UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------------------------
FORM 10-K
(mark one)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------- -----------------------------------------
Common Stock, $1.00 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
3 1/4% Subordinated Convertible Debentures due 2007 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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 the filing requirements for
at least the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ X ] No [ ]
As of July 2, 2004, the aggregate market value of the voting stock held by
nonaffiliates of the Registrant was approximately $4,881,520,000 (based on the
last reported sale of common stock on the New York Stock Exchange Composite Tape
reporting system on July 2, 2004).
As of January 28, 2005, the Registrant had 160,828,435 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Sections of Thermo Electron Corporation's definitive Proxy Statement for the
2005 Annual Meeting of Shareholders are incorporated by reference into Parts II
and III of this report.
THERMO ELECTRON CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 3
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities 16
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 37
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 38
Item 9A. Controls and Procedures 38
Item 9B. Other Information 39
PART III
Item 10. Directors and Executive Officers of the Registrant 39
Item 11. Executive Compensation 39
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
40
Item 13. Certain Relationships and Related Transactions 40
Item 14. Principal Accountant Fees and Services 40
PART IV
Item 15. Exhibits and Financial Statement Schedules 40
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THERMO ELECTRON CORPORATION
PART I
Item 1. Business
General Development of Business
Thermo Electron Corporation (also referred to in this document as "Thermo
Electron," "we," the "company," or the "registrant") is a world-wide provider of
analytical instruments that enable customers to make the world a healthier,
cleaner, and safer place. We provide analytical instruments, scientific
equipment, services, and software solutions for life science, drug discovery,
clinical, environmental, and industrial laboratories, as well as for use in a
variety of manufacturing processes and in-the-field applications including those
associated with safety and homeland security.
In the late 1980s, Thermo Electron adopted a strategy of spinning out
certain businesses into separate public subsidiaries in which we kept a majority
ownership. By 1997, we had spun out 22 public entities serving many diverse
markets. To simplify our structure, we announced in January 2000 a major
reorganization that ultimately resulted in taking private all of our public
subsidiaries, selling noncore businesses, and spinning off our paper recycling
and medical products businesses. As part of the reorganization, we divested of
businesses with aggregate annual revenues of over $2 billion. This
reorganization was substantially completed in February 2002, when we took
private our last publicly traded subsidiary. In July 2004, we sold
Spectra-Physics, Inc., our optical technologies segment. The businesses spun off
and sold have been accounted for as discontinued operations (see "Business
Segments and Products"). The company's continuing operations are comprised
solely of its instrument businesses. Except where indicated, the information
presented in this report pertains to our continuing operations.
Our current strategy is to drive internal growth by developing for our
customers those products, services, and solutions with the highest growth
potential. In addition, we plan to augment that growth with strategic
acquisitions that expand the reach of our technology and services by either
rounding out our product lines or bringing them to new markets. Our strategy for
growth also includes expanding our presence in developing geographic markets
such as Asia, in particular China, where economic development is contributing to
demand for our products. Our strategy is also to continue to improve
productivity, enabling us to better serve our customers with improved products,
technologies, and complete integrated systems and services.
Thermo Electron is a Delaware corporation and was incorporated in 1956.
The company completed its initial public offering in 1967 and was listed on the
New York Stock Exchange in 1980.
Forward-looking Statements
Forward-looking statements, within the meaning of Section 21E of the
Securities Exchange Act of 1934 (the Exchange Act), are made throughout this
Annual Report on Form 10-K. 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 report.
A number of important factors could cause the 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 Part
II, Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
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Business Segments and Products
We report our business in two principal segments: Life and Laboratory
Sciences and Measurement and Control.
Life and Laboratory Sciences
We serve the pharmaceutical, biotechnology, academic, government, and
other research and industrial laboratory markets, as well as the clinical
laboratory and healthcare industries, through our Life and Laboratory Sciences
segment. This segment has four principal product groupings - Bioscience
Technologies, Scientific Instruments, Informatics and Services, and Clinical
Diagnostics - and provides products and integrated solutions for various
scientific challenges that support many facets of life science research.
Specifically, our Biosciences Technologies products consist primarily of sample
preparation and handling equipment, our Scientific Instruments products include
analytical instrumentation that analyzes the prepared samples, our Informatics
and Services offerings include software interpretation tools and development
support for the data generated by the instruments, and our Clinical Diagnostics
products and services are used by healthcare and other laboratories to prepare
and analyze patient samples, such as blood.
We sell our products through a variety of distribution channels, which
include our direct sales force, distributors, independent sales representatives,
independent agents, and catalogs. Generally, our more technically complex
instruments and solutions are sold directly by our sales force and less
sophisticated products are sold through distributors and catalogs.
Bioscience Technologies products and integrated solutions are used
primarily by pharmaceutical companies for drug discovery and development, and by
biotechnology companies and universities for life science research to advance
the prevention and cure of diseases and enhance the quality of life. Our broad
product range includes instrumentation, consumables, and integrated automation
systems that improve efficiency and productivity in the laboratory. We provide
microplate-based handling, detection, and purification instruments that allow
the researcher to optimize protocols while providing quality, reproducible
results on a consistent basis. We also provide thermal cyclers for the
amplification of nucleic acids by polymerase chain reaction (PCR) or reverse
transcriptase-PCR (RT-PCR). In addition, our consumables, microtiter plates,
pipettes, and pipette tips provide accuracy and precision for liquid handling in
a variety of industrial, academic, government, and clinical laboratories. We
also provide robotic arms, stackers, and fully integrated automation systems
that are used for purposes ranging from simple storage solutions to high
throughput screening, primarily for drug discovery applications.
We also provide a broad range of equipment that is used for the
preparation and preservation of chemical and biological samples, primarily for
pharmaceutical, academic, clinical, and government customers. Products include
incubators that are used in biological experiments to allow growth of cells and
organisms in optimal conditions of temperature, carbon dioxide, and humidity as
well as cold temperature storage equipment, ranging from laboratory
refrigerators to freezers, ultra-low temperature freezers, and cryopreservation
storage tanks, which are used primarily for storing samples in a cold
environment to protect from degradation. We also offer a range of centrifuges,
which are used to separate biological matrices and inorganic materials. Our
microcentrifuges are primarily used for the purification of nucleic acids in the
molecular biology laboratory, our general use benchtop centrifuges are suitable
for processing clinical samples such as blood and urine, and our floor models
are used for large volume blood processing or in laboratories with high
throughput needs. Our centrifugal vacuum concentrators assist researchers in
evaporating organic solvents, acids, and buffers from their samples and have a
wide range of applications in preparations of deoxyribonucleic acid (DNA)
oligomers and pharmaceutical compounds and our freeze dryers are used to
lyophilize drugs, plants or tissues. Our biological safety cabinets enable
technicians to handle samples without risk to themselves or their environment
and without risk of cross contamination of samples. Equipped with filtered air
ventilation, controlled laminar flow, and an ultraviolet source, biological
safety cabinets can be used for forensic analysis or bioterrorism research.
Other products we provide to the laboratory include circulating water baths and
ovens for applications where temperature uniformity and control are critical.
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In January 2005, we reached an agreement to purchase the Kendro
Laboratories Products division of SPX Corporation for $833.5 million in cash,
subject to a post-closing balance sheet adjustment. Kendro designs,
manufactures, markets, and services a wide range of laboratory equipment for
sample preparation, processing, and storage used primarily in life sciences and
drug discovery laboratories as well as clinical laboratories. The acquisition is
subject to regulatory approvals and other customary conditions. Kendro's
revenues were approximately $375 million in 2004.
Scientific Instruments represent the company's core offering of
instrumentation, including mass spectrometry, chromatography, and optical
spectroscopy, for laboratory and industrial settings, along with the automation,
accessories, consumables, software, spectral reference databases, and services,
to provide a complete solution. Mass spectrometry is a technique for analyzing
chemical compounds, individually or in complex mixtures, by forming gas phase
charged ions that are then analyzed according to mass-to-charge ratios. In
addition to molecular information, each discrete chemical compound generates a
fragmentation pattern that provides structurally diagnostic information.
Chromatography is a technique for separating, identifying, and quantifying
individual chemical components of substances based on physical and chemical
characteristics specific to each component. Optical spectroscopy is a technique
for analyzing individual chemical components of substances based on the
absorption or emission of electromagnetic radiation of a specific wavelength of
light, for example, visible (light), ultraviolet or infra-red.
In the life sciences market, we offer a line of mass spectrometers
including ion traps, quadrupoles, and hybrid mass spectrometers (MS), as well as
liquid chromatographs (LCs) and columns, and hybrid multi-instrument
combinations of these products as integrated solutions (LC-MS). These systems
are tailored to meet the rigorous demands of lab professionals in applications
such as drug discovery, life science research, and analytical quantitation.
Ion Traps. The company's ion trap mass spectrometer product line features
a four-tier portfolio to support a wide spectrum of analytical requirements.
These instruments support applications ranging from compound identification and
routine high performance liquid chromatography (HPLC) to sophisticated analysis
of low-level components in complex biological matrices.
- Finnigan LTQ FT(TM) - this hybrid MS system combines our most
advanced ion trap and Fourier Transform (FT) Ion Cyclotron Resonance
(ICR) technologies into a single instrument with superior analytical
power and versatility. The system uniquely combines high resolution,
accurate mass determinations, and MSn (mass spectrometry to the nth
power) for high-throughput analysis on a single instrument.
- Finnigan LTQ(TM) - this linear MS system, based on a 2-dimensional
(2-D) linear ion trap design and incorporating patented innovative
technologies and ease-of-use features, is primarily used for
metabolic profiling and proteomics research.
- Finnigan LCQ(TM) Deca XP MAX - this ion trap mass spectrometer is
used primarily for rapid metabolite identification, peptide mapping,
and complex mixture analysis. It features our new Ion Max(TM) source,
an improved front-end ion source, which provides ruggedness and full
scan sensitivity, making it a valuable tool for analysis of in-vivo
and in-vitro samples.
- Finnigan LCQ Advantage MAX - this ion trap mass spectrometer
integrates the power of MS/MS with an LC system, boosting analytical
power with library searchable MS/MS spectra for reliable compound
identification. This instrument delivers high productivity for
routine HPLC environments.
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Triple Quadrupole MS. The company's TSQ Quantum Series of mass
spectrometers represents a highly advanced and powerful line of triple
quadrupole mass spectrometers.
- Finnigan TSQ(TM) Quantum Discovery MAX - this high-performance, ultra
compact benchtop MS system incorporates innovative new technology for
increased sensitivity, precision, ruggedness, and reliability. It is
principally designed for high-productivity environments such as
environmental, clinical, and drug discovery laboratories. With the
Ion Max source, the Finnigan TSQ Quantum Discovery MAX addresses the
need of these laboratories for more rugged and dependable LC/MS/MS to
enable around-the-clock productivity.
- Finnigan TSQ Quantum Ultra EMR - this recently introduced MS offers
higher resolution and an extended mass range (EMR) of up to 3000
Daltons. This extended mass range capability allows high-resolution
analysis of a whole new class of biopolymers including peptides,
polysaccharides, and oligonucleotides. The system delivers a complete
solution for the proteomics and large molecule research community.
- The Finnigan TSQ Quantum Ultra - this MS is an advanced instrument
used primarily for bioanalytical and environmental analysis. It
features the Ion Max source with interchangeable electrospray
ionization (ESI) and atmospheric pressure chemical ionization (APCI)
probes and a wide aperture titanium skimmer for increased robustness
and sensitivity.
A significant and growing application for our technology-driving mass
spectrometers is proteomics, the study of proteins. Most drugs - about 90
percent - interact with proteins, so multi-instrument systems that can rapidly
identify and quantify proteins are of increasing value to pharmaceutical and
biotechnology customers. We continue to introduce new systems that address the
breadth of primary analytical needs for high-throughput analysis and proteomics
research, as well as for other growing life science areas such as:
- Biomarkers - compounds which may be endogenous and signal the early
onset of a specific disease.
- ADME/Tox - Absorption, Distribution, Metabolism, Excretion, and
Toxicology studies that are conducted for drug discovery in support
of human clinical trials.
- Metabalomics - measurement of the real biochemical status, dynamics,
interactions, and regulation of whole systems or organisms at a
molecular level.
The sensitivity of our Finnigan LTQ ion trap and the power of our
Finnigan LTQ FT hybrid MS, particularly with the new vMALDI source, are being
used to improve protein detection, and our SEQUEST(R) (registered trademark of
the University of Washington) software provides higher sensitivity and accuracy
for protein identification.
Liquid Chromatography. Our HPLC systems, such as the Finnigan Surveyor
Plus and Finnigan SpectraSYSTEM, offer high throughput and sensitivity. They are
sold as stand-alone instrumentation (HPLC) or as integrated systems with our
mass spectrometers (LC-MS). These products utilize our comprehensive line of
HPLC columns, including HYPERSIL(TM) Gold, HyPurity(TM), and Aquasil columns.
Beyond the life sciences market, our chemical analysis instrumentation
uses various separation and optical spectroscopy techniques to determine the
elemental and molecular composition of a wide range of complex liquids and
solids. We manufacture and market a range of spectroscopy instruments using gas
chromatography (GC), GC mass spectrometry (GC-MS), combustion analysis, atomic
absorption (AA), inductively coupled plasma-mass spectrometer (ICP-MS), Fourier
transform infrared (FT-IR), near-infrared (NIR), Optical Emission (OE), Raman,
ultraviolet/visible (UV-Vis), fluorescence, X-ray diffractometry (XRD), X-ray
fluorescence (XRF), and infrared and X-ray microspectroscopy. We also develop
state-of-the-art advanced instrumentation, including magnetic sector MS, auger,
and X-ray photoelectron spectroscopy systems. Customers include environmental,
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pharmaceutical, polymer, petrochemical, food, semiconductor, energy, coatings,
geological, steel, and basic material producers, who frequently use these
instruments for quality assurance and quality control applications, primarily in
a laboratory.
Informatics and Services offerings include laboratory information
management systems (LIMS), chromatography data systems, database analytical
tools, and instrument integration solutions for customers in regulated and
nonregulated industries such as pharmaceuticals, biotechnology, petrochemicals,
chemicals, and food and beverage. We also provide desktop spectroscopy software
for data processing, data management, 3-D data viewing, spectral reference
databases, and chemometrics. Each of these software systems is critical to
regulatory compliance because they facilitate the monitoring and analysis of
samples by storing and organizing the massive amounts of analytical data
gathered in laboratories, industrial settings, and clinical-testing sites. To
support our global installations, we provide implementation, validation,
training, maintenance, and support from our large globally-based informatics
services network.
We expanded our LIMS offerings in September 2004 with the acquisition of
InnaPhase Corporation, a supplier of application-oriented LIMS software
solutions for the pharmaceutical and biotechnology markets.
Our expanded portfolio includes SampleManager, an enterprise LIMS used in
laboratories at leading companies in the pharmaceutical, oil and gas,
environmental, chemical, and food and beverage industries; Watson(TM), an
industry-leading LIMS for pharmaceutical bioanalytical laboratories; Galileo(TM)
LIMS, designated specifically for ADME and in-vitro testing in early drug
discovery and development; and Nautilus LIMS, used by leading biotechnology
laboratories because of its application-specific functionality and
configurability. In addition, we market the Atlas chromatography data system, a
multi-industry enterprise-class system that is tightly integrated with our LIMS
solutions for greater accuracy and consistent reporting of shared data. Our
Enterprise Pharmacology (EP) Series(TM) and Kinetica(TM) database analytical
tools are used in pharmacokinetics and pharmacodynamics and our GRAMS/AI is a
comprehensive desk-top spectroscopy data processing and management solution.
Our software portfolio also includes Retriever(TM), a reporting and
data-mining application for accessing and sharing information from our suite of
LIMS products, and Migration Agent, a professional services-driven process that
includes software tools for data migration to facilitate a successful transition
to a new or upgraded LIMS solution.
We also provide a global services network of experienced consultants that
provide a broad range of services focused on the successful implementation of
our customers' projects. These services include project planning, management of
user workshops, defining business requirements, milestone delivery, systems
integration, workflow modeling, and validation consultancy.
Furthering our strategy to become the most comprehensive service provider
to scientific laboratories, we acquired Laboratory Management Systems, Inc.
(LMSi) in November 2003 and US Counseling Services, Inc. (USCS) in April 2004.
LMSi provides multi-vendor laboratory instrument services, including instrument
qualifications and computer systems validation, regulatory compliance,
metrology, and certification as well as a range of consulting services to the
pharmaceutical and related industries. USCS is a leader in equipment asset
management services in the pharmaceutical and healthcare industries with
solutions that deliver instrument and equipment maintenance management, physical
inventory tracking, and enterprise-wide maintenance reporting to help customers
improve the performance of their laboratory facilities.
Clinical Diagnostics products and services are used by healthcare
laboratories in doctors' offices and hospitals to prepare and analyze patient
samples, such as blood, urine, body fluids or tissue sections, to detect and
diagnose diseases, such as cancer.
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Our clinical chemistry offerings include clinical chemistry analyzers and
reagents to analyze and measure routine blood and urine chemistry, such as
glucose and cholesterol; and advanced testing for specific proteins, therapeutic
drug monitoring, and drugs of abuse. We also provide pre- and post-analytical
automation for preparation of blood and urine specimens before and after
analysis.
Our anatomical pathology products consist of cytocentrifuges for cell
preparation of body fluids; tissue processors for preparation of tissue samples;
microtomes for sectioning of processed tissues, and slide stainers to highlight
abnormal cells for microscopic examination and diagnosis. We also supply a
complete line of ventilated workstations, dissecting tables, autopsy sinks, and
cadaver storage for forensic investigation and morgue facilities.
Our rapid diagnostics products utilize our patented OIA(R) (Optical
ImmunoAssay) technology to provide highly sensitive and specific diagnostic test
results in minutes. They are widely used in physicians' offices, hospitals, and
reference laboratories to test for respiratory, gastrointestinal, and sexually
transmitted infectious diseases. Our products include tests for Group A and B
Streptococcus; Influenza A and B; Chlamydia; Gonorrhea; Respiratory Syncytial
Virus (RSV), the most common cause of lower respiratory tract infections in
children worldwide; and Clostridium difficile toxin A.
Measurement and Control
Our Measurement and Control segment serves industrial markets and
governmental agencies by providing products and services for process control and
optimization, and for environmental monitoring, safety, and security. Our
products enable customers to increase quality, improve productivity, ensure
worker safety, and improve environmental protection and regulatory compliance.
In addition, we offer a comprehensive range of fixed and portable chemical-,
radiation-, and explosives-detection instruments to help ensure the safety of
public places and people. This segment has two principal product groupings,
Process Instruments and Environmental Instruments.
We sell our products through a variety of distribution channels, which
include our direct sales force, distributors, independent sales representatives,
independent agents, and catalogs to end-users and original equipment
manufacturers. Generally, our more technically complex instruments and solutions
are sold directly by our sales force and less sophisticated products are sold
through distributors and catalogs.
Process Instruments include online instrumentation products, solutions,
and services that provide regulatory inspection, quality control, package
integrity, process measurements, precise temperature control, physical,
elemental and compositional analysis, surface and thickness measurements, remote
communications, and flow and blend optimization. We serve a variety of
industries, such as oil and gas, petrochemical, pharmaceutical, food and
beverage, consumer products, power-generation, metal, cement, minerals and
mining, semiconductor, polymer, coatings and adhesives manufacturers, water and
wastewater treatment facilities, and pulp and paper manufacturers. Our Process
Instruments include four principal product lines: control technologies,
materials and minerals, process systems, and weighing and inspection.
Through our control technologies product line we are a leading
manufacturer of precision temperature control, material characterization,
compliance test systems, and high vacuum components for the global industrial
and laboratory markets. The temperature-control product line includes the
NESLAB(TM) and HAAKE(TM) lines of heated/refrigerated circulating baths,
immersion coolers, and re-circulating chillers. Customers use these products to
control highly critical manufacturing processes, such as semiconductor
manufacturing operations or pharmaceutical-grade extrusion lines. We provide
material characterization instruments that help our customers analyze materials
for viscosity, surface tension, and thermal properties. For instance, our highly
flexible Haake-MARS(TM) and Haake-POLYLAB(TM) products lead the market in
accuracy and flexibility for measuring a wide range of rheological properties in
the lab and in process applications. Our compliance-test systems and simulators
ensure that electronic components and systems meet international and industry
standards for electromagnetic compatibility and electrostatic discharge. We also
manufacture components, assemblies, and systems used to produce high- and
ultra-high vacuum operations in industrial, educational, and R&D applications.
These products range from small gaskets to walk-in chambers.
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Our materials and minerals products include online bulk material analysis
systems, such as the CBX(TM) and CQM(TM) products, and use proprietary,
ultrahigh-speed, non-invasive measurement technologies that use neutron
activation and measurement of gamma rays to analyze, in real time, the physical
and chemical properties of streams of raw materials. These products are used in
the coal, cement, minerals, and other bulk material handling applications to
analyze entire streams of material and eliminate the need for off-line sampling,
which can add production time, waste, and cost. Our analyzer products coupled
with material-handling products help our customers optimally blend raw feed
streams to control sulfur and ash in coal-fired power plants. We also provide
systems, such as the Radiometrie(TM) line of products, to measure the total
thickness, basis weight, and coating thickness of flat-sheet materials, such as
metal strip, plastics, foil, rubber, glass, paper, and other web-type products.
These gauging products use ionizing and non-ionizing technologies to perform
high-speed, real-time, non-invasive measurement.
Our process systems help oil and gas, refining, petrochemical,
electric-utility, and other manufacturers optimize their processes. Our
instruments provide sophisticated measurement and sensor systems to improve
efficiency, provide process and quality control, maintain regulatory compliance,
and increase worker safety. For instance, our gas flow computers support custody
transfer applications in the production and transmission of natural gas; our
KRIL(TM) level and interface detection products are used in extremely harsh
coker applications for petroleum refining; and our VG Prima(TM) line of process
mass spectrometers help our customers detect minute constituents in process
gases. These systems provide real-time direct and remote data collection,
analysis, and local control functions using a variety of technologies, including
radiation, radar, ultrasonic, and vibration measurement principles, gas
chromatography, and mass spectrometry. As another example, our SOLA(TM) line of
products, based on pulsed UV fluorescence technology, is the leading online
sulfur analyzer used by refiners to bring clean fuels to consumers.
Our weighing and inspection products serve the food and beverage,
pharmaceutical packaging, and bulk material handling industries. For the food
and beverage and pharmaceutical markets, we provide solutions to help our
customers attain safety and quality standards. Our products are based on a
variety of technologies, such as X-ray imaging and ultratrace chemical
detection, to inspect packaged goods for physical contaminants, validate fill
quantities, or check for missing or broken parts. For example, our DSP(TM) line
of metal detectors uses non-invasive, high-speed, flux technology to inspect
packaged products; our AC line of checkweighers is used to weigh packages on
high-speed packaging lines; our InScan(TM) line uses X-ray imaging to enable our
customers to inspect canned or bottled beverages at very high speed; and the
PureAqua(TM) line provides online-sniffing technology to inspect recycled
bottles for traces of contaminants before refilling. We also provide bulk
material handling products such as belt-scales, flow meters, safety switches,
and contamination detectors to enable solids-flow-monitoring, level
measurements, personnel safety, spillage prevention, and contamination detection
for a wide variety of processing applications in the food, minerals, coal,
cement, and other bulk solids handling markets.
Environmental Instruments include portable and fixed instrumentation used
to help our customers protect people and the environment, with particular focus
on environmental compliance, product quality, worker safety, process efficiency,
and security. Key end markets include fossil fuel and nuclear-powered electric
generation facilities, federal and state agencies such as the Environmental
Protection Agency (EPA) and first responders such as the New York Police
Department, national laboratories such as Los Alamos, general commercial and
academic laboratories, transportation security for sites such as ports and
airports, and other industrial markets such as pulp and paper and petrochemical.
Our instrumentation is used in four primary applications: air quality monitoring
and gas detection, water quality and aqueous solutions analysis, radiation
measurement and protection, and explosives detection.
We are a leader in air quality instruments for ambient air and continuous
emissions monitoring. Primary markets and customers include environmental
regulatory agencies, emissions generating industries such as power generation
and pulp and paper, first responders, and industrial customers with Occupational
Safety and Health Administration-related gas detection requirements. Our
instruments utilize a variety of leading analytical techniques, such as
chemiluminescence, which uses the light emission from chemical reactions to
detect gases at the parts per trillion level to detect common air pollutants
such as nitrogen dioxide. The iSeries(TM) family of analyzers uses various
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optical detection technologies to monitor parts per billion levels of regulated
pollutants, such as ground level ozone and sulfur dioxide. Further, state and
federal environmental agencies, as well as environmental compliance officers at
facilities that generate emissions into the air, use our stack gas monitoring
systems to ensure that governmentally mandated standards are being met. Our
industrial hygiene products measure combustible gases such as carbon monoxide,
toxic gases such as hydrogen sulfide, and hazardous chemicals such as benzene.
The instruments range from hand-held monitors that are used at hazardous waste
sites for remediation activities, to general-purpose portable products for
personnel exposure monitoring, to sophisticated fixed systems in industrial
facilities for early warning of unsafe combustible and toxic gas concentrations.
In addition to these core applications, our product portfolio includes
particulate monitoring instruments and leak detection monitors.
Our water analysis business is recognized as an industry leader for high
quality meters, electrodes, and solutions for the measurement of pH, ions,
conductivity, and dissolved oxygen. Marketed under the Orion(TM) product name,
our products are sold across a broad range of industries for a variety of
laboratory, field, and process applications. Based on electrochemical sensing
technology, these products are used wherever the quality of water and
water-based products is critical. Primary applications include quality
assurance, environmental testing, and regulatory compliance in end markets such
as general laboratories, life science, water and wastewater, food and beverage,
chemical, pharmaceutical, and power-generation.
Our radiation measurement and protection instruments are used to monitor,
detect, and identify specific forms of radiation in nuclear power,
environmental, industrial, medical, and security applications. For example,
power- generation facilities distribute our Mark II(TM) electronic
pocket-calculator sized personal dosimeters to employees who work in areas that
may expose them to radiation to capture the legal dose of record to which they
are daily exposed. In addition, our customers use contamination monitors, such
as our PCM2(TM), in at-risk locations around their facilities to monitor
radiation. A variety of our detectors, such as the Surveyor 2000(TM), are used
to monitor radiation levels and dosage using gross gamma detection methods.
Using these methods, which can both measure and identify the source of
radiation, our product portfolio includes hand-held survey meters and vehicle
and pedestrian portals used in steel mills to stop a radiation source from
entering a steel recycling process as well as at border crossings to stop
illicit transport of radioactive material. Environmental and contamination
monitors are used by nuclear power plants to ensure worker safety.
Our security instruments and systems include a comprehensive range of
internally developed stationary and portable instruments used for chemical,
radiation, and trace explosives detection. These instruments are based upon
analytical technologies used in our core markets that we have refined for the
specific needs of the security market, including key customers like the
Department of Homeland Security, the Department of Defense, the Department of
Energy, and first responders. Our instruments are used for the detection and
prevention of terrorist acts at airports, embassies, cargo facilities, border
crossings, and other high-threat facilities, as well as at major events such as
the Olympics. For example, the EGIS(TM) System is designed to identify
explosives so that they can be intercepted before being taken to their intended
destination, whether it is an airplane, building, or other target. EGIS is
currently being used to screen checked and carry-on baggage, packages, and
personnel at airports, buildings, military bases, and embassies. EGIS utilizes
separation and detection technologies identical to those used in advanced
forensic laboratories worldwide: gas chromatography combined with
chemiluminescent detection. The Transportation Security Administration (TSA) has
approved the EGIS System as in accordance with TSA's trace explosive detection
standards, and has placed these technologies on its Qualified Vendor List for
trace explosive detection systems. EGIS and our other instruments are also used
by first responders, hazardous material teams, and forensics labs in response to
a terrorist event.
For financial information about segments, including domestic and
international operations and export sales, see Note 3 to our Consolidated
Financial Statements, which begin on page F-1 of this report.
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THERMO ELECTRON CORPORATION
Discontinued Operations
In July 2004, we sold Spectra-Physics, which constituted our optical
technologies segment, to Newport Corporation. Spectra-Physics manufactures and
distributes high-powered semiconductor and solid-state lasers for industrial,
scientific, electronics, and biomedical markets. The business also manufactures
and distributes optical and optoelectronic components and systems that make,
move, manipulate, and measure light. This business has been reflected as a
discontinued operation in the accompanying financial statements. As part of the
consideration for the sale of Spectra-Physics, the company obtained a note
receivable from Newport and shares of Newport common stock (Note 16).
New Products and Research and Development
Our business includes the development and introduction of new products
and may include entry into new business segments. We are not currently committed
to any new products that require the investment of a material amount of our
funds, nor do we have any definitive plans to enter new businesses that would
require such an investment.
During 2004, 2003, and 2002, we spent $134.7 million, $128.0 million, and
$132.0 million, respectively, on research and development.
Raw Materials
Our management team believes that we have a readily available supply of
raw materials for all of our significant products from various sources. We do
not anticipate any difficulties obtaining the raw materials essential to our
business.
Patents, Licenses, and Trademarks
Patents are important in both segments of our business. No particular
patent, or related group of patents, is so important, however, that its loss
would significantly affect our operations as a whole. Where appropriate, we seek
patent protection for inventions and developments made by our personnel and
incorporated into our products or otherwise falling within our fields of
interest. Patent rights resulting from work sponsored by outside parties do not
always accrue exclusively to the company and may be limited by agreements or
contracts.
We protect some of our technology as trade secrets and, where
appropriate, we use trademarks or register trademarks used in connection with
products. We also enter into license agreements with others to grant and/or
receive rights to patents and know-how.
Seasonal Influences
Revenues in the fourth calendar quarter are historically stronger than in
the other quarters due to capital spending patterns of industrial,
pharmaceutical, and government customers.
Working Capital Requirements
There are no special inventory requirements or credit terms extended to
customers that would have a material adverse effect on our working capital.
Dependency on a Single Customer
There is no single customer the loss of which would have a material
adverse effect on our business. No customer accounted for more than 10% of our
total revenues in any of the past three years.
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Backlog
Our backlog in continuing operations of firm orders at year-end 2004 and
2003 was as follows:
2004 2003
-------- --------
(In thousands)
Life and Laboratory Sciences $339,662 $261,033
Measurement and Control 127,329 108,603
-------- --------
$466,991 $369,636
======== ========
We believe that virtually all of our backlog at the end of 2004 will be
filled during 2005. The increase in backlog in 2004 is due to acquisitions and,
to a lesser extent, currency translation and increased demand.
Government Contracts
Although the company transacts business with various government agencies,
no government contract is of such magnitude that a renegotiation of profits or
termination of the contract at the election of the government agency would have
a material adverse effect on the company's financial results.
Competition
General
The company encounters aggressive and able competition in virtually all
of the markets we serve. Because of the diversity of our products and services,
we face many different types of competitors and competition. Our competitors
range from large organizations that produce a comprehensive array of products
and services for a variety of markets to small organizations producing a limited
number of products and services for specialized markets. In general, competitive
climates in the markets we serve are characterized by changing technology and
customer demands that require continuing research and development. Our success
in these markets primarily depends on five factors:
- technical performance and advances in technology that result in new
products and improved price/performance ratios;
- our reputation among customers as a quality provider of products and
services;
- customer service and support;
- active research and application-development programs; and
- relative prices of our products and services.
Life and Laboratory Sciences
Bioscience Technologies. In the markets for these products, our principal
competitors include Eppendorf AG; Gilson, Inc.; Tecan Group Ltd.; PerkinElmer,
Inc.; Molecular Devices Corp.; Kendro Laboratory Products (a division of SPX
Corporation); Sanyo Electric Biomedical Co. (a subsidiary of Sanyo Electric
Co.); New Brunswick Scientific Co., Inc.; Nuaire, Inc.; Beckman Coulter, Inc.;
Fisher Scientific International Inc.; The Baker Company; and Sheldon Mfg. Inc.
Scientific Instruments. In the markets for these products, our principal
competitors include Applied Biosystems Inc.; Agilent Technologies Inc.; Waters
Corporation; Shimadzu Corporation; PerkinElmer; Bruker Biosciences Corporation;
Hitachi, Ltd.; and Varian Inc.
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Informatics and Services. In the markets for these offerings, our
principal competitors include PerkinElmer; Applied Biosystems; Agilent; LabWare,
Inc.; and GE Medical Systems (a General Electric Company going to market as GE
Healthcare).
Clinical Diagnostics. In the markets for these products, our principal
competitors include Leica Microsystems; Sakura Finetechnical Co., Ltd.; Becton,
Dickinson and Company; Quidel Corporation; Apogent Technologies Inc. (a
subsidiary of Fisher Scientific International Inc.); and Roche Diagnostics (a
division of F. Hoffmann-La Roche A.G.).
Measurement and Control
Process Instruments. In the markets for these products, our principal
competitors include Mettler-Toledo International Inc.; Yokogawa Electric
Corporation; Fisher-Rosemount (a division of Emerson Electric Co.); ABB Ltd.;
Endress & Hauser Holding AG; Integrated Measurement Systems, Inc.; Antek
Instruments, Inc.; SMC Corporation; Lytron Inc.; Julabo USA, Inc.; TA
Instruments Inc.; Gottfert Inc.; C.W. Brabender Instruments, Inc.; and MDC
Technology (a division of Emerson Electric Co.).
Environmental Instruments. In the markets for these products, our
principal competitors include Mettler-Toledo; Horiba Instruments Inc.; Fisher-
Rosemount; Danaher Corporation; Teledyne Advanced Pollution Instrumentation,
Inc.; RAE Systems Inc.; Canberra Industries, Inc.; MGP Instruments, Inc.; GE
Interlogix Inc. (a subsidiary of General Electric Company); and Smiths Group
PLC.
Environmental Protection Regulations
Complying with federal, state, and local environmental protection
regulations should not significantly affect our capital spending, earnings, or
competitive position.
Number of Employees
As of December 31, 2004, we had approximately 9,900 employees.
Financial Information About Geographic Areas
Financial information about geographic areas is summarized in Note 3 to
our Consolidated Financial Statements, which begin on page F-1 of this report.
Available Information
The company files annual, quarterly, and current reports, proxy
statements, and other documents with the Securities and Exchange Commission
(SEC) under the Exchange Act. The public may read and copy any materials that we
file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, D.C. 20549. The public may obtain information on the operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC
maintains a Web site that contains reports, proxy and information statements,
and other information that issuers, including the company, file electronically
with the SEC. The public can obtain any documents that we file with the SEC at
www.sec.gov. We also make available free of charge on or through our own Web
site at www.thermo.com our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those
reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon
as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC. In addition, paper copies of these documents may be
obtained free of charge by writing to the company care of its Investor Relations
Department at our principal executive office located at 81 Wyman Street,
Waltham, Massachusetts 02451.
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Executive Officers of the Registrant
Name Age Present Title (Fiscal Year First Became Executive Officer)
- ------------------ --- ----------------------------------------------------------
Marijn E. Dekkers 47 President and Chief Executive Officer (2000)
Marc N. Casper 36 Senior Vice President (2001)
Guy Broadbent 41 Vice President; President, Bioscience Technologies (2001)
Seth H. Hoogasian 50 Vice President, General Counsel, and Secretary (2001)
Stephen G. Sheehan 49 Vice President, Human Resources (2003)
Peter M. Wilver 45 Vice President and Chief Financial Officer (2003)
Peter E. Hornstra 45 Corporate Controller and Chief Accounting Officer (2001)
Mr. Dekkers was appointed Chief Executive Officer in November 2002 and
President in July 2000. He was Chief Operating Officer from July 2000 to
November 2002. From June 1999 to June 2000, Mr. Dekkers served as president of
Honeywell International's electronic materials division.
Mr. Casper was appointed Senior Vice President of Thermo Electron in
December 2003. He was President, Life and Laboratory Sciences from December 2001
to March 2005. He was Vice President of Thermo Electron from December 2001 to
December 2003. From July 2000 to July 2001, Mr. Casper was president and chief
executive officer of Kendro Laboratory Products, a life sciences company that
provides sample-preparation and processing equipment. From May 1999 to June
2000, Mr. Casper was president for the Americas at Dade Behring Inc., a
manufacturer of clinical-diagnosis products.
Mr. Broadbent was appointed President, Bioscience Technologies in
November 2004 and Vice President of Thermo Electron in January 2001. He was
President, Spectra-Physics Division from December 2003 to July 2004 and was
President, Optical Technologies from October 2000 to December 2003. From May
2000 to October 2000, Mr. Broadbent was vice president and general manager of
the amorphous metals division of Honeywell International, and from November 1998
to April 2000, he was business director for Honeywell International's specialty
fluorine division.
Mr. Hoogasian was appointed Secretary in 2001, Vice President in 1996,
and General Counsel in 1992.
Mr. Sheehan was appointed Vice President, Human Resources in August 2001.
From 1997 to July 2001, Mr. Sheehan served as vice president of human resources
for Merck Research Labs, the research unit of Merck & Co., Inc., a
pharmaceutical company.
Mr. Wilver was appointed Vice President and Chief Financial Officer in
October 2004. He was Vice President, Financial Operations from October 2000 to
October 2004. From February 2000 to September 2000, Mr. Wilver was vice
president and chief financial officer of Honeywell International's electronic
materials division, and from May 1998 to January 2000, he was finance director
of its aerospace aftermarket services business.
Mr. Hornstra was appointed Chief Accounting Officer in January 2001 and
Corporate Controller in 1996.
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THERMO ELECTRON CORPORATION
Item 2. Properties
The location and general character of our principal properties by segment
as of December 31, 2004, are as follows:
Life and Laboratory Sciences
We own approximately 1,495,000 square feet of office, engineering,
laboratory, and production space, principally in Ohio, Wisconsin, California,
Virginia, Texas, and Pennsylvania within the U.S., and in Germany, Italy,
France, and Switzerland. We lease approximately 1,857,000 square feet of office,
engineering, laboratory, and production space, principally in Massachusetts and
Colorado within the U.S., and in Finland, France, England, China, Denmark, and
Japan, under various leases that expire between 2005 and 2022.
Measurement and Control
We own approximately 700,000 square feet of office, engineering,
laboratory, and production space, principally in New Hampshire, Minnesota, and
New Mexico within the U.S., and in Germany and England. We lease approximately
800,000 square feet of office, engineering, laboratory, and production space,
principally in Massachusetts and Texas within the U.S., and in England, under
various leases that expire between 2005 and 2013.
Corporate Headquarters
We own approximately 81,000 square feet of office space in Massachusetts.
We believe that all of the facilities that we are currently utilizing are
in good condition and are suitable and adequate to meet our current needs. If we
are unable to renew any of the leases that are due to expire in the next year or
two, we believe that suitable replacement properties are available on
commercially reasonable terms.
Item 3. 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. On December 8, 2004 and
February 23, 2005, the company asserted in two lawsuits in the same Delaware
court, that the plaintiffs infringe two patents of the company. The lawsuits
brought by the company seek relief similar to that being sought by the
plaintiffs.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders, whether through
the solicitation of proxies or otherwise, during our 2004 fourth fiscal quarter.
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THERMO ELECTRON CORPORATION
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Market Price of Common Stock
Our common stock is traded on the New York Stock Exchange under the
symbol TMO. The following table sets forth the high and low sale prices of the
company's common stock for 2004 and 2003, as reported in the consolidated
transaction reporting system.
2004 2003
-------------------- --------------------
High Low High Low
------ ------ ------ ------
First Quarter $29.33 $25.03 $20.38 $17.02
Second Quarter 31.00 27.81 22.36 17.57
Third Quarter 29.45 24.21 23.33 21.00
Fourth Quarter 30.88 26.20 25.37 21.40
Holders of Common Stock
As of January 28, 2005, the company had 9,481 holders of record of its
common stock. This does not include holdings in street or nominee names.
Dividend Policy
The company has never paid cash dividends and does not expect to pay cash
dividends in the foreseeable future. Payment of dividends will rest within the
discretion of the company's Board of Directors and will depend upon, among other
factors, the company's earnings, capital requirements, and financial condition.
Issuer Purchases of Equity Securities
The company did not repurchase any of its debt or equity securities
during the fourth quarter of 2004. As of December 31, 2004, the authorization by
the company's Board of Directors to repurchase company securities had been
substantially expended.
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THERMO ELECTRON CORPORATION
Item 6. Selected Financial Data
2004 (a) 2003 (b) 2002 (c) 2001 (d) 2000 (e)
-------- -------- -------- -------- --------
(In millions except per share amounts)
Statement of Operations Data
Revenues $2,206.0 $1,899.4 $1,849.4 $1,916.2 $2,033.8
Operating Income 237.5 187.4 169.9 82.4 253.6
Income from Continuing Operations Before Cumulative Effect
of Change in Accounting Principle 218.4 175.2 203.4 76.0 54.4
Income (Loss) Before Cumulative Effect of Change in
Accounting Principle 361.8 200.0 309.7 0.2 (23.2)
Net Income (Loss) 361.8 200.0 309.7 (0.8) (36.1)
Earnings per Share from Continuing Operations Before
Cumulative Effect of Change in Accounting Principle:
Basic 1.34 1.08 1.21 .42 .32
Diluted 1.31 1.05 1.17 .41 .31
Earnings (Loss) per Share:
Basic 2.22 1.23 1.84 - (.22)
Diluted 2.17 1.20 1.73 - (.22)
Balance Sheet Data
Working Capital $ 890.9 $ 710.5 $ 667.8 $ 823.2 $1,737.0
Total Assets 3,576.7 3,389.3 3,651.5 3,825.1 4,863.0
Long-term Obligations 226.1 229.5 451.3 727.5 1,521.0
Minority Interest - - - 0.1 0.1
Shareholders' Equity 2,665.6 2,381.7 2,030.3 1,908.1 2,534.0
Through 2002, the company had a fiscal year end ending the Saturday
nearest December 31. In 2003, the company changed its year end to December 31.
The consolidated financial statements for fiscal years 2000 and 2001 were
audited by Arthur Andersen LLP, which has ceased operations. The results of
Spectra-Physics have been reclassified to discontinued operations for all years
presented.
(a) Reflects a $19.2 million pre-tax charge for restructuring and other costs;
$9.6 million of pre-tax gains from the sale of shares of Thoratec
Corporation; $33.8 million of tax benefits recorded on completion of tax
audits; after-tax income of $143.5 million related to the company's
discontinued operations; and the repurchase of $231.5 million of the
company's common stock.
(b) Reflects a $45.3 million pre-tax charge for restructuring and other costs;
$16.3 million of pre-tax gains from the sale of shares of Thoratec; $13.7
million of pre-tax gains from the sale of shares of FLIR Systems, Inc.;
after-tax income of $24.8 million related to the company's discontinued
operations; and the repurchase and redemption of $356.9 million of the
company's debt and equity securities.
(c) Reflects a $46.2 million pre-tax charge for restructuring and other costs;
$111.4 million of pre-tax gains from the sale of shares of FLIR; after-tax
income of $106.3 million related to the company's discontinued operations;
the repurchase and redemption of $924.9 million of the company's debt and
equity securities; and the reclassification of the company's $71.9 million
principal amount 4 3/8% subordinated convertible debentures from long-term
obligations to current liabilities as a result of the company's decision
to redeem them in April 2003. Also reflects the adoption of SFAS No. 142,
under which amortization of goodwill ceased.
(d) Reflects a $107.4 million pre-tax charge for restructuring and other
costs; $35.1 million of pre-tax gains from the sale of shares of FLIR; an
after-tax loss of $75.8 million related to the company's discontinued
operations; a $1.0
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THERMO ELECTRON CORPORATION
million after-tax charge reflecting the cumulative effect of a change in
accounting principle for the adoption of SFAS No. 133; and the
reclassification of $468.1 million of subordinated convertible debentures
from long-term obligations to current liabilities as a result of the
company's decision to redeem them in March 2002. Also reflects the spinoff
of the company's Kadant and Viasys Healthcare subsidiaries and the
repurchase of $511.4 million of the company's debt and equity securities.
(e) Reflects $5.7 million of pre-tax restructuring and other income, net; an
after-tax loss of $77.6 million related to the company's discontinued
operations; the issuance of company common stock valued at $448.7 million
to acquire the minority interest of certain subsidiaries; and a $12.9
million after-tax charge reflecting the cumulative effect of a change in
accounting principle for the adoption of SAB No. 101.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Reference is made throughout this Management's Discussion and Analysis of
Financial Condition and Results of Operations to Notes to Consolidated Financial
Statements, which begin on page F-1 of this report.
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. During 2000 and 2001, the company
carried out the principal aspects of a major reorganization plan under which it
sold or spun off many noncore businesses. In 2004, the company sold
Spectra-Physics, its optical technologies segment. As a result of these actions,
the company's continuing operations are comprised solely of its instrument
businesses. The businesses that have been spun off and sold have been presented
as discontinued operations in the accompanying financial statements. The
company's continuing operations fall into two principal business segments: Life
and Laboratory Sciences and Measurement and Control.
Revenues 2004 2003
-------- ---------------------- ----------------------
(Dollars in thousands)
Life and Laboratory Sciences $1,573,445 71.3% $1,293,009 68.1%
Measurement and Control 632,550 28.7% 601,104 31.6%
Other - - 5,265 0.3%
---------- ----- ---------- -----
$2,205,995 100% $1,899,378 100%
========== ===== ========== =====
The company's revenues grew by 16% during 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 4% in 2004, primarily due to
increased demand. The higher demand resulted primarily from a recovery in the
U.S. and Asian economies that has positively affected capital spending across
many markets addressed by the company 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 global supplier 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
November 2003; and the personal radiation-detection instruments product line
from Siemens plc, which was acquired in October 2003.
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In 2004, the company's operating income and operating income margin
improved to $237.5 million and 10.8%, respectively, from $187.4 million and
9.9%, respectively, in 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 and, to a lesser extent, higher revenues, offset in part by
$13.8 million of higher amortization expense associated with acquisition-related
intangible assets. Restructuring and other costs, net, (including charges to
cost of revenues associated with the sale of inventories revalued at the date of
acquisition and facility consolidations) reduced operating income by $19.2
million and $45.3 million in 2004 and 2003, respectively.
The company's effective tax rate was 15.8% and 21.3% in 2004 and 2003,
respectively. The effective tax rate in 2004 includes a benefit of $33.8 million
associated with the settlement of tax audits. The effective tax rate in 2003
includes a tax benefit from the reversal of a valuation allowance for tax credit
carryforwards of $9.0 million and a tax benefit of $3.7 million from the sale of
a business. The company expects its effective tax rate in 2005 for its existing
business will be approximately 29%.
Income from continuing operations increased to $218.4 million in 2004,
from $175.2 million in 2003, primarily due to the higher operating income
discussed above, offset in part by lower gains from the sale of investments.
During 2004, the company's cash flow from operations totaled $264.5
million, compared with $214.7 million in 2003. The increase resulted primarily
from higher income offset in part by increased investment in working capital in
2004.
As of December 31, 2004, the company's outstanding debt totaled $241.1
million, of which 93% is due in 2007 and thereafter. The company expects to
borrow up to $600 million in 2005 through a 364-day bridge financing commitment
obtained in connection with the January 2005 agreement to acquire Kendro
Laboratory Products for $833.5 million, subject to a post-closing adjustment.
The commitment is subject to customary conditions for financings of this type.
The company expects that its existing cash and short-term investments of $512.3
million as of December 31, 2004, and the company's future cash flow from
operations together with available unsecured borrowings of up to $250 million
under its existing 5-year revolving credit agreement and commitment for funds to
acquire Kendro, are sufficient to meet its capital requirements for the
foreseeable future, including at least the next 24 months.
Critical Accounting Policies
The company's discussion and analysis of its financial condition and
results of operations is based upon its financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
the company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses, and related disclosure of contingent
liabilities. On an on-going basis, the company evaluates its estimates,
including those related to equity investments, bad debts, inventories,
intangible assets, warranty obligations, income taxes, pension costs,
contingencies and litigation, restructuring, and sale of businesses. The company
bases its estimates on historical experience, current market and economic
conditions, and other assumptions that management believes are reasonable. The
results of these estimates form the basis for judgments about the carrying value
of assets and liabilities where the values are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.
The company believes the following represent its critical accounting
policies and estimates used in the preparation of its financial statements:
(a) The company maintains allowances for doubtful accounts for
estimated losses resulting from the inability of its customers to
pay amounts due. Such allowances totaled $22.8 million at December
31, 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.
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(b) The company writes down its inventories for estimated obsolescence
for differences between the cost and estimated net realizable value
taking into consideration usage in the preceding 12 months,
expected demand, and any other information that is relevant to the
judgment. If ultimate usage or demand vary significantly from
expected usage or demand, additional writedowns may be required.
(c) The company periodically evaluates goodwill for impairment using
forecasts of discounted future cash flows. Goodwill totaled $1.51
billion at December 31, 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 estimates the fair value of acquisition-related
intangible assets principally based on projections of cash flows
that will arise from identifiable intangible assets of acquired
businesses. The projected cash flows are discounted to determine
the present value of the assets at the dates of acquisition. Actual
cash flows arising from a particular intangible asset could vary
from projected cash flows which could imply different carrying
values and annual amortization expense from those established at
the dates of acquisition.
(e) The company reviews other long-lived assets for impairment when
indication of potential impairment exists, such as a significant
reduction in cash flows associated with the assets. Other
long-lived assets totaled $594.0 million at December 31, 2004,
including $261.0 million of fixed assets. In testing a long-lived
asset for impairment, assumptions are made concerning projected
cash flows associated with the asset. Estimates of future cash
flows require assumptions related to revenue and operating income
growth and asset-related expenditures associated with the asset
being reviewed for impairment. Should future cash flows decline
significantly from estimated amounts, charges for impairment of
other long-lived assets may be necessary.
(f) In instances where the company sells equipment with a related
installation obligation, the company generally recognizes revenue
related to the equipment when title passes. The company recognizes
revenue related to the installation when it performs the
installation. The allocation of revenue between the equipment and
the installation is based on relative fair value at the time of
sale. Should the fair value of either the equipment or the
installation change, the company's revenue recognition would be
affected. If fair value is not available for any undelivered
element, revenue for all elements is deferred until delivery is
completed.
(g) In instances where the company sells equipment with customer-
specified acceptance criteria, the company must assess whether it
can demonstrate adherence to the acceptance criteria prior to the
customer's acceptance testing to determine the timing of revenue
recognition. If the nature of customer-specified acceptance
criteria were to change or grow in complexity such that the company
could not demonstrate adherence, the company would be required to
defer additional revenues upon shipment of its products until
completion of customer acceptance testing.
(h) The company's software license agreements generally include
multiple products and services, or "elements." The company
recognizes software license revenue based on the residual method
after all elements have either been delivered or vendor specific
objective evidence (VSOE) of fair value exists for any undelivered
elements. In the event VSOE is not available for any undelivered
element, revenue for all elements is deferred until delivery is
completed. Revenues from software maintenance and support contracts
are recognized on a straight-line basis over the term of the
contract. VSOE of fair value of software maintenance and support is
determined based on the price charged for the maintenance and
support when sold separately. Revenues from training and consulting
services are recognized as services are performed, based on VSOE,
which is determined by reference to the price customers pay when
the services are sold separately.
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THERMO ELECTRON CORPORATION
(i) At the time the company recognizes revenue, it provides for the
estimated cost of product warranties based primarily on historical
experience and knowledge of any specific warranty problems that
indicate projected warranty costs may vary from historical
patterns. The liability for warranty obligations of the company's
continuing operations totaled $27.4 million at December 31, 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.
(j) The company estimates the degree to which tax assets and loss
carryforwards will result in a benefit based on expected
profitability by tax jurisdiction, and provides a valuation
allowance for tax assets and loss carryforwards that it believes
will more likely than not go unused. If it becomes more likely than
not that a tax asset or loss carryforward will be used, the company
reverses the related valuation allowance with an offset generally
to goodwill as most of the tax attributes arose from acquisitions.
The company's tax valuation allowance totaled $66.2 million at
December 31, 2004. Should the company's actual future taxable
income by tax jurisdiction vary from estimates, additional
allowances or reversals thereof may be necessary.
(k) The company provides a liability for future income tax payments in
the worldwide tax jurisdictions in which it operates. Accrued
income taxes totaled $22.8 million at December 31, 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 previously
unrecognized tax benefits ultimately be sustained, a reduction in
the company's tax provision would result.
(l) The company estimates losses on contingencies and litigation for
which a loss is probable and provides a reserve for losses that can
be reasonably estimated. Should the ultimate losses on
contingencies and litigation vary from estimates, adjustments to
those reserves may be required.
(m) One of the company's U.S. subsidiaries and several non-U.S.
subsidiaries sponsor defined benefit pension plans. Major
assumptions used in the accounting for these employee benefit plans
include the discount rate, expected return on plan assets, and rate
of increase in employee compensation levels. Assumptions are
determined based on company data and appropriate market indicators
in consultation with third party actuaries, and are evaluated each
year as of the plans' measurement date. Net periodic pension costs
for defined benefit plans totaled $9.5 million in 2004. Should any
of these assumptions change, they would have an effect on net
periodic pension costs.
(n) The company records restructuring charges for the cost of vacating
facilities based on future lease obligations and expected
sub-rental income. The company's accrued restructuring costs for
abandoned facilities in continuing operations totaled $9.8 million
at December 31, 2004. Should actual cash flows associated with
sub-rental income from vacated facilities vary from estimated
amounts, adjustments may be required.
(o) The company estimates the expected proceeds from any assets held
for sale and, when necessary, records losses to reduce the carrying
value of these assets to estimated realizable value. Should the
actual or estimated proceeds, which would include post-closing
purchase price adjustments, vary from current estimates, results
could differ from expected amounts.
(p) The company considers declines in quoted fair market values of
available-for-sale investments and other equity investments with
durations of six to nine months as indicative that the decline may
be other than temporary. As of December 31, 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 December 31, 2004, were $45.0 million and $45.4 million,
respectively. Should a decline in quoted fair market value occur,
an impairment charge may be required.
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THERMO ELECTRON CORPORATION
Results of Operations
2004 Compared With 2003
Continuing Operations
Sales in 2004 were $2.206 billion, an increase of $306.6 million from
2003. The favorable effects of currency translation resulted in an increase in
revenues of $92.1 million in 2004. Sales increased $134.4 million due to
acquisitions, net of divestitures. In addition to the changes in revenue
resulting from currency translation, acquisitions, and divestitures, revenues
increased $80.1 million, or 4%, primarily due to increased demand, as described
by segment below.
Operating Income Margin 2004 2003
----------------------- ----- -----
Life and Laboratory Sciences 14.3% 14.2%
Measurement and Control 8.4% 7.4%
Consolidated 10.8% 9.9%
Operating income was $237.5 million in 2004, compared with $187.4 million
in 2003. Operating income margin increased to 10.8% in 2004 from 9.9% 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. Operating
income in 2004 and 2003 was reduced by additional charges associated with
restructuring actions initiated in those and prior years and certain other
costs, net (Note 15). The restructuring and other items totaled $19.2 million
and $45.3 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 actions initiated in 2004 resulted in annual
cost savings of approximately $10 million, including $7 million in the Life and
Laboratory Sciences segment and $3 million in the Measurement and Control
segment. The company expects to incur an additional $1 million of restructuring
costs, primarily in 2005, for charges associated with these actions that cannot
be recorded until incurred. In connection with the planned acquisition of
Kendro, the company expects to undertake restructuring actions at both acquired
and existing facilities. The actions at acquired facilities will be recorded as
a cost of the acquisition. The actions at existing facilities will be charged to
expense. The company has not finalized its plans for integrating Kendro with its
existing business but expects that charges to expense will total $10-$20 million
following the acquisition.
Life and Laboratory Sciences
2004 2003 Change
---------- ---------- ------
(Dollars in thousands)
Revenues $1,573,445 $1,293,009 21.7%
Operating Income Margin 14.3% 14.2% 0.1%
Sales in the Life and Laboratory Sciences segment increased $280.4
million, or 22%, to $1.573 billion in 2004. The favorable effects of currency
translation resulted in an increase in revenues of $66.7 million in 2004. Sales
increased $153.1 million due to the acquisitions of InnaPhase in September 2004,
USCS in April 2004, Jouan in December 2003, and LMSi in November 2003, net of
product line divestitures. In addition to the changes in revenue resulting from
currency translation, acquisitions, and divestitures, revenues increased $60.6
million, or 5%, due to higher demand. The increase in demand resulted
principally in higher sales of mass spectrometry and spectroscopy instruments
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THERMO ELECTRON CORPORATION
and, to a lesser extent, new anatomical pathology products and laboratory
informatics. 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. The increase in
revenues was offset in part by $5.6 million of lower revenue from rapid
diagnostic tests due to a weak flu season in 2004 following a harsh season in
2003.
Operating income margin was 14.3% in 2004 and 14.2% in 2003. Operating
income margin was affected by restructuring and other costs, net, of $10.2
million and $21.8 million in 2004 and 2003, respectively, as discussed below.
The favorable impact of lower restructuring and other costs, net, and higher
revenues was substantially offset by a $13.2 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 2004, the segment recorded restructuring and other costs, net, of
$10.2 million, including charges to cost of revenues of $3.2 million, consisting
of $2.1 million for the sale of inventories revalued at the date of acquisition
of Jouan, and $1.1 million of accelerated depreciation on fixed assets being
abandoned due to facility consolidations. The segment incurred $8.6 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 $1.0
million from the writedown of abandoned equipment and the sale of two abandoned
buildings. In 2003, the segment recorded restructuring and other costs, net, of
$21.8 million, including $18.8 million of cash costs, primarily for severance,
abandoned facilities, employee retention, and relocation expenses at businesses
being consolidated. In addition, the segment recorded net charges of $3.4
million to write down the carrying value of fixed assets, primarily buildings
held for sale, to expected disposal value, offset by $0.4 million of net gains,
primarily from the sale of a product line (Note 15).
Measurement and Control
2004 2003 Change
-------- -------- ------
(Dollars in thousands)
Revenues $632,550 $601,104 5.2%
Operating Income Margin 8.4% 7.4% 1.0%
Sales in the Measurement and Control segment increased $31.4 million, or
5%, to $632.6 million in 2004. The favorable effects of currency translation
resulted in an increase in revenues of $25.4 million in 2004. Sales decreased
$13.5 million due to divestitures, net of acquisitions. The principal
divestiture was the segment's test and measurement business, which it sold in
October 2003. In addition to the changes in revenue resulting from currency
translation, acquisitions, and divestitures, revenues increased $19.5 million,
or 3%. 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.
Operating income margin increased to 8.4% in 2004 from 7.4% in 2003.
Operating income margin was affected by restructuring and other costs, net, of
$6.5 million and $10.3 million in 2004 and 2003, respectively, as discussed
below. Nearly half of the increase in operating income margin resulted from the
$3.8 million reduction in restructuring and other costs, net, with the balance
from higher sales volumes and cost reduction measures following restructuring
actions.
In 2004, the segment recorded restructuring and other costs, net, of $6.5
million, including cash costs of $6.2 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 for the
writedown of equipment at an abandoned facility, and charges to cost of revenues
of $0.2 million for the sale of inventories revalued at the date of acquisition.
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THERMO ELECTRON CORPORATION
In 2003, the segment recorded restructuring and other costs, net, of $10.3
million, including cash costs of $10.3 million, 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 the test and measurement business to
reduce the carrying value to 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. The segment also recorded charges to cost of revenues of $0.1 million
for the sale of inventories revalued at the date of acquisition (Note 15).
Other Income, Net
The company reported other income, net, of $21.7 million and $35.2
million in 2004 and 2003, respectively (Note 4). Other income, net, includes
interest income, interest expense, gain on investments, net, equity in earnings
of unconsolidated subsidiaries, and other items, net. Interest income decreased
to $9.0 million in 2004 from $19.7 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 $11.0 million in 2004 from $18.2
million in 2003, as a result of the repurchase and redemption of debentures.
During 2004 and 2003, the company had gains on investments, net, of $20.8
million and $35.5 million, respectively. The gains included $9.6 million in 2004
and $16.3 million in 2003 from the sale of shares of Thoratec Corporation and
$13.7 million in 2003 from the sale of shares of FLIR Systems, Inc. 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. Other income in 2004 and 2003 also includes
currency transaction gains and losses and equity in earnings of unconsolidated
subsidiaries. In addition, the company repurchased and redeemed debentures,
resulting in a charge of $1.0 million during 2003.
Provision for Income Taxes
The company's effective tax rate was 15.8% and 21.3% in 2004 and 2003,
respectively. The effective tax rate decreased in 2004 primarily due to $33.8
million of tax benefits associated with the completion of tax audits. The
company's tax returns and those of several subsidiaries were under audit for the
period 1998 to 2000. In 2004 and early 2005, the IRS and the company reached
final settlements of the audits and the company determined that previously
unrecognized tax benefits were realizable. In addition, audits of state tax
returns were also completed in 2004. The 2003 effective tax rate was favorably
affected by $9.0 million of tax benefit from the reversal of a valuation
allowance due to expected utilization of foreign tax credit carryforwards (Note
6) and $3.7 million of tax benefit from the sale of a business. These tax
benefits reduced the company's 2004 and 2003 effective tax rates by 13.0
percentage points and 5.7 percentage points, respectively. The 2003 effective
tax rate was also favorably affected by the full-year impact of a reorganization
throughout 2002 of the company's subsidiaries in several European countries that
resulted in a more tax-efficient corporate structure and a decrease in 2003 of
gains from the sale of investment securities. In addition, the company reduced
its effective tax rate by 1.8 percentage points in 2003 through repatriation of
cash from non-U.S. subsidiaries, which resulted in foreign tax credits. The
company expects its effective tax rate in 2005 for its existing business will be
approximately 29%.
The American Jobs Creation Act of 2004, signed into law in October 2004,
allows companies to repatriate permanently reinvested non-U.S. earnings in 2005
or 2006 at an effective rate of 5.25%. The company does not currently expect to
take advantage of this provision. The new tax law also phases out an existing
deduction based on export revenues and replaces it with a deduction for a
portion of the profit derived from domestic manufacturing activities. The
company is continuing to evaluate the effect of this change but does not expect
a material impact on its tax provision.
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THERMO ELECTRON CORPORATION
Contingent Liabilities
At year-end 2004, the company was contingently liable with respect to
certain lawsuits. An unfavorable outcome in either of the two pending matters
described in Note 11 could materially affect the company's financial position as
well as its results of operations and cash flows.
Income from Continuing Operations
Income from continuing operations was $218.4 million in 2004, compared
with $175.2 million in 2003. Results in both periods were affected by
restructuring, gains on the sale of Thoratec shares, and other items, discussed
above.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R) "Share-Based Payment."
SFAS No. 123(R) amends SFAS No. 123 to require that companies record as expense
the effect of equity-based compensation, including stock options over the
applicable vesting period. The company currently discloses the effect on income
that stock options would have were they recorded as expense. SFAS No. 123(R)
also requires more extensive disclosures concerning stock options than required
under current standards. The new rule applies to option grants made after
adoption as well as options that are not vested at the date of adoption. SFAS
No. 123(R) becomes effective no later than fiscal periods beginning after June
15, 2005. The company does not currently expect to elect early adoption and has
not determined whether it will apply the new standard prospectively in the third
quarter of 2005, retroactively from the beginning of 2005, or restate all
periods on a comparable basis.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4," which is the result of its efforts to
converge U.S. accounting standards for inventories with International Accounting
Standards. SFAS No. 151 requires abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) to be recognized as
current-period charges. It also requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 will be effective for inventory costs
incurred during 2006. The company is currently evaluating the impact this
standard will have on its financial statements.
Discontinued Operations
The company had after-tax gains of $100.5 million in 2004 and $27.3
million in 2003 from the disposal of 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.
The company's discontinued operations (Spectra-Physics) had revenues
through the date of sale of $118.9 million and $197.8 million in 2004 and 2003,
respectively. Net income of the discontinued operations through the date of sale
in 2004 was $4.5 million, net of a tax provision of $2.2 million. The company's
discontinued operations incurred a net loss in 2003 of $2.5 million, net of a
tax benefit of $1.5 million. The improvement 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 as income from discontinued operations
totaling $38.5 million in 2004. In 2004, the company recorded a gain on the sale
of Spectra-Physics of $45.9 million, net of a tax provision of $15.9 million.
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THERMO ELECTRON CORPORATION
The tax returns of the company and its former Trex Medical and ThermoLase
businesses were under audit by the IRS. In 2004 and early 2005, the IRS and the
company reached final settlements of the audits and the company determined that
previously unrecognized tax benefits associated with the divested businesses
totaling $52.7 million were realizable. These tax benefits were recorded as a
gain on the disposal of discontinued operations in 2004.
In addition to the 2004 gains discussed above, the company had $1.3
million of after-tax gains and $0.6 million of tax benefits associated with
discontinued operations.
The 2003 gain consists of two pre-tax components and two tax components.
In 2003, the company resolved several disputes and related claims 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 estimated and amount of established reserves as well as the
settlement of lease obligations, the company's pre-tax gain recorded in prior
years on disposal of the related businesses increased by $27.1 million. In 2003,
the company also sold the last remaining business in discontinued operations,
Peter Brotherhood Ltd., and received additional proceeds associated with
businesses sold prior to 2003, including post-closing purchase price
adjustments. The company recorded pre-tax gains from the disposal of
discontinued operations of $8.3 million, substantially as a result of these
transactions. The company recorded a tax provision of $13.2 million on the above
gains and realized $5.1 million of additional tax benefits from the disposal of
businesses sold prior to 2003, principally foreign tax credits.
2003 Compared With 2002
Continuing Operations
Sales in 2003 were $1.899 billion, an increase of $50.0 million from
2002. The favorable effects of currency translation resulted in an increase in
revenues of $116.8 million in 2003. Sales decreased $9.1 million due to
divestitures, net of acquisitions. In addition to the changes in revenue
resulting from currency translation, divestitures, and acquisitions, revenues
decreased $57.7 million, or 3%, primarily due to lower demand, as described by
segment below.
Operating Income Margin 2003 2002
----------------------- ----- -----
Life and Laboratory Sciences 14.2% 14.4%
Measurement and Control 7.4% 7.3%
Consolidated 9.9% 9.2%
Operating income was $187.4 million in 2003, compared with $169.9 million
in 2002. Operating income margin increased to 9.9% in 2003 from 9.2% in 2002.
Operating income in 2003 was reduced by additional charges associated with
restructuring actions initiated in 2003, restructuring plans initiated prior to
2003, and certain other costs, net (Note 15). Operating income in 2002 was
reduced by charges associated with restructuring plans initiated during 2002 and
2001, and certain other costs, net. The restructuring and other items totaled
$45.3 million and $46.2 million in 2003 and 2002, respectively, and are
discussed by segment below. Operating income increased primarily due to a lower
cost base following recent restructuring actions. Among the other actions
contributing to a lower cost base was lower spending on research and development
activities, which decreased 3% to $128.0 million in 2003 as the company focused
on those projects with the highest estimated returns.
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 2003 in a number of business units to reduce costs and
redundancies, principally through headcount reductions and consolidation of
facilities. These actions resulted in annual cost reductions beginning in mid-
to late 2003 and continuing in early 2004 of approximately $11 million,
including $7 million in the Life and Laboratory Sciences segment and $4 million
in the Measurement and Control segment.
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THERMO ELECTRON CORPORATION
In November 2002, the Emerging Issues Task Force (EITF) reached a
consensus on EITF Issue No. 00-21, "Accounting for Revenue Arrangements with
Multiple Deliverables." The company began applying the consensus prospectively
in the first quarter of 2003. Under EITF Issue No. 00-21, the company recognizes
revenue and related costs for arrangements with customers that have multiple
deliverables, such as equipment and installation, as each element is delivered
or completed based on its fair value. When a portion of the customer's payment
is not due until installation, the company defers that portion of the revenue
until completion of installation. The adoption of EITF Issue No. 00-21 did not
materially affect the company's financial statements.
Life and Laboratory Sciences
2003 2002 Change
---------- ---------- ------
(Dollars in thousands)
Revenues $1,293,009 $1,204,034 7.4%
Operating Income Margin 14.2% 14.4% (0.2%)
Sales in the Life and Laboratory Sciences segment increased $89.0
million, or 7%, to $1.293 billion in 2003. The favorable effects of currency
translation resulted in an increase in revenues of $86.3 million in 2003. Sales
decreased $9.7 million due to product line divestitures, net of acquisitions. In
addition to the changes in revenue resulting from currency translation,
divestitures, and acquisitions, revenues increased $12.4 million, or 1%. A $13.3
million increase in sales of clinical diagnostic products was offset in part by
decreased sales of bioscience instrumentation, principally due to a downturn in
demand from pharmaceutical and industrial markets. The increase in sales of
clinical diagnostic products resulted primarily from higher demand for rapid
diagnostic tests during a harsh flu season in the United States and, to a lesser
extent, increased demand for a newly released tissue processor used in
anatomical pathology laboratories.
Operating income margin decreased to 14.2% in 2003 from 14.4% in 2002.
Operating income margin was affected by restructuring and other costs, net, of
$21.8 million and $19.4 million in 2003 and 2002, respectively. In addition to
the increase in restructuring and other costs in 2003, the decrease in operating
income margin resulted from higher marketing and selling expenses due to several
key commercial initiatives. The segment's commercial initiatives included key
customer account management, increased advertising costs for a branding
transition, and establishment of customer call centers and product demonstration
facilities. These cost increases were offset in part by cost savings from
facility consolidations and related productivity measures. The cost reduction
measures in 2002 and 2003 reduced the segment's cost base by an aggregate of
approximately $14 million on an annualized basis.
In 2003, the segment recorded restructuring and other costs, net, of
$21.8 million, including $18.8 million of cash costs, primarily for severance,
abandoned facilities, employee retention, and relocation expenses at businesses
being consolidated. In addition, the segment recorded net charges of $3.4
million to write down the carrying value of fixed assets, primarily buildings
held for sale, to expected disposal value, offset by $0.4 million of net gains,
primarily from the sale of a product line. In 2002, the segment recorded
restructuring and other costs, net, of $19.4 million, including $12.3 million of
cash costs, primarily for severance, abandoned facilities, and employee
retention at businesses being consolidated. The segment also recorded charges to
cost of revenues of $1.3 million, primarily for the sale of inventories revalued
at the date of acquisition. In addition, the segment realized a net loss of $4.3
million on the sale of assets, principally its Dynex automated diagnostics
product line, and wrote down $1.5 million of fixed assets at abandoned
facilities (Note 15).
Measurement and Control
2003 2002 Change
-------- -------- ------
(Dollars in thousands)
Revenues $601,104 $629,697 (4.5%)
Operating Income Margin 7.4% 7.3% 0.1%
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THERMO ELECTRON CORPORATION
Sales in the Measurement and Control segment decreased $28.6 million, or
5%, to $601.1 million in 2003. The favorable effects of currency translation
resulted in an increase in revenues of $30.1 million in 2003. Sales increased
$3.3 million due to acquisitions, net of divestitures. In addition to the
changes in revenue resulting from currency translation, acquisitions, and
divestitures, revenues decreased $62.0 million, or 10%. Of this amount, $26.8
million, or 4%, was due to the inclusion in the fourth quarter of 2002 of a
shipment of explosives-detection equipment to the U.S. Transportation Security
Administration following a congressional mandate to screen all checked airline
baggage in the United States by the end of 2002. The balance of the decrease was
primarily the result of weaker demand arising from economic conditions facing
customers, particularly in the process instruments businesses where
approximately 60% of the remaining decrease occurred. Process instruments are
generally used in industrial markets such as minerals and mining and
petrochemical applications, where capital expenditures slowed. In addition, a 7%
decrease in sales of equipment used primarily in semiconductor applications was
offset in part by higher revenues from equipment used in homeland security.
Operating income margin increased to 7.4% in 2003 from 7.3% in 2002.
Operating income margin was affected by restructuring and other costs, net, of
$10.3 million and $13.6 million in 2003 and 2002, respectively. The increase in
operating income margin resulted primarily from cost reduction measures
following restructuring actions in 2002 and 2003 and, to a lesser extent, $3.3
million of lower restructuring and other costs, net, offset in part by the
effect on operating margin of lower revenues. The cost reduction measures in
2002 and 2003 reduced the segment's cost base by an aggregate of approximately
$17 million on an annualized basis.
In 2003, the segment recorded restructuring and other costs, net, of
$10.3 million, including cash costs of $10.3 million, 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 the test and measurement business to
reduce the carrying value to 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. The segment also recorded charges to cost of revenues of $0.1 million,
primarily for the sale of inventories revalued at the date of acquisition. In
2002, the segment recorded restructuring and other costs, net, of $13.6 million,
including $20.4 million of cash costs principally for severance, abandoned
facilities, and employee retention. In addition, the segment recorded $8.7
million of net gains, primarily from the sale of its Thermo BLH and Thermo Nobel
subsidiaries, which were noncore businesses held for sale since 2001. In 2002,
the segment recorded charges to cost of revenues of $1.4 million for the sale of
inventories revalued at the date of acquisition and $0.5 million of asset
writedowns (Note 15).
Other Income, Net
The company reported other income, net, of $35.2 million and $131.5
million in 2003 and 2002, respectively (Note 4). Interest income decreased to
$19.7 million in 2003 from $47.6 million in 2002, primarily due to lower
invested cash balances following the repurchase and redemption of company
securities, the payment of short-term notes payable and, to a lesser extent,
lower prevailing interest rates. Interest expense decreased to $18.2 million in
2003 from $40.2 million in 2002 as a result of the redemption, maturity, and
repurchase of debentures, as well as the full year effect of entering into
interest-rate swap arrangements in the first quarter of 2002, offset in part by
interest on borrowings under securities-lending arrangements.
During 2003 and 2002, the company had gains on investments, net, of $35.5
million and $123.1 million, respectively. The gains included $16.3 million in
2003 from the sale of shares of Thoratec and $13.7 million and $111.4 million in
2003 and 2002, respectively, from the sale of shares of FLIR. The company
recorded income from equity in earnings of unconsolidated subsidiaries of $2.5
million in 2002, primarily related to the investment in FLIR. Effective March
30, 2002, following a reduction in the company's percentage ownership of FLIR to
less then 20%, the company no longer reported its pro-rata share of FLIR
earnings but instead accounted for its remaining investment as an
available-for-sale security (Note 4). In addition, the company repurchased and
redeemed debentures, resulting in charges of $1.0 million and $1.5 million
during 2003 and 2002, respectively.
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THERMO ELECTRON CORPORATION
Provision for Income Taxes
The company's effective tax rate was 21.3% and 32.5% in 2003 and 2002,
respectively. The effective tax rate decreased in 2003 primarily due to $9.0
million of tax benefit from the reversal of a valuation allowance due to
expected utilization of foreign tax credit carryforwards (Note 6) and $3.7
million of tax benefit from the sale of a business. These tax benefits reduced
the company's 2003 effective tax rate by 5.7 percentage points. The decrease was
also due in part to the full-year impact on the 2003 effective tax rate of a
reorganization throughout 2002 of the company's subsidiaries in several European
countries that resulted in a more tax-efficient corporate structure and a
decrease in 2003 of gains from the sale of investment securities. In addition,
the company reduced its effective tax rate by 1.8 percentage points in 2003
through repatriation of cash from non-U.S. subsidiaries, which resulted in
foreign tax credits.
Income from Continuing Operations
Income from continuing operations was $175.2 million in 2003, compared
with $203.4 million in 2002. Results in both periods were affected by
restructuring, gains on the sale of Thoratec and FLIR shares, and other items,
discussed above.
Discontinued Operations
The company's discontinued operations (Spectra-Physics) had revenues of
$197.8 million and $237.0 million in 2003 and 2002, respectively. The decrease
in revenues resulted principally from a severe slowdown in the semiconductor and
other industrial markets. Net loss of the discontinued operations was $2.5
million and $9.1 million in 2003 and 2002, respectively, net of tax benefits of
$1.5 million and $5.5 million, respectively. The improvement was due to lower
restructuring costs in 2003 and cost reduction measures.
The company had after-tax gains of $27.3 million in 2003 and $115.4
million in 2002 from the disposal of discontinued operations. The 2003 gain
consists of two pre-tax components and two tax components. In 2003, the company
resolved several disputes and related claims 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 estimated
and amount of established reserves as well as the settlement of lease
obligations, the company's pre-tax gain recorded in prior years on disposal of
the related businesses increased by $27.1 million. In 2003, the company also
sold the last remaining business in discontinued operations, Peter Brotherhood,
and received additional proceeds associated with businesses sold prior to 2003,
including post-closing purchase price adjustments. The company recorded pre-tax
gains from the disposal of discontinued operations of $8.3 million,
substantially as a result of these transactions. The company recorded a tax
provision of $13.2 million on the above gains and realized $5.1 million of
additional tax benefits from the disposal of businesses sold prior to 2003,
principally foreign tax credits.
During 2002, primarily as a result of new tax regulations concerning
deductible losses from divested businesses, the company revised its estimate of
the tax consequences of business disposals in discontinued operations and
recorded a tax benefit of $46.6 million. In addition, in 2002 the company sold
its Trophy Radiologie business for approximately $51 million in cash and,
principally as a result of this transaction, recorded an after-tax gain of $17.4
million. Also, the company sold the last remaining component of its former
power-generation business in 2002 and realized a gain from the disposition
totaling $13.0 million, primarily for previously unrecognized tax benefits that
were realized upon the sale.
In February 2001, the company sold its interest in Thermo Cardiosystems
to Thoratec in exchange for 19.3 million shares of Thoratec common stock.
Certain restrictions, which lapsed in August 2002, limited the timing of the
company's ability to sell these shares. Following a sale of shares in February
2002 for net proceeds of $104 million and an after-tax gain of $38.4 million,
the company owned less than 20% of Thoratec's outstanding shares and began
accounting for its investment as an available-for-sale security in continuing
operations in the first quarter of 2002, with unrealized gains or losses
recorded as part of accumulated other comprehensive items in the accompanying
balance sheet.
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THERMO ELECTRON CORPORATION
Liquidity and Capital Resources
Consolidated working capital was $890.9 million at December 31, 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
$512.3 million at December 31, 2004, compared with $418.2 million at December
31, 2003. This increase was due to cash provided by operating and investing
activities, offset in part by cash of $183.2 million used in financing
activities, as discussed below.
2004
Cash provided by operating activities was $264.5 million during 2004,
including $250.0 million provided by continuing operations and $14.5 million
provided by discontinued operations. Payments for restructuring actions of the
company's continuing operations, principally severance, lease costs, and other
expenses of real estate consolidation, used cash of $25.8 million in 2004.
Accounts receivable increased $27.6 million due primarily to higher sales of
mass spectrometry and informatics product offerings. Inventories increased $21.5
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 $14.5 million principally represents the
positive cash flow of Spectra-Physics, offset in part by the payment of retained
liabilities from 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 $15.8 million for restructuring costs at
December 31, 2004. The company expects to pay approximately $5.8 million of this
amount for severance, primarily through 2006, and $0.2 million for other costs,
primarily through 2005. The balance of $9.8 million will be paid for lease
obligations over the remaining terms of the leases, with approximately 53% to be
paid through 2005 and the remainder through 2016. In addition, at December 31,
2004, the company had accrued $9.2 million for acquisition expenses. Accrued
acquisition expenses included $3.2 million of severance and relocation
obligations, which the company expects to pay primarily through 2005. The
remaining balance primarily represents abandoned-facility payments that will be
paid over the remaining terms of the leases through 2014.
During 2004, the primary investing activities of the company's continuing
operations, excluding available-for-sale investment activities, included
acquisitions for $143.0 million, net of cash acquired (Note 2) and the
expenditure of $44.5 million for the purchase of property, plant, and equipment,
net of dispositions. Investing activities of discontinued operations provided
$171.8 million of cash in 2004. In July 2004, the company sold Spectra-Physics
to Newport Corporation for $300 million, including $200 million of initial 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 refunded $25.1 million to Newport
(Note 16).
The company's financing activities used $183.2 million of cash during
2004, including $183.7 million used by continuing operations. During 2004, the
company expended $231.5 million to repurchase 8.4 million shares of the
company's common stock. As of December 31, 2004, the authorization by the
company's Board of Directors to repurchase company securities had been
substantially expended. The company received net proceeds of $57.6 million from
the exercise of employee stock options during 2004. During 2004, the company
replaced its existing credit facilities with a 5-year $250 million revolving
credit agreement (Note 10).
2003
Cash provided by operating activities was $214.7 million during 2003,
including $200.3 million provided by continuing operations and $14.4 million
provided by discontinued operations. Payments for restructuring actions of the
company's continuing operations, principally severance, lease costs, and other
expenses of real estate consolidation, used cash of $53.6 million in 2003. A
decrease in inventories of $27.4 million resulted from efforts to improve
working capital. Cash provided by discontinued operations of $14.4 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.
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THERMO ELECTRON CORPORATION
During 2003, the primary investing activities of the company's continuing
operations, excluding available-for-sale investment activities, included
acquisitions, the purchase of property, plant, and equipment, and collection of
a note receivable. The company expended $134.9 million, net of cash acquired,
for acquisitions (Note 2). The company expended $37.4 million for purchases of
property, plant, and equipment, net of dispositions. 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 $663.6 million of cash during
2003, including $652.0 million for continuing operations. During 2003, the
company's continuing operations expended $369.1 million to reduce short-term
notes payable. The company received net proceeds of $75.0 million from the
exercise of employee stock options in 2003. During 2003, the company expended
$269.1 million to redeem its debt securities (Note 10). In addition, the company
expended $88.9 million to repurchase its debt and equity securities, of which
$57.8 million was used to repurchase 3.0 million shares of the company's common
stock. The debt repurchases and redemptions have been made with the objective of
reducing interest costs.
2002
Cash provided by operating activities was $106.8 million during 2002,
including $114.5 million provided by continuing operations and $7.7 million used
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 $53.9 million in 2002. Aside from cash
used for restructuring actions, a decrease in other current liabilities used
cash of $68.6 million, including $45.6 million of income taxes and $10.8 million
of accrued interest, principally due to the debt redemptions discussed in Note
10. The income tax payments included approximately $39.0 million related to
gains on investments. The use of cash of $7.7 million by discontinued operations
was principally due to the payment of liabilities, primarily for the settlement
of litigation, including a patent-infringement matter (Note 11), offset in part
by the positive cash flow of Spectra-Physics and cash from tax benefits
associated with discontinued operations.
During 2002, the primary investing activities of the company's continuing
operations, excluding available-for-sale investment activities, included the
sale of other investments, acquisitions and divestitures, the collection of
notes receivable, and the purchase of property, plant, and equipment. The
company's continuing operations received proceeds of $65.3 million from the sale
of other investments, principally shares of FLIR (Note 4), and proceeds of $22.3
million from the sale of businesses, net of cash divested (Note 2). In addition,
the company's continuing operations expended $78.7 million for acquisitions
(Note 2), and $31.7 million for purchases of property, plant, and equipment, net
of dispositions. The company's continuing operations collected $76.4 million
from notes receivable, which included the repayment of Viasys Healthcare's $33.4
million principal amount note in May 2002, the August 2002 repayment of a $25.0
million principal amount note receivable related to the sale of a business in
2000, and partial repayment from Trimble Navigation Limited in March 2002.
During 2002, investing activities of the company's discontinued operations
provided $114.9 million of cash, primarily representing proceeds of $104 million
from the sale of Thoratec common stock and the sale of Trophy Radiologie, offset
in part by the use of $23.2 million to acquire the minority interest in
Spectra-Physics (Note 16).
The company's financing activities used $589.5 million of cash during
2002, including $573.5 million for continuing operations. During 2002, the
company's continuing operations expended $590.7 million to redeem certain
convertible debentures. The company increased short-term notes payable by $329.8
million to partially fund debt redemptions (Note 10). The company's continuing
operations received net proceeds of $25.3 million from the exercise of employee
stock options in 2002. During 2002, the company expended $334.2 million to
repurchase its debt and equity securities, of which $285.6 million was expended
to repurchase 15.4 million shares of the company's common stock.
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THERMO ELECTRON CORPORATION
Off-Balance Sheet Arrangements
The company did not use special purpose entities or other
off-balance-sheet financing arrangements in 2002 - 2004 except for letters of
credit, bank guarantees, surety bonds, and other guarantees disclosed in the
table below. Of the amounts disclosed in the table below for letters of credit,
bank guarantees, surety bonds, and other guarantees, $24.5 million relates to
guarantees of the performance of third parties, principally in connection with
businesses that were sold (Note 11). The balance relates to guarantees of the
company's own performance, primarily in the ordinary course of business.
Contractual Obligations and Other Commercial Commitments
The table below summarizes, by period due or expiration of commitment,
the company's contractual obligations and other commercial commitments as of
December 31, 2004, which are principally for its continuing operations.
Payments Due by Period or Expiration of Commitment
------------------------------------------------------------------------------
2006 and 2008 and 2010 and
2005 2007 2009 Thereafter Total
-------- -------- -------- ---------- --------
(In thousands)
Contractual Obligations and Other
Commercial Commitments:
Long-term debt obligations $ 765 $ 78,156 $135,657 $ 3,140 $217,718
Capital lease obligations 1,187 2,214 2,380 4,523 10,304
Operating lease obligations 38,048 54,043 34,075 94,294 220,460
Purchase obligations 77,889 182 - - 78,071
-------- -------- -------- -------- --------
Total contractual
obligations 117,889 134,595 172,112 101,957 526,553
-------- -------- -------- -------- --------
Other Commitments (not on the balance
sheet):
Letters of credit and bank
guarantees 50,961 2,664 696 338 54,659
Surety bonds and other
guarantees 13,469 126 8,227 4 21,826
-------- -------- -------- -------- --------
Total other commitments 64,430 2,790 8,923 342 76,485
-------- -------- -------- -------- --------
$182,319 $137,385 $181,035 $102,299 $603,038
======== ======== ======== ======== ========
This table excludes $91.2 million of other long-term liabilities,
principally pension liabilities, and $15.2 million of deferred income taxes, as
these liabilities are not subject to fixed payment schedules.
The company has no material commitments for purchases of property, plant,
and equipment but expects that for 2005, such expenditures for its existing
business will approximate $43 to $47 million.
In connection with the January 2005 agreement to acquire Kendro for
$833.5 million, subject to a post-closing adjustment, the company obtained a
bridge financing commitment which will permit it to borrow up to $600 million
for a period of 364 days on terms substantially equivalent to those of its
existing 5-year revolving credit agreement. The company expects to use cash from
this commitment and existing cash balances to fund the acquisition of Kendro.
The commitment is subject to customary conditions for financings of this type.
The company believes that its existing resources, including cash and
investments, future cash flow from operations, and available borrowings under
its existing 5-year revolving credit facility, are sufficient to meet the
working capital requirements of its existing businesses for the foreseeable
future, including at least the next 24 months.
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THERMO ELECTRON CORPORATION
Forward-looking Statements
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, we caution readers that the following important
factors, among others, in some cases have affected, and in the future could
affect, our actual results and could cause our actual results in 2004 and beyond
to differ materially from those expressed in any forward-looking statements made
by us.
We must develop new products, adapt to rapid and significant
technological change, and respond to introductions of new products in order to
remain competitive. Our growth strategy includes significant investment in and
expenditures for product development. We sell our products in several industries
that are characterized by rapid and significant technological changes, frequent
new product and service introductions, and enhancements and evolving industry
standards. Without the timely introduction of new products, services, and
enhancements, our products and services will likely become technologically
obsolete over time, in which case our revenue and operating results would
suffer.
Our customers use many of our products to develop, test, and manufacture
their own products. As a result, we must anticipate industry trends and develop
products in advance of the commercialization of our customers' products. If we
fail to adequately predict our customers' needs and future activities, we may
invest heavily in research and development of products and services that do not
lead to significant revenue.
Many of our existing products and those under development are
technologically innovative and require significant planning, design,
development, and testing at the technological, product, and
manufacturing-process levels. These activities require us to make significant
investments.
Products in our markets undergo rapid and significant technological
change because of quickly changing industry standards and the introduction of
new products and technologies that make existing products and technologies
uncompetitive or obsolete. Our competitors may adapt more quickly to new
technologies and changes in customers' requirements than we can. The products
that we are currently developing, or those we will develop in the future, may
not be technologically feasible or accepted by the marketplace, and our products
or technologies could become uncompetitive or obsolete.
Our Measurement and Control segment sells products and services to a
number of companies that operate in cyclical industries; downturns in those
industries would adversely affect our results of operations. The growth and
profitability of some of our businesses in the Measurement and Control segment
depend in part on sales to industries that are subject to cyclical downturns.
For example, certain businesses in this segment depend in part on sales to the
steel, cement, and semiconductor industries. Slowdowns in these industries would
adversely affect sales by these businesses, which in turn would adversely affect
our revenues and results of operations.
Our business is impacted by general economic conditions and related
uncertainties affecting markets in which we operate. Adverse economic conditions
could adversely impact our business in 2005 and beyond, resulting in:
- reduced demand for some of our products;
- increased rate of order cancellations or delays;
- increased risk of excess and obsolete inventories;
- increased pressure on the prices for our products and services; and
- greater difficulty in collecting accounts receivable.
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Changes in governmental regulations may reduce demand for our products or
increase our expenses. We compete in many markets in which we and our customers
must comply with federal, state, local, and international regulations, such as
environmental, health and safety, and food and drug regulations. We develop,
configure, and market our products to meet customer needs created by those
regulations. Any significant change in regulations could reduce demand for our
products or increase our expenses. For example, many of our instruments are
marketed to the pharmaceutical industry for use in discovering and developing
drugs. Changes in the U.S. Food and Drug Administration's regulation of the drug
discovery and development process could have an adverse effect on the demand for
these products.
Demand for most of our products depends on capital spending policies of
our customers and on government funding policies. Our customers include
pharmaceutical and chemical companies, laboratories, universities, healthcare
providers, government agencies, and public and private research institutions.
Many factors, including public policy spending priorities, available resources,
and product and economic cycles, have a significant effect on the capital
spending policies of these entities. These policies in turn can have a
significant effect on the demand for our products.
Our inability to protect our intellectual property could have a material
adverse effect on our business. In addition, third parties may claim that we
infringe their intellectual property, and we could suffer significant litigation
or licensing expense as a result. We place considerable emphasis on obtaining
patent and trade secret protection for significant new technologies, products,
and processes because of the length of time and expense associated with bringing
new products through the development process and into the marketplace. Our
success depends in part on our ability to develop patentable products and obtain
and enforce patent protection for our products both in the United States and in
other countries. We own numerous U.S. and foreign patents, and we intend to file
additional applications, as appropriate, for patents covering our products.
Patents may not be issued for any pending or future patent applications owned by
or licensed to us, and the claims allowed under any issued patents may not be
sufficiently broad to protect our technology. Any issued patents owned by or
licensed to us may be challenged, invalidated, or circumvented, and the rights
under these patents may not provide us with competitive advantages. In addition,
competitors may design around our technology or develop competing technologies.
Intellectual property rights may also be unavailable or limited in some foreign
countries, which could make it easier for competitors to capture increased
market position. We could incur substantial costs to defend ourselves in suits
brought against us or in suits in which we may assert our patent rights against
others. An unfavorable outcome of any such litigation could materially adversely
affect our business and results of operations.
We also rely on trade secrets and proprietary know-how which we seek to
protect our products, in part, by confidentiality agreements with our
collaborators, employees, and consultants. These agreements may be breached and
we may not have adequate remedies for any breach. In addition, our trade secrets
may otherwise become known or be independently developed by our competitors.
Third parties may assert claims against us to the effect that we are
infringing on their intellectual property rights. For example, in September 2004
Applied Biosystems/MDS Scientific Instruments and related parties brought a
lawsuit against us alleging our mass spectrometer systems infringe a patent held
by the plaintiffs. We could incur substantial costs and diversion of management
resources in defending these claims, which could have a material adverse effect
on our business, financial condition, and results of operations. In addition,
parties making these claims could secure a judgment awarding substantial
damages, as well as injunctive or other equitable relief, which could
effectively block our ability to make, use, sell, distribute, or market our
products and services in the United States or abroad. In the event that a claim
relating to intellectual property is asserted against us, or third parties not
affiliated with us hold pending or issued patents that relate to our products or
technology, we may seek licenses to such intellectual property or challenge
those patents. However, we may be unable to obtain these licenses on
commercially reasonable terms, if at all, and our challenge of the patents may
be unsuccessful. Our failure to obtain the necessary licenses or other rights
could prevent the sale, manufacture, or distribution of our products and,
therefore, could have a material adverse effect on our business, financial
condition, and results of operations.
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If any of our security products fail to detect explosives or radiation,
we could be exposed to product liability and related claims for which we may not
have adequate insurance coverage. The products sold by our environmental
instruments division include a comprehensive range of fixed and portable
instruments used for chemical, radiation, and trace explosives detection. These
products are used in airports, embassies, cargo facilities, border crossings,
and other high-threat facilities for the detection and prevention of terrorist
acts. If any of these products were to malfunction, it is possible that
explosive or radioactive material could pass through the product undetected,
which could lead to product liability claims. There are also many other factors
beyond our control that could lead to liability claims, such as the reliability
and competence of the customers' operators and the training of such operators.
Any such product liability claims brought against us could be significant and
any adverse determination may result in liabilities in excess of our insurance
coverage. Although we carry product liability insurance, we cannot be certain
that our current insurance will be sufficient to cover these claims or that it
can be maintained on acceptable terms, if at all.
We have retained contingent liabilities from businesses that we have
sold. From 1997 through 2004, we divested over 60 businesses with aggregate
annual revenues in excess of $2 billion. As part of these transactions, we
retained responsibility for some of the contingent liabilities related to these
businesses, such as lawsuits, product liability claims, and potential claims by
buyers that representations and warranties we made about the businesses were
inaccurate. The resolution of these contingencies has not had a material adverse
effect on our results of operations or financial condition; however, we can not
be certain that this favorable pattern will continue.
Our results could be impacted if we are unable to realize potential
future benefits from new productivity initiatives. In addition to the real
estate consolidations and cost-saving initiatives that we have pursued over the
past three years, we are instituting practical process improvement (PPI)
programs at our locations to further enhance our productivity, efficiency, and
customer satisfaction. While we anticipate continued benefits from these PPI
initiatives as well as our continuing sourcing activities, future benefits are
expected to be fewer and smaller in size and may be more difficult to achieve.
Our branding strategy could be unsuccessful. We historically operated our
business largely as autonomous, unaffiliated companies, and as a result, each of
our businesses independently created and developed its own brand names. Our
marketing and branding strategy transitions multiple, unrelated brands to one
brand, Thermo Electron. Several of our former brands such as Finnigan and
Nicolet commanded strong market recognition and customer loyalty. We believe the
transition to the one brand enhances and strengthens our collective brand image
and brand awareness across the entire company. Our success in promoting our
brand depends on many factors, including effective communication of the
transition to our customers, acceptance and recognition by customers of this
brand, and successful execution of the branding campaign by our marketing and
sales teams. If we are not successful with this strategy, we may experience
erosion in our product recognition, brand image and customer loyalty, and a
decrease in demand for our products.
It may be difficult for us to implement our strategies for improving
internal growth. Some of the markets in which we compete have been flat or
declining over the past several years. To address this issue, we are pursuing a
number of strategies to improve our internal growth, including:
- finding new markets for our products;
- developing new applications for our technologies;
- 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;
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THERMO ELECTRON CORPORATION
- expanding our service offerings;
- strengthening our presence in selected geographic markets; and
- continuing the development of commercial tools and infrastructure to
increase and support cross-selling opportunities of products and
services to take advantage of our breadth in product offerings.
We may not be able to successfully implement these strategies, and these
strategies may not result in the growth of our business.
As a multinational corporation, we are exposed to fluctuations in
currency exchange rates, which could adversely affect our cash flows and results
of operations. International revenues account for a substantial portion of our
revenues, and we intend to continue expanding our presence in international
markets. In 2004, our international revenues from continuing operations,
including export revenues from the United States, accounted for approximately
60% of our total revenues. The exposure to fluctuations in currency exchange
rates takes on different forms. International revenues are subject to the risk
that fluctuations in exchange rates could adversely affect product demand and
the profitability in U.S. dollars of products and services provided by us in
international markets, where payment for our products and services is made in
the local currency. As a multinational corporation, our businesses occasionally
invoice third-party customers in currencies other than the one in which they
primarily do business (the "functional currency"). Movements in the invoiced
currency relative to the functional currency could adversely impact our cash
flows and our results of operations. In addition, reported sales made in
non-U.S. currencies by our international businesses, when translated into U.S.
dollars for financial reporting purposes, fluctuate due to exchange rate
movement. Should our international sales grow, exposure to fluctuations in
currency exchange rates could have a larger effect on our financial results. In
fiscal 2004 and 2003, currency translation had a favorable effect on revenues of
our continuing operations of $92.1 million and $116.8 million, respectively, due
to weakening of the U.S. dollar relative to other currencies in which the
company sells products and services. A strengthening of the U.S. dollar would
unfavorably affect revenues.
Our inability to successfully identify and complete acquisitions or
successfully integrate any new or previous acquisitions could have a material
adverse effect on our business. Our business strategy includes the acquisition
of technologies and businesses that complement or augment our existing products
and services. Promising acquisitions are difficult to identify and complete for
a number of reasons, including competition among prospective buyers and the need
for regulatory, including antitrust, approvals. We may not be able to identify
and successfully complete transactions. Any acquisition we may complete may be
made at a substantial premium over the fair value of the net assets of the
acquired company. Further, we may not be able to integrate any acquired
businesses successfully into our existing businesses, make such businesses
profitable, or realize anticipated cost savings or synergies, if any, from these
acquisitions, which could adversely affect our business.
Moreover, we previously acquired several companies and businesses. As a
result of these acquisitions, we recorded significant goodwill on our balance
sheet, which amounts to approximately $1.51 billion as of December 31, 2004. We
assess the realizability of the goodwill we have on our books annually as well
as whenever events or changes in circumstances indicate that the goodwill may be
impaired. These events or circumstances generally include operating losses or a
significant decline in earnings associated with the acquired business or asset.
Our ability to realize the value of the goodwill will depend on the future cash
flows of these businesses. These cash flows in turn depend in part on how well
we have integrated these businesses. If we are not able to realize the value of
the goodwill, we may be required to incur material charges relating to the
impairment of those assets.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The company is exposed to market risk from changes in interest rates,
currency exchange rates, and equity prices, which could affect its future
results of operations and financial condition. The company manages its exposure
to these risks through its regular operating and financing activities.
Additionally, the company uses short-term forward contracts to manage certain
exposures to currencies. The company enters into forward currency-exchange
contracts to hedge firm purchase and sale commitments denominated in currencies
other than its subsidiaries' local currencies. The company does not engage in
extensive currency hedging activities; however, the purpose of the company's
currency hedging activities is to protect the company's local currency cash
flows related to these commitments from fluctuations in currency exchange rates.
The company's forward currency-exchange contracts principally hedge transactions
denominated in U.S. dollars, euros, British pounds sterling, and Swiss francs.
Income and losses arising from forward contracts are recognized as offsets to
losses and income resulting from the underlying exposure being hedged. The
company does not enter into speculative currency agreements.
Interest Rates
Certain of the company's short-term available-for-sale investments and
long-term obligations are sensitive to changes in interest rates. Interest rate
changes would result in a change in the fair value of these financial
instruments due to the difference between the market interest rate and the rate
at the date of purchase or issuance of the financial instrument. A 10% decrease
in year-end 2004 and 2003 market interest rates would result in a negative
impact to the company of $5 million and $1 million, respectively, on the net
fair value of its interest-sensitive financial instruments.
In addition, interest rate changes would result in a change in the
company's interest expense due to variable-rate debt instruments. A
100-basis-point increase in 90-day LIBOR at December 31, 2004 and 2003, would
increase the company's annual pre-tax interest expense by $1 million.
Currency Exchange Rates
The company views its investment in international subsidiaries with a
functional currency other than the company's reporting currency as long-term.
The company's investment in international subsidiaries is sensitive to
fluctuations in currency exchange rates. The functional currencies of the
company's international subsidiaries are principally denominated in euros,
British pounds sterling, and Japanese yen. The effect of a change in currency
exchange rates on the company's net investment in international subsidiaries is
reflected in the "accumulated other comprehensive items" component of
shareholders' equity. A 10% depreciation in year-end 2004 and 2003 functional
currencies, relative to the U.S. dollar, would result in a reduction of
shareholders' equity of $106 million and $89 million, respectively.
The fair value of forward currency-exchange contracts is sensitive to
changes in currency exchange rates. The fair value of forward currency-exchange
contracts is the estimated amount that the company would pay or receive upon
termination of the contract, taking into account the change in currency exchange
rates. A 10% depreciation in year-end 2004 and 2003 currency exchange rates
related to the company's contracts would result in an increase in the unrealized
loss on forward currency-exchange contracts of $5.9 million and $6.9 million,
respectively. The unrealized gains or losses on forward currency-exchange
contracts resulting from changes in currency exchange rates are expected to
approximately offset losses or gains on the exposures being hedged.
Certain of the company's cash and cash equivalents are denominated in
currencies other than the functional currency of the depositor and are sensitive
to changes in currency exchange rates. A 10% depreciation in the related
year-end 2004 and 2003 currency exchange rates would result in a negative impact
of $3.6 million and $2.1 million, respectively, on the company's net income.
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THERMO ELECTRON CORPORATION
Equity Prices
The company's available-for-sale investment portfolio includes equity
securities that are sensitive to fluctuations in price. In addition, the
company's convertible obligations are sensitive to fluctuations in the price of
the company's common stock. Changes in equity prices would result in changes in
the fair value of the company's available-for-sale investments and convertible
obligations due to the difference between the current market price and the
market price at the date of purchase or issuance of the financial instrument. A
10% decrease in year-end 2004 and 2003 market equity prices would result in a
negative impact to the company of $10 million on the net fair value of its
price-sensitive equity financial instruments, principally its available-for-sale
investments.
Item 8. Financial Statements and Supplementary Data
This data is submitted as a separate section to this report. See Item 15
"Exhibits and Financial Statement Schedules."
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
Item 9A. Controls and Procedures
Management's Evaluation of Disclosure 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 December 31, 2004. Based on this
evaluation, the company's chief executive officer and chief financial officer
concluded that, as of December 31, 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.
Management's Annual Report on Internal Control Over Financial Reporting
The company's management, including the company's chief executive officer
and chief financial officer, is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the company. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. The company's management conducted an assessment of the
effectiveness of the company's internal control over financial reporting as of
December 31, 2004 based on criteria established in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this assessment, the company's management
concluded that, as of December 31, 2004, the company's internal control over
financial reporting was effective.
The company's independent registered public accounting firm,
PricewaterhouseCoopers LLP, has audited the effectiveness of the company's
internal control over financial reporting and management's assessment of the
effectiveness of the company's internal control over financial reporting as of
December 31, 2004, as stated in their report that appears on pages F-2 and F-3
of this Annual Report on Form 10-K.
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THERMO ELECTRON CORPORATION
Changes in Internal Control over Financial Reporting
In conjunction with its preparation toward compliance with Section 404 of
the Sarbanes-Oxley Act of 2002, during the fourth quarter of 2004, the company
implemented 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 enhanced and standardized certain information technology controls,
including documentation thereof, as well as documentation of other financial
controls across its businesses.
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information with respect to directors required by this Item is
contained in our definitive proxy statement to be filed with the SEC not later
than 120 days after the close of business of the fiscal year (2005 Definitive
Proxy Statement) under the headings "ELECTION OF DIRECTORS" and "CORPORATE
GOVERNANCE PRINCIPLES AND BOARD MATTERS," and is incorporated in this report by
reference.
The information with respect to executive officers required by this Item
is included in Item 1 of Part I of this report.
The information with respect to audit committee financial expert and
identification of the audit committee of the Board of Directors required by this
Item is contained in our 2005 Definitive Proxy Statement under the heading
"CORPORATE GOVERNANCE PRINCIPLES AND BOARD MATTERS," and is incorporated in this
report by reference. Copies of the audit committee charter, as well as the
charters for the compensation committee and nominating and corporate governance
committee, are available on our Web site at www.thermo.com. Paper copies of
these documents may be obtained free of charge by writing to the company care of
its Investor Relations Department at our principal executive office located at
81 Wyman Street, Waltham, Massachusetts 02451.
The company has adopted a code of ethics that applies to its principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. This code of ethics is
incorporated in our code of business conduct and ethics that applies to all of
our officers, directors, and employees. A copy of our code of business conduct
and ethics is available on our Web site at www.thermo.com. We intend to satisfy
the SEC's disclosure requirements regarding amendments to, or waivers of, the
code of business conduct and ethics by posting such information on our Web site.
A paper copy of our code of business conduct and ethics may be obtained free of
charge by writing to the company care of its Investor Relations Department at
our principal executive office.
In addition, the Board of Directors has adopted corporate governance
guidelines of the company. A copy of the company's corporate governance
guidelines are available on the company's Web site at www.thermo.com. Paper
copies of the corporate governance guidelines may be obtained free of charge by
writing to the company care of its Investor Relations Department at our
principal executive office.
Item 11. Executive Compensation
The information required by this Item is contained in our 2005 Definitive
Proxy Statement under the heading "EXECUTIVE COMPENSATION," and under the
sub-heading "Director Compensation" under the heading "CORPORATE GOVERNANCE
PRINCIPLES AND BOARD MATTERS," and is incorporated in this report by reference.
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THERMO ELECTRON CORPORATION
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information with respect to security ownership of certain beneficial
owners and management required by this Item is contained in our 2005 Definitive
Proxy Statement under the heading "STOCK OWNERSHIP," and is incorporated in this
report by reference.
The information with respect to securities authorized for issuance under
equity compensation plans is contained in our 2005 Definitive Proxy Statement
under the heading "EQUITY COMPENSATION PLAN INFORMATION," and is incorporated in
this report by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is contained in our 2005 Definitive
Proxy Statement under the heading "CORPORATE GOVERNANCE PRINCIPLES AND BOARD
MATTERS," and is incorporated in this report by reference.
Item 14. Principal Accountant Fees and Services
The information required by this Item is contained in our 2005 Definitive
Proxy Statement under the heading "INDEPENDENT PUBLIC ACCOUNTANTS," and is
incorporated in this report by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements (see Index on page F-1 of this
report):
Report of Independent Registered Public Accounting Firm
Consolidated Statement of Income
Consolidated Balance Sheet
Consolidated Statement of Cash Flows
Consolidated Statement of Comprehensive Income and Shareholders'
Equity
Notes to Consolidated Financial Statements
(2) Consolidated Financial Statement Schedule (see Index on page F-1 of
this report):
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable
or not required, or because the required information is included
either in the consolidated financial statements or in the notes
thereto.
(b) Exhibits
See the Exhibit Index on page 42.
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THERMO ELECTRON CORPORATION
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: March 16, 2005 THERMO ELECTRON CORPORATION
By: /s/ Marijn E. Dekkers
-------------------------------------
Marijn E. Dekkers
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, as of March 16, 2005.
Signature Title
- --------- -----
By: /s/ Marijn E. Dekkers President, Chief Executive Officer, and Director
------------------------------ (Principal Executive Officer)
Marijn E. Dekkers
By: /s/ Jim P. Manzi Chairman of the Board and Director
------------------------------
Jim P. Manzi
By: /s/ Peter M. Wilver Vice President and Chief Financial Officer
------------------------------ (Principal Financial Officer)
Peter M. Wilver
By: /s/ Peter E. Hornstra Corporate Controller and Chief Accounting Officer
------------------------------ (Principal Accounting Officer)
Peter E. Hornstra
By: /s/ John L. LaMattina Director
------------------------------
John L. LaMattina
By: /s/ Peter J. Manning Director
------------------------------
Peter J. Manning
By: /s/ Robert A. McCabe Director
------------------------------
Robert A. McCabe
By: /s/ Robert W. O'Leary Director
------------------------------
Robert W. O'Leary
By: /s/ Michael E. Porter Director
------------------------------
Michael E. Porter
By: /s/ Elaine S. Ullian Director
------------------------------
Elaine S. Ullian
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THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
2 Purchase Agreement among the Registrant, one of its direct
wholly-owned subsidiaries, SPX Corporation and certain of its
direct and indirect wholly-owned subsidiaries, dated as of
January 19, 2005 (filed as Exhibit 99.1 to the Registrant's
Current Report on Form 8-K filed January 21, 2005 [File No.
1-8002] and incorporated in this document by reference).
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (filed as Exhibit 1 to the Registrant's Amendment
No. 3 to Registration Statement on Form 8-A/A [File No.
1-8002] and incorporated in this document by reference).
3.2 By-laws of the Registrant, as amended and effective as of
November 20, 2003 (filed as Exhibit 3.2 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
31, 2003 [File No. 1-8002] and incorporated in this document
by reference).
The Registrant agrees, pursuant to Item 601(b)(4)(iii)(A) of
Regulation S-K, to furnish to the Commission upon request, a
copy of each instrument with respect to long-term debt of the
Registrant or its consolidated subsidiaries.
4.1 Rights Agreement dated as of October 29, 2001, between the
Registrant and American Stock Transfer & Trust Company, which
includes as Exhibit A the Form of Certificate of Designations,
as Exhibit B the Form of Rights Certificate, and as Exhibit C
the Summary of Rights to Purchase Preferred Stock (filed as
Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 29, 2001 [File No. 1-8002] and
incorporated in this document by reference).
4.2 Amendment No. 1 to Rights Agreement dated as of February 7,
2002, between the Registrant and American Stock Transfer &
Trust Company (filed as Exhibit 4.3 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 29,
2001 [File No. 1-8002] and incorporated in this document by
reference).
10.1 Revolving Credit Facility Letters from Barclays Bank PLC in
favor of the Registrant and its subsidiaries (filed as Exhibit
10.8 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 3, 1998 [File No. 1-8002] and
incorporated in this document by reference).
10.2 Amended and Restated Deferred Compensation Plan for Directors
of the Registrant (filed as Exhibit 10.1 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 3,
1999 [File No. 1-8002] and incorporated in this document by
reference).
10.3 Thermo Electron Corporation Directors Stock Option Plan, as
amended and restated as of February 25, 2005.
10.4 Thermo Electron Corporation 2003 Annual Incentive Award Plan,
effective May 14, 2003 (filed as Appendix B to the
Registrant's Definitive Proxy on Schedule 14A for the 2003
Annual Shareholders Meeting [File No. 1-8002] and incorporated
in this document by reference).
10.5 Amended and Restated Nonqualified Stock Option Plan of the
Registrant (filed as Exhibit 10.3 to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 3,
1999 [File No. 1-8002] and incorporated in this document by
reference). (Plan amended in 1984 to extend expiration date to
December 14, 1994.)
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THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.6 Thermo Electron Corporation Equity Incentive Plan, as amended
and restated as of February 7, 2002 (filed as Exhibit 10.10 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 29, 2001 [File No. 1-8002] and
incorporated in this document by reference).
10.7 Thermo Electron Corporation 2001 Equity Incentive Plan, as
amended and restated as of February 7, 2002 (filed as Exhibit
10.11 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 29, 2001 [File No. 1-8002] and
incorporated in this document by reference).
10.8 Thermo Electron Corporation Employees' Equity Incentive Plan,
as amended and restated as of February 7, 2002 (filed as
Exhibit 10.12 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 29, 2001 [File No. 1-8002]
and incorporated in this document by reference).
10.9 Thermo Electron Corporation Deferred Compensation Plan,
effective November 1, 2001 (filed as Exhibit 10.13 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 29, 2001 [File No. 1-8002] and incorporated in
this document by reference).
10.10 Thermo Electron Corporation 2000 Employees Equity Incentive
Plan as amended and restated as of May 15, 2003 (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended June 28, 2003 [File No. 1-8002] and
incorporated in this document by reference).
Each of the plans listed in Exhibits 10.11 to 10.33 originally
provided for the grant of options to acquire the shares of the
Registrant's formerly majority-owned subsidiaries. In
connection with the reorganization of the Registrant commenced
in 1999, all of the Registrant's formerly majority-owned
subsidiaries were taken private and as a result, these plans
were frozen and all of the options originally granted under
the plans ultimately became options to purchase shares of
Common Stock of the Registrant.
10.11 Amended and Restated Thermo Information Solutions Inc. Equity
Incentive Plan (filed as Exhibit 10.13 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
28, 2002 [File No. 1-8002] and incorporated in this document
by reference). (Thermo Information Solutions merged with
Thermo Coleman Corporation on September 17, 1999, and Thermo
Coleman merged with Thermo Electron on October 15, 1999.)
10.12 Amended and Restated Thermo Coleman Corporation Equity
Incentive Plan (filed as Exhibit 10.15 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
28, 2002 [File No. 1-8002] and incorporated in this document
by reference). (Thermo Coleman merged with Thermo Electron on
October 15, 1999.)
10.13 Nonqualified Stock Option Plan of Thermo Power Corporation, as
amended (filed as Exhibit 10(i) to the Quarterly Report on
Form 10-Q of Thermo Power for the quarter ended April 3, 1993
[File No. 1-10573] and incorporated in this document by
reference). (Thermo Power merged with Thermo Electron on
October 28, 1999.)
10.14 Equity Incentive Plan of ThermoSpectra Corporation (filed as
Exhibit 10.18 to ThermoSpectra's Registration Statement on
Form S-1 [Reg. No. 33-93778] and incorporated in this document
by reference). (ThermoSpectra merged with Thermo Instrument on
December 9, 1999, and Thermo Instrument merged with Thermo
Electron on June 30, 2000.)
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THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.15 Amended and Restated Thermo Electron Corporation - Thermo
Sentron Inc. Nonqualified Stock Option Plan (filed as Exhibit
10.21 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended July 3, 1999 [File No. 1-8002] and
incorporated in this document by reference). (Thermo Sentron
merged with Thermedics Inc. on April 4, 2000, and Thermedics
merged with Thermo Electron on June 30, 2000.)
10.16 Equity Incentive Plan of Thermo Sentron Inc. (filed as Exhibit
10.7 to Thermo Sentron's Registration Statement on Form S-1
[Reg. No. 333-806] and incorporated in this document by
reference). (Thermo Sentron merged with Thermedics Inc. on
April 4, 2000, and Thermedics merged with Thermo Electron on
June 30, 2000.)
10.17 Equity Incentive Plan of Thermedics Detection Inc. (filed as
Exhibit 10.7 to Thermedics Detection's Registration Statement
on Form S-1 [File No. 333-19199] and incorporated in this
document by reference). (Thermedics Detection merged with
Thermedics on April 12, 2000, and Thermedics merged with
Thermo Electron on June 30, 2000.)
10.18 Amended and Restated Equity Incentive Plan of Thermedics Inc.
(filed as Exhibit 10.7 to the Quarterly Report on Form 10-Q of
Thermedics for the quarter ended July 3, 1999 [File No.
1-9567] and incorporated in this document by reference).
(Thermedics merged with Thermo Electron on June 30, 2000.)
10.19 Amended and Restated Thermo Electron Corporation - Thermo
BioAnalysis Corporation Nonqualified Stock Option Plan (filed
as Exhibit 10.14 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 3, 1999 [File No. 1-8002] and
incorporated in this document by reference). (On April 19,
2000, Thermo BioAnalysis merged with Thermo Instrument Systems
Inc. and on June 30, 2000, Thermo Instrument merged with
Thermo Electron and all outstanding options granted under this
plan were ultimately assumed by Thermo Electron.)
10.20 Amended and Restated Equity Incentive Plan of Metrika Systems
Corporation (filed as Exhibit 10.3 to the Quarterly Report on
Form 10-Q of Metrika for the quarter ended July 3, 1999 [File
No. 1-13085] and incorporated in this document by reference).
(Metrika merged with Thermo Instrument on May 3, 2000, and
Thermo Instrument merged with Thermo Electron on June 30,
2000.)
10.21 Amended and Restated Equity Incentive Plan of ThermoQuest
Corporation (filed as Exhibit 10.2 to the Quarterly Report on
Form 10-Q of ThermoQuest for the quarter ended July 3, 1999
[File No. 1-14262] and incorporated in this document by
reference). (ThermoQuest merged with Thermo Instrument on May
11, 2000, and Thermo Instrument merged with Thermo Electron on
June 30, 2000.)
10.22 Amended and Restated Thermo Electron Corporation - ThermoQuest
Corporation Nonqualified Stock Option Plan (filed as Exhibit
10.19 to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended July 3, 1999 [File No. 1-8002] and
incorporated in this document by reference). (On May 11, 2000,
ThermoQuest merged with Thermo Instrument and on June 30,
2000, Thermo Instrument merged with Thermo Electron and all
outstanding options granted under this plan were ultimately
assumed by Thermo Electron.)
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THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.23 Amended and Restated Equity Incentive Plan of Thermo Optek
Corporation (filed as Exhibit 10.2 to the Quarterly Report on
Form 10-Q of Thermo Optek for the quarter ended July 3, 1999
[File No. 1-11757] and incorporated in this document by
reference). (Thermo Optek merged with Thermo Instrument on May
11, 2000, and Thermo Instrument merged with Thermo Electron on
June 30, 2000.)
10.24 Amended and Restated Thermo Electron Corporation - Thermo
Optek Corporation Nonqualified Stock Option Plan (filed as
Exhibit 10.20 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 3, 1999 [File No. 1-8002] and
incorporated in this document by reference). (On May 11, 2000,
Thermo Optek merged with Thermo Instrument and on June 30,
2000, Thermo Instrument merged with Thermo Electron and all
outstanding options granted under this plan were ultimately
assumed by Thermo Electron.)
10.25 Amended and Restated Equity Incentive Plan of Thermo
Instrument Systems Inc. (filed as Exhibit 10.6 to the
Quarterly Report on Form 10-Q of Thermo Instrument for the
quarter ended July 3, 1999 [File No. 1-9786] and incorporated
in this document by reference). (Thermo Instrument merged with
Thermo Electron on June 30, 2000.)
10.26 Amended and Restated Nonqualified Stock Option Plan of Thermo
Ecotek Corporation (filed as Exhibit 10.6 to the Quarterly
Report on Form 10-Q of Thermo Ecotek for the quarter ended
July 3, 1999 [File No. 1-13572] and incorporated in this
document by reference). (Thermo Ecotek merged with Thermo
Electron on August 10, 2000.)
10.27 Amended and Restated Nonqualified Stock Option Plan of
ThermoTrex Corporation (filed as Exhibit 10.2 to the Quarterly
Report on Form 10-Q of ThermoTrex for the quarter ended July
3, 1999 [File No. 1-10791] and incorporated in this document
by reference). (ThermoTrex merged with Thermo Electron on
August 14, 2000.)
10.28 Amended and Restated Nonqualified Stock Option Plan of
ThermoLase Corporation (filed as Exhibit 10.5 to the Quarterly
Report on Form 10-Q of ThermoLase for the quarter ended July
3, 1999 [File No. 1-13104] and incorporated in this document
by reference). (ThermoLase merged with Thermo Electron on
August 14, 2000.)
10.29 Amended and Restated Nonqualified Stock Option Plan of Thermo
TerraTech Inc. (filed as Exhibit 10.34 to the Annual Report on
Form 10-K of Thermo TerraTech for the fiscal year ended April
1, 2000 [File No. 1-09549] and incorporated in this document
by reference). (Thermo TerraTech merged with Thermo Electron
on September 22, 2000.)
10.30 Amended and Restated Thermo Electron Corporation - Trex
Medical Corporation Nonqualified Stock Option Plan (filed as
Exhibit 10.22 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended July 3, 1999 [File No. 1-8002] and
incorporated in this document by reference). (Trex Medical
merged with Thermo Electron on November 29, 2000.)
10.31 Amended and Restated Equity Incentive Plan of Trex Medical
Corporation (filed as Exhibit 10.2 to the Quarterly Report on
Form 10-Q of Trex Medical for the quarter ended July 3, 1999
[File No. 1-11827] and incorporated in this document by
reference). (Trex Medical merged with Thermo Electron on
November 29, 2000.)
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THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.32 1997 Spectra-Physics Lasers, Inc. Stock Option Plan (filed as
Exhibit 10.6 of Amendment No. 1 to Spectra-Physics'
Registration Statement on Form S-1 [File No. 333-38329] and
incorporated in this document by reference). (Spectra-Physics
merged with Thermo Electron on February 25, 2002.)
10.33 2000 Spectra-Physics Lasers, Inc. Stock Option Plan (filed as
Exhibit 10.1 to Spectra-Physics' Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000 [File No. 000-23461]
and incorporated in this document by reference). (Spectra-
Physics merged with Thermo Electron on February 25, 2002.)
10.34 Description of Amendments to Certain Stock Option Plans made
in February 2002 (filed as Exhibit 10.31 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended December
29, 2001 [File No. 1-8002] and incorporated in this document
by reference).
10.35 Form of Indemnification Agreement between the Registrant and
the directors and officers of its majority-owned subsidiaries
(filed as Exhibit 10.1 to the Registrant's Registration
Statement on Form S-4 [Reg. No. 333-90661] and incorporated in
this document by reference).
10.36 Form of Amended and Restated Indemnification Agreement between
the Registrant and its directors and officers (filed as
Exhibit 10.2 to the Registrant's Registration Statement on
Form S-4 [Reg. No. 333-90661] and incorporated in this
document by reference).
10.37 Amended and Restated Employment Agreement between the
Registrant and Mr. Marijn Dekkers (filed as Exhibit 99.1 to
the Registrant's Current Report on Form 8-K dated December 12,
2002 [File No. 1-8002] and incorporated in this document by
reference).
10.38 Amended and Restated Employment Agreement between the
Registrant and Mr. Richard F. Syron (filed as Exhibit 99.2 to
the Registrant's Current Report on Form 8-K dated December 12,
2002 [File No. 1-8002] and incorporated in this document by
reference).
10.39 Employment Offer Letter dated October 3, 2000, between the
Registrant and Mr. Guy Broadbent (filed as Exhibit 10.40 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 30, 2000 [File No. 1-8002] and
incorporated in this document by reference).
10.40 Amendment to Amended and Restated Employment Agreement dated
as of March 14, 2001, between the Registrant and Mr. Richard
F. Syron (filed as Exhibit 10.41 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 30,
2000 [File No. 1-8002] and incorporated in this document by
reference).
10.41 Employment Agreement dated as of November 29, 2001, between
the Registrant and Mr. Marc N. Casper (filed as Exhibit 10.54
to the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 29, 2001 [File No. 1-8002] and
incorporated in this document by reference).
10.42 Letter Agreement dated as of November 27, 2001, among SPX
Corporation, Kendro Laboratory Products, L.P., the Registrant,
and Mr. Marc N. Casper (filed as Exhibit 10.55 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 29, 2001 [File No. 1-8002] and incorporated in
this document by reference).
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THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.43 Master Securities Loan Agreement between Thermo Electron
Corporation and JPMorgan Chase Bank (filed as Exhibit 10.1 to
the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 29, 2002 [File No. 1-8002] and incorporated in this
document by reference).
10.44 Master Securities Loan Agreement between Thermo Electron
Corporation and ABN AMRO Inc. (filed as Exhibit 10.2 to the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 29, 2002 [File No. 1-8002] and incorporated in this
document by reference).
10.45 Executive Registry Program at the Massachusetts General
Hospital (filed as Exhibit 10.74 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 28,
2002 [File No. 1-8002] and incorporated in this document by
reference).
10.46 Form of Executive Change in Control Retention Agreement dated
November 19, 2003, between the Registrant and its executive
officers (other than Mr. Marijn Dekkers) and certain other key
employees (filed as Exhibit 10.65 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31,
2003 [File No. 1-8002] and incorporated in this document by
reference).
10.47 Form of Executive Severance Agreement dated November 19, 2003,
between the Registrant and its executive officers (other than
Mr. Marijn Dekkers) and certain other key employees (filed as
Exhibit 10.66 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003 [File No. 1-8002]
and incorporated in this document by reference).
10.48 Restricted Stock Agreement dated February 26, 2003, by and
between the Registrant and Mr. Marc Casper (filed as Exhibit
10.67 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 [File No. 1-8002] and
incorporated in this document by reference).
10.49 Restricted Stock Units Agreement dated November 19, 2003, by
and between the Registrant and Mr. Marc Casper (filed as
Exhibit 10.68 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003 [File No. 1-8002]
and incorporated in this document by reference).
10.50 Severance Agreement dated November 26, 2003, between the
Registrant and Mr. Barry Howe (filed as Exhibit 10.69 to the
Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 2003 [File No. 1-8002] and incorporated in
this document by reference).
10.51 Letter Agreement dated December 12, 2003, between the
Registrant and Mr. Richard Syron (filed as Exhibit 10.70 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003 [File No. 1-8002] and
incorporated in this document by reference).
10.52 Restricted Stock Agreement dated December 12, 2003, by and
between the Registrant and Mr. Jim Manzi (filed as Exhibit
10.71 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 [File No. 1-8002] and
incorporated in this document by reference).
10.53 Stock Option Agreement dated December 12, 2003, by and between
the Registrant and Mr. Jim Manzi (filed as Exhibit 10.72 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003 [File No. 1-8002] and
incorporated in this document by reference).
10.54 Restricted Stock Agreement for Chief Executive Officer dated
January 7, 2004, between the Registrant and Mr. Marijn Dekkers
(filed as Exhibit 10.73 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 2003 [File
No. 1-8002] and incorporated in this document by reference).
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THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.55 Letter Agreement dated February 11, 2004, between the
Registrant and Mr. Marijn Dekkers (filed as Exhibit 10.74 to
the Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003 [File No. 1-8002] and
incorporated in this document by reference).
10.56 Restricted Stock Agreement dated February 26, 2004, by and
between the Registrant and Mr. Peter Wilver (filed as Exhibit
10.75 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003 [File No. 1-8002] and
incorporated in this document by reference).
10.57 Restricted Stock Agreement dated June 2, 2004, by and between
Thermo Electron Corporation and Mr. Seth Hoogasian (filed as
Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
for the quarter ended July 3, 2004 [File No. 1-8002] and
incorporated in this document by reference).
10.58 Five-Year Credit Agreement among the Registrant, the Several
Lenders thereto, Barclays Bank Plc, as Administrative Agent,
ABN AMRO Bank N.V., as Syndication Agent, and Bank of America,
N.A. and JPMorgan Chase Bank, N.A., as co-documentation
agents, dated as of December 17, 2004.
10.59 Commitment Letter and Term Sheet among the Registrant,
JPMorgan Chase Bank, N.A. and JPMorgan Securities Inc. dated
as of January 19, 2005 (filed as Exhibit 99.2 to the
Registrant's Current Report on Form 8-K filed January 21, 2005
[File No. 1-8002] and incorporated in this document by
reference).
10.60 Letter Agreement dated February 25, 2005, between the
Registrant and Mr. Marijn Dekkers.
10.61 Form of Thermo Electron Corporation Stock Option Agreement for
use in connection with the grant of stock options under the
Registrant's equity incentive plans to officers and directors
of the Registrant (filed as Exhibit 99.1 to the Registrant's
Current Report on Form 8-K dated February 25, 2005 [file
number 1-8002] and incorporated herein by reference).
10.62 Form of Thermo Electron Corporation Stock Option Agreement for
use in connection with the grant of stock options under the
Registrant's equity incentive plans to Mr. Dekkers (filed as
Exhibit 99.2 to the Registrant's Current Report on Form 8-K
dated February 25, 2005 [file number 1-8002] and incorporated
herein by reference).
10.63 Form of Thermo Electron Corporation Restricted Stock Agreement
for use in connection with the grant of restricted stock under
the Registrant's equity incentive plans to Mr. Dekkers (filed
as Exhibit 99.3 to the Registrant's Current Report on Form 8-K
dated February 25, 2005 [file number 1-8002] and incorporated
herein by reference).
10.64 Form of Thermo Electron Corporation Restricted Stock Agreement
for use in connection with the grant of restricted stock under
the Registrant's equity incentive plans to Mr. Manzi (filed as
Exhibit 99.4 to the Registrant's Current Report on Form 8-K
dated February 25, 2005 [file number 1-8002] and incorporated
herein by reference).
10.65 Summary of Thermo Electron Corporation Director Compensation.
10.66 Summary of Annual Incentive Program of Thermo Electron
Corporation.
10.67 Summary of 2005 Annual Cash Incentive Plan Matters (set forth
in Item 1.01 to the Registrant's Current Report on Form 8-K
dated February 25, 2005 [file number 1-8002] in the first two
paragraphs under heading "2005 Executive Compensation Matters"
and incorporated herein by reference).
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THERMO ELECTRON CORPORATION
EXHIBIT INDEX
Exhibit
Number Description of Exhibit
- ------- ----------------------
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
31.1 Certification of Chief Executive Officer required by Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer required by Exchange
Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer required by Exchange
Act Rules 13a-14(b) and 15d-14(b), as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2 Certification of Chief Financial Officer required by Exchange
Act Rules 13a-14(b) and 15d-14(b), as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
*Certification is not deemed "filed" for purposes of Section 18 of the Exchange
Act, or otherwise subject to the liability of that section. Such certification
is not deemed to be incorporated by reference into any filing under the
Securities Act or the Exchange Act, except to the extent that the registrant
specifically incorporates it by reference.
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THERMO ELECTRON CORPORATION
ANNUAL REPORT ON FORM 10-K
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
The following Consolidated Financial Statements of the Registrant and its
subsidiaries are required to be included in Item 15:
Page
----
Report of Independent Registered Public Accounting Firm on financial statements at December 31, 2004, and for
the three years then ended F-2
Consolidated Statement of Income for the years ended December 31, 2004, December 31, 2003, and December 28, 2002 F-4
Consolidated Balance Sheet as of December 31, 2004 and 2003 F-5
Consolidated Statement of Cash Flows for the years ended December 31, 2004, December 31, 2003, and December 28,
2002 F-7
Consolidated Statement of Comprehensive Income and Shareholders' Equity for the years ended December 31, 2004,
December 31, 2003, and December 28, 2002 F-9
Notes to Consolidated Financial Statements F-11
The following Consolidated Financial Statement Schedule of the Registrant and its subsidiaries is filed as
part of this Report as required to be included in Item 15(a):
Page
----
Schedule II - Valuation and Qualifying Accounts F-57
Note: All other financial statement schedules are omitted because they are not applicable or not required, or
because the required information is included in the consolidated financial statements or in the notes thereto.
<
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THERMO ELECTRON CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Thermo Electron Corporation:
We have completed an integrated audit of Thermo Electron Corporation's 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedule
- ------------------------------------------------------------------
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of Thermo Electron Corporation and its subsidiaries at
December 31, 2004 and 2003, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
- -----------------------------------------
Also, in our opinion, management's assessment, included in Management's Annual
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company maintained effective internal control over financial reporting
as of December 31, 2004 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the COSO. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
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THERMO ELECTRON CORPORATION
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - (Continued)
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 14, 2005
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THERMO ELECTRON CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(In thousands except per share amounts)
2004 2003 2002
---------- ---------- ----------
Revenues (Notes 1 and 3) $2,205,995 $1,899,378 $1,849,360
---------- ---------- ----------
Costs and Operating Expenses:
Cost of revenues (Note 15) 1,191,516 1,019,476 1,000,465
Selling, general, and administrative expenses 626,458 519,322 509,366
Research and development expenses 134,680 127,996 131,976
Restructuring and other costs, net (Note 15) 15,829 45,200 37,691
---------- ---------- ----------
1,968,483 1,711,994 1,679,498
---------- ---------- ----------
Operating Income 237,512 187,384 169,862
Other Income, Net (Note 4) 21,707 35,247 131,500
---------- ---------- ----------
Income from Continuing Operations Before Provision for Income Taxes 259,219 222,631 301,362
Provision for Income Taxes (Note 6) (40,852) (47,421) (97,943)
---------- ---------- ----------
Income from Continuing Operations 218,367 175,210 203,419
Income (Loss) from Discontinued Operations (includes income tax benefit
of $36,321, $1,485, and $5,478; Note 16) 43,018 (2,513) (9,059)
Gain on Disposal of Discontinued Operations, Net (includes income tax benefit
of $36,728 and $21,008 in 2004 and 2002; net of income tax provision of
$8,141 in 2003; Note 16) 100,452 27,312 115,370
---------- ---------- ----------
Net Income $ 361,837 $ 200,009 $ 309,730
========== ========== ==========
Earnings per Share from Continuing Operations (Note 7)
Basic $ 1.34 $ 1.08 $ 1.21
========== ========== ==========
Diluted $ 1.31 $ 1.05 $ 1.17
========== ========== ==========
Earnings per Share (Note 7)
Basic $ 2.22 $ 1.23 $ 1.84
========== ========== ==========
Diluted $ 2.17 $ 1.20 $ 1.73
========== ========== ==========
Weighted Average Shares (Note 7)
Basic 163,133 162,713 168,572
========== ========== ==========
Diluted 167,641 170,730 186,611
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands)
2004 2003
---------- ----------
Assets
Current Assets:
Cash and cash equivalents $ 326,886 $ 195,773
Short-term available-for-sale investments, at quoted market value (Notes 4 and 9) 185,369 222,465
Accounts receivable, less allowances of $22,844 and $24,212 469,553 419,625
Inventories 336,711 302,161
Deferred tax assets (Note 6) 92,929 113,006
Other current assets 52,606 46,995
Current assets of discontinued operations (Note 16) 5,600 95,231
---------- ----------
1,469,654 1,395,256
---------- ----------
Property, Plant, and Equipment, at Cost, Net 261,041 252,252
---------- ----------
Acquisition-related Intangible Assets (Note 2) 158,577 65,542
---------- ----------
Other Assets (Note 2) 174,428 47,761
---------- ----------
Goodwill (Note 2) 1,513,025 1,441,172
---------- ----------
Long-term Assets of Discontinued Operations (Note 16) - 187,339
---------- ----------
$3,576,725 $3,389,322
========== ==========
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THERMO ELECTRON CORPORATION
CONSOLIDATED BALANCE SHEET - (Continued)
(In thousands except share amounts)
2004 2003
---------- ----------
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term obligations and current maturities of long-term obligations (Note 10) $ 15,017 $ 45,981
Accounts payable 131,175 102,617
Accrued payroll and employee benefits 94,671 89,452
Accrued income taxes 22,829 98,167
Deferred revenue 77,778 59,055
Accrued restructuring costs (Note 15) 15,819 22,453
Other accrued expenses (Note 2) 178,887 171,249
Current liabilities of discontinued operations (Note 16) 42,552 95,819
---------- ----------
578,728 684,793
---------- ----------
Deferred Income Taxes (Note 6) 15,213 11,700
---------- ----------
Other Long-term Liabilities (Note 5) 91,164 74,861
---------- ----------
Long-term Liabilities of Discontinued Operations (Note 16) - 6,766
---------- ----------
Long-term Obligations (Note 10):
Senior notes 135,232 137,874
Subordinated convertible obligations 77,234 77,234
Other 13,604 14,401
---------- ----------
226,070 229,509
---------- ----------
Commitments and Contingencies (Note 11)
Shareholders' Equity (Notes 5 and 12):
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 350,000,000 shares authorized; 179,818,648 and
175,479,994 shares issued 179,819 175,480
Capital in excess of par value 1,381,448 1,298,881
Retained earnings 1,381,257 1,019,420
Treasury stock at cost, 19,269,245 and 10,416,770 shares (435,779) (192,469)
Deferred compensation (2,561) (2,834)
Accumulated other comprehensive items (Note 8) 161,366 83,215
---------- ----------
2,665,550 2,381,693
---------- ----------
$3,576,725 $3,389,322
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
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THERMO ELECTRON CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
2004 2003 2002
--------- --------- ---------
Operating Activities
Net income $ 361,837 $ 200,009 $ 309,730
(Income) loss from discontinued operations (43,018) 2,513 9,059
Gain on disposal of discontinued operations, net (Note 16) (100,452) (27,312) (115,370)
--------- --------- ---------
Income from continuing operations 218,367 175,210 203,419
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities:
Depreciation and amortization 66,141 46,716 43,477
Noncash restructuring and other costs, net (Note 15) 1,156 5,394 5,349
Provision for losses on accounts receivable 3,045 3,485 2,260
Equity in earnings of unconsolidated subsidiaries (Note 4) (733) (490) (2,533)
Change in deferred income taxes 3,004 (17,249) 21,979
Gain on investments, net (Notes 4 and 9) (20,838) (35,536) (123,134)
(Gain) loss on sale of businesses (Note 2) - 4,654 (2,612)
Other 9,663 10,024 18,255
Changes in current accounts, excluding the effects of
acquisitions and dispositions:
Accounts receivable (27,609) 931 4,597
Inventories (21,456) 27,414 18,426
Other current assets (1,009) 688 11,087
Accounts payable 12,939 (12,942) (573)
Other current liabilities 7,337 (7,956) (85,466)
--------- --------- ---------
Net cash provided by continuing operations 250,007 200,343 114,531
Net cash provided by (used in) discontinued operations 14,503 14,402 (7,683)
--------- --------- ---------
Net cash provided by operating activities 264,510 214,745 106,848
--------- --------- ---------
Investing Activities
Proceeds from sale of available-for-sale investments (Note 4) 634,967 291,521 122,094
Proceeds from maturities of available-for-sale investments 29,819 349,192 217,011
Purchases of available-for-sale investments (611,095) (245,704) (37,833)
Proceeds from sale of other investments (Note 4) 26 1,692 65,251
Acquisitions, net of cash acquired (Note 2) (143,010) (134,924) (78,683)
Purchases of property, plant, and equipment (49,985) (41,690) (41,442)
Proceeds from sale of property, plant, and equipment 5,511 4,272 9,719
Collection of notes receivable (Note 2) 178 69,136 76,392
Proceeds from sale of businesses, net of cash divested (Note 2) - 16,427 22,324
Increase in other assets (2,506) (6,623) (6,298)
Other (1,579) (938) (121)
--------- --------- ---------
Net cash provided by (used in) continuing operations (137,674) 302,361 348,414
Net cash provided by discontinued operations 171,827 6,042 114,916
--------- --------- ---------
Net cash provided by investing activities $ 34,153 $ 308,403 $ 463,330
--------- --------- ---------
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THERMO ELECTRON CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS - (Continued)
(In thousands)
2004 2003 2002
--------- --------- ---------
Financing Activities
Redemption and repayment of long-term obligations (Note 10) $ (1,288) $(269,135) $(594,449)
Purchases of company common stock and subordinated convertible
debentures (Note 10) (231,530) (88,871) (334,152)
Increase (decrease) in short-term notes payable (7,938) (369,110) 329,810
Net proceeds from issuance of company common stock (Note 5) 57,636 75,049 25,335
Other (548) 40 (51)
--------- --------- ---------
Net cash used in continuing operations (183,668) (652,027) (573,507)
Net cash provided by (used in) discontinued operations 445 (11,605) (16,018)
--------- --------- ---------
Net cash used in financing activities (183,223) (663,632) (589,525)
--------- --------- ---------
Exchange Rate Effect on Cash of Continuing Operations 16,522 31,976 17,626
Exchange Rate Effect on Cash of Discontinued Operations (849) 2,966 (2,164)
--------- --------- ---------
Increase (Decrease) in Cash and Cash Equivalents 131,113 (105,542) (3,885)
Cash and Cash Equivalents at Beginning of Year 195,773 301,315 305,200
--------- --------- ---------
326,886 195,773 301,315
Cash and Cash Equivalents of Discontinued Operations at End of Year - - (29)
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ 326,886 $ 195,773 $ 301,286
========= ========= =========
See Note 14 for supplemental cash flow information.
The accompanying notes are an integral part of these consolidated financial statements.
<
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THERMO ELECTRON CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
AND SHAREHOLDERS' EQUITY
(In thousands except share amounts)
2004 2003 2002
---------- ---------- ----------
Comprehensive Income
Net Income $ 361,837 $ 200,009 $ 309,730
---------- ---------- ----------
Other Comprehensive Items (Note 8):
Currency translation adjustment 96,800 124,711 91,261
Unrealized gains (losses) on available-for-sale investments, net of
reclassification adjustment and net of tax (9,970) 28,195 (65,894)
Unrealized gains (losses) on hedging instruments, net of tax 2,528 (1,033) (2,828)
Minimum pension liability adjustment, net of tax (3,023) (7,415) (21,995)
---------- ---------- ----------
86,335 144,458 544
---------- ---------- ----------
$ 448,172 $ 344,467 $ 310,274
========== ========== ==========
Shareholders' Equity
Common Stock, $1 Par Value:
Balance at beginning of year (175,479,994; 169,952,419; and 199,816,264
shares) $ 175,480 $ 169,952 $ 199,816
Issuance of stock under employees' and directors' stock plans
(4,338,654; 5,527,575; and 2,136,155 shares) 4,339 5,528 2,136
Restoration of stock to authorized but unissued status (32,000,000
shares; Note 12) - - (32,000)
---------- ---------- ----------
Balance at end of year (179,818,648; 175,479,994; and 169,952,419 shares) 179,819 175,480 169,952
---------- ---------- ----------
Capital in Excess of Par Value:
Balance at beginning of year 1,298,881 1,212,145 1,758,567
Activity under employees' and directors' stock plans 66,562 74,717 31,669
Tax benefit related to employees' and directors' stock plans 16,005 12,019 6,696
Effect of subsidiaries' equity transactions - - 613
Restoration of stock to authorized but unissued status (Note 12) - - (585,400)
---------- ---------- ----------
Balance at end of year 1,381,448 1,298,881 1,212,145
---------- ---------- ----------
Retained Earnings:
Balance at beginning of year 1,019,420 819,411 509,681
Net income 361,837 200,009 309,730
---------- ---------- ----------
Balance at end of year $1,381,257 $1,019,420 $ 819,411
---------- ---------- ----------
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THERMO ELECTRON CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
AND SHAREHOLDERS' EQUITY - (Continued)
(In thousands except share amounts)
2004 2003 2002
---------- ---------- ----------
Treasury Stock:
Balance at beginning of year (10,416,770; 7,098,501; and 23,458,555
shares) $ (192,469) $ (129,675) $ (457,475)
Purchases of company common stock (8,448,800; 3,033,400; and 15,444,000
shares) (231,530) (57,838) (285,632)
Activity under employees' and directors' stock plans (403,675; 284,869;
and 195,946 shares) (11,780) (4,956) (3,968)
Restoration of stock to authorized but unissued status (32,000,000
shares; Note 12) - - 617,400
---------- ---------- ----------
Balance at end of year (19,269,245; 10,416,770; and 7,098,501 shares) (435,779) (192,469) (129,675)
---------- ---------- ----------
Deferred Compensation (Note 5):
Balance at beginning of year (2,834) (4,852) (3,157)
Awards under employees' stock plans (1,680) (1,577) (4,207)
Amortization of deferred compensation 1,757 2,256 2,272
Forfeitures under employees' stock plans 196 1,339 240
---------- ---------- ----------
Balance at end of year (2,561) (2,834) (4,852)
---------- ---------- ----------
Accumulated Other Comprehensive Items (Note 8):
Balance at beginning of year 83,215 (36,704) (99,290)
Other comprehensive items 78,151 119,919 (48,080)
Reclassification of equity interests to available-for-sale investments
(Note 4) - - 110,666
---------- ---------- ----------
Balance at end of year 161,366 83,215 (36,704)
---------- ---------- ----------
$2,665,550 $2,381,693 $2,030,277
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
<
F-10
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THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
A world leader in high-tech instruments, Thermo Electron Corporation (the
company) helps life science, laboratory, and industrial customers advance
scientific knowledge, enable drug discovery, improve manufacturing processes,
and protect people and the environment with instruments, scientific equipment,
services, and software solutions. The company's powerful technologies help
researchers make discoveries that will fight disease or prolong life. They
automatically monitor and control online production to ensure the quality and
safety of raw materials as well as the end products. And they are critical
components embedded as enabling technologies within scientific and industrial
devices.
Principles of Consolidation
The accompanying financial statements include the accounts of the company
and its wholly and majority-owned subsidiaries. All intercompany accounts and
transactions have been eliminated. The company accounts for investments in
businesses in which it owns between 20% and 50% using the equity method.
Presentation
During 2000 and 2001, the company completed the principal aspects of a
major corporate reorganization. As part of this reorganization, the company spun
off two businesses and sold a number of operating units which were treated as
discontinued operations. In July 2004, the company sold Spectra-Physics, Inc.,
its optical technologies segment. The results of operations of Spectra-Physics
as well as balance sheet amounts pertaining to this business have been
classified as discontinued operations in the accompanying financial statements
(Note 16). The company transferred management responsibility and the related
financial reporting and monitoring for several small business units in 2003
between segments (Note 3).
Fiscal Year
Through 2002, the company had a fiscal year ending the Saturday nearest
December 31. In 2003, the company changed its year end to December 31.
References to 2004, 2003, and 2002 are for the fiscal years ended December 31,
2004, December 31, 2003, and December 28, 2002, respectively.
Revenue Recognition and Accounts Receivable
Revenue is recognized after all significant obligations have been met,
collectibility is probable and title has passed, which typically occurs upon
shipment or completion of services. If customer-specific acceptance criteria
exists, the company recognizes revenue after demonstrating adherence to the
acceptance criteria. The company recognizes revenue and related costs for
arrangements with multiple deliverables, such as equipment and installation, in
accordance with Emerging Issues Task Force (EITF) Issue No. 00-21, "Accounting
for Revenue Arrangements with Multiple Deliverables," as each element is
delivered or completed based upon its relative fair value. If fair value is not
available for any undelivered element, revenue for all elements is deferred
until delivery is completed. When a portion of the customer's payment is not due
until installation, the company defers that portion of the revenue until
completion of installation. Revenues for training are deferred until the service
is completed. Revenues for extended service contracts are recognized ratably
over the contract period.
The company's informatics business recognizes revenue from the sale of
software in accordance with the American Institute of Certified Public
Accountants Statement of Position (SOP) 97-2, "Software Revenue Recognition," as
amended by subsequent SOPs. License fee revenues relate primarily to sales of
perpetual licenses to end-users and are recognized when a formal agreement
exists, the license fee is fixed and determinable, delivery of the software has
<
F-11
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
occurred, and collection is probable. Software arrangements with customers
often include multiple elements, including software products, maintenance, and
support. The company recognizes software license fees based on the residual
method after all elements have either been delivered or vendor specific
objective evidence (VSOE) of fair value exists for such undelivered elements. In
the event VSOE is not available for any undelivered element, revenue for all
elements is deferred until delivery is completed. Revenues from software
maintenance and support contracts are recognized on a straight-line basis over
the term of the contract, which is generally a period of one year. VSOE of fair
value of software maintenance and support is determined based on the price
charged for the maintenance and support when sold separately. Revenues from
training and consulting services are recognized as services are performed, based
on VSOE, which is determined by reference to the price customers pay when the
services are sold separately.
Accounts receivable are recorded at the invoiced amount and do not bear
interest. The company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to pay amounts due. The
allowance for doubtful accounts is the company's best estimate of the amount of
probable credit losses in existing accounts receivable. The company determines
the allowance based on historical write-off experience. Past due balances are
reviewed individually for collectibility. Account balances are charged off
against the allowance when the company believes it is probable the receivable
will not be recovered. The company does not have any off-balance-sheet credit
exposure related to customers.
Deferred revenue in the accompanying balance sheet consists primarily of
unearned revenue on service contracts, which is recognized ratably over the
terms of the contracts. Substantially all of the deferred revenue in the
accompanying 2004 balance sheet will be recognized within one year.
Warranty Obligations
The company provides for the estimated cost of product warranties,
primarily from historical information, in cost of revenues at the time product
revenue is recognized. While the company engages in extensive product quality
programs and processes, including actively monitoring and evaluating the quality
of its component supplies, the company's warranty obligation is affected by
product failure rates, utilization levels, material usage, service delivery
costs incurred in correcting a product failure, and supplier warranties on parts
delivered to the company. Should actual product failure rates, utilization
levels, material usage, service delivery costs, or supplier warranties on parts
differ from the company's estimates, revisions to the estimated warranty
liability would be required. The liability for warranties is included in other
accrued expenses in the accompanying balance sheet. The changes in the carrying
amount of warranty obligations are as follows (in thousands):
Balance at December 28, 2002 $ 22,863
Provision charged to income 22,689
Usage (19,449)
Adjustments to previously provided warranties, net (2,818)
Other, net (a) 2,360
--------
Balance at December 31, 2003 25,645
Provision charged to income 21,063
Usage (19,952)
Adjustments to previously provided warranties, net (2,545)
Other, net (a) 3,158
--------
Balance at December 31, 2004 $ 27,369
========
(a) Primarily represents the effects of currency translation.
<
F-12
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
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 (Note 5). 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, and had the fair value of awards been amortized on a straight-line
basis over the vesting period, the effect on certain financial information of
the company would have been as follows:
2004 2003 2002
-------- -------- --------
(In thousands except
per share amounts)
Income from Continuing Operations:
As reported $218,367 $175,210 $203,419
Add: Stock-based employee compensation expense included in reported results,
net of tax 1,142 1,677 3,117
Deduct: Total stock-based employee compensation expense determined
under the fair-value-based method for all awards, net of tax (12,710) (18,276) (21,876)
-------- -------- --------
Pro forma $206,799 $158,611 $184,660
======== ======== ========
Basic Earnings per Share from Continuing Operations:
As reported $ 1.34 $ 1.08 $ 1.21
Pro forma $ 1.27 $ 0.97 $ 1.10
Diluted Earnings per Share from Continuing Operations:
As reported $ 1.31 $ 1.05 $ 1.17
Pro forma $ 1.24 $ 0.96 $ 1.06
Net Income:
As reported $361,837 $200,009 $309,730
Add: Stock-based employee compensation expense included in reported net
income, net of tax 1,142 1,677 3,117
Deduct: Total stock-based employee compensation expense determined
under the fair-value-based method for all awards, net of tax (12,607) (21,601) (25,667)
-------- -------- --------
Pro forma $350,372 $180,085 $287,180
======== ======== ========
Basic Earnings per Share:
As reported $ 2.22 $ 1.23 $ 1.84
Pro forma $ 2.15 $ 1.11 $ 1.70
Diluted Earnings per Share:
As reported $ 2.17 $ 1.20 $ 1.73
Pro forma $ 2.10 $ 1.08 $ 1.61
<
F-13
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
The weighted average fair value per share of options granted was $8.79,
$6.73, and $9.23 in 2004, 2003, and 2002, respectively. The fair value of each
option grant was estimated on the grant date using the Black-Scholes
option-pricing model assuming an expected dividend yield of zero and with the
following weighted-average assumptions:
2004 2003 2002
--------- ---------- ----------
Volatility 31% 38% 42%
Risk-free Interest Rate 3.2% 2.9% 4.2%
Expected Life of Options 4.6 years 4.4 years 6.0 years
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option-pricing models require the input
of highly subjective assumptions, including expected stock price volatility.
Because the company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Income Taxes
In accordance with SFAS No. 109, "Accounting for Income Taxes," the
company recognizes deferred income taxes based on the expected future tax
consequences of differences between the financial statement basis and the tax
basis of assets and liabilities, calculated using enacted tax rates in effect
for the year in which the differences are expected to be reflected in the tax
return.
Earnings per Share
Basic earnings per share has been computed by dividing net income by the
weighted average number of shares outstanding during the year. Except where the
result would be antidilutive to income from continuing operations, diluted
earnings per share has been computed assuming the conversion of convertible
obligations and the elimination of the related interest expense, and the
exercise of stock options, as well as their related income tax effects (Note 7).
Cash and Cash Equivalents
Cash equivalents consists principally of money market funds, commercial
paper, and other marketable securities purchased with an original maturity of
three months or less. These investments are carried at cost, which approximates
market value.
In connection with preparation of the accompanying financial statements,
the company concluded that it was appropriate to classify its investments in
auction rate securities as short-term available-for-sale investments.
Previously, such investments were classified as cash and cash equivalents.
Accordingly, the company has revised the classification to exclude from cash and
cash equivalents $108.1 million and $37.8 million of auction rate securities at
December 31, 2003 and 2002, respectively, and to include such amounts as
short-term available-for-sale investments. In addition, the company has made
corresponding adjustments to the accompanying statement of cash flows to reflect
the gross purchases and sales of these securities as investing activities. As a
result, cash provided by investing activities decreased by $70.4 million and
$37.8 million in 2003 and 2002, respectively. This change in classification does
not affect previously reported cash flows from operations or from financing
activities. Auction rate securities are debt instruments with interest rates
that generally reset every 7 to 28 days. Despite the long-term nature of their
stated contractual maturities, the company has the ability to quickly liquidate
investments in auction rate securities.
<
F-14
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Available-for-sale Investments
The company's marketable equity and debt securities are considered
available-for-sale investments in the accompanying balance sheet and are carried
at market value, with the difference between cost and market value, net of
related tax effects, recorded in the "Accumulated other comprehensive items"
component of shareholders' equity (Notes 8 and 9). Decreases in market values of
individual securities below cost for a duration of six to nine months are deemed
indicative of other than temporary impairment, and the company assesses the need
to write down the carrying amount of the investments to market value through
other income, net, in the accompanying statement of income.
Inventories
Inventories are stated at the lower of standard cost (which approximates
the first-in, first-out basis) or net realizable value and include materials,
labor, and manufacturing overhead. The components of inventories are as follows:
2004 2003
-------- --------
(In thousands)
Raw Materials $131,810 $118,660
Work in Progress 40,244 42,069
Finished Goods (includes $5,016 and $12,046 at customer locations) 164,657 141,432
-------- --------
$336,711 $302,161
======== ========
The company writes down its inventories for estimated obsolescence for
differences between the cost and estimated net realizable value taking into
consideration usage in the preceding 12 months, expected demand, and any other
information that is relevant to the judgment. The company records as a charge to
cost of revenues any amounts required to reduce the carrying value of
inventories to net realizable value (Note 15).
Property, Plant, and Equipment
The costs of additions and improvements are capitalized, while
maintenance and repairs are charged to expense as incurred. The company provides
for depreciation and amortization using the straight-line method over the
estimated useful lives of the property as follows: buildings and improvements, 3
to 40 years; machinery and equipment, 2 to 20 years; and leasehold improvements,
the shorter of the term of the lease or the life of the asset. Property, plant,
and equipment consists of the following:
2004 2003
-------- --------
(In thousands)
Land $ 33,037 $ 33,621
Buildings and Improvements 156,218 137,447
Machinery, Equipment, and Leasehold Improvements 310,674 300,432
-------- --------
499,929 471,500
Less: Accumulated Depreciation and Amortization 238,888 219,248
-------- --------
$261,041 $252,252
======== ========
Depreciation and amortization expense of property, plant, and equipment
was $43.3 million, $37.7 million, and $36.2 million in 2004, 2003, and 2002,
respectively.
<
F-15
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Acquisition-related Intangible Assets and Other Assets
Other assets in the accompanying balance sheet include deferred tax
assets, notes receivable, cash surrender value of life insurance, deferred debt
expense, other assets and, in 2004, shares of Newport Corporation common stock
subject to long-term resale restrictions (Note 16). Acquisition-related
intangible assets include the costs of acquired product technology, patents,
trademarks, and other specifically identifiable intangible assets, and are being
amortized using the straight-line method over their estimated useful lives,
which range from 2 to 20 years. The company has no intangible assets with
indefinite lives. The company reviews other intangible assets for impairment
when indication of potential impairment exists, such as a significant reduction
in cash flows associated with the assets. Acquisition-related intangible assets
are as follows:
Accumulated
Gross Amortization Net
-------- ------------ --------
(In thousands)
2004
Product technology $ 88,482 $(27,490) $ 60,992
Customer relationships 89,368 (11,968) 77,400
Patents 34,690 (19,295) 15,395
Trademarks 2,996 (941) 2,055
Other 4,398 (1,663) 2,735
-------- -------- --------
$219,934 $(61,357) $158,577
======== ======== ========
2003
Product technology $ 59,238 $(19,238) $ 40,000
Customer relationships 3,111 (417) 2,694
Patents 35,893 (18,189) 17,704
Trademarks 2,825 (657) 2,168
Other 4,134 (1,158) 2,976
-------- -------- --------
$105,201 $(39,659) $ 65,542
======== ======== ========
The estimated future amortization expense of acquisition-related intangible assets is as follows (in thousands):
2005 $ 29,257
2006 28,596
2007 28,034
2008 27,978
2009 19,969
2010 and thereafter 24,743
--------
$158,577
========
Amortization of acquisition-related intangible assets was $22.8 million, $9.0 million, and $7.2 million in 2004, 2003, and
2002, respectively.
<
F-16
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Goodwill
The company assesses the realizability of goodwill annually and whenever
events or changes in circumstances indicate it may be impaired. Such events or
circumstances generally include the occurrence of operating losses or a
significant decline in earnings associated with one or more of the company's
reporting units. The company estimates the fair value of its reporting units by
using forecasts of discounted future cash flows. When an impairment is
indicated, any excess of carrying value over fair value of goodwill is recorded
as an operating loss (Note 15).
The company completed annual tests for impairment at December 31, 2004
and 2003, and determined that goodwill was not impaired.
The changes in the carrying amount of goodwill by segment are as follows:
Life and
Laboratory Measurement
Sciences and Control Total
---------- ----------- ----------
(In thousands)
Balance at December 28, 2002 $ 885,843 $ 414,415 $1,300,258
Acquisitions 103,398 - 103,398
Write off due to sale of businesses - (11,976) (11,976)
Currency translation 37,671 11,715 49,386
Other - 106 106
---------- ---------- ----------
Balance at December 31, 2003 1,026,912 414,260 1,441,172
Acquisitions 93,964 - 93,964
Acquired tax benefits (38,748) (1,771) (40,519)
Finalization of purchase price allocation for Jouan (22,186) - (22,186)
Reversal of acquisition reserve due to favorable lease settlement (2,316) - (2,316)
Change in estimate of pre-acquisition tax matter - 3,767 3,767
Currency translation 32,479 7,387 39,866
Other (1,139) 416 (723)
---------- ---------- ----------
Balance at December 31, 2004 $1,088,966 $ 424,059 $1,513,025
========== ========== ==========
Currency Translation
All assets and liabilities of the company's non-U.S. subsidiaries are
translated at year-end exchange rates, and revenues and expenses are translated
at average exchange rates for the year in accordance with SFAS No. 52, "Foreign
Currency Translation." Resulting translation adjustments are reflected in the
"Accumulated other comprehensive items" component of shareholders' equity.
Currency transaction gains and losses are included in the accompanying statement
of income and are not material for the three years presented.
<
F-17
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
Forward Contracts
The company accounts for forward contracts under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133, as
amended, requires that all derivatives, including forward currency-exchange
contracts, be recognized in the balance sheet at fair value. Derivatives that
are not hedges must be recorded at fair value through earnings. If a derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
the derivative are either offset against the change in fair value of the hedged
item through earnings or recognized in other comprehensive income until the
hedged item is recognized in earnings. The company immediately records in
earnings the extent to which a hedge is not effective in achieving offsetting
changes in fair value or cash flows.
The company uses forward currency-exchange contracts primarily to hedge
certain operational (cash-flow hedges) and balance sheet (fair-value hedges)
exposures resulting from changes in currency exchange rates. Such exposures
result from purchases, sales, and intercompany loans that are denominated in
currencies other than the functional currencies of the respective operations.
These contracts principally hedge transactions denominated in U.S. dollars,
euros, British pounds sterling, and Swiss francs. The company enters into these
currency-exchange contracts to hedge anticipated product purchases and sales and
assets and liabilities arising in the normal course of business, principally
accounts receivable and intercompany loans. Accordingly, the hedges are not
speculative in nature. As part of the company's overall strategy to manage the
level of exposure to the risk of currency-exchange fluctuations, some operating
units hedge a portion of their currency exposures anticipated over the ensuing
12-month period, using exchange contracts that have maturities of 12 months or
less. The company does not hold or engage in transactions involving derivative
instruments for purposes other than risk management.
The company records its forward currency-exchange contracts at fair value
in its balance sheet as other current assets or other accrued expenses and, for
cash-flow hedges, the related gains or losses on these contracts are deferred as
a component of accumulated other comprehensive items in the accompanying balance
sheet. These deferred gains and losses are recognized in earnings in the period
in which the underlying anticipated transaction occurs. Unrealized gains and
losses resulting from the impact of currency exchange rate movements on
fair-value hedges are recognized in earnings in the period in which the exchange
rates change and offset the currency losses and gains on the underlying exposure
being hedged. Cash flows resulting from currency-exchange contracts qualifying
as cash-flow hedges are recorded in the accompanying statement of cash flows in
the same category as the item being hedged. At December 31, 2004, the company
had deferred gains, net of income taxes, relating to forward currency-exchange
contracts of a nominal amount, which is expected to be recognized as income over
the next 12 months to approximately offset losses on the exposures being hedged.
The ineffective portion of the gain or loss on derivative instruments is
recorded in other income, net, in the accompanying statement of income and is
not material for the three years presented.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R) "Share-Based Payment."
SFAS No. 123(R) amends SFAS No. 123 to require that companies record as expense
the effect of equity-based compensation, including stock options, over the
applicable vesting period. The company currently discloses the effect on income
that stock options would have were they recorded as expense. SFAS No. 123(R)
also requires more extensive disclosures concerning stock options than required
under current standards. The new rule applies to option grants made after
adoption as well as options that are not vested at the date of adoption. SFAS
No. 123(R) becomes effective no later than fiscal periods beginning after June
15, 2005. The company does not currently expect to elect early adoption and has
not determined whether it will apply the new standard prospectively in the third
quarter of 2005, retroactively from the beginning of 2005, or restate all
periods on a comparable basis.
<
F-18
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 1. Nature of Operations and Summary of Significant Accounting Policies
(continued)
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4," which is the result of its efforts to
converge U.S. accounting standards for inventories with International Accounting
Standards. SFAS No. 151 requires abnormal amounts of idle facility expense,
freight, handling costs, and wasted material (spoilage) to be recognized as
current-period charges. It also requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS No. 151 will be effective for inventory costs
incurred during 2006. The company currently is evaluating the impact this
standard will have on its financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. In addition, significant estimates were made in estimating
future cash flows to quantify impairment of assets, and in determining the
ultimate loss from abandoning leases at facilities being exited (Note 15).
Actual results could differ from those estimates.
Note 2. Acquisitions and Dispositions
Acquisitions
In September 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 $66.5 million in cash, including debt repayment (or
$64.7 million, net of cash acquired). In February 2005 the company received a
post-closing adjustment of $0.5 million as a refund of part of the purchase
price. The purchase price exceeded the fair value of the acquired net assets
and, accordingly, $39.8 million was 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.
In April 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 $77.8 million in cash (or $74.7 million,
net of cash acquired). The purchase price exceeded the fair value of the
acquired net assets and, accordingly, $54.2 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.
On December 31, 2003, the Life and Laboratory Sciences segment acquired
Jouan SA for 110.9 million euros in cash ($137.8 million, or $122.7 million, net
of cash acquired) and the assumption of approximately 11.8 million euros of debt
($14.7 million). Jouan is a global supplier of products used by life science
researchers in academic, pharmaceutical, biotech, and clinical markets to
prepare and preserve laboratory samples and has broadened the company's
offerings in these markets. Having completed the acquisition of Jouan at the
close of business on the last day of the company's fiscal year, the 2003 balance
sheet of Jouan has been included in the accompanying financial statements,
however, no results of operations or cash flows prior to 2004 have been
included. 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 was reclassified from goodwill to
acquired intangible assets in 2004. In
<
F-19
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2. Acquisitions and Dispositions (continued)
addition, the company recorded a deferred tax liability of $12.1 million related
to these assets, with a corresponding increase in goodwill. After these
adjustments, goodwill arising from the Jouan acquisition totaled $77.1 million,
none of which is deductible for tax purposes.
In 2003, in addition to the acquisition of Jouan, the company made four
other acquisitions for $12.3 million in cash, net of cash acquired, and up to
$2.0 million of additional consideration through 2005 based on post-acquisition
results of one of the acquired businesses. The additional consideration will be
recorded as an increase to goodwill, if earned.
In July 2002, the Measurement and Control segment acquired the
radiation-monitoring products business (RMP) of Saint-Gobain Corporation to
further enhance its line of security products. The aggregate purchase price was
$31.4 million in cash. The purchase price exceeded the fair value of the
acquired net assets and, accordingly, $2.4 million was allocated as goodwill,
all of which is deductible for tax purposes. RMP is a major supplier of
radiation safety, security, and industrial equipment to the U.S. market, and the
leader in personal radiation monitoring in the United Kingdom.
In a transaction undertaken in April and May 2002, the Life and
Laboratory Sciences segment acquired CRS Robotics Corporation (CRS), a Toronto
Stock Exchange-listed company, for 5.75 Canadian dollars per share
(approximately $3.68 per share). The aggregate purchase price was $43.0 million
in cash, net of cash acquired. The purchase price exceeded the fair value of the
acquired net assets and, accordingly, $21.9 million was allocated as goodwill,
none of which is deductible for tax purposes. In 2004, the company determined
that it was more likely than not that certain tax acquired attributes of CRS
including net operating losses, would be realized. As a result, $7.2 million of
tax assets were recorded with a corresponding decrease in goodwill. CRS is a
global supplier of lab automation robotics, software, and equipment to the
drug-discovery market. The acquisition was made to further enhance the segment's
product offering for laboratory automation equipment.
In 2002, in addition to the acquisitions of RMP and CRS, the company made
two other acquisitions for $4.3 million in cash.
In addition to the $7.2 million reduction in goodwill discussed above,
the company recorded a reduction in goodwill of $33.3 million in 2004 as a
result of the use of tax attributes of businesses acquired prior to 2002.
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.
These acquisitions have been accounted for using the purchase method of
accounting, and the acquired companies' results have been included in the
accompanying financial statements from their respective dates of acquisition.
Allocation of the purchase price for acquisitions was based on estimates of the
fair value of the net assets acquired and, for acquisitions completed in 2004,
is subject to adjustment upon finalization of the purchase price allocation. The
company has gathered no information that indicates the final purchase price
allocations will differ materially from the preliminary estimates.
<
F-20
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2. Acquisitions and Dispositions (continued)
Had the acquisition of Jouan, USCS, and InnaPhase been completed as of
the beginning of 2003, the company's pro forma results for 2003 would have been
as follows (in thousands except per share amounts):
Revenues $2,063,341
Net Income $ 185,911
Earnings per Share from Continuing Operations:
Basic $ 0.99
Diluted $ 0.97
Earnings per Share:
Basic $ 1.14
Diluted $ 1.12
The company's results for 2004 would not have been materially different
from its reported results had the acquisitions of USCS and InnaPhase occurred at
the beginning of the year.
The components of the purchase price allocation for 2004 acquisitions are
as follows:
InnaPhase USCS Other Total
--------- -------- -------- --------
(In thousands)
Purchase Price:
Cash paid (a) $ 66,467 $ 77,785 $ 3,650 $147,902
Cash acquired (1,777) (3,115) - (4,892)
-------- -------- -------- --------
$ 64,690 $ 74,670 $ 3,650 $143,010
======== ======== ======== ========
Allocation:
Current assets $ 4,975 $ 5,711 $ 75 $ 10,761
Property, plant, and equipment 761 367 - 1,128
Acquired intangible assets 36,089 34,700 3,610 74,399
Goodwill 39,753 54,211 - 93,964
Other assets 4,465 3 - 4,468
Liabilities assumed (21,353) (20,322) (35) (41,710)
-------- -------- -------- --------
$ 64,690 $ 74,670 $ 3,650 $143,010
======== ======== ======== ========
(a) Includes acquisition expenses.
<
F-21
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2. Acquisitions and Dispositions (continued)
Acquired intangible assets for 2004 acquisitions are as follows:
InnaPhase USCS Other Total
--------- -------- -------- --------
(In thousands)
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 weighted-average amortization periods for intangible assets acquired
in 2004 are: 5 years for customer relationships and 7 years for product
technology. The weighted-average amortization period for all intangible assets
acquired in 2004 is 6 years.
The components of the purchase price allocation for 2003 acquisitions, as
revised in 2004 following the completion of the purchase price allocation for
Jouan, are as follows:
Jouan Other Total
-------- -------- --------
(In thousands)
Purchase Price:
Cash paid (a) $137,838 $ 12,422 $150,260
Cash acquired (15,188) (148) (15,336)
-------- -------- --------
$122,650 $ 12,274 $134,924
======== ======== ========
Allocation:
Current assets $ 48,049 $ 3,713 $ 51,762
Property, plant, and equipment 24,089 851 24,940
Acquired intangible assets 35,116 8,078 43,194
Goodwill 77,130 4,082 81,212
Other assets 7 2 9
Debt (14,653) (234) (14,887)
Other liabilities assumed (47,088) (4,218) (51,306)
-------- -------- --------
$122,650 $ 12,274 $134,924
======== ======== ========
(a) Includes acquisition expenses.
Acquired intangible assets for 2003 acquisitions are as follows:
Jouan Other Total
-------- -------- --------
(In thousands)
Customer and Distributor Relationships $ 24,643 $ - $ 24,643
Product Technology 10,231 4,755 14,986
Patents 198 1,352 1,550
Other 44 1,971 2,015
-------- -------- --------
$ 35,116 $ 8,078 $ 43,194
======== ======== ========
<
F-22
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2. Acquisitions and Dispositions (continued)
The weighted-average amortization periods for intangible assets acquired
in 2003 are: 6 years for customer and distributor relationships; 6 years for
product technology; 10 years for patents; and 3 years for other intangible
assets. The weighted-average amortization period for all intangible assets
acquired in 2003 is 6 years.
The company has undertaken restructuring activities at acquired
businesses. These activities, which were accounted for in accordance with EITF
Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase
Business Combination," have primarily included reductions in staffing levels and
the abandonment of excess facilities. In connection with these restructuring
activities, as part of the cost of acquisitions, the company established
reserves as detailed below, primarily for severance and excess facilities. In
accordance with EITF Issue No. 95-3, the company finalizes its restructuring
plans no later than one year from the respective dates of the acquisitions. Upon
finalization of restructuring plans or settlement of obligations for less than
the expected amount, any excess reserves are reversed with a corresponding
decrease in goodwill or other intangible assets when no goodwill exists. Accrued
acquisition expenses are included in other accrued expenses in the accompanying
balance sheet.
The company did not establish material reserves for restructuring
businesses acquired in 2004.
The changes in accrued acquisition expenses for acquisitions completed
during 2003 are as follows:
Abandonment
of Excess
Severance Facilities Other Total
--------- ----------- ------- -------
(In thousands)
Reserves established $ 5,043 $ 3,954 $ 99 $ 9,096
Payments (62) (44) - (106)
Currency translation 17 15 7 39
------- ------- ------- -------
Balance at December 31, 2003 4,998 3,925 106 9,029
Reserves established 747 - 317 1,064
Payments (3,241) (385) (385) (4,011)
Decrease recorded as a reduction in goodwill - (2,329) - (2,329)
Currency translation 639 120 43 802
------- ------- ------- -------
Balance at December 31, 2004 $ 3,143 $ 1,331 $ 81 $ 4,555
======= ======= ======= =======
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 restructuring plans
arising in the first year following the acquisitions have been reflected through
adjustments to goodwill.
<
F-23
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2. Acquisitions and Dispositions (continued)
The changes in accrued acquisition expenses for acquisitions completed
prior to 2003 are as follows:
Abandonment
of Excess
Severance Facilities Other Total
--------- ----------- ------- -------
(In thousands)
Balance at December 29, 2001 $ 626 $ 6,226 $ 131 $ 6,983
Reserves established 1,727 509 487 2,723
Payments (830) (452) (73) (1,355)
Decrease recorded as a reduction in goodwill
and other intangible assets (329) - (73) (402)
Currency translation 125 727 27 879
------- ------- ------- -------
Balance at December 28, 2002 1,319 7,010 499 8,828
Payments (904) (653) (194) (1,751)
Decrease recorded as a reduction in goodwill
and other intangible assets (488) (401) (186) (1,075)
Currency translation 73 684 28 785
------- ------- ------- -------
Balance at December 31, 2003 - 6,640 147 6,787
Payments - (183) (118) (301)
Decrease recorded as a reduction in goodwill - (2,316) - (2,316)
Currency translation - 393 2 395
------- ------- ------- -------
Balance at December 31, 2004 $ - $ 4,534 $ 31 $ 4,565
======= ======= ======= =======
The principal acquisition expenses for pre-2003 acquisitions were for
severance for approximately 878 employees across all functions and for abandoned
facilities, primarily related to the company's acquisitions of Life Sciences
International PLC in 1997, the product-monitoring businesses of Graseby Limited
in 1998, Spectra-Physics AB in 1999, CRS in 2002, and RMP in 2002. The abandoned
facilities for the 1997 and 1998 acquisitions include four operating facilities
in England with leases expiring through 2014. The amounts captioned as "other"
primarily represent employee relocation, contract termination, and other exit
costs.
Dispositions
The company sold Spectra-Physics in 2004 and reclassified the financial
information pertaining to the business to discontinued operations for all
periods presented (Note 16). The company's continuing operations sold several
noncore businesses for net cash proceeds of $16.4 million in 2003 and $22.3
million in 2002 and recorded $4.7 million of pre-tax losses in 2003 and $2.6
million of net pre-tax gains in 2002, which are included in restructuring and
other costs, net, in the accompanying statement of income.
<
F-24
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 2. Acquisitions and Dispositions (continued)
In 2000, the company's Measurement and Control segment sold its Spectra
Precision businesses to Trimble Navigation Limited. As part of the sale
proceeds, the company obtained an $80.0 million note from Trimble, which carried
interest at 10%. Trimble and the company negotiated a change in the note's terms
in March 2002. Under the revised terms, Trimble paid $11 million of principal,
together with $10 million of accrued interest. The amended note carried an
interest rate of 10.41% and under certain conditions allowed the interest to be
added to the note's principal. In addition, the company obtained warrants to
purchase shares of Trimble, which became exercisable at various times and prices
depending on the outstanding balance of the note. The warrants were recorded at
their fair value. During 2003, Trimble repaid the note in full and the company
sold all of the warrants that it had obtained from Trimble. The company recorded
a gain of $1.2 million on the sale of the warrants as other income in the
accompanying 2003 statement of income.
Note 3. Business Segment and Geographical Information
The company's businesses are managed in two segments:
Life and Laboratory Sciences: serves the pharmaceutical, biotechnology,
and other research and industrial laboratory markets, as well as scientists in
government and academia, with advanced instrument systems and software that
enable discovery, R&D, and quality assurance. The segment also serves the
healthcare market with rapid point-of-care diagnostic tests, and with equipment,
laboratory-automation systems, and consumables for pharmaceutical,
biotechnology, academic, government, and clinical customers.
Measurement and Control: enables customers in key industrial markets,
such as chemical, oil and gas, semiconductor, pharmaceutical, food and beverage,
minerals and mining, and steel, to control and optimize their manufacturing
processes. The segment provides analytical tools, online process instruments,
and precision temperature-control systems that are used to increase quality,
improve productivity, and meet environmental and other regulatory standards. The
segment also offers a comprehensive range of chemical-, radiation-, and
explosives-detection instruments.
As part of the divestiture of Spectra-Physics in 2004 (Note 16), 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 for this segment have been
reclassified to reflect this change.
During 2003, the company transferred management responsibility and the
related financial reporting and monitoring for several small business units
between segments as follows: (1) the compositional-metrology business was moved
to the Life and Laboratory Sciences segment from the Optical Technologies
segment; (2) the ultra-high-vacuum systems and semiconductor-testing businesses
were moved to the Measurement and Control segment from the Optical Technologies
segment; and (3) the organic elemental analysis business was moved to the Life
and Laboratory Sciences segment from the Measurement and Control segment. The
company has historically moved a business unit between segments when a shift in
strategic focus of either the business unit or a segment more closely aligns the
business unit with a segment different than that in which it had previously been
reported. In addition to these changes, during the first quarter of 2003, the
company began allocating certain costs, which had previously been classified as
corporate expenses, to the business segments based on the estimated extent to
which the segment benefited from the costs. Allocated costs principally include
e-commerce, global sourcing, and marketing as well as some legal, human
resources, and information systems costs. Prior-period segment information has
been reclassified to reflect these changes.
Business segment information captioned as Other in the following tables
represents results of a unit that marketed and manufactured molecular beam
epitaxy equipment. The unit was part of the company's former Optical
Technologies segment and was sold in 2003.
<
F-25
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3. Business Segment and Geographical Information (continued)
2004 2003 2002
---------- ---------- ----------
(In thousands)
Business Segment Information
Revenues:
Life and Laboratory Sciences $1,573,445 $1,293,009 $1,204,034
Measurement and Control 632,550 601,104 629,697
Other - 5,265 15,629
---------- ---------- ----------
$2,205,995 $1,899,378 $1,849,360
========== ========== ==========
Income from Continuing Operations Before Provision for
Income Taxes:
Life and Laboratory Sciences (a) $ 224,393 $ 183,533 $ 172,791
Measurement and Control (b) 53,376 44,549 45,862
Other (c) (163) (8,429) (14,893)
---------- ---------- ----------
Total Operating Income - Segments 277,606 219,653 203,760
Corporate/Other (d) (18,387) 2,978 97,602
---------- ---------- ----------
$ 259,219 $ 222,631 $ 301,362
========== ========== ==========
Total Assets:
Life and Laboratory Sciences $2,438,703 $2,128,177 $1,726,709
Measurement and Control 971,515 894,772 982,224
Other 210 286 3,477
Corporate (e) 160,697 83,517 625,164
---------- ---------- ----------
Total Assets - Continuing Operations 3,571,125 3,106,752 3,337,574
Discontinued Operations 5,600 282,570 313,901
---------- ---------- ----------
$3,576,725 $3,389,322 $3,651,475
========== ========== ==========
<
F-26
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3. Business Segment and Geographical Information (continued)
2004 2003 2002
---------- ---------- ----------
(In thousands)
Depreciation:
Life and Laboratory Sciences $ 29,811 $ 23,399 $ 21,795
Measurement and Control 10,245 10,698 11,065
Other - 382 494
Corporate 3,254 3,199 2,880
---------- ---------- ----------
$ 43,310 $ 37,678 $ 36,234
========== ========== ==========
Amortization:
Life and Laboratory Sciences $ 19,830 $ 6,592 $ 5,630
Measurement and Control 2,998 2,446 1,613
Corporate 3 - -
---------- ---------- ----------
$ 22,831 $ 9,038 $ 7,243
========== ========== ==========
Capital Expenditures:
Life and Laboratory Sciences $ 36,837 $ 26,585 $ 25,708
Measurement and Control 9,710 9,321 10,759
Other - - 3,010
Corporate 3,438 5,784 1,965
---------- ---------- ----------
$ 49,985 $ 41,690 $ 41,442
========== ========== ==========
Geographical Information
Revenues (f):
United States $1,272,153 $1,133,626 $1,158,473
England 324,728 294,264 290,194
Germany 316,386 254,038 205,243
Other 790,327 617,282 540,565
Transfers among geographical areas (g) (497,599) (399,832) (345,115)
---------- ---------- ----------
$2,205,995 $1,899,378 $1,849,360
========== ========== ==========
Long-lived Assets (h):
United States $ 116,306 $ 118,751 $ 113,890
England 23,291 22,728 26,844
Germany 41,025 29,070 25,779
Other 116,009 93,083 57,529
---------- ---------- ----------
$ 296,631 $ 263,632 $ 224,042
========== ========== ==========
Export Sales Included in United States Revenues Above (i) $ 383,600 $ 354,108 $ 333,077
========== ========== ==========
<
F-27
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 3. Business Segment and Geographical Information (continued)
(a) Includes restructuring and other costs, net, of $10.2 million, $21.8
million, and $19.4 million in 2004, 2003, and 2002, respectively.
(b) Includes restructuring and other costs, net, of $6.5 million, $10.3
million, and $13.6 million in 2004, 2003, and 2002, respectively.
(c) Includes restructuring and other costs, net, of $0.2 million, $8.1
million, and $10.6 million in 2004, 2003, and 2002, respectively.
(d) Includes corporate general and administrative expenses and other
income and expense. Includes corporate restructuring and other costs
of $2.3 million, $5.1 million, and $2.6 million at the company's
corporate offices in 2004, 2003, and 2002, respectively. Other income
and expense includes $9.6 million, $29.0 million, and $109.9 million
of income in 2004, 2003, and 2002, respectively, primarily related to
the company's investment in FLIR and Thoratec (Note 4).
(e) Primarily cash and cash equivalents, short-term investments, and
property and equipment at the company's corporate office.
(f) Revenues are attributed to countries based on selling location.
(g) Transfers among geographical areas are accounted for at prices that
are representative of transactions with unaffiliated parties.
(h) Includes property, plant, and equipment, net, and other long-term
tangible assets.
(i) In general, export revenues are denominated in U.S. dollars.
Note 4. Other Income, Net
The components of other income, net, in the accompanying statement of
income are as follows:
2004 2003 2002
-------- -------- --------
(In thousands)
Interest Income $ 9,021 $ 19,663 $ 47,628
Interest Expense (Note 10) (10,979) (18,197) (40,246)
Gain on Investments, Net (Note 9) 20,838 35,536 123,134
Equity in Earnings of Unconsolidated Subsidiaries 733 490 2,533
Other Items, Net (Note 10) 2,094 (2,245) (1,549)
-------- -------- --------
$ 21,707 $ 35,247 $131,500
======== ======== ========
As a result of the divestiture of Thermo Cardiosystems Inc. in 2001, the
company acquired shares of Thoratec Corporation. The company sold 1,250,000 and
2,000,000 shares of Thoratec common stock during 2004 and 2003 and realized
gains of $9.6 million and $16.3 million, respectively. At December 31, 2004, the
company owned 4.4 million shares of Thoratec with a fair market value of $46.2
million.
The company acquired 4,162,000 shares of FLIR Systems, Inc. common stock
in connection with a business acquired in 1999. FLIR designs, manufactures, and
markets thermal imaging and broadcast camera systems that detect infrared
radiation or heat emitted directly by all objects and materials. Through the
first quarter of 2002, the company accounted for its investment in FLIR using
the equity method with a one quarter lag to ensure the availability of FLIR's
operating results in time to enable the company to include its pro-rata share of
FLIR's results with its own. In December 2001, following a sale of shares, the
company's ownership of FLIR fell below 20%. In the first quarter of 2002, the
company recorded $2.1 million of income as its share of FLIR's fourth quarter
2001 earnings through the date on which the company's ownership fell below 20%.
Effective March 30, 2002, the company accounted for its investment in FLIR as an
available-for-sale security and no longer recorded its share of FLIR's earnings.
As an available-for-sale security, the investment in FLIR was recorded at quoted
market value in current assets, and unrealized gains or losses were recorded as
a part of accumulated other comprehensive items.
<
F-28
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 4. Other Income, Net (continued)
The company sold 334,175 and 2,669,700 shares of FLIR common stock during
2003 and 2002, respectively, and realized gains of $13.7 million and $111.4
million, respectively. These gains included $3.9 million and $31.0 million in
2003 and 2002, respectively, from the recovery of amounts written down in prior
years when the company deemed an impairment of its investment in FLIR to be
other than temporary. At December 31, 2003, the company no longer owned shares
of FLIR.
Gain on investments, net, also includes portfolio gains from the
company's day-to-day investing activities.
Note 5. Employee Benefit Plans
Stock-based Compensation Plans
Stock Option Plans
- ------------------
The company has stock-based compensation plans for its key employees,
directors, and others. These plans permit the grant of a variety of stock and
stock-based awards, including restricted stock, stock options, stock bonus
shares, or performance-based shares, as determined by the compensation committee
of the company's Board of Directors (the Board Committee) or in limited
circumstances, by the company's option committee, which consists of its chief
executive officer. Generally, options granted prior to July 2000 under these
plans are exercisable immediately, but shares acquired upon exercise are subject
to certain transfer restrictions and the right of the company to repurchase the
shares at the exercise price upon certain events, primarily termination of
employment. The restrictions and repurchase rights lapse over periods ranging
from 0-10 years, depending on the term of the option, which may range from 3-12
years. Options granted in or after July 2000 under these plans generally vest
over three to five years, assuming continued employment with certain exceptions.
Upon a change in control of the company, all options, regardless of grant date,
become immediately exercisable and shares acquired upon exercise cease to be
subject to transfer restrictions and the company's repurchase rights.
Nonqualified options are generally granted at fair market value, although
options may be granted at a price at or above 85% of the fair market value on
the date of grant under certain of the company's plans. Incentive stock options
must be granted at not less than the fair market value of the company's stock on
the date of grant. Stock options have been granted at fair market value. The
company also has a directors' stock option plan that provides for the annual
grant of stock options of the company to outside directors. Options awarded
under this plan prior to 2003 are immediately exercisable and expire three to
seven years after the date of grant. Options awarded in 2003 and thereafter vest
over three years, assuming continued service on the board, and expire seven
years after the date of grant.
Following the completion of a cash tender offer in December 2001 for all
the shares of Spectra-Physics it did not previously own, the company completed a
short-form merger with Spectra-Physics in February 2002. Options to purchase
shares of Spectra-Physics became options to purchase 2,242,000 shares of Thermo
Electron common stock, which was accounted for in accordance with the
methodology set forth in FASB Interpretation (FIN) No. 44, "Accounting for
Certain Transactions Involving Stock Compensation."
In 2004, 2003, and 2002, the company awarded to a number of key employees
60,000, 75,000, and 323,000 shares, respectively, of restricted company common
stock or restricted units that convert into an equivalent number of shares of
common stock assuming continued employment, with some exceptions. The awards had
an aggregate value of $1.7 million, $1.6 million, and $6.5 million,
respectively. The awards generally vest in equal annual installments over three
years, assuming continued employment, with some exceptions. Of the shares/units
awarded in 2002, 112,000 units vested immediately but did not become shares of
company common stock until cessation of employment. The company recorded $1.8
million, $2.6 million, and $4.5 million of compensation expense related to these
awards in 2004, 2003, and 2002, respectively.
<
F-29
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5. Employee Benefit Plans (continued)
A summary of the company's stock option activity is as follows:
2004 2003 2002
-------------------- -------------------- -------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
(Shares in thousands)
Options Outstanding, Beginning of Year 15,915 $20.83 22,472 $20.11 19,663 $17.78
Granted 1,671 27.77 1,534 18.82 5,322 19.69
Assumed in merger with subsidiary (Note 16) - - - - 2,242 42.71
Exercised (3,920) 16.77 (5,200) 14.69 (2,049) 13.03
Forfeited (2,773) 32.51 (2,891) 25.21 (2,706) 26.46
------ ------ ------
Options Outstanding, End of Year 10,893 $20.38 15,915 $20.83 22,472 $20.11
====== ====== ====== ====== ====== ======
Options Exercisable 6,003 $19.32 8,916 $21.57 11,391 $19.44
====== ====== ====== ====== ====== ======
Options Available for Grant 3,806 3,842 3,667
====== ====== ======
A summary of the status of the company's stock options at December 31, 2004, is as follows:
Options Outstanding Options Exercisable
----------------------------------------------- --------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of of Remaining Exercise of Exercise
Exercise Prices Shares Contractual Life Price Shares Price
----------------- ------ ---------------- -------- ------ --------
(Shares in thousands)
$ 3.49 - $ 11.00 643 1.9 years $ 9.48 579 $ 9.49
11.01 - 19.00 2,324 3.4 years 16.01 1,487 15.65
19.01 - 21.00 4,248 5.3 years 19.77 1,944 19.78
21.01 - 30.00 3,414 4.6 years 24.71 1,862 22.82
30.01 - 40.00 220 5.1 years 31.66 87 33.02
40.01 - 70.00 15 1.5 years 46.99 15 46.99
70.01 - 196.48 29 4.1 years 91.47 29 91.27
------ ------
$ 3.49 - $196.48 10,893 4.5 years $20.38 6,003 $19.32
====== ======
<
F-30
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5. Employee Benefit Plans (continued)
Employee Stock Purchase Plans
- -----------------------------
Qualifying employees are eligible to participate in an employee stock
purchase plan sponsored by the company. Under this program, shares of the
company's common stock may be purchased at 85% of the lower of the fair market
value at the beginning or end of the purchase period, and the shares purchased
are subject to a one-year resale restriction. Shares are purchased through
payroll deductions of up to 10% of each participating employee's gross wages. In
early 2005, 2004, and 2003, the company issued 136,000, 185,000, and 147,000
shares, respectively, of its common stock for the 2004, 2003, and 2002 plan
years, which ended on December 31.
The company has a plan in England under which employees can purchase
shares of the company's common stock through payroll deductions. No material
issuances occurred in 2002 - 2004 under the plan. As of December 31, 2004,
87,000 shares of the company's common stock have been reserved for issuance
under the plan. Following the issuance of shares under the plan in 2005, the
plan will be discontinued.
401(k) Savings Plan and Other Defined Contribution Plans
The company's 401(k) savings plan covers the majority of the company's
eligible full-time U.S. employees. Contributions to the plan are made by both
the employee and the company. Company contributions are based on the level of
employee contributions.
Certain of the company's subsidiaries offer retirement plans in lieu of
participation in the company's principal 401(k) savings plan. Company
contributions to these plans are based on formulas determined by the company.
For these plans, the company contributed and charged to expense $17.7
million, $16.3 million, and $17.2 million in 2004, 2003, and 2002, respectively.
Defined Benefit Pension Plans
Several of the company's non-U.S. subsidiaries, principally in Germany
and England, and one U.S. subsidiary have defined benefit pension plans covering
substantially all full-time employees at those subsidiaries. Some of the plans
are unfunded, as permitted under the plans and applicable laws. Net periodic
benefit costs for the plans in aggregate included the following components:
2004 2003 2002
------- ------- -------
(In thousands)
Service Cost $ 5,527 $ 4,408 $ 3,051
Interest Cost on Benefit Obligation 11,191 9,578 6,836
Expected Return on Plan Assets (9,798) (8,227) (7,273)
Recognized Net Actuarial Loss 2,558 2,091 114
Amortization of Unrecognized Initial Obligation and Prior Service Cost 1 45 35
------- ------- -------
$ 9,479 $ 7,895 $ 2,763
======= ======= =======
<
F-31
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5. Employee Benefit Plans (continued)
The activity under the company's defined benefit plans is as follows:
2004 2003
-------- --------
(In thousands)
Change in Benefit Obligation:
Benefit obligation, beginning of year $215,199 $173,001
Service cost 5,527 4,408
Interest cost 11,191 9,578
Benefits paid (4,745) (4,961)
Actuarial loss 10,137 12,205
Currency translation 18,560 20,968
-------- --------
Benefit obligation, end of year 255,869 215,199
-------- --------
Change in Plan Assets:
Fair value of plan assets, beginning of year 146,283 114,790
Company contributions 5,624 4,638
Benefits paid (4,745) (4,961)
Actual return on plan assets 12,687 18,625
Currency translation 12,452 13,191
-------- --------
Fair value of plan assets, end of year 172,301 146,283
-------- --------
Funded Status (83,568) (68,916)
Unrecognized Net Actuarial Loss 60,925 52,176
Unrecognized Initial Obligation and Prior Service Cost 63 64
-------- --------
Net Amount Recognized $(22,580) $(16,676)
======== ========
Amounts Recognized in the Balance Sheet:
Accrued pension liability $(68,984) $(56,533)
Intangible asset 63 64
Accumulated other comprehensive items 46,341 39,793
-------- --------
Net Amount Recognized $(22,580) $(16,676)
======== ========
All of the company's defined benefit plans have projected benefit
obligations and accumulated benefit obligations in excess of plan assets. The
aggregate accumulated benefit obligations were $240.7 million and $201.2 million
at year-end 2004 and 2003, respectively. The measurement date used to determine
benefit information was December 31 for all plan assets and benefit obligations.
<
F-32
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 5. Employee Benefit Plans (continued)
The weighted average rates used to determine the net periodic benefit
costs were as follows:
2004 2003 2002
---- ---- ----
Discount Rate 5.3% 5.5% 6.3%
Rate of Increase in Salary Levels 3.3% 3.3% 3.9%
Expected Long-term Rate of Return on Assets 6.8% 6.9% 7.7%
The weighted average rates used to determine benefit obligations at the respective year ends were as follows:
2004 2003
---- ----
Discount Rate 4.9% 5.3%
Rate of Increase in Salary Levels 3.2% 3.3%
In determining the expected long-term rate of return on plan assets, the
company considers the relative weighting of plan assets, the historical
performance of total plan assets and individual asset classes, and economic and
other indicators of future performance. In addition, the company may consult
with and consider the opinions of financial and other professionals in
developing appropriate return benchmarks.
For the company's plans, the asset allocation at the respective year ends
by asset category, which approximates target allocation, was as follows:
2004 2003
---- ----
Equity Securities 62% 64%
Debt Securities 21% 18%
Insurance Policies 6% 7%
Real Estate 3% 2%
Other 8% 9%
---- ----
100% 100%
==== ====
Asset management objectives include maintaining an adequate level of
diversification to reduce interest rate and market risk and providing adequate
liquidity to meet immediate and future benefit payment requirements.
The company expects to make contributions to its plans in 2005 of
approximately $4.7 million.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid (in thousands):
2005 $ 7,092
2006 7,601
2007 7,842
2008 8,939
2009 9,489
2010-2014 $55,012
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THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6. Income Taxes
The components of income from continuing operations before provision for
income taxes are as follows:
2004 2003 2002
-------- -------- --------
(In thousands)
U.S. $109,812 $108,424 $223,257
Non-U.S. 149,407 114,207 78,105
-------- -------- --------
$259,219 $222,631 $301,362
======== ======== ========
The components of the provision for income taxes of continuing operations
are as follows:
2004 2003 2002
-------- -------- --------
(In thousands)
Currently Payable:
Federal $ 10,759 $ 41,126 $ 60,302
Non-U.S. 29,636 32,572 24,299
State (6,363) 1,575 1,888
-------- -------- --------
34,032 75,273 86,489
-------- -------- --------
Net Deferred (Prepaid):
Federal 7,494 (29,766) 9,648
Non-U.S. (679) 1,621 1,429
State 5 293 377
-------- -------- --------
6,820 (27,852) 11,454
-------- -------- --------
$ 40,852 $ 47,421 $ 97,943
======== ======== ========
The income tax provision (benefit) included in the accompanying statement
of income is as follows:
2004 2003 2002
-------- -------- --------
(In thousands)
Continuing Operations $ 40,852 $ 47,421 $ 97,943
Discontinued Operations (73,049) 6,656 (26,486)
-------- -------- --------
$(32,197) $ 54,077 $ 71,457
======== ======== ========
The company receives a tax deduction upon the exercise of nonqualified
stock options by employees for the difference between the exercise price and the
market price of the underlying common stock on the date of exercise. The
provision for income taxes that is currently payable does not reflect $16.0
million, $12.0 million, and $6.7 million, of such benefits of the company that
have been allocated to capital in excess of par value in 2004, 2003, and 2002,
respectively.
<
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>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6. Income Taxes (continued)
The provision for income taxes in the accompanying statement of income
differs from the provision calculated by applying the statutory federal income
tax rate of 35% to income from continuing operations before provision for income
taxes due to the following:
2004 2003 2002
-------- -------- --------
(In thousands)
Provision for Income Taxes at Statutory Rate $ 90,727 $ 77,921 $105,477
Increases (Decreases) Resulting From:
Tax return reassessments and settlements (33,782) - -
Non-U.S. tax rate and tax law differential (17,392) (12,909) 2,299
Federal tax credits (1,618) (13,678) (7,105)
Foreign sales corporation/extraterritorial income exclusion (3,396) (3,358) (2,184)
Basis difference of businesses sold or terminated 2,847 (4,988) 206
State income taxes, net of federal tax 1,885 1,213 1,472
Nondeductible expenses 863 1,014 905
Losses not benefited in the year they occurred - 2,224 (3,192)
Other, net 718 (18) 65
-------- -------- --------
$ 40,852 $ 47,421 $ 97,943
======== ======== ========
Net deferred tax asset in the accompanying balance sheet consists of the following:
2004 2003
-------- --------
(In thousands)
Deferred Tax Asset (Liability):
Net operating loss and credit carryforwards $160,693 $116,441
Reserves and accruals 71,582 77,646
Inventory basis difference 22,714 25,170
Accrued compensation 4,728 5,483
Depreciation and amortization (27,829) (16,869)
Available-for-sale investments (11,901) (20,132)
Other, net (2,434) (2,119)
-------- --------
217,553 185,620
Less: Valuation allowance 66,152 70,245
-------- --------
$151,401 $115,375
======== ========
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 and
credit carryforwards that it believes will more likely than not go unused. The
valuation allowance primarily relates to the uncertainty surrounding the
realization of acquired tax loss and credit carryforwards. Any tax benefit
resulting from the use of acquired loss carryforwards will be used to reduce
goodwill.
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THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 6. Income Taxes (continued)
During 2004 and early 2005, the Internal Revenue Service (IRS) and the
company reached a final settlement of the audit of the company's tax returns for
the 1998 through 2000 tax years. In addition, in 2004 audits of state tax
returns were completed. In 2004, the company recorded tax benefits that had not
previously been recognized of $33.8 million in continuing operations and $52.7
million in discontinued operations (Note 16) associated with the completion of
the tax audits.
In addition to the tax benefit of $52.7 million, discussed above, the
company's tax benefit from discontinued operations in 2004 included amounts
pertaining to Spectra-Physics (Note 16).
At December 31, 2004, the company had federal, state, and non-U.S. net
operating loss carryforwards of $80 million, $99 million, and $188 million,
respectively. Use of the carryforwards is limited based on the future income of
certain subsidiaries. The federal and state net operating loss carryforwards
expire in the years 2005 through 2024. Of the non-U.S. net operating loss
carryforwards, $14 million expire in the years 2005 through 2014, and the
remainder do not expire. The company also had $60 million of federal foreign tax
credit carryforwards as of December 31, 2004, which expire in the years 2005
through 2014.
A provision has not been made for U.S. or additional non-U.S. taxes on
$629 million of undistributed earnings of international subsidiaries that could
be subject to taxation if remitted to the U.S. because the company plans to keep
these amounts permanently reinvested overseas except for instances where the
company can remit such earnings to the U.S. without an associated net tax cost.
The American Jobs Creation Act of 2004, signed into law in October 2004,
allows companies to repatriate permanently reinvested non-U.S. earnings in 2005
or 2006 at an effective rate of 5.25%. The company does not currently expect to
take advantage of this provision. The new tax law also phases out an existing
deduction based on export revenues and replaces it with a deduction for a
portion of the profit derived from domestic manufacturing activities. The
company is continuing to evaluate the effect of this change but does not expect
a material impact on its tax provision.
Note 7. Earnings per Share
2004 2003 2002
-------- -------- --------
(In thousands except
per share amounts)
Income from Continuing Operations $218,367 $175,210 $203,419
Income (Loss) from Discontinued Operations 43,018 (2,513) (9,059)
Gain on Disposal of Discontinued Operations, Net 100,452 27,312 115,370
-------- -------- --------
Net Income for Basic Earnings per Share 361,837 200,009 309,730
Effect of Convertible Debentures 1,606 4,830 13,986
-------- -------- --------
Income Available to Common Shareholders, as Adjusted for Diluted Earnings
per Share $363,443 $204,839 $323,716
-------- -------- --------
Basic Weighted Average Shares 163,133 162,713 168,572
Effect of:
Convertible debentures 1,846 5,737 15,952
Stock options 2,571 2,085 2,068
Contingently issuable shares 91 195 19
-------- -------- --------
Diluted Weighted Average Shares 167,641 170,730 186,611
-------- -------- --------
<
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>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 7. Earnings per Share (continued)
2004 2003 2002
----- ----- -----
(In thousands except
per share amounts)
Basic Earnings per Share:
Continuing operations $1.34 $1.08 $1.21
Discontinued operations .88 .15 .63
----- ----- -----
$2.22 $1.23 $1.84
===== ===== =====
Diluted Earnings per Share:
Continuing operations $1.31 $1.05 $1.17
Discontinued operations .86 .15 .57
----- ----- -----
$2.17 $1.20 $1.73
===== ===== =====
Options to purchase 1,078,000, 6,678,000, and 10,786,000 shares of common
stock were not included in the computation of diluted earnings per share for
2004, 2003, and 2002, respectively, because the options' exercise prices were
greater than the average market price for the common stock and their effect
would have been antidilutive.
The computation of diluted earnings per share for 2003 and 2002 excludes
the effect of assuming the conversion of the company's 4 3/8% subordinated
convertible debentures convertible at $111.83 per share because the effect would
be antidilutive. These debentures were no longer outstanding as of December 31,
2003, having previously been redeemed.
Note 8. 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.
Accumulated other comprehensive items in the accompanying balance sheet
consists of the following:
2004 2003
-------- --------
(In thousands)
Cumulative Translation Adjustment $180,063 $ 83,263
Net Unrealized Gains on Available-for-sale Investments 13,731 31,885
Net Unrealized Gains (Losses) on Hedging Instruments 5 (2,523)
Minimum Pension Liability Adjustment (net of tax benefit of $13,908 and $12,613) (32,433) (29,410)
-------- --------
$161,366 $ 83,215
======== ========
<
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THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 8. Comprehensive Income (continued)
Comprehensive income in 2002 excludes the effect of unrealized gains of
$111 million that existed at the date the company reclassified equity interests
in FLIR and Thoratec to available-for-sale investments.
The change in unrealized gains (losses) on available-for-sale
investments, a component of other comprehensive items in the accompanying
statement of comprehensive income and shareholders' equity, includes the
following:
2004 2003 2002
-------- -------- ---------
(In thousands)
Unrealized Holding Gains (Losses) Arising During the Year (net of
income tax provision (benefit) of $(2,481), $14,407, and $(22,067)) $ (4,609) $ 26,754 $ (34,481)
Reclassification Adjustment for (Gains) Losses Included in Net Income
(net of income tax provision (benefit) of $2,690, $(1,366), and
$15,746) (5,361) 1,441 (31,413)
-------- -------- ---------
Net Unrealized Gains (Losses) (net of income tax provision (benefit)
of $(5,171), $15,773, and $(37,813)) $ (9,970) $ 28,195 $ (65,894)
======== ======== =========
The change in unrealized gains (losses) on hedging instruments, a component of other comprehensive items in the accompanying
statement of comprehensive income and shareholders' equity, includes the following:
2004 2003 2002
-------- -------- --------
(In thousands)
Unrealized Holding Gains (Losses) Arising During the Year (net of
income tax provision (benefit) of $(43), $(2,137), and $(1,794)) $ 28 $ (4,261) $ (2,852)
Reclassification Adjustment for Losses Included in Net Income (net of
income tax provision (benefit) of $(1,410), $(1,686), and $(15)) 2,500 3,228 24
-------- -------- --------
Net Unrealized Gains (Losses) (net of income tax provision (benefit)
of $1,367, $(451), and $(1,779)) $ 2,528 $ (1,033) $ (2,828)
======== ======== ========
<
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>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 9. Available-for-sale Investments
The aggregate market value, cost basis, and gross unrealized gains and
losses of short-term available-for-sale investments by major security type are
as follows:
Fair
Value of
Gross Gross Investments
Market Cost Unrealized Unrealized with Unrealized
Value Basis Gains Losses Losses
-------- -------- ---------- ---------- ---------------
(In thousands)
2004
Equity Securities $ 81,446 $ 60,321 $ 22,107 $ (982) $ 22,703
Auction Rate Securities 103,923 103,923 - - -
-------- -------- -------- -------- --------
$185,369 $164,244 $ 22,107 $ (982) $ 22,703
======== ======== ======== ======== ========
2003
Corporate Bonds and Notes $ 18,638 $ 18,578 $ 60 $ - $ -
Equity Securities 95,688 46,695 48,993 - -
Auction Rate Securities 108,139 108,139 - - -
-------- -------- -------- -------- --------
$222,465 $173,412 $ 49,053 $ - $ -
======== ======== ======== ======== ========
The cost of available-for-sale investments that were sold was based on
specific identification in determining realized gains and losses recorded in the
accompanying statement of income. The net gain on the sale of available-for-sale
investments resulted from gross realized gains of $21.0 million, $38.2 million,
and $126.6 million, and gross realized losses of $0.2 million, $2.7 million, and
$3.5 million, in 2004, 2003, and 2002, respectively. The sole investment with an
unrealized loss at December 31, 2004, was the portion of the company's
investment in Newport common stock held as an available-for-sale security (Note
16). The company acquired the shares of Newport in July 2004. The fair value of
the Newport shares increased in early 2005 such that it approximated the
company's cost.
The company's investments in auction rate securities are recorded at
cost, which approximates fair value due to their variable interest rates. The
interest rates generally reset every 7 to 28 days. Despite the long-term nature
of their stated contractual maturities, the company has the ability to quickly
liquidate investments in auction rate securities. All income generated from
these investments has been recorded as interest income.
<
F-39
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 10. Long-term Obligations and Other Financing Arrangements
2004 2003
-------- --------
(In thousands except
per share amounts)
7 5/8% Senior Notes, Due 2008 $135,232 $137,874
3 1/4% Subordinated Convertible Debentures, Due 2007, Convertible at $41.84 per Share 77,234 77,234
Other 15,556 20,282
-------- --------
228,022 235,390
Less: Current Maturities 1,952 5,881
-------- --------
$226,070 $229,509
======== ========
The annual requirements for long-term obligations are as follows (in thousands):
2005 $ 1,952
2006 1,818
2007 78,552
2008 136,619
2009 1,418
2010 and thereafter 7,663
--------
$228,022
See Note 13 for fair value information pertaining to the company's
long-term obligations.
Short-term obligations and current maturities of long-term obligations in
the accompanying balance sheet included $13.1 million and $39.9 million at
year-end 2004 and 2003, respectively, of short-term bank borrowings and
borrowings under lines of credit of certain of the company's subsidiaries. The
weighted average interest rate for these borrowings was 1.4% and 1.5% at
year-end 2004 and 2003, respectively. Unused lines of credit for non-U.S.
subsidiaries were $189 million as of year-end 2004. The unused lines of credit
generally provide for short-term unsecured borrowings at various interest rates.
In addition, the company has a credit facility of $250 million discussed below.
In 2003 and 2002, the company redeemed the convertible debentures
discussed below with the objective of reducing interest expense. The redemption
price was 100% of the principal amount of the debentures plus accrued interest.
In 2003, the company redeemed all of its outstanding 4 3/8% subordinated
convertible debentures due 2004 and 4% subordinated convertible debentures due
2005. The principal amounts redeemed for the 4 3/8% and 4% debentures were $70.9
million and $197.1 million, respectively.
In 2002, the company redeemed all of its outstanding 4 1/2% senior
convertible debentures due 2003, 4 1/4% and 4 5/8% subordinated convertible
debentures due 2003, and 4 7/8% subordinated convertible debentures due 2004.
The principal amounts redeemed for the 4 1/2%, 4 1/4%, 4 5/8%, and 4 7/8%
debentures were $121.1 million, $398.4 million, $57.9 million, and $13.3
million, respectively. Redemptions and repurchases of subordinated convertible
debentures resulted in charges of $1.0 million and $1.5 million in 2003 and
2002, respectively, in the accompanying statement of income.
In December 2002, the company entered into revolving credit agreements,
as amended, with a bank group that provided for up to $250 million of unsecured
borrowings. The arrangement was replaced in December 2004 with a 5-year
revolving credit agreement. The agreement provides for a $250 million revolving
credit facility that will expire in
<
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>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 10. Long-term Obligations and Other Financing Arrangements (continued)
December 2009. The agreement calls for interest at either a LIBOR-based rate or
a rate based on the prime lending rate of the agent bank, at the company's
option. The rate at December 31, 2004, was 3.19% under the more favorable of the
two rates. The agreement contains affirmative, negative, and financial
covenants, and events of default customary for financings of this type. The
financial covenants include interest coverage and debt-to-capital ratios. At
December 31, 2004, no borrowings were outstanding. The credit agreement permits
the company to use the facility for working capital; acquisitions; repurchases
of common stock, debentures and other securities; the refinancing of debt; and
general corporate purposes.
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% (4.89% as of December 31, 2004). The swaps have terms
expiring at the maturity of the debt. The swaps are designated as fair-value
hedges and as such, are carried at fair value, which resulted in an increase in
other long-term assets and long-term debt of $6.5 million at December 31, 2004,
and $9.2 million at December 31, 2003. 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.
Note 11. Commitments and Contingencies
Operating Leases
The company leases portions of its office and operating facilities under
various operating lease arrangements. Income from continuing operations includes
expense from operating leases of $40.3 million, $35.5 million, and $33.5 million
in 2004, 2003, and 2002, respectively. Future minimum payments due under
noncancellable operating leases at December 31, 2004, are $38.1 million in 2005,
$30.1 million in 2006, $23.9 million in 2007, $18.9 million in 2008, $15.2
million in 2009, and $94.3 million in 2010 and thereafter. Total future minimum
lease payments are $220.5 million.
Purchase Obligations
At December 31, 2004, the company had outstanding noncancellable purchase
obligations, principally for inventory purchases, totaling $78.1 million,
substantially all of which will be settled in 2005.
Letters of Credit and Guarantees
Outstanding letters of credit and bank guarantees totaled $54.7 million
at December 31, 2004, including $6.2 million for businesses that have been sold.
The expiration of these credits and guarantees ranges through 2013 for existing
businesses and through 2005 for businesses that have been sold.
Outstanding surety bonds totaled $21.8 million at December 31, 2004,
including $18.3 million for businesses that have been sold. The expiration of
these bonds ranges through 2010 for existing businesses and primarily through
2009 for businesses that have been sold.
The letters of credit, bank guarantees, and surety bonds principally
secure performance obligations, and allow the holder to draw funds up to the
face amount of the letter of credit, bank guarantee, or surety bond if the
applicable business unit does not perform as contractually required. With
respect to letters of credit, guarantees, and surety bonds that were issued for
businesses that were sold, the buyer is obligated to indemnify the company in
the event such letters of credit and/or surety bonds are drawn.
<
F-41
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 11. Commitments and Contingencies (continued)
The company also has an outstanding guarantee of $0.5 million at December
31, 2004, that relates to the third-party indebtedness of a former equity
investee. The guarantee was reduced to $0.2 million in February 2005 and will be
eliminated by the end of 2005.
In connection with the sale of businesses of the company, the buyers have
assumed certain contractual obligations of such businesses and have agreed to
indemnify the company with respect to those assumed liabilities. In the event a
third party to a transferred contract does not recognize the transfer of
obligations or a buyer defaults on its obligations under the transferred
contract, the company could be liable to the third party for such obligations.
However, in such event, the company would be entitled to indemnification by the
buyer.
Indemnifications
In conjunction with certain transactions, primarily divestitures, the
company has agreed to indemnify the other parties with respect to certain
liabilities related to the businesses that were sold or leased properties that
were abandoned (e.g., retention of certain environmental, tax, employee, and
product liabilities). The scope and duration of such indemnity obligations vary
from transaction to transaction. Where appropriate, an obligation for such
indemnifications is recorded as a liability. Generally, a maximum obligation
cannot be reasonably estimated. Other than obligations recorded as liabilities
at the time of divestiture, historically the company has not made significant
payments for these indemnifications.
In connection with the company's efforts to reduce the number of
facilities that it occupies, the company has vacated some of its leased
facilities or sublet them to third parties. When the company sublets a facility
to a third party, it remains the primary obligor under the master lease
agreement with the owner of the facility. As a result, if a third party vacates
the sublet facility, the company would be obligated to make lease or other
payments under the master lease agreement. The company believes that the
financial risk of default by sublessors is individually and in the aggregate not
material to the company's financial position or results of operations.
In connection with the sale of products in the ordinary course of
business, the company often makes representations affirming, among other things,
that its products do not infringe on the intellectual property rights of others
and agrees to indemnify customers against third-party claims for such
infringement. The company has not been required to make material payments under
such provisions.
Litigation and Related Contingencies
Continuing Operations
- ---------------------
In September 2004, Applera Corporation, MDS Inc., and Applied
Biosystems/MDS Scientific Instruments filed a lawsuit alleging that the
company's mass spectrometer systems infringe a patent of the plaintiffs. The
plaintiffs seek damages, including treble damages for alleged willful
infringement, attorneys' fees, prejudgment interest, and injunctive relief.
The company has been named a defendant, along with many other companies,
in a patent-infringement lawsuit brought by the Lemelson Medical, Education &
Research Foundation, L.P. The suit asserts that products manufactured, used, or
sold by the defendants, infringe one or more patents related to methods of
machine vision or computer-image analysis.
The company intends to vigorously defend these matters. In the opinion of
management, an unfavorable outcome of either or both of these matters could have
a material adverse effect on the company's financial position as well as its
results of operations and cash flows.
On December 8, 2004 and February 23, 2005, the company asserted in two
lawsuits against a combination of Applera Corporation, MDS Inc., and Applied
Biosystems/MDS Scientific Instruments that these parties infringe two patents of
the company.
<
F-42
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 11. Commitments and Contingencies (continued)
Discontinued Operations
- -----------------------
During 2002, the company's discontinued operations settled a
patent-infringement matter that Fischer Imaging Corporation had brought against
the company's former Trex Medical subsidiary. 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.
The company's continuing and discontinued operations are a defendant in a
number of other pending legal proceedings incidental to present and former
operations. The company does not expect the outcome of these proceedings, either
individually or in the aggregate, to have a material adverse effect on its
financial position, results of operations, or cash flows.
Note 12. Common and Preferred Stock
At December 31, 2004, the company had reserved 16,539,205 unissued shares
of its common stock for possible issuance under stock-based compensation plans
and for possible conversion of the company's convertible debentures.
The company has 50,000 shares of authorized but unissued $100 par value
preferred stock.
In 2002, the company restored 32,000,000 shares of common stock to
authorized but unissued status, which had been held in treasury stock.
The company has distributed rights under a shareholder rights plan
adopted by the company's Board of Directors to holders of outstanding shares of
the company's common stock. Each right entitles the holder to purchase one
ten-thousandth of a share (a Unit) of Series B Junior Participating Preferred
Stock, $100 par value, at a purchase price of $250 per Unit, subject to
adjustment. The rights will not be exercisable until the earlier of (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons (an Acquiring Person) has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of common
stock (the Stock Acquisition Date), or (ii) 10 business days following the
commencement of a tender offer or exchange offer for 15% or more of the
outstanding shares of common stock.
In the event that a person becomes the beneficial owner of 15% or more of
the outstanding shares of common stock, except pursuant to an offer for all
outstanding shares of common stock approved by at least a majority of the
members of the Board of Directors, each holder of a right (except for the
Acquiring Person) will thereafter have the right to receive, upon exercise, that
number of shares of common stock that equals the exercise price of the right
divided by one-half of the current market price of the common stock. In the
event that, at any time after any person has become an Acquiring Person, (i) the
company is acquired in a merger or other business combination transaction in
which the company is not the surviving corporation or its common stock is
changed or exchanged (other than a merger that follows an offer approved by the
Board of Directors), or (ii) 50% or more of the company's assets or earning
power is sold or transferred, each holder of a right (except for the Acquiring
Person) shall thereafter have the right to receive, upon exercise, the number of
shares of common stock of the acquiring company that equals the exercise price
of the right divided by one-half of the current market price of such common
stock.
At any time until 10 days following the Stock Acquisition Date, the
company may redeem the rights in whole, but not in part, at a price of $.01 per
right (payable in cash or stock). The rights expire on January 29, 2006, unless
earlier redeemed or exchanged.
<
F-43
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THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 13. Fair Value of Financial Instruments
The company's financial instruments consist mainly of cash and cash
equivalents, short-term available-for-sale investments, accounts receivable,
notes receivable, investment in Newport common stock subject to long-term resale
restrictions, short-term obligations and current maturities of long-term
obligations, accounts payable, long-term obligations, and forward
currency-exchange contracts. The carrying amounts of cash and cash equivalents,
accounts receivable, short-term obligations and current maturities of long-term
obligations, and accounts payable approximate fair value due to their short-term
nature.
Available-for-sale investments are carried at fair value in the
accompanying balance sheet. The fair values were determined based on quoted
market prices (Note 9).
The carrying amount and fair value of the company's notes receivable,
long-term obligations, and forward currency-exchange contracts are as follows:
2004 2003
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(In thousands)
Notes Receivable $ 47,373 $ 49,286 $ - $ -
======== ======== ======== ========
Investment in Newport Common Stock Subject to
Long-term Resale Restrictions $ 21,317 $ 22,703 $ - $ -
======== ======== ======== ========
Long-term Obligations:
Convertible obligations $ 77,234 $ 76,848 $ 77,234 $ 76,269
Senior notes 135,232 135,232 137,874 137,874
Other 13,604 13,604 14,401 14,401
-------- -------- -------- --------
$226,070 $225,684 $229,509 $228,544
======== ======== ======== ========
Forward Currency-exchange Contracts Receivable $ 56 $ 56 $ 159 $ 159
The fair value of the notes receivable (principally the note receivable
from Newport) was determined based on borrowing rates available to companies of
comparable credit worthiness at December 31, 2004.
The fair value of the investment in Newport common stock subject to
long-term resale restrictions that lapse in January 2006 was determined using a
quoted fair market value.
The fair value of long-term obligations was determined based on quoted
market prices and on borrowing rates available to the company at the respective
year ends.
The notional amounts of forward currency-exchange contracts outstanding
totaled $60.4 million and $87.9 million at year-end 2004 and 2003, respectively.
The fair value of such contracts is the estimated amount that the company would
receive upon liquidation of the contracts, taking into account the change in
currency exchange rates.
<
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THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 14. Supplemental Cash Flow Information
2004 2003 2002
--------- --------- ---------
(In thousands)
Cash Paid For
Interest $ 11,003 $ 20,548 $ 47,366
========= ========= =========
Income taxes $ 36,279 $ 33,592 $ 62,726
========= ========= =========
Noncash Activities
Fair value of assets of acquired businesses and product lines $ 189,612 $ 216,453 $ 94,881
Cash paid for acquired businesses and product lines (147,902) (150,260) (78,825)
--------- --------- ---------
Liabilities assumed of acquired businesses and product lines $ 41,710 $ 66,193 $ 16,056
========= ========= =========
Note 15. Restructuring and Other Costs, Net
In response to a downturn in markets served by the company and in
connection with the company's overall reorganization, restructuring actions were
initiated in 2002 in a number of business units to reduce costs and
redundancies, principally through headcount reductions and consolidation of
facilities. 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. These charges totaled $19.2 million and are detailed by segment
below. The company expects to incur an additional $1.0 million of restructuring
costs, primarily in 2005. The restructuring actions undertaken in 2003 and 2004
were substantially complete at the end of 2004.
2004
The company recorded net restructuring and other costs by segment for
2004 as follows:
Life and
Laboratory Measurement
Sciences and Control Other Corporate Total
---------- ----------- ------- --------- -------
(In thousands)
Cost of Revenues $ 3,177 $ 184 $ - $ - $ 3,361
Restructuring and Other Costs, Net 7,054 6,337 163 2,275 15,829
------- ------- ------- ------- -------
$10,231 $ 6,521 $ 163 $ 2,275 $19,190
======= ======= ======= ======= =======
The components of net restructuring and other costs by segment are as
follows:
Life and Laboratory Sciences
- ----------------------------
The Life and Laboratory Sciences segment recorded $10.2 million of net
restructuring and other charges in 2004. The segment recorded charges to cost of
revenues of $3.2 million, consisting of $2.1 million for the sale of inventories
revalued at the date of acquisition of Jouan, and $1.1 million of accelerated
depreciation on fixed assets being abandoned due to facility consolidations; and
$7.0 million of other costs. These other costs consisted of $8.6 million of
<
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THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 15. Restructuring and Other Costs, Net (continued)
cash costs, including $5.1 million of severance for 181 employees across all
functions; $2.8 million of abandoned- facility costs, primarily for charges
associated with facilities vacated in prior periods where estimates of
sub-tenant rental income have changed or for costs that could not be recorded
until incurred; and $0.7 million of other cash costs, primarily relocation
expenses. These severance and other cash costs were net of reversals of $0.6
million, principally due to lower costs resulting from employee attrition. In
addition, the segment recorded charges of $1.0 million, primarily for abandoned
equipment and the sale of two abandoned buildings. These costs were offset by a
gain of $2.6 million on the sale of a product line.
Measurement and Control
- -----------------------
The Measurement and Control segment recorded $6.5 million of net
restructuring and other charges in 2004. The segment recorded charges to cost of
revenues of $0.2 million for the sale of inventories revalued at the date of
acquisition, and $6.3 million of other costs. These other costs consisted of
$6.2 million of cash costs, including $3.8 million of severance for 106
employees across all functions; $1.9 million of abandoned-facility costs,
primarily for charges associated with facilities vacated in prior periods where
estimates of sub-tenant rental income have changed or for costs that could not
be recorded until incurred; and $0.5 million of other cash costs, primarily
relocation expenses. These severance, facility, and other cash costs were net of
reversals of $0.7 million, principally due to lower costs resulting from
employee attrition. In addition, the segment recorded charges of $0.1 million,
primarily for equipment at an abandoned facility.
Corporate
- ---------
The company recorded $2.3 million of restructuring and other charges at
its U.S. and European administrative offices in 2004, all of which were cash
costs. These cash costs included $1.3 million of severance; $0.7 million of
third-party advisory fees; and $0.3 million of abandoned-facility costs. 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 were incurred to simplify this legal structure.
The principal aspects of this project were completed in 2004.
2003
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 2003 in a number of business units to reduce costs and
redundancies, principally through headcount reductions and consolidation of
facilities. These charges totaled $45.3 million and are detailed by segment
below.
The company recorded net restructuring and other costs by segment for
2003 as follows:
Life and
Laboratory Measurement
Sciences and Control Other Corporate Total
---------- ----------- ------- --------- -------
(In thousands)
Cost of Revenues $ - $ 71 $ - $ - $ 71
Restructuring and Other Costs, Net 21,808 10,214 8,051 5,127 45,200
------- ------- ------- ------- -------
$21,808 $10,285 $ 8,051 $ 5,127 $45,271
======= ======= ======= ======= =======
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THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 15. Restructuring and Other Costs, Net (continued)
The components of net restructuring and other costs by segment are as
follows:
Life and Laboratory Sciences
- ----------------------------
The Life and Laboratory Sciences segment recorded $21.8 million of net
restructuring and other charges in 2003. These charges included $18.8 million of
cash costs, principally associated with facility consolidations, including $9.8
million of severance for 415 employees across all functions; $4.2 million of
ongoing lease costs through 2006 for abandoned facilities described below; $1.5
million of employee-retention costs; and $3.3 million of other cash costs,
primarily relocation expenses. The charges for severance are net of reversals of
$1.5 million that the segment had provided prior to 2003 and were not required,
primarily due to employee attrition. The charges for abandoned facilities
included the consolidation of four manufacturing facilities in the United
States; the closure of a manufacturing facility in the United Kingdom, the
activities of which were transferred to a facility in the United States;
consolidation of distribution facilities in Japan; and revised estimates of
future lease costs for facilities in Europe that the segment provided prior to
2003. These charges are net of reversals of $1.0 million, which represents
revised estimates of future lease costs for facilities that the segment
abandoned prior to 2003. In addition, the segment recorded net charges of $3.4
million, principally to write down the carrying value of fixed assets, primarily
buildings held for sale, to estimated disposal value. These charges were offset
by $0.4 million of net gains, primarily from the sale of a product line.
Measurement and Control
- -----------------------
The Measurement and Control segment recorded $10.3 million of net
restructuring and other charges in 2003. The segment recorded charges to cost of
revenues of $0.1 million, primarily for the sale of inventories revalued at the
date of acquisition, and $10.2 million of other costs. These other costs
consisted of $10.3 million of cash costs, principally associated with facility
consolidations, including $6.8 million of severance for 164 employees across all
functions; $0.9 million of ongoing lease costs through 2007 for abandoned
facilities described below; $0.3 million of employee-retention costs; and $2.3
million of other cash costs, primarily relocation expenses. The charges for
severance are net of reversals of $1.5 million that the segment had provided
prior to 2003 and were not required, primarily due to a change in the
restructuring plan and employee attrition. The charges for abandoned facilities
included the closure of sales offices in The Netherlands and France, the
activities of which were transferred to other facilities in the region, and the
consolidation of manufacturing facilities in Massachusetts and Wisconsin. These
charges are net of reversals of $0.4 million, which represent revised estimates
of future lease costs for facilities that the segment abandoned prior to 2003.
In addition, the segment recorded a gain of $2.1 million on the sale of a
building in Germany, offset by net charges of $2.0 million, primarily for the
writedown of goodwill related to the segment's test and measurement business to
reduce the carrying value of the business to disposal value. The test and
measurement business was sold in October 2003.
Other
- -----
The company's other businesses (previously included in the Optical
Technologies segment) recorded $8.1 million of restructuring costs in 2003. The
costs included a charge of $4.8 million for the writedown to disposal value of a
noncore product line that was sold in October 2003. The company also recorded
$2.2 million of lease costs for the closure of a manufacturing facility in the
United Kingdom relating to the sale of the product line discussed above; $0.7
million of severance for 20 employees; and $0.4 million of employee retention
and other cash costs.
Corporate
- ---------
The company recorded $5.1 million of restructuring and other charges at
its corporate offices in 2003, all of which were cash costs. These cash costs
included $2.6 million for third-party advisory fees; $1.0 million of ongoing
lease costs through 2006 for abandoned facilities described below; $0.9 million
of severance for 16 employees in
<
F-47
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 15. Restructuring and Other Costs, Net (continued)
administrative functions; and $0.6 million of relocation expenses. The
third-party advisory fees were incurred to simplify the legal structure of the
company's non-U.S. subsidiaries. The charges for abandoned facilities and
relocation expenses are for the consolidation of three administrative offices in
Europe.
2002
In response to a continued downturn in markets served by the company,
restructuring actions were initiated in 2002 in a number of business units to
reduce costs and shed unproductive assets, principally through headcount
reductions, discontinuation of three mature or unprofitable product lines, and
consolidation of facilities. These charges totaled $46.2 million and are
detailed by segment below.
The company recorded net restructuring and other costs by segment for
2002 as follows:
Life and
Laboratory Measurement
Sciences and Control Other Corporate Total
---------- ----------- ------- --------- -------
(In thousands)
Cost of Revenues $ 1,251 $ 1,384 $ 5,837 $ - $ 8,472
Restructuring and Other Costs, Net 18,177 12,226 4,726 2,562 37,691
------- ------- ------- ------- -------
$19,428 $13,610 $10,563 $ 2,562 $46,163
======= ======= ======= ======= =======
The components of net restructuring and other costs by segment are as
follows:
Life and Laboratory Sciences
- ----------------------------
The Life and Laboratory Sciences segment recorded $19.4 million of net
restructuring and other charges in 2002. The segment recorded charges to cost of
revenues of $1.3 million, which consisted of $1.1 million for the sale of
inventories revalued at the date of acquisition and $0.2 million for a
discontinued product line, and $18.2 million of other costs. These other costs
consisted of $12.3 million of cash costs, including $5.8 million of severance
for 255 employees across all functions; $1.8 million of ongoing lease costs
through 2005 for abandoned facilities described below; $1.7 million of
employee-retention costs; $0.7 million of pension costs for terminated employees
that was accrued as a pension liability; $0.5 million for the termination of a
distributor agreement; and $1.8 million of other cash costs, primarily
relocation expenses. In addition, the segment realized a net loss of $4.3
million on the sale of assets and small business units, principally its Dynex
automated diagnostics product line, and wrote down $1.5 million of fixed assets
at abandoned facilities. The abandoned-facility costs included $1.6 million of
additional expense related to a facility in Finland that was abandoned in 2001,
at which time the segment recorded estimated abandonment cost. The segment has
been unable to sublease the space and has reserved the remaining obligation
through the expiration of the lease in 2005. Other facility consolidations in
2002 included closure of three sales and services offices in The Netherlands,
the United Kingdom, and California, and a manufacturing facility in Texas. The
activities of these facilities were transferred to other locations. In addition,
certain other office and manufacturing space in Massachusetts that was abandoned
and reserved for in 2001 has been occupied by the company's Measurement and
Control segment, and consequently, the remaining reserve for abandonment of $1.5
million has been reversed.
<
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>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 15. Restructuring and Other Costs, Net (continued)
Measurement and Control
- -----------------------
The Measurement and Control segment recorded $13.6 million of net
restructuring and other charges in 2002. The segment recorded charges to cost of
revenues of $1.4 million for the sale of inventories revalued at the date of
acquisition, and $12.2 million of other costs, net. These other costs consisted
of $20.4 million of cash costs, including $11.0 million of severance for 388
employees across all functions; $4.9 million of ongoing lease costs through 2007
for abandoned facilities described below; $2.0 million of employee-retention
costs; and $2.5 million of other cash costs, primarily relocation expenses. The
charge also included $0.5 million of asset writedowns, and was offset by $8.7
million of net gains, primarily on the sale of businesses, principally the
segment's Thermo BLH and Thermo Nobel subsidiaries. The charges for severance,
abandoned facilities, and other items are net of reversals of $2.4 million, $2.3
million, and $0.4 million, respectively, that the segment had provided in 2000
and 2001. Of the total amount reversed, $2.1 million had been initially provided
in 2001 to downsize the segment's operations in Maryland. During 2002, following
a change in that operation's management, the 2001 plan to restructure the
Maryland operation was substantially revised to include closure of the plant.
The amounts provided in 2001 were reversed and all of the actions contemplated
in the 2001 plan are components of the expanded 2002 plan, recorded in 2002. The
remainder of the 2000 and 2001 plan reserves that were reversed were not
required primarily due to employee attrition and favorable settlement of lease
obligations. The facility consolidations in the 2002 plan included closure of
six manufacturing facilities in the United States and one sales and service
facility in Australia, and the transfer of their activities to other locations.
Other
- -----
The company's other businesses (previously in the Optical Technologies
segment) recorded $10.6 million of net restructuring and other charges in 2002.
These businesses recorded charges to cost of revenues of $5.8 million, primarily
for two discontinued product lines, and $4.7 million of other costs. These other
costs consisted of $1.7 million of cash costs, consisting primarily of severance
for 20 employees across all functions. The charges for severance are net of
reversals of $0.5 million that the segment had provided in 2001 and 2002. The
severance reserves that were reversed were no longer required, primarily due to
employee attrition. In addition, these businesses wrote off assets totaling $3.0
million, primarily manufacturing equipment associated with the discontinued
product lines.
Corporate
- ---------
The company recorded $2.6 million of restructuring and other charges at
its corporate office in 2002, which were primarily cash costs, principally for
third-party advisory fees to simplify the legal structure of the company's
non-U.S. subsidiaries.
<
F-49
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THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 15. Restructuring and Other Costs, Net (continued)
The following table summarizes the severance actions of the company in
2002, 2003, and 2004.
Number of
Employees
---------
Pre-2002 Restructuring Plans
Remaining Terminations at December 29, 2001 714
Additional Terminations Announced in 2002 247
Terminations Occurring in 2002 (878)
Adjustment to Plan (53)
----
Remaining Terminations at December 28, 2002 30
Terminations Occurring in 2003 (28)
Adjustment to Plan (2)
----
Remaining Terminations at December 31, 2003 and December 31, 2004 -
====
2002 Restructuring Plans
Terminations Announced in 2002 618
Terminations Occurring in 2002 (319)
----
Remaining Terminations at December 28, 2002 299
Terminations Occurring in 2003 (289)
Adjustment to Plan (10)
----
Remaining Terminations at December 31, 2003 and December 31, 2004 -
====
2003 Restructuring Plans
Terminations Announced in 2003 615
Terminations Occurring in 2003 (453)
----
Remaining Terminations at December 31, 2003 162
Terminations Announced in 2004 125
Terminations Occurring in 2004 (223)
Adjustment to Plan (16)
----
Remaining Terminations at December 31, 2004 48
====
2004 Restructuring Plans
Terminations Announced in 2004 169
Terminations Occurring in 2004 (139)
----
Remaining Terminations at December 31, 2004 30
====
<
F-50
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 15. 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 statement of income have
been summarized in the notes to the tables.
Abandonment
Employee of Excess
Severance Retention (a) Facilities Other Total
--------- ------------- ----------- -------- --------
(In thousands)
Pre-2002 Restructuring Plans
Balance at December 29, 2001 $ 25,896 $ 6,430 $ 14,224 $ 2,688 $ 49,238
Costs incurred in 2002 (e) 5,916 2,729 3,513 1,970 14,128
Reserves reversed (b) (4,222) (4) (4,833) (528) (9,587)
Payments (24,280) (8,529) (6,499) (3,282) (42,590)
Transfer to accrued pension costs (c) - - - (534) (534)
Currency translation 2,161 24 858 119 3,162
-------- -------- -------- -------- --------
Balance at December 28, 2002 5,471 650 7,263 433 13,817
Costs incurred in 2003 100 115 1,904 208 2,327
Reserves reversed (b) (2,434) (103) (865) (223) (3,625)
Payments (2,351) (587) (4,358) (308) (7,604)
Transfer to accrued pension costs (d) (290) - - - (290)
Currency translation 631 - 834 28 1,493
-------- -------- -------- -------- --------
Balance at December 31, 2003 1,127 75 4,778 138 6,118
Costs incurred in 2004 - - 319 3 322
Reserves reversed (b) (260) (15) (4) (132) (411)
Payments (604) (60) (3,005) (9) (3,678)
Currency translation 75 - 304 - 379
-------- -------- -------- -------- --------
Balance at December 31, 2004 $ 338 $ - $ 2,392 $ - $ 2,730
======== ======== ======== ======== ========
<
F-51
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 15. Restructuring and Other Costs, Net (continued)
Abandonment
Employee of Excess
Severance Retention (a) Facilities Other Total
--------- ------------- ----------- -------- --------
(In thousands)
2002 Restructuring Plans
Costs incurred in 2002 (f) $ 17,037 $ 975 $ 7,991 $ 5,493 $ 31,496
Reserves reversed (b) (77) - - - (77)
Payments (5,817) (50) (577) (4,890) (11,334)
Currency translation 229 2 53 42 326
-------- -------- -------- -------- --------
Balance at December 28, 2002 11,372 927 7,467 645 20,411
Costs incurred in 2003 2,025 1,334 587 2,368 6,314
Reserves reversed (b) (703) (66) (506) (111) (1,386)
Payments (11,936) (2,180) (4,851) (3,103) (22,070)
Currency translation 1,185 39 385 208 1,817
-------- -------- -------- -------- --------
Balance at December 31, 2003 1,943 54 3,082 7 5,086
Costs incurred in 2004 8 - 687 125 820
Reserves reversed (b) (546) (54) (114) - (714)
Payments (617) - (1,587) (115) (2,319)
Currency translation 151 - - - 151
-------- -------- -------- -------- --------
Balance at December 31, 2004 $ 939 $ - $ 2,068 $ 17 $ 3,024
======== ======== ======== ======== ========
2003 Restructuring Plans
Costs incurred in 2003 (g) $ 20,025 $ 770 $ 8,030 $ 6,844 $ 35,669
Reserves reversed (b) (791) - (819) (267) (1,877)
Payments (13,908) (706) (2,643) (6,682) (23,939)
Currency translation 827 4 346 219 1,396
-------- -------- -------- -------- --------
Balance at December 31, 2003 6,153 68 4,914 114 11,249
Costs incurred in 2004 (h) 4,164 148 3,971 1,780 10,063
Reserves reversed (b) (120) - (4) (29) (153)
Payments (9,590) (153) (4,327) (1,927) (15,997)
Currency translation 401 - 511 71 983
-------- -------- -------- -------- --------
Balance at December 31, 2004 $ 1,008 $ 63 $ 5,065 $ 9 $ 6,145
======== ======== ======== ======== ========
2004 Restructuring Plans
Costs incurred in 2004 (h) $ 6,751 $ - $ 340 $ 370 $ 7,461
Reserves reversed (b) (24) - - - (24)
Payments (3,497) - (53) (276) (3,826)
Currency translation 287 - 14 8 309
-------- -------- -------- -------- --------
Balance at December 31, 2004 $ 3,517 $ - $ 301 $ 102 $ 3,920
======== ======== ======== ======== ========
<
F-52
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 15. Restructuring and Other Costs, Net (continued)
(a) Employee-retention costs are accrued ratably over the period through
which employees must work to qualify for a payment. The pre-2002
awards were based on specified percentages of employees' salaries and
were generally awarded to help ensure continued employment at least
through completion of the company's reorganization plan.
(b) Represents reductions in cost of plans as described in the discussion
of restructuring actions by segment.
(c) Balance of accrued restructuring costs from 1998 plans related to
pension liability associated with employees terminated in 1998, which
was transferred to accrued pension costs in 2002.
(d) Balance of accrued restructuring costs for severance from 2000 plans
related to pension liability associated with employees terminated in
2000, which was transferred to accrued pension costs in 2003.
(e) Excludes net gains from the sale of businesses and other assets of
$0.9 million and $2.4 million in the Life and Laboratory Sciences and
Measurement and Control segments, respectively; noncash charges of
$3.1 million in the company's other businesses; and a cash charge of
$0.7 million recorded in accrued ension costs in the Life and
Laboratory Sciences segment.
(f) Excludes noncash charges of $6.8 million and $0.2 million in the Life
and Laboratory Sciences segment and at the company's corporate
office, respectively, and net gains from the sale of businesses and
other assets of $5.8 million in the Measurement and Control segment.
(g) Excludes noncash charges, net, of $3.0 million in the Life and
Laboratory Sciences segment and $4.9 million at the company's other
businesses; and net gains of $0.1 million, primarily from the sale of
a building, offset by a writedown to disposal value of a business
sold in October 2003, in the Measurement and Control segment.
(h) Excludes noncash charges, net, of $1.0 million and $0.1 million in
the Life and Laboratory Sciences and Measurement and Control
segments, respectively; other income, net, of $2.6 million in the
Life and Laboratory Sciences segment; and $0.1 million of other
income, net in the company's other businesses.
The company expects to pay accrued restructuring costs as follows:
severance, employee-retention obligations, and other costs, which principally
consist of cancellation/termination fees, primarily through 2005; and
abandoned-facility payments, over lease terms expiring through 2016.
Note 16. Discontinued Operations
During 2004, the company's discontinued operations (principally
Spectra-Physics) had revenues and net income of $118.9 million and $4.5 million,
respectively. In addition, the company recorded a $38.5 million tax benefit
related to Spectra-Physics, described below. During 2003, the company's
discontinued operations had revenues and a net loss of $197.8 million and $2.5
million, respectively. During 2002, the company's discontinued operations had
revenues and a net loss of $237.0 million and $9.1 million, respectively.
Liabilities of discontinued operations principally represent remaining
obligations of the discontinued businesses including litigation, severance, and
lease obligations.
Spectra-Physics
In July 2004, the company sold its Optical Technologies segment,
Spectra-Physics, to Newport Corporation for initial consideration of $300
million, subject to a post-closing balance sheet adjustment. 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 paid $25.1 million to Newport, making the net selling price
approximately $275 million. The company sold this operating unit to focus on its
core businesses that provide analytical instrumentation to laboratory and
industrial customers. The net selling price of $275 million exceeded
Spectra-Physics' book value and is comprised of $175 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
<
F-53
>
THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 16. Discontinued Operations (continued)
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 2005, together with the note
receivable from Newport, are classified as noncurrent other assets in the
accompanying 2004 balance sheet. As of December 31, 2004, the company owned
3,220,000 shares of Newport common stock with a quoted fair market value of
$45.4 million. The company retained a small manufacturing unit in New York as a
term of the sale, 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 2004 balance sheet.
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 as income from discontinued operations totaling $38.5 million in 2004.
In addition, the company recorded a gain on the sale of Spectra-Physics of $45.9
million, net of a tax provision of $15.9 million.
In February 2002, the company acquired the shares of Spectra-Physics it
did not previously own through a short-form merger at $17.50 per share and
Spectra-Physics ceased to be publicly traded. The company expended $23.2 million
of cash to complete the purchase of the minority interest.
Other
In January 2000, the company announced its intention to sell several of
its businesses, including its power-generation business and its Trex Medical and
ThermoLase units. The company classified these businesses as discontinued
operations.
The tax returns of the company and its former Trex Medical and ThermoLase
businesses were under audit by the IRS. In 2004 and early 2005, the IRS and the
company reached final settlements of the audits and the company determined that
previously unrecognized tax benefits associated with the divested businesses
totaling $52.7 million were realizable. These tax benefits were recorded as a
gain on disposal of discontinued operations in 2004.
In addition to the 2004 gains discussed above, the company had $1.3
million of after-tax gains and $0.6 million of tax benefits associated with
discontinued operations.
The company had after-tax gains of $27.3 million in 2003 and $115.4
million in 2002 from the disposal of discontinued operations. The 2003 gain
consisted of two pre-tax components and two tax components. In 2003, the company
resolved several disputes and related claims 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 estimated
and amount of established reserves as well as the settlement of lease
obligations, the company's pre-tax gain recorded in prior years on disposal of
the related businesses increased by $27.1 million. In 2003, the company also
sold the last remaining business in discontinued operations, Peter Brotherhood
Ltd., and received additional proceeds associated with businesses sold prior to
2003, including post-closing purchase price adjustments. The company recorded
pre-tax gains on disposal of discontinued operations of $8.3 million,
substantially as a result of these transactions. The company recorded a tax
provision of $13.2 million on the above gains and realized $5.1 million of
additional tax benefits from the disposal of businesses sold prior to 2003,
principally foreign tax credits.
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THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 16. Discontinued Operations (continued)
During 2002, primarily as a result of new tax regulations concerning
deductible losses from divested businesses, the company revised its estimate of
the tax consequences of business disposals in discontinued operations and
recorded a tax benefit of $46.6 million. Also in 2002, the company sold the
Trophy Radiologie subsidiary of Trex Medical for approximately $51 million in
cash and, principally as a result of this transaction, recorded an after-tax
gain of $17.4 million. This business is engaged in the production and sale of
dental X-ray imaging systems and related software.
In March 2002, the company sold the last remaining component of its
former power-generation business and realized a gain from the disposition
totaling $13.0 million, principally for previously unrecognized tax benefits
that were realized upon the sale.
Note 17. Unaudited Quarterly Information
2004
------------------------------------------------------
First (a) Second (b) Third (c) Fourth (d)
--------- ---------- --------- ----------
(In thousands except per share amounts)
Revenues $525,032 $525,309 $542,315 $613,339
Gross Profit 240,860 238,885 250,955 283,779
Income from Continuing Operations 39,665 50,579 42,641 85,482
Net Income 43,122 91,080 106,536 121,099
Earnings per Share from Continuing Operations:
Basic .24 .31 .26 .53
Diluted .24 .30 .26 .52
Earnings per Share:
Basic .26 .55 .66 .76
Diluted .26 .54 .65 .74
Amounts reflect aggregate restructuring and other items, net, and
nonoperating items, net, as follows:
(a) Costs of $5.6 million, gains of $1.6 million from the sale of shares
of Thoratec, and after-tax income of $3.5 million related to the
company's discontinued operations.
(b) Costs of $1.1 million, gains of $8.0 million from the sale of shares
of Thoratec, and after-tax income of $40.5 million related to the
company's discontinued operations.
(c) Costs of $5.4 million and after-tax income of $63.9 million related
to the company's discontinued operations.
(d) Costs of $7.1 million, a tax benefit of $33.8 million recorded on
completion of tax audits, and after-tax income of $35.6 million
related to the company's discontinued operations.
2003
------------------------------------------------------
First (e) Second (f) Third (g) Fourth (h)
--------- ---------- --------- ----------
(In thousands except per share amounts)
Revenues $454,628 $467,268 $448,567 $528,915
Gross Profit 210,567 217,121 208,743 243,471
Income from Continuing Operations 34,088 54,641 38,995 47,486
Net Income 36,427 53,139 48,515 61,928
Earnings per Share from Continuing Operations:
Basic .21 .34 .24 .29
Diluted .21 .33 .24 .29
Earnings per Share:
Basic .22 .33 .30 .38
Diluted .22 .32 .29 .37
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THERMO ELECTRON CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Note 17. Unaudited Quarterly Information (continued)
Amounts reflect aggregate restructuring and other items, net, and
nonoperating items, net, as follows:
(e) Costs of $7.0 million, gains of $3.7 million from the sale of shares
of FLIR, and after-tax income of $2.3 million related to the
company's discontinued operations.
(f) Costs of $4.7 million, gains of $10.0 million from the sale of shares
of FLIR, a $9.0 million tax benefit from the reversal of a valuation
allowance, and an after-tax loss of $1.5 million related to the
company's discontinued operations.
(g) Costs of $13.8 million, gains of $10.3 million from the sale of
shares of Thoratec, a loss of $1.0 million on the early retirement of
debt, and after-tax income of $9.5 million related to the company's
discontinued operations.
(h) Costs of $19.8 million, gains of $6.0 million from the sale of shares
of Thoratec, and after-tax income of $14.4 million related to the
company's discontinued operations.
In the second quarter of 2004, the company reclassified the results of
operations of Spectra-Physics (Note 16) to discontinued operations. The first
quarter 2004 and 2003 results presented above reflect the reclassification of
Spectra-Physics and differ from amounts reported in the company's Form 10-Q for
the quarter ended April 3, 2004. As a result of reclassifying the results of
operations of Spectra-Physics, in the first quarter of 2004, revenue, gross
profit, and income from continuing operations decreased from previously reported
amounts by $57.0 million, $23.7 million, and $3.5 million, respectively. In the
first quarter of 2003, revenue and gross profit decreased from previously
reported amounts by $45.6 million and $13.3 million, respectively, and income
from continuing operations increased by $2.7 million. Earnings per share from
continuing operations decreased from previously reported amounts by $.02 in the
first quarter of 2004 and increased by $.02 in the first quarter of 2003. Net
income and earnings per share were not affected in either period by this
reclassification.
Note 18. Subsequent Event
In January 2005, the company reached an agreement to acquire the Kendro
Laboratory Products division of SPX Corp. for $833.5 million, subject to a
post-closing adjustment. Kendro designs, manufactures, markets, and services a
wide range of laboratory equipment for sample preparation, processing, and
storage, used primarily in life sciences and drug discovery laboratories as well
as clinical laboratories. The acquisition is subject to regulatory approvals and
other customary conditions. Kendro's revenues were approximately $375 million in
2004.
The company obtained a bridge financing commitment which will permit it
to borrow up to $600 million for a 364-day period on terms substantially
equivalent to its existing 5-year revolving credit facility (Note 10) to
partially fund the purchase price of Kendro. The commitment is subject to
customary conditions for financings of this type. The company expects to use
existing cash balances to fund the remainder of the purchase price.
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THERMO ELECTRON CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Provision Accounts Balance
Beginning Charged to Accounts Written at End
of Year Expense Recovered Off Other (a) of Year
---------- ---------- --------- -------- --------- --------
Allowance for Doubtful Accounts
Year Ended December 31, 2004 $ 24,212 $ 3,045 $ 116 $ (6,978) $ 2,449 $ 22,844
Year Ended December 31, 2003 $ 22,064 $ 3,485 $ 221 $ (5,257) $ 3,699 $ 24,212
Year Ended December 28, 2002 $ 22,930 $ 2,260 $ 118 $ (5,390) $ 2,146 $ 22,064
Balance at Established Activity Balance
Beginning as Cost of Charged to at End
of Year Acquisitions Reserve Other (c) of Year
---------- ------------ ---------- --------- ---------
Accrued Acquisition Expenses (b)
Year Ended December 31, 2004 $ 15,816 $ 1,217 $ (4,356) $ (3,448) $ 9,229
Year Ended December 31, 2003 $ 8,828 $ 9,096 $ (1,857) $ (251) $ 15,816
Year Ended December 28, 2002 $ 7,104 $ 2,723 $ (1,357) $ 358 $ 8,828
Balance at Provision Activity Balance
Beginning Charged to Charged to at End
of Year Expense (e) Reserve Other (f) of Year
---------- ----------- ---------- --------- --------
Accrued Restructuring Costs (d)
Year Ended December 31, 2004 $ 22,453 $ 17,364 $(25,820) $ 1,822 $ 15,819
Year Ended December 31, 2003 $ 34,228 $ 37,422 $(53,614) $ 4,417 $ 22,453
Year Ended December 28, 2002 $ 49,238 $ 35,960 $(53,923) $ 2,953 $ 34,228
(a) Includes allowance of businesses acquired and sold during the year as
described in Note 2 and the effect of currency translation.
(b) The nature of activity in this account is described in Note 2.
(c) Represents reversal of accrued acquisition expenses and corresponding
reduction of goodwill or other intangible assets resulting from
finalization of restructuring plans and the effect of currency translation.
(d) The nature of activity in this account is described in Note 15.
(e) In 2004, excludes $1.1 million of noncash costs, net, primarily for asset
writedowns, and excludes other income, net, of $2.7 million. In 2003,
excludes $7.8 million of noncash costs, net, primarily for asset
writedowns. In 2002, excludes $1.0 million of noncash costs, net, primarily
for asset writedowns, and excludes a cash charge of $0.7 million recorded
in accrued pension costs.
(f) Represents the effect of currency translation and, in 2003 and 2002,
transfers to accrued pension costs of $0.3 million and $0.5 million,
respectively.
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