TMO 10-Q Q2 2006
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 1, 2006

o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-8002
Logo
(Exact name of Registrant as specified in its charter)
 
Delaware
04-2209186
(State of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
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 o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer x Accelerated Filer o Non-Accelerated Filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

 
 
Class
 
Outstanding at July 28, 2006
 
 
Common Stock, $1.00 par value
 
157,593,971
 

 
 


 

PART I — FINANCIAL INFORMATION 
 
Item 1 — Financial Statements

 
THERMO ELECTRON CORPORATION

Consolidated Balance Sheet
(Unaudited)

Assets

 
    July 1,    
December 31,
 
(In thousands)
   
2006
   
2005
 
               
Current Assets:
             
  Cash and cash equivalents
 
$
189,716
 
$
214,326
 
  Short-term available-for-sale investments, at quoted market value (amortized cost of $8,267 and $80,661)
   
8,267
   
80,661
 
   Accounts receivable, less allowances of $22,548 and $21,841
   
544,520
   
565,564
 
      Inventories:
             
         Raw materials and supplies
   
150,543
   
133,774
 
         Work in process
   
56,896
   
50,043
 
         Finished goods
   
188,721
   
175,575
 
   Deferred tax assets
   
80,487
   
79,586
 
   Other current assets
   
61,072
   
54,371
 
               
     
1,280,222
   
1,353,900
 
               
Property, Plant and Equipment, at Cost
   
541,852
   
515,385
 
   Less: Accumulated depreciation and amortization
   
258,610
   
234,731
 
               
     
283,242
   
280,654
 
               
Acquisition-related Intangible Assets
   
405,011
   
450,740
 
               
Other Assets
   
216,907
   
200,080
 
               
Goodwill
   
1,990,821
   
1,966,195
 
               
   
$
4,176,203
 
$
4,251,569
 



2

 
THERMO ELECTRON CORPORATION

Consolidated Balance Sheet (continued)
(Unaudited)

Liabilities and Shareholders’ Equity

 
    July 1,    
December 31,
 
(In thousands except share amounts)
   
2006
   
2005
 
               
Current Liabilities:
             
      Short-term obligations and current maturities of long-term obligations
 
$
171,540
 
$
130,137
 
   Accounts payable
   
147,635
   
153,475
 
   Accrued payroll and employee benefits
   
98,199
   
114,707
 
   Accrued income taxes
   
21,860
   
55,147
 
   Deferred revenue
   
101,913
   
85,592
 
   Customer deposits
   
39,342
   
38,229
 
   Accrued warranty costs (Note 10)
   
36,326
   
33,453
 
   Other accrued expenses (Notes 2 and 11)
   
167,139
   
180,922
 
               
     
783,954
   
791,662
 
               
Deferred Income Taxes
   
43,468
   
65,015
 
               
Other Long-term Liabilities
   
144,313
   
132,950
 
               
Long-term Obligations:
             
   Senior notes (Note 9)
   
379,529
   
380,542
 
   Subordinated convertible obligations
   
77,234
   
77,234
 
   Other
   
10,699
   
10,854
 
               
     
467,462
   
468,630
 
               
Shareholders’ Equity:
             
      Preferred stock, $100 par value, 50,000 shares authorized; none issued
             
      Common stock, $1 par value, 350,000,000 shares authorized; 183,154,779 and 181,817,452 shares issued
   
183,155
   
181,817
 
   Capital in excess of par value
   
1,459,872
   
1,421,382
 
   Retained earnings
   
1,699,261
   
1,604,475
 
   Treasury stock at cost, 25,597,876 and 19,335,163 shares
   
(666,120
)
 
(437,707
)
   Deferred compensation
   
   
(3,834
)
   Accumulated other comprehensive items (Note 6)
   
60,838
   
27,179
 
             
     
2,737,006
   
2,793,312
 
               
   
$
4,176,203
 
$
4,251,569
 


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 1,
 
 July 2,
 
(In thousands except per share amounts)     2006      2005  
               
Revenues
 
$
713,468
 
$
653,621
 
               
Costs and Operating Expenses:
             
Cost of revenues
   
388,976
   
366,166
 
Selling, general and administrative expenses
   
206,919
   
192,593
 
Research and development expenses
   
40,620
   
39,432
 
Restructuring and other costs, net (Note 11)
   
4,780
   
2,216
 
               
     
641,295
   
600,407
 
               
Operating Income
   
72,173
   
53,214
 
Other Income (Expense), Net (Note 4)
   
(3,383
)
 
25,504
 
               
     Income from Continuing Operations Before Provision for Income Taxes
   
68,790
   
78,718
 
Provision for Income Taxes
   
(19,847
)
 
(21,958
)
               
Income from Continuing Operations
   
48,943
   
56,760
 
     Gain (Loss) on Disposal of Discontinued Operations (includes income tax benefit of $623 in 2006, net of
         income tax provision of $2,034 in 2005; Note 13)
   
(1,063
)
 
3,463
 
               
Net Income
 
$
47,880
 
$
60,223
 
               
     Earnings per Share from Continuing Operations (Note 5):
             
Basic
 
$
.30
 
$
.35
 
               
Diluted
 
$
.30
 
$
.35
 
               
Earnings per Share (Note 5):
             
Basic
 
$
.30
 
$
.37
 
               
Diluted
 
$
.29
 
$
.37
 
               
Weighted Average Shares (Note 5):
             
Basic
   
161,289
   
161,255
 
               
Diluted
   
165,523
   
164,658
 



 
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 1,     July 2,  
(In thousands except per share amounts)     2006     2005  
               
Revenues
 
$
1,397,755
 
$
1,212,829
 
               
Costs and Operating Expenses:
             
Cost of revenues
   
760,639
   
666,140
 
Selling, general and administrative expenses
   
409,367
   
356,094
 
Research and development expenses
   
79,357
   
75,760
 
Restructuring and other costs, net (Note 11)
   
8,374
   
1,945
 
               
     
1,257,737
   
1,099,939
 
               
Operating Income
   
140,018
   
112,890
 
Other Income (Expense), Net (Note 4)
   
(7,162
)
 
28,808
 
               
     Income from Continuing Operations Before Provision for Income Taxes
   
132,856
   
141,698
 
Provision for Income Taxes
   
(40,294
)
 
(39,355
)
               
Income from Continuing Operations
   
92,562
   
102,343
 
     Gain on Disposal of Discontinued Operations, Net (net of income tax provision of $1,303 and $4,272; Note 13)
   
2,224
   
6,736
 
               
Net Income
 
$
94,786
 
$
109,079
 
               
     Earnings per Share from Continuing Operations (Note 5):
             
Basic
 
$
.57
 
$
.64
 
               
Diluted
 
$
.56
 
$
.63
 
               
Earnings per Share (Note 5):
             
Basic
 
$
.58
 
$
.68
 
               
Diluted
 
$
.57
 
$
.67
 
               
Weighted Average Shares (Note 5):
             
Basic
   
162,167
   
161,106
 
               
Diluted
   
166,253
   
164,694
 




 
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 1,     July 2,  
(In thousands)     2006     2005  
               
Operating Activities:
             
Net income
 
$
94,786
 
$
109,079
 
    Gain on disposal of discontinued operations, net
   
(2,224
)
 
(6,736
)
               
        Income from continuing operations
   
92,562
   
102,343
 
               
    Adjustments to reconcile income from continuing operations to net cash provided by operating  
            activities:
             
  Depreciation and amortization
   
76,437
   
47,435
 
  Change in deferred income taxes
   
(10,703
)
 
(1,438
)
  Gain on sale of product lines, net
   
(207
)
 
(119
)
  Gain on investments, net
   
(525
)
 
(32,066
)
  Noncash equity compensation
   
12,937
   
1,339
 
  Other noncash expenses, net
   
1,096
   
13,513
 
   Changes in current accounts, excluding the effects of acquisitions and dispositions:
             
                  Accounts receivable
   
36,601
   
6,154
 
                  Inventories
   
(28,440
)
 
(15,200
)
                  Other current assets
   
(3,796
)
 
2,303
 
                  Accounts payable
   
(11,691
)
 
(11,521
)
                  Other current liabilities
   
(64,525
)
 
(22,187
)
               
Net cash provided by continuing operations
   
99,746
   
90,556
 
Net cash used in discontinued operations
   
(1,528
)
 
(1,577
)
               
Net cash provided by operating activities
   
98,218
   
88,979
 
               
Investing Activities:
             
 Acquisitions, net of cash acquired
   
(26,574
)
 
(914,923
)
 Proceeds from sale of available-for-sale investments
   
151,012
   
349,863
 
 Purchases of available-for-sale investments
   
(77,850
)
 
(148,450
)
 Purchases of property, plant and equipment
   
(21,800
)
 
(16,441
)
 Proceeds from sale of property, plant and equipment
   
2,071
   
9,534
 
 Proceeds from sale of product lines
   
8,875
   
5,661
 
 Collection of notes receivable
   
2,805
   
 
 Proceeds from sale of other investments
   
816
   
280
 
 Increase in other assets
   
(8,481
)
 
(1,535
)
 Other
   
(546
)
 
(64
)
               
Net cash provided by (used in) continuing operations
   
30,328
   
(716,075
)
Net cash provided by discontinued operations
   
5,333
   
5,327
 
               
Net cash provided by (used in) investing activities
 
$
35,661
 
$
(710,748
)



6

THERMO ELECTRON CORPORATION
 
Consolidated Statement of Cash Flows (continued)
(Unaudited)
 
 Six Months Ended
 
      July 1,     July 2,  
(In thousands)     2006     2005
               
Financing Activities:
             
   Purchases of company common stock
 
$
(228,001
)
$
 
Net proceeds from issuance of long-term debt
   
   
247,450
 
Increase in short-term notes payable
   
36,664
   
219,150
 
   Net proceeds from issuance of company common stock
   
22,072
   
8,721
 
   Borrowings under short-term bridge financing agreement
   
   
570,000
 
   Repayment of bridge financing agreement
   
   
(570,000
)
   Tax benefits from exercised stock options (Note 7)
   
5,589
   
 
Other
   
(38
)
 
(2,161
)
               
Net cash provided by (used in) financing activities
   
(163,714
)
 
473,160
 
               
Exchange Rate Effect on Cash of Continuing Operations
   
5,225
   
(18,533
)
               
Decrease in Cash and Cash Equivalents
   
(24,610
)
 
(167,142
)
Cash and Cash Equivalents at Beginning of Period
   
214,326
   
326,886
 
               
Cash and Cash Equivalents at End of Period
 
$
189,716
 
$
159,744
 
               
Noncash Investing Activities:
             
Fair value of assets of acquired businesses
 
$
37,527
 
$
1,076,315
 
Cash paid for acquired businesses
   
(28,005
)
 
(920,135
)
               
Liabilities of acquired businesses
 
$
9,522
 
$
156,180
 





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, Thermo 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 1, 2006, the results of operations for the three- and six-month periods ended July 1, 2006, and July 2, 2005, and the cash flows for the six-month periods ended July 1, 2006, and July 2, 2005. 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, 2005, 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, 2005, filed with the Securities and Exchange Commission (SEC).

2.
Merger and Acquisitions

The company and Fisher Scientific International Inc. announced on May 8, 2006 that the boards of directors of both companies had unanimously approved a definitive agreement to combine the two companies in a tax-free, stock-for-stock exchange. Fisher is a leading provider of products and services to the scientific research community and clinical laboratories. Fisher provides a suite of products and services to customers worldwide from biochemicals, cell-culture media and proprietary RNAi technology to rapid-diagnostic tests, safety products and other consumable supplies. Fisher had revenues of $5.4 billion in 2005. The transaction is subject to approval by both companies' shareholders as well as regulatory approvals and other customary closing conditions. The transaction is expected to close in the fourth quarter of 2006. The combined company will be named Thermo Fisher Scientific Inc.

Under the terms of the agreement, Fisher shareholders will receive two shares of Thermo common stock for each share of Fisher common stock they own. Based on Thermo's average closing price for the two trading days before and after the announcement date of $38.93 per share, this exchange represents a value of $77.86 per Fisher share, or an aggregate equity value of $10.3 billion. The company will also assume Fisher’s debt ($2.2 billion at June 30, 2006). Upon completion of the transaction, Thermo's shareholders will own approximately 39 percent of the combined company, and Fisher’s shareholders will own approximately 61 percent. Based upon current members of Thermo’s board of directors and senior management representing a majority of the composition of the combined company’s board and senior management and the Fisher shareholders receiving a premium (as of the date preceding the merger announcement) over the fair market value of Fisher common stock on such date, Thermo is considered to be the acquirer for accounting purposes.

On June 30, 2006, the company’s Measurement and Control segment acquired EGS Gauging, Inc., a Massachusetts-based provider of flat polymer web gauging products for $26.3 million, net of cash acquired, subject to a post-closing adjustment. The purchase price includes $24.0 million paid at the closing and $2.3 million payable in the third quarter of 2006. The agreement calls for contingent consideration of up to $2.0 million based on 2006 revenues and operating results. The acquisition of EGS enables the segment to broaden its gauging systems product offerings. EGS’s revenues totaled $25 million in 2005. Having completed the acquisition of EGS on the last business day of the company’s fiscal quarter, the balance sheet of EGS has been included in the accompanying financial statements, however, no results of operations or cash flows have been included. The company has undertaken an assessment to determine the fair value of EGS’s identifiable intangible assets and to complete the purchase price allocation. Pending the results of that review, which the company expects to substantially complete during the third quarter of 2006, the excess of the purchase price over the fair value of the acquired tangible assets, or $22.4 million, has been recorded as an increase to goodwill, none of which is tax deductible.


8

THERMO ELECTRON CORPORATION

2.
Merger and Acquisitions (continued)

In addition to the acquisition of EGS, the company acquired a product line and a small distributor in the second quarter of 2006 for an aggregate of $2.7 million. The product line acquisition is subject to a post-closing adjustment that the company does not expect will be material.

The company’s acquisitions have historically been made at prices above the fair value of the acquired assets, resulting in goodwill, due to expectations of synergies of combining the businesses. These synergies include use of the company’s existing infrastructure such as sales force, distribution channels and customer relations to expand sales of the acquired businesses’ products; use of the infrastructure of the acquired businesses to cost effectively expand sales of company products; and elimination of duplicative facilities, functions and staffing.

These acquisitions have been accounted for using the purchase method of accounting, and the acquired companies’ results have been included in the accompanying financial statements from their respective dates of acquisition. Allocation of the purchase price for acquisitions was based on estimates of the fair value of the net assets acquired and, for acquisitions completed in 2006, is subject to adjustment upon finalization of the purchase price allocation.

The components of the preliminary purchase price allocation for 2006 acquisitions are as follows:
 
(In thousands)     EGS      Other      Total   
                     
Purchase Price:
                   
Cash paid (a)
 
$
25,363
 
$
2,642
 
$
28,005
 
Cash acquired
   
(1,417
)
 
(14
)
 
(1,431
)
Purchase price payable
   
2,343
   
91
   
2,434
 
                     
   
$
26,289
 
$
2,719
 
$
29,008
 
                     
Allocation:
                   
Current assets
 
$
8,381
 
$
14
 
$
8,395
 
Property, plant and equipment
   
768
   
16
   
784
 
Acquired intangible assets (b)
   
   
2,857
   
2,857
 
Goodwill
   
22,431
   
844
   
23,275
 
Other assets
   
785
   
   
785
 
Liabilities assumed
   
(6,076
)
 
(1,012
)
 
(7,088
)
                     
   
$
26,289
 
$
2,719
 
$
29,008
 

(a)  
Includes transaction costs.
(b)  
The acquired intangible assets for EGS will be determined in the third quarter of 2006, following finalization of the purchase price allocation.

Acquired intangible assets for 2006 acquisitions are as follows (in thousands):

Customer Relationships 
 
$
446
 
Product Technology
   
2,411
 
         
   
$
2,857
 

The weighted-average amortization periods for intangible assets acquired in 2006 are: 5 years for customer relationships and 5 years for product technology. The weighted-average amortization period for all intangible assets acquired in 2006 is 5 years.


9

THERMO ELECTRON CORPORATION

2.
Merger and Acquisitions (continued)

In May 2005, the Company’s Life and Laboratory Sciences segment acquired the Kendro Laboratory Products division of SPX Corporation. Had the acquisition of Kendro been completed as of the beginning of 2005, the company’s pro forma results for 2005 would have been as follows:
 
   
 Three Months Ended
 
 Six Months Ended
 
(In thousands except per share amounts)  
 July 2, 2005 
   
July 2, 2005
 
               
Revenues
 
$
688,080
 
$
1,341,148
 
               
Net Income
 
$
54,880
 
$
97,463
 
               
     Earnings per Share from Continuing Operations:
             
Basic
 
$
.32
 
$
.56
 
Diluted
 
$
.31
 
$
.56
 
               
Earnings Per Share:
             
Basic
 
$
.34
 
$
.60
 
Diluted
 
$
.34
 
$
.60
 

The company’s results for 2006 and 2005 would not have been materially different from its reported results had the company’s other acquisitions occurred at the beginning of 2005.

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 have been established for the acquisitions completed in 2006.

The changes in accrued acquisition expenses for acquisitions completed during 2005 are as follows:
 
(In thousands)    
Severance
 
Abandonment
of Excess
Facilities
   
Other
   
Total
 
                           
                           
Balance at December 31, 2005
 
$
2,494
 
$
345
 
$
73
 
$
2,912
 
Reserves established
   
3,213
   
479
   
629
   
4,321
 
Payments
   
(1,636
)
 
(76
)
 
   
(1,712
)
Decrease recorded as a reduction in goodwill
   
(415
)
 
   
(488
)
 
(903
)
Currency translation
   
314
   
20
   
5
   
339
 
                           
Balance at July 1, 2006
 
$
3,970
 
$
768
 
$
219
 
$
4,957
 



10

THERMO ELECTRON CORPORATION

2.
Merger and Acquisitions (continued)

The accrued acquisition expenses consist primarily of severance for approximately 156 employees across all functions at Kendro, relocation costs and facility obligations for a building vacated in Tennessee. The company expects to pay amounts accrued for severance and other through 2006 and facility costs through the expiration of the lease in 2007.

The changes in accrued acquisition expenses for acquisitions completed prior to 2005 are as follows:
 
 
 
(In thousands)
   
Severance
 
  Abandonment
of Excess
Facilities
   
Total
 
                     
                     
Balance at December 31, 2005
 
$
139
 
$
3,212
 
$
3,351
 
Payments
   
   
(1,145
)
 
(1,145
)
   Divestiture
   
   
(199
)
 
(199
)
Decrease recorded as a reduction in goodwill
   
(15
)
 
(29
)
 
(44
)
Currency translation
   
9
   
185
   
194
 
                     
Balance at July 1, 2006
 
$
133
 
$
2,024
 
$
2,157
 

The accrued acquisition expenses relate primarily to severance for approximately 160 employees across all functions at Jouan, acquired in December 2003, and for abandoned facilities, primarily for three abandoned operating facilities in England, with leases expiring through 2014, and the closure of a Jouan manufacturing facility in Denmark, with a lease expiring in 2007. The company expects to pay amounts accrued for severance and other expenses primarily through 2006 and amounts accrued for abandonment of excess facilities through 2014. The liability for the abandoned facilities is net of estimated sublease income and includes an estimate of restoration costs required at the termination of the lease.

3.
Business Segment Information

The company’s continuing operations fall into two business segments: Life and Laboratory Sciences and Measurement and Control.

     
Life and
Laboratory
Sciences
   
Measurement and Control
   
Eliminations
 and Other
   
Corporate
   
Total
     
   
(In thousands)
     
                                     
Three Months Ended July 1, 2006
                                   
Revenues
 
$
539,286
 
$
174,182
 
$
 
$
 
$
713,468
     
                                     
Adjusted operating income (a)
 
$
93,398
 
$
24,736
 
$
(3,512
)
$
(10,748
)
$
103,874
 
(b)
 
Cost of revenues charges
   
1,266
   
   
   
   
1,266
     
Restructuring and other items
   
2,571
   
2,094
   
7
   
108
   
4,780
     
Stock option compensation expense
   
2,808
   
704
   
(3,512
)
 
   
     
Amortization
   
24,197
   
1,456
   
   
2
   
25,655
     
                                     
Operating income
   
62,556
   
20,482
   
(7
)
 
(10,858
)
 
72,173
 
(b)
 
Other expense, net
                           
(3,383
)
   
                                     
    Income from continuing operations before provision for
                income taxes
                         
$
68,790
     
                                     
Depreciation
 
$
9,656
 
$
2,222
 
$
 
$
1,584
 
$
13,462
     



11

THERMO ELECTRON CORPORATION

3.
Business Segment Information (continued)
 
     
Life and
Laboratory
Sciences
   
Measurement and Control
   
Eliminations
 and Other
   
Corporate
   
Total
     
   
 (In thousands)
     
                                     
Three Months Ended July 2, 2005
                                   
Revenues
 
$
487,462
 
$
166,159
 
$
 
$
 
$
653,621
     
                                     
Adjusted operating income (a)
 
$
77,920
 
$
15,829
 
$
 
$
(7,745
)
$
86,004
 
(c)
 
Cost of revenues charges
   
11,232
   
233
   
   
   
11,465
     
Restructuring and other items
   
(160
)
 
2,168
   
(502
)
 
710
   
2,216
     
Amortization
   
17,773
   
1,335
   
   
1
   
19,109
     
                                     
Operating income
   
49,075
   
12,093
   
502
   
(8,456
)
 
53,214
 
(c)
 
Other income, net
                           
25,504
     
                                     
    Income from continuing operations before provision for
                income taxes
                         
$
78,718
     
                                     
Depreciation
 
$
7,764
 
$
2,045
 
$
 
$
951
 
$
10,760
     
                                     
Six Months Ended July 1, 2006
                                   
Revenues
 
$
1,051,641
 
$
346,114
 
$
 
$
 
$
1,397,755
     
                                     
Adjusted operating income (a)
 
$
179,548
 
$
49,135
 
$
(6,407
)
$
(21,402
)
$
200,874
 
(b)
 
Cost of revenues charges
   
1,266
   
   
   
   
1,266
     
Restructuring and other items
   
5,617
   
2,634
   
9
   
114
   
8,374
     
Stock option compensation expense
   
5,060
   
1,347
   
(6,407
)
 
   
     
Amortization
   
48,292
   
2,920
   
   
4
   
51,216
     
                                     
Operating income
   
119,313
   
42,234
   
(9
)
 
(21,520
)
 
140,018
 
(b)
 
Other expense, net
                           
(7,162
)
   
                                     
    Income from continuing operations before provision for
                income taxes
                         
$
132,856
     
                                     
Depreciation
 
$
17,589
 
$
4,347
 
$
 
$
3,285
 
$
25,221
     
                                     



12

THERMO ELECTRON CORPORATION

3.
Business Segment Information (continued)
 
     
Life and
Laboratory
Sciences
   
Measurement and Control
   
Eliminations and Other
   
Corporate
   
Total
     
   
 (In thousands)
     
                                     
Six Months Ended July 2, 2005
                                   
Revenues
 
$
880,767
 
$
332,062
 
$
 
$
 
$
1,212,829
     
                                     
Adjusted operating income (a)
 
$
134,630
 
$
36,022
 
$
 
$
(17,829
)
$
152,823
 
(c)
 
Cost of revenues charges
   
11,232
   
233
   
   
   
11,465
     
Restructuring and other items
   
(1,894
)
 
3,202
   
(573
)
 
1,210
   
1,945
     
Amortization
   
24,387
   
2,134
   
   
2
   
26,523
     
                                     
Operating income
   
100,905
   
30,453
   
573
   
(19,041
)
 
112,890
 
(c)
 
Other income, net
                           
28,808
     
                                     
    Income from continuing operations before provision for
                income taxes
                         
$
141,698
     
                                     
Depreciation
 
$
14,543
 
$
4,461
 
$
 
$
1,908
 
$
20,912
     

(a)
Represents operating income before restructuring and other costs, net; amortization of acquisition-related intangibles; and, for the segments, stock option compensation expense.
(b)
Consolidated adjusted operating income and consolidated operating income in the second quarter of 2006 include pre-tax stock option compensation expense of $6.4 million, including $0.7 million in cost of revenues, $5.3 million in selling, general and administrative expenses and $0.4 million in research and development expenses. Consolidated adjusted operating income and consolidated operating income in the first six months of 2006 include pre-tax stock option compensation expense of $11.8 million, including $1.3 million in cost of revenues, $9.8 million in selling, general and administrative expenses and $0.7 million in research and development expenses. No stock option compensation expense has been capitalized in inventories due to immateriality.
(c)
Had stock option expense been recorded in the second quarter of 2005, consolidated adjusted operating income and consolidated operating income on a pro forma basis would have been lower by $5.1 million, including $0.5 million in cost of revenues, $4.3 million in selling, general and administrative expenses and $0.3 million in research and development expenses. Had stock option expense been recorded in the first six months of 2005, consolidated adjusted operating income and consolidated operating income on a pro forma basis would have been lower by $10.5 million, including $1.2 million in cost of revenues, $8.7 million in selling, general and administrative expenses and $0.6 million in research and development expenses.

4.
Other Income (Expense), Net

The components of other income (expense), net, in the accompanying statement of income are as follows:
 
   
 Three Months Ended
 
Six Months Ended 
 
(In thousands)    
July 1,
2006
   
July 2,
2005
   
July 1,
2006
   
July 2,
2005
 
                           
                           
Interest Income
 
$
3,393
 
$
2,591
 
$
6,925
 
$
5,927
 
Interest Expense
   
(7,934
)
 
(7,287
)
 
(15,729
)
 
(10,442
)
Gain on Investments, Net
   
560
   
29,802
   
525
   
32,066
 
Other Items, Net
   
598
   
398
   
1,117
   
1,257
 
                           
   
$
(3,383
)
$
25,504
 
$
(7,162
)
$
28,808
 



13

THERMO ELECTRON CORPORATION

4.
Other Income (Expense), 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 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 
 
(In thousands except per share amounts)    
July 1,
2006
   
July 2,
2005
   
July 1,
2006
   
July 2,
2005
 
                           
     Income from Continuing Operations
 
$
48,943
 
$
56,760
 
$
92,562
 
$
102,343
 
     Gain (Loss) on Disposal of Discontinued Operations
   
(1,063
)
 
3,463
   
2,224
   
6,736
 
                           
     Net Income for Basic Earnings per Share
   
47,880
   
60,223
   
94,786
   
109,079
 
Effect of Convertible Debentures
   
402
   
402
   
803
   
803
 
                           
     Income Available to Common Shareholders, as Adjusted for Diluted Earnings
        per Share
 
$
48,282
 
$
60,625
 
$
95,589
 
$
109,882
 
                           
Basic Weighted Average Shares
   
161,289
   
161,255
   
162,167
   
161,106
 
Effect of:
                         
Stock options
   
2,318
   
1,515
   
2,171
   
1,704
 
Convertible debentures
   
1,846
   
1,846
   
1,846
   
1,846
 
Restricted stock awards and contingently issuable shares
   
70
   
42
   
69
   
38
 
                           
     Diluted Weighted Average Shares
   
165,523
   
164,658
   
166,253
   
164,694
 
                           
Basic Earnings per Share:
                         
       Continuing operations
 
$
.30
 
$
.35
 
$
.57
 
$
.64
 
Discontinued operations
   
(.01
)
 
.02
   
.01
   
.04
 
                           
   
$
.30
 
$
.37
 
$
.58
 
$
.68
 
                           
Diluted Earnings per Share:
                         
       Continuing operations
 
$
.30
 
$
.35
 
$
.56
 
$
.63
 
Discontinued operations
   
(.01
)
 
.02
   
.01
   
.04
 
                           
   
$
.29
 
$
.37
 
$
.57
 
$
.67
 

Options to purchase 3,025,000, 4,508,000, 3,117,000 and 2,515,000 shares of common stock were not included in the computation of diluted earnings per share for the second quarter of 2006 and 2005 and the first six months of 2006 and 2005, respectively, because their effect would have been antidilutive.


14

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 2006 and 2005, the company had comprehensive income of $77.2 million and $38.2 million, respectively. During the first six months of 2006 and 2005, the company had comprehensive income of $128.4 million and $42.3 million, respectively. The three- and six-month periods of 2005 were unfavorably affected by reductions in the cumulative translation adjustment of $32.5 million and $82.7 million, respectively, due to movements in currency exchange rates, the effects of which are recorded in shareholders’ equity. The three- and six-month periods of 2006 were favorably affected by increases in the cumulative translation adjustment of $31.6 million and $36.1 million, respectively, due to movements in currency exchange rates.

7.
Stock-based Compensation Plans and Stock-based Compensation Expense

The company has stock-based compensation plans for its key employees, directors and others. These plans permit the grant of a variety of stock and stock-based awards, including restricted stock, stock options, stock bonus shares or performance-based shares, as determined by the compensation committee of the company’s Board of Directors (the Board Committee) or in limited circumstances, by the company’s option committee, which consists of its chief executive officer. Generally, options granted prior to July 2000 under these plans are exercisable immediately, but shares acquired upon exercise are subject to certain transfer restrictions and the right of the company to repurchase the shares at the exercise price upon certain events, primarily termination of employment. The restrictions and repurchase rights lapse over periods ranging from 0-10 years, depending on the term of the option, which may range from 3-12 years. Options granted in or after July 2000 under these plans generally vest over three to five years, assuming continued employment with certain exceptions. Upon a change in control of the company, substantially all options, regardless of grant date, become immediately exercisable and shares acquired upon exercise cease to be subject to transfer restrictions and the company’s repurchase rights. If consummated, the merger with Fisher discussed in Note 2 will result in a change in control and the vesting of substantially all of the company’s options will accelerate except for those of the chief executive officer who has waived acceleration. Nonqualified options are generally granted at fair market value. Incentive stock options must be granted at not less than the fair market value of the company’s stock on the date of grant. The company also has a directors’ stock option plan that provides for the annual grant of stock options of the company to outside directors. Options awarded under this plan prior to 2003 are immediately exercisable and expire three to seven years after the date of grant. Options awarded in 2003 and thereafter vest over three years, assuming continued service on the board, and expire seven years after the date of grant. The company generally issues new shares of its common stock to satisfy option exercises.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No.123R, “Share-based Payment,” which requires compensation costs related to share-based transactions, including employee share options, to be recognized in the financial statements based on fair value. SFAS No. 123R revises SFAS No. 123, as amended, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”

Effective January 1, 2006, the company adopted the provisions of SFAS No. 123R using the modified prospective application transition method. Under this transition method, the compensation cost recognized beginning January 1, 2006 includes compensation cost for (i) all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (ii) all share-based payments granted subsequent to December 31, 2005 based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R. Compensation cost is recognized ratably over the requisite vesting period or, for 2006 grants, to the retirement date for retirement eligible employees, if earlier. Use of the date of retirement eligibility to record the expense associated with awards granted to retirement eligible employees did not materially affect the company’s results of operations in the first half of 2006. Prior period amounts have not been restated for the adoption of SFAS No. 123R.


15

THERMO ELECTRON CORPORATION

7.
Stock-based Compensation Plans and Stock-based Compensation Expense (continued)

As a result of the adoption of SFAS No. 123R, the company’s results for the three and six months ended July 1, 2006 include incremental share-based compensation pre-tax expense of $6.4 million and $11.8 million, respectively, related to stock options. The total stock-based compensation cost of $6.9 million and $12.9 million, respectively, including restricted stock awards, has been included in the statements of income within the applicable operating expense where the company reports the option holders’ compensation cost. The company has recognized a related tax benefit associated with its share-based compensation expense totaling $2.2 million and $4.3 million in the three and six months ended July 1, 2006, respectively. The incremental expense, net of the related tax benefit, resulted in a $.03 decrease in both basic and diluted earnings per share in the second quarter of 2006 and a $.05 decrease in both basic and diluted earnings per share in the first six months of 2006. In the first six months of 2006, the adoption of SFAS No. 123R also resulted in the inclusion of $5.6 million of tax benefits from exercised stock options in cash flows from financing activities that would have been reflected in cash flows from operating activities prior to adoption of SFAS No. 123R.

Stock Options— The fair value of each option grant is estimated using the Black-Scholes option pricing model. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the historical volatility of the company’s stock. The average expected life was estimated using the simplified method for “plain vanilla” options as permitted by SAB 107. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term which approximates the expected life assumed at the date of grant. The compensation expense recognized for all equity-based awards is net of estimated forfeitures. Forfeitures are estimated based on an analysis of actual option forfeitures.

The weighted average assumptions used in the Black-Scholes option pricing model are as follows:
 
   
 Six Months Ended
 
   
 July 1,
2006
 
 July 2,
2005
 
               
Expected Stock Price Volatility
   
28%
 
 
32%
 
Risk Free Interest Rate
   
4.7%
 
 
3.8%
 
Expected Life of Options (years)
   
4.5   
   
4.3   
 
Expected Annual Dividend per Share
 
$
—   
 
$
—   
 

The weighted average grant-date fair values of options granted during the first six months of 2006 and 2005 were $11.02 and $9.05, respectively. The total intrinsic value of options exercised during the same periods was $5.3 million and $6.6 million, respectively. The intrinsic value is the difference between the market value of the shares on the exercise date and the exercise price of the option.


16

THERMO ELECTRON CORPORATION

7.
Stock-based Compensation Plans and Stock-based Compensation Expense (continued)

A summary of option activity as of July 1, 2006 and changes during the six months then ended is presented below:
 
   
 Shares
(In thousands)
 
 Weighted
Average
Exercise Price
 
 Weighted
Average
Remaining
Contractual Term
(In years)
 
 Aggregate
Intrinsic
Value
(In thousands)
 
                           
Outstanding at December 31, 2005
   
12,084
 
$
22.65
             
Granted
   
2,985
   
34.97
             
Exercised
   
(1,181
)
 
18.68
             
Canceled
   
(131
)
 
29.22
             
Expired
   
(29
)
 
63.45
             
                           
Outstanding at July 1, 2006
   
13,728
   
25.58
   
4.7
 
$
158,026
 
                           
Vested and Exercisable at July 1, 2006
   
6,723
   
21.85
   
3.2
 
$
102,452
 

As of July 1, 2006, there was $53.0 million ($35.7 million, net of tax) of total unrecognized compensation cost related to nonvested stock options granted. The cost is expected to be recognized over a weighted average period of 2.1 years. However, substantially all of the company’s equity awards would become fully vested upon the merger with Fisher, which would result in a charge for the unrecognized compensation at the date of the merger.

Restricted Share Awards — The company awards to a number of key employees restricted company common stock or restricted units that convert into an equivalent number of shares of common stock assuming continued employment, with some exceptions. The awards generally vest in equal annual installments over two to three years, assuming continued employment, with some exceptions. The fair market value of the award at the time of the grant is amortized to expense over the period of vesting. Recipients of restricted shares have the right to vote such shares and receive dividends, whereas recipients of restricted units have no voting rights but are entitled to receive dividend equivalents. The fair value of restricted share awards is determined based on the number of shares granted and the market value of the company’s shares on the grant date. During the six months ended July 1, 2006, the company granted 27,500 share awards at a weighted average fair value of $34.31 per share on the grant date.

A summary of the status of the company’s restricted shares as of July 1, 2006 and changes during the six-months then ended are presented below:
 
Nonvested Restricted Share Awards  
 Shares
 
Weighted Average
Grant-Date Fair
Value
 
               
Nonvested at December 31, 2005
   
199,334
 
$
27.03
 
Granted
   
27,500
   
34.31
 
Vested
   
(43,333
)
 
26.00
 
               
Nonvested at July 1, 2006
   
183,501
   
28.37
 

As of July 1, 2006, there was $3.6 million ($2.6 million, net of tax) of total unrecognized compensation cost related to nonvested restricted share awards. That cost is expected to be recognized over a weighted average period of 1.9 years. However, the restricted share awards would become fully vested upon the merger with Fisher, which would result in a charge for the unrecognized compensation at the date of the merger. The total fair value of shares vested during the first six months of 2006 and 2005 was $1.1 million in each period.


17

THERMO ELECTRON CORPORATION

7.
Stock-based Compensation Plans and Stock-based Compensation Expense (continued)

Prior to January 1, 2006, the company accounted for stock-based compensation plans in accordance with the provisions of APB Opinion No. 25, as permitted by SFAS No. 123, and accordingly did not recognize compensation expense for the issuance of options with an exercise price equal to or greater than the market price at the date of grant. 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 for the second quarter and first six months of 2005 would have been as follows:
 
   
Three Months Ended
 
 Six Months Ended
 
(In thousands except per share amounts)  
 July 2, 2005 
 
 July 2, 2005 
 
               
Income from Continuing Operations:
             
As reported
 
$
56,760
 
$
102,343
 
   Add: Stock-based employee compensation expense included in reported results, net of tax
   
454
   
870
 
   Deduct: Total stock-based employee compensation expense determined under the fair-
             value-based method for all awards, net of tax
   
(3,796
)
 
(7,678
)
               
Pro forma
 
$
53,418
 
$
95,535
 
               
Basic Earnings per Share from Continuing Operations:
             
As reported
 
$
.35
 
$
.64
 
Pro forma
 
$
.33
 
$
.59
 
               
Diluted Earnings per Share from Continuing Operations:
             
As reported
 
$
.35
 
$
.63
 
Pro forma
 
$
.33
 
$
.59
 
               
Net Income:
             
As reported
 
$
60,223
 
$
109,079
 
   Add: Stock-based employee compensation expense included in reported net income, net of tax
   
454
   
870
 
   Deduct: Total stock-based employee compensation expense determined under the fair-
          value-based method for all awards, net of tax
   
(3,796
)
 
(7,678
)
               
Pro forma
 
$
56,881
 
$
102,271
 
               
Basic Earnings per Share:
             
As reported
 
$
.37
 
$
.68
 
Pro forma
 
$
.35
 
$
.63
 
               
Diluted Earnings per Share:
             
As reported
 
$
.37
 
$
.67
 
Pro forma
 
$
.35
 
$
.63
 




18

THERMO ELECTRON CORPORATION

8.
Defined Benefit Pension Plans

Several of the company’s non-U.S. subsidiaries, principally in Germany and England, and one U.S. subsidiary have defined benefit pension plans covering substantially all full-time employees at those subsidiaries. Some of the company’s plans are unfunded, as permitted under the plans and applicable laws. Net periodic benefit costs for the plans in the aggregate included the following components:
 
   
 Three Months Ended
 
 Six Months Ended
 
(In thousands)  
 July 1,
2006
 
July 2,
2005
 
 July 1,
2006
 
 July 2,
2005
 
                           
Service Cost
 
$
1,478
 
$
1,764