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 October 1, 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 by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at October 28, 2005
----------------------------- -------------------------------
Common Stock, $1.00 par value 162,247,832
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
October 1, December 31,
(In thousands) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 193,459 $ 326,886
Short-term available-for-sale investments, at quoted market value
(amortized cost of $8,624 and $164,244) 8,690 185,369
Accounts receivable, less allowances of $21,114 and $22,844 521,381 469,553
Inventories:
Raw materials and supplies 143,806 131,810
Work in process 52,231 40,244
Finished goods 199,522 164,657
Deferred tax assets 55,675 92,929
Other current assets 87,062 58,206
---------- ----------
1,261,826 1,469,654
---------- ----------
Property, Plant and Equipment, at Cost 531,501 499,929
Less: Accumulated depreciation and amortization 243,289 238,888
---------- ----------
288,212 261,041
---------- ----------
Acquisition-related Intangible Assets (Note 2) 476,867 158,577
---------- ----------
Other Assets 178,543 174,428
---------- ----------
Goodwill (Note 2) 1,940,397 1,513,025
---------- ----------
$4,145,845 $3,576,725
========== ==========
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THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Equity
October 1, December 31,
(In thousands except share amounts) 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Short-term obligations and current maturities of long-term obligations (Note 9) $ 167,415 $ 15,017
Accounts payable 138,900 131,175
Accrued payroll and employee benefits 98,006 94,671
Accrued income taxes - 22,829
Deferred revenue 82,771 77,778
Other accrued expenses (Notes 2, 10 and 11) 206,862 194,706
Current liabilities of discontinued operations 36,962 42,552
---------- ----------
730,916 578,728
---------- ----------
Deferred Income Taxes 74,077 15,213
---------- ----------
Other Long-term Liabilities 107,544 91,164
---------- ----------
Long-term Obligations:
Senior notes (Note 9) 383,269 135,232
Subordinated convertible obligations 77,234 77,234
Other 11,593 13,604
---------- ----------
472,096 226,070
---------- ----------
Shareholders' Equity:
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized; 181,508,670 and
179,818,648 shares issued 181,509 179,819
Capital in excess of par value 1,415,037 1,381,448
Retained earnings 1,548,070 1,381,257
Treasury stock at cost, 19,335,163 and 19,269,245 shares (437,707) (435,779)
Deferred compensation (4,570) (2,561)
Accumulated other comprehensive items (Notes 6 and 9) 58,873 161,366
---------- ----------
2,761,212 2,665,550
---------- ----------
$4,145,845 $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
-----------------------------
October 1, October 2,
(In thousands except per share amounts) 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $679,411 $542,315
-------- --------
Costs and Operating Expenses:
Cost of revenues (Note 11) 373,712 291,360
Selling, general and administrative expenses 194,323 153,425
Research and development expenses 38,784 32,874
Restructuring and other costs, net (Note 11) 10,482 5,035
-------- --------
617,301 482,694
-------- --------
Operating Income 62,110 59,621
Other Income (Expense), Net (Note 4) (2,751) 2,471
-------- --------
Income from Continuing Operations Before Provision for Income Taxes 59,359 62,092
Provision for Income Taxes (18,762) (19,451)
-------- --------
Income from Continuing Operations 40,597 42,641
Loss from Discontinued Operations (includes income tax benefit of
$541 in 2004) - (940)
Gain on Disposal of Discontinued Operations (net of income tax
provision of $11,456 in 2005; includes income tax benefit of
$4,322 in 2004; Note 13) 17,137 64,835
-------- --------
Net Income $ 57,734 $106,536
======== ========
Earnings per Share from Continuing Operations (Note 5):
Basic $ .25 $ .26
======== ========
Diluted $ .25 $ .26
======== ========
Earnings per Share (Note 5):
Basic $ .36 $ .66
======== ========
Diluted $ .35 $ .65
======== ========
Weighted Average Shares (Note 5):
Basic 161,794 161,514
======== ========
Diluted 165,635 165,570
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
-----------------------------
October 1, October 2,
(In thousands except per share amounts) 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $1,892,240 $1,592,656
---------- ----------
Costs and Operating Expenses:
Cost of revenues (Note 11) 1,039,852 861,956
Selling, general and administrative expenses 550,417 450,492
Research and development expenses 114,544 99,735
Restructuring and other costs, net (Note 11) 12,427 9,008
---------- ----------
1,717,240 1,421,191
---------- ----------
Operating Income 175,000 171,465
Other Income, Net (Note 4) 26,057 15,740
---------- ----------
Income from Continuing Operations Before Provision for Income Taxes 201,057 187,205
Provision for Income Taxes (58,117) (54,320)
---------- ----------
Income from Continuing Operations 142,940 132,885
Income from Discontinued Operations (includes income tax benefit of
$36,321 in 2004) - 43,018
Gain on Disposal of Discontinued Operations (net of income tax
provision of $15,728 in 2005; includes income tax benefit of
$4,322 in 2004; Note 13) 23,873 64,835
---------- ----------
Net Income $ 166,813 $ 240,738
========== ==========
Earnings per Share from Continuing Operations (Note 5):
Basic $ .89 $ .81
========== ==========
Diluted $ .87 $ .79
========== ==========
Earnings per Share (Note 5):
Basic $ 1.03 $ 1.47
========== ==========
Diluted $ 1.02 $ 1.43
========== ==========
Weighted Average Shares (Note 5):
Basic 161,335 164,097
========== ==========
Diluted 165,008 168,696
========== ==========
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)
Nine Months Ended
-----------------------------
October 1, October 2,
(In thousands) 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 166,813 $ 240,738
Income from discontinued operations - (43,018)
Gain on disposal of discontinued operations (23,873) (64,835)
---------- ----------
Income from continuing operations 142,940 132,885
Adjustments to reconcile income from continuing operations
to net cash provided by operating activities:
Depreciation and amortization 85,344 47,393
Noncash restructuring and other costs, net (Note 11) 1,723 700
Provision for losses on accounts receivable 1,451 2,518
Change in deferred income taxes (3,197) 6,753
Gain on investments, net (Note 4) (34,761) (15,353)
Equity in earnings of unconsolidated subsidiaries (122) (924)
Other noncash expenses, net 16,850 7,945
Changes in current accounts, excluding the effects of
acquisitions and dispositions:
Accounts receivable (10,218) (4,698)
Inventories (15,495) (32,285)
Other current assets (13,637) (13,726)
Accounts payable (8,347) 9,110
Other current liabilities (16,020) 20,568
---------- ----------
Net cash provided by continuing operations 146,511 160,886
Net cash provided by (used in) discontinued operations (1,647) 14,811
---------- ----------
Net cash provided by operating activities 144,864 175,697
---------- ----------
Investing Activities:
Acquisitions, net of cash acquired (939,436) (144,086)
Proceeds from sale of available-for-sale investments 352,029 571,498
Purchases of available-for-sale investments (148,500) (514,795)
Proceeds from maturities of available-for-sale investments 297 18,760
Purchases of property, plant and equipment (27,125) (32,648)
Proceeds from sale of property, plant and equipment 10,026 4,037
Proceeds from sale of business 5,661 -
Proceeds from sale of other investments 2,113 179
Increase in other assets (1,977) (1,977)
Other (97) (463)
---------- ----------
Net cash used in continuing operations (747,009) (99,495)
Net cash provided by discontinued operations 65,042 196,956
---------- ----------
Net cash provided by (used in) investing activities $ (681,967) $ 97,461
---------- ----------
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THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
-----------------------------
October 1, October 2,
(In thousands) 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net proceeds from issuance of long-term debt $ 246,965 $ -
Borrowings under short-term bridge financing agreement 570,000 -
Repayment of bridge financing agreement (570,000) -
Increase (decrease) in short-term notes payable 155,741 (12,897)
Purchases of company common stock - (231,530)
Net proceeds from issuance of company common stock 21,739 47,155
Other (2,320) (1,199)
---------- ----------
Net cash provided by (used in) continuing operations 422,125 (198,471)
Net cash provided by discontinued operations - 445
---------- ----------
Net cash provided by (used in) financing activities 422,125 (198,026)
---------- ----------
Exchange Rate Effect on Cash of Continuing Operations (18,449) 82
Exchange Rate Effect on Cash of Discontinued Operations - (847)
---------- ----------
Increase (Decrease) in Cash and Cash Equivalents (133,427) 74,367
Cash and Cash Equivalents at Beginning of Period 326,886 195,773
---------- ----------
Cash and Cash Equivalents at End of Period $ 193,459 $ 270,140
========== ==========
Noncash Investing Activities:
Fair value of assets of acquired businesses $1,103,872 $ 201,799
Cash paid for acquired businesses (946,935) (148,866)
---------- ----------
Liabilities assumed of acquired businesses $ 156,937 $ 52,933
========== ==========
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
October 1, 2005, the results of operations for the three- and nine-month periods
ended October 1, 2005, and October 2, 2004, and the cash flows for the
nine-month periods ended October 1, 2005, and October 2, 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).
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 nine months of 2004 provided cash of $97.5 million instead of $56.0
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 August 10, 2005, the company's Life and Laboratory Sciences segment
acquired Ionalytics Corporation, a Canada-based provider of a dynamic
ion-filtering device used with mass spectrometers in bioanalysis, proteomics and
drug discovery for $24.4 million, net of cash acquired. The acquisition of
Ionalytics enabled the segment to broaden its mass spectrometry product
offerings. Ionalytics did not have material revenues in 2004 as its focus was on
commercially introducing its principal product to market. The purchase price
exceeded the fair value of the acquired net assets and, accordingly, $6.2
million was allocated to goodwill, all of which is tax deductible.
On May 9, 2005, the company's Life and Laboratory Sciences segment
acquired the Kendro Laboratory Products division of SPX Corporation for $843.3
million, net of cash acquired, including transaction costs and subject to a
post-closing adjustment. Kendro designs, manufactures, markets and services, on
a global basis, 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 of Kendro
broadened the segment's product offerings and access to customers. Kendro's
revenues were $371 million in 2004. The purchase price exceeded the fair value
of the acquired assets and, accordingly, $444.2 million was allocated to
goodwill, approximately $185 million of which is expected to be tax deductible.
The company obtained short-term bridge financing, which permitted it to
borrow $570 million to partially fund the purchase price of Kendro. The company
used existing cash balances to fund the remainder of the purchase price.
Subsequently, the company used a combination of short- and long-term debt
instruments to refinance the bridge loan (Note 9).
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THERMO ELECTRON CORPORATION
2. Acquisitions (continued)
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 $30.7
million in cash, net of cash acquired. The acquisition of R&P enabled the
segment to broaden its air monitoring product offerings. 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 payment of
7% of specified product sales thereafter through 2009. The purchase price
exceeded the fair value of the acquired net assets and, accordingly, $15.5
million was allocated to goodwill, none of which is tax deductible.
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 $41.0 million in cash, net
of cash acquired. Of the total purchase price, $40.0 million was paid on the
closing date and the balance was paid in June 2005, following determination of
the post-closing adjustment. 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 enabled
the segment to expand its X-ray products to include a portable line. Niton's
revenues in 2004 totaled $36 million. The purchase price exceeded the fair value
of the acquired net assets and, accordingly, $15.2 million was allocated to
goodwill, all of which is tax deductible.
The company's acquisitions have historically been made at prices above
the fair value of the acquired assets, resulting in goodwill, due to
expectations of synergies of combining the businesses. These synergies include
use of the company's existing infrastructure such as sales force, distribution
channels and customer relations to expand sales of the acquired businesses'
products; use of the infrastructure of the acquired businesses to cost
effectively expand sales of the company's products; and elimination of
duplicative facilities, functions and staffing.
These acquisitions have been accounted for using the purchase method of
accounting, and the acquired companies' results have been included in the
accompanying financial statements from the respective dates of acquisition.
Allocation of the purchase price for acquisitions was based on estimates of the
fair value of the net assets acquired and is subject to adjustment upon
finalization of the purchase price allocation.
Had the acquisition of Kendro been completed as of the beginning of 2004,
the company's pro forma results for 2004 and 2005 would have been as follows:
Three
Months Ended Nine Months Ended
------------ -----------------------------
October 2, October 1, October 2,
(In thousands except per share amounts) 2004 2005 (a) 2004
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $ 633,037 $2,020,559 $1,851,651
Net Income $ 101,950 $ 156,907 $ 224,970
Earnings per Share from Continuing Operations:
Basic $ .24 $ .82 $ .71
Diluted $ .23 $ .81 $ .70
Earnings Per Share:
Basic $ .63 $ .97 $ 1.37
Diluted $ .62 $ .96 $ 1.34
(a) Includes a $12.4 million pre-tax charge to cost of revenues for the sale of Kendro inventories revalued at the date of
acquisition (Note 11).
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THERMO ELECTRON CORPORATION
2. Acquisitions (continued)
The company's results for 2004 and 2005 would not have been materially
different from its reported results had the acquisitions of Ionalytics, R&P and
Niton occurred at the beginning of 2004.
The components of the preliminary purchase price allocation for the 2005
acquisitions are as follows:
(In thousands) Niton R&P Kendro Ionalytics Total
- ---------------------------------------------------------------------------------------------------------------------------------
Purchase Price (including transaction costs):
Cash paid $ 41,716 $ 32,565 $845,950 $ 26,704 $946,935
Cash acquired (764) (1,817) (2,631) (2,287) (7,499)
-------- -------- -------- -------- --------
$ 40,952 $ 30,748 $843,319 $ 24,417 $939,436
======== ======== ======== ======== ========
Allocation:
Current assets 13,240 6,622 139,488 632 159,982
Property, plant and equipment 2,316 449 67,305 170 70,240
Acquired intangible assets 17,741 15,796 330,432 18,276 382,245
Goodwill 15,227 15,522 444,191 6,194 481,134
Other assets 181 - 2,591 - 2,772
Other liabilities (7,753) (7,641) (140,688) (855) (156,937)
-------- -------- -------- -------- --------
$ 40,952 $ 30,748 $843,319 $ 24,417 $939,436
======== ======== ======== ======== ========
Acquired intangible assets for the 2005 acquisitions are as follows:
(In thousands) Niton R&P Kendro Ionalytics Total
- ---------------------------------------------------------------------------------------------------------------------------------
Customer Relationships $ 11,468 $ 12,904 $287,355 $ - $311,727
Product Technology 6,273 2,892 43,077 18,276 70,518
-------- -------- -------- -------- --------
$ 17,741 $ 15,796 $330,432 $ 18,276 $382,245
======== ======== ======== ======== ========
The weighted-average amortization periods for intangible assets acquired
in 2005 are 5 years for customer relationships and 6 years for product
technology. The weighted-average amortization period for all intangible assets
acquired in 2005 is approximately 5 years. Annual amortization expense has
increased by $75 million as a result of the 2005 acquisitions.
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.
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THERMO ELECTRON CORPORATION
2. Acquisitions (continued)
The changes in accrued acquisition expenses for acquisitions completed
during 2005 are as follows:
Abandonment
of Excess
(In thousands) Severance Facilities Total
- -------------------------------------------------------------------------------------------------------------------------------
Reserves established $1,100 $ 373 $1,473
Payments (523) - (523)
Currency translation (26) - (26)
------ ------ ------
Balance at October 1, 2005 $ 551 $ 373 $ 924
====== ====== ======
The accrued acquisition expenses consist primarily of severance for
approximately 31 employees across all functions at Kendro and facility
obligations for a building in Tennessee being vacated. The company expects to
pay amounts accrued for severance through early 2006 and facility costs through
the expiration of the lease in 2007.
The company is continuing to evaluate potential restructuring actions
that may be undertaken at Kendro or within existing businesses with which Kendro
is being integrated. Such actions may include rationalization of product lines,
consolidation of facilities and reductions in staffing levels. The company will
record the cost of any additional restructuring actions at Kendro as an increase
to goodwill when decisions are made as to the extent of such actions. Costs of
restructuring actions at existing businesses will be recorded to expense. The
company expects to finalize its restructuring plan no later than one year
following completion of the Kendro acquisition.
The changes in accrued acquisition expenses for acquisitions completed
prior to 2005 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 (2,042) (18) (1) (2,061)
Decrease recorded as a reduction in goodwill - (1,989) (30) (2,019)
Currency translation (277) (495) (27) (799)
------- ------- ------- -------
Balance at October 1, 2005 $ 929 $ 3,367 $ 54 $ 4,350
======= ======= ======= =======
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 three 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. The liability for the abandoned facilities is net of
estimated sublease income and includes an estimate of restoration costs required
at the termination of the lease.
Following a favorable resolution of certain lease obligations for a
facility in England that were assumed by a sub-tenant, the company reversed $2.0
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 Nine Months Ended
----------------------------- -----------------------------
October 1, October 2, October 1, October 2,
(In thousands) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Life and Laboratory Sciences $ 516,047 $ 383,162 $1,396,814 $1,118,451
Measurement and Control 163,364 159,153 495,426 474,205
---------- ---------- ---------- ----------
$ 679,411 $ 542,315 $1,892,240 $1,592,656
========== ========== ========== ==========
Income from Continuing Operations Before Provision for
Income Taxes:
Life and Laboratory Sciences (a) $ 56,200 $ 54,508 $ 157,105 $ 154,636
Measurement and Control (b) 14,555 14,533 45,008 41,131
Other (c) - (58) 573 (160)
---------- ---------- ---------- ----------
Total Operating Income - Segments 70,755 68,983 202,686 195,607
Corporate/Other (d) (11,396) (6,891) (1,629) (8,402)
---------- ---------- ---------- ----------
$ 59,359 $ 62,092 $ 201,057 $ 187,205
========== ========== ========== ==========
Depreciation:
Life and Laboratory Sciences $ 8,190 $ 7,188 $ 22,733 $ 22,169
Measurement and Control 2,803 2,195 7,264 7,273
Corporate 1,347 821 3,255 2,422
---------- ---------- ---------- ----------
$ 12,340 $ 10,204 $ 33,252 $ 31,864
========== ========== ========== ==========
Amortization:
Life and Laboratory Sciences $ 24,098 $ 5,183 $ 48,485 $ 13,289
Measurement and Control 1,470 895 3,604 2,238
Corporate 1 1 3 2
---------- ---------- ---------- ----------
$ 25,569 $ 6,079 $ 52,092 $ 15,529
========== ========== ========== ==========
(a) Includes restructuring and other costs, net, of $8.0 million, $2.4 million, $17.3 million and $5.7 million in the third quarter
of 2005 and 2004 and the first nine months of 2005 and 2004, respectively.
(b) Includes restructuring and other costs, net, of $4.1 million, $2.2 million, $7.5 million, and $4.8 million in the third quarter
of 2005 and 2004 and the first nine months of 2005 and 2004, respectively.
(c) Represents restructuring and other income (expense), net.
(d) Includes corporate general and administrative expenses and other income and expense. Includes corporate restructuring and other
costs of $0.2 million, $0.7 million, $1.4 million, and $1.5 million in the third quarter of 2005 and 2004 and the first nine
months of 2005 and 2004, respectively. Other income, net, includes net gains on the sale of shares of Thoratec and Newport of
$27.6 million in the first nine months of 2005 and gains on the sale of shares of Thoratec of $9.6 million in the first nine
months of 2004, respectively (Note 4).
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THERMO ELECTRON CORPORATION
4. Other Income (Expense), Net
The components of other income (expense), net, in the accompanying
statement of income are as follows:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
October 1, October 2, October 1, October 2,
(In thousands) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 2,198 $ 2,459 $ 8,125 $ 6,045
Interest Expense (Note 9) (8,307) (2,677) (18,749) (8,100)
Gain on Investments, Net 2,695 1,875 34,761 15,353
Other Items, Net 663 814 1,920 2,442
-------- -------- -------- --------
$ (2,751) $ 2,471 $ 26,057 $ 15,740
======== ======== ======== ========
The company sold 4,436,000 shares of Thoratec Corporation common stock
during the first nine months of 2005 and realized a gain of $28.9 million. The
company sold 1,250,000 shares of Thoratec common stock during the first nine
months of 2004 and realized a gain of $9.6 million. The company obtained common
shares of Thoratec as part of the sale of Thermo Cardiosystems Inc. in 2001. At
October 1, 2005, the company no longer owned shares of Thoratec.
In July 2004, the company received 3,220,000 shares of Newport
Corporation common stock upon the sale of Spectra-Physics to Newport. In June
2005, the company reached an agreement with Newport under which Newport
purchased all of the 3,220,000 shares of Newport common stock. Newport purchased
the shares for $13.56 per share, which resulted in aggregate proceeds of $43.7
million. The company recorded a loss on the sale of $1.3 million. The Newport
shares had been subject to resale restrictions that would have fully lapsed by
January 2006.
5. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
October 1, October 2, October 1, October 2,
(In thousands except per share amounts) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 40,597 $ 42,641 $142,940 $132,885
Income (Loss) from Discontinued Operations - (940) - 43,018
Gain on Disposal of Discontinued Operations 17,137 64,835 23,873 64,835
-------- -------- -------- --------
Net Income for Basic Earnings per Share 57,734 106,536 166,813 240,738
Effect of Convertible Debentures 402 398 1,205 1,209
-------- -------- -------- --------
Income Available to Common Shareholders, as
Adjusted for Diluted Earnings per Share $ 58,136 $106,934 $168,018 $241,947
-------- -------- -------- --------
Basic Weighted Average Shares 161,794 161,514 161,335 164,097
Effect of:
Stock options 1,920 2,113 1,776 2,656
Convertible debentures 1,846 1,846 1,846 1,846
Contingently issuable shares 75 97 51 97
-------- -------- -------- --------
Diluted Weighted Average Shares 165,635 165,570 165,008 168,696
-------- -------- -------- --------
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THERMO ELECTRON CORPORATION
5. Earnings per Share (continued)
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
October 1, October 2, October 1, October 2,
(In thousands except per share amounts) 2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share:
Continuing operations $ .25 $ .26 $ .89 $ .81
Discontinued operations .11 .40 .15 .66
-------- -------- -------- --------
$ .36 $ .66 $ 1.03 $ 1.47
======== ======== ======== ========
Diluted Earnings per Share:
Continuing operations $ .25 $ .26 $ .87 $ .79
Discontinued operations .10 .39 .14 .64
-------- -------- -------- --------
$ .35 $ .65 $ 1.02 $ 1.43
======== ======== ======== ========
Options to purchase 360,000, 1,676,000, 1,796,000 and 1,343,000 shares of
common stock were not included in the computation of diluted earnings per share
for the third quarter of 2005 and 2004 and the first nine months 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 third quarter of 2005 and 2004, the company had
comprehensive income of $51.1 million and $107.3 million, respectively. During
the first nine months of 2005 and 2004, the company had comprehensive income of
$93.4 million and $236.3 million, respectively. The decrease in comprehensive
income resulted primarily from a reduction in the cumulative translation
adjustment due to movements in currency exchange rates during 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.
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
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THERMO ELECTRON CORPORATION
7. Stock-based Compensation Plans and Pro Forma Stock-based Compensation
Expense (continued)
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 Nine Months Ended
------------------------ ------------------------
October 1, October 2, October 1, October 2,
(In thousands except per share amounts) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations:
As reported $ 40,597 $ 42,641 $142,940 $132,885
Add: Stock-based employee compensation expense included in reported
results, net of tax 473 335 1,344 815
Deduct: Total stock-based employee compensation expense determined under
the fair-value-based method for all awards, net of tax (3,864) (3,334) (11,543) (9,977)
-------- -------- -------- --------
Pro forma $ 37,206 $ 39,642 $132,741 $123,723
======== ======== ======== ========
Basic Earnings per Share from Continuing Operations:
As reported $ .25 $ .26 $ .89 $ .81
Pro forma $ .23 $ .25 $ .82 $ .75
Diluted Earnings per Share from Continuing Operations:
As reported $ .25 $ .26 $ .87 $ .79
Pro forma $ .23 $ .24 $ .81 $ .74
Net Income:
As reported $ 57,734 $106,536 $166,813 $240,738
Add: Stock-based employee compensation expense included in reported net
income, net of tax 473 335 1,344 815
Deduct: Total stock-based employee compensation expense determined under
the fair-value-based method for all awards, net of tax (3,864) (2,001) (11,543) (9,874)
-------- -------- -------- --------
Pro forma $ 54,343 $104,870 $156,614 $231,679
======== ======== ======== ========
Basic Earnings per Share:
As reported $ .36 $ .66 $ 1.03 $ 1.47
Pro forma $ .34 $ .65 $ .97 $ 1.41
Diluted Earnings per Share:
As reported $ .35 $ .65 $ 1.02 $ 1.43
Pro forma $ .33 $ .64 $ .96 $ 1.38
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 has not elected early adoption and expects to apply the new
standard prospectively in 2006.
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THERMO ELECTRON CORPORATION
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
company's plans are unfunded, as permitted under the plans and applicable laws.
Net periodic benefit costs for the plans in the aggregate included the following
components:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
October 1, October 2, October 1, October 2,
(In thousands) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Service Cost $ 1,866 $ 1,518 $ 5,326 $ 4,556
Interest Cost on Benefit Obligation 4,226 2,993 10,796 8,978
Expected Return on Plan Assets (2,956) (2,579) (8,510) (7,734)
Amortization of Prior Service Costs 2,402 - 2,402 -
Recognized Net Actuarial Loss 815 637 2,096 1,910
------- ------- ------- -------
$ 6,353 $ 2,569 $12,110 $ 7,710
======= ======= ======= =======
During the second quarter of 2005, the company merged two defined benefit
plans in the U.K. and provided the participating employees with a defined
contribution plan while limiting future benefits under the combined defined
benefit plan. The transaction met the criteria of a plan curtailment although no
gain or loss resulted. In connection with the transaction, the company
contributed $10.9 million to the combined U.K. defined benefit plan.
Subsequently, the company modified a retirement benefit obligation under the
merged plan to conform to U.K. law and recorded the cost of the change, $2.4
million, in the third quarter of 2005.
9. Swap Arrangement and Debt
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% (6.38% as of October 1, 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 $4.5 million
at October 1, 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.
In May 2005, in connection with plans to refinance a portion of the
amounts borrowed under the bridge facility 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 was
probable and that such debt would carry semi-annual interest payments over a
10-year term, the swaps hedge the cash flow risk that exists on each of the
semi-annual fixed-rate interest payments on $250 million of principal amount of
the 10-year fixed-rate debt issue (or any subsequent refinancing of such debt).
The change in the fair value of the hedge, $2.0 million, net of tax, was
classified as a reduction of other comprehensive items within shareholders'
equity and is being amortized to interest costs over the term of the debt
through 2015.
The company repaid in full $570 million of borrowings under its bridge
loan with cash and proceeds of new debt issuances described below. On May 27,
2005, the company issued $250 million aggregate principal amount of 5% senior
notes (the Notes) due 2015, with an effective interest rate of 5.27% after
including the impact of the swap arrangement. Under the Notes' Indenture, the
company is subject to certain affirmative and negative covenants.
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THERMO ELECTRON CORPORATION
9. Swap Arrangement and Debt (continued)
Also on May 27, 2005, the company entered into an arrangement that
provides the company an uncommitted line of credit of up to $250 million through
a series of short-term money market loans funded on an ongoing basis in the
secondary market. Such money market loans have maturity periods of overnight to
364 days and bear varying rates of interest based on the maturity date and
market rate at the time of issuance. On May 27, 2005, the company borrowed $250
million through three short-term loans under the money market arrangement with
maturities of one week to three months. As of October 1, 2005, the company had
repaid these borrowings and had no balance outstanding.
On June 30, 2005, the company entered into a five-year revolving credit
facility with a bank group that provides up to 175 million euros. The facility
carries interest at a Euribor rate plus 35 basis points. Under the facility,
borrowings of one to six months duration may be drawn. 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. As of October 1, 2005, the company had outstanding
borrowings under this facility of 132 million euros ($159 million) in two
tranches with maturities of approximately one to three months and with a
weighted average interest rate of 2.46%.
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:
Nine Months Ended
------------------------
October 1, October 2,
(In thousands) 2005 2004
- -------------------------------------------------------------------------------------------------------------------------------
Beginning Balance $ 27,369 $ 25,645
Provision charged to income 19,638 14,536
Usage (16,870) (12,926)
Acquisitions 6,002 -
Adjustments to previously provided warranties, net (1,249) (2,251)
Other, net (a) (2,282) 878
-------- --------
Ending Balance $ 32,608 $ 25,882
======== ========
(a) Primarily represents the effects of currency translation.
11. Restructuring and Other Costs, 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. Further actions were initiated in 2003 and, to a lesser extent, in
2004. Certain costs associated with these actions are recorded when incurred.
Restructuring and other costs recorded in 2005 are primarily for reductions in
staffing levels at existing businesses resulting from the integration of Kendro
as well as charges associated with actions initiated prior to 2005 that could
not be recorded until incurred and adjustments to previously provided reserves
due to changes in estimates of amounts due for abandoned facilities, net of
expected sub-tenant rental income. The restructuring actions undertaken prior to
2005 were substantially complete at the end of 2004. The company is continuing
to evaluate potential restructuring actions that may be undertaken at Kendro or
within existing businesses with which Kendro is being integrated. Such actions
may include rationalization of product lines, consolidation of facilities and
reductions in staffing levels. The actions at acquired facilities will be
recorded as a cost of the acquisition through an increase to goodwill. 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 ultimately total $10 - $20 million, of
which approximately $6 million has been recorded as of October 1, 2005. Also,
the company expects to incur an additional $0.4 million of restructuring costs
through the remainder of 2005 and early 2006 for charges associated with the
actions undertaken prior to 2005 that cannot be recorded until incurred.
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THERMO ELECTRON CORPORATION
11. Restructuring and Other Costs, Net (continued)
During the third quarter of 2005, the company recorded net restructuring
and other costs by segment as follows:
Life and
Laboratory Measurement
(In thousands) Sciences and Control Other Corporate Total
- --------------------------------------------------------------------------------------------------------------------------------
Cost of Revenues $ 1,142 $ 614 $ - $ - $ 1,756
Restructuring and Other Costs, Net 6,823 3,445 - 214 10,482
------- ------- ------- ------- --------
$ 7,965 $ 4,059 $ - $ 214 $12,238
======= ======= ======= ======= =======
During the first nine months 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
- --------------------------------------------------------------------------------------------------------------------------------
Cost of Revenues $12,374 $ 847 $ - $ - $13,221
Restructuring and Other Costs, Net 4,929 6,647 (573) 1,424 12,427
------- ------- ------- ------- --------
$17,303 $ 7,494 $ (573) $ 1,424 $25,648
======= ======= ======= ======= =======
The components of net restructuring and other costs by segment are as
follows:
Life and Laboratory Sciences
- ----------------------------
The Life and Laboratory Sciences segment recorded $8.0 million of net
restructuring and other charges in the third quarter of 2005. The segment
recorded charges to cost of revenues of $1.2 million for the sale of inventories
revalued at the date of acquisition, and $6.8 million of net restructuring and
other costs. This amount consisted of $5.2 million of cash costs, principally
associated with the integration of Kendro with existing businesses, including
$4.8 million of severance for 85 employees across all functions; $0.1 million of
net abandoned-facility costs, primarily for charges associated with facilities
vacated in prior periods that could not be recorded until incurred; and $0.3
million of other cash costs, primarily retention and relocation expenses. In
addition, the segment recorded a $1.6 million charge for the writedown to
estimated disposal value of a building in France held for sale.
In the second quarter of 2005, this segment recorded $11.1 million of net
restructuring and other charges. The segment recorded charges to cost of
revenues of $11.2 million for the sale of inventories revalued at the date of
acquisition, and $0.2 million of net restructuring and other income. This amount
consisted of $1.0 million of cash costs, principally associated with facility
consolidations, including $0.9 million of severance for 11 employees across all
functions; and $0.1 million of net abandoned-facility costs, primarily for
charges associated with facilities vacated in prior periods that could not be
recorded until incurred. These costs are net of a gain of $1.3 million on the
sale of an abandoned building in Colorado.
In the first quarter of 2005, this segment recorded $1.7 million of net
restructuring and other income. 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. These 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, Net (continued)
Measurement and Control
- -----------------------
The Measurement and Control segment recorded $4.1 million of net
restructuring and other charges in the third quarter of 2005. The segment
recorded $3.5 million of cash costs as well as charges to cost of revenues of
$0.4 million for accelerated depreciation at facilities that will be closed due
to real estate consolidation and $0.2 million for the sale of inventories
revalued at the date of acquisition. The cash costs arise from cost reduction
measures including facility consolidations and consist of $2.7 million of
severance for 78 employees, primarily in sales and service functions; $0.3
million of net abandoned-facility costs, primarily for costs that could not be
recorded until incurred; and $0.5 million of other cash costs, primarily
retention and relocation expenses.
In the second quarter of 2005, this segment recorded $2.4 million of net
restructuring and other charges. The segment recorded charges to cost of
revenues of $0.2 million for the sale of inventories revalued at the date of
acquisition, and $2.2 million of cash costs. These cash costs were principally
associated with facility consolidations, including $1.3 million of net
abandoned-facility costs, primarily for revised estimates of costs associated
with facilities vacated in prior periods and, to a lesser extent, costs that
could not be recorded until incurred; $0.8 million of severance for 12
employees, primarily in sales and service functions; and $0.1 million of other
cash costs, primarily retention and relocation expenses.
In the first quarter of 2005, this segment recorded $1.0 million of net
restructuring and other charges. 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.
Other
- -----
The company recorded a gain of $0.5 million in the second quarter of 2005
as a result of revising its estimate of lease obligations due to sub-leasing an
abandoned facility of a divested business.
Corporate
- ---------
The company recorded $0.2 million of restructuring and other charges at
its corporate offices in the third quarter of 2005, all of which were cash
costs. In the second quarter of 2005, the company recorded $0.7 million of
restructuring and other charges at its corporate offices, all of which were cash
costs. In the first quarter of 2005, the company recorded $0.5 million of
restructuring and other charges at its corporate offices, all of which were cash
costs. The cash costs were primarily for severance for 22 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 (15)
Adjustments to Plan (12)
---
Remaining Terminations at October 1, 2005 24
===
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THERMO ELECTRON CORPORATION
11. Restructuring and Other Costs, Net (continued)
Number of
2004 Restructuring Plans Employees
- -------------------------------------------------------------------------------------------------------------------------------
Remaining Terminations at December 31, 2004 30
Terminations Announced in 2005 59
Terminations Occurring to Date in 2005 (68)
Adjustments to Plan (7)
---
Remaining Terminations at October 1, 2005 14
===
Number of
2005 Restructuring Plans Employees
- -------------------------------------------------------------------------------------------------------------------------------
Terminations Announced in 2005 185
Terminations Occurring to Date in 2005 (96)
---
Remaining Terminations at October 1, 2005 89
===
The following table summarizes the cash components of the company's
restructuring plans. The noncash components and other amounts reported as
restructuring and other costs, net, in the accompanying 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-2004 Restructuring Plans
Balance at December 31, 2004 $ 2,285 $ 63 $ 9,525 $ 26 $11,899
Costs incurred in 2005 (b) 343 - 2,824 94 3,261
Reserves reversed (359) - (415) - (774)
Payments (1,004) (63) (3,966) (103) (5,136)
Currency translation (148) - (517) - (665)
------- ------- ------- ------- -------
Balance at October 1, 2005 $ 1,117 $ - $ 7,451 $ 17 $ 8,585
======= ======= ======= ======= =======
2004 Restructuring Plans
Balance at December 31, 2004 $ 3,517 $ - $ 301 $ 102 $ 3,920
Costs incurred in 2005 (b) 2,038 - 228 167 2,433
Reserves reversed (7) - - - (7)
Payments (4,464) - (290) (209) (4,963)
Currency translation (324) - (30) - (354)
------- ------- ------- ------- -------
Balance at October 1, 2005 $ 760 $ - $ 209 $ 60 $ 1,029
======= ======= ======= ======= =======
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THERMO ELECTRON CORPORATION
11. Restructuring and Other Costs, Net (continued)
Abandonment
Employee of Excess
(In thousands) Severance Retention (a) Facilities Other Total
- --------------------------------------------------------------------------------------------------------------------------------
2005 Restructuring Plans
Costs incurred in 2005 (b) $ 9,064 $ 298 $ 33 $ 374 $ 9,769
Payments (3,356) (68) (33) (371) (3,828)
Currency translation (105) 1 - (2) (106)
------- ------- ------- ------- -------
Balance at October 1, 2005 $ 5,603 $ 231 $ - $ 1 $ 5,835
======= ======= ======= ======= =======
(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 $3.9 million from the sale of four abandoned buildings and noncash charges of $1.7 million in the
Life and Laboratory Sciences segment and a gain of $0.1 million from the sale of a small product line in the Measurement
and Control segment.
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 2012.
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.
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.
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13. Discontinued Operations
In the third quarter of 2005, the company recorded after-tax gains of
$17.1 million from the disposal of discontinued operations. On September 30,
2005, the Life and Laboratory Sciences segment sold its point of care and rapid
diagnostics business for $52.5 million in cash, subject to a post-closing
adjustment, after determining it was not a strategic fit in the long-term. The
company recorded an after-tax gain of $16.3 million as a result of the sale.
Revenues and pre-tax loss of the divested business totaled $29.7 million and
$0.7 million, respectively, in 2004 and revenues and pre-tax income totaled
$26.6 million and $1.0 million, respectively, in the first nine months of 2005.
Due to the immateriality of the operating results of the business relative to
consolidated results, the company has not reclassified the historical results
and accounts of this business to discontinued operations. In August 2005, the
company sold a building of a previously divested business for net proceeds of
$7.3 million in cash, which approximated its carrying value.
In the second quarter of 2005, the company settled litigation and
received proceeds from an arbitration award related to divested businesses. In
addition, the company recorded an increase in the net realizable value of a
building held for sale after entering an agreement to sell the facility. The
building had previously been written down to estimated disposal value. As a
result of these transactions, the company recorded an after-tax gain on the
disposal of discontinued operations of $3.5 million.
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 third quarter of 2004, the company's discontinued operations
(Spectra-Physics) had revenues of $6.5 million and net loss of $0.9 million,
including a tax benefit of $0.5 million for the 12-day period before the sale on
July 16, 2004. In the first nine months of 2004, the company's discontinued
operations had revenues of $118.9 million and net income of $43.0 million,
including a tax benefit of $36.3 million.
On July 16, 2004, the company sold Spectra-Physics and recorded a gain on
the disposal of discontinued operations of $41.4 million, net of an income tax
provision of $19.1 million.
The tax returns of the company's former Trex Medical business that was
sold in 2000 were under audit by the IRS. In the third quarter of 2004, the
Joint Congressional Committee on Taxation completed its review of the audit
findings and the company determined that previously unrecognized tax benefits
associated with the divested business totaling $23.5 million were realizable.
This amount was recorded as a tax gain on the sale of the discontinued operation
in the third quarter of 2004.
Current liabilities of discontinued operations in the accompanying
balance sheet includes obligations for abandoned leases, litigation, severance
and related obligations of previously owned businesses.
14. Common and Preferred Stock
On September 15, 2005, the company's Board of Directors declared a
dividend distribution of one preferred stock purchase right for each outstanding
share of the company's common stock to stockholders of record at the close of
business on September 29, 2005. Each right entitles the holder to purchase one
one hundred-thousandth of a share (a Unit) of Series B Junior Participating
Preferred Stock, $100 par value, at a purchase price of $200 per Unit, subject
to adjustment. These rights replace the company's prior rights, which expired on
September 15, 2005. The rights will not be exercisable until the earlier of (i)
10 business days following a public announcement that a person or group of
affiliated or associated persons (an Acquiring Person) has acquired, or obtained
the right to acquire, beneficial ownership of 15% or more of the outstanding
shares of common stock (the Stock Acquisition Date), or (ii) 10 business days
following the commencement of a tender offer or exchange offer for 15% or more
of the outstanding shares of common stock.
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14. Common and Preferred Stock (continued)
In the event that a person becomes the beneficial owner of 15% or more of
the outstanding shares of common stock, except pursuant to an offer for all
outstanding shares of common stock that at least 75% of the Board of Directors
determines to be fair to, and otherwise in the best interests of, stockholders,
each holder of a right (except for the Acquiring Person) will thereafter have
the right to receive, upon exercise, that number of shares of common stock (or,
in certain circumstances, units of preferred stock, cash, property or other
securities of the company) which equals the exercise price of the right divided
by one-half of the current market price of the common stock. In the event that,
at any time after any person has become an Acquiring Person, (i) the company is
acquired in a merger or other business combination transaction in which the
company is not the surviving corporation or its common stock is changed or
exchanged (other than a merger that follows an offer approved by the Board of
Directors), or (ii) 50% or more of the company's assets or earning power is sold
or transferred, each holder of a right (except for the Acquiring Person) shall
thereafter have the right to receive, upon exercise, the number of shares of
common stock of the acquiring company that equals the exercise price of the
right divided by one-half of the current market price of such common stock.
At any time until the Stock Acquisition Date, the company may redeem the
rights in whole, but not in part, at a price of $.01 per right (payable in cash
or stock). The rights expire on September 29, 2015, unless earlier redeemed or
exchanged.
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 Nine Months Ended
-------------------------------------------- --------------------------------------------
(Dollars in thousands) October 1, 2005 October 2, 2004 October 1, 2005 October 2, 2004
- -----------------------------------------------------------------------------------------------------------------------------------
Life and Laboratory Sciences $ 516,047 76.0% $ 383,162 70.7% $1,396,814 73.8% $ 1,118,451 70.2%
Measurement and Control 163,364 24.0% 159,153 29.3% 495,426 26.2% 474,205 29.8%
---------- ----- ---------- ----- ---------- ----- ----------- -----
$ 679,411 100% $ 542,315 100% $1,892,240 100% $ 1,592,656 100%
========== ===== ========== ===== ========== ===== =========== =====
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THERMO ELECTRON CORPORATION
Overview of Results of Operations and Liquidity (continued)
The company's revenues grew by 25% during the third quarter of 2005 over
the same period in 2004. Acquisitions, net of divestitures, caused a 21%
increase in reported revenues. Currency translation did not materially affect
comparative revenues in the third quarter of 2005 and 2004. Aside from the
effect of acquisitions, net of divestitures, revenues increased 4%, or 5%
assuming the acquired companies had been owned in the third quarter of 2004.
Revenues grew as a result of increased demand in each of the company's principal
businesses and, to a lesser extent, increased prices.
The company's strategy is to augment internal growth at existing
businesses with complementary acquisitions such as those completed in 2005 (Note
2) and 2004. The principal acquisitions included Ionalytics Corporation, a
provider of an ion-filtering device used with mass spectrometers, which was
acquired in August 2005; the Kendro Laboratory Products division of SPX
Corporation, a provider of a wide range of laboratory equipment for sample
preparation, processing and storage, which was acquired in May 2005; Rupprecht
and Patashnick Co., Inc. (R&P), a provider of continuous particulate monitoring
instrumentation for the ambient air, emissions monitoring and industrial hygiene
markets, which was acquired in April 2005; Niton LLC, a provider of portable
X-ray analyzers to the metals, petrochemical and environmental markets, which
was acquired in March 2005; 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.
In the third quarter of 2005, the company's operating income and
operating income margin were $62.1 million and 9.1%, respectively, compared with
$59.6 million and 11.0%, respectively, in 2004. (Operating income margin is
operating income divided by revenues.) The increase in operating income resulted
primarily from higher profitability from increased revenues, offset in part by
$19.5 million of higher amortization expense associated with acquisition-related
intangible assets and $6.9 million of higher restructuring and other costs
primarily related to the integration of Kendro with existing businesses. The
decrease in operating income margin resulted primarily from the higher
amortization expense relative to revenues as a result of the recent
acquisitions.
Income from continuing operations decreased to $40.6 million in the third
quarter of 2005 from $42.6 million in the third quarter of 2004, primarily due
to higher interest expense and an increase in the company's effective tax rate.
During the first nine months of 2005, the company's cash flow from
operations totaled $144.9 million, compared with $175.7 million in the first
nine months of 2004. The decrease resulted primarily from a $63.7 million
investment in working capital in 2005, principally a reduction in other current
liabilities and an increase in inventories, compared with a $21.0 million
investment in working capital in the first nine months of 2004.
As of October 1, 2005, the company's outstanding debt totaled $639.5
million, of which 59% is due in 2008 and thereafter. The company believes that
its existing cash and short-term investments, future cash flow from operations,
and available borrowings of up to $250 million under its existing 5-year
revolving credit agreement 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 ongoing basis, the company evaluates its estimates, including
those related to 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
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THERMO ELECTRON CORPORATION
Critical Accounting Policies (continued)
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. The company had no changes in its critical
accounting policies from those described in its Form 10-Q for the quarter ended
April 2, 2005.
Results of Operations
Third Quarter 2005 Compared With Third Quarter 2004
- ---------------------------------------------------
Continuing Operations
Sales in the third quarter of 2005 were $679.4 million, an increase of
$137.1 million (25%) from the third quarter of 2004. Sales increased $114.0
million (21%) due to acquisitions, net of divestitures. The favorable effects of
currency translation resulted in an increase in revenues of $0.8 million in
2005. Aside from the effect of acquisitions, net of divestitures, and currency
translation, revenues increased $22.3 million (4%), or 5% assuming the acquired
companies had been owned in the third quarter of 2004. The increase was
primarily due to a broad-based increase in demand in each of the company's
principal businesses and, to a lesser extent, increased prices. Sales were
particularly strong in North America and Asia, while European sales were down
slightly from the 2004 quarter.
Operating Income Margin
Three Months Ended
-------------------------
October 1, October 2,
2005 2004
- ----------------------------------------------------------------------------------------------------------------------------------
Life and Laboratory Sciences 10.9% 14.2%
Measurement and Control 8.9% 9.1%
Consolidated 9.1% 11.0%
Operating income was $62.1 million in the third quarter of 2005, compared
with $59.6 million in the third quarter of 2004. Operating income margin
decreased to 9.1% in 2005 from 11.0% in 2004. Operating income margin decreased
primarily due to $19.5 million of higher amortization expense for
acquisition-related intangible assets and $6.9 million of higher restructuring
and other costs principally related to the integration of Kendro with existing
businesses. Following the acquisitions completed in 2005, the company expects
amortization of acquisition-related intangible assets will total approximately
$26 million per quarter in the fourth quarter of 2005 and thereafter.
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. Further actions were initiated in 2003 and, to a lesser extent, in
2004. Certain costs associated with these actions are recorded when incurred.
Restructuring and other costs recorded in 2005 are primarily for reductions in
staffing levels at existing businesses resulting from the integration of Kendro
as well as charges associated with actions initiated prior to 2005 that could
not be recorded until incurred and adjustments to previously provided reserves
due to changes in estimates of amounts due for abandoned facilities, net of
expected sub-tenant rental income. The restructuring actions undertaken prior to
2005 were substantially complete at the end of 2004. The company is continuing
to evaluate potential restructuring actions that may be undertaken at Kendro or
within existing businesses with which Kendro is being integrated. Such actions
may include rationalization of product lines, consolidation of facilities and
reductions in staffing levels. The actions at acquired facilities will be
recorded as a cost of the acquisition through an increase to goodwill. 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 ultimately total $10 - $20 million, of
which approximately $6 million has been recorded as of October 1, 2005. Also,
the company expects to incur an additional $0.4 million of restructuring costs
through the remainder of 2005 and early 2006 for charges associated with the
actions undertaken prior to 2005 that cannot be recorded until incurred.
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THERMO ELECTRON CORPORATION
Third Quarter 2005 Compared With Third Quarter 2004 (continued)
- ---------------------------------------------------
Life and Laboratory Sciences
Three Months Ended
------------------------------------
October 1, October 2,
(Dollars in thousands) 2005 2004 Change
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $516,047 $383,162 34.7%
Operating Income Margin 10.9% 14.2% (3.3)
Sales in the Life and Laboratory Sciences segment increased $132.9
million (35%) to $516.0 million in the third quarter of 2005. Sales increased
$113.2 million (30%) due to the acquisitions of Kendro in May 2005, Niton in
March 2005 and InnaPhase in September 2004, net of a product line divestiture.
The favorable effects of currency translation resulted in an increase in
revenues of $0.4 million in 2005. Excluding the changes in revenues resulting
from acquisitions, net of a divestiture, and currency translation, revenues
increased $19.3 million (5%), or 6% assuming the acquired companies had been
owned in the third quarter of 2004. The increase was due to a broad-based
increase in demand from life science and industrial customers combined with
strong market response to new products. The increase in revenues was, to a
lesser extent, due to price increases.
Operating income margin was 10.9% in the third quarter of 2005 and 14.2%
in the third quarter of 2004. The decrease in operating income margin was due in
part to an increase of $18.9 million in amortization expense of
acquisition-related intangible assets. Operating income margin was also affected
by restructuring and other costs, net, of $8.0 million in 2005 and $2.4 million
in 2004, discussed below. These factors were offset in part by higher
profitability resulting from increased sales.
In the third quarter of 2005, the segment recorded restructuring and
other costs, net, of $8.0 million, including a $1.2 million charge to cost of
revenues for the sale of inventories revalued at acquisition and $5.2 million of
cash costs, primarily for severance and abandoned-facility costs principally
related to the integration of Kendro with existing businesses. In addition, the
segment recorded a $1.6 million charge for the writedown to estimated disposal
value of a building held for sale in France (Note 11). In 2004, the segment
recorded restructuring and other income, net, of $2.4 million, including $1.9
million of cash costs, primarily for severance, abandoned facilities and
relocation expenses at businesses being consolidated; a $0.2 million charge
primarily for the writedown of abandoned equipment; and charges to costs of
revenues of $0.3 million, primarily for accelerated depreciation on
manufacturing equipment that was abandoned as a result of site consolidations.
Measurement and Control
Three Months Ended
------------------------------------
October 1, October 2,
(Dollars in thousands) 2005 2004 Change
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $163,364 $159,153 2.6%
Operating Income Margin 8.9% 9.1% (0.2)
Sales in the Measurement and Control segment increased $4.2 million (3%)
to $163.4 million in the third quarter of 2005. Sales increased $0.8 million
(1%) due to acquisitions, net of a divestiture. The favorable effects of
currency translation resulted in an increase in revenues of $0.4 million in
2005. Excluding the changes in revenues resulting from acquisitions, net of a
divestiture, and currency translation, revenues increased $3.0 million (2%). The
increase was primarily the result of higher demand from customers in industrial
markets, particularly petroleum, steel and cement, where the company believes
rising commodity prices have enabled customers to increase purchasing.
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THERMO ELECTRON CORPORATION
Third Quarter 2005 Compared With Third Quarter 2004 (continued)
- ---------------------------------------------------
Operating income margin decreased to 8.9% in the third quarter of 2005
from 9.1% in the third quarter of 2004. The decrease in operating income margin
resulted primarily from $1.9 million of higher restructuring and other costs and
$0.6 million of higher amortization expense associated with acquisition-related
intangible assets. These items were offset in part by price increases and, to a
lesser extent, productivity improvements including cost reduction measures.
In the third quarter of 2005, the segment recorded restructuring and
other costs, net, of $4.1 million, including $3.5 million of cash costs,
principally for severance and abandoned-facility costs (Note 11); and $0.6
million of charges to cost of revenues primarily for accelerated manufacturing
depreciation on fixed assets that will be abandoned following a facility
consolidation. In 2004, the segment recorded restructuring and other costs, net,
of $2.2 million, including cash costs of $2.1 million, principally for
severance. In addition, in 2004 the segment recorded charges to cost of revenues
of $0.1 million for the sale of inventories revalued at the date of acquisition.
Other Income (Expense), Net
- ---------------------------
The company reported other expense, net, of $2.8 million in the third
quarter of 2005 and other income, net, of $2.5 million in the third quarter of
2004 (Note 4). Other income, net, includes interest income, interest expense,
gain on investments, net, and other items, net. Interest income decreased to
$2.2 million in 2005 from $2.5 million in 2004, primarily due to the use of cash
to fund acquisitions. Interest expense increased to $8.3 million in 2005 from
$2.7 million in 2004, as a result of debt used to partially fund the acquisition
of Kendro and, to a lesser extent, higher rates associated with the company's
variable rate debt.
During the third quarter of 2005 and 2004, the company had gains on
investments, net, of $2.7 million and $1.9 million, respectively. Following the
sale of investments in the first nine months of 2005, the company does not
expect to have material gains or losses from investments for the foreseeable
future.
Provision for Income Taxes
- --------------------------
The company's effective tax rate was 31.6% and 31.3% in the third quarter
of 2005 and 2004, respectively. In the third quarter of 2005, the United Kingdom
enacted a tax law change, retroactive to March 15, 2005, that eliminates the
U.K. tax benefit associated with interest expense from certain debt arrangements
among subsidiaries if those debt arrangements lack business purpose. The company
has estimated the extent to which its U.K. debt structures are affected by the
new legislation. The company expects to meet with the U.K. Inland Revenue in the
fourth quarter of 2005 to definitively resolve this matter. The ultimate outcome
could differ from the company's current estimate. The company's estimate of the
impact of the new legislation increased the effective tax rate for the third
quarter of 2005 by 3.1 percentage points. After increasing its effective tax
rate for the estimated effects of the new legislation on the third and the
fourth quarter of 2005, the company estimates that its effective tax rate for
all of 2005 will be approximately 29%. This estimate of the company's 2005
effective tax rate contains a benefit of 2.1 percentage points that remains
potentially affected by the new legislation.
The effective tax rate in 2004 includes an unfavorable adjustment
relating to finalization of the tax on the sale of divested businesses, which
increased the rate by 2.2 percentage points.
Contingent Liabilities
- ----------------------
At October 1, 2005, the company was contingently liable with respect to
certain lawsuits. An unfavorable outcome in either of the matters described in
the first two paragraphs of Note 12 could materially affect the company's
financial position as well as its results of operations and cash flows.
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THERMO ELECTRON CORPORATION
Third Quarter 2005 Compared With Third Quarter 2004 (continued)
- ---------------------------------------------------
Discontinued Operations
In the third quarter of 2005, the company recorded after-tax gains of
$17.1 million from the disposal of discontinued operations, primarily its point
of care and rapid diagnostics business, which it sold for $52.5 million in cash.
Due to the immateriality of the operating results of this business relative to
consolidated results, the company has not reclassified the historical results
and accounts of this business to discontinued operations.
In the third quarter of 2004, the company recorded a gain on the sale of
Spectra-Physics of $41.4 million, net of an income tax provision of $19.1
million. In the third quarter of 2004, the company's discontinued operations
(Spectra-Physics) had revenues of $6.5 million and net loss of $0.9 million, for
the 12-day period before the sale on July 16, 2004.
The tax returns of the company's former Trex Medical business that was
sold in 2000 were under audit by the IRS. In the third quarter of 2004, the
Joint Congressional Committee on Taxation completed its review of the audit
findings and the company determined that previously unrecognized tax benefits
associated with the divested business totaling $23.5 million were realizable.
This amount was recorded as a tax gain on the sale of the discontinued operation
in the third quarter of 2004.
First Nine Months 2005 Compared With First Nine Months 2004
- -----------------------------------------------------------
Continuing Operations
Sales in the first nine months of 2005 were $1,892.2 million, an increase
of $299.6 million (19%) from the first nine months of 2004. Sales increased
$222.5 million (14%) due to acquisitions, net of divestitures. The favorable
effects of currency translation resulted in an increase in revenues of $21.6
million (1%) in 2005. Aside from the effect of acquisitions, net of
divestitures, and currency translation, revenues increased $55.5 million (4%)
due to a broad-based increase in demand in each of the company's principal
businesses.
Operating Income Margin
Nine Months Ended
------------------------
October 1, October 2,
2005 2004
- ---------------------------------------------------------------------------------------------------------------------------------
Life and Laboratory Sciences 11.2% 13.8%
Measurement and Control 9.1% 8.7%
Consolidated 9.2% 10.8%
Operating income was $175.0 million in the first nine months of 2005,
compared with $171.5 million in the first nine months of 2004. Operating income
increased due to higher sales including revenues from acquisitions,
substantially offset by the items discussed below. Operating income margin
decreased to 9.2% in 2005 from 10.8% in 2004. Operating income margin decreased
primarily due to $36.6 million of higher amortization expense for
acquisition-related intangible assets and $10.1 million of higher charges to
cost of revenues, primarily for the sale of inventories revalued at the date of
acquisition. These factors were offset in part by higher profitability from the
increase in revenues.
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THERMO ELECTRON CORPORATION
First Nine Months 2005 Compared With First Nine Months 2004 (continued)
- -----------------------------------------------------------
Life and Laboratory Sciences
Nine Months Ended
------------------------------------
October 1, October 2,
(Dollars in thousands) 2005 2004 Change
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $1,396,814 $1,118,451 24.9%
Operating Income Margin 11.2% 13.8% (2.6)
Sales in the Life and Laboratory Sciences segment increased $278.4
million (25%) to $1,396.8 million in the first nine months of 2005. Sales
increased $221.9 million (20%) primarily due to the acquisitions of Kendro in
May 2005, Niton in March 2005, InnaPhase in September 2004 and USCS in April
2004, net of a product line divestiture. The favorable effects of currency
translation resulted in an increase in revenues of $15.9 million (1%) in 2005.
Excluding the changes in revenues resulting from acquisitions, net of a
divestiture, and currency translation, revenues increased $40.5 million (4%)
primarily due to broad-based higher demand from life science and industrial
customers combined with strong market response to new products.
Operating income margin was 11.2% in the first nine months of 2005 and
13.8% in the first nine months of 2004. Operating income margin decreased due to
$35.2 million of higher amortization expense associated with acquisition-related
intangible assets. Operating income margin was also affected by restructuring
and other costs, net, of $17.3 million in 2005 and $5.7 million in 2004, as
discussed below. The margin decrease was offset in part by higher profitability
due to increased revenues.
In 2005, the segment recorded restructuring and other costs, net, of
$17.3 million. The segment had $12.4 million of charges to cost of revenues,
primarily for the sale of inventories revalued at the date of acquisition. The
segment incurred $7.1 million of cash costs, primarily for severance, abandoned
facilities and relocation expenses in connection with the integration of Kendro
with existing businesses; and a $1.7 million charge principally for the
writedown of a building held for sale. These costs were offset by $3.9 million
of net gains on the sale of four abandoned buildings (Note 11). In 2004, the
segment recorded restructuring and other costs, net, of $5.7 million, including
charges to cost of revenues of $2.9 million, primarily for the sale of
inventories revalued at the date of acquisition, and $4.7 million of cash costs,
primarily for severance, abandoned facilities and relocation expenses at
businesses being consolidated. In addition, the segment recorded a gain of $2.6
million on the sale of a product line and a loss of $0.7 million from the sale
of two abandoned buildings and the writedown of abandoned equipment.
Measurement and Control
Nine Months Ended
------------------------------------
October 1, October 2,
(Dollars in thousands) 2005 2004 Change
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $495,426 $474,205 4.5%
Operating Income Margin 9.1% 8.7% 0.4
Sales in the Measurement and Control segment increased $21.2 million (4%)
to $495.4 million in the first nine months of 2005. The favorable effects of
currency translation resulted in an increase in revenues of $5.6 million (1%) in
2005. Sales increased $0.6 million due to acquisitions, net of a divestiture.
Excluding the changes in revenues resulting from currency translation and
acquisitions, net of a divestiture, revenues increased $15.0 million (3%). The
increase was primarily the result of higher demand from industrial customers,
particularly from commodity markets including steel, petroleum and cement, and
customers purchasing instruments for use in environmental and security
applications.
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THERMO ELECTRON CORPORATION
First Nine Months 2005 Compared With First Nine Months 2004 (continued)
- -----------------------------------------------------------
Operating income margin increased to 9.1% in the first nine months of
2005 from 8.7% in the first nine months of 2004. The increase in operating
income margin resulted primarily from higher sales volumes, offset in part by
$1.4 million of higher amortization expense associated with acquisition-related
intangible assets and $2.7 million of higher restructuring and other costs, as
discussed below.
In the first nine months of 2005, the segment recorded restructuring and
other costs, net, of $7.5 million, including $6.8 million of cash costs,
principally for cost reduction measures including severance and facility
consolidation costs (Note 11). In addition, the segment had $0.8 million of
charges to cost of revenues for the sale of inventories revalued at the date of
acquisition and accelerated depreciation on manufacturing assets being abandoned
due to real estate consolidations and a gain of $0.1 million on the sale of a
product line. In 2004, the segment recorded restructuring and other costs, net,
of $4.8 million, including cash costs of $4.5 million, principally for
severance, abandoned facilities, 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 cost of revenues of $0.2 million for the sale of inventories revalued at the
date of acquisition.
Other Income, Net
- -----------------
The company reported other income, net, of $26.1 million and $15.7
million in the first nine months of 2005 and 2004, respectively (Note 4).
Interest income increased to $8.1 million in 2005 from $6.0 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, offset in part by cash used to fund acquisitions. Interest expense
increased to $18.7 million in 2005 from $8.1 million in 2004 as a result of debt
used to partially fund the Kendro acquisition and, to a lesser extent, higher
rates associated with the company's variable rate debt.
During the first nine months of 2005 and 2004, the company had gains on
investments, net, of $34.8 million and $15.4 million, respectively. The gains
included $28.9 million and $9.6 million in 2005 and 2004, respectively, from the
sale of shares of Thoratec and a loss of $1.3 million in 2005 from the sale of
shares of Newport in addition to other gains from the company's investment
portfolio activity.
Provision for Income Taxes
- --------------------------
The company's effective tax rate was 28.9% and 29.0% in the first nine
months of 2005 and 2004, respectively.
Discontinued Operations
In the first nine months of 2005, the company recorded after-tax gains of
$23.9 million from the disposal of discontinued operations. The gains arose from
the sale of the company's point of care and rapid diagnostics business, the
settlement of litigation, an increase in the net realizable value of an
abandoned facility for which a sale agreement was reached and additional
proceeds from the sale of businesses divested prior to 2004, including the sale
of abandoned real estate and post-closing adjustments (Note 13).
In the third quarter of 2004, the company recorded a gain on the sale of
Spectra-Physics of $41.4 million, net of an income tax provision of $19.1
million. In the first nine months of 2004, the company's discontinued operations
(Spectra-Physics) had revenues of $118.9 million and net income of $43.0
million, including a tax benefit of $36.3 million. The company sold
Spectra-Physics in July 2004.
The tax returns of the company's former Trex Medical business that was
sold in 2000 were under audit by the IRS. In the third quarter of 2004, the
Joint Congressional Committee on Taxation completed its review of the audit
findings and the company determined that previously unrecognized tax benefits
associated with the divested business totaling $23.5 million were realizable.
This amount was recorded as a tax gain on the sale of the discontinued operation
in the third quarter of 2004.
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THERMO ELECTRON CORPORATION
Liquidity and Capital Resources
First Nine Months 2005
- ----------------------
Consolidated working capital was $530.9 million at October 1, 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
$202.1 million at October 1, 2005, compared with $512.3 million at December 31,
2004. The decreases result primarily from use of cash, cash equivalents,
short-term available-for-sale investments and short-term debt to partially fund
the Kendro acquisition.
Cash provided by operating activities was $144.9 million during the first
nine months of 2005, including $146.5 million provided by continuing operations
and $1.6 million used by discontinued operations. The company used cash of $15.5
million to increase inventories, particularly mass spectrometry and spectroscopy
instruments, for new product introductions and expansion of operations in China.
A reduction in other current liabilities used $16.0 million of cash in the first
nine months of 2005, primarily for income tax payments of which approximately
$13 million arose from taxes on gains on the sale of investments. The company
contributed $10.9 million of funding to a U.K. pension plan in June 2005 (Note
8). Payments for restructuring actions of the company's continuing operations,
principally severance, lease costs and other expenses of real estate
consolidation, used cash of $13.9 million in the first nine months of 2005.
In connection with restructuring actions undertaken by continuing
operations, the company had accrued $15.4 million for restructuring costs at
October 1, 2005. The company expects to pay approximately $7.7 million of this
amount for severance primarily through 2005. The balance of $7.7 million will be
paid for lease obligations over the remaining terms of the leases, with
approximately 70% to be paid through 2006 and the remainder through 2012. In
addition, at October 1, 2005, the company had accrued $5.3 million for
acquisition expenses. Accrued acquisition expenses included $1.5 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 nine months of 2005, the primary investing activities of
the company's continuing operations, excluding available-for-sale investment
activities, included acquisitions and the purchase and sale of property, plant
and equipment. The company expended $939.4 million, net of cash acquired, for
the acquisitions of Niton, R&P, Kendro and Ionalytics (Note 2). The company
expended $27.1 million for purchases of property, plant and equipment and had
proceeds from the sale of property, principally abandoned real estate, of $10.0
million. Investing activities of the company's discontinued operations provided
$65.0 million of cash in the first nine months of 2005, primarily from the sale
of its point of care and rapid diagnostics business in September 2005 and the
sale of a former operating facility in August 2005.
The company's financing activities provided $422.1 million of cash during
the first nine months of 2005, principally from the issuance of $250 million
senior notes due in 2015 and a net increase in short-term borrowings of $155.7
million.
The company repaid in full $570 million of borrowings under its bridge
loan with cash and proceeds of new debt issuances described below. On May 27,
2005, the company issued $250 million aggregate principal amount of 5% senior
notes (the Notes) due 2015, with an effective interest rate of 5.27% after
including the impact of an interest swap arrangement. Under the Notes'
Indenture, the company is subject to certain affirmative and negative covenants.
Also on May 27, 2005, the company entered into an arrangement that
provides the company an uncommitted line of credit of up to $250 million through
a series of short-term money market loans funded on an ongoing basis in the
secondary market. Such money market loans have maturity periods of overnight to
364 days and bear varying rates of interest based on the maturity date and
market rate at the time of issuance. On May 27, 2005, the company borrowed $250
million through three short-term loans under the money market arrangement with
maturities of one week to three months. As of October 1, 2005, the company had
repaid the borrowings under this arrangement.
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THERMO ELECTRON CORPORATION
First Nine Months 2005 (continued)
- ----------------------
On June 30, 2005, the company entered into a five-year revolving credit
facility with a bank group that provides up to 175 million euros. The facility
carries interest at a Euribor rate plus 35 basis points. Under the facility,
borrowings of one to six months duration may be drawn. 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. As of October 1, 2005, the company had outstanding
borrowings under this facility of 132 million euros ($159 million) in two
tranches with maturities of approximately one to three months and with a
weighted average interest rate of 2.46%.
The company has no material commitments for purchases of property, plant
and equipment and expects that for all of 2005, such expenditures will
approximate $48 - $52 million. The company's contractual obligations and other
commercial commitments did not change materially between December 31, 2004 and
October 1, 2005.
The company believes that its existing cash and short-term investments,
future cash flow from operations, and available borrowings of up to $250 million
under its existing 5-year revolving credit agreement will be sufficient to meet
its capital requirements for the foreseeable future, including at least the next
24 months.
First Nine Months 2004
- ----------------------
Cash provided by operating activities was $175.7 million during the first
nine months of 2004, including $160.9 million provided by continuing operations
and $14.8 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 $18.3 million in the first nine months of 2004. Inventories increased
$32.3 million, due in part to increased production of mass spectrometry and
spectroscopy instruments in response to higher demand for these products. Cash
provided by discontinued operations of $14.8 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 nine months of 2004, the primary investing activities of
the company's continuing operations, excluding available-for-sale investment
activities, included acquisitions for $144.1 million, net of cash acquired, and
the purchase of property, plant and equipment. The company's continuing
operations expended $32.6 million for purchases of property, plant and equipment
and had proceeds from the sale of property of $4.0 million.
The company's financing activities used $198.0 million of cash during the
first nine months of 2004, principally for continuing operations. During the
first nine months of 2004, the company's continuing operations received net
proceeds of $47.2 million from the exercise of employee stock options. In
addition, the company expended $231.5 million to repurchase 8.4 million shares
of the company's common stock and $12.9 million to reduce short-term notes
payable.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The company is exposed to market risk from changes in interest rates,
currency exchange rates and equity prices, which could affect its results of
operations and financial condition.
The company increased its LIBOR-based and Euribor-based borrowings
following the Kendro acquisition (Note 9). A 100-basis-point increase in 90-day
LIBOR and Euribor at October 1, 2005 would increase the company's annual pre-tax
interest expense by $1 million and $2 million, respectively.
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THERMO ELECTRON CORPORATION
Item 3 - Quantitative and Qualitative Disclosures About Market Risk (continued)
- -------------------------------------------------------------------
During the second quarter of 2005, the company sold substantially all of
its available-for-sale equity investments (Note 4). A 10% decrease in October 1,
2005 market equity prices would result in an immaterial impact on the net fair
value of the company's remaining price sensitive equity financial instruments.
Except as described above, the company's exposure to market risk from
interest rates and currency exchange rates 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 October 1, 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 October 1,
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 October 1, 2005, that have materially affected
or are reasonably likely to materially affect the company's internal control
over financial reporting. The company acquired Kendro on May 9, 2005 and is in
the process of evaluating Kendro's internal control over financial reporting and
will make changes where appropriate.
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.
Development of our products requires significant investment; our products
and technologies could become uncompetitive or obsolete. Our customers use many
of our products to develop, test and manufacture their own products. As a
result, we must anticipate industry trends and develop products in advance of
the commercialization of our customers' products. If we fail to adequately
predict our customers' needs and future activities, we may invest heavily in
research and development of products and services that do not lead to
significant revenue.
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
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.
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, we experienced a slow down in demand from the pharmaceutical
market.
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
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 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.
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
We have retained contingent liabilities from businesses that we have
sold. From 1997 through 2004, we divested over 60 businesses with aggregate
annual revenues in excess of $2 billion. As part of these transactions, we
retained responsibility for some of the contingent liabilities related to these
businesses, such as lawsuits, product liability and environmental claims and
potential claims by buyers that representations and warranties we made about the
businesses were inaccurate. The resolution of these contingencies has not had a
material adverse effect on our results of operations or financial condition;
however, we can not be certain that this favorable pattern will continue.
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, or 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;
- 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.
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
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, we will
need to successfully integrate the Kendro business that we recently acquired 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 $1.94 billion as of October 1, 2005. We
assess the realizability of the goodwill we have on our books annually as well
as whenever events or changes in circumstances indicate that the goodwill may be
impaired. These events or circumstances generally include operating losses or a
significant decline in earnings associated with the acquired business or asset.
Our ability to realize the value of the goodwill will depend on the future cash
flows of these businesses. These cash flows in turn depend in part on how well
we have integrated these businesses. If we are not able to realize the value of
the goodwill, we may be required to incur material charges relating to the
impairment of those assets.
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THERMO ELECTRON CORPORATION
PART II - OTHER INFORMATION
Item 6 - Exhibits
- -----------------
Exhibit
Number Description of Exhibit
- ------- ----------------------
3.1 Certificate of Amendment of Certificate of Designation of the
Series B Junior Participating Preferred Stock of Thermo
Electron Corporation (filed as Exhibit 3.1 to the Registrant's
Current Report on Form 8-K dated September 16, 2005 [File No.
1-8002] and incorporated in this document by reference).
4.1 Rights Agreement, dated as of September 15, 2005, by and
between Thermo Electron Corporation and American Stock
Transfer & Trust Company, as Rights Agent, which includes as
Exhibit A, the Terms of Series B Junior Participating
Preferred Stock, and as Exhibit B, the Form of Rights
Certificate (filed as Exhibit 4.1 to the Registrant's Current
Report on Form 8-K dated September 16, 2005 [File No. 1-8002]
and incorporated in this document by reference).
4.2 Amendment No. 2 to the Rights Agreement, dated as of September
15, 2005, by and between Thermo Electron Corporation and
American Stock Transfer & Trust Company (filed as Exhibit 4.2
to the Registrant's Current Report on Form 8-K dated September
16, 2005 [File No. 1-8002] and incorporated in this document
by reference).
31.1 Certification of Chief Executive Officer required by Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer required by Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer required by Exchange
Act Rules 13a-14(b) and 15d-14(b), as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2 Certification of Chief Financial Officer required by Exchange
Act Rules 13a-14(b) and 15d-14(b), as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
- ----------------------------
*Certification is not deemed "filed" for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liability of that section. Such certification
is not deemed to be incorporated by reference into any filing under the
Securities Act or the Exchange Act, except to the extent that the registrant
specifically incorporates it by reference.
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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 9th day of November 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 of Exhibit
- --------------------------------------------------------------------------------
3.1 Certificate of Amendment of Certificate of Designation of the
Series B Junior Participating Preferred Stock of Thermo
Electron Corporation (filed as Exhibit 3.1 to the Registrant's
Current Report on Form 8-K dated September 16, 2005 [File No.
1-8002] and incorporated in this document by reference).
4.1 Rights Agreement, dated as of September 15, 2005, by and
between Thermo Electron Corporation and American Stock
Transfer & Trust Company, as Rights Agent, which includes as
Exhibit A, the Terms of Series B Junior Participating
Preferred Stock, and as Exhibit B, the Form of Rights
Certificate (filed as Exhibit 4.1 to the Registrant's Current
Report on Form 8-K dated September 16, 2005 [File No. 1-8002]
and incorporated in this document by reference).
4.2 Amendment No. 2 to the Rights Agreement, dated as of September
15, 2005, by and between Thermo Electron Corporation and
American Stock Transfer & Trust Company (filed as Exhibit 4.2
to the Registrant's Current Report on Form 8-K dated September
16, 2005 [File No. 1-8002] and incorporated in this document
by reference).
31.1 Certification of Chief Executive Officer required by Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer required by Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer required by Exchange
Act Rules 13a-14(b) and 15d-14(b), as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2 Certification of Chief Financial Officer required by Exchange
Act Rules 13a-14(b) and 15d-14(b), as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
- ----------------------------
*Certification is not deemed "filed" for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liability of that section. Such certification
is not deemed to be incorporated by reference into any filing under the
Securities Act or the Exchange Act, except to the extent that the registrant
specifically incorporates it by reference.
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