UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------------------
FORM 10-Q
(mark one)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended October 2, 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 October 29, 2004
----------------------------- -------------------------------
Common Stock, $1.00 par value 159,950,300
PART I - Financial Information
Item 1 - Financial Statements
- -----------------------------
THERMO ELECTRON CORPORATION
Consolidated Balance Sheet
(Unaudited)
Assets
October 2, December 31,
(In thousands) 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 335,664 $ 303,912
Short-term available-for-sale investments, at quoted market value
(amortized cost of $71,464 and $65,273) 90,233 114,326
Accounts receivable, less allowances of $23,600 and $24,212 429,388 419,625
Inventories:
Raw materials and supplies 119,104 118,660
Work in process 46,506 42,069
Finished goods 165,534 141,432
Deferred tax assets 111,881 113,006
Other current assets 61,630 46,995
Current assets of discontinued operations (Note 12) 5,852 95,231
---------- ----------
1,365,792 1,395,256
---------- ----------
Property, Plant, and Equipment, at Cost 485,369 471,500
Less: Accumulated depreciation and amortization 238,856 219,248
---------- ----------
246,513 252,252
---------- ----------
Acquisition-related Intangible Assets (Note 2) 160,336 65,542
---------- ----------
Other Assets (Notes 9 and 12) 100,922 47,408
---------- ----------
Goodwill (Note 2) 1,493,942 1,441,172
---------- ----------
Long-term Assets of Discontinued Operations (Note 12) - 187,339
---------- ----------
$3,367,505 $3,388,969
========== ==========
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THERMO ELECTRON CORPORATION
Consolidated Balance Sheet (continued)
(Unaudited)
Liabilities and Shareholders' Equity
October 2, December 31,
(In thousands except share amounts) 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Current Liabilities:
Short-term obligations and current maturities of long-term obligations $ 15,378 $ 45,981
Accounts payable 121,240 102,617
Accrued payroll and employee benefits 76,627 89,452
Accrued income taxes 80,303 98,167
Deferred revenue 73,471 59,055
Accrued restructuring costs (Note 11) 15,054 22,453
Other accrued expenses (Notes 2 and 10) 177,108 171,249
Current liabilities of discontinued operations (Note 12) 72,652 95,819
---------- ----------
631,833 684,793
---------- ----------
Deferred Income Taxes (Note 2) 405 11,700
---------- ----------
Other Long-term Liabilities 77,481 73,395
---------- ----------
Long-term Liabilities of Discontinued Operations (Note 12) - 6,766
---------- ----------
Long-term Obligations:
Senior notes (Note 9) 137,859 137,874
Subordinated convertible obligations 77,234 77,234
Other 13,345 14,401
---------- ----------
228,438 229,509
---------- ----------
Shareholders' Equity:
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized; 178,895,934 and
175,479,994 shares issued 178,896 175,480
Capital in excess of par value 1,353,306 1,298,881
Retained earnings 1,260,158 1,019,420
Treasury stock at cost, 19,131,750 and 10,416,770 shares (431,639) (192,469)
Deferred compensation (3,065) (2,834)
Accumulated other comprehensive items (Note 6) 71,692 84,328
---------- ----------
2,429,348 2,382,806
---------- ----------
$3,367,505 $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
-----------------------------
October 2, September 27,
(In thousands except per share amounts) 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $542,315 $448,567
-------- --------
Costs and Operating Expenses:
Cost of revenues (Note 11) 291,360 239,824
Selling, general, and administrative expenses 153,425 122,634
Research and development expenses 32,874 30,444
Restructuring and other costs, net (Note 11) 5,035 13,819
-------- --------
482,694 406,721
-------- --------
Operating Income 59,621 41,846
Other Income, Net (Note 4) 2,471 10,536
-------- --------
Income from Continuing Operations Before Provision for Income Taxes 62,092 52,382
Provision for Income Taxes (19,451) (13,387)
-------- --------
Income from Continuing Operations 42,641 38,995
Income (Loss) from Discontinued Operations (includes income tax benefit
of $541 in 2004; Note 12) (940) 2
Gain on Disposal of Discontinued Operations (includes income tax benefit
of $4,322 and $2,600; Note 12) 64,835 9,518
-------- --------
Net Income $106,536 $ 48,515
======== ========
Earnings per Share from Continuing Operations (Note 5):
Basic $ .26 $ .24
======== ========
Diluted $ .26 $ .24
======== ========
Earnings per Share (Note 5):
Basic $ .66 $ .30
======== ========
Diluted $ .65 $ .29
======== ========
Weighted Average Shares (Note 5):
Basic 161,514 162,531
======== ========
Diluted 165,570 169,155
======== ========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Consolidated Statement of Income
(Unaudited)
Nine Months Ended
-----------------------------
October 2, September 27,
(In thousands except per share amounts) 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Revenues $1,592,656 $1,370,463
---------- ----------
Costs and Operating Expenses:
Cost of revenues (Note 11) 861,956 734,032
Selling, general, and administrative expenses 450,492 380,718
Research and development expenses 99,735 95,763
Restructuring and other costs, net (Note 11) 9,008 25,457
---------- ----------
1,421,191 1,235,970
---------- ----------
Operating Income 171,465 134,493
Other Income, Net (Note 4) 15,740 29,156
---------- ----------
Income from Continuing Operations Before Provision for Income Taxes 187,205 163,649
Provision for Income Taxes (54,320) (35,925)
---------- ----------
Income from Continuing Operations 132,885 127,724
Income (Loss) from Discontinued Operations (includes income tax benefit
of $36,321 and $1,394; Note 12) 43,018 (4,197)
Gain on Disposal of Discontinued Operations (includes income tax benefit
of $4,322 in 2004; net of income tax provision of $964 in 2003; Note 12) 64,835 14,554
---------- ----------
Net Income $ 240,738 $ 138,081
========== ==========
Earnings per Share from Continuing Operations (Note 5):
Basic $ .81 $ .79
========== ==========
Diluted $ .79 $ .77
========== ==========
Earnings per Share (Note 5):
Basic $ 1.47 $ .85
========== ==========
Diluted $ 1.43 $ .83
========== ==========
Weighted Average Shares (Note 5):
Basic 164,097 162,474
========== ==========
Diluted 168,696 171,703
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
----------------------------
October 2, September 27,
(In thousands) 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 240,738 $ 138,081
(Income) loss from discontinued operations (43,018) 4,197
Gain on disposal of discontinued operations (64,835) (14,554)
--------- ---------
Income from continuing operations 132,885 127,724
Adjustments to reconcile income from continuing operations to net cash provided
by operating activities:
Depreciation and amortization 47,393 34,733
Noncash restructuring and other costs, net (Note 11) 700 4,859
Provision for losses on accounts receivable 2,518 4,392
Change in deferred income taxes 6,753 2,366
Gain on sale of businesses - (189)
Equity in earnings of unconsolidated subsidiaries (924) (416)
Gain on investments, net (Note 4) (15,353) (28,603)
Other 5,188 5,224
Changes in current accounts, excluding the effects of acquisitions and
dispositions:
Accounts receivable (4,698) 9,065
Inventories (32,285) 7,270
Other current assets (13,726) (8,914)
Accounts payable 9,110 (20,759)
Other current liabilities 23,267 (35,787)
--------- ---------
Net cash provided by continuing operations 160,828 100,965
Net cash provided by discontinued operations 14,811 1,845
--------- ---------
Net cash provided by operating activities 175,639 102,810
--------- ---------
Investing Activities:
Proceeds from maturities of available-for-sale investments 18,567 308,568
Proceeds from sale of available-for-sale investments 25,473 102,162
Purchases of available-for-sale investments (11,195) (179)
Acquisitions, net of cash acquired (Note 2) (144,086) (3,120)
Purchases of property, plant, and equipment (32,648) (28,711)
Proceeds from sale of property, plant, and equipment 4,037 6,033
Proceeds from sale of other investments 179 1,396
Collection of note receivable - 69,136
Increase in other assets (842) (5,080)
Other (438) (410)
--------- ---------
Net cash provided by (used in) continuing operations (140,953) 449,795
Net cash provided by discontinued operations 196,956 3,245
--------- ---------
Net cash provided by investing activities 56,003 453,040
--------- ---------
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THERMO ELECTRON CORPORATION
Consolidated Statement of Cash Flows (continued)
(Unaudited)
Nine Months Ended
-----------------------------
October 2, September 27,
(In thousands) 2004 2003
- -------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Repayment and redemption of long-term obligations $ (2,318) $(269,812)
Purchases of company common stock and subordinated convertible debentures (231,530) (84,135)
Net proceeds from issuance of company common stock 47,155 35,456
Decrease in short-term notes payable (12,897) (373,850)
Other 18 (38)
--------- ---------
Net cash used in continuing operations (199,572) (692,379)
Net cash provided by (used in) discontinued operations 445 (5,422)
--------- ---------
Net cash used in financing activities (199,127) (697,801)
--------- ---------
Exchange Rate Effect on Cash of Continuing Operations 83 11,918
Exchange Rate Effect on Cash of Discontinued Operations (846) (1,488)
--------- ---------
Increase (Decrease) in Cash and Cash Equivalents 31,752 (131,521)
Cash and Cash Equivalents at Beginning of Period 303,912 339,067
--------- ---------
Cash and Cash Equivalents at End of Period $ 335,664 $ 207,546
========= =========
Noncash Investing Activities:
Fair value of assets of acquired businesses $ 201,799 $ 4,845
Cash paid for acquired businesses (148,866) (3,269)
--------- ---------
Liabilities assumed of acquired businesses $ 52,933 $ 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
October 2, 2004, and the results of operations and cash flows for the three- and
nine-month periods ended October 2, 2004, and September 27, 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 July 2004, the company sold 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,
the assets and liabilities of Spectra-Physics have been classified as
discontinued operations in the accompanying 2003 consolidated balance sheet
(Note 12).
2. Acquisitions
On September 13, 2004, the Life and Laboratory Sciences segment broadened
its informatics offerings by acquiring InnaPhase Corporation, a supplier of
laboratory information management systems for the pharmaceutical and
biotechnology markets, for $66.4 million in cash, including debt repayment (or
$64.6 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, $40.2 million has been allocated to
goodwill, none of which is deductible for tax purposes. InnaPhase had revenues
of $17.7 million in 2004, prior to it being acquired.
On April 20, 2004, the Life and Laboratory Sciences segment expanded its
service capabilities by acquiring US Counseling Services, Inc. (USCS), a
supplier of equipment asset management services to the pharmaceutical,
healthcare, and related industries, for $78.8 million in cash, including
transaction costs (or $75.8 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, $67.1 million was allocated
to goodwill, all of which is deductible for tax purposes. USCS reported revenues
of $57 million in 2003.
In addition, in September 2004 the Measurement and Control segment
acquired a manufacturer and distributor of air quality instruments in China for
$3.7 million in cash.
The company's acquisitions have historically been made at prices above
the fair value of the acquired assets, resulting in goodwill, due to
expectations of synergies of combining the businesses. These synergies include
use of the company's existing infrastructure such as sales force, distribution
channels and customer relations to expand sales of the acquired businesses'
products; use of the infrastructure of the acquired businesses to cost
effectively expand sales of company products; and elimination of duplicative
facilities, functions, and staffing. Results of acquired businesses have been
included with the company's results from the dates of acquisition. Pro forma
results are not presented as the acquisitions did not materially affect the
company's results of operations individually or in the aggregate.
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THERMO ELECTRON CORPORATION
2. Acquisitions (continued)
The components of the purchase price allocation for 2004 acquisitions are
as follows:
(In thousands) InnaPhase USCS Other Total
- --------------------------------------------------------------------------------------------------------------------------------
Purchase Price:
Cash paid (a) $ 66,376 $ 78,805 $ 3,685 $148,866
Cash acquired (1,777) (3,003) - (4,780)
-------- -------- -------- --------
$ 64,599 $ 75,802 $ 3,685 $144,086
======== ======== ======== ========
Allocation:
Current assets $ 4,595 $ 5,067 $ 75 $ 9,737
Property, plant, and equipment 761 353 - 1,114
Acquired intangible assets 36,089 34,700 3,610 74,399
Goodwill 40,168 67,133 - 107,301
Other assets 4,465 3 - 4,468
Liabilities assumed (21,479) (31,454) - (52,933)
-------- -------- -------- --------
$ 64,599 $ 75,802 $ 3,685 $144,086
======== ======== ======== ========
(a) Includes acquisition expenses.
Acquired intangible assets for the 2004 acquisitions are as follows:
(In thousands) InnaPhase USCS Other Total
- --------------------------------------------------------------------------------------------------------------------------------
Customer Relationships $ 22,676 $ 34,700 $ 1,805 $ 59,181
Product Technology 13,413 - 1,805 15,218
-------- -------- -------- --------
$ 36,089 $ 34,700 $ 3,610 $ 74,399
======== ======== ======== ========
The amortization period for the customer relationships acquired in 2004
is 5-6 years. The amortization period for the product technology acquired in
2004 is 5-7 years. The weighted-average amortization period for all intangible
assets acquired in the 2004 acquisitions is approximately 6 years. Annual
amortization expense has increased by $13.4 million as a result of the 2004
acquisitions. The company recorded deferred tax liabilities of $22.5 million
related to any nondeductible acquired intangible assets, with a corresponding
increase in goodwill. The deferred tax liabilities are 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.
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THERMO ELECTRON CORPORATION
2. Acquisitions (continued)
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 material reserves for restructuring
businesses acquired in 2004.
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 1,113 - 299 1,412
Payments (1,573) (336) (382) (2,291)
Decrease recorded as a reduction in goodwill - (2,231) - (2,231)
Currency translation 147 (30) 3 120
------- ------- ------- -------
Balance at October 2, 2004 $ 4,685 $ 1,328 $ 26 $ 6,039
======= ======= ======= =======
The 2003 acquisitions primarily consisted of Jouan. The principal accrued
acquisition expenses for 2003 acquisitions were for severance for approximately
160 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 2005 and amounts accrued for abandonment of excess
facilities through 2007. Changes to the plan for restructuring Jouan's
operations arising in the first year following the acquisition have been
reflected through adjustments to goodwill.
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THERMO ELECTRON CORPORATION
2. Acquisitions (continued)
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 (129) (118) (247)
Decrease recorded as a reduction in goodwill (2,315) - (2,315)
Currency translation 144 (1) 143
------- ------- -------
Balance at October 2, 2004 $ 4,340 $ 28 $ 4,368
======= ======= =======
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. Following a favorable resolution of
certain lease obligations that were assumed by subtenants, the company reversed
$2.3 million of accrued acquisition expenses in the third quarter of 2004 with a
corresponding decrease in goodwill.
The company recorded a reduction in goodwill of $28.4 million in the
third quarter of 2004, as a result of the use of tax attributes of acquired
businesses, including net operating losses.
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. All periods presented have been reclassified to reflect
Spectra-Physics as a discontinued operation.
As part of the divestiture of Spectra-Physics (Note 12), the company
retained a manufacturing unit in New York with approximately $5 million in
annual revenues. This business was transferred to the Life and Laboratory
Sciences segment and prior period results have been reclassified to reflect this
change.
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THERMO ELECTRON CORPORATION
3. Business Segment Information (continued)
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
October 2, September 27, October 2, September 27,
(In thousands) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues:
Life and Laboratory Sciences $ 383,163 $ 301,755 $1,118,451 $ 915,866
Measurement and Control 159,152 145,562 474,205 449,343
Other - 1,250 - 5,254
---------- ---------- ---------- ----------
$ 542,315 $ 448,567 $1,592,656 $1,370,463
========== ========== ========== ==========
Income from Continuing Operations Before Provision
for Income Taxes:
Life and Laboratory Sciences (a) $ 54,508 $ 43,845 $ 154,636 $ 127,471
Measurement and Control (b) 14,533 10,882 41,131 35,076
Other (c) (58) (5,670) (160) (5,997)
---------- ---------- ---------- ----------
Total Operating Income - Segments 68,983 49,057 195,607 156,550
Corporate/Other (d) (6,891) 3,325 (8,402) 7,099
---------- ---------- ---------- ----------
$ 62,092 $ 52,382 $ 187,205 $ 163,649
========== ========== ========== ==========
Depreciation:
Life and Laboratory Sciences $ 7,188 $ 5,922 $ 22,169 $ 17,588
Measurement and Control 2,195 2,382 7,273 7,680
Other - 125 - 382
Corporate 821 842 2,422 2,376
---------- ---------- ---------- ----------
$ 10,204 $ 9,271 $ 31,864 $ 28,026
========== ========== ========== ==========
Amortization:
Life and Laboratory Sciences $ 5,184 $ 1,663 $ 13,289 $ 4,908
Measurement and Control 895 600 2,238 1,799
Corporate - - 2 -
---------- ---------- ---------- ----------
$ 6,079 $ 2,263 $ 15,529 $ 6,707
========== ========== ========== ==========
(a) Includes restructuring and other costs, net, of $2.4 million, $4.9 million, $5.7 million, and $11.4 million in the third quarter
of 2004 and 2003 and the first nine months of 2004 and 2003, respectively.
(b) Includes restructuring and other costs, net, of $2.2 million, $2.7 million, $4.8 million, and $6.1 million in the third quarter
of 2004 and 2003 and the first nine months of 2004 and 2003, respectively.
(c) Includes restructuring and other costs, net, of $0.1 million, $5.3 million, $0.2 million, and $5.6 million in the third quarter
of 2004 and 2003 and the first nine 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 $0.7 million, $1.0 million, $1.5 million, and $2.4 million in the third quarter of 2004 and 2003 and the first nine
months of 2004 and 2003, respectively. Other income, net, includes gains on the sale of shares of Thoratec of $10.3 million in
the third quarter and first nine months of 2003 and $9.6 million in the first nine months of 2004, and gains on the sale of
shares of FLIR Systems, Inc. of $13.7 million in the first nine months of 2003 (Note 4).
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THERMO ELECTRON CORPORATION
4. Other Income, Net
The components of other income, net, in the accompanying statement of income are as follows:
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
October 2, September 27, October 2, September 27,
(In thousands) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Interest Income $ 2,459 $ 2,910 $ 6,045 $ 17,656
Interest Expense (Note 9) (2,677) (3,458) (8,100) (15,544)
Gain on Investments, Net 1,875 12,614 15,353 28,603
Other Items, Net 814 (1,530) 2,442 (1,559)
-------- -------- -------- --------
$ 2,471 $ 10,536 $ 15,740 $ 29,156
======== ======== ======== ========
The company sold 1,250,000 shares of Thoratec Corporation common stock
during the first nine months of 2004 and realized a gain of $9.6 million. The
company sold 1,000,000 shares of Thoratec common stock during the third quarter
of 2003 and realized a gain of $10.3 million. In addition, the company sold
334,175 shares of FLIR Systems, Inc. common stock during the first nine months
of 2003 and realized a gain of $13.7 million. This gain included $3.9 million
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 October 2, 2004, the company owned 4.4 million
shares of Thoratec with a fair market value of $42.3 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 Nine Months Ended
----------------------------- -----------------------------
October 2, September 27, October 2, September 27,
(In thousands except per share amounts) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations $ 42,641 $ 38,995 $132,885 $127,724
Income (Loss) from Discontinued Operations (940) 2 43,018 (4,197)
Gain on Disposal of Discontinued Operations, Net 64,835 9,518 64,835 14,554
-------- -------- -------- --------
Net Income for Basic Earnings per Share 106,536 48,515 240,738 138,081
Effect of Convertible Debentures 398 871 1,209 4,417
-------- -------- -------- --------
Income Available to Common Shareholders, as Adjusted
for Diluted Earnings per Share $106,934 $ 49,386 $241,947 $142,498
-------- -------- -------- --------
Basic Weighted Average Shares 161,514 162,531 164,097 162,474
Effect of:
Stock options 2,113 2,455 2,656 1,995
Convertible debentures 1,846 3,969 1,846 7,034
Contingently issuable shares 97 200 97 200
-------- -------- -------- --------
Diluted Weighted Average Shares 165,570 169,155 168,696 171,703
-------- -------- -------- --------
Basic Earnings per Share:
Continuing operations $ .26 $ .24 $ .81 $ .79
Discontinued operations .40 .06 .66 .06
-------- -------- -------- --------
$ .66 $ .30 $ 1.47 $ .85
======== ======== ======== ========
Diluted Earnings per Share:
Continuing operations $ .26 $ .24 $ .79 $ .77
Discontinued operations .39 .06 .64 .06
-------- -------- -------- --------
$ .65 $ .29 $ 1.43 $ .83
======== ======== ======== ========
Options to purchase 1,676,000, 4,753,000, 1,343,000, and 8,124,000 shares
of common stock were not included in the computation of diluted earnings per
share for the third quarter of 2004 and 2003 and the first nine 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 third quarter of 2004 and 2003, the company had
comprehensive income of $107.3 million and $51.2 million, respectively. During
the first nine months of 2004 and 2003, the company had comprehensive income of
$236.3 million and $239.7 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 Nine Months Ended
--------------------------- ---------------------------
October 2, September 27, October 2, September 27,
(In thousands except per share amounts) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations:
As reported $ 42,641 $ 38,995 $132,885 $127,724
Add: Stock-based employee compensation expense included
in reported results, net of tax 335 378 894 1,331
Deduct: Total stock-based employee compensation expense
determined under the fair-value-based method for all
awards, net of tax (3,409) (4,431) (10,344) (14,854)
-------- -------- -------- --------
Pro forma $ 39,567 $ 34,942 $123,435 $114,201
======== ======== ======== ========
Basic Earnings per Share from Continuing Operations:
As reported $ .26 $ .24 $ .81 $ .79
Pro forma $ .24 $ .21 $ .75 $ .70
Diluted Earnings per Share from Continuing Operations:
As reported $ .26 $ .24 $ .79 $ .77
Pro forma $ .24 $ .21 $ .74 $ .69
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THERMO ELECTRON CORPORATION
7. Stock-based Compensation Plans and Pro Forma Stock-based Compensation Expense (continued)
Three Months Ended Nine Months Ended
--------------------------- ----------------------------
October 2, September 27, October 2, September 27,
(In thousands except per share amounts) 2004 2003 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income:
As reported $106,536 $ 48,515 $240,738 $138,081
Add: Stock-based employee compensation expense included in
reported net income, net of tax 335 378 894 1,331
Deduct: Total stock-based employee compensation expense
determined under the fair-value-based method for all
awards, net of tax (3,409) (5,224) (11,344) (17,270)
-------- -------- -------- --------
Pro forma $103,462 $ 43,669 $230,288 $122,142
======== ======== ======== ========
Basic Earnings per Share:
As reported $ .66 $ .30 $ 1.47 $ .85
Pro forma $ .64 $ .27 $ 1.40 $ .75
Diluted Earnings per Share:
As reported $ .65 $ .29 $ 1.43 $ .83
Pro forma $ .63 $ .26 $ 1.37 $ .74
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 Nine Months Ended
--------------------------- ---------------------------
October 2, September 27, October 2, September 27,
(In thousands) 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Service Cost $ 904 $ 820 $ 2,713 $ 2,455
Interest Cost on Benefit Obligation 2,353 2,007 7,063 6,003
Expected Return on Plan Assets (2,047) (1,651) (6,142) (4,949)
Recognized Net Actuarial Loss 636 442 1,907 1,327
Amortization of Unrecognized Initial Obligation and
Prior Service Cost 1 12 2 35
------- ------- ------- -------
$ 1,847 $ 1,630 $ 5,543 $ 4,871
======= ======= ======= =======
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% (4.34% as of October 2, 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
$9.1 million at October 2, 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:
Nine Months Ended
---------------------------
October 2, September 27,
(In thousands) 2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Beginning Balance $ 25,645 $ 22,863
Provision charged to income 14,536 14,535
Usage (12,926) (12,081)
Adjustments to previously provided warranties, net (2,251) (2,013)
Other, net (a) 878 1,298
-------- --------
Ending Balance $ 25,882 $ 24,602
======== ========
(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 and, to a lesser extent, in
2004. Restructuring and other costs recorded in 2004 include charges associated
with new actions and actions initiated prior to 2004 that could not be recorded
until incurred. The company expects to incur an additional $1.3 million of
restructuring costs, primarily in 2004. The company believes that restructuring
actions undertaken in 2003 and 2004 will be substantially completed in 2004.
During the third 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 $ 276 $ 61 $ - $ - $ 337
Restructuring and Other Costs, Net 2,127 2,102 58 748 5,035
------- ------ ------ ------ ------
$2,403 $2,163 $ 58 $ 748 $5,372
====== ====== ====== ====== ======
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THERMO ELECTRON CORPORATION
11. Restructuring and Other Costs, Net (continued)
During the first nine 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 $ 2,897 $ 184 $ - $ - $ 3,081
Restructuring and Other Costs, Net 2,769 4,623 160 1,456 9,008
------- -------- -------- -------- -------
$ 5,666 $ 4,807 $ 160 $ 1,456 $12,089
======= ======== ======== ======== =======
The components of net restructuring and other costs by segment are as
follows:
Life and Laboratory Sciences
- ----------------------------
The Life and Laboratory Sciences segment recorded $2.4 million of net
restructuring and other charges in the third quarter of 2004. The segment
recorded charges to cost of revenues of $0.3 million, primarily accelerated
depreciation expense for manufacturing equipment that will be abandoned due to
site consolidations, and $2.1 million of other costs. These other costs
consisted of $1.9 million of cash costs, including $1.6 million of severance for
43 employees across all functions; $0.2 million of 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 addition, the segment recorded charges of $0.2
million, primarily for the writedown of abandoned equipment.
In the second quarter of 2004, this segment recorded $0.5 million of net
restructuring and other income. The segment recorded charges to cost of revenues
of $0.3 million, primarily accelerated depreciation expense 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 $2.2 million of net
restructuring and other charges in the third 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 $2.1 million of other costs. These
other costs consisted solely of cash costs, including $1.8 million of severance
for 71 employees across all functions; $0.2 million of net abandoned-facility
costs, primarily for charges associated with facilities vacated in prior periods
that could not be recorded until incurred; and $0.1 million of other cash costs,
primarily relocation expenses.
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THERMO ELECTRON CORPORATION
11. Restructuring and Other Costs, Net (continued)
In the second quarter of 2004, this segment recorded $1.4 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 $1.3 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 write-down of equipment at an abandoned facility.
Corporate
- ---------
The company recorded $0.7 million of restructuring and other charges at
its U.S. and European corporate offices in the third quarter of 2004, all of
which were cash costs. The costs were primarily for severance.
In the second quarter of 2004, the company recorded $0.2 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. 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
Employees
- -------------------------------------------------------------------------------------------------------------------------------
2003 Restructuring Plans
Remaining Terminations at December 31, 2003 162
Terminations Announced in 2004 128
Terminations Occurring to Date in 2004 (176)
Adjustments to Plan (17)
----
Remaining Terminations at October 2, 2004 97
====
2004 Restructuring Plans
Terminations Announced in 2004 93
Terminations Occurring to Date in 2004 (39)
----
Remaining Terminations at October 2, 2004 54
====
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THERMO ELECTRON CORPORATION
11. Restructuring and Other Costs, Net (continued)
The following table summarizes the cash components of the company's
restructuring plans. The noncash components and other amounts reported as
restructuring and other costs, 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 October 2, 2004 $ - $ - $ - $ - $ -
======== ======== ======== ======== ========
2001 Restructuring Plans
Balance at December 31, 2003 $ 1,127 $ 16 $ 4,778 $ 138 $ 6,059
Costs incurred in 2004 - - 290 3 293
Reserves reversed (57) (15) - (132) (204)
Payments (612) (1) (1,537) (9) (2,159)
Currency translation (7) - 13 - 6
-------- -------- -------- -------- --------
Balance at October 2, 2004 $ 451 $ - $ 3,544 $ - $ 3,995
======== ======== ======== ======== ========
2002 Restructuring Plans
Balance at December 31, 2003 $ 1,943 $ 54 $ 3,082 $ 7 $ 5,086
Costs incurred in 2004 8 - 466 90 564
Reserves reversed (91) (54) (114) - (259)
Payments (612) - (1,166) (80) (1,858)
Currency translation (7) - - - (7)
-------- -------- -------- -------- --------
Balance at October 2, 2004 $ 1,241 $ - $ 2,268 $ 17 $ 3,526
======== ======== ======== ======== ========
2003 Restructuring Plans
Balance at December 31, 2003 $ 6,153 $ 68 $ 4,914 $ 114 $ 11,249
Costs incurred in 2004 (b) 4,192 145 1,838 1,406 7,581
Reserves reversed (96) - (4) (29) (129)
Payments (8,062) (153) (3,229) (1,402) (12,846)
Currency translation (1) - 35 (2) 32
-------- -------- -------- -------- --------
Balance at October 2, 2004 $ 2,186 $ 60 $ 3,554 $ 87 $ 5,887
======== ======== ======== ======== ========
2004 Restructuring Plans
Costs incurred in 2004 $ 3,061 $ - $ - $ 16 $ 3,077
Payments (1,414) - - (9) (1,423)
Currency translation (8) - - - (8)
-------- -------- -------- -------- --------
Balance at October 2, 2004 $ 1,639 $ - $ - $ 7 $ 1,646
======== ======== ======== ======== ========
(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 $0.6 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.
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THERMO ELECTRON CORPORATION
11. Restructuring and Other Costs, Net (continued)
The company expects to pay accrued restructuring costs as follows:
severance, primarily through 2006; employee-retention obligations and other
costs, primarily through 2004; and abandoned-facility payments, over lease terms
expiring through 2016.
12. Discontinued Operations
Spectra-Physics
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
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. The portion of the Newport
shares with resale restrictions that lapse within a year are classified as
available-for-sale investments in the accompanying 2004 balance sheet. The
portion of the Newport shares with resale restrictions that lapse beyond one
year together with the note receivable from Newport are classified as noncurrent
other assets at October 2, 2004. As a result of Newport assuming non-U.S. debt
of Spectra-Physics that had earlier been expected to be retained by the company
and as a result of the post-closing adjustment process, the company expects to
pay approximately $24 million to Newport, which has been accrued in current
liabilities of discontinued operations in the accompanying 2004 balance sheet.
The company retained a small manufacturing unit in New York as a term of the
sale (Note 3) as well as a building in Arizona. The building is held for sale
and is classified as current assets of discontinued operations in the
accompanying balance sheet.
The following table summarizes the results of the company's discontinued
operations (Spectra-Physics).
Three Months Nine Months
July 4, 2004 Ended January 1, 2004 Ended
Through September 27, Through September 27,
(In thousands) July 16, 2004 2003 July 16, 2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Revenue $ 6,530 $ 48,549 $118,921 $143,263
Operating Income (Loss) (1,317) 536 6,993 (4,534)
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. In the third quarter of 2004, the company recorded a gain on the sale
of Spectra-Physics of $41.4 million, net of a tax provision of $19.1 million.
As of October 2, 2004, the company owned 3,220,000 shares of Newport with
a quoted fair market value of $39.8 million.
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THERMO ELECTRON CORPORATION
12. Discontinued Operations (continued)
Other
The tax returns of the company's former Trex Medical business that was
sold in 2000 were under audit by the Internal Revenue Service. In the third
quarter of 2004, the Joint Congressional Committee on Taxation completed its
review of the audit findings and the company determined that previously
unrecognized tax benefits associated with the divested business totaling $23.5
million were realizable. This amount was recorded as a tax gain on the sale of
the discontinued operation in the third quarter of 2004.
13. Litigation
In September 2004, Applera Corporation, MDS Inc. and Applied
Biosystems/MDS Scientific Instruments filed a lawsuit alleging that the
company's mass spectrometer systems infringe a patent of the plaintiffs.
The company has been named a defendant, along with many other companies,
in a patent-infringement lawsuit brought by the Lemelson Medical, Education &
Research Foundation, L.P. The suit asserts that products manufactured, used, or
sold by the defendants, infringe one or more patents related to methods of
machine vision or computer-image analysis.
The company intends to vigorously defend these matters. In the opinion of
management, an unfavorable outcome of either or both of these matters could have
a material adverse effect on the company's financial position as well as its
results of operations and cash flows.
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.
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. As a term of the sale of Trex
Medical in 2000, the company retained the liability for this matter. Under the
settlement agreement, as amended, the company paid Fischer $25 million in 2002
and $0.9 million in 2003, with final payments totaling $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. All periods presented have been reclassified to reflect Spectra-Physics
as a discontinued operation.
Revenues
Three Months Ended Nine Months Ended
--------------------------------------------- --------------------------------------------
October 2, September 27, October 2, September 27,
(Dollars in thousands) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------------------------------------------------------
Life and Laboratory Sciences $ 383,163 70.7% $ 301,755 67.3% $1,118,451 70.2% $ 915,866 66.8%
Measurement and Control 159,152 29.3% 145,562 32.4% 474,205 29.8% 449,343 32.8%
Other - 1,250 0.3% - 5,254 0.4%
---------- ----- ---------- ----- ---------- ----- ---------- -----
$ 542,315 100% $ 448,567 100% $1,592,656 100% $1,370,463 100%
========== ===== ========== ===== ========== ===== ========== =====
The company's revenues grew by 21% during the third quarter of 2004. The
strengthening of non-U.S. currencies relative to the dollar caused an increase
in reported revenues as did acquisitions, net of divestitures. In addition to
the change in revenues caused by currency translation and acquisitions, net of
divestitures, which are discussed below, sales increased 9% in the third quarter
of 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 together with
growth from new product introductions.
The company's strategy is to augment internal growth at existing
businesses with complementary acquisitions such as those completed in 2004 and
2003. The principal acquisitions included InnaPhase Corporation, a supplier of
laboratory information management systems for the pharmaceutical and
biotechnology markets, which was acquired in September 2004; 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 in December 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 third quarter of 2004, the company's operating income and
operating income margin improved to $59.6 million and 11.0%, respectively, from
$41.8 million and 9.3%, respectively, in the third 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 $3.8 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 $5.4
million and $13.8 million in the third quarter of 2004 and 2003, respectively.
Income from continuing operations increased to $42.6 million in the third
quarter of 2004, from $39.0 million in the third quarter of 2003, primarily due
to the higher operating income discussed above, offset in part by lower gains
from the sale of investments.
During the first nine months of 2004, the company's cash flow from
operations totaled $175.6 million, compared with $102.8 million in the first
nine months of 2003. The increase resulted primarily from a lower investment in
working capital items in 2004 and improved cash flows from Spectra-Physics prior
to its sale.
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Overview of Results of Operations and Liquidity (continued)
As of October 2, 2004, the company's outstanding debt totaled $243.8
million, of which 88% is due in 2007 and thereafter. The company expects that
its existing cash and short-term investments of $425.9 million as of October 2,
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 equity investments, bad debts, inventories,
intangible assets, warranty obligations, income taxes, pension costs,
contingencies and litigation, restructuring, and sale of businesses. The company
bases its estimates on historical experience, current market and economic
conditions, and other assumptions that management believes are reasonable. The
results of these estimates form the basis for judgments about the carrying value
of assets and liabilities where the values are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
The company believes the following represent its critical accounting
policies and estimates used in the preparation of its financial statements:
(a) The company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to
pay amounts due. Such allowances totaled $23.6 million at October
2, 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 write-downs 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 totaled $1.494 billion at
October 2, 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 $507.8 million at October 2, 2004,
including $246.5 million of fixed assets. In testing a long-lived
asset for impairment, assumptions are made concerning projected
cash flows associated with the asset. Estimates of future cash
flows require assumptions related to revenue and operating income
growth and asset-related expenditures associated with the asset
being reviewed for impairment. Should future cash flows decline
significantly from estimated amounts, charges for impairment of
other long-lived assets may be necessary.
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THERMO ELECTRON CORPORATION
Critical Accounting Policies (continued)
(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 $25.9 million at October 2, 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 $59 million at October 2,
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 $80.3 million at October 2, 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 totaled $5.5 million in the first
nine months of 2004. Should any of these assumptions change, they
would have an effect on net periodic pension costs.
(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 $9.4 million
at October 2, 2004. Should actual cash flows associated with
sub-rental income from vacated facilities vary from estimated
amounts, adjustments may be required.
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THERMO ELECTRON CORPORATION
Critical Accounting Policies (continued)
(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.
(n) The company considers declines in quoted fair market values of
available-for-sale investments and other equity investments with
durations of six to nine months as indicative that the decline may
be other than temporary. As of October 2, 2004, the company held
3,220,000 shares of Newport Corporation common stock, which it
received as partial consideration in the July 2004 sale of
Spectra-Physics. The cost and quoted fair market value of the
shares at October 2, 2004, were $45.0 million and $39.8 million,
respectively. Should a decline in quoted fair market value
continue, an impairment charge may be required.
Results of Operations
Third Quarter 2004 Compared With Third Quarter 2003
- ---------------------------------------------------
Continuing Operations
Sales in the third quarter of 2004 were $542.3 million, an increase of
$93.7 million from the third quarter of 2003. The favorable effects of currency
translation resulted in an increase in revenues of $21.3 million in 2004. Sales
increased $34.9 million due to acquisitions, net of divestitures. In addition to
the changes in revenue resulting from currency translation, acquisitions, and
divestitures, revenues increased $37.5 million, or 9%, primarily due to
increased demand, as described by segment below.
Operating Income Margin
Three Months Ended
-----------------------------
October 2, September 27,
2004 2003
- ---------------------------------------------------------------------------------------------------------------------------------
Life and Laboratory Sciences 14.2% 14.5%
Measurement and Control 9.1% 7.5%
Consolidated 11.0% 9.3%
Operating income was $59.6 million in the third quarter of 2004, compared
with $41.8 million in the third quarter of 2003. Operating income margin
increased to 11.0% in 2004 from 9.3% 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 $3.8 million of higher
amortization expense of acquisition-related intangible assets. Restructuring and
other costs, net, totaled $5.4 million and $13.8 million in 2004 and 2003,
respectively, and are discussed by segment below.
Restructuring actions were initiated in 2003 and, to a lesser extent, in
2004 in a number of business units to reduce costs and redundancies in response
to a downturn in markets served by the company and in connection with the
company's overall reorganization, principally through headcount reductions and
consolidation of facilities. The company expects to incur an additional $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 and 2004 will be substantially
completed in 2004.
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THERMO ELECTRON CORPORATION
Third Quarter 2004 Compared With Third Quarter 2003 (continued)
- ---------------------------------------------------
Life and Laboratory Sciences
Three Months Ended
----------------------------------------
October 2, September 27,
(Dollars in thousands) 2004 2003 Change
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $383,163 $301,755 27.0%
Operating Income Margin 14.2% 14.5% (0.3)
Sales in the Life and Laboratory Sciences segment increased $81.4
million, or 27%, to $383.2 million in the third quarter of 2004. The favorable
effects of currency translation resulted in an increase in revenues of $15.1
million in 2004. Sales increased $40.8 million due to the acquisitions of
InnaPhase in September 2004, USCS in April 2004, Jouan in December 2003, and
LMSi in October 2003. In addition to the changes in revenues resulting from
currency translation and acquisitions, revenues increased $25.5 million, or 8%,
due to higher demand. The increase in demand resulted in higher sales of mass
spectrometry and spectroscopy instruments and, to a lesser extent, new products
in anatomical pathology and laboratory automation. Revenue growth was strong in
the U.S. and Asia while flat in Europe where economic recovery has lagged other
regions.
Operating income margin decreased to 14.2% in the third quarter of 2004
from 14.5% in the third quarter of 2003. The decrease in operating income margin
resulted from 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, and from a $3.5 million increase in the segment's
amortization of acquisition-related intangible assets over the 2003 quarter,
primarily as a result of acquisitions, offset by lower restructuring and other
costs, net. The segment is currently integrating the largest of these
acquisitions, 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. Operating income margin was
affected by restructuring and other costs, net, of $2.4 million in 2004 and $4.9
million in 2003, as discussed below.
In the third quarter of 2004, the segment recorded restructuring and
other costs, net, of $2.4 million, including cash costs of $1.9 million,
primarily for severance, abandoned facilities, and relocation expenses at
businesses that have been consolidated; a $0.2 million charge primarily for the
writedown of abandoned equipment; and charges to costs of revenues of $0.3
million, primarily for accelerated depreciation on manufacturing equipment that
is being abandoned as a result of site consolidations (Note 11). In 2003, the
segment recorded restructuring and other costs, net, of $4.9 million,
substantially all of which were cash costs, primarily for severance, employee
retention, abandoned facilities, and relocation expenses at businesses being
consolidated.
Measurement and Control
Three Months Ended
----------------------------------------
October 2, September 27,
(Dollars in thousands) 2004 2003 Change
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $159,152 $145,562 9.3%
Operating Income Margin 9.1% 7.5% 1.6
Sales in the Measurement and Control segment increased $13.6 million, or
9%, to $159.2 million in the third quarter of 2004. The favorable effects of
currency translation resulted in an increase in revenues of $6.2 million in
2004. Sales decreased $4.6 million due to divestitures, net of acquisitions. In
addition to the changes in revenue resulting from currency translation,
acquisitions, and divestitures, revenues increased $12.0 million, or 9%. The
increase was primarily the result of a rebound in demand for precision
temperature-control products from the semiconductor industry and other process
applications and, to a lesser extent, process instruments used by the materials
industry and equipment used in metal production, particularly in China.
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THERMO ELECTRON CORPORATION
Third Quarter 2004 Compared With Third Quarter 2003 (continued)
- ---------------------------------------------------
Operating income margin increased to 9.1% in the third quarter of 2004
from 7.5% in the third quarter of 2003. Operating income margin was affected by
restructuring and other costs, net, of $2.2 million in 2004 and $2.7 million in
2003, as discussed below. The increase in operating income margin resulted
primarily from the contribution to income of higher sales volumes.
In the third quarter of 2004, the segment recorded restructuring and
other costs, net, of $2.2 million, of which $2.1 million were cash costs,
principally for severance. 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
costs, net, of $2.7 million, all of which were cash costs, primarily for
severance, abandoned facilities, and relocation expenses at businesses being
consolidated.
Other Income, Net
- -----------------
The company reported other income, net, of $2.5 million and $10.5 million
in the third 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 $2.5 million in 2004 from $2.9 million
in 2003, primarily due to lower invested cash balances following the
acquisitions (net of divestitures) 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 $3.5 million in 2003 as
a result of the redemption and repurchase of debentures.
During 2004 and 2003, the company had gains on investments, net, of $1.9
million and $12.6 million, respectively. The gains included $10.3 million in
2003 from the sale of shares of Thoratec Corporation.
Provision for Income Taxes
- --------------------------
The company's effective tax rate was 31.3% and 25.6% in the third quarter
of 2004 and 2003, respectively. The effective tax rate in 2004 includes an
unfavorable adjustment relating to finalization of the tax on the sale of a
divested business, which increased the rate by 2.2 percentage points. The
effective tax rate in 2003 included a reduction of 2.0 percentage points to
adjust the year-to-date rate to the rate that was expected for the full year.
The effective tax rate in 2003 was favorably affected by repatriation of cash
from non-U.S. subsidiaries that 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 1998
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
and approval of the findings by the Joint Congressional Committee on Taxation.
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.
Contingent Liabilities
- ----------------------
At October 2, 2004, the company was contingently liable with respect to
certain lawsuits. An unfavorable outcome in the matters described in Note 13
could materially affect the company's financial position as well as its results
of operations and cash flows.
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THERMO ELECTRON CORPORATION
Third Quarter 2004 Compared With Third Quarter 2003 (continued)
- ---------------------------------------------------
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. In the third
quarter of 2004, the company recorded a gain on the sale of Spectra-Physics of
$41.4 million, net of a tax provision of $19.1 million (Note 12).
The company's discontinued operations (Spectra-Physics) had revenues and
an operating loss for the 12 day period before the sale on July 16, 2004 of $6.5
million and $1.3 million, respectively. In the third quarter of 2003, the
company's discontinued operations (Spectra-Physics) had revenues and operating
income of $48.5 million and $0.5 million, respectively.
The tax returns of the company's former Trex Medical business that was
sold in 2000 were under audit by the IRS. In the third quarter of 2004, the
Joint Congressional Committee on Taxation completed its review of the audit
findings and the company determined that previously unrecognized tax benefits
associated with the divested business totaling $23.5 million were realizable.
This amount was recorded as a tax gain on the sale of the discontinued operation
in the third quarter of 2004.
Proposed Accounting Standard
- ----------------------------
The Financial Accounting Standards Board (FASB) expects to issue a final
statement on equity-based compensation in the fourth quarter of 2004 that would
require the company to record the impact of stock options in its financial
statements beginning no later than the third quarter of 2005. The company does
not presently expect to elect early adoption of the final standard.
First Nine Months 2004 Compared With First Nine Months 2003
- -----------------------------------------------------------
Continuing Operations
Sales in the first nine months of 2004 were $1.593 billion, an increase
of $222.2 million from the first nine months of 2003. The favorable effects of
currency translation resulted in an increase in revenues of $68.2 million in
2004. Sales increased $87.7 million due to acquisitions, net of divestitures. In
addition to the changes in revenue resulting from currency translation,
acquisitions, and divestitures, revenues increased $66.3 million, or 5%,
primarily due to increased demand, as described by segment below.
Operating Income Margin
Nine Months Ended
-----------------------------
October 2, September 27,
2004 2003
- --------------------------------------------------------------------------------------------------------------------------------
Life and Laboratory Sciences 13.8% 13.9%
Measurement and Control 8.7% 7.8%
Consolidated 10.8% 9.8%
Operating income was $171.5 million in the first nine months of 2004,
compared with $134.5 million in the first nine months of 2003. Operating income
margin increased to 10.8% in 2004 from 9.8% in 2003. Operating income increased
primarily due to lower restructuring and other costs, net, and, to a lesser
extent, higher revenues in each segment in 2004. These improvements were offset
in part by $8.8 million of higher amortization expense related to intangible
assets arising from acquisitions. 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
$12.1 million and $25.5 million in 2004 and 2003, respectively, and are
discussed by segment below.
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THERMO ELECTRON CORPORATION
First Nine Months 2004 Compared With First Nine Months 2003 (continued)
- -----------------------------------------------------------
Life and Laboratory Sciences
Nine Months Ended
----------------------------------------
October 2, September 27,
(Dollars in thousands) 2004 2003 Change
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $1,118,451 $ 915,866 22.1%
Operating Income Margin 13.8% 13.9% (0.1)
Sales in the Life and Laboratory Sciences segment increased $202.6
million, or 22%, to $1.118 billion in the first nine months of 2004. The
favorable effects of currency translation resulted in an increase in revenues of
$48.7 million in 2004. Sales increased $105.9 million due to the acquisitions of
InnaPhase in September 2004, 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 $48.0 million, or 5%, 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 decreased slightly to 13.8% in the first nine
months of 2004 from 13.9% in the first nine months of 2003. Operating income
margin was affected by restructuring and other costs, net, of $5.7 million and
$11.4 million in 2004 and 2003, respectively, as discussed below. The favorable
impact of lower restructuring and other costs, net, and higher revenues was more
than offset by a $8.4 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 nine months of 2004, the segment recorded restructuring and
other costs, net, of $5.7 million, including charges to costs of revenues of
$2.9 million, primarily for the sale of inventories revalued at the date of
acquisition of Jouan, and $4.7 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 $0.7 million from the sale of two abandoned
buildings and the writedown of abandoned equipment (Note 11). In 2003, the
segment recorded restructuring and other costs, net, of $11.4 million, including
$11.5 million of cash costs, primarily for severance, abandoned facilities,
employee retention, 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
Nine Months Ended
----------------------------------------
October 2, September 27,
(Dollars in thousands) 2004 2003 Change
- --------------------------------------------------------------------------------------------------------------------------------
Revenues $474,205 $449,343 5.5%
Operating Income Margin 8.7% 7.8% 0.9
Sales in the Measurement and Control segment increased $24.9 million, or
6%, to $474.2 million in the first nine months of 2004. The favorable effects of
currency translation resulted in an increase in revenues of $19.5 million in
2004. Sales decreased $12.9 million due to divestitures, net of acquisitions. In
addition to the changes in revenue resulting from currency translation,
acquisitions, and divestitures, revenues increased $18.3 million, or 4%. The
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THERMO ELECTRON CORPORATION
First Nine Months 2004 Compared With First Nine Months 2003 (continued)
- -----------------------------------------------------------
increase was primarily the result of a rebound in demand for precision
temperature-control products from the semiconductor industry and other process
applications and, to a lesser extent, process instruments used by the materials
industry and equipment used in metal production, particularly in China.
Operating income margin increased to 8.7% in the first nine months of
2004 from 7.8% in the first nine months of 2003. Operating income margin was
affected by restructuring and other costs, net, of $4.8 million and $6.1 million
in 2004 and 2003, respectively, as discussed below. Approximately half of the
increase in operating income margin resulted from the $1.3 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 nine months of 2004, the segment recorded restructuring and
other costs, net, of $4.8 million, including cash costs of $4.5 million,
principally for severance, abandoned facilities, and relocation expenses at
businesses that 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 $0.2 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 $6.1 million, including
$6.2 million of cash costs, principally for severance, abandoned facilities,
employee retention, 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 $15.7 million and $29.2
million in the first nine months of 2004 and 2003, respectively (Note 4).
Interest income decreased to $6.0 million in 2004 from $17.7 million in 2003,
primarily due to lower invested cash balances following the acquisitions (net of
divestitures) in late 2003 and 2004 and the use of cash for the repurchase and
redemption of company securities. Interest expense decreased to $8.1 million in
2004 from $15.5 million in 2003 as a result of the repurchase and redemption of
debentures.
During the first nine months of 2004 and 2003, the company had gains on
investments, net, of $15.4 million and $28.6 million, respectively. The gains
included $9.6 million in 2004 and $10.3 million in 2003 from the sale of shares
of Thoratec and $13.7 million in 2003 from the sale of shares of FLIR.
Provision for Income Taxes
- --------------------------
The company's effective tax rate was 29.0% and 22.0% in the first nine
months of 2004 and 2003, respectively. 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 5.5 percentage points. The
effective tax rate in 2003 was also favorably affected by 1.4 percentage points
by repatriation of cash from non-U.S. subsidiaries that resulted in foreign tax
credits.
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 reclassified the results of Spectra-Physics as discontinued
operations for all periods presented in the accompanying financial statements.
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THERMO ELECTRON CORPORATION
First Nine Months 2004 Compared With First Nine Months 2003 (continued)
- -----------------------------------------------------------
The company's discontinued operations (Spectra-Physics) had revenues of
$118.9 million and $143.3 million in the first nine months of 2004 and 2003,
respectively. Operating income of the discontinued operations was $7.0 million
in the first nine months of 2004. The company's discontinued operations incurred
operating losses of $4.5 million in the first nine 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
in the second quarter of 2004. In the third quarter of 2004, the company
recorded a gain on the sale of Spectra-Physics of $41.4 million, net of a tax
provision of $19.1 million.
The tax returns of the company's former Trex Medical business that was
sold in 2000 were under audit by the IRS. In the third quarter of 2004, the
Joint Congressional Committee on Taxation completed its review of the audit
findings and the company determined that previously unrecognized tax benefits
associated with the divested business totaling $23.5 million were realizable.
This amount was recorded as a tax gain on the sale of the discontinued operation
in the third quarter of 2004.
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.
During the third quarter of 2003, the company had a gain on the disposal
of discontinued operations of $9.5 million. The company resolved several
disputes and related claims in the quarter that it had retained following the
sale of businesses in its discontinued operations. In connection with the
resolution of these matters on favorable terms relative to the damages claimed
and amount of established reserves, the company's pre-tax gain on disposal of
the related businesses increased by $6.9 million. The company recorded a tax
provision of $2.5 million on this gain. In addition, the company realized $5.1
million of additional tax benefits from the disposal of businesses sold prior to
2003, principally foreign tax credits.
Liquidity and Capital Resources
First Nine Months 2004
- ----------------------
Consolidated working capital was $734.0 million at October 2, 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
$425.9 million at October 2, 2004, compared with $418.2 million at December 31,
2003.
Cash provided by operating activities was $175.6 million during the first
nine months of 2004, including $160.8 million by continuing operations and $14.8
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 $18.3 million in the first
nine months of 2004. Inventories increased $32.3 million, due in part to
increased production of mass spectrometry and spectroscopy instruments in
response to higher demand for these products. Cash provided by discontinued
operations of $14.8 million principally represents the positive cash flow of
Spectra-Physics, offset in part by 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 $15.1 million for restructuring costs at
October 2, 2004. The company expects to pay approximately $5.5 million of this
amount for severance primarily through 2006, and $0.2 million for other costs
primarily through 2004. The balance of $9.4 million will be paid for lease
obligations over the remaining terms of the leases, with approximately 60% to be
paid through 2005 and the remainder through 2016. In addition, at October 2,
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THERMO ELECTRON CORPORATION
Liquidity and Capital Resources (continued)
2004, the company had accrued $10.5 million for acquisition expenses. Accrued
acquisition expenses included $4.8 million of severance and relocation
obligations, which the company expects to pay primarily through 2005. The
balance primarily represents abandoned-facility payments that will be paid over
the remaining terms of the leases through 2014.
During the first nine months of 2004, the primary investing activities of
the company's continuing operations, excluding available-for-sale investment
activities, included acquisitions for $144.1 million, net of cash acquired (Note
2) and the purchase of property, plant, and equipment. The company expended
$28.6 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 that had earlier
been expected to be retained by the company, and as a result of the post-closing
adjustment process, the company expects to pay approximately $24 million to
Newport, which has been accrued in current liabilities of discontinued
operations in the accompanying 2004 balance sheet (Note 12).
The company's financing activities used $199.1 million of cash during the
first nine months of 2004. During the first nine months of 2004, the company
expended $12.9 million to reduce short-term notes payable. The company received
net proceeds of $47.2 million from the exercise of employee stock options.
During the first nine months of 2004, the company expended $231.5 million to
repurchase 8.4 million shares of the company's common stock. As of October 2,
2004, the most recent authorization by the company's Board of Directors to
repurchase company securities had been substantially depleted.
The company has no material commitments for purchases of property, plant,
and equipment and expects that for all of 2004, such expenditures will
approximate $45 - $50 million. The company's contractual obligations and other
commercial commitments did not change materially between December 31, 2003 and
October 2, 2004.
The company believes that its existing resources, including cash and
investments, 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 Nine Months 2003
- ----------------------
Cash provided by operating activities was $102.8 million during the first
nine months of 2003, including $101.0 million by continuing operations and $1.8
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 $38.0 million in the first
nine months of 2003. Aside from cash used for restructuring actions, a decrease
in other current liabilities used cash of $19.0 million, including $8.8 million
of accrued payroll and employee benefits due to the timing of payments. Cash
provided by discontinued operations of $1.8 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 nine 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
acquisitions. The company's continuing operations expended $22.7 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 $697.8 million of cash during the
first nine months of 2003, including $692.4 million for continuing operations.
During the first nine months of 2003, the company's continuing operations
expended $373.9 million to reduce short-term notes payable. The company's
continuing operations received net proceeds of $35.5 million from the exercise
of employee stock options. During the first nine months of 2003, the company
expended $353.9 million to reduce its debt and repurchase its equity securities,
of which $53.7 million was used to repurchase 2.8 million shares of the
company's common stock.
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THERMO ELECTRON CORPORATION
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 October 2, 2004. Based on this evaluation,
the company's chief executive officer and chief financial officer concluded
that, as of October 2, 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.
In conjunction with its preparation toward compliance with Section 404 of
the Sarbanes-Oxley Act of 2002, the company is in the process of implementing
certain enhancements with respect to its internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). The
company is enhancing and standardizing certain information technology controls,
including documentation thereof, as well as documentation of other financial
controls across its businesses.
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.
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
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.
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.
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
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. For example, in September 2004
Applied Biosystems/MDS Scientific Instruments and related parties brought a
lawsuit against us alleging that our mass spectrometer systems infringe a patent
held by the plaintiffs. We could incur substantial costs and diversion of
management resources in defending infringement claims, which could have a
material adverse effect on our business, financial condition, and results of
operations. In addition, parties making these claims could secure a judgment
awarding substantial damages, as well as injunctive or other equitable relief,
which could effectively block our ability to make, use, sell, distribute, or
market our products and services in the United States or abroad. In the event
that a claim relating to intellectual property is asserted against us, or third
parties not affiliated with us hold pending or issued patents that relate to our
products or technology, we may seek licenses to such intellectual property or
challenge those patents. However, we may be unable to obtain these licenses on
commercially reasonable terms, if at all, and our challenge of the patents may
be unsuccessful. Our failure to obtain the necessary licenses or other rights
could prevent the sale, manufacture, or distribution of our products and,
therefore, could have a material adverse effect on our business, financial
condition, and results of operations.
If any of our security products fail to detect explosives or radiation,
we could be exposed to product liability and related claims for which we may not
have adequate insurance coverage. The products sold by our environmental
instruments division include a comprehensive range of fixed and portable
instruments used for chemical, radiation, and trace explosives detection. These
products are used in airports, embassies, cargo facilities, border crossings,
and other high-threat facilities for the detection and prevention of terrorist
acts. If any of these products were to malfunction, it is possible that
explosive or radioactive material could pass through the product undetected,
which could lead to product liability claims. There are also many other factors
beyond our control that could lead to liability claims, such as the reliability
and competence of the 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 the third quarter of 2004, we divested over 60
businesses with aggregate annual revenues in excess of $2 billion. As part of
these transactions, we retained responsibility for some of the contingent
liabilities related to these businesses, such as lawsuits, product liability
claims, and potential claims by buyers that representations and warranties we
made about the businesses were inaccurate. The resolution of these contingencies
has not had a material adverse effect on our results of operations or financial
condition; however, we can not be certain that this favorable pattern will
continue.
Our results could be impacted if we are unable to realize potential
future benefits from new productivity initiatives. In addition to the real
estate consolidations and cost-saving initiatives that we have pursued over the
past three years, we are instituting practical process improvement (PPI)
programs at our locations to further enhance our productivity, efficiency, and
customer satisfaction. While we anticipate continued benefits from these PPI
initiatives as well as our continuing sourcing activities, future benefits are
expected to be fewer and smaller in size and may be more difficult to achieve.
Our 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
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
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;
- 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 nine months of 2004, currency translation had a favorable effect on
revenues of our continuing operations of $68.2 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.
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THERMO ELECTRON CORPORATION
Forward-looking Statements (continued)
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 October 2, 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.
We believe that we currently have adequate internal controls over
financial reporting but we are still exposed to potential risks resulting from
new requirements that we evaluate the effectiveness of such internal controls
under Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 of the
Sarbanes-Oxley Act of 2002 requires that we include in our annual report on Form
10-K our assessment of the effectiveness of our internal controls over financial
reporting. In addition, our independent auditors will be required to attest to
whether our assessment is free of material misstatement and documented in an
acceptable form and separately report on whether it believes we maintain, in all
material respects, effective control over financial reporting as of December 31,
2004.
We are currently testing our internal control systems and procedures and
implementing improvements in order to comply with the assessment and attestation
requirements of Section 404. The evaluation and attestation processes required
by Section 404 are new and neither companies nor independent auditors have
significant experience in testing or complying with these requirements.
Accordingly, we may encounter problems or delays in completing the review and
evaluation, the implementation of improvements, the receipt of a report of our
independent auditors indicating that management's assessment of the
effectiveness of internal controls over financial reporting is free of material
misstatement and adequately documented, and the receipt of a separate report of
our independent auditors that we maintain effective internal controls. While we
currently anticipate being able to fully implement the requirements of Section
404, we cannot be certain as to the timing of completion of our evaluation,
testing and remediation actions or our independent auditors' review thereof. If
we are not able to implement the requirements of Section 404 in a timely manner
or with adequate compliance, the impact thereof on our future financial
performance and the market price of our stock is uncertain, and we might be
subject to sanctions or investigation by regulatory authorities, such as the
Securities and Exchange Commission or the New York Stock Exchange.
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THERMO ELECTRON CORPORATION
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
- --------------------------
On September 3, 2004, Applera Corporation, MDS Inc. and Applied
Biosystems/MDS Scientific Instruments filed a complaint in U.S. District Court
for the District of Delaware, Civil Action No. 04-1230-GMS, alleging that the
company's mass spectrometer systems infringe U.S. patent number 4,963,736
entitled "Mass Spectrometer and Method and Improved Ion Transmission." The
plaintiffs seek damages, including treble damages for alleged willful
infringement, attorneys' fees, prejudgment interest and injunctive relief. The
company intends to vigorously defend itself in this matter. An unfavorable
outcome could have a material adverse impact on the company's financial
position, results of operations, and cash flows.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
- --------------------------------------------------------------------
A summary of the share repurchase activity for the company's third
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)(2) Programs (1)(2)
- ---------------------------------------------------------------------------------------------------------------------------------
July 4 - July 31 1,513,700 $28.41 1,513,700 $97,496,800
August 1 - August 28 2,780,000 25.21 2,780,000 27,399,500
August 29 - October 2 1,028,000 26.64 1,028,000 13,200
--------- ---------
Total Third Quarter 5,321,700 $26.40 5,321,700 $ 13,200
========= ====== ========= ===========
(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. Of the shares
of the common stock repurchased by the company during the third quarter of 2004, 1,416,200 shares were purchased under this
program. This program has been completed.
(2) 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. Of the shares of common stock
repurchased by the company during the third quarter of 2004, 3,905,500 shares were purchased under this program. This program
has been substantially completed.
Item 6 - Exhibits
- -----------------
See Exhibit Index on the page immediately preceding exhibits.
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THERMO ELECTRON CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 8th day of November 2004.
THERMO ELECTRON CORPORATION
/s/ Peter M. Wilver
-------------------------------------------------
Peter M. Wilver
Vice President and Chief Financial Officer
/s/ Peter E. Hornstra
-------------------------------------------------
Peter E. Hornstra
Corporate Controller and Chief Accounting Officer
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EXHIBIT INDEX
Exhibit
Number Description
- --------------------------------------------------------------------------------
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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