10-Q 1 tmoq214.htm THERMO FISHER SCIENTIFIC INC., FORM 10-Q, DATED JUNE 28, 2014 tmoq214.htm
 
 






UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
____________________________________________________

FORM 10-Q

x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended June 28, 2014

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

Commission File Number 1-8002

THERMO FISHER SCIENTIFIC INC.
(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
 
Waltham, Massachusetts
02451
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x     Accelerated filer o     Non-accelerated filer o     Smaller reporting company 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 June 28, 2014
Common Stock, $1.00 par value
 
399,354,992
 
 
 



 
 

 

THERMO FISHER SCIENTIFIC INC.
 
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 28, 2014
 
TABLE OF CONTENTS

   
Page
 
PART I
 
     
Item 1.
Financial Statements (Unaudited)
3
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
49
     
Item 4.
Controls and Procedures
49
     
 
PART II
 
     
Item 1.
Legal Proceedings
50
     
Item 1A.
Risk Factors
50
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
56
     
Item 6.
Exhibits
56
     
     

 
2

 

THERMO FISHER SCIENTIFIC INC.

PART I          FINANCIAL INFORMATION
 
Item 1.           Financial Statements
 
CONSOLIDATED BALANCE SHEET
(Unaudited)
 
         
June 28,
December 31,
 
(In millions)
 
2014
 
2013
 
                       
Assets
             
Current Assets:
             
 
Cash and cash equivalents
 
$
 584.9
 
$
 5,826.0
 
 
Short-term investments
   
 21.0
   
 4.5
 
 
Accounts receivable, less allowances of $84.6 and $54.1
   
 2,660.1
   
 1,942.3
 
 
Inventories
   
 1,933.8
   
 1,494.5
 
 
Deferred tax assets
   
 237.5
   
 192.5
 
 
Other current assets
   
 507.1
   
 420.9
 
                       
   
Total current assets
   
 5,944.4
   
 9,880.7
 
                       
Property, Plant and Equipment, at Cost, Net
   
 2,472.0
   
 1,767.4
 
                       
Acquisition-related Intangible Assets, Net
 
 15,621.6
   
 7,071.3
 
                       
Other Assets
   
 836.1
   
 640.7
 
                       
Goodwill
   
 19,439.3
   
 12,503.3
 
                       
Total Assets
 
$
 44,313.4
 
$
 31,863.4
 
                       
 

 
3

 

THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)
 
         
June 28,
December 31,
(In millions except share amounts)
 
2014
 
2013
                     
Liabilities and Shareholders' Equity
           
Current Liabilities:
           
 
Short-term obligations and current maturities of long-term obligations
 
$
 3,075.1
 
$
 987.7
 
Accounts payable
   
 849.9
   
 691.5
 
Accrued payroll and employee benefits
   
 535.8
   
 432.0
 
Accrued income taxes
   
 293.4
   
 —
 
Deferred revenue
   
 342.5
   
 198.9
 
Other accrued expenses
   
 1,138.9
   
 815.9
                     
   
Total current liabilities
   
 6,235.6
   
 3,126.0
                     
Deferred Income Taxes
   
 3,788.3
   
 1,609.9
                     
Other Long-term Liabilities
   
 1,128.9
   
 771.8
                     
Long-term Obligations
   
 12,502.0
   
 9,499.6
                     
Shareholders' Equity:
           
 
Preferred stock, $100 par value, 50,000 shares authorized; none issued
           
 
Common stock, $1 par value, 1,200,000,000 shares authorized; 407,241,027 and
           
   
369,598,265 shares issued
   
 407.2
   
 369.6
 
Capital in excess of par value
   
 11,351.6
   
 8,222.6
 
Retained earnings
   
 9,454.6
   
 8,753.3
 
Treasury stock at cost, 7,886,035 and 7,636,887 shares
   
 (443.1)
   
 (412.2)
 
Accumulated other comprehensive items
   
 (111.7)
   
 (77.2)
                     
   
Total shareholders' equity
   
 20,658.6
   
 16,856.1
                     
Total Liabilities and Shareholders' Equity
 
$
 44,313.4
 
$
 31,863.4
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
 
4

 
 
THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
 
       
Three Months Ended
 
Six Months Ended
     
June 28,
June 29,
June 28,
June 29,
(In millions except per share amounts)
 
2014
 
2013
 
2014
 
2013
                             
Revenues
                       
 
Product revenues
 
$
 3,778.0
 
$
 2,786.8
 
$
 7,153.4
 
$
 5,510.3
 
Service revenues
   
 543.9
   
 453.3
   
 1,072.0
   
 921.3
                             
   
Total revenues
   
 4,321.9
   
 3,240.1
   
 8,225.4
   
 6,431.6
                             
Costs and Operating Expenses:
                       
 
Cost of product revenues
   
 2,112.9
   
 1,572.5
   
 4,046.2
   
 3,105.6
 
Cost of service revenues
   
 362.5
   
 304.4
   
 712.7
   
 626.5
 
Selling, general and administrative expenses
 
 1,253.8
   
 869.6
   
 2,430.8
   
 1,699.1
 
Research and development expenses
   
 183.7
   
 96.7
   
 333.4
   
 194.9
 
Restructuring and other costs (income), net
   
 60.9
   
 21.5
   
 (521.3)
   
 43.0
                             
   
Total costs and operating expenses
   
 3,973.8
   
 2,864.7
   
 7,001.8
   
 5,669.1
                             
Operating Income
   
 348.1
   
 375.4
   
 1,223.6
   
 762.5
Other Expense, Net
   
 (111.6)
   
 (95.4)
   
 (212.7)
   
 (139.6)
                             
Income from Continuing Operations Before Income Taxes
   
 236.5
   
 280.0
   
 1,010.9
   
 622.9
Income Tax Benefit (Provision)
   
 42.0
   
 (2.4)
   
 (189.3)
   
 (4.5)
                             
Income from Continuing Operations
   
 278.5
   
 277.6
   
 821.6
   
 618.4
Loss from Discontinued Operations (net of income tax
     benefit of $0.1 and $0.3)
   
 —
   
 (0.2)
   
 —
   
 (0.6)
Loss on Disposal of Discontinued Operations, Net (net
     of income tax benefit of $2.8)
   
 —
   
 —
   
 —
   
 (4.2)
                             
Net Income
 
$
 278.5
 
$
 277.4
 
$
 821.6
 
$
 613.6
                             
Earnings per Share from Continuing Operations
                       
 
Basic
 
$
 .70
 
$
 .77
 
$
 2.07
 
$
 1.72
 
Diluted
 
$
 .69
 
$
 .76
 
$
 2.05
 
$
 1.71
                             
Earnings per Share
                       
 
Basic
 
$
 .70
 
$
 .77
 
$
 2.07
 
$
 1.71
 
Diluted
 
$
 .69
 
$
 .76
 
$
 2.05
 
$
 1.69
                             
Weighted Average Shares
                       
 
Basic
   
 399.4
   
 360.0
   
 396.3
   
 359.0
 
Diluted
   
 403.1
   
 363.5
   
 400.7
   
 362.6
                             
Cash Dividends Declared per Common Share
 
$
 .15
 
$
 .15
 
$
 .30
 
$
 .30
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
 
5

 
 
THERMO FISHER SCIENTIFIC INC.
 
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
 
           
Three Months Ended
 
Six Months Ended
         
June 28,
June 29,
June 28,
June 29,
(In millions)
 
2014
 
2013
 
2014
 
2013
                                 
Comprehensive Income
                       
 
Net Income
 
$
 278.5
 
$
 277.4
 
$
 821.6
 
$
 613.6
                                 
 
Other Comprehensive Items:
                       
   
Currency translation adjustment
   
 (50.7)
   
 (135.7)
   
 (36.4)
   
 (315.0)
   
Unrealized gains on available-for-sale investments:
                     
     
Unrealized holding gains (losses) arising
      during the period (net of tax provision
      (benefit) of $0.1, ($0.1), $0.1  and $0.3)
   
 1.8
   
 (0.1)
   
 1.8
   
 1.1
     
Reclassification adjustment for gains included
     in net income (net of tax provision of $0.0,
    $0.0 and $2.5)
   
 (1.4)
   
 —
   
 (1.4)
   
 (8.0)
   
Unrealized gains and losses on hedging instruments:
                     
     
Unrealized gain on hedging instruments
     (net of tax provision of $4.1 and $4.1)
   
 —
   
 6.7
   
 —
   
 6.7
     
Reclassification adjustment for losses
     included in net income (net of tax benefit
     of $0.5, $0.5, $0.9 and $1.0)
   
 0.8
   
 0.8
   
 1.5
   
 1.6
   
Pension and other postretirement benefit liability
      adjustment:
                       
     
Pension and other postretirement benefit
     liability adjustments arising during the
     period (net of tax (benefit) provision of
     ($0.3), ($0.1), ($0.9) and $1.5)
   
 (0.7)
   
 (0.3)
   
 (2.6)
   
 4.2
     
Amortization of net loss and prior service
     benefit included in net periodic pension
     cost (net of tax benefit of $0.6, $0.9, $1.2
     and $1.8)
   
 1.3
   
 1.9
   
 2.6
   
 3.8
                                 
       
Total other comprehensive items
   
 (48.9)
   
 (126.7)
   
 (34.5)
   
 (305.6)
                                 
Comprehensive Income
 
$
 229.6
 
$
 150.7
 
$
 787.1
 
$
 308.0
                                 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
   
   
 
 
 
6

 
 
THERMO FISHER SCIENTIFIC INC.
 
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
           
Six Months Ended
 
         
June 28,
June 29,
 
(In millions)
 
2014
 
2013
 
                       
Operating Activities
             
 
Net income
 
$
 821.6
 
$
 613.6
 
 
Loss from discontinued operations
   
 —
   
 0.6
 
 
Loss on disposal of discontinued operations
   
 —
   
 4.2
 
                       
 
Income from continuing operations
   
 821.6
   
 618.4
 
                       
 
Adjustments to reconcile income from continuing operations to net cash provided by
   operating activities:
             
   
Depreciation and amortization
   
 800.4
   
 500.2
 
   
Change in deferred income taxes
   
 (460.4)
   
 (65.0)
 
   
Net gains on sale of businesses
   
 (761.8)
   
 —
 
   
Non-cash stock-based compensation
   
 56.0
   
 43.7
 
   
Tax benefits from stock-based compensation awards
   
 (55.6)
   
 (30.6)
 
   
Non-cash charges for sale of inventories revalued at the date of acquisition
   
 302.3
   
 23.9
 
   
Other non-cash expenses, net
   
 27.1
   
 13.4
 
   
Changes in assets and liabilities, excluding the effects of acquisitions and dispositions:
             
     
Accounts receivable
   
 (153.7)
   
 (139.0)
 
     
Inventories
   
 (53.8)
   
 (97.6)
 
     
Other assets
   
 258.9
   
 (107.1)
 
     
Accounts payable
   
 3.4
   
 33.3
 
     
Other liabilities
   
 233.1
   
 7.4
 
     
Contributions to retirement plans
   
 (25.7)
   
 (22.6)
 
                       
       
Net cash provided by continuing operations
   
 991.8
   
 778.4
 
       
Net cash used in discontinued operations
   
 (1.9)
   
 (1.7)
 
                       
       
Net cash provided by operating activities
   
 989.9
   
 776.7
 
                       
Investing Activities
             
 
Acquisitions, net of cash acquired
   
 (13,054.5)
   
 (4.7)
 
 
Purchase of property, plant and equipment
   
 (180.2)
   
 (131.6)
 
 
Proceeds from sale of property, plant and equipment
   
 12.7
   
 3.6
 
 
Proceeds from sale of investments
   
 65.0
   
 0.5
 
 
Proceeds from sale of businesses, net of cash divested
   
 1,048.7
   
 —
 
 
Decrease (increase) in restricted cash
   
 37.9
   
 (0.5)
 
 
Other investing activities, net
   
 (3.7)
   
 (0.2)
 
                       
       
Net cash used in investing activities
 
$
 (12,074.1)
 
$
 (132.9)
 
 
 
 
 
 
7

 
 
THERMO FISHER SCIENTIFIC INC.
 
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
 
           
Six Months Ended
         
June 28,
June 29,
(In millions)
 
2014
 
2013
                     
Financing Activities
           
 
Net proceeds from issuance of long-term debt
 
$
 4,999.6
 
$
 —
 
Increase in commercial paper, net
   
 305.6
   
 —
 
Repayment of long-term obligations
   
 (2,452.3)
   
 (0.7)
 
Decrease in short-term notes payable
   
 (18.6)
   
 (1.6)
 
Purchases of company common stock
   
 —
   
 (89.8)
 
Dividends paid
   
 (114.7)
   
 (107.9)
 
Net proceeds from issuance of company common stock
   
 2,942.0
   
 —
 
Net proceeds from issuance of company common stock under employee stock plans
   
 108.6
   
 172.3
 
Tax benefits from stock-based compensation awards
   
 55.6
   
 30.6
 
Other financing activities, net
   
 (4.9)
   
 (0.8)
                     
       
Net cash provided by financing activities
   
 5,820.9
   
 2.1
                     
Exchange Rate Effect on Cash
   
 22.2
   
 (88.8)
                     
(Decrease) Increase in Cash and Cash Equivalents
   
 (5,241.1)
   
 557.1
Cash and Cash Equivalents at Beginning of Period
   
 5,826.0
   
 805.6
                     
Cash and Cash Equivalents at End of Period
 
$
 584.9
 
$
 1,362.7
                     
See Note 13 for supplemental cash flow information.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
 
8

 
 
THERMO FISHER SCIENTIFIC INC.
 
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
 
                                     
Accumulated
     
               
Capital in
                   
Other
 
Total
   
Common Stock
 
Excess of
 
Retained
 
Treasury Stock
Comprehensive
Shareholders'
(In millions)
 
Shares
 
Amount
 
Par Value
 
Earnings
 
Shares
 
Amount
 
Items
 
Equity
                                                 
Balance at December 31, 2012
   
 413.5
 
$
 413.5
 
$
 10,501.1
 
$
 7,697.3
   
 56.0
 
$
 (2,996.8)
 
$
 (150.4)
 
$
 15,464.7
                                                 
Issuance of shares under employees'
    and directors' stock plans
 
 4.6
   
 4.6
   
 171.6
   
 —
   
 0.3
   
 (19.3)
   
 —
   
 156.9
Stock-based compensation
   
 —
   
 —
   
 43.7
   
 —
   
 —
   
 —
   
 —
   
 43.7
Tax benefit related to employees'
    and directors' stock plans
   
 —
   
 —
   
 28.4
   
 —
   
 —
   
 —
   
 —
   
 28.4
Purchases of company common
    stock
   
 —
   
 —
   
 —
   
 —
   
 1.3
   
 (89.8)
   
 —
   
 (89.8)
Dividends declared
   
 —
   
 —
   
 —
   
 (108.3)
   
 —
   
 —
   
 —
   
 (108.3)
Net income
   
 —
   
 —
   
 —
   
 613.6
   
 —
   
 —
   
 —
   
 613.6
Other comprehensive items
   
 —
   
 —
   
 —
   
 —
   
 —
   
 —
   
 (305.6)
   
 (305.6)
Other
   
 —
   
 —
   
 (0.8)
   
 —
   
 —
   
 —
   
 —
   
 (0.8)
                                                 
Balance at June 29, 2013
   
 418.1
 
$
 418.1
 
$
 10,744.0
 
$
 8,202.6
   
 57.6
 
$
 (3,105.9)
 
$
 (456.0)
 
$
 15,802.8
                                                 
                                                 
Balance at December 31, 2013
   
 369.6
 
$
 369.6
 
$
 8,222.6
 
$
 8,753.3
   
 7.6
 
$
 (412.2)
 
$
 (77.2)
 
$
 16,856.1
Issuance of shares under employees'
    and directors' stock plans
 
 2.7
   
 2.7
   
 110.2
   
 —
   
 0.3
   
 (30.9)
   
 —
   
 82.0
Issuance of shares
   
 34.9
   
 34.9
   
 2,907.4
   
 —
   
 —
   
 —
   
 —
   
 2,942.3
Stock-based compensation
   
 —
   
 —
   
 56.0
   
 —
   
 —
   
 —
   
 —
   
 56.0
Tax benefit related to employees'
    and directors' stock plans
   
 —
   
 —
   
 55.5
   
 —
   
 —
   
 —
   
 —
   
 55.5
Dividends declared
   
 —
   
 —
   
 —
   
 (120.3)
   
 —
   
 —
   
 —
   
 (120.3)
Net income
   
 —
   
 —
   
 —
   
 821.6
   
 —
   
 —
   
 —
   
 821.6
Other comprehensive items
   
 —
   
 —
   
 —
   
 —
   
 —
   
 —
   
 (34.5)
   
 (34.5)
Other
   
 —
   
 —
   
 (0.1)
   
 —
   
 —
   
 —
   
 —
   
 (0.1)
                                                 
Balance at June 28, 2014
   
 407.2
 
$
 407.2
 
$
 11,351.6
 
$
 9,454.6
   
 7.9
 
$
 (443.1)
 
$
 (111.7)
 
$
 20,658.6
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
 
 
9

 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Note 1.           Nature of Operations and Summary of Significant Accounting Policies
 
Nature of Operations
 
Thermo Fisher Scientific Inc. (the company or Thermo Fisher) enables customers to make the world healthier, cleaner and safer by providing analytical instruments, equipment, reagents and consumables, software and services for research, manufacturing, analysis, discovery and diagnostics. Markets served include pharmaceutical and biotech companies, hospitals and clinical diagnostic labs, universities, research institutions and government agencies, as well as environmental and industrial process control settings. On February 3, 2014, the company acquired Life Technologies Corporation (Note 2).
 
Interim Financial Statements
 
The interim consolidated financial statements presented herein have been prepared by the company, 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 June 28, 2014, the results of operations for the three- and six-month periods ended June 28, 2014, and June 29, 2013, and the cash flows for the six-month periods ended June 28, 2014, and June 29, 2013. Interim results are not necessarily indicative of results for a full year.
 
    The consolidated balance sheet presented as of December 31, 2013, 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 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 2013 financial statements and notes included in the company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (SEC) on May 2, 2014.
 
Note 1 to the consolidated financial statements for 2013 describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the company’s significant accounting policies during the six months ended June 28, 2014.
 
Warranty Obligations
 
Product warranties are included in other accrued expenses in the accompanying balance sheet. The changes in the carrying amount of warranty obligations are as follows:
           
Six Months Ended
         
June 28,
June 29,
(In millions)
 
2014
 
2013
             
Beginning Balance
 
$
 49.8
 
$
 48.7
 
Provision charged to income
   
 38.2
   
 34.8
 
Usage
   
 (39.2)
   
 (37.1)
 
Acquisitions
   
 7.2
   
 —
 
Adjustments to previously provided warranties, net
   
 0.9
   
 0.3
 
Other, net
   
 —
   
 (0.5)
                     
Ending Balance
 
$
 56.9
 
$
 46.2
 
 
 
10

 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Inventories
 
The components of inventories are as follows:
         
June 28,
 
December 31,
(In millions)
   
2014
 
2013
             
Raw Materials
 
$
 461.3
 
$
 347.4
Work in Process
   
 217.2
   
 157.7
Finished Goods
   
 1,255.3
   
 989.4
                     
Inventories
 
$
 1,933.8
 
$
 1,494.5
                     
Property, Plant and Equipment\
 
Property, plant and equipment consists of the following:
         
June 28,
 
December 31,
(In millions)
   
2014
 
2013
             
Land
 
$
 294.9
 
$
 212.2
Buildings and Improvements
   
 1,025.4
   
 821.0
Machinery, Equipment and Leasehold Improvements
   
 2,569.2
   
 2,047.9
             
Property, Plant and Equipment, at Cost
   
 3,889.5
   
 3,081.1
Less: Accumulated Depreciation and Amortization
   
 1,417.5
   
 1,313.7
                     
Property, Plant and Equipment, at Cost, Net
 
$
 2,472.0
 
$
 1,767.4
 
Acquisition-related Intangible Assets
 
Acquisition-related intangible assets are as follows:
 
       
June 28, 2014
 
December 31, 2013
           
Accumulated
           
Accumulated
     
(In millions)
 
Gross
 
Amortization
 
Net
 
Gross
 
Amortization
 
Net
                                       
Definite Lived
 
$
 18,715.2
 
$
 (4,937.8)
 
$
 13,777.4
 
$
 10,121.8
 
$
 (4,388.2)
 
$
 5,733.6
Indefinite Lived
   
 1,844.2
   
 —
   
 1,844.2
   
 1,337.7
   
 —
   
 1,337.7
                                         
Acquisition-related
      Intangible Assets
 
$
 20,559.4
 
$
 (4,937.8)
 
$
 15,621.6
 
$
 11,459.5
 
$
 (4,388.2)
 
$
 7,071.3
 
Use of Estimates
 
    The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In addition, significant estimates were made in estimating future cash flows to assess potential impairment of assets and in determining the fair value of acquired intangible assets (Note 2) and the ultimate loss from abandoning leases at facilities being exited (Note 14). Actual results could differ from those estimates.
 
 
 
 
11

 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Recent Accounting Pronouncements
 
         In May 2014, the FASB issued new revenue recognition guidance which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity's nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for the company in 2017. Early adoption is not permitted. The company is currently evaluating the impact the standard will have on its consolidated financial statements.
 
In April 2014, the FASB issued new guidance on reporting discontinued operations and disclosures of disposals. Under the new guidance, only disposals representing a strategic shift in operations will be presented as discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of the company that does not qualify for discontinued operations reporting. This guidance is effective for the company in 2015. Adoption of this standard is not expected to have a material impact on the company’s consolidated financial statements.
 
Note 2.           Acquisitions and Dispositions
 
    The company’s acquisitions have historically been made at prices above the fair value of the acquired identifiable assets, resulting in goodwill, due to expectations of the synergies that will be realized by combining the businesses. These synergies include the elimination of redundant facilities, functions and staffing; use of the company’s existing commercial infrastructure to expand sales of the acquired businesses’ products; and use of the commercial infrastructure of the acquired businesses to cost-effectively expand sales of company products.
 
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. Acquisition transaction costs are recorded in selling, general and administrative expenses as incurred.
 
2014
 
On February 3, 2014, the company completed the acquisition of Life Technologies Corporation within the Life Sciences Solutions segment for a total purchase price of $15.30 billion, net of cash acquired, including the assumption of $2.28 billion of debt. The company issued debt and common stock in late 2013 and early 2014 to partially fund the acquisition (Notes 9 and 11). Life Technologies provides innovative products and services to customers conducting scientific research and genetic analysis, as well as those in applied markets, such as forensics and food safety testing. The acquisition of Life Technologies extends customer reach and broadens the company’s offerings in biosciences; genetic, medical and applied sciences; and bioproduction. Life Technologies’ revenues totaled $3.87 billion in 2013. The purchase price exceeded the fair value of the identifiable net assets and, accordingly, $7.12 billion was allocated to goodwill, substantially none of which is tax deductible.
 
In addition, in 2014, the company acquired an animal health diagnostics company within the Life Sciences Solutions segment for $34 million, net of cash acquired.
 
 
 
12

 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
   
The components of the purchase price and net assets acquired for 2014 acquisitions are as follows:
                       
(In millions)
 
Life Technologies
 
Other
 
Total
                   
Purchase Price
                 
 
Cash paid
 
$
 13,487.3
 
$
 41.7
 
$
 13,529.0
 
Debt assumed
   
 2,279.7
   
 —
   
 2,279.7
 
Purchase price payable
   
 —
   
 4.0
   
 4.0
 
Cash acquired
   
 (463.0)
   
 (11.5)
   
 (474.5)
                       
     
$
 15,304.0
 
$
 34.2
 
$
 15,338.2
                   
Net Assets Acquired
                 
 
Current assets
 
$
 1,768.1
 
$
 18.4
 
$
 1,786.5
 
Property, plant and equipment
   
 752.3
   
 1.1
   
 753.4
 
Definite-lived intangible assets:
                 
   
Customer relationships
   
 5,864.0
   
 5.5
   
 5,869.5
   
Product technology
   
 2,624.6
   
 5.5
   
 2,630.1
   
Tradenames and other
   
 240.6
   
 —
   
 240.6
 
Indefinite-lived intangible assets:
                 
   
Tradenames
   
 448.2
   
 —
   
 448.2
   
In-process research and development
   
 58.4
   
 —
   
 58.4
 
Goodwill
   
 7,123.5
   
 12.5
   
 7,136.0
 
Other assets
   
 251.8
   
 0.1
   
 251.9
 
Liabilities assumed
   
 (3,827.5)
   
 (8.9)
   
 (3,836.4)
                       
     
$
 15,304.0
 
$
 34.2
 
$
 15,338.2
                       
         The weighted-average amortization periods for intangible assets acquired in 2014 are 16 years for customer relationships, 11 years for product technology and 9 years for definite-lived tradenames and other. The weighted average amortization period for all definite-lived intangible assets acquired in 2014 is 14 years.
 
The net assets acquired have been recorded based on estimates of fair value. The company is not aware of any incomplete aspects of the purchase price allocation for Life Technologies except for the ongoing evaluation of the value attributable to various tradenames as of the acquisition date as well as their designation as indefinite-lived or definite-lived. The company expects the evaluation and any resulting changes to the purchase price allocation to be completed in the second half of 2014.
 
Unaudited Pro Forma Information
 
The company acquired Life Technologies in February 2014. Revenues of Life Technologies after the date of acquisition are included in the accompanying statement of income and totaled approximately $0.96 billion and $1.62 billion in the three and six months ended June 28, 2014, respectively. Immediately upon the closing of the acquisition, the company began integrating Life Technologies and as such the legacy and acquired businesses are now sharing various selling, general and administrative functions. As a result, computing a separate measure of Life Technologies’ stand-alone profitability for periods after the acquisition date is not practical.
 
13

 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
    Had the acquisition of Life Technologies been completed as of the beginning of 2013, the company’s pro forma results for 2014 and 2013 would have been as follows:
 
 
           
Three Months Ended
 
Six Months Ended
             
June 29,
June 28,
 
June 29,
(In millions except per share amounts)
       
2013
 
2014
 
2013
                         
Revenues
       
$
 4,153.6
 
$
 8,501.5
 
$
 8,268.6
                             
Income from Continuing Operations
       
$
 319.8
 
$
 1,114.9
 
$
 326.2
                             
Net Income
       
$
 319.6
 
$
 1,114.9
 
$
 321.4
                             
Earnings per Share from Continuing Operations:
                       
 
Basic
       
$
 0.81
 
$
 2.80
 
$
 0.83
 
Diluted
       
$
 0.80
 
$
 2.77
 
$
 0.82
                             
Earnings per Share:
                       
 
Basic
       
$
 0.81
 
$
 2.80
 
$
 0.82
 
Diluted
       
$
 0.80
 
$
 2.77
 
$
 0.81
                             
    Pro forma results include non-recurring pro forma adjustments that were directly attributable to the business combination, as follows:
 
·  
Pre tax charge to selling, general and administrative expenses of $208.2 million in the six months ended June 29, 2013, for acquisition-related transaction costs incurred by the company and Life Technologies;
 
·  
Pre tax charge to cost of revenues of $55.4 million and $301.4 million in the three and six months ended June 29, 2013, for the sale of Life Technologies inventories revalued at the date of acquisition;
 
·  
Pre tax charge of $91.7 million in the six months ended June 29, 2013, for monetizing equity awards held by Life Technologies’ employees at the date of acquisition;
 
·  
Pre tax charge of $37.6 million in the six months ended June 29, 2013, to conform the accounting policies of Life Technologies with the company's accounting policies; and
 
·  
Pre tax reduction of revenues of $5.2 million, $4.7 million and $16.8 million in the three months ended June 29, 2013 and the six months ended June 28, 2014 and June 29, 2013, respectively, for revaluing Life Technologies’ deferred revenue obligations to fair value.
 
These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated or that may result in the future.
 
The company’s results would not have been materially different from its pro forma results had the company’s other 2014 acquisition occurred at the beginning of 2013.
 
Dispositions
 
On July 17, 2014, the company announced that it had entered an agreement to sell its Cole-Parmer specialty channel business, part of the Laboratory Products and Services segment, for $480 million in cash. The transaction is expected to close in the third quarter of 2014, subject to customary closing conditions and applicable regulatory approvals. Revenues and operating income of the business to be sold were approximately $232 million and $43 million, respectively, for the year ended December 31, 2013 and $119 million and $23 million, respectively, in the first half of 2014.
 
 
 
14

 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
    The assets and liabilities of the Cole-Parmer business were as follows at June 28, 2014:
 
 
June 28,
(In millions)
 
2014
       
Current Assets
 
$
 39.5
Long-term Assets
   
 400.3
Current Liabilities
   
 15.5
Long-term Liabilities
   
 84.1
 
    On March 21, 2014, the company sold its sera and media, gene modulation and magnetic beads businesses to GE Healthcare for $1.05 billion, net of cash divested, or $0.8 billion of after-tax proceeds. The businesses fell principally in the Life Sciences Solutions segment. Divestiture of these businesses was a condition to obtaining antitrust approval for the Life Technologies acquisition. Revenues and operating income of the businesses sold were approximately $250 million and $64 million, respectively, for the year ended December 31, 2013 and $61 million and $12 million, respectively, in 2014 through the date of sale. The sale of these businesses resulted in a pre-tax gain of approximately $761 million, included in restructuring and other costs (income), net.
 
    The assets and liabilities of the businesses sold in March 2014 were as follows at December 31, 2013:
 
 
December 31,
(In millions)
 
2013
       
Current Assets
 
$
 74.3
Long-term Assets
   
 229.3
Current Liabilities
   
 6.4
Long-term Liabilities
   
 22.0

 
15

 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Note 3.
Business Segment and Geographical Information
 
With the completion of the Life Technologies acquisition, the company established a new reporting segment, called Life Sciences Solutions. Effective January 1, 2014, the company’s financial performance is reported in four segments reflecting the following changes:
 
·  
The new Life Sciences Solutions segment consists of the majority of the former Life Technologies businesses and Thermo Fisher biosciences businesses.
 
·  
Thermo Fisher’s global chemicals business has moved from the biosciences business in the Analytical Technologies segment to the Laboratory Products and Services segment.
 
·  
Thermo Fisher’s Analytical Technologies segment has been renamed the Analytical Instruments segment to reflect the transfer of the biosciences businesses to other segments, as mentioned above.
 
·  
Two small specialty diagnostics businesses within Life Technologies have become part of the Specialty Diagnostics segment.
 
Prior period segment information has been reclassified to reflect these transfers. As Life Technologies was acquired on February 3, 2014, its results are not included in the company’s results prior to that date. A description of each segment follows.
 
Life Sciences Solutions: provides a portfolio of reagents, instruments and consumables used in biological and medical research, discovery and production of new drugs and vaccines as well as diagnosis of disease. These products and services are used by customers in life science research, drug discovery and diagnostics markets.
 
Analytical Instruments: provides a broad offering of instruments, consumables, software and services that are used for a range of applications in the laboratory, on the production line and in the field. These products and services are used by customers in pharmaceutical, biotechnology, academic, government, environmental and other research and industrial markets, as well as the clinical laboratory.
 
Specialty Diagnostics: provides a wide range of diagnostic test kits, reagents, culture media, instruments and associated products used to increase the speed and accuracy of diagnoses. These products are used primarily by customers in healthcare, clinical, pharmaceutical, industrial and food safety laboratories.
 
Laboratory Products and Services: provides virtually everything needed for the laboratory, including a combination of self-manufactured and sourced products and an extensive service offering. These products and services are used by customers in pharmaceutical, biotechnology, academic, government and other research and industrial markets, as well as the clinical laboratory.
 
The company’s management evaluates segment operating performance based on operating income before certain charges/credits to cost of revenues and selling, general and administrative expenses, principally associated with acquisition accounting; restructuring and other costs/income including costs arising from facility consolidations such as severance and abandoned lease expense and gains and losses from the sale of real estate and product lines; and amortization of acquisition-related intangible assets. The company uses this measure because it helps management understand and evaluate the segments’ core operating results and facilitates comparison of performance for determining compensation.
 
 
 
16

 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Business Segment Information
                             
       
Three Months Ended
 
Six Months Ended
     
June 28,
June 29,
June 28,
June 29,
(In millions)
 
2014
 
2013
 
2014
 
2013
                             
Revenues
                       
 
Life Sciences Solutions
 
$
 1,103.1
 
$
 181.0
 
$
 1,938.6
 
$
 353.6
 
Analytical Instruments
   
 793.4
   
 761.0
   
 1,563.3
   
 1,501.1
 
Specialty Diagnostics
   
 855.1
   
 793.6
   
 1,668.8
   
 1,599.2
 
Laboratory Products and Services
   
 1,699.4
   
 1,595.0
   
 3,289.9
   
 3,151.3
 
Eliminations
   
 (129.1)
   
 (90.5)
   
 (235.2)
   
 (173.6)
                             
   
Consolidated revenues
   
 4,321.9
   
 3,240.1
   
 8,225.4
   
 6,431.6
                             
Segment Income
                       
 
Life Sciences Solutions (a)
   
 299.1
   
 43.5
   
 543.7
   
 84.5
 
Analytical Instruments (a)
   
 130.4
   
 125.3
   
 261.3
   
 245.8
 
Specialty Diagnostics (a)
   
 236.4
   
 216.3
   
 457.4
   
 439.2
 
Laboratory Products and Services (a)
   
 257.7
   
 238.7
   
 491.7
   
 469.4
                             
   
Subtotal reportable segments (a)
   
 923.6
   
 623.8
   
 1,754.1
   
 1,238.9
                             
 
Cost of revenues charges
   
 (156.1)
   
 (13.1)
   
 (324.6)
   
 (26.3)
 
Selling, general and administrative charges, net
   
 (14.9)
   
 (22.6)
   
 (97.7)
   
 (23.9)
 
Restructuring and other (costs) income, net
   
 (60.9)
   
 (21.5)
   
 521.3
   
 (43.0)
 
Amortization of acquisition-related intangible assets
   
 (343.6)
   
 (191.2)
   
 (629.5)
   
 (383.2)
                             
   
Consolidated operating income
   
 348.1
   
 375.4
   
 1,223.6
   
 762.5
 
Other expense, net (b)
   
 (111.6)
   
 (95.4)
   
 (212.7)
   
 (139.6)
                             
 
Income from continuing operations before income taxes
 
$
 236.5
 
$
 280.0
 
$
 1,010.9
 
$
 622.9
                             
Depreciation
                       
 
Life Sciences Solutions
 
$
 36.3
 
$
 4.1
 
$
 60.3
 
$
 8.2
 
Analytical Instruments
   
 9.2
   
 9.8
   
 19.6
   
 20.0
 
Specialty Diagnostics
   
 19.2
   
 18.1
   
 38.0
   
 36.6
 
Laboratory Products and Services
   
 26.5
   
 26.0
   
 53.0
   
 52.2
                         
   
Consolidated depreciation
 
$
 91.2
 
$
 58.0
 
$
 170.9
 
$
 117.0
 
(a) Represents operating income before certain charges to cost of revenues and selling, general and administrative expenses; restructuring and other costs, net; and amortization of acquisition-related intangibles.
(b)
The company does not allocate other expense, net to its segments.
 
 
 
17

 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Note 4.           Other Expense, Net
 
The components of other expense, net, in the accompanying statement of income are as follows:
 
       
Three Months Ended
 
Six Months Ended
     
June 28,
June 29,
June 28,
June 29,
(In millions)
 
2014
 
2013
 
2014
 
2013
                             
Interest Income
 
$
 16.0
 
$
 7.1
 
$
 27.9
 
$
 14.3
Interest Expense
   
 (129.1)
   
 (64.4)
   
 (246.9)
   
 (128.8)
Other Items, Net
   
 1.5
   
 (38.1)
   
 6.3
   
 (25.1)
                             
Other Expense, Net
 
$
 (111.6)
 
$
 (95.4)
 
$
 (212.7)
 
$
 (139.6)
                             
 
Other Items, Net
 
In the first six months of 2014, other items, net includes $5 million of gains from the sale of equity and available-for-sale investments. In the first six months of 2013, other items, net includes $41 million of charges related to amortization of fees paid to obtain bridge financing commitments related to the acquisition of Life Technologies, offset in part by a $2 million gain from additional proceeds from the prior sale of an equity investment. In the first quarter of 2013, the company irrevocably contributed appreciated available-for-sale investments that had a fair value of $27 million to two of its U.K. defined benefit plans, resulting in realization of a previously unrecognized gain of $11 million.
 
Note 5.           Stock-based Compensation Expense
 
   
The components of stock-based compensation expense are as follows:
                             
       
Three Months Ended
 
Six Months Ended
     
June 28,
June 29,
June 28,
June 29,
(In millions)
 
2014
 
2013
 
2014
 
2013
                             
Stock Option Awards
 
$
 11.7
 
$
 10.6
 
$
 22.4
 
$
 20.2
Restricted Unit Awards
   
 19.1
   
 12.7
   
 33.6
   
 23.5
                             
Total Stock-based Compensation Expense
 
$
 30.8
 
$
 23.3
 
$
 56.0
 
$
 43.7
         
    As of June 28, 2014, there was $104 million of total unrecognized compensation cost related to unvested stock options granted. The cost is expected to be recognized through 2018 with a weighted average amortization period of 2.7 years.
         
    As of June 28, 2014, there was $142 million of total unrecognized compensation cost related to unvested restricted stock unit awards. The cost is expected to be recognized through 2017 with a weighted average amortization period of 2.5 years.
         
    During the first six months of 2014, the company made equity compensation grants to employees consisting of 1.0 million service- and performance-based restricted stock units and options to purchase 2.5 million shares.
 
    Certain pre-acquisition equity awards of Life Technologies were converted to rights to receive future cash payments over the remaining vesting period. In addition to stock-based compensation, which is included in the above table, in the three- and six-month periods ended June 28, 2014, the company recorded expense for cash-in-lieu of equity of $10.0 million and $17.1 million, respectively, related to these arrangements.
 
 
 
 
18

 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Note 6.           Pension and Other Postretirement Benefit Plans
 
    Employees of a number of the company’s non-U.S. and certain U.S. subsidiaries participate in defined benefit pension plans covering substantially all full-time employees at those subsidiaries. Some of the plans are unfunded, as permitted under the plans and applicable laws. The company also maintains postretirement healthcare programs at several acquired businesses where certain employees are eligible to participate. The costs of the postretirement healthcare programs are funded on a self-insured and insured-premium basis.
 
    Net periodic benefit costs for the company’s defined benefit pension plans include the following components:
 
       
Three Months Ended
 
Six Months Ended
     
June 28,
June 29,
June 28,
June 29,
(In millions)
 
2014
 
2013
 
2014
 
2013
                         
Service Cost - Benefits Earned
 
$
 5.0
 
$
 5.8
 
$
 9.6
 
$
 9.4
Interest Cost on Benefit Obligation
   
 23.5
   
 11.9
   
 43.6
   
 23.9
Expected Return on Plan Assets
   
 (25.1)
   
 (13.2)
   
 (46.2)
   
 (26.4)
Amortization of Net Loss
   
 2.1
   
 2.9
   
 4.0
   
 5.7
Amortization of Prior Service Benefit
   
 (0.1)
   
 (0.1)
   
 (0.1)
   
 (0.2)
Special Termination Benefits
   
 —
   
 0.4
   
 —
   
 0.5
                             
Net Periodic Benefit Cost
 
$
 5.4
 
$
 7.7
 
$
 10.9
 
$
 12.9
 
Note 7.           Income Taxes
 
    The provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate of 35% to income from continuing operations before provision for income taxes due to the following:
                 
       
Six Months Ended
     
June 28,
June 29,
(In millions)
 
2014
 
2013
                 
Provision for Income Taxes at Statutory Rate
 
$
 353.8
 
$
 218.0
                 
Increases (Decreases) Resulting From:
           
 
Foreign rate differential
   
 (60.8)
   
 (119.8)
 
Impact of change in tax laws and apportionment on deferred taxes
   
 (25.9)
   
 (1.8)
 
Foreign and research and development tax credits
   
 (59.4)
   
 (79.5)
 
Manufacturing deduction
   
 (8.9)
   
 (13.4)
 
State income taxes, net of federal tax
   
 23.1
   
 (1.8)
 
Nondeductible expenses
   
 3.3
   
 3.3
 
Provision of tax reserves, net
   
 25.3
   
 —
 
Basis difference on disposal of businesses
   
 (61.9)
   
 —
 
Other, net
   
 0.7
   
 (0.5)
                 
       
$
 189.3
 
$
 4.5
         
    The company’s unrecognized tax benefits increased to $259.8 million at June 28, 2014, from $134.2 million at December 31, 2013. Of the total increase, $100.3 million resulted from the acquisition of Life Technologies and $54.4 million resulted from the provision of tax reserves, primarily related to the sale of the divested businesses and a tax matter in a foreign jurisdiction, offset in part by a reduction of $29.1 million from resolution of a tax matter for which a reserve had previously been established.
 
 
 
 
19

 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Note 8.           Earnings per Share
 
       
Three Months Ended
 
Six Months Ended
     
June 28,
June 29,
June 28,
June 29,
(In millions except per share amounts)
 
2014
 
2013
 
2014
 
2013
                             
Income from Continuing Operations
 
$
 278.5
 
$
 277.6
 
$
 821.6
 
$
 618.4
Loss from Discontinued Operations
   
 —
   
 (0.2)
   
 —
   
 (0.6)
Loss on Disposal of Discontinued Operations, Net
   
 —
   
 —
   
 —
   
 (4.2)
                             
Net Income
 
$
 278.5
 
$
 277.4
 
$
 821.6
 
$
 613.6
                             
Basic Weighted Average Shares
   
 399.4
   
 360.0
   
 396.3
   
 359.0
Plus Effect of:
                       
 
Equity forward arrangement
   
 —
   
 —
   
 0.3
   
 —
 
Stock options and restricted units
   
 3.7
   
 3.5
   
 4.1
   
 3.6
                             
Diluted Weighted Average Shares
   
 403.1
   
 363.5
   
 400.7
   
 362.6
                             
Basic Earnings per Share:
                       
 
Continuing operations
 
$
 .70
 
$
 .77
 
$
 2.07
 
$
 1.72
 
Discontinued operations
   
 —
   
 —
   
 —
   
 (.01)
                             
       
$
 .70
 
$
 .77
 
$
 2.07
 
$
 1.71
                             
Diluted Earnings per Share:
                       
 
Continuing operations
 
$
 .69
 
$
 .76
 
$
 2.05
 
$
 1.71