UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended March 30, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-8002
THERMO ELECTRON CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2209186
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at April 26, 2002
----------------------------- -----------------------------
Common Stock, $1.00 par value 172,347,069
PART I - Financial Information
Item 1 - Financial Statements
- -----------------------------
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
March 30, December 29,
(In thousands) 2002 2001
- ----------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 314,995 $ 297,557
Short-term available-for-sale investments, at quoted market
value (amortized cost of $703,035 and $697,757; Notes 11 and 14) 844,230 744,321
Accounts receivable, less allowances of $25,377 and $26,525 397,605 410,960
Unbilled contract costs and fees 21,951 24,071
Inventories:
Raw materials and supplies 145,368 137,622
Work in process 60,597 60,220
Finished goods (includes $17,815 and $14,918 at customer locations) 136,508 139,199
Deferred tax asset 53,798 82,766
Other current assets 75,085 68,494
---------- ----------
2,050,137 1,965,210
---------- ----------
Property, Plant, and Equipment, at Cost 484,292 482,386
Less: Accumulated depreciation and amortization 215,867 211,674
---------- ----------
268,425 270,712
---------- ----------
Long-term Available-for-sale Investments, at Quoted Market Value
(amortized cost of $5,688 and $5,729) 9,575 9,360
---------- ----------
Other Assets 197,864 231,395
---------- ----------
Goodwill (Notes 8 and 12) 1,355,644 1,348,393
---------- ----------
$3,881,645 $3,825,070
========== ==========
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THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
March 30, December 29,
(In thousands except share amounts) 2002 2001
- ----------------------------------------------------------------------------------------------------------
Current Liabilities:
Short-term obligations and current maturities of long-term
obligations (Notes 5 and 11) $ 429,872 $ 528,988
Accounts payable 104,137 111,950
Accrued payroll and employee benefits 73,680 79,403
Accrued income taxes 102,311 30,797
Deferred revenue 53,096 48,166
Accrued restructuring costs (Note 13) 49,808 60,685
Other accrued expenses (Note 2) 182,789 216,634
Net liabilities of discontinued operations (Note 14) 116,129 65,416
---------- ----------
1,111,822 1,142,039
Deferred Income Taxes and Other Deferred Items 47,036 40,486
---------- ----------
Long-term Obligations:
Senior convertible obligations 140,099 145,414
Senior notes (Note 10) 124,858 128,725
Subordinated convertible obligations 444,420 445,377
Other 7,526 7,986
---------- ----------
716,903 727,502
---------- ----------
Minority Interest (Note 12) 90 6,901
---------- ----------
Shareholders' Investment:
Preferred stock, $100 par value, 50,000 shares authorized;
none issued
Common stock, $1 par value, 350,000,000 shares authorized;
200,579,256 and 199,816,264 shares issued 200,579 199,816
Capital in excess of par value 1,768,417 1,758,567
Retained earnings 624,725 509,681
Treasury stock at cost, 27,276,216 and 23,458,555 shares (541,233) (457,475)
Deferred compensation (2,382) (3,157)
Accumulated other comprehensive items (Notes 7 and 10) (44,312) (99,290)
---------- ----------
2,005,794 1,908,142
---------- ----------
$3,881,645 $3,825,070
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
------------------------
March 30, March 31,
(In thousands except per share amounts) 2002 2001
- --------------------------------------------------------------------------------------------------------
Revenues $491,326 $573,089
-------- --------
Costs and Operating Expenses:
Cost of revenues 267,670 317,835
Selling, general, and administrative expenses 138,913 160,167
Research and development expenses 39,626 44,365
Restructuring and other unusual costs, net (Note 13) 8,383 10,882
-------- --------
454,592 533,249
-------- --------
Operating Income 36,734 39,840
Other Income (Expense), Net (Notes 4, 10, and 13) 61,008 (3,746)
-------- --------
Income from Continuing Operations Before Provision for Income
Taxes, Minority Interest, Extraordinary Item, and Cumulative
Effect of Change in Accounting Principle 97,742 36,094
Provision for Income Taxes (33,692) (14,257)
Minority Interest Income (Expense) 331 (18)
-------- --------
Income from Continuing Operations Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle 64,381 21,819
Gain (Loss) on Disposal of Discontinued Operations, Net (net of income
tax provision (benefit) of $5,593 and $(40,000); Note 14) 51,370 (66,000)
-------- --------
Income (Loss) Before Extraordinary Item and Cumulative Effect of
Change in Accounting Principle 115,751 (44,181)
Extraordinary Item (net of income tax benefit of $380; Note 5) (707) -
-------- --------
Income (Loss) Before Cumulative Effect of Change in Accounting Principle 115,044 (44,181)
Cumulative Effect of Change in Accounting Principle (net of
income tax benefit and minority interest of $663) - (994)
-------- --------
Net Income (Loss) $115,044 $(45,175)
======== ========
Earnings per Share from Continuing Operations Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle (Note 6):
Basic $ .37 $ .12
======== ========
Diluted $ .34 $ .12
======== ========
Earnings (Loss) per Share (Note 6):
Basic $ .66 $ (.25)
======== ========
Diluted $ .59 $ (.24)
======== ========
Weighted Average Shares (Note 6):
Basic 174,250 182,856
======== ========
Diluted 204,189 187,177
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
------------------------
March 30, March 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------
Operating Activities:
Net income (loss) $ 115,044 $ (45,175)
(Gain) loss on disposal of discontinued operations, net (Note 14) (51,370) 66,000
--------- ---------
Income from continuing operations 63,674 20,825
Adjustments to reconcile income from continuing operations to net
cash provided by (used in) operating activities:
Depreciation and amortization (Note 8) 14,536 23,942
Noncash restructuring and other unusual costs, net (Note 13) 991 9,556
Provision for losses on accounts receivable 818 1,345
Minority interest (income) expense (331) 18
Equity in earnings of unconsolidated subsidiaries (Note 4) (2,169) (209)
Cumulative effect of change in accounting principle, net of
income tax benefit and minority interest - 994
Change in deferred income taxes (5,605) (1,587)
Gain on sale of businesses (2,270) (491)
(Gain) loss on investments, net (Note 4) (57,953) 2,152
Extraordinary item, net of income taxes (Note 5) 707 -
Other noncash items, net 1,868 2,157
Changes in current accounts, excluding the effects of
acquisitions and dispositions:
Accounts receivable 9,667 (10,206)
Inventories (7,100) (19,973)
Other current assets (5,066) (12,441)
Accounts payable (6,833) (2,371)
Other current liabilities (15,169) 20,807
--------- ---------
Net cash provided by (used in) continuing operations (10,235) 34,518
Net cash used in discontinued operations (7,877) (3,275)
--------- ---------
Net cash provided by (used in) operating activities (18,112) 31,243
--------- ---------
Investing Activities:
Purchases of available-for-sale investments - (359,556)
Proceeds from sale of available-for-sale investments 39,237 29,566
Proceeds from maturities of available-for-sale investments 18,882 91,933
Proceeds from sale of other investments (Note 4) 80,595 -
Purchases of property, plant, and equipment (13,466) (21,490)
Proceeds from sale of property, plant, and equipment 1,051 4,647
Acquisition of minority interest of subsidiary (Note 12) (21,283) -
Acquisitions, net of cash acquired - (12,652)
Proceeds from sale of businesses, net of cash divested 3,185 390
Advance to affiliates - (31,351)
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THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Three Months Ended
------------------------
March 30, March 31,
(In thousands) 2002 2001
- --------------------------------------------------------------------------------------------------------
Investing Activities (continued):
Increase in other assets $ (5,662) $ (3,153)
Other 346 870
--------- ---------
Net cash provided by (used in) continuing operations 102,885 (300,796)
Net cash provided by discontinued operations 107,540 131,042
--------- ---------
Net cash provided by (used in) investing activities 210,425 (169,754)
--------- ---------
Financing Activities:
Redemption and repayment of long-term obligations (Note 5) (457,009) (12,467)
Net proceeds from issuance of Company and subsidiary common stock 10,693 21,314
Purchases of Company common stock and subordinated convertible
debentures (Note 5) (100,036) (14,668)
Increase in short-term notes payable (Note 11) 369,162 2,158
Other 293 (102)
--------- ---------
Net cash used in continuing operations (176,897) (3,765)
Net cash used in discontinued operations (1,789) (13,529)
--------- ---------
Net cash used in financing activities (178,686) (17,294)
--------- ---------
Exchange Rate Effect on Cash of Continuing Operations (746) (1,719)
Exchange Rate Effect on Cash of Discontinued Operations (60) 8,899
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents 12,821 (148,625)
Cash and Cash Equivalents at Beginning of Period 305,200 636,252
--------- ---------
318,021 487,627
Cash and Cash Equivalents of Discontinued Operations at End of Period (3,026) (163,225)
--------- ---------
Cash and Cash Equivalents at End of Period $ 314,995 $ 324,402
========= =========
Noncash Activities:
Fair value of assets of acquired companies $ - $ 16,144
Cash paid for acquired companies - (13,357)
--------- ---------
Liabilities assumed of acquired companies $ - $ 2,787
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Electron Corporation (the Company) without audit and, in the opinion
of management, reflect all adjustments of a normal recurring nature necessary
for a fair statement of the financial position at March 30, 2002, and the
results of operations and cash flows for the three-month periods ended March 30,
2002, and March 31, 2001. Prior-period amounts have been reclassified to conform
to the presentation in the current financial statements. Interim results are not
necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 29, 2001, has been
derived from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 29,
2001, filed with the Securities and Exchange Commission.
2. Accrued Acquisition Expenses
The Company has undertaken restructuring activities at acquired
businesses. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily
have included reductions in staffing levels and the abandonment of excess
facilities. In connection with these restructuring activities, as part of the
cost of acquisitions, the Company established reserves, primarily for severance
and excess facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. Accrued acquisition expenses are included in other accrued
expenses in the accompanying balance sheet.
A summary of the changes in accrued acquisition expenses for acquisitions
completed before and during 1999 is as follows:
1999 Acquisitions
---------------------------------------
Abandonment
of Excess Pre-1999
(In thousands) Severance Facilities Other Acquisitions Total
- ----------------------------------------------------------------------------------------------------------
Balance at December 29, 2001 $ 626 $ 10 $ 131 $6,216 $6,983
Payments - - - (48) (48)
Currency translation (2) - (1) (108) (111)
------ ------ ------ ------ ------
Balance at March 30, 2002 $ 624 $ 10 $ 130 $6,060 $6,824
====== ====== ====== ====== ======
The remaining accrued acquisition expenses for pre-1999 acquisitions
represent lease obligations for four operating facilities in England with leases
expiring through 2014.
The principal accrued acquisition expenses for 1999 acquisitions were for
severance for approximately 175 employees across all functions and for abandoned
facilities, primarily at Spectra-Physics AB. The amounts captioned as "other"
primarily represent relocation, contract termination, and other exit costs. The
Company expects to pay amounts accrued for acquisition expenses primarily
through 2002. The Company finalized its restructuring plans for Spectra-Physics
and other 1999 acquisitions in 1999 and 2000.
The Company did not establish material reserves for restructuring
businesses acquired in 2000 or 2001.
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THERMO ELECTRON CORPORATION
3. Business Segment Information
Three Months Ended
------------------------
March 31, March 30,
(In thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------------
Revenues:
Life and Laboratory Sciences $267,349 $273,002
Measurement and Control 145,745 191,314
Optical Technologies 79,951 109,723
Other 910 1,852
Intersegment (a) (2,629) (2,802)
-------- --------
$491,326 $573,089
======== ========
Income from Continuing Operations Before Provision for Income Taxes, Minority
Interest, Extraordinary Item, and Cumulative Effect of Change in Accounting
Principle:
Life and Laboratory Sciences (b) $ 44,486 $ 34,375
Measurement and Control (c) 14,667 9,748
Optical Technologies (d) (10,196) 7,895
Other (398) 81
-------- --------
Total Segment Operating Income (e) 48,559 52,099
Corporate/Other (f) 49,183 (16,005)
-------- --------
$ 97,742 $ 36,094
======== ========
Depreciation:
Life and Laboratory Sciences $ 5,223 $ 5,064
Measurement and Control 2,726 3,220
Optical Technologies 4,307 3,560
Corporate/Other 713 351
-------- --------
$ 12,969 $ 12,195
======== ========
Amortization (Note 8):
Life and Laboratory Sciences $ 969 $ 6,887
Measurement and Control 281 3,355
Optical Technologies 317 1,485
Corporate/Other - 20
-------- --------
$ 1,567 $ 11,747
======== ========
During the first quarter of 2002, the Company transferred management
responsibility for several businesses between segments as follows: (1) the
spectroscopy businesses were moved to the renamed Life and Laboratory Sciences
segment from the Measurement and Control segment; (2) the temperature-control
businesses were moved to the Measurement and Control segment from the Optical
Technologies segment; and (3) the electrochemistry products business was moved
to the Measurement and Control segment from the Life and Laboratory Sciences
segment. Prior-period segment information has been restated to reflect these
changes.
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THERMO ELECTRON CORPORATION
3. Business Segment Information (continued)
(a) Intersegment sales are accounted for at prices that are representative of
transactions with unaffiliated parties.
(b) Includes restructuring and other unusual income, net, of $0.3 million and
restructuring and other unusual costs, net, of $2.8 million in the first
quarter of 2002 and 2001, respectively.
(c) Includes restructuring and other unusual income, net, of $0.2 million and
restructuring and other unusual costs, net, of $6.1 million in the first
quarter of 2002 and 2001, respectively.
(d) Includes restructuring and other unusual costs of $8.3 million and $0.5
million in the first quarter of 2002 and 2001, respectively.
(e) Segment operating income is income before corporate general and
administrative expenses, other income and expense, minority interest income
(expense), income taxes, extraordinary item, and cumulative effect of change
in accounting principle.
(f) Includes corporate, general, and administrative expenses and other income
and expense. Includes corporate restructuring and other unusual costs of
$0.7 million and $1.5 million in the first quarter of 2002 and 2001,
respectively. Other income, net, in the first quarter of 2002 includes a
gain of $56.3 million on sales of shares of FLIR Systems, Inc. Other
expense, net, in the first quarter of 2001 includes a charge of $2.0 million
for impairment of an available-for-sale investment.
4. Other Income (Expense), Net
The components of other income (expense), net, in the accompanying
statement of operations are as follows:
Three Months Ended
------------------------
March 30, March 31,
(In thousands) 2002 2001
- ---------------------------------------------------------------------------------------------------------
Interest Income $ 14,358 $ 17,674
Interest Expense (Note 10) (13,479) (19,443)
Equity in Earnings of Unconsolidated Subsidiaries 2,169 209
Gain (Loss) on Investments, Net 57,953 (2,152)
Other Items, Net 7 (34)
-------- --------
$ 61,008 $ (3,746)
======== ========
The Company sold 1.3 million shares of FLIR Systems, Inc. common stock
during the first quarter of 2002 and realized a gain of $56.3 million, including
$14.4 million from the recovery of amounts written down in prior years. The
Company reports its pro-rata share of FLIR's results on a one-quarter lag. In
December 2001, following a sale of shares, the Company's ownership of FLIR fell
below 20%. In the first quarter of 2002, the Company recorded its share of
FLIR's fourth quarter 2001 earnings through the date the Company's ownership
fell below 20%. The Company's share of such earnings totaled $2.1 million. As of
March 30, 2002, the Company accounts for its investment in FLIR as an
available-for-sale security and will no longer record its share of FLIR's
earnings. As an available-for-sale security, the investment in FLIR is recorded
at quoted market value in current assets and unrealized gains or losses are
recorded as a part of accumulated other comprehensive items in the accompanying
2002 balance sheet.
5. Redemption and Repurchase of Subordinated Convertible Debentures and
Extraordinary Item
In March 2002, the Company redeemed all of its outstanding 4 1/4% and 4
5/8% subordinated convertible debentures due 2003 with the objective of
minimizing interest costs. The principal amounts redeemed for the 4 1/4% and 4
5/8% debentures were $398.4 million and $57.9 million, respectively. The
redemption price was 100% of the principal amount of the debentures, plus
accrued interest. During the first quarter of 2002, the Company repurchased
$18.1 million principal amount of its other subordinated convertible debentures
for $17.9 million in cash. These transactions resulted in a net extraordinary
charge of $0.7 million, net of taxes of $0.4 million.
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THERMO ELECTRON CORPORATION
6. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended
------------------------
March 30, March 31,
(In thousands except per share amounts) 2002 2001
- ---------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Extraordinary Item and
Cumulative Effect of Change in Accounting Principle $ 64,381 $ 21,819
Gain (Loss) on Disposal of Discontinued Operations, Net 51,370 (66,000)
Extraordinary Item (707) -
Cumulative Effect of Change in Accounting Principle - (994)
-------- --------
Net Income (Loss) for Basic Earnings (Loss) per Share 115,044 (45,175)
Effect of Convertible Debentures 5,908 -
-------- --------
Income (Loss) Available to Common Shareholders, as Adjusted
for Diluted Earnings (Loss) per Share $120,952 $(45,175)
-------- --------
Basic Weighted Average Shares 174,250 182,856
Effect of:
Stock options 2,974 3,833
Convertible debentures 26,965 488
-------- --------
Diluted Weighted Average Shares 204,189 187,177
-------- --------
Basic Earnings (Loss) per Share:
Continuing operations before extraordinary item and cumulative
effect of change in accounting principle $ .37 $ .12
Discontinued operations .29 (.36)
Extraordinary item - -
Cumulative effect of change in accounting principle - (.01)
-------- --------
$ .66 $ (.25)
======== ========
Diluted Earnings (Loss) per Share:
Continuing operations before extraordinary item and cumulative
effect of change in accounting principle $ .34 $ .12
Discontinued operations .25 (.35)
Extraordinary item - -
Cumulative effect of change in accounting principle - (.01)
-------- --------
$ .59 $ (.24)
======== ========
Options to purchase 7,575,000 and 2,819,000 shares of common stock were
not included in the computation of diluted earnings per share for the first
quarter of 2002 and 2001, respectively, because the options' exercise prices
were greater than the average market price for the common stock and their effect
would have been antidilutive.
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THERMO ELECTRON CORPORATION
6. Earnings (Loss) per Share (continued)
The computation of diluted earnings per share for the first quarter of
2002 excludes the effect of assuming the conversion of the Company's 4 3/8%
subordinated convertible debentures, with a principal balance of $74,618,000 as
of March 30, 2002, and convertible at $111.83 per share, because the effect
would be antidilutive. The computation of diluted earnings per share for the
first quarter of 2001 excludes the effect of assuming the conversion of the
Company's subordinated convertible debentures, except for the Company's 0%
subordinated convertible debentures, with a principal balance of $31,565,000 as
of March 31, 2001, and convertible at $61.67 per share, because the effect would
be antidilutive.
7. Comprehensive Income
Comprehensive income combines net income and other comprehensive items,
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including currency
translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments and hedging instruments (Note 10). During the
first quarter of 2002 and 2001, the Company had comprehensive income of $59.4
million and a comprehensive loss of $64.9 million, respectively. Comprehensive
income in 2002 excludes the effect on unrealized gains of reclassifying equity
interests in FLIR and Thoratec Corporation to available-for-sale investments
(Notes 4 and 14).
8. Recent Accounting Pronouncements and Pro Forma Results
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets." The Company adopted the requirements of SFAS No. 142
effective December 30, 2001. SFAS No. 142 requires companies to cease
amortization of all goodwill. SFAS No. 142 also requires companies to annually
test goodwill for impairment and to perform an initial test in the year of
adoption. The Company has completed this initial test and determined that no
impairment of goodwill existed at the adoption date. Goodwill amortization for
the three-month period ended March 31, 2001, was $10.0 million. Pro forma
results for the first quarter of 2001, as if the standard had been adopted at
the beginning of 2001, are as follows:
Three Months Ended
(In thousands except per share amounts) March 31, 2001
- ---------------------------------------------------------------------------------------------------------
Income from Continuing Operations Before Extraordinary Item and Cumulative
Effect of Change in Accounting Principle:
As reported $ 21,819
Pro forma 30,788
Basic Earnings per Share from Continuing Operations Before Extraordinary Item
and Cumulative Effect of Change in Accounting Principle:
As reported .12
Pro forma .17
Diluted Earnings per Share from Continuing Operations Before Extraordinary Item
and Cumulative Effect of Change in Accounting Principle:
As reported .12
Pro forma .16
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THERMO ELECTRON CORPORATION
8. Recent Accounting Pronouncements and Pro Forma Results (continued)
Three Months Ended
(In thousands except per share amounts) March 31, 2001
- ---------------------------------------------------------------------------------------------------------
Net Loss:
As reported $(45,175)
Pro forma (36,206)
Basic Loss per Share:
As reported (.25)
Pro forma (.20)
Diluted Loss per Share:
As reported (.24)
Pro forma (.19)
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-lived Assets." The Company adopted the standard
during the first quarter of 2002. Adoption of the standard did not materially
affect the Company's financial statements.
9. Note Receivable
In July 2000, the Company completed the sale of its wholly owned Spectra
Precision businesses to Trimble Navigation Limited for $208.1 million in net
cash proceeds and $80.0 million in seller debt financing at an initial interest
rate of 10%. The note from the buyer called for repayment in two equal, annual
installments beginning in July 2001, but permitted extension of maturity under
certain conditions. Trimble elected to defer the note payment due in July 2001,
and in March 2002, the Company and Trimble negotiated a change in terms. Under
the revised terms, Trimble paid $12 million of principal, together with $10
million of accrued interest. Maturity for the remaining balance was extended to
July 2004, and the amended note carries an interest rate of 10.41% and has
provisions that require earlier repayment under certain conditions. In addition,
the Company obtained warrants to purchase 376,233 shares of Trimble at $15.11
per share of which 200,000 shares are exercisable immediately through 2007 and
the balance of which becomes exercisable for five-year terms at various times if
the note remains outstanding to its maturity. Spectra Precision, formerly part
of the Measurement and Control segment, was acquired as part of Spectra-Physics
AB and provides the construction, surveying, and heavy machine industries with
precision-positioning equipment.
10. Derivative Instruments and Hedging
Forward currency exchange contracts are used by the Company primarily to
hedge certain operational (cash-flow hedges) and balance sheet (fair-value
hedges) exposures resulting from changes in currency exchange rates. Such
exposures result from sales that are denominated in currencies other than the
functional currencies of the respective operations. The Company enters into
these currency exchange contracts to hedge anticipated product sales and
recorded accounts receivable made in the normal course of business, and
accordingly, the hedges are not speculative in nature. As part of the Company's
overall strategy to manage the level of exposure to the risk of currency
exchange fluctuations, certain operating units hedge a portion of their currency
exposures anticipated over the ensuing twelve month period, using exchange
contracts that have maturities of twelve months or less. The Company does not
hold or engage in transactions involving derivative instruments for purposes
other than risk management.
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THERMO ELECTRON CORPORATION
10. Derivative Instruments and Hedging (continued)
The Company records its forward currency exchange contracts at fair value
in its consolidated balance sheet as other current assets or other accrued
expenses and, for cash flow hedges, the related gains or losses on these
contracts are deferred as a component of accumulated other comprehensive items
in the accompanying balance sheet. These deferred gains and losses are
recognized in income in the period in which the underlying anticipated
transaction occurs. At March 30, 2002, the Company had deferred gains, net of
income taxes, relating to forward currency exchange contracts of approximately
$1.1 million, substantially all of which is expected to be recognized as income
over the next twelve months. Unrealized gains and losses resulting from the
impact of currency exchange rate movements on fair-value hedges are recognized
in earnings in the period in which the exchange rates change and offset the
currency gains and losses on the underlying exposure being hedged.
During the first quarter of 2002, the Company entered into interest rate
swap arrangements for its $128.7 million principal amount 7.625% senior notes,
due in 2008, with the objective of minimizing interest costs. The arrangements
provide that the Company will receive a fixed interest rate of 7.625% and will
pay a variable rate of 90-day LIBOR plus 2.19% (4.34% as of March 30, 2002). The
swaps have terms expiring at the maturity of the debt. The swaps are designated
as fair-value hedges and as such, are carried at fair value. Changes in the fair
value of these swaps and the changes in the fair value of the debt that result
from changes in LIBOR are recorded in interest expense in the accompanying
statement of operations. The swap arrangements are with different counterparties
than the holders of the underlying debt. Management believes that any credit
risk associated with the swaps is remote based on the creditworthiness of the
financial institutions issuing the swaps.
11. Securities Lending Agreement
Simultaneous with the March 2002 debt redemption discussed in Note 5, the
Company entered into a securities lending agreement with a third party under
which the Company may borrow funds for short-term needs. Borrowings are
collateralized by available-for-sale investments. As of March 30, 2002, the
Company had outstanding borrowings of $370.0 million under this arrangement with
maturities between April and September 2002. The proceeds of the borrowings were
used to partially fund the debt redemption discussed in Note 5. The borrowings
carried a weighted average interest rate of 2.2% at March 30, 2002. The Company
has pledged $388.5 million of available-for-sale securities in the accompanying
balance sheet as collateral for such borrowings.
12. Purchase of Minority Interest in Spectra-Physics
Following the completion of a cash tender offer in December 2001 for all
of the shares of Spectra-Physics it did not previously own, the Company
completed a short-form merger with Spectra-Physics in February 2002. After the
merger, Spectra-Physics was no longer publicly traded and became a wholly owned
subsidiary of the Company. The Company expended $21.3 million of cash during the
first quarter of 2002 to complete the purchase of the minority interest and
recorded an increase in goodwill of $15.6 million. Options to purchase shares of
Spectra-Physics were exchanged for options to purchase 2,241,598 shares of
Thermo Electron common stock. The exchange of options was accounted for in
accordance with the methodology set forth in FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation" (Note 13).
13. Restructuring and Other Unusual Costs, Net
In response to a downturn in telecommunications, semiconductor, and other
markets served by the Company's businesses and in an effort to further integrate
business units, the Company initiated restructuring actions in the second
quarter of 2001 in a number of business units to reduce costs and shed
unproductive assets. Further actions were initiated in the fourth quarter of
2001 and the first quarter of 2002. The restructuring and related actions
primarily consisted 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
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THERMO ELECTRON CORPORATION
13. Restructuring and Other Unusual Costs, Net (continued)
facilities to streamline operations and reduce costs. The Company expects to
incur an additional $6 million of restructuring costs in the second quarter of
2002 and thereafter for charges associated with these actions that cannot be
recorded until incurred. The Company expects that the restructuring actions
undertaken in 2001 and the first quarter of 2002 will be substantially completed
by the third quarter of 2002.
The Company recorded net charges (income) by segment as follows:
Life and
Laboratory Measurement Optical
(In thousands) Sciences and Control Technologies Corporate Total
- ----------------------------------------------------------------------------------------------------------
Restructuring and Other
Unusual Costs (Income), Net $ (317) $ (248) $8,258 $ 690 $8,383
====== ====== ====== ====== ======
The components of restructuring and unusual costs (income) by segment are
as follows:
Life and Laboratory Sciences
- ----------------------------
The Life and Laboratory Sciences segment recorded $0.3 million of
restructuring and other unusual income, net, in the first quarter of 2002. The
restructuring and other unusual income consisted of a gain on the sale of a
product line of $1.5 million. This gain was offset by cash costs of $1.2 million
associated with the restructuring actions initiated in 2001, including $0.6
million of employee-retention costs; $0.4 million of severance for eight
employees, primarily with administrative and sales functions; and $0.2 million
of other cash costs, primarily relocation costs.
Measurement and Control
- -----------------------
The Measurement and Control segment recorded $0.2 million of restructuring
and other unusual income, net, in the first quarter of 2002. The restructuring
and other unusual income included gains of $1.5 million from the favorable
resolution of a dispute on a business sold in 2000 and the sale of a small
business unit in 2002. These gains were offset by $1.1 million of cash costs
associated with the restructuring actions initiated in 2001, including $0.5
million of severance; $0.1 million of employee retention; and $0.5 million of
other cash costs, primarily relocation and contract-termination costs. The
charge also included $0.2 million of asset writedowns, primarily for asset
impairment of a building held for sale.
Optical Technologies
- --------------------
The Optical Technologies segment recorded $8.3 million of restructuring
and other unusual costs in the first quarter of 2002. These costs included $6.8
million of cash costs at Spectra-Physics, including $4.5 million of lease costs,
primarily for abandoned equipment; $2.1 million of severance for 76 employees
across all functions; $0.1 million of employee retention costs; and $0.1 million
of other cash costs. The charge also included $0.7 million of asset writeoffs
for abandoned manufacturing equipment and $0.8 million resulting from the
exchange of options to purchase shares of Spectra-Physics for options to
purchase shares of Thermo Electron following the spin-in of this business in
February 2002 (Note 12).
Corporate
- ---------
The Company recorded $0.7 million of restructuring and unusual costs at
its corporate office in the first quarter of 2002, all of which were cash costs.
This amount included $0.6 million of third-party advisory fees associated with
the Company's reorganization plan; and $0.1 million of severance for three
employees.
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THERMO ELECTRON CORPORATION
13. Restructuring and Other Unusual Costs, Net (continued)
General
- -------
The following table summarizes the severance actions of the Company in
2001 and 2002.
Number of
2000 Restructuring Plans Employees
- --------------------------------------------------------------------------------------------------------
Remaining Terminations at December 30, 2000 80
Additional Terminations Announced in 2001 16
Terminations Occurring in 2001 (91)
Adjustment to Plan (1)
------
Remaining Terminations at December 29, 2001 4
Terminations Occurring in 2002 (2)
------
Remaining Terminations at March 30, 2002 2
======
2001 Restructuring Plans
- --------------------------------------------------------------------------------------------------------
Terminations Announced in 2001 1,606
Terminations Occurring in 2001 (1,001)
------
Remaining Terminations at December 29, 2001 605
Additional Terminations Announced in 2002 88
Terminations Occurring in 2002 (253)
------
Remaining Terminations at March 30, 2002 440
======
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THERMO ELECTRON CORPORATION
13. Restructuring and Other Unusual Costs, Net (continued)
The following table summarizes the cash components of the Company's
restructuring plans. The noncash components and other amounts reported as
restructuring and other unusual costs, net, in the accompanying 2002 statement
of operations have been summarized in the notes to the table.
Abandonment
Employee of Excess
(In thousands) Severance Retention (a) Facilities Other Total
- ---------------------------------------------------------------------------------------------------------
1998 Restructuring Plans
Balance at December 29, 2001 $ - $ - $ - $ 506 $ 506
Currency translation - - - (9) (9)
-------- -------- -------- -------- --------
Balance at March 30, 2002 $ - $ - $ - $ 497 $ 497
======== ======== ======== ======== ========
1999 Restructuring Plans
Balance at December 29, 2001 $ 571 $ - $ - $ - $ 571
Payments (83) - - - (83)
-------- -------- -------- -------- --------
Balance at March 30, 2002 $ 488 $ - $ - $ - $ 488
======== ======== ======== ======== ========
2000 Restructuring Plans
Balance at December 29, 2001 $ 1,588 $ 6,287 $ 1,866 $ 1,200 $ 10,941
Costs incurred in 2002 - - - 548 548
Payments (690) (5,941) (126) (1,554) (8,311)
Currency translation (6) (1) (19) (1) (27)
-------- -------- -------- -------- --------
Balance at March 30, 2002 $ 892 $ 345 $ 1,721 $ 193 $ 3,151
======== ======== ======== ======== ========
2001 Restructuring Plans
Balance at December 29, 2001 $ 26,092 $ 143 $ 19,765 $ 2,667 $ 48,667
Costs incurred in 2002 (b) 3,081 771 4,547 713 9,112
Payments (9,451) (372) (1,097) (1,002) (11,922)
Currency translation (117) - (64) (4) (185)
-------- -------- -------- -------- --------
Balance at March 30, 2002 $ 19,605 $ 542 $ 23,151 $ 2,374 $ 45,672
======== ======== ======== ======== ========
(a) Employee retention costs are accrued ratably over the period through which
employees must work to qualify for a payment. The 2000 awards were based on
specified percentages of employees' salaries and were generally awarded to
help ensure continued employment at least through completion of the
Company's reorganization plan.
(b) Excludes net gains of $1.5 million and $1.3 million in the Life and
Laboratory Sciences and Measurement and Control segments, respectively, and
noncash charges of $1.5 million in the Optical Technologies segment.
The Company expects to pay accrued restructuring costs as follows:
severance, employee-retention obligations, and other costs, which primarily
represent cancellation/termination fees, primarily in 2002; and
abandoned-facility payments, over lease terms expiring through 2012.
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THERMO ELECTRON CORPORATION
14. Discontinued Operations
Net liabilities of discontinued operations principally represent remaining
obligations of the discontinued businesses, including severance, lease,
litigation, and tax obligations, offset by the net assets of two remaining
operating units held for sale. These businesses have aggregate annual revenues
of approximately $90 million.
During the first quarter of 2002, the Company's discontinued operations
had revenues and operating income of $20.3 million and $1.8 million,
respectively. During the first quarter of 2001, the Company's discontinued
operations had revenues and operating income of $221.2 million and $10.5
million, respectively.
Thermo Cardiosystems
In February 2001, the Company sold Thermo Cardiosystems Inc. to Thoratec
in exchange for 19.3 million shares of Thoratec common stock. Certain
restrictions limit the Company's ability to sell these shares, although the
restrictions fully lapse in August 2002. The Company recorded an after-tax
charge of $66.0 million in the first quarter of 2001 for a decline in market
value of Thoratec common stock as a loss on disposal of discontinued operations.
In February 2002, the Company sold 6.9 million shares of Thoratec for net
proceeds of $105 million, and realized an after-tax gain of $38.4 million as a
gain on disposal of discontinued operations. Following the sale of shares in
2001 and 2002, the Company owns less than 20% of Thoratec's outstanding shares
and began accounting for its investment as an available-for-sale security in
continuing operations in the first quarter of 2002. As such, the investment is
recorded at quoted market value in current assets and unrealized gains or losses
are recorded as a part of accumulated other comprehensive items in the
accompanying 2002 balance sheet. As of March 30, 2002, the Company held 7.7
million shares of Thoratec, substantially all of which were restricted from
trading until August 2002.
Power Generation Business
In March 2002, the Company sold the last remaining component of its former
power generation business and realized an after-tax gain from the disposition
totaling $13.0 million, principally for previously unrecognized tax benefits
that were realized upon the sale.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934, are made throughout this Management's
Discussion and Analysis of Financial Condition and Results of Operations. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates," and similar expressions are intended to identify forward-looking
statements. While the Company may elect to update forward-looking statements in
the future, it specifically disclaims any obligation to do so, even if the
Company's estimates change, and readers should not rely on those forward-looking
statements as representing the Company's views as of any date subsequent to the
date of the filing of this Quarterly Report. There are a number of important
factors that could cause the results of the Company to differ materially from
those indicated by such forward-looking statements, including those detailed
under the heading "Forward-looking Statements" in this report on Form 10-Q.
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THERMO ELECTRON CORPORATION
Results of Operations
First Quarter 2002 Compared With First Quarter 2001
- ---------------------------------------------------
Continuing Operations
Sales in the first quarter of 2002 were $491.3 million, a decrease of
$81.8 million from the first quarter of 2001. Excluding the effect of
acquisitions, divestitures, and currency translation, revenues decreased $49.6
million, or 9%. 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 $36.7 million in the first quarter of 2002, compared
with $39.8 million in the first quarter of 2001. Segment operating income
decreased to $48.6 million in 2002 from $52.1 million in 2001. (Segment
operating income is operating income excluding costs incurred at the Company's
corporate office.) Operating and segment operating income in the first quarter
of 2002 were affected by charges associated with a restructuring plan initiated
during the fourth quarter of 2001 and the first quarter of 2002 and certain
other unusual costs (Note 13). Operating and segment operating income in the
first quarter of 2001 were affected by charges associated with the planned
disposition of a business, the writeoff of in-process research and development
costs at an acquired business, and certain other restructuring and unusual
costs, net. The unusual items in both periods are discussed by segment below.
Excluding these unusual costs, which totaled $7.7 million in 2002 and $9.4
million in 2001, segment operating income was $56.3 million in 2002 and $61.5
million in 2001. The 2001 period included $10.0 million of goodwill
amortization. Amortization of goodwill ceased following the adoption of
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets," effective in 2002 (Note 8). Segment operating income
excluding unusual items decreased due to lower revenues and profitability at
certain businesses discussed below, offset in part by the inclusion of goodwill
amortization in 2001.
During the first quarter of 2002, the Company transferred management
responsibility for several businesses as follows: (1) the spectroscopy
businesses were moved to the renamed Life and Laboratory Sciences segment from
the Measurement and Control segment; (2) the temperature-control businesses were
moved to the Measurement and Control segment from the Optical Technologies
segment; and (3) the electrochemistry products business was moved to the
Measurement and Control segment from the Life and Laboratory Sciences segment.
Prior period segment results have been restated to reflect these changes.
In its Form 10-K for the year ended December 29, 2001, the Company
identified its most critical accounting policies and estimates upon which its
financial results depend as those relating to loss provisions on accounts
receivable and inventories, intangible assets and goodwill, warranty
liabilities, income taxes, litigation, restructuring charges, and discontinued
operations. These remain the Company's most critical accounting policies and
estimates for the quarter ended March 30, 2002.
Life and Laboratory Sciences
- ----------------------------
Sales in the Life and Laboratory Sciences segment decreased $5.7 million
to $267.3 million in the first quarter of 2002. The unfavorable effects of
currency translation resulted in a decrease in revenues of $6.3 million in 2002.
Sales decreased $0.1 million due to a divestiture, net of an acquisition.
Excluding the effect of currency translation, a divestiture, and an acquisition,
revenues increased $0.7 million. Continued strong demand for histology and
cytology products and mass spectrometry equipment, including ion trap
instruments and triple quadrupole mass spectrometers used in proteomics and drug
discovery research, was substantially offset by lower sales of spectroscopy
instruments and microplate-instrumentation products.
Operating income margin increased to 16.6% in the first quarter of 2002
from 12.6% in the first quarter of 2001. The segment's margin increased
primarily due to ceasing goodwill amortization due to the adoption of SFAS No.
142 in 2002 and the inclusion of unusual costs in the 2001 period. Excluding
restructuring and unusual income, net, of $0.3 million in 2002, restructuring
and unusual costs, net, of $2.8 million in 2001, and goodwill amortization of
$5.8
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THERMO ELECTRON CORPORATION
First Quarter 2002 Compared With First Quarter 2001 (continued)
- ---------------------------------------------------
million in 2001, operating income margin was 16.5% in 2002 and 15.8% in 2001.
Cost reduction and productivity measures undertaken in 2001 contributed to the
improved margin. In the first quarter of 2002, the segment recorded
restructuring and unusual cash costs of $1.2 million, primarily for employee
retention and severance at businesses being consolidated (Note 13). In addition,
the segment sold a product line and realized a gain of $1.5 million.
Restructuring and unusual costs in 2001 represent a charge of $3.4 million for
the writeoff of in-process research and development at an acquired business,
offset by a $0.5 million gain on the sale of a product line and the reversal of
$0.1 million of previously established restructuring reserves that were no
longer required.
Measurement and Control
- -----------------------
Sales in the Measurement and Control segment decreased $45.6 million to
$145.7 million in the first quarter of 2002. Sales decreased $21.5 million due
to divestitures, net of an acquisition. The unfavorable effects of currency
translation resulted in a decrease in revenues of $2.1 million in 2002.
Excluding the effect of divestitures, an acquisition, and currency translation,
revenues decreased $22.0 million, or 13%. The decrease was due to a decline in
revenues in each of the segment's principal businesses due to economic
conditions facing customers, particularly in the semiconductor, energy, and
steel industries. A downturn in markets served by the segment will unfavorably
affect the segment's revenue and profitability comparisons with corresponding
periods in the prior year for at least the near-term. The segment's backlog has
decreased 6% since year-end 2001 to $87.6 million at March 30, 2002.
The principal divestitures referenced above included the following
businesses. In August 2001, the segment sold its Pharos Marine unit, which
manufactures and sells marine-navigation equipment and systems. In July 2001,
the segment sold its ThermoMicroscopes unit, a manufacturer of scanning probe
microscopes. In April 2001, the segment sold its CAC and Mid South businesses,
which provide the oil and gas industry with wellhead safety and control
products.
Operating income margin increased to 10.1% in the first quarter of 2002
from 5.1% in the first quarter of 2001, primarily due to restructuring and
unusual costs in 2001 and ceasing amortization of goodwill due to the adoption
of SFAS No. 142 in 2002. Operating income margin, excluding restructuring and
unusual income, net, of $0.2 million in 2002, restructuring and unusual costs,
net, of $6.1 million in 2001, and goodwill amortization of $3.0 million in 2001,
increased to 9.9% in 2002 from 9.8% in 2001. The increase in operating income
margin resulted primarily from the effects of cost reduction and productivity
measures undertaken in 2001, offset in part by the effect of lower revenues. In
the first quarter of 2002, the segment recorded restructuring and unusual
income, net, of $0.2 million, including gains totaling $1.5 million from the
favorable resolution of a dispute on a business sold in 2000 and the sale of a
small business, offset in part by $1.1 million of cash costs associated with the
restructuring actions initiated in 2001 and a charge of $0.2 million, primarily
for asset impairment of a building held for sale (Note 13). Restructuring and
unusual costs, net, in 2001 include charges of $4.8 million to reduce the
carrying value of ThermoMicroscopes to estimated disposal value; $1.0 million
for impairment of a note receivable; and $0.3 million, primarily for severance
costs.
Optical Technologies
- --------------------
Sales in the Optical Technologies segment decreased $29.8 million to $80.0
million in the first quarter of 2002. The unfavorable effects of currency
translation resulted in a decrease in revenues of $1.0 million in 2002. Sales
decreased $0.2 million due to a divestiture. Excluding the effect of currency
translation and a divestiture, revenues decreased $28.5 million, or 26%. The
decrease was due to a severe slowdown in the semiconductor and telecommunication
industries that has adversely affected a number of the segment's businesses.
These industries are highly cyclical and have experienced downturns that began
in 2001. The Company expects that the slowdowns in semiconductor and
telecommunication markets will continue to result in unfavorable revenue and
profitability comparisons with corresponding periods in the prior year for at
least the near-term.
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THERMO ELECTRON CORPORATION
First Quarter 2002 Compared With First Quarter 2001 (continued)
- ---------------------------------------------------
Operating income margin was negative 12.8% in the first quarter of 2002,
compared with positive 7.2% in the first quarter of 2001. Excluding
restructuring and unusual costs, net, of $8.3 million in 2002 and $0.5 million
in 2001, and goodwill amortization of $1.1 million in 2001, operating income
margin was negative 2.4% in 2002 and positive 8.6% in 2001. The decrease in
operating income margin was due to lower revenues at each of the segment's
principal businesses and in particular at Spectra-Physics, where the decline in
revenues led to an operating loss of $6.6 million. The Company initiated
additional restructuring actions at Spectra-Physics in the first quarter of
2002, following those announced in the fourth quarter of 2001. These actions are
discussed below and in Note 13.
In the first quarter of 2002, the segment recorded restructuring and
unusual charges of $8.3 million, including $6.8 million of cash costs at
Spectra-Physics, principally for abandoned-equipment leases and severance (Note
13). In addition, this segment wrote off abandoned assets totaling $0.7 million
and recorded a charge of $0.8 million resulting from the exchange of options to
purchase shares of Spectra-Physics for options to purchase shares of Thermo
Electron following the spin-in of this business in February 2002 (Note 12). The
unusual costs in 2001 primarily represent the writeoff of costs associated with
a canceled financing at Spectra-Physics.
Other Income (Expense), Net
- ---------------------------
The Company reported other income, net, of $61.0 million in the first
quarter of 2002 and other expense, net, of $3.7 million in the first quarter of
2001 (Note 4). Other income (expense), net, includes interest income, interest
expense, equity in earnings of unconsolidated subsidiaries, gain (loss) on
investments, net, and other items, net. Interest income decreased to $14.4
million in 2002 from $17.7 million in 2001, primarily due to lower invested cash
balances following the repurchase of Company securities and the spin-in of
Spectra-Physics. The Company expects that a trend of lower market interest rates
in 2002 will continue to adversely affect the yield it earns as maturing
investments are reinvested at lower market rates. Interest expense decreased to
$13.5 million in 2002 from $19.4 million in 2001, as a result of the maturity
and repurchase of debentures.
During 2002, the Company had a gain on sale of investments, net, of $58.0
million, compared with a loss on investments, net, of $2.2 million in 2001. The
2002 gain includes $56.3 million from the sale of 1,250,000 shares of FLIR
Systems, Inc. Of the total gain from the sale of FLIR shares, $14.4 million
represents a recovery of previous writedowns on the shares that were sold during
the period. Of the loss on investments recorded in 2001, $2.0 million arose as a
result of impairment of an available-for-sale security that the company deemed
other than temporary. The security was a preacquisition asset of an acquired
business. The Company recorded income from equity in earnings of unconsolidated
subsidiaries of $2.2 million in 2002 and $0.2 million in 2001. Equity in
earnings of unconsolidated subsidiaries primarily relates to the investment in
FLIR. Following a reduction in the Company's percentage ownership of FLIR to
less than 20%, the Company will no longer report its pro-rata share of FLIR's
earnings but instead will account for its remaining investment as an
available-for-sale security (Note 4).
Provision for Income Taxes
- --------------------------
The Company's effective tax rate was 34.5% and 39.5% in the first quarter
of 2002 and 2001, respectively. Excluding restructuring and unusual costs or
income, the effective tax rate was 33.0% and 39.5% in 2002 and 2001,
respectively. The effective tax rate decreased in 2002, primarily due to the
absence of nondeductible goodwill amortization following the adoption of SFAS
No. 142 (Note 8) and, to a lesser extent, a reorganization in Europe that
resulted in a more tax-efficient corporate structure. The effective tax rate
exceeded the statutory federal income tax rate in 2001 due to the impact of
state income taxes and nondeductible expenses, which included goodwill
amortization.
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THERMO ELECTRON CORPORATION
First Quarter 2002 Compared With First Quarter 2001 (continued)
- ---------------------------------------------------
Minority Interest Income
- ------------------------
The Company recorded minority interest income of $0.3 million in the first
quarter of 2002, representing minority shareholders' allocable share of losses
at Spectra-Physics through the date that this subsidiary was spun-in in February
2002 (Note 12). Following the spin-in, the Company does not have material
minority interests in any subsidiaries.
Income from Continuing Operations
- ---------------------------------
Income from continuing operations before extraordinary item was $64.4
million in the first quarter of 2002, compared with $21.8 million in the first
quarter of 2001. Results in both periods were affected by unusual items,
discussed above. Excluding the unusual items in both periods, income from
continuing operations before extraordinary item increased to $33.7 million in
2002 from $29.5 million in 2001 due to the absence of goodwill amortization in
2002, offset in part by the reasons discussed above.
Extraordinary Item
- ------------------
The Company repurchased and redeemed debentures during the first quarter
of 2002, resulting in an extraordinary charge of $0.7 million, net of tax (Note
5).
Cumulative Effect of Change in Accounting Principle
- ---------------------------------------------------
The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, in the first quarter of 2001 and recorded
an after-tax charge of $1.0 million representing the cumulative effect of the
change in accounting principle.
Discontinued Operations
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. The Company recorded an after-tax
charge of $66.0 million in the first quarter of 2001 for a decline in market
value of Thoratec common stock as a loss on disposal of discontinued operations.
During the first quarter of 2002, the Company sold 6.9 million shares of
Thoratec for net proceeds of $105 million and realized an after-tax gain of
$38.4 million as a gain on disposal of discontinued operations. Following the
sale of shares in 2001 and 2002, the Company owns less than 20% of Thoratec's
outstanding shares and accounts for its remaining investment in Thoratec as an
available-for-sale security with unrealized gains or losses recorded in equity
(Note 14).
During the first quarter of 2002, the Company sold the last remaining
component of its former power generation business and realized an after-tax gain
from the disposition totaling $13.0 million, principally for previously
unrecognized tax benefits that were realized upon the sale.
Liquidity and Capital Resources
Consolidated working capital was $938.3 million at March 30, 2002,
compared with $823.2 million at December 29, 2001. Included in working capital
were cash, cash equivalents, and short-term available-for-sale investments of
$1.16 billion at March 30, 2002, compared with $1.04 billion at December 29,
2001. In addition, the Company had $9.6 million of long-term available-for-sale
investments at March 30, 2002, compared with $9.4 million at December 29, 2001.
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THERMO ELECTRON CORPORATION
Liquidity and Capital Resources (continued)
Operating activities used cash of $18.1 million during the first three
months of 2002, including $10.2 million for continuing operations. A decrease in
other current liabilities used $15.2 million of cash, including $9.8 million of
payments for restructuring actions and $6.9 million of accrued interest,
principally due to the debt redemption discussed in Note 5.
In connection with certain restructuring actions undertaken by the
Company's continuing operations, the Company had accrued $49.8 million for
restructuring costs at March 30, 2002. The Company expects to pay approximately
$33 million of this amount for severance, employee retention, lease obligations,
and other costs primarily through 2002. The balance will be paid through the
expiration of additional lease obligations through 2012. In addition, at March
30, 2002, the Company had accrued $6.9 million for acquisition expenses. Accrued
acquisition expenses included $0.6 million of severance obligations, which the
Company expects to pay primarily through 2002. The balance, which primarily
represents abandoned-facility payments, will be paid over the remaining terms of
the leases through 2014.
During the first three months of 2002, the primary investing activities of
the Company's continuing operations, excluding available-for-sale investment
activities, included the sale of other investments, the purchase of shares of a
majority-owned subsidiary, and the purchase of property, plant, and equipment.
The Company's continuing operations received proceeds of $80.6 million from the
sale of other investments, principally shares of FLIR (Note 4). In addition, the
Company's continuing operations expended $21.3 million to purchase the remaining
minority-owned shares of its Spectra-Physics subsidiary (Note 12) and $12.4
million for purchases of property, plant, and equipment, net of dispositions.
During the first three months of 2002, investing activities of the Company's
discontinued operations provided $107.5 million of cash, primarily representing
proceeds of $105 million from the sale of Thoratec common stock (Note 14).
The Company's financing activities used $178.7 million of cash during the
first three months of 2002, including $176.9 million for continuing operations.
During the first three months of 2002, the Company's continuing operations
expended $456.3 million to redeem all of its outstanding 4 1/4% and 4 5/8%
subordinated convertible debentures due 2003. The redemption price was 100% of
the principal amount of the debentures, plus accrued interest. The Company
increased short-term notes payable by $369.2 million to partially fund the debt
redemption (Note 11). The Company's continuing operations received net proceeds
of $10.7 million from the exercise of employee stock options. During the first
three months of 2002, the Company expended $100.0 million to repurchase its
securities. As of March 30, 2002, the Company had $96 million remaining under
Board of Directors' authorizations to repurchase its own securities. Such
purchases may be made in the open market, or in negotiated transactions.
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.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company's exposure to market risk from changes in interest rates,
currency exchange rates, and equity prices has not changed materially from its
exposure at year-end 2001, except that a 10% decrease in market interest rates
at the end of the first quarter of 2002 would result in a negative impact to the
Company of $1 million on the net fair value of its interest-sensitive financial
instruments; a 10% decrease in market equity prices at the end of the first
quarter of 2002 would result in a negative impact to the Company of $18 million
on the net fair value of its price-sensitive equity financial instruments; and a
100 basis point increase in 90-day LIBOR at the end of the first quarter of 2002
would increase the Company's annual pre-tax interest expense by $3 million.
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THERMO ELECTRON CORPORATION
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.
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
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
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
Forward-looking Statements (continued)
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.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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THERMO ELECTRON CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 9th day of May 2002.
THERMO ELECTRON CORPORATION
/s/ Theo Melas-Kyriazi
-------------------------------------------------
Theo Melas-Kyriazi
Vice President and Chief Financial Officer
/s/ Peter E. Hornstra
-------------------------------------------------
Peter E. Hornstra
Corporate Controller and Chief Accounting Officer