SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended September 30, 2000
[ ] 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
(State or other jurisdiction of 04-2209186
incorporation or organization) (I.R.S. Employer Identification No.)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at October 27, 2000
Common Stock, $1.00 par value 180,008,112
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
September 30, January 1,
(In thousands) 2000 2000
- ------------------------------------------------------------------------------ ------------- ----------
Current Assets:
Cash and cash equivalents $ 320,958 $ 281,760
Short-term available-for-sale investments at quoted market value 434,422 555,501
(amortized cost of $431,134 and $545,639)
Accounts receivable, less allowances of $28,315 and $33,699 487,653 574,126
Inventories:
Raw materials and supplies 172,346 177,153
Work in process 67,014 66,746
Finished goods 126,787 129,242
Deferred tax asset 154,195 160,959
Other current assets 98,065 54,370
Net assets of discontinued operations (Note 9) 475,751 517,350
---------- ----------
2,337,191 2,517,207
---------- ----------
Property, Plant, and Equipment, at Cost 620,717 756,443
Less: Accumulated depreciation and amortization 213,627 245,796
---------- ----------
407,090 510,647
---------- ----------
Long-term Available-for-sale Investments, at Quoted Market Value
(amortized cost of $37,224 and $38,064) 42,253 40,165
---------- ----------
Other Assets 203,207 207,732
---------- ----------
Cost in Excess of Net Assets of Acquired Companies (Note 9) 1,416,739 1,227,335
---------- ----------
Long-term Net Assets of Discontinued Operations (Note 9) 635,755 678,756
---------- ----------
$5,042,235 $5,181,842
========== ==========
2
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
September 30, January 1,
(In thousands except share amounts) 2000 2000
- ------------------------------------------------------------------------------ ------------- ----------
Current Liabilities:
Short-term obligations and current maturities of long-term obligations
obligations $ 120,944 $ 302,962
Advance payable to affiliates 15,951 115,009
Accounts payable 133,453 156,573
Accrued payroll and employee benefits 80,566 89,184
Accrued income taxes 92,729 85,407
Deferred revenue 49,594 47,440
Accrued installation and warranty costs 42,571 44,198
Other accrued expenses (Notes 7 and 8) 203,574 225,576
---------- ----------
739,382 1,066,349
---------- ----------
Deferred Income Taxes and Other Deferred Items 150,427 163,063
---------- ----------
Long-term Obligations:
Senior convertible obligations 172,500 172,500
Senior notes 150,000 150,000
Subordinated convertible obligations 1,177,565 1,209,305
Other 54,192 34,169
---------- ----------
1,554,257 1,565,974
---------- ----------
Minority Interest (Note 9) 28,380 364,278
---------- ----------
Common Stock Subject to Redemption (at redemption value) - 7,692
---------- ----------
Shareholders' Investment (Note 9):
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized;
192,979,226 and 167,432,776 shares issued 192,979 167,433
Capital in excess of par value 1,647,059 1,052,837
Retained earnings 1,096,540 1,041,968
Treasury stock at cost, 13,347,990 and 10,955,798 shares (236,164) (189,646)
Deferred compensation (7,965) (3,190)
Accumulated other comprehensive items (Note 2) (122,660) (54,916)
---------- ----------
2,569,789 2,014,486
---------- ----------
$5,042,235 $5,181,842
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
3
THERMO ELECTRON CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
-------------------------
September 30, October 2,
(In thousands except per share amounts) 2000 1999
- ------------------------------------------------------------------------------ ------------- ----------
Revenues $580,951 $624,292
-------- --------
Costs and Operating Expenses:
Cost of revenues 339,021 347,460
Selling, general, and administrative expenses 157,903 167,837
Research and development expenses 40,611 43,352
Restructuring and other unusual income, net (Note 8) (76,590) (11,982)
-------- --------
460,945 546,667
-------- --------
Operating Income 120,006 77,625
Other Expense, Net (Note 3) (35,782) (14,686)
-------- --------
Income from Continuing Operations Before Provision for Income Taxes
and Minority Interest 84,224 62,939
Provision for Income Taxes 70,360 24,717
Minority Interest Expense 376 6,810
-------- --------
Income from Continuing Operations 13,488 31,412
Income from Discontinued Operations (net of income taxes and minority
interest of $5,728; Note 9) - 4,917
-------- --------
Net Income $ 13,488 $ 36,329
======== ========
Earnings per Share from Continuing Operations (Note 5):
Basic $ .08 $ .20
======== ========
Diluted $ .07 $ .19
======== ========
Earnings per Share (Note 5):
Basic $ .08 $ .23
======== ========
Diluted $ .07 $ .22
======== ========
Weighted Average Shares (Note 5):
Basic 175,978 158,198
======== ========
Diluted 180,440 158,384
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
4
THERMO ELECTRON CORPORATION
Consolidated Statement of Operations
(Unaudited)
Nine Months Ended
-------------------------
September 30, October 2,
(In thousands except per share amounts) 2000 1999
- ------------------------------------------------------------------------------ ------------- ----------
Revenues $1,789,362 $1,812,208
---------- ----------
Costs and Operating Expenses:
Cost of revenues 997,967 1,010,555
Selling, general, and administrative expenses 503,601 498,430
Research and development expenses 135,162 125,829
Restructuring and other unusual costs (income), net (Note 8) (87,975) 144,498
---------- ----------
1,548,755 1,779,312
---------- ----------
Operating Income 240,607 32,896
Other Expense, Net (Note 3) (67,260) (51,938)
---------- ----------
Income (Loss) from Continuing Operations Before Provision for
Income Taxes, Minority Interest, and Extraordinary Item 173,347 (19,042)
Provision for Income Taxes 107,700 6,692
Minority Interest Expense 11,607 11,136
---------- ----------
Income (Loss) from Continuing Operations Before Extraordinary Item 54,040 (36,870)
Loss from Discontinued Operations (net of income taxes and minority
interest of $80,704; Note 9) - (133,690)
---------- ----------
Income (Loss) Before Extraordinary Item 54,040 (170,560)
Extraordinary Item (net of provision for income taxes of $333; Note 4) 532 -
---------- ----------
Net Income (Loss) $ 54,572 $ (170,560)
========== ==========
Earnings (Loss) per Share from Continuing Operations Before
Extraordinary Item (Note 5):
Basic $ .33 $ (.23)
========== ==========
Diluted $ .32 $ (.25)
========== ==========
Earnings (Loss) per Share (Note 5):
Basic $ .33 $ (1.08)
========== ==========
Diluted $ .32 $ (1.09)
========== ==========
Weighted Average Shares (Note 5):
Basic 162,937 158,084
========== ==========
Diluted 165,224 158,084
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
5
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
-------------------------
September 30, October 2,
(In thousands) 2000 1999
- ------------------------------------------------------------------------------ ------------- ----------
Operating Activities:
Net income (loss) $ 54,572 $(170,560)
Loss from discontinued operations (Note 9) - 133,690
--------- ---------
Income (loss) from continuing operations 54,572 (36,870)
Adjustments to reconcile income (loss) from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 77,501 85,704
Noncash restructuring and other unusual costs, net (Note 8) 23,034 148,447
Provision for losses on accounts receivable 6,060 6,520
Minority interest expense 11,607 11,136
Equity in losses of unconsolidated subsidiaries (Note 8) 41,089 9,966
Change in deferred income taxes 5,012 (52,607)
Gain on sale of businesses (Note 8) (127,533) (13,462)
Gain on investments, net (6,601) (1,039)
Extraordinary item, net of income taxes (Note 4) (532) -
Other noncash items, net 26,175 13,805
Other unusual income (9,291) -
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable 1,373 (7,131)
Inventories (65,214) (467)
Other current assets (7,442) (11,855)
Accounts payable (8,281) 17,027
Other current liabilities 23,353 (41,843)
--------- ---------
Net cash provided by continuing operations 44,882 127,331
Net cash provided by discontinued operations 69,913 92,101
--------- ---------
Net cash provided by operating activities 114,795 219,432
--------- ---------
Investing Activities:
Acquisition of minority interests of subsidiaries (Note 9) (303,587) (20,482)
Proceeds from sale of businesses, net of cash divested (Note 8) 253,184 15,775
Acquisitions, net of cash acquired (15,769) (352,081)
Refund of acquisition purchase price - 4,574
Purchases of available-for-sale investments (336,705) (460,008)
Proceeds from sale of available-for-sale investments 116,025 281,327
Proceeds from maturities of available-for-sale investments 344,109 665,362
Purchases of property, plant, and equipment (82,113) (51,175)
Proceeds from sale of property, plant, and equipment 29,060 5,538
Proceeds from termination of power-sales agreement 83,823 -
Advance (to) from affiliates (100,444) 12,318
6
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
-------------------------
September 30, October 2,
(In thousands) 2000 1999
- ------------------------------------------------------------------------------ ------------- ----------
Investing Activities (continued):
(Increase) decrease in other assets $ (1,624) $ 15,702
Other 13,591 (5,258)
--------- ---------
Net cash provided by (used in) continuing operations (450) 111,592
Net cash provided by (used in) discontinued operations 217,211 (99,615)
--------- ---------
Net cash provided by investing activities 216,761 11,977
--------- ---------
Financing Activities:
Net proceeds from issuance of long-term obligations 18,946 14,655
Repayment of long-term obligations (174,358) (33,479)
Net proceeds from issuance of Company and subsidiary common stock 25,160 6,848
Purchases of Company and subsidiary common stock and subordinated (43,787) (126,011)
convertible debentures
Increase in short-term obligations 7,327 16,309
Other (2,153) (1,412)
--------- ---------
Net cash used in continuing operations (168,865) (123,090)
Net cash provided by (used in) discontinued operations 3,471 (69,352)
--------- ---------
Net cash used in financing activities (165,394) (192,442)
--------- ---------
Exchange Rate Effect on Cash of Continuing Operations (9,150) (10,594)
Exchange Rate Effect on Cash of Discontinued Operations (8,105) (767)
--------- ---------
Increase in Cash and Cash Equivalents 148,907 27,606
Cash and Cash Equivalents at Beginning of Period 357,215 396,670
--------- ---------
506,122 424,276
Cash and Cash Equivalents of Discontinued Operations at End of Period (185,164) (89,246)
--------- ---------
Cash and Cash Equivalents at End of Period $ 320,958 $ 335,030
========= =========
Noncash Activities:
Fair value of assets of acquired companies $ 24,996 $ 617,171
Cash paid for acquired companies (17,272) (394,721)
Issuance of short- and long-term obligations for acquired companies - (14,852)
--------- ---------
Liabilities assumed of acquired companies $ 7,724 $ 207,598
========= =========
Issuance of Company common stock in exchange for minority interests of
subsidiaries (Note 9) $ 448,747 $ -
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
7
THERMO ELECTRON CORPORATION
Notes to Consolidated Financial Statements
1. General
The interim consolidated financial statements presented have been prepared
by Thermo Electron Corporation (the Company) without audit and, in the opinion
of management, reflect all adjustments of a normal recurring nature necessary
for a fair statement of the financial position at September 30, 2000, the
results of operations for the three- and nine-month periods ended September 30,
2000, and October 2, 1999, and the cash flows for the nine-month periods ended
September 30, 2000, and October 2, 1999. Certain prior-period amounts have been
reclassified to conform to the presentation in the current financial statements.
Interim results are not necessarily indicative of results for a full year.
Historical financial results have been restated to reflect a decision to
sell or spin off several of the Company's businesses, which have been presented
as discontinued operations in the accompanying financial statements (Note 9).
The consolidated balance sheet presented as of January 1, 2000, has been derived
from the consolidated financial statements that have been audited by the
Company's independent public accountants. The consolidated financial statements
and notes are presented as permitted by Form 10-Q and do not contain certain
information included in the annual financial statements and notes of the
Company. The consolidated financial statements and notes included herein should
be read in conjunction with the financial statements and notes included in the
Company's Annual Report on Form 10-K for the fiscal year ended January 1, 2000,
filed with the Securities and Exchange Commission (SEC).
2. Comprehensive Income
Comprehensive income combines net income and "other comprehensive items,"
which represents certain amounts that are reported as components of
shareholders' investment in the accompanying balance sheet, including foreign
currency translation adjustments and unrealized net of tax gains and losses on
available-for-sale investments. During the third quarter of 2000 and 1999, the
Company had a comprehensive loss of $16.1 million and comprehensive income of
$62.6 million, respectively. During the first nine months of 2000 and 1999, the
Company had comprehensive losses of $7.9 million and $206.3 million,
respectively.
3. Other Expense, Net
The components of other expense, net, in the accompanying statement of
operations are as follows:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, October 2, September 30, October 2,
(In thousands) 2000 1999 2000 1999
- --------------------------------------------- ------------- ---------- ------------- ----------
Interest Income $ 10,107 $ 10,050 $ 28,562 $ 34,271
Interest Expense (20,035) (24,997) (64,713) (74,109)
Equity in Income (Losses) of Unconsolidated (26,027) 785 (41,089) (9,966)
Subsidiaries (Note 8)
Gain on Investments, Net 229 1,738 6,601 1,039
Other Income (Expense), Net (Note 8) (56) (2,262) 3,379 (3,173)
-------- -------- -------- --------
$(35,782) $(14,686) $(67,260) $(51,938)
======== ======== ======== ========
8
THERMO ELECTRON CORPORATION
4. Extraordinary Item
During the first quarter of 2000, the Company repurchased $7.3 million
principal amount of its 4 1/4% subordinated convertible debentures for $6.4
million in cash, resulting in an extraordinary gain of $0.5 million, net of
taxes of $0.3 million.
5. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, October 2, September 30, October 2,
(In thousands except per share amounts) 2000 1999 2000 1999
- --------------------------------------------- ------------- ---------- ------------- ----------
Basic
Income (Loss) from Continuing Operations
Before Extraordinary Item $ 13,488 $ 31,412 $ 54,040 $ (36,870)
Income (Loss) from Discontinued Operations - 4,917 - (133,690)
Extraordinary Item - - 532 -
--------- --------- --------- ---------
Net Income (Loss) $ 13,488 $ 36,329 $ 54,572 $(170,560)
--------- --------- --------- ---------
Weighted Average Shares 175,978 158,198 162,937 158,084
--------- --------- --------- ---------
Basic Earnings (Loss) per Share:
Continuing operations before extraordinary
item $ .08 $ .20 $ .33 $ (.23)
Discontinued operations - .03 - (.85)
Extraordinary item - - - -
--------- --------- --------- ---------
$ .08 $ .23 $ .33 $ (1.08)
========= ========= ========= =========
9
THERMO ELECTRON CORPORATION
5. Earnings (Loss) per Share (continued)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, October 2, September 30, October 2,
(In thousands except per share amounts) 2000 1999 2000 1999
- --------------------------------------------- ------------- ---------- ------------- ----------
Diluted
Income (Loss) from Continuing Operations
Before Extraordinary Item $ 13,488 $ 31,412 $ 54,040 $ (36,870)
Effect of Majority-owned Subsidiaries' Dilutive
Securities - Continuing Operations (87) (1,265) (1,444) (1,986)
--------- --------- --------- ---------
Income (Loss) from Continuing Operations
Before Extraordinary Item Available to
Common Shareholders, as Adjusted 13,401 30,147 52,596 (38,856)
Income (Loss) from Discontinued Operations - 4,917 - (133,690)
Effect of Majority-owned Subsidiaries'
Dilutive Securities - Discontinued
Operations - (55) - (111)
Extraordinary Item - - 532 -
--------- --------- --------- ---------
Income (Loss) Available to Common
Shareholders, as Adjusted $ 13,401 $ 35,009 $ 53,128 $(172,657)
--------- --------- --------- ---------
Weighted Average Shares 175,978 158,198 162,937 158,084
Effect of:
Stock options 3,997 186 2,132 -
Convertible debentures 465 - 155 -
--------- --------- --------- ---------
Weighted Average Shares, as Adjusted 180,440 158,384 165,224 158,084
--------- --------- --------- ---------
Diluted Earnings (Loss) per Share:
Continuing operations before extraordinary
item $ .07 $ .19 $ .32 $ (.25)
Discontinued operations - .03 - (.85)
Extraordinary item - - - -
--------- --------- --------- ---------
$ .07 $ .22 $ .32 $ (1.09)
========= ========= ========= =========
Options to purchase 3,800,000 and 9,696,000 shares of common stock for the
third quarter of 2000 and 1999, respectively, and 5,283,000 and 9,178,000 shares
of common stock for the first nine months of 2000 and 1999, respectively, were
not included in the computation of diluted earnings per share because the
options' exercise prices were greater than the average market price for the
common stock and their effect would have been antidilutive.
10
THERMO ELECTRON CORPORATION
5. Earnings (Loss) per Share (continued)
The computation of diluted earnings per share for the third quarter and
first nine months of 1999 excludes the effect of assuming the conversion of the
Company's $562 million principal amount 4 1/4% subordinated convertible
debentures, convertible at $37.80 per share, because the effect would be
antidilutive. During 2000, convertible obligations of certain of the Company's
former public subsidiaries became convertible into Company common stock (Note
9). The computation of diluted earnings per share for the third quarter and
first nine months of 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)
$561,563 4 1/4% $ 37.80
247,000 4% 41.94
172,500 4 1/2% 40.54
110,191 4 5/8% 40.30
98,310 4 3/8% 131.71
78,048 3 1/4% 49.06
35,029 4 7/8% 38.28
15,859 2 7/8% 33.17
6. Business Segment Information
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, October 2, September 30, October 2,
(In thousands) 2000 1999 2000 1999
- ---------------------------------------------- -------------- -------------- -------------- -------------
Revenues:
Life Sciences $ 191,001 $ 185,356 $ 568,878 $ 559,629
Optical Technologies 126,573 99,584 347,500 279,667
Measurement and Control 233,621 295,469 799,828 853,981
Power Generation 34,340 51,524 86,656 137,963
Intersegment (a) (4,584) (7,641) (13,500) (19,032)
---------- ---------- ---------- ----------
$ 580,951 $ 624,292 $1,789,362 $1,812,208
========== ========== ========== ==========
Income (Loss) from Continuing Operations
Before Income Taxes, Minority Interest, and
Extraordinary Item:
Life Sciences (b) $ 9,960 $ 27,290 $ 62,248 $ 83,637
Optical Technologies (c) 4,798 5,695 22,369 17,517
Measurement and Control (d) 109,480 28,432 172,757 43,528
Power Generation (e) 8,512 23,282 15,933 (87,902)
---------- ---------- ---------- ----------
Total segment income (f) 132,750 84,699 273,307 56,780
Corporate and Other (g) (48,526) (21,760) (99,960) (75,822)
---------- ---------- ---------- ----------
$ 84,224 $ 62,939 $ 173,347 $ (19,042)
========== ========== ========== ==========
11
THERMO ELECTRON CORPORATION
6. Business Segment Information (continued)
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, October 2, September 30, October 2,
(In thousands) 2000 1999 2000 1999
- --------------------------------------------- ------------- ---------- ------------- ----------
Depreciation:
Life Sciences $ 4,518 $ 3,978 $ 12,407 $ 11,871
Optical Technologies 3,792 3,817 10,882 8,952
Measurement and Control 5,927 5,656 17,420 16,846
Power Generation 924 5,227 2,859 16,953
Corporate 290 313 911 925
---------- ---------- ---------- ----------
$ 15,451 $ 18,991 $ 44,479 $ 55,547
========== ========== ========== ==========
Amortization:
Life Sciences $ 5,491 $ 3,833 $ 13,935 $ 11,069
Optical Technologies 1,783 1,208 4,448 3,184
Measurement and Control 4,839 5,208 14,090 15,112
Power Generation - - - 27
Corporate 15 259 549 765
---------- ---------- ---------- ----------
$ 12,128 $ 10,508 $ 33,022 $ 30,157
========== ========== ========== ==========
During the third quarter of 2000, the Company's spectroscopy units and
certain other businesses were moved to the Measurement and Control segment from
the Optical Technologies segment due to an organizational change. Prior period
segment results have been restated to conform to this presentation.
(a) Intersegment sales are accounted for at prices that are representative of transactions with unaffiliated
parties.
(b) Includes restructuring and other unusual costs of $7.8 million in the third quarter and first nine
months of 2000 and restructuring and other unusual income of $0.3 million in the third quarter and
first nine months of 1999. Also includes charges to cost of revenues of $8.4 million in the third
quarter and first nine months of 2000.
(c) Includes restructuring and other unusual costs of $3.4 million in the third quarter and first nine
months of 2000, and $0.3 million and $1.1 million in the third quarter and first nine months of 1999,
respectively. Also includes charges to cost of revenues of $2.9 million in the third quarter and first
nine months of 2000 and $3.2 million in the first nine months of 1999.
(d) Includes restructuring and other unusual income, net, of $91.7 million and $104.5 million in the third
quarter and first nine months of 2000, respectively, and restructuring and other unusual costs, net,
of $0.1 million and $30.9 million in the third quarter and first nine months of 1999, respectively.
Also includes charges to cost of revenues of $8.0 million in the third quarter and first nine months
of 2000, and $1.9 million and $6.3 million in the third quarter and first nine months of 1999,
respectively.
(e) Includes restructuring and other unusual costs of $0.2 million and restructuring and other unusual
income, net, of $2.2 million in the third quarter and first nine months of 2000, respectively, and
restructuring and other unusual income, net, of $12.1 million and restructuring and other unusual
costs of $112.2 million in the third quarter and first nine months of 1999, respectively. Also includes
a revenue reversal of $2.8 million due to a dispute with a utility customer in the third quarter and
first nine months of 1999.
(f) Segment income is operating income before corporate charges.
(g) Includes corporate general and administrative expenses, other income and expense, and restructuring
and other unusual costs, net, of $5.4 million, $9.2 million, and $0.6 million in the third quarter
and first nine months of 2000 and the first nine months of 1999, respectively.
12
THERMO ELECTRON CORPORATION
7. Accrued Acquisition Expenses
The Company has undertaken restructuring activities at certain acquired
businesses. The Company's restructuring activities, which were accounted for in
accordance with Emerging Issues Task Force Pronouncement (EITF) 95-3, primarily
have included reductions in staffing levels and the abandonment of excess
facilities. In connection with these restructuring activities, as part of the
cost of acquisitions, the Company established reserves, primarily for severance
and excess facilities. In accordance with EITF 95-3, the Company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. Accrued acquisition expenses are included in other accrued
expenses in the accompanying balance sheet.
A summary of the changes in accrued acquisition expenses for acquisitions
completed before and during 1997 is as follows:
1997 Acquisitions
---------------------------------------
Abandonment
of Excess Pre-1997
(In thousands) Severance Facilities Other Acquisitions Total
- ----------------------------------- --------- ----------- ------- ------------ -------
Balance at January 1, 2000 $ 23 $ 1,420 $ 248 $ 7,437 $ 9,128
Usage (3) (42) (206) (1,061) (1,312)
Decrease recorded to cost in
excess of net assets of
acquired companies - (99) - - (99)
Currency translation (9) (124) (16) (711) (860)
------- ------- ------- ------- -------
Balance at September 30, 2000 $ 11 $ 1,155 $ 26 $ 5,665 $ 6,857
======= ======= ======= ======= =======
The remaining accrued acquisition expenses for pre-1997 acquisitions
primarily represent lease obligations for a building in Uxbridge, England, and
an operating facility in Hayworth, England, with obligations through 2007.
The remaining accrued acquisition expenses for 1997 acquisitions primarily
represent lease obligations for an operating location in Runcorn, England, with
an obligation through 2014.
A summary of the changes in accrued acquisition expenses for acquisitions
completed during 1998 is as follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- -------------------------------------------------- --------- ----------- ------ ------
Balance at January 1, 2000 $ 281 $1,185 $ 83 $1,549
Usage (50) (296) (44) (390)
Decrease recorded to cost in excess of net assets
of acquired companies (80) (94) (39) (213)
Currency translation (32) (101) - (133)
------ ------ ------ ------
Balance at September 30, 2000 $ 119 $ 694 $ - $ 813
====== ====== ====== ======
The remaining accrued acquisition expenses for 1998 acquisitions primarily
represent lease obligations for two operating facilities in North America with
leases expiring in 2001 and severance payable primarily in 2000.
13
THERMO ELECTRON CORPORATION
7. Accrued Acquisition Expenses (continued)
A summary of the changes in accrued acquisition expenses for acquisitions
completed during 1999 is as follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- -------------------------------------------------- --------- ----------- ------- -------
Balance at January 1, 2000 $ 5,262 $ 1,173 $ 2,333 $ 8,768
Reserves established 308 55 - 363
Usage (1,913) (219) (547) (2,679)
Decrease due to finalization of
restructuring plans, recorded as a
decrease to cost in excess of net assets
of acquired companies (371) - (46) (417)
Reserves of businesses sold (715) (154) (999) (1,868)
Currency translation (244) (144) (114) (502)
------- ------- ------- -------
Balance at September 30, 2000 $ 2,327 $ 711 $ 627 $ 3,665
======= ======= ======= =======
The principal accrued acquisition expenses for 1999 acquisitions are
severance for approximately 175 employees across all functions and for abandoned
facilities, primarily at Spectra-Physics AB. The abandoned facilities at
Spectra-Physics include operating facilities in Sweden, Germany, and France with
obligations primarily through 2001. The amounts captioned as "other" primarily
represent relocation, contract termination, and other exit costs. The Company
expects to pay amounts accrued for severance and other through 2001 and amounts
accrued for abandoned facilities over the respective lease terms. The Company
finalized its restructuring plans for Spectra-Physics in 1999. As of September
30, 2000, no unresolved matters existed relating to acquisitions completed in
1999.
A summary of the changes in accrued acquisition expenses for acquisitions
completed during 2000 is as follows:
Abandonment
of Excess
(In thousands) Severance Facilities Total
- ----------------------------------------------------------------- --------- ----------- -----
Reserves established $ 91 $ 52 $143
Usage (69) (9) (78)
Currency translation (5) (2) (7)
---- ---- ----
Balance at September 30, 2000 $ 17 $ 41 $ 58
==== ==== ====
8. Restructuring and Other Unusual Costs (Income), Net
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 consists of headcount
reductions, discontinuing certain mature or unprofitable product lines, and
consolidation of facilities to streamline operations and reduce costs. During
the third quarter of 2000, the Company recorded $58.1 million of charges
associated with the restructuring, including $19.3 million included in cost of
revenues in the accompanying statement of operations. These charges are detailed
by segment below. The Company expects to incur an additional $1.5 million of
restructuring costs in the fourth quarter of 2000 and thereafter for charges
that can not be recorded until incurred. The Company expects that the
restructuring actions undertaken in the third quarter of 2000 will be
substantially completed by the second quarter of 2001. In addition, the Company
recorded other unusual income, net, of $115.4 million during the third quarter
of 2000, as detailed by segment below.
14
THERMO ELECTRON CORPORATION
8. Restructuring and Other Unusual Costs (Income), Net (continued)
The Company's continuing operations recorded charges (income) by segment
for the third quarter of 2000 as follows:
Measurement
Optical and Power
(In thousands) Life Sciences Technologies Control (a) Generation Corporate Total
- ------------------- ------------- ------------ ----------- ---------- --------- --------
Cost of Revenues $ 8,369 $ 2,916 $ 8,000 $ - $ - $ 19,285
Restructuring and
Other Unusual
Costs (Income),
Net 7,781 3,369 (93,359) 191 5,428 (76,590)
Equity in Losses of
Unconsolidated
Subsidiaries - 26,142 - - - 26,142
Other Income, Net - (573) - - - (573)
-------- -------- -------- -------- --------- --------
$ 16,150 $ 31,854 $(85,359) $ 191 $ 5,428 $(31,736)
======== ======== ======== ======== ========= ========
The Company's continuing operations recorded charges (income) by segment
for the first nine months of 2000 as follows:
Measurement
Optical and Power
(In thousands) Life Sciences Technologies Control (a) Generation Corporate Total
- ------------------- ------------- ------------ ----------- ---------- --------- ---------
Cost of Revenues $ 8,369 $ 2,916 $ 8,000 $ - $ - $ 19,285
Restructuring and
Other Unusual
Costs (Income),
Net 7,781 3,444 (106,218) (2,212) 9,230 (87,975)
Equity in Losses
of Unconsolidated
Subsidiaries - 41,374 - - - 41,374
Other Income, Net - (4,043) - - - (4,043)
--------- --------- --------- -------- --------- ---------
$ 16,150 $ 43,691 $ (98,218) $ (2,212) $ 9,230 $ (31,359)
========= ========= ========= ======== ========= =========
(a) The Spectra Precision businesses had an operating loss of $1.7 million in the third quarter of 2000
prior to being divested.
The components of restructuring and related costs by segment are as follows:
Life Sciences
- -------------
The Life Sciences segment recorded $16.2 million of restructuring and
unusual costs in the third quarter of 2000. The segment recorded charges to cost
of revenues of $8.4 million, primarily for discontinued product lines. The
segment also recorded restructuring and other unusual costs of $7.8 million in
the third quarter of 2000. The restructuring and unusual costs consist of $6.4
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
15
THERMO ELECTRON CORPORATION
8. Restructuring and Other Unusual Costs (Income), Net (continued)
million for settlement of two lawsuits during the third quarter of 2000; and
$0.5 million for other exit costs. A total of 31 employees were terminated as of
September 30, 2000. 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 include $0.7 million of cost in
excess of net assets of acquired companies and $0.7 million of fixed assets. The
facility consolidations include 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 $6.3 million of restructuring
and unusual costs in the third quarter of 2000. The segment recorded charges to
cost of revenues of $2.9 million, primarily for discontinued product lines.
Restructuring and unusual costs of $3.4 million consist 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 $1.0 million of cash costs,
including $0.3 million of severance for 22 employees across all functions, $0.2
million for ongoing lease costs, and $0.5 million of other exit costs. All of
the severed employees had been terminated as of September 30, 2000. The asset
writedowns primarily consist of charges to reduce the carrying value of a small
business unit that is held for sale to estimated disposal value and include $0.7
million of cost in excess of net assets of acquired companies and $0.2 million
of fixed assets. The lease costs are for closure of a facility in California
with lease payments through 2000. The segment recorded $0.1 million of
restructuring costs in the second quarter of 2000 related to an abandoned
facility.
The Optical Technologies segment also recorded a charge of $23.7 million
in the third quarter of 2000 to write down the carrying value of its 29% equity
method investment in FLIR Systems, Inc. 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 $13.4 million, $1.8 million, and $2.4 million
in the first, second, and third quarters of 2000, respectively, associated with
its investment in FLIR. The segment records FLIR's results on a one-quarter lag.
FLIR recorded significant charges in its fourth quarter of 1999 and operating
losses in the first and second quarters of 2000. The charges represent the
Company's pro rata share of FLIR's losses and were recorded to equity in income
(losses) of unconsolidated subsidiaries, a component of other expense, net, in
the accompanying statement of operations. The segment also recorded other income
of $1.7 million, $1.8 million, and $0.6 million in the first, second, and third
quarters of 2000, respectively, related to hedging transactions of its
majority-owned Spectra-Physics Lasers, Inc. (SPLI) subsidiary, which elected
early adoption of Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
Measurement and Control
- -----------------------
The Measurement and Control segment recorded $83.7 million of
restructuring and unusual income, net, in the third quarter of 2000. The segment
had a net gain of $115.4 million on the sale of two businesses, primarily
Spectra Precision in July 2000 (Note 11). Spectra Precision had an operating
loss of $1.7 million in the third quarter of 2000 for the period prior to its
sale. The segment also recorded charges of $16.6 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; $8.0 million
of charges to cost of revenues, primarily for discontinued product lines; and
$5.4 million of cash costs, including $3.1 million of severance for 128
employees across all functions, $1.7 million of lease costs through 2001; and
$0.6 million of other exit costs, primarily relocation costs. A total of 58
employees were terminated as of September 30, 2000. The asset writedowns
included $14.6 million of cost in excess of net assets of acquired companies,
$1.8 million of fixed assets, and $0.2 million of other assets. The businesses
held for sale primarily include 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 the Pharos Marine businesses,
which manufacture and sell marine navigation
16
THERMO ELECTRON CORPORATION
8. Restructuring and Other Unusual Costs (Income), Net (continued)
equipment and systems. The businesses held for sale had revenues and operating
income in 1999 of $132.2 million and $2.9 million, respectively. These
businesses are generally cyclical, noncore units that are being sold to generate
funds to invest in potentially higher-growth opportunities. The lease costs
include amounts for the closure of sales offices in Norway, New Zealand, and
Germany and a manufacturing operation in the U.K.
The Measurement and Control segment had unusual income of $0.6 million in
the second quarter of 2000, primarily representing a gain on the termination of
a lease, and $0.1 million of restructuring costs for employee retention. In the
first quarter of 2000, this segment recorded $12.2 million of restructuring
costs and unusual income, net, resulting from a gain of $12.4 million on the
sale of its Nicolet Imaging Systems (NIS) and Sierra Research and Technology,
Inc. (SRT) subsidiaries. These businesses manufacture products that include
imaging systems used in assembling complex printed circuit boards and in airbag
manufacturing. NIS and SRT were sold for aggregate proceeds of $40.0 million and
had aggregate revenues and operating income of $28.3 million and $2.2 million,
respectively, in 1999. These units were sold due to a consolidation trend among
manufacturers of test equipment in the markets these businesses serve. The
segment also recorded $0.2 million of restructuring and unusual costs for
employee retention for a small business unit that was sold and reversed $0.1
million of previously established restructuring reserves during the first
quarter of 2000.
Power Generation
- ----------------
The Power Generation segment recorded $0.2 million of restructuring costs
during the third quarter of 2000 for employee retention.
The Power Generation segment recorded restructuring and unusual income,
net, of $2.1 million in the second quarter of 2000. Thermo Ecotek Corporation
had a gain of $2.7 million from factoring a portion of a stream of payments it
was to have received from a utility in connection with the 1999 termination of
the power-sales agreement for its Delano plants. In 1999, when Thermo Ecotek
decided to terminate the agreement, it recorded a $47.5 million charge for
impairment of the facility. The factoring gain represents a revision to the
estimate of impairment recorded in 1999. Thermo Ecotek also recorded a gain of
$0.2 million in the second quarter of 2000 related to the sale of its
coal-beneficiation plant and termination of its relationship with its former
partner in the plant. This unusual income was offset in part by a charge of $0.5
million for contract obligations that arose as a result of the closure of Thermo
Ecotek's gas marketing business, discussed below, and $0.3 million of employee
retention and severance costs.
The Power Generation segment recorded unusual income of $2.0 million in
the first quarter of 2000, representing a gain on the sale of Thermo Ecotek's
Gorbell facility in Maine. This segment also had restructuring costs of $1.7
million in the first quarter of 2000. This amount included $1.0 million of
severance for 45 employees, 12 of whom were terminated as of September 30, 2000;
$0.6 million of noncash charges associated with the closing of Thermo Ecotek's
gas marketing business; and $0.1 million of employee retention costs. The gas
marketing costs include a writeoff of $0.3 million of cost in excess of net
assets of acquired companies and $0.3 million of capitalized development costs.
Thermo Ecotek determined that its gas marketing business was a noncore business.
Corporate
- ---------
The Company recorded $5.4 million of restructuring and unusual costs at
its corporate office in the third quarter of 2000. This amount includes $2.9
million of severance for 19 employees; $1.3 million of investment banking,
consulting, and legal fees associated with the Company's reorganization plan;
$1.0 million of employee retention costs that are being accrued ratably over the
period through which the employees must work to qualify for a payment; and $0.2
million of noncash costs.
The Company recorded $1.1 million of restructuring and unusual income,
net, at its corporate office in the second quarter of 2000. This amount includes
a gain of $3.8 million from the sale of an office building adjacent to the
Company's corporate headquarters and $1.9 million of investment banking, legal,
and consulting fees associated with the Company's reorganization plan. The
Company also recorded $0.1 million of severance for 2 employees and $0.7 million
of employee retention costs.
17
THERMO ELECTRON CORPORATION
8. Restructuring and Other Unusual Costs (Income), Net (continued)
The Company also recorded $4.9 million of restructuring and unusual costs
at its corporate office in the first quarter of 2000. This amount includes $2.8
million of investment banking, consulting, and legal fees associated with the
Company's reorganization plan; a $1.2 million noncash charge, primarily related
to modification of the term of certain stock options of the Company's former
chairman; and $0.9 million of employee retention costs.
General
- -------
During 1998 and 1999, the Company announced restructuring actions that
included plans for the termination of 729 employees. As of January 1, 2000, the
Company had terminated 717 employees. The restructuring actions in 2000 included
plans for the termination of an additional 294 employees. During the first nine
months of 2000, the Company terminated 139 employees.
The following tables summarize the cash components of the Company's
restructuring plans. The noncash components and other amounts reported as
restructuring and other unusual costs (income), net, in the accompanying
statement of operations have been summarized in the notes to the tables. Accrued
restructuring costs for the Company's continuing operations are included in
other accrued expenses in the accompanying balance sheet.
Continuing Operations
Abandonment
Employee of Excess
(In thousands) Severance Retention (b) Facilities Other Total
- ----------------------------------- --------- ------------- ----------- -------- --------
1998 Restructuring Plans
Balance at January 1, 2000 $ 893 $ - $ 224 $ 565 $ 1,682
Costs incurred in 2000 - - 102 - 102
Usage (714) - (239) - (953)
Reserves reversed - - (84) - (84)
Currency translation (77) - (3) (51) (131)
-------- -------- -------- -------- --------
Balance at September 30, 2000 $ 102 $ - $ - $ 514 $ 616
======== ======== ======== ======== ========
1999 Restructuring Plans
Balance at January 1, 2000 $ 3,840 $ - $ 324 $ 6,348 $ 10,512
Usage (2,788) - - (950) (3,738)
Reserves reversed (6) - - - (6)
Reserves of businesses sold - - (324) (3,345) (3,669)
-------- -------- -------- -------- --------
Balance at September 30, 2000 $ 1,046 $ - $ - $ 2,053 $ 3,099
======== ======== ======== ======== ========
2000 Restructuring Plans
Costs incurred in 2000 (a) $ 11,485 $ 3,482 $ 3,065 $ 7,229 $ 25,261
Usage (4,172) (449) (775) (6,449) (11,845)
Currency translation (68) (32) (32) (12) (144)
-------- -------- -------- -------- --------
Balance at September 30, 2000 $ 7,245 $ 3,001 $ 2,258 $ 768 $ 13,272
======== ======== ======== ======== ========
(a) Reflects restructuring costs of $5.6 million, $1.0 million, $5.7 million, $1.6 million, and $11.4 million
in the Life Sciences, Optical Technologies, Measurement and Control, and Power Generation segments and
the corporate headquarters, respectively. Excludes noncash charges of $1.4 million, $0.9 million, $16.6
million, $0.6 million, and $1.6 million in the Life Sciences, Optical Technologies, Measurement and
Control, and Power Generation segments and the corporate headquarters, respectively. Also excludes
unusual income, net, of $128.5 million,
18
THERMO ELECTRON CORPORATION
8. Restructuring and Other Unusual Costs (Income), Net (continued)
$4.4 million, and $3.8 million, in the Measurement and Control and Power Generation segments and the
corporate headquarters, respectively, and unusual costs of $0.8 million and $1.5 million in the Life
Sciences and Optical Technologies segments, respectively.
(b) Employee retention costs are accrued ratably each quarter through the date that employees must remain
employed to qualify for a payment. The awards are 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.
The Company's continuing operations expect to pay accrued restructuring
costs as follows: severance, primarily through 2001; employee retention
obligations, primarily in 2001 and January 2002; abandoned-facility payments,
over lease terms expiring through 2003; and other costs, which represent fuel
contract cancellation and pension termination costs, through 2001.
Discontinued Operations
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- ------------------------------------------------- --------- ----------- ------- -------
1998 Restructuring Plans
Balance at January 1, 2000 $ 198 $ 1,580 $ - $ 1,778
Usage (113) (65) - (178)
Reserves reversed (7) - - (7)
Reserves of businesses sold (34) (666) - (700)
Currency translation (19) - - (19)
------- ------- ------- -------
Balance at September 30, 2000 $ 25 $ 849 $ - $ 874
======= ======= ======= =======
1999 Restructuring Plans
Balance at January 1, 2000 $ 2,682 $19,000 $ 9,743 $31,425
Costs incurred in 2000 by discontinued
operations 2,214 412 919 3,545
Usage (2,413) (980) (2,718) (6,111)
Reserves reversed (11) (7,116) (11) (7,138)
Reserves of businesses sold (62) (1,650) - (1,712)
Currency translation (236) (418) (365) (1,019)
------- ------- ------- -------
Balance at September 30, 2000 $ 2,174 $ 9,248 $ 7,568 $18,990
======= ======= ======= =======
The Company's ThermoLase Corporation subsidiary negotiated a favorable
resolution of certain lease obligations during the first nine months of 2000 and
reversed $7.1 million of reserves related to such obligations. The reversal did
not affect the Company's results of operations due to its treatment of
ThermoLase as a discontinued operation. The Company's discontinued operations
expect to pay accrued restructuring costs as follows: severance, primarily in
2000; abandoned-facility payments, over lease terms expiring through 2014; and
other costs, which principally include land reclamation liabilities and contract
termination costs, primarily through 2001.
19
THERMO ELECTRON CORPORATION
9. Reorganization and Discontinued Operations
Reorganization
In January 2000, the Company announced a proposed reorganization involving
the Company and certain of its subsidiaries. The reorganization would split the
Company into three independent public entities. The Company's continuing
operations will focus on its instruments businesses. The Company's plans also
include spinning off as a dividend to Company shareholders Thermo Fibertek Inc.
and a medical products company that focuses on patient monitoring and
respiratory equipment.
Continuing Operations
In addition to the majority-owned subsidiaries the Company had previously
announced its intention to repurchase, the Company announced its intention to
repurchase the publicly traded shares it did not already own in Thermo Optek
Corporation, ThermoQuest Corporation, Thermo BioAnalysis Corporation, Metrika
Systems Corporation, ONIX Systems Inc., Thermo Instrument Systems Inc., and
Thermedics Inc. The Company also announced the terms of its previously announced
repurchases of Thermo Sentron Inc., Thermedics Detection Inc., and Thermo
Ecotek.
Thermo Instrument has completed cash tender offers of $28.00 per share for
Thermo BioAnalysis, $9.00 per share for Metrika Systems, and $9.00 per share for
ONIX Systems 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 has ceased to be publicly traded. Because Thermo Instrument owned
more than 90% of the outstanding shares of Thermo Optek and ThermoQuest 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 has ceased to
be publicly traded.
Thermedics has completed cash tender offers of $8.00 and $15.50 per share
for Thermedics Detection and Thermo Sentron, respectively, in order to bring its
and the Company's collective ownership of these subsidiaries 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 has ceased to be publicly
traded.
The Company has completed exchange offers for Thermo Instrument and
Thermedics in which shares of Company common stock were offered to Thermo
Instrument and Thermedics shareholders in exchange for their shares in order to
bring the Company's ownership in each of these subsidiaries 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 and the exchange ratio for
Thermedics was 0.45 shares of Company common stock for each share of Thermedics
common stock. Subsequently, Thermo Instrument and Thermedics were spun into the
Company through short-form mergers at the same exchange ratios that were offered
in the exchange offers and their common stock has 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. Following the merger, the common
stock of Thermo Ecotek ceased to be publicly traded. Although it is no longer a
core business under the reorganization plan, Thermo Ecotek will remain within
the Company while the Company continues to evaluate how to best exit the
business while maximizing shareholder value.
20
THERMO ELECTRON CORPORATION
9. Reorganization and Discontinued Operations (continued)
As a result of the completion of the mergers with Thermo Instrument,
Thermedics, and Thermo Ecotek, the Company issued 18.3 million shares of its
common stock valued at $380.7 million.
As a result of the completion of the exchange offers for Thermo
Instrument, Thermedics, Thermo Ecotek, ThermoLase, ThermoTrex Corporation, and
Thermo TerraTech Inc., $790.2 million principal amount of subordinated
convertible obligations of these subsidiaries became subordinated obligations
convertible into Company common stock. In addition, the stock options of the
subsidiaries were converted into stock options that are exercisable into 14.6
million shares of Company common stock. As a result of the completion of the
cash tender offers and other repurchases, exchange offers, and stock option
conversions described above, the Company has recorded an increase in cost in
excess of net assets of acquired companies of approximately $410 million as of
September 30, 2000. This asset is being amortized principally over 40 years.
Discontinued Operations
The Company has completed its 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. Following the merger, the common stock of Thermo TerraTech ceased to be
publicly traded.
The Company has completed its 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. Following
the merger, the common stock of ThermoLase ceased to be publicly traded. In
addition, under the agreement, units of ThermoLase were modified so that each
unit consists of a fractional share of Company common stock, which is redeemable
in April 2001 for $20.25.
The Company has completed its 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. Following the merger,
the common stock of ThermoTrex ceased to be publicly traded.
The Company has completed its 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 ThermoRetec and Randers Killam has ceased to be
publicly traded.
As a result of the completion of the mergers with Thermo TerraTech,
ThermoLase, and ThermoTrex, the Company issued 4.3 million shares of its common
stock valued at $68.0 million.
The spinoffs of Thermo Fibertek and the medical products company will
require a favorable ruling by the Internal Revenue Service regarding tax
treatment of the transactions, review by the SEC of necessary filings related to
the medical products company, final Company Board of Directors actions, and
other customary conditions.
Discontinued Operations
The Company has also announced its intention to sell several of its
businesses. These businesses, together with certain businesses to be spun off,
constitute the Company's former Biomedical and Emerging Technologies and
Resource Recovery segments as well as the Company's environmental businesses and
Thermo Power Corporation. In accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 30 concerning reporting the effects
21
THERMO ELECTRON CORPORATION
9. Reorganization and Discontinued Operations (continued)
of disposal of a segment of a business, the Company has classified the results
of these businesses, as well as the results of the businesses being spun off as
dividends (collectively, "the discontinued businesses"), as discontinued in the
accompanying statement of operations. In addition, the net assets of these
businesses were classified as net assets of discontinued operations in the
accompanying balance sheet. Current net assets of discontinued operations
primarily consist of cash, inventories, and accounts receivable, net of certain
liabilities, primarily accrued expenses and accounts payable. Long-term net
assets of discontinued operations primarily consist of machinery and equipment
and cost in excess of net assets of acquired companies. In addition, long-term
net assets of discontinued operations reflect subordinated convertible
debentures of Thermo Cardiosystems Inc. and Thermo Fibertek.
Summary operating results of the discontinued businesses were as follows:
Three Nine
Months Months
Ended Ended
October 2, October 2,
(In thousands) 1999 1999
- ----------------------------------------------------------------------------- ---------- ----------
Revenues $ 452,978 $1,366,940
Costs and Expenses 442,333 1,581,334
---------- ----------
Income (Loss) from Discontinued Operations Before Income Taxes and
Minority Interest 10,645 (214,394)
Income Tax (Provision) Benefit (5,820) 32,888
Minority Interest Income 92 47,816
---------- ----------
Income (Loss) from Discontinued Operations $ 4,917 $ (133,690)
========== ==========
During the third quarter and first nine months of 2000, the Company's
discontinued operations had revenues of $359.1 million and $1,164.8 million,
respectively, and a net loss of $31.8 million and net income of $5.2 million,
respectively. During the first nine months of 2000, the discontinued operations
received proceeds of $202.0 million, net of cash divested, from the sale of
businesses. While there can be no assurance as to the timing of the sale of any
particular business, the Company expects to complete the sale of most of the
remaining businesses by the first quarter of 2001. The Company expects to
complete the spinoffs of Thermo Fibertek and the medical products company in
2001.
10. Recent Accounting Pronouncement
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101,
"Revenue Recognition in Financial Statements." SAB 101 includes requirements for
recording shipments as revenue when the terms of the sale include customer
acceptance provisions or an obligation of the seller to install the product. In
such instances, SAB 101 may require that revenue recognition occur at completion
of installation and/or upon customer acceptance. SAB 101 requires that companies
conform their revenue recognition practices to the requirements therein no later
than the fourth quarter of calendar 2000 through recording a cumulative net of
tax effect of the change in accounting as of January 2, 2000. The Company has
not yet completed the analysis to determine the effect that SAB 101 will have on
its financial statements.
22
THERMO ELECTRON CORPORATION
11. Sale of Business
On July 14, 2000, Thermo Instrument completed the sale of its wholly owned
Spectra Precision businesses to Trimble Navigation Limited for approximately
$214 million in cash and $80 million in seller debt financing, subject to a
post-closing adjustment. The note from the buyer calls for repayment in two
equal annual installments beginning in July 2001 and carries interest at 10% per
annum. The note has provisions that require earlier repayment under certain
conditions. Spectra Precision, part of the Measurement and Control segment, was
acquired in February 1999 as part of Spectra-Physics and provides the
construction, surveying, and heavy machine industries with precision positioning
equipment. These businesses were sold as part of an effort to focus on
potentially higher-growth opportunities in the Life Sciences and Optical
Technologies segments.
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. 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 "Risk Factors" in the
Company's Amendment No. 5 to Registration Statement on Form S-4 [Reg. No.
333-90661], filed with the Securities and Exchange Commission on August 23,
2000.
Results of Operations
Third Quarter 2000 Compared With Third Quarter 1999
- ---------------------------------------------------
Continuing Operations
Sales in the third quarter of 2000 were $581.0 million, a decrease of
$43.3 million from the third quarter of 1999. Excluding the results of the Power
Generation segment, for which the Company is evaluating alternatives for exiting
this business, revenues decreased $26.2 million. Excluding the effect of
acquisitions, divestitures, foreign currency translation, and the results of the
Power Generation segment, revenues increased $56.3 million, or 11%.
Operating income was $120.0 million in 2000, compared with $77.6 million
in 1999. Segment income, which is operating income before corporate charges,
increased to $132.8 million in 2000 from $84.7 million in 1999. Operating and
segment income in the third quarter of 2000 were affected by gain on the sale of
businesses, net, and charges for restructuring actions, inventory provisions,
and impairment of an equity method investment (Note 8). Excluding these unusual
items, which totaled income of $61.0 million and $7.3 million in 2000 and 1999,
respectively, segment income decreased to $71.8 million in 2000 from $77.4
million in 1999. The unusual items in both periods are discussed below.
Excluding the results of the Power Generation segment and the unusual items,
segment income decreased slightly to $63.1 million in 2000 from $63.4 million in
1999 and segment income margin (segment income divided by revenues) improved to
11.5% in 2000 from 11.1% in 1999. Segment income was affected by the inclusion
of $5.6 million of income in the 1999 period from businesses divested in 2000
and higher amortization expense in the 2000 period, substantially offset by
higher profitability in certain business units. The purchase of the minority
interests of several subsidiaries that were previously publicly traded resulted
in an increase in cost in excess of net assets of acquired companies and $2.9
million of incremental amortization expense in 2000 (Note 9).
23
THERMO ELECTRON CORPORATION
Third Quarter 2000 Compared With Third Quarter 1999 (continued)
- ---------------------------------------------------
During the third quarter of 2000, the Company moved its spectroscopy and
certain other businesses from the Optical Technologies segment to the
Measurement and Control segment due to an organizational change. Prior periods
have been restated to conform to this presentation. The restructuring actions
undertaken in the third quarter of 2000 are expected to be substantially
completed by the second quarter of 2001. These actions are expected to result in
annualized savings of approximately $5 million, $2 million, $4 million, and $2
million in the Life Sciences, Optical Technologies, and Measurement and Control
segments and corporate office, respectively, generally beginning in 2001.
Life Sciences
- -------------
Sales in the Life Sciences segment increased $5.6 million to $191.0
million in the third quarter of 2000. Sales increased $2.0 million due to
acquisitions. The unfavorable effects of currency translation, due to the
strengthening of the U.S. dollar relative to foreign currencies in countries in
which the segment operates, resulted in an $11.4 million decrease in revenues in
2000. Excluding the effect of acquisitions and currency translation, revenues
increased $15.0 million, or 8%. Sales of clinical diagnostic products increased
$6.1 million, reflecting higher demand for clinical chemistry analyzers and
reagents. Sales of mass spectrometers increased $5.6 million, primarily due to
strong sales in Japan and increased demand for high-end instruments used in
proteomics, offset by reduced demand for lower-priced products. Sales of
controlled-environment laboratory equipment increased $4.8 million due to
expanding market share. These increases were offset in part by lower revenues
from laboratory information management systems. Revenues from laboratory
information management systems decreased due to lower demand that the Company
believes is attributable in part to completion of year-2000 compliance projects
in 1999.
Segment income margin decreased to 5.2% in 2000 from 14.7% in 1999,
primarily due to restructuring and related actions in 2000. Excluding inventory
provisions and restructuring and unusual costs of $16.2 million in 2000 and
unusual income of $0.3 million in 1999, segment income margin was 13.7% in 2000
and 14.5% in 1999. The decrease in segment income margin was primarily due to an
increase in amortization of cost in excess of net assets of acquired companies
as a result of the purchase of the minority interests of previously public
subsidiaries. Excluding the additional amortization expense and the
restructuring and unusual items, segment income margin was 14.4% in 2000. Lower
profitability from a decrease in sales of laboratory information management
systems was offset in part by improved results at other businesses, primarily
due to an increase in revenues. The restructuring and unusual costs in 2000
include $8.4 million of charges to cost of revenues, primarily for discontinued
product lines; $6.4 million of cash costs, primarily for severance and
facilities closures; and $1.4 million of asset writedowns at a small business
unit that was closed and for abandoned facilities.
Optical Technologies
- --------------------
Sales in the Optical Technologies segment increased $27.0 million to
$126.6 million in the third quarter of 2000. Sales increased $0.3 million due to
acquisitions. The unfavorable effects of currency translation, due to the
strengthening of the U.S. dollar relative to foreign currencies in countries in
which the segment operates, resulted in a decrease in revenues of $4.5 million
in 2000. Excluding the effect of acquisitions and currency translation, revenues
increased $31.2 million, or 32%. The increase in revenues was due in part to
$14.1 million of increased demand from manufacturers of computers and
microelectronics for semiconductor-based lasers as well as $9.0 million of
higher revenues from temperature-control systems due to an increase in demand
from the semiconductor industry. Revenues from photonics products increased $4.4
million, primarily due to strong demand for diffraction gratings for lithography
and telecommunication devices. In addition, increased demand for molecular beam
epitaxy systems contributed to higher revenues. The growth and profitability of
this segment is, in part, dependent on the cyclical nature of the semiconductor
industry, which is currently in a period of strong growth.
24
THERMO ELECTRON CORPORATION
Third Quarter 2000 Compared With Third Quarter 1999 (continued)
- ---------------------------------------------------
Segment income margin decreased to 3.8% in 2000 from 5.7% in 1999,
primarily due to restructuring and other charges. Excluding inventory provisions
and restructuring and unusual costs of $6.3 million and $0.3 million in 2000 and
1999, respectively, segment income margin increased to 8.8% in 2000 from 6.0% in
1999. The increase in segment income margin was primarily due to increased
sales. The restructuring and unusual charges in 2000 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; $1.0 million of cash costs for severance and facility exit costs;
and $0.9 million primarily to reduce the carrying value of a small business unit
that is held for sale to estimated disposal value. The unusual charges in 1999
included exit costs related to completion of the segment's 1998 restructuring
plan.
Measurement and Control
- -----------------------
Sales in the Measurement and Control segment decreased $61.8 million to
$233.6 million in the third quarter of 2000. Sales decreased $58.2 million due
to divestitures, net of an acquisition. The divestitures primarily included the
segment's Spectra Precision businesses in July 2000 and Nicolet Imaging Systems
(NIS) and Sierra Research and Technology, Inc. (SRT) in March 2000. The
unfavorable effects of currency translation, due to the strengthening of the
U.S. dollar relative to foreign currencies in countries in which the segment
operates, resulted in a decrease in revenues of $10.7 million in 2000. Excluding
the effect of divestitures and currency translation, revenues increased $7.0
million, or 3%. The increase in revenues included $2.8 million from quality
control systems used by raw materials processors following depressed results in
1999, $2.6 million from process instruments used in the natural gas industry,
which is benefiting from higher gas prices, and $2.0 million from environmental
monitoring equipment.
Spectra Precision, NIS, and SRT were sold as part of an effort to focus on
potentially higher-growth opportunities in the Life Sciences and Optical
Technologies segments. In 1999, these businesses had aggregate revenues of
$226.4 million and segment income of $19.0 million. In addition, this segment is
holding several units for sale including its power electronics and test
equipment businesses and units that provide the oil and gas industry with
wellhead safety and control products. These businesses are cyclical, noncore
units, and the segment expects the divestitures to be completed by late 2000 or
early 2001. In 1999, these businesses had aggregate revenues of $132.2 million
and segment income before restructuring and unusual charges of $2.9 million.
Segment income margin increased to 46.9% in 2000 from 9.6% in 1999,
primarily due to unusual income, net, in 2000. Segment income margin, excluding
restructuring costs, inventory provisions, and unusual income, net, of $83.7
million in 2000, and inventory provisions and restructuring costs of $2.0
million in 1999, increased to 11.1% in 2000 from 10.3% in 1999. The increase in
segment income margin resulted primarily from higher revenues at certain of the
businesses discussed above. The unusual income, net, in 2000 primarily
represents a net gain of $115.4 million on the sale of two businesses, primarily
Spectra Precision, and Spectra Precision's operating loss of $1.7 million in the
third quarter of 2000 prior to its sale; asset writedowns of $16.6 million to
reduce the carrying value of businesses held for sale to estimated disposal
value and for abandoned facilities; charges to cost of revenues of $8.0 million,
primarily for discontinued product lines; and $5.4 million of cash costs,
primarily for severance and consolidation of facilities.
Power Generation
- ----------------
Sales in the Power Generation segment, which consists of the Company's
Thermo Ecotek subsidiary, decreased $17.2 million to $34.3 million in the third
quarter of 2000. Revenues decreased $13.7 million due to the expiration or
negotiated termination of fixed-price contracts for the sale of power at Thermo
Ecotek's principal California plants and a facility in Maine. In 1999, Thermo
Ecotek had $3.7 million of revenues from peak-period operation of a newly
acquired facility in California. In 2000, Thermo Ecotek recorded this facility's
revenues as a reduction of construction cost due to commencement of a major
expansion project. In addition, Thermo Ecotek had $1.1 million of developer fee
revenue in 1999 associated with the transfer of rights to a power-sales
agreement to a third party. These decreases
25
THERMO ELECTRON CORPORATION
Third Quarter 2000 Compared With Third Quarter 1999 (continued)
- ---------------------------------------------------
were offset in part by $1.6 million of higher revenues from 1999 acquisitions.
As noted below, the periods during which Thermo Ecotek received fixed rates for
power at its four principal California facilities ended in 1999. The expiration
or negotiated termination of fixed-price power-sales agreements has had and will
continue to have a significant adverse effect on Thermo Ecotek's revenues and
profitability, as discussed below.
Segment income margin was 24.8% in 2000 and 45.2% in 1999 and decreased
primarily due to unusual income, net, in 1999. Excluding restructuring and
unusual costs of $0.2 million in 2000 and restructuring and unusual income, net,
of $9.3 million in 1999, segment income margin was 25.3% in 2000 and 27.2% in
1999. The decrease in segment income margin resulted in part from $3.6 million
of lower profitability at the Delano plants in California due to the expiration
or termination of fixed-price contract periods. In addition, Thermo Ecotek
established an accounts receivable reserve of $1.5 million at its plant in
Germany due to financial difficulties at one of its customers. These decreases
were offset in part by $3.1 million of higher profitability at the Mendota
plant, which became fully depreciated in 1999, and a $0.5 million reduction in
operating losses as a result of the closure of Thermo Ecotek's
coal-beneficiation facility in mid-1999 and its subsequent sale. In addition,
Thermo Ecotek's natural gas operations operated profitably in 2000, compared
with a loss in 1999. The restructuring and unusual costs in 2000 represent cash
costs for employee retention. The unusual income, net, in 1999 included a $13.5
million gain on the termination of a power-sales agreement, offset in part by a
$2.8 million charge for a dispute with a utility customer and $1.4 million of
asset writeoffs.
The power-sales agreements for Thermo Ecotek's Mendota, Woodland, and
Delano plants in California are so-called standard offer #4 (SO#4) contracts,
which required Pacific Gas & Electric (PG&E), in the case of Mendota and
Woodland, and Southern California Edison (SCE), in the case of the Delano
facilities, to purchase the power output of the projects at fixed rates through
specified periods. Thereafter, the utility pays a rate based upon the costs that
would have otherwise been incurred by the purchasing utilities in generating
their own electricity or in purchasing it from other sources (avoided cost).
Avoided cost rates are currently substantially lower than the rates Thermo
Ecotek received under the fixed-rate portions of its contracts and are expected
to remain so for the foreseeable future. PG&E commenced paying for power
purchased from the Mendota and Woodland facilities at avoided cost rates
effective in July and August 1999, respectively. The power-sales agreement with
SCE for the Delano facilities called for fixed contract rates through September
2000. In expectation of a decline in rates at its Delano facilities, Thermo
Ecotek reached an agreement in May 1999 to terminate its power-sales agreement,
effective December 31, 1999. During the first quarter of 2000, Thermo Ecotek
decided that it was uneconomical to operate the Delano facilities in nonpeak
periods following the termination of their power-sales agreement. The plants
suspended operations in March 2000 and commenced operations again in June 2000
for the summer peak period. Due to improved economics resulting in part from
certain California tax incentives established to encourage operation of biomass
plants, the Delano facilities have continued to operate following the end of the
peak summer period and currently expect to operate for the foreseeable future on
a seasonal basis. The California facilities affected by the change from fixed
contract to avoided cost rates had aggregate revenues and operating income in
1999 of $105.6 million and $30.4 million, respectively. If Thermo Ecotek had
been paid avoided cost rates for all of 1999 at its four principal California
plants, 1999 revenues would have been reduced by approximately $64 million.
Other Expense, Net
- ------------------
The Company reported other expense, net, of $35.8 million and $14.7
million in the third quarter of 2000 and 1999, respectively (Note 3). Other
expense, net, includes interest income, interest expense, equity in income
(losses) of unconsolidated subsidiaries, gain on investments, net, and other
income (expense), net. Interest income was unchanged at $10.1 million in 2000
and 1999. Interest income decreased due to the use of cash for the purchase of
securities of the Company's majority-owned subsidiaries, offset by interest
income on proceeds from divestitures and a note receivable from the buyer of the
Spectra Precision businesses. Interest expense decreased to $20.0 million in
2000 from $25.0 million in 1999, as a result of the maturity and repurchase of
Company and subsidiary debentures in 1999 and 2000.
26
THERMO ELECTRON CORPORATION
Third Quarter 2000 Compared With Third Quarter 1999 (continued)
- ---------------------------------------------------
The Company incurred a net loss of $26.0 million in 2000 from its equity
in the results of unconsolidated subsidiaries, primarily $26.1 million related
to its investment in FLIR Systems, Inc. The Company recorded a write-down of
$23.7 million in the carrying value of its investment in FLIR due to a decline
in the market value of FLIR shares that the Company deemed other than temporary.
The Company also recorded a $2.4 million charge as its pro rata share of FLIR's
results. The Company reports its pro rata share of FLIR's results on a
one-quarter lag. During 2000, gain on investments, net, was $0.2 million,
compared with $1.7 million in 1999. In 2000, other expense, net, also includes
$0.1 million of net currency losses, including $0.6 million of gains resulting
from hedging activities at SPLI, which elected early adoption of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities."
Income Taxes
- ------------
The Company's effective tax rate was 84% and 39% in the third quarter of
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 the gain and the tax
effect of restructuring and unusual costs, the effective tax rate was 39% and
40% in 2000 and 1999, 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 cost in
excess of net assets of acquired companies.
Minority Interest Expense
- -------------------------
The Company recorded minority interest expense of $0.4 million and $6.8
million in the third quarter of 2000 and 1999, respectively, representing
minority shareholders' allocable share of subsidiary earnings or losses.
Minority interest expense decreased due to the purchase of the minority interest
in most of the Company's previously public subsidiaries.
Income from Continuing Operations
- ---------------------------------
Income from continuing operations was $13.5 million in 2000, compared with
$31.4 million in 1999. Results were affected by restructuring costs and unusual
items, as well as the significant tax provision in 2000 on a gain on the sale of
a business, discussed above.
Currency Exchange Rates
- -----------------------
The Company's export sales to Europe totaled 32% of revenues in 1999.
During the 12 months ended October 31, 2000, the Euro declined in value against
the U.S. dollar by 19%. As the Euro declines in value, U.S. manufactured goods
become more costly to customers in Europe, and European-based manufacturers
become more price competitive. The Company believes that its growth in exports
to Europe in 2000 has been adversely affected by the weakness in the Euro.
Continued weakness in the Euro could adversely affect the Company's revenues and
operating results.
Litigation
- ----------
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, SPLI has been sued for patent
infringement by Rockwell International Corp. The suit claims that SPLI infringes
a patent for the manufacture of a film used in semiconductor applications. The
Company intends to vigorously defend against these claims. While the Company can
give no assurance that it will prevail in these lawsuits, it believes that
resolution of this litigation will not have a material adverse effect on the
Company's financial position, although unfavorable outcomes could have a
material adverse effect on the Company's results of operations or cash flow in
the quarter or annual period in which the resolution occurs.
27
THERMO ELECTRON CORPORATION
Third Quarter 2000 Compared With Third Quarter 1999 (continued)
- ---------------------------------------------------
Discontinued Operations
The Company's discontinued operations had income of $4.9 million in the
third quarter of 1999, net of taxes and minority interest. While the Company is
not currently aware of any known trends, events, or uncertainties involving
discontinued operations, it is reasonably possible that expected proceeds from
the sale of businesses could differ materially from the amounts estimated. Any
difference from the amounts recorded would be reported as an adjustment to the
loss on disposal of discontinued operations that was recorded in 1999.
First Nine Months 2000 Compared With First Nine Months 1999
- -----------------------------------------------------------
Continuing Operations
Sales in the first nine months of 2000 were $1.79 billion, a decrease of
$22.8 million over the first nine months of 1999. Excluding the results of the
Power Generation segment, for which the Company is evaluating alternatives for
exiting this business, revenues increased $28.5 million. Excluding the effect of
acquisitions, divestitures, foreign currency translation, and the results of the
Power Generation segment, revenues increased $99.5 million, or 7%.
Operating income was $240.6 million in 2000, compared with $32.9 million
in 1999. Segment income increased to $273.3 million in 2000 from $56.8 million
in 1999. The 2000 period includes significant gains on the sale of businesses,
inventory provisions, and restructuring and related costs. The 1999 period
included significant restructuring and related costs. Excluding unusual items
totaling $76.2 million of income in 2000 and $156.2 million of costs in 1999,
segment income decreased to $197.1 million in 2000 from $213.0 million in 1999.
The restructuring costs, inventory provisions, and unusual items in both periods
are discussed below. Excluding the results of the Power Generation segment and
the unusual items, segment income decreased slightly to $183.4 million in 2000
from $185.9 million in 1999, due to the inclusion in 1999 of $6.8 million of
income from businesses subsequently divested and $2.9 million of incremental
amortization expense resulting from the purchase of the minority interests of
previously public subsidiaries. These decreases were offset in part by higher
profitability at certain units.
Life Sciences
- -------------
Sales in the Life Sciences segment increased $9.2 million to $568.9
million in the first nine months of 2000. Sales increased $11.0 million due to
acquisitions. The unfavorable effects of currency translation, due to the
strengthening of the U.S. dollar relative to foreign currencies in countries in
which the segment operates, resulted in a decrease in revenues of $26.7 million
in 2000. Excluding the effect of acquisitions and currency translation, revenues
increased $24.9 million, or 4%. Sales of clinical diagnostic products increased
$10.1 million due to higher demand for clinical chemistry analyzers and reagents
and point of care testing products. Increased demand for mass spectrometers
contributed $8.4 million of higher revenues, due in part to strong sales in
Japan. Sales increased $6.7 million due to higher demand for
controlled-environment laboratory equipment. In addition, an increase in
revenues from biosciences products due to higher demand for the segment's
immunoassay testing and Multiblock deoxyribonucleic (DNA) amplification products
was offset in part by lower revenues from laboratory information management
systems due to completion of year-2000 compliance projects in 1999.
Segment income margin decreased to 10.9% in 2000 from 14.9% in 1999. The
segment's margin decreased primarily due to restructuring and related actions in
2000. Excluding inventory provisions and restructuring and unusual costs,
segment income margin decreased to 13.8% in 2000 from 14.9% 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 expansion of the sales and service organization and
consolidation of the principal operating units of the segment's biosciences
products business and $1.3 million of higher amortization expense following the
purchase of the minority interests of previously public subsidiaries. The
restructuring and unusual costs are discussed in the results of operations for
the third quarter.
28
THERMO ELECTRON CORPORATION
First Nine Months 2000 Compared With First Nine Months 1999 (continued)
- -----------------------------------------------------------
Optical Technologies
- --------------------
Sales in the Optical Technologies segment increased $67.8 million to
$347.5 million in the first nine months of 2000. Sales increased $18.9 million
due to acquisitions, primarily the acquisition of SPLI, in which the segment
acquired a majority interest on February 22, 1999. The unfavorable effects of
currency translation, due to the strengthening of the U.S. dollar relative to
foreign currencies in countries in which the segment operates, resulted in a
decrease in revenues of $8.7 million in 2000. Excluding the effect of
acquisitions and currency translation, revenues increased $57.6 million, or 22%.
Sales of semiconductor-based lasers increased $21.6 million due to higher demand
from computer and microelectronic manufacturers. Sales of temperature-control
systems increased $18.6 million due to higher revenues in 2000 as a result of
strong demand from the semiconductor industry. Revenues from the sale of
photonics products increased $12.9 million 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 6.4% in 2000 and 6.3% in 1999. Excluding
inventory provisions and restructuring and unusual costs of $6.3 million and
$4.3 million in 2000 and 1999, respectively, segment income margin increased to
8.3% in 2000 from 7.8% in 1999. Segment income margin increased primarily due to
higher revenues. SPLI had slightly better than breakeven results in 2000 due to
research and development costs totaling 13.6% of revenues as it increases
initiatives in telecommunications. The restructuring and unusual costs in 2000
are discussed in the results of operations for the third quarter. The
restructuring and unusual costs in 1999 included $3.2 million of charges to cost
of revenues for the sale of inventories revalued at the date of acquisition and
$1.1 million of facility closing costs and severance associated with a
restructuring plan undertaken in 1998 and completed in 1999.
Measurement and Control
- -----------------------
Sales in the Measurement and Control segment decreased $54.2 million to
$799.8 million in the first nine months of 2000. Sales decreased $37.7 million
due to divestitures, net of acquisitions. The unfavorable effects of currency
translation, due to the strengthening of the U.S. dollar relative to foreign
currencies in countries in which the segment operates, resulted in a decrease in
revenues of $27.9 million in 2000. Excluding the effect of acquisitions,
divestitures, and currency translation, revenues increased by $11.5 million, or
2%. Revenues from the sale of spectroscopy instruments increased $6.6 million
due to higher demand. Revenues from the sale of process instruments increased
$5.9 million, primarily due to strong demand from the natural gas industry,
which is benefiting from higher gas prices. In addition, sales of environmental
monitoring equipment increased $5.3 million. These increases were offset in part
by lower sales of weighing and inspection equipment resulting from reduced
demand from the global packaged food industry. This industry is in a period of
consolidation and the Company believes that a decrease in capital spending has
resulted from uncertainty in the marketplace.
Segment income margin was 21.6% in 2000 and 5.1% in 1999 and increased
primarily due to gains on the sale of businesses. Segment income margin,
excluding inventory provisions and restructuring and unusual income, net, of
$96.5 million in 2000, and inventory provisions and restructuring and unusual
costs of $37.2 million in 1999, was 9.5% in 2000 and 1999. Higher profitability
from increased sales of process instruments and environmental monitoring
equipment was offset 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 includes gains on the sale of
businesses, net, of $127.9 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; $16.6 million of asset writedowns to reduce the carrying value of
businesses held for sale to estimated disposal value; charges to cost of
revenues of $8.0 million, primarily for discontinued product lines; $5.7 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 include
$31.0 million of restructuring charges, primarily to reduce the carrying value
of the power electronics and test equipment business to estimated disposal
value; $4.4 million of charges for the sale of inventories revalued at the date
of acquisition; and $1.9 million of inventory provisions.
29
THERMO ELECTRON CORPORATION
First Nine Months 2000 Compared With First Nine Months 1999 (continued)
- -----------------------------------------------------------
Power Generation
- ----------------
Sales in the Power Generation segment, which consists of the Company's
Thermo Ecotek subsidiary, decreased $51.3 million to $86.7 million in the first
nine months of 2000. Revenues decreased $60.5 million due to the expiration or
negotiated termination of fixed-price contracts for the sale of power at Thermo
Ecotek's principal California plants and a facility in Maine. This decrease was
offset in part by $13.1 million of higher revenues from the 1999 acquisitions of
a plant in Germany and a gas gathering and two gas storage facilities in the
United States, as well as the expansion of a facility in the Czech Republic.
Thermo Ecotek had $4.4 million of revenues from peak-period operation of a newly
acquired facility in California in 1999. In 2000, Thermo Ecotek recorded this
plant's revenues as a reduction of construction cost due to commencement of a
major expansion project. As noted in the results for the third quarter, the
periods during which Thermo Ecotek received fixed rates for power at its four
principal California facilities ended in 1999. The expiration or negotiated
termination of fixed-price power-sales agreements has had and will continue to
have a significant adverse effect on Thermo Ecotek's revenues and profitability.
Segment income margin was 18.4% in 2000 and a negative amount in 1999 due
to restructuring and unusual costs. Excluding restructuring and unusual income,
net, of $2.2 million in 2000 and restructuring and unusual costs, net, of $115.0
million in 1999, segment income margin was 15.8% in 2000 and 19.7% in 1999. The
decrease in segment income margin resulted in part from lower segment income of
$19.5 million in 2000 at Thermo Ecotek's Delano plants due to the expiration or
termination of fixed-price contract periods. This decrease was offset in part by
a $5.9 million reduction in operating losses as a result of the closure of
Thermo Ecotek's coal-beneficiation facility in mid-1999 and its subsequent sale.
Also, the addition of gas gathering and storage facilities reduced the decline
in segment income. In 2000, Thermo Ecotek recorded $2.2 million of restructuring
and unusual income, net, including a $2.7 million gain on a factoring
transaction, which represents a revision to the estimate of impairment recorded
in 1999; a $2.0 million gain on the sale of its Gorbell plant in Maine; and $0.2
million of other gains, offset in part by $1.6 million of employee severance and
retention costs and $1.1 million of costs associated with the closure of a
business. In 1999, Thermo Ecotek recorded restructuring and unusual costs, net,
of $115.0 million, primarily associated with the termination of the power-sales
agreement for the Delano plants and closure of its coal-beneficiation plant.
Other Expense, Net
- ------------------
The Company reported other expense, net, of $67.3 million and $51.9
million in the first nine months of 2000 and 1999, respectively (Note 3). Other
expense, net, includes interest income, interest expense, equity in income
(losses) of unconsolidated subsidiaries, gain on investments, net, and other
income (expense), net. Interest income decreased to $28.6 million in 2000 from
$34.3 million in 1999. The decrease resulted primarily from the use of cash for
the purchase of securities of the Company's majority-owned subsidiaries.
Interest expense decreased to $64.7 million in 2000 from $74.1 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 $41.1 million in 2000 from its equity in
the results of unconsolidated subsidiaries, primarily $41.4 million at FLIR,
including a writedown of the carrying value of the investment in FLIR to market
value. The Company reports its pro rata share of FLIR's results on a one-quarter
lag. During 2000, gain on investments, net, was $6.6 million, compared with $1.0
million in 1999. The 1999 gain on investments includes $5.7 million of charges
for impairment that was deemed other than temporary. In 2000, other income, net,
also includes $4.0 million of currency gains, primarily resulting from hedging
activities at SPLI, which elected early adoption of SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
30
THERMO ELECTRON CORPORATION
First Nine Months 2000 Compared With First Nine Months 1999 (continued)
- -----------------------------------------------------------
Income Taxes
- ------------
The Company's effective tax rate was 62% in the first nine months of 2000.
The Company recorded a tax provision of $6.7 million on a pretax loss of $19.0
million in the first nine months of 1999 due to certain nondeductible
restructuring charges. 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
tax rate in 2000 and 1999 was 39% and 38%, 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 cost in
excess of net assets of acquired companies.
Minority Interest Expense
- -------------------------
The Company recorded minority interest expense of $11.6 million and $11.1
million in the first nine months of 2000 and 1999, respectively.
Income from Continuing Operations
- ---------------------------------
Income from continuing operations was $54.0 million in 2000, compared with
a loss of $36.9 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.
Discontinued Operations
The Company's discontinued operations had a loss of $133.7 million in the
first nine months of 1999, net of taxes and minority interest.
Liquidity and Capital Resources
Consolidated working capital was $1.60 billion at September 30, 2000,
compared with $1.45 billion at January 1, 2000. Included in working capital were
cash, cash equivalents, and short-term available-for-sale investments of $755.4
million at September 30, 2000, compared with $837.3 million at January 1, 2000.
In addition, the Company had $42.3 million of long-term available-for-sale
investments at September 30, 2000, compared with $40.2 million at January 1,
2000.
Cash provided by operating activities was $114.8 million during the first
nine months of 2000, including $44.9 million from continuing operations. Cash of
$65.2 million was used to fund an increase in inventories, which was
approximately evenly distributed among the Company's three instrument segments.
The Company expects to focus renewed attention to inventory management during
the remainder of 2000 and in 2001. An increase in other current liabilities
provided $23.4 million of cash, including $7.4 million of accrued interest and
$7.3 million of accrued income taxes, due to the timing of payments. In
connection with certain restructuring actions undertaken by the Company's
continuing operations, the Company had accrued $17.0 million for restructuring
and unusual costs at September 30. The Company expects to pay $14.7 million of
this amount for severance, employee retention, and other costs through January
2002. The remaining balance of $2.3 million will be paid through the expiration
of lease obligations in 2003. In addition, at September 30, 2000, the Company
had accrued $11.4 million for acquisition expenses. Accrued acquisition expenses
includes $2.5 million of severance obligations, which the Company expects to pay
through 2001. The balance, which primarily represents abandoned-facility
payments, will be paid over the remaining terms of the leases through 2014.
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THERMO ELECTRON CORPORATION
Liquidity and Capital Resources (continued)
During the first nine months of 2000, the primary investing activities of
the Company's continuing operations, excluding available-for-sale investment
activities, included the acquisition of minority interests of subsidiaries, the
sale of businesses, and the purchase of property, plant, and equipment. The
Company's continuing operations expended an aggregate of $303.6 million to
acquire the minority interest of certain majority-owned subsidiaries (Note 9).
In the first nine months of 2000, the Company's continuing operations sold
businesses for aggregate proceeds, net of cash divested, of $253.2 million (Note
11). The Company's continuing operations expended $82.1 million for purchases of
property, plant, and equipment and $15.8 million, net of cash acquired, for
acquisitions during the first nine months of 2000. In addition, Thermo Ecotek
entered into an agreement with a bank group to factor a portion of the payments
to be received from the termination of the power-sales agreement at its Delano
facilities. Proceeds from this arrangement, together with termination payments
received prior to the factoring agreement, totaled $83.8 million. During the
first nine months of 2000, investing activities of the Company's discontinued
operations provided $217.2 million of cash, primarily representing proceeds, net
of cash divested, of $202.0 million from the sale of businesses, including the
FES division of Thermo Power Corporation, Trex Communications Corporation, the
Medical Imaging business of Trex Medical Corporation, and the Lancaster
Laboratories business of Thermo TerraTech Inc. In addition, the Company's
discontinued operations used $44.6 million to acquire the minority interest of
certain majority-owned subsidiaries and $27.3 million for the purchase of
property, plant, and equipment.
The Company's financing activities used $165.4 million of cash during the
first nine months of 2000, including $168.9 million for continuing operations.
During the first nine months of 2000, the Company expended $174.4 million for
the repayment of long-term obligations, $29.2 million to purchase shares of its
common stock and debentures, and $14.6 million to purchase debentures of certain
of the Company's majority-owned subsidiaries.
The Company has no material commitments for purchases of property, plant,
and equipment and expects that for the remainder of 2000, such expenditures will
approximate the current level of expenditures.
The Company believes that its existing resources are sufficient to meet
the working capital requirements of its existing businesses for the foreseeable
future, including at least the next 24 months.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company's exposure to market risk from changes in interest rates,
foreign currency exchange rates, and equity prices has not changed materially
from its exposure at year-end 1999.
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
See Exhibit Index on page immediately preceding exhibits.
(b) Reports on Form 8-K
On July 11, 2000, the Company filed a Current Report on Form 8-K with
respect to the appointment of Marijn Dekkers as chief operating officer of the
Company.
On August 4, 2000, the Company filed a Current Report on Form 8-K to
include the Company's press release issued on August 3, 2000, regarding its
financial results for the quarter ended July 1, 2000.
32
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 13th day of November 2000.
THERMO ELECTRON CORPORATION
--------------------------------------------
/s/ Theo Melas-Kyriazi
Theo Melas-Kyriazi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
33
THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger dated as of October 3, 2000, by and
among Thoratec Laboratories Corporation, Lightning Acquisition
Corp., Thermo Electron Corporation, and Thermo Cardiosystems Inc.
(filed as Exhibit 2 to Thermo Cardiosystems' Quarterly Report on
Form 10-Q for the quarter ended September 30, 2000 [File No.
1-10114] and incorporated
herein by reference).
10.1 Employment Agreement between Thermo Electron Corporation and
Marijn Dekkers.
27.1 Financial Data Schedule for the quarter ended September 30, 2000.
27.2 Restated Financial Data Schedule for the quarter ended October 2,
1999.