Thermo Electron Reports Strong Revenue and Operating Income Growth
in Second Quarter 2006
WALTHAM, Mass., July 26, 2006 - Thermo Electron Corporation (NYSE: TMO) today reported revenue growth of 9% to $713 million in the second quarter of 2006, compared with $654 million in the 2005 quarter. Acquisitions (net of divestitures) increased revenues by 3%, and currency translation had no effect. GAAP diluted earnings per share (EPS) were $.29 in the 2006 quarter, compared with $.37 in the year-ago period. GAAP earnings in the 2006 quarter reflect a $.03 impact from stock option expense for rules that became effective this year, and in 2005 included an $.11 net gain from the sale of shares in two large investments. GAAP operating income in the second quarter of 2006 rose 36%, and GAAP operating margin for the period was 10.1%, versus 8.1% a year ago.
Adjusted EPS grew 24% to $.42 in the second quarter of 2006 (including $.03 of stock option expense), compared with $.34 in 2005 on a pro forma basis as if stock option expense had been recorded in that quarter. Adjusted operating income increased 28% in the 2006 quarter, and adjusted operating margin rose 220 basis points to 14.6%, from 12.4% in 2005 on a pro forma basis including stock option expense.
Adjusted EPS, adjusted operating income and adjusted operating margin are non-GAAP measures that exclude certain items detailed later in this press release under the heading “Use of Non-GAAP Financial Measures.”
Second Quarter Highlights
“In addition to announcing our significant merger with Fisher Scientific during the second quarter, we are very pleased to report that our growth momentum continued across the board,” said Marijn E. Dekkers, president and chief executive officer of Thermo. “We had solid increases in revenues, operating income and adjusted EPS, as well as yet another quarter of great margin expansion. This excellent performance is the result of ongoing strength in our major end markets and our ability to provide our customers with a breadth of innovative solutions.
“We continue to reinforce our global leadership in analytical technologies by making strategic investments across our businesses. At the recent ASMS conference, we launched a number of new products that raise the bar in analytical performance - for applications in industries ranging from biotech and pharmaceutical to environmental and food processing. Among these were a high-speed chromatography system, three mass spectrometry technologies and a software package that accelerates biomarker research. Meanwhile, our recently introduced iCAP spectroscopy system and last year’s flagship launch, the LTQ™ Orbitrap™ mass spectrometer, generated strong sales during the quarter. We also expanded our line of gauging systems with an acquisition that offers technology for industrial web-processing markets.
“After quarter end, we strengthened our leading position in isotope ratio mass spectrometry (IRMS) by acquiring a business that adds complementary technologies for earth sciences, agricultural and life sciences research. We also learned that we were selected by the U.S. Department of Homeland Security to provide our Advanced Spectroscopic Portal (ASP) monitors for the detection of nuclear and radiological materials at border crossings and ports - a potential $200 million opportunity for Thermo over the next five years.
“With another strong growth quarter behind us, we are on track to achieve our previously stated full-year forecast of $1.68 to $1.73 in adjusted EPS (including $.10 per share of stock option expense), which would lead to a 14 to 18% increase over our pro forma 2005 results, including stock option expense. Our revenue estimate remains in the range of $2.81 to $2.86 billion in 2006, for a 7 to 9% increase over last year. We expect to revise our 2006 guidance after the completion of our pending merger with Fisher Scientific. Both companies’ shareholders will vote on the transaction on August 30, 2006, and, while regulatory reviews are under way, teams from both companies have been hard at work on post-merger integration plans.”
In the following segment information, results identified as “adjusted” exclude stock option expense and other items described below under “Use of Non-GAAP Financial Measures.”
Life and Laboratory Sciences
The Life and Laboratory Sciences segment reported that revenues grew 11% in the second quarter of 2006 to $539 million, compared with $487 million in 2005. GAAP operating income for the segment increased 27% in the quarter, and GAAP operating margin increased to 11.6%, from 10.1% in the year-ago period. Adjusted operating income rose 20% in the 2006 quarter, and adjusted operating margin increased to 17.3%, compared with 16.0% in 2005.
Measurement and Control
Revenues in the Measurement and Control segment grew 5% to $174 million in the second quarter of 2006, compared with $166 million in the 2005 quarter. GAAP operating income for the segment rose 69% in the 2006 period, and GAAP operating margin increased to 11.8%, compared with 7.3% a year ago. Adjusted operating income grew 56% in the 2006 quarter, and adjusted operating margin increased to 14.2%, from 9.5% in 2005.
Use of Non-GAAP Financial Measures
In addition to the financial measures prepared in accordance with generally accepted accounting principles (GAAP), we use certain non-GAAP financial measures, including adjusted EPS, adjusted operating income and adjusted operating margin, which exclude restructuring and other costs/income and amortization of acquisition-related intangible assets. Adjusted EPS also excludes certain other gains and losses, tax provisions/benefits related to the previous items, benefits from tax credit carryforwards, the impact of significant tax audits or events and discontinued operations. We exclude the above items because they are outside of our normal operations and/or, in certain cases, are difficult to forecast accurately for future periods. Stock option expense has been excluded from adjusted segment results because management does not utilize that component of cost in evaluating the performance of the segments. For purposes of comparison, 2005 consolidated adjusted results reflect the pro forma effect of stock option expense as if it had been required in that period. We believe that the use of non-GAAP measures helps investors to gain a better understanding of our core operating results and future prospects, consistent with how management measures and forecasts the company’s performance, especially when comparing such results to previous periods or forecasts.
For example:
We exclude costs and tax effects associated with restructuring activities, such as reducing overhead and consolidating facilities in connection with our Kendro acquisition. We believe that the costs related to these restructuring activities are not indicative of our normal operating costs.
We exclude charges and tax effects related to the sale of inventories revalued at the date of acquisition, as we believe these charges are not indicative of our normal operating costs.
We exclude the expense and tax effects associated with the amortization of acquisition-related intangible assets because a significant portion of the purchase price for acquisitions may be allocated to intangible assets that have lives of 5 to 10 years. Our adjusted EPS estimate for 2006 excludes approximately $.40 of expense for the amortization of acquisition-related intangible assets for acquisitions completed through the second quarter of 2006, except for EGS Gauging, for which the purchase price allocation is not complete. Exclusion of the amortization expense allows comparisons of operating results that are consistent over time for both our newly acquired and long-held businesses and with both acquisitive and non-acquisitive peer companies.
We also exclude certain gains/losses and related tax effects, benefits from tax credit carryforwards and the impact of significant tax audits or events, which are either isolated or cannot be expected to occur again with any regularity or predictability and that we believe are not indicative of our normal operating gains and losses. We exclude gains/losses from the sale of our equity interests in Newport Corporation and Thoratec Corporation, as well as other items such as the sale of a business or real estate, the early retirement of debt and discontinued operations. (We sold our remaining shares of Newport and Thoratec during the second quarter of 2005.)
Thermo’s management uses these non-GAAP measures, in addition to GAAP financial measures, as the basis for measuring the company’s core operating performance and comparing such performance to that of prior periods and to the performance of our competitors. Such measures are also used by management in their financial and operating decision-making and for compensation purposes.
The non-GAAP financial measures of Thermo’s results of operations included in this press release are not meant to be considered superior to or a substitute for Thermo’s results of operations prepared in accordance with GAAP. Reconciliations of such non-GAAP financial measures to the most directly comparable GAAP financial measures are set forth in the accompanying tables. Thermo’s earnings guidance, however, is only provided on an adjusted basis. It is not feasible to provide GAAP EPS guidance because the items excluded, other than the amortization expense, are difficult to predict and estimate and are primarily dependent on future events, such as the impact of accounting principles not yet adopted and decisions concerning the location and timing of facility consolidations.
Conference Call
Thermo Electron will hold its earnings conference call today, July 26, at 9:00 a.m. Eastern time. To listen, dial 888-872-9028 within the U.S. or 973-633-6740 outside the U.S., and use passcode 6449367. You may also listen to the call live on the Web by visiting www.thermo.com. Click on “About Thermo,” then “Investors.” An audio archive of the call will be available in that section of our Website until Friday, August 25, 2006. You will also find this press release, including the accompanying reconciliation of non-GAAP financial measures, under the heading “Press Releases,” and related information under the heading “Financial Reports,” in the Investors section of our Website.
About Thermo Electron
Thermo Electron Corporation is the world leader in analytical instruments. Our instrument solutions enable our customers to make the world a healthier, cleaner and safer place. Thermo’s Life and Laboratory Sciences segment provides analytical instruments, scientific equipment, services and software solutions for life science, drug discovery, clinical, environmental and industrial laboratories. Thermo’s Measurement and Control segment is dedicated to providing analytical instruments used in a variety of manufacturing processes and in-the-field applications, including those associated with safety and homeland security. For more information, visit www.thermo.com.
The following constitutes a “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995: This press release contains forward-looking statements that involve a number of risks and uncertainties. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are set forth under the heading “Risk Factors” in the company’s most recent Form 10-Q. These include risks and uncertainties relating to: the need to develop new products and adapt to significant technological change; implementation of strategies for improving internal growth; use and protection of intellectual property; dependence on customers’ capital spending policies and government funding policies; realization of potential future savings from new productivity initiatives; dependence on customers that operate in cyclical industries; general worldwide economic conditions and related uncertainties; the effect of changes in governmental regulations; exposure to product liability claims in excess of insurance coverage; implementation of our branding strategy; identification, completion and integration of new acquisitions and potential impairment of goodwill from previous acquisitions; retention of contingent liabilities from businesses we sold; and the effect of exchange rate fluctuations on international operations. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise.
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