UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended April 2, 2005
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-8002
THERMO ELECTRON CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2209186
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at April 29, 2005
----------------------------- -----------------------------
Common Stock, $1.00 par value 161,193,200
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
April 2, December 31,
(In thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 351,560 $ 326,886
Short-term available-for-sale investments, at quoted market value (amortized cost
of $147,709 and $164,244; Note 13) 177,043 185,369
Accounts receivable, less allowances of $22,257 and $22,844 458,558 469,553
Inventories:
Raw materials and supplies 128,432 131,810
Work in process 43,473 40,244
Finished goods 173,700 164,657
Deferred tax assets 91,558 92,929
Other current assets 61,294 58,206
---------- ----------
1,485,618 1,469,654
---------- ----------
Property, Plant and Equipment, at Cost 471,814 499,929
Less: Accumulated depreciation and amortization 233,784 238,888
---------- ----------
238,030 261,041
---------- ----------
Acquisition-related Intangible Assets (Note 2) 166,305 158,577
---------- ----------
Other Assets (Notes 9 and 13) 159,171 174,428
---------- ----------
Goodwill (Note 2) 1,505,339 1,513,025
---------- ----------
$3,554,463 $3,576,725
========== ==========
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THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Equity
April 2, December 31,
(In thousands except share amounts) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Short-term obligations and current maturities of long-term obligations $ 15,500 $ 15,017
Accounts payable 123,692 131,175
Accrued payroll and employee benefits 69,018 94,671
Accrued income taxes 30,908 22,829
Deferred revenue 90,628 77,778
Other accrued expenses (Notes 2, 10 and 11) 177,600 194,706
Current liabilities of discontinued operations 41,173 42,552
---------- ----------
548,519 578,728
---------- ----------
Deferred Income Taxes 14,066 15,213
---------- ----------
Other Long-term Liabilities 91,458 91,164
---------- ----------
Long-term Obligations:
Senior notes (Note 9) 133,681 135,232
Subordinated convertible obligations 77,234 77,234
Other 12,812 13,604
---------- ----------
223,727 226,070
---------- ----------
Shareholders' Equity:
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized; 180,433,289 and
179,818,648 shares issued 180,433 179,819
Capital in excess of par value 1,392,143 1,381,448
Retained earnings 1,430,113 1,381,257
Treasury stock at cost, 19,321,482 and 19,269,245 shares (437,315) (435,779)
Deferred compensation (4,873) (2,561)
Accumulated other comprehensive items (Note 6) 116,192 161,366
---------- ----------
2,676,693 2,665,550
---------- ----------
$3,554,463 $3,576,725
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Three Months Ended
---------------------------
April 2, April 3,
(In thousands except per share amounts) 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $559,208 $525,032
-------- --------
Costs and Operating Expenses:
Cost of revenues (Note 11) 299,974 284,172
Selling, general and administrative expenses 163,501 150,559
Research and development expenses 36,328 34,269
Restructuring and other costs (income), net (Note 11) (271) 3,158
-------- --------
499,532 472,158
-------- --------
Operating Income 59,676 52,874
Other Income, Net (Note 4) 3,304 2,602
-------- --------
Income from Continuing Operations Before Provision for Income Taxes 62,980 55,476
Provision for Income Taxes (17,397) (15,811)
-------- --------
Income from Continuing Operations 45,583 39,665
Income from Discontinued Operations (net of income tax provision of $1,147) - 3,457
Gain on Disposal of Discontinued Operations (net of income tax provision of $2,238) 3,273 -
-------- --------
Net Income $ 48,856 $ 43,122
======== ========
Earnings per Share from Continuing Operations (Note 5):
Basic $ .28 $ .24
======== ========
Diluted $ .28 $ .24
======== ========
Earnings per Share (Note 5):
Basic $ .30 $ .26
======== ========
Diluted $ .30 $ .26
======== ========
Weighted Average Shares (Note 5):
Basic 160,957 165,206
======== ========
Diluted 164,730 169,996
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended
----------------------------
April 2, April 3,
(In thousands) 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 48,856 $ 43,122
Income from discontinued operations - (3,457)
Gain on disposal of discontinued operations (3,273) -
--------- ---------
Income from continuing operations 45,583 39,665
Adjustments to reconcile income from continuing operations to net cash provided
by operating activities:
Depreciation and amortization 17,566 14,684
Noncash restructuring and other costs, net (Note 11) 26 519
Provision for losses on accounts receivable 566 808
Change in deferred income taxes 327 (394)
Gain on sale of businesses (119) -
Gain on investments, net (Note 4) (2,264) (2,631)
Other 509 4,781
Changes in current accounts, excluding the effects of acquisitions
and dispositions:
Accounts receivable 9,022 2,182
Inventories (15,272) (20,313)
Other current assets (4,467) (11,355)
Accounts payable (7,363) 18,901
Other current liabilities (12,411) (4,367)
--------- ---------
Net cash provided by continuing operations 31,703 42,480
Net cash provided by (used in) discontinued operations (1,421) 4,124
--------- ---------
Net cash provided by operating activities 30,282 46,604
--------- ---------
Investing Activities:
Proceeds from sale of available-for-sale investments 160,308 121,931
Purchases of available-for-sale investments (127,425) (137,188)
Proceeds from maturities of available-for-sale investments 246 18,523
Acquisition, net of cash acquired (39,233) -
Purchases of property, plant and equipment (7,319) (10,353)
Proceeds from sale of property, plant and equipment 9,187 3,050
Proceeds from sale of product line 4,609 -
Increase in other assets (600) (1,183)
Other (18) (1,257)
--------- ---------
Net cash used in continuing operations (245) (6,477)
Net cash provided by discontinued operations 5,327 715
--------- ---------
Net cash provided by (used in) investing activities $ 5,082 $ (5,762)
--------- ---------
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THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Three Months Ended
----------------------------
April 2, April 3,
(In thousands) 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Repayment of long-term obligations $ (79) $ (489)
Purchases of company common stock - (31,544)
Net proceeds from issuance of company common stock 4,595 21,088
Decrease in short-term notes payable (1,193) (2,474)
Other (55) (46)
--------- ---------
Net cash provided by (used in) continuing operations 3,268 (13,465)
Net cash used in discontinued operations - (135)
--------- ---------
Net cash provided by (used in) financing activities 3,268 (13,600)
--------- ---------
Exchange Rate Effect on Cash of Continuing Operations (13,958) 758
Exchange Rate Effect on Cash of Discontinued Operations - (375)
--------- ---------
Increase in Cash and Cash Equivalents 24,674 27,625
Cash and Cash Equivalents at Beginning of Period 326,886 195,773
--------- ---------
Cash and Cash Equivalents at End of Period $ 351,560 $ 223,398
========= =========
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 $ -
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
1. General
The interim consolidated financial statements presented herein have been
prepared by Thermo Electron Corporation (the company or the Registrant), 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 2, 2005, and the results of operations and cash flows for the three-month
periods ended April 2, 2005, and April 3, 2004. 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, 2004, 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, 2004, filed with the Securities
and Exchange Commission (SEC).
Results for the first quarter of 2004 have been reclassified to reflect
Spectra-Physics, Inc. as a discontinued operation. Spectra-Physics was sold in
July 2004.
In connection with the preparation of its 2004 Form 10-K, the company
determined that it was appropriate to revise the classification of its
investments in auction rate securities as short-term available-for-sale
investments. Previously, such investments were classified as cash and cash
equivalents. As a result of this revision, the company's investing activities in
the first quarter of 2004 used cash of $5.8 million instead of providing cash of
$16.2 million as previously reported. This change in classification does not
affect previously reported cash flows from operations or from financing
activities. Auction rate securities are debt instruments with interest rates
that generally reset every 7 to 28 days. Despite the long-term nature of their
stated contractual maturities, the company has the ability to quickly liquidate
investments in auction rate securities.
2. Acquisitions
On March 29, 2005, the Life and Laboratory Sciences segment acquired
Niton LLC, a Massachusetts-based provider of portable X-ray analyzers to the
metals, petrochemical and environmental markets for $40.5 million in cash,
subject to a post-closing balance sheet adjustment. Of the total purchase price,
$40.0 million was paid on the closing date and the balance was accrued pending
determination of the post-closing adjustment. The company expects that the
remaining $0.5 million and the post-closing adjustment will, in aggregate,
result in an additional payment of $2.2 million, which has been accrued at April
2, 2005. The agreement under which the company acquired Niton calls for
additional contingent consideration of up to $2.0 million through 2006 based on
post-acquisition results. The acquisition of Niton enables the segment to expand
its X-ray products to include a portable line. Niton's revenues in 2004 totaled
$36 million. Having acquired Niton just prior to the end of the first quarter,
the April 2, 2005, balance sheet of Niton has been included in the accompanying
2005 balance sheet, however, no results of operations have been included due to
immateriality. The purchase price exceeded the fair value of the acquired net
assets and, accordingly, $15.3 million was allocated to goodwill, all of which
is tax deductible. Pro forma results are not presented as the acquisition of
Niton did not materially affect the company's results of operations.
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THERMO ELECTRON CORPORATION
2. Acquisitions (continued)
The components of the preliminary purchase price allocation for Niton are
as follows:
(In thousands) Niton
- -------------------------------------------------------------------------------------------------------------------------------
Purchase Price:
Cash paid $40,000
Cash acquired (767)
Purchase price payable 2,200
-------
$41,433
Allocation:
Current assets 12,991
Property, plant and equipment 2,346
Acquired intangible assets 17,741
Goodwill 15,302
Other assets 194
Other liabilities (7,141)
-------
$41,433
=======
Acquired intangible assets for the acquisition of Niton are as follows:
(In thousands)
- -------------------------------------------------------------------------------------------------------------------------------
Customer Relationships $11,468
Product Technology 6,273
-------
$17,741
=======
The weighted-average amortization periods for intangible assets acquired
in the acquisition of Niton are 6 years for customer relationships and 3 years
for product technology. The weighted-average amortization period for all
intangible assets acquired in the acquisition of Niton is approximately 5 years.
Annual amortization expense has increased by $4.0 million as a result of the
acquisition of Niton.
In January 2005, the company reached an agreement to acquire the Kendro
Laboratory Products division of SPX Corporation for $833.5 million, subject to a
post-closing adjustment. Kendro designs, manufactures, markets and services a
wide range of laboratory equipment for sample preparation, processing and
storage, used primarily in life sciences and drug discovery laboratories as well
as clinical laboratories. The acquisition is expected to close in May 2005.
Kendro's revenues were approximately $375 million in 2004.
The company obtained a bridge financing commitment, which will permit it
to borrow up to $600 million for a 364-day period on terms substantially
equivalent to its existing 5-year revolving credit facility to partially fund
the purchase price of Kendro. The commitment is subject to customary conditions
for financings of this type. The company expects to use existing cash balances
to fund the remainder of the purchase price. Although the company has not yet
obtained firm commitments, it expects to use a combination of short- and
long-term debt instruments to refinance the bridge loan following completion of
the acquisition (Note 15).
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THERMO ELECTRON CORPORATION
2. Acquisitions (continued)
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, 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.
The company did not establish material reserves for restructuring
businesses acquired in 2004 or 2005. The changes in accrued acquisition expenses
are as follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004 $ 3,248 $ 5,869 $ 112 $ 9,229
Payments (760) - (1) (761)
Decrease recorded as a reduction in goodwill - (2,112) (30) (2,142)
Currency translation (122) (157) (5) (284)
------- ------- ------- -------
Balance at April 2, 2005 $ 2,366 $ 3,600 $ 76 $ 6,042
======= ======= ======= =======
The accrued acquisition expenses relate primarily to severance for
approximately 160 employees across all functions at Jouan, acquired in December
2003, and for abandoned facilities, primarily for four abandoned operating
facilities in England, with leases expiring through 2014, and the downsizing of
a manufacturing facility in Denmark, with a lease expiring in 2007, to a smaller
site. The company expects to pay amounts accrued for severance and other
expenses primarily through 2005 and amounts accrued for abandonment of excess
facilities through 2014.
Following a favorable resolution of certain lease obligations for a
facility in England that were assumed by a sub-tenant, the company reversed $2.1
million of accrued acquisition expenses in the first quarter of 2005 with a
corresponding decrease in goodwill.
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THERMO ELECTRON CORPORATION
3. Business Segment Information
The company's continuing operations fall into two principal business
segments: Life and Laboratory Sciences and Measurement and Control.
Three Months Ended
---------------------------
April 2, April 3,
(In thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Life and Laboratory Sciences $393,305 $365,466
Measurement and Control 165,903 159,566
-------- --------
$559,208 $525,032
======== ========
Income from Continuing Operations Before Provision for Income Taxes:
Life and Laboratory Sciences (a) $ 51,830 $ 46,817
Measurement and Control (b) 18,360 14,183
Other (c) 71 (48)
-------- --------
Total Operating Income - Segments 70,261 60,952
Corporate/Other (d) (7,281) (5,476)
-------- --------
$ 62,980 $ 55,476
======== ========
Depreciation:
Life and Laboratory Sciences $ 6,779 $ 7,535
Measurement and Control 2,416 2,457
Corporate 957 886
-------- --------
$ 10,152 $ 10,878
======== ========
Amortization:
Life and Laboratory Sciences $ 6,614 $ 3,143
Measurement and Control 799 662
Corporate 1 1
-------- --------
$ 7,414 $ 3,806
======== ========
(a) Includes restructuring and other income, net, of $1.7 million in the first
quarter of 2005 and restructuring and other costs, net, of $3.8 million in
the first quarter of 2004, respectively.
(b) Includes restructuring and other costs, net, of $1.0 million and $1.3
million in the first quarter of 2005 and 2004, respectively.
(c) Includes restructuring and other income, net, of $0.1 million in the first
quarter of 2005.
(d) Includes corporate general and administrative expenses and other income and
expense. Includes corporate restructuring and other costs of $0.5 million
in both the first quarter of 2005 and 2004. Other income, net, includes
gains on the sale of shares of Thoratec of $1.6 million in the first
quarter of 2004 (Note 4).
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THERMO ELECTRON CORPORATION
4. Other Income, Net
The components of other income, net, in the accompanying statement of
income are as follows:
Three Months Ended
---------------------------
April 2, April 3,
(In thousands) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 3,336 $ 1,920
Interest Expense (Note 9) (3,155) (2,729)
Gain on Investments, Net 2,264 2,631
Other Items, Net 859 780
------- -------
$ 3,304 $ 2,602
======= =======
The company sold 250,000 shares of Thoratec Corporation common stock
during the first quarter of 2004 and realized a gain of $1.6 million. The
company obtained common shares of Thoratec as part of the sale of Thermo
Cardiosystems Inc. in 2001. At April 2, 2005, the company owned 4.4 million
shares of Thoratec with a fair market value of $54 million, which are classified
as short-term available-for-sale investments in the accompanying balance sheet.
5. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended
---------------------------
April 2, April 3,
(In thousands except per share amounts) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 45,583 $ 39,665
Income from Discontinued Operations - 3,457
Gain on Disposal of Discontinued Operations 3,273 -
-------- --------
Net Income for Basic Earnings per Share 48,856 43,122
Effect of Convertible Debentures 402 413
-------- --------
Income Available to Common Shareholders, as Adjusted for Diluted
Earnings per Share $ 49,258 $ 43,535
-------- --------
Basic Weighted Average Shares 160,957 165,206
Effect of:
Stock options 1,893 2,847
Convertible debentures 1,846 1,846
Contingently issuable shares 34 97
-------- --------
Diluted Weighted Average Shares 164,730 169,996
-------- --------
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THERMO ELECTRON CORPORATION
5. Earnings per Share (continued)
Three Months Ended
---------------------------
April 2, April 3,
(In thousands except per share amounts) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share:
Continuing operations $ .28 $ .24
Discontinued operations .02 .02
-------- --------
$ .30 $ .26
======== ========
Diluted Earnings per Share:
Continuing operations $ .28 $ .24
Discontinued operations .02 .02
-------- --------
$ .30 $ .26
======== ========
Options to purchase 521,000 and 1,388,000 shares of common stock were not
included in the computation of diluted earnings per share for the first quarter
of 2005 and 2004, respectively, because the options' exercise prices were
greater than the average market price for the common stock and their effect
would have been antidilutive.
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
liability adjustment. During the first quarter of 2005 and 2004, the company had
comprehensive income of $4.1 million and $54.9 million, respectively. The
decrease resulted primarily from a reduction in the cumulative translation
adjustment due to movements in currency exchange rates during the first quarter
of 2005, the effects of which are recorded in shareholders' equity.
7. Stock-based Compensation Plans and Pro Forma Stock-based Compensation
Expense
The company applies Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no accounting
recognition is given to stock options granted at fair market value until they
are exercised. Upon exercise, net proceeds, including tax benefits realized, are
credited to shareholders' equity.
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THERMO ELECTRON CORPORATION
7. Stock-based Compensation Plans and Pro Forma Stock-based Compensation
Expense (continued)
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which sets forth a fair-value-based method of
recognizing stock-based compensation expense. As permitted by SFAS No. 123, the
company has elected to continue to apply APB No. 25 to account for its
stock-based compensation plans. 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 would have been as follows:
Three Months Ended
---------------------------
April 2, April 3,
(In thousands except per share amounts) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations:
As reported $45,583 $39,665
Add: Stock-based employee compensation expense included in
reported results, net of tax 417 165
Deduct: Total stock-based employee compensation expense
determined under the fair-value-based method for all
awards, net of tax (3,883) (3,228)
------- -------
Pro forma $42,117 $36,602
======= =======
Basic Earnings per Share from Continuing Operations:
As reported $ .28 $ .24
Pro forma $ .26 $ .22
Diluted Earnings per Share from Continuing Operations:
As reported $ .28 $ .24
Pro forma $ .26 $ .22
Net Income:
As reported $48,856 $43,122
Add: Stock-based employee compensation expense included in
reported net income, net of tax 417 165
Deduct: Total stock-based employee compensation expense
determined under the fair-value-based method for all
awards, net of tax (3,883) (3,941)
------- -------
Pro forma $45,390 $39,346
======= =======
Basic Earnings per Share:
As reported $ .30 $ .26
Pro forma $ .28 $ .24
Diluted Earnings per Share:
As reported $ .30 $ .26
Pro forma $ .28 $ .23
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THERMO ELECTRON CORPORATION
7. Stock-based Compensation Plans and Pro Forma Stock-based Compensation Expense
(continued)
In December 2004, the FASB issued SFAS No. 123(R) "Share-Based Payment."
SFAS No. 123(R) amends SFAS No. 123 to require that companies record as expense
the effect of equity-based compensation, including stock options, over the
applicable vesting period. The company currently discloses the effect on income
that stock options would have were they recorded as expense. SFAS No. 123(R)
also requires more extensive disclosures concerning stock options than required
under current standards. The new rule applies to option grants made after
adoption as well as options that are not vested at the date of adoption. SFAS
No. 123(R) becomes effective no later than fiscal years beginning after June 15,
2005. The company does not currently expect to elect early adoption and has not
determined whether it will apply the new standard prospectively in 2006 or
restate all periods on a comparable basis.
8. Defined Benefit Pension Plans
Several of the company's non-U.S. subsidiaries, principally 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 plans
are unfunded, as permitted under the plans and applicable laws. Net periodic
benefit costs for the plans in aggregate included the following components:
Three Months Ended
---------------------
April 2, April 3,
(In thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Service Cost $ 1,697 $ 1,534
Interest Cost on Benefit Obligation 3,221 3,025
Expected Return on Plan Assets (2,802) (2,600)
Recognized Net Actuarial Loss 645 642
------- -------
$ 2,761 $ 2,601
======= =======
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% (5.48% as of April 2, 2005). 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 over time has resulted in
an increase in other long-term assets and long-term debt totaling $5.0 million
at April 2, 2005. 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.
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THERMO ELECTRON CORPORATION
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
---------------------
April 2, April 3,
(In thousands) 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Beginning Balance $27,369 $25,645
Provision charged to income 5,623 5,112
Usage (4,688) (4,310)
Adjustments to previously provided warranties, net (571) (1,377)
Other, net (a) (583) 171
------- -------
Ending Balance $27,150 $25,241
======= =======
(a) Primarily represents the effects of currency translation.
11. Restructuring and Other Costs (Income), Net
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 2002 in a number of business units to reduce costs and
redundancies, principally through headcount reductions and consolidation of
facilities. Certain costs associated with these actions are recorded when
incurred. Further actions were initiated in 2003 and, to a lesser extent, in
2004. Restructuring and other costs recorded in 2005 are primarily for 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 company expects to incur an additional $0.3 million of
restructuring costs through the remainder of 2005 for charges associated with
the pre-2005 actions that cannot be recorded until incurred. The restructuring
actions undertaken in 2003 and 2004 were substantially complete at the end of
2004.
During the first quarter of 2005, the company recorded net restructuring
and other costs (income) by segment as follows:
Life and
Laboratory Measurement
(In thousands) Sciences and Control Other Corporate Total
- --------------------------------------------------------------------------------------------------------------------------------
Restructuring and Other Costs (Income), Net $(1,734) $ 1,034 $ (71) $ 500 $ (271)
======= ======= ======= ======= ========
The components of net restructuring and other costs (income) by segment
are as follows:
Life and Laboratory Sciences
The Life and Laboratory Sciences segment recorded $1.7 million of net
restructuring and other income in the first quarter of 2005. This amount
consisted of $0.8 million of cash costs, principally associated with facility
consolidations, including $0.5 million of severance for 31 employees across all
functions; $0.2 million of net abandoned-facility costs, primarily for charges
associated with facilities vacated in prior periods that could not be recorded
until incurred; and $0.1 million of other cash costs, primarily relocation
expenses. The costs are net of $2.5 million of net gains on the sale of three
abandoned buildings in the U.S. and Germany.
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THERMO ELECTRON CORPORATION
11. Restructuring and Other Costs (Income), Net (continued)
Measurement and Control
The Measurement and Control segment recorded $1.0 million of net
restructuring and other charges in the first quarter of 2005. These costs
consisted of $1.1 million of cash costs, principally associated with facility
consolidations, including $1.0 million of net abandoned-facility costs,
primarily for revised estimates of costs associated with facilities vacated in
prior periods and costs that could not be recorded until incurred, and $0.1
million of severance for 8 employees primarily, in sales and service functions.
The segment recorded a gain of $0.1 million on the sale of a small product line
in England for cash proceeds of $4.6 million.
Corporate
The company recorded $0.5 million of restructuring and other charges at
its corporate offices in the first quarter of 2005, all of which were cash
costs. The cash costs were primarily for severance for 12 employees.
General
The following table summarizes the company's severance actions in 2005.
Number of
2003 Restructuring Plans Employees
- -------------------------------------------------------------------------------------------------------------------------------
Remaining Terminations at December 31, 2004 48
Terminations Announced in 2005 3
Terminations Occurring to Date in 2005 (8)
Adjustments to Plan (2)
---
Remaining Terminations at April 2, 2005 41
===
Number of
2004 Restructuring Plans Employees
- -------------------------------------------------------------------------------------------------------------------------------
Remaining Terminations at December 31, 2004 30
Terminations Announced in 2005 48
Terminations Occurring to Date in 2005 (39)
Adjustments to Plan (2)
---
Remaining Terminations at April 2, 2005 37
===
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THERMO ELECTRON CORPORATION
11. Restructuring and Other Costs (Income), Net (continued)
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 (income), net, in the accompanying 2005 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.
Abandonment
Employee of Excess
(In thousands) Severance Retention (a) Facilities Other Total
- --------------------------------------------------------------------------------------------------------------------------------
Pre-2003 Restructuring Plans
Balance at December 31, 2004 $ 1,277 $ - $ 4,460 $ 17 $ 5,754
Costs incurred in 2005 (b) 34 - 967 38 1,039
Reserves reversed (149) - - - (149)
Payments (109) - (325) (39) (473)
Currency translation (60) - (30) 1 (89)
------- ------- ------- ------- -------
Balance at April 2, 2005 $ 993 $ - $ 5,072 $ 17 $ 6,082
======= ======= ======= ======= =======
2003 Restructuring Plans
Balance at December 31, 2004 $ 1,008 $ 63 $ 5,065 $ 9 $ 6,145
Costs incurred in 2005 (b) 16 - 184 10 210
Reserves reversed (38) - - - (38)
Payments (328) (63) (1,089) (14) (1,494)
Currency translation (6) - (145) - (151)
------- ------- ------- ------- -------
Balance at April 2, 2005 $ 652 $ - $ 4,015 $ 5 $ 4,672
======= ======= ======= ======= =======
2004 Restructuring Plans
Balance at December 31, 2004 $ 3,517 $ - $ 301 $ 102 $ 3,920
Costs incurred in 2005 (b) 1,224 - 53 51 1,328
Payments (2,870) - (119) (92) (3,081)
Currency translation (122) - (12) (2) (136)
------- ------- ------- ------- -------
Balance at April 2, 2005 $ 1,749 $ - $ 223 $ 59 $ 2,031
======= ======= ======= ======= =======
(a) Employee-retention costs are accrued ratably over the period through which
employees must work to qualify for a payment.
(b) Excludes net gains of $2.5 million from the sale of three abandoned
buildings and $0.1 million from the sale of a small product line in the
Life and Laboratory Sciences and Measurement and Control segments,
respectively.
The company expects to pay accrued restructuring costs as follows:
severance, primarily through 2006; employee-retention obligations and other
costs, primarily through 2005; and abandoned-facility payments, over lease terms
expiring through 2016.
12. Litigation
In September 2004, Applera Corporation, MDS Inc. and Applied
Biosystems/MDS Scientific Instruments filed a lawsuit alleging that the
company's mass spectrometer 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.
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THERMO ELECTRON CORPORATION
12. Litigation (continued)
The company has been named a defendant, along with many other companies,
in a patent-infringement lawsuit brought by the Lemelson Medical, Education &
Research Foundation, L.P. The suit asserts that products manufactured, used, or
sold by the defendants infringe one or more patents related to methods of
machine vision or computer-image analysis.
The company intends to vigorously defend these matters. In the opinion of
management, an unfavorable outcome of either or both of these matters 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 these parties infringe two patents of
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 its
financial position, results of operations, or cash flows.
13. Available-for-sale Investments
The company acquired 3,220,000 shares of Newport Corporation common
stock as part of the consideration for the sale of Spectra-Physics in July 2004.
The Newport shares carry resale restrictions. Restrictions lapsed on 25% of the
shares in January 2005 and these shares are in the process of being registered
by Newport with the SEC for resale. Restrictions on an additional 25% lapse in
July 2005 and on the remaining 50% in January 2006. During the first quarter of
2005, the company reclassified the shares of Newport that restrict resale until
January 2006 to short-term available-for-sale investments from non-current other
assets. As of April 2, 2005, the company owned 3,220,000 shares of Newport with
a quoted fair market value of $46.6 million, all of which are included in
available-for-sale investments.
14. Discontinued Operations
In the first quarter of 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 businesses divested prior to 2004,
including the sale of abandoned real estate and post-closing adjustments.
In the first quarter of 2004, the company's discontinued operations
(Spectra-Physics) had revenues of $57.0 million and net income of $3.5 million,
net of a tax provision of $1.1 million.
Current liabilities of discontinued operations in the accompanying
balance sheet includes obligations for abandoned leases, litigation, severance
and related obligations of previously owned businesses.
15. Subsequent Events
Acquisition
On April 26, 2005, the company's Measurement and Control segment
completed the acquisition of Rupprecht and Patashnick Co., Inc. (R&P), a New
York-based provider of continuous particulate monitoring instrumentation for the
ambient air, emissions monitoring and industrial hygiene markets for $32.5
million in cash, subject to a post-closing adjustment. R&P's revenues totaled
$17 million in 2004. The agreement calls for additional consideration of up to
$3 million through 2007 based on achieving targeted sales levels and 7% of
specified product sales thereafter through 2009.
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THERMO ELECTRON CORPORATION
15. Subsequent Events (continued)
Swap Agreements
In May 2005, in connection with plans to refinance part of the bridge
facility that the company will borrow under for the Kendro acquisition (Note 2),
the company entered into forward starting pay fixed swap agreements with several
banks to mitigate the risk of interest rates rising prior to completion of a
debt offering. Based on the company's conclusion that a debt offering is
probable and that such debt will carry semi-annual interest payments over a 10
year term, the swaps will hedge the cash flow risk that exists on each of the
semi-annual fixed-rate interest payments on $250,000,000 of principal amount of
the anticipated 10 year fixed rate debt issue (or any subsequent refinancing of
such debt).
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 "Forward-looking Statements" in this report on Form 10-Q.
Overview of Results of Operations and Liquidity
The company develops and manufactures 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. In July 2004, the company sold
Spectra-Physics, its optical technologies segment. The company's continuing
operations fall into two principal business segments: Life and Laboratory
Sciences and Measurement and Control.
Revenues
Three Months Ended
----------------------------------------------
(Dollars in thousands) April 2, 2005 April 3, 2004
- --------------------------------------------------------------------------------------------------------------------------------
Life and Laboratory Sciences $393,305 70.3% $365,466 69.6%
Measurement and Control 165,903 29.7% 159,566 30.4%
-------- ----- -------- -----
$559,208 100% $525,032 100%
======== ===== ======== =====
The company's revenues grew by 7% during the first quarter of 2005. The
strengthening of non-U.S. currencies relative to the dollar caused an increase
in reported revenues as did acquisitions, net of divestitures. Aside from
currency translation and the effect of acquisitions, net of divestitures,
revenues were approximately flat compared with the first quarter of 2004. Lower
demand from pharmaceutical customers was offset by improved sales to industrial
markets.
The company's strategy is to augment internal growth at existing
businesses with complementary acquisitions such as those completed in 2004 and
2005. The principal acquisitions included 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 (Note 15); Niton LLC, a provider of portable X-ray
analyzers to the metals, petrochemical and environmental markets, which was
acquired in March 2005 (Note 2); InnaPhase Corporation, a supplier of laboratory
information management systems for the pharmaceutical and biotechnology markets,
which was acquired in September 2004; and US Counseling Services, Inc. (USCS), a
supplier of equipment asset management services to the pharmaceutical,
healthcare and related industries, which was acquired in April 2004.
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THERMO ELECTRON CORPORATION
Overview of Results of Operations and Liquidity (continued)
In the first quarter of 2005, the company's operating income and
operating income margin improved to $59.7 million and 10.7%, respectively, from
$52.9 million and 10.1%, respectively, in 2004. (Operating income margin is
operating income divided by revenues.) The improvement resulted primarily from
lower restructuring costs, net, and the absence of charges to cost of revenues
in 2005, offset in part by $3.6 million of higher amortization expense
associated with acquisition-related intangible assets. Restructuring and other
income, net, increased operating income by $0.3 million in 2005. Restructuring
and other costs, net, (including charges to cost of revenues primarily
associated with the sale of inventories revalued at the date of acquisition)
reduced operating income by $5.6 million in 2004.
Income from continuing operations increased to $45.6 million in 2005 from
$39.7 million in 2004, primarily due to the higher operating income discussed
above.
During the first quarter of 2005, the company's cash flow from operations
totaled $30.3 million, compared with $46.6 million in the first quarter of 2004.
The decrease resulted primarily from a $30.5 million investment in working
capital in 2005, principally a reduction in other current liabilities and an
increase in inventories, compared with a $15.0 million investment in working
capital in the first quarter of 2004.
As of April 2, 2005, the company's outstanding debt totaled $239.2
million, of which 86% is due in 2007 and 2008. The company expects to borrow up
to $600 million in 2005 through a 364-day bridge financing commitment obtained
in connection with the January 2005 agreement to acquire Kendro Laboratory
Products for $833.5 million, subject to a post-closing adjustment. The
commitment is subject to customary conditions for financings of this type. The
company expects to use existing cash balances to fund the remainder of the
purchase price. Although the company has not yet obtained firm commitments, it
expects to use a combination of short- and long-term debt instruments to
refinance the bridge loan following completion of the acquisition (Note 15). The
company expects that its existing cash and short-term investments; future cash
flow from operations; available borrowings of up to $250 million under its
existing 5-year revolving credit agreement; commitment for a bridge loan to
acquire Kendro; and expected refinancing of the bridge loan will be sufficient
to meet its capital requirements for the foreseeable future, including at least
the next 24 months.
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 accepted in the
United States of America. The preparation of these financial statements requires
the company to make estimates and judgments that affect 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,
contingencies and litigation, restructuring and sale of businesses. The company
bases its estimates on historical experience, current market and economic
conditions and other assumptions that management believes are reasonable. The
results of these estimates form 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.
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 $22.3 million at April 2,
2005. 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.
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THERMO ELECTRON CORPORATION
Critical Accounting Policies (continued)
(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 $1.51
billion at April 2, 2005. 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, 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 $563.5 million at April 2, 2005,
including $238.0 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.
(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
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THERMO ELECTRON CORPORATION
Critical Accounting Policies (continued)
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 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 $27.2 million at April 2, 2005.
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 $66.2 million at
April 2, 2005. 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 $30.9 million at April 2, 2005. 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.
(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.
(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 $2.8 million in the first quarter
of 2005. Should any of these assumptions change, they would have an
effect on net periodic pension costs.
(n) 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 $9.3 million
at April 2, 2005. Should actual cash flows associated with
sub-rental income from vacated facilities vary from estimated
amounts, adjustments may be required.
(o) 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.
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THERMO ELECTRON CORPORATION
Critical Accounting Policies (continued)
(p) The company considers declines in quoted fair market values of
available-for-sale investments and other equity investments with
durations of six to nine months as indicative that the decline may
be other than temporary. As of April 2, 2005, the company held
3,220,000 shares of Newport Corporation common stock, which it
received as partial consideration in the July 2004 sale of
Spectra-Physics. The cost and quoted fair market value of the
shares at April 2, 2005, were $45.0 million and $46.6 million,
respectively. Should a decline in quoted fair market value occur,
an impairment charge may be required.
Results of Operations
First Quarter 2005 Compared With First Quarter 2004
- ---------------------------------------------------
Continuing Operations
Sales in the first quarter of 2005 were $559.2 million, an increase of
$34.2 million from the first quarter of 2004. The favorable effects of currency
translation resulted in an increase in revenues of $11.5 million in 2005. Sales
increased $24.6 million due to acquisitions, net of divestitures. Aside from
currency translation and the effect of acquisitions, net of divestitures,
revenues were approximately flat compared with the first quarter of 2004. Lower
demand from pharmaceutical customers was offset by improved sales to industrial
markets.
Operating Income Margin
Three Months Ended
-----------------------
April 2, April 3,
2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------
Life and Laboratory Sciences 13.2% 12.8%
Measurement and Control 11.1% 8.9%
Consolidated 10.7% 10.1%
Operating income was $59.7 million in the first quarter of 2005, compared
with $52.9 million in 2004. Operating income margin increased to 10.7% in 2005
from 10.1% in 2004. Operating income increased primarily due to lower
restructuring and other costs, net, offset by $3.6 million of higher
amortization expense for acquisition-related intangible assets. Operating income
in 2004 was reduced by additional charges associated with restructuring actions
initiated in 2004 and prior years and certain other costs, net (Note 11). The
restructuring and other items, net, totaled income of $0.3 million and costs of
$5.6 million in 2005 and 2004, respectively, and are discussed by segment below.
Restructuring actions were initiated in 2003 and, to a lesser extent, in
2004 in a number of business units to reduce costs and redundancies in response
to a downturn in markets served by the company and in connection with the
company's overall reorganization, principally through headcount reductions and
consolidation of facilities. The company expects to incur an additional $0.3
million of restructuring costs, primarily in 2005, for charges associated with
these actions that cannot be recorded until incurred. In connection with the
planned acquisition of Kendro, the company expects to undertake restructuring
actions at both acquired and existing facilities. The actions at acquired
facilities will be recorded as a cost of the acquisition. The actions at
existing facilities will be charged to expense. The company has not finalized
its plans for integrating Kendro with its existing business but expects that
charges to expense will total $10-$20 million following the acquisition.
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THERMO ELECTRON CORPORATION
First Quarter 2005 Compared With First Quarter 2004 (continued)
- ---------------------------------------------------
Life and Laboratory Sciences
Three Months Ended
----------------------------------
April 2, April 3,
(Dollars in thousands) 2005 2004 Change
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $393,305 $365,466 7.6%
Operating Income Margin 13.2% 12.8% 0.4
Sales in the Life and Laboratory Sciences segment increased $27.8
million, or 8%, to $393.3 million in the first quarter of 2005. The favorable
effects of currency translation resulted in an increase in revenues of $8.6
million in 2005. Sales increased $25.3 million due to the acquisitions of
InnaPhase in September 2004 and USCS in April 2004, net of a product line
divestiture. Excluding the changes in revenues resulting from currency
translation, acquisitions and a divestiture, revenues decreased $6.1 million, or
2%, due to lower demand from pharmaceutical customers, several of which have
announced cost cutting initiatives, offset in part by higher sales to customers
in industrial markets.
Operating income margin was 13.2% in the first quarter of 2005 and 12.8%
in the first quarter of 2004. Operating income margin was affected by
restructuring and other income, net, of $1.7 million in 2005 and restructuring
and other costs, net, of $3.8 million in 2004, as discussed below. The favorable
impact of lower restructuring and other costs, net, was offset in part by a $3.5
million increase in amortization expense of acquisition-related intangible
assets.
In 2005, the segment recorded restructuring and other income, net, of
$1.7 million. The segment incurred $0.8 million of cash costs, primarily for
severance, abandoned facilities and relocation expenses at businesses that have
been consolidated. These costs were offset by $2.5 million of net gains on the
sale of three abandoned buildings (Note 11). In 2004, the segment recorded
restructuring and other costs, net, of $3.8 million, including charges to costs
of revenue of $2.4 million, primarily for the sale of inventories revalued at
the date of acquisition, and $1.0 million of cash costs, primarily for
severance, abandoned facilities and relocation expenses at businesses being
consolidated. In addition, the segment recorded a loss of $0.4 million from the
sale of two abandoned buildings.
Measurement and Control
Three Months Ended
----------------------------------
April 2, April 3,
(Dollars in thousands) 2005 2004 Change
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $165,903 $159,566 4.0%
Operating Income Margin 11.1% 8.9% 2.2
Sales in the Measurement and Control segment increased $6.3 million, or
4%, to $165.9 million in the first quarter of 2005. The favorable effects of
currency translation resulted in an increase in revenues of $2.9 million in
2005. Sales decreased $0.8 million due to a divestiture, net of an acquisition.
In addition to the changes in revenue resulting from currency translation, a
divestiture and an acquisition, revenues increased $4.2 million, or 3%. The
increase was primarily the result of higher broad-based demand from industrial
customers in applications such as minerals and mining, power generation,
plastics and food processing.
Operating income margin increased to 11.1% in 2005 from 8.9% in 2004. The
increase in operating income margin resulted primarily from higher sales
volumes. Operating income margin was also affected by restructuring and other
costs, net, of $1.0 million and $1.3 million in 2005 and 2004, respectively, as
discussed below.
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THERMO ELECTRON CORPORATION
First Quarter 2005 Compared With First Quarter 2004 (continued)
- ---------------------------------------------------
In the first quarter of 2005, the segment recorded restructuring and
other costs, net, of $1.0 million, including $1.1 million of cash costs,
principally for previously abandoned facilities at businesses being consolidated
(Note 11). In 2004, the segment recorded restructuring and other costs, net, of
$1.3 million, including cash costs of $1.1 million, principally for abandoned
facilities, severance and relocation expenses at businesses that were
consolidated. In addition, the segment recorded charges of $0.1 million,
primarily for the writedown of equipment at an abandoned facility, and charges
to costs of revenues of $0.1 million for the sale of inventories revalued at the
date of acquisition.
Other Income, Net
- -----------------
The company reported other income, net, of $3.3 million and $2.6 million
in the first quarter of 2005 and 2004, respectively (Note 4). Other income, net,
includes interest income, interest expense, gain on investments, net, and other
items, net. Interest income increased to $3.3 million in 2005 from $1.9 million
in 2004, primarily due to higher invested cash balances following the sale of
Spectra-Physics in July 2004 and, to a lesser extent, increased market interest
rates. Interest expense increased to $3.2 million in 2005 from $2.7 million in
2004 as a result of higher rates associated with the company's variable rate
debt.
During the first quarter of 2005 and 2004, the company had gains on
investments, net, of $2.3 million and $2.6 million, respectively. The gains
included $1.6 million in 2004 from the sale of shares of Thoratec Corporation.
In the second quarter through May 5, 2005, the company has sold 3.9
million shares of Thoratec, resulting in a gain of $25.4 million.
Provision for Income Taxes
- --------------------------
The company's effective tax rate was 27.6% and 28.5% in the first quarter
of 2005 and 2004, respectively. The decrease in the effective tax rate resulted
primarily from higher income in lower-tax jurisdictions and adjustments to
prior-year returns. The company expects an effective tax rate for its existing
businesses of approximately 28.5% in the remainder of 2005.
The American Jobs Creation Act of 2004, signed into law in October 2004,
allows companies to repatriate permanently reinvested non-U.S. earnings in 2005
or 2006 at an effective rate of 5.25%. The company does not currently expect to
take advantage of this provision. The new tax law also phases out an existing
deduction based on export revenues and replaces it with a deduction for a
portion of the profit derived from domestic manufacturing activities. The
company is continuing to evaluate the effect of these changes but does not
expect a material net impact on its tax provision.
Discontinued Operations
In the first quarter of 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 businesses divested prior to 2004,
including the sale of abandoned real estate and post-closing adjustments.
In the first quarter of 2004, the company's discontinued operations
(Spectra-Physics) had revenues of $57.0 million and net income of $3.5 million,
net of a tax provision of $1.1 million. The company sold Spectra-Physics in July
2004.
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THERMO ELECTRON CORPORATION
Liquidity and Capital Resources
First Quarter 2005
- ------------------
Consolidated working capital was $937.1 million at April 2, 2005,
compared with $890.9 million at December 31, 2004. Included in working capital
were cash, cash equivalents and short-term available-for-sale investments of
$528.6 million at April 2, 2005, compared with $512.3 million at December 31,
2004.
Cash provided by operating activities was $30.3 million during the first
quarter 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
quarter 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 quarter of 2005.
In connection with restructuring actions undertaken by continuing
operations, the company had accrued $12.8 million for restructuring costs at
April 2, 2005. The company expects to pay approximately $3.4 million of this
amount for severance primarily through 2006, and $0.1 million for other costs
primarily through 2005. The balance of $9.3 million will be paid for lease
obligations over the remaining terms of the leases, with approximately half to
be paid through 2005 and the remainder through 2016. In addition, at April 2,
2005, the company had accrued $6.0 million for acquisition expenses. Accrued
acquisition expenses included $2.4 million of severance and relocation
obligations, which the company expects to pay primarily through 2005. The
balance primarily represents abandoned-facility payments that will be paid over
the remaining terms of the leases through 2014.
During the first quarter 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 (Note 2). 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 quarter of 2005, principally proceeds of $4.6 million from the
exercise of employee stock options.
The company obtained a bridge financing commitment which will permit it
to borrow up to $600 million for a 364-day period on terms substantially
equivalent to its existing 5-year revolving credit facility to partially fund
the $833.5 million purchase price of Kendro. The commitment is subject to
customary conditions for financings of this type. The company expects to use
existing cash balances to fund the remainder of the purchase price. Although the
company has not yet obtained firm commitments, it expects to use a combination
of short- and long-term debt instruments to refinance the bridge loan following
the completion of the acquisition (Note 15). The existing revolving credit
agreement calls for interest at either a LIBOR-based rate or a rate based on the
prime lending rate of the agent bank, at the company's option. The agreement
contains affirmative, negative and financial covenants and events of default
customary for financings of this type. The financial covenants include interest
coverage and debt-to-capital ratios.
Aside from the agreement to acquire Kendro, the company has no material
commitments for purchases of property, plant and equipment and expects that for
all of 2005, such expenditures will approximate $43 - $47 million and its
contractual obligations and other commercial commitments did not change
materially between December 31, 2004 and April 2, 2005.
The company expects that its existing cash and short-term investments;
future cash flow from operations; available borrowings of up to $250 million
under its existing 5-year revolving credit agreement; commitment for a bridge
loan to acquire Kendro; and expected refinancing of the bridge loan will be
sufficient to meet its capital requirements for the foreseeable future,
including at least the next 24 months.
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THERMO ELECTRON CORPORATION
First Quarter 2004
- ------------------
Cash provided by operating activities was $46.6 million during the first
quarter of 2004, including $42.5 million provided by continuing operations and
$4.1 million provided by discontinued operations. Payments for restructuring
actions of the company's continuing operations, principally severance, lease
costs and other expenses of real estate consolidation, used cash of $7.0 million
in the first quarter of 2004. Inventories increased $20.3 million, due in part
to increased production of mass spectrometry and spectroscopy instruments in
response to higher demand for these products. An increase in accounts payable
was a source of $18.9 million of cash due to a higher volume of purchase
activity. Cash provided by discontinued operations of $4.1 million principally
represents the positive cash flow of Spectra-Physics, offset in part by payment
of liabilities from businesses sold prior to 2003, including settlement of
litigation and lease payments on abandoned facilities.
During the first quarter of 2004, the primary investing activities of the
company's continuing operations, excluding available-for-sale investment
activities, included the purchase of property, plant and equipment. The
company's continuing operations expended $10.4 million for purchases of
property, plant and equipment and had proceeds from the sale of property of $3.1
million.
The company's financing activities used $13.6 million of cash during the
first quarter of 2004, principally for continuing operations. During the first
quarter of 2004, the company's continuing operations received net proceeds of
$21.1 million from the exercise of employee stock options. In addition, the
company expended $31.5 million to repurchase 1.1 million shares of the company's
common stock and $2.5 million to reduce short-term notes payable.
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 2004.
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 2, 2005. 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 2,
2005, 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 2, 2005, 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 CORPORATION
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, we caution readers that the following important
factors, among others, in some cases have affected, and in the future could
affect, our actual results and could cause our actual results in 2005 and beyond
to differ materially from those expressed in any forward-looking statements made
by us.
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.
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.
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 2005 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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THERMO ELECTRON CORPORATION
Forward-looking Statements (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.
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. For example, in the first
quarter of 2005, the company experienced a slow down in demand from the
pharmaceutical market.
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 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 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
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
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.
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 division 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.
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 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.
Our results could be impacted if we are unable to realize potential
future benefits from new productivity initiatives. In addition to the real
estate consolidations and cost-saving initiatives that we have pursued over the
past three years, we are instituting practical process improvement (PPI)
programs at our locations to further enhance our productivity, efficiency and
customer satisfaction. While we anticipate continued benefits from these PPI
initiatives as well as our continuing sourcing activities, future benefits are
expected to be fewer and smaller in size and may be more difficult to achieve.
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.
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;
- developing new applications for our technologies;
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
- combining sales and marketing operations in appropriate markets to
compete more effectively;
- allocating research and development funding to products with higher
growth prospects;
- continuing key customer initiatives;
- expanding our service 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.
As 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 2004, our international revenues from continuing operations,
including export revenues from the United States, accounted for approximately
60% 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
fiscal 2004 and 2003, currency translation had a favorable effect on revenues of
our continuing operations of $92.1 million and $116.8 million, respectively, due
to weakening of the U.S. dollar relative to other currencies in which the
company sells products and services. A strengthening of the U.S. dollar would
unfavorably affect revenues.
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, the
company expects to complete the acquisition of Kendro in May 2005, and will need
to integrate the business in order to realize its anticipated cost savings and
synergies.
Moreover, we previously acquired several companies and businesses. As a
result of these acquisitions, we recorded significant goodwill on our balance
sheet, which amounts to approximately $1.51 billion as of April 2, 2005. We
assess the realizability of the goodwill we have on our books annually as well
as whenever events or changes in
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
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.
PART II - OTHER INFORMATION
Item 6 - Exhibits
- -----------------
See Exhibit Index on the page immediately preceding exhibits.
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THERMO ELECTRON CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 6th day of May 2005.
THERMO ELECTRON CORPORATION
/s/ Peter M. Wilver
-------------------------------------------------
Peter M. Wilver
Vice President and Chief Financial Officer
/s/ Peter E. Hornstra
-------------------------------------------------
Peter E. Hornstra
Corporate Controller and Chief Accounting Officer
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THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
10.1 Revised Summary of Thermo Electron Corporation Director Compensation.
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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