10-Q 1 tmoq314.htm THERMO FISHER SCIENTIFIC INC., FORM 10-Q, DATED SEPTEMBER 27, 2014 tmoq314.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 September 27, 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 September 27, 2014
Common Stock, $1.00 par value
 
400,025,475
 
 



 
 

 
 
THERMO FISHER SCIENTIFIC INC.

QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 27, 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
51
     
Item 1A.
Risk Factors
51
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
57
     
Item 6.
Exhibits
57
 
 
 
 
2

 
THERMO FISHER SCIENTIFIC INC.
 
PART I          FINANCIAL INFORMATION
 
Item 1.           Financial Statements
 
CONSOLIDATED BALANCE SHEET
(Unaudited)
   
September 27,
   
December 31,
 
(In millions)
 
2014
   
2013
 
             
Assets
           
Current Assets:
           
   Cash and cash equivalents
  $ 534.3     $ 5,826.0  
   Short-term investments
    9.3       4.5  
   Accounts receivable, less allowances of $78.5 and $54.1
    2,507.1       1,942.3  
   Inventories
    1,913.7       1,494.5  
   Deferred tax assets
    230.6       192.5  
   Other current assets
    524.9       420.9  
                 
      Total current assets
    5,719.9       9,880.7  
                 
Property, Plant and Equipment, at Cost, Net
    2,406.1       1,767.4  
                 
Acquisition-related Intangible Assets, Net
    14,698.3       7,071.3  
                 
Other Assets
    819.7       640.7  
                 
Goodwill
    19,046.8       12,503.3  
                 
Total Assets
  $ 42,690.8     $ 31,863.4  
 
 
 
 
 
3

 
 
 
 
THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)
 
   
September 27,
   
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
  $ 3,088.5     $ 987.7  
   Accounts payable
    818.1       691.5  
   Accrued payroll and employee benefits
    627.8       432.0  
   Accrued income taxes
    324.0        
   Deferred revenue
    325.9       198.9  
   Other accrued expenses
    1,037.8       815.9  
                 
      Total current liabilities
    6,222.1       3,126.0  
                 
Deferred Income Taxes
    3,473.1       1,609.9  
                 
Other Long-term Liabilities
    1,096.4       771.8  
                 
Long-term Obligations
    11,388.6       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; 408,013,012 and 369,598,265 shares issued
    408.0        369.6  
   Capital in excess of par value
    11,416.3       8,222.6  
   Retained earnings
    9,866.0       8,753.3  
   Treasury stock at cost, 7,987,537 and 7,636,887 shares
    (455.4 )     (412.2 )
   Accumulated other comprehensive items
    (724.3 )     (77.2 )
                 
      Total shareholders' equity
    20,510.6       16,856.1  
                 
Total Liabilities and Shareholders' Equity
  $ 42,690.8     $ 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
   
Nine Months Ended
 
   
September 27,
   
September 28,
   
September 27,
   
September 28,
 
(In millions except per share amounts)
 
2014
   
2013
   
2014
   
2013
 
                         
Revenues
                       
 Product revenues
  $ 3,628.5     $ 2,730.8     $ 10,781.9     $ 8,241.1  
 Service revenues
    542.9       461.0       1,614.9       1,382.3  
                                 
   Total revenues
    4,171.4       3,191.8       12,396.8       9,623.4  
                                 
Costs and Operating Expenses:
                               
 Cost of product revenues
    1,873.9       1,546.6       5,920.1       4,652.2  
 Cost of service revenues
    363.9       297.3       1,076.6       923.8  
 Selling, general and administrative expenses
    1,228.7       848.5       3,659.5       2,547.6  
 Research and development expenses
    175.2       95.9       508.6       290.8  
 Restructuring and other costs (income), net
    (110.6 )     11.4       (631.9 )     54.4  
                                 
   Total costs and operating expenses
    3,531.1       2,799.7       10,532.9       8,468.8  
                                 
Operating Income
    640.3       392.1       1,863.9       1,154.6  
Other Expense, Net
    (101.1 )     (73.1 )     (313.8 )     (212.7 )
                                 
Income from Continuing Operations Before Income Taxes
    539.2       319.0       1,550.1       941.9  
Income Tax Provision
    (69.3 )     (1.3 )     (258.6 )     (5.8 )
                                 
Income from Continuing Operations
    469.9       317.7       1,291.5       936.1  
Gain (Loss) from Discontinued Operations (net of income tax provision (benefit) of
       $1.0, ($0.1), $1.0 and ($0.4))
    1.7       (0.1 )     1.7       (0.7 )
Loss on Disposal of Discontinued Operations, Net (net of income tax benefit of $2.8)
                      (4.2 )
                                 
Net Income
  $ 471.6     $ 317.6     $ 1,293.2     $ 931.2  
                                 
Earnings per Share from Continuing Operations
                               
 Basic
  $ 1.17     $ .88     $ 3.25     $ 2.60  
 Diluted
  $ 1.16     $ .86     $ 3.21     $ 2.57  
                                 
Earnings per Share
                               
 Basic
  $ 1.18     $ .88     $ 3.25     $ 2.59  
 Diluted
  $ 1.17     $ .86     $ 3.22     $ 2.56  
                                 
Weighted Average Shares
                               
 Basic
    399.9       361.2       397.5       359.8  
 Diluted
    403.7       367.3       401.7       364.1  
                                 
Cash Dividends Declared per Common Share
  $ .15     $ .15     $ .45     $ .45  
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
5

 
 
 
THERMO FISHER SCIENTIFIC INC.
 
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
   
Three Months Ended
   
Nine Months Ended
 
 
September 27,
   
September 28,
   
September 27,
   
September 28,
 
(In millions)
 
2014
   
2013
   
2014
   
2013
 
                         
Comprehensive Income (Loss)
                       
       Net Income
  $ 471.6     $ 317.6     $ 1,293.2     $ 931.2  
                                 
       Other Comprehensive Items:
                               
        Currency translation adjustment
    (619.5 )     308.8       (655.9 )     (6.2 )
        Unrealized gains on available-for-sale investments:
                               
           Unrealized holding gains (losses) arising during the period (net of tax provision 
                   (benefit) of ($0.2), $0.1, ($0.1) and $0.4)
    (0.1 )     0.1       1.7       1.2  
           Reclassification adjustment for gains included in net income (net of tax provision
                   of $0.0 and $2.5)
                (1.4 )     (8.0 )
        Unrealized gains and losses on hedging instruments:
                               
           Unrealized gain (loss) on hedging instruments (net of tax provision (benefit) of
                   ($1.1) and $3.0)
          (1.7 )           5.0  
           Reclassification adjustment for losses included in net income (net of tax benefit
                   of $0.5, $0.6, $1.4 and $1.6)
    0.7       0.8       2.2       2.4  
        Pension and other postretirement benefit liability adjustment:
                               
           Pension and other postretirement benefit liability adjustments arising during the 
                   period (net of tax provision (benefit) of $2.1, ($1.7), $1.2 and ($0.2))
    4.9       (4.4 )     2.3       (0.2 )
           Amortization of net loss and prior service benefit included in net periodic pension 
                   cost (net of tax benefit of $0.5, $0.8, $1.7 and $2.6)
    1.4       2.0       4.0       5.8  
                                 
                  Total other comprehensive items
    (612.6 )     305.6       (647.1 )      
                                 
Comprehensive Income (Loss)
  $ (141.0 )   $ 623.2     $ 646.1     $ 931.2  
 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
 
6

 
 
 
THERMO FISHER SCIENTIFIC INC.
 
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
   
Nine Months Ended
 
   
September 27,
   
September 28,
 
(In millions)
 
2014
   
2013
 
             
Operating Activities
           
   Net income
  $ 1,293.2     $ 931.2  
   (Gain) loss from discontinued operations
    (1.7 )     0.7  
   Loss on disposal of discontinued operations
          4.2  
                 
   Income from continuing operations
    1,291.5       936.1  
                 
   Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
               
      Depreciation and amortization
    1,256.1       750.6  
      Change in deferred income taxes
    (583.8 )     (204.5 )
      Net gains on sale of businesses
    (894.4 )      
      Non-cash stock-based compensation
    86.6       66.6  
      Tax benefits from stock-based compensation awards
    (61.1 )     (39.8 )
      Non-cash charges for sale of inventories revalued at the date of acquisition
    303.1       23.9  
      Other non-cash expenses, net
    27.8       17.0  
      Changes in assets and liabilities, excluding the effects of acquisitions and dispositions:
               
          Accounts receivable
    (117.3 )     (155.3 )
          Inventories
    (109.1 )     (129.7 )
          Other assets
    205.8       (69.0 )
          Accounts payable
    (3.3 )     49.1  
          Other liabilities
    304.8       66.1  
          Contributions to retirement plans
    (37.3 )     (25.6 )
                 
              Net cash provided by continuing operations
    1,669.4       1,285.5  
              Net cash used in discontinued operations
    (3.5 )     (3.3 )
                 
              Net cash provided by operating activities
    1,665.9       1,282.2  
                 
Investing Activities
               
   Acquisitions, net of cash acquired
    (13,056.1 )     (5.5 )
   Purchase of property, plant and equipment
    (270.9 )     (187.9 )
   Proceeds from sale of property, plant and equipment
    19.7       15.9  
   Proceeds from sale of investments
    84.4       0.5  
   Proceeds from sale of businesses, net of cash divested
    1,520.0        
   Decrease (increase) in restricted cash
    50.2       (24.7 )
   Other investing activities, net
    (4.0 )     8.4  
                 
              Net cash used in investing activities
  $ (11,656.7 )   $ (193.3 )
 
 
 
7

 
 
 
THERMO FISHER SCIENTIFIC INC.
 
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
 
   
Nine Months Ended
 
   
September 27,
   
September 28,
 
(In millions)
 
2014
   
2013
 
             
Financing Activities
           
   Net proceeds from issuance of long-term debt
  $ 4,999.6     $  
   Increase in commercial paper, net
    212.2        
   Repayment of long-term obligations
    (3,430.3 )     (0.9 )
   Decrease in short-term notes payable
    (28.2 )     (0.7 )
   Purchases of company common stock
          (89.8 )
   Dividends paid
    (174.8 )     (162.0 )
   Net proceeds from issuance of company common stock
    2,942.0        
   Net proceeds from issuance of company common stock under employee stock plans
    132.7       204.9  
   Tax benefits from stock-based compensation awards
    61.1       39.8  
   Other financing activities, net
    (7.5 )     (4.8 )
                 
              Net cash provided by (used in) financing activities
    4,706.8       (13.5 )
                 
Exchange Rate Effect on Cash
    (7.7 )     (35.4 )
                 
(Decrease) Increase in Cash and Cash Equivalents
    (5,291.7 )     1,040.0  
Cash and Cash Equivalents at Beginning of Period
    5,826.0       805.6  
                 
Cash and Cash Equivalents at End of Period
  $ 534.3     $ 1,845.6  
 
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
    5.5       5.5       208.0             (0.3 )     (22.9 )           190.6  
Stock-based compensation
                66.6                               66.6  
Tax benefit related to employees'
       and directors' stock plans
                37.6                               37.6  
Purchases of company common
       stock
                            (1.3 )     (89.8 )           (89.8 )
Dividends declared
                      (162.8 )                       (162.8 )
Net income
                      931.2                         931.2  
Other comprehensive items
                                               
Other
                (0.8 )                             (0.8 )
                                                                 
Balance at September 28, 2013
    419.0     $ 419.0     $ 10,812.5     $ 8,465.7       (57.6 )   $ (3,109.5 )   $ (150.4 )   $ 16,437.3  
                                                                 
                                                                 
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
    3.5       3.5       139.0             (0.4 )     (43.2 )           99.3  
Issuance of shares
    34.9       34.9       2,907.4                               2,942.3  
Stock-based compensation
                86.6                               86.6  
Tax benefit related to employees'
       and directors' stock plans
                60.9                               60.9  
Dividends declared
                      (180.5 )                       (180.5 )
Net income
                      1,293.2                         1,293.2  
Other comprehensive items
                                        (647.1 )     (647.1 )
Other
                (0.2 )                             (0.2 )
                                                                 
Balance at September 27, 2014
    408.0     $ 408.0     $ 11,416.3     $ 9,866.0       (8.0 )   $ (455.4 )   $ (724.3 )   $ 20,510.6  
 
 
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 presentation of the financial position at September 27, 2014, the results of operations for the three- and nine-month periods ended September 27, 2014, and September 28, 2013, and the cash flows for the nine-month periods ended September 27, 2014, and September 28, 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 nine months ended September 27, 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:
 
   
Nine Months Ended
 
   
September 27,
   
September 28,
 
(In millions)
 
2014
   
2013
 
             
Beginning Balance
  $ 49.8     $ 48.7  
   Provision charged to income
    57.6       51.8  
   Usage
    (58.0 )     (54.2 )
   Acquisitions
    7.1        
   Adjustments to previously provided warranties, net
    1.0       0.7  
   Other, net
    (1.3 )      
                 
Ending Balance
  $ 56.2     $ 47.0  
 
 
 
10

 
 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Inventories
 
The components of inventories are as follows:
   
September 27,
   
December 31,
 
(In millions)
 
2014
   
2013
 
             
Raw Materials
  $ 444.3     $ 347.4  
Work in Process
    216.9       157.7  
Finished Goods
    1,252.5       989.4  
                 
Inventories
  $ 1,913.7     $ 1,494.5  
                 
Property, Plant and Equipment
 
Property, plant and equipment consists of the following:
   
September 27,
   
December 31,
 
(In millions)
 
2014
   
2013
 
             
Land
  $ 287.2     $ 212.2  
Buildings and Improvements
    996.6       821.0  
Machinery, Equipment and Leasehold Improvements
    2,550.3       2,047.9  
                 
Property, Plant and Equipment, at Cost
    3,834.1       3,081.1  
Less: Accumulated Depreciation and Amortization
    1,428.0       1,313.7  
                 
Property, Plant and Equipment, at Cost, Net
  $ 2,406.1     $ 1,767.4  
                 
Acquisition-related Intangible Assets
 
Acquisition-related intangible assets are as follows:
 
   
September 27, 2014
   
December 31, 2013
 
         
Accumulated
               
Accumulated
       
(In millions)
 
Gross
   
Amortization
   
Net
   
Gross
   
Amortization
   
Net
 
                                     
Definite Lived
  $ 18,483.2     $ (5,088.9 )   $ 13,394.3     $ 10,121.8     $ (4,388.2 )   $ 5,733.6  
Indefinite Lived
    1,304.0             1,304.0       1,337.7             1,337.7  
                                                 
Acquisition-related Intangible Assets
  $ 19,787.2     $ (5,088.9 )   $ 14,698.3     $ 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, $7.15 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, and a distributor of analytical instruments, within the Analytical Instruments segment, for an aggregate of $36 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     $ 43.3     $ 13,530.6  
   Debt assumed
    2,279.5             2,279.5  
   Purchase price payable
          4.0       4.0  
   Cash acquired
    (463.0 )     (11.5 )     (474.5 )
                         
    $ 15,303.8     $ 35.8     $ 15,339.6  
                         
Net Assets Acquired
                       
   Current assets
  $ 1,759.0     $ 18.5     $ 1,777.5  
   Property, plant and equipment
    751.8       1.1       752.9  
   Definite-lived intangible assets:
                       
    Customer relationships
    5,883.0       7.0       5,890.0  
    Product technology
    2,626.9       5.5       2,632.4  
    Tradenames and other
    619.1             619.1  
    Indefinite-lived intangible assets:
                       
    In-process research and development
    58.4             58.4  
   Goodwill
    7,153.1       12.5       7,165.6  
   Other assets
    252.3       0.1       252.4  
   Liabilities assumed
    (3,799.8 )     (8.9 )     (3,808.7 )
                         
    $ 15,303.8     $ 35.8     $ 15,339.6  
         
    The weighted-average amortization periods for intangible assets acquired in 2014 are 16 years for customer relationships, 11 years for product technology and 11 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 included in the table above have been recorded based on estimates of fair value, as revised for certain measurement period adjustments as follows. In the third quarter of 2014, the company completed the valuation of the identifiable intangibles acquired in the acquisition of Life Technologies. Following completion of the valuation, the company adjusted the values of certain acquired intangible assets, primarily tradenames, recorded in the first quarter of 2014 and changed the characterization to definite-lived from indefinite-lived as follows:
 
(In millions)
 
Increase (Decrease) from Initial Valuation
 
       
Indefinite-lived Tradenames
  $ (448.2 )
         
Definite-lived Intangible Assets:
       
   Tradenames
    378.5  
   Customer relationships
    19.0  
   Product technology
    2.3  
         
Goodwill
    30.8  
         
Deferred Tax Liabilities
    (17.6 )
 
 
 
 
 
13

 
 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
    As a result, in the third quarter of 2014, the company recorded amortization expense of $14.2 million related to the first and second quarters of 2014, which the company concluded was not material to the results of any quarter in 2014. The company is not aware of any incomplete aspects of the purchase price allocation for Life Technologies and the company does not expect material changes to such allocations from that reported herein.
 
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 $0.94 billion and $2.56 billion in the three and nine months ended September 27, 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.
 
    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
   
Nine Months Ended
 
   
September 28,
   
September 27,
   
September 28,
 
(In millions except per share amounts)
 
2013
   
2014
   
2013
 
                   
Revenues
  $ 4,153.6     $ 12,675.0     $ 12,422.3  
                         
Income from Continuing Operations
  $ 286.8     $ 1,590.9     $ 567.6  
                         
Net Income
  $ 286.6     $ 1,592.6     $ 562.6  
                         
Earnings per Share from Continuing Operations:
                       
Basic
  $ 0.72     $ 3.99     $ 1.44  
Diluted
  $ 0.72     $ 3.95     $ 1.43  
                         
Earnings per Share:
                       
Basic
  $ 0.72     $ 3.99     $ 1.43  
Diluted
  $ 0.72     $ 3.95     $ 1.41  
         
    Pro forma results include non-recurring pro forma adjustments that were directly attributable to the business combination to reflect amounts as if the acquisition had been completed as of the beginning of 2013, as follows:
 
            ·  
Pre tax charge to selling, general and administrative expenses of $219.5 million in the nine months ended September 28, 2013, for acquisition-related transaction costs incurred by the company and Life Technologies;
 
            ·  
Pre tax charge to cost of revenues of $301.4 million in the nine months ended September 28, 2013, for the sale of Life Technologies inventories revalued at the date of acquisition;
 
            ·  
Pre tax charge of $91.7 million in the nine months ended September 28, 2013, for monetizing equity awards held by Life Technologies’ employees at the date of acquisition;
 
            ·  
Pre tax charge of $37.6 million in the nine months ended September 28, 2013, to conform the accounting policies of Life Technologies with the company's accounting policies; and
 
            ·  
Pre tax reduction of revenues of $4.0 million, $6.5 million and $20.8 million in the three months ended September 28, 2013 and the nine months ended September 27, 2014 and September 28, 2013, respectively, for revaluing Life Technologies’ deferred revenue obligations to fair value.
 
 
 
 
14

 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
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 acquisitions occurred at the beginning of 2013.
 
Dispositions
 
On August 15, 2014, the company sold its Cole-Parmer specialty channel business, part of the Laboratory Products and Services segment, for $480 million in cash, net of cash divested. The sale of this business resulted in a pre-tax gain of approximately $133 million, included in restructuring and other costs (income), net. Due to the low tax basis in the Cole-Parmer business, the tax provision related to the sale slightly exceeded the pre-tax gain, resulting in a $4 million after-tax loss on the sale of the business. Revenues and operating income of the business sold were approximately $232 million and $43 million, respectively, for the year ended December 31, 2013 and $149 million and $28 million, respectively, in 2014 through the date of sale.
         
    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 $1.06 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
   
Nine Months Ended
 
   
September 27,
   
September 28,
   
September 27,
   
September 28,
 
(In millions)
 
2014
   
2013
   
2014
   
2013
 
                         
Revenues
                       
Life Sciences Solutions
  $ 1,071.9     $ 167.2     $ 3,010.5     $ 520.8  
Analytical Instruments
    786.5       765.4       2,349.8       2,266.5  
Specialty Diagnostics
    811.8       759.3       2,480.6       2,358.5  
Laboratory Products and Services
    1,628.7       1,594.7       4,918.6       4,746.0  
Eliminations
    (127.5 )     (94.8 )     (362.7 )     (268.4 )
                                 
 Consolidated revenues
    4,171.4       3,191.8       12,396.8       9,623.4  
                                 
Segment Income (a)
                               
Life Sciences Solutions
    306.3       38.9       850.0       123.4  
Analytical Instruments
    137.8       131.0       399.1       376.8  
Specialty Diagnostics
    224.3       204.2       681.7       643.4  
Laboratory Products and Services
    246.6       245.3       738.3       714.7  
                                 
 Subtotal reportable segments (a)
    915.0       619.4       2,669.1       1,858.3  
                                 
Cost of revenues charges
    (2.1 )     (0.9 )     (326.7 )     (27.2 )
Selling, general and administrative charges, net
    (20.3 )     (24.0 )     (118.0 )     (47.9 )
Restructuring and other (costs) income, net
    110.6       (11.4 )     631.9       (54.4 )
Amortization of acquisition-related intangible assets
    (362.9 )     (191.0 )     (992.4 )     (574.2 )
                                 
 Consolidated operating income
    640.3       392.1       1,863.9       1,154.6  
Other expense, net (b)
    (101.1 )     (73.1 )     (313.8 )     (212.7 )
                                 
Income from continuing operations before income taxes
  $ 539.2     $ 319.0     $ 1,550.1     $ 941.9  
                                 
Depreciation
                               
Life Sciences Solutions
  $ 37.1     $ 4.3     $ 97.4     $ 12.5  
Analytical Instruments
    9.4       10.5       29.0       30.5  
Specialty Diagnostics
    19.4       18.3       57.4       54.9  
Laboratory Products and Services
    26.9       26.3       79.9       78.5  
                                 
 Consolidated depreciation
  $ 92.8     $ 59.4     $ 263.7     $ 176.4  
 
(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
   
Nine Months Ended
 
   
September 27,
   
September 28,
   
September 27,
   
September 28,
 
(In millions)
 
2014
   
2013
   
2014
   
2013
 
                         
Interest Income
  $ 10.5     $ 7.1     $ 38.4     $ 21.4  
Interest Expense
    (116.8 )     (64.3 )     (363.7 )     (193.1 )
Other Items, Net
    5.2       (15.9 )     11.5       (41.0 )
                                 
Other Expense, Net
  $ (101.1 )   $ (73.1 )   $ (313.8 )   $ (212.7 )
                                 
 
Other Items, Net
 
In the first nine months of 2014, other items, net includes $9 million of gains from the sale of equity and available-for-sale investments. In the first nine months of 2013, other items, net includes $61 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 $5 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
 
Nine Months Ended
 
 
September 27,
 
September 28,
 
September 27,
 
September 28,
 
(In millions)
2014
 
2013
 
2014
 
2013
 
                         
Stock Option Awards
  $ 11.7     $ 10.4     $ 34.1     $ 30.6  
Restricted Unit Awards
    18.9       12.5       52.5       36.0  
                                 
Total Stock-based Compensation Expense
  $ 30.6     $ 22.9     $ 86.6     $ 66.6  
 
    As of September 27, 2014, there was $91 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 2.6 years.
   
    As of September 27, 2014, there was $121 million of total unrecognized compensation cost related to unvested restricted stock unit awards. The cost is expected to be recognized through 2018 with a weighted average amortization period of 2.3 years.
 
    During the first nine 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 nine-month periods ended September 27, 2014, the company recorded expense for cash-in-lieu of equity of $9.2 million and $26.3 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 generally 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
   
Nine Months Ended
 
   
September 27,
   
September 28,
   
September 27,
   
September 28,
 
(In millions)
 
2014
   
2013
   
2014
   
2013
 
                         
Service Cost-Benefits Earned
  $ 8.0     $ 5.8     $ 17.6     $ 15.2  
Interest Cost on Benefit Obligation
    23.6       11.9       67.2       35.8  
Expected Return on Plan Assets
    (25.0 )     (13.3 )     (71.2 )     (39.7 )
Amortization of Actuarial Net Loss
    1.9       2.8       5.9       8.5  
Amortization of Prior Service Benefit
                (0.1 )     (0.2 )
Special Termination Benefits
    0.2       0.7       0.2       1.2  
                                 
Net Periodic Benefit Cost
  $ 8.7     $ 7.9     $ 19.6     $ 20.8  
 
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:
 
   
Nine Months Ended
 
   
September 27,
   
September 28,
 
(In millions)
 
2014
   
2013
 
             
Provision for Income Taxes at Statutory Rate
  $ 542.5     $ 329.7  
                 
Increases (Decreases) Resulting From:
               
      Foreign rate differential
    (187.6 )     (178.0 )
      Impact of change in tax laws and apportionment on deferred taxes
    (26.0 )     (5.0 )
      Foreign and research and development tax credits
    (122.5 )     (118.6 )
      Manufacturing deduction
    (26.6 )     (21.1 )
      State income taxes, net of federal tax
    27.7       (3.1 )
      Nondeductible expenses
    9.6       5.3  
      Provision of tax reserves, net
    25.3        
      Tax return reassessments and settlements
    (1.5 )      
      Basis difference on disposal of businesses
    26.3        
      Singapore tax holiday
    (10.3 )      
      Other, net
    1.7       (3.4 )
                 
    $ 258.6     $ 5.8  
                 
    The company has significant activities in Singapore and has received considerable tax incentives. The local taxing authority granted the company pioneer company status which provides an incentive encouraging companies to undertake activities that have the effect of promoting economic or technological development in Singapore. This incentive equates to a tax exemption on earnings associated with most of the company’s manufacturing activities in Singapore and continues through December 31, 2021. The impact of this tax holiday decreased the annual effective tax rate by 0.7% and increased diluted earnings per share by approximately $0.03 for the nine months ended September 27, 2014.
 
 
 
 
19

 
 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
The company’s unrecognized tax benefits increased to $259.8 million at September 27, 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.
 
Note 8.           Earnings per Share
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 27,
   
September 28,
   
September 27,
   
September 28,
 
(In millions except per share amounts)
 
2014
   
2013
   
2014
   
2013
 
                         
Income from Continuing Operations
  $ 469.9     $ 317.7     $ 1,291.5     $ 936.1  
Gain (Loss) from Discontinued Operations
    1.7       (0.1 )     1.7