TMO 10-Q Q3 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 September 30, 2006

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

Commission File Number 1-8002

(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 October 27, 2006
 
 
Common Stock, $1.00 par value
 
158,020,239
 
 
 
 


 

PART I — FINANCIAL INFORMATION 
 
Item 1 — Financial Statements

THERMO ELECTRON CORPORATION

Consolidated Balance Sheet
(Unaudited)

Assets
 
 
 September 30,
   
December 31,
 
(In thousands)
   
2006
   
2005
 
               
Current Assets:
             
   Cash and cash equivalents
 
$
157,964
 
$
214,326
 
   Short-term available-for-sale investments, at quoted market value (amortized cost of $14,431
            and $80,661)          
   
14,679
   
80,661
 
Accounts receivable, less allowances of $23,001 and $21,841
   
539,839
   
560,172
 
Inventories:
             
Raw materials and supplies
   
147,415
   
133,774
 
Work in process
   
60,804
   
50,043
 
Finished goods
   
199,253
   
175,575
 
Deferred tax assets
   
80,121
   
79,586
 
Other current assets
   
78,501
   
59,763
 
               
     
1,278,576
   
1,353,900
 
               
Property, Plant and Equipment, at Cost
   
544,180
   
515,385
 
Less: Accumulated depreciation and amortization
   
263,664
   
234,731
 
               
     
280,516
   
280,654
 
               
Acquisition-related Intangible Assets
   
405,470
   
450,740
 
               
Other Assets
   
219,691
   
200,080
 
               
Goodwill
   
2,013,985
   
1,966,195
 
               
   
$
4,198,238
 
$
4,251,569
 



2

THERMO ELECTRON CORPORATION
 
Consolidated Balance Sheet (continued)
(Unaudited)

Liabilities and Shareholders’ Equity

 
 September 30,
   
December 31,
 
(In thousands except share amounts)
   
2006
   
2005
 
               
Current Liabilities:
             
   Short-term obligations and current maturities of long-term obligations
 
$
68,658
 
$
130,137
 
Accounts payable
   
154,546
   
153,475
 
Accrued payroll and employee benefits
   
108,834
   
114,707
 
Accrued income taxes
   
28,186
   
55,147
 
Deferred revenue
   
96,066
   
85,592
 
Customer deposits
   
44,160
   
38,229
 
Accrued warranty costs (Note 10)
   
36,213
   
33,453
 
Other accrued expenses (Notes 2 and 11)
   
186,160
   
180,922
 
               
     
722,823
   
791,662
 
               
Deferred Income Taxes
   
42,582
   
65,015
 
               
Other Long-term Liabilities
   
147,905
   
132,950
 
               
Long-term Obligations:
             
Senior notes (Note 9)
   
382,175
   
380,542
 
Subordinated convertible obligations
   
77,234
   
77,234
 
Other
   
10,477
   
10,854
 
               
     
469,886
   
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; 163,360,801 and 181,817,452 shares issued
   
163,361
   
181,817
 
Capital in excess of par value (Note 6)
   
971,873
   
1,421,382
 
Retained earnings
   
1,748,094
   
1,604,475
 
Treasury stock at cost, 5,600,554 and 19,335,163 shares (Note 6)
   
(145,821
)
 
(437,707
)
Deferred compensation
   
   
(3,834
)
Accumulated other comprehensive items (Note 6)
   
77,535
   
27,179
 
               
     
2,815,042
   
2,793,312
 
               
   
$
4,198,238
 
$
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
 
 
 September 30,
   
October 1,
 
(In thousands except per share amounts)
   
2006
   
2005
 
               
Revenues
 
$
724,962
 
$
679,411
 
               
Costs and Operating Expenses:
             
Cost of revenues
   
388,077
   
373,712
 
Selling, general and administrative expenses
   
217,938
   
194,323
 
Research and development expenses
   
38,658
   
38,784
 
Restructuring and other costs, net (Note 11)
   
5,178
   
10,482
 
               
     
649,851
   
617,301
 
               
Operating Income
   
75,111
   
62,110
 
Other Expense, Net (Note 4)
   
(5,743
)
 
(2,751
)
               
     Income from Continuing Operations Before Provision for Income Taxes
   
69,368
   
59,359
 
Provision for Income Taxes
   
(20,535
)
 
(18,762
)
               
Income from Continuing Operations
   
48,833
   
40,597
 
     Gain on Disposal of Discontinued Operations (net of income tax provision of $11,456; Note 13)
   
   
17,137
 
               
Net Income
 
$
48,833
 
$
57,734
 
               
     Earnings per Share from Continuing Operations (Note 5):
     
Basic
 
$
.31
 
$
.25
 
               
Diluted
 
$
.30
 
$
.25
 
               
Earnings per Share (Note 5):
             
Basic
 
$
.31
 
$
.36
 
               
Diluted
 
$
.30
 
$
.35
 
               
Weighted Average Shares (Note 5):
             
Basic
   
157,705
   
161,794
 
               
Diluted
   
162,161
   
165,635
 








The accompanying notes are an integral part of these consolidated financial statements.



4

THERMO ELECTRON CORPORATION
 
Consolidated Statement of Income
(Unaudited)
 
   
 Nine Months Ended
 
 
 
 September 30,
   
October 1,
 
(In thousands except per share amounts)
   
2006
   
2005
 
               
Revenues
 
$
2,122,717
 
$
1,892,240
 
               
Costs and Operating Expenses:
             
Cost of revenues
   
1,148,716
   
1,039,852
 
Selling, general and administrative expenses
   
627,305
   
550,417
 
Research and development expenses
   
118,015
   
114,544
 
Restructuring and other costs, net (Note 11)
   
13,552
   
12,427
 
               
     
1,907,588
   
1,717,240
 
               
Operating Income
   
215,129
   
175,000
 
Other Income (Expense), Net (Note 4)
   
(12,905
)
 
26,057
 
               
     Income from Continuing Operations Before Provision for Income Taxes
   
202,224
   
201,057
 
Provision for Income Taxes
   
(60,829
)
 
(58,117
)
               
Income from Continuing Operations
   
141,395
   
142,940
 
     Gain on Disposal of Discontinued Operations, Net (net of income tax provision of $1,303 and $15,728; Note 13)
   
2,224
   
23,873
 
               
Net Income
 
$
143,619
 
$
166,813
 
               
     Earnings per Share from Continuing Operations (Note 5):
     
Basic
 
$
.88
 
$
.89
 
               
Diluted
 
$
.86
 
$
.87
 
               
Earnings per Share (Note 5):
             
Basic
 
$
.89
 
$
1.03
 
               
Diluted
 
$
.88
 
$
1.02
 
               
Weighted Average Shares (Note 5):
             
Basic
   
160,680
   
161,335
 
               
Diluted
   
164,889
   
165,008
 








The accompanying notes are an integral part of these consolidated financial statements.



5

THERMO ELECTRON CORPORATION
 
Consolidated Statement of Cash Flows
(Unaudited)
 
   
 Nine Months Ended
 
 
 
 September 30,
   
October 1,
 
(In thousands)
   
2006
   
2005
 
               
Operating Activities:
             
              Net income
 
$
143,619
 
$
166,813
 
   Gain on disposal of discontinued operations, net
   
(2,224
)
 
(23,873
)
               
   Income from continuing operations
   
141,395
   
142,940
 
               
   Adjustments to reconcile income from continuing operations to net cash provided by operating  
            activities:
             
 Depreciation and amortization
   
116,262
   
85,344
 
 Noncash restructuring and other costs, net
   
126
   
1,723
 
 Provision for losses on accounts receivable
   
1,440
   
1,451
 
 Change in deferred income taxes
   
(28,543
)
 
(3,197
)
 Gain on sale of product lines, net
   
(556
)
 
(119
)
 Gain on investments, net
   
(902
)
 
(34,761
)
 Noncash equity compensation
   
20,134
   
2,067
 
 Other noncash expenses, net
   
29
   
14,780
 
              Changes in current accounts, excluding the effects of acquisitions and dispositions:
             
                  Accounts receivable
   
42,700
   
(8,780
)
                  Inventories
   
(31,027
)
 
(15,495
)
                  Other current assets
   
(14,382
)
 
(15,075
)
                  Accounts payable
   
(8,340
)
 
(8,347
)
                  Other current liabilities
   
(37,934
)
 
(16,020
)
               
Net cash provided by continuing operations
   
200,402
   
146,511
 
Net cash used in discontinued operations
   
(161
)
 
(1,647
)
               
Net cash provided by operating activities
   
200,241
   
144,864
 
               
Investing Activities:
             
Acquisitions, net of cash acquired
   
(59,208
)
 
(939,436
)
Proceeds from sale of available-for-sale investments
   
151,012
   
352,326
 
Purchases of available-for-sale investments
   
(83,979
)
 
(148,500
)
Purchases of property, plant and equipment
   
(31,814
)
 
(27,125
)
Proceeds from sale of property, plant and equipment
   
4,611
   
10,026
 
Proceeds from sale of product lines
   
8,875
   
5,661
 
Collection of notes receivable
   
2,805
   
 
Proceeds from sale of other investments
   
1,942
   
2,113
 
Increase in other assets
   
(1,983
)
 
(1,977
)
Other
   
(531
)
 
(97
)
               
Net cash used in continuing operations
   
(8,270
)
 
(747,009
)
Net cash provided by discontinued operations
   
5,333
   
65,042
 
               
Net cash used in investing activities
 
$
(2,937
)
$
(681,967
)



6

THERMO ELECTRON CORPORATION
 
Consolidated Statement of Cash Flows (continued)
(Unaudited)
 
   
 Nine Months Ended
 
 
 
 September 30,
   
October 1,
 
(In thousands)
   
2006
   
2005
 
               
Financing Activities:
             
   Purchases of company common stock
 
$
(228,001
)
$
 
Net proceeds from issuance of long-term debt
   
   
246,965
 
Increase (decrease) in short-term notes payable
   
(66,916
)
 
155,741
 
   Net proceeds from issuance of company common stock
   
26,382
   
21,739
 
   Borrowings under short-term bridge financing agreement
   
   
570,000
 
   Repayment of bridge financing agreement
   
   
(570,000
)
   Tax benefits from exercised stock options (Note 7)
   
6,662
   
 
Other
   
(175
)
 
(2,320
)
               
Net cash provided by (used in) financing activities
   
(262,048
)
 
422,125
 
               
Exchange Rate Effect on Cash of Continuing Operations
   
8,382
   
(18,449
)
               
Decrease in Cash and Cash Equivalents
   
(56,362
)
 
(133,427
)
Cash and Cash Equivalents at Beginning of Period
   
214,326
   
326,886
 
               
Cash and Cash Equivalents at End of Period
 
$
157,964
 
$
193,459
 
               
Noncash Investing Activities:
             
Fair value of assets of acquired businesses
 
$
91,581
 
$
1,103,872
 
Cash paid for acquired businesses
   
(61,015
)
 
(946,935
)
               
Liabilities of acquired businesses
 
$
30,566
 
$
156,937
 




















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 September 30, 2006, the results of operations for the three- and nine-month periods ended September 30, 2006, and October 1, 2005, and the cash flows for the nine-month periods ended September 30, 2006, and October 1, 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 was approved by both companies’ shareholders, in separate meetings, held on August 30, 2006. The transaction is subject to regulatory approvals and other customary closing conditions. The U.S. Federal Trade Commission has granted the companies early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act and no further regulatory review is necessary in the U.S. for the parties to close the merger. The deadline for the European Commission to rule on the merger is November 9, 2006. Assuming the European Commission clears the transaction on November 9, 2006, the company expects to close the merger on that date. 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 ($2.15 billion at September 30, 2006).

On July 20, 2006, the company’s Life and Laboratory Sciences segment acquired GV Instruments Limited (GVI), a UK-based provider of isotope ratio mass spectrometry instruments and accessories used in earth sciences, medical and life sciences applications. The acquisition broadened the segment’s offerings of mass spectrometry products. The purchase price was $21.5 million, net of cash acquired, and is subject to a post-closing adjustment. GVI’s revenues totaled $19 million in 2005. The purchase price exceeded the fair value of the acquired net assets and, accordingly, $18.0 million was allocated to goodwill, none of which is tax deductible.



8

THERMO ELECTRON CORPORATION
 
2.
Merger and Acquisitions (continued)

On June 30, 2006, the company’s Measurement and Control segment acquired EGS Gauging, Inc. (EGS), a Massachusetts-based provider of flat polymer web gauging products for $26.4 million, net of cash acquired. The agreement calls for contingent consideration of up to $2.0 million based on 2006 revenues and operating results. The acquisition broadened the segment’s gauging systems product offerings. EGS’s revenues totaled $25 million in 2005. The purchase price exceeded the fair value of the acquired net assets and, accordingly, $14.1 million was allocated to goodwill, none of which is tax deductible.

In addition to the acquisitions of GVI and EGS, the company acquired a small manufacturer of on-line elemental analyzer products in the third quarter of 2006 as well as a product line and a small distributor in the second quarter of 2006 for aggregate consideration of $11.3 million.

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

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 within the past year, is subject to adjustment upon finalization of the purchase price allocation. The company does not expect material changes to the preliminary purchase price allocation.

The components of the preliminary purchase price allocation for 2006 acquisitions are as follows:

(In thousands)
   
GVI
   
EGS
   
Other
   
Total
 
                           
Purchase Price:
                         
Cash paid (a)
 
$
21,916
 
$
27,816
 
$
11,283
 
$
61,015
 
Cash acquired
   
(377
)
 
(1,416
)
 
(14
)
 
(1,807
)
                           
   
$
21,539
 
$
26,400
 
$
11,269
 
$
59,208
 
                           
Allocation:
                         
Current assets
 
$
10,753
 
$
7,385
 
$
1,525
 
$
19,663
 
Property, plant and equipment
   
337
   
806
   
61
   
1,204
 
Acquired intangible assets
   
7,780
   
14,635
   
6,420
   
28,835
 
Goodwill
   
17,996
   
14,113
   
5,552
   
37,661
 
Other assets
   
   
786
   
1,625
   
2,411
 
Liabilities assumed
   
(15,327
)
 
(11,325
)
 
(3,914
)
 
(30,566
)
                           
   
$
21,539
 
$
26,400
 
$
11,269
 
$
59,208
 

(a)  
Includes transaction costs.
   


9

THERMO ELECTRON CORPORATION
 
2.
Merger and Acquisitions (continued)

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

(In thousands)
   
GVI
   
EGS
   
Other
   
Total
 
                           
Customer Relationships
 
$
4,215
 
$
9,217
 
$
3,045
 
$
16,477
 
Product Technology
   
3,565
   
5,418
   
3,375
   
12,358
 
                           
   
$
7,780
 
$
14,635
 
$
6,420
 
$
28,835
 

The weighted-average amortization periods for intangible assets acquired in 2006 are: 9 years for customer relationships and 6 years for product technology. The weighted-average amortization period for all intangible assets acquired in 2006 is 8 years.

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 the nine months ended October 1, 2005 would have been as follows:

 
 
Nine Months Ended
 
(In thousands except per share amounts)
 
 October 1, 2005
 
 
Revenues
 
$
2,020,559
 
         
Net Income
 
$
155,197
 
         
     Earnings per Share from Continuing Operations:
       
Basic
 
$
.81
 
Diluted
 
$
.80
 
         
Earnings Per Share:
       
Basic
 
$
.96
 
Diluted
 
$
.95
 

The company’s results for the first nine months of 2006 and 2005 would not have been materially different from its reported results had the company’s other acquisitions completed through the third quarter of 2006 occurred at the beginning of 2005 or 2006.

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, the company established reserves through an increase in goodwill, 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.


10

THERMO ELECTRON CORPORATION
 
2.
Merger and Acquisitions (continued)

The changes in accrued acquisition expenses for acquisitions completed during 2006 are as follows:

(In thousands)
 
 Severance
 
         
    Reserves established
 
$
536
 
    Payments
   
(274
)
    Currency translation
   
10
 
         
Balance at September 30, 2006
 
$
272
 

The accrued acquisition expenses consist of severance for 28 employees across all functions at GVI. The company expects to pay the amounts accrued 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
   
531
   
629
   
4,373
 
Payments
   
(1,969
)
 
(108
)
 
   
(2,077
)
Decrease recorded as a reduction in goodwill
   
(427
)
 
   
(537
)
 
(964
)
Currency translation
   
376
   
36
   
8
   
420
 
                           
Balance at September 30, 2006
 
$
3,687
 
$
804
 
$
173
 
$
4,664
 

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 these amounts through 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
   
   
(1,163
)
 
(1,163
)
   Divestiture
   
   
(199
)
 
(199
)
Decrease recorded as a reduction in goodwill
   
(15
)
 
(211
)
 
(226
)
Currency translation
   
10
   
277
   
287
 
                     
Balance at September 30, 2006
 
$
134
 
$
1,916
 
$
2,050
 

The accrued acquisition expenses relate primarily to severance 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.



11

THERMO ELECTRON CORPORATION
 
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 September 30, 2006
                                   
Revenues
 
$
543,470
 
$
181,492
 
$
 
$
 
$
724,962
     
                                     
Adjusted operating income (a)
 
$
99,689
 
$
25,764
 
$
(3,699
)
$
(13,076
)
$
108,678
 
(b)
 
Cost of revenues charges
   
(1,458
)
 
(526
)
 
   
   
(1,984
)
   
Restructuring and other items
   
(969
)
 
(2,612
)
 
   
(1,597
)
 
(5,178
)
   
Stock option compensation expense
   
(2,863
)
 
(836
)
 
3,699
   
   
     
Amortization
   
(24,491
)
 
(1,918
)
 
   
4
   
(26,405
)
   
                                     
Operating income
   
69,908
   
19,872
   
   
(14,669
)
 
75,111
 
(b)
 
Other expense, net
                           
(5,743
)
   
                                     
            Income from continuing operations before provision for 
                income taxes
                         
$
69,368
     
                                     
Depreciation
 
$
9,450
 
$
2,300
 
$
 
$
1,670
 
$
13,420
     
                                     
Three Months Ended October 1, 2005
                                   
Revenues
 
$
516,047
 
$
163,364
 
$
 
$
 
$
679,411
     
                                     
Adjusted operating income (a)
 
$
88,263
 
$
20,084
 
$
 
$
(8,430
)
$
99,917
 
(c)
 
Cost of revenues charges
   
(1,142
)
 
(614
)
 
   
   
(1,756
)
   
Restructuring and other items
   
(6,823
)
 
(3,445
)
 
   
(214
)
 
(10,482
)
   
Amortization
   
(24,098
)
 
(1,470
)
 
   
(1
)
 
(25,569
)
   
                                     
Operating income
   
56,200
   
14,555
   
   
(8,645
)
 
62,110
 
(c)
 
Other expense, net
                           
(2,751
)
   
                                     
            Income from continuing operations before provision for
                income taxes
                         
$
59,359
     
                                     
Depreciation
 
$
8,190
 
$
2,803
 
$
 
$
1,347
 
$
12,340
     



12

THERMO ELECTRON CORPORATION
 
3.
Business Segment Information (continued)

   
Life and
Laboratory
Sciences
   
Measurement and Control
   
Eliminations and Other
   
Corporate
   
Total
     
 
(In thousands) 
   
                                     
Nine Months Ended September 30, 2006
                                   
Revenues
 
$
1,595,111
 
$
527,606
 
$
 
$
 
$
2,122,717
     
                                     
Adjusted operating income (a)
 
$
279,237
 
$
74,899
 
$
(10,106
)
$
(34,478
)
$
309,552
 
(b)
 
Cost of revenues charges
   
(2,724
)
 
(526
)
 
   
   
(3,250
)
   
Restructuring and other items
   
(6,586
)
 
(5,246
)
 
(9
)
 
(1,711
)
 
(13,552
)
   
Stock option compensation expense
   
(7,923
)
 
(2,183
)
 
10,106
   
   
     
Amortization
   
(72,783
)
 
(4,838
)
 
   
   
(77,621
)
   
                                     
Operating income
   
189,221
   
62,106
   
(9
)
 
(36,189
)
 
215,129
 
(b)
 
Other expense, net
                           
(12,905
)
   
                                     
            Income from continuing operations before
                provision for income taxes
                         
$
202,224
     
                                     
Depreciation
 
$
27,039
 
$
6,647
 
$
 
$
4,955
 
$
38,641
     
                                     
Nine Months Ended October 1, 2005
                                   
Revenues
 
$
1,396,814
 
$
495,426
 
$
 
$
 
$
1,892,240
     
                                     
Adjusted operating income (a)
 
$
222,893
 
$
56,106
 
$
 
$
(26,259
)
$
252,740
 
(c)
 
Cost of revenues charges
   
(12,374
)
 
(847
)
 
   
   
(13,221
)
   
Restructuring and other items
   
(4,929
)
 
(6,647
)
 
573
   
(1,424
)
 
(12,427
)
   
Amortization
   
(48,485
)
 
(3,604
)
 
   
(3
)
 
(52,092
)
   
                                     
Operating income
   
157,105
   
45,008
   
573
   
(27,686
)
 
175,000
 
(c)
 
Other income, net
                           
26,057
     
                                     
    Income from continuing operations before
                provision for income taxes
                         
$
201,057
     
                                     
Depreciation
 
$
22,733
 
$
7,264
 
$
 
$
3,255
 
$
33,252
     

(a)
Represents operating income before restructuring and other costs, net; amortization of acquisition-related intangible assets; and, for the business segments, stock option compensation expense.
(b)
Consolidated adjusted operating income and consolidated operating income in 2006 include stock option compensation expense of $6.7 million in the third quarter ($0.8 million in cost of revenues, $5.5 million in selling, general and administrative expenses and $0.4 million in research and development expenses) and $18.5 million in the first nine months ($2.1 million in cost of revenues, $15.3 million in selling, general and administrative expenses and $1.1 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 2005, consolidated adjusted operating income and consolidated operating income on a pro forma basis would have been lower by $5.2 million in the third quarter ($0.5 million in cost of revenues, $4.4 million in selling, general and administrative expenses and $0.3 million in research and development expenses) and by $15.7 million in the first nine months ($1.7 million in cost of revenues, $13.1 million in selling, general and administrative expenses and $0.9 million in research and development expenses).


13

THERMO ELECTRON CORPORATION
 
4.
Other Income (Expense), Net

The components of other income (expense), net, in the accompanying statement of income are as follows:
 
   
 Three Months Ended
 
 Nine Months Ended
 
 
 September 30,
   
October 1,
   
September 30,
   
October 1,
 
(In thousands)
   
2006
   
2005
   
2006
   
2005
 
                           
Interest Income
 
$
2,825
 
$
2,198
 
$
9,750
 
$
8,125
 
Interest Expense
   
(9,278
)
 
(8,307
)
 
(25,007
)
 
(18,749
)
Gain on Investments, Net
   
377
   
2,695
   
902
   
34,761
 
Other Items, Net
   
333
   
663
   
1,450
   
1,920
 
                           
   
$
(5,743
)
$
(2,751
)
$
(12,905
)
$
26,057
 

The company sold 4,436,000 shares of Thoratec Corporation common stock, obtained as part of the sale of Thermo Cardiosystems Inc. in 2001, during the first nine months of 2005 and realized a gain of $28.9 million. 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.




14

THERMO ELECTRON CORPORATION
 
5.
Earnings per Share

Basic and diluted earnings per share were calculated as follows:
  
   
 Three Months Ended
 
 Nine Months Ended
 
 
 September 30,
   
October 1,
   
September 30,
   
October 1,
 
(In thousands except per share amounts)
   
2006
   
2005
   
2006
   
2005
 
                           
 Income from Continuing Operations
 
$
48,833
 
$
40,597
 
$
141,395
 
$
142,940
 
     Gain on Disposal of Discontinued Operations
   
   
17,137
   
2,224
   
23,873
 
                           
Net Income for Basic Earnings per Share
   
48,833
   
57,734
   
143,619
   
166,813
 
Effect of Convertible Debentures
   
402
   
402
   
1,205
   
1,205
 
                           
   Income Available to Common Shareholders, as Adjusted for Diluted
       Earnings per Share
 
$
49,235
 
$
58,136
 
$
144,824
 
$
168,018
 
                           
Basic Weighted Average Shares
   
157,705
   
161,794
   
160,680
   
161,335
 
Effect of:
                         
Stock options
   
2,538
   
1,920
   
2,293
   
1,776
 
Convertible debentures
   
1,846
   
1,846
   
1,846
   
1,846
 
   Restricted stock awards and contingently issuable shares
   
72
   
75
   
70
   
51
 
                           
Diluted Weighted Average Shares
   
162,161
   
165,635
   
164,889
   
165,008
 
                           
Basic Earnings per Share:
                         
Continuing operations
 
$
.31
 
$
.25
 
$
.88
 
$
.89
 
Discontinued operations
   
   
.11
   
.01
   
.15
 
                           
   
$
.31
 
$
.36
 
$
.89
 
$
1.03
 
                           
Diluted Earnings per Share:
                         
Continuing operations
 
$
.30
 
$
.25
 
$
.86
 
$
.87
 
Discontinued operations
   
   
.10
   
.01
   
.14
 
                           
   
$
.30
 
$
.35
 
$
.88
 
$
1.02
 

Options to purchase 2,958,000, 360,000, 3,064,000 and 1,796,000 shares of common stock were not included in the computation of diluted earnings per share for the third quarter of 2006 and 2005 and the first nine months of 2006 and 2005, respectively, because their effect would have been antidilutive.


15

THERMO ELECTRON CORPORATION
 
6.
Comprehensive Income and Shareholders’ Equity

Comprehensive income combines net income and other comprehensive items. Other comprehensive items represents certain amounts that are reported as components of shareholders’ equity in the accompanying balance sheet, including currency translation adjustments; unrealized gains and losses, net of tax, on available-for-sale investments and hedging instruments; and minimum pension liability adjustment. During the third quarter of 2006 and 2005, the company had comprehensive income of $65.5 million and $51.1 million, respectively. During the first nine months of 2006 and 2005, the company had comprehensive income of $194.0 million and $93.4 million, respectively. The three and nine months ended October 1, 2005 were unfavorably affected by reductions in the cumulative translation adjustment of $5.8 million and $88.5 million, respectively, due to movements in currency exchange rates, the effects of which are recorded in shareholders’ equity. The three and nine months ended September 30, 2006 were favorably affected by increases in the cumulative translation adjustment of $18.0 million and $54.1 million, respectively, due to movements in currency exchange rates.

In July 2006, the company’s board of directors authorized the retirement of 20 million shares of treasury stock. Shares with a cost of $520.4 million were retired on July 28, 2006, through a reduction of capital in excess of par value.

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 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. Options are granted at fair market value. The company also has a directors’ stock option plan that provides for the annual grant of stock options of the company to outside directors. Options awarded under this plan prior to 2003 are immediately exercisable and expire three to seven years after the date of grant. Options awarded in 2003 and thereafter vest over three years, assuming continued service on the board, and expire seven years after the date of grant. 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


16

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

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 nine months of 2006. Prior period amounts have not been restated for the adoption of SFAS No. 123R.

As a result of the adoption of SFAS No. 123R, the company’s results for the three and nine months ended September 30, 2006 include incremental share-based compensation pre-tax expense of $6.7 million and $18.5 million, respectively, related to stock options. The total stock-based compensation cost of $7.2 million and $20.1 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 $2.3 million and $6.6 million in the three and nine months ended September 30, 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 third quarter of 2006 and a $.08 decrease in both basic and diluted earnings per share in the first nine months of 2006. In the first nine months of 2006, the adoption of SFAS No. 123R also resulted in the inclusion of $6.7 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:

 
Nine Months Ended 
   
September 30,
   
October 1,
 
     
2006
   
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 per share grant-date fair values of options granted during the first nine months of 2006 and 2005 were $11.02 and $9.04, respectively. The total intrinsic value of options exercised during the same periods was $22.8 million and $16.7 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.


17

THERMO ELECTRON CORPORATION
 
7.
Stock-based Compensation Plans and Stock-based Compensation Expense (continued)
 
A summary of option activity as of September 30, 2006 and changes during the nine months then ended is presented below:

 
 
 Shares
(In thousands)
   
Weighted
Average
Exercise Price
 
 Weighted
Average
Remaining
Contractual Term
(In years)
 
 
Aggregate
Intrinsic
Value (a)
(In thousands)
 
 
                           
Outstanding at December 31, 2005
   
12,084
 
$
22.65
             
Granted
   
3,001
   
34.97
             
Exercised
   
(1,377
)
 
19.15
             
Canceled
   
(199
)
 
29.02