- --------------------------------------------------------------------------------
associated with the equipment and for the cost of vacating facilities based on
expected sub-rental income. Should actual cash flows associated with impaired
equipment and sub-rental income from vacated facilities vary from estimated
amounts, additional charges may be required. h) The Company estimates the
expected proceeds from the sale of its discontinued businesses and recorded
losses in 1999-2001 to reduce the carrying value of these businesses to
estimated realizable value. Should the actual proceeds vary from estimates,
actual results could differ from expected amounts.
Results of Operations
- --------------------------------------------------------------------------------
2001 Compared With 2000
Continuing Operations
Sales in 2001 were $2.188 billion, a decrease of $92.3 million from 2000.
Excluding the effect of acquisitions, divestitures, and currency translation,
revenues increased $113.5 million, or 5%. 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 $34.2 million in 2001, compared with $266.0 million
in 2000. Segment income decreased to $85.2 million in 2001 from $319.8 million
in 2000. (Segment income is defined as operating income excluding corporate
general and administrative expenses and corporate restructuring and other
unusual items, net.) Operating and segment income in 2001 were affected by
restructuring and other unusual costs. Operating and segment income in 2000 were
affected by gains from the sale of businesses, 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. The unusual items in both periods are
discussed below and in more detail in Note 15. Excluding these unusual items,
which totaled $147.3 million of expense in 2001 and $67.3 million of income in
2000, segment income was $232.4 million in 2001 and $252.5 million in 2000.
Segment income excluding unusual items decreased due to a reduction in segment
income of $10.9 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 in
2000, offset in part by lower amortization expense following a number of
divestitures. In addition, certain businesses discussed below had lower
profitability in 2001.
The Company undertook restructuring actions in 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 and cement industries. The Company expects to
substantially complete the restructuring actions by the third quarter of 2002.
In addition to the actions to reduce costs, the Company recorded an impairment
charge for equipment used in telecommunication manufacturing at Spectra-Physics.
The Company also recorded provisions for inventories related to the
discontinuance of certain mature or unprofitable product lines and inventories
made redundant by combining businesses and for excess telecommunication
inventories at Spectra-Physics. The Company expects that the restructuring
actions will result in annual cost reductions of approximately $63 million with
approximately 40% beginning in the fourth quarter of 2001 and the balance by the
third quarter of 2002, including $12 million in the Life Sciences segment, $24
million in the Optical Technologies segment, $24 million in the Measurement and
Control segment, and $3 million at the Company's corporate office. The Company
expects to incur an additional $11 million of restructuring costs in 2002 for
charges that cannot be recorded until incurred. The Company will incur other
restructuring costs in 2002 as it integrates its formerly public subsidiary,
Spectra-Physics, with other businesses in its Optical Technologies sector. These
plans are being formed as of March 15, 2002, but are expected to include
severance and abandonment of certain redundant manufacturing processes and
related fixed assets and leased equipment with associated charges of at least $7
million, principally in the first quarter of 2002. The Company may incur other
restructuring costs in 2002 or thereafter as the Company continues its efforts
to consolidate the number of its operating locations. The particular actions,
costs, and timing of such undertakings have not been determined.
<
55
>
Thermo Electron Corporation 2001 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
2001 Compared With 2000 (continued)
During 2001, the Company moved its Thermo KeyTek unit from the Measurement
and Control segment to the Optical Technologies segment and moved its Thermo
Projects unit (the principal operating business of which was acquired in early
2001) from the Life Sciences segment to a separate segment (included as "Other"
in Note 3) due to organizational changes. Prior periods have been restated to
conform to this presentation where applicable.
Life Sciences
- -------------
Sales in the Life Sciences segment increased $54.2 million to $834.2
million in 2001. Sales increased $5.7 million due to acquisitions. The
unfavorable effects of currency translation resulted in a decrease in revenues
of $20.0 million in 2001. Excluding the effect of acquisitions and currency
translation, revenues increased $68.5 million, or 9%. Nearly half of the
increase was due to higher sales of mass spectrometry products in 2001 including
ion trap and triple quadrupole instruments used in proteomics and drug discovery
research. Of the remaining increase, approximately two thirds was from increased
sales of biosciences equipment including sample-preparation equipment and
microplate and liquid-handling products due to strong demand from the drug
discovery market and expanded distribution channels. In addition, the segment
had higher revenues from clinical diagnostic products, including rapid
diagnostic tests.
Segment income margin decreased to 9.9% in 2001 from 11.9% in 2000. The
segment's margin in both periods was affected by restructuring and unusual
charges, discussed below. Excluding restructuring and unusual costs, net, of
$30.3 million in 2001 and $16.0 million in 2000, segment income margin was 13.5%
in 2001 and 14.0% 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 13.9% in 2001. Lower profitability due to research and development
expenditures on proteomics initiatives was offset in part by the effect of
higher revenues, discussed above. In 2001, the segment recorded charges of $30.3
million, including cash costs of $15.1 million, primarily for severance and
abandoned facilities; $6.7 million of asset writedowns; $4.4 million of charges
to cost of revenues principally for discontinued product lines; and $0.7 million
of noncash severance costs (Note 15). The segment also recorded a charge of $3.4
million for the writeoff of in-process research and development at an acquired
business. Restructuring costs in 2000 represent $8.4 million of charges to cost
of revenues principally for discontinued product lines; $6.5 million of cash
costs, primarily for severance and abandoned facilities; and $1.4 million of
asset writedowns.
Optical Technologies
- --------------------
Sales in the Optical Technologies segment increased $30.0 million to
$526.4 million in 2001. Sales increased $2.3 million from acquisitions, net of a
small divestiture. The unfavorable effects of currency translation resulted in a
decrease in revenues of $8.5 million in 2001. Excluding the effect of
acquisitions, a divestiture, and currency translation, revenues increased $36.3
million, or 7%. The increase in revenues was due in part to $32.7 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. These increases were
offset in part by a 11% decrease in sales of temperature-control products due to
a severe market downturn in the semiconductor industry. This downturn, together
with poor economic conditions in the telecommunications markets, resulted in a
decline in segment revenues in the third and fourth quarters of 2001 of 8% and
11%, respectively, (excluding currency effects), compared with the same quarters
of 2000. These market conditions are continuing in 2002 and unfavorable revenue
and profitability comparisons with corresponding periods in the prior year will
result for at least the near-term. The segment's backlog trended down throughout
2001 and was $171.6 million at December 29, 2001, a decrease of 33% from the end
of 2000, excluding a divestiture.
<
56
>
Thermo Electron Corporation 2001 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
2001 Compared With 2000 (continued)
Segment income margin decreased to negative 5.7% in 2001 from 7.3% in
2000. Excluding restructuring and unusual costs of $61.5 million in 2001 and
$6.5 million in 2000, segment income margin was 6.0% in 2001 and 8.6% in 2000.
The decrease in segment income margin excluding unusual costs was primarily due
to $2.8 million of operating losses at Spectra-Physics from its telecom product
introductions and associated start-up costs, compared with profitable operations
in 2000. The decrease in segment income margin was also due to a smaller
contribution toward fixed costs as a result of lower revenues from
temperature-control products together with $0.9 million of higher goodwill
amortization in 2001 following the purchase of the minority interests of
formerly public subsidiaries. In 2001, the segment recorded restructuring and
unusual charges of $61.5 million, including $25.2 million of cash costs for
severance, lease obligations for abandoned equipment and facilities, litigation
loss, and other cash costs; $24.6 million of asset writedowns, principally fixed
assets associated with telecommunication initiatives; and $11.8 million of
charges to cost of revenues for inventories (Note 15). Restructuring and unusual
costs in 2000 represent $2.9 million of charges to cost of revenues principally
for discontinued product lines, a $1.5 million writeoff of in-process research
and development at an acquired business, $1.2 million of cash costs, a $0.7
million writedown of goodwill on a business held for sale, and $0.2 million of
asset writedowns.
Measurement and Control
- -----------------------
Sales in the Measurement and Control segment decreased $189.7 million to
$831.3 million in 2001. Sales decreased $179.4 million due to divestitures, net
of an acquisition. The unfavorable effects of currency translation resulted in a
decrease in revenues of $17.9 million in 2001. Excluding the effect of
divestitures, an acquisition, and currency translation, revenues increased $7.6
million, or 1%. Revenues from the sale of environmental-monitoring equipment
increased $11.1 million due in part to increased sales of chemical and radiation
monitors as well as demand from the construction industry and upgrades of power
plants. In addition, revenues from the sale of spectroscopy instruments
increased due to new product introductions. These increases were offset in part
by $12.7 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 and cement industries
due to a downturn in those markets. In April 2001, the segment sold businesses
that contributed $4.4 million of the segment's internal revenue growth in 2001.
A downturn in some markets served by the segment resulted in a decline in
revenues in the third and fourth quarters of 2001 of 4% and 3%, respectively,
(excluding currency effects), compared with the same quarters of 2000. These
market conditions are continuing in 2002 and will unfavorably affect the
segment's revenue comparisons with corresponding periods in the prior year for
at least the near-term. The segment's backlog trended down in 2001 and was
$133.5 million at December 29, 2001, a decrease of 21% from the end of 2000,
excluding divestitures.
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 industries with wellhead safety and control
products. The businesses were sold for net proceeds of approximately $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 2001 through the dates of sale. In 2000, the
segment's divestitures primarily included Spectra Precision, Nicolet Imaging
Systems, and Sierra Research and Technology, Inc. (Note 2).
Segment income margin decreased to 4.0% in 2001 from 18.8% in 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 $55.4 million in 2001 and unusual income, net, of $90.1 million
in 2000, increased to 10.6% in 2001 from 10.0% in 2000. The increase in segment
income margin resulted primarily from higher revenues 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 2001, the segment recorded
<
57
>
Thermo Electron Corporation 2001 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
2001 Compared With 2000 (continued)
restructuring and unusual charges, net, of $55.4 million, including cash costs
of $30.0 million for severance, abandoned facilities, and other exit costs;
$11.0 million, net, for the loss on the sale of businesses and writedowns of
businesses subsequently sold; $9.9 million of charges to cost of revenues
principally for discontinued product lines; $5.5 million of asset writedowns;
and $0.1 million of other costs. These charges were offset in part by a gain of
$1.1 million on the sale of a building (Note 15). The businesses for which the
segment recorded a loss on or prior to sale were ThermoMicroscopes and Pharos
Marine. In 2000, restructuring and unusual income, net, totaled $90.2 million
and included gains on the sale of businesses, net, of $126.3 million, and the
related operating loss of $1.7 million of one of the divested businesses in the
third quarter of 2000 prior to its sale; $20.6 million of asset writedowns to
reduce the carrying value of businesses held for sale to estimated disposal
value and for fixed assets unique to certain discontinued products; charges to
cost of revenues of $8.0 million, primarily for discontinued product lines; $6.4
million of cash costs for severance and facility costs; and a gain of $0.6
million from the termination of a lease (Note 15).
Other Income (Expense), Net
- ---------------------------
The Company reported other income, net, of $36.5 million in 2001 and other
expense, net, of $81.2 million in 2000 (Note 4). Other income (expense), net,
includes interest income, interest expense, equity in earnings (loss) of
unconsolidated subsidiaries, gain on investments, net, and other items, net.
Interest income increased to $68.5 million in 2001 from $40.2 million in 2000,
primarily due to proceeds from the sale of businesses, including discontinued
operations, offset in part by cash used in 2000 and 2001 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 $71.8
million in 2001 from $83.1 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 $4.7 million in 2001 and incurred a net equity loss of $47.3
million in 2000, primarily related to its investment in FLIR Systems, Inc.,
which undertook significant restructuring actions in 2000. The Company reports
its pro rata share of FLIR's results on a one-quarter lag. In December 2001, the
Company's ownership of FLIR fell below 20%, following a sale of shares discussed
below. In the first quarter of 2002, the Company will record its pro rata share
of FLIR's fourth quarter 2001 earnings. Thereafter, the Company will account for
its investment in FLIR as an available-for-sale security and will no longer
record its share of FLIR's earnings. The Company had gains on investments, net,
of $35.6 million and $6.8 million in 2000. The gain in 2001 includes $35.1
million from the sale of 1,150,000 shares of FLIR. Of the total gain from the
sale of FLIR, $14.2 million represents a recovery of previous writedowns of
FLIR. The gain in 2001 was reduced by a charge of $2.8 million to writedown two
available-for-sale investments due to impairment that the Company deemed other
than temporary. In 2001, other income, net, includes $0.5 million of other
expense, principally currency losses. In 2000, other expense, net, also includes
$2.3 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% and 61% in 2001 and 2000,
respectively. Excluding the tax effect of restructuring and unusual costs or
income, the effective tax rate was 38% and 39% 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.
<
58
>
Thermo Electron Corporation 2001 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
2001 Compared With 2000 (continued)
Minority Interest Income (Expense)
- ----------------------------------
The Company recorded minority interest income of $5.8 million in 2001 and
minority interest expense of $10.6 million in 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 (Note 17). In 2001, Spectra-Physics incurred a loss and
minority interest income represents the minority shareholders' share of the
loss. Following the purchase of the minority interest in Spectra-Physics in
February 2002 (Note 19), the Company has no material minority interests in its
subsidiaries.
Contingent Liabilities
- ----------------------
At year-end 2001, the Company was contingently liable with respect to
certain lawsuits. An unfavorable outcome in one or more of the matters described
in Note 11 could materially affect the Company's financial position as well as
its results of operations and cash flows for a particular quarter or annual
period.
Income from Continuing Operations
- ---------------------------------
Income from continuing operations before extraordinary item and cumulative
effect of change in accounting principle was $49.6 million in 2001, compared
with $62.0 million in 2000. Results were affected by restructuring and other
unusual items, discussed above. Excluding restructuring and other unusual items
in both periods as well as gains from the sale of shares of FLIR, income from
continuing operations before extraordinary item and cumulative effect of change
in accounting principle increased to $122.4 million in 2001 from $100.0 million
in 2000 due to the items 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 (Note 1). In addition, in accordance with the requirements of Securities
and Exchange Commission Staff Accounting Bulletin (SAB) 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 (Note 16).
Discontinued Operations
In February 2001, the Company sold Thermo Cardiosystems Inc. to Thoratec
Corporation in exchange for 19.3 million shares of Thoratec common stock.
Certain restrictions limit the Company's ability to sell these shares, although
the restrictions fully lapse in August 2002. Subsequent to the receipt of the
Thoratec common stock, the market value of the shares declined significantly.
The Company recorded a net of tax provision 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 2001, the Company sold 4.7 million
shares of Thoratec for proceeds of $75.5 million. In February 2002, the Company
sold an additional 6.9 million shares for proceeds of approximately $105
million.
<
59
>
Thermo Electron Corporation 2001 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
2001 Compared With 2000 (continued)
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 $14.2 million in 2000, net of taxes
and minority interest.
The Company recorded a net of tax provision of $100 million in 2000 as a
revision to the estimate of loss on disposal of discontinued operations recorded
in 1999. The increase in the loss resulted from lower after-tax proceeds from
the sale of noncore businesses than had been anticipated at the time the
businesses were discontinued. The Company believes that deterioration in the
financial markets in the latter part of 2000, including tighter financing terms
and lower equity values, adversely affected the selling prices of the
discontinued businesses.
2000 Compared With 1999
Continuing Operations
Sales in 2000 were $2.281 billion, a decrease of $14.1 million from 1999.
Excluding the effect of acquisitions, divestitures, and currency translation,
revenues increased $146.6 million, or 7%. Operating income was $266.0 million in
2000, compared with $182.1 million in 1999. Segment income increased to $319.8
million in 2000 from $219.2 million in 1999. The 2000 period included
significant gains on the sale of businesses, inventory provisions, and
restructuring and unusual costs as well as a $1.7 million operating loss in the
third quarter at a business that was sold. The 1999 period included significant
restructuring and unusual costs. These items are discussed below. Excluding
unusual income, net, of $67.3 million in 2000 and unusual costs of $41.0 million
in 1999, segment income decreased to $252.5 million in 2000 from $260.2 million
in 1999. Segment income excluding unusual items decreased in part due to a
reduction in segment income of $8.6 million from businesses divested. In
addition, $4.9 million of incremental amortization expense 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 higher profitability at
certain units.
The restructuring actions undertaken in 2000 were substantially completed
by the end of the second quarter of 2001. These actions resulted in annualized
savings of approximately $5 million in the Life Sciences segment, $2 million in
the Optical Technologies segment, $4 million in the Measurement and Control
segment, and $2 million in the corporate office, generally beginning in the
fourth quarter of 2000.
Life Sciences
- -------------
Sales in the Life Sciences segment increased $15.6 million to $780.0
million in 2000. The unfavorable effects of currency translation resulted in a
decrease in revenues of $29.6 million in 2000. Revenues increased $13.7 million
due to acquisitions, offset in part by a decrease of $2.0 million due to the
adoption of SAB No. 101. Excluding the effect of currency translation,
acquisitions, and the adoption of SAB No. 101, revenues increased $33.5 million,
or 4%. Over half of the increase resulted from increased demand for mass
spectrometers, due in part to strong sales in Japan and growth in the drug
discovery market. Approximately a third of the increase in revenues was from
increased sales of clinical diagnostic products due to higher demand for
clinical chemistry analyzers and reagents and rapid diagnostic tests. In
addition, a 10% increase in sales of controlled-environment laboratory equipment
was largely offset by lower revenues from laboratory information management
systems due to completion of year-2000 compliance projects in 1999.
Segment income margin decreased to 11.9% in 2000 from 15.5% in 1999. The
segment's margin decreased primarily due to restructuring and related actions in
2000. Excluding restructuring and unusual costs, segment income margin decreased
to 14.0% in 2000 from 15.5% in 1999 due to lower sales of laboratory information
management systems, which have a higher profit margin than the segment's other
products. In addition, segment income margin was negatively affected by the
purchase of the minority interests of formerly public subsidiaries, which
resulted in an increase of $4.5 million in goodwill amortization expense, as
well as $1.8 million of research and development
<
60
>
Thermo Electron Corporation 2001 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
2000 Compared With 1999 (continued)
spending on proteomics initiatives. The restructuring and unusual costs totaled
$16.3 million and included $8.4 million of charges to cost of revenues,
primarily for discontinued product lines; $6.5 million of cash costs, primarily
for severance and facilities closures; and $1.4 million of asset writedowns in
connection with the closure of a small business and the consolidation and
abandonment of facilities. The segment recorded unusual income of $0.3 million
in 1999 for the reversal of previously recorded restructuring costs (Note 15).
Optical Technologies
- --------------------
Sales in the Optical Technologies segment increased $89.5 million to
$496.3 million in 2000. Sales increased $19.4 million due to acquisitions,
primarily the inclusion of a full year of revenues from the acquisition of a
majority interest in Spectra-Physics on February 22, 1999. The unfavorable
effects of currency translation resulted in a decrease in revenues of $13.3
million in 2000. The adoption of SAB No. 101 reduced revenues by $13.1 million.
Excluding the effect of acquisitions, currency translation, and the adoption of
SAB No. 101, revenues increased $96.5 million, or 25%. Sales of
semiconductor-based lasers increased $41.9 million due to higher demand from
computer and microelectronic manufacturers. Sales of temperature-control systems
increased $27.3 million in 2000 as a result of strong demand from the
semiconductor industry. Approximately 18% of the increase in revenues was from
higher sale of photonics products as a result of strong demand for gratings and
other optical components used in systems for lithography and telecommunication
devices. In addition, higher sales of molecular beam epitaxy systems resulted
from increased demand from semiconductor manufacturers.
Segment income margin was 7.3% in 2000 and 6.2% in 1999. Excluding
restructuring and unusual costs, segment income margin was 8.6% in 2000 and 8.9%
in 1999. Segment income margin was unfavorably affected by the growth in
revenues at Spectra-Physics, which has lower operating margins due to heavy
investments in telecommunications products. In addition, the segment had $2.1
million of higher goodwill amortization expense, primarily resulting from the
purchase of the minority interests in formerly public subsidiaries. These
factors were offset in part by higher profitability resulting from increased
sales of photonics products and temperature-control systems. The restructuring
and unusual costs in 2000 totaled $6.5 million and included charges to cost of
revenues of $2.9 million, primarily for discontinued product lines; a $1.5
million charge for in-process research and development in connection with an
acquisition; $1.2 million of cash costs for severance and facility exit costs;
and $0.9 million of asset writedowns, primarily to reduce the carrying value of
a small business unit held for sale to estimated disposal value. The
restructuring and unusual costs in 1999 totaled $11.2 million and included $6.0
million of goodwill impairment in connection with the planned sale of the
Company's power electronics and test-equipment business; $3.2 million of charges
to cost of revenues for the sale of inventories revalued at the date of
acquisition; $1.0 million of facility closing costs and severance associated
with a restructuring plan undertaken in 1998 and completed in 1999; $0.9 million
of inventory provisions; and $0.1 million of other costs (Note 15). The Company
sold the operating units of the power electronics and test-equipment business in
2000 and 2001, except for its Thermo KeyTek unit, which it decided to retain.
The other components of the power electronics and test-equipment business were
part of the Measurement and Control segment.
Measurement and Control
- -----------------------
Sales in the Measurement and Control segment decreased $127.0 million to
$1.021 billion in 2000. Sales decreased $101.7 million due to divestitures, net
of acquisitions. The unfavorable effects of currency translation resulted in a
decrease in revenues of $37.1 million in 2000. Revenues increased $2.9 million
due to the adoption of SAB No. 101. Excluding the effect of divestitures,
acquisitions, currency translation, and the adoption of SAB No. 101, revenues
increased $8.9 million, or 1%. Revenues from the sale of process instruments
increased $8.1 million, primarily due to strong demand from the natural gas
industry, which benefited from higher gas prices. In addition, sales of
environmental-monitoring equipment increased $7.2 million. Revenues from the
sale of spectroscopy instruments increased $4.6 million due to higher demand.
These increases were offset in part by lower sales of
<
61
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Thermo Electron Corporation 2001 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
2000 Compared With 1999 (continued)
weighing and inspection equipment resulting from reduced demand from the global
packaged food industry. This industry was in a period of consolidation and the
Company believes that a decrease in customers' capital spending resulted from
uncertainty in the marketplace.
Segment income margin increased to 18.8% in 2000 from 6.7% in 1999,
primarily due to gains on the sale of businesses. Segment income margin,
excluding restructuring and unusual items, increased to 10.0% in 2000 from 9.3%
in 1999. Higher profitability from increased sales of process instruments and
environmental-monitoring equipment was offset in part by lower margins from
spectroscopy instruments due to price competition at certain of the segment's
elemental analysis businesses. Restructuring and unusual income, net, in 2000
totaled $90.2 million and included gains on the sale of businesses, net, of
$126.3 million, and the related operating loss of $1.7 million of one of the
divested businesses in the third quarter of 2000 prior to its sale; $20.6
million of asset writedowns to reduce the carrying value of businesses held for
sale to estimated disposal value and for fixed assets unique to certain
discontinued products; charges to cost of revenues of $8.0 million, primarily
for discontinued product lines; $6.4 million of cash costs for severance and
facility costs; and a gain of $0.6 million from the termination of a lease. The
1999 restructuring and unusual costs totaled $30.1 million, including $24.8
million of restructuring charges, primarily to reduce the carrying value of the
power electronics and test-equipment business to estimated disposal value; $3.5
million of charges for the sale of inventories revalued at the date of
acquisition; and $1.9 million of inventory provisions (Note 15).
Other Expense, Net
- ------------------
The Company reported other expense, net, of $81.2 million and $57.3
million in 2000 and 1999, respectively (Note 4). Interest income increased to
$40.2 million in 2000 from $40.8 million in 1999 due to investment of cash
proceeds from the divestiture of noncore businesses, offset in part by lower
cash balances from the purchase of the minority interests in certain formerly
public subsidiaries. Interest expense decreased to $83.1 million in 2000 from
$91.9 million in 1999 as a result of the maturity and repurchase of Company and
subsidiary debentures in 1999 and 2000.
The Company incurred a loss of $47.3 million in 2000 from its equity in
the results of unconsolidated subsidiaries, primarily $47.4 million at FLIR,
including a writedown of the carrying value of the investment in FLIR to market
value. In 1999, the Company's equity in the results of unconsolidated subsidiary
totaled a loss of $7.3 million, including $11.1 million of unusual charges
related to FLIR (Notes 2 and 15). During 2000, gain on investments, net, was
$6.8 million, compared with $3.7 million in 1999. The 1999 gain on investments,
net, includes $3.6 million of charges for impairment that was deemed other than
temporary. In 2000, other expense, net, also includes $2.3 million of net
currency gains, primarily resulting from hedging activities at Spectra-Physics,
which elected early adoption of SFAS No. 133. In 1999, the Company had $2.3
million of losses from Spectra-Physics' hedging activities (Note 15).
Provision for Income Taxes
- --------------------------
The Company's effective tax rate was 61% and 52% in 2000 and 1999,
respectively. The effective tax rate in 2000 includes the effect of the sale of
Spectra Precision, which had a lower tax basis than book basis, resulting in a
significant tax gain on the sale. Excluding unusual items, the effective tax
rate was 39% and 40% in 2000 and 1999, respectively. The effective tax rate in
each period exceeds the statutory federal income tax rate primarily due to state
income taxes and nondeductible expenses, including amortization of goodwill.
Minority Interest Expense
- -------------------------
The Company recorded minority interest expense of $10.6 million and $23.0
million in 2000 and 1999, respectively. Minority interest expense decreased due
to the purchase of the minority interests in a number of formerly public
subsidiaries.
<
62
>
Thermo Electron Corporation 2001 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
2000 Compared With 1999 (continued)
Income from Continuing Operations
- ---------------------------------
Income from continuing operations before extraordinary item and cumulative
effect of change in accounting principle was $62.0 million in 2000, compared
with $37.3 million in 1999. Results were affected by restructuring costs and
unusual items, net, in both periods as well as the significant tax provision in
2000 on a gain on the sale of a business as discussed above. Excluding these
items, income from continuing operations before extraordinary item and
cumulative effect of change in accounting principle was $104.4 million in 2000
and $79.8 million in 1999.
Cumulative Effect of Change in Accounting Principle
- ---------------------------------------------------
In accordance with the requirements of SAB No. 101, 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 (Note 16).
Discontinued Operations
The Company recorded a net of tax provision of $100 million in 2000 as a
revision to the estimate of $50 million recorded in 1999 for loss on disposal of
discontinued operations. The increase in the loss resulted from lower after-tax
proceeds from the sale of noncore businesses than had been anticipated at the
time the businesses were discontinued. The Company believes that deterioration
in the financial markets in the latter part of 2000, including tighter financing
terms and lower equity values, adversely affected the selling prices of the
discontinued businesses.
In February 2001, the Company entered into a definitive agreement to sell
its power generation business and subsequently sold the chief components of this
business in June and July 2001. The power generation business had income of
$14.2 million in 2000, net of taxes and minority interest. The Company's
discontinued operations had an aggregate loss of $163.3 million in 1999, net of
taxes and minority interest, primarily as a result of asset impairment charges.
Liquidity and Capital Resources
- --------------------------------------------------------------------------------
Consolidated working capital was $823.2 million at December 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
$1.04 billion at December 29, 2001, compared with $1.03 billion at December 30,
2000. In addition, the Company had $9.4 million of long-term available-for-sale
investments at December 29, 2001, compared with $17.1 million at December 30,
2000. Half of the decrease in working capital resulted from the Company's
decision to redeem certain convertible debentures prior to their 2003 maturity
(Note 19). The balance of the decrease resulted primarily from repurchases of
the Company's debt and equity securities in 2001.
Cash provided by operating activities was $188.4 million during 2001,
including $184.4 million from continuing operations. Accounts receivable used
$19.0 million of cash, of which $12.6 million occurred at the Company's Thermo
Finnigan business due to strong fourth quarter revenue growth in 2001 over the
fourth quarter of 2000. Accounts payable decreased by $19.1 million primarily
due to lower volume of purchasing activities resulting from slowdowns in several
businesses. Other current liabilities increased by $50.5 million, including an
increase of $39.7 million of restructuring reserves and an increase of $10.2
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 $60.7 million for restructuring and unusual costs at
December 29, 2001. The Company expects to pay $39.1 million of this amount for
severance, employee retention, and other costs primarily through 2002. The
remaining balance of $21.6 million will be paid through the expiration of lease
obligations in 2012 (Note 15). In addition, at December 29, 2001, the Company
had accrued $7.1 million for acquisition expenses. This balance principally
represents abandoned-facility payments that will be paid over the remaining
terms of the leases through 2014 (Note 2).
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Thermo Electron Corporation 2001 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources (continued)
- --------------------------------------------------------------------------------
During 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 purchase of shares of a
majority-owned subsidiary, the sale of businesses and other investments, and
acquisitions. The Company's continuing operations expended $73.2 million, net of
dispositions, for purchases of property, plant, and equipment, $69.5 million for
the purchase of shares of its majority-owned Spectra-Physics subsidiary, and
$14.1 million, net of cash acquired, for acquisitions. In addition, in 2001, the
Company's continuing operations sold businesses for aggregate proceeds, net of
cash divested, of $46.8 million and recorded proceeds of $43.3 million from the
sale of other investments, principally shares of FLIR. During 2001, investing
activities of the Company's discontinued operations provided $447.7 million of
cash, primarily representing proceeds, net of cash divested, of $347.8 million
from the sale of businesses and proceeds of $75.5 million from the sale of
Thoratec common stock.
The Company's financing activities used $696.3 million of cash during
2001, including $503.0 million for continuing operations. During 2001, the
Company's continuing operations expended $43.1 million for the repayment of
long-term obligations and received net proceeds of $69.9 million from the
exercise of employee stock options. During 2001, the Company expended $511.4
million to repurchase its securities. In November 2001, the Company's Board of
Directors authorized the repurchase of an additional $100 million tranche of its
own securities through November 6, 2002. Such purchases may be made in the open
market, or in negotiated transactions. As of December 29, 2001, the Company had
$96 million remaining under Board of Directors authorizations to repurchase its
own securities. In March 2002, the Company's Board of Directors authorized the
repurchase of an additional $100 million tranche of its own securities through
March 6, 2003. During 2001, the financing activities of the Company's
discontinued operations used $193.3 million of cash, including cash at the
Company's Kadant subsidiary, which was spun off in August 2001 (Note 17), and
the repayment of debt.
The table below summarizes the Company's contractual obligations and other
commercial commitments as of December 29, 2001, by period due or expiration of
commitment.
Payments Due by Period or Expiration of Commitment
----------------------------------------------------------------------
Less than
1 year 1-3 Years 4-5 Years After 5 Years Total
----------------------------------------------------------------------
Contractual Obligations and Other
Commercial Commitments:
Long-term obligations $ 470,429 $ 516,678 $ 346 $ 210,478 $1,197,931
Operating leases 36,265 60,873 35,906 59,044 192,088
---------- ---------- ---------- ---------- ----------
Total contractual obligations 506,694 577,551 36,252 269,522 1,390,019
---------- ---------- ---------- ---------- ----------
Other Commitments:
Standby letters of credit 40,099 4,174 98 - 44,371
Guarantees - 207,838 - - 207,838
---------- ---------- ---------- ---------- ----------
Total other commitments 40,099 212,012 98 - 252,209
---------- ---------- ---------- ---------- ----------
$ 546,793 $ 789,563 $ 36,350 $ 269,522 $1,642,228
========== ========== ========== ========== ==========
The Company does not use special purpose entities or other
off-balance-sheet financing techniques except for operating leases and other
commitments disclosed in the table above.
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Thermo Electron Corporation 2001 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources (continued)
- --------------------------------------------------------------------------------
The Company has no material commitments for purchases of property, plant,
and equipment and expects that for 2002, such expenditures will approximate $60
- - 70 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.
Market Risk
- --------------------------------------------------------------------------------
The Company is exposed to market risk from changes in interest rates,
currency exchange rates, and equity prices, which could affect its future
results of operations and financial condition. The Company manages its exposure
to these risks through its regular operating and financing activities.
Additionally, the Company uses short-term forward contracts to manage certain
exposures to currencies. The Company enters into forward currency exchange
contracts to hedge firm purchase and sale commitments denominated in currencies
other than its subsidiaries' local currencies. The Company does not engage in
extensive currency hedging activities; however, the purpose of the Company's
currency hedging activities is to protect the Company's local currency cash
flows related to these commitments from fluctuations in currency exchange rates.
The Company's forward currency exchange contracts principally hedge transactions
denominated in U.S. dollars, Euros, British pounds sterling, Japanese yen,
French francs, Swiss francs, German marks, Swedish krona, and Netherlands
guilders. Income and losses arising from forward contracts are recognized as
offsets to income and losses resulting from the transactions being hedged. The
Company does not enter into speculative currency agreements.
Interest Rates
Certain of the Company's short- and long-term available-for-sale
investments and long-term obligations are sensitive to changes in interest
rates. Interest rate changes would result in a change in the fair value of these
financial instruments due to the difference between the market interest rate and
the rate at the date of purchase or issuance of the financial instrument. A 10%
decrease in year-end 2001 and 2000 market interest rates would result in a
negative impact to the Company of $9 million and $16 million, respectively, on
the net fair value of its interest-sensitive financial instruments.
Currency Exchange Rates
The Company generally views its investment in international subsidiaries
with a functional currency other than the Company's reporting currency as
long-term. The Company's investment in international subsidiaries is sensitive
to fluctuations in currency exchange rates. The functional currencies of the
Company's international subsidiaries are principally denominated in British
pounds sterling, Euros, Netherlands guilders, Swedish krona, French francs, and
German marks. The effect of a change in currency exchange rates on the Company's
net investment in international subsidiaries is reflected in the "Accumulated
other comprehensive items" component of shareholders' investment. A 10%
depreciation in year-end 2001 and 2000 functional currencies, relative to the
U.S. dollar, would result in a reduction of shareholders' investment of $72
million and $62 million, respectively.
The fair value of forward currency exchange contracts is sensitive to
changes in currency exchange rates. The fair value of forward currency exchange
contracts is the estimated amount that the Company would pay or receive upon
termination of the contract, taking into account the change in currency exchange
rates. A 10% depreciation in year-end 2001 and 2000 currency exchange rates
related to the Company's contracts would result in an increase in the unrealized
loss on forward currency exchange contracts of $5.1 million and $7.0 million,
respectively. Since the Company uses forward currency exchange contracts as
hedges of firm purchase and sale commitments, the unrealized gain or loss on
forward currency exchange contracts resulting from changes in currency exchange
rates would be offset by a corresponding change in the fair value of the hedged
item.
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Thermo Electron Corporation 2001 Financial Statements
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Market Risk (continued)
- --------------------------------------------------------------------------------
Certain of the Company's cash and cash equivalents are denominated in
currencies other than the functional currency of the depositor and are sensitive
to changes in currency exchange rates. A 10% depreciation in the related
year-end 2001 and 2000 currency exchange rates would result in a negative impact
of $0.6 million and $0.3 million, respectively, on the Company's net income.
Equity Prices
The Company's available-for-sale investment portfolio includes equity
securities that are sensitive to fluctuations in price. In addition, the
Company's convertible obligations are sensitive to fluctuations in the price of
Company common stock into which the obligations are convertible. Changes in
equity prices would result in changes in the fair value of the Company's
available-for-sale investments and convertible obligations due to the difference
between the current market price and the market price at the date of purchase or
issuance of the financial instrument. A 10% increase in the year-end 2001 and
2000 market equity prices would result in a negative impact to the Company of $7
million and $26 million, respectively, on the net fair value of its
price-sensitive equity financial instruments, principally its convertible
obligations.
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Thermo Electron Corporation 2001 Financial Statements
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Thermo Electron wishes to caution readers that
the following important factors, among others, in some cases have affected, and
in the future could affect, Thermo Electron's actual results and could cause its
actual results in 2002 and beyond to differ materially from those expressed in
any forward-looking statements made by, or on behalf of, Thermo Electron.
Thermo Electron faces a number of challenges in integrating its instrument
businesses. Thermo Electron has historically operated its instrument businesses
largely as autonomous, unaffiliated operations. As part of its reorganization,
Thermo Electron has begun to manage these operations in a more coordinated
manner. The following factors may make it difficult to successfully integrate
and consolidate Thermo Electron's instrument operations:
- Thermo Electron's success in integrating these businesses will depend on
its ability to coordinate geographically separate organizations and integrate
personnel with different business backgrounds and corporate cultures.
- Thermo Electron's ability to combine these businesses will require
coordination of previously autonomous administrative, sales and marketing,
distribution, and accounting and finance functions, and expansion and
integration of information and management systems.
- The integration process could become disruptive to Thermo Electron's
instrument businesses.
Moreover, Thermo Electron may not be able to realize all of the cost
savings and other benefits that it expects to result from the integration
process, even if the process is completed.
It may be difficult for Thermo Electron to expand because some of the
markets for its products are not growing. Some of the markets in which Thermo
Electron competes have been flat or declining over the past several years. To
address this issue, Thermo Electron is pursuing a number of strategies to
improve its internal growth, including:
- finding new markets for its products, including, most significantly, in
the areas of proteomics and photonics;
- developing new applications for its technologies;
- combining sales and marketing operations in appropriate markets to
compete more effectively;
- actively funding research and development; and
- strengthening its presence in selected geographic markets.
Thermo Electron may not be able to successfully implement these
strategies, and these strategies may not result in growth of Thermo Electron's
business.
As a result of the spin-off of Kadant, Thermo Electron remains as the
guarantor of indebtedness issued by Kadant even though Thermo Electron no longer
controls Kadant's business or operations. Thermo Electron has guaranteed the
payment of principal and interest on $153 million principal amount of debentures
issued by Kadant. These debentures mature in July 2004. Thermo Electron remains
liable as a guarantor for this obligation following the spinoff, although it no
longer controls the business or operations of Kadant.
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Thermo Electron Corporation 2001 Financial Statements
Forward-looking Statements
Thermo Electron has significant international operations, which entail the
risk that exchange rate fluctuations may negatively affect demand for its
products and its profitability. International revenues account for a substantial
portion of Thermo Electron's revenues, and Thermo Electron intends to continue
expanding its presence in international markets. In 2001, Thermo Electron's
international revenues from continuing operations, including export revenues
from the United States, accounted for approximately 50% of its total revenues.
International revenues are subject to the risk that changes in exchange rates
may adversely affect product demand and the profitability in U.S. dollars of
products and services provided by Thermo Electron in international markets,
where payment for Thermo Electron's products and services is made in the local
currency. For example, in fiscal 2001, the unfavorable effects of currency
translation decreased revenues of Thermo Electron's continuing operations by
$46.5 million.
Thermo Electron has acquired several companies and businesses; as a result
it has recorded significant goodwill on its balance sheet, which it must
continually evaluate for potential impairment. Thermo Electron has acquired
significant intangible assets, including approximately $1.3 billion of goodwill
that it has recorded on its balance sheet as of December 29, 2001. Thermo
Electron assesses the future useful life of the goodwill it has on its books
whenever events or changes in circumstances indicate that the current useful
life has diminished. These events or circumstances generally include operating
losses or a significant decline in earnings associated with the acquired
business or asset. Thermo Electron's ability to realize the value of the
goodwill that it has recorded as a result of its acquisition of the minority
interests in its formerly publicly-traded subsidiaries will depend on the future
cash flows of these businesses. These cash flows in turn depend in part on how
well Thermo Electron has integrated these businesses.
Thermo Electron must develop new products, adapt to rapid and significant
technological change, and respond to introductions of new products in order to
remain competitive. Thermo Electron's growth strategy includes significant
investment in and expenditures for product development, including most
significantly in the areas of proteomics and photonics. Thermo Electron intends
to increase spending in the area of research and development. Thermo Electron
sells its products in several industries that are characterized by rapid and
significant technological changes, frequent new product and service
introductions, and enhancements and evolving industry standards. Without the
timely introduction of new products, services, and enhancements, Thermo
Electron's products and services will likely become technologically obsolete
over time, in which case its revenue and operating results would suffer.
Thermo Electron's customers use many of its products to develop, test, and
manufacture their own products. As a result, Thermo Electron must anticipate
industry trends and develop products in advance of the commercialization of its
customers' products. If it fails to adequately predict its customers' needs and
future activities, Thermo Electron may invest heavily in research and
development of products and services that do not lead to significant revenue.
Many of its products and products under development are technologically
innovative and require significant planning, design, development, and testing at
the technological, product, and manufacturing-process levels. These activities
require Thermo Electron to make significant investments.
Products in Thermo Electron's markets undergo rapid and significant
technological change because of quickly changing industry standards and the
introduction of new products and technologies that make existing products and
technologies uncompetitive or obsolete. Thermo Electron's competitors may adapt
more quickly to new technologies and changes in customers' requirements than
Thermo Electron can. The products Thermo Electron is currently developing, or
those it will develop in the future, may not be technologically feasible or
accepted by the marketplace, and its products or technologies could become
uncompetitive or obsolete.
Thermo Electron sells its products and services to a number of companies
that operate in cyclical industries, which could adversely affect its results of
operations when those industries experience a downturn. The growth and
profitability of Thermo Electron's Optical Technologies segment depends in part
on sales to the semiconductor and telecommunications industries, which are
subject to cyclical downturns. These industries are experiencing slowing trends.
A prolonged slowdown in these industries would adversely affect sales by the
Optical Technologies segment, which in turn could adversely affect Thermo
Electron's revenues and results of operations.
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Thermo Electron Corporation 2001 Financial Statements
Forward-looking Statements
Changes in governmental regulations may reduce demand for Thermo
Electron's products or increase its expenses. Thermo Electron competes in many
markets in which it and its customers must comply with federal, state, local,
and international regulations, such as environmental, health and safety, and
food and drug regulations. Thermo Electron develops, configures, and markets its
products to meet customer needs created by those regulations. Any significant
change in regulations could reduce demand for Thermo Electron's products. For
example, many of Thermo Electron's instruments are marketed to the
pharmaceutical industry for use in discovering and developing drugs. Changes in
the U.S. Food and Drug Administration's regulation of the drug discovery and
development process could have an adverse effect on the demand for these
products.
Demand for some of Thermo Electron's products depends on capital spending
policies of its customers and on government funding policies. Thermo Electron's
customers include manufacturers of semiconductors and products incorporating
semiconductors, pharmaceutical and chemical companies, laboratories,
universities, healthcare providers, government agencies, and public and private
research institutions. Many factors, including public policy spending
priorities, available resources, and economic cycles, have a significant effect
on the capital spending policies of these entities. These policies in turn can
have a significant effect on the demand for our products. For example, sales of
weighing and inspection equipment have decreased as a result of lower demand
from the global packaged food industry, which is undergoing a period of
consolidation.
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Thermo Electron Corporation 2001 Financial Statements
Selected Financial Information
(In millions except per share amounts) 2001 (a) 2000 (b) 1999 (c) 1998 (d) 1997
- ----------------------------------------------------------------------------------------------------------
Statement of Operations Data
Revenues $2,188.2 $2,280.5 $2,294.6 $1,880.9 $1,811.5
Gross Profit 958.6 1,021.8 1,048.8 872.8 859.2
Operating Income 34.2 266.0 182.1 191.3 235.5
Income from Continuing Operations Before
Extraordinary Item and Cumulative Effect of
Change in Accounting Principle 49.6 62.0 37.3 93.8 142.4
Income (Loss) Before Extraordinary Item and
Cumulative Effect of Change in Accounting
Principle (0.8) (23.7) (176.0) 181.5 239.3
Net Income (Loss) (0.8) (36.1) (174.6) 181.9 239.3
Earnings per Share from Continuing Operations
Before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle:
Basic .27 .37 .24 .58 .93
Diluted .27 .36 .22 .55 .87
Earnings (Loss) per Share:
Basic - (.22) (1.10) 1.12 1.57
Diluted - (.22) (1.12) 1.08 1.45
Balance Sheet Data
Working Capital $ 823.2 $1,737.0 $1,291.6 $2,130.1 $1,983.8
Total Assets 3,825.1 4,863.0 5,071.8 5,217.9 4,731.6
Long-term Obligations 727.5 1,528.5 1,566.0 1,786.4 1,463.9
Minority Interest 6.9 24.7 348.4 378.9 442.1
Common Stock Subject to Redemption - - 7.7 40.5 40.5
Shareholders' Investment 1,908.1 2,534.0 2,013.5 2,256.1 2,004.0
(a) Reflects a $161.6 million pretax charge for restructuring and related costs, $35.1 million of gains
from the sale of shares of FLIR Systems, Inc., a net of tax charge of $50.4 million related to the
Company's discontinued operations, a $1.0 million charge reflecting the cumulative effect of change
in accounting principle for the adoption of SFAS No. 133, and the reclassification of $468.1 million
of subordinated convertible debentures from long-term obligations to current liabilities as a result
of the Company's decision to redeem them in March 2002. Also reflects the spinoff of the Company's
Kadant and Viasys Healthcare subsidiaries and the repurchase of $511.4 million of the Company's debt
and equity securities.
(b) Reflects $3.4 million of pretax restructuring and related income, net, a net of tax charge of $100
million related to the Company's discontinued operations, the issuance of Company common stock valued
at $448.7 million to acquire the minority interest of certain subsidiaries, and a $12.9 million
charge reflecting the cumulative effect of change in accounting principle for the adoption of
SAB No. 101.
(c) Reflects a $65.2 million pretax charge for restructuring and related costs, a net of tax charge of
$50 million related to the Company's discontinued operations, and the February 1999 acquisition of
Spectra-Physics AB.
(d) Reflects a $32.5 million pretax charge for restructuring and related costs, the issuance of $150.0
million principal amount of the Company's notes, and the Company's public offering of common stock for
net proceeds of $290.1 million.
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Thermo Electron Corporation 2001 Financial Statements
Common Stock Market Information
The Company's common stock is traded on the New York Stock Exchange under
the symbol TMO. The following table sets forth the high and low sale prices of
the Company's common stock for 2001 and 2000, as reported in the consolidated
transaction reporting system.
2001 2000
----------------- -----------------
Quarter High Low High Low
- ------------------------------------------------------------------------------------------------------
First $26.32 $17.12 $26.25 $14.25
Second 28.57 20.97 21.77 17.94
Third 22.02 17.38 26.94 20.06
Fourth 23.86 15.98 31.10 24.25
In August and November 2001, the Company spun off to shareholders its
Kadant Inc. and Viasys Healthcare Inc. subsidiaries. Prices in the above table
for periods prior to these spinoffs have not been adjusted to reflect the
spinoffs. As of January 25, 2002, the Company had 13,248 holders of record of
its common stock. This does not include holdings in street or nominee names.
Shareholder Services
Shareholders of Thermo Electron Corporation who desire information about
the Company are invited to contact the Investor Relations Department, Thermo
Electron Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts
02454-9046, (781) 622-1111, or by e-mail at: investorrelations@thermo.com. We
maintain a mailing list to enable shareholders whose stock is held in street
name, and other interested individuals, to receive Company information as
quickly as possible. All material is also available from the Company's Internet
site at www.thermo.com, under "Investors."
Stock Transfer Agent
American Stock Transfer & Trust Company is the stock transfer agent and
maintains shareholder activity records. The agent will respond to questions on
issuance of stock certificates, change of ownership, lost stock certificates,
and change of address. For these and similar matters, please direct inquiries
to: American Stock Transfer & Trust Company, 59 Maiden Lane, Plaza Level, New
York, New York 10038, (877) 777-0800. You may also send an e-mail to
info@amstock.com, or visit the transfer agent's Internet site at
www.amstock.com.
Dividend Policy
The Company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future because its policy has been to use earnings
to finance expansion and growth. Payment of dividends will rest within the
discretion of the Company's Board of Directors and will depend upon, among other
factors, the Company's earnings, capital requirements, and financial condition.
Form 10-K Report
A copy of the Annual Report on Form 10-K for the fiscal year ended
December 29, 2001, as filed with the Securities and Exchange Commission, may be
obtained at no charge by contacting the Investor Relations Department, Thermo
Electron Corporation, 81 Wyman Street, P.O. Box 9046, Waltham, Massachusetts
02454-9046, (781) 622-1111, or by e-mail at: investorrelations@thermo.com. The
Form 10-K is also available from the Company's Internet site at www.thermo.com,
under "Investors."