10-Q 1 tmoq205.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------------------------- FORM 10-Q (mark one) [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended July 2, 2005 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 1-8002 THERMO ELECTRON CORPORATION (Exact name of Registrant as specified in its charter) Delaware 04-2209186 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 81 Wyman Street, P.O. Box 9046 Waltham, Massachusetts 02454-9046 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (781) 622-1000 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. Class Outstanding at July 29, 2005 ----------------------------- ---------------------------- Common Stock, $1.00 par value 161,613,800 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements ----------------------------- THERMO ELECTRON CORPORATION Consolidated Balance Sheet (Unaudited) Assets
July 2, December 31, (In thousands) 2005 2004 -------------------------------------------------------------------------------------------------------------------------------- Current Assets: Cash and cash equivalents $ 159,744 $ 326,886 Short-term available-for-sale investments, at quoted market value (amortized cost of $8,647 and $164,244) 11,061 185,369 Accounts receivable, less allowances of $22,619 and $22,844 512,648 469,553 Inventories: Raw materials and supplies 154,898 131,810 Work in process 47,951 40,244 Finished goods 196,850 164,657 Deferred tax assets 94,753 92,929 Other current assets 59,690 58,206 ---------- ---------- 1,237,595 1,469,654 ---------- ---------- Property, Plant and Equipment, at Cost 534,081 499,929 Less: Accumulated depreciation and amortization 239,561 238,888 ---------- ---------- 294,520 261,041 ---------- ---------- Acquisition-related Intangible Assets (Note 2) 490,638 158,577 ---------- ---------- Other Assets 164,300 174,428 ---------- ---------- Goodwill (Note 2) 1,947,321 1,513,025 ---------- ---------- $4,134,374 $3,576,725 ========== ========== < 2 > THERMO ELECTRON CORPORATION Consolidated Balance Sheet (continued) (Unaudited) Liabilities and Shareholders' Equity July 2, December 31, (In thousands except share amounts) 2005 2004 -------------------------------------------------------------------------------------------------------------------------------- Current Liabilities: Short-term obligations and current maturities of long-term obligations (Note 9) $ 228,259 $ 15,017 Accounts payable 138,029 131,175 Accrued payroll and employee benefits 94,785 94,671 Accrued income taxes 26,555 22,829 Deferred revenue 87,324 77,778 Other accrued expenses (Notes 2, 10 and 11) 175,199 194,706 Current liabilities of discontinued operations 37,394 42,552 ---------- ---------- 787,545 578,728 ---------- ---------- Deferred Income Taxes 80,023 15,213 ---------- ---------- Other Long-term Liabilities 100,815 91,164 ---------- ---------- Long-term Obligations: Senior notes (Note 9) 383,771 135,232 Subordinated convertible obligations 77,234 77,234 Other 11,932 13,604 ---------- ---------- 472,937 226,070 ---------- ---------- Shareholders' Equity: Preferred stock, $100 par value, 50,000 shares authorized; none issued Common stock, $1 par value, 350,000,000 shares authorized; 180,671,315 and 179,818,648 shares issued 180,671 179,819 Capital in excess of par value 1,398,041 1,381,448 Retained earnings 1,490,336 1,381,257 Treasury stock at cost, 19,323,070 and 19,269,245 shares (437,357) (435,779) Deferred compensation (4,175) (2,561) Accumulated other comprehensive items (Note 6) 65,538 161,366 ---------- ---------- 2,693,054 2,665,550 ---------- ---------- $4,134,374 $3,576,725 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. < 3 > THERMO ELECTRON CORPORATION Consolidated Statement of Income (Unaudited) Three Months Ended --------------------------- July 2, July 3, (In thousands except per share amounts) 2005 2004 ------------------------------------------------------------------------------------------------------------------------------- Revenues $653,621 $525,309 -------- -------- Costs and Operating Expenses: Cost of revenues (Note 11) 366,166 286,424 Selling, general and administrative expenses 192,593 146,508 Research and development expenses 39,432 32,592 Restructuring and other costs, net (Note 11) 2,216 815 -------- -------- 600,407 466,339 -------- -------- Operating Income 53,214 58,970 Other Income, Net (Note 4) 25,504 10,667 -------- -------- Income from Continuing Operations Before Provision for Income Taxes 78,718 69,637 Provision for Income Taxes (21,958) (19,058) -------- -------- Income from Continuing Operations 56,760 50,579 Income from Discontinued Operations (includes income tax benefit of $36,927) - 40,501 Gain on Disposal of Discontinued Operations (net of income tax provision of $2,034) 3,463 - -------- -------- Net Income $ 60,223 $ 91,080 ======== ======== Earnings per Share from Continuing Operations (Note 5): Basic $ .35 $ .31 ======== ======== Diluted $ .35 $ .30 ======== ======== Earnings per Share (Note 5): Basic $ .37 $ .55 ======== ======== Diluted $ .37 $ .54 ======== ======== Weighted Average Shares (Note 5): Basic 161,255 165,571 ======== ======== Diluted 164,658 170,521 ======== ======== The accompanying notes are an integral part of these consolidated financial statements. < 4 > THERMO ELECTRON CORPORATION Consolidated Statement of Income (Unaudited) Six Months Ended ----------------------------- July 2, July 3, (In thousands except per share amounts) 2005 2004 ------------------------------------------------------------------------------------------------------------------------------- Revenues $1,212,829 $1,050,341 ---------- ---------- Costs and Operating Expenses: Cost of revenues (Note 11) 666,140 570,596 Selling, general and administrative expenses 356,094 297,067 Research and development expenses 75,760 66,861 Restructuring and other costs, net (Note 11) 1,945 3,973 ---------- ---------- 1,099,939 938,497 ---------- ---------- Operating Income 112,890 111,844 Other Income, Net (Note 4) 28,808 13,269 ---------- ---------- Income from Continuing Operations Before Provision for Income Taxes 141,698 125,113 Provision for Income Taxes (39,355) (34,869) ---------- ---------- Income from Continuing Operations 102,343 90,244 Income from Discontinued Operations (includes income tax benefit of $35,780) - 43,958 Gain on Disposal of Discontinued Operations (net of income tax provision of $4,272) 6,736 - ---------- ---------- Net Income $ 109,079 $ 134,202 ========== ========== Earnings per Share from Continuing Operations (Note 5): Basic $ .64 $ .55 ========== ========== Diluted $ .63 $ .53 ========== ========== Earnings per Share (Note 5): Basic $ .68 $ .81 ========== ========== Diluted $ .67 $ .79 ========== ========== Weighted Average Shares (Note 5): Basic 161,106 165,389 ========== ========== Diluted 164,694 170,258 ========== ========== The accompanying notes are an integral part of these consolidated financial statements. < 5 > THERMO ELECTRON CORPORATION Consolidated Statement of Cash Flows (Unaudited) Six Months Ended ---------------------------- July 2, July 3, (In thousands) 2005 2004 ------------------------------------------------------------------------------------------------------------------------------- Operating Activities: Net income $ 109,079 $ 134,202 Income from discontinued operations - (43,958) Gain on disposal of discontinued operations (6,736) - --------- --------- Income from continuing operations 102,343 90,244 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization 47,435 31,110 Noncash restructuring and other costs, net (Note 11) 57 507 Provision for losses on accounts receivable 1,238 1,098 Change in deferred income taxes (1,438) 1,039 Gain on sale of businesses (119) - Gain on investments, net (Note 4) (32,066) (13,478) Other noncash expenses, net 13,557 6,279 Changes in current accounts, excluding the effects of acquisitions and dispositions: Accounts receivable 6,154 7,265 Inventories (15,200) (25,677) Other current assets 2,303 (12,977) Accounts payable (11,521) 8,592 Other current liabilities (22,187) 1,235 --------- --------- Net cash provided by continuing operations 90,556 95,237 Net cash provided by (used in) discontinued operations (1,577) 9,878 --------- --------- Net cash provided by operating activities 88,979 105,115 --------- --------- Investing Activities: Acquisitions, net of cash acquired (914,923) (75,706) Proceeds from sale of available-for-sale investments 349,558 331,038 Purchases of available-for-sale investments (148,450) (259,645) Proceeds from maturities of available-for-sale investments 305 18,542 Purchases of property, plant and equipment (16,441) (22,071) Proceeds from sale of property, plant and equipment 9,534 3,359 Proceeds from sale of product line 5,661 - Increase in other assets (1,255) (1,524) Other (64) (383) --------- --------- Net cash used in continuing operations (716,075) (6,390) Net cash provided by discontinued operations 5,327 1,935 --------- --------- Net cash used in investing activities $(710,748) $ (4,455) --------- --------- < 6 > THERMO ELECTRON CORPORATION Consolidated Statement of Cash Flows (continued) (Unaudited) Six Months Ended ----------------------------- July 2, July 3, (In thousands) 2005 2004 ------------------------------------------------------------------------------------------------------------------------------- Financing Activities: Net proceeds from issuance of long-term debt $ 247,450 $ - Repayment of long-term obligations (143) (817) Purchases of company common stock - (81,975) Net proceeds from issuance of company common stock 8,721 40,915 Borrowings under short-term bridge financing agreement 570,000 - Repayment of bridge financing agreement (570,000) - Increase (decrease) in short-term notes payable 219,150 (8,111) Other (2,018) (124) ---------- ---------- Net cash provided by (used in) continuing operations 473,160 (50,112) Net cash provided by discontinued operations - 427 ---------- ---------- Net cash provided by (used in) financing activities 473,160 (49,685) ---------- ---------- Exchange Rate Effect on Cash of Continuing Operations (18,533) (153) Exchange Rate Effect on Cash of Discontinued Operations - 191 ---------- ---------- Increase (Decrease) in Cash and Cash Equivalents (167,142) 51,013 Cash and Cash Equivalents at Beginning of Period 326,886 195,773 ---------- ---------- Cash and Cash Equivalents at End of Period $ 159,744 $ 246,786 ========== ========== Noncash Investing Activities: Fair value of assets of acquired businesses $1,076,315 $ 108,515 Cash paid for acquired businesses (920,135) (78,050) ---------- ---------- Liabilities assumed of acquired businesses $ 156,180 $ 30,465 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
< 7 > THERMO ELECTRON CORPORATION Notes to Consolidated Financial Statements (Unaudited) 1. General The interim consolidated financial statements presented herein have been prepared by Thermo Electron Corporation (the company or the Registrant), are unaudited and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the financial position at July 2, 2005, and the results of operations and cash flows for the three- and six-month periods ended July 2, 2005, and July 3, 2004. Certain prior-period amounts have been reclassified to conform to the presentation in the current financial statements. Interim results are not necessarily indicative of results for a full year. The consolidated balance sheet presented as of December 31, 2004, has been derived from the audited consolidated financial statements as of that date. The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain all of the information that is included in the annual financial statements and notes of the company. The consolidated financial statements and notes included in this report should be read in conjunction with the financial statements and notes included in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004, filed with the Securities and Exchange Commission (SEC). In connection with the preparation of its 2004 Form 10-K, the company determined that it was appropriate to revise the classification of its investments in auction rate securities as short-term available-for-sale investments. Previously, such investments were classified as cash and cash equivalents. As a result of this revision, the company's investing activities in the first six months of 2004 used cash of $4.5 million instead of $51.9 million as previously reported. This change in classification does not affect previously reported cash flows from operations or from financing activities. Auction rate securities are debt instruments with interest rates that generally reset every 7 to 28 days. Despite the long-term nature of their stated contractual maturities, the company has the ability to quickly liquidate investments in auction rate securities. 2. Acquisitions On May 9, 2005, the company's Life and Laboratory Sciences segment acquired the Kendro Laboratory Products division of SPX Corporation for $833.5 million, net of cash acquired and subject to a post-closing adjustment. The cash disbursed ($846.0 million) exceeded this amount as it included transaction costs and an estimate of Kendro's cash at the closing date. The estimate of cash will be adjusted to the actual cash amount through the post-closing adjustment. Kendro designs, manufactures, markets and services, on a global basis, a wide range of laboratory equipment for sample preparation, processing and storage, used primarily in life sciences and drug discovery laboratories as well as clinical laboratories. The acquisition of Kendro broadened the segment's product offerings and access to customers. Kendro's revenues were $371 million in 2004. The purchase price exceeded the fair value of the acquired assets and, accordingly, $444.4 million was allocated to goodwill, approximately $185 million of which is expected to be tax deductible. The company obtained short-term bridge financing, which permitted it to borrow $570 million to partially fund the purchase price of Kendro. The company used existing cash balances to fund the remainder of the purchase price. Subsequently, the company used a combination of short- and long-term debt instruments to refinance the bridge loan (Note 9). On April 26, 2005, the company's Measurement and Control segment completed the acquisition of Rupprecht and Patashnick Co., Inc. (R&P), a New York-based provider of continuous particulate monitoring instrumentation for the ambient air, emissions monitoring and industrial hygiene markets for $32.5 million in cash, subject to a post-closing adjustment. The acquisition of R&P enabled the segment to broaden its air monitoring product offerings. R&P's revenues totaled $17 million in 2004. The agreement calls for additional consideration of up to $3 million through 2007 based on achieving targeted sales levels and payment of 7% of specified product sales thereafter through 2009. The purchase price exceeded the fair value of the acquired net assets and, accordingly, $15.5 million was allocated to goodwill, none of which is tax deductible. < 8 > THERMO ELECTRON CORPORATION 2. Acquisitions (continued) On March 29, 2005, the Life and Laboratory Sciences segment acquired Niton LLC, a Massachusetts-based provider of portable X-ray analyzers to the metals, petrochemical and environmental markets for $41.7 million in cash. Of the total purchase price, $40.0 million was paid on the closing date and the balance was paid in June 2005, following determination of the post-closing adjustment. The agreement under which the company acquired Niton calls for additional contingent consideration of up to $2.0 million through 2006 based on post-acquisition results. The acquisition of Niton enabled the segment to expand its X-ray products to include a portable line. Niton's revenues in 2004 totaled $36 million. The purchase price exceeded the fair value of the acquired net assets and, accordingly, $15.2 million was allocated to goodwill, all of which is tax deductible. The company's acquisitions have historically been made at prices above the fair value of the acquired assets, resulting in goodwill, due to expectations of synergies of combining the businesses. These synergies include use of the company's existing infrastructure such as sales force, distribution channels and customer relations to expand sales of the acquired businesses' products; use of the infrastructure of the acquired businesses to cost effectively expand sales of the company's products; and elimination of duplicative facilities, functions and staffing. These acquisitions have been accounted for using the purchase method of accounting, and the acquired companies' results have been included in the accompanying financial statements from the respective dates of acquisition. Allocation of the purchase price for acquisitions was based on estimates of the fair value of the net assets acquired and is subject to adjustment upon finalization of the purchase price allocation. Had the acquisition of Kendro been completed as of the beginning of 2004, the company's pro forma results for 2004 and 2005 would have been as follows:
Three Months Ended Six Months Ended ----------------------------- ----------------------------- July 2, July 3, July 2, July 3, (In thousands except per share amounts) 2005 (a) 2004 2005 (a) 2004 -------------------------------------------------------------------------------------------------------------------------------- Revenues $ 688,080 $ 611,273 $1,341,148 $1,218,613 Net Income $ 54,880 $ 85,706 $ 99,173 $ 123,019 Earnings per Share from Continuing Operations: Basic $ .32 $ .27 $ .57 $ .48 Diluted $ .31 $ .27 $ .57 $ .47 Earnings Per Share: Basic $ .34 $ .52 $ .62 $ .74 Diluted $ .34 $ .50 $ .61 $ .73 (a) Includes an $11.2 million pre-tax charge to cost of revenues for the sale of Kendro inventories revalued at the date of acquisition (Note 11). The company's results for 2004 and 2005 would not have been materially different from its reported results had the acquisitions of Niton and R&P occurred at the beginning of 2004.
< 9 > THERMO ELECTRON CORPORATION 2. Acquisitions (continued) The components of the preliminary purchase price allocation for the 2005 acquisitions are as follows:
(In thousands) Niton R&P Kendro Total -------------------------------------------------------------------------------------------------------------------------------- Purchase Price (including transaction costs): Cash paid $ 41,656 $ 32,529 $ 845,950 $ 920,135 Cash acquired (764) (1,817) (2,631) (5,212) --------- --------- --------- --------- $ 40,892 $ 30,712 $ 843,319 $ 914,923 ========= ========= ========= ========= Allocation: Current assets 13,240 6,622 139,488 159,350 Property, plant and equipment 2,316 449 67,305 70,070 Acquired intangible assets 17,741 15,698 330,432 363,871 Goodwill 15,167 15,509 444,364 475,040 Other assets 181 - 2,591 2,772 Other liabilities (7,753) (7,566) (140,861) (156,180) --------- --------- --------- --------- $ 40,892 $ 30,712 $ 843,319 $ 914,923 ========= ========= ========= ========= Acquired intangible assets for the 2005 acquisitions are as follows: (In thousands) Niton R&P Kendro Total -------------------------------------------------------------------------------------------------------------------------------- Customer Relationships $ 11,468 $ 12,808 $ 287,355 $ 311,631 Product Technology 6,273 2,890 43,077 52,240 --------- --------- --------- --------- $ 17,741 $ 15,698 $ 330,432 $ 363,871 ========= ========= ========= ========= The weighted-average amortization periods for intangible assets acquired in 2005 are 5 years for customer relationships and 5 years for product technology. The weighted-average amortization period for all intangible assets acquired in 2005 is approximately 5 years. Annual amortization expense has increased by $72.8 million as a result of the 2005 acquisitions. The company has undertaken restructuring activities at acquired businesses. These activities, which were accounted for in accordance with Emerging Issues Task Force (EITF) Issue No. 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination," have primarily included reductions in staffing levels and the abandonment of excess facilities. In connection with these restructuring activities, as part of the cost of acquisitions, the company established reserves, primarily for severance and excess facilities. In accordance with EITF Issue No. 95-3, the company finalizes its restructuring plans no later than one year from the respective dates of the acquisitions. Upon finalization of restructuring plans or settlement of obligations for less than the expected amount, any excess reserves are reversed with a corresponding decrease in goodwill or other intangible assets when no goodwill exists. Accrued acquisition expenses are included in other accrued expenses in the accompanying balance sheet. No accrued acquisition expenses for acquisitions completed during 2005 have been established as of July 2, 2005. The company is evaluating potential restructuring actions that may be undertaken at Kendro or within existing businesses with which Kendro is being integrated. Such actions may include rationalizing product lines, consolidation of facilities and reductions in staffing levels. The company will record the cost of restructuring actions at Kendro as an increase to goodwill when decisions are made as to the extent of such actions. Costs of restructuring actions at existing businesses will be recorded to expense. The company expects to finalize its restructuring plan no later than one year following completion of the Kendro acquisition. < 10 > THERMO ELECTRON CORPORATION 2. Acquisitions (continued) The changes in accrued acquisition expenses for acquisitions completed prior to 2005 are as follows: Abandonment of Excess (In thousands) Severance Facilities Other Total ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2004 $ 3,248 $ 5,869 $ 112 $ 9,229 Payments (1,446) (65) (1) (1,512) Decrease recorded as a reduction in goodwill - (2,032) (30) (2,062) Currency translation (271) (398) (27) (696) ------- ------- ------- -------- Balance at July 2, 2005 $ 1,531 $ 3,374 $ 54 $ 4,959 ======= ======= ======= ======= The accrued acquisition expenses relate primarily to severance for approximately 160 employees across all functions at Jouan, acquired in December 2003, and for abandoned facilities, primarily for four abandoned operating facilities in England, with leases expiring through 2014, and the downsizing of a manufacturing facility in Denmark, with a lease expiring in 2007, to a smaller site. The company expects to pay amounts accrued for severance and other expenses primarily through 2005 and amounts accrued for abandonment of excess facilities through 2014. Following a favorable resolution of certain lease obligations for a facility in England that were assumed by a sub-tenant, the company reversed $2.1 million of accrued acquisition expenses in the first quarter of 2005 with a corresponding decrease in goodwill. 3. Business Segment Information The company's continuing operations fall into two principal business segments: Life and Laboratory Sciences and Measurement and Control. Three Months Ended Six Months Ended ----------------------------- ----------------------------- July 2, July 3, July 2, July 3, (In thousands) 2005 2004 2005 2004 --------------------------------------------------------------------------------------------------------------------------------- Revenues: Life and Laboratory Sciences $ 487,462 $ 369,823 $ 880,767 $ 735,289 Measurement and Control 166,159 155,486 332,062 315,052 ---------- ---------- ---------- ---------- $ 653,621 $ 525,309 $1,212,829 $1,050,341 ========== ========== ========== ========== Income from Continuing Operations Before Provision for Income Taxes: Life and Laboratory Sciences (a) $ 49,075 $ 53,311 $ 100,905 $ 100,128 Measurement and Control (b) 12,093 12,415 30,453 26,598 Other (c) 502 (54) 573 (102) ---------- ---------- ---------- ---------- Total Operating Income - Segments 61,670 65,672 131,931 126,624 Corporate/Other (d) 17,048 3,965 9,767 (1,511) ---------- ---------- ---------- ---------- $ 78,718 $ 69,637 $ 141,698 $ 125,113 ========== ========== ========== ========== < 11 > THERMO ELECTRON CORPORATION 3. Business Segment Information (continued) Three Months Ended Six Months Ended ----------------------------- ----------------------------- July 2, July 3, July 2, July 3, (In thousands) 2005 2004 2005 2004 --------------------------------------------------------------------------------------------------------------------------------- Depreciation: Life and Laboratory Sciences $ 7,764 $ 7,446 $ 14,543 $ 14,981 Measurement and Control 2,045 2,621 4,461 5,078 Corporate 951 715 1,908 1,601 ---------- ---------- ---------- ---------- $ 10,760 $ 10,782 $ 20,912 $ 21,660 ========== ========== ========== ========== Amortization: Life and Laboratory Sciences $ 17,773 $ 4,963 $ 24,387 $ 8,106 Measurement and Control 1,335 681 2,134 1,343 Corporate 1 - 2 1 ---------- ---------- ---------- ---------- $ 19,109 $ 5,644 $ 26,523 $ 9,450 ========== ========== ========== ========== (a) Includes restructuring and other costs, net, of $11.1 million, $9.3 million and $3.3 million in the second quarter of 2005 and the first six months of 2005 and 2004, respectively. Includes restructuring and other income, net, of $0.5 million in the second quarter of 2004. (b) Includes restructuring and other costs, net, of $2.4 million, $1.4 million, $3.4 million, and $2.6 million in the second quarter of 2005 and 2004 and the first six months of 2005 and 2004, respectively. (c) Includes restructuring and other income, net, of $0.5 million and $0.6 million in the second quarter of 2005 and first six months of 2005, respectively. Includes restructuring and other costs, net, of $0.1 million in both the second quarter of 2004 and the first six months of 2004, respectively. (d) Includes corporate general and administrative expenses and other income and expense. Includes corporate restructuring and other costs of $0.7 million, $0.2 million, $1.2 million, and $0.7 million in the second quarter of 2005 and 2004 and the first six months of 2005 and 2004, respectively. Other income, net, includes net gains on the sale of shares of Thoratec and Newport of $27.6 million in the second quarter and first six months of 2005 and gains on the sale of shares of Thoratec of $8.0 million and $9.6 million in the second quarter and first six months of 2004, respectively (Note 4). 4. Other Income, Net The components of other income, net, in the accompanying statement of income are as follows: Three Months Ended Six Months Ended --------------------------- --------------------------- July 2, July 3, July 2, July 3, (In thousands) 2005 2004 2005 2004 -------------------------------------------------------------------------------------------------------------------------------- Interest Income $ 2,591 $ 1,666 $ 5,927 $ 3,586 Interest Expense (Note 9) (7,287) (2,694) (10,442) (5,423) Gain on Investments, Net 29,802 10,847 32,066 13,478 Other Items, Net 398 848 1,257 1,628 -------- -------- -------- -------- $ 25,504 $ 10,667 $ 28,808 $ 13,269 ======== ======== ======== ======== < 12 > THERMO ELECTRON CORPORATION 4. Other Income, Net (continued) The company sold 4,436,000 shares of Thoratec Corporation common stock during the second quarter and first six months of 2005 and realized a gain of $28.9 million. The company sold 1,000,000 and 1,250,000 shares of Thoratec common stock during the second quarter and first six months of 2004 and realized gains of $8.0 million and $9.6 million, respectively. The company obtained common shares of Thoratec as part of the sale of Thermo Cardiosystems Inc. in 2001. At July 2, 2005, the company no longer owned shares of Thoratec. In July 2004, the company received 3,220,000 shares of Newport Corporation common stock upon the sale of Spectra-Physics to Newport. In June 2005, the company reached an agreement with Newport under which Newport purchased all of the 3,220,000 shares of Newport common stock. Newport purchased the shares for $13.56 per share, which resulted in aggregate proceeds of $43.7 million. The company recorded a loss on the sale of $1.3 million. The Newport shares had been subject to resale restrictions that would have fully lapsed by January 2006. 5. Earnings per Share Basic and diluted earnings per share were calculated as follows: Three Months Ended Six Months Ended --------------------------- --------------------------- July 2, July 3, July 2, July 3, (In thousands except per share amounts) 2005 2004 2005 2004 -------------------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations $ 56,760 $ 50,579 $102,343 $ 90,244 Income from Discontinued Operations - 40,501 - 43,958 Gain on Disposal of Discontinued Operations 3,463 - 6,736 - -------- -------- -------- -------- Net Income for Basic Earnings per Share 60,223 91,080 109,079 134,202 Effect of Convertible Debentures 402 398 803 811 -------- -------- -------- -------- Income Available to Common Shareholders, as Adjusted for Diluted Earnings per Share $ 60,625 $ 91,478 $109,882 $135,013 -------- -------- -------- -------- Basic Weighted Average Shares 161,255 165,571 161,106 165,389 Effect of: Stock options 1,515 3,007 1,704 2,926 Convertible debentures 1,846 1,846 1,846 1,846 Contingently issuable shares 42 97 38 97 -------- -------- -------- -------- Diluted Weighted Average Shares 164,658 170,521 164,694 170,258 -------- -------- -------- -------- Basic Earnings per Share: Continuing operations $ .35 $ .31 $ .64 $ .55 Discontinued operations .02 .24 .04 .27 -------- -------- -------- -------- $ .37 $ .55 $ .68 $ .81 ======== ======== ======== ======== Diluted Earnings per Share: Continuing operations $ .35 $ .30 $ .63 $ .53 Discontinued operations .02 .24 .04 .26 -------- -------- -------- -------- $ .37 $ .54 $ .67 $ .79 ======== ======== ======== ======== Options to purchase 4,508,000, 966,000, 2,515,000 and 1,177,000 shares of common stock were not included in the computation of diluted earnings per share for the second quarter of 2005 and 2004 and the first six months of 2005 and 2004, respectively, because the options' exercise prices were greater than the average market price for the common stock and their effect would have been antidilutive. < 13 > THERMO ELECTRON CORPORATION 6. Comprehensive Income Comprehensive income combines net income and other comprehensive items. Other comprehensive items represents certain amounts that are reported as components of shareholders' equity in the accompanying balance sheet, including currency translation adjustments, unrealized gains and losses, net of tax, on available-for-sale investments and hedging instruments and minimum pension liability adjustment. During the second quarter of 2005 and 2004, the company had comprehensive income of $38.2 million and $74.1 million, respectively. During the first six months of 2005 and 2004, the company had comprehensive income of $42.3 million and $129.0 million, respectively. The decrease in other comprehensive items resulted primarily from a reduction in the cumulative translation adjustment due to movements in currency exchange rates during the first half of 2005, the effects of which are recorded in shareholders' equity. 7. Stock-based Compensation Plans and Pro Forma Stock-based Compensation Expense The company applies Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for its stock-based compensation plans. Accordingly, no accounting recognition is given to stock options granted at fair market value until they are exercised. Upon exercise, net proceeds, including tax benefits realized, are credited to shareholders' equity. In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which sets forth a fair-value-based method of recognizing stock-based compensation expense. As permitted by SFAS No. 123, the company has elected to continue to apply APB No. 25 to account for its stock-based compensation plans. Had compensation cost for awards granted after 1994 under the company's stock-based compensation plans been determined based on the fair value at the grant dates consistent with the method set forth under SFAS No. 123, and had the fair value of awards been amortized on a straight-line basis over the vesting period, the effect on certain financial information of the company would have been as follows: Three Months Ended Six Months Ended ---------------------- ---------------------- July 2, July 3, July 2, July 3, (In thousands except per share amounts) 2005 2004 2005 2004 ---------------------------------------------------------------------------------------------------------------------------------- Income from Continuing Operations: As reported $ 56,760 $ 50,579 $102,343 $ 90,244 Add: Stock-based employee compensation expense included in reported results, net of tax 454 315 870 480 Deduct: Total stock-based employee compensation expense determined under the fair-value-based method for all awards, net of tax (3,796) (3,415) (7,678) (6,643) -------- -------- -------- -------- Pro forma $ 53,418 $ 47,479 $ 95,535 $ 84,081 ======== ======== ======== ======== Basic Earnings per Share from Continuing Operations: As reported $ .35 $ .31 $ .64 $ .55 Pro forma $ .33 $ .29 $ .59 $ .51 Diluted Earnings per Share from Continuing Operations: As reported $ .35 $ .30 $ .63 $ .53 Pro forma $ .33 $ .28 $ .59 $ .50 < 14 > THERMO ELECTRON CORPORATION 7. Stock-based Compensation Plans and Pro Forma Stock-based Compensation Expense (continued) Three Months Ended Six Months Ended ---------------------- ---------------------- July 2, July 3, July 2, July 3, (In thousands except per share amounts) 2005 2004 2005 2004 ---------------------------------------------------------------------------------------------------------------------------------- Net Income: As reported $ 60,223 $ 91,080 $109,079 $134,202 Add: Stock-based employee compensation expense included in reported net income, net of tax 454 315 870 480 Deduct: Total stock-based employee compensation expense determined under the fair-value-based method for all awards, net of tax (3,796) (3,932) (7,678) (7,873) -------- -------- -------- -------- Pro forma $ 56,881 $ 87,463 $102,271 $126,809 ======== ======== ======== ======== Basic Earnings per Share: As reported $ .37 $ .55 $ .68 $ .81 Pro forma $ .35 $ .53 $ .63 $ .77 Diluted Earnings per Share: As reported $ .37 $ .54 $ .67 $ .79 Pro forma $ .35 $ .52 $ .63 $ .75 In December 2004, the FASB issued SFAS No. 123(R) "Share-Based Payment." SFAS No. 123(R) amends SFAS No. 123 to require that companies record as expense the effect of equity-based compensation, including stock options, over the applicable vesting period. The company currently discloses the effect on income that stock options would have were they recorded as expense. SFAS No. 123(R) also requires more extensive disclosures concerning stock options than required under current standards. The new rule applies to option grants made after adoption as well as options that are not vested at the date of adoption. SFAS No. 123(R) becomes effective no later than fiscal years beginning after June 15, 2005. The company does not currently expect to elect early adoption and has not determined whether it will apply the new standard prospectively in 2006 or restate all periods on a comparable basis. 8. Defined Benefit Pension Plans Several of the company's non-U.S. subsidiaries, principally in Germany and England, and one U.S. subsidiary have defined benefit pension plans covering substantially all full-time employees at those subsidiaries. In addition, Kendro's operations in Germany have defined benefit pension plans. Some of the company's plans are unfunded, as permitted under the plans and applicable laws. Net periodic benefit costs for the plans in aggregate included the following components: Three Months Ended Six Months Ended -------------------------- -------------------------- July 2, July 3, July 2, July 3, (In thousands) 2005 2004 2005 2004 --------------------------------------------------------------------------------------------------------------------------------- Service Cost $ 1,764 $ 1,503 $ 3,460 $ 3,038 Interest Cost on Benefit Obligation 3,349 2,960 6,570 5,985 Expected Return on Plan Assets (2,752) (2,554) (5,554) (5,155) Recognized Net Actuarial Loss 636 632 1,281 1,273 ------- ------- ------- ------- $ 2,997 $ 2,541 $ 5,757 $ 5,141 ======= ======= ======= =======
< 15 > THERMO ELECTRON CORPORATION 8. Defined Benefit Pension Plans (continued) During the second quarter of 2005, the company merged two defined benefit plans in the U.K. and provided the participating employees with a defined contribution plan while limiting future benefits under the combined defined benefit plan. The transaction met the criteria of a plan curtailment although no gain or loss resulted. In connection with the transaction, the company contributed $10.9 million to the combined U.K. defined benefit plan. 9. Swap Arrangement and Debt During 2002, the company entered into interest-rate swap arrangements for its $128.7 million principal amount 7 5/8% senior notes, due in 2008, with the objective of reducing interest costs. The arrangements provide that the company will receive a fixed interest rate of 7 5/8% and will pay a variable rate of 90-day LIBOR plus 2.19% (5.85% as of July 2, 2005). The swaps have terms expiring at the maturity of the debt. The swaps are designated as fair-value hedges and as such, are carried at fair value, which over time has resulted in an increase in other long-term assets and long-term debt totaling $5.0 million at July 2, 2005. The swap arrangements are with different counterparties than the holders of the underlying debt. Management believes that any credit risk associated with the swaps is remote based on the creditworthiness of the financial institutions issuing the swaps. In May 2005, in connection with plans to refinance part of the bridge facility that the company borrowed under for the Kendro acquisition (Note 2), the company entered into forward starting pay fixed swap agreements with several banks to mitigate the risk of interest rates rising prior to completion of a debt offering. Based on the company's conclusion that a debt offering was probable and that such debt will carry semi-annual interest payments over a 10 year term, the swaps hedge the cash flow risk that exists on each of the semi-annual fixed-rate interest payments on $250 million of principal amount of the 10 year fixed rate debt issue (or any subsequent refinancing of such debt). The change in the fair value of the hedge, $2.0 million, net of tax, was classified as a reduction of other comprehensive items within shareholders' equity and is being amortized to interest costs over the term of the debt through 2015. The company repaid in full $570 million of borrowings under its bridge loan with cash and proceeds of new debt issuances described below. On May 27, 2005, the company issued $250 million aggregate principal amount of 5% senior notes (the Notes) due 2015, with an effective interest rate after including the impact of the swap arrangement of 5.27%. Under the Notes' Indenture, the company is subject to certain affirmative and negative covenants. The Notes carry registration rights and provisions that could result in an increase in the interest rate of up to 50 basis points in the event of delays in the registration of the Notes under the Securities Act of 1933. Also on May 27, 2005, the company entered into an arrangement that provides the company an uncommitted line of credit of up to $250 million through a series of short-term money market loans funded on an ongoing basis in the secondary market. Such money market loans have maturity periods of overnight to 364 days and bear varying rates of interest based on the maturity date and market rate at the time of issuance. On May 27, 2005, the company borrowed $250 million through three short-term loans under the money market arrangement with maturities of one week to three months. As of July 2, 2005, the company had outstanding borrowings under this arrangement aggregating $215 million at an average interest rate of 3.45%. On June 30, 2005, the company entered into a five-year revolving credit facility with a bank group that provides up to 175 million euros. The facility carries interest at a Euribor rate plus 35 basis points. Under the facility, borrowings of one to six months duration may be drawn. The agreement contains affirmative, negative and financial covenants and events of default customary for financings of this type. The financial covenants include interest coverage and debt-to-capital ratios. No borrowings were outstanding under the facility on July 2, 2005, however, on July 6, 2005, the company borrowed 150 million euros ($179 million) in three tranches with maturities of one to six months and with an initial interest rate of 2.45%. A portion of the proceeds was used to repay $135 million of the short-term money market loans outstanding at July 2, 2005. < 16 > THERMO ELECTRON CORPORATION 10. Warranty Obligations Product warranties are included in other accrued expenses in the accompanying balance sheet. The changes in the carrying amount of warranty obligations are as follows:
Six Months Ended --------------------- July 2, July 3, (In thousands) 2005 2004 --------------------------------------------------------------------------------------------------------------------------------- Beginning Balance $ 27,369 $ 25,645 Provision charged to income 11,915 9,257 Usage (10,856) (8,016) Acquisitions 6,002 - Adjustments to previously provided warranties, net (1,603) (2,206) Other, net (a) (1,951) 72 -------- -------- Ending Balance $ 30,876 $ 24,752 ======== ======== (a) Primarily represents the effects of currency translation.
11. Restructuring and Other Costs (Income), 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 2005 are primarily for charges associated with actions initiated prior to 2005 that could not be recorded until incurred and adjustments to previously provided reserves due to changes in estimates of amounts due for abandoned facilities, net of expected sub-tenant rental income. The company expects to incur an additional $0.5 million of restructuring costs through the remainder of 2005 for charges associated with the pre-2005 actions that cannot be recorded until incurred. The restructuring actions undertaken in 2003 and 2004 were substantially complete at the end of 2004. In connection with the acquisition of Kendro, the company expects to undertake restructuring actions at both acquired and existing facilities. When determined, 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. During the second quarter of 2005, the company recorded net restructuring and other costs (income) by segment as follows:
Life and Laboratory Measurement (In thousands) Sciences and Control Other Corporate Total -------------------------------------------------------------------------------------------------------------------------------- Cost of Revenues $11,232 $ 233 $ - $ - $11,465 Restructuring and Other Costs (Income), Net (160) 2,168 (502) 710 2,216 ------- ------- -------- ------- ------- $11,072 $ 2,401 $ (502) $ 710 $13,681 ======= ======= ======== ======= ======= < 17 > THERMO ELECTRON CORPORATION 11. Restructuring and Other Costs (Income), Net (continued) During the first six months of 2005, the company recorded net restructuring and other costs (income) by segment as follows: Life and Laboratory Measurement (In thousands) Sciences and Control Other Corporate Total -------------------------------------------------------------------------------------------------------------------------------- Cost of Revenues $11,232 $ 233 $ - $ - $11,465 Restructuring and Other Costs (Income), Net (1,894) 3,202 (573) 1,210 1,945 ------- ------- -------- ------- ------- $ 9,338 $ 3,435 $ (573) $ 1,210 $13,410 ======= ======= ======== ======= =======
The components of net restructuring and other costs (income) by segment are as follows: Life and Laboratory Sciences ---------------------------- The Life and Laboratory Sciences segment recorded $11.1 million of net restructuring and other charges in the second quarter of 2005. The segment recorded charges to cost of revenues of $11.2 million for the sale of inventories revalued at the date of acquisition, and $0.2 million of net restructuring and other income. This amount consisted of $1.0 million of cash costs, principally associated with facility consolidations, including $0.9 million of severance for 11 employees across all functions; and $0.1 million of net abandoned-facility costs, primarily for charges associated with facilities vacated in prior periods that could not be recorded until incurred. These costs are net of a gain on the sale of an abandoned building in Colorado of $1.3 million. In the first quarter of 2005, this segment recorded $1.7 million of net restructuring and other income. This amount consisted of $0.8 million of cash costs, principally associated with facility consolidations, including $0.5 million of severance for 31 employees across all functions; $0.2 million of net abandoned-facility costs, primarily for charges associated with facilities vacated in prior periods that could not be recorded until incurred; and $0.1 million of other cash costs, primarily relocation expenses. The costs are net of $2.5 million of net gains on the sale of three abandoned buildings in the U.S. and Germany. Measurement and Control ----------------------- The Measurement and Control segment recorded $2.4 million of net restructuring and other charges in the second quarter of 2005. The segment recorded charges to cost of revenues of $0.2 million for the sale of inventories revalued at the date of acquisition, and $2.2 million of cash costs. These cash costs are principally associated with facility consolidations, including $1.3 million of net abandoned-facility costs, primarily for revised estimates of costs associated with facilities vacated in prior periods and, to a lesser extent, costs that could not be recorded until incurred; $0.8 million of severance for 12 employees, primarily in sales and service functions; and $0.1 million of other cash costs, primarily retention and relocation expenses. In the first quarter of 2005, this segment recorded $1.0 million of net restructuring and other charges. These costs consisted of $1.1 million of cash costs, principally associated with facility consolidations, including $1.0 million of net abandoned-facility costs, primarily for revised estimates of costs associated with facilities vacated in prior periods and costs that could not be recorded until incurred, and $0.1 million of severance for 8 employees, primarily in sales and service functions. The segment recorded a gain of $0.1 million on the sale of a small product line in England for cash proceeds of $4.6 million. < 18 > THERMO ELECTRON CORPORATION 11. Restructuring and Other Costs (Income), Net (continued) Other ----- The company recorded a gain of $0.5 million in the second quarter of 2005 as a result of revising its estimate of lease obligations due to sub-leasing an abandoned facility of a divested business. Corporate --------- The company recorded $0.7 million of restructuring and other charges at its corporate offices in the second quarter of 2005, all of which were cash costs. In the first quarter of 2005, the company recorded $0.5 million of restructuring and other charges at its corporate offices, all of which were cash costs. The cash costs were primarily for severance for 15 employees. General ------- The following table summarizes the company's severance actions in 2005.
Number of 2003 Restructuring Plans Employees -------------------------------------------------------------------------------------------------------------------------------- Remaining Terminations at December 31, 2004 48 Terminations Announced in 2005 3 Terminations Occurring to Date in 2005 (12) Adjustments to Plan (12) --- Remaining Terminations at July 2, 2005 27 === Number of 2004 Restructuring Plans Employees -------------------------------------------------------------------------------------------------------------------------------- Remaining Terminations at December 31, 2004 30 Terminations Announced in 2005 57 Terminations Occurring to Date in 2005 (71) Adjustments to Plan (2) --- Remaining Terminations at July 2, 2005 14 === Number of 2005 Restructuring Plans Employees -------------------------------------------------------------------------------------------------------------------------------- Terminations Announced in 2005 17 Terminations Occurring to Date in 2005 (14) --- Remaining Terminations at July 2, 2005 3 ===
< 19 > THERMO ELECTRON CORPORATION 11. Restructuring and Other Costs (Income), 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 2005 statement of income have been summarized in the notes to the table. Accrued restructuring costs are included in other accrued expenses in the accompanying balance sheet.
Abandonment Employee of Excess (In thousands) Severance Retention (a) Facilities Other Total -------------------------------------------------------------------------------------------------------------------------------- Pre-2004 Restructuring Plans Balance at December 31, 2004 $ 2,285 $ 63 $ 9,525 $ 26 $11,899 Costs incurred in 2005 (b) 38 - 2,386 91 2,515 Reserves reversed (359) - (372) - (731) Payments (644) (63) (2,856) (96) (3,659) Currency translation (139) - (437) - (576) ------- ------- ------- ------- ------- Balance at July 2, 2005 $ 1,181 $ - $ 8,246 $ 21 $ 9,448 ======= ======= ======= ======= ======= 2004 Restructuring Plans Balance at December 31, 2004 $ 3,517 $ - $ 301 $ 102 $ 3,920 Costs incurred in 2005 (b) 1,666 - 220 133 2,019 Reserves reversed - - - - - Payments (3,995) - (283) (176) (4,454) Currency translation (305) - (28) (1) (334) ------- ------- ------- ------- ------- Balance at July 2, 2005 $ 883 $ - $ 210 $ 58 $ 1,151 ======= ======= ======= ======= ======= 2005 Restructuring Plans Costs incurred in 2005 (b) $ 2,008 $ 20 $ - $ 35 $ 2,063 Payments (1,142) (20) - (34) (1,196) Currency translation (27) - - (1) (28) ------- ------- ------- ------- ------- Balance at July 2, 2005 $ 839 $ - $ - $ - $ 839 ======= ======= ======= ======= ======= (a) Employee-retention costs are accrued ratably over the period through which employees must work to qualify for a payment. (b) Excludes net gains of $3.9 million from the sale of four abandoned buildings in the Life and Laboratory Sciences segment and $0.1 million from the sale of a small product line in the Measurement and Control segment.
The company expects to pay accrued restructuring costs as follows: severance, primarily through 2007; employee-retention obligations and other costs, primarily through 2005; and abandoned-facility payments, over lease terms expiring through 2012. < 20 > THERMO ELECTRON CORPORATION 12. Litigation In September 2004, Applera Corporation, MDS Inc. and Applied Biosystems/MDS Scientific Instruments filed a lawsuit alleging that the company's mass spectrometer systems infringe a patent of the plaintiffs. The plaintiffs seek damages, including treble damages for alleged willful infringement, attorneys' fees, prejudgment interest and injunctive relief. The company has been named a defendant, along with many other companies, in a patent-infringement lawsuit brought by the Lemelson Medical, Education & Research Foundation, L.P. The suit asserts that products manufactured, used, or sold by the defendants infringe one or more patents related to methods of machine vision or computer-image analysis. The company intends to vigorously defend these matters. In the opinion of management, an unfavorable outcome of either or both of these matters could have a material adverse effect on the company's financial position as well as its results of operations and cash flows. On December 8, 2004 and February 23, 2005, the company asserted in two lawsuits against a combination of Applera Corporation, MDS Inc. and Applied Biosystems/MDS Scientific Instruments that these parties infringe two patents of the company. The company's continuing and discontinued operations are a defendant in a number of other pending legal proceedings incidental to present and former operations. The company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its financial position, results of operations, or cash flows. 13. Discontinued Operations In the second quarter of 2005, the company settled litigation and received proceeds from an arbitration award related to divested businesses. In addition, the company recorded an increase in the net realizable value of a building held for sale after entering an agreement to sell the facility. The building had previously been written down to estimated disposal value. As a result of these transactions, the company recorded an after-tax gain on the disposal of discontinued operations of $3.5 million. In the first quarter of 2005, the company recorded after-tax gains of $3.3 million from the disposal of discontinued operations. The gains represent additional proceeds from the sale of businesses divested prior to 2004, including the sale of abandoned real estate and post-closing adjustments. In the second quarter of 2004, the company's discontinued operations (Spectra-Physics) had revenues of $55.4 million and net income of $40.5 million, including a tax benefit of $36.9 million. In the first six months of 2004, the company's discontinued operations had revenues of $112.4 million and net income of $44.0 million, including a tax benefit of $35.8 million. Current liabilities of discontinued operations in the accompanying balance sheet includes obligations for abandoned leases, litigation, severance and related obligations of previously owned businesses. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------------------------- Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934, are made throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "seeks," "estimates" and similar expressions are intended to identify forward-looking statements. While < 21 > THERMO ELECTRON CORPORATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations (continued) -------------------------------------------------------------------------------- the company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the company's estimates change, and readers should not rely on those forward-looking statements as representing the company's views as of any date subsequent to the date of the filing of this Quarterly Report. There are a number of important factors that could cause the actual results of the company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading "Forward-looking Statements" in this report on Form 10-Q. Overview of Results of Operations and Liquidity The company develops and manufactures a broad range of products that are sold worldwide. The company expands the product lines and services it offers by developing and commercializing its own core technologies and by making strategic acquisitions of complementary businesses. In July 2004, the company sold Spectra-Physics, its optical technologies segment. The company's continuing operations fall into two principal business segments: Life and Laboratory Sciences and Measurement and Control.
Revenues Three Months Ended Six Months Ended -------------------------------------------- -------------------------------------------- (Dollars in thousands) July 2, 2005 July 3, 2004 July 2, 2005 July 3, 2004 ----------------------------------------------------------------------------------------------------------------------------------- Life and Laboratory Sciences $ 487,462 74.6% $ 369,823 70.4% $ 880,767 72.6% $ 735,289 70.0% Measurement and Control 166,159 25.4% 155,486 29.6% 332,062 27.4% 315,052 30.0% ---------- ----- ---------- ----- ---------- ----- --------- ----- $ 653,621 100% $ 525,309 100% $1,212,829 100% $1,050,341 100% ========== ===== ========== ===== ========== ===== ========= =====
The company's revenues grew by 24% during the second quarter of 2005 over the same period in 2004. The strengthening of non-U.S. currencies relative to the dollar caused an increase in reported revenues as did acquisitions, net of divestitures. Aside from currency translation and the effect of acquisitions, net of divestitures, revenues increased $35.3 million or 7%, as a result of increased demand in each of the company's principal businesses and, to a lesser extent, increased prices. The company's strategy is to augment internal growth at existing businesses with complementary acquisitions such as those completed in 2005 (Note 2) and 2004. The principal acquisitions included the Kendro Laboratory Products division of SPX Corporation, a provider of a wide range of laboratory equipment for sample preparation, processing and storage, which was acquired in May 2005; Rupprecht and Patashnick Co., Inc. (R&P), a provider of continuous particulate monitoring instrumentation for the ambient air, emissions monitoring and industrial hygiene markets, which was acquired in April 2005; Niton LLC, a provider of portable X-ray analyzers to the metals, petrochemical and environmental markets, which was acquired in March 2005; InnaPhase Corporation, a supplier of laboratory information management systems for the pharmaceutical and biotechnology markets, which was acquired in September 2004; and US Counseling Services, Inc. (USCS), a supplier of equipment asset management services to the pharmaceutical, healthcare and related industries, which was acquired in April 2004. In the second quarter of 2005, the company's operating income and operating income margin decreased to $53.2 million and 8.1%, respectively, from $59.0 million and 11.2%, respectively, in 2004. (Operating income margin is operating income divided by revenues.) The decrease resulted primarily from $13.5 million of higher amortization expense associated with acquisition-related intangible assets and $11.1 million of higher charges to cost of revenues, primarily for the sale of inventories revalued at the date of acquisition. The effect of these items was offset in part by higher profitability from increased revenues. < 22 > THERMO ELECTRON CORPORATION Overview of Results of Operations and Liquidity (continued) Income from continuing operations increased to $56.8 million in the second quarter of 2005 from $50.6 million in the second quarter of 2004, primarily due to gains on the sale of investments, offset in part by the lower operating income discussed above. During the first six months of 2005, the company's cash flow from operations totaled $89.0 million, compared with $105.1 million in the first six months of 2004. The decrease resulted primarily from a $40.5 million investment in working capital in 2005, principally a reduction in other current liabilities and an increase in inventories, compared with a $21.6 million investment in working capital in the first six months of 2004. As of July 2, 2005, the company's outstanding debt totaled $701.2 million, of which 65% is due in 2007 and thereafter. The company believes that its existing cash and short-term investments, future cash flow from operations, and available borrowings of up to $250 million under its existing 5-year revolving credit agreement will be sufficient to meet its capital requirements for the foreseeable future, including at least the next 24 months. Critical Accounting Policies The company's discussion and analysis of its financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent liabilities. On an on-going basis, the company evaluates its estimates, including those related to bad debts, inventories, intangible assets, warranty obligations, income taxes, pension costs, contingencies and litigation, restructuring and sale of businesses. The company bases its estimates on historical experience, current market and economic conditions and other assumptions that management believes are reasonable. The results of these estimates form the basis for judgments about the carrying value of assets and liabilities where the values are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The company had no changes in its critical accounting policies from those described in its Form 10-Q for the quarter ended April 2, 2005. Results of Operations Second Quarter 2005 Compared With Second Quarter 2004 ----------------------------------------------------- Continuing Operations Sales in the second quarter of 2005 were $653.6 million, an increase of $128.3 million from the second quarter of 2004. Sales increased $83.7 million due to acquisitions, net of divestitures. The favorable effects of currency translation resulted in an increase in revenues of $9.3 million in 2005. Aside from currency translation and the effect of acquisitions, net of divestitures, revenues increased $35.3 million, or 7%, due primarily to a broad-based increase in demand in each of the company's principal businesses and, to a lesser extent, increased prices. Sales were particularly strong in Asia while European markets also rebounded from flat performance in recent periods. < 23 > THERMO ELECTRON CORPORATION Second Quarter 2005 Compared With Second Quarter 2004 (continued) -----------------------------------------------------
Operating Income Margin Three Months Ended ---------------------- July 2, July 3, 2005 2004 ---------------------------------------------------------------------------------------------------------------------------------- Life and Laboratory Sciences 10.1% 14.4% Measurement and Control 7.3% 8.0% Consolidated 8.1% 11.2%
Operating income was $53.2 million in the second quarter of 2005, compared with $59.0 million in the second quarter of 2004. Operating income margin decreased to 8.1% in 2005 from 11.2% in 2004. Operating income decreased primarily due to $13.5 million of higher amortization expense for acquisition-related intangible assets and $11.1 million of higher charges to cost of revenues, primarily for the sale of inventories revalued at the date of acquisition. Following the acquisitions completed in the second quarter of 2005, the company expects amortization of acquisition-related intangible assets will total approximately $25 million per quarter in the third quarter of 2005 and thereafter. Restructuring actions were initiated in 2003 and, to a lesser extent, in 2004 and 2005 in a number of business units to reduce costs and redundancies in response to a downturn in markets served by the company and in connection with the company's overall reorganization, principally through headcount reductions and consolidation of facilities. The company expects to incur an additional $0.5 million of restructuring costs, primarily in 2005, for charges associated with these actions that cannot be recorded until incurred. The company is evaluating potential restructuring actions that may be undertaken at Kendro or within existing businesses with which Kendro is being integrated. Such actions may include rationalizing product lines, consolidation of facilities and reductions in staffing levels. The actions at acquired facilities will be recorded as a cost of the acquisition through an increase to goodwill. The actions at existing facilities will be charged to expense. The company has not finalized its plans for integrating Kendro with its existing business but expects that charges to expense will total $10-$20 million.
Life and Laboratory Sciences Three Months Ended ---------------------------------- July 2, July 3, (Dollars in thousands) 2005 2004 Change ------------------------------------------------------------------------------------------------------------------------------- Revenues $487,462 $369,823 31.8% Operating Income Margin 10.1% 14.4% (4.3) Sales in the Life and Laboratory Sciences segment increased $117.6 million, or 32%, to $487.5 million in the second quarter of 2005. Sales increased $83.4 million due to the acquisitions of Kendro in May 2005, Niton in March 2005, InnaPhase in September 2004 and USCS in April 2004, net of a product line divestiture. The favorable effects of currency translation resulted in an increase in revenues of $6.9 million in 2005. Excluding the changes in revenues resulting from currency translation, acquisitions and a divestiture, revenues increased $27.4 million, or 8%, due to a broad-based increase in demand from life science and industrial customers. The increase in revenues was, to a lesser extent, due to price increases. < 24 > THERMO ELECTRON CORPORATION Second Quarter 2005 Compared With Second Quarter 2004 (continued) ----------------------------------------------------- Operating income margin was 10.1% in the second quarter of 2005 and 14.4% in the second quarter of 2004. The decrease in operating income margin was due in part to an increase in amortization expense of acquisition-related intangible assets of $12.8 million. Operating income margin was also affected by restructuring and other costs, net, of $11.1 million in 2005 and restructuring and other income, net, of $0.5 million in 2004. The costs in 2005 were principally charges to cost of revenues for the sale of inventories revalued at the date of acquisition. In the second quarter of 2005, the segment recorded restructuring and other costs, net, of $11.1 million, primarily the charges to cost of revenues described above. In addition, $1.0 million of cash costs for severance and abandoned facility costs for businesses that have been consolidated were offset by a gain of $1.3 million from the sale of real estate (Note 11). In 2004, the segment recorded restructuring and other income, net, of $0.5 million, including a gain of $2.6 million on the sale of a product line. This gain was offset in part by $1.8 million of cash costs, primarily for severance, abandoned facilities and relocation expenses at businesses being consolidated and charges to costs of revenues of $0.3 million, primarily for accelerated depreciation on manufacturing equipment that was abandoned as a result of site consolidations. Measurement and Control Three Months Ended ---------------------------------- July 2, July 3, (Dollars in thousands) 2005 2004 Change ------------------------------------------------------------------------------------------------------------------------------- Revenues $166,159 $155,486 6.9% Operating Income Margin 7.3% 8.0% (0.7)
Sales in the Measurement and Control segment increased $10.7 million, or 7%, to $166.2 million in the second quarter of 2005. The favorable effects of currency translation resulted in an increase in revenues of $2.4 million in 2005. Sales increased $0.4 million due to acquisitions, net of a divestiture. In addition to the changes in revenue resulting from currency translation, acquisitions and a divestiture, revenues increased $7.9 million, or 5%. The increase was primarily the result of higher demand from industrial customers, particularly in Asia, and customers purchasing instruments for use in environmental and security applications. Operating income margin decreased to 7.3% in 2005 from 8.0% in 2004. The decrease in operating income margin resulted primarily from $1.0 million of higher restructuring and other costs and $0.7 million of higher amortization expense associated with acquisition-related intangible assets. In the second quarter of 2005, the segment recorded restructuring and other costs, net, of $2.4 million, including $2.2 million of cash costs, principally for previously abandoned facilities at businesses being consolidated (Note 11) and $0.2 million of charges to cost of revenues for the sale of inventories revalued at the date of acquisition. In 2004, the segment recorded restructuring and other costs, net, of $1.4 million, including cash costs of $1.3 million, principally for abandoned facilities, severance and relocation expenses at businesses that were consolidated. In addition, the segment recorded charges to cost of revenues of $0.1 million for the sale of inventories revalued at the date of acquisition. Other Income, Net ----------------- The company reported other income, net, of $25.5 million and $10.7 million in the second quarter of 2005 and 2004, respectively (Note 4). Other income, net, includes interest income, interest expense, gain on investments, net, and other items, net. Interest income increased to $2.6 million in 2005 from $1.7 million in 2004, primarily due to higher invested cash balances following the sale of Spectra-Physics in July 2004 and, to a lesser extent, < 25 > THERMO ELECTRON CORPORATION Second Quarter 2005 Compared With Second Quarter 2004 (continued) ----------------------------------------------------- increased market interest rates, offset in part by cash used to fund acquisitions. Interest expense increased to $7.3 million in 2005 from $2.7 million in 2004 as a result of debt used to partially fund the acquisition of Kendro and, to a lesser extent, higher rates associated with the company's variable rate debt. During the second quarter of 2005 and 2004, the company had gains on investments, net, of $29.8 million and $10.8 million, respectively. The gains included $28.9 million and $8.0 million in 2005 and 2004, respectively, from the sale of shares of Thoratec Corporation and a loss of $1.3 million in 2005 on the sale of shares of Newport Corporation. Following these sales, the company no longer owned shares of Thoratec or Newport. Provision for Income Taxes -------------------------- The company's effective tax rate was 27.9% and 27.4% in the second quarter of 2005 and 2004, respectively. The increase in the effective tax rate resulted primarily from higher projected income in higher-tax jurisdictions following the acquisition of Kendro. 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 these changes but does not expect a material net impact on its tax provision. On July 20, 2005, the United Kingdom enacted legislation, retroactive to March 15, 2005, that eliminates a tax benefit associated with certain debt arrangements among subsidiaries where the debt arrangements lack business purpose. Although the company believes that its existing U.K. finance structure has business purpose, in the event that U.K. Inland Revenue were to determine that the debt arrangements among the subsidiaries lack business purpose, the company's effective tax rate would increase. The benefit from the company's U.K. finance structure that is potentially affected by this law change is reducing the company's estimated 2005 effective tax rate by 2.6 percentage points. Contingent Liabilities ---------------------- At July 2, 2005, the company was contingently liable with respect to certain lawsuits. An unfavorable outcome in either of the matters described in the first two paragraphs of Note 12 could materially affect the company's financial position as well as its results of operations and cash flows. Discontinued Operations In the second quarter of 2005, the company settled litigation and received proceeds from an arbitration award related to divested businesses. In addition, the company recorded an increase in the net realizable value of a building held for sale after entering an agreement to sell the facility. As a result of these transactions, the company recorded an after-tax gain on the disposal of discontinued operations of $3.5 million. In the second quarter of 2004, the company's discontinued operations (Spectra-Physics) had revenues of $55.4 million and net income of $40.5 million, including a tax benefit of $36.9 million. The company sold Spectra-Physics in July 2004. First Six Months 2005 Compared With First Six Months 2004 --------------------------------------------------------- Continuing Operations Sales in the first six months of 2005 were $1,212.8 million, an increase of $162.5 million from the first six months of 2004. Sales increased $108.5 million due to acquisitions, net of divestitures. The favorable effects of currency translation resulted in an increase in revenues of $20.8 million in 2005. Aside from currency translation and the effect of acquisitions, net of divestitures, revenues increased $33.2 million, or 3%. A broad-based increase occurred in second quarter demand after flat performance in the first quarter. < 26 > THERMO ELECTRON CORPORATION First Six Months 2005 Compared With First Six Months 2004 (continued) ---------------------------------------------------------
Operating Income Margin Six Months Ended --------------------- July 2, July 3, 2005 2004 --------------------------------------------------------------------------------------------------------------------------------- Life and Laboratory Sciences 11.5% 13.6% Measurement and Control 9.2% 8.4% Consolidated 9.3% 10.6%
Operating income was $112.9 million in the first six months of 2005, compared with $111.8 million in the first six months of 2004. Operating income increased due to higher sales including revenues from acquisitions, substantially offset by the items discussed below. Operating income margin decreased to 9.3% in 2005 from 10.6% in 2004. Operating income margin decreased primarily due to $17.1 million of higher amortization expense for acquisition-related intangible assets and $8.7 million of higher charges to cost of revenues, primarily for the sale of inventories revalued at the date of acquisition.
Life and Laboratory Sciences Six Months Ended ---------------------------------- July 2, July 3, (Dollars in thousands) 2005 2004 Change -------------------------------------------------------------------------------------------------------------------------------- Revenues $880,767 $735,289 19.8% Operating Income Margin 11.5% 13.6% (2.1) Sales in the Life and Laboratory Sciences segment increased $145.5 million, or 20%, to $880.8 million in the first six months of 2005. Sales increased $108.7 million due to the acquisitions of Kendro in May 2005, Niton in March 2005, InnaPhase in September 2004 and USCS in April 2004, net of a product line divestiture. The favorable effects of currency translation resulted in an increase in revenues of $15.5 million in 2005. Excluding the changes in revenues resulting from currency translation, acquisitions and a divestiture, revenues increased $21.3 million, or 3%, due to broad-based higher demand from life science and industrial customers in the second quarter of 2005, following flat demand in the first quarter of 2005. Operating income margin was 11.5% in the first six months of 2005 and 13.6% in the first six months of 2004. Operating income margin decreased due to $16.3 million of higher amortization expense associated with acquisition- related intangible assets. Operating income margin was also affected by restructuring and other costs, net, of $9.3 million in 2005 and $3.3 million in 2004, as discussed below. These decreases were offset in part by higher profitability due to increased revenues. In 2005, the segment recorded restructuring and other costs, net, of $9.3 million. The segment had $8.6 million of higher charges to cost of revenues, primarily for the sale of inventories revalued at the date of acquisition. The segment incurred $1.9 million of cash costs, primarily for severance, abandoned facilities and relocation expenses at businesses that have been consolidated. These costs were offset by $3.9 million of net gains on the sale of four abandoned buildings (Note 11). In 2004, the segment recorded restructuring and other costs, net, of $3.3 million, including charges to cost of revenues of $2.6 million, primarily for the sale of inventories revalued at the date of acquisition, and $2.9 million of cash costs, primarily for severance, abandoned facilities and relocation expenses at businesses being consolidated. In addition, the segment recorded a gain of $2.6 million on the sale of a product line and a loss of $0.4 million from the sale of two abandoned buildings. < 27 > THERMO ELECTRON CORPORATION First Six Months 2005 Compared With First Six Months 2004 (continued) --------------------------------------------------------- Measurement and Control Six Months Ended ---------------------------------- July 2, July 3, (Dollars in thousands) 2005 2004 Change -------------------------------------------------------------------------------------------------------------------------------- Revenues $332,062 $315,052 5.4% Operating Income Margin 9.2% 8.4% 0.8
Sales in the Measurement and Control segment increased $17.0 million, or 5%, to $332.1 million in the first six months of 2005. The favorable effects of currency translation resulted in an increase in revenues of $5.3 million in 2005. Sales decreased $0.2 million due to a divestiture, net of acquisitions. In addition to the changes in revenue resulting from currency translation, a divestiture and acquisitions, revenues increased $11.9 million, or 4%. The increase was primarily the result of higher demand from industrial customers, particularly in Asia, and customers purchasing instruments for use in environmental and security applications. Operating income margin increased to 9.2% in 2005 from 8.4% in 2004. The increase in operating income margin resulted primarily from higher sales volumes, offset in part by $0.8 million of higher amortization expense associated with acquisition-related intangible assets and $0.8 million of higher restructuring and other costs, as discussed below. In the first six months of 2005, the segment recorded restructuring and other costs, net, of $3.4 million, including $3.3 million of cash costs, principally for previously abandoned facilities at businesses being consolidated (Note 11). In addition, the segment had $0.2 million of charges to cost of revenues for the sale of inventories revalued at the date of acquisition and $0.1 million of a gain on the sale of a product line. In 2004, the segment recorded restructuring and other costs, net, of $2.6 million, including cash costs of $2.4 million, principally for abandoned facilities, severance and relocation expenses at businesses that were consolidated. In addition, the segment recorded charges of $0.1 million, primarily for the writedown of equipment at an abandoned facility, and charges to cost of revenues of $0.1 million for the sale of inventories revalued at the date of acquisition. Other Income, Net ----------------- The company reported other income, net, of $28.8 million and $13.3 million in the first six months of 2005 and 2004, respectively (Note 4). Other income, net, includes interest income, interest expense, gain on investments, net, and other items, net. Interest income increased to $5.9 million in 2005 from $3.6 million in 2004, primarily due to higher invested cash balances following the sale of Spectra-Physics in July 2004 and, to a lesser extent, increased market interest rates, offset in part by cash used to fund acquisitions. Interest expense increased to $10.4 million in 2005 from $5.4 million in 2004 as a result of debt used to partially fund the Kendro acquisition and, to a lesser extent, higher rates associated with the company's variable rate debt. During the first six months of 2005 and 2004, the company had gains on investments, net, of $32.1 million and $13.5 million, respectively. The gains included $28.9 million and $9.6 million in 2005 and 2004 from the sale of shares of Thoratec and a loss of $1.3 million in 2005 from the sale of shares of Newport. Provision for Income Taxes -------------------------- The company's effective tax rate was 27.8% and 27.9% in the first six months of 2005 and 2004, respectively. < 28 > THERMO ELECTRON CORPORATION First Six Months 2005 Compared With First Six Months 2004 (continued) --------------------------------------------------------- Discontinued Operations In the first six months of 2005, the company recorded after-tax gains of $6.7 million from the disposal of discontinued operations. The gains arose from the settlement of litigation, an increase in the net realizable value of an abandoned facility for which a sale agreement was reached and additional proceeds from the sale of businesses divested prior to 2004, including the sale of abandoned real estate and post-closing adjustments. In the first six months of 2004, the company's discontinued operations (Spectra-Physics) had revenues of $112.4 million and net income of $44.0 million, including a tax benefit of $35.8 million. The company sold Spectra-Physics in July 2004. Liquidity and Capital Resources First Six Months 2005 --------------------- Consolidated working capital was $450.1 million at July 2, 2005, compared with $890.9 million at December 31, 2004. Included in working capital were cash, cash equivalents and short-term available-for-sale investments of $170.8 million at July 2, 2005, compared with $512.3 million at December 31, 2004. The decrease results primarily from use of cash, cash equivalents, short-term available-for-sale investments and short-term debt to partially fund the Kendro acquisition. Cash provided by operating activities was $89.0 million during the first six months of 2005, including $90.6 million provided by continuing operations and $1.6 million used by discontinued operations. The company used cash of $15.2 million to increase inventories, particularly mass spectrometry and spectroscopy instruments, for new product introductions and expansion of operations in China. A reduction in other current liabilities used $22.2 million of cash in the first six months of 2005, including approximately half for annual incentive compensation that was paid in the first quarter. The company contributed $10.9 million of funding to a U.K. pension plan in June 2005 (Note 8). Payments for restructuring actions of the company's continuing operations, principally severance, lease costs and other expenses of real estate consolidation, used cash of $9.3 million in the first six months of 2005. In connection with restructuring actions undertaken by continuing operations, the company had accrued $11.4 million for restructuring costs at July 2, 2005. The company expects to pay approximately $2.9 million of this amount for severance primarily through 2005. The balance of $8.5 million will be paid for lease obligations over the remaining terms of the leases, with approximately 70% to be paid through 2006 and the remainder through 2012. In addition, at July 2, 2005, the company had accrued $5.0 million for acquisition expenses. Accrued acquisition expenses included $1.6 million of severance and relocation obligations, which the company expects to pay primarily through 2005. The balance primarily represents abandoned-facility payments that will be paid over the remaining terms of the leases through 2014. During the first six months of 2005, the primary investing activities of the company's continuing operations, excluding available-for-sale investment activities, included acquisitions and the purchase and sale of property, plant and equipment. The company expended $914.9 million, net of cash acquired, for the acquisitions of Niton, R&P and Kendro (Note 2). The company expended $16.4 million for purchases of property, plant and equipment and had proceeds from the sale of property, principally abandoned real estate, of $9.5 million. The company's financing activities provided $473.2 million of cash during the first six months of 2005, principally issuance of $250 million senior notes due in 2015 and a net increase in short-term borrowings of $219.2 million. < 29 > THERMO ELECTRON CORPORATION First Six Months 2005 (continued) --------------------- The company repaid in full $570 million of borrowings under its bridge loan with cash and proceeds of new debt issuances described below. On May 27, 2005, the company issued $250 million aggregate principal amount of 5% senior notes (the Notes) due 2015, with an effective interest rate after including the impact of an interest swap arrangement of 5.27%. Under the Notes' Indenture, the company is subject to certain affirmative and negative covenants. The Notes carry registration rights and provisions that could result in an increase in the interest rate of up to 50 basis points in the event of delays in the registration of the Notes under the Securities Act of 1933. Also on May 27, 2005, the company entered into an arrangement that provides the company an uncommitted line of credit of up to $250 million through a series of short-term money market loans funded on an ongoing basis in the secondary market. Such money market loans have maturity periods of overnight to 364 days and bear varying rates of interest based on the maturity date and market rate at the time of issuance. On May 27, 2005, the company borrowed $250 million through three short-term loans under the money market arrangement with maturities of one week to three months. As of July 2, 2005, the company had outstanding borrowings under this arrangement aggregating $215 million at an average interest rate of 3.45%. On June 30, 2005, the company entered into a five-year revolving credit facility with a bank group that provides up to 175 million euros. The facility carries interest at a Euribor rate plus 35 basis points. Under the facility, borrowings of one to six months duration may be drawn. The agreement contains affirmative, negative and financial covenants and events of default customary for financings of this type. The financial covenants include interest coverage and debt-to-capital ratios. No borrowings were outstanding under the facility on July 2, 2005, however, on July 6, 2005, the company borrowed 150 million euros ($179 million) in three tranches with maturities of one to six months and with an initial interest rate of 2.45%. A portion of the proceeds was used to repay $135 million of the short-term money market loans outstanding at July 2, 2005. The company has no material commitments for purchases of property, plant and equipment and expects that for all of 2005, such expenditures will approximate $48 - $52 million and its contractual obligations and other commercial commitments did not change materially between December 31, 2004 and July 2, 2005. The company believes that its existing cash and short-term investments; future cash flow from operations; and available borrowings of up to $250 million under its existing 5-year revolving credit agreement will be sufficient to meet its capital requirements for the foreseeable future, including at least the next 24 months. First Six Months 2004 --------------------- Cash provided by operating activities was $105.1 million during the first six months of 2004, including $95.2 million provided by continuing operations and $9.9 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 $9.4 million in the first six months of 2004. Inventories increased $25.7 million, due in part to increased production of mass spectrometry and spectroscopy instruments in response to higher demand for these products. Cash provided by discontinued operations of $9.9 million principally represents the positive cash flow of Spectra-Physics, offset in part by payment of liabilities from businesses sold prior to 2003, including settlement of litigation and lease payments on abandoned facilities. < 30 > THERMO ELECTRON CORPORATION First Six Months 2004 (continued) --------------------- During the first six months of 2004, the primary investing activities of the company's continuing operations, excluding available-for-sale investment activities, included the acquisition of USCS for $75.7 million, net of cash acquired, and the purchase of property, plant and equipment. The company's continuing operations expended $22.1 million for purchases of property, plant and equipment and had proceeds from the sale of property of $3.4 million. The company's financing activities used $49.7 million of cash during the first six months of 2004, principally for continuing operations. During the first quarter of 2004, the company's continuing operations received net proceeds of $40.9 million from the exercise of employee stock options. In addition, the company expended $82.0 million to repurchase 3.1 million shares of the company's common stock and $8.1 million to reduce short-term notes payable. Item 3 - Quantitative and Qualitative Disclosures About Market Risk ------------------------------------------------------------------- The company is exposed to market risk from changes in interest rates, currency exchange rates and equity prices, which could affect its results of operations and financial condition. The company increased its LIBOR-based borrowings following the Kendro acquisition (Note 9). A 100-basis-point increase in 90-day LIBOR at July 2, 2005, would increase the company's annual pre-tax interest expense by $3 million. During the second quarter of 2005, the company sold substantially all of its available-for-sale equity investments (Note 4). A 10% decrease in July 2, 2005 market equity prices would result in an immaterial impact on the net fair value of the company's remaining price sensitive equity financial instruments. Except as described above, the company's exposure to market risk from interest rates and currency exchange rates has not changed materially from its exposure at year-end 2004. Item 4 - Controls and Procedures -------------------------------- The company's management, with the participation of the company's chief executive officer and chief financial officer, evaluated the effectiveness of the company's disclosure controls and procedures as of July 2, 2005. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the company's disclosure controls and procedures as of July 2, 2005, the company's chief executive officer and chief financial officer concluded that, as of such date, the company's disclosure controls and procedures were effective at the reasonable assurance level. There have been no changes in the company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal quarter ended July 2, 2005, that have materially affected or are reasonably likely to materially affect the company's internal control over financial reporting. The company acquired Kendro on May 9, 2005 and is in the process of evaluating Kendro's internal control over financial reporting and will make changes where appropriate. < 31 > 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 2005 and beyond to differ materially from those expressed in any forward-looking statements made by us. We must develop new products, adapt to rapid and significant technological change and respond to introductions of new products in order to remain competitive. Our growth strategy includes significant investment in and expenditures for product development. We sell our products in several industries that are characterized by rapid and significant technological changes, frequent new product and service introductions and enhancements and evolving industry standards. Without the timely introduction of new products, services and enhancements, our products and services will likely become technologically obsolete over time, in which case our revenue and operating results would suffer. Development of our products requires significant investment; our products and technologies could become uncompetitive or obsolete. Our customers use many of our products to develop, test and manufacture their own products. As a result, we must anticipate industry trends and develop products in advance of the commercialization of our customers' products. If we fail to adequately predict our customers' needs and future activities, we may invest heavily in research and development of products and services that do not lead to significant revenue. 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. < 32 > THERMO ELECTRON CORPORATION Forward-looking Statements (continued) Changes in governmental regulations may reduce demand for our products or increase our expenses. We compete in many markets in which we and our customers must comply with federal, state, local and international regulations, such as environmental, health and safety, and food and drug regulations. We develop, configure and market our products to meet customer needs created by those regulations. Any significant change in regulations could reduce demand for our products or increase our expenses. For example, many of our instruments are marketed to the pharmaceutical industry for use in discovering and developing drugs. Changes in the U.S. Food and Drug Administration's regulation of the drug discovery and development process could have an adverse effect on the demand for these products. Demand for most of our products depends on capital spending policies of our customers and on government funding policies. Our customers include pharmaceutical and chemical companies, laboratories, universities, healthcare providers, government agencies and public and private research institutions. Many factors, including public policy spending priorities, available resources and product and economic cycles, have a significant effect on the capital spending policies of these entities. These policies in turn can have a significant effect on the demand for our products. For example, in the first quarter of 2005, we experienced a slow down in demand from the pharmaceutical market. 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. < 33 > THERMO ELECTRON CORPORATION Forward-looking Statements (continued) If any of our security products fail to detect explosives or radiation, we could be exposed to product liability and related claims for which we may not have adequate insurance coverage. The products sold by our environmental instruments division include a comprehensive range of fixed and portable instruments used for chemical, radiation and trace explosives detection. These products are used in airports, embassies, cargo facilities, border crossings and other high-threat facilities for the detection and prevention of terrorist acts. If any of these products were to malfunction it is possible that explosive or radioactive material could pass through the product undetected, which could lead to product liability claims. There are also many other factors beyond our control that could lead to liability claims, such as the reliability and competence of the 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 and environmental claims and potential claims by buyers that representations and warranties we made about the businesses were inaccurate. The resolution of these contingencies has not had a material adverse effect on our results of operations or financial condition; however, we can not be certain that this favorable pattern will continue. Our results could be impacted if we are unable to realize potential future benefits from new productivity initiatives. In addition to the real estate consolidations and cost-saving initiatives that we have pursued over the past three years, we are instituting practical process improvement, or PPI, programs at our locations to further enhance our productivity, efficiency and customer satisfaction. While we anticipate continued benefits from these PPI initiatives as well as our continuing sourcing activities, future benefits are expected to be fewer and smaller in size and may be more difficult to achieve. Our branding strategy could be unsuccessful. We historically operated our business largely as autonomous, unaffiliated companies, and as a result, each of our businesses independently created and developed its own brand names. Our marketing and branding strategy transitions multiple, unrelated brands to one brand, Thermo Electron. Several of our former brands such as Finnigan and Nicolet commanded strong market recognition and customer loyalty. We believe the transition to the one brand enhances and strengthens our collective brand image and brand awareness across the entire company. Our success in promoting our brand depends on many factors, including effective communication of the transition to our customers, acceptance and recognition by customers of this brand, and successful execution of the branding campaign by our marketing and sales teams. If we are not successful with this strategy, we may experience erosion in our product recognition, brand image and customer loyalty, and a decrease in demand for our products. It may be difficult for us to implement our strategies for improving internal growth. Some of the markets in which we compete have been flat or declining over the past several years. To address this issue, we are pursuing a number of strategies to improve our internal growth, including: - finding new markets for our products; - developing new applications for our technologies; - combining sales and marketing operations in appropriate markets to compete more effectively; - allocating research and development funding to products with higher growth prospects; < 34 > THERMO ELECTRON CORPORATION Forward-looking Statements (continued) - continuing key customer initiatives; - expanding our service offerings; - strengthening our presence in selected geographic markets; and - continuing the development of commercial tools and infrastructure to increase and support cross-selling opportunities of products and services to take advantage of our breadth in product offerings. We may not be able to successfully implement these strategies, and these strategies may not result in the growth of our business. As a multinational corporation, we are exposed to fluctuations in currency exchange rates, which could adversely affect our cash flows and results of operations. International revenues account for a substantial portion of our revenues, and we intend to continue expanding our presence in international markets. In 2004, our international revenues from continuing operations, including export revenues from the United States, accounted for approximately 60% of our total revenues. The exposure to fluctuations in currency exchange rates takes on different forms. International revenues are subject to the risk that fluctuations in exchange rates could adversely affect product demand and the profitability in U.S. dollars of products and services provided by us in international markets, where payment for our products and services is made in the local currency. As a multinational corporation, our businesses occasionally invoice third-party customers in currencies other than the one in which they primarily do business (the "functional currency"). Movements in the invoiced currency relative to the functional currency could adversely impact our cash flows and our results of operations. In addition, reported sales made in non-U.S. currencies by our international businesses, when translated into U.S. dollars for financial reporting purposes, fluctuate due to exchange rate movement. Should our international sales grow, exposure to fluctuations in currency exchange rates could have a larger effect on our financial results. In fiscal 2004 and 2003, currency translation had a favorable effect on revenues of our continuing operations of $92.1 million and $116.8 million, respectively, due to weakening of the U.S. dollar relative to other currencies in which the company sells products and services. A strengthening of the U.S. dollar would unfavorably affect revenues. Our inability to successfully identify and complete acquisitions or successfully integrate any new or previous acquisitions could have a material adverse effect on our business. Our business strategy includes the acquisition of technologies and businesses that complement or augment our existing products and services. Promising acquisitions are difficult to identify and complete for a number of reasons, including competition among prospective buyers and the need for regulatory, including antitrust, approvals. We may not be able to identify and successfully complete transactions. Any acquisition we may complete may be made at a substantial premium over the fair value of the net assets of the acquired company. Further, we may not be able to integrate any acquired businesses successfully into our existing businesses, make such businesses profitable, or realize anticipated cost savings or synergies, if any, from these acquisitions, which could adversely affect our business. For example, we will need to integrate the Kendro business that we recently acquired in order to realize its anticipated cost savings and synergies. Moreover, we previously acquired several companies and businesses. As a result of these acquisitions, we recorded significant goodwill on our balance sheet, which amounts to approximately $1.95 billion as of July 2, 2005. We assess the realizability of the goodwill we have on our books annually as well as whenever events or changes in circumstances indicate that the goodwill may be impaired. These events or circumstances generally include operating losses or a significant decline in earnings associated with the acquired business or asset. Our ability to realize the value of the goodwill will depend on the future cash flows of these businesses. These cash flows in turn depend in part on how well we have integrated these businesses. If we are not able to realize the value of the goodwill, we may be required to incur material charges relating to the impairment of those assets. < 35 > THERMO ELECTRON CORPORATION PART II - OTHER INFORMATION Item 4 - Submission of Matters to a Vote of Security Holders ------------------------------------------------------------ At the company's Annual Meeting of Stockholders held on May 17, 2005, the stockholders elected a class of two incumbent directors, John L. LaMattina and Michael E. Porter, to a three-year term expiring at the 2008 Annual Meeting of Stockholders. In addition, the stockholders ratified the selection by the Audit Committee of the company's Board of Directors of PricewaterhouseCoopers LLP as the company's independent auditors for the fiscal year ending. December 31, 2005. The stockholders also approved the company's 2005 stock incentive plan. A stockholder proposal regarding the vote standard for director elections, as described in the company's definitive proxy statement for the company's 2005 Annual Meeting of Stockholders, was not approved by the stockholders. The results of the votes for each of these proposals were as follows: Proposal 1 - Election of two directors, constituting the class of directors to be elected for a three-year term expiring in 2008:
Nominee For Withheld ----------------- ----------- ---------- John L. LaMattina 134,159,241 4,763,681 Michael E. Porter 83,777,666 55,145,256 No abstentions or broker non-votes were recorded on the proposal.
Proposal 2 - Ratification of selection by the Audit Committee of the company's Board of Directors of PricewaterhouseCoopers LLP as the company's independent auditors for the fiscal year ending December 31, 2005:
For Against Abstained ----------- ---------- --------- 137,450,272 512,228 960,422 No broker non-votes were recorded on the proposal. Proposal 3 - Approval of the company's 2005 stock incentive plan: For Against Abstained ----------- ---------- --------- 108,225,197 12,890,958 1,110,445 16,696,322 broker non-votes were recorded on the proposal. Proposal 4 - Stockholder proposal regarding the vote standard for director elections: For Against Abstained ----------- ---------- --------- 53,215,336 67,360,542 1,650,721 16,696,323 broker non-votes were recorded on the proposal.
< 36 > THERMO ELECTRON CORPORATION Item 6 - Exhibits -----------------
Exhibit Number Description of Exhibit ------- ---------------------- 2.1 Amendment to Purchase Agreement among the Company, the indirect, wholly owned subsidiaries of the Company named therein, SPX Corporation, and the direct and indirect, wholly owned subsidiaries of SPX Corporation named therein, dated May 6, 2005 (filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed May 12, 2005 [File No. 1-8002] and incorporated herein by reference). 10.1 Credit Agreement among the Company, the several banks and other financial institutions or entities from time to time parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Barclays Bank PLC, as Syndication Agent, and ABN AMRO Bank, N.V., as Documentation Agent, dated May 9, 2005 (filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed May 12, 2005 [File 1-8002] and incorporated herein by reference). 10.2 2005 Stock Incentive Plan, as amended. 10.3 Form of Thermo Electron Corporation Stock Option Agreement for use in connection with the grant of stock options under the Company's 2005 Stock Incentive Plan to officers and directors (filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed May 23, 2005 [File No. 1-8002] and incorporated herein by reference). 10.4 Indenture, dated as of May 27, 2005, between the Company and JPMorgan Chase Bank, N.A. (filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed June 3, 2005 [File No. 1-8002] and incorporated herein by reference). 10.5 Registration Rights Agreement, dated as of May 27, 2005, among the Company and J.P. Morgan Securities Inc., Barclays Capital Inc., ABN AMRO Incorporated, Banc of America Securities LLC, KeyBanc Capital Markets, a Division of McDonald Investments Inc., and Mitsubishi Securities International plc (filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed June 3, 2005 [Filed No. 1-8002] and incorporated herein by reference). 10.6+ Credit Agreement among the Company, Thermo Luxembourg Holding S.a.r.l., Thermo Finance Company B.V., the several banks and other financial institutions or entities from time to time parties thereto, ABN AMRO Bank, N.V., as Administrative Agent, Sole Bookrunner and a Lead Arranger, Barclays Bank PLC, as co-Documentation Agent, JPMorgan Chase Bank, N.A., as co-Documentation Agent, and Bank of Tokyo-Mitsubishi Trust Company, as Syndication Agent, dated June 30, 2005. 10.7 Form of Fixed Rate Promissory Note (Multiple Loans) for use in connection with money market loans to the Company by JPMorgan Chase Bank, N.A. 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. < 37 > THERMO ELECTRON CORPORATION Item 6 - Exhibits (continued) ----------------- Exhibit Number Description of Exhibit ------- ---------------------- 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. +Confidential treatment requested as to certain portions, which portions have been separately filed with the Securities and Exchange Commission.
< 38 > THERMO ELECTRON CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 4th day of August 2005. THERMO ELECTRON CORPORATION /s/ Peter M. Wilver ------------------------------------------------- Peter M. Wilver Vice President and Chief Financial Officer /s/ Peter E. Hornstra ------------------------------------------------- Peter E. Hornstra Corporate Controller and Chief Accounting Officer < 39 > THERMO ELECTRON CORPORATION EXHIBIT INDEX
Exhibit Number Description of Exhibit -------------------------------------------------------------------------------- 2.1 Amendment to Purchase Agreement among the Company, the indirect, wholly owned subsidiaries of the Company named therein, SPX Corporation, and the direct and indirect, wholly owned subsidiaries of SPX Corporation named therein, dated May 6, 2005 (filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed May 12, 2005 [File No. 1-8002] and incorporated herein by reference). 10.1 Credit Agreement among the Company, the several banks and other financial institutions or entities from time to time parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Barclays Bank PLC, as Syndication Agent, and ABN AMRO Bank, N.V., as Documentation Agent, dated May 9, 2005 (filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed May 12, 2005 [File 1-8002] and incorporated herein by reference). 10.2 2005 Stock Incentive Plan, as amended. 10.3 Form of Thermo Electron Corporation Stock Option Agreement for use in connection with the grant of stock options under the Company's 2005 Stock Incentive Plan to officers and directors (filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed May 23, 2005 [File No. 1-8002] and incorporated herein by reference). 10.4 Indenture, dated as of May 27, 2005, between the Company and JPMorgan Chase Bank, N.A. (filed as Exhibit 99.1 to the Company's Current Report on Form 8-K filed June 3, 2005 [File No. 1-8002] and incorporated herein by reference). 10.5 Registration Rights Agreement, dated as of May 27, 2005, among the Company and J.P. Morgan Securities Inc., Barclays Capital Inc., ABN AMRO Incorporated, Banc of America Securities LLC, KeyBanc Capital Markets, a Division of McDonald Investments Inc., and Mitsubishi Securities International plc (filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed June 3, 2005 [Filed No. 1-8002] and incorporated herein by reference). 10.6+ Credit Agreement among the Company, Thermo Luxembourg Holding S.a.r.l., Thermo Finance Company B.V., the several banks and other financial institutions or entities from time to time parties thereto, ABN AMRO Bank, N.V., as Administrative Agent, Sole Bookrunner and a Lead Arranger, Barclays Bank PLC, as co-Documentation Agent, JPMorgan Chase Bank, N.A., as co-Documentation Agent, and Bank of Tokyo-Mitsubishi Trust Company, as Syndication Agent, dated June 30, 2005. 10.7 Form of Fixed Rate Promissory Note (Multiple Loans) for use in connection with money market loans to the Company by JPMorgan Chase Bank, N.A. 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. < 40 > THERMO ELECTRON CORPORATION EXHIBIT INDEX Exhibit Number Description of Exhibit -------------------------------------------------------------------------------- 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. +Confidential treatment requested as to certain portions, which portions have been separately filed with the Securities and Exchange Commission.
< 41 >