UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(mark one)
xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended April 1, 2006March 31, 2007

oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-8002

TMO Logo
(Exact name of Registrant as specified in its charter)

Delaware04-2209186
(State of incorporation or organization)(I.R.S. Employer Identification No.)
  
81 Wyman Street, P.O. Box 9046 
Waltham, Massachusetts02454-9046
(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 o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer"“accelerated filer” and "large“large accelerated filer"filer” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer x Accelerated Filer o Non-Accelerated Filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

 
 Class Outstanding at April 28, 2006March 31, 2007 
 Common Stock, $1.00 par value 163,688,419421,930,107 

 
 

PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements

THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

Consolidated Balance Sheet
(Unaudited)

Assets

  April 1,  December 31, March 31, December 31, 
(In thousands)  2006  2005
(In millions) 2007 2006 
  (Unaudited)    
             
Current Assets:             
Cash and cash equivalents 
$
230,792
 
$
214,326
 
$
670.9
 
$
667.4
 
Short-term available-for-sale investments, at quoted market value (amortized cost of $79,443 and $80,661)
  
79,761
  
80,661
Accounts receivable, less allowances of $22,542 and $21,841
  
542,929
  
565,564
Short-term investments, at quoted market value (amortized cost of $23.9 and $23.8)
  
20.5
  
23.8
 
Accounts receivable, less allowances of $50.9 and $45.0
  
1,419.0
  
1,392.7
 
Inventories:
             
Raw materials and supplies
  
137,521
  
133,774
Raw materials
  
322.4
  
307.7
 
Work in process
  
54,135
  
50,043
  
134.1
  
121.7
 
Finished goods
  
189,846
  
175,575
  
724.0
  
735.1
 
Deferred tax assets
  
77,949
  
79,586
  
225.3
  
209.2
 
Other current assets
  
64,205
  
54,371
  
230.0
  
201.9
 
             
  
1,377,138
  
1,353,900
  
3,746.2
  
3,659.5
 
             
Property, Plant and Equipment, at Cost  
526,646
  
515,385
  
1,578.5
  
1,533.0
 
Less: Accumulated depreciation and amortization
  
243,540
  
234,731
  
322.3
  
276.3
 
             
  
283,106
  
280,654
  
1,256.2
  
1,256.7
 
             
Acquisition-related Intangible Assets  
425,468
  
450,740
Acquisition-related Intangible Assets, net of Accumulated Amortization of $445.2 and $276.4  
7,333.2
  
7,511.6
 
             
Other Assets  
203,954
  
200,080
  
258.3
  
309.4
 
             
Goodwill  
1,950,988
  
1,966,195
  
8,578.0
  
8,525.0
 
             
 
$
4,240,654
 
$
4,251,569
 
$
21,171.9
 
$
21,262.2
 



2

THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

Consolidated Balance Sheet (continued)
(Unaudited)

Liabilities and Shareholders’ Equity

  April 1,  December 31,  March 31, December 31, 
(In thousands except share amounts)  2006  2005 
(In millions except share amounts) 2007 2006 
  (Unaudited)    
              
Current Liabilities:              
Short-term obligations and current maturities of long-term obligations
 
$
91,247
 
$
130,137
  
$
167.4
 
$
483.3
 
Accounts payable
  
155,604
  
153,475
   
679.6
  
630.8
 
Accrued payroll and employee benefits
  
82,732
  
114,707
   
196.2
  
253.3
 
Accrued income taxes
  
39,527
  
55,147
   
38.4
  
60.3
 
Deferred revenue
  
97,284
  
85,592
   
138.4
  
121.3
 
Customer deposits
  
34,667
  
38,229
 
Other accrued expenses (Notes 2, 10 and 11)
  
180,683
  
179,184
   
576.5
  
603.3
 
Current liabilities of discontinued operations
  
34,823
  
35,191
 
              
  
716,567
  
791,662
   
1,796.5
  
2,152.3
 
              
Deferred Income Taxes  
44,023
  
65,015
   
2,483.8
  
2,557.5
 
              
Other Long-term Liabilities  
136,806
  
132,950
   
476.5
  
459.9
 
              
Long-term Obligations:       
Senior notes (Note 9)
  
381,285
  
380,542
 
Subordinated convertible obligations
  
77,234
  
77,234
 
Other
  
10,691
  
10,854
 
       
  
469,210
  
468,630
 
Long-term Obligations (Note 9)  
2,182.4
  
2,180.7
 
              
Shareholders’ Equity:              
Preferred stock, $100 par value, 50,000 shares authorized; none issued
              
Common stock, $1 par value, 350,000,000 shares authorized; 182,867,123 and 181,817,452 shares issued
  
182,867
  
181,817
 
Common stock, $1 par value, 1,200,000,000 shares authorized; 429,563,224 and 424,240,292 shares issued
  
429.6
  
424.2
 
Capital in excess of par value
  
1,446,399
  
1,421,382
   
11,928.9
  
11,810.4
 
Retained earnings
  
1,651,381
  
1,604,475
   
1,912.3
  
1,773.4
 
Treasury stock at cost, 19,345,041 and 19,335,163 shares
  
(438,042
)
 
(437,707
)
Deferred compensation
  
—
  
(3,834
)
Treasury stock at cost, 7,633,117 and 7,635,184 shares
  
(253.7
)
 
(246.4
)
Accumulated other comprehensive items (Note 6)
  
31,443
  
27,179
   
215.6
  
150.2
 
              
  
2,874,048
  
2,793,312
   
14,232.7
  
13,911.8
 
              
 
$
4,240,654
 
$
4,251,569
  
$
21,171.9
 
$
21,262.2
 













The accompanying notes are an integral part of these consolidated financial statements.


3
THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.
 
Consolidated Statement of Income
(Unaudited)

 Three Months Ended  Three Months Ended 
  April 1,  April 2,  March 31, April 1, 
(In thousands except per share amounts)  2006  2005 
(In millions except per share amounts) 2007 2006 
              
Revenues 
$
684,287
 
$
559,208
  
$
2,338.2
 
$
684.3
 
              
Costs and Operating Expenses:              
Cost of revenues
  
371,663
  
299,974
   
1,458.3
  
371.7
 
Selling, general and administrative expenses
  
202,448
  
163,501
   
620.3
  
202.5
 
Research and development expenses
  
38,737
  
36,328
   
59.8
  
38.7
 
Restructuring and other costs (income), net (Note 11)
  
3,594
  
(271
)
Restructuring and other costs, net (Note 11)
  
7.4
  
3.6
 
              
  
616,442
  
499,532
   
2,145.8
  
616.5
 
              
Operating Income  
67,845
  
59,676
   
192.4
  
67.8
 
Other Income (Expense), Net (Note 4)  
(3,779
)
 
3,304
 
Other Expense, Net (Note 4)  
(26.7
)
 
(3.7
)
              
Income from Continuing Operations Before Provision for Income Taxes  
64,066
  
62,980
   
165.7
  
64.1
 
Provision for Income Taxes  
(20,447
)
 
(17,397
)
  
(26.9
)
 
(20.5
)
              
Income from Continuing Operations  
43,619
  
45,583
   
138.8
  
43.6
 
Gain on Disposal of Discontinued Operations (net of income tax provision of $1,926 and $2,238; Note 13)  
3,287
  
3,273
 
Income from Discontinued Operations (net of income tax provision of $0.1 in 2007; Note 14)  
0.1
  
—
 
Gain on Disposal of Discontinued Operations (net of income tax provision of $1.9 in 2006; Note 14)  
—
  
3.3
 
              
Net Income 
$
46,906
 
$
48,856
  
$
138.9
 
$
46.9
 
              
Earnings per Share from Continuing Operations (Note 5):              
Basic
 
$
.27
 
$
.28
  
$
.33
 
$
.27
 
              
Diluted
 
$
.26
 
$
.28
  
$
.31
 
$
.26
 
              
Earnings per Share (Note 5):              
Basic
 
$
.29
 
$
.30
  
$
.33
 
$
.29
 
              
Diluted
 
$
.28
 
$
.30
  
$
.31
 
$
.28
 
              
Weighted Average Shares (Note 5):              
Basic
  
163,044
  
160,957
   
420.1
  
163.0
 
              
Diluted
  
166,982
  
164,730
   
441.1
  
167.0
 






The accompanying notes are an integral part of these consolidated financial statements.



4
THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.
 
Consolidated Statement of Cash Flows
(Unaudited)
  
 Three Months Ended  Three Months Ended 
  April 1,  April 2,  March 31, April 1, 
(In thousands)  2006  2005 
(In millions) 2007 2006 
              
Operating Activities:              
Net income 
$
46,906
 
$
48,856
  
$
138.9
 
$
46.9
 
Income from discontinued operations
  
(0.1
)
 
—
 
Gain on disposal of discontinued operations
  
(3,287
)
 
(3,273
)
  
—
  
(3.3
)
              
Income from continuing operations
  
43,619
  
45,583
   
138.8
  
43.6
 
              
Adjustments to reconcile income from continuing operations to net cash provided by operating
activities:
              
Depreciation and amortization
  
37,320
  
17,566
   
185.3
  
37.4
 
Change in deferred income taxes
  
2,756
  
327
   
3.6
  
2.8
 
Gain on sale of product lines
  
(820
)
 
(119
)
Gain on investments, net
  
35
  
(2,264
)
Noncash equity compensation
  
6,031
  
641
   
13.8
  
6.1
 
Noncash charges for sale of inventories revalued at the date of acquisition
  
36.2
  
—
 
Other noncash expenses, net
  
768
  
460
   
10.6
  
(0.2
)
Changes in current accounts, excluding the effects of acquisitions and dispositions:
              
Accounts receivable
  
24,800
  
9,022
   
(42.2
)
 
27.6
 
Inventories
  
(25,043
)
 
(15,272
)
  
(46.7
)
 
(25.0
)
Other current assets
  
(9,479
)
 
(4,467
)
  
(36.5
)
 
(12.3
)
Accounts payable
  
1,541
  
(7,363
)
  
42.9
  
1.5
 
Other current liabilities
  
(53,397
)
 
(12,411
)
  
(87.3
)
 
(53.4
)
              
Net cash provided by continuing operations
  
28,131
  
31,703
   
218.5
  
28.1
 
Net cash provided by (used in) discontinued operations
  
3,747
  
(1,421
)
Net cash provided by discontinued operations
  
0.1
  
3.8
 
              
Net cash provided by operating activities
  
31,878
  
30,282
   
218.6
  
31.9
 
              
Investing Activities:              
Acquisition, net of cash acquired
  
—
  
(39,233
)
Acquisitions, net of cash acquired
  
(34.0
)
 
—
 
Refund of acquisition purchase price
  
4.6
  
—
 
Proceeds from sale of available-for-sale investments
  
36,314
  
160,308
   
1.7
  
36.3
 
Purchases of available-for-sale investments
  
(34,950
)
 
(127,425
)
  
(1.7
)
 
(35.0
)
Proceeds from maturities of available-for-sale investments
  
6
  
246
 
Purchases of property, plant and equipment
  
(13,258
)
 
(7,319
)
  
(40.5
)
 
(13.3
)
Proceeds from sale of property, plant and equipment
  
268
  
9,187
   
1.3
  
0.3
 
Proceeds from sale of product lines
  
8,850
  
4,609
   
—
  
8.9
 
Collection of notes receivable
  
2,805
  
—
   
48.2
  
2.8
 
Proceeds from sale of other investments
  
686
  
—
 
Increase in other assets
  
(1,171
)
 
(600
)
  
(8.7
)
 
(1.1
)
Other
  
(531
)
 
(18
)
  
—
  
0.2
 
              
Net cash used in continuing operations
  
(981
)
 
(245
)
  
(29.1
)
 
(0.9
)
Net cash provided by discontinued operations
  
5,333
  
5,327
   
—
  
5.3
 
              
Net cash provided by investing activities
 
$
4,352
 
$
5,082
 
Net cash (used in) provided by investing activities
 
$
(29.1
)
$
4.4
 



5
THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.
 
Consolidated Statement of Cash Flows (continued)
(Unaudited)
 
  Three Months Ended 
  April 1,  April 2, 
(In thousands)  2006  2005 
        
Financing Activities:       
Decrease in short-term notes payable
 
$
(41,292
)
$
(1,193
)
   Net proceeds from issuance of company common stock
  
16,541
  
4,595
 
   Tax benefits from exercised stock options
  
4,296
  
—
 
Other
  
(32
)
 
(134
)
        
Net cash provided by (used in) continuing operations
  
(20,487
)
 
3,268
 
Net cash provided by discontinued operations
  
—
  
—
 
        
Net cash provided by (used in) financing activities
  
(20,487
)
 
3,268
 
        
Exchange Rate Effect on Cash of Continuing Operations  
723
  
(13,958
)
        
Increase in Cash and Cash Equivalents  
16,466
  
24,674
 
Cash and Cash Equivalents at Beginning of Period  
214,326
  
326,886
 
        
Cash and Cash Equivalents at End of Period 
$
230,792
 
$
351,560
 
        
Noncash Investing Activities:       
Fair value of assets of acquired business
 
$
—
 
$
49,341
 
Cash paid for acquired business
  
—
  
(40,000
)
Purchase price payable
  
—
  
(2,200
)
        
Liabilities assumed of acquired business
 
$
—
 
$
7,141
 
  Three Months Ended 
  March 31, April 1, 
(In millions) 2007 2006 
        
Financing Activities:       
Decrease in short-term notes payable
 
$
(309.3
)
$
(41.3
)
Net proceeds from issuance of company common stock
  
113.0
  
16.5
 
Tax benefits from exercised stock options
  
9.8
  
4.3
 
Redemption and repayment of long-term obligations
  
(7.6
)
 
—
 
        
Net cash used in financing activities
  
(194.1
)
 
(20.5
)
        
Exchange Rate Effect on Cash of Continuing Operations  
8.1
  
0.7
 
        
Increase in Cash and Cash Equivalents  
3.5
  
16.5
 
Cash and Cash Equivalents at Beginning of Period  
667.4
  
214.3
 
        
Cash and Cash Equivalents at End of Period 
$
670.9
 
$
230.8
 
        
Supplemental Cash Flow Information:       
Fair value of assets of acquired businesses
 
$
38.1
 
$
—
 
Cash paid for acquired businesses
  
(29.4
)
 
—
 
        
Liabilities assumed of acquired businesses
 
$
8.7
 
$
—
 
        
Conversion of subordinated convertible debentures
 
$
0.4
 
$
—
 
        
Issuance of restricted stock
 
$
12.8
 
$
0.9
 









 










The accompanying notes are an integral part of these consolidated financial statements.


6
THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)


1.General

The interim consolidated financial statements presented herein have been prepared by Thermo Electron CorporationFisher Scientific Inc. (the company or the Registrant)Thermo Fisher), are unaudited and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the financial position at April 1, 2006,March 31, 2007, the results of operations for the three-month periods ended March 31, 2007, and April 1, 2006, and April 2, 2005, and the cash flows for the three-month periods ended March 31, 2007, and April 1, 2006, and April 2, 2005.2006. 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.

The consolidated balance sheet presented as of December 31, 2005,2006, has been derived from the audited consolidated financial statements as of that date. The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain all of the information that is included in the annual financial statements and notes of the company. The consolidated financial statements and notes included in this report should be read in conjunction with the financial statements and notes included in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005,2006, filed with the Securities and Exchange Commission (SEC).

2.Acquisitions

In May 2005,On January 15, 2007, the Company’s Life and Laboratory Sciencescompany’s Analytical Technologies segment acquired the Kendro Laboratory Products divisionSpectronex AG and Flux AG businesses (Spectronex/Flux) of SPX Corporation. HadSwiss Analytic Group AG. These Switzerland-based businesses include a distributor of mass spectrometry, chromatography and surface science instruments and a manufacturer of high performance liquid chromatography pumps and software. The purchase price totaled $24 million, net of cash acquired. The acquisition broadened the segment’s mass spectrometry offerings. Revenues of Spectronex/Flux totaled $22 million in fiscal 2006. The purchase price exceeded the fair value of the acquired net assets and, accordingly, $9 million was allocated to goodwill, none of which is tax deductible.

In addition to the acquisition of KendroSpectronex/Flux, the Analytical Technologies segment acquired a small manufacturer of electrostatic discharge products in the first quarter of 2007, for aggregate consideration of $5 million. The company also paid transaction costs and post-closing and contingent purchase price adjustments aggregating $5 million in the first quarter of 2007, for various acquisitions completed prior to 2007. The company obtained a refund of $5 million in the first quarter of 2007, related to a post-closing adjustment for the 2006 acquisition of GV Instruments Limited (GVI).

Subsequent to the acquisition of GVI, the UK Office of Fair Trading (OFT) commenced an investigation of the transaction to determine whether it qualified for consideration under the UK Enterprise Act. On December 15, 2006, the OFT referred the transaction to the UK Competition Commission for further investigation under the Enterprise Act to determine whether the transaction had resulted in, or may be expected to result in, a substantial lessening of competition within any market in the UK for goods or services, particularly gas isotope ratio mass spectrometers (Gas IRMS), thermal ionization mass spectrometers (TIMS) and multicollector inductively coupled plasma mass spectrometers. Of GVI’s sales of $19 million in its fiscal 2006, $0.4 million were UK sales. The Competition Commission published its provisional findings on March 22, 2007, preliminarily concluding that the company’s acquisition of GVI would lead to a substantial lessening of competition in the UK in the markets for Gas IRMS and TIMS products. The Competition Commission has invited comments on their provisional findings, and the statutory deadline for publication of their final report is May 31, 2007. If the Competition Commission confirms its provisional decision, it is likely to seek remedies in the form of divestment of the GVI business by the company.


7
THERMO FISHER SCIENTIFIC INC.
2.Acquisitions (continued)

During the investigation, the company is subject to certain undertakings, which took effect in October 2006, that require it not to take any action that will lead to further integration of the GVI business with the company or otherwise impair the GVI business from competing independently. The company is cooperating with the Competition Commission’s investigation and continuing to provide information supporting the company’s view that the acquisition is not anti-competitive. However, there can be no assurance as to the outcome of this matter. Goodwill and other intangible assets associated with the acquisition of GVI totaled $23 million at March 31, 2007. Were the Competition Commission to require the company to divest of GVI, charges for impairment of assets could result.

The company’s acquisitions have historically been made at prices above the fair value of the acquired assets, resulting in goodwill, due to expectations of synergies of combining the businesses. These synergies include elimination of duplicative facilities, functions and staffing; use of the company’s existing infrastructure such as sales force, distribution channels and customer relations to expand sales of the acquired businesses’ products; and use of the infrastructure of the acquired businesses to cost effectively expand sales of company products.

These acquisitions have been accounted for using the purchase method of accounting, and the acquired companies’ results have been included in the accompanying financial statements from their respective dates of acquisition. Allocation of the purchase price for acquisitions was based on estimates of the fair value of the net assets acquired and, for acquisitions completed within the past year, is subject to adjustment upon finalization of the purchase price allocation. The company is not aware of any information that indicates the final purchase price allocations will differ materially from the preliminary estimates.

The components of the preliminary purchase price allocation for 2007 acquisitions are as follows:

(In millions) Spectronex/Flux Other Total 
           
Purchase Price:          
Cash paid (a)
 
$
25.8
 
$
5.4
 
$
31.2
 
Cash acquired
  
(1.8
)
 
—
  
(1.8
)
           
  
$
24.0
 
$
5.4
 
$
29.4
 
           
Allocation:          
Current assets
 
$
8.1
 
$
1.7
 
$
9.8
 
Property, plant and equipment
  
0.4
  
—
  
0.4
 
Acquired intangible assets
  
14.8
  
2.4
  
17.2
 
Goodwill
  
9.1
  
1.6
  
10.7
 
Liabilities assumed
  
(8.4
)
 
(0.3
)
 
(8.7
)
           
  
$
24.0
 
$
5.4
 
$
29.4
 

(a)Includes transaction costs.



8
THERMO FISHER SCIENTIFIC INC.
2.Acquisitions (continued)

Acquired intangible assets for 2007 acquisitions are as follows:

(In millions) Spectronex/Flux Other Total 
           
Customer Relationships 
$
12.9
 
$
1.5
 
$
14.4
 
Product Technology  
1.5
  
0.9
  
2.4
 
Tradenames  
0.4
  
—
  
0.4
 
           
  
$
14.8
 
$
2.4
 
$
17.2
 

The weighted-average amortization periods for the customer relationships, product technology and tradenames acquired in 2007 are 6 years each.

During the first quarter of 2007, the company refined estimates recorded in the fourth quarter of 2006 of acquisition-related intangible assets related to the November 2006 merger with Fisher Scientific International Inc. and the December 2006 acquisition of Cohesive Technologies Inc. and finalized the determination of such intangible assets. The purchase price allocations for Fisher and Cohesive, as revised, are as follows:

(In millions) Fisher Cohesive 
        
Fair Value of Common Stock Issued to Fisher Shareholders 
$
9,777.8
 
$
—
 
     Fair Value of Fisher Stock Options and Warrants Converted into Options in
         Company Common Stock
  
502.3
  
—
 
Debt Assumed  
2,284.7
  
—
 
Cash Paid Including Transaction Costs  
38.5
  
71.3
 
Cash Acquired  
(392.0
)
 
(0.3
)
      �� 
  
$
12,211.3
 
$
71.0
 
        
Allocation:       
Current assets
 
$
1,919.3
 
$
5.7
 
Property, plant and equipment
  
953.2
  
1.0
 
Acquired intangible assets
  
7,082.0
  
36.2
 
Goodwill
  
6,512.3
  
33.4
 
Other assets
  
312.8
  
—
 
Liabilities assumed
  
(4,021.5
)
 
(5.3
)
Fair value of convertible debt allocable to equity
  
(546.8
)
 
—
 
        
  
$
12,211.3
 
$
71.0
 




9
THERMO FISHER SCIENTIFIC INC.
2.Acquisitions (continued)

The acquired intangible assets from the merger with Fisher and the acquisition of Cohesive are as follows:

(In millions) Fisher Cohesive 
        
Indefinite Lives:       
Trademarks
 
$
1,326.9
 
$
—
 
        
Definite Lives:       
Customer relationships
  
4,275.3
  
18.4
 
Product technology
  
844.8
  
14.4
 
Tradenames
  
635.0
  
3.4
 
        
  
$
7,082.0
 
$
36.2
 

The weighted-average amortization periods for intangible assets with definite lives are: 14 years for customer relationships, 9 years for product technology and 10 years for tradenames. The weighted-average amortization period for all intangible assets with definite lives in the above table is 13 years.

In November 2006, the Company merged with Fisher. Had the merger with Fisher been completed as of the beginning of 2005,2006, the company’s pro forma results for 20052006 would have been as follows:

 Three Months Ended Three Months Ended 
(In thousands except per share amounts)  April 2, 2005
(In millions except per share amounts) April 1, 2006 (a) 
       
Revenues 
$
653,068
 
$
2,096.4
 
       
Net Income 
$
43,726
 
$
(6.3
)
       
Earnings per Share from Continuing Operations:       
Basic
 
$
.25
 
$
(.02
)
Diluted
 
$
.25
 
$
(.02
)
       
Earnings Per Share:       
Basic
 
$
.27
 
$
(.02
)
Diluted
 
$
.27
 
$
(.02
)

(a)Includes $97 million pre-tax charge to cost of revenues for the sale of Fisher inventories revalued at the date of merger, $15 million pre-tax charge for Fisher’s in-process research and development and $37 million pre-tax charge for accelerated vesting of equity-based awards resulting from the change in control occurring at the date of the Fisher merger.

The company’s results for 20052006 would not have been materially different from its reported results had the company’s other 20052006 and 2007 acquisitions occurred at the beginning of 2005.2006.

The company has undertaken restructuring activities at acquired businesses. These activities, which were accounted for in accordance with Emerging Issues Task Force (EITF) Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” have primarily included reductions in staffing levels and the abandonment of excess facilities. In connection with these restructuring activities, as part of the cost of acquisitions, the company established reserves, 


10
THERMO FISHER SCIENTIFIC INC.
2.Acquisitions (continued)

primarily for severance and excess facilities. In accordance with EITF Issue No. 95-3, the company finalizes its restructuring plans no later than one year from the respective dates of the acquisitions. Upon finalization of restructuring plans or settlement of obligations for less than the expected amount, any excess reserves are reversed with a corresponding decrease in goodwill or other intangible assets when no goodwill exists. Accrued acquisition expenses are included in other accrued expenses in the accompanying balance sheet.


7
THERMO ELECTRON CORPORATION
2.Acquisitions (continued)
No accrued acquisition expenses have been established for 2007 acquisitions.

The changes in accrued acquisition expenses for acquisitions completed during 20052006 are as follows:

(In thousands)  Severance  
Abandonment
of Excess
Facilities
  Other  Total 
              
Balance at December 31, 2005
 
$
2,494
 
$
345
 
$
73
 
$
2,912
 
Reserves established
  
3,213
  
479
  
629
  
4,321
 
Payments
  
(1,151
)
 
(47
)
 
—
  
(1,198
)
Currency translation
  
31
  
—
  
1
  
32
 
              
Balance at April 1, 2006
 
$
4,587
 
$
777
 
$
703
 
$
6,067
 
(In millions)
Severance
Abandonment
of Excess
Facilities
Other
Total
              
Balance at December 31, 2006
 
$
26.0
 
$
3.1
 
$
1.3
 
$
30.4
 
Reserves established
  
3.2
  
3.6
  
1.3
  
8.1
 
Payments
  
(3.2
)
 
(0.1
)
 
(0.2
)
 
(3.5
)
Currency translation
  
0.1
  
—
  
—
  
0.1
 
              
Balance at March 31, 2007
 
$
26.1
 
$
6.6
 
$
2.4
 
$
35.1
 

The accruedprincipal acquisition expenses consist primarily offor 2006 acquisitions were for severance for approximately 156252 employees across all functions at Kendro, relocation costs and cost associated with various facility obligations for a building vacated in Tennessee. The company expectsconsolidations, primarily related to pay amounts accrued for severance and other through 2006 and facility costs through the expiration of the lease in 2007.company’s merger with Fisher.

The changes in accrued acquisition expenses for acquisitions completed prior to 20052006 are as follows:

(In thousands)  Severance  
Abandonment
of Excess
Facilities
  Total 
           
Balance at December 31, 2005
 
$
139
 
$
3,212
 
$
3,351
 
Payments
  
—
  
(1,056
)
 
(1,056
)
   Divestiture
  
—
  
(199
)
 
(199
)
Currency translation
  
2
  
42
  
44
 
           
Balance at April 1, 2006
 
$
141
 
$
1,999
 
$
2,140
 
(In millions)
Severance
Abandonment
of Excess
Facilities
Other
Total
              
Balance at December 31, 2006
 
$
2.2
 
$
2.7
 
$
0.1
 
$
5.0
 
Payments
  
(1.3
)
 
—
  
—
  
(1.3
)
              
Balance at March 31, 2007
 
$
0.9
 
$
2.7
 
$
0.1
 
$
3.7
 

The remaining amounts accrued for pre-2006 acquisitions include severance related to the company’s acquisition expenses relate primarily to severance for approximately 160 employees across all functions at Jouan, acquiredof Kendro in December 2003,2005 and for abandoned facilities primarily related to the company’s acquisitions of Life Sciences International PLC in 1997, the product monitoring businesses of Graseby Limited in 1998 and Kendro in 2005. The abandoned facilities for the 1997 and 1998 acquisitions include three abandoned operating facilities in England with leases expiring through 2014, and2014. In some instances, the closurefacilities have been subleased but certain restoration obligations are payable at the end of a Jouan manufacturing facility in Denmark, with a lease expiring in 2007.the lease. The company expects to payremaining amounts accrued for abandoned facilities also include facility obligations for a Kendro building vacated in Tennessee. The amounts captioned as “other” primarily represent employee relocation, contract termination and other exit costs. The severance and other expenses primarily through 2006 and amounts accrued for abandonment of excess facilities through 2014. The liability for the abandoned facilities is net of estimated sublease income and includes an estimate of restoration costs required at the termination of the lease.are expected to be paid in 2007.




811
THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

3.Business Segment Information

The company’sFollowing the merger with Fisher in November 2006, the company reorganized management responsibility and its continuing operations now fall into two business segments: LifeAnalytical Technologies and Laboratory SciencesProducts and Measurement and Control.Services. Prior year results have been reclassified to conform to the new segments.

(In thousands)
  
Life and
Laboratory
Sciences
  Measurement and Control  Eliminations and Other  Corporate  Total  
                  
Q1 2006
                 
Revenues
 
$
512,355
 
$
171,932
 
$
—
 
$
—
 
$
684,287
  
                  
Adjusted operating income (a)
 
$
86,150
 
$
24,399
 
$
(2,895
)
$
(10,654
)
$
97,000
 (b)
Restructuring and other items
  
3,046
  
540
  
2
  
6
  
3,594
  
Stock option compensation expense
  
2,252
  
643
  
(2,895
)
 
—
  
—
  
Amortization
  
24,095
  
1,464
  
—
  
2
  
25,561
  
                  
Operating income
  
56,757
  
21,752
  
(2
)
 
(10,662
)
 
67,845
 (b)
Other expense, net
              
(3,779
)
 
                  
   Income from continuing operations before provision for
              income taxes
             
$
64,066
  
                  
Depreciation
 
$
7,933
 
$
2,125
 
$
—
 
$
1,701
 
$
11,759
  
                  
Q1 2005
                 
Revenues
 
$
393,305
 
$
165,903
 $
—
 $
—
 
$
559,208
  
                  
Adjusted operating income (a)
 
$
56,710
 
$
20,193
 
$
—
 
$
(10,084
)
$
66,819
 (c)
Restructuring and other items
  
(1,734
)
 
1,034
  
(71
)
 
500
  
(271
)
 
Amortization
  
6,614
  
799
  
—
  
1
  
7,414
  
                  
Operating income
  
51,830
  
18,360
  
71
  
(10,585
)
 
59,676
 (c)
Other income, net
              
3,304
  
                  
   Income from continuing operations before provision for
              income taxes
             
$
62,980
  
                  
Depreciation
 
$
6,779
 
$
2,416
 
$
—
 
$
957
 
$
10,152
  
  Three Months Ended 
  March 31, April 1, 
(In millions) 2007 2006 
        
Revenues:
       
Analytical Technologies
 
$
1,006.2
 
$
504.6
 
Laboratory Products and Services
  
1,416.5
  
179.7
 
Eliminations
  
(84.5
)
 
—
 
        
Consolidated revenues
 
$
2,338.2
 
$
684.3
 
        
Operating Income:
       
Analytical Technologies (a)
 
$
189.8
 
$
71.5
 
Laboratory Products and Services (a)
  
185.7
  
25.5
 
        
Subtotal reportable segments (a)
  
375.5
  
97.0
 
        
Cost of revenues charges
  
(36.4
)
 
—
 
Restructuring and other costs, net
  
(7.4
)
 
(3.6
)
Amortization of acquisition-related intangible assets
  
(139.3
)
 
(25.6
)
        
Consolidated operating income
  
192.4
  
67.8
 
Other expense, net (b)
  
(26.7
)
 
(3.7
)
        
Income from continuing operations before provision for income taxes
 
$
165.7
 
$
64.1
 
        
Equity-based Compensation Expense:
       
Analytical Technologies
 
$
6.5
 
$
4.6
 
Laboratory Products and Services
  
7.3
  
1.5
 
        
Consolidated equity-based compensation expense
 
$
13.8
 
$
6.1
 
        
Amortization:
       
Analytical Technologies
 
$
52.6
 
$
6.5
 
Laboratory Products and Services
  
86.7
  
19.1
 
        
Consolidated amortization
 
$
139.3
 
$
25.6
 
        
Depreciation:
       
Analytical Technologies
 
$
20.4
 
$
7.2
 
Laboratory Products and Services
  
25.6
  
4.6
 
        
Consolidated depreciation
 
$
46.0
 
$
11.8
 

(a)Represents operating income before certain charges to cost of revenues; restructuring and other costs, net;net and amortization of acquisition-related intangibles; and, for the segments, stock option compensation expense.intangibles.
(b)Consolidated adjusted operatingThe company does not allocate other income and consolidated operating income in 2006 include pre-tax stock option compensation expense of $5.3 million, including $0.6 million in cost of revenues, $4.4 million in selling, general and administrative expenses and $0.3 million in research and development expenses. No stock option compensation expense was capitalized in inventories due to immateriality.its segments.
(c)Had stock option expense been recorded in 2005, consolidated adjusted operating income and consolidated operating income on a pro forma basis would have been lower by $5.3 million, including $0.6 million in cost of revenues, $4.4 million in selling, general and administrative expenses and $0.3 million in research and development expenses.



912
THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

4.Other Income (Expense), Net

The components of other income (expense),expense, net, in the accompanying statement of income are as follows:
 
 Three Months Ended  Three Months Ended 
  April 1,  April 2,  March 31, April 1, 
(In thousands)  2006  2005 
(In millions) 2007 2006 
              
Interest Income 
$
3,532
 
$
3,336
  
$
8.9
 
$
3.5
 
Interest Expense  
(7,795
)
 
(3,155
)
  
(37.2
)
 
(7.7
)
Gain on Investments, Net  
(35
)
 
2,264
 
Other Items, Net  
519
  
859
   
1.6
  
0.5
 
              
 
$
(3,779
)
$
3,304
  
$
(26.7
)
$
(3.7
)

5.Earnings per Share

Basic and diluted earnings per share were calculated as follows:
  
 Three Months Ended Three Months Ended 
  April 1,  April 2, March 31, April 1, 
(In thousands except per share amounts)  2006  2005
(In millions except per share amounts) 2007 2006 
             
Income from Continuing Operations 
$
43,619
 
$
45,583
 
$
138.8
 
$
43.6
 
Income from Discontinued Operations  
0.1
  
—
 
Gain on Disposal of Discontinued Operations  
3,287
  
3,273
  
—
  
3.3
 
             
Net Income for Basic Earnings per Share  
46,906
  
48,856
  
138.9
  
46.9
 
Effect of Convertible Debentures  
402
  
402
  
—
  
0.4
 
             
Income Available to Common Shareholders, as Adjusted for Diluted Earnings per Share 
$
47,308
 
$
49,258
 
$
138.9
 
$
47.3
 
             
Basic Weighted Average Shares  
163,044
  
160,957
  
420.1
  
163.0
 
Effect of:             
Stock options
  
2,023
  
1,893
Convertible debentures
  
1,846
  
1,846
  
11.7
  
1.9
 
Restricted stock awards and contingently issuable shares
  
69
  
34
Stock options, restricted stock awards and warrants
  
9.3
  
2.1
 
             
Diluted Weighted Average Shares  
166,982
  
164,730
  
441.1
  
167.0
 



10
THERMO ELECTRON CORPORATION

5.Earnings per Share (continued)
 Three Months Ended
  April 1,  April 2,
(In thousands except per share amounts)  2006  2005
             
Basic Earnings per Share:             
Continuing operations
 
$
.27
 
$
.28
 
$
.33
 
$
.27
 
Discontinued operations
  
.02
  
.02
  
—
  
.02
 
             
 
$
.29
 
$
.30
 
$
.33
 
$
.29
 
             
Diluted Earnings per Share:             
Continuing operations
 
$
.26
 
$
.28
 
$
.31
 
$
.26
 
Discontinued operations
  
.02
  
.02
  
—
  
.02
 
             
 
$
.28
 
$
.30
 
$
.31
 
$
.28
 

Options to purchase 3,209,0005.9 million and 521,0003.2 million shares of common stock were not included in the computation of diluted earnings per share for the first quarter of 20062007 and 2005,2006, respectively, because the options’ exercise prices were greater than the average market price for the common stock and their effect would have been antidilutive.



13
THERMO FISHER SCIENTIFIC INC.
6.Comprehensive Income

Comprehensive income combines net income and other comprehensive items. Other comprehensive items represents certain amounts that are reported as components of shareholders’ equity in the accompanying balance sheet, including currency translation adjustments; unrealized gains and losses, net of tax, on available-for-sale investments and hedging instruments; and minimum pension and other postretirement benefit liability adjustment.adjustments. During the first quarter of 20062007 and 2005,2006, the company had comprehensive income of $51.2$204 million and $4.1$51 million, respectively. The 2005 quarter was unfavorably affected by a reduction in the cumulative translation adjustment due to movements in currency exchange rates, the effects of which are recorded in shareholders’ equity.

7.Stock-based Compensation Plans and Stock-basedEquity-based Compensation Expense

The company has stock-basedcomponents of pre-tax equity-based compensation plans for its key employees, directors and others. These plans permit the grant of a variety of stock and stock-based awards, including restricted stock, stock options, stock bonus shares or performance-based shares,are as determined by the compensation committee of the company’s Board of Directors (the Board Committee) or in limited circumstances, by the company’s option committee, which consists of its chief executive officer. Generally, options granted prior to July 2000 under these plans are exercisable immediately, but shares acquired upon exercise are subject to certain transfer restrictions and the right of the company to repurchase the shares at the exercise price upon certain events, primarily termination of employment. The restrictions and repurchase rights lapse over periods ranging from 0-10 years, depending on the term of the option, which may range from 3-12 years. Options granted in or after July 2000 under these plans generally vest over three to five years, assuming continued employment with certain exceptions. Upon a change in control of the company, substantially all options, regardless of grant date, become immediately exercisable and shares acquired upon exercise cease to be subject to transfer restrictions and the company’s repurchase rights. Nonqualified options are generally granted at fair market value. Incentive stock options must be granted at not less than the fair market value of the company’s stock on the date of grant. The company also has a directors’ stock option plan that provides for the annual grant of stock options of the company to outside directors. Options awarded under this plan prior to 2003 are immediately exercisable and expire three to seven years after the date of grant. Options awarded in 2003 and thereafter vest over three years, assuming continued service on the board, and expire seven years after the date of grant. The company generally issues new shares of its common stock to satisfy option exercises.follows:

  Three Months Ended 
  March 31, April 1, 
(In millions) 2007 2006 
        
Stock Option Awards 
$
9.3
 
$
5.4
 
Restricted Share/Unit Awards  
4.5
  
0.7
 
        
Total Equity-based Compensation Expense 
$
13.8
 
$
6.1
 

11
THERMO ELECTRON CORPORATION

7.Stock-based Compensation Plans and Stock-based Compensation Expense (continued)Equity-based compensation expense is included in the accompanying statement of income as follows:
  Three Months Ended 
  March 31, April 1, 
(In millions) 2007 2006 
        
Cost of Revenues 
$
1.3
 
$
0.6
 
Selling, General and Administrative Expenses  
12.0
  
5.2
 
Research and Development Expenses  
0.5
  
0.3
 
        
Total Equity-based Compensation Expense 
$
13.8
 
$
6.1
 

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No.123R, “Share-based Payment,”which requiresNo equity-based compensation costs relatedexpense has been capitalized in inventories due to share-based transactions, including employee share options, to be recognized in the financial statements based on fair value. SFAS No. 123R revises SFAS No. 123, as amended, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”immateriality.

Effective January 1, 2006, the company adopted the provisions of SFAS No. 123R using the modified prospective application transition method. Under this transition method, theEquity-based compensation cost recognized beginning January 1, 2006 includes compensation cost for (i) all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (ii) all share-based payments granted subsequent to December 31, 2005 based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. Compensation cost is recognized ratably over the requisite vesting period or, for 2006 grants, to the retirement date for retirement eligible employees, if earlier. Use of the date of retirement eligibility to record the expense associated with awards granted to retirement eligible employees did not materially affect the company’s results of operationsreduced diluted earnings per share by $.02 in the first quarter of both 2007 and 2006. Prior period amounts have not been restated for the adoption of SFAS No. 123R.

As a result of the adoption of SFAS No. 123R, the company’s results for the quarter ended April 1, 2006 include incremental share-based compensation pre-tax expense of $5.3 million related to stock options. The total stock-based compensation cost of $6.0 million, including restricted stock awards, has been included in the statement of income within the applicable operating expense where the company reports the option holders’ compensation cost. The company has recognized a related tax benefit associated with its share-based compensation arrangements totaling $2.1 million. The incremental expense, net of the related tax benefit, resulted in a $.02 decrease in both basic and diluted earnings per share in the first quarter of 2006. The adoption of SFAS No. 123R also resulted in the inclusion in cash flows from financing activities of $4.3 million of tax benefits from exercised stock options that would have been reflected in cash flows from operating activities prior to adoption of SFAS No. 123R.

Stock Options— The fair value of each option grant is estimated using the Black-Scholes option pricing model. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the historical volatility of the company’s stock. The average expected life was estimated using the simplified method for “plain vanilla” options as permitted by SAB 107. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term which approximates the expected life assumed at the date of grant. The compensation expense recognized for all equity-based awards is net of estimated forfeitures. Forfeitures are estimated based on an analysis of actual option forfeitures.

The weighted average assumptions used in the Black-Scholes option pricing model are as follows:

  Three Months Ended 
   April 1,  April 2,
   2006  2005
       
Expected Stock Price Volatility  28%  32%
Risk Free Interest Rate  4.7%  3.8%
Expected Life of Options (years)  4.5     4.3   
Expected Annual Dividend per Share 
$
—
 
$
—

The weighted average grant-date fair values of options granted during the first quarter of 2006 and 2005 were $10.99 and $9.06, respectively. The total intrinsic value of options exercised during the same periods was $14.3 million and $4.5 million, respectively. The intrinsic value is the difference between the market value of the shares on the exercise date and the exercise price of the option. The tax benefit realized from stock option exercises during the quarter ended April 1, 2006 was $4.3 million.


12
THERMO ELECTRON CORPORATION

7.Stock-based Compensation Plans and Stock-based Compensation Expense (continued)

A summary of option activity as of April 1, 2006 and changes during the three months then ended is presented below:

 
Shares
(In thousands) 
  
Weighted
Average
Exercise Price
 
Weighted
Average
Remaining
Contractual Term
(In years)
 
Aggregate
Intrinsic
Value
(In thousands)
          
Outstanding at December 31, 2005 
12,084
 
$
22.65
    
Granted
 
2,817
  
34.86
    
Exercised
 
(894
)
 
18.50
    
Canceled
 
(69
)
 
29.34
    
Expired
 
(9
)
 
63.45
    
          
Outstanding at April 1, 2006 
13,929
  
25.33
 4.9 
352,789
          
Vested and Exercisable at April 1, 2006 
6,855
  
21.72
 3.4 
148,894

As of April 1, 2006, there was $57.2 million of total unrecognizedUnrecognized compensation cost related to nonvestedunvested stock options granted. The costand restricted stock total approximately $53 million and $22 million, respectively, as of March 31, 2007, and is expected to be recognized over a weighted average periodperiods of 2.2 years.3 years and 2 years, respectively.

Restricted Share Awards — The company awards to a number of key employees restricted company common stock or restricted units that convert into an equivalent number of shares of common stock assuming continued employment, with some exceptions. The awards generally vest in equal annual installments over two to three years, assuming continued employment, with some exceptions. The fair market value of the award at the time of the grant is amortized to expense over the period of vesting. Recipients of restricted shares have the right to vote such shares and receive dividends, whereas recipients of restricted units have no voting rights and are entitled to receive dividend equivalents. The fair value of restricted share awards is determined based on the number of shares granted and the market value of the company’s shares on the grant date. During the quarter ended April 1, 2006, the company granted 27,500 share awards at a weighted average fair value of $34.31 on the grant date.

A summary of the status of the company’s restricted shares as of April 1, 2006 and changes during the three-months then ended are presented below:

Nonvested Restricted Share Awards Shares  
Weighted Average
Grant-Date Fair
Value
      
Nonvested at December 31, 2005 
199,334
 
$
27.03
Granted
 
27,500
  
34.31
Vested
 
(38,333
)
 
25.42
      
Nonvested at April 1, 2006 
188,501
  
28.43

As of April 1, 2006, there was $4.1 million of total unrecognized compensation cost related to nonvested restricted share awards. That cost is expected to be recognized over a weighted average period of 2.1 years. The total fair value of shares vested during the first quarter of 2006 and 2005 were $1.0 million and $0.9 million, respectively.


13
THERMO ELECTRON CORPORATION

7.Stock-based Compensation Plans and Stock-based Compensation Expense (continued)

Prior to January 1, 2006,2007, the company accounted for stock-basedmade equity compensation plans in accordance with the provisionsgrants to employees consisting of APB Opinion No. 25, as permitted by SFAS No. 123,5,000 restricted shares and accordingly did not recognize compensation expense for the issuance of options with an exercise price equal to or greater than the market price at the date of grant. Had compensation cost for awards granted after 1994 under the company’s stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method set forth under SFAS No. 123, and had the fair value of awards been amortized on a straight-line basis over the vesting period, the effect on certain financial information of the company for the first quarter of 2005 would have been as follows:purchase 201,000 shares.

 Three Months Ended 
(In thousands except per share amounts) April 2, 2005 
     
Income from Continuing Operations:    
As reported
 
$
45,583
 
   Add: Stock-based employee compensation expense included in reported results, net of tax
  
417
 
   Deduct: Total stock-based employee compensation expense determined under the fair-value-based
          method for all awards, net of tax
  
(3,883
)
     
Pro forma
 
$
42,117
 
     
Basic Earnings per Share from Continuing Operations:    
As reported
 
$
.28
 
Pro forma
 
$
.26
 
     
Diluted Earnings per Share from Continuing Operations:    
As reported
 
$
.28
 
Pro forma
 
$
.26
 
     
Net Income:    
As reported
 
$
48,856
 
   Add: Stock-based employee compensation expense included in reported net income, net of tax
  
417
 
   Deduct: Total stock-based employee compensation expense determined under the fair-value-based
          method for all awards, net of tax
  
(3,883
)
     
Pro forma
 
$
45,390
 
     
Basic Earnings per Share:    
As reported
 
$
.30
 
Pro forma
 
$
.28
 
     
Diluted Earnings per Share:    
As reported
 
$
.30
 
Pro forma
 
$
.28
 





14
THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

8.Defined Benefit Pension Plans

SeveralEmployees of a number of the company’s non-U.S. and certain U.S. subsidiaries principallyparticipate in Germany and England, and one U.S. subsidiary have defined benefit pension plans covering substantially all full-time employees at those subsidiaries. Some of the company’s plans are unfunded, as permitted under the plans and applicable laws. The company also has a postretirement healthcare program in which certain employees are eligible to participate. Net periodic benefit costs for the company’s pension plans in the aggregate includedinclude the following components:
 
 Three Months Ended  Three Months Ended 
  April 1,  April 2,  March 31, April 1, 
(In thousands)  2006  2005 
(In millions) 2007 2006 
              
Service Cost 
$
1,431
 
$
1,697
  
$
4.8
 
$
1.4
 
Interest Cost on Benefit Obligation  
3,537
  
3,221
   
15.3
  
3.5
 
Expected Return on Plan Assets  
(2,981
)
 
(2,802
)
  
(16.1
)
 
(3.0
)
Recognized Net Actuarial Loss  
895
  
645
 
Amortization of Net Loss  
1.2
  
0.9
 
Amortization of Prior Service Costs  
44
  
—
   
—
  
0.1
 
              
 
$
2,926
 
$
2,761
 
Net Periodic Benefit Cost 
$
5.2
 
$
2.9
 

Net periodic benefit costs for the company’s other postretirement benefit plans (which were assumed in the Fisher merger) include the following components:

  Three Months Ended 
(In millions) March 31, 2007 
     
Service Cost 
$
0.2
 
Interest Cost on Benefit Obligation  
0.4
 
     
Net Periodic Benefit Cost 
$
0.6
 

9.Swap Arrangement 

During 2002, the company entered into interest-rate swap arrangements for its $128.7 million principal amount 7 5/8% senior notes, due in 2008, with the objective of reducing interest costs. The arrangements provide that the company will receive a fixed interest rate of 7 5/8% and will pay a variable rate of 90-day LIBOR plus 2.19% (7.19%(7.51% as of April 1, 2006)March 31, 2007). The swaps have terms expiring at the maturity of the debt. The swaps are designated as fair-value hedges and as such, are carried at fair value, which resulted in an increase in other long-term assets and long-term debt totaling $2.6$3 million at April 1, 2006.March 31, 2007. The swap arrangements are with different counterparties than the holders of the underlying debt. Management believes that any credit risk associated with the swaps is remote based on the creditworthiness of the financial institutions issuing the swaps.


15
THERMO FISHER SCIENTIFIC INC.
10.Warranty Obligations

Product warranties are included in other accrued expenses in the accompanying balance sheet. The changes in the carrying amount of warranty obligations are as follows:
 
 Three Months Ended  Three Months Ended 
  April 1,  April 2,  March 31, April 1, 
(In thousands)  2006  2005 
(In millions) 2007 2006 
              
Beginning Balance
 
$
33,453
 
$
27,369
  
$
45.5
 
$
33.4
 
Provision charged to income
  
8,783
  
5,623
   
12.2
  
8.8
 
Usage
  
(8,730
)
 
(4,688
)
  
(7.9
)
 
(8.7
)
Acquisitions
  
0.5
  
—
 
Adjustments to previously provided warranties, net
  
(291
)
 
(571
)
  
0.5
  
(0.3
)
Other, net (a)
  
124
  
(583
)
  
0.5
  
0.1
 
              
Ending Balance
 
$
33,339
 
$
27,150
  
$
51.3
 
$
33.3
 

(a)Primarily represents the effects of currency translation.


15
THERMO ELECTRON CORPORATION

11.Restructuring and Other Costs, Net

In responseRestructuring costs prior to a downturn in markets served by the company and in connection with the company’s overall reorganization, restructuring2006 primarily related to actions were initiated in 2003 and, to a lesser extent, 2004 in a number of business units to reduce costs and redundancies, principally through headcount reductions and consolidation of facilities. Restructuring and other costs recorded in 2005 were primarily for reductions in staffing levels at existing businesses resulting from the integration of Kendro and the consolidation of two facilities in Texas as well as charges associated with actions initiated prior to 2005 that could not be recorded until incurred and adjustments to previously provided reserves due to changes in estimates of amounts due for abandoned facilities, net of expected sub-tenant rental income. The restructuring actions undertaken prior to 2005 were substantially complete at the end of 2004. Restructuring costs in 2006 included charges for consolidation of a U.K. facility into an existing factory in Germany and remaining costs of prior actions. The company is continuing to evaluate potential restructuring actions that may be undertaken within existing businesses with which Kendro is being integrated. Such actions may include consolidation of facilities and reductions in staffing levels. In April 2006, the company announced it will close a plant in Massachusetts and consolidate its operations with those of an acquired Kendro facility in North Carolina.Carolina, charges for consolidation of a U.K. facility into an existing factory in Germany, the move of manufacturing operations in New Mexico to other plants in the U.S. and Europe and remaining costs of prior actions. Restructuring costs in 2007 include plans to consolidate anatomical pathology operations currently in Pennsylvania with a Fisher site in Michigan. The company is finalizing its plan for potential restructuring actions that may be undertaken at Fisher or within existing businesses with which Fisher is being integrated. Such actions may include rationalization of product lines, consolidation of facilities and reductions in staffing levels. The cost of actions at Fisher businesses is being charged to the cost of the acquisition while the cost of actions at existing businesses being integrated with Fisher is charged to restructuring expense. The company expects to incur approximately $8 millionfinalize its restructuring plans related to the Fisher merger no later than one year from the date of charges associated with this action, principally over the second and third quarters of 2006. These charges will include $5.5 million of cash costs, including $2.3 million of severance and $3.2 million of abandoned-facility costs. In addition, the company expects to write-off $2.5 million of fixed assets. The company has not finalized its plans for integrating Kendro with its existing business but expects that charges to expense will ultimately total $15 - $20 million, of which approximately $8 million has been recorded as of April 1, 2006. Also, the company expects to incur an additional $2 million of restructuring costs through the remainder of 2006 for charges associated with the actions undertaken prior to 2006 that cannot be recorded until incurred.merger.

During the first quarter of 2006,2007, the company recorded net restructuring and other costs by segment as follows:

( (In millions) 
Analytical
Technologies
 
Laboratory
Products and
Services
 Corporate Total 
             
Cost of Revenues 
$
29.1
 
$
7.3
 
$
—
 
$
36.4
 
Restructuring and Other Costs, Net  
3.1
  
0.6
  
3.7
  
7.4
 
  Life and                     
  Laboratory Measurement       
$
32.2
 
$
7.9
 
$
3.7
 
$
43.8
 
(In thousands)  Sciences  and Control  Other  Corporate  Total
           
Restructuring and Other Costs, Net 
$
3,046
 
$
540
 
$
2
 
$
6
 
$
3,594



16
THERMO FISHER SCIENTIFIC INC.
11.Restructuring and Other Costs, Net (continued)

The components of net restructuring and other costs by segment are as follows:

Life and Laboratory SciencesAnalytical Technologies

The Life and Laboratory SciencesAnalytical Technologies segment recorded $3.0$32.2 million of net restructuring and other charges in 2007. The segment recorded charges to cost of revenues of $29.1 million, primarily for the first quartersale of 2006. This amountinventories revalued at the date of acquisition, and $3.1 million of other costs, net. These other costs consisted of $2.9$3.0 million of cash costs, principally associated with the consolidation of a U.K. facility into an existing factory in Germany,consolidations, including $2.2$2.0 million of severance for 8110 employees across all functions; $0.4 million of net abandoned-facility costs; and $0.3 million of other cash costs, primarily relocation expenses. In addition, the segment recorded a lossfor charges associated with facilities vacated in prior periods where estimates of $0.1 million on the disposal of a product line.

Measurement and Control

The Measurement and Control segment recorded $0.5 million of net restructuring and other charges in the first quarter of 2006. The segment recorded $1.3 million of cash costs for cost reduction measures including $1.1 million of severance for 7 employees, primarily in sales and service functions; $0.1 million of net abandoned-facility costs, primarilysub-tenant rental income have changed or for costs that could not be recorded until incurred; and $0.6 million of other cash costs, primarily relocation expenses associated with facility consolidations.

Laboratory Products and Services

The Laboratory Products and Services segment recorded $7.9 million of net restructuring and other charges in 2007. The segment recorded charges to cost of revenues of $7.3 million, consisting primarily of the sale of inventories revalued at the date of acquisition; and $0.6 million of other costs, net, all of which were cash costs. These other costs consisted of $0.3 million of severance for 10 employees primarily in sales and service functions; $0.2 million of abandoned-facility costs; and $0.1 million of other cash costs, primarily relocation expenses. In addition,

Corporate

The company recorded $3.7 million of restructuring and other charges at its corporate office in 2007, all of which were cash costs. These cash costs were primarily for merger-related expenses and retention agreements with certain Fisher employees. Retention costs are accrued ratably over the segment recorded a pre-tax gain of $0.8 million onperiod the disposal of a product line.employees must work to qualify for the payment.


1617
THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

11.Restructuring and Other Costs, Net (continued)

General 

The following table summarizes the cash components of the company’s restructuring plans. The noncash components and other amounts reported as restructuring and other costs, net, in the accompanying 20062007 statement of income have been summarized in the notes to the table. Accrued restructuring costs are included in other accrued expenses in the accompanying balance sheet.

 
 
(In thousands)
  
Severance
  
Employee
Retention (a)
  
Abandonment
of Excess
Facilities
  
Other
  
Total
 
                 
Pre-2004 Restructuring Plans
                
Balance at December 31, 2005
 
$
798
 
$
—
 
$
7,908
 
$
—
 
$
8,706
 
Costs incurred in 2006 (b)
  
—
  
—
  
376
  
36
  
412
 
Reserves reversed
  
—
  
—
  
(338
)
 
—
  
(338
)
Payments
  
(79
)
 
—
  
(950
)
 
(36
)
 
(1,065
)
Currency translation
  
4
  
—
  
43
  
—
  
47
 
                 
Balance at April 1, 2006
 
$
723
 
$
—
 
$
7,039
 
$
—
 
$
7,762
 
                 
2004 Restructuring Plans
                
Balance at December 31, 2005
 
$
451
 
$
—
 
$
206
 
$
589
 
$
1,246
 
Costs incurred in 2006 (b)
  
6
  
—
  
—
  
7
  
13
 
Reserves reversed
  
—
  
—
  
(3
)
 
—
  
(3
)
Payments
  
(117
)
 
—
  
(16
)
 
(7
)
 
(140
)
Currency translation
  
7
  
—
  
3
  
1
  
11
 
                 
Balance at April 1, 2006
 
$
347
 
$
—
 
$
190
 
$
590
 
$
1,127
 
                 
2005 Restructuring Plans
                
Balance at December 31, 2005
 
$
6,132
 
$
313
 
$
1,131
 
$
357
 
$
7,933
 
Costs incurred in 2006 (b)
  
3,401
  
5
  
740
  
313
  
4,459
 
Reserves reversed
  
(117
)
 
—
  
(173
)
 
—
  
(290
)
Payments
  
(4,957
)
 
(257
)
 
(924
)
 
(625
)
 
(6,763
)
Currency translation
  
60
  
—
  
3
  
(1
)
 
62
 
                 
Balance at April 1, 2006
 
$
4,519
 
$
61
 
$
777
 
$
44
 
$
5,401
 
 
 
(In millions)
 
 
 
Severance
 
Employee
Retention (a)
 
Abandonment
of Excess
Facilities
 
 
 
Other
 
 
 
Total
 
                 
Pre-2006 Restructuring Plans
                
Balance at December 31, 2006
 
$
1.8
 
$
0.3
 
$
9.4
 
$
0.6
 
$
12.1
 
Costs incurred in 2007 (b)
  
0.5
  
—
  
0.2
  
0.1
  
0.8
 
Reserves reversed
  
(0.4
)
 
—
  
—
  
—
  
(0.4
)
Payments
  
(0.3
)
 
(0.3
)
 
(6.5
)
 
(0.1
)
 
(7.2
)
                 
Balance at March 31, 2007
 
$
1.6
 
$
—
 
$
3.1
 
$
0.6
 
$
5.3
 
                 
2006 Restructuring Plans
                
Balance at December 31, 2006
 
$
4.0
 
$
0.8
 
$
2.7
 
$
—
 
$
7.5
 
Costs incurred in 2007 (b)
  
0.1
  
1.4
  
0.2
  
1.0
  
2.7
 
Payments
  
(1.1
)
 
(0.4
)
 
(1.1
)
 
(1.0
)
 
(3.6
)
                 
Balance at March 31, 2007
 
$
3.0
 
$
1.8
 
$
1.8
 
$
—
 
$
6.6
 
                 
2007 Restructuring Plans
                
Costs incurred in 2007 (b)
 
$
2.1
 
$
0.2
 
$
0.2
 
$
1.7
 
$
4.2
 
Payments
  
(0.4
)
 
—
  
—
  
(1.5
)
 
(1.9
)
                 
Balance at March 31, 2007
 
$
1.7
 
$
0.2
 
$
0.2
 
$
0.2
 
$
2.3
 

(a)Employee-retention costs are accrued ratably over the period through which employees must work to qualify for a payment.
(b)
Excludes a loss ofnon-cash items including $0.1 million asset write down in the Life and Laboratory Sciences segment and a gain of $0.8 million in the Measurement and Control segment on the disposal of product lines.Analytical Technologies segment.

The company expects to pay accrued restructuring costs as follows: severance, employee-retention obligations and other costs, primarily through 2006;2007; and abandoned-facility payments, over lease terms expiring through 2012.2013.


1718
THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

12.Litigation and Related Contingencies

On September 3, 2004, Applera Corporation, MDS Inc. and Applied Biosystems/MDS Scientific Instruments filed a lawsuit against the company in U.S. federal court. These plaintiffs allege that the company’s mass spectrometer systems, including its triple quadrupole and certain of its ion trap systems, infringe a patent of the plaintiffs. The plaintiffs seek damages, including treble damages for alleged willful infringement, attorneys’ fees, prejudgment interest and injunctive relief.

In the opinion of management, an unfavorable outcome of this matter could have a material adverse effect on the company’s financial position as well as its results of operations and cash flows.

On December 8, 2004 and February 23, 2005, the company asserted in two lawsuits against a combination of Applera Corporation, MDS Inc. and Applied Biosystems/MDS Scientific Instruments that one or more of these parties infringe two patents of the company.

OnThe company has a reserve for environmental costs of approximately $24 million at March 11, 2006,31, 2007. Management believes that this accrual is adequate for environmental remediation costs the company settled its previously disclosed arbitrationexpects to incur. As a result, the company believes that the ultimate liability with Chromagen, Inc. on terms that wererespect to environmental remediation matters will not material to the company.

The company’s continuing and discontinued operations are a defendant in a number of other pending legal proceedings incidental to present and former operations. The company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on itsthe company’s financial position, results of operations or cash flows. However, the company may be subject to additional remedial or compliance costs due to future events, such as changes in existing laws and regulations, changes in agency direction or enforcement policies, developments in remediation technologies or changes in the conduct of the company’s operations, which could have a material adverse effect on the company’s financial position, results of operations or cash flows. Although these environmental remediation liabilities do not include third-party recoveries, the company may be able to bring indemnification claims against third parties for liabilities relating to certain sites.

There are various other lawsuits and claims pending against the company involving contract, product liability and other issues. In view of the company’s financial condition and the accruals established for related matters, management does not believe that the ultimate liability, if any, related to these matters will have a material adverse effect on the company’s financial condition, results of operations or cash flows.

13.Adoption of FASB Interpretation No. 48

In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Under FIN 48, the financial statements reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without discounting for the time value of money. FIN 48 also revises disclosure requirements and introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax benefits.

The company adopted the provisions of FIN 48 on January 1, 2007. As a result of the implementation of FIN 48, the company recognized no material adjustment in the liability for unrecognized tax benefits. As of the adoption date of January 1, 2007, the company had $88 million of unrecognized tax benefits, of which $38 million, if recognized, would affect the effective tax rate and the remaining $50 million, if recognized, would decrease goodwill. As of the adoption date the company had accrued interest expense and penalties related to the unrecognized tax benefits of $5 million which is included in the $88 million of unrecognized tax benefits. The company recognizes interest and penalties related to unrecognized tax benefits as a component of tax expense.

The company conducts business globally and, as a result, Thermo Fisher or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, China, Denmark, Finland, France, Germany, Italy, Japan, the United Kingdom and the United States. With few exceptions, the company is no longer subject to U.S. federal, state and local, or non-U.S., income tax examinations for years before 2001.


19
THERMO FISHER SCIENTIFIC INC.
13.Adoption of FASB Interpretation No. 48 (continued)

The company is currently under audit by the Internal Revenue Service for the 2001 to 2004 tax years. The IRS is also auditing the 2003, 2004 and 2005 pre-acquisition tax years of certain Fisher subsidiaries. It is likely that the examination phase of these audits will be completed within twelve months. There have been no significant changes to the status of these examinations during the quarter ended March 31, 2007 and the company does not currently expect any significant increases to previously recorded uncertain tax positions.

14.Discontinued Operations

During 2006, the company committed to a plan to dispose of Genevac Limited (Genevac), a Fisher business which is a manufacturer of solvent evaporation technology. The decision follows the U.S. Federal Trade Commission (FTC) consent order which requires divesture of Genevac for FTC approval of the Thermo Fisher merger under the Hart-Scott-Rodino Antitrust Improvements Act. Genevac was sold on April 3, 2007, for net proceeds of approximately $22 million in cash. The carrying value of this business at March 31, 2007, reflects the price at which it was sold, net of related transaction costs. The results of discontinued operations also include the results of Systems Manufacturing Corporation, a Fisher business which provides consoles, workstations and server enclosures for information technology operations and data centers. The operating results and assets and liabilities of these entities were not material at March 31, 2007, or for the period then ended.

In the first quarter of 2006, and 2005, the company recorded after-tax gains of $3.3 million, from the disposal of discontinued operations. The gains represent additional proceeds from the sale of several businesses divested prior to 2004, includingnet of a charge for the settlement of an indemnification claim that arose from a divested business.

15.Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for the company in 2005,2008. The company is currently evaluating the salepotential impact of abandoned real estate and post-closing adjustments.adopting SFAS No. 157.

CurrentIn February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to measure eligible financial assets, financial liabilities and certain other assets and liabilities at fair value on an instrument-by-instrument basis. The fair value measurement election is irrevocable once made and subsequent changes in fair value must be recorded in earnings. The effect of discontinued operationsadoption will be reported as a cumulative-effect adjustment to beginning retained earnings. The Company will adopt SFAS No. 159 in 2008 and is currently evaluating if it will elect the accompanying balance sheet includes obligationsfair value option for abandoned leases, litigation, severanceany of its eligible financial instruments and related obligations of previously owned businesses.other items.

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. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates” and similar expressions are intended to identify forward-looking statements. While the company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the company’s estimates change, and readers should not rely on those forward-looking statements as representing the company’s views as of any date subsequent to the date of the filing of this Quarterly Report. There are a number of important factors that could cause the actual results of the company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading “Risk Factors” in this report on Form 10-Q.



1820
THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

Overview of Results of Operations and Liquidity

The company develops, manufactures and manufacturessells a broad range of products that are sold worldwide. The company expands the product lines and services it offers by developing and commercializing its own core technologies and by making strategic acquisitions of complementary businesses. TheFollowing the November 2006 merger with Fisher Scientific International Inc., the company’s continuing operations fall into two business segments: LifeAnalytical Technologies and Laboratory SciencesProducts and Measurement and Control.Services.

Revenues
  
  Three Months Ended
(Dollars in thousands) April 1, 2006
April 2, 2005
           
Life and Laboratory Sciences 
$
512,355
 74.9% 
$
393,305
 70.3%
Measurement and Control  
171,932
 25.1%  
165,903
 29.7%
           
  
$
684,287
 100% 
$
559,208
 100%
                                          Three Months Ended 
(Dollars in millions) March 31, 2007 April 1, 2006 
              
Analytical Technologies 
$
1,006.2
  43.0% 
$
504.6
  73.7% 
Laboratory Products and Services  
1,416.5
  60.6%  
179.7
  26.3% 
Eliminations  
(84.5
)
 (3.6)%  
—
  0.0% 
              
  
$
2,338.2
  100% 
$
684.3
  100% 

The company’s revenues grew by 22% duringSales in the first quarter of 2006 over2007 were $2.34 billion, an increase of $1.65 billion from the same period in 2005. Acquisitions, netfirst quarter of divestitures, caused2006. Sales increased principally due to the merger with Fisher as well as other acquisitions and, to a 17% increase in reported revenues. The unfavorable effectslesser extent, increased demand and the favorable effect of currency translation resulted in a 4% decrease intranslation. If the merger with Fisher had occurred on January 1, 2006, revenues in 2006.would have increased $242 million (12%), over pro forma 2006 revenues. Aside from the effecteffects of acquisitions net ofand divestitures made by both companies and currency translation (discussed in total and by segment below), revenues increased 10%. Revenues grewover pro forma 2006 revenues by $134 million (6%) due to higher revenues at existing businesses as a result of increased demand, in each of the company’s principal businessesdiscussed below, and, to a lesser extent, increased prices.price increases.

The company’s strategy is to augment internal growth at existing businesses with complementary acquisitions such as those completed in 2005. The2007 and 2006. In addition to the merger with Fisher, the principal acquisitions included Ionalytics Corporation,the Spectronex AG and Flux AG businesses of Swiss Analytic Group AG, a distributor of mass spectrometry, chromatography and surface science instruments and a manufacturer of high performance liquid chromography pumps and software in January 2007; Cohesive Technologies Inc., a provider of an ion-filtering device used withadvanced sample extraction and liquid chromatography products in December 2006; GV Instruments Limited, a manufacturer of isotope ratio mass spectrometers, which was acquired in August 2005; the Kendro Laboratory Products division of SPX Corporation,July 2006; and EGS Gauging, Inc., a provider of a wide range of laboratory equipment for sample preparation, processing and storage,flat polymer web gauging products, which was acquired in May 2005; Rupprecht and Patashnick Co., Inc. (R&P), a provider of continuous particulate monitoring instrumentation for the ambient air, emissions monitoring and industrial hygiene markets, which was acquired in April 2005; and Niton LLC, a provider of portable X-ray analyzers to the metals, petrochemical and environmental markets, which was acquired in March 2005.June 2006.

In the first quarter of 2006,2007, the company’s operating income and operating income margin were $67.8$192 million and 8.2%, respectively, compared with $68 million and 9.9%, respectively, compared with $59.7 million and 10.7%, respectively, in 2005.2006. (Operating income margin is operating income divided by revenues.) The increase in operating income was due to higher demandinclusion of the Fisher businesses and, to a lesser extent, higher profitability at existing businesses resulting from incremental revenues, price increases and productivity improvements. These increases were offset in part by $18.1$114 million of higher amortization expense associated withas a result of acquisition-related intangible assets from the Fisher merger and $5.3other acquisitions and $36 million of stock option compensation expense.charges for the sale of inventories revalued at the date of the merger. The decrease in operating income margin resultedwas primarily fromdue to the higher amortization expense relative$36 million charge to cost of revenues as a resultassociated with inventories revalued at the date of the recent acquisitions.merger.

Income from continuing operations decreased to $43.6 millionThe company’s effective tax rate was 16.2% and 31.9% in the first quarter of 2007 and 2006, from $45.6 millionrespectively. The decrease in the effective tax rate in the first quarter of 2005,2007 compared with the first quarter of 2006 was primarily due to higher interest expense associated with debt used to fund the Kendro acquisition and an increasegeographic changes in the company’s effective tax rate.

During the first three months of 2006, the company’s cash flow from operations totaled $31.9 million, compared with $30.3 millionprofits, in the first three months of 2005.

As of April 1, 2006, the company’s outstanding debt totaled $560.5 million, of which 68% is due in 2008 and thereafter. The company expects that its existing cash and short-term investments and future cash flow from operations together with available unsecured borrowings of up to $250 million under its existing 5-year revolving credit agreement and available unsecured borrowings under its 5-year euro facility are sufficient to meet its capital requirements for the foreseeable future, including at least the next 24 months.



19
THERMO ELECTRON CORPORATION

Critical Accounting Policies

The company’s discussion and analysis of its financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with accounting principles generally acceptedparticular lower income in the United States due to charges and amortization associated with the Fisher merger, together with the impact of America. The preparationan enhanced tax credit for qualifying U.S. research costs, growth in lower tax regions such as Asia and, to a lesser extent, a tax gain in excess of these financial statements requires the company to make estimates and judgments that affectrelated book gain on the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent liabilities. On an on-going basis, the company evaluates its estimates, including those related to equity investments, bad debts, inventories, intangible assets, warranty obligations, income taxes, pension costs, stock-based compensation, contingencies and litigation, restructuring and sale of businesses.a product line in 2006. The company basescurrently expects its estimates on historical experience, current market and economic conditions and other assumptions that management believes are reasonable. The results of these estimates formtax rate for the basis for judgments about the carrying value of assets and liabilities where the values are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.full year to be approximately 16%.

The company believes the following represent its critical accounting policies and estimates used in the preparation of its financial statements:

(a)The company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to pay amounts due. Such allowances totaled $22.5 million at April 1, 2006. The company estimates the amount of customer receivables that are uncollectible based on the age of the receivable, the creditworthiness of the customer and any other information that is relevant to the judgment. If the financial condition of the company’s customers were to deteriorate, reducing their ability to make payments, additional allowances would be required.

(b)The company writes down its inventories for estimated obsolescence for differences between the cost and estimated net realizable value taking into consideration usage in the preceding 12 months, expected demand and any other information that is relevant to the judgment. If ultimate usage or demand vary significantly from expected usage or demand, additional writedowns may be required.

(c)The company periodically evaluates goodwill for impairment using forecasts of discounted future cash flows. Goodwill totaled $1.95 billion at April 1, 2006. Estimates of future cash flows require assumptions related to revenue and operating income growth, asset-related expenditures, working capital levels and other factors. Different assumptions from those made in the company’s analysis could materially affect projected cash flows and the company’s evaluation of goodwill for impairment. Should the fair value of the company’s goodwill decline because of reduced operating performance, market declines, or other indicators of impairment, or as a result of changes in the discount rate, charges for impairment of goodwill may be necessary.

(d)The company estimates the fair value of acquisition-related intangible assets principally based on projections of cash flows that will arise from identifiable intangible assets of acquired businesses. The projected cash flows are discounted to determine the present value of the assets at the dates of acquisition. Actual cash flows arising from a particular intangible asset could vary from projected cash flows which could imply different carrying values and annual amortization expense from those established at the dates of acquisition.

(e)The company reviews other long-lived assets for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. Other long-lived assets totaled $912.5 million at April 1, 2006, including $283.1 million of fixed assets. In testing a long-lived asset for impairment, assumptions are made concerning projected cash flows associated with the asset. Estimates of future cash flows require assumptions related to revenue and operating income growth and asset-related expenditures associated with the asset being reviewed for impairment. Should future cash flows decline significantly from estimated amounts, charges for impairment of other long-lived assets may be necessary.



20
THERMO ELECTRON CORPORATION

Critical Accounting Policies (continued)

(f)In instances where the company sells equipment with a related installation obligation, the company generally recognizes revenue related to the equipment when title passes. The company recognizes revenue related to the installation when it performs the installation. The allocation of revenue between the equipment and the installation is based on relative fair value at the time of sale. Should the fair value of either the equipment or the installation change, the company’s revenue recognition would be affected. If fair value is not available for any undelivered element, revenue for all elements is deferred until delivery is completed.

(g)In instances where the company sells equipment with customer-specified acceptance criteria, the company must assess whether it can demonstrate adherence to the acceptance criteria prior to the customer’s acceptance testing to determine the timing of revenue recognition. If the nature of customer-specified acceptance criteria were to change or grow in complexity such that the company could not demonstrate adherence, the company would be required to defer additional revenues upon shipment of its products until completion of customer acceptance testing.

(h)The company’s software license agreements generally include multiple products and services, or “elements.” The company recognizes software license revenue based on the residual method after all elements have either been delivered or vendor specific objective evidence (VSOE) of fair value exists for any undelivered elements. In the event VSOE is not available for any undelivered element, revenue for all elements is deferred until delivery is completed. Revenues from software maintenance and support contracts are recognized on a straight-line basis over the term of the contract. VSOE of fair value of software maintenance and support is determined based on the price charged for the maintenance and support when sold separately. Revenues from training and consulting services are recognized as services are performed, based on VSOE, which is determined by reference to the price customers pay when the services are sold separately.

(i)At the time the company recognizes revenue, it provides for the estimated cost of product warranties and returns based primarily on historical experience and knowledge of any specific warranty problems that indicate projected warranty costs may vary from historical patterns. The liability for warranty obligations of the company’s continuing operations totaled $33.3 million at April 1, 2006. Should product failure rates or the actual cost of correcting product failures vary from estimates, revisions to the estimated warranty liability would be necessary.

(j)The company estimates the degree to which tax assets and loss carryforwards will result in a benefit based on expected profitability by tax jurisdiction, and provides a valuation allowance for tax assets and loss carryforwards that it believes will more likely than not go unused. If it becomes more likely than not that a tax asset or loss carryforward will be used, the company reverses the related valuation allowance with an offset generally to goodwill as most of the tax attributes arose from acquisitions. The company’s tax valuation allowance totaled $67.1 million at April 1, 2006. Should the company’s actual future taxable income by tax jurisdiction vary from estimates, additional allowances or reversals thereof may be necessary.

(k)The company provides a liability for future income tax payments in the worldwide tax jurisdictions in which it operates. Accrued income taxes totaled $39.5 million at April 1, 2006. Should tax return positions that the company expects are sustainable not be sustained upon audit, the company could be required to record an incremental tax provision for such taxes. Should previously unrecognized tax benefits ultimately be sustained, a reduction in the company’s tax provision would result.


21
THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

Critical Accounting PoliciesOverview of Results of Operations and Liquidity (continued)

(l)The company estimates losses on contingencies and litigation for which a loss is probable and provides a reserve for losses that can be reasonably estimated. Should the ultimate losses on contingencies and litigation vary from estimates, adjustments to those reserves may be required.
Income from continuing operations increased to $139 million in the first quarter of 2007, from $44 million in the first quarter of 2006, primarily due to the items discussed above that increased operating income in 2007, offset in part by higher interest expense, primarily associated with debt assumed in the Fisher merger.

(m)One of the company’s U.S. subsidiaries and several non-U.S. subsidiaries sponsor defined benefit pension plans. Major assumptions used in the accounting for these employee benefit plans include the discount rate, expected return on plan assets and rate of increase in employee compensation levels. Assumptions are determined based on company data and appropriate market indicators in consultation with third party actuaries, and are evaluated each year as of the plans’ measurement date. Net periodic pension costs for defined benefit plans totaled $16.1 million in 2005 and the company’s unfunded benefit obligation totaled $124 million at year-end 2005. Should any of these assumptions change, they would have an effect on net periodic pension costs and the unfunded benefit obligation. For example, a 10% decrease in the discount rate would result in an annual increase in pension expense of approximately $3 million and an increase in the benefit obligation of approximately $31 million.
(n)The fair value of each stock option granted by the company is estimated using the Black-Scholes option pricing model. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Management estimates expected volatility based on the historical volatility of the company’s stock. The expected life of a grant is estimated using the simplified method for “plain vanilla” options as permitted by SAB 107. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term which approximates the expected life assumed at the date of grant. Changes in these input variables would affect the amount of expense associated with stock-based compensation. The compensation expense recognized for all equity-based awards is net of estimated forfeitures. The company estimates forfeiture rates based on historical analysis of option forfeitures. If actual forfeitures should vary from estimated forfeitures, adjustments to compensation expense may be required.
(o)The company records restructuring charges for the cost of vacating facilities based on future lease obligations and expected sub-rental income. The company’s accrued restructuring costs for abandoned facilities in continuing operations totaled $8.0 million at April 1, 2006. Should actual cash flows associated with sub-rental income from vacated facilities vary from estimated amounts, adjustments may be required.
During the first quarter of 2007, the company’s cash flow from operations totaled $219 million, compared with $32 million for the first quarter of 2006. The increase resulted from cash flow from the Fisher businesses and, to a lesser extent, improved cash flow at existing businesses.

(p)The company estimates the expected proceeds from any assets held for sale and, when necessary, records losses to reduce the carrying value of these assets to estimated realizable value. Should the actual or estimated proceeds, which would include post-closing purchase price adjustments, vary from current estimates, results could differ from expected amounts.
As of March 31, 2007, the company’s outstanding debt totaled $2.35 billion, of which approximately 87% is due in 2009 and thereafter. The company expects that its existing cash and short-term investments of $691 million as of March 31, 2007, and the company’s future cash flow from operations together with available unsecured borrowing capacity of up to $905 million under its existing 5-year revolving credit agreement, are sufficient to meet the working capital requirements of its existing businesses for the foreseeable future, including at least the next 24 months.

Critical Accounting Policies

Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements in the company’s Form 10-K for 2006, describe the significant accounting estimates and policies used in preparation of the consolidated financial statements. Actual results in these areas could differ from management’s estimates. As discussed below and in Note 13, the company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” on January 1, 2007. Other than this change, there have been no significant changes in the company’s critical accounting policies during the first three months of 2007.

In the ordinary course of business there is inherent uncertainty in quantifying the company’s income tax positions. The company assesses income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, the company has recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest has also been recognized.

Results of Operations

First Quarter 2007 Compa Quarter 2006 Comparedred With First Quarter 20052006

Continuing Operations

Sales in the first quarter of 20062007 were $684.3 million,$2.34 billion, an increase of $125.1 million (22%)$1.65 billion from the first quarter of 2005.2006. Sales increased $93.8 million (17%)principally due to acquisitions, net of divestitures. The unfavorable effects of currency translation resulted in a decrease in revenues of $21.5 million (4%) in 2006. Aside from the effect ofmerger with Fisher as well as other acquisitions net of divestitures, and currency translation, revenues increased $52.8 million (10%). The increase was primarily due to a broad-based increase in demand in each of the company’s principal businesses and, to a lesser extent, increased prices. Sales growthdemand and the favorable effect of currency translation. If the merger with Fisher had occurred on January 1, 2006, revenues would have increased $242 million (12%) over pro forma 2006 revenues, including increases of a) $56 million due to acquisitions made by the combined companies, net of divestitures, b) $52 million due to the favorable effect of currency translation and c) $134 million (6%) due to higher revenues at existing businesses as a result of increased demand and, to a lesser extent, price increases. Growth was particularly strong in North AmericaAsia and AsiaEurope and, to a lesser extent, in Europe.North America.


22
THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

First Quarter 2007 Compa Quarter 2006 Comparedred With First Quarter 20052006 (continued)
  Three Months Ended 
  March 31, April 1, 
  
2007
 
2006
 
        
  Operating Income Margin
       
        
  Consolidated  8.2%  9.9% 

Operating Income Margin
Three Months Ended
April 1,
2006
April 2,
2005
Consolidated9.9%10.7%
OperatingIn the first quarter of 2007, operating income was $67.8and operating income margin were $192 million and 8.2%, respectively, compared with $68 million and 9.9%, respectively, in the first quarter of 2006, compared with $59.7 million2006. The increase in the first quarter of 2005. Operatingoperating income margin decreased to 9.9% in 2006 from 10.7% in 2005, primarilywas due to $18.1inclusion of the Fisher businesses and, to a lesser extent, higher profitability at existing businesses resulting from incremental revenues, price increases and productivity improvements. These increases were offset in part by $114 million of higher amortization expense foras a result of acquisition-related intangible assets from the Fisher merger and $3.9$36 million of higher restructuring and other costs as discussed below.charges for the sale of inventories revalued at the date of the merger. The decrease in operating income margin was primarily due to the $36 million charge to cost of revenues associated with inventories revalued at the date of merger.

In response to a downturn in markets served by the company and in connection with the company’s overall reorganization, restructuring actions were initiated in 2003 and, to a lesser extent, 2004 in a number of business units to reduce costs and redundancies, principally through headcount reductions and consolidation of facilities. Restructuring and other costs were recorded in 2005 were primarily for reductions in staffing levels at existing businesses resulting fromduring the integrationfirst quarter of Kendro2007 and the consolidation of two facilities in Texas as well as charges associated with actions initiated prior to 2005 that could not be recorded until incurred and adjustments to previously provided reserves due to changes in estimates of amounts due for abandoned facilities, net of expected sub-tenant rental income. The restructuring actions undertaken prior to 2005 were substantially complete at the end of 2004.2006. Restructuring costs in 2006 included charges for consolidation of a U.K. facility into anthe 2007 period include merger-related exit costs at existing factory in Germany and remaining costs of prior actions.businesses. The company is continuing to evaluatefinalizing its plan for potential restructuring actions that may be undertaken at Fisher or within existing businesses with which KendroFisher is being integrated. Such actions may include rationalization of product lines, consolidation of facilities and reductions in staffing levels. In April 2006,The cost of actions at Fisher businesses is being charged to the company announced it will close a plant in Massachusetts and consolidate its operationscost of the acquisition, while the cost of actions at existing businesses being integrated with those of an acquired Kendro facility in North Carolina.Fisher is charged to restructuring expense. The company expects to incur approximately $8finalize its restructuring plans for Fisher no later than one year from the date of merger.

In the first quarter of 2007, the company recorded restructuring and other costs, net, of $43.8 million, including $36.4 million of charges associated with this action, principally overto cost of revenues, substantially all related to the second and third quarterssale of 2006. These charges will include $5.5inventories revalued at the date of acquisition (principally Fisher). The company incurred $7.3 million of cash costs, including $2.3 million ofprimarily for severance, abandoned facilities and $3.2 million of abandoned-facility costs. In addition, therelocation expenses at businesses that have been consolidated as well as merger-related costs, recorded as incurred (Note 11). The company expects to write-off $2.5additional charges of $11 million of fixed assets. The company has not finalized its plans for integrating Kendro with its existing business but expects that charges to expense will ultimately total $15 - $20 million, of which approximately $8 million has been recorded as of April 1, 2006. Also, the company expects to incur an additional $2 million of restructuring costs throughover the remainder of 20062007, primarily in the second quarter, for charges associated with the actions undertaken prior to 2006 that cannot be recorded until incurred.

sale of inventories revalued at the date of acquisition. In the first quarter of 2006, the company recorded restructuring and other costs, net, of $3.6 million, including $4.3 million of cash costs, primarily for severance, abandoned facilities and relocation expenses at businesses that have been consolidated. In addition, the company recorded a net gain of $0.8 million from disposal of a small product line (Note 11). In the first quarter of 2005, the company recorded restructuring and other income, net, of $0.3 million, including $2.4 million of cash costs, primarily for severance, abandoned facilities and relocation expenses at businesses that have been consolidated. In addition, the company recorded a gain of $2.7 million primarily from the sale of three abandoned buildings.line.

AsSubsequent to the acquisition of January 1,GVI, the UK Office of Fair Trading (OFT) commenced an investigation of the transaction to determine whether it qualified for consideration under the UK Enterprise Act. On December 15, 2006, the company adopted SFAS No. 123R “Shared-based Payment.” The standard requires that companies record as expenseOFT referred the effect of equity-based compensation over the applicable vesting period. The company adopted the standard using the modified prospective application transition method. Under this transition method, the compensation cost recognized beginning January 1, 2006 includes compensation cost for (i) all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (ii) all share-based payments granted subsequent to December 31, 2005 based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. Compensation cost is recognized ratably over the requisite vesting period or, for 2006 grants,transaction to the retirement dateUK Competition Commission for retirement eligible employees, if earlier. Prior period amounts further investigation under the Enterprise Act to determine whether the transaction had resulted in, or may be expected to result in, a substantial lessening of competition within any market in the UK for goods or services, particularly gas isotope ratio mass spectrometers (Gas IRMS), thermal ionization mass spectrometers (TIMS) and multicollector inductively coupled plasma mass spectrometers. Of GVI’s sales of $19 million in its fiscal 2006, $0.4 million were UK sales. The Competition Commission published its provisional findings on March 22, 2007, preliminarily concluding that the company’s acquisition of GVI would lead to a substantial lessening of competition in the UK in the markets for Gas IRMS and TIMS products. The Competition Commission has invited comments on their provisional findings, and the statutory deadline for publication of their final report is May 31, 2007. If the Competition Commission confirms its provisional decision, it is likely to seek remedies in the form of divestment of the GVI business by the company.


23
THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

First Quarter 2006 Compared2007 Compared With First Quarter 20052006 (continued)

haveDuring the investigation, the company is subject to certain undertakings, which took effect in October 2006, that require it not been restated.to take any action that will lead to further integration of the GVI business with the company or otherwise impair the GVI business from competing independently. The company recorded $5.3 is cooperating with the Competition Commission’s investigation and continuing to provide information supporting the company’s view that the acquisition is not anti-competitive. However, there can be no assurance as to the outcome of this matter. Goodwill and other intangible assets associated with the acquisition of GVI totaled $23 million of pre-tax expense inat March 31, 2007. Were the first quarter of 2006 for stock options. As of April 1, 2006,Competition Commission to require the company had $57.2 millionto divest of total unrecognized compensation costs related to nonvested stock options. The cost is expected to be recognized over a weighted average periodGVI, charges for impairment of 2.2 years.

As of January 1, 2006, the company adopted SFAS No. 151, “Inventory Costs - an amendment of ARB No. 43, Chapter 4.” SFAS No. 151 requires abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of SFAS No. 151 did not materially affect the company’s financial statements.assets could result.

Segment Results

The company’s management evaluates segment operating segment performance based on measures that are not determined in accordance with U.S. generally accepted accounting principles including adjusted operating income and adjusted operating income margin. Adjusted operating income is segmentusing operating income before certain charges to cost of revenues, principally associated with acquisition accounting; restructuring and other costs/income including costs arising from facility consolidations such as severance and abandoned lease expense and gains and losses from the sale of real estate and product lines; and amortization of acquisition-related intangible assets; and stock option compensation.assets. The company uses these measures because they help management understand and evaluate the segments’ core operating results and facilitate comparison of performance for determining compensation. Adjusted operating income margincompensation (Note 3). Accordingly, the following segment data is adjusted operating income divided by revenues.reported on this basis.
  Three Months Ended 
  March 31, April 1, 
(Dollars in millions) 2007 2006 
        
Revenues:
       
Analytical Technologies 
$
1,006.2
 
$
504.6
 
Laboratory Products and Services  
1,416.5
  
179.7
 
Eliminations  
(84.5
)
 
—
 
        
Consolidated Revenues 
$
2,338.2
 
$
684.3
 
        
Operating Income:
       
Analytical Technologies 
$
189.8
 
$
71.5
 
Laboratory Products and Services  
185.7
  
25.5
 
        
Subtotal Reportable Segments  
375.5
  
97.0
 
        
Cost of Revenues Charges  
(36.4
)
 
—
 
Restructuring and Other Costs, Net  
(7.4
)
 
(3.6
)
Amortization of Acquisition-related Intangible Assets  
(139.3
)
 
(25.6
)
        
Consolidated Operating Income 
$
192.4
 
$
67.8
 

Life and Laboratory SciencesAnalytical Technologies
  Three Months Ended
  April 1,  April 2,  
(Dollars in thousands)  2006  2005 Change
         
Revenues 
$
512,355
 
$
393,305
 30.3%
         
Operating Income Margin  
11.1%
  
13.2 %
      (2.1)
Restructuring and other costs (income), net
  
0.6%
  
    (0.5)%
       1.1
Stock option compensation expense
  
0.4%
  
0.0 %
       0.4
Amortization of acquisition-related intangible assets
  4.7%  1.7 %       3.0
         
Adjusted Operating Income Margin  
16.8%
  
14.4 %
       2.4
  Three Months Ended 
  March 31, April 1,   
(Dollars in millions) 2007 2006 Change 
           
Revenues 
$
1,006.2
 
$
504.6
  99% 
           
Operating Income Margin  
18.9%
  
14.2%
  4.7 pts. 



24
THERMO FISHER SCIENTIFIC INC.
First Quarter 2007 Compared With First Quarter 2006 (continued)

Sales in the Life and Laboratory SciencesAnalytical Technologies segment increased $119.1$502 million (30%) to $512.4 million$1.01 billion in the first quarter of 2006. Sales2007 primarily due to the merger with Fisher and other acquisitions and, to a lesser extent, increased $92.6revenues at existing businesses and favorable currency translation. Had the Fisher merger occurred on January 1, 2006, revenues would have increased $134 million (24%over pro forma 2006 revenues, including increases of a) $39 million due to acquisitions made by the combined companies, net of divestitures, b) $31 million due to the favorable effect of currency translation and c) $64 million (7%) due to the acquisitionsincreased revenue at existing businesses as a result of Kendro in May 2005,increased demand and, Niton in March 2005, net ofto a product line divestiture. The unfavorable effects of currency translation resulted in a decrease in revenues of $16.8 million (4%) in 2006. Excluding the changes in revenues resulting from acquisitions, net of a divestiture, and currency translation, revenues increased $43.3 million (11%).lesser extent, higher prices. The increase was due to a broad-based increase in demand was from life science and industrial customers combined within part due to strong market response to new products and, to a lesser extent, price increases.products. Growth was particularly strong in sales of mass spectrometry and spectroscopy instruments and, to a lesser extent, anatomical pathology products.bioscience reagents and environmental monitoring instruments.

Adjusted operatingOperating income margin was 16.8%18.9% in the first quarter of 20062007 and 14.4%14.2% in the first quarter of 2005.2006. The increase resulted from higherprofit on incremental revenues and, to a lesser extent, price increases and productivity improvements, including cost-reduction measures following restructuring actions. Had the effectmerger with Fisher occurred on January 1, 2006, operating income margin would have been 16.6% in the first quarter of 2006.

Laboratory Products and Services
  Three Months Ended 
  March 31, April 1,   
(Dollars in millions) 2007 2006 Change 
           
Revenues 
$
1,416.5
 
$
179.7
  688% 
           
Operating Income Margin  
13.1%
  
14.2%
  (1.1) pts. 

Sales in the Laboratory Products and Services segment increased $1.24 billion to $1.42 billion in the first quarter of 2007 primarily due to the merger with Fisher and other acquisitions and, to a lesser extent, price increases.

The change in restructuringincreased revenues at existing businesses and other costs, net, wasfavorable currency translation. Had the Fisher merger occurred on January 1, 2006, revenues would have increased $117 million over pro forma 2006 revenues, including increases of a) $17 million due to inclusionacquisitions made by the combined companies, net of gains on the sale of buildings in the 2005 quarter. The increase in amortization of acquisition-related intangible assets was primarilydivestitures, b) $22 million due to the acquisitionfavorable effect of Kendrocurrency translation and c) $78 million (6%) due to increased revenue at existing businesses as a result of increased demand and, to a lesser extent, other businesses.


24
THERMO ELECTRON CORPORATION


First Quarter 2006 Compared With First Quarter 2005 (continued)higher prices. Sales made through the segment’s research market channel and revenues from the company’s biopharma outsourcing offerings were particularly strong.

Measurement and Control
  Three Months Ended
  April 1,  April 2,  
(Dollars in thousands)  2006  2005 Change
         
Revenues 
$
171,932
 
$
165,903
 3.6%
         
Operating Income Margin  
12.7%
  
11.1%
 1.6   
Restructuring and other costs, net
  
0.3%
  
0.6%
 (0.3)  
Stock option compensation expense
  
0.4%
  
0.0%
 0.4   
Amortization of acquisition-related intangible assets
  
0.8%
  
0.5%
 0.3   
          
Adjusted Operating Income Margin  
14.2%
  
12.2%
 2.0   

Sales in the Measurement and Control segment increased $6.0 million (4%)Operating income margin decreased to $171.9 million13.1% in the first quarter of 2006. Sales increased $1.2 million (1%) due to acquisitions, net of divestitures. The unfavorable effects of currency translation resulted in a decrease in revenues of $4.7 million in 2006. Excluding the changes in revenues resulting2007 from acquisitions, net of divestitures, and currency translation, revenues increased $9.5 million (6%). The increase was primarily the result of higher demand from industrial customers, particularly from commodity markets including steel, petroleum and minerals, and customers purchasing instruments for use in environmental and security applications. The company believes that enactment of stricter environmental disposal regulations, particularly in Europe, has helped increase demand for instruments that measure contaminants.

Adjusted operating income margin increased to 14.2% in the first quarter of 2006, from 12.2%primarily due to the inclusion of Fisher revenues, which have a slightly lower operating margin than the company’s legacy laboratory equipment business, offset in part by price increases and productivity improvements, including restructuring actions. Had the merger with Fisher occurred on January 1, 2006, operating income margin would have been 10.5% in the first quarter of 2005, primarily due to higher sales volumes and, to a lesser extent, price increases.2006.

The increase in amortization of acquisition-related intangible assets was due primarily to the acquisition of R&P.

Other Income (Expense),Expense, Net

The company reported other expense, net, of $3.8$27 million and $4 million in the first quarter of 2007 and 2006, respectively (Note 4). Other expense, net, includes interest income, interest expense, equity in earnings of unconsolidated subsidiaries and other items, net. Interest income increased to $9 million in the first quarter of 2007 from $4 million in the same period of 2006, primarily due to higher invested cash balances from operating cash flow and, to a lesser extent, increased market interest rates, offset in part by cash used to fund acquisitions. Interest expense increased to $37 million in the first quarter of 2007 from $8 million in the first quarter of 2006, and other income, net, of $3.3 million in the first quarter of 2005 (Note 4). Other income (expense), net, includes interest income, interest expense, gain on investments, net, and other items, net. Interest income was $3.5 million in 2006 and $3.3 million in 2005. Interest expense increased to $7.8 million in 2006 from $3.2 million in 2005,primarily as a result of debt used to partially fund the acquisition of Kendro and, to a lesser extent, higher rates associated with the company’s variable rate debt. In the first quarter of 2005, the company had other gains of $3.2 million, including $2.3 million of gains on sale of investments.

Provision for Income Taxes

The company’s effective tax rate was 31.9% and 27.6%assumed in the first quarter of 2006 and 2005, respectively. As a result of the sale of a product line in the first quarter of 2006, the company realized a tax gain in excess of the related book gain. This transaction caused an increase in the company’s effective rate in the first quarter of 2006 of 3.1 percentage points.merger with Fisher.


25
THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

First Quarter 2007 Compa Quarter 2006 Comparedred With First Quarter 20052006 (continued)

Provision for Income Taxes

The company’s effective tax rate was 16.2% and 31.9% in the first quarter of 2007 and 2006, respectively. The decrease in the effective tax rate in 2007 compared with 2006 was primarily due to geographic changes in profits, in particular lower income in the United States due to charges and amortization associated with the Fisher merger, together with the impact of an enhanced tax credit for qualifying U.S. research costs, growth in lower tax regions such as Asia and, to a lesser extent, a tax gain in excess of the related book gain on the sale of a product line in 2006. The company currently expects its tax rate for the full year to be approximately 16%.

Contingent Liabilities

At April 1, 2006,the first quarter end 2007, the company was contingently liable with respect to certain lawsuits. Anlegal proceedings and related matters. As described under “Litigation and Related Contingencies” in Note 12, an unfavorable outcome in the mattermatters described in the first paragraph of Note 12therein could materially affect the company’s financial position as well as its results of operations and cash flows.

Recent Accounting Pronouncements

In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. Under FIN 48, the financial statements reflect expected future tax consequences of such positions presuming the taxing authorities’ full knowledge of the position and all relevant facts, but without discounting for the time value of money. FIN 48 also revises disclosure requirements and introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax benefits. FIN 48 became effective in the first quarter of 2007. The effect of adoption was not material (Note 13).

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for the company in 2008. The company is currently evaluating the potential impact of adopting SFAS No. 157.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to measure eligible financial assets, financial liabilities and certain other assets and liabilities at fair value on an instrument-by-instrument basis. The fair value measurement election is irrevocable once made and subsequent changes in fair value must be recorded in earnings. The effect of adoption will be reported as a cumulative-effect adjustment to beginning retained earnings. The Company will adopt SFAS No. 159 in fiscal year 2008 and is currently evaluating if it will elect the fair value option for any of its eligible financial instruments and other items.

Discontinued Operations

During 2006, the company committed to a plan to dispose of Genevac Limited (Genevac), a Fisher business which is a manufacturer of solvent evaporation technology. The decision follows the U.S. Federal Trade Commission (FTC) consent order which requires divesture of Genevac for FTC approval of the Thermo Fisher merger under the Hart-Scott-Rodino Antitrust Improvements Act. Genevac was sold on April 3, 2007, for net proceeds of approximately $22 million in cash. The carrying value of this business at March 31, 2007, reflects the price at which it was sold, net of related transaction costs. The results of discontinued operations also include the results of Systems Manufacturing Corporation, a Fisher business which provides consoles, workstations and server enclosures for information technology operations and data centers. The operating results and assets and liabilities of these entities were not material at March 31, 2007, or for the period then ended.


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First Quarter 2007 Compared With First Quarter 2006 (continued)

The company recordedhad after-tax gains of $3 million in 2006 from the disposal of discontinued operations of $3.3 million in the first quarter of 2006 and 2005.operations. The gains represent additional proceeds from the sale of several businesses divested prior to 2004, including in 2005net of a charge for the salesettlement of abandoned real estate and post-closing adjustments.an indemnification claim that arose from a divested business.

Liquidity and Capital Resources

First Quarter 2006

Consolidated working capital was $660.6 million$1.95 billion at April 1, 2006,March 31, 2007, compared with $562.2 million$1.51 billion at December 31, 2005.2006. The increase was primarily due to a reduction in short-term borrowings. Included in working capital were cash, cash equivalents and short-term available-for-sale investments of $310.6$691 million at April 1, 2006, compared with $295.0 million atMarch 31, 2007 and December 31, 2005.2006.

First Quarter 2007

Cash provided by operating activities was $31.9$219 million during the first quarter of 2007. A reduction in current liabilities used cash of $87 million, primarily as a result of payment of annual incentive compensation as well as $23 million of merger-related payments. Cash of $47 million was used to replenish inventory levels following strong fourth quarter shipments. Payments for restructuring actions of the company’s continuing operations, principally severance, lease costs and other expenses of real estate consolidation, used cash of $13 million during the first quarter of 2007.

In connection with restructuring actions undertaken by continuing operations, the company had accrued $14.2 million for restructuring costs at March 31, 2007. The company expects to pay approximately $8.3 million of this amount for severance and retention, primarily through 2007, and $0.8 million for other costs, primarily through 2007. The balance of $5.1 million will be paid for lease obligations over the remaining terms of the leases, with approximately 30% to be paid through 2007 and the remainder through 2012. In addition, at March 31, 2007, the company had accrued $38.8 million for acquisition expenses. Accrued acquisition expenses included $29.5 million of severance and relocation obligations, which the company expects to pay primarily during 2007. The remaining balance primarily represents abandoned-facility payments that will be paid over the remaining terms of the leases through 2014.

During the first quarter of 2007, the primary investing activities of the company’s continuing operations, excluding available-for-sale investment activities, included acquisitions, the purchase of property, plant and equipment and the sale of product lines. The company expended $34 million on acquisitions and $40 million for purchases of property, plant and equipment. The company collected a note receivable from Newport Corporation totaling $48 million.

The company’s financing activities used $194 million of cash during the first quarter of 2007, principally for the repayment of $309 million of short-term debt, offset in part by proceeds of stock option exercises. The company had proceeds of $113 million from the exercise of employee stock options and $10 million of tax benefits from the exercise of stock options. In February 2007, the Board of Directors authorized the repurchase of up to $300 million of the company’s common stock through February 28, 2008, none of which had been used as of March 31, 2007.

The company has no material commitments for purchases of property, plant and equipment and expects that for all of 2007, such expenditures will approximate $240 - $260 million. The company’s contractual obligations and other commercial commitments did not change materially between December 31, 2006 and March 31, 2007.

The company believes that its existing resources, including cash and investments, future cash flow from operations and available borrowings under its existing revolving credit facilities, are sufficient to meet the working capital requirements of its existing businesses for the foreseeable future, including at least the next 24 months.


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Liquidity and Capital Resources (continued)

First Quarter 2006

Cash provided by operating activities was $32 million during the first three months of 2006, including $28.1$28 million provided by continuing operations and $3.8$4 million provided by discontinued operations. The company used cash of $25.0$25 million to replenish inventory levels following strong fourth quarter shipments. Cash of $24.8$28 million was provided by collections on accounts receivable. A reduction in other current liabilities used $53.4$53 million of cash in the first three months of 2006, primarily for payment of annual incentive compensation and income tax payments. Payments for restructuring actions of the company’s continuing operations, principally severance, lease costs and other expenses of real estate consolidation, used cash of $8.0$8 million in the first three months of 2006.

In connection with restructuring actions undertaken by continuing operations, the company had accrued $14.3 million for restructuring costs at April 1, 2006. The company expects to pay approximately $6.3 million of this amount for severance, retention and other costs primarily through 2006. The balance of $8.0 million will be paid for lease obligations over the remaining terms of the leases, with approximately 60% to be paid through 2006 and the remainder through 2012. In addition, at April 1, 2006, the company had accrued $8.2 million for acquisition expenses. Accrued acquisition expenses included $5.4 million of severance and relocation obligations, which the company expects to pay primarily through 2006. The balance primarily represents abandoned-facility payments that will be paid over the remaining terms of the leases through 2014.

During the first three months of 2006, the primary investing activities of the company’s continuing operations, excluding available-for-sale investment activities, included the purchase and sale of property, plant and equipment and sale of a product line. The company expended $13.3$13 million for purchases of property, plant and equipment. The company had proceeds from the sale of a product line of $8.9$9 million. Investing activities of the company’s discontinued operations provided $5.3$5 million of cash in the first three months of 2006, primarily additional proceeds from a business divested prior to 2004.

The company’s financing activities used $20.5$20 million of cash during the first three months of 2006, principally for a decrease of $41.3$41 million in short-term borrowings, offset in part by proceeds of $16.5$17 million from the exercise of employee stock options and $4.3$4 million of tax benefits from the exercise of stock options.

The company has no material commitments for purchases of property, plant and equipment and expects that for all of 2006, such expenditures will approximate $46 - $51 million. The company’s contractual obligations and other commercial commitments did not change materially between December 31, 2005 and April 1, 2006.


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First Quarter 2006 (continued)

The company believes that its existing resources, including cash and investments, future cash flow from operations, and available borrowings under its existing 5-year revolving credit facilities, are sufficient to meet the working capital requirements of its existing businesses for the foreseeable future, including at least the next 24 months.

First Quarter 2005

Cash provided by operating activities was $30.3 million during the first three months of 2005, including $31.7 million provided by continuing operations and $1.4 million used by discontinued operations. The company used cash of $15.3 million to increase inventories, particularly mass spectrometry and spectroscopy instruments, to replenish levels following strong fourth quarter sales. A reduction in other current liabilities used $12.4 million of cash in the first three months of 2005, primarily annual incentive compensation that was paid in the quarter. Payments for restructuring actions of the company’s continuing operations, principally severance, lease costs and other expenses of real estate consolidation, used cash of $5.0 million in the first three months of 2005.

During the first three months of 2005, the primary investing activities of the company’s continuing operations, excluding available-for-sale investment activities, included an acquisition and the purchase and sale of property, plant and equipment. The company expended $39.2 million, net of cash acquired, for the acquisition of Niton. The company expended $7.3 million for purchases of property, plant and equipment and had proceeds from the sale of property, principally abandoned real estate, of $9.2 million.

The company’s financing activities provided $3.3 million of cash during the first three months of 2005, principally proceeds of $4.6 million from the exercise of employee stock options.

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

The company’s exposure to market risk from changes in interest rates, currency exchange rates and equity prices has not changed materially from its exposure at year-end 2005.2006.

Item 4 — Controls and Procedures

The company’s management, with the participation of the company’s chief executive officer and chief financial officer, evaluated the effectiveness of the company’s disclosure controls and procedures as of April 1, 2006.March 31, 2007. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the company’s disclosure controls and procedures as of April 1, 2006,March 31, 2007, the company’s chief executive officer and chief financial officer concluded that, as of such date, the company’s disclosure controls and procedures were effective at the reasonable assurance level.

There have been no changes in the company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal quarter ended April 1, 2006,March 31, 2007, that have materially affected or are reasonably likely to materially affect the company’s internal control over financial reporting.


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THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

PART II — OTHER INFORMATION

Item 1A — Risk Factors

Set forth below are the risks that we believe are material to our investors. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 18.20.

We must develop new products, adapt to rapid and significant technological change and respond to introductions of new products in order to remain competitive. Our growth strategy includes significant investment in and expenditures for product development. We sell our products in several industries that are characterized by rapid and significant technological changes, frequent new product and service introductions and enhancements and evolving industry standards. Without the timely introduction of new products, services and enhancements, our products and services will likely become technologically obsolete over time, in which case our revenue and operating results would suffer.

Development of our products requires significant investment; our products and technologies could become uncompetitive or obsolete. Our customers use many of our products to develop, test and manufacture their own products. As a result, we must anticipate industry trends and develop products in advance of the commercialization of our customers’ products. If we fail to adequately predict our customers’ needs and future activities, we may invest heavily in research and development of products and services that do not lead to significant revenue.

Many of our existing products and those under development are technologically innovative and require significant planning, design, development and testing at the technological, product and manufacturing-process levels. These activities require us to make significant investments.

Products in our markets undergo rapid and significant technological change because of quickly changing industry standards and the introduction of new products and technologies that make existing products and technologies uncompetitive or obsolete. Our competitors may adapt more quickly to new technologies and changes in customers’ requirements than we can. The products that we are currently developing, or those we will develop in the future, may not be technologically feasible or accepted by the marketplace, and our products or technologies could become uncompetitive or obsolete.

It may be difficult for us to implement our strategies for improving internal growth. Some of the markets in which we compete have been flat or declining over the past several years. To address this issue, we are pursuing a number of strategies to improve our internal growth, including:

·  finding new markets for our products;
finding new markets for our products;

·  developing new applications for our technologies;
developing new applications for our technologies;

·  combining sales and marketing operations in appropriate markets to compete more effectively;
combining sales and marketing operations in appropriate markets to compete more effectively;

·  allocating research and development funding to products with higher growth prospects;
allocating research and development funding to products with higher growth prospects;

·  continuing key customer initiatives;
complexities associated with managing the combined businesses;

·  expanding our service offerings;
continuing key customer initiatives;

·  strengthening our presence in selected geographic markets; and
expanding our service offerings;


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Risk Factors (continued)

·  continuing the development of commercial tools and infrastructure to increase and support cross-selling opportunities of products and services to take advantage of our breadth in product offerings.
strengthening our presence in selected geographic markets; and

continuing the development of commercial tools and infrastructure to increase and support cross-selling opportunities of products and services to take advantage of our breadth in product offerings.

We may not be able to successfully implement these strategies, and these strategies may not result in the growth of our business.

The company may be unable to integrate successfully the legacy businesses of Thermo Electron Corporation and Fisher Scientific International Inc. and may be unable to realize the anticipated benefits of the merger.


The merger involved the combination of two companies which previously operated as independent public companies. The company is required to devote significant management attention and resources to integrating its business practices and operations. Potential difficulties the company may encounter in the integration process include the following:

if we are unable to successfully combine the businesses of Thermo and Fisher in a manner that permits the company to achieve the cost savings and operating synergies anticipated to result from the merger, such anticipated benefits of the merger may not be realized fully or at all or may take longer to realize than expected;
28
lost sales and customers as a result of certain customers of either of the two former companies deciding not to do business with the company;

THERMO ELECTRON CORPORATIONcomplexities associated with managing the combined businesses;

integrating personnel from diverse corporate cultures while maintaining focus on providing consistent, high quality products and customer service;

potential unknown liabilities and unforeseen increased expenses or delays associated with the merger; and

inability to successfully execute a branding campaign for the combined company.

Risk Factors (continued)In addition, it is possible that the integration process could result in the loss of key employees, the disruption or interruption of, or the loss of momentum in, the company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers and employees or our ability to achieve the anticipated benefits of the merger, or could reduce our earnings or otherwise adversely affect the business and financial results of the company.

Our inability to protect our intellectual property could have a material adverse effect on our business. In addition, third parties may claim that we infringe their intellectual property, and we could suffer significant litigation or licensing expense as a result. We place considerable emphasis on obtaining patent and trade secret protection for significant new technologies, products and processes because of the length of time and expense associated with bringing new products through the development process and into the marketplace. Our success depends in part on our ability to develop patentable products and obtain and enforce patent protection for our products both in the United States and in other countries. We own numerous U.S. and foreign patents, and we intend to file additional applications, as appropriate, for patents covering our products. Patents may not be issued for any pending or future patent applications owned by or licensed to us, and the claims allowed under any issued patents may not be sufficiently broad to protect our technology. Any issued patents owned

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Risk Factors (continued)

by or licensed to us may be challenged, invalidated or circumvented, and the rights under these patents may not provide us with competitive advantages. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture increased market position. We could incur substantial costs to defend ourselves in suits brought against us or in suits in which we may assert our patent rights against others. An unfavorable outcome of any such litigation could materially adversely affect our business and results of operations.

We also rely on trade secrets and proprietary know-how with which we seek to protect our products, in part, by confidentiality agreements with our collaborators, employees and consultants. These agreements may be breached and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently developed by our competitors.

Third parties may assert claims against us to the effect that we are infringing on their intellectual property rights. For example, in September 2004 Applied Biosystems/MDS Scientific Instruments and related parties brought a lawsuit against us alleging our mass spectrometer systems infringe a patent held by the plaintiffs. We could incur substantial costs and diversion of management resources in defending these claims, which could have a material adverse effect on our business, financial condition and results of operations. In addition, parties making these claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief, which could effectively block our ability to make, use, sell, distribute, or market our products and services in the United States or abroad. In the event that a claim relating to intellectual property is asserted against us, or third parties not affiliated with us hold pending or issued patents that relate to our products or technology, we may seek licenses to such intellectual property or challenge those patents. However, we may be unable to obtain these licenses on commercially reasonable terms, if at all, and our challenge of the patents may be unsuccessful. Our failure to obtain the necessary licenses or other rights could prevent the sale, manufacture, or distribution of our products and, therefore, could have a material adverse effect on our business, financial condition and results of operations.

Demand for most of our products depends on capital spending policies of our customers and on government funding policies. Our customers include pharmaceutical and chemical companies, laboratories, universities, healthcare providers, government agencies and public and private research institutions. Many factors, including public policy spending priorities, available resources and product and economic cycles, have a significant effect on the capital spending policies of these entities. These policies in turn can have a significant effect on the demand for our products.

Our results could be impacted if we are unable to realize potential future benefits from new productivity initiatives. We continue to pursue practical process improvement (PPI) programs and other cost saving initiatives at our locations which are designed to further enhance our productivity, efficiency and customer satisfaction. While we anticipate continued benefits from these initiatives, future benefits are expected to be fewer and smaller in size and may be more difficult to achieve.


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Risk Factors (continued)

Our Measurement and Control segment sells products and services to a number of companies that operate in cyclical industries; downturns in those industries would adversely affect our results of operations. The growth and profitability of some of our businesses in the Measurement and Control segment depend in part on sales to industries that are subject to cyclical downturns. For example, certain businesses in this segment depend in part on sales to the steel, cement and semiconductor industries. Slowdowns in these industries would adversely affect sales by these businesses, which in turn would adversely affect our revenues and results of operations.

Our business is impacted by general economic conditions and related uncertainties affecting markets in which we operate. Adverse economic conditions could adversely impact our business in 2006during 2007 and beyond, resulting in:

·
reduced demand for some of our products;

·
increased rate of order cancellations or delays;

·
increased risk of excess and obsolete inventories;

·
increased pressure on the prices for our products and services; and

·
greater difficulty in collecting accounts receivable.


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Risk Factors (continued)

Changes in governmental regulations may reduce demand for our products or increase our expenses. We compete in many markets in which we and our customers must comply with federal, state, local and international regulations, such as environmental, health and safety, and food and drug regulations. We develop, configure and market our products to meet customer needs created by those regulations. Any significant change in regulations could reduce demand for our products or increase our expenses. For example, many of our instruments are marketed to the pharmaceutical industry for use in discovering and developing drugs. Changes in the U.S. Food and Drug Administration’s regulation of the drug discovery and development process could have an adverse effect on the demand for these products.

If any of our security products fail to detect explosives or radiation, we could be exposed to product liability and related claims for which we may not have adequate insurance coverage. The products sold by our environmental instruments divisionbusiness include a comprehensive range of fixed and portable instruments used for chemical, radiation and trace explosives detection. These products are used in airports, embassies, cargo facilities, border crossings and other high-threat facilities for the detection and prevention of terrorist acts. If any of these products were to malfunction, it is possible that explosive or radioactive material could pass through the product undetected, which could lead to product liability claims. There are also many other factors beyond our control that could lead to liability claims, such as the reliability and competence of the customers’ operators and the training of such operators. Any such product liability claims brought against us could be significant and any adverse determination may result in liabilities in excess of our insurance coverage. Although we carry product liability insurance, we cannot be certain that our current insurance will be sufficient to cover these claims or that it can be maintained on acceptable terms, if at all.

Our branding strategy could be unsuccessful. We historically operated our business largely as autonomous, unaffiliated companies, and as a result, each of our businesses independently created and developed its own brand names. Our marketing and branding strategy transitions multiple, unrelated brands to one brand, Thermo Electron. Several of our former brands such as Finnigan and Nicolet commanded strong market recognition and customer loyalty. We believe the transition to the one brand enhances and strengthens our collective brand image and brand awareness across the entire company. Our success in promoting our brand depends on many factors, including effective communication of the transition to our customers, acceptance and recognition by customers of this brand and successful execution of the branding campaign by our marketing and sales teams. If we are not successful with this strategy, we may experience erosion in our product recognition, brand image and customer loyalty and a decrease in demand for our products.


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Risk Factors (continued)

Our inability to successfully identify and complete acquisitions or successfully integrate any new or previous acquisitions could have a material adverse effect on our business. Our business strategy includes the acquisition of technologies and businesses that complement or augment our existing products and services. Promising acquisitions are difficult to identify and complete for a number of reasons, including competition among prospective buyers and the need for regulatory, including antitrust, approvals. We may not be able to identify and successfully complete transactions. Any acquisition we may complete may be made at a substantial premium over the fair value of the net assets of the acquired company. Further, we may not be able to integrate any acquired businesses successfully into our existing businesses, make such businesses profitable, or realize anticipated cost savings or synergies, if any, from these acquisitions, which could adversely affect our business. For example, we will need to integrate the Kendro business that we recently acquired in order to realize its anticipated cost savings and synergies.

Moreover, we have acquired many companies and businesses. As a result of these acquisitions, we recorded significant goodwill on our balance sheet, which amounts to approximately $1.95$8.58 billion as of April 1, 2006.March 31, 2007. We assess the realizability of the goodwill we have on our books annually as well as whenever events or changes in circumstances indicate that the goodwill may be impaired. These events or circumstances generally include operating losses or a significant decline in earnings associated with the acquired business or asset. Our ability to realize the value of the goodwill will depend on the future cash flows of these businesses. These cash flows in turn depend in part on how well we have integrated these businesses. If we are not able to realize the value of the goodwill, we may be required to incur material charges relating to the impairment of those assets.

Our growth strategy to acquire new businesses may not be successful and the integration of future acquisitions may be difficult and disruptive to our ongoing operations.

We have retained contingent liabilities from businesses that we have sold. From 1997 through 2004, we divested over 60 businesses with aggregate annual revenues in excess of $2 billion. As part of these transactions, we retained responsibility for some of the contingent liabilities related to these businesses, such as lawsuits, product liability and environmental claims and potential claims by buyers that representations and warranties we made about the businesses were inaccurate. The resolution of these contingencies has not had a material adverse effect on our results of operations or financial condition; however, we can not be certain that this favorable pattern will continue.


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Risk Factors (continued)

AsAs a multinational corporation, we are exposed to fluctuations in currency exchange rates, which could adversely affect our cash flows and results of operations. International revenues account for a substantial portion of our revenues, and we intend to continue expanding our presence in international markets. In 2005,2006, our international revenues from continuing operations, including export revenues from the United States, accounted for approximately 58%46% of our total revenues. The exposure to fluctuations in currency exchange rates takes on different forms. International revenues are subject to the risk that fluctuations in exchange rates could adversely affect product demand and the profitability in U.S. dollars of products and services provided by us in international markets, where payment for our products and services is made in the local currency. As a multinational corporation, our businesses occasionally invoice third-party customers in currencies other than the one in which they primarily do business (the “functional currency”). Movements in the invoiced currency relative to the functional currency could adversely impact our cash flows and our results of operations. In addition, reported sales made in non-U.S. currencies by our international businesses, when translated into U.S. dollars for financial reporting purposes, fluctuate due to exchange rate movement. Should our international sales grow, exposure to fluctuations in currency exchange rates could have a larger effect on our financial results. In 2005,2006, currency translation had an unfavorablea favorable effect on revenues of our continuing operations of $4.5$18 million due to a strengtheningweakening of the U.S. dollar relative to other currencies in which the company sells products and services. In 2004, currency translation had a favorable effect on revenues of our continuing operations of $92.1 million due to weakening of the U.S. dollar.

We are subject to laws and regulations governing government contracts, and failure to address these laws and regulations or comply with government contracts could harm our business by leading to a reduction in revenue associated with these customers. We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government.

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Risk Factors (continued)

The laws governing government contracts differ from the laws governing private contracts and government contracts may contain pricing terms and conditions that are not applicable to private contracts. We are also subject to investigation for compliance with the regulations governing government contracts. A failure to comply with these regulations could result in suspension of these contracts, criminal, civil and administrative penalties or debarment.

Because we compete directly with certain of our largest customers and product suppliers, our results of operations could be adversely affected in the short term if these customers or suppliers abruptly discontinue or significantly modify their relationship with us.

Our largest customerin the laboratory consumables business and our largest customer in the diagnostics business are also significant competitors. Our business may be harmed in the short term if our competitive relationship in the marketplace with these customers results in a discontinuation of their purchases from us. In addition, we manufacture products that compete directly with products that we source from third-party suppliers. We also source competitive products from multiple suppliers. Our business could be adversely affected in the short term if any of our large third-party suppliers abruptly discontinues selling products to us.

Because we rely heavily on third-party package-delivery services, a significant disruption in these services or significant increases in prices may disrupt our ability to ship products, increase our costs and lower our profitability.

We ship a significant portion of our products to our customers through independent package delivery companies, such as UPS and Federal Express in the U.S. and DHL in Europe. We also maintain a small fleet of vehicles dedicated to the delivery of our products and ship our products through other carriers, including national and regional trucking firms, overnight carrier services and the U.S. Postal Service. If UPS or another third-party package-delivery provider experiences a major work stoppage, preventing our products from being delivered in a timely fashion or causing us to incur additional shipping costs we could not pass on to our customers, our costs could increase and our relationships with certain of our customers could be adversely affected. In addition, if UPS or our other third-party package-delivery providers increase prices, and we are not able to find comparable alternatives or make adjustments in our delivery network, our profitability could be adversely affected.


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Risk Factors (continued)

We are subject to regulation by various federal, state and foreign agencies that require us to comply with a wide variety of regulations, including those regarding the manufacture of products, the shipping of our products and environmental matters.

Some of our operations are subject to regulation by the U.S. Food and Drug Administration and similar international agencies. These regulations govern a wide variety of product activities, from design and development to labeling, manufacturing, promotion, sales and distribution. If we fail to comply with the U.S. Food and Drug Administration’s regulations or those of similar international agencies, we may have to recall products and cease their manufacture and distribution, which would increase our costs and reduce our revenues.

We are subject to federal, state, local and international laws and regulations that govern the handling, transportation, manufacture, use or sale of substances that are or could be classified as toxic or hazardous substances. Some risk of environmental damage is inherent in our operations and the products we manufacture, sell or distribute. This requires us to devote significant resources to maintain compliance with applicable environmental laws and regulations, including the establishment of reserves to address potential environmental costs, and manage environmental risks.

We rely heavily on manufacturing operations to produce the products we sell, and our business could be adversely affected by disruptions of our manufacturing operations.

We rely upon our manufacturing operations to produce many of the products we sell. Any significant disruption of those operations for any reason, such as strikes or other labor unrest, power interruptions, fire, earthquakes, or other events beyond our control could adversely affect our sales and customer relationships and therefore adversely affect our business. Although most of our raw materials are available from a number of potential suppliers, our operations also depend upon our ability to obtain raw materials at reasonable prices. If we are unable to obtain the materials we need at a reasonable price, we may not be able to produce certain of our products or we may not be able to produce certain of these products at a marketable price, which could have an adverse effect on our results of operations.

We may be unable to adjust to rapid changes in the healthcare industry, some of which could adversely affect our business.

The healthcare industry has undergone significant changes in an effort to reduce costs. These changes include:
development of large and sophisticated groups purchasing medical and surgical supplies;
wider implementation of managed care;
legislative healthcare reform;

consolidation of pharmaceutical companies;
increased outsourcing of certain activities, including to low-cost offshore locations; and
consolidation of distributors of pharmaceutical, medical and surgical supplies.

We expect the healthcare industry to continue to change significantly in the future. Some of these potential changes, such as a reduction in governmental support of healthcare services or adverse changes in legislation or regulations governing the delivery or pricing of healthcare services or mandated benefits, may cause healthcare-industry participants to purchase fewer of our products and services or to reduce the prices they are willing to pay for our products or services.


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Risk Factors (continued)

We may incur unexpected costs from increases in fuel and raw material prices, which could reduce our earnings and cash flow.

Our primary commodity exposures are for fuel, petroleum-based resins, steel and serum. While we may seek to minimize the impact of price increases through higher prices to customers and various cost-saving measures, our earnings and cash flows could be adversely affected in the event these measures are insufficient to cover our costs.

Unforeseen problems with the implementation and maintenance of our information systems could interfere with our operations. As a part of the effort to upgrade our current information systems, we are implementing new enterprise resource planning software and other software applications to manage certain of our business operations. As we implement and add functionality, problems could arise that we have not foreseen. Such problems could adversely impact our ability to do the following in a timely manner: provide quotes, take customer orders, ship products, provide services and support to our customers, bill and track our customers, fulfill contractual obligations and otherwise run our business. In addition, if our new systems fail to provide accurate and increased visibility into pricing and cost structures, it may be difficult to improve or maximize our profit margins. As a result, our results of operations and cash flows could be adversely affected.

Our debt may adversely affect our cash flow and may restrict our investment opportunities or limit our activities.

As of April 1, 2006,March 31, 2007, we had approximately $560.5 million$2.35 billion in outstanding indebtedness.

We have $250 In addition, we had the ability to incur an additional $905 million in additional borrowing capacity available to usof indebtedness under our revolving credit facility and $130 million available under our euro facility. We may also obtain additional long-term debt and lines of credit to meet future financing needs, which would have the effect of increasing our total leverage.

Our leverage could have negative consequences, including increasing our vulnerability to adverse economic and industry conditions, limiting our ability to obtain additional financing and limiting our ability to acquire new products and technologies through strategic acquisitions.

Our ability to satisfy our obligations depends on our future operating performance and on economic, financial, competitive and other factors beyond our control. Our business may not generate sufficient cash flow to meet these obligations. If we are unable to service our debt or obtain additional financing, we may be forced to delay strategic acquisitions, capital expenditures or research and development expenditures. We may not be able to obtain additional financing on terms acceptable to us or at all.

Additionally, the agreements governing our debt require that we maintain certain financial ratios, and contain affirmative and negative covenants that restrict our activities by, among other limitations, limiting our ability to incur additional indebtedness, make investments, create liens, sell assets and enter into transactions with affiliates. The financial covenants in our U.S. dollar revolving credit facility and euro facility include interest coverage and debt-to-capital ratios.a debt-to-EBITDA ratio. Specifically, the company agreeshas agreed that, so long as any lender has any commitment under the commitments remain in effectfacility, or any loan or other amountobligation is outstanding under the loan agreements,facility, or any letter of credit is outstanding under the new facility, it will not permit (as the following terms are defined in the loan agreements):

·  the Consolidated Interest Coverage Ratio (the ratio of Consolidated EBITDA to Consolidated Interest Expense) for any period of four consecutive fiscal quarters to be less than 3.25:1.00; or

·  the Consolidated Total Debt to Consolidated Total Capitalization ratio at the end of any fiscal quarter to be greater than 0.50:1.00.



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THERMO ELECTRON CORPORATION

Risk Factors (continued)new facility) the Consolidated Leverage Ratio (the ratio of consolidated indebtedness to consolidated EBITDA) as at the last day of any fiscal quarter to be greater than 3.0 to 1.0.

Our ability to comply with these financial restrictions and covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control such as foreign exchange rates and interest rates.

Our failure to comply with any of these restrictions or covenants may result in an event of default under the applicable debt instrument, which could permit acceleration of the debt under that instrument and require us to prepay that debt before its scheduled due date. Also, an acceleration of the debt under one of our debt instruments would trigger an event of default under other of our debt instruments.

Earthquakes could disrupt our operations in California. One of the company’s principal operations, which manufactures analytical instruments, is located in San Jose, a region near major California earthquake faults. Our operating results could be materially affected in the event of a major earthquake.

Item 6 — Exhibits

See Exhibit Index on page 35.37.


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THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

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 5th4th day of May 2006.2007.

 THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.
  
  
  
 /s/ Peter M. Wilver
 Peter M. Wilver
 Senior Vice President and Chief Financial Officer
  
  
  
 /s/ Peter E. Hornstra
 Peter E. Hornstra
 Corporate ControllerVice President and Chief Accounting Officer



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THERMO ELECTRON CORPORATIONFISHER SCIENTIFIC INC.

EXHIBIT INDEX

Exhibit
Number
 
 
Description of Exhibit

          3.1Amended and Restated Bylaws of the company, effective as of January 17, 2007 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed January 19, 2007 [File No. 1-8002] and incorporated in this document by reference).
31.1 Certification of Chief Executive Officer required by Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.2 Certification of Chief Financial Officer required by Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.1 Certification of Chief Executive Officer required by Exchange Act Rules 13a-14(b) and 15d-14(b), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
   
32.2 Certification of Chief Financial Officer required by Exchange Act Rules 13a-14(b) and 15d-14(b), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
_____________________________________________
*Certification is not deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section. Such certification is not deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.



 

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