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 July 3, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number 1-8002
THERMO ELECTRON CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 04-2209186
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
81 Wyman Street, P.O. Box 9046
Waltham, Massachusetts 02454-9046
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 622-1000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
Class Outstanding at July 30, 2004
----------------------------- ----------------------------
Common Stock, $1.00 par value 163,283,800
PART I - Financial Information
Item 1 - Financial Statements
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
July 3, December 31,
(In thousands) 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 306,617 $ 303,912
Short-term available-for-sale investments, at quoted market value (amortized
cost of $37,125 and $65,273) 65,168 114,326
Accounts receivable, less allowances of $22,325 and $24,212 414,368 419,625
Inventories:
Raw materials and supplies 119,065 118,660
Work in process 43,945 42,069
Finished goods 160,862 141,432
Deferred tax assets 119,944 113,006
Other current assets 60,355 46,995
Current assets of discontinued operations (Note 12) 123,044 95,231
---------- ----------
1,413,368 1,395,256
---------- ----------
Property, Plant, and Equipment, at Cost 480,423 471,500
Less: Accumulated depreciation and amortization 234,215 219,248
---------- ----------
246,208 252,252
---------- ----------
Acquisition-related Intangible Assets (Note 2) 125,238 65,542
---------- ----------
Other Assets (Note 9) 44,724 47,408
---------- ----------
Goodwill (Note 2) 1,484,414 1,441,172
---------- ----------
Long-term Assets of Discontinued Operations (Note 12) 181,980 187,339
---------- ----------
$3,495,932 $3,388,969
========== ==========
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THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Equity
July 3, December 31,
(In thousands except share amounts) 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Short-term obligations and current maturities of long-term obligations $ 35,061 $ 45,981
Accounts payable 119,815 102,617
Accrued payroll and employee benefits 74,587 89,452
Accrued income taxes 120,812 98,167
Deferred revenue 68,442 59,055
Accrued restructuring costs (Note 11) 15,316 22,453
Other accrued expenses (Notes 2 and 10) 177,229 171,249
Current liabilities of discontinued operations (Note 12) 84,935 95,819
---------- ----------
696,197 684,793
---------- ----------
Deferred Income Taxes (Note 2) 36,052 11,700
---------- ----------
Other Long-term Liabilities 77,923 73,395
---------- ----------
Long-term Liabilities of Discontinued Operations (Note 12) 6,817 6,766
---------- ----------
Long-term Obligations:
Senior notes (Note 9) 133,985 137,874
Subordinated convertible obligations 77,234 77,234
Other 13,324 14,401
---------- ----------
224,543 229,509
---------- ----------
Shareholders' Equity:
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized; 178,497,228 and 175,479,994
shares issued 178,497 175,480
Capital in excess of par value 1,345,474 1,298,881
Retained earnings 1,153,622 1,019,420
Treasury stock at cost, 13,787,902 and 10,416,770 shares (290,527) (192,469)
Deferred compensation (3,581) (2,834)
Accumulated other comprehensive items (Note 6) 70,915 84,328
---------- ----------
2,454,400 2,382,806
---------- ----------
$3,495,932 $3,388,969
========== ==========
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
---------------------------
July 3, June 28,
(In thousands except per share amounts) 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $525,309 $467,268
-------- --------
Costs and Operating Expenses:
Cost of revenues (Note 11) 286,424 250,147
Selling, general, and administrative expenses 146,508 130,077
Research and development expenses 32,592 32,610
Restructuring and other costs, net (Note 11) 815 4,688
-------- --------
466,339 417,522
-------- --------
Operating Income 58,970 49,746
Other Income, Net (Note 4) 10,667 12,440
-------- --------
Income from Continuing Operations Before Provision for Income Taxes 69,637 62,186
Provision for Income Taxes (19,058) (7,545)
-------- --------
Income from Continuing Operations 50,579 54,641
Income (Loss) from Discontinued Operations (includes income tax benefit of
$36,927 and $207; Note 12) 40,501 (1,502)
-------- --------
Net Income $ 91,080 $ 53,139
======== ========
Earnings per Share from Continuing Operations (Note 5):
Basic $ .31 $ .34
======== ========
Diluted $ .30 $ .33
======== ========
Earnings per Share (Note 5):
Basic $ .55 $ .33
======== ========
Diluted $ .54 $ .32
======== ========
Weighted Average Shares (Note 5):
Basic 165,571 162,048
======== ========
Diluted 170,521 172,459
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Six Months Ended
-----------------------------
July 3, June 28,
(In thousands except per share amounts) 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $1,050,341 $ 921,896
---------- ----------
Costs and Operating Expenses:
Cost of revenues (Note 11) 570,596 494,208
Selling, general, and administrative expenses 297,067 258,084
Research and development expenses 66,861 65,319
Restructuring and other costs, net (Note 11) 3,973 11,638
---------- ----------
938,497 829,249
---------- ----------
Operating Income 111,844 92,647
Other Income, Net (Note 4) 13,269 18,620
---------- ----------
Income from Continuing Operations Before Provision for Income Taxes 125,113 111,267
Provision for Income Taxes (34,869) (22,538)
---------- ----------
Income from Continuing Operations 90,244 88,729
Income (Loss) from Discontinued Operations (includes income tax benefit of
$35,780 and $1,394; Note 12) 43,958 (4,199)
Gain on Disposal of Discontinued Operations (net of income tax provision of
$3,564) - 5,036
---------- ----------
Net Income $ 134,202 $ 89,566
========== ==========
Earnings per Share from Continuing Operations (Note 5):
Basic $ .55 $ .55
========== ==========
Diluted $ .53 $ .53
========== ==========
Earnings per Share (Note 5):
Basic $ .81 $ .55
========== ==========
Diluted $ .79 $ .54
========== ==========
Weighted Average Shares (Note 5):
Basic 165,389 162,446
========== ==========
Diluted 170,258 172,977
========== ==========
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)
Six Months Ended
----------------------------
July 3, June 28,
(In thousands) 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 134,202 $ 89,566
(Income) loss from discontinued operations (43,958) 4,199
Gain on disposal of discontinued operations - (5,036)
--------- ---------
Income from continuing operations 90,244 88,729
Adjustments to reconcile income from continuing operations to net cash provided
by operating activities:
Depreciation and amortization 31,110 23,199
Noncash restructuring and other costs, net (Note 11) 507 260
Provision for losses on accounts receivable 1,098 2,802
Change in deferred income taxes 1,039 (6,320)
Gain on sale of businesses - (341)
Gain on investments, net (Note 4) (13,478) (15,989)
Other 3,832 3,170
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable 7,265 25,878
Inventories (25,677) 3,534
Other current assets (12,977) (3,240)
Accounts payable 8,592 (21,673)
Other current liabilities 3,570 (38,053)
--------- ---------
Net cash provided by continuing operations 95,125 61,956
Net cash provided by discontinued operations 9,878 4,109
--------- ---------
Net cash provided by operating activities 105,003 66,065
--------- ---------
Investing Activities:
Proceeds from maturities of available-for-sale investments 18,432 276,693
Proceeds from sale of available-for-sale investments 23,388 24,898
Purchases of property, plant, and equipment (22,071) (20,785)
Proceeds from sale of property, plant, and equipment 3,359 5,927
Acquisitions, net of cash acquired (Note 2) (75,706) (3,120)
Proceeds from sale of businesses, net of cash divested - 384
Collection of note receivable - 69,136
Increase in other assets (626) (1,787)
Other (578) (276)
--------- ---------
Net cash provided by (used in) continuing operations (53,802) 351,070
Net cash provided by discontinued operations 1,935 2,729
--------- ---------
Net cash provided by (used in) investing activities (51,867) 353,799
--------- ---------
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THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Six Months Ended
----------------------------
July 3, June 28,
(In thousands) 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Repayment and redemption of long-term obligations $ (1,743) $ (72,090)
Purchases of company common stock and subordinated convertible debentures (81,975) (74,113)
Net proceeds from issuance of company common stock 40,915 22,337
Decrease in short-term notes payable (8,111) (380,902)
Other 18 35
--------- ---------
Net cash used in continuing operations (50,896) (504,733)
Net cash provided by (used in) discontinued operations 427 (4,638)
--------- ---------
Net cash used in financing activities (50,469) (509,371)
--------- ---------
Exchange Rate Effect on Cash of Continuing Operations (153) 16,095
Exchange Rate Effect on Cash of Discontinued Operations 191 (1,213)
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents 2,705 (74,625)
Cash and Cash Equivalents at Beginning of Period 303,912 339,067
--------- ---------
Cash and Cash Equivalents at End of Period $ 306,617 $ 264,442
========= =========
Noncash Investing Activities:
Fair value of assets of acquired businesses $ 108,515 $ 4,845
Cash paid for acquired businesses (78,050) (3,269)
--------- ---------
Liabilities assumed of acquired businesses $ 30,465 $ 1,576
========= =========
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
July 3, 2004, and the results of operations and cash flows for the three- and
six-month periods ended July 3, 2004, and June 28, 2003. 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, 2003, 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, 2003, filed with the Securities
and Exchange Commission (SEC).
In June 2004, the company announced it had entered into a definitive
agreement for the sale of its Optical Technologies segment, Spectra-Physics, to
Newport Corporation. The company has classified the operating results and cash
flows of Spectra-Physics as discontinued operations for all periods presented in
the accompanying financial statements. In addition, assets and liabilities of
Spectra-Physics have been classified as discontinued operations in the
accompanying consolidated balance sheets (Note 12).
2. Acquisitions
On April 20, 2004, the Life and Laboratory Sciences segment acquired US
Counseling Services, Inc. (USCS), a supplier of equipment asset management
services to the pharmaceutical, healthcare, and related industries, for
approximately $78.8 million in cash (or $75.7 million, net of cash acquired).
The purchase price is subject to a post-closing adjustment. The purchase price
exceeded the fair value of the acquired net assets and, accordingly, $66.9
million was allocated to goodwill. USCS reported revenues of $57 million in
2003.
The components of the purchase price allocation for USCS are as follows:
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Purchase Price:
Cash paid (a) $ 78,805
Cash acquired (3,099)
--------
$ 75,706
========
Allocation:
Current assets $ 5,067
Property, plant, and equipment 356
Acquired intangible assets 34,700
Goodwill 66,910
Other assets 2
Liabilities assumed (31,329)
--------
$ 75,706
========
(a) Includes acquisition expenses.
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THERMO ELECTRON CORPORATION
2. Acquisitions (continued)
Acquired intangible assets for the acquisition of USCS are as follows:
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Customer Relationships $34,700
=======
The amortization period for the customer relationships acquired in the
acquisition of USCS is 5 years. Annual amortization expense has increased by
$6.9 million as a result of the acquisition of USCS. The company recorded a
deferred tax liability of $12.5 million related to this intangible asset, with a
corresponding increase in goodwill. The deferred tax liability is included in
liabilities assumed in the above table detailing the purchase price components.
On December 31, 2003, the Life and Laboratory Sciences segment acquired
Jouan SA, a global supplier of products used by life science researchers. During
the first quarter of 2004, the company determined the fair value of Jouan's
identifiable intangible assets and completed the purchase price allocation. As a
result, $34.9 million has been reclassified from goodwill to acquired intangible
assets as of April 3, 2004. In addition, the company recorded a deferred tax
liability of $12.1 million related to these intangible assets, with a
corresponding increase in goodwill.
Acquired intangible assets for the acquisition of Jouan are as follows:
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Customer and Distributor Relationships $24,643
Product Technology 10,231
-------
$34,874
The amortization periods for intangible assets acquired in the
acquisition of Jouan are 6 years for customer and distributor relationships and
5 years for product technology. The weighted-average amortization period for all
intangible assets acquired in the acquisition of Jouan is approximately 6 years.
Annual amortization expense has increased by $6.2 million as a result of the
acquisition of Jouan.
The company has undertaken restructuring activities at acquired
businesses. These activities, which were accounted for in accordance with
Emerging Issues Task Force Issue (EITF) 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 No. 95-3, the company finalizes its
restructuring plans no later than one year from the respective dates of the
acquisitions. Upon finalization of restructuring plans or settlement of
obligations for less than the expected amount, any excess reserves are reversed
with a corresponding decrease in goodwill or other intangible assets when no
goodwill exists. Accrued acquisition expenses are included in other accrued
expenses in the accompanying balance sheet.
The company did not establish reserves for restructuring businesses
acquired in 2004.
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THERMO ELECTRON CORPORATION
2. Acquisitions (continued)
The changes in accrued acquisition expenses for acquisitions completed
during 2003 are as follows:
Abandonment
of Excess
(In thousands) Severance Facilities Other Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $ 4,998 $ 3,925 $ 106 $ 9,029
Reserves established - 243 304 547
Payments (707) (474) (336) (1,517)
Decrease recorded as a reduction in goodwill (526) - - (526)
Currency translation (69) (61) - (130)
------- ------- ------- -------
Balance at July 3, 2004 $ 3,696 $ 3,633 $ 74 $ 7,403
======= ======= ======= =======
The 2003 acquisitions primarily consisted of Jouan. The principal accrued
acquisition expenses for 2003 acquisitions were for severance for approximately
100 employees at Jouan across all functions and the downsizing of a Jouan
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 2004 and amounts accrued for abandonment of excess
facilities through 2007.
The changes in accrued acquisition expenses for acquisitions completed
prior to 2003 are as follows:
Abandonment
of Excess
(In thousands) Facilities Other Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $6,640 $ 147 $6,787
Payments (28) (36) (64)
Currency translation 221 (1) 220
------ ------ ------
Balance at July 3, 2004 $6,833 $ 110 $6,943
====== ====== ======
The remaining accrued acquisition expenses for pre-2003 acquisitions
primarily represent lease obligations for four abandoned operating facilities in
England with leases expiring through 2014.
3. Business Segment Information
Following the decision to sell Spectra-Physics, previously reported as
the Optical Technologies segment, the company's continuing operations fall into
two principal business segments: Life and Laboratory Sciences and Measurement
and Control. Results for 2003 and the first quarter of 2004 have been restated
to reflect Spectra-Physics as a discontinued operation.
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THERMO ELECTRON CORPORATION
3. Business Segment Information (continued)
As part of the divestiture of Spectra-Physics (Note 12), the company
retained a small business unit in Syracuse, New York, that manufactures imaging
sensors and cameras for scientific, medical, and machine vision imaging
applications. This business was transferred to the Life and Laboratory Sciences
segment and prior period results have been restated to reflect this change.
Three Months Ended Six Months Ended
----------------------------- -----------------------------
July 3, June 28, July 3, June 28,
(In thousands) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Life and Laboratory Sciences $ 369,823 $ 314,330 $ 735,289 $ 614,111
Measurement and Control 155,486 151,285 315,052 303,781
Other - 1,653 - 4,004
---------- ---------- ---------- ----------
$ 525,309 $ 467,268 $1,050,341 $ 921,896
========== ========== ========== ==========
Income from Continuing Operations Before Provision
for Income Taxes:
Life and Laboratory Sciences (a) $ 53,331 $ 44,127 $ 100,146 $ 83,626
Measurement and Control (b) 12,415 13,375 26,598 24,194
Other (c) (54) (197) (102) (327)
---------- ---------- ---------- ----------
Total Operating Income - Segments 65,692 57,305 126,642 107,493
Corporate/Other (d) 3,945 4,881 (1,529) 3,774
---------- ---------- ---------- ----------
$ 69,637 $ 62,186 $ 125,113 $ 111,267
========== ========== ========== ==========
Depreciation:
Life and Laboratory Sciences $ 7,446 $ 6,263 $ 14,981 $ 11,666
Measurement and Control 2,621 2,719 5,078 5,298
Other - 127 - 257
Corporate 715 798 1,601 1,534
---------- ---------- ---------- ----------
$ 10,782 $ 9,907 $ 21,660 $ 18,755
========== ========== ========== ==========
Amortization:
Life and Laboratory Sciences $ 4,963 $ 1,657 $ 8,106 $ 3,245
Measurement and Control 681 676 1,343 1,199
Corporate - - 1 -
---------- ---------- ---------- ----------
$ 5,644 $ 2,333 $ 9,450 $ 4,444
========== ========== ========== ==========
(a) Includes restructuring and other income, net, of $0.5 million in the second
quarter of 2004. Includes restructuring and other costs, net, of $3.9
million, $3.3 million, and $6.5 million in the second quarter of 2003 and
the first six months of 2004 and 2003, respectively.
(b) Includes restructuring and other costs, net, of $1.4 million, $2.6 million,
and $3.5 million in the second quarter of 2004 and the first six months of
2004 and 2003, respectively. Includes restructuring and other income, net,
of $0.2 million in the second quarter of 2003.
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THERMO ELECTRON CORPORATION
3. Business Segment Information (continued)
(c) Includes restructuring and other costs, net, of $0.1 million, $0.2 million,
$0.1 million, and $0.3 million in the second quarter of 2004 and 2003 and
the first six months of 2004 and 2003, respectively.
(d) Includes corporate general and administrative expenses and other income and
expense. Includes corporate restructuring and other costs of $0.2 million,
$0.8 million, $0.7 million, and $1.4 million in the second quarter of 2004
and 2003 and the first six months of 2004 and 2003, respectively. Other
income, net, includes gains on the sale of shares of Thoratec of $8.0
million and $9.6 million in the second quarter and first six months of
2004, respectively, and gains on the sale of shares of FLIR Systems, Inc.
of $10.0 million and $13.7 million in the second quarter and first six
months of 2003, respectively (Note 4).
4. Other Income, Net
The components of other income, net, in the accompanying statement of
income are as follows:
Three Months Ended Six Months Ended
--------------------------- ---------------------------
July 3, June 28, July 3, June 28,
(In thousands) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 1,666 $ 7,074 $ 3,586 $ 14,746
Interest Expense (Note 9) (2,694) (5,357) (5,423) (12,086)
Gain on Investments, Net 10,847 10,814 13,478 15,989
Other Items, Net 848 (91) 1,628 (29)
-------- -------- -------- --------
$ 10,667 $ 12,440 $ 13,269 $ 18,620
======== ======== ======== ========
The company sold 1,000,000 and 1,250,000 shares of Thoratec Corporation
common stock during the second quarter and first six months of 2004,
respectively, and realized gains of $8.0 million and $9.6 million, respectively.
In addition, the company sold 234,175 and 334,175 shares of FLIR Systems, Inc.
common stock during the second quarter and first six months of 2003,
respectively, and realized gains of $10.0 million and $13.7 million,
respectively. These gains included $2.7 million and $3.9 million in the second
quarter and first six months of 2003, respectively, from the recovery of amounts
written down in prior years. The company obtained common shares of Thoratec as
part of the sale of Thermo Cardiosystems Inc. in 2001 and obtained an equity
interest in FLIR as part of the acquisition of Spectra-Physics AB in 1999. At
July 3, 2004, the company owned 4.4 million shares of Thoratec with a fair
market value of $46.5 million, which are classified as short-term
available-for-sale investments in the accompanying balance sheet. The company no
longer owned shares of FLIR as of December 31, 2003.
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THERMO ELECTRON CORPORATION
5. Earnings per Share
Basic and diluted earnings per share were calculated as follows:
Three Months Ended Six Months Ended
--------------------------- ---------------------------
July 3, June 28, July 3, June 28,
(In thousands except per share amounts) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 50,579 $ 54,641 $ 90,244 $ 88,729
Income (Loss) of Discontinued Operations 40,501 (1,502) 43,958 (4,199)
Gain on Disposal of Discontinued Operations, Net - - - 5,036
-------- -------- -------- --------
Net Income for Basic Earnings per Share 91,080 53,139 134,202 89,566
Effect of Convertible Debentures 398 1,745 811 3,546
-------- -------- -------- --------
Income Available to Common Shareholders, as Adjusted
for Diluted Earnings per Share $ 91,478 $ 54,884 $135,013 $ 93,112
-------- -------- -------- --------
Basic Weighted Average Shares 165,571 162,048 165,389 162,446
Effect of:
Stock options 3,007 1,876 2,926 1,764
Convertible debentures 1,846 8,335 1,846 8,567
Contingently issuable shares 97 200 97 200
-------- -------- -------- --------
Diluted Weighted Average Shares 170,521 172,459 170,258 172,977
-------- -------- -------- --------
Basic Earnings per Share:
Continuing operations $ .31 $ .34 $ .55 $ .55
Discontinued operations .24 (.01) .27 .01
-------- -------- -------- --------
$ .55 $ .33 $ .81 $ .55
======== ======== ======== ========
Diluted Earnings per Share:
Continuing operations $ .30 $ .33 $ .53 $ .53
Discontinued operations .24 (.01) .26 -
-------- -------- -------- --------
$ .54 $ .32 $ .79 $ .54
======== ======== ======== ========
Options to purchase 966,000, 7,480,000, 1,177,000, and 9,810,000 shares
of common stock were not included in the computation of diluted earnings per
share for the second quarter of 2004 and 2003 and the first six months of 2004
and 2003, respectively, because the options' exercise prices were greater than
the average market price for the common stock and their effect would have been
antidilutive.
In 2004, there were no convertible debentures outstanding that if
converted would be antidilutive. In 2003, the computations of diluted earnings
per share exclude the effect of assuming the conversion of the company's 4 3/8%
subordinated convertible debentures because the effect would be antidilutive.
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THERMO ELECTRON CORPORATION
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 second quarter of 2004 and 2003, the company
had comprehensive income of $74.1 million and $118.0 million, respectively.
During the first six months of 2004 and 2003, the company had comprehensive
income of $129.0 million and $185.4 million, respectively.
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
the fair value at the grant dates consistent with the method set forth under
SFAS No. 123, the effect on certain financial information of the company would
have been as follows:
Three Months Ended Six Months Ended
--------------------------- ---------------------------
July 3, June 28, July 3, June 28,
(In thousands except per share amounts) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations:
As reported $ 50,579 $ 54,641 $ 90,244 $ 88,729
Add: Stock-based employee compensation expense
included in reported results, net of tax 315 469 559 953
Deduct: Total stock-based employee compensation
expense determined under the fair-value-based
method for all awards, net of tax (3,923) (5,055) (7,687) (10,423)
-------- -------- -------- --------
Pro forma $ 46,971 $ 50,055 $ 83,116 $ 79,259
======== ======== ======== ========
Basic Earnings per Share from Continuing Operations:
As reported $ .31 $ .34 $ .55 $ .55
Pro forma $ .28 $ .31 $ .50 $ .49
Diluted Earnings per Share from Continuing Operations:
As reported $ .30 $ .33 $ .53 $ .53
Pro forma $ .28 $ .30 $ .49 $ .48
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THERMO ELECTRON CORPORATION
7. Stock-based Compensation Plans and Pro Forma Stock-based Compensation
Expense (continued)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
July 3, June 28, July 3, June 28,
(In thousands except per share amounts) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income:
As reported $ 91,080 $ 53,139 $134,202 $ 89,566
Add: Stock-based employee compensation expense
included in reported net income, net of tax 315 469 559 953
Deduct: Total stock-based employee compensation
expense determined under the fair-value-based
method for all awards, net of tax (4,335) (5,712) (8,688) (12,046)
-------- -------- -------- --------
Pro forma $ 87,060 $ 47,896 $126,073 $ 78,473
======== ======== ======== ========
Basic Earnings per Share:
As reported $ .55 $ .33 $ .81 $ .55
Pro forma $ .53 $ .30 $ .76 $ .48
Diluted Earnings per Share:
As reported $ .54 $ .32 $ .79 $ .54
Pro forma $ .51 $ .29 $ .75 $ .47
8. Defined Benefit Pension Plans
Several of the company's non-U.S. subsidiaries and one U.S. subsidiary
have defined benefit pension plans covering substantially all full-time
employees at those subsidiaries. Some of the plans are unfunded, as permitted
under the plans and applicable laws. Net periodic benefit costs for the plans in
aggregate included the following components:
Three Months Ended Six Months Ended
--------------------- ---------------------
July 3, June 28, July 3, June 28,
(In thousands) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Service Cost $ 897 $ 824 $ 1,809 $ 1,635
Interest Cost on Benefit Obligation 2,331 2,018 4,710 3,996
Expected Return on Plan Assets (2,031) (1,659) (4,095) (3,298)
Recognized Net Actuarial Loss 630 445 1,271 885
Amortization of Unrecognized Initial Obligation and Prior Service Cost 1 12 1 23
------- ------- ------- -------
$ 1,828 $ 1,640 $ 3,696 $ 3,241
======= ======= ======= =======
9. Swap Arrangement
During 2002, the company entered into interest-rate swap arrangements for
its $128.7 million principal amount 7 5/8% senior notes, due in 2008, with the
objective of reducing interest costs. The arrangements provide that the company
will receive a fixed interest rate of 7 5/8%, and will pay a variable rate of
90-day LIBOR plus 2.19% (3.96% as of July 3, 2004). The swaps have terms
expiring at the maturity of the debt. The swaps are designated as fair-value
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THERMO ELECTRON CORPORATION
9. Swap Arrangement (continued)
hedges and as such, are carried at fair value, which over time has resulted in
an increase in other long-term assets and long-term debt totaling $5.3 million
at July 3, 2004. 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.
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:
(In thousands)
- --------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003 $25,645
Provision charged to income 9,257
Usage (8,016)
Adjustments to previously provided warranties, net (2,206)
Other, net (a) 72
-------
Balance at July 3, 2004 $24,752
=======
(a) Primarily represents the effects of currency translation.
11. Restructuring and Other Costs, Net
In response to a continued downturn in markets served by the company and
in connection with the company's overall reorganization, restructuring actions
were initiated in 2002 in a number of business units to reduce costs and
redundancies, principally through headcount reductions and consolidation of
facilities. Certain costs associated with these actions are recorded when
incurred. Further actions were initiated in 2003. Restructuring and other costs
recorded in 2004 are primarily for charges associated with actions initiated
prior to 2004 that could not be recorded until incurred and the company expects
to incur an additional $1.3 million of such restructuring costs, primarily in
2004. The company believes that restructuring actions undertaken in 2003 will be
substantially completed in 2004. During 2003 and 2004, the company has added
headcount in such areas as key account initiatives, operational excellence, and
expansion of operations in China. While the company is adding resources in
several parts of its business, it is also responding to changing skill
requirements for employees and striving to continue productivity improvements.
In connection with these efforts, in the third quarter of 2004, the company is
undertaking headcount reductions in several businesses approximating 200
employees at a cost of approximately $5 million.
During the second quarter of 2004, 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 $ 275 $ 61 $ - $ - $ 336
Restructuring and Other Costs (Income), Net (779) 1,299 54 241 815
------ ------ ------ ------ ------
$ (504) $1,360 $ 54 $ 241 $1,151
====== ====== ====== ====== ======
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THERMO ELECTRON CORPORATION
11. Restructuring and Other Costs, Net (continued)
During the first six months of 2004, 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 $2,621 $ 123 $ - $ - $2,744
Restructuring and Other Costs, Net 642 2,521 102 708 3,973
------ ------ ------ ------ ------
$3,263 $2,644 $ 102 $ 708 $6,717
====== ====== ====== ====== ======
The components of net restructuring and other costs by segment are as
follows:
Life and Laboratory Sciences
- ----------------------------
The Life and Laboratory Sciences segment recorded $0.5 million of net
restructuring and other income in the second quarter of 2004. The segment
recorded charges to cost of revenues of $0.3 million, primarily depreciation
expense that was accelerated for manufacturing equipment that will be abandoned
due to site consolidations, and $0.8 million of other income, net. This other
income, net, consisted of a gain of $2.6 million on the sale of a product line,
offset in part by $1.8 million of cash costs, principally associated with
facility consolidations, including $1.1 million of severance for 61 employees
across all functions; $0.6 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.
In the first quarter of 2004, this segment recorded $3.8 million of net
restructuring and other charges. The segment recorded charges to cost of
revenues of $2.4 million, primarily for the sale of inventories revalued at the
date of acquisition of Jouan, and $1.4 million of other costs. These other costs
consisted of $1.0 million of cash costs, principally associated with facility
consolidations, including $0.6 million of severance for 20 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 $0.2 million of other cash costs, primarily relocation
expenses. In addition, the segment recorded a loss of $0.4 million from the sale
of two abandoned buildings.
Measurement and Control
- -----------------------
The Measurement and Control segment recorded $1.4 million of net
restructuring and other charges in the second quarter of 2004. The segment
recorded charges to cost of revenues of $0.1 million for the sale of inventories
revalued at the date of acquisition, and $1.3 million of other costs. These
other costs consisted of $1.3 million of cash costs, principally associated with
facility consolidations, including $0.6 million of net abandoned-facility costs,
primarily for charges associated with facilities vacated in prior periods that
could not be recorded until incurred; and $0.7 million of severance for 17
employees, primarily in sales and service functions.
In the first quarter of 2004, this segment recorded $1.3 million of net
restructuring and other charges. The segment recorded charges to cost of
revenues of $0.1 million for the sale of inventories revalued at the date of
acquisition, and $1.2 million of other costs. These other costs consisted of
$1.1 million of cash costs, principally associated with facility consolidations,
including $0.5 million of net abandoned-facility costs, primarily for charges
associated with facilities vacated in prior periods that could not be recorded
until incurred; $0.4 million of severance for 7 employees primarily in sales and
service functions; and $0.2 million of other cash costs, primarily relocation
expenses. In addition, the segment recorded charges of $0.1 million, primarily
for the writedown of equipment at an abandoned facility.
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THERMO ELECTRON CORPORATION
11. Restructuring and Other Costs, Net (continued)
Corporate
- ---------
The company recorded $0.2 million of restructuring and other charges at
its corporate offices in the second quarter of 2004, all of which were cash
costs. The costs were primarily for third-party advisory fees. While the company
no longer has any public subsidiaries, it has numerous non-U.S. subsidiaries
through which the formerly public subsidiaries conducted business. The
third-party advisory fees are being incurred to simplify this legal structure.
In the first quarter of 2004, the company recorded $0.5 million of
restructuring and other charges at its corporate offices, all of which were cash
costs. The costs were primarily for third-party advisory fees.
General
- -------
The following table summarizes the company's severance actions in 2004.
Number of
2003 Restructuring Plans Employees
- -------------------------------------------------------------------------------------------------------------------------------
Remaining Terminations at December 31, 2003 162
Terminations Announced in 2004 105
Terminations Occurring to Date in 2004 (156)
----
Remaining Terminations at July 3, 2004 111
====
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 2004 statement of income
have been summarized in the notes to the table.
Abandonment
Employee of Excess
(In thousands) Severance Retention (a) Facilities Other Total
- --------------------------------------------------------------------------------------------------------------------------------
Pre-2001 Restructuring Plans
Balance at December 31, 2003 $ - $ 59 $ - $ - $ 59
Payments - (59) - - (59)
------- ------- ------- ------- -------
Balance at July 3, 2004 $ - $ - $ - $ - $ -
======= ======= ======= ======= =======
2001 Restructuring Plans
Balance at December 31, 2003 $ 1,127 $ 16 $ 4,778 $ 138 $ 6,059
Costs incurred in 2004 - - 207 1 208
Reserves reversed (23) (15) - (132) (170)
Payments (551) (1) (1,062) (7) (1,621)
Currency translation (17) - 9 - (8)
------- ------- ------- ------- -------
Balance at July 3, 2004 $ 536 $ - $ 3,932 $ - $ 4,468
======= ======= ======= ======= =======
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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
- --------------------------------------------------------------------------------------------------------------------------------
2002 Restructuring Plans
Balance at December 31, 2003 $ 1,943 $ 54 $ 3,082 $ 7 $ 5,086
Costs incurred in 2004 9 - 280 30 319
Reserves reversed (79) (54) (97) - (230)
Payments (470) - (820) (20) (1,310)
Currency translation (20) - - - (20)
------- ------- ------- ------- -------
Balance at July 3, 2004 $ 1,383 $ - $ 2,445 $ 17 $ 3,845
======= ======= ======= ======= =======
2003 Restructuring Plans
Balance at December 31, 2003 $ 6,153 $ 68 $ 4,914 $ 114 $11,249
Costs incurred in 2004 (b) 3,116 87 1,635 1,234 6,072
Reserves reversed (114) - - - (114)
Payments (6,509) (27) (2,476) (1,217) (10,229)
Currency translation (20) - 47 (2) 25
------- ------- ------- ------- -------
Balance at July 3, 2004 $ 2,626 $ 128 $ 4,120 $ 129 $ 7,003
======= ======= ======= ======= =======
(a) Employee-retention costs are accrued ratably over the period through which
employees must work to qualify for a payment.
(b) Excludes noncash charges, net, of $0.4 million and $0.1 million in the Life
and Laboratory Sciences and Measurement and Control segments, respectively,
and other income, net, of $2.6 million in the Life and Laboratory Sciences
segment.
The company expects to pay accrued restructuring costs as follows:
severance, primarily through 2005; employee-retention obligations and other
costs, primarily through 2004; and abandoned-facility payments, over lease terms
expiring through 2016.
12. Discontinued Operations
In June 2004, the company announced it had entered into a definitive
agreement for the sale of its Optical Technologies segment, Spectra-Physics, to
Newport Corporation for $300 million, subject to a post-closing balance sheet
adjustment. On July 16, 2004, the sale was completed. The company sold this
cyclical operating unit to focus on its core businesses that provide analytical
instrumentation to laboratory and industrial customers. The selling price of
$300 million exceeded Spectra-Physics' book value and is comprised of $200
million in cash, a 5% note in the principal amount of $50 million, due in 2009,
and $50 million in Newport common stock, with the number of issued shares
determined based on the 20-trading day average price prior to closing. The fair
value of the note and Newport common stock at the date of closing aggregated
approximately $90 million. Under the terms of the agreement, the company has
agreed to certain restrictions on the sale of the Newport shares it received in
this transaction. The restrictions will lapse gradually in six month intervals
after the closing, with no sales permitted prior to six months after closing,
sale of 25% permitted after six months, sale of an additional 25% after one
year, and no restrictions on sales after 18 months. As a result of Newport
assuming non-U.S. debt of Spectra-Physics which had earlier been expected to be
retained by the company, approximately $14 million will be paid by the company
to Newport as part of the post-closing balance sheet adjustment. The company
retained a small manufacturing unit in Syracuse, New York, as a term of the sale
(Note 3).
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THERMO ELECTRON CORPORATION
12. Discontinued Operations (continued)
The company's discontinued operations (Spectra-Physics) had revenue of
$55.4 million, $49.1 million, $112.4 million, and $94.7 million in the second
quarter of 2004 and 2003 and the first six months of 2004 and 2003,
respectively. Operating income of the discontinued operations totaled $3.3
million and $8.3 million in the second quarter and first six months of 2004,
respectively. The company's discontinued operations incurred operating losses of
$1.5 million and $5.1 million in the second quarter and first six months of
2003, respectively. As a result of the decision to sell Spectra-Physics, a
previously unrecognized tax asset arising from the difference between the book
and tax basis of Spectra-Physics became realizable and the company recorded a
tax benefit in discontinued operations totaling $38.5 million in the second
quarter of 2004.
13. Litigation
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, including the company's continuing and discontinued
operations, infringe one or more patents related to methods of machine vision or
computer-image analysis. The Lemelson action seeks damages, including enhanced
damages for alleged willful infringement, attorney's fees, and injunctive
relief.
The company intends to vigorously defend this matter. In the opinion of
management, an unfavorable outcome could have a material adverse effect on the
company's financial position as well as its results of operations and cash flows
for a particular quarter or annual period.
The company's continuing and discontinued operations are defendants 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.
Discontinued Operations
During 2002, the company's discontinued operations settled a
patent-infringement matter that Fischer Imaging Corporation had brought against
the company's former Trex Medical subsidiary. The company sold Trex Medical in
2000, but retained this obligation as a term of the sale. Under the settlement
agreement, as amended, the company paid Fischer $25 million in 2002 and $0.9
million in 2003, with a final payment of $5.2 million in 2004. The settlement
payments were charged against a reserve established for this matter.
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.
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THERMO ELECTRON CORPORATION
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. Following the decision to sell
Spectra-Physics (Note 12), the company's continuing operations fall into two
principal business segments: Life and Laboratory Sciences and Measurement and
Control. Results for 2003 and the first quarter of 2004 have been restated to
reflect Spectra-Physics as a discontinued operation.
Revenues
Three Months Ended Six Months Ended
--------------------------------------------- --------------------------------------------
(Dollars in thousands) July 3, 2004 June 28, 2003 July 3, 2004 June 28, 2003
- ----------------------------------------------------------------------------------------------------------------------------------
Life and Laboratory Sciences $ 369,823 70.4% $ 314,330 67.3% $ 735,289 70.0% $ 614,111 66.6%
Measurement and Control 155,486 29.6% 151,285 32.4% 315,052 30.0% 303,781 33.0%
Other - 1,653 0.3% - 4,004 0.4%
---------- ----- ---------- ----- ---------- ----- ---------- -----
$ 525,309 100% $ 467,268 100% $1,050,341 100% $ 921,896 100%
========== ===== ========== ===== ========== ===== ========== =====
The company's revenues grew by 12% during the second quarter of 2004. The
strengthening of non-U.S. currencies relative to the dollar caused an increase
in reported revenues. In addition to the change in revenues caused by currency
translation and acquisitions, net of divestitures, which are discussed below,
sales increased 3% in 2004, primarily due to increased demand. The higher demand
resulted primarily from a recovery in the U.S. and Asian economies that has
positively affected capital spending across many markets addressed by the
company.
The company's strategy is to augment internal growth at existing
businesses with complementary acquisitions such as those completed in 2004 and
2003. These acquisitions included 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; Jouan SA,
a manufacturer of products used to prepare and preserve laboratory samples,
which was acquired on December 31, 2003; Laboratory Management Systems, Inc.
(LMSi), a supplier of regulatory instrument and consulting services to the
pharmaceutical and related industries, which was acquired in October 2003; and
the personal radiation-detection instruments product line from Siemens plc,
which was acquired in October 2003.
In the second quarter of 2004, the company's operating income and
operating income margin improved to $59.0 million and 11.2%, respectively, from
$49.7 million and 10.6%, respectively, in the second quarter of 2003. (Operating
income margin is operating income divided by revenues.) The improvement resulted
primarily from lower restructuring costs, net, in 2004 and a lower cost base
following restructuring actions in 2003, offset in part by $3.3 million of
higher amortization expense associated with acquisition-related intangible
assets. Restructuring and other costs, net, (including charges to cost of
revenues associated with facility consolidations) reduced pre-tax income by $1.2
million and $4.7 million in the second quarter of 2004 and 2003, respectively.
Income from continuing operations decreased to $50.6 million in the
second quarter of 2004, from $54.6 million in the second quarter of 2003,
primarily due a $9.0 million tax benefit in 2003 related to tax credit
carryforwards, offset by the higher operating income discussed above.
During the first six months of 2004, the company's cash flow from
operations totaled $105.0 million, compared with $66.1 million in the first six
months of 2003. The increase resulted primarily from a lower investment in
working capital items in 2004.
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THERMO ELECTRON CORPORATION
Overview of Results of Operations and Liquidity (continued)
As of July 3, 2004, the company's outstanding debt totaled $259.6
million, of which 81% is due in 2007 and thereafter. The company expects that
its existing cash and investments of $371.8 million as of July 3, 2004, the cash
proceeds from the sale of Spectra-Physics on July 16, 2004, and the company's
future cash flow from operations together with available unsecured borrowings of
up to $250 million under its revolving credit agreements are sufficient to meet
the capital requirements of its existing businesses for the foreseeable future,
including at least the next 24 months.
Critical Accounting Policies
The company's discussion and analysis of its financial condition and
results of operations is based upon its financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
liabilities. On an on-going basis, the company evaluates its estimates,
including those related to bad debts, inventories, intangible assets, warranty
obligations, income taxes, pension costs, contingencies and litigation,
restructuring, and sale of businesses. The company bases its estimates on
historical experience, current market and economic conditions, and other
assumptions that management believes are reasonable. The results of these
estimates form the basis for judgments about the carrying value of assets and
liabilities where the values are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
The company believes the following represent its critical accounting
policies and estimates used in the preparation of its financial statements:
(a) The company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to
pay amounts due. Such allowances of the company's continuing
operations totaled $22.3 million at July 3, 2004. The company
estimates the amount of customer receivables that are uncollectible
based on the age of the receivable, the creditworthiness of the
customer, and any other information that is relevant to the
judgment. If the financial condition of the company's customers
were to deteriorate, reducing their ability to make payments,
additional allowances would be required.
(b) The company writes down its inventories for estimated obsolescence
for differences between the cost and estimated net realizable value
based on usage in the preceding 12 months, expected demand, and any
other information that is relevant to the judgment. If ultimate
usage or demand vary significantly from expected usage or demand,
additional writedowns may be required.
(c) The company periodically evaluates goodwill for impairment using
market comparables for similar businesses or forecasts of
discounted future cash flows. Goodwill of the company's continuing
operations totaled $1.484 billion at July 3, 2004. Estimates of
future cash flows require assumptions related to revenue and
operating income growth, asset-related expenditures, working
capital levels, and other factors. Different assumptions from those
made in the company's analysis could materially affect projected
cash flows and the company's evaluation of goodwill for impairment.
Should the fair value of the company's goodwill decline because of
reduced operating performance, market declines, or other indicators
of impairment, charges for impairment of goodwill may be necessary.
(d) The company reviews other long-lived assets for impairment when
indication of potential impairment exists, such as a significant
reduction in cash flows associated with the assets. Other
long-lived assets totaled $598.2 million at July 3, 2004, including
$246.2 million of fixed assets and $182.0 million of long-term
assets of discontinued operations. In testing a long-lived asset
for impairment, assumptions are made concerning projected cash
flows associated with the asset. Estimates of future cash flows
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THERMO ELECTRON CORPORATION
Critical Accounting Policies (continued)
require assumptions related to revenue and operating income growth
and asset-related expenditures associated with the asset being
reviewed for impairment. Should future cash flows decline
significantly from estimated amounts, charges for impairment of other
long-lived assets may be necessary.
(e) In instances where the company sells equipment with a related
installation obligation, the company generally recognizes revenue
related to the equipment when title passes. The company recognizes
revenue related to the installation when it performs the
installation. The allocation of revenue between the equipment and
the installation is based on relative fair value at the time of
sale. Should the fair value of either the equipment or the
installation change, the company's revenue recognition would be
affected.
(f) In instances where the company sells equipment with
customer-specified acceptance criteria, the company must assess
whether it can demonstrate adherence to the acceptance criteria
prior to the customer's acceptance testing to determine the timing
of revenue recognition. If the nature of customer-specified
acceptance criteria were to change or grow in complexity such that
the company could not demonstrate adherence, the company would be
required to defer additional revenues upon shipment of its products
until completion of customer acceptance testing.
(g) At the time the company recognizes revenue, it provides for the
estimated cost of product warranties based primarily on historical
experience and knowledge of any specific warranty problems that
indicate projected warranty costs may vary from historical
patterns. The liability for warranty obligations of the company's
continuing operations totaled $24.8 million at July 3, 2004. Should
product failure rates or the actual cost of correcting product
failures vary from estimates, revisions to the estimated warranty
liability would be necessary.
(h) The company estimates the degree to which tax assets and loss
carryforwards will result in a benefit based on expected
profitability by tax jurisdiction, and provides a valuation
allowance for tax assets and loss carryforwards that it believes
will more likely than not go unused. If it becomes more likely than
not that a tax asset or loss carryforward will be used, the company
reverses the related valuation allowance. The company's tax
valuation allowance totaled approximately $75 million at July 3,
2004. Should the company's actual future taxable income by tax
jurisdiction vary from estimates, additional allowances or
reversals thereof may be necessary.
(i) The company provides a liability for future income tax payments in
the worldwide tax jurisdictions in which it operates. Accrued
income taxes totaled $120.8 million at July 3, 2004. Should tax
return positions that the company expects are sustainable not be
sustained upon audit, the company could be required to record an
incremental tax provision for such taxes. Should disputed positions
that are reserved ultimately be sustained, the company would
recognize a reduction in its tax provision.
(j) The company estimates losses on contingencies and litigation and
provides a reserve for these losses. Should the ultimate losses on
contingencies and litigation vary from estimates, adjustments to
those reserves may be required.
(k) One of the company's U.S. subsidiaries and several non-U.S.
subsidiaries sponsor defined benefit pension plans. Major
assumptions used in the accounting for these employee benefit plans
include the discount rate, expected return on plan assets, and rate
of increase in employee compensation levels. Assumptions are
determined based on company data and appropriate market indicators
in consultation with the company's actuaries, and are evaluated
each year as of the plans' measurement date. Net periodic pension
costs for defined benefit plans of the company's continuing
operations totaled $3.7 million in the first six months of 2004.
Should any of these assumptions change, they would have an effect
on net periodic pension costs.
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THERMO ELECTRON CORPORATION
Critical Accounting Policies (continued)
(l) The company records restructuring charges for the cost of vacating
facilities based on future lease obligations and expected
sub-rental income. The company's accrued restructuring costs for
abandoned facilities in continuing operations totaled $10.5 million
at July 3, 2004. Should actual cash flows associated with
sub-rental income from vacated facilities vary from estimated
amounts, adjustments may be required.
(m) The company estimates the expected proceeds from any businesses
held for sale and, when necessary, records losses to reduce the
carrying value of these businesses to estimated realizable value.
Should the actual or estimated proceeds, which would include
post-closing purchase price adjustments, vary from current
estimates, results could differ from expected amounts.
Results of Operations
Second Quarter 2004 Compared With Second Quarter 2003
- -----------------------------------------------------
Continuing Operations
Sales in the second quarter of 2004 were $525.3 million, an increase of
$58.0 million from the second quarter of 2003. The favorable effects of currency
translation resulted in an increase in revenues of $15.0 million in 2004. Sales
increased $30.7 million due to acquisitions, net of divestitures. In addition to
the changes in revenue resulting from currency translation, acquisitions, and
divestitures, revenues increased $12.3 million, or 3%, primarily due to
increased demand, as described by segment below.
Operating Income Margin
Three Months Ended
----------------------
July 3, June 28,
2004 2003
- ----------------------------------------------------------------------------------------------------------------------------------
Life and Laboratory Sciences 14.4% 14.0%
Measurement and Control 8.0% 8.8%
Consolidated 11.2% 10.6%
Operating income was $59.0 million in the second quarter of 2004,
compared with $49.7 million in the second quarter of 2003. Operating income
margin increased to 11.2% in 2004 from 10.6% in 2003. Operating income increased
primarily due to lower restructuring costs, net, and a lower cost base following
restructuring actions in 2003, offset in part by $3.3 million of higher
amortization expense of acquisition-related intangible assets. Operating income
in 2004 and 2003 was reduced by additional charges associated with restructuring
actions initiated in 2003 and 2002 and certain other costs, net. The
restructuring and other items totaled $1.2 million and $4.7 million in 2004 and
2003, respectively, and are discussed by segment below.
Restructuring actions were initiated in 2003 in a number of business
units to reduce costs and redundancies in response to a downturn in markets
served by the company and in connection with the company's overall
reorganization, principally through headcount reductions and consolidation of
facilities. The company expects to incur an additional $1.3 million of
restructuring costs, primarily in 2004, for charges associated with these
actions that cannot be recorded until incurred. The company believes that
restructuring actions undertaken in 2003 will be substantially completed in
2004. During 2003 and 2004, the company has added headcount in such areas as key
account initiatives, operational excellence, and expansion of operations in
China. While the company is adding resources in several parts of its business,
it is also responding to changing skill requirements for employees and striving
to continue productivity improvements. In connection with these efforts, in the
third quarter of 2004, the company is undertaking headcount reductions in
several businesses approximating 200 employees at a cost of approximately $5
million.
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THERMO ELECTRON CORPORATION
Second Quarter 2004 Compared With Second Quarter 2003 (continued)
- -----------------------------------------------------
Life and Laboratory Sciences
Three Months Ended
----------------------------------
July 3, June 28,
(Dollars in thousands) 2004 2003 Change
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $369,823 $314,330 17.7%
Operating Income Margin 14.4% 14.0% 0.4%
Sales in the Life and Laboratory Sciences segment increased $55.5
million, or 18%, to $369.8 million in the second quarter of 2004. The favorable
effects of currency translation resulted in an increase in revenues of $10.7
million in 2004. Sales increased $37.4 million due to the acquisitions of USCS
in April 2004, Jouan in December 2003, and LMSi in October 2003, net of a
product line divestiture. In addition to the changes in revenues resulting from
currency translation, acquisitions, and divestitures, revenues increased $7.4
million, or 2%, due to higher demand. The increase in demand resulted in higher
sales of mass spectrometry instruments and, to a lesser extent, new products in
anatomical pathology and laboratory automation. These increases were offset in
part by lower sales in Europe where the company has not seen the economic
recovery experienced in the U.S. and Asia.
Operating income margin increased to 14.4% in the second quarter of 2004
from 14.0% in the second quarter of 2003. Operating income margin was affected
by restructuring and other income, net, of $0.5 million in 2004 and
restructuring and other costs, net, of $3.9 million in 2003, as discussed below.
The increase in operating income margin resulting from lower restructuring and
other costs, net, was offset in part by the inclusion of the results of Jouan,
USCS, and LMSi, which have historically operated at lower profitability margins
compared with the segment's existing businesses. The segment is currently
integrating the largest of these, Jouan, with its existing operations and
expects to improve its margin, taking advantage of operating synergies in areas
such as sales and service and research activities to reduce costs. The segment's
amortization of acquisition-related intangible assets increased by $3.3 million
over the 2003 quarter, primarily as a result of the three acquisitions.
In the second quarter of 2004, the segment recorded restructuring and
other income, net, of $0.5 million, including a gain of $2.6 million on the sale
of a product line. This gain was offset in part by $1.8 million of cash costs,
primarily for severance, abandoned facilities, and relocation expenses at
businesses that have been consolidated and charges to costs of revenues of $0.3
million, primarily for accelerated depreciation on manufacturing equipment that
is being abandoned as a result of site consolidations (Note 11). In 2003, the
segment recorded restructuring and other costs, net, of $3.9 million,
substantially all of which were cash costs, primarily for abandoned facilities,
employee retention, and severance at businesses being consolidated.
Measurement and Control
Three Months Ended
----------------------------------
July 3, June 28,
(Dollars in thousands) 2004 2003 Change
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $155,486 $151,285 2.8%
Operating Income Margin 8.0% 8.8% (0.8%)
Sales in the Measurement and Control segment increased $4.2 million, or
3%, to $155.5 million in the second quarter of 2004. The favorable effects of
currency translation resulted in an increase in revenues of $4.3 million in
2004. Sales decreased $5.0 million due to divestitures, net of acquisitions. In
addition to the changes in revenue resulting from currency translation,
acquisitions, and divestitures, revenues increased $4.9 million, or 3%. The
increase was primarily the result of a rebound in demand for precision
temperature-control products, particularly from the semiconductor industry.
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THERMO ELECTRON CORPORATION
Second Quarter 2004 Compared With Second Quarter 2003 (continued)
- -----------------------------------------------------
Operating income margin decreased to 8.0% in the second quarter of 2004
from 8.8% in the second quarter of 2003. Operating income margin was affected by
restructuring and other costs, net, of $1.4 million in 2004 and restructuring
and other income, net, of $0.2 million in 2003, as discussed below. The decrease
in operating income margin resulted primarily from the change in restructuring
and other costs, net.
In the second quarter of 2004, the segment recorded restructuring and
other costs, net, of $1.4 million, including cash costs of $1.3 million,
principally for abandoned facilities, severance, and relocation expenses at
businesses that have been consolidated. In addition, the segment recorded
charges to costs of revenues of $0.1 million for the sale of inventories
revalued at the date of acquisition (Note 11). In 2003, the segment recorded
restructuring and other income, net, of $0.2 million, including a gain of $2.1
million on the sale of a building, offset by $1.9 million of restructuring and
other charges. Restructuring and other charges included $1.6 million of cash
costs, primarily for severance, employee retention, abandoned facilities, and
relocation expenses at businesses being consolidated. In addition, the segment
recorded a charge of $0.3 million for the writedown of assets at facilities
being consolidated.
Other Income, Net
- -----------------
The company reported other income, net, of $10.7 million and $12.4
million in the second quarter of 2004 and 2003, respectively (Note 4). Other
income, net, includes interest income, interest expense, gain on investments,
net, and other items, net. Interest income decreased to $1.7 million in 2004
from $7.1 million in 2003, primarily due to lower invested cash balances
following the acquisitions made in 2004 and late 2003, as well as the repurchase
and redemption of company securities in the second half of 2003. Interest
expense decreased to $2.7 million in 2004 from $5.4 million in 2003 as a result
of the redemption and repurchase of debentures.
During both the second quarter of 2004 and 2003, the company had gains on
investments, net, of $10.8 million. The gains included $8.0 million in 2004 from
the sale of shares of Thoratec Corporation and $10.0 million in 2003 from the
sale of shares of FLIR Systems, Inc. Of the total gain from the sale of FLIR
shares, $2.7 million represents a recovery of amounts written down in prior
years when the company deemed an impairment of its investment in FLIR to be
other than temporary.
Provision for Income Taxes
- --------------------------
The company's effective tax rate was 27.4% and 12.1% in the second
quarter of 2004 and 2003, respectively. The effective tax rate in 2004 reflects
a benefit of $0.9 million that arose upon completion of a reorganization of
several European subsidiaries and was recorded as a discrete event in 2004. This
tax benefit reduced the effective rate in 2004 by 1.3 percentage points. The
effective tax rate in 2003 reflects a $9.0 million tax benefit from the reversal
of a valuation allowance due to expected utilization of foreign tax credit
carryforwards that was recorded as a discrete event in the second quarter of
2003. The reversal of the valuation allowance reduced the effective tax rate by
14.5 percentage points in 2003. In addition, the company reduced its effective
tax rate by 1.8 percentage points in 2003 through repatriation of cash from
non-U.S. subsidiaries, which resulted in foreign tax credits.
In the normal course of business, the company and its subsidiaries are
examined by various tax authorities, including the Internal Revenue Service
(IRS). The IRS has concluded its field examination for the tax years 1997
through 2000 as part of its routine examinations of the company's income tax
returns. At the conclusion of the field examination, several issues were
unresolved and are currently being reviewed at the Appeals Office of the IRS.
The company expects to resolve the disputed issues and complete the examination
in late 2004 or the first half of 2005. Although the outcome of these matters
cannot presently be determined, management believes that it may reach favorable
settlement of the examination upon completion of the appellate review by the
IRS. Unfavorable settlement of any particular issue would require use of cash.
Favorable resolution would result in a reduction to the company's effective tax
rate in the quarter of resolution. Any additional impact on the company's
liability for income taxes cannot presently be determined; however, the company
believes its accrued income tax liabilities are adequate.
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THERMO ELECTRON CORPORATION
Second Quarter 2004 Compared With Second Quarter 2003 (continued)
- -----------------------------------------------------
Contingent Liabilities
- ----------------------
At July 3, 2004, the company was contingently liable with respect to
certain lawsuits. An unfavorable outcome in the matter described in Note 13
could materially affect the company's financial position as well as its results
of operations and cash flows for a particular quarterly or annual period.
Discontinued Operations
In June 2004, the company announced it had entered into a definitive
agreement for the sale of its Optical Technologies segment, Spectra-Physics, to
Newport Corporation. On July 16, 2004, the company completed the sale. The
company has classified the results of Spectra-Physics as discontinued operations
for all periods presented in the accompanying financial statements (Note 12).
The company's discontinued operations (Spectra-Physics) had revenues of
$55.4 million and $49.1 million in the second quarter of 2004 and 2003,
respectively. Operating income of the discontinued operations was $3.3 million
in the second quarter of 2004. The company's discontinued operations incurred
operating losses of $1.5 million in the second quarter of 2003. The improvement
in operating results resulted from a rebound in the demand for lasers and
photonics from microelectronics customers and other industrial markets served by
Spectra-Physics. As a result of the decision to sell Spectra-Physics, a
previously unrecognized tax asset arising from the difference between the book
and tax basis of Spectra-Physics became realizable and the company recorded a
tax benefit in discontinued operations totaling $38.5 million, or $.23 per
diluted share, in the second quarter of 2004. The company expects to record an
additional gain of approximately $.20 per diluted share in the third quarter of
2004, reflecting the gain on the sale of Spectra-Physics.
First Six Months 2004 Compared With First Six Months 2003
- ---------------------------------------------------------
Continuing Operations
Sales in the first six months of 2004 were $1.050 billion, an increase of
$128.4 million from the first six months of 2003. The favorable effects of
currency translation resulted in an increase in revenues of $46.9 million in
2004. Sales increased $52.8 million due to acquisitions, net of divestitures. In
addition to the changes in revenue resulting from currency translation,
acquisitions, and divestitures, revenues increased $28.7 million, or 3%,
primarily due to increased demand, as described by segment below.
Operating Income Margin
Six Months Ended
----------------------
July 3, June 28,
2004 2003
- ----------------------------------------------------------------------------------------------------------------------------------
Life and Laboratory Sciences 13.6% 13.6%
Measurement and Control 8.4% 8.0%
Consolidated 10.6% 10.0%
Operating income was $111.8 million in the first six months of 2004,
compared with $92.6 million in the first six months of 2003. Operating income
margin increased to 10.6% in 2004 from 10.0% in 2003. Operating income increased
primarily due to higher revenues in each segment and, to a lesser extent, lower
restructuring and other costs, net, in 2004. Operating income in 2004 and 2003
was reduced by additional charges associated with restructuring actions
initiated in 2003 and 2002 and certain other costs, net. The restructuring and
other items totaled $6.7 million and $11.6 million in 2004 and 2003,
respectively, and are discussed by segment below.
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THERMO ELECTRON CORPORATION
First Six Months 2004 Compared With First Six Months 2003 (continued)
- ---------------------------------------------------------
Life and Laboratory Sciences
Six Months Ended
----------------------------------
July 3, June 28,
(Dollars in thousands) 2004 2003 Change
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $735,289 $614,111 19.7%
Operating Income Margin 13.6% 13.6% -
Sales in the Life and Laboratory Sciences segment increased $121.2
million, or 20%, to $735.3 million in the first six months of 2004. The
favorable effects of currency translation resulted in an increase in revenues of
$33.6 million in 2004. Sales increased $65.2 million due to the acquisitions of
USCS in April 2004, Jouan in December 2003, and LMSi in October 2003, net of
product line divestitures. In addition to the changes in revenues resulting from
currency translation, acquisitions, and divestitures, revenues increased $22.4
million, or 4%, due to higher demand. The increase in demand resulted in higher
sales of mass spectrometry and spectroscopy instruments and, to a lesser extent,
new anatomical pathology products. The combination of new products and a rebound
in sales to industrial markets along with continued strength in pharmaceutical
demand have driven the instrument sales growth, offset in part by lower revenues
in Europe where the recovery of demand has lagged the U.S. and Asia.
Operating income margin was flat at 13.6% in the first six months of 2004
and 2003. Operating income margin was affected by restructuring and other costs,
net, of $3.3 million and $6.5 million in 2004 and 2003, respectively, as
discussed below. The favorable impact of lower restructuring and other costs,
net, and higher revenues was offset by a $4.9 million increase in amortization
expense of acquisition-related intangible assets and the inclusion of Jouan,
USCS, and LMSi, which have historically operated at lower profitability margins
compared with the segment's existing businesses.
In the first six months of 2004, the segment recorded restructuring and
other costs, net, of $3.3 million, including charges to costs of revenues of
$2.6 million, primarily for the sale of inventories revalued at the date of
acquisition of Jouan, and $2.9 million of cash costs, primarily for severance,
abandoned facilities, and relocation expenses at businesses that have been
consolidated. In addition, the segment recorded a gain of $2.6 million on the
sale of a product line and a loss of $0.4 million from the sale of two abandoned
buildings (Note 11). In 2003, the segment recorded restructuring and other
costs, net, of $6.5 million, including $6.6 million of cash costs, primarily for
severance, employee retention, abandoned facilities, and relocation expenses at
businesses being consolidated. In addition, the segment recorded a charge of
$0.4 million to writedown the carrying value of a building held for sale to net
realizable value, offset by $0.5 million of net gains, primarily for the sale of
a product line.
Measurement and Control
Six Months Ended
----------------------------------
July 3, June 28,
(Dollars in thousands) 2004 2003 Change
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $315,052 $303,781 3.7%
Operating Income Margin 8.4% 8.0% 0.4%
Sales in the Measurement and Control segment increased $11.3 million, or
4%, to $315.1 million in the first six months of 2004. The favorable effects of
currency translation resulted in an increase in revenues of $13.3 million in
2004. Sales decreased $8.3 million due to divestitures, net of acquisitions. In
addition to the changes in revenue resulting from currency translation,
acquisitions, and divestitures, revenues increased $6.3 million, or 2%. The
increase was primarily the result of a rebound in demand for precision
temperature-control products, particularly from the semiconductor industry.
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THERMO ELECTRON CORPORATION
First Six Months 2004 Compared With First Six Months 2003 (continued)
- ---------------------------------------------------------
Operating income margin increased to 8.4% in the first six months of 2004
from 8.0% in the first six months of 2003. Operating income margin was affected
by restructuring and other costs, net, of $2.6 million and $3.5 million in 2004
and 2003, respectively, as discussed below. The increase in operating income
margin resulted approximately half from the $0.9 million reduction in
restructuring and other costs, net, with the balance from higher sales volumes
and cost reduction measures following restructuring actions in 2003.
In the first six months of 2004, the segment recorded restructuring and
other costs, net, of $2.6 million, including cash costs of $2.4 million,
principally for abandoned facilities, severance, and relocation expenses at
businesses that have been consolidated. In addition, the segment recorded
charges of $0.1 million, primarily for the writedown of equipment at an
abandoned facility, and charges to costs of revenues of $0.1 million for the
sale of inventories revalued at the date of acquisition (Note 11). In 2003, the
segment recorded restructuring and other costs, net, of $3.5 million, including
$3.6 million of cash costs, principally for severance, employee retention,
abandoned facilities, and relocation expenses at businesses being consolidated.
In addition, the segment recorded charges of $2.0 million, primarily for the
writedown of goodwill in a business held for sale to reduce the value to
estimated disposal value, and for the writedown of assets at facilities being
consolidated, offset by a gain of $2.1 million on the sale of a building.
Other Income, Net
- -----------------
The company reported other income, net, of $13.3 million and $18.6
million in the first six months of 2004 and 2003, respectively (Note 4).
Interest income decreased to $3.6 million in 2004 from $14.7 million in 2003,
primarily due to lower invested cash balances following the acquisitions in late
2003 and 2004 and the repurchase and redemption of company securities. Interest
expense decreased to $5.4 million in 2004 from $12.1 million in 2003 as a result
of the repurchase and redemption of debentures.
During the first six months of 2004 and 2003, the company had gains on
investments, net, of $13.5 million and $16.0 million, respectively. The gains
included $9.6 million in 2004 from the sale of shares of Thoratec and $13.7
million in 2003 from the sale of shares of FLIR. Of the total gain from the sale
of FLIR shares, $3.9 million represents a recovery of amounts written down in
prior years when the company deemed an impairment of its investment in FLIR to
be other than temporary.
Provision for Income Taxes
- --------------------------
The company's effective tax rate was 27.9% and 20.3% in the first six
months of 2004 and 2003, respectively. The effective tax rate in 2004 reflects a
$0.9 million benefit that arose upon completion of a reorganization of several
European subsidiaries and was recorded as a discrete event in 2004. This tax
benefit reduced the effective rate in 2004 by 0.7 percentage points. The
effective tax rate in 2003 reflects a $9.0 million tax benefit from the reversal
of a valuation allowance due to expected utilization of foreign tax credit
carryforwards that was recorded as a discrete event in the second quarter of
2003. The reversal of the valuation allowance reduced the effective rate in 2003
by 8.1 percentage points.
Discontinued Operations
The company's discontinued operations (Spectra-Physics) had revenues of
$112.4 million and $94.7 million in the first six months of 2004 and 2003,
respectively. Operating income of the discontinued operations was $8.3 million
in the first six months of 2004. The company's discontinued operations incurred
operating losses of $5.1 million in the first six months of 2003. The
improvement in operating results resulted from a rebound in the demand for
lasers and photonics from microelectronics customers and other industrial
markets served by Spectra-Physics. As a result of the decision to sell
Spectra-Physics, a previously unrecognized tax asset arising from the difference
between the book and tax basis of Spectra-Physics became realizable and the
company recorded a tax benefit in discontinued operations totaling $38.5
million, or $.23 per diluted share, in the second quarter of 2004.
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THERMO ELECTRON CORPORATION
First Six Months 2004 Compared With First Six Months 2003 (continued)
- ---------------------------------------------------------
During the first quarter of 2003, the company recorded an after-tax gain
on disposal of discontinued operations of $5.0 million, resulting primarily from
the sale of Peter Brotherhood Ltd., and a favorable post-closing adjustment
resulting from the 2002 sale of its Trophy Radiologie business.
Liquidity and Capital Resources
First Six Months 2004
- ---------------------
Consolidated working capital was $717.2 million at July 3, 2004, compared
with $710.5 million at December 31, 2003. Included in working capital were cash,
cash equivalents, and short-term available-for-sale investments of $371.8
million at July 3, 2004, compared with $418.2 million at December 31, 2003.
Cash provided by operating activities was $105.0 million during the first
six months of 2004, including $95.1 million by continuing operations and $9.9
million 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 $9.4 million, net of taxes,
in the first six months of 2004. Inventories increased $25.7 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 $9.9 million principally represents the positive cash flow of
Spectra-Physics, offset in part by the payment of liabilities for businesses
sold prior to 2003, including settlement of litigation and lease payments on
abandoned facilities.
In connection with restructuring actions undertaken by continuing
operations, the company had accrued $15.3 million for restructuring costs at
July 3, 2004. The company expects to pay approximately $4.5 million of this
amount for severance primarily through 2005, and $0.3 million for employee
retention and other costs primarily through 2004. The balance of $10.5 million
will be paid for lease obligations over the remaining terms of the leases, with
approximately two-thirds to be paid through 2005 and the remainder through 2016.
In addition, at July 3, 2004, the company had accrued $14.3 million for
acquisition expenses. Accrued acquisition expenses included $3.8 million of
severance and relocation obligations, which the company expects to pay primarily
through 2004. The balance primarily represents abandoned-facility payments that
will be paid over the remaining terms of the leases through 2014.
During the first six months of 2004, the primary investing activities of
the company's continuing operations, excluding available-for-sale investment
activities, included the acquisition of USCS for $75.7 million, net of cash
acquired (Note 2) and the purchase of property, plant, and equipment. The
company expended $18.7 million for purchases of property, plant, and equipment,
net of dispositions. On July 16, 2004, the company sold Spectra-Physics to
Newport Corporation for $300 million, including $200 million of cash proceeds.
As a result of Newport assuming non-U.S. debt of Spectra-Physics which had
earlier been expected to be retained by the company, approximately $14 million
will be paid by the company to Newport as part of the post-closing balance sheet
adjustment (Note 12).
The company's financing activities used $50.5 million of cash during the
first six months of 2004. During the first six months of 2004, the company
expended $8.1 million to reduce short-term notes payable. The company received
net proceeds of $40.9 million from the exercise of employee stock options.
During the first six months of 2004, the company expended $82.0 million to
repurchase 3.1 million shares of the company's common stock. As of July 3, 2004,
$40.5 million remained under an authorization by the company's Board of
Directors to repurchase company securities through February 25, 2005. On July
22, 2004, the Board of Directors authorized an additional $100 million to
repurchase company securities through July 22, 2005.
The company has no material commitments for purchases of property, plant,
and equipment and expects that for all of 2004, such expenditures will
approximate $55 - $65 million. The company's contractual obligations and other
commercial commitments did not change materially between December 31, 2003 and
July 3, 2004.
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THERMO ELECTRON CORPORATION
First Six Months 2004 (continued)
- ---------------------
The company believes that its existing resources, including cash and
investments, the cash proceeds from the sale of Spectra-Physics on July 16,
2004, future cash flow from operations, and available borrowings under credit
facilities are sufficient to meet the working capital requirements of its
existing businesses for the foreseeable future, including at least the next 24
months.
First Six Months 2003
- ---------------------
Cash provided by operating activities was $66.1 million during the first
six months of 2003, including $62.0 million by continuing operations and $4.1
million 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 $16.5 million, net of taxes,
in the first six months of 2003. Aside from cash used for restructuring actions,
a decrease in other current liabilities used cash of $24.0 million, including
$17.0 million of accrued payroll and employee benefits due to the timing of
payments, offset in part by an increase in deferred revenue. Cash provided by
discontinued operations of $4.1 million principally represents the positive cash
flow of Spectra-Physics, offset in part by the payment of liabilities for
businesses sold prior to 2003, including settlement of litigation and lease
payments on abandoned facilities.
During the first six months of 2003, the primary investing activities of
the company's continuing operations, excluding available-for-sale investment
activities, included the purchase of property, plant, and equipment and an
acquisition. The company's continuing operations expended $14.9 million for
purchases of property, plant, and equipment, net of dispositions, and $3.1
million for product line acquisitions. In April and June 2003, the company
received aggregate cash payments of $75.6 million, including $69.1 million of
principal payments, plus interest, from Trimble Navigation Limited as complete
and early payment of Trimble's note to the company.
The company's financing activities used $509.4 million of cash during the
first six months of 2003, including $504.7 million for continuing operations.
During the first six months of 2003, the company's continuing operations
expended $380.9 million to reduce short-term notes payable. The company's
continuing operations received net proceeds of $22.3 million from the exercise
of employee stock options. During the first six months of 2003, the company
expended $146.2 million to reduce its debt and repurchase its equity securities,
of which $43.9 million was used to repurchase 2.4 million shares of the
company's common stock.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The company's exposure to market risk from changes in interest rates,
currency exchange rates, and equity prices has not changed materially from its
exposure at year-end 2003.
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 defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of July 3, 2004. Based on this evaluation, the
company's chief executive officer and chief financial officer concluded that, as
of July 3, 2004, the company's disclosure controls and procedures were effective
in providing reasonable assurance that information required to be disclosed by
the 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.
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 July 3, 2004 that have materially affected or
are reasonably likely to materially affect the company's internal control over
financial reporting.
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THERMO ELECTRON CORPORATION
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, we caution readers that the following important
factors, among others, in some cases have affected, and in the future could
affect, our actual results and could cause our actual results in 2004 and beyond
to differ materially from those expressed in any forward-looking statements made
by us.
We must develop new products, adapt to rapid and significant
technological change, and respond to introductions of new products in order to
remain competitive. Our growth strategy includes significant investment in and
expenditures for product development. We sell our products in several industries
that are characterized by rapid and significant technological changes, frequent
new product and service introductions, and enhancements and evolving industry
standards. Without the timely introduction of new products, services, and
enhancements, our products and services will likely become technologically
obsolete over time, in which case our revenue and operating results would
suffer.
Our customers use many of our products to develop, test, and manufacture
their own products. As a result, we must anticipate industry trends and develop
products in advance of the commercialization of our customers' products. If we
fail to adequately predict our customers' needs and future activities, we may
invest heavily in research and development of products and services that do not
lead to significant revenue.
Many of our existing products and those under development are
technologically innovative and require significant planning, design,
development, and testing at the technological, product, and
manufacturing-process levels. These activities require us to make significant
investments.
Products in our markets undergo rapid and significant technological
change because of quickly changing industry standards and the introduction of
new products and technologies that make existing products and technologies
uncompetitive or obsolete. Our competitors may adapt more quickly to new
technologies and changes in customers' requirements than we can. The products
that we are currently developing, or those we will develop in the future, may
not be technologically feasible or accepted by the marketplace, and our products
or technologies could become uncompetitive or obsolete.
Our Measurement and Control segment sells products and services to a
number of companies that operate in cyclical industries; downturns in those
industries would adversely affect our results of operations. The growth and
profitability of some of our businesses in the Measurement and Control segment
depend in part on sales to industries that are subject to cyclical downturns.
For example, certain businesses in this segment depend in part on sales to the
steel, cement, and semiconductor industries. Slowdowns in these industries would
adversely affect sales by these businesses, which in turn would adversely affect
our revenues and results of operations.
Our business is impacted by general economic conditions and related
uncertainties affecting markets in which we operate. Adverse economic conditions
could adversely impact our business in 2004 and beyond, resulting in:
- reduced demand for some of our products;
- increased rate of order cancellations or delays;
- increased risk of excess and obsolete inventories;
- increased pressure on the prices for our products and services; and
- greater difficulty in collecting accounts receivable.
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
Changes in governmental regulations may reduce demand for our products or
increase our expenses. We compete in many markets in which we and our customers
must comply with federal, state, local, and international regulations, such as
environmental, health and safety, and food and drug regulations. We develop,
configure, and market our products to meet customer needs created by those
regulations. Any significant change in regulations could reduce demand for our
products. 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, manufacturers of semiconductors and products
incorporating semiconductors, and public and private research institutions. Many
factors, including public policy spending priorities, available resources, and
product and economic cycles, have a significant effect on the capital spending
policies of these entities. These policies in turn can have a significant effect
on the demand for our products.
Our 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, 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. 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.
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
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 customer's operators and the training of such operators.
Any such product liability claims brought against us could be significant and
any adverse determination may result in liabilities in excess of our insurance
coverage. Although we carry product liability insurance, we cannot be certain
that our current insurance will be sufficient to cover these claims or that it
can be maintained on acceptable terms, if at all.
We have retained contingent liabilities from businesses that we have
sold. From 1997 through 2003, we divested over 60 businesses with aggregate
annual revenues in excess of $2 billion. As part of these transactions, we
retained responsibility for some of the contingent liabilities related to these
businesses, such as lawsuits, product liability claims, and potential claims by
buyers that representations and warranties we made about the businesses were
inaccurate. The resolution of these contingencies has not had a material adverse
effect on our results of operations or financial condition; however, we can not
be certain that this favorable pattern will continue.
Our results could be impacted if we are unable to realize potential
future benefits from new productivity initiatives. In addition to the real
estate consolidations and cost-saving initiatives that we have pursued over the
past three years, we are instituting practical process improvement (PPI)
programs at our locations to further enhance our productivity, efficiency, and
customer satisfaction. While we anticipate continued benefits from these PPI
initiatives as well as our continuing sourcing activities, future benefits are
expected to be fewer and smaller in size and may be more difficult to achieve.
Our new 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 new 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 new 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 new
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;
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
- continuing key customer initiatives;
- expanding our services offerings;
- strengthening our presence in selected geographic markets; and
- continuing the development of commercial tools and infrastructure to
increase and support cross-selling opportunities of products and
services to take advantage of our breadth in product offerings.
We may not be able to successfully implement these strategies, and these
strategies may not result in the growth of our business.
As a multinational corporation, we are exposed to fluctuations in
currency exchange rates, which could adversely affect our cash flows and results
of operations. International revenues account for a substantial portion of our
revenues, and we intend to continue expanding our presence in international
markets. In 2003, our international revenues from continuing operations,
including export revenues from the United States, accounted for approximately
69% 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
the first six months of 2004, currency translation had a favorable effect on
revenues of our continuing operations of $46.9 million 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.
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 $1.5 billion as of July 3, 2004. 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 2 - Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity
Securities
- --------------------------------------------------------------------------------
A summary of the share repurchase activity for the company's second
quarter of 2004 follows:
Total Number Maximum
of Shares Dollar Amount
Purchased of Shares That
as Part of May Yet Be
Total Publicly Purchased
Number Announced Under the
of Shares Average Price Plans or Plans or
Period Purchased Paid per Share Programs (1) Programs (1)(2)
- ---------------------------------------------------------------------------------------------------------------------------------
April 4 - May 1 - $ - - $100,000,000
May 2 - May 29 - - - 100,000,000
May 30 - July 3 2,002,100 29.72 2,002,100 40,501,200
--------- ---------
Total Second Quarter 2,002,100 $29.72 2,002,100 $ 40,501,200
========= ====== ========= ============
(1) On February 26, 2004, the company announced a repurchase program
authorizing the purchase of up to $100 million of the company's equity and
debt securities in the open market or in negotiated transactions, which
expires on February 25, 2005. All shares of the company's common stock
repurchased by it during the second quarter of 2004 were purchased under
this program.
(2) As of July 22, 2004, the company had used substantially all of the
remaining $40.5 million under the program to repurchase shares of the
company's common stock. On July 22, 2004, the company announced a new
authorization for the purchase of up to $100 million of the company's
equity and debt securities in the open market or in negotiated
transactions, which expires on July 22, 2005.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At the company's Annual Meeting of Stockholders held on May 18, 2004, the
stockholders elected a class of three incumbent directors, Marijn E. Dekkers,
Robert A. McCabe, and Robert W. O'Leary, to a three-year term expiring at the
2007 Annual Meeting of Stockholders. In addition, the stockholders ratified the
selection by the Audit Committee of the company's Board of Directors of
PricewaterhouseCoopers LLP as the company's independent auditors for the fiscal
year ending December 31, 2004. The stockholders also voted against a stockholder
proposal regarding performance and time-based restricted stock, as described in
the company's definitive proxy statement for the company's 2004 Annual Meeting
of Stockholders. The results of the votes for each of these proposals were as
follows:
Proposal 1 - Election of three directors constituting the class of
directors to be elected for a three-year term expiring in
2007:
Nominee For Withheld
-------------------------------------------------------
Marijn E. Dekkers 145,203,126 3,417,464
Robert A. McCabe 145,214,782 3,405,808
Robert W. O'Leary 145,213,738 3,406,852
No abstentions or broker non-votes were recorded on the proposal.
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THERMO ELECTRON CORPORATION
Item 4 - Submission of Matters to a Vote of Security Holders (continued)
- ------------------------------------------------------------
Proposal 2 - Ratification of selection by the Audit Committee of the
company's Board of Directors of PricewaterhouseCoopers LLP
as the company's independent auditors for the fiscal year
ending December 31, 2004:
For Against Abstained
---------------------------------------------
145,443,136 2,303,252 874,202
No broker non-votes were recorded on the proposal.
Proposal 3 - Stockholder proposal regarding performance and time-based
restricted stock:
For Against Abstained
---------------------------------------------
6,437,846 124,860,998 1,932,810
15,388,936 broker non-votes were recorded on the proposal.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
See Exhibit Index on the page immediately preceding exhibits.
(b) Report on Form 8-K
On April 28, 2004, the company furnished a Current Report on Form 8-K
with respect to the company's financial results for the quarter ended April 3,
2004.
On June 2, 2004, the company furnished a Current Report on Form 8-K with
respect to the company's sale of its Spectra-Physics business.
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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 August 2004.
THERMO ELECTRON CORPORATION
/s/ Theo Melas-Kyriazi
-------------------------------------------------
Theo Melas-Kyriazi
Vice President and Chief Financial Officer
/s/ Peter E. Hornstra
-------------------------------------------------
Peter E. Hornstra
Corporate Controller and Chief Accounting Officer
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THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
10.1 Restricted Stock Agreement dated June 2, 2004, by and between
Thermo Electron Corporation and Mr. Seth Hoogasian.
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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