10-Q 1 tmoq1201610q.htm THERMO FISHER SCIENTIFIC INC., FORM 10-Q, DATED APRIL 2, 2016 10-Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended
April 2, 2016
¨ 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 ý  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 ý  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 ý             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 ý
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 April 2, 2016
 
 
Common Stock, $1.00 par value
 
393,512,230
 





THERMO FISHER SCIENTIFIC INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 2, 2016

2


THERMO FISHER SCIENTIFIC INC.

PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements
CONSOLIDATED BALANCE SHEET
(Unaudited)
 
 
April 2,

 
December 31,

(In millions except share and per share amounts)
 
2016

 
2015

 
 
 
 
 
Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
826.8

 
$
452.1

Accounts receivable, less allowances of $71.6 and $70.1
 
2,668.3

 
2,544.9

Inventories
 
2,154.9

 
1,991.7

Other current assets
 
889.0

 
752.5

 
 
 
 
 
Total current assets
 
6,539.0

 
5,741.2

 
 
 
 
 
Property, Plant and Equipment, Net
 
2,483.1

 
2,448.8

Acquisition-related Intangible Assets, Net
 
13,237.8

 
12,758.3

Other Assets
 
1,060.3

 
1,058.4

Goodwill
 
19,632.5

 
18,827.6

 
 
 
 
 
Total Assets
 
$
42,952.7

 
$
40,834.3

 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Short-term obligations and current maturities of long-term obligations
 
$
3,383.0

 
$
1,051.8

Accounts payable
 
853.0

 
822.2

Accrued payroll and employee benefits
 
421.2

 
598.2

Accrued income taxes
 
55.7

 
212.5

Deferred revenue
 
360.5

 
317.9

Other accrued expenses
 
1,249.4

 
1,143.7

 
 
 
 
 
Total current liabilities
 
6,322.8

 
4,146.3

 
 
 
 
 
Deferred Income Taxes
 
2,694.0

 
2,622.6

Other Long-term Liabilities
 
1,358.5

 
1,295.0

Long-term Obligations
 
11,653.0

 
11,420.2

 
 
 
 
 
Shareholders' Equity:
 
 
 
 
Preferred stock, $100 par value, 50,000 shares authorized; none issued
 


 


Common stock, $1 par value, 1,200,000,000 shares authorized; 413,253,651 and 411,944,301 shares issued
 
413.3

 
411.9

Capital in excess of par value
 
11,918.8

 
11,801.2

Retained earnings
 
12,485.2

 
12,142.3

Treasury stock at cost, 19,741,421 and 12,314,200 shares
 
(2,026.2
)
 
(1,007.9
)
Accumulated other comprehensive items
 
(1,866.7
)
 
(1,997.3
)
 
 
 
 
 
Total shareholders' equity
 
20,924.4

 
21,350.2

 
 
 
 
 
Total Liabilities and Shareholders' Equity
 
$
42,952.7

 
$
40,834.3


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

3



THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
 
 
Three Months Ended
 
 
April 2,

 
March 28,

(In millions except per share amounts)
 
2016

 
2015

 
 
 
 
 
Revenues
 
 
 
 
Product revenues
 
$
3,690.4

 
$
3,387.6

Service revenues
 
604.4

 
531.2

 
 
 
 
 
Total revenues
 
4,294.8

 
3,918.8

 
 
 
 
 
Costs and Operating Expenses:
 
 
 
 
Cost of product revenues
 
1,933.6

 
1,720.8

Cost of service revenues
 
403.3

 
375.5

Selling, general and administrative expenses
 
1,212.9

 
1,137.4

Research and development expenses
 
176.5

 
165.8

Restructuring and other costs, net
 
50.6

 
32.0

 
 
 
 
 
Total costs and operating expenses
 
3,776.9

 
3,431.5

 
 
 
 
 
Operating Income
 
517.9

 
487.3

Other Expense, Net
 
(94.9
)
 
(105.3
)
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
 
423.0

 
382.0

(Provision for) Benefit from Income Taxes
 
(20.7
)
 
3.1

 
 
 
 
 
Income from Continuing Operations
 
402.3

 
385.1

Loss from Discontinued Operations (net of income tax benefit of $0.1 and $0.0)
 
(0.1
)
 

 
 
 
 
 
Net Income
 
$
402.2

 
$
385.1

 
 
 
 
 
Earnings per Share from Continuing Operations
 
 
 
 
Basic
 
$
1.02

 
$
0.97

Diluted
 
$
1.01

 
$
0.96

 
 
 
 
 
Earnings per Share
 
 
 
 
Basic
 
$
1.02

 
$
0.97

Diluted
 
$
1.01

 
$
0.96

 
 
 
 
 
Weighted Average Shares
 
 
 
 
Basic
 
395.8

 
397.8

Diluted
 
398.7

 
401.4

 
 
 
 
 
Cash Dividends Declared per Common Share
 
$
0.15

 
$
0.15


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


4


THERMO FISHER SCIENTIFIC INC.

 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
Three Months Ended
 
 
April 2,

 
March 28,

(In millions)
 
2016

 
2015

 
 
 
 
 
Comprehensive Income (Loss)
 
 
 
 
Net Income
 
$
402.2

 
$
385.1

 
 
 
 
 
Other Comprehensive Items:
 
 
 
 
Currency translation adjustment
 
169.9

 
(563.1
)
Unrealized gains on available-for-sale investments:
 
 
 
 
Unrealized holding (losses) gains arising during the period (net of tax benefit of $0.4 and $0.0)
 
(1.5
)
 
0.1

Unrealized gains and losses on hedging instruments:
 
 
 
 
Unrealized losses on hedging instruments (net of tax benefit of $22.4 and $4.9)
 
(36.6
)
 
(8.0
)
Reclassification adjustment for losses included in net income (net of tax benefit of $0.5 and $0.1)
 
0.8

 
1.1

Pension and other postretirement benefit liability adjustments:
 
 
 
 
Pension and other postretirement benefit liability adjustments arising during the period (net of tax (benefit) provision of ($1.1) and $2.9)
 
(3.4
)
 
6.6

Amortization of net loss and prior service benefit included in net periodic pension cost (net of tax benefit of $0.3 and $0.7)
 
1.4

 
1.7

 
 
 
 
 
Total other comprehensive items
 
130.6

 
(561.6
)
 
 
 
 
 
Comprehensive Income (Loss)
 
$
532.8

 
$
(176.5
)

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


5


THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
 
Three Months Ended
 
 
April 2,

 
March 28,

(In millions)
 
2016

 
2015

 
 
 
 
 
Operating Activities
 
 
 
 
Net income
 
$
402.2

 
$
385.1

Loss from discontinued operations
 
0.1

 

 
 
 
 
 
Income from continuing operations
 
402.3

 
385.1

 
 
 
 
 
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
416.1

 
416.3

Change in deferred income taxes
 
(88.8
)
 
(102.4
)
Non-cash stock-based compensation
 
33.4

 
28.2

Tax benefits from stock-based compensation awards
 
(27.2
)
 
(39.2
)
Non-cash charges for sale of inventories revalued at the date of acquisition
 
6.2

 
0.5

Other non-cash expenses, net
 
14.2

 
15.8

Changes in assets and liabilities, excluding the effects of acquisitions and dispositions:
 
 
 
 
Accounts receivable
 
(29.9
)
 
(124.7
)
Inventories
 
(56.2
)
 
(81.3
)
Other assets
 
(38.7
)
 
(37.6
)
Accounts payable
 
34.8

 
34.8

Other liabilities
 
(353.4
)
 
(395.4
)
Contributions to retirement plans
 
(22.2
)
 
(18.0
)
 
 
 
 
 
Net cash provided by continuing operations
 
290.6

 
82.1

Net cash used in discontinued operations
 
(1.5
)
 
(2.1
)
 
 
 
 
 
Net cash provided by operating activities
 
289.1

 
80.0

 
 
 
 
 
Investing Activities
 
 

 
 

Acquisitions, net of cash acquired
 
(1,032.4
)
 
(298.6
)
Purchase of property, plant and equipment
 
(115.1
)
 
(97.2
)
Proceeds from sale of property, plant and equipment
 
6.0

 
0.6

Other investing activities, net
 
2.2

 
0.9

 
 
 
 
 
Net cash used in investing activities
 
$
(1,139.3
)
 
$
(394.3
)


6


THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
 
 
Three Months Ended
 
 
April 2,

 
March 28,

(In millions)
 
2016

 
2015

 
 
 
 
 
Financing Activities
 
 
 
 
Net proceeds from issuance of debt
 
$
998.9

 
$

Repayment of debt
 
(1.4
)
 
(851.4
)
Increase in commercial paper, net
 
1,174.0

 
1,218.9

Purchases of company common stock
 
(1,000.0
)
 
(500.0
)
Dividends paid
 
(60.3
)
 
(60.8
)
Net proceeds from issuance of company common stock under employee stock plans
 
50.0

 
60.0

Tax benefits from stock-based compensation awards
 
27.2

 
39.2

Other financing activities, net
 
(0.4
)
 
(6.3
)
 
 
 
 
 
Net cash used in financing activities
 
1,188.0

 
(100.4
)
 
 
 
 
 
Exchange Rate Effect on Cash
 
36.9

 
(64.2
)
 
 
 
 
 
Increase (Decrease) in Cash and Cash Equivalents
 
374.7

 
(478.9
)
Cash and Cash Equivalents at Beginning of Period
 
452.1

 
1,343.5

 
 
 
 
 
Cash and Cash Equivalents at End of Period
 
$
826.8

 
$
864.6

 
 
 
 
 
See Note 13 for supplemental cash flow information.

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


7


THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
 
 
Common Stock
 
Capital in Excess of Par Value

 
Retained Earnings

 
Treasury Stock
 
Accumulated Other Comprehensive Items

 
Total Shareholders' Equity

(In millions)
 
Shares

 
Amount

 
 
 
Shares

 
Amount

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
 
408.5

 
$
408.5

 
$
11,473.6

 
$
10,406.9

 
8.0

 
$
(455.9
)
 
$
(1,285.0
)
 
$
20,548.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of shares under employees' and directors' stock plans
 
1.7

 
1.7

 
66.5

 

 
0.3

 
(32.3
)
 

 
35.9

Stock-based compensation
 

 

 
28.2

 

 

 

 

 
28.2

Tax benefit related to employees' and directors' stock plans
 

 

 
39.0

 

 

 

 

 
39.0

Purchases of company common stock
 

 

 

 

 
3.9

 
(500.0
)
 

 
(500.0
)
Dividends declared
 

 

 

 
(59.9
)
 

 

 

 
(59.9
)
Net income
 

 

 

 
385.1

 

 

 

 
385.1

Other comprehensive items
 

 

 

 

 

 

 
(561.6
)
 
(561.6
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at March 28, 2015
 
410.2

 
$
410.2

 
$
11,607.3

 
$
10,732.1

 
12.2

 
$
(988.2
)
 
$
(1,846.6
)
 
$
19,914.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
411.9

 
$
411.9

 
$
11,801.2

 
$
12,142.3

 
12.3

 
$
(1,007.9
)
 
$
(1,997.3
)
 
$
21,350.2

Issuance of shares under employees' and directors' stock plans
 
1.4

 
1.4

 
57.4

 

 
0.1

 
(18.3
)
 

 
40.5

Stock-based compensation
 

 

 
33.4

 

 

 

 

 
33.4

Tax benefit related to employees' and directors' stock plans
 

 

 
26.8

 

 

 

 

 
26.8

Purchases of company common stock
 

 

 

 

 
7.3

 
(1,000.0
)
 

 
(1,000.0
)
Dividends declared
 

 

 

 
(59.3
)
 

 

 

 
(59.3
)
Net income
 

 

 

 
402.2

 

 

 

 
402.2

Other comprehensive items
 

 

 

 

 

 

 
130.6

 
130.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at April 2, 2016
 
413.3

 
$
413.3

 
$
11,918.8

 
$
12,485.2

 
19.7

 
$
(2,026.2
)
 
$
(1,866.7
)
 
$
20,924.4


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

8


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, academic and government, industrial and applied, as well as healthcare and diagnostics.
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 April 2, 2016, the results of operations for the three-month periods ended April 2, 2016, and March 28, 2015, and the cash flows for the three-month periods ended April 2, 2016, and March 28, 2015. Interim results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 31, 2015, 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 thereto of the company. The consolidated financial statements and notes included in this report should be read in conjunction with the 2015 financial statements and notes included in the company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC).
Note 1 to the consolidated financial statements for 2015 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 three months ended April 2, 2016.
Inventories
The components of inventories are as follows:
 
 
April 2,

 
December 31,

(In millions)
 
2016

 
2015

 
 
 
 
 
Raw Materials
 
$
467.9

 
$
421.1

Work in Process
 
259.7

 
236.8

Finished Goods
 
1,427.3

 
1,333.8

 
 
 
 
 
Inventories
 
$
2,154.9

 
$
1,991.7

Property, Plant and Equipment
Property, plant and equipment consists of the following:
 
 
April 2,

 
December 31,

(In millions)
 
2016

 
2015

 
 
 
 
 
Land
 
$
277.5

 
$
276.4

Buildings and Improvements
 
1,075.6

 
1,050.5

Machinery, Equipment and Leasehold Improvements
 
2,877.9

 
2,786.8

 
 
 
 
 
Property, Plant and Equipment, at Cost
 
4,231.0

 
4,113.7

Less: Accumulated Depreciation and Amortization
 
1,747.9

 
1,664.9

 
 
 
 
 
Property, Plant and Equipment, Net
 
$
2,483.1

 
$
2,448.8


9


THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Acquisition-related Intangible Assets
Acquisition-related intangible assets are as follows:
 
 
Balance at April 2, 2016
 
Balance at December 31, 2015
(In millions)
 
Gross

 
Accumulated Amortization

 
Net

 
Gross

 
Accumulated Amortization

 
Net

 
 
 
 
 
 
 
 
 
 
 
 
 
Definite Lived:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
12,364.7

 
$
(4,320.6
)
 
$
8,044.1

 
$
11,844.4

 
$
(4,086.9
)
 
$
7,757.5

Product technology
 
5,083.5

 
(1,932.4
)
 
3,151.1

 
4,799.8

 
(1,819.0
)
 
2,980.8

Tradenames
 
1,370.9

 
(579.6
)
 
791.3

 
1,316.7

 
(548.2
)
 
768.5

Other
 
33.6

 
(33.6
)
 

 
33.2

 
(33.0
)
 
0.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
18,852.7

 
(6,866.2
)
 
11,986.5

 
17,994.1

 
(6,487.1
)
 
11,507.0

Indefinite Lived:
 
 
 
 
 
 
 
 
 
 
 
 
Tradenames
 
1,234.8

 

 
1,234.8

 
1,234.8

 

 
1,234.8

In-process research and development
 
16.5

 

 
16.5

 
16.5

 

 
16.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,251.3

 

 
1,251.3

 
1,251.3

 

 
1,251.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related Intangible Assets
 
$
20,104.0

 
$
(6,866.2
)
 
$
13,237.8

 
$
19,245.4

 
$
(6,487.1
)
 
$
12,758.3

Warranty Obligations
The liability for warranties is included in other accrued expenses in the accompanying balance sheet. The changes in the carrying amount of standard product warranty obligations are as follows:
 
 
Three Months Ended
 
 
April 2,

 
March 28,

(In millions)
 
2016

 
2015

 
 
 
 
 
Beginning Balance
 
$
55.8

 
$
57.5

Provision charged to income
 
21.9

 
17.2

Usage
 
(20.3
)
 
(18.3
)
Acquisitions
 
1.1

 
0.5

Adjustments to previously provided warranties, net
 
(0.6
)
 
(0.1
)
Currency translation
 
1.0

 
(1.9
)
 
 
 
 
 
Ending Balance
 
$
58.9

 
$
54.9

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.
Recent Accounting Pronouncements
In March 2016, the FASB issued new guidance which affects the accounting for stock-based compensation. The new guidance simplifies the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for the

10


THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

company in 2017. Early adoption is permitted. The company is currently evaluating the impact the standard will have on its consolidated financial statements.
In February 2016, the FASB issued new guidance which requires lessees to record most leases on their balance sheets as lease liabilities, initially measured at the present value of the future lease payments, with corresponding right-of-use assets. The new guidance also sets forth new disclosure requirements related to leases. The guidance is effective for the company in 2019 and most be adopted using a modified retrospective method. Early adoption is permitted. The company is currently evaluating the impact the standard will have on its consolidated financial statements.
In January 2016, the FASB issued new guidance which affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. This guidance retains the current accounting for classifying and measuring investments in debt securities and loans, but requires equity investments to be measured at fair value with subsequent changes recognized in net income, except for those accounted for under the equity method or requiring consolidation. The guidance also changes the accounting for investments without a readily determinable fair value and that do not qualify for the practical expedient permitted by the guidance to estimate fair value. A policy election can be made for these investments whereby estimated fair value may be measured at cost and adjusted in subsequent periods for any impairment or changes in observable prices of identical or similar investments. The guidance is effective for the company in 2018. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the company’s consolidated financial statements.
In September 2015, the FASB issued new guidance which eliminates the requirement for an acquirer in a business combination to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new guidance also sets forth new disclosure requirements related to the adjustments. The guidance is effective for the company in 2016. Adoption of this standard did not have a material impact on the company’s consolidated balance sheet.
In July 2015, the FASB issued new guidance which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance does not apply to inventory that is measured using last-in, first-out (LIFO). The guidance is effective for the company in 2017. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the company’s consolidated financial statements.
In April 2015, the FASB issued new guidance which requires the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability, consistent with the current treatment of debt discounts. The guidance is effective for the company in 2016. As a result of adoption of this standard, debt issuance costs of $55 million were reclassified from other assets to reduce long-term debt as of December 31, 2015.
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 currently effective for the company in 2018. Early adoption is permitted in 2017. The company is currently evaluating the impact the standard will have on its consolidated financial statements.

Note 2.
Acquisitions
The company’s acquisitions have historically been made at prices above the determined 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.

11


THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

2016
On March 31, 2016, the company acquired, within the Life Sciences Solutions segment, Affymetrix, Inc., a North America-based provider of cellular and genetic analysis products, for a total purchase price of $1.34 billion, net of cash acquired, including the assumption of $254 million of debt. The acquisition expands the company's existing portfolio of antibodies and assays for flow cytometry and single-cell biology applications. Revenues of Affymetrix were $360 million in 2015. The purchase price exceeded the fair value of the identifiable net assets and, accordingly, $709 million was allocated to goodwill, none of which is tax deductible.
In addition, in 2016, the company acquired, within the Analytical Instruments segment, a provider of X-ray diffraction solutions for material science and industrial applications and, within the Life Sciences Solutions segment, selected assets of an existing channel partner, for an aggregate purchase price of $5 million.
During 2016, the company made contingent purchase price payments totaling $1 million for acquisitions completed prior to 2016. The contingent purchase price payments were contractually due to the sellers upon achievement of certain performance criteria at the acquired businesses.
The components of the purchase price and net assets acquired for 2016 acquisitions are as follows:
(In millions)
 
Affymetrix

 
Other

 
Total

 
 
 
 
 
 
 
Purchase Price
 
 
 
 
 
 
Cash paid
 
$
1,105.8

 
$
3.6

 
$
1,109.4

Debt assumed
 
254.2

 
0.6

 
254.8

Purchase price payable
 
59.5

 
0.6

 
60.1

Cash acquired
 
(77.7
)
 

 
(77.7
)
 
 
 
 
 
 
 
 
 
$
1,341.8

 
$
4.8

 
$
1,346.6

 
 
 
 
 
 
 
Net Assets Acquired
 
 
 
 
 
 
Current assets
 
$
161.3

 
$
1.1

 
$
162.4

Property, plant and equipment
 
20.2

 

 
20.2

Definite-lived intangible assets:
 
 
 
 
 
 
Customer relationships
 
384.3

 
1.8

 
386.1

Product technology
 
249.5

 
0.7

 
250.2

Tradenames and other
 
41.0

 

 
41.0

Indefinite-lived intangible assets:
 
 
 
 
 
 
In-process research and development
 
10.7

 

 
10.7

Goodwill
 
708.6

 
2.9

 
711.5

Other assets
 
9.1

 
0.1

 
9.2

Liabilities assumed
 
(242.9
)
 
(1.8
)
 
(244.7
)
 
 
 
 
 
 
 
 
 
$
1,341.8

 
$
4.8

 
$
1,346.6

The weighted-average amortization periods for definite-lived intangible assets acquired in 2016 are 15 years for customer relationships, 9 years for product technology and 9 years for tradenames and other. The weighted average amortization period for all definite-lived intangible assets acquired in 2016 is 12 years.
The preliminary allocation of the purchase price for Affymetrix was based on estimates of the fair value value of the net assets acquired and is subject to adjustment upon finalization of the valuation of the acquired intangible assets in the second quarter of 2016. The company recorded a deferred tax liability of $151 million in the acquisition accounting related to the outside basis difference of the Affymetrix Singapore operations as the company does not intend to permanently reinvest the pre-acquisition Singapore earnings.
The company's results would not have been materially different had the 2016 acquisitions occurred at the beginning of 2015.

12


THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Note 3.
Business Segment Information
The company’s financial performance is reported in four segments. A description of each segment follows.
Life Sciences Solutions: provides an extensive 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 pharmaceutical, biotechnology, agricultural, clinical, academic, and government 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 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 as well as from significant litigation-related matters; 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.

13


THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Business Segment Information
 
 
Three Months Ended
 
 
April 2,

 
March 28,

(In millions)
 
2016

 
2015

 
 
 
 
 
Revenues
 
 
 
 
Life Sciences Solutions
 
$
1,133.0

 
$
1,019.9

Analytical Instruments
 
759.3

 
727.4

Specialty Diagnostics
 
854.6

 
785.2

Laboratory Products and Services
 
1,724.6

 
1,513.4

Eliminations
 
(176.7
)
 
(127.1
)
 
 
 
 
 
Consolidated revenues
 
4,294.8

 
3,918.8

 
 
 
 
 
Segment Income (a)
 
 
 
 
Life Sciences Solutions
 
330.0

 
298.7

Analytical Instruments
 
111.7

 
121.7

Specialty Diagnostics
 
230.1

 
214.1

Laboratory Products and Services
 
258.2

 
222.1

 
 
 
 
 
Subtotal reportable segments (a)
 
930.0

 
856.6

 
 
 
 
 
Cost of revenues charges
 
(10.6
)
 
(0.6
)
Selling, general and administrative charges, net
 
(28.9
)
 
(7.6
)
Restructuring and other costs, net
 
(50.6
)
 
(32.0
)
Amortization of acquisition-related intangible assets
 
(322.0
)
 
(329.1
)
 
 
 
 
 
Consolidated operating income
 
517.9

 
487.3

Other expense, net (b)
 
(94.9
)
 
(105.3
)
 
 
 
 
 
Income from continuing operations before income taxes
 
$
423.0

 
$
382.0

 
 
 
 
 
Depreciation
 
 
 
 
Life Sciences Solutions
 
$
36.7

 
$
33.5

Analytical Instruments
 
9.6

 
9.3

Specialty Diagnostics
 
18.0

 
17.8

Laboratory Products and Services
 
29.8

 
26.6

 
 
 
 
 
Consolidated depreciation
 
$
94.1

 
$
87.2

(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.

14


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
 
 
April 2,

 
March 28,

(In millions)
 
2016

 
2015

 
 
 
 
 
Interest Income
 
$
10.8

 
$
7.0

Interest Expense
 
(106.2
)
 
(108.4
)
Other Items, Net
 
0.5

 
(3.9
)
 
 
 
 
 
Other Expense, Net
 
$
(94.9
)
 
$
(105.3
)
Other Items, Net
In 2016, other items, net includes $2 million of gains on investments. In 2015, other items, net includes costs of $7.5 million associated with entering into interest rate swap arrangements and losses of $3 million for the early extinguishment of debt.

Note 5.
 Stock-based Compensation Expense
The components of stock-based compensation expense are primarily included in selling, general and administrative expenses and are as follows:
 
 
Three Months Ended
 
 
April 2,

 
March 28,

(In millions)
 
2016

 
2015

 
 
 
 
 
Stock Option Awards
 
$
10.6

 
$
10.4

Restricted Unit Awards
 
22.8

 
17.8

 
 
 
 
 
Total Stock-based Compensation Expense
 
$
33.4

 
$
28.2

During the first three months of 2016, the company made equity compensation grants to employees consisting of 0.7 million service- and performance-based restricted stock units and options to purchase 1.6 million shares.
As of April 2, 2016, there was $99 million of total unrecognized compensation cost related to unvested stock options granted. The cost is expected to be recognized through 2020 with a weighted average amortization period of 2.7 years.
As of April 2, 2016, there was $187 million of total unrecognized compensation cost related to unvested restricted stock unit awards. The cost is expected to be recognized through 2019 with a weighted average amortization period of 2.4 years.

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.

15


THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The net periodic benefit cost for the company's defined benefit pension plans includes the following components:
 
 
Three Months Ended
 
 
April 2,

 
March 28,

(In millions)
 
2016

 
2015

 
 
 
 
 
Components of Net Benefit Cost
 
 
 
Service cost-benefits earned
 
$
5.2

 
$
6.2

Interest cost on benefit obligation
 
19.5

 
19.4

Expected return on plan assets
 
(19.7
)
 
(23.3
)
Amortization of actuarial net loss
 
1.8

 
2.3

Amortization of prior service benefit
 
(0.1
)
 

 
 
 
 
 
Net periodic benefit cost
 
$
6.7

 
$
4.6


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:
 
 
Three Months Ended
 
 
April 2,

 
March 28,

(In millions)
 
2016

 
2015

 
 
 
 
 
Provision for Income Taxes at Statutory Rate
 
$
148.1

 
$
133.7

 
 
 
 
 
Increases (Decreases) Resulting From:
 
 
 
 
Foreign rate differential
 
(47.3
)
 
(23.8
)
Income tax credits
 
(77.8
)
 
(103.1
)
Manufacturing deduction
 
(6.7
)
 
(7.6
)
Singapore tax holiday
 
(3.7
)
 
(3.2
)
Impact of change in tax laws and apportionment on deferred taxes
 
8.9

 
0.7

Nondeductible expenses
 
1.7

 
1.9

Tax return reassessments and settlements
 
(2.0
)
 

State income taxes, net of federal tax
 
(1.5
)
 
(1.6
)
Other, net
 
1.0

 
(0.1
)
 
 
 
 
 
Provision for (benefit from) income taxes
 
$
20.7

 
$
(3.1
)
In 2016, the company implemented tax planning initiatives related to non-U.S. subsidiaries. These non-U.S. subsidiaries incurred foreign tax obligations and made cash and deemed distributions to the company’s U.S. operations which resulted in no net tax cost. As a result of these distributions, the company benefitted from U.S. foreign tax credits of $46 million, offset in part by additional U.S. income taxes of $16 million on the related foreign income (which reduced the benefit from the foreign rate differential in 2016). The foreign tax credits are the result of foreign earnings remitted or deemed remitted to the U.S. during the reporting year and the U.S. treatment of taxes paid in the foreign jurisdictions in the years those profits were originally earned.
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. In 2016 and 2015, the impact of this tax holiday decreased the annual effective tax rates by 0.9% and 0.8%, respectively, and increased diluted earnings per share by approximately $0.01 and $0.01, respectively.

16


THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)


Note 8.
Earnings per Share
 
 
Three Months Ended
 
 
April 2,

 
March 28,

(In millions except per share amounts)
 
2016

 
2015

 
 
 
 
 
Income from Continuing Operations
 
$
402.3

 
$
385.1

Loss from Discontinued Operations
 
(0.1
)
 

 
 
 
 
 
Net Income
 
$
402.2

 
$
385.1

 
 
 
 
 
Basic Weighted Average Shares
 
395.8

 
397.8

Plus Effect of:
 
 
 
 
Stock options and restricted units
 
2.9

 
3.6

 
 
 
 
 
Diluted Weighted Average Shares
 
398.7

 
401.4

 
 
 
 
 
Basic Earnings per Share:
 
 
 
 
Continuing operations
 
$
1.02

 
$
0.97

Discontinued operations
 

 

 
 
 
 
 
Basic Earnings per Share
 
$
1.02

 
$
0.97

 
 
 
 
 
Diluted Earnings per Share:
 
 
 
 
Continuing operations
 
$
1.01

 
$
0.96

Discontinued operations
 

 

 
 
 
 
 
Diluted Earnings per Share
 
$
1.01

 
$
0.96

Options to purchase 3.6 million and 4.0 million shares of common stock were not included in the computation of diluted earnings per share for the first three months of 2016 and 2015, respectively, because their effect would have been antidilutive.

17


THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Note 9.
Debt and Other Financing Arrangements
 
 
Effective Interest Rate at April 2,

 
April 2,

 
December 31,

(Dollars in millions)
 
2016

 
2016

 
2015

 
 
 
 
 
 
 
Commercial Paper
 
1.51
%
 
$
1,228.0

 
$
49.6

Term Loan
 
1.57
%
 
1,000.0

 

2.25% 5-Year Senior Notes, Due 8/15/2016
 
2.44
%
 
1,000.0

 
1,000.0

1.30% 3-Year Senior Notes, Due 2/1/2017
 
1.25
%
 
900.0

 
900.0

1.85% 5-Year Senior Notes, Due 1/15/2018
 
2.01
%
 
500.0

 
500.0

2.15% 3-Year Senior Notes, Due 12/14/2018
 
2.35
%
 
450.0

 
450.0

2.40% 5-Year Senior Notes, Due 2/1/2019
 
2.59
%
 
900.0

 
900.0

6.00% 10-Year Senior Notes, Due 3/1/2020
 
2.97
%
 
750.0

 
750.0

4.70% 10-Year Senior Notes, Due 5/1/2020
 
4.23
%
 
300.0

 
300.0

1.50% 5-Year Senior Notes, Due 12/1/2020 (euro-denominated)
 
1.61
%
 
484.1

 
461.6

5.00% 10-Year Senior Notes, Due 1/15/2021
 
3.24
%
 
400.0

 
400.0

4.50% 10-Year Senior Notes, Due 3/1/2021
 
3.50
%
 
1,000.0

 
1,000.0

3.60% 10-Year Senior Notes, Due 8/15/2021
 
3.16
%
 
1,100.0

 
1,100.0

3.30% 7-Year Senior Notes, Due 2/15/2022
 
3.43
%
 
800.0

 
800.0

2.15% 7-Year Senior Notes, Due 7/21/2022 (euro-denominated)
 
2.28
%
 
569.6

 
543.1

3.15% 10-Year Senior Notes, Due 1/15/2023
 
3.31
%
 
800.0

 
800.0

4.15% 10-Year Senior Notes, Due 2/1/2024
 
4.16
%
 
1,000.0

 
1,000.0

2.00% 10-Year Senior Notes, Due 4/15/2025 (euro-denominated)
 
2.09
%
 
729.0

 
695.2

3.65% 10-Year Senior Notes, Due 12/15/2025
 
3.77
%
 
350.0

 
350.0

5.30% 30-Year Senior Notes, Due 2/1/2044
 
5.37
%
 
400.0

 
400.0

Affymetrix Debt at Fair Value (a)
 
 
 
254.1

 

Other
 
 
 
15.7

 
16.3

 
 
 
 
 
 
 
Total Borrowings at Par Value
 
 
 
14,930.5

 
12,415.8

Fair Value Hedge Accounting Adjustments
 
 
 
59.6

 
6.2

Unamortized Premium, Net
 
 
 
98.8

 
104.7

Unamortized Debt Issuance Costs (Note 1)
 
 
 
(52.9
)
 
(54.7
)
 
 
 
 
 
 
 
Total Borrowings at Carrying Value
 
 
 
15,036.0

 
12,472.0

Less: Short-term Obligations and Current Maturities
 
 
 
3,383.0

 
1,051.8

 
 
 
 
 
 
 
Long-term Obligations
 
 
 
$
11,653.0

 
$
11,420.2

(a)
The debt assumed in the acquisition of Affymetrix was substantially repaid in April 2016.
The effective interest rates for the fixed-rate debt include the stated interest on the notes, the accretion of any discount or amortization of any premium, the amortization of any debt issuance costs and, if applicable, adjustments related to hedging.
See Note 12 for fair value information pertaining to the company’s long-term obligations.
Credit Facilities
The company has a revolving credit facility with a bank group that provides for up to $2.00 billion of unsecured multi-currency revolving credit. The facility expires in July 2018. The agreement calls for interest at either a LIBOR-based rate or a rate based on the prime lending rate of the agent bank, at the company’s option. The agreement contains affirmative, negative and financial covenants, and events of default customary for financings of this type. The financial covenant requires the company to maintain a Consolidated Leverage Ratio of debt to EBITDA (as defined in the agreement) below 3.5 to 1.0 and an Interest Coverage Ratio of EBITDA (as defined in the agreement) to interest expense of 3.0 to 1.0. The credit agreement permits the company to use the facility for working capital; acquisitions; repurchases of common stock, debentures and other securities; the refinancing of debt; and general corporate purposes. The credit agreement allows for the issuance of letters of

18


THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

credit, which reduces the amount available for borrowing. If the company borrows under this facility, it intends to leave undrawn an amount equivalent to outstanding commercial paper to provide a source of funds in the event that commercial paper markets are not available. As of April 2, 2016, no borrowings were outstanding under the facility, although available capacity was reduced by approximately $68 million as a result of outstanding letters of credit.
Term Loan
In the first quarter of 2016, in connection with the acquisition of Affymetrix, the company entered into a 364-day unsecured term loan agreement. The term loan agreement called for interest at either a LIBOR-based rate or a rate based on the prime lending rate of the agent bank, at the company’s option. The term loan agreement contains affirmative, negative and financial covenants, and events of default customary for financings of this type. The financial covenant requires the company to maintain a Consolidated Leverage Ratio of debt to EBITDA (as defined in the agreement) below 3.5 to 1.0 and an Interest Coverage Ratio of EBITDA (as defined in the agreement) to interest expense of 3.0 to 1.0. As of April 2, 2016, $1.00 billion was outstanding under the term loan agreement. Borrowings may be prepaid without penalty.
Senior Notes
Interest on the euro-denominated senior notes is payable annually. Interest on each of the other senior notes is payable semi-annually. Each of the notes may be redeemed at a redemption price of 100% of the principal amount plus a specified make-whole premium plus accrued interest. The company is subject to certain affirmative and negative covenants under the indentures governing the senior notes, the most restrictive of which limits the ability of the company to pledge principal properties as security under borrowing arrangements.
In April 2016, the company issued $1.00 billion principal amount of 3.00% Senior Notes due 2023 and used the proceeds to repay all of the 2.25% Senior Notes due 2016. As the company had the ability and intent to refinance the 2.25% Senior Notes, they have been reported as long-term obligations in the accompanying balance sheet as of April 2, 2016. Prior to issuing the 3.00% Senior Notes due 2023, the company had entered into an agreement to hedge its exposure related to the interest rate on the anticipated borrowings (described under the heading "Cash Flow Hedge Arrangements" in Note 12) that was terminated in April 2016. The company had a cash outlay of $75 million early in the second quarter of 2016 associated with termination of the arrangement.
Interest Rate Swap Arrangements
In the first quarter of 2016, the company terminated certain of its fixed to floating rate swap arrangements. The terminated swaps were accounted for as fair value hedges. As a result of terminating these arrangements, the company received $61 million (excluding accrued interest) in cash in the second quarter of 2016. The proceeds were recorded as part of the carrying value of the underlying debt and will be amortized as a reduction to interest expense over the remaining terms of the respective debt instruments. Subsequently, the company entered into new swap arrangements which are included in the table below.
The company has entered into LIBOR-based interest rate swap arrangements with various banks on several of its outstanding senior notes. The aggregate amounts of the swaps are equal to the principal amounts of the notes and the payment dates of the swaps coincide with the interest payment dates of the notes. The swap contracts provide for the company to pay a variable interest rate and receive a fixed rate. The variable interest rates reset monthly. The swaps have been accounted for as fair value hedges of the notes. See Note 12 for additional information. The following table summarizes the outstanding interest rate swap arrangements on the company's senior notes at April 2, 2016:
 
 
Aggregate Notional Amount

 
 
 
Pay Rate as of

 
 
(Dollars in millions)
 
 
Pay Rate
 
April 2,
2016

 
Receive Rate

 
 
 
 
 
 
 
 
 
1.30% Senior Notes due 2017
 
$
900.0

 
1-month LIBOR + 0.6616%
 
1.0956
%
 
1.30
%
4.50% Senior Notes due 2021
 
1,000.0

 
1-month LIBOR + 3.4420%
 
3.8758
%
 
4.50
%
3.60% Senior Notes due 2021
 
1,100.0

 
1-month LIBOR + 2.5150%
 
2.9165
%
 
3.60
%


19


THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Note 10.
Commitments and Contingencies
Environmental Matters
The company is currently involved in various stages of investigation and remediation related to environmental matters. The company cannot predict all potential costs related to environmental remediation matters and the possible impact on future operations given the uncertainties regarding the extent of the required cleanup, the complexity and interpretation of applicable laws and regulations, the varying costs of alternative cleanup methods and the extent of the company’s responsibility. Expenses for environmental remediation matters related to the costs of installing, operating and maintaining groundwater-treatment systems and other remedial activities related to historical environmental contamination at the company’s domestic and international facilities were not material in any period presented. The company records accruals for environmental remediation liabilities, based on current interpretations of environmental laws and regulations, when it is probable that a liability has been incurred and the amount of such liability can be reasonably estimated. The company calculates estimates based upon several factors, including reports prepared by environmental specialists and management’s knowledge of and experience with these environmental matters. The company includes in these estimates potential costs for investigation, remediation and operation and maintenance of cleanup sites. At April 2, 2016 and December 31, 2015, the company’s total environmental liability was approximately $46 million and $35 million, respectively. While management believes the accruals for environmental remediation are adequate based on current estimates of remediation costs, the company may be subject to additional remedial or compliance costs due to future events such as changes in existing laws and regulations, changes in agency direction or enforcement policies, developments in remediation technologies or changes in the conduct of the company’s operations, which could have a material adverse effect on the company’s financial position, results of operations or cash flows.
Litigation and Related Contingencies
There are various lawsuits and claims pending against the company including matters involving product liability, intellectual property, antitrust, employment, and contractual issues. The company determines the probability and range of possible loss based on the current status of each of these matters. A liability is recorded in the financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The company establishes a liability that is an estimate of amounts expected to be paid in the future for events that have already occurred. The company accrues the most likely amount or at least the minimum of the range of probable loss when a range of probable loss can be estimated. The accrued liabilities are based on management’s judgment as to the probability of losses for asserted and unasserted claims and, where applicable, actuarially determined estimates. Accrual estimates are adjusted as additional information becomes known or payments are made. The amount of ultimate loss may differ from these estimates. Due to the inherent uncertainties associated with pending litigation or claims, the company cannot predict the outcome, nor, with respect to certain pending litigation or claims where no liability has been accrued, make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. The company has no material accruals for pending litigation or claims for which accrual amounts are not disclosed below or in the company's 2015 Annual Report on Form 10-K filed with the SEC, nor are material losses deemed probable for such matters. It is reasonably possible, however, that an unfavorable outcome that exceeds the company’s current accrual estimate, if any, for one or more of the matters described below could have a material adverse effect on the company’s results of operations, financial position and cash flows.
Product Liability, Workers Compensation and Other Personal Injury Matters
For product liability, workers compensation and other personal injury matters, the company accrues the most likely amount or at least the minimum of the range of possible loss when a range of possible loss can be estimated. The company records estimated amounts due from insurers related to certain product liabilities as an asset. Although the company believes that the amounts accrued and estimated recoveries are probable and appropriate based on available information, including actuarial studies of loss estimates, the process of estimating losses and insurance recoveries involves a considerable degree of judgment by management and the ultimate amounts could vary materially. Insurance contracts do not relieve the company of its primary obligation with respect to any losses incurred. The collectability of amounts due from its insurers is subject to the solvency and willingness of the insurer to pay, as well as the legal sufficiency of the insurance claims. Management monitors the payment history as well as the financial condition and ratings of its insurers on an ongoing basis.
Intellectual Property Matters
On July 13 and 15, 2015, 454 Life Sciences (a member of the Roche Group) filed complaints against Ion Torrent, Inc., Life Technologies Corp., and Thermo Fisher Scientific Inc. in the United States District Court for the District of Delaware and in Germany. Plaintiff alleges infringement of patents relating to methods of analyzing nucleic acid sequences using emulsion

20


THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

amplification, which plaintiff alleges are impermissibly used in Ion Torrent sequencing workflows. Plaintiff seeks damages for alleged willful infringement and breach of contract, attorneys’ fees and costs, and injunctive relief.
On June 6, 2004, Enzo Biochem, Enzo Life Sciences and Yale University filed a complaint against Life Technologies in United States District Court for the District of Connecticut. The plaintiffs allege patent infringement by Applera’s labeled DNA terminator products used in DNA sequencing and fragment analysis. The plaintiff sought damages for alleged willful infringement, attorneys’ fees, costs, prejudgment interest, and injunctive relief. In November 2012, the jury awarded damages of $49 million. Prejudgment interest of $12 million was also granted. The $61 million judgment and interest was accrued by Life Technologies and the liability was assumed by the company as of the date of the acquisition. In March 2015 the United States Court of Appeals for the Federal Circuit vacated the judgment and returned the case to the District Court for further proceedings. In February 2016, the District Court granted the company’s motion for summary judgment of non-infringement and entered judgment in its favor.  Enzo appealed that decision to the Federal Circuit in March 2016. The company has maintained the $61 million accrual, pending appeals.
On January 30, 2012, Enzo Life Sciences filed a complaint against Life Technologies in United States District Court for the District of Delaware. The plaintiff alleges patent infringement by Life Technologies’ Taqman probes and assays, Dynabead oligo-dT beads, NCode oligonucleotide array products, Ion Torrent beads and chips and SOLiD beads and chips. The plaintiff seeks damages for alleged willful infringement, attorneys’ fees, costs, prejudgment interest and injunctive relief.
On May 26, 2010, Promega Corp. & Max-Planck-Gesellschaft Zur Forderung Der Wissenschaften EV filed a complaint against Life Technologies in the United States District Court for the Western District of Wisconsin. The plaintiffs allege patent infringement by sales and uses of Applied Biosystems’ short tandem repeat DNA identification products outside the scope of a 2006 license agreement. The plaintiff sought damages for alleged willful infringement, attorneys’ fees, costs, prejudgment interest, and injunctive relief. Although a jury initially found willful infringement and assessed damages at $52 million, the District Court subsequently overturned the verdict on the grounds that the plaintiff had failed to prove infringement. The District Court entered judgment in favor of Life Technologies; and plaintiffs and Life Technologies filed cross-appeals with the United States Court of Appeals for the Federal Circuit. The $52 million award was accrued by Life Technologies and the liability was assumed by the company as of the date of the acquisition. On December 15, 2014, the Court of Appeals issued a decision invalidating four of the plaintiffs’ patents, but finding infringement by Life Technologies of the remaining fifth patent. The Court of Appeals also ordered a new trial on damages in the District Court. The company has maintained the $52 million accrual, pending conclusion of this matter.
On December 27, 2011, Illumina Inc. filed a complaint against Life Technologies in the United States District Court for the Southern District of California alleging infringement of a patent relating to methods for making bead arrays by Ion Torrent’s semiconductor sequencing systems. Plaintiff seeks damages for alleged willful infringement, attorneys’ fees, costs, pre- and post-judgment interest, and injunctive relief.
On June 3, 2013, Unisone Strategic IP filed a complaint against Life Technologies in the United States District Court for the Southern District of California alleging patent infringement by Life Technologies’ supply chain management system software, which operates with product “supply centers” installed at customer sites. Plaintiff seeks damages for alleged willful infringement, attorneys’ fees, costs, and injunctive relief.


21


THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

Note 11.
Comprehensive Income and Shareholders' Equity
Comprehensive Income (Loss)
Comprehensive income (loss) combines net income and other comprehensive items. Other comprehensive items represent certain amounts that are reported as components of shareholders’ equity in the accompanying balance sheet.
Changes in each component of accumulated other comprehensive items, net of tax are as follows: 
(In millions)
 
Currency
Translation
Adjustment

 
Unrealized
Gains on
Available-for-
Sale
Investments

 
Unrealized
Losses on
Hedging
Instruments

 
Pension and
Other
Postretirement
Benefit
Liability
Adjustment

 
Total

 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
 
$
(1,776.7
)
 
$
1.8

 
$
(26.6
)
 
$
(195.8
)
 
$
(1,997.3
)
Other comprehensive income (loss) before reclassifications
 
169.9

 
(1.5
)
 
(36.6
)
 
(3.4
)
 
128.4

Amounts reclassified from accumulated other comprehensive items
 

 

 
0.8

 
1.4

 
2.2

 
 
 
 
 
 
 
 
 
 
 
Net other comprehensive items
 
169.9

 
(1.5
)
 
(35.8
)
 
(2.0
)
 
130.6

 
 
 
 
 
 
 
 
 
 
 
Balance at April 2, 2016
 
$
(1,606.8
)
 
$
0.3

 
$
(62.4
)
 
$
(197.8
)
 
$
(1,866.7
)

Note 12.
Fair Value Measurements and Fair Value of Financial Instruments
Fair Value Measurements
The company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during 2016. The company’s financial assets and liabilities carried at fair value are primarily comprised of insurance contracts, investments in money market funds, derivative contracts, mutual funds holding publicly traded securities and other investments in unit trusts held as assets to satisfy outstanding deferred compensation and retirement liabilities; and acquisition-related contingent consideration.
The fair value accounting guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities that the company has the ability to access.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data such as quoted prices, interest rates and yield curves.
Level 3: Inputs are unobservable data points that are not corroborated by market data.

22


THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

The following tables present information about the company’s financial assets and liabilities measured at fair value on a recurring basis as of April 2, 2016 and December 31, 2015:
 
 
April 2,

 
Quoted
Prices in
Active
Markets

 
Significant
Other
Observable
 Inputs

 
Significant
Unobservable
Inputs

(In millions)
 
2016

 
(Level 1)

 
(Level 2)

 
(Level 3)

 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash equivalents
 
$
65.8

 
$
65.8

 
$

 
$

Bank time deposits
 
2.0

 
2.0

 

 

Investments in mutual funds and other similar instruments
 
7.5

 
7.5

 

 

Warrants
 
1.5

 

 
1.5

 

Insurance contracts
 
110.0

 

 
110.0

 

Derivative contracts
 
13.5

 

 
13.5

 

 
 
 
 
 
 
 
 
 
Total Assets
 
$
200.3

 
$
75.3

 
$
125.0

 
$

 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Derivative contracts
 
$
19.5

 
$

 
$
19.5