Why did net income rise so sharply in 2002 if sales declined?

Most of the increase came from non-operating and one-time items rather than core operations. Gains from selling FLIR Systems shares totaled $111.4 million, a $115.4 million net gain was recorded on discontinued operations, and restructuring costs fell from $147 million to about $59 million. Goodwill amortization also stopped under SFAS No. 142. Income from continuing operations excluding restructuring and FLIR gains rose to $164.4 million from $122.4 million, which is the cleaner comparison.

How exposed is the company to the semiconductor downturn?

Significantly, mainly through the Optical Technologies segment, which sells lasers and semiconductor test and production equipment. That segment's revenue fell 16% organically and it posted an operating loss. The Measurement and Control segment also depends in part on semiconductor, steel, and energy markets, and its revenue fell 7% organically, with temperature control hit hardest. Management expects these markets to remain weak in the near term.

Is the balance sheet in better shape after the 2002 debt and share actions?

Yes, with some caveats. Long-term obligations fell to $451.3 million from $727.5 million, and shareholders' equity increased to $2.03 billion. However, the company funded part of the debt redemption with $311.1 million of short-term notes and $292.0 million of securities-lending borrowings collateralized by investments, and it has $250 million of revolving credit available. Cash and short-term investments totaled about $875.5 million, and the company authorized an additional $100 million repurchase program in February 2003.

What risks does the company disclose that investors should weigh?

Key risks include continued cyclical weakness in semiconductor, industrial, and pharmaceutical capital spending; the possibility of goodwill impairment if the downturn persists (about $1.4 billion on the balance sheet); integration and brand-transition execution; contingent liabilities from over 60 businesses sold since 1997; and pending litigation, including the Lemelson patent suit. The company also notes that Arthur Andersen, its former auditor for 1998 to 2001, has ceased operations, which limits recourse for investors relying on those audits.

What should investors expect from the company's 2003 outlook?

The filing gives no formal revenue or earnings guidance. Management expects restructuring to be substantially complete by mid-2003, with about $6 million of additional charges, and expects capital expenditures of $55 to $60 million. It also expects lower interest income because of reduced invested cash and lower market rates, and it stated that virtually all year-end 2002 backlog should ship during 2003. Sector changes effective Q1 2003 will also change how segment results are reported.

TMO 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 7, 2003. Cited figures are marked; the original filing is the authoritative source.

Thermo Electron Corporation (NYSE: TMO) reported fiscal 2002 results in its 10-K filed March 7, 2003, with continuing operations consisting solely of three instrument sectors: Life and Laboratory Sciences, Measurement and Control, and Optical Technologies.

Revenue declined 5% to $2.086 billion, and operating income rose to $155.5 million^a from $34.2 million, though the improvement was largely driven by lower restructuring charges and the end of goodwill amortization under SFAS No. 142. Net income was $309.7 million, boosted by $111.4 million of gains from selling FLIR Systems shares and a $115.4 million net gain from discontinued operations. Income from continuing operations was $195.3 million, compared with $49.6 million a year earlier.

Excluding restructuring and FLIR gains, income from continuing operations rose to $164.4 million^b, which is the more representative measure of underlying performance. The weakness is in the core businesses. Optical Technologies (Spectra-Physics lasers and semiconductor equipment) posted an operating loss and revenue fell 16% organically amid a semiconductor downturn, and Measurement and Control revenue fell 7% organically, mainly in temperature control.

Life and Laboratory Sciences, the largest segment at $1.14 billion^c, was roughly flat, with pharmaceutical customers delaying capital purchases. Backlog fell 12% to $380.6 million. Balance sheet and capital allocation moved meaningfully.

The company redeemed about $590.7 million^d of convertible debentures, funded partly by $311.1 million of short-term notes and securities-lending borrowings, and repurchased $285.6 million of common stock. Long-term obligations fell to $451.3 million from $727.5 million, and shareholders' equity rose to $2.03 billion. The company does not pay dividends.

Management expects cost savings of about $43 million from 2002 restructuring, and it is consolidating its brands into Thermo Electron and Spectra-Physics. Investors should watch whether organic revenue recovers as semiconductor and pharmaceutical capital spending improves, and whether the company's roughly $1.4 billion of goodwill holds up if the downturn persists.

02—Key points

Key Highlights

Revenue fell 5% to $2.086 billion (about 5% organic decline), while operating income rose to $155.5 million from $34.2 million, mainly due to lower restructuring costs and the end of goodwill amortization.
Net income of $309.7 million (diluted EPS $1.73) was inflated by $111.4 million of FLIR Systems share-sale gains and a $115.4 million net gain from discontinued operations; income from continuing operations was $195.3 million.
Optical Technologies swung to an operating loss (margin of -6.5%) as semiconductor revenue dropped 16% organically; backlog in that segment fell 54% to $71.6 million, partly due to a $39.3 million accounting policy change.
Life and Laboratory Sciences grew roughly flat organically to $1.14 billion, with strength in high-end mass spectrometry offset by weaker spectroscopy and sample-preparation demand.
The company aggressively reduced leverage: it redeemed about $590.7 million of convertible debentures, cutting long-term obligations to $451.3 million from $727.5 million, and repurchased $285.6 million of common stock.
Shareholders' equity rose to $2.03 billion, and total assets were $3.65 billion, including about $1.4 billion of goodwill; management stated that goodwill was not impaired in its 2002 annual test.
The company has never paid cash dividends and does not expect to do so, retaining earnings for growth, and it is consolidating its brands and restructuring for roughly $43 million of annual savings.

03—Questions

Frequently Asked Questions

Why did net income rise so sharply in 2002 if sales declined?
Most of the increase came from non-operating and one-time items rather than core operations. Gains from selling FLIR Systems shares totaled $111.4 million, a $115.4 million net gain was recorded on discontinued operations, and restructuring costs fell from $147 million to about $59 million. Goodwill amortization also stopped under SFAS No. 142. Income from continuing operations excluding restructuring and FLIR gains rose to $164.4 million from $122.4 million, which is the cleaner comparison.
How exposed is the company to the semiconductor downturn?
Significantly, mainly through the Optical Technologies segment, which sells lasers and semiconductor test and production equipment. That segment's revenue fell 16% organically and it posted an operating loss. The Measurement and Control segment also depends in part on semiconductor, steel, and energy markets, and its revenue fell 7% organically, with temperature control hit hardest. Management expects these markets to remain weak in the near term.
Is the balance sheet in better shape after the 2002 debt and share actions?
Yes, with some caveats. Long-term obligations fell to $451.3 million from $727.5 million, and shareholders' equity increased to $2.03 billion. However, the company funded part of the debt redemption with $311.1 million of short-term notes and $292.0 million of securities-lending borrowings collateralized by investments, and it has $250 million of revolving credit available. Cash and short-term investments totaled about $875.5 million, and the company authorized an additional $100 million repurchase program in February 2003.
What risks does the company disclose that investors should weigh?
Key risks include continued cyclical weakness in semiconductor, industrial, and pharmaceutical capital spending; the possibility of goodwill impairment if the downturn persists (about $1.4 billion on the balance sheet); integration and brand-transition execution; contingent liabilities from over 60 businesses sold since 1997; and pending litigation, including the Lemelson patent suit. The company also notes that Arthur Andersen, its former auditor for 1998 to 2001, has ceased operations, which limits recourse for investors relying on those audits.
What should investors expect from the company's 2003 outlook?
The filing gives no formal revenue or earnings guidance. Management expects restructuring to be substantially complete by mid-2003, with about $6 million of additional charges, and expects capital expenditures of $55 to $60 million. It also expects lower interest income because of reduced invested cash and lower market rates, and it stated that virtually all year-end 2002 backlog should ship during 2003. Sector changes effective Q1 2003 will also change how segment results are reported.

04—Continue

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