Exhibit 99.4
KENDRO LABORATORY PRODUCTS
INDEX OF COMBINED FINANCIAL STATEMENTS
Page
----
Report of Independent Registered Public Accounting Firm on financial statements at December 31, 2004, and for
the year then ended F-2
Combined Statement of Income for the three months ended March 31, 2005 and 2004 (unaudited) and for the year
ended December 31, 2004 F-3
Combined Balance Sheet as of March 31, 2005 (unaudited) and December 31, 2004 F-4
Combined Statement of Cash Flows for the three months ended March 31, 2005 and 2004 (unaudited) and for the
year ended December 31, 2004 F-5
Combined Statement of Comprehensive Income and Parent's Investment for the three months ended March 31, 2005
(unaudited) and for the year ended December 31, 2004 F-6
Notes to Combined Financial Statements F-7
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KENDRO LABORATORY PRODUCTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Thermo Electron Corporation.
We have audited the accompanying combined balance sheet of Kendro
Laboratory Products (the "Company") as of December 31, 2004, and the related
combined statements of income, comprehensive income and parent's investment, and
cash flows for the year ended December 31, 2004. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
combined financial statements are free of material misstatement. The Company is
not required to have, nor were we engaged to perform, an audit of internal
controls over financial reporting. An audit includes consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of Kendro Laboratory Products as of
December 31, 2004, and the results of its operations and its cash flows for the
year ended December 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying combined balance sheet of Kendro Laboratory Products as
of March 31, 2005, and the related combined statements of income, comprehensive
income and parent's investment, and cash flows for the three months ended March
31, 2004 and 2005 were not audited by us and, accordingly, we do not express an
opinion on them.
As discussed in Note 1, the accompanying combined financial statements
have been prepared from the separate records maintained by the entities that
comprise the Company and include allocations of expenses from SPX Corporation,
the parent company. Therefore, the financial position and operating results
reflected in these combined financial statements may not necessarily be
indicative of the conditions that would have existed if the Company had been
operated as a single, unaffiliated entity. Portions of certain income and
expenses represent allocations made from home-office items applicable to the
Company as a whole.
/s/ Deloitte & Touche LLP
Charlotte, North Carolina
July 22, 2005
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KENDRO LABORATORY PRODUCTS
COMBINED STATEMENT OF INCOME
(In thousands)
Three Months Ended Year Ended
March 31, December 31,
----------------------------
2005 2004 2004
----------- ----------- ------------
(Unaudited) (Unaudited)
Revenues $ 93,860 $ 83,633 $370,594
-------- -------- --------
Costs and Operating Expenses:
Cost of revenues 55,422 50,031 227,694
Selling, general, and administrative expenses 19,196 17,894 76,582
Research and development expenses 3,032 2,644 11,005
Special charges and other costs (income) (23) 939 11,566
-------- -------- --------
77,627 71,508 326,847
-------- -------- --------
Operating Income 16,233 12,125 43,747
Interest Income 2,130 1,688 7,048
Interest Expense (133) (87) (787)
Other Income (Expense), Net 3 (287) (241)
-------- -------- --------
Income Before Provision for Income Taxes 18,233 13,439 49,767
Provision for Income Taxes (4,447) (4,212) (15,597)
-------- -------- --------
Net Income $ 13,786 $ 9,227 $ 34,170
======== ======== ========
The accompanying notes are an integral part of these combined financial statements.
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KENDRO LABORATORY PRODUCTS
COMBINED BALANCE SHEET
(In thousands)
March 31, December 31,
2005 2004
----------- -----------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 5,364 $ 2,494
Accounts receivable, net 63,390 73,511
Receivables from affiliates 1,700 61
Inventories, net 58,644 53,346
Other current assets 10,510 9,183
--------- --------
139,608 138,595
--------- --------
Property, Plant, and Equipment:
Land 4,655 4,782
Buildings and leasehold improvements 41,469 43,879
Machinery and equipment 62,799 61,557
--------- --------
108,923 110,218
Accumulated depreciation (45,825) (43,950)
--------- --------
63,098 66,268
--------- --------
Intangible Assets, net 70,116 72,195
--------- --------
Note Receivable From Parent 120,000 120,000
--------- --------
Other Assets 2,561 1,858
--------- --------
Goodwill 310,570 320,144
--------- --------
$ 705,953 $719,060
========= ========
Liabilities and Parent's Investment
Current Liabilities:
Short-term revolving debt $ 331 $ 2,675
Accounts payable 25,655 28,973
Payables to affiliates - 697
Deferred revenue 5,750 7,203
Accrued expenses 28,316 28,126
--------- --------
60,052 67,674
--------- --------
Note Payable to Parent 6,522 6,520
--------- --------
Deferred Income Taxes 14,082 14,931
--------- --------
Other Liabilities 24,163 24,912
--------- --------
Commitments and Contingencies
Parent's Investment:
Parent's net investment 519,386 508,119
Accumulated other comprehensive income 81,748 96,904
--------- --------
601,134 605,023
--------- --------
$ 705,953 $719,060
========= ========
The accompanying notes are an integral part of these combined financial statements.
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KENDRO LABORATORY PRODUCTS
COMBINED STATEMENT OF CASH FLOWS
(In thousands)
Three Months Ended
March 31, Year Ended
----------------------------- December 31,
2005 2004 2004
----------- ----------- ------------
(Unaudited) (Unaudited)
Operating Activities
Net income $ 13,786 $ 9,227 $ 34,170
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 2,438 2,440 9,563
Special charges and other costs (income) (23) 939 11,566
Deferred income taxes (634) (12) (404)
Earnings in joint venture, net of distribution (139) (60) (160)
Changes in current accounts, excluding the effects of
acquisitions and divestiture:
Accounts receivable and other 6,377 3,159 (18,662)
Inventories (5,299) (4,511) 1,756
Accounts payable (4,015) (3,489) (991)
Accrued expenses and other liabilities (4,306) 2,308 (16,719)
-------- -------- --------
Net cash provided by operating activities 8,185 10,001 20,119
-------- -------- --------
Investing Activities
Acquisitions, net of cash acquired - (9,460) (22,415)
Purchases of property, plant, and equipment (452) (1,783) (5,762)
Proceeds from sale of product line - - 3,200
-------- -------- --------
Net cash used in investing activities (452) (11,243) (24,977)
-------- -------- --------
Financing Activities
Transfers from (to) parent (2,519) 804 6,032
Repayment of debt assumed in acquisition - - (1,409)
Net payments under debt agreements (2,344) 621 621
-------- -------- --------
Net cash (used in) provided by financing activities (4,863) 1,425 5,244
-------- -------- --------
Increase in Cash and Cash Equivalents 2,870 183 386
Cash and Cash Equivalents at Beginning of Year 2,494 2,108 2,108
-------- -------- --------
Cash and Cash Equivalents at End of Period $ 5,364 $ 2,291 $ 2,494
======== ======== ========
Supplemental Cash Flow Information
Cash Paid for Income Taxes $ 3,259
========
Cash Paid for Interest $ 787
========
The accompanying notes are an integral part of these combined financial statements.
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KENDRO LABORATORY PRODUCTS
COMBINED STATEMENT OF COMPREHENSIVE INCOME
AND PARENT'S INVESTMENT
(In thousands)
Three Months
Ended Year Ended
March 31, December 31,
2005 2004
------------ ------------
(Unaudited)
Comprehensive Income (Loss)
Net Income $ 13,786 $ 34,170
-------- --------
Other Comprehensive Items:
Currency translation adjustment (15,156) 25,421
-------- --------
(15,156) 25,421
-------- --------
Comprehensive (loss) income $ (1,370) $ 59,591
======== ========
Parent's Investment
Parent's Net Investment:
Balance at beginning of year $508,119 $467,917
Net income 13,786 34,170
Transfer (to) from parent, net (2,519) 6,032
-------- --------
Balance at end of period 519,386 508,119
-------- --------
Accumulated Other Comprehensive Items:
Balance at beginning of year 96,904 71,483
Currency translation adjustment (15,156) 25,421
-------- --------
Balance at end of period 81,748 96,904
-------- --------
$601,134 $605,023
======== ========
The accompanying notes are an integral part of these combined financial statements.
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KENDRO LABORATORY PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1. Basis of Presentation, Nature of Operations, and Summary of
Significant Accounting Policies
Basis of Presentation and Subsequent Event
The accompanying combined financial statements include the accounts of
the Kendro Laboratory Products business (the "company" or "we"), which was sold
to Thermo Electron Corporation on May 9, 2005 for $833.5 million, subject to a
post-closing adjustment, pursuant to the purchase agreement by and among SPX
Corporation (the "parent"); Kendro GP II, LLC, SPX Europe GmbH, General Signal
Ireland B.V. and GSLE Development Corporation; and Thermo Electron Corporation
and Thermo Electron (Oberhausen) GmbH (collectively, "Thermo Electron") dated
January 19, 2005.
The combined financial statements have been prepared using the company's
historical basis in the assets and liabilities and the results of operations of
the company included in the historical financial statements of the parent.
Specifically, the accompanying combined financial statements include Kendro
Laboratory Products, L.P.; Kendro Laboratory Products GmbH; GSLE Development
Corporation; Kendro Laboratory Products plc; Kendro Laboratory Products AG;
Cryonix, Inc.; Medical Equipment Maintenance Company; Kendro Laboratory Products
(GP), Inc.; Key Scientific Inc.; Nippon Kendro KK; and Kendro GP II, LLC.
Specifically identifiable administrative services and expenses incurred
by the company in the normal course of business, such as external legal fees,
audit fees, risk insurance premiums, certain employee benefit costs and other
items were originally recorded by the parent. The costs associated with these
services and expenses were allocated to the combined financial statements of the
company from the parent. Management believes the assumptions used to allocate
such items are reasonable. However, the combined financial information included
herein may not necessarily reflect the combined financial position, operating
results, changes in invested capital and cash flows of the company in the future
or what they would have been had we been a separate, stand-alone entity during
the periods presented. Because a direct ownership relationship did not exist
among all the various units comprising the company, the parent's net investment
in the entities that comprise the company is shown in lieu of stockholder's
equity in the combined financial statements. Changes in the parent's net
investment represent the net earnings of the company and net cash transfers to
the parent and other transfers from the parent.
The accompanying combined financial statements for the three-month
periods ended March 31, 2005 and 2004 are unaudited. The unaudited interim
combined financial statements have been prepared on the same basis as the
accompanying annual combined financial statements. In the opinion of management,
such interim combined financial statements reflect all adjustments of a normal
recurring nature necessary for a fair statement of financial position at March
31, 2005 and the results of operations and cash flows for the three-month
periods ended March 31, 2005 and 2004. Unaudited results of operations for the
interim periods ended March 31, 2005 and 2004 are not necessarily indicative of
the results of operations to be expected for any other interim period or the
full year. In addition, for the reasons stated above, the unaudited interim
combined financial statements may not reflect the financial position and
operating results that would have been reported had the company been a separate,
stand-alone entity during the interim periods.
Nature of Operations
We design, manufacture, market, and service 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.
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KENDRO LABORATORY PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Note 1. Basis of Presentation, Nature of Operations, and Summary of
Significant Accounting Policies (continued)
Principles of Combination
The accompanying combined financial statements include the accounts of
and the entities listed above adjusted to include certain allocations from the
parent as described above. All significant intercompany accounts and
transactions have been eliminated.
Foreign Currency Translation
The financial statements of our foreign combined entities are translated
into U.S. dollars in accordance with Statement of Financial Accounting Standards
("SFAS") No. 52, "Foreign Currency Translation." Balance sheet accounts are
translated at the current rate at the end of each period and income statement
accounts are translated at the average rate. Gains and losses on foreign
currency translations are reflected as a separate component of parent's
investment and other comprehensive income. Transaction losses are included in
the statement of income and totaled $4.2 million in 2004.
Cash Equivalents
We consider highly liquid money market investments with original
maturities of three months or less at the date of purchase to be cash
equivalents.
Revenue Recognition and Accounts Receivable
We recognize revenues from product sales upon shipment to the customer
(f.o.b. shipping point) except for revenues from service contracts and long-term
maintenance arrangements, which are deferred and recognized on a straight-line
basis over the agreement period. Certain sales to distributors made with return
rights are recognized upon shipment to the customer. Expected returns under
these arrangements are estimated and accrued for at the time of sale. The
accrual considers restocking charges for returns and in some cases the customer
must issue a replacement order before the return is authorized. Actual return
experience may vary from our estimates. Amounts billed for shipping and handling
are included in revenue and costs incurred for shipping and handling are
recorded in cost of products sold and not netted against amounts billed.
Deferred revenue in the accompanying balance sheet consists primarily of
unearned revenue on service contracts, which is recognized ratably over the
terms of the contracts.
Accounts receivable are recorded at the invoiced amount and do not bear
interest. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to pay amounts due. The allowance
for doubtful accounts is our best estimate of the amount of probable credit
losses in existing accounts receivable. We estimate the allowance based on
historical write-off experience and a review of individual past due balances.
Account balances are charged off against the allowance when we believe it is
probable the receivable will not be recovered. We do not have any
off-balance-sheet credit exposure related to customers.
Research and Development Costs
Internal research and development costs are expensed when incurred.
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KENDRO LABORATORY PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Note 1. Basis of Presentation, Nature of Operations, and Summary of
Significant Accounting Policies (continued)
Property, Plant, and Equipment
Property, plant, and equipment ("PP&E") is stated at cost, less
accumulated depreciation and amortization. We use the straight-line method for
computing depreciation expense over the useful lives of PP&E, which do not
exceed 40 years for buildings and range from 3 to 15 years for machinery and
equipment. Leasehold improvements are amortized over the life of the related
asset or the life of the lease, whichever is shorter.
Income Taxes
Income taxes are accounted for under SFAS No. 109, "Accounting for Income
Taxes," which includes an estimate of the amount of taxes payable or refundable
for the current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in our financial statements or
tax returns. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. We periodically
assess the realizability of deferred tax assets and the adequacy of deferred tax
liabilities, including the results of local, state, federal or foreign statutory
tax audits or estimates and judgments used.
Certain of the entities included in the combined financial statements are
partnerships which are owned by entities not included in the combined financial
statements. Accordingly, no tax expense has been reflected for those partnership
entities in the combined financial statements.
Stock-Based Employee Compensation
The parent has a stock-based compensation plan, including stock option,
restricted stock and restricted stock unit awards. Expenses associated with the
parent's plan have been allocated to the combined financial statements to the
extent our employees participate in the plan. We account for our stock-based
employee compensation under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and, accordingly, except for awards
of restricted stock and restricted stock units, we do not recognize any
compensation expense. We have adopted the disclosure provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure, an
amendment of FASB Statement No. 123."
In December 2003, the Compensation Committee of the parent's Board of
Directors announced its intent to issue restricted stock and restricted stock
units in lieu of stock options for stock-based employee compensation to eligible
employees commencing with grants in the first quarter of 2004. Accordingly,
under APB No. 25 these awards to employees are required to be expensed over the
vesting period. Non-cash pre-tax compensation expense associated with restricted
stock awards was $0.4 million in 2004. There were no stock option grants made in
2004.
As a result of the sale of the company on May 9, 2005, all restricted
stock awards issued to our employees vested immediately. All options issued to
our employees in 2001, 2002, and 2003 vested immediately upon sale and the
optionees have two years from the date of sale to exercise those options.
Optionees have 90 days from the date of sale to exercise vested options issued
prior to 2001.
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KENDRO LABORATORY PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Note 1. Basis of Presentation, Nature of Operations, and Summary of
Significant Accounting Policies (continued)
We have applied the intrinsic value-based method of accounting prescribed
by APB Opinion No. 25 and related interpretations in accounting for stock-based
compensation plans. Accordingly, no compensation cost is reflected in net income
for stock option awards as all options granted had an exercise price equal to or
in excess of the market value of the underlying parent common stock on the date
of grant. In accordance with SFAS No. 148, the following table illustrates the
pro forma effect on net income, had the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation," been applied to
stock-based employee compensation (in thousands):
Three Months Ended
March 31, Year Ended
---------------------------- December 31,
2005 2004 2004
----------- ----------- ------------
(Unaudited) (Unaudited)
Net Income:
As reported $13,786 $ 9,227 $34,170
Add: Stock-based employee compensation expense
included in reported net income, net of tax 69 59 256
Deduct: Total stock-based employee compensation
expense determined under the fair-value-based method
for all awards, net of tax (155) (248) (1,009)
------- ------- -------
Pro forma $13,700 $ 9,038 $33,417
======= ======= =======
Note 2. Use of Estimates
The preparation of our combined financial statements in conformity with
generally accepted accounting principles ("GAAP") requires us to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the combined financial statements, and the reported amounts of
revenues and expenses during the reporting period. We evaluate these estimates
and judgments on an ongoing basis and base our estimates on experience, current
and expected future conditions, third-party evaluations, and various other
assumptions that we believe are reasonable under the circumstances. The results
of these estimates form the basis for making judgments about the carrying values
of assets and liabilities as well as identifying and assessing the accounting
treatment with respect to commitments and contingencies. Actual results may
differ from the estimates and assumptions used in the financial statements and
related notes.
Listed below are certain significant estimates and assumptions used in
the preparation of our financial statements. Certain other estimates and
assumptions are further explained in the related notes.
Allowance for Doubtful Accounts
We estimate losses for uncollectible accounts based on our historical
experience and the evaluation of the likelihood of success in collecting
specific customer receivables. Summarized below is the activity for the
allowance for doubtful accounts (in thousands):
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KENDRO LABORATORY PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Note 2. Use of Estimates (continued)
Year Ended
December 31,
2004
------------
Balance at beginning of year $1,548
Acquisitions 86
Provisions 792
Write-offs, net of recoveries (777)
Currency translation 85
------
Balance at end of year $1,734
======
Inventory
We estimate losses for excess and/or obsolete inventory and the net
realizable value of inventory based on the aging of the inventory and the
evaluation of the likelihood of recovering the inventory costs based on
anticipated demand and selling price.
Impairment of Long-Lived Assets and Intangibles Subject to Amortization
We continually review whether events and circumstances subsequent to the
acquisition of any long-lived assets or intangible assets subject to
amortization, have occurred that indicate the remaining estimated useful lives
of those assets may warrant revision or that the remaining balance of those
assets may not be recoverable. If events and circumstances indicate that the
long-lived assets should be reviewed for possible impairment, we use projections
to assess whether future cash flows on a non-discounted basis related to the
tested assets are likely to exceed the recorded carrying amount of those assets
to determine if a write-down is appropriate. If we identify impairment, we will
report a loss to the extent that the carrying value of the impaired assets
exceeds their fair values as determined by valuation techniques appropriate in
the circumstances that could include the use of similar projections on a
discounted basis.
In determining the estimated useful lives of definite-lived intangibles,
we consider the nature, competitive position, life cycle position, and
historical and expected future operating cash flows of each acquired asset, as
well as our commitment to support these assets through continued investment and
legal infringement protection.
Goodwill and Indefinite-Lived Intangible Assets
We test goodwill and indefinite-lived intangible assets for impairment
annually during the fourth quarter and during interim periods if triggering
events have occurred to determine whether the carrying value exceeds the implied
value. The fair value of reporting units is based on discounted projected cash
flows, but we also consider factors such as comparable industry price multiples.
We employ cash flow projections that we believe to be reasonable under current
and forecasted circumstances, the results of which form the basis for making
judgments about the carrying values of the reported net assets of our reporting
units. Many of our businesses closely follow changes in the industries and
end-markets that they serve. Accordingly, we consider estimates and judgments
that affect the future cash flow projections, including principal methods of
competition, such as volume, price, service, product performance, and technical
innovations, as well as estimates associated with cost improvement initiatives,
capacity utilization, and assumptions for inflation and foreign currency
changes. Actual results may differ from these estimates under different
assumptions or conditions.
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KENDRO LABORATORY PRODUCTS
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
Note 2. Use of Estimates (continued)
Accrued Expenses
We make estimates and judgments in establishing accruals as required
under GAAP. Summarized in the table below are current accrued expenses at March
31, 2005 and December 31, 2004 (in thousands):
March 31, December 31,
2005 2004
----------- ------------
(Unaudited)
Employee benefits $14,399 $12,071
Warranty 4,572 5,880
Other(1) 9,345 10,175
------- -------
$28,316 $28,126
======= =======
(1) Other consists of various items, including legal, interest and income
taxes, none of which individually meet the threshold for separate
disclosure.
Legal
It is our policy to accrue for estimated losses from legal actions or
claims, including legal expenses, when events exist that make the realization of
the losses or expenses probable and they can be reasonably estimated.
Self-Insurance
We are primarily self-insured for workers' compensation, automobile,
product, general liability, and health costs, and we believe that we maintain
adequate accruals to cover our retained liability. Our accrual for
self-insurance liability is determined by management and is based on claims
filed and an estimate of claims incurred but not yet reported. Management
considers a number of factors, including third-party actuary valuations, when
making these determinations. We maintain third party stop-loss insurance
policies to cover certain liability costs in excess of predetermined retained
amounts.
Warranty
In the normal course of business, we issue product warranties for
specific product lines and provide for the estimated future warranty cost in the
period in which the sale is recorded. We provide for the estimate of warranty
cost based on contract terms and historical warranty loss experience that is
periodically adjusted for recent actual experience. Because warranty estimates
are forecasts that are based on the best available information, claims costs may
differ from amounts provided. In addition, due to the seasonal fluctuations at
certain of our businesses, the timing of warranty provisions and the usage of
warranty accruals can vary period to period. We make adjustments to initial
obligations for warranties as changes in the obligations become reasonably
estimable. The following is an analysis of our product warranty accrual for the
periods presented (in thousands):
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Note 2. Use of Estimates (continued)
Three Months Ended
March 31, Year Ended
--------------------------- December 31,
2005 2004 2004
---------- ---------- ------------
(Unaudited) (Unaudited)
Balance at beginning of year $ 5,880 $ 4,537 $ 4,537
Acquisitions - - 292
Provisions 639 1,088 4,943
Usage (1,827) (1,186) (4,065)
Other, net (a) (120) - 173
------- ------- -------
Balance at end of period $ 4,572 $ 4,439 $ 5,880
======= ======= =======
(a) Primarily represents the effects of currency translation.
Income Taxes
We analyze the potential realization of deferred tax assets associated
with net operating loss and credit carryforwards. When we believe that it is
more likely than not that a net operating loss or credit carryforward may expire
unused, we establish a valuation allowance against them.
Employee Benefit Plans
We have defined benefit plans in Germany that cover a significant portion
of our salaried and hourly paid employees in that country. We derive pension
expense from an actuarial calculation based on the defined benefit plans'
provisions and management's assumptions regarding discount rate, rate of
increase in compensation levels, and expected long-term rate of return on
assets. Management determines the expected long-term rate of return on plan
assets based upon historical actual asset returns and the expectations of asset
returns over the expected period to fund participant benefits based on the
current investment mix of our plans. Management sets the discount rate based on
the yield of high quality fixed income investments, commonly defined as fixed
income investments with at least a Moody's AA credit rating. The rate of
increase in compensation levels is established based on management's
expectations of current and foreseeable future increases in compensation. In
addition, management also consults with independent actuaries in determining
these assumptions. See Note 8 for more information. Further, certain of our U.S.
employees participate in a defined benefit plan of the parent.
Note 3. Acquisitions and Divestiture
We use acquisitions as a part of our strategy to acquire access to new
technology, expand our geographical reach, penetrate new markets and leverage
our existing product, market, manufacturing or technical expertise. Acquisitions
and a divestiture in 2004 are described below.
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Note 3. Acquisitions and Divestiture (continued)
All business acquisitions of the company have been accounted for using
the purchase method of accounting and, accordingly, the combined statements of
income include the results of each acquired business since the date of
acquisition. The assets acquired and liabilities assumed are recorded at
estimates of fair values as determined by management based on information
available. We finalize the allocation of purchase price to the fair value of the
assets acquired and liabilities assumed when we obtain information sufficient to
complete the allocation, but in any case, within one year after acquisition.
In March 2004, we acquired H+P Labortechnik AG ("H+P"), a Germany-based
manufacturer of clean air and containment facilities for hospitals,
pharmaceutical, research, education, and general industrial applications, for
$9.4 million. H+P had 2003 revenues of $14.6 million. The purchase price
exceeded the fair value of the acquired net assets and, accordingly, $0.1
million was allocated to goodwill.
In September 2004, we acquired Medical Air Technology Ltd. ("MAT"), a
U.K.-based manufacturer of steam sterilizers, magnetic stirrers, and biosafe
waste water sterilizers for the pharmaceutical, biotech, academic, and medical
markets, for $12.7 million. MAT had 2003 revenues of $14.1 million. The purchase
price exceeded the fair value of the acquired net assets and, accordingly, $7.5
million was allocated to goodwill.
The components of the preliminary purchase price allocation for H+P and
MAT are as follows as of December 31, 2004 (in thousands):
H+P MAT
------- -------
Purchase Price:
Cash paid $ 9,355 $12,652
Cash acquired (262) -
------- -------
$ 9,093 $12,652
======= =======
Allocation:
Current assets $ 6,672 $ 5,428
Property, plant, and equipment 484 658
Acquired intangible assets 5,332 5,420
Goodwill 112 7,482
Liabilities assumed (3,507) (6,336)
------- -------
$ 9,093 $12,652
======= =======
Acquired intangible assets for H+P and MAT are as follows (in thousands):
H+P MAT
------- -------
Trademarks $ 3,488 $ 4,387
Patents 1,059 744
Other 785 289
------- -------
$ 5,332 $ 5,420
======= =======
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Note 3. Acquisitions and Divestiture (continued)
Trademarks have an indefinite life and are not amortized. Patents are
being amortized over 5-8 years and other intangible assets are being amortized
over 3-5 years.
In addition to the acquisitions discussed above, in March 2004, we
acquired a product line of protein crystallization lab automation equipment for
$0.4 million. Revenues and assets of the product line were not material.
Pro forma results are not presented as our results in 2004 would not have
differed materially had the acquisitions occurred at the beginning of 2004.
In November 2004, we sold the Carr BioProcessing product line for $3.2
million and recorded a pre-tax loss on the sale of $5.6 million which is
included in special charges and other costs (income). Carr's revenues in 2004,
through the date of sale, totaled $4.4 million.
Note 4. Geographical Information
Year Ended
December 31,
2004
--------------
(In thousands)
Geographical Information
Revenues:
United States $163,582
Germany 66,582
England 27,723
Other 112,707
---------
$370,594
========
December 31,
2004
--------------
(In thousands)
Long-lived Assets:
United States $362,436
Germany 183,586
England 30,770
Other 3,673
-------
$580,465
========
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Note 5. Special Charges and Other Costs (Income)
We recorded net special charges of $11.6 million in 2004. These net
special charges were primarily for a loss on the sale of a non-core product
line, impairment of a building held for sale, and restructuring initiatives to
consolidate manufacturing and sales facilities and reduce workforce.
The purpose of our restructuring initiatives is to improve future
profitability, streamline operations, reduce costs, and improve efficiency. We
estimate that we will achieve operating cost reductions in 2005 and beyond
through reduced employee and manufacturing costs and other facility overhead.
The components of the charges have been computed based on actual cash
payouts, our estimate of the realizable value of the affected assets and
estimated exit costs, including severance and other employee benefits based on
existing severance policies and local laws.
In 2003, we adopted SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," for all exit and disposal activities entered into
after December 31, 2002. The standard requires us to recognize costs associated
with exit or disposal activities when they are incurred rather than at the date
of a commitment to an exit or disposal plan as previously provided for under
EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". Examples of costs covered by the standard include lease
termination costs and certain employee severance costs that are associated with
a restructuring, plant closing or other exit or disposal activities. SFAS No.
146 has impacted the timing of recognition of certain restructuring costs by
postponing the cost recognition beyond the plan commitment date.
Impairments of long-lived assets, including amortizable intangibles,
which represent non-cash asset write-downs, are accounted for in accordance with
SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets."
Typically, these non-cash asset write-downs arise from business restructuring
decisions that lead to the disposition of assets no longer required in the
restructured business. For these situations, we recognize a loss when the
carrying amount of an asset exceeds the sum of the cash flows expected to result
from the use and eventual disposition of the asset. Realization values for
assets subject to impairment testing are determined primarily by management,
taking into consideration various factors including third-party appraisals,
quoted market prices or previous experience. If an asset remains in service at
the decision date, the asset is written down to its fair value and the resulting
net book value is depreciated over its remaining economic useful life. When we
commit to a plan to sell an asset, including the initiation of a plan to locate
a buyer and it is probable that the asset will be sold within one year based on
its current condition and sales price, depreciation of the asset is discontinued
and the asset is determined to be an asset held for sale. Upon the completion of
a sale of a long-lived asset that was previously written down to net realizable
value as part of a restructuring initiative, we recognize any gain on its sale
as a reduction of special charges, to the extent of the previous write-down.
At December 31, 2004, a total of $0.3 million of restructuring
liabilities remained on the combined balance sheet as shown below. We anticipate
that the liabilities related to restructuring actions will be paid within one
year from the period in which the action was initiated. The following table
summarizes the restructuring accrual activity from December 31, 2003 through
March 31, 2005 (in thousands):
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Note 5. Special Charges and Other Costs (Income) (continued)
Employee Facility
Termination Consolidation
Costs Costs Total
----------- -------------- -------
Balance at December 31, 2003 $ 1,832 $ - $ 1,832
Special and other charges 2,624 1,121 3,745
Cash payments (4,115) (1,121) (5,236)
------- -------- -------
Balance at December 31, 2004 341 - 341
(Unaudited)
Special and other charges 21 - 21
Cash payments (267) - (267)
------- -------- -------
Balance at March 31, 2005 $ 95 $ - $ 95
======= ======== =======
The 2004 charges include $2.6 million of employee termination costs and
$1.1 million of facility consolidation costs for a site in Connecticut that
relocated to North Carolina. The 2004 special charges also include a $2.5
million writedown to estimated disposal value of the Connecticut facility and a
$5.4 million net loss on the sale of assets, principally our Carr BioProcessing
product line, which we sold for $3.2 million in November 2004.
Note 6. Inventories
March 31, December 31,
2005 2004
----------- ------------
(In thousands)
(Unaudited)
Finished goods $22,503 $18,416
Work in progress 7,376 8,429
Raw materials and purchased parts 28,765 26,501
------- -------
$58,644 $53,346
======= =======
Inventories include material, labor, and factory overhead costs and are
reduced, when necessary, to estimated realizable values. All inventories are
valued using the first-in, first-out ("FIFO") method.
Note 7. Goodwill and Other Intangible Assets
We account for goodwill and other intangible assets acquired through
business combinations in accordance with SFAS No. 141, "Business Combinations,"
and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 clarifies
the criteria in recognizing other intangible assets separately from goodwill in
a business combination. SFAS No. 142 states goodwill and other intangible assets
deemed to have indefinite lives are no longer amortized but are reviewed for
impairment annually (or more frequently if impairment indicators arise).
Separable intangible assets that are not determined to have an indefinite life
are amortized over their useful lives and assessed for impairment under the
provisions of SFAS No. 144, "Accounting for the Impairment and Disposal of
Long-Lived Assets".
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Note 7. Goodwill and Other Intangible Assets (continued)
The following table reflects the goodwill and intangible assets as of
December 31, 2003 and the activity thereafter through December 31, 2004 (in
thousands):
Unamortized Amortized
------------------------ -------------------------
Trademarks/
Goodwill Trade names Patents Other Total
-------- ------------ -------- -------- --------
Gross Balance
December 31, 2003 balance $299,629 $ 48,761 $ 13,946 $ 2,076 $364,412
Acquisitions 7,965 7,875 2,173 1,090 19,103
Reclassification for 2003
acquisition (1,775) - - 1,775 -
Currency translation 15,720 2,906 296 - 18,922
Disposal (1,165) - (2,205) - (3,370)
Other (230) (143) - 183 (190)
-------- -------- -------- -------- --------
December 31, 2004 balance $320,144 $ 59,399 $ 14,210 $ 5,124 $398,877
======== ======== ======== ======== ========
Accumulated Amortization
December 31, 2003 balance $ 3,375 $ 690 $ 4,065
Amortization 2,693 767 3,460
Currency translation (44) 5 (39)
Disposal (948) - (948)
-------- -------- --------
December 31, 2004 balance $ 5,076 $ 1,462 $ 6,538
======== ======== ========
Estimated amortization expense (in thousands):
For the year ended 2005 $ 2,537
For the year ended 2006 2,477
For the year ended 2007 2,334
For the year ended 2008 2,191
For the year ended 2009 1,741
For the year ended 2010 and thereafter 1,516
--------
$ 12,796
========
The decrease in goodwill that occurred in the first quarter of 2005 was
due to currency translation. The decrease in intangible assets that occurred in
the first quarter of 2005 was due to currency translation and amortization.
Consistent with the requirements of SFAS No. 142, the fair value of the
company was based on discounted cash flow projections that are believed to be
reasonable under current and forecasted circumstances, the results of which form
the basis for making judgments about the carrying values of the reported net
assets. Other considerations are also incorporated, including comparable
industry price multiples. We consider estimates and judgments that affect the
future cash flow projections including principal methods of competition such as
volume, price, service, product performance, and technical innovations as well
as estimates associated with cost improvement initiatives, capacity utilization,
and assumptions for inflation and foreign currency changes. Any significant
change in market conditions and estimates or judgments used to determine
expected future cash flows that indicate a reduction in carrying value may give
rise to impairment in the period that the change becomes known.
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Note 8. Employee Benefit Plans
Stock-Based Compensation Plans
Under the parent's stock compensation plan, options to purchase the
parent's common stock may be granted to our key employees in the form of
incentive stock options or nonqualified stock options, vest ratably over three
years and expire no later than 10 years from the date of grant. The option price
per share may be no less than the fair market value of the parent's common stock
on the date of grant. Upon exercise, the employee has the option to surrender
previously owned shares at current value in payment of the exercise price and
/or withholding tax obligations, and, subject to certain restrictions, may
receive a reload option having an exercise price equal to the current market
value for the number of shares so surrendered. The reload option expires at the
same time that the exercised option would have expired.
The following table shows stock option activity for our employees from
December 31, 2003 through December 31, 2004:
Weighted Average
Shares Exercise Price
-------- ----------------
Options outstanding at December 31, 2003 292,168 $52.58
Exercised (25,023) 39.69
Terminated (44,929) 52.31
-------
Options outstanding at December 31, 2004 222,216 $54.09
======= ======
Options outstanding and exercisable held by our employees at December 31,
2004 were as follows:
Options Outstanding Options Exercisable
------------------------------------------------- -----------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of of Remaining Exercise of Exercise
Exercise Prices Shares Contractual Life Price Shares Price
---------------- ------- ---------------- -------- ------- --------
$38.57 - $40.00 85,548 7.6 years $38.65 31,927 $38.79
48.44 - 50.43 27,500 5.2 years 48.48 27,166 48.45
52.75 - 69.43 109,168 6.5 years 67.60 78,700 66.89
------- -------
$38.57 - $69.43 222,216 6.7 years $54.09 137,793 $56.74
======= =======
Restricted stock or restricted stock units may be granted to certain
eligible employees in accordance with applicable equity compensation plan
documents and agreements. Subject to participants' continued employment and
other plan terms and conditions, the restrictions lapse and units vest over
three years. The 2004 grants vest ratably.
Upon vesting, the restricted stock units are converted into shares of the
parent's common stock and are free of any restrictions. In 2004, the parent
issued 31,000 of restricted stock units to certain of our business leaders and
other employees. Expense for restricted stock and restricted sock units is
recognized over the vesting period in accordance with APB No. 25. Compensation
expense associated with restricted stock unit awards totaled $0.4 million in
2004.
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F-19
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Note 8. Employee Benefit Plans (continued)
Defined Contribution Retirement Plans
Under the parent's 401(k) savings plan eligible U.S. employees may
voluntarily contribute up to 50% of their compensation into the plan and the
parent matches a portion of the participating employees' contributions. The
matching contributions are made in newly issued shares of the parent's common
stock and are issued at the prevailing market price. The matching contributions
vest with the employee immediately upon the date of the match and there are no
restrictions on the resale of common stock held by employees.
Under the plan, the parent contributed 16,000 shares of its common stock
to employee accounts in 2004. Compensation expense is recorded based upon the
market value of the shares as the shares are contributed to employee accounts.
We recorded $0.9 million in 2004 as compensation expense related to the matching
contribution.
Defined Benefit Pension Plans
We have defined benefit pension plans in Germany covering employees
there. 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 (in thousands):
Three Months Ended
March 31, Year Ended
----------------------------- December 31,
2005 2004 2004
----------- ----------- ------------
(Unaudited) (Unaudited)
Service Cost $ 162 $ 150 $ 595
Interest Cost on Benefit Obligation 300 275 1,094
------ ------ ------
$ 462 $ 425 $1,689
====== ====== ======
The activity under the defined benefit plans is as follows (in
thousands):
2004
--------
Change in Benefit Obligation:
Benefit obligation, beginning of year $ 19,884
Service cost 595
Interest cost 1,094
Benefits paid (340)
Actuarial loss (491)
Currency translation 1,965
--------
Benefit obligation, end of year 22,707
--------
Funded Status (22,707)
Unrecognized Net Actuarial Loss (187)
--------
Net Amount Recognized $(22,894)
========
Amounts Recognized in the Balance Sheet:
Accrued pension liability $(22,894)
Intangible asset -
Accumulated other comprehensive items -
--------
Net Amount Recognized $(22,894)
========
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Note 8. Employee Benefit Plans (continued)
Our defined benefit plans have projected benefit obligations and
accumulated benefit obligations in excess of plan assets. The aggregate
accumulated benefit obligations were $20.4 million at year-end 2004. The
measurement date used to determine benefit information was December 31 for all
plan assets and benefit obligations.
The weighted average rates used to determine the net periodic benefit
costs and benefit obligations were as follows:
2004
------
Discount Rate 5.5%
Rate of Increase in Salary Levels 2.8%
We do not expect to make contributions to our plans in 2005.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
2005 $ 388
2006 508
2007 582
2008 633
2009 707
2010-2014 5,488
We were allocated our share of expense related to the parent's U.S. based
defined benefit plan. The expense totaled $0.1 million (unaudited) and $0.1
million (unaudited) for the three months ended March 31, 2005 and 2004,
respectively and $0.3 million for the year ended December 31, 2004.
Note 9. Income Taxes
The components of income before provision for income taxes are as follows
(in thousands):
Year Ended
December 31,
2004
------------
U.S. $18,785
Non-U.S. 30,982
-------
$49,767
=======
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Note 9. Income Taxes (continued)
The components of the provision (benefit) for income taxes are as follows
(in thousands):
Year Ended
December 31,
2004
------------
Currently Payable:
U.S. $ 2,616
Non-U.S. 13,438
-------
16,054
-------
Net Deferred (Prepaid):
U.S. 422
Non-U.S. (879)
-------
(457)
-------
$15,597
=======
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory U.S. federal
income tax rate of 35% to income before provision for income taxes due to the
following (in thousands):
Year Ended
December 31,
2004
------------
Provision for Income Taxes at Statutory Rate $17,418
Increases (Decreases) Resulting From:
Partnership income not subject to income taxes (3,690)
Non-U.S. tax rate and tax law differential 1,716
Other, net 153
-------
$15,597
=======
Significant components of our deferred tax assets and liabilities are as
follows (in thousands):
December 31,
2004
------------
Deferred Tax Liability:
Net operating loss and credit carryforwards $(1,659)
Intangibles recorded in acquisition 14,931
Other, net (340)
-------
12,932
Valuation allowance 1,659
-------
$14,591
=======
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Note 9. Income Taxes (continued)
We estimate the degree to which tax assets and loss carryforwards will
result in a benefit based on expected profitability by tax jurisdiction and
provide a valuation allowance for deferred tax assets that we believe will more
likely than not go unused.
At December 31, 2004, we had non-U.S. net operating loss carryforwards of
$4.9 million. Use of the carryforwards is limited based on the future income of
certain subsidiaries. Of the net operating loss carryforwards, $2.1 million
expire in the years 2005 through 2009, and the remainder do not expire.
A provision has not been made for U.S. or additional non-U.S. taxes on
undistributed earnings of international subsidiaries that could be subject to
taxation if remitted to the U.S. because we plan to keep these amounts
permanently reinvested overseas.
Note 10. Financial Instruments
Fair Value Financial Assets and Liabilities
The carrying amount of cash and equivalents and receivables reported on
the combined balance sheets approximates fair value because of the short
maturity of those instruments.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant
concentrations of credit risk consist of cash and temporary investments and
trade accounts receivable. Cash and temporary investments are placed with
high-quality financial institutions throughout the world. We periodically
evaluate the credit standing of these financial institutions. Concentrations of
credit risk arising from trade accounts receivable are due to selling to a large
number of customers in a particular industry. We perform ongoing credit
evaluations of our customers' financial conditions and obtain collateral or
other security when appropriate. No one customer accounts for more than 10% of
our revenues.
Note 11. Commitments and Contingencies
Operating Leases
We lease portions of our office and operating facilities under various
operating lease arrangements. Net income includes expense for operating leases
of $3.1 million in 2004. Future minimum payments due under noncancellable
operating leases at December 31, 2004, are $5.2 million in 2005, $3.6 million in
2006, $2.8 million in 2007, $1.5 million in 2008, $0.8 million in 2009, and $1.1
million in 2010 and thereafter. Total future minimum lease payments are $15.0
million.
Rent expense totaled $1.5 million (unaudited) in the three months ended
March 31, 2005. Future minimum lease commitments at March 31, 2005, did not
differ materially from the amounts detailed above except that for the remainder
of 2005, future commitments totaled $3.7 million (unaudited).
<
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Note 11. Commitments and Contingencies (continued)
Purchase Obligations
At December 31, 2004, we had outstanding noncancellable purchase
obligations, principally for inventory purchases, totaling $2.3 million,
approximately half of which will be settled in 2005 and the remainder will be
settled in 2006 and 2007.
Letters of Credit and Guarantees
Outstanding letters of credit totaled $4.5 million at December 31, 2004.
The expiration of these credits and guarantees ranges through 2008.
Outstanding surety bonds totaled $0.2 million at December 31, 2004.
The letters of credit and surety bonds principally secure performance
obligations, and allow the holder to draw funds up to the face amount of the
letter of credit, bank guarantee, or surety bond if the applicable business unit
does not perform as contractually required.
Self-Insurance
We are primarily self-insured for workers' compensation, automobile,
product and general liability, and health costs, and we believe that we maintain
adequate accruals to cover our retained liability. Our accrual for
self-insurance liability is determined by management and is based on claims
filed and an estimate of claims incurred but not yet reported. Management
considers a number of factors, including third-party actuarial valuations, when
making these determinations. We maintain third-party stop-loss insurance
policies to cover certain liability costs in excess of predetermined retained
amounts.
Note 12. Related Party Transactions and Parent's Investment
Sales to Related Parties
Net sales to related companies for the three month ended March 31, 2005
(unaudited) and March 31, 2004 (unaudited) were $0.1 million and $0.1 million,
respectively, and were $0.3 million for the year ended December 31, 2004.
Receivables/Payables from/to Related Parties
Receivables/payables from/to related companies consist of balances
pertaining to sales/purchases of goods and services in the ordinary course of
business between the company and other subsidiaries of the parent, excluding the
parent's corporate office.
<
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Note 12. Related Party Transactions and Parent's Investment (continued)
Loans to/from Parent
We had a $120 million loan to the parent bearing interest at the prime
rate plus 1.5% (5.75% at December 31, 2004). The note was due on demand,
however, we had agreed not to seek repayment within a year and, accordingly, the
note was classified as long-term in the accompanying combined balance sheet.
Interest received from the parent totaled $2.0 million and $1.6 million for the
three months ended March 31, 2005 (unaudited) and 2004 (unaudited),
respectively, and $6.7 million for the year ended December 31, 2004.
We had a $6.5 million demand loan payable to the parent bearing interest
at the prime rate plus 1% (5.25% at December 31, 2004). The note was due on
demand, however, the parent had agreed not to seek repayment within a year and,
accordingly, the note was classified as long-term in the accompanying balance
sheet. Interest expense associated with this note totaled $0.1 million and $0.1
million for the three months ended March 31, 2005 (unaudited) and 2004
(unaudited), respectively, and $0.3 million for the year ended December 31,
2004.
Immediately prior to the sale of the company to Thermo Electron, these
notes were offset against one another and the net receivable was distributed to
the parent.
Transfer From / (To) Parent
We receive cash and other asset contributions from and send cash and
other asset distributions to the parent. Net transfers from (to) parent are
recorded in the parent's net investment account and are as follows (in
thousands):
March 31, December 31,
2005 2004
----------- -----------
(Unaudited)
Cash transfers, net $ (8,883) $(18,422)
Payroll and benefit expenses 3,357 15,222
Freight expense 2,218 8,356
Insurance expense 1,975 6,784
Receivables - (5,661)
Interest income/expense (1,897) (5,223)
Professional fees 782 3,647
Other (71) 1,329
-------- --------
$ (2,519) $ 6,032
======== ========
Corporate Overhead Expenses and Services
Specifically identifiable administrative services and expenses incurred
by the company in the normal course of business, such as external legal fees,
audit fees, risk insurance premiums, certain employee benefit costs, and other
items were originally recorded by the parent. The costs associated with these
services and expenses are allocated back to us from the parent. These allocated
expenses are included in the accompanying combined statement of income, and were
$8.2 million and $9.5 million for the three months ended March 31, 2005
(unaudited) and 2004 (unaudited), respectively, and $36.8 million for the year
ended December 31, 2004.
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Note 13. Unaudited Quarterly Information
2004
----------------------------------------------------
First Second Third Fourth
----------------------------------------------------
(In thousands)
Revenues $ 83,633 $ 87,289 $ 92,047 $107,625
Gross Profit 33,602 34,612 37,615 37,071
Net Income 9,227 9,814 10,383 4,746
<
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