10-Q 1 tmoq3201610q.htm THERMO FISHER SCIENTIFIC INC., FORM 10-Q, DATED OCTOBER 1, 2016 Document



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
October 1, 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.)
 
 
168 Third Avenue
 
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 October 1, 2016
 
 
Common Stock, $1.00 par value
 
395,025,225
 





THERMO FISHER SCIENTIFIC INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 1, 2016

2


THERMO FISHER SCIENTIFIC INC.

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

 
December 31,

(In millions except share and per share amounts)
 
2016

 
2015

 
 
 
 
 
Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
1,970.0

 
$
452.1

Accounts receivable, less allowances of $82.3 and $70.1
 
2,895.1

 
2,544.9

Inventories
 
2,390.9

 
1,991.7

Other current assets
 
948.4

 
752.5

 
 
 
 
 
Total current assets
 
8,204.4

 
5,741.2

 
 
 
 
 
Property, Plant and Equipment, Net
 
2,599.3

 
2,448.8

Acquisition-related Intangible Assets, Net
 
14,522.4

 
12,758.3

Other Assets
 
1,104.6

 
1,058.4

Goodwill
 
21,580.0

 
18,827.6

 
 
 
 
 
Total Assets
 
$
48,010.7

 
$
40,834.3

 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Short-term obligations and current maturities of long-term obligations
 
$
1,972.1

 
$
1,051.8

Accounts payable
 
941.7

 
822.2

Accrued payroll and employee benefits
 
611.2

 
598.2

Accrued income taxes
 
23.7

 
212.5

Deferred revenue
 
492.2

 
317.9

Other accrued expenses
 
1,219.0

 
1,143.7

 
 
 
 
 
Total current liabilities
 
5,259.9

 
4,146.3

 
 
 
 
 
Deferred Income Taxes
 
2,715.0

 
2,622.6

Other Long-term Liabilities
 
1,436.8

 
1,295.0

Long-term Obligations
 
16,940.4

 
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; 414,958,014 and 411,944,301 shares issued
 
415.0

 
411.9

Capital in excess of par value
 
12,097.1

 
11,801.2

Retained earnings
 
13,356.5

 
12,142.3

Treasury stock at cost, 19,932,789 and 12,314,200 shares
 
(2,055.3
)
 
(1,007.9
)
Accumulated other comprehensive items
 
(2,154.7
)
 
(1,997.3
)
 
 
 
 
 
Total shareholders' equity
 
21,658.6

 
21,350.2

 
 
 
 
 
Total Liabilities and Shareholders' Equity
 
$
48,010.7

 
$
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
 
Nine Months Ended
 
 
October 1,

 
September 26,

 
October 1,

 
September 26,

(In millions except per share amounts)
 
2016

 
2015

 
2016

 
2015

 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Product revenues
 
$
3,866.5

 
$
3,570.3

 
$
11,453.0

 
$
10,635.1

Service revenues
 
624.4

 
552.9

 
1,867.9

 
1,677.8

 
 
 
 
 
 
 
 
 
Total revenues
 
4,490.9

 
4,123.2

 
13,320.9

 
12,312.9

 
 
 
 
 
 
 
 
 
Costs and Operating Expenses:
 
 
 
 
 
 
 
 
Cost of product revenues
 
2,024.3

 
1,853.9

 
5,997.2

 
5,481.7

Cost of service revenues
 
412.7

 
386.0

 
1,233.4

 
1,183.6

Selling, general and administrative expenses
 
1,274.6

 
1,133.3

 
3,710.6

 
3,421.7

Research and development expenses
 
183.3

 
171.6

 
542.2

 
512.0

Restructuring and other costs, net
 
54.9

 
15.5

 
140.9

 
67.9

 
 
 
 
 
 
 
 
 
Total costs and operating expenses
 
3,949.8

 
3,560.3

 
11,624.3

 
10,666.9

 
 
 
 
 
 
 
 
 
Operating Income
 
541.1

 
562.9

 
1,696.6

 
1,646.0

Other Expense, Net
 
(113.2
)
 
(94.8
)
 
(324.6
)
 
(292.3
)
 
 
 
 
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
 
427.9

 
468.1

 
1,372.0

 
1,353.7

Benefit from Income Taxes
 
45.6

 
9.2

 
20.6

 
20.3

 
 
 
 
 
 
 
 
 
Income from Continuing Operations
 
473.5

 
477.3

 
1,392.6

 
1,374.0

Loss from Discontinued Operations (net of income tax benefit of $0.0, $0.7, $0.2 and $0.7)
 

 
(1.2
)
 
(0.3
)
 
(1.2
)
 
 
 
 
 
 
 
 
 
Net Income
 
$
473.5

 
$
476.1

 
$
1,392.3

 
$
1,372.8

 
 
 
 
 
 
 
 
 
Earnings per Share from Continuing Operations
 
 
 
 
 
 
 
 
Basic
 
$
1.20

 
$
1.20

 
$
3.53

 
$
3.45

Diluted
 
$
1.19

 
$
1.19

 
$
3.50

 
$
3.42

 
 
 
 
 
 
 
 
 
Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
1.20

 
$
1.19

 
$
3.53

 
$
3.45

Diluted
 
$
1.19

 
$
1.18

 
$
3.50

 
$
3.42

 
 
 
 
 
 
 
 
 
Weighted Average Shares
 
 
 
 
 
 
 
 
Basic
 
394.7

 
399.0

 
394.8

 
398.4

Diluted
 
397.4

 
402.0

 
397.6

 
401.7

 
 
 
 
 
 
 
 
 
Cash Dividends Declared per Common Share
 
$
0.15

 
$
0.15

 
$
0.45

 
$
0.45


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


4


THERMO FISHER SCIENTIFIC INC.

 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
October 1,

 
September 26,

 
October 1,

 
September 26,

(In millions)
 
2016

 
2015

 
2016

 
2015

 
 
 
 
 
 
 
 
 
Comprehensive Income
 
 
 
 
 
 
 
 
Net Income
 
$
473.5

 
$
476.1

 
$
1,392.3

 
$
1,372.8

 
 
 
 
 
 
 
 
 
Other Comprehensive Items:
 
 
 
 
 
 
 
 
Currency translation adjustment
 
(77.0
)
 
(263.6
)
 
(127.8
)
 
(605.6
)
Unrealized gains and losses on available-for-sale investments:
 
 
 
 
 
 
 
 
Unrealized holding gains (losses) arising during the period (net of tax provision (benefit) of $0.1, ($0.2), ($0.2) and ($0.2))
 
0.5

 
(0.2
)
 
(1.0
)
 
(0.2
)
Reclassification adjustment for losses included in net income (net of tax benefit of $0.2 and $0.2)
 
0.7

 

 
0.7

 

Unrealized gains and losses on hedging instruments:
 
 
 
 
 
 
 
 
Unrealized gains (losses) on hedging instruments (net of tax provision (benefit) of $0.0, ($17.7), ($22.4) and ($3.6))
 

 
(28.7
)
 
(36.6
)
 
(5.7
)
Reclassification adjustment for losses included in net income (net of tax benefit of $1.2, $0.5, $2.6 and $1.1)
 
1.8

 
0.6

 
4.3

 
2.5

Pension and other postretirement benefit liability adjustments:
 
 
 
 
 
 
 
 
Pension and other postretirement benefit liability adjustments arising during the period (net of tax provision (benefit) of $0.1, ($0.2), ($0.0) and $1.5)
 

 
(1.0
)
 
(1.1
)
 
2.4

Amortization of net loss and prior service benefit included in net periodic pension cost (net of tax benefit of $0.5, $0.7, $1.4 and $1.9)
 
1.4

 
1.6

 
4.1

 
5.2

 
 
 
 
 
 
 
 
 
Total other comprehensive items
 
(72.6
)
 
(291.3
)
 
(157.4
)
 
(601.4
)
 
 
 
 
 
 
 
 
 
Comprehensive Income
 
$
400.9

 
$
184.8

 
$
1,234.9

 
$
771.4


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


5


THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
 
Nine Months Ended
 
 
October 1,

 
September 26,

(In millions)
 
2016

 
2015

 
 
 
 
 
Operating Activities
 
 
 
 
Net income
 
$
1,392.3

 
$
1,372.8

Loss from discontinued operations
 
0.3

 
1.2

 
 
 
 
 
Income from continuing operations
 
1,392.6

 
1,374.0

 
 
 
 
 
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
1,284.2

 
1,263.7

Change in deferred income taxes
 
(514.8
)
 
(285.9
)
Net gains on sale of businesses
 

 
(7.6
)
Non-cash stock-based compensation
 
102.0

 
91.8

Tax benefits from stock-based compensation awards
 
(54.9
)
 
(55.6
)
Non-cash charges for sale of inventories revalued at the date of acquisition
 
38.7

 
0.7

Other non-cash expenses, net
 
49.0

 
39.5

Changes in assets and liabilities, excluding the effects of acquisitions and dispositions:
 
 
 
 
Accounts receivable
 
(112.4
)
 
(145.9
)
Inventories
 
22.3

 
(175.3
)
Other assets
 
(92.3
)
 
(213.7
)
Accounts payable
 
66.1

 
(26.9
)
Other liabilities
 
(194.0
)
 
(236.3
)
Contributions to retirement plans
 
(33.1
)
 
(25.7
)
 
 
 
 
 
Net cash provided by continuing operations
 
1,953.4

 
1,596.8

Net cash used in discontinued operations
 
(3.0
)
 
(8.0
)
 
 
 
 
 
Net cash provided by operating activities
 
1,950.4

 
1,588.8

 
 
 
 
 
Investing Activities
 
 

 
 

Acquisitions, net of cash acquired
 
(5,153.0
)
 
(306.0
)
Purchase of property, plant and equipment
 
(310.9
)
 
(293.5
)
Proceeds from sale of property, plant and equipment
 
23.1

 
7.5

Other investing activities, net
 
(3.2
)
 
16.0

 
 
 
 
 
Net cash used in investing activities
 
$
(5,444.0
)
 
$
(576.0
)


6


THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
 
 
Nine Months Ended
 
 
October 1,

 
September 26,

(In millions)
 
2016

 
2015

 
 
 
 
 
Financing Activities
 
 
 
 
Net proceeds from issuance of debt
 
$
7,605.8

 
$
542.8

Repayment of debt
 
(2,307.1
)
 
(2,481.0
)
Increase in commercial paper, net
 
768.8

 
725.5

Purchases of company common stock
 
(1,000.0
)
 
(500.0
)
Dividends paid
 
(179.2
)
 
(180.7
)
Net proceeds from issuance of company common stock under employee stock plans
 
122.5

 
96.6

Tax benefits from stock-based compensation awards
 
54.9

 
55.6

Other financing activities, net
 
(13.6
)
 
(5.9
)
 
 
 
 
 
Net cash provided by (used in) financing activities
 
5,052.1

 
(1,747.1
)
 
 
 
 
 
Exchange Rate Effect on Cash
 
(40.6
)
 
(105.8
)
 
 
 
 
 
Increase (Decrease) in Cash and Cash Equivalents
 
1,517.9

 
(840.1
)
Cash and Cash Equivalents at Beginning of Period
 
452.1

 
1,343.5

 
 
 
 
 
Cash and Cash Equivalents at End of Period
 
$
1,970.0

 
$
503.4

 
 
 
 
 
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
 
2.9

 
2.9

 
112.6

 

 
0.4

 
(51.4
)
 

 
64.1

Stock-based compensation
 

 

 
91.8

 

 

 

 

 
91.8

Tax benefit related to employees' and directors' stock plans
 

 

 
54.8

 

 

 

 

 
54.8

Purchases of company common stock
 

 

 

 

 
3.9

 
(500.0
)
 

 
(500.0
)
Dividends declared
 

 

 

 
(180.0
)
 

 

 

 
(180.0
)
Net income
 

 

 

 
1,372.8

 

 

 

 
1,372.8

Other comprehensive items
 

 

 

 

 

 

 
(601.4
)
 
(601.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at September 26, 2015
 
411.4

 
$
411.4

 
$
11,732.8

 
$
11,599.7

 
12.3

 
$
(1,007.3
)
 
$
(1,886.4
)
 
$
20,850.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
3.1

 
3.1

 
139.7

 

 
0.3

 
(47.4
)
 

 
95.4

Stock-based compensation
 

 

 
102.0

 

 

 

 

 
102.0

Tax benefit related to employees' and directors' stock plans
 

 

 
54.2

 

 

 

 

 
54.2

Purchases of company common stock
 

 

 

 

 
7.3

 
(1,000.0
)
 

 
(1,000.0
)
Dividends declared
 

 

 

 
(178.1
)
 

 

 

 
(178.1
)
Net income
 

 

 

 
1,392.3

 

 

 

 
1,392.3

Other comprehensive items
 

 

 

 

 

 

 
(157.4
)
 
(157.4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at October 1, 2016
 
415.0

 
$
415.0

 
$
12,097.1

 
$
13,356.5

 
19.9

 
$
(2,055.3
)
 
$
(2,154.7
)
 
$
21,658.6


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 October 1, 2016, the results of operations for the three- and nine-month periods ended October 1, 2016 and September 26, 2015, and the cash flows for the nine-month periods ended October 1, 2016 and September 26, 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 nine months ended October 1, 2016.
Inventories
The components of inventories are as follows:
 
 
October 1,

 
December 31,

(In millions)
 
2016

 
2015

 
 
 
 
 
Raw Materials
 
$
498.1

 
$
421.1

Work in Process
 
367.3

 
236.8

Finished Goods
 
1,525.5

 
1,333.8

 
 
 
 
 
Inventories
 
$
2,390.9

 
$
1,991.7

Property, Plant and Equipment
Property, plant and equipment consists of the following:
 
 
October 1,

 
December 31,

(In millions)
 
2016

 
2015

 
 
 
 
 
Land
 
$
291.2

 
$
276.4

Buildings and Improvements
 
1,118.6

 
1,050.5

Machinery, Equipment and Leasehold Improvements
 
3,055.0

 
2,786.8

 
 
 
 
 
Property, Plant and Equipment, at Cost
 
4,464.8

 
4,113.7

Less: Accumulated Depreciation and Amortization
 
1,865.5

 
1,664.9

 
 
 
 
 
Property, Plant and Equipment, Net
 
$
2,599.3

 
$
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 October 1, 2016
 
Balance at December 31, 2015
(In millions)
 
Gross

 
Accumulated Amortization

 
Net

 
Gross

 
Accumulated Amortization

 
Net

 
 
 
 
 
 
 
 
 
 
 
 
 
Definite Lived:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
13,374.8

 
$
(4,691.1
)
 
$
8,683.7

 
$
11,844.4

 
$
(4,086.9
)
 
$
7,757.5

Product technology
 
5,751.6

 
(2,116.4
)
 
3,635.2

 
4,799.8

 
(1,819.0
)
 
2,980.8

Tradenames
 
1,486.3

 
(628.4
)
 
857.9

 
1,316.7

 
(548.2
)
 
768.5

Other
 
33.8

 
(33.8
)
 

 
33.2

 
(33.0
)
 
0.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20,646.5

 
(7,469.7
)
 
13,176.8

 
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
 
110.8

 

 
110.8

 
16.5

 

 
16.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,345.6

 

 
1,345.6

 
1,251.3

 

 
1,251.3

 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related Intangible Assets
 
$
21,992.1

 
$
(7,469.7
)
 
$
14,522.4

 
$
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:
 
 
Nine Months Ended
 
 
October 1,

 
September 26,

(In millions)
 
2016

 
2015

 
 
 
 
 
Beginning Balance
 
$
55.8

 
$
57.5

Provision charged to income
 
68.6

 
59.9

Usage
 
(64.5
)
 
(59.0
)
Acquisitions
 
16.8

 
0.5

Adjustments to previously provided warranties, net
 
(1.8
)
 
(2.1
)
Currency translation
 
0.5

 
(2.2
)
 
 
 
 
 
Ending Balance
 
$
75.4

 
$
54.6

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 August 2016, the FASB issued new guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. 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 statement of cash flows.

10


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

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 company in 2017. Early adoption is permitted. The company expects to adopt this guidance on January 1, 2017. Adoption of this guidance is not expected to have a material impact on the company's consolidated financial statements; however, the impact in any given period will be dependent upon changes in the company's stock price, the volume of employee stock option exercises and the timing of service- and performance-based restricted unit vestings.
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 must 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. During the first and second quarters of 2016, the FASB issued additional guidance and clarification relating to identifying performance obligations, assessing collectability, licensing, principal verses agent considerations, sales tax, non-cash consideration, contract modification, disclosures and the handling of completed contracts at transition. The guidance is currently effective for the company in 2018. Early adoption is permitted in 2017. The company expects to adopt this guidance on January 1, 2018. The company is currently evaluating the impact the standard will have on its consolidated financial statements.


11


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

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.
2016
On September 19, 2016, the company acquired, within the Analytical Instruments segment, FEI Company, a North America-based provider of high-performance electron microscopy, for a total purchase price of $4.08 billion, net of cash acquired. The acquisition strengthens the company's analytical instrument portfolio with the addition of high-end electron microscopes. Revenues of FEI were $930 million in 2015. The purchase price exceeded the fair value of the identifiable net assets and, accordingly, $2.06 billion was allocated to goodwill, approximately $65 million of which is tax deductible.
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. Additionally, the acquisition expands the company's genetic analysis portfolio through the addition of microarrays. Revenues of Affymetrix were $360 million in 2015. The purchase price exceeded the fair value of the identifiable net assets and, accordingly, $702 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.

12


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

The components of the purchase price and net assets acquired for 2016 acquisitions are as follows:
(In millions)
 
FEI

 
Affymetrix

 
Other

 
Total

 
 
 
 
 
 
 
 
 
Purchase Price
 
 
 
 
 
 
 
 
Cash paid
 
$
4,432.8

 
$
1,162.2

 
$
4.2

 
$
5,599.2

Debt assumed
 

 
254.2

 
0.6

 
254.8

Purchase price payable
 
18.4

 
3.3

 
0.1

 
21.8

Cash acquired
 
(369.1
)
 
(77.9
)
 
(0.1
)
 
(447.1
)
 
 
 
 
 
 
 
 
 
 
 
$
4,082.1

 
$
1,341.8

 
$
4.8

 
$
5,428.7

 
 
 
 
 
 
 
 
 
Net Assets Acquired
 
 
 
 
 
 
 
 
Current assets
 
$
625.6

 
$
160.6

 
$
1.1

 
$
787.3

Property, plant and equipment
 
162.6

 
19.3

 

 
181.9

Definite-lived intangible assets:
 
 
 
 
 
 
 
 
Customer relationships
 
1,051.1

 
413.2

 
1.7

 
1,466.0

Product technology
 
739.8

 
232.7

 
0.7

 
973.2

Tradenames and other
 
130.0

 
41.6

 

 
171.6

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
In-process research and development
 
104.7

 
11.0

 

 
115.7

Goodwill
 
2,057.3

 
702.1

 
3.1

 
2,762.5

Other assets
 
56.5

 
7.8

 
0.1

 
64.4

Liabilities assumed
 
(845.5
)
 
(246.5
)
 
(1.9
)
 
(1,093.9
)
 
 
 
 
 
 
 
 
 
 
 
$
4,082.1

 
$
1,341.8

 
$
4.8

 
$
5,428.7

The weighted-average amortization periods for definite-lived intangible assets acquired in 2016 are 16 years for customer relationships, 8 years for product technology and 8 years for tradenames and other. The weighted average amortization period for all definite-lived intangible assets acquired in 2016 is 13 years.
The preliminary allocation of the purchase price for the 2016 acquisitions was based on estimates of the fair value of the net assets acquired and is subject to adjustment upon finalization of the valuation of the acquired intangible assets in the fourth quarter of 2016. The company recorded a deferred tax liability of $156 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.
Revenues of FEI in the third quarter of 2016 subsequent to the date of acquisition were approximately $100 million. Operating profits were not material due to acquisition-related charges.


13


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.

14


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

Business Segment Information
 
 
Three Months Ended
 
Nine Months Ended
 
 
October 1,

 
September 26,

 
October 1,

 
September 26,

(In millions)
 
2016

 
2015

 
2016

 
2015

 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Life Sciences Solutions
 
$
1,231.5

 
$
1,080.4

 
$
3,642.1

 
$
3,229.6

Analytical Instruments
 
898.0

 
778.5

 
2,451.2

 
2,282.9

Specialty Diagnostics
 
798.9

 
776.9

 
2,504.8

 
2,379.2

Laboratory Products and Services
 
1,746.2

 
1,638.2

 
5,273.0

 
4,844.9

Eliminations
 
(183.7
)
 
(150.8
)
 
(550.2
)
 
(423.7
)
 
 
 
 
 
 
 
 
 
Consolidated revenues
 
4,490.9

 
4,123.2

 
13,320.9

 
12,312.9

 
 
 
 
 
 
 
 
 
Segment Income (a)
 
 
 
 
 
 
 
 
Life Sciences Solutions
 
370.1

 
332.7

 
1,069.7

 
954.9

Analytical Instruments
 
190.1

 
146.5

 
446.7

 
407.8

Specialty Diagnostics
 
214.4

 
204.9

 
682.4

 
646.2

Laboratory Products and Services
 
257.9

 
249.6

 
795.9

 
731.7

 
 
 
 
 
 
 
 
 
Subtotal reportable segments (a)
 
1,032.5

 
933.7

 
2,994.7

 
2,740.6

 
 
 
 
 
 
 
 
 
Cost of revenues charges
 
(32.4
)
 
(0.8
)
 
(60.4
)
 
(2.5
)
Selling, general and administrative charges, net
 
(62.5
)
 
(24.6
)
 
(95.2
)
 
(35.4
)
Restructuring and other costs, net
 
(54.9
)
 
(15.5
)
 
(140.9
)
 
(67.9
)
Amortization of acquisition-related intangible assets
 
(341.6
)
 
(329.9
)
 
(1,001.6
)
 
(988.8
)
 
 
 
 
 
 
 
 
 
Consolidated operating income
 
541.1

 
562.9

 
1,696.6

 
1,646.0

Other expense, net (b)
 
(113.2
)
 
(94.8
)
 
(324.6
)
 
(292.3
)
 
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
 
$
427.9

 
$
468.1

 
$
1,372.0

 
$
1,353.7

 
 
 
 
 
 
 
 
 
Depreciation
 
 
 
 
 
 
 
 
Life Sciences Solutions
 
$
34.1

 
$
38.4

 
$
108.3

 
$
106.7

Analytical Instruments
 
11.4

 
9.9

 
30.9

 
28.6

Specialty Diagnostics
 
17.3

 
18.8

 
53.5

 
54.6

Laboratory Products and Services
 
28.6

 
30.7

 
89.9

 
85.0

 
 
 
 
 
 
 
 
 
Consolidated depreciation
 
$
91.4

 
$
97.8

 
$
282.6

 
$
274.9

(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.

15


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
 
 
October 1,

 
September 26,

 
October 1,

 
September 26,

(In millions)
 
2016

 
2015

 
2016

 
2015

 
 
 
 
 
 
 
 
 
Interest Income
 
$
10.4

 
$
7.2

 
$
34.4

 
$
21.9

Interest Expense
 
(113.3
)
 
(100.6
)
 
(338.3
)
 
(311.9
)
Other Items, Net
 
(10.3
)
 
(1.4
)
 
(20.7
)
 
(2.3
)
 
 
 
 
 
 
 
 
 
Other Expense, Net
 
$
(113.2
)
 
$
(94.8
)
 
$
(324.6
)
 
$
(292.3
)
Other Items, Net
In the first nine months of 2016, other items, net includes $22 million of charges related to the amortization of fees paid to obtain bridge financing commitments for the acquisition of FEI (Note 2) and $6.5 million of losses on the early extinguishment of debt, offset in part by $4 million of gains on investments. In the first nine months of 2015, other items, net includes costs of $7.5 million associated with entering into interest rate swap arrangements and losses of $6 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
 
Nine Months Ended
 
 
October 1,

 
September 26,

 
October 1,

 
September 26,

(In millions)
 
2016

 
2015

 
2016

 
2015

 
 
 
 
 
 
 
 
 
Stock Option Awards
 
$
10.4

 
$
11.1

 
$
31.0

 
$
32.4

Restricted Unit Awards
 
24.5

 
21.4

 
71.0

 
59.4

 
 
 
 
 
 
 
 
 
Total Stock-based Compensation Expense
 
$
34.9

 
$
32.5

 
$
102.0

 
$
91.8

During the first nine months of 2016, the company made equity compensation grants to employees consisting of 0.8 million service- and performance-based restricted stock units and options to purchase 1.7 million shares.
As of October 1, 2016, there was $75 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 2.3 years.
As of October 1, 2016, there was $137 million of total unrecognized compensation cost related to unvested restricted stock unit awards. The cost is expected to be recognized through 2020 with a weighted average amortization period of 2.0 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.

16


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
 
Nine Months Ended
 
 
October 1,

 
September 26,

 
October 1,

 
September 26,

(In millions)
 
2016

 
2015

 
2016

 
2015

 
 
 
 
 
 
 
 
 
Components of Net Benefit Cost
 
 
 
 
 
 
Service cost-benefits earned
 
$
5.3

 
$
7.7

 
$
15.8

 
$
20.0

Interest cost on benefit obligation
 
19.1

 
19.4

 
58.1

 
58.1

Expected return on plan assets
 
(19.3
)
 
(23.4
)
 
(58.8
)
 
(70.0
)
Amortization of actuarial net loss
 
1.9

 
2.3

 
5.6

 
7.0

Amortization of prior service benefit
 

 
(0.1
)
 
(0.1
)
 
(0.2
)
Settlement/curtailment loss
 

 

 

 
0.1

 
 
 
 
 
 
 
 
 
Net periodic benefit cost
 
$
7.0

 
$
5.9

 
$
20.6

 
$
15.0


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
 
 
October 1,

 
September 26,

(In millions)
 
2016

 
2015

 
 
 
 
 
Provision for Income Taxes at Statutory Rate
 
$
480.2

 
$
473.8

 
 
 
 
 
Increases (Decreases) Resulting From:
 
 
 
 
Foreign rate differential
 
(189.7
)
 
(148.9
)
Income tax credits
 
(233.6
)
 
(241.4
)
Manufacturing deduction
 
(25.5
)
 
(27.2
)
Singapore tax holiday
 
(14.0
)
 
(11.5
)
Impact of change in tax laws and apportionment on deferred taxes
 
0.3

 
(13.5
)
Nondeductible expenses
 
6.3

 
6.9

Tax return reassessments and settlements
 
(41.0
)
 
(51.0
)
State income taxes, net of federal tax
 
(6.3
)
 
(4.8
)
Other, net
 
2.7

 
(2.7
)
 
 
 
 
 
Benefit from income taxes
 
$
(20.6
)
 
$
(20.3
)
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 $114 million, offset in part by additional U.S. income taxes of $40 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 1.0% and 0.8%, respectively, and increased diluted earnings per share by approximately $0.04 and $0.03, respectively.

17


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

The company's unrecognized tax benefits increased to $458 million at October 1, 2016, from $350 million at December 31, 2015. Of the total increase, $51 million resulted from acquisitions, $43 million resulted from tax planning related to prior years that resulted in amended tax filings and $14 million resulted from the utilization of deferred tax assets.

Note 8.
Earnings per Share
 
 
Three Months Ended
 
Nine Months Ended
 
 
October 1,

 
September 26,

 
October 1,

 
September 26,

(In millions except per share amounts)
 
2016

 
2015

 
2016

 
2015

 
 
 
 
 
 
 
 
 
Income from Continuing Operations
 
$
473.5

 
$
477.3

 
$
1,392.6

 
$
1,374.0

Loss from Discontinued Operations
 

 
(1.2
)
 
(0.3
)
 
(1.2
)
 
 
 
 
 
 
 
 
 
Net Income
 
$
473.5

 
$
476.1

 
$
1,392.3

 
$
1,372.8

 
 
 
 
 
 
 
 
 
Basic Weighted Average Shares
 
394.7

 
399.0

 
394.8

 
398.4

Plus Effect of:
 
 
 
 
 
 
 
 
Stock options and restricted units
 
2.7

 
3.0

 
2.8

 
3.3

 
 
 
 
 
 
 
 
 
Diluted Weighted Average Shares
 
397.4

 
402.0

 
397.6

 
401.7

 
 
 
 
 
 
 
 
 
Basic Earnings per Share:
 
 
 
 
 
 
 
 
Continuing operations
 
$
1.20

 
$
1.20

 
$
3.53

 
$
3.45

Discontinued operations
 

 

 

 

 
 
 
 
 
 
 
 
 
Basic Earnings per Share
 
$
1.20

 
$
1.19

 
$
3.53

 
$
3.45

 
 
 
 
 
 
 
 
 
Diluted Earnings per Share: