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 July 1, 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 July 28, 2000
----------------------------- ----------------------------
Common Stock, $1.00 par value 173,410,341
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
-----------------------------
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
<TABLE>
<CAPTION>
July 1, January 1,
<S> <C> <C>
(In thousands) 2000 2000
-------------------------------------------------------------------------------- ---------- ----------
Current Assets:
Cash and cash equivalents $ 281,174 $ 281,760
Short-term available-for-sale investments at quoted market value
(amortized cost of $292,799 and $545,639) 298,093 555,501
Accounts receivable, less allowances of $32,378 and $33,699 525,142 574,126
Inventories:
Raw materials and supplies 191,499 177,153
Work in process 72,106 66,746
Finished goods 144,823 129,242
Deferred tax asset 160,013 160,959
Other current assets 70,628 54,370
Net assets of discontinued operations (Note 9) 519,465 517,350
---------- ----------
2,262,943 2,517,207
---------- ----------
Property, Plant, and Equipment, at Cost 645,008 756,443
Less: Accumulated depreciation and amortization 212,655 245,796
---------- ----------
432,353 510,647
---------- ----------
Long-term Available-for-sale Investments, at Quoted Market Value
(amortized cost of $35,850 and $38,064) 42,598 40,165
---------- ----------
Other Assets 175,893 207,732
---------- ----------
Cost in Excess of Net Assets of Acquired Companies (Note 9) 1,583,985 1,227,335
---------- ----------
Long-term Net Assets of Discontinued Operations (Note 9) 648,747 678,756
---------- ----------
$5,146,519 $5,181,842
========== ==========
2
<PAGE>
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Investment
July 1, January 1,
(In thousands except share amounts) 2000 2000
-------------------------------------------------------------------------------- ---------- ----------
Current Liabilities:
Short-term obligations and current maturities of long-term obligations $ 145,896 $ 302,962
Advance payable to affiliates 162,162 115,009
Accounts payable 135,655 156,573
Accrued payroll and employee benefits 86,014 89,184
Accrued income taxes 55,769 85,407
Deferred revenue 51,574 47,440
Other accrued expenses (Notes 7 and 8) 254,870 269,774
---------- ----------
891,940 1,066,349
---------- ----------
Deferred Income Taxes and Other Deferred Items 159,781 163,063
---------- ----------
Long-term Obligations:
Senior convertible obligations 172,500 172,500
Senior notes 150,000 150,000
Subordinated convertible obligations (Note 4) 1,184,033 1,209,305
Other 65,055 34,169
---------- ----------
1,571,588 1,565,974
---------- ----------
Minority Interest (Note 9) 40,562 364,278
---------- ----------
Common Stock of Subsidiary Subject to Redemption (at redemption value) 7,692 7,692
---------- ----------
Shareholders' Investment:
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized; 185,626,868
and 167,432,776 shares issued 185,627 167,433
Capital in excess of par value 1,523,884 1,052,837
Retained earnings 1,083,052 1,041,968
Treasury stock at cost, 12,611,369 and 10,955,798 shares (217,797) (189,646)
Deferred compensation (6,779) (3,190)
Accumulated other comprehensive items (Note 2) (93,031) (54,916)
---------- ----------
2,474,956 2,014,486
---------- ----------
$5,146,519 $5,181,842
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
3
<PAGE>
THERMO ELECTRON CORPORATION
Consolidated Statement of Operations
(Unaudited)
Three Months Ended
----------------------
July 1, July 3,
(In thousands except per share amounts) 2000 1999
-------------------------------------------------------------------------------- --------- ---------
Revenues $ 609,482 $ 632,166
--------- ---------
Costs and Operating Expenses:
Cost of revenues 333,763 350,983
Selling, general, and administrative expenses 172,016 176,401
Research and development expenses 46,105 44,445
Restructuring and other unusual costs (income), net (Note 8) (3,685) 154,942
--------- ---------
548,199 726,771
--------- ---------
Operating Income (Loss) 61,283 (94,605)
Other Expense, Net (Note 3) (10,306) (29,196)
--------- ---------
Income (Loss) from Continuing Operations Before Income Taxes and Minority
Interest 50,977 (123,801)
Income Tax (Provision) Benefit (20,612) 35,460
Minority Interest (Expense) Income (5,104) 1,990
--------- ---------
Income (Loss) from Continuing Operations 25,261 (86,351)
Loss from Discontinued Operations (net of income taxes and minority interest
of $97,700; Note 9) - (148,837)
--------- ---------
Net Income (Loss) $ 25,261 $(235,188)
========= =========
Earnings (Loss) per Share from Continuing Operations (Note 5):
Basic $ .16 $ (.55)
========= =========
Diluted $ .16 $ (.55)
========= =========
Earnings (Loss) per Share (Note 5):
Basic $ .16 $ (1.49)
========= =========
Diluted $ .16 $ (1.49)
========= =========
Weighted Average Shares (Note 5):
Basic 156,018 158,010
========= =========
Diluted 157,767 158,010
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
4
<PAGE>
THERMO ELECTRON CORPORATION
Consolidated Statement of Operations
(Unaudited)
Six Months Ended
-----------------------
July 1, July 3,
(In thousands except per share amounts) 2000 1999
-------------------------------------------------------------------------------- ---------- ----------
Revenues $1,208,411 $1,187,916
---------- ----------
Costs and Operating Expenses:
Cost of revenues 658,946 663,095
Selling, general, and administrative expenses 345,698 330,593
Research and development expenses 94,551 82,477
Restructuring and other unusual costs (income), net (Note 8) (11,385) 156,480
---------- ----------
1,087,810 1,232,645
---------- ----------
Operating Income (Loss) 120,601 (44,729)
Other Expense, Net (Note 3) (31,478) (37,252)
---------- ----------
Income (Loss) from Continuing Operations Before Income Taxes, Minority
Interest, and Extraordinary Item 89,123 (81,981)
Income Tax (Provision) Benefit (37,340) 18,025
Minority Interest Expense (11,231) (4,326)
---------- ----------
Income (Loss) from Continuing Operations Before Extraordinary Item 40,552 (68,282)
Loss from Discontinued Operations (net of income taxes and minority
interest of $86,432; Note 9) - (138,607)
---------- ----------
Income (Loss) Before Extraordinary Item 40,552 (206,889)
Extraordinary Item (net of provision for income taxes of $333; Note 4)
532 -
---------- ----------
Net Income (Loss) $ 41,084 $ (206,889)
========== ==========
Earnings (Loss) per Share from Continuing Operations Before Extraordinary
Item (Note 5):
Basic $ .26 $ (.43)
========== ==========
Diluted $ .25 $ (.44)
========== ==========
Earnings (Loss) per Share (Note 5):
Basic $ .26 $ (1.31)
========== ==========
Diluted $ .25 $ (1.32)
========== ==========
Weighted Average Shares (Note 5):
Basic 156,416 158,028
========== ==========
Diluted 157,616 158,028
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
5
<PAGE>
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
----------------------
July 1, July 3,
(In thousands) 2000 1999
-------------------------------------------------------------------------------- --------- ---------
Operating Activities:
Net income (loss) $ 41,084 $(206,889)
Loss from discontinued operations (Note 9) - 138,607
--------- ---------
Income (loss) from continuing operations 41,084 (68,282)
Adjustments to reconcile income (loss) from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 49,923 56,309
Noncash restructuring and other unusual costs, net (Note 8) 2,342 147,319
Provision for losses on accounts receivable 2,461 3,076
Minority interest expense 11,231 4,326
Equity in losses of unconsolidated subsidiaries (Note 8) 15,062 10,751
Change in deferred income taxes 806 (52,572)
Gain on sale of businesses (Note 8) (12,480) -
(Gain) loss on investments, net (6,372) 699
Extraordinary item, net of income taxes (Note 4) (532) -
Other noncash items, net 3,793 9,259
Other unusual income (9,291) -
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable 26,611 (12,655)
Inventories (52,723) (9,777)
Other current assets (5,189) 1,350
Accounts payable (15,063) 8,856
Other current liabilities (44,225) (36,791)
--------- ---------
Net cash provided by continuing operations 7,438 61,868
Net cash provided by discontinued operations 45,048 28,266
--------- ---------
Net cash provided by operating activities 52,486 90,134
--------- ---------
Investing Activities:
Acquisition of minority interests of subsidiaries (Note 9) (295,714) (20,482)
Proceeds from sale of businesses, net of cash divested (Note 8) 44,917 -
Acquisitions, net of cash acquired (10,117) (331,374)
Refund of acquisition purchase price - 4,074
Purchases of available-for-sale investments (175,636) (378,151)
Proceeds from sale of available-for-sale investments 96,759 275,486
Proceeds from maturities of available-for-sale investments 334,021 595,009
6
<PAGE>
THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
----------------------
July 1, July 3,
(In thousands) 2000 1999
--------------------------------------------------------------------------------- --------- ---------
Investing Activities (continued):
Purchases of property, plant, and equipment $ (52,590) $ (34,473)
Proceeds from sale of property, plant, and equipment 19,583 10,169
Proceeds from termination of power-sales agreement 69,573 -
Advance from affiliates 47,153 4,139
(Increase) decrease in other assets (1,213) 10,828
Other 7,593 (5,650)
--------- ---------
Net cash provided by continuing operations 84,329 129,575
Net cash provided by (used in) discontinued operations 16,783 (46,357)
--------- ---------
Net cash provided by investing activities 101,112 83,218
--------- ---------
Financing Activities:
Net proceeds from issuance of long-term obligations 18,850 14,586
Repayment of long-term obligations (147,937) (10,671)
Net proceeds from issuance of Company and subsidiary common stock 12,328 5,516
Purchases of Company and subsidiary common stock and subordinated
convertible debentures (43,787) (105,448)
Increase (decrease) in short-term obligations 7,195 (10,384)
Other 609 (4,116)
--------- ---------
Net cash used in continuing operations (152,742) (110,517)
Net cash provided by (used in) discontinued operations 3,826 (56,489)
--------- ---------
Net cash used in financing activities (148,916) (167,006)
--------- ---------
Exchange Rate Effect on Cash of Continuing Operations (8,792) (12,759)
Exchange Rate Effect on Cash of Discontinued Operations (4,212) (3,393)
--------- ---------
Decrease in Cash and Cash Equivalents (8,322) (9,806)
Cash and Cash Equivalents at Beginning of Period 357,215 396,670
--------- ---------
348,893 386,864
Cash and Cash Equivalents of Discontinued Operations at End of Period (67,719) (92,640)
--------- ---------
Cash and Cash Equivalents at End of Period $ 281,174 $ 294,224
========= =========
Noncash Activities:
Fair value of assets of acquired companies $ 13,512 $ 571,741
Cash paid for acquired companies (10,117) (331,374)
--------- ---------
Liabilities assumed of acquired companies $ 3,395 $ 240,367
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
7
<PAGE>
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 July 1, 2000, the results of
operations for the three- and six-month periods ended July 1, 2000, and July 3,
1999, and the cash flows for the six-month periods ended July 1, 2000, and July
3, 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 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 second quarter of 2000 and 1999, the
Company had comprehensive income of $6.8 million and a comprehensive loss of
$267.5 million, respectively. During the first six months of 2000 and 1999, the
Company had comprehensive income of $8.2 million and a comprehensive loss of
$268.9 million, respectively.
</TABLE>
3. Other Expense, Net
The components of other expense, net, in the accompanying statement of
operations are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------- -------------------
July 1, July 3, July 1, July 3,
<S> <C> <C> <C> <C>
(In thousands) 2000 1999 2000 1999
------------------------------------------------------------ -------- -------- -------- --------
Interest Income $ 8,280 $ 10,048 $ 18,455 $ 24,221
Interest Expense (21,638) (24,655) (44,678) (49,112)
Equity in Losses of Unconsolidated Subsidiaries (Note 8) (1,726) (10,734) (15,062) (10,751)
Gain (Loss) on Investments, Net 2,907 (3,469) 6,372 (699)
Other Income (Expense), Net (Note 8) 1,871 (386) 3,435 (911)
-------- ------- -------- --------
$(10,306) $(29,196) $(31,478) $(37,252)
======== ======== ======== ========
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.
8
<PAGE>
THERMO ELECTRON CORPORATION
5. Earnings (Loss) per Share
Basic and diluted earnings (loss) per share were calculated as follows:
Three Months Ended Six Months Ended
--------------------- ---------------------
July 1, July 3, July 1, July 3,
(In thousands except per share amounts) 2000 1999 2000 1999
--------------------------------------------------------- --------- --------- --------- ---------
Basic
Income (Loss) from Continuing Operations Before
Extraordinary Item $ 25,261 $ (86,351) $ 40,552 $ (68,282)
Loss from Discontinued Operations - (148,837) - (138,607)
Extraordinary Item - - 532 -
--------- --------- --------- ---------
Net Income (Loss) $ 25,261 $(235,188) $ 41,084 $(206,889)
--------- --------- --------- ---------
Weighted Average Shares 156,018 158,010 156,416 158,028
--------- --------- --------- ---------
Basic Earnings (Loss) per Share:
Continuing operations before extraordinary item $ .16 $ (.55) $ .26 $ (.43)
Discontinued operations - (.94) - (.88)
Extraordinary item - - - -
--------- --------- --------- ---------
$ .16 $ (1.49) $ .26 $ (1.31)
========= ========= ========= =========
Diluted
Income (Loss) from Continuing Operations Before
Extraordinary Item $ 25,261 $ (86,351) $ 40,552 $ (68,282)
Effect of Majority-owned Subsidiaries' Dilutive
Securities - Continuing Operations (480) (651) (1,358) (1,209)
--------- --------- --------- ---------
Income (Loss) from Continuing Operations Before
Extraordinary Item Available to Common Shareholders,
as Adjusted 24,781 (87,002) 39,194 (69,491)
Loss from Discontinued Operations - (148,837) - (138,607)
Effect of Majority-owned Subsidiaries' Dilutive
Securities - Discontinued Operations - (28) - (279)
Extraordinary Item - - 532 -
--------- --------- --------- ---------
Income (Loss) Available to Common Shareholders,
as Adjusted $ 24,781 $(235,867) $ 39,726 $(208,377)
--------- --------- --------- ---------
Weighted Average Shares 156,018 158,010 156,416 158,028
Effect of Stock Options 1,749 - 1,200 -
--------- --------- --------- ---------
Weighted Average Shares, as Adjusted 157,767 158,010 157,616 158,028
--------- --------- --------- ---------
Diluted Earnings (Loss) per Share:
Continuing operations before extraordinary item $ .16 $ (.55) $ .25 $ (.44)
Discontinued operations - (.94) - (.88)
Extraordinary item - - - -
--------- --------- --------- ---------
$ .16 $ (1.49) $ .25 $ (1.32)
========= ========= ========= =========
9
<PAGE>
THERMO ELECTRON CORPORATION
5. Earnings (Loss) per Share (continued)
Options to purchase 5,642,000 and 11,952,000 shares of common stock for
the second quarter of 2000 and 1999, respectively, and 6,024,000 and 10,780,000
shares of common stock for the first six 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.
The computation of diluted earnings per share for all periods presented
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.
6. Business Segment Information
Three Months Ended Six Months Ended
---------------------- -----------------------
July 1, July 3, July 1, July 3,
(In thousands) 2000 1999 2000 1999
-------------------------------------------------------- ---------- ---------- ---------- ----------
Revenues:
Life Sciences $ 187,047 $ 192,141 $ 377,877 $ 374,273
Optical Technologies 204,637 195,961 401,442 372,782
Measurement and Control 194,550 202,139 382,594 362,637
Power Generation 26,367 45,403 52,316 86,439
Intersegment (a) (3,119) (3,478) (5,818) (8,215)
---------- ---------- ---------- ----------
$ 609,482 $ 632,166 $1,208,411 $1,187,916
========== ========== ========== ==========
Income (Loss) from Continuing Operations Before Income
Taxes, Minority Interest, and Extraordinary Item:
Life Sciences $ 23,259 $ 29,092 $ 52,266 $ 56,331
Optical Technologies (b) 20,382 18,738 50,747 35,687
Measurement and Control (c) 19,384 (18,324) 30,123 (8,751)
Power Generation (d) 4,878 (115,249) 7,421 (111,184)
---------- ---------- ---------- ----------
Total segment income (loss) (e) 67,903 (85,743) 140,557 (27,917)
Corporate and Other (f) (16,926) (38,058) (51,434) (54,064)
---------- ---------- ---------- ----------
$ 50,977 $ (123,801) $ 89,123 $ (81,981)
========== ========== ========== ==========
(a) Intersegment sales are accounted for at prices that are representative of transactions with unaffiliated
parties.
(b) Includes restructuring and other unusual income of $12.4 million in the first six months of 2000 and
restructuring and other unusual costs of $0.1 million, $0.2 million, and $1.5 million in the second
quarter of 2000 and 1999 and first six months of 1999, respectively. Also includes charges of
$1.8 million and $3.2 million in the second quarter and first six months of 1999, respectively, for
the sale of inventories revalued in connection with an acquisition.
(c) Includes restructuring and other unusual income, net, of $0.6 million and $0.4 million in the second
quarter and first six months of 2000, respectively, and restructuring and other unusual costs of
$30.1 million in the second quarter and first six months of 1999. Also includes charges of $1.2 million
and $4.4 million in the second quarter and first six months of 1999, respectively, for the sale of
inventories revalued in connection with an acquisition and inventory provisions.
(d) Includes restructuring and other unusual income, net, of $2.1 million and $2.4 million in the second
quarter and first six months of 2000, respectively, and restructuring and other unusual costs of
$124.3 million in the second quarter and first six months of 1999.
10
<PAGE>
THERMO ELECTRON CORPORATION
6. Business Segment Information (continued)
(e) Segment income is operating income before corporate charges.
(f) Includes corporate general and administrative expenses, other income and expense, and restructuring
and other unusual costs, net, of $0.3 million, $3.8 million, and $0.6 million in the second quarter
of 1999 and the first six months of 2000 and 1999, respectively. The results for the second quarter
of 2000 include restructuring and other unusual income, net, of $1.1 million.
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.
</TABLE>
A summary of the changes in accrued acquisition expenses for acquisitions
completed before and during 1997 is as follows:
<TABLE>
<CAPTION>
1997 Acquisitions
---------------------------------------
Abandonment Other
of Excess Pre-1997
<S> <C> <C> <C> <C> <C>
(In thousands) Severance Facilities Acquisitions Total
---------------------------------- --------- ----------- ------ ------------ ------
Balance at January 1, 2000 $ 23 $1,420 $ 248 $7,437 $9,128
Usage (7) (30) - (571) (608)
Currency translation (5) (79) (15) (440) (539)
------ ------ ------ ------ ------
Balance at July 1, 2000 $ 11 $1,311 $ 233 $6,426 $7,981
====== ====== ====== ====== ======
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. The amounts captioned as "other" in 1997 primarily
represent costs to exit certain joint venture arrangements.
11
<PAGE>
THERMO ELECTRON CORPORATION
7. Accrued Acquisition Expenses (continued)
</TABLE>
A summary of the changes in accrued acquisition expenses for acquisitions
completed during 1998 is as follows:
<TABLE>
<CAPTION>
Abandonment
of Excess
<S> <C> <C> <C> <C>
(In thousands) Severance Facilities Other Total
------------------------------------------------- --------- ----------- ------ ------
Balance at January 1, 2000 $ 281 $1,185 $ 83 $1,549
Usage (52) (281) (44) (377)
Decrease recorded to cost in excess of net (1) (94) (39) (134)
assets of acquired companies
Currency translation (10) (64) - (74)
------ ------ ------ ------
Balance at July 1, 2000 $ 218 $ 746 $ - $ 964
====== ====== ====== ======
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.
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 101 55 - 156
Usage (1,621) (169) (484) (2,274)
Decrease due to finalization of (404) - (20) (424)
restructuring plans, recorded as a
decrease to cost in excess of net assets
of acquired companies
Currency translation (96) (64) (41) (201)
------- ------- ------- -------
Balance at July 1, 2000 $ 3,242 $ 995 $ 1,788 $ 6,025
======= ======= ======= =======
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 through 2000. 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. Of the total reserves at
July 1, 2000, $1.9 million relates to the Spectra Precision businesses and will
not be paid as a result of the sale of these businesses (Note 11). The Company
finalized its restructuring plans for Spectra-Physics in 1999. Unresolved
matters at July 1, 2000, included completion of planned severances and
abandonment of excess facilities for other acquisitions completed in 1999. Such
matters will be resolved no later than one year from the respective acquisition
dates.
12
<PAGE>
THERMO ELECTRON CORPORATION
7. Accrued Acquisition Expenses (continued)
</TABLE>
A summary of the changes in accrued acquisition expenses for acquisitions
completed during 2000 is as follows:
<TABLE>
<CAPTION>
Abandonment
of Excess
<S> <C> <C> <C>
(In thousands) Severance Facilities Total
---------------------------------------------------------------- --------- ----------- -----
Reserves established $ 80 $ 45 $125
---- ---- ----
Balance at July 1, 2000 $ 80 $ 45 $125
==== ==== ====
8. Restructuring and Other Unusual Costs (Income), Net
</TABLE>
<TABLE>
The Company's continuing operations recorded charges (income) by segment for the second quarter of
2000 as follows:
<CAPTION>
(In thousands) Optical Measurement Power
<S> <C> <C> <C> <C> <C>
Technologies and Control Generation Corporate Total
--------------------------------- ------------ ----------- ---------- --------- -------
Restructuring and Other Unusual
Costs (Income), Net $ 53 $ (584) $(2,091) $(1,063) $(3,685)
Equity in Losses of
Unconsolidated Subsidiaries 1,838 - - - 1,838
Other Income, Net (1,757) - - - (1,757)
------- ------- ------- ------- -------
$ 134 $ (584) $(2,091) $(1,063) $(3,604)
======= ======= ======= ======= =======
The Company's continuing operations recorded charges (income) by segment
for the first six months of 2000 as follows:
(In thousands) Optical Measurement Power
Technologies and Control Generation Corporate Total
-------------------------------- ------------- ----------- ---------- --------- --------
Restructuring and Other Unusual
Costs (Income), Net $(12,423) $ (361) $ (2,403) $ 3,802 $(11,385)
Equity in Losses of
Unconsolidated Subsidiaries 15,232 - - - 15,232
Other Income, Net (3,470) - - - (3,470)
-------- -------- -------- -------- --------
$ (661) $ (361) $ (2,403) $ 3,802 $ 377
======== ======== ======== ======== ========
13
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THERMO ELECTRON CORPORATION
8. Restructuring and Other Unusual Costs (Income), Net (continued)
The components of restructuring and related costs by segment are as
follows:
Optical Technologies
--------------------
The Optical Technologies segment recorded $0.1 million of restructuring
costs in the second quarter of 2000 related to an abandoned facility. In the
first quarter of 2000, this segment recorded $12.4 million of unusual income
resulting from the sale of Thermo Instrument Systems Inc.'s Nicolet Imaging
Systems (NIS) and Sierra Research and Technology, Inc. (SRT) subsidiaries. The
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 Company has decided to
focus on growth in other sectors of the instruments market. The segment also
recorded noncash charges of $13.4 million and $1.8 million in the first and
second quarters of 2000, respectively, associated with its equity method
investment in FLIR Systems, Inc., acquired as part of the February 1999
acquisition of Spectra-Physics. The segment records FLIR's results on a
one-quarter lag. FLIR recorded significant charges in its fourth quarter of 1999
and an operating loss in the first quarter of 2000. The charges represent the
Company's pro rata share of FLIR's loss and were recorded to equity in losses of
unconsolidated subsidiaries, a component of other expense, in the accompanying
statement of operations. In addition, the Optical Technologies segment recorded
other noncash income of $1.7 million and $1.8 million in the first and second
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." The segment also
reversed $0.1 million of previously established restructuring reserves during
the first quarter of 2000.
Measurement and Control
-----------------------
The Measurement and Control segment had unusual income of $0.7 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, the Measurement and Control segment recorded $0.2 million
of restructuring and unusual costs for employee retention costs for a business
unit that was sold. The unit was part of the power electronics and test
equipment business that is held for sale. The segment expects to complete the
sale of the remaining units of this business during the second half of 2000.
Power Generation
----------------
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, 8
14
<PAGE>
THERMO ELECTRON CORPORATION
8. Restructuring and Other Unusual Costs (Income), Net (continued)
of whom were terminated in the first six months of 2000, $0.6 million of noncash
charges associated with the closing of Thermo Ecotek's gas marketing business,
and $0.1 million for employee retention costs. The gas marketing costs include a
write-off 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 $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. In addition, the Company had $1.9 million of
investment banking, legal, and consulting fees associated with its
reorganization plan. The Company also recorded $0.1 million of severance for 2
employees and $0.7 million of employee retention costs that are being accrued
ratably over the period through which the employees must work to qualify for a
payment.
The Company also recorded $4.9 million of restructuring and unusual costs
in its corporate office during the first quarter of 2000. These costs included
$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 47 employees. During the first six
months of 2000, the Company terminated 20 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.
15
<PAGE>
THERMO ELECTRON CORPORATION
8. Restructuring and Other Unusual Costs (Income), Net (continued)
Continuing Operations
Abandonment
Employee of Excess
(In thousands) Severance Retention Facilities Other Total
----------------------------------- --------- --------- ----------- ------- -------
1998 Restructuring Plans
Balance at January 1, 2000 $ 893 $ - $ 224 $ 565 $ 1,682
Costs incurred in 2000 - - 54 - 54
Usage (634) - (54) - (688)
Reserves reversed - - (84) - (84)
Currency translation (29) - (2) (32) (63)
------- -------- ------- ------- -------
Balance at July 1, 2000 $ 230 $ - $ 138 $ 533 $ 901
======= ======== ======= ======= =======
1999 Restructuring Plans
Balance at January 1, 2000 $ 3,840 $ - $ 324 $ 6,348 $10,512
Usage (2,628) - - (950) (3,578)
Reserves reversed (6) - - - (6)
Reserves of businesses sold - - (324) (3,345) (3,669)
------- -------- ------- ------- -------
Balance at July 1, 2000 $ 1,206 $ - $ - $ 2,053 $ 3,259
======= ======== ======= ======= =======
2000 Restructuring Plans
Costs incurred in 2000 (a) $ 1,135 $ 2,277 $ - $ 4,667 $ 8,079
Usage (476) (264) - (4,667) (5,407)
Currency translation - (1) - - (1)
------- -------- ------- ------- -------
Balance at July 1, 2000 $ 659 $ 2,012 $ - $ - $ 2,671
======= ======== ======= ======= =======
(a) Reflects restructuring costs of $0.3 million, $1.4 million, and $6.4 million in the Measurement and
Control and Power Generation segments and the corporate headquarters, respectively. Excludes noncash
charges of $1.2 million in the corporate headquarters. Also excludes unusual income of $12.4 million,
$0.7 million, $3.8 million, and $3.8 million in the Optical Technologies, Measurement and Control,
and Power Generation segments and the corporate headquarters, respectively.
The Company's continuing operations expect to pay accrued restructuring
costs as follows: severance, primarily in 2000; employee retention obligations,
primarily in 2001 and January 2002; abandoned-facility payments, over lease
terms expiring through 2000; and other costs, which represent fuel contract
cancellation and pension termination costs, through 2001.
16
<PAGE>
THERMO ELECTRON CORPORATION
8. Restructuring and Other Unusual Costs (Income), Net (continued)
Discontinued Operations
Abandonment
Employee of Excess
(In thousands) Severance Retention Facilities Other Total
----------------------------------- --------- --------- ----------- ------- -------
1998 Restructuring Plans
Balance at January 1, 2000 $ 198 $ - $ 1,580 $ - $ 1,778
Usage (113) - (59) - (172)
Reserves of businesses sold (34) - (666) - (700)
Currency translation (8) - - - (8)
------- ------- ------- ------- -------
Balance at July 1, 2000 $ 43 $ - $ 855 $ - $ 898
======= ======= ======= ======= =======
1999 Restructuring Plans
Balance at January 1, 2000 $ 2,682 $ - $19,000 $ 9,743 $31,425
Costs incurred in 2000 by
discontinued operations 2,097 54 411 680 3,242
Usage (1,317) (54) (635) (2,357) (4,363)
Reserves reversed (11) - (7,116) - (7,127)
Reserves of businesses sold (62) - (1,650) - (1,712)
Currency translation (80) - (134) (191) (405)
------- ------- ------- ------- -------
Balance at July 1, 2000 $ 3,309 $ - $ 9,876 $ 7,875 $21,060
======= ======= ======= ======= =======
2000 Restructuring Plans
Costs incurred in 2000 by
discontinued operations $ 99 $ 2,710 $ - $ 77 $ 2,886
Usage (99) (25) - (77) (201)
------- ------- ------- ------- -------
Balance at July 1, 2000 $ - $ 2,685 $ - $ - $ 2,685
======= ======= ======= ======= =======
The Company's ThermoLase Corporation subsidiary negotiated a favorable
resolution of certain lease obligations during the first six 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; employee retention obligations, in 2000 and 2001; abandoned-facility
payments, over lease terms expiring through 2014; and other costs, which
principally include land reclamation liabilities and contract termination costs,
primarily in 2000.
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 core business of measurement and detection
instruments. This business will consist of Thermo Instrument and its
subsidiaries, as well as Thermedics Detection Inc. and Thermo Sentron Inc. 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.
17
<PAGE>
THERMO ELECTRON CORPORATION
9. Reorganization and Discontinued Operations (continued)
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, and Thermedics Inc.
The Company also announced the terms of its previously announced repurchases of
Thermo Sentron, Thermedics Detection, and Thermo Ecotek.
During the second quarter of 2000, Thermo Instrument successfully
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, during the second quarter of 2000, and their common
stock has ceased to be publicly traded.
Thermedics has successfully 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 companies 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.
On June 30, 2000, the Company 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. In connection with these transactions, the Company issued
approximately 17.3 million shares of its common stock valued at $363.7 million.
The Company expects to issue an additional 5.2 million shares of its common
stock for the mergers of Thermo Ecotek, Thermo TerraTech Inc., ThermoTrex
Corporation, and ThermoLase, described below.
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 held. This transaction was
completed on August 10, 2000. 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.
As a result of the completion of the repurchases and exchange offers
described above, the Company has recorded an increase in cost in excess of net
assets of acquired companies of approximately $400 million as of July 1, 2000.
This asset is being amortized principally over 40 years. In addition, the stock
options of the subsidiaries were converted into stock options that are
exercisable into 13.3 million shares of Company common stock. As a result of the
completion of the exchange offers for Thermo Instrument and Thermedics, $466.9
million principal amount of subordinated convertible obligations of these
subsidiaries became subordinated obligations convertible into common stock of
the Company.
18
<PAGE>
THERMO ELECTRON CORPORATION
9. Reorganization and Discontinued Operations (continued)
Discontinued Operations
In October 1999, Thermo TerraTech entered into a definitive agreement and
plan of merger with the Company pursuant to which the Company would acquire all
of Thermo TerraTech's outstanding shares of common stock not already owned by
the Company in exchange for a number of shares of the Company's common stock to
be determined based upon the average closing price of the Company's common stock
during the 20 trading days ending five days prior to the effective date of the
merger. Under the agreement, as amended, Thermo TerraTech shareholders would
receive Company common stock valued between $7.50 and $9.25 per share of Thermo
TerraTech common stock. However, the Company may elect to terminate the
agreement if it is required to issue more than 1.8 million shares of its common
stock in this transaction. Following this merger, Thermo TerraTech's common
stock would cease to be publicly traded. The merger of Thermo TerraTech is
expected to be completed during the third quarter of 2000.
The Company successfully 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.
On August 14, 2000, the Company 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 of Company common stock 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.
On August 14, 2000, the Company 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 of Company common stock for each share of
ThermoTrex common stock. Following the merger, the common stock of ThermoTrex
ceased to be publicly traded.
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 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 the
discontinued 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.
19
<PAGE>
THERMO ELECTRON CORPORATION
9. Reorganization and Discontinued Operations (continued)
</TABLE>
Summary operating results of the discontinued businesses were as follows:
<TABLE>
<CAPTION>
Three Six
Months Months
Ended Ended
<S> <C> <C>
(In thousands) July 3,1999 July 3,1999
------------------------------------------------------------------------------ ------------ -----------
Revenues $ 460,174 $ 913,962
Costs and Expenses 706,711 1,139,001
---------- ----------
Loss from Discontinued Operations Before Income Taxes and Minority Interest (246,537) (225,039)
Income Tax Benefit 52,172 38,708
Minority Interest Income 45,528 47,724
---------- ----------
Loss from Discontinued Operations $ (148,837) $ (138,607)
========== ==========
During the second quarter and first six months of 2000, the Company's
discontinued operations had revenues of $405.0 million and $805.7 million,
respectively, and net income of $12.9 million and $37.0 million, respectively.
During the second quarter and first six months of 2000, the discontinued
operations received proceeds of $16.6 million and $105.7 million, respectively,
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 the remaining businesses by the end of 2000. The
Company expects to complete the spinoffs of Thermo Fibertek and the medical
products company by early 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
when shipments may be recorded 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 generally requires 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.
11. Subsequent Event
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%.
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.
20
<PAGE>
THERMO ELECTRON CORPORATION
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. 2 to Registration Statement on Form S-4 [Reg. No.
333-35478], filed with the Securities and Exchange Commission on June 27, 2000.
Results of Operations
Second Quarter 2000 Compared With Second Quarter 1999
-----------------------------------------------------
Continuing Operations
Sales in the second quarter of 2000 were $609.5 million, a decrease of
$22.7 million, or 4%, from the second quarter of 1999. Excluding the results of
the Power Generation segment, for which the Company is evaluating alternatives
for exiting this business, revenues decreased $3.6 million. Excluding the effect
of acquisitions, divestitures, foreign currency, and the results of the Power
Generation segment, revenues increased $22.7 million, or 4%.
Operating income was $61.3 million in 2000, compared with a loss of $94.6
million in 1999. Income from continuing operations was $25.3 million in 2000,
compared with a loss of $86.4 million in 1999. The 1999 period included
significant restructuring costs. Segment income is operating income before
corporate charges. Segment income increased to $67.9 million in 2000 from a loss
of $85.7 million in 1999. Segment income decreased to $65.3 million in 2000 from
$71.9 million in 1999, excluding restructuring and unusual income, net, of $2.6
million in 2000, restructuring and related costs of $154.7 million in 1999, and
a charge for the sale of inventories revalued at the date of acquisition and
inventory provisions of $3.0 million, also in 1999. The restructuring costs and
unusual items in both periods are discussed below. Excluding the results of the
Power Generation segment and these unusual items, segment income was relatively
flat at $62.5 million in 2000 and $62.8 million in 1999 and segment income
margin was unchanged at 10.7%.
Life Sciences
-------------
Sales from the Life Sciences segment decreased $5.1 million to $187.0
million in the second quarter of 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, decreased revenues by
$7.8 million in 2000. Sales increased $1.2 million due to acquisitions.
Excluding the effect of acquisitions and currency translation, revenues
increased by $1.5 million. Sales of biosciences products increased $4.1 million,
reflecting higher demand for immunoassay testing and Multiblock deoxyribonucleic
acid (DNA) amplification products. This increase was 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 (segment income divided by revenues) decreased to
12.4% in 2000 from 15.1% in 1999. Approximately half of the decrease in segment
income margin was due to a decrease in 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, as well as
completion of research and development and production startup costs in
connection with the launch of an automated clinical sample transportation
system.
21
<PAGE>
THERMO ELECTRON CORPORATION
Second Quarter 2000 Compared With Second Quarter 1999 (continued)
-----------------------------------------------------
Optical Technologies
--------------------
Sales from the Optical Technologies segment increased $8.7 million to
$204.6 million in the second quarter of 2000. Sales decreased $6.6 million due
to dispositions, net of acquisitions. The dispositions primarily included the
segment's Nicolet Imaging Systems (NIS) and Sierra Research and Technology, Inc.
(SRT) businesses that were sold in March 2000. These units were sold due to a
consolidation trend among manufacturers of test equipment in the markets these
businesses serve. The Company has decided to focus on growth in other sectors of
the instruments market. 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, decreased revenues by $5.7 million in 2000.
Excluding the effect of acquisitions, dispositions, and currency translation,
revenues increased $21.0 million. The increase in revenues was due in part to
$7.4 million of increased demand from original equipment manufacturers (OEM)
customers for semiconductor-based lasers as well as $4.9 million of higher sales
of physical properties products due to an increase in demand from the
semiconductor industry, which is experiencing renewed growth after a downturn in
the first half of 1999. Revenues from photonics products increased $5.5 million,
primarily due to strong demand for gratings and other optical components used in
systems for semiconductor manufacturers and in telecommunications. In addition,
higher demand for spectroscopy products was offset in part by lower sales of
test and measurement products due to competitive pressures. The Company is
considering divestiture of its test and measurement business.
Segment income margin was 10.0% in 2000 and 9.6% in 1999. Excluding
restructuring costs of $0.1 million in 2000 and restructuring and unusual
charges of $2.0 million in 1999, segment income margin decreased to 10.0% in
2000 from 10.6% in 1999. The decrease resulted from lower profitability from
spectroscopy instruments due to price competition at certain of the segment's
elemental analysis businesses. The decrease in segment income margin was offset
in part by higher profitability from increased sales of photonics and physical
properties products. The segment's spectroscopy businesses reduced headcount by
32 permanent employees and 11 temporary employees in July 2000 in an effort to
lower operating costs. This segment will incur approximately $0.4 million of
severance costs in the third quarter of 2000 as a result of this action. The
restructuring costs of $0.1 million in 2000 represents abandoned-facility costs.
The unusual charges in 1999 included a charge of $1.8 million for the sale of
inventories revalued at the date of acquisition and $0.2 million of facility
closing costs and severance associated with a restructuring plan undertaken in
1998 and completed in 1999.
Measurement and Control
-----------------------
Sales decreased $7.6 million to $194.6 million in the Measurement and
Control segment in the second quarter of 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, caused revenues
to decrease by $7.2 million in 2000. Sales decreased $0.2 million due to
divestitures, net of acquisitions. Excluding the effect of acquisitions,
divestitures, and currency translation, revenues were relatively flat,
decreasing by $0.1 million. Revenues from the sale of weighing and inspection
equipment decreased $4.8 million, primarily due to lower demand from the global
packaged food industry. This industry is in a period of consolidation and
restructuring and the Company believes that a decrease in capital spending has
resulted from uncertainty in the marketplace. This decrease was offset in part
by increases in revenues at other businesses. Higher demand resulted in
increases in revenues of environmental monitoring and compliance products of
$2.2 million and process control products of $1.3 million. In addition, revenues
from industrial products rose due to an increase in U.S. government sales during
the period at Spectra Precision. In July 2000, the Company sold its Spectra
Precision businesses (Note 11), which had been acquired in February 1999 as part
of the acquisition of Spectra-Physics AB. Spectra Precision was sold as part of
an effort to focus on potentially higher-growth opportunities in the Life
Sciences and Optical Technologies segments. In 1999, Spectra Precision had
revenues of $198.1 million and segment income of $16.8 million from the date of
its acquisition. In addition, this segment is holding its power electronics and
test equipment businesses for sale as cyclical, noncore units, and expects the
divestitures to be completed during the second half of 2000. In 1999, these
businesses had revenues of $28.2 million and a segment loss before restructuring
and unusual charges of $0.3 million.
22
<PAGE>
THERMO ELECTRON CORPORATION
Second Quarter 2000 Compared With Second Quarter 1999 (continued)
-----------------------------------------------------
Segment income margin was 10.0% in 2000 and negative 9.1% in 1999,
primarily due to restructuring and unusual charges in 1999, discussed below.
Segment income margin, excluding restructuring and unusual income, net, of $0.6
million in 2000, restructuring costs of $30.1 million in 1999, and a charge for
the sale of inventories revalued at the date of acquisition and inventory
provisions of $1.2 million, also in 1999, increased to 9.7% in 2000 from 6.4% in
1999. The increase in margin resulted primarily from improved profitability at
Spectra Precision as well as higher revenues at certain of the businesses
discussed above. Spectra Precision's results reflect the benefit of cost
reduction measures and the incremental margin on a large order that was shipped
during the second quarter. Excluding restructuring and unusual items and the
results of Spectra Precision in both periods, segment income margin was 6.8% in
2000 and 4.7% in 1999. The unusual income, net, in 2000 primarily represents a
gain on terminating a lease agreement. The restructuring costs in 1999 primarily
relate to the planned disposition of the power electronics and test equipment
businesses and were taken to adjust the carrying value of these units to
estimated disposal value.
Power Generation
----------------
Sales from the Power Generation segment, which consists of the Company's
Thermo Ecotek subsidiary, decreased $19.0 million to $26.4 million in the second
quarter of 2000. Revenues decreased $23.8 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 $5.6 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 18.5% in 2000, compared with a negative amount
in 1999, primarily as a result of restructuring charges in 1999, discussed
below. Excluding restructuring and unusual income, net, of $2.1 million in 2000,
and restructuring costs of $124.3 million in 1999, segment income margin was
10.6% in 2000 and 20.0% in 1999. The decrease in segment income margin resulted
in part from lower segment income of $10.1 million at Thermo Ecotek's Mendota
and Delano plants in California due to the expiration or termination of
fixed-price contract periods. This decrease was offset in part by a $1.4 million
reduction in operating losses as a result of the closure of Thermo Ecotek's
coal-beneficiation facility in mid-1999. In addition, Thermo Ecotek's natural
gas operations operated profitably in 2000, compared with a loss in 1999. In
2000, Thermo Ecotek factored a portion of a stream of payments it was to have
received from a utility in connection with the termination of a power-sales
agreement for its Delano plants in 1999. Thermo Ecotek realized a gain of $2.7
million on the factoring transaction, which represents a revision to the
estimate of impairment of the Delano plants recorded in 1999. In addition,
Thermo Ecotek realized a gain of $0.2 million 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 associated with the closure of its gas
marketing business, and $0.3 million of employee retention and severance costs.
In 1999, Thermo Ecotek incurred restructuring charges primarily associated with
the termination of the power-sales agreement for the Delano plants and closure
of its coal-beneficiation plant.
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
23
<PAGE>
THERMO ELECTRON CORPORATION
Second Quarter 2000 Compared With Second Quarter 1999 (continued)
-----------------------------------------------------
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, and the plants suspended operations in March 2000 and
commenced operations again in June 2000. 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, revenues would have been reduced by approximately
$64 million. In response to these declines in revenues and operating income,
Thermo Ecotek may continue to explore other options for its biomass facilities,
including disposal.
Other Expense, Net
------------------
The Company reported other expense, net, of $10.3 million and $29.2
million in the second quarter of 2000 and 1999, respectively (Note 3). Other
expense, net includes interest income, interest expense, equity in losses of
unconsolidated subsidiaries, gain (loss) on investments, net, and other income
(expense), net. Interest income decreased to $8.3 million in 2000 from $10.0
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 $21.6 million in 2000 from $24.7 million in 1999, as a
result of the maturity and repurchase of Company and subsidiary debentures in
1999 and the first quarter of 2000.
The Company incurred a loss of $1.7 million in 2000 from its equity in the
results of unconsolidated subsidiaries, primarily $1.8 million related to its
investment in FLIR Systems, Inc. In 1999, the Company recorded $11.1 million of
charges in equity in earnings of unconsolidated subsidiaries related to FLIR.
The Company reports its pro rata share of FLIR's results on a one-quarter lag.
During 2000, gain on investments, net was $2.9 million, compared with a loss of
$3.5 million in 1999. The 1999 loss on investments includes $5.7 million of
charges for impairments that were deemed other than temporary. In 2000, other
expense, net also includes $1.9 million of currency gains, including $1.7
million 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 a provision of 40% and a benefit of
29% in the second quarter of 2000 and 1999, respectively. The effective tax rate
varies from the statutory federal income tax rate in 2000 primarily due to state
income taxes and nondeductible expenses, including amortization of cost in
excess of net assets of acquired companies. The tax benefit in 1999 was below
the statutory federal income tax rate primarily due to the write-off of
nondeductible cost in excess of net assets of acquired companies.
Minority Interest Expense
-------------------------
The Company recorded minority interest expense of $5.1 million and
minority interest income of $2.0 million in the second quarter of 2000 and 1999,
respectively, representing minority shareholders' allocable share of subsidiary
earnings or losses.
Litigation
----------
The Company has recently 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
24
<PAGE>
THERMO ELECTRON CORPORATION
Second Quarter 2000 Compared With Second Quarter 1999 (continued)
-----------------------------------------------------
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.
Discontinued Operations
The Company's discontinued operations had a loss of $148.8 million in the
second 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 Six Months 2000 Compared With First Six Months 1999
---------------------------------------------------------
Continuing Operations
Sales in the first six months of 2000 were $1.21 billion, an increase of
$20.5 million over the first six months of 1999. Excluding the results of the
Power Generation segment, for which the Company is evaluating alternatives for
exiting this business, revenues increased $54.6 million. Excluding the effect of
acquisitions, divestitures, foreign currency, and the results of the Power
Generation segment, revenues increased $43.9 million, or 4%.
Operating income was $120.6 million in 2000, compared with a loss of $44.7
million in 1999. Income from continuing operations was $40.6 million in 2000,
compared with a loss of $68.3 million in 1999. Segment income increased to
$140.6 million in 2000 from a loss of $27.9 million in 1999. The 1999 period
included significant restructuring and unusual charges. Segment income decreased
to $125.4 million in 2000 from $135.6 million in 1999, excluding restructuring
and unusual income, net, of $15.2 million in 2000, restructuring and related
costs of $156.0 million in 1999, and a charge for the sale of inventories
revalued at the date of acquisition and inventory provisions of $7.6 million,
also in 1999. The restructuring costs and unusual items in both periods are
discussed below. Excluding the results of the Power Generation segment and these
unusual items, segment income decreased to $120.4 million in 2000 from $122.5
million in 1999.
Life Sciences
-------------
Sales from the Life Sciences segment increased $3.6 million to $377.9
million in the first six months of 2000. Sales increased $8.8 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, decreased revenues by $15.2 million in 2000.
Excluding the effect of acquisitions and currency translation, revenues
increased $10.0 million. Revenues from biosciences products increased $4.8
million due to higher demand for the segment's immunoassay testing and
Multiblock DNA amplification products. Revenues from analytical instruments
increased $2.7 million due to higher sales of mass spectrometers in Europe and
Asia. In addition, revenues increased $2.3 million due to higher demand for
controlled-environment laboratory equipment. These increases in revenues were
offset in part by lower revenues from laboratory information management systems
due to lower demand.
Segment income margin decreased to 13.8% in 2000 from 15.1% in 1999. The
segment's margin decreased primarily as a result of the reasons discussed in the
results for the second quarter.
25
<PAGE>
THERMO ELECTRON CORPORATION
First Six Months 2000 Compared With First Six Months 1999 (continued)
---------------------------------------------------------
Optical Technologies
--------------------
Sales from the Optical Technologies segment increased $28.7 million to
$401.4 million in the first six months of 2000. Sales increased $7.2 million due
to acquisitions, net of dispositions, primarily the acquisition of SPLI, in
which the segment acquired a majority interest on February 22, 1999. The
dispositions primarily included the segment's NIS and SRT businesses that were
sold 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, decreased revenues by $11.1 million in 2000.
Excluding the effect of acquisitions, dispositions, and currency translation,
revenues increased $32.6 million, or 10%. The segment's physical properties
businesses had $9.6 million of higher revenues in 2000 due to strong demand from
the semiconductor industry. Revenues from the sale of photonics products
increased $8.5 million as a result of strong demand for gratings and other
optical components used in systems for semiconductor manufacturers and in
telecommunications. While revenues at the segment's spectroscopy businesses
increased by $7.8 million for the six month period, price competition at certain
spectroscopy businesses caused growth to slow in the second quarter of 2000 and
the segment took restructuring actions in July 2000, as discussed in the results
for the second quarter. An increase in sales of semiconductor-based lasers of
$7.4 million also contributed to higher sales. These increases were offset in
part by continuing lower sales from test and measurement products due to reduced
demand.
Segment income margin was 12.6% in 2000 and 9.6% in 1999 and improved as a
result of a gain recorded in 2000 from the sale of businesses. Excluding unusual
income of $12.4 million in 2000 and restructuring costs of $1.5 million and a
charge for the sale of inventories revalued at the date of acquisition of $3.2
million in 1999, segment income margin decreased to 9.5% in 2000 from 10.8% in
1999. Segment income margin decreased primarily due to the reasons discussed in
the results for the second quarter. In addition, the 1999 period was favorably
affected by a high level of sales and profitability at SPLI for the six weeks of
the 1999 first quarter that it was included in the segment's results. SPLI also
increased its research and development expenses to 15% of its revenues in 2000
from 11% in the 1999 period, primarily for products in the telecommunications
market. The segment income margin for SPLI was 1.8% and 8.4% in 2000 and 1999,
respectively, excluding a charge for revalued inventories in 1999. Excluding
restructuring and unusual items and the results of SPLI from both periods,
segment income margin increased to 11.5% in 2000 from 11.2% in 1999. The unusual
income in 2000 primarily represents a gain of $12.4 million on the sale of NIS
and SRT. The restructuring costs in 1999 were primarily facility closing costs
and severance associated with a restructuring plan undertaken in 1998 and
completed in 1999.
Measurement and Control
-----------------------
Sales increased $20.0 million to $382.6 million in the Measurement and
Control segment in the first six months of 2000. Sales increased $31.4 million
due to acquisitions, net of divestitures. 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, caused revenues to
decrease by $10.2 million in 2000. Excluding the effect of acquisitions and
currency translation, revenues decreased by $1.2 million. Revenues from the sale
of weighing and inspection equipment decreased $6.5 million, primarily due to
the reason discussed in the results for the second quarter. Revenues from
industrial products and quality control systems decreased $1.8 million due to
lower demand. These decreases in revenues were offset in part by $3.8 million of
higher revenues from the sale of environmental monitoring and compliance
products due to stronger demand, and $3.3 million from the sale of process
control products following depressed results in the 1999 period.
Segment income margin was 7.9% in 2000 and negative 2.4% in 1999. Segment
income margin, excluding restructuring and unusual income, net, of $0.4 million
in 2000 and restructuring costs of $30.1 million and a charge of $4.4 million
for the sale of inventories revalued at the date of acquisition and inventory
provisions in 1999, increased to 7.8% in 2000 from 7.1% in 1999. The increase in
segment income margin resulted primarily from improved
26
<PAGE>
THERMO ELECTRON CORPORATION
First Six Months 2000 Compared With First Six Months 1999 (continued)
---------------------------------------------------------
profitability at Spectra Precision as well as higher sales at certain businesses
described above. Spectra Precision's results reflect cost reduction measures and
the incremental margin on a large order that was shipped during the period.
Excluding restructuring and unusual items and the results of Spectra Precision
from both periods, segment income margin increased to 6.3% in 2000 from 4.7% in
1999, primarily due to higher sales at certain operating units discussed above.
Restructuring costs and unusual income, net, in 2000 represents a gain on the
termination of a lease agreement, offset in part by employee retention costs for
the power electronics and test equipment businesses. The restructuring costs in
1999 primarily represent a charge to reduce the carrying value of the power
electronics and test equipment businesses to estimated disposal value.
Power Generation
----------------
Sales from the Power Generation segment, which consists of the Company's
Thermo Ecotek subsidiary, decreased $34.1 million to $52.3 million in the first
six months of 2000. Revenues decreased $46.8 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. As
noted in the results for the second 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 14.2% in 2000 and a negative amount in 1999.
Excluding restructuring and unusual income, net, of $2.4 million in 2000 and
restructuring costs of $124.3 million in 1999, segment income margin was 9.6% in
2000 and 15.2% in 1999. The decrease in segment income margin resulted in part
from lower segment income of $18.7 million in 2000 at Thermo Ecotek's Mendota
and Delano plants due to the expiration or termination of fixed-price contract
periods. This decrease was offset in part by a $5.4 million reduction in
operating losses as a result of the closure of Thermo Ecotek's
coal-beneficiation facility in mid-1999. In addition, new or expanded operations
in Europe as well as the addition of gas gathering and storage facilities
reduced the decline in segment income. In 2000, Thermo Ecotek recorded $2.4
million of restructuring and unusual income, net, including $2.1 million as
discussed in the results for the second quarter as well as a $2.0 million gain
on the sale of its Gorbell plant in Maine, offset by $1.1 million of employee
severance and retention costs and $0.6 million of costs associated with the
closure of a business. The restructuring costs in 1999 were discussed in the
results for the second quarter.
Other Expense, Net
------------------
The Company reported other expense, net, of $31.5 million and $37.3
million in the first six months of 2000 and 1999, respectively (Note 3). Other
expense, net includes interest income, interest expense, equity in losses of
unconsolidated subsidiaries, gain (loss) on investments, net, and other income
(expense), net. Interest income decreased to $18.5 million in 2000 from $24.2
million in 1999. The decrease resulted primarily from the use of cash for
acquisitions, principally Spectra-Physics, and the purchases of securities of
the Company's majority-owned subsidiaries. Interest expense decreased to $44.7
million in 2000 from $49.1 million in 1999, as a result of the maturity and
repurchase of Company and subsidiary debentures in 1999 and the first quarter of
2000.
The Company incurred a loss of $15.1 million in 2000 from its equity in
the results of unconsolidated subsidiaries, primarily $15.2 million at FLIR,
which recorded significant charges in its fourth quarter of 1999 and operating
losses in the first quarter of 2000. The Company reports its pro rata share of
FLIR's results on a one-quarter lag. During 2000, gain on investments, net was
$6.4 million, compared with a loss of $0.7 million in 1999. The 1999 loss on
investments includes $5.7 million of charges for impairment that were deemed
other than temporary. In 2000, other expense, net also includes $3.5 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."
27
<PAGE>
THERMO ELECTRON CORPORATION
First Six Months 2000 Compared With First Six Months 1999 (continued)
---------------------------------------------------------
Income Taxes
------------
The Company's effective tax rate was a provision of 42% and a benefit of
22% in the first six months of 2000 and 1999, respectively. The effective tax
rate varies from the statutory federal income tax rate in 2000 primarily due to
state income taxes and nondeductible expenses, including amortization of cost in
excess of net assets of acquired companies. The tax benefit in 1999 was below
the statutory federal income tax rate due primarily to the write-off of
nondeductible cost in excess of net assets of acquired companies.
Minority Interest Expense
-------------------------
The Company recorded minority interest expense of $11.2 million and $4.3
million in the first six months of 2000 and 1999, respectively. Minority
interest expense increased in 2000 as a result of higher subsidiary
profitability due to the absence of significant restructuring charges in 2000.
Discontinued Operations
The Company's discontinued operations had a loss of $138.6 million in the
first six months of 1999, net of taxes and minority interest.
Liquidity and Capital Resources
Consolidated working capital was $1.37 billion at July 1, 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 $579.3
million at July 1, 2000, compared with $837.3 million at January 1, 2000. In
addition, the Company had $42.6 million of long-term available-for-sale
investments at July 1, 2000, compared with $40.2 million at January 1, 2000. Of
the total $621.9 million of cash, cash equivalents, and short- and long-term
available-for-sale investments at July 1, 2000, $472.3 million was held by the
Company's majority-owned subsidiaries, and the balance was held by the Company
and its wholly owned subsidiaries.
Cash provided by operating activities was $52.5 million during the first
six months of 2000, including $7.4 million from continuing operations. Cash of
$52.7 million was used to fund an increase in inventories, primarily in the
Optical Technologies and Life Sciences segments. The Company expects to focus
renewed attention to inventory management in the second half of 2000. A decrease
in accounts receivable provided $26.6 million in cash, primarily in the Power
Generation, Optical Technologies, and Life Sciences segments due to lower sales
volume in the first six months of 2000, compared with the fourth quarter of
1999. A decrease in other current liabilities used $44.2 million of cash,
including $43 million for federal income tax payments. In connection with
certain restructuring actions undertaken by the Company's continuing operations,
the Company had accrued $6.8 million for restructuring and unusual costs at July
1, 2000, which the Company expects to pay through January 2002. In addition, at
July 1, 2000, the Company had accrued $15.1 million for acquisition expenses.
Accrued acquisition expenses includes $3.6 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.
During the first six 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 $295.7 million to
acquire the minority interest of certain majority-owned subsidiaries (Note 9).
In the first six months of 2000, the Company's majority-owned subsidiaries sold
businesses for aggregate proceeds, net of cash divested, of $44.9 million,
including Thermo Instrument's sale of NIS and SRT. On July 14, 2000, the
28
<PAGE>
THERMO ELECTRON CORPORATION
Liquidity and Capital Resources (continued)
Company's Measurement and Control segment sold its Spectra Precision businesses
for $294 million, including $214 million in cash, subject to a post-closing
adjustment (Note 11). The Company's continuing operations expended $52.6 million
for purchases of property, plant, and equipment and $10.1 million, net of cash
acquired, for acquisitions during the first six 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 $69.6 million.
During the first six months of 2000, investing activities of the Company's
discontinued operations provided $16.8 million of cash, primarily representing
proceeds, net of cash divested, of $105.7 million from the sale of businesses,
including Thermo Power Corporation's sale of its FES division and ThermoTrex
Corporation's sale of its Trex Communications subsidiary. In addition, the
Company's discontinued operations used $42.7 million to acquire the minority
interest of certain majority-owned subsidiaries, $19.7 million for the purchase
of property, plant, and equipment, and $3.0 million for acquisitions.
The Company's financing activities used $148.9 million of cash during the
first six months of 2000, including $152.7 million for continuing operations.
During the first six months of 2000, the Company expended $147.9 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.
As discussed above, a significant percentage of the Company's consolidated
cash and investments is held by subsidiaries that are not wholly owned by the
Company. The Company's ability to access assets held by its majority-owned
subsidiaries through dividends, loans, or other transactions is subject in each
instance to a fiduciary duty owed to the minority shareholders of the relevant
subsidiary. In addition, dividends received by Thermo Electron from a subsidiary
that does not consolidate with Thermo Electron for tax purposes are subject to
tax. Therefore, under certain circumstances, a portion of the Company's
consolidated cash and short-term investments may not be readily available to
Thermo Electron or certain of its subsidiaries.
The Company expects significant additional cash proceeds from the sale of
discontinued operations in 2000. The Company has received cash proceeds of $446
million for businesses sold in 2000 through August 11, 2000.
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.
29
<PAGE>
THERMO ELECTRON CORPORATION
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.
Item 4 - Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
On May 17, 2000, at the Annual Meeting of Shareholders, the shareholders elected three incumbent
directors to a three-year term expiring in 2003. The Directors elected at the meeting were: Dr. Samuel
W. Bodman III, Mr. Peter O. Crisp, and Mr. Jim P. Manzi. Dr. Bodman received 139,597,448 shares voted
in favor of his election and 1,801,204 shares voted against. Mr. Crisp received 139,563,252 shares
voted in favor of his election and 1,835,400 shares voted against. Mr. Manzi received 138,684,789
shares voted in favor of his election and 2,713,863 shares voted against. No abstentions or broker
nonvotes were recorded on the election of directors.
At the Annual Meeting, the shareholders also approved a proposal to amend
the Company's equity incentive plan to restate the limitation on the potential
size of awards to any recipient in a year provided by Section 162(m) of the
Internal Revenue Code, as amended, as follows: 124,402,735 shares were voted in
favor of the proposal, 16,409,330 shares were voted against, 586,587 shares
abstained, and no broker nonvotes were recorded on the proposal.
The shareholders did not approve a shareholder proposal that the Company
endorse the CERES Principles as follows: 9,224,137 shares were voted in favor of
the proposal, 105,315,892 shares were voted against, 8,413,461 shares abstained,
and 18,445,162 broker nonvotes were recorded on the proposal.
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 May 2, 2000, the Company filed a Current Report on Form 8-K with
respect to the Company's financial results for the quarter ended April 1,
2000.
The Company filed a Current Report on Form 8-K on June 14, 2000, to
include the Company's previously issued press release with respect to the
Company's financial results for the fiscal year and quarter ended January
1, 2000.
On June 30, 2000, the Company filed a Current Report on Form 8-K with
respect to the completion of the Company's exchange offers for its
subsidiaries, Thermo Instrument Systems Inc. and Thermedics Inc.
30
<PAGE>
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 14th day of August 2000.
THERMO ELECTRON CORPORATION
/s/ Theo Melas-Kyriazi
--------------------------------------------
Theo Melas-Kyriazi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
31
<PAGE>
THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
--------------------------------------------------------------------------------
10.1 Letter agreement dated July 10, 2000, between the Registrant and
Earl R. Lewis pertaining to his resignation.
10.2 Executive Severance Agreement dated as of January 27, 2000, by
and between the Registrant and Brian D. Holt.
27.1 Financial Data Schedule for the quarter ended July 1, 2000.
27.2 Restated Financial Data Schedule for the quarter ended July 3,
1999.
</TABLE>
