10-Q 1 tmoq1201710q.htm THERMO FISHER SCIENTIFIC INC., FORM 10-Q, DATED APRIL 1, 2017 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
April 1, 2017
¨ 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý                                              Accelerated filer o                                       Non-accelerated filer o
Smaller reporting company o                                      Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  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 1, 2017
 
 
Common Stock, $1.00 par value
 
391,219,918
 





THERMO FISHER SCIENTIFIC INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 1, 2017

2


THERMO FISHER SCIENTIFIC INC.

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

 
December 31,

(In millions except share and per share amounts)
 
2017

 
2016

 
 
 
 
 
Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
713.3

 
$
786.2

Accounts receivable, less allowances of $87.2 and $77.3
 
3,096.5

 
3,048.5

Inventories
 
2,327.1

 
2,213.3

Refundable income taxes
 
427.0

 
378.3

Other current assets
 
684.2

 
594.7

 
 
 
 
 
Total current assets
 
7,248.1

 
7,021.0

 
 
 
 
 
Property, Plant and Equipment, Net
 
2,563.3

 
2,577.8

Acquisition-related Intangible Assets, Net
 
13,821.7

 
13,969.0

Other Assets
 
1,020.2

 
1,011.9

Goodwill
 
21,560.3

 
21,327.8

 
 
 
 
 
Total Assets
 
$
46,213.6

 
$
45,907.5

 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Short-term obligations and current maturities of long-term obligations
 
$
1,882.4

 
$
1,255.5

Accounts payable
 
1,031.0

 
926.2

Accrued payroll and employee benefits
 
520.8

 
708.7

Accrued income taxes
 
82.2

 
165.4

Deferred revenue
 
538.9

 
485.9

Other accrued expenses
 
1,247.6

 
1,324.1

 
 
 
 
 
Total current liabilities
 
5,302.9

 
4,865.8

 
 
 
 
 
Deferred Income Taxes
 
2,463.4

 
2,557.4

Other Long-term Liabilities
 
1,463.7

 
1,572.6

Long-term Obligations
 
15,188.4

 
15,372.4

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


 


Common stock, $1 par value, 1,200,000,000 shares authorized; 416,414,308 and 415,138,564 shares issued
 
416.4

 
415.1

Capital in excess of par value
 
12,252.0

 
12,139.6

Retained earnings
 
14,419.4

 
13,926.9

Treasury stock at cost, 25,194,390 and 21,690,679 shares
 
(2,819.1
)
 
(2,306.0
)
Accumulated other comprehensive items
 
(2,473.5
)
 
(2,636.3
)
 
 
 
 
 
Total shareholders' equity
 
21,795.2

 
21,539.3

 
 
 
 
 
Total Liabilities and Shareholders' Equity
 
$
46,213.6

 
$
45,907.5


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 1,

 
April 2,

(In millions except per share amounts)
 
2017

 
2016

 
 
 
 
 
Revenues
 
 
 
 
Product revenues
 
$
4,102.1

 
$
3,690.4

Service revenues
 
662.9

 
604.4

 
 
 
 
 
Total revenues
 
4,765.0

 
4,294.8

 
 
 
 
 
Costs and Operating Expenses:
 
 
 
 
Cost of product revenues
 
2,129.6

 
1,933.6

Cost of service revenues
 
442.9

 
403.3

Selling, general and administrative expenses
 
1,331.2

 
1,212.9

Research and development expenses
 
215.4

 
176.5

Restructuring and other costs, net
 
23.5

 
50.6

 
 
 
 
 
Total costs and operating expenses
 
4,142.6

 
3,776.9

 
 
 
 
 
Operating Income
 
622.4

 
517.9

Other Expense, Net
 
(119.5
)
 
(94.9
)
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
 
502.9

 
423.0

Benefit from (Provision for) Income Taxes
 
48.5

 
(20.7
)
 
 
 
 
 
Income from Continuing Operations
 
551.4

 
402.3

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

 
(0.1
)
 
 
 
 
 
Net Income
 
$
551.4

 
$
402.2

 
 
 
 
 
Earnings per Share from Continuing Operations
 
 
 
 
Basic
 
$
1.41

 
$
1.02

Diluted
 
$
1.40

 
$
1.01

 
 
 
 
 
Earnings per Share
 
 
 
 
Basic
 
$
1.41

 
$
1.02

Diluted
 
$
1.40

 
$
1.01

 
 
 
 
 
Weighted Average Shares
 
 
 
 
Basic
 
391.0

 
395.8

Diluted
 
394.1

 
398.7

 
 
 
 
 
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
(Unaudited)
 
 
Three Months Ended
 
 
April 1,

 
April 2,

(In millions)
 
2017

 
2016

 
 
 
 
 
Comprehensive Income
 
 
 
 
Net Income
 
$
551.4

 
$
402.2

 
 
 
 
 
Other Comprehensive Items:
 
 
 
 
Currency translation adjustment
 
160.0

 
169.9

Unrealized gains and losses on available-for-sale investments:
 
 
 
 
Unrealized holding gains (losses) arising during the period (net of tax provision (benefit) of $0.3 and ($0.4))
 
1.1

 
(1.5
)
Unrealized gains and losses on hedging instruments:
 
 
 
 
Unrealized losses on hedging instruments (net of tax benefit of $22.4)
 

 
(36.6
)
Reclassification adjustment for losses included in net income (net of tax benefit of $1.1 and $0.5)
 
1.8

 
0.8

Pension and other postretirement benefit liability adjustments:
 
 
 
 
Pension and other postretirement benefit liability adjustments arising during the period (net of tax benefit of $0.7 and $1.1)
 
(2.0
)
 
(3.4
)
Amortization of net loss and prior service benefit included in net periodic pension cost (net of tax benefit of $0.7 and $0.3)
 
1.9

 
1.4

 
 
 
 
 
Total other comprehensive items
 
162.8

 
130.6

 
 
 
 
 
Comprehensive Income
 
$
714.2

 
$
532.8


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 1,

 
April 2,

(In millions)
 
2017

 
2016

 
 
 
 
 
Operating Activities
 
 
 
 
Net income
 
$
551.4

 
$
402.2

Loss from discontinued operations
 

 
0.1

 
 
 
 
 
Income from continuing operations
 
551.4

 
402.3

 
 
 
 
 
Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
464.5

 
416.1

Change in deferred income taxes
 
(127.3
)
 
(88.8
)
Non-cash stock-based compensation
 
33.0

 
33.4

Non-cash charges for sale of inventories revalued at the date of acquisition
 
30.7

 
6.2

Other non-cash expenses, net
 
28.3

 
14.2

Changes in assets and liabilities, excluding the effects of acquisitions and dispositions:
 
 
 
 
Accounts receivable
 
(18.0
)
 
(29.9
)
Inventories
 
(105.1
)
 
(56.2
)
Other assets
 
(133.8
)
 
(38.7
)
Accounts payable
 
114.0

 
34.8

Other liabilities
 
(302.8
)
 
(335.0
)
Contributions to retirement plans
 
(172.5
)
 
(22.2
)
 
 
 
 
 
Net cash provided by continuing operations
 
362.4

 
336.2

Net cash used in discontinued operations
 
(0.9
)
 
(1.5
)
 
 
 
 
 
Net cash provided by operating activities
 
361.5

 
334.7

 
 
 
 
 
Investing Activities
 
 

 
 

Acquisitions, net of cash acquired
 
(300.7
)
 
(1,032.4
)
Purchase of property, plant and equipment
 
(93.4
)
 
(115.1
)
Proceeds from sale of property, plant and equipment
 
1.1

 
6.0

Proceeds from sale of investments
 
11.7

 
3.9

Other investing activities, net
 
(0.6
)
 
(1.3
)
 
 
 
 
 
Net cash used in investing activities
 
$
(381.9
)
 
$
(1,138.9
)


6


THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
 
 
Three Months Ended
 
 
April 1,

 
April 2,

(In millions)
 
2017

 
2016

 
 
 
 
 
Financing Activities
 
 
 
 
Net proceeds from issuance of debt
 
$
519.0

 
$
998.8

Repayment of debt
 
(703.2
)
 
(1.3
)
Net proceeds from issuance of commercial paper
 
2,361.1

 
2,359.7

Repayments of commercial paper
 
(1,795.3
)
 
(1,185.8
)
Purchases of company common stock
 
(500.0
)
 
(1,000.0
)
Dividends paid
 
(59.1
)
 
(60.3
)
Net proceeds from issuance of company common stock under employee stock plans
 
58.2

 
31.7

Other financing activities, net
 

 
(0.4
)
 
 
 
 
 
Net cash (used in) provided by financing activities
 
(119.3
)
 
1,142.4

 
 
 
 
 
Exchange Rate Effect on Cash
 
65.8

 
37.0

 
 
 
 
 
(Decrease) Increase in Cash, Cash Equivalents and Restricted Cash
 
(73.9
)
 
375.2

Cash, Cash Equivalents and Restricted Cash at Beginning of Period
 
810.8

 
466.3

 
 
 
 
 
Cash, Cash Equivalents and Restricted Cash at End of Period
 
$
736.9

 
$
841.5

 
 
 
 
 
See Note 12 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, 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
 
415.1

 
$
415.1

 
$
12,139.6

 
$
13,926.9

 
21.7

 
$
(2,306.0
)
 
$
(2,636.3
)
 
$
21,539.3

Issuance of shares under employees' and directors' stock plans
 
1.3

 
1.3

 
79.4

 

 
0.1

 
(13.1
)
 

 
67.6

Stock-based compensation
 

 

 
33.0

 

 

 

 

 
33.0

Purchases of company common stock
 

 

 

 

 
3.4

 
(500.0
)
 

 
(500.0
)
Dividends declared
 

 

 

 
(58.9
)
 

 

 

 
(58.9
)
Net income
 

 

 

 
551.4

 

 

 

 
551.4

Other comprehensive items
 

 

 

 

 

 

 
162.8

 
162.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at April 1, 2017
 
416.4

 
$
416.4

 
$
12,252.0

 
$
14,419.4

 
25.2

 
$
(2,819.1
)
 
$
(2,473.5
)
 
$
21,795.2


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 1, 2017, the results of operations for the three-month periods ended April 1, 2017 and April 2, 2016, and the cash flows for the three-month periods ended April 1, 2017 and April 2, 2016. Interim results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 31, 2016, 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 2016 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 2016 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 1, 2017.
Inventories
The components of inventories are as follows:
 
 
April 1,

 
December 31,

(In millions)
 
2017

 
2016

 
 
 
 
 
Raw Materials
 
$
521.6

 
$
466.3

Work in Process
 
361.5

 
327.9

Finished Goods
 
1,444.0

 
1,419.1

 
 
 
 
 
Inventories
 
$
2,327.1

 
$
2,213.3

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

 
December 31,

(In millions)
 
2017

 
2016

 
 
 
 
 
Land
 
$
306.3

 
$
305.6

Buildings and Improvements
 
1,172.6

 
1,154.2

Machinery, Equipment and Leasehold Improvements
 
3,033.8

 
2,955.7

 
 
 
 
 
Property, Plant and Equipment, at Cost
 
4,512.7

 
4,415.5

Less: Accumulated Depreciation and Amortization
 
1,949.4

 
1,837.7

 
 
 
 
 
Property, Plant and Equipment, Net
 
$
2,563.3

 
$
2,577.8


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 1, 2017
 
Balance at December 31, 2016
(In millions)
 
Gross

 
Accumulated Amortization

 
Net

 
Gross

 
Accumulated Amortization

 
Net

 
 
 
 
 
 
 
 
 
 
 
 
 
Definite Lived:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
13,318.0

 
$
(5,046.4
)
 
$
8,271.6

 
$
13,167.3

 
$
(4,821.4
)
 
$
8,345.9

Product technology
 
5,818.8

 
(2,350.6
)
 
3,468.2

 
5,679.7

 
(2,204.2
)
 
3,475.5

Tradenames
 
1,473.7

 
(681.4
)
 
792.3

 
1,452.2

 
(646.0
)
 
806.2

Other
 
33.3

 
(33.3
)
 

 
33.0

 
(33.0
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
20,643.8

 
(8,111.7
)
 
12,532.1

 
20,332.2

 
(7,704.6
)
 
12,627.6

Indefinite Lived:
 
 
 
 
 
 
 
 
 
 
 
 
Tradenames
 
1,234.8

 

 
1,234.8

 
1,234.8

 

 
1,234.8

In-process research and development
 
54.8

 

 
54.8

 
106.6

 

 
106.6

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,289.6

 

 
1,289.6

 
1,341.4

 

 
1,341.4

 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related Intangible Assets
 
$
21,933.4

 
$
(8,111.7
)
 
$
13,821.7

 
$
21,673.6

 
$
(7,704.6
)
 
$
13,969.0

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 1,

 
April 2,

(In millions)
 
2017

 
2016

 
 
 
 
 
Beginning Balance
 
$
77.9

 
$
55.8

Provision charged to income
 
25.3

 
21.9

Usage
 
(24.6
)
 
(20.3
)
Acquisitions
 
0.5

 
1.1

Adjustments to previously provided warranties, net
 
(0.6
)
 
(0.6
)
Currency translation
 
0.8

 
1.0

 
 
 
 
 
Ending Balance
 
$
79.3

 
$
58.9

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 13). Actual results could differ from those estimates.
Recent Accounting Pronouncements
In March 2017, the FASB issued new guidance intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires the service cost component of net periodic cost be reported in the same line item(s) as other employee compensation costs and all other components of the net periodic cost be reported in the

10


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

income statement below operating income. The guidance is effective for the company in 2018. The adoption of this guidance is not expected to have a material impact on the company’s consolidated financial statements.
In January 2017, the FASB issued new guidance that eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, the new guidance will require entities to record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The guidance is effective for the company in 2020. 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 January 2017, the FASB issued new guidance clarifying the definition of a business and providing criteria to determine when an integrated set of assets and activities is not defined as a business. The new guidance requires such integrated sets to be defined as an asset (and not a business) if substantially all of the fair value of the gross assets acquired or disposed is concentrated in a single identifiable asset or a group of similar identifiable assets. 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 November 2016, the FASB issued new guidance intended to reduce diversity in practice in the classification and presentation of changes in restricted cash on the statement of cash flows. The company adopted this guidance on January 1, 2017 and applied the changes to the statement of cash flows retrospectively, as required. The table below summarizes the impact of adopting this and related guidance on the company’s consolidated statement of cash flows for the three months ended April 2, 2016.
In October 2016, the FASB issued new guidance eliminating the deferral of the tax effects of intra-entity asset transfers. The guidance is effective for the company in 2018. The impact of this guidance will be dependent on the extent of future asset transfers which usually occur in connection with planning around acquisitions and other business structuring activities.
In August 2016, the FASB issued new guidance intended to reduce diversity in practice in how certain transactions are classified on the statement of cash flows. The company adopted this guidance on January 1, 2017 and applied the changes to the statement of cash flows retrospectively, as required. The table below summarizes the impact of adopting this and related guidance on the company’s consolidated statement of cash flows for the three months ended April 2, 2016.
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 company adopted this guidance on January 1, 2017 and applied the changes to the statement of cash flows retrospectively. The table below summarizes the impact of adopting this and related guidance on the company’s consolidated statement of cash flows. Adoption of this guidance decreased the company's tax provision in the first three months of 2017 by $24 million and increased diluted earnings per share for the same period by $0.06. The impact in future periods 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 vesting.
The guidance issued in November 2016, August 2016 and the provisions of the guidance issued in March 2016 which affected classification on the statement of cash flows were applied retrospectively. As a result of adoption of this guidance, the accompanying statement of cash flows for the first three months of 2016 reflect the following changes from previously reported amounts:
 
 
Three Months Ended

(In millions)
 
April 2, 2016

 
 
 
Increase in Net Cash Provided by Operating Activities
 
$
45.6

Increase in Net Cash Used in Investing Activities
 
(0.4
)
Decrease in Net Cash Provided by Financing Activities
 
(45.6
)
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

11


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

the impact this guidance will have on its consolidated financial statements, however, assets and liabilities will increase upon adoption for right-of-use assets and lease liabilities. The company’s future commitments under lease obligations are summarized in Note 10 to the consolidated financial statements for 2016 included in the company’s Annual Report on Form  10-K, filed with the SEC.
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 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 was effective for the company in 2017. Adoption of this guidance did not have a material impact on the company’s consolidated financial statements.
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 2016, the FASB issued additional guidance and clarification. The guidance is currently effective for the company in 2018. Early adoption is permitted. The company expects to adopt this guidance on January 1, 2018 through application of the modified retrospective method. The company’s preliminary assessment of its most commonly used customer terms and conditions and routine sales transactions did not identify material impacts to its consolidated financial statements from the application of the guidance; however, a broad assessment is ongoing that includes surveying the company’s major businesses concerning any unique customer contract terms or transactions that could have implications to the timing of revenue recognition under the new guidance. The company expects this undertaking will be complete in the second half of 2017.

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.
2017
On March 2, 2017, the company acquired, within the Analytical Instruments segment, Core Informatics, a North America-based provider of cloud-based platforms supporting scientific data management, for a total purchase price of $94 million, net of cash acquired. The acquisition enhanced the company's existing informatics solutions. Revenues of Core Informatics were approximately $10 million in 2016. The purchase price exceeded the fair market value of the identifiable net assets and, accordingly, $63 million was allocated to goodwill, $50 million of which is tax deductible.
On February 14, 2017, the company acquired, within the Life Sciences Solutions segment, Finesse Solutions, Inc., a North America-based developer of scalable control automation systems and software for bioproduction, for a total purchase price of $220 million, net of cash acquired. The acquisition expanded the company's bioproduction offerings. Revenues of Finesse

12


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

Solutions were approximately $50 million in 2016. The purchase price exceeded the fair market value of the identifiable net assets and, accordingly, $127 million was allocated to goodwill, none of which is tax deductible.
The components of the purchase price and net assets acquired for 2017 acquisitions are as follows:
(In millions)
 
Core Informatics

 
Finesse Solutions

 
Total

 
 
 
 
 
 
 
Purchase Price
 
 
 
 
 
 
Cash paid
 
$
89.2

 
$
222.6

 
$
311.8

Debt assumed
 

 

 

Purchase price payable
 
14.6

 

 
14.6

Cash acquired
 
(10.1
)
 
(2.2
)
 
(12.3
)
 
 
 
 
 
 
 
 
 
$
93.7

 
$
220.4

 
$
314.1

 
 
 
 
 
 
 
Net Assets Acquired
 
 
 
 
 
 
Current assets
 
$
2.0

 
$
21.6

 
$
23.6

Property, plant and equipment
 
0.2

 
1.6

 
1.8

Definite-lived intangible assets:
 
 
 
 
 
 
Customer relationships
 
6.3

 
67.7

 
74.0

Product technology
 
29.1

 
32.0

 
61.1

Tradenames and other
 
2.7

 
9.0

 
11.7

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

 
1.6

 
1.6

Goodwill
 
62.6

 
127.4

 
190.0

Other assets
 
0.1

 
0.3

 
0.4

Liabilities assumed
 
(9.3
)
 
(40.8
)
 
(50.1
)
 
 
 
 
 
 
 
 
 
$
93.7

 
$
220.4

 
$
314.1

The weighted-average amortization periods for definite-lived intangible assets acquired in 2017 are 12 years for customer relationships, 10 years for product technology and 8 years for tradenames and other. The weighted average amortization period for all definite-lived intangible assets acquired in 2017 is 11 years.
The preliminary allocation of the purchase price for the 2017 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 second quarter of 2017.
Unaudited Pro Forma Information
Had the 2016 acquisitions of FEI Company and Affymetrix, Inc. been completed as of the beginning of 2015, the company’s pro forma results for 2016 would have been as follows:
(In millions except per share amounts)
 
Three Months Ended 
 April 2, 2016

 
 
 
Revenues
 
$
4,605.0

 
 
 
Net Income
 
$
376.8

 
 
 
Earnings per Share:
 
 
Basic
 
$
0.95

Diluted
 
$
0.95


13


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

These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred on the date indicated or that may result in the future.
The company’s results would not have been materially different from its pro forma results had the company’s other 2016 or 2017 acquisitions occurred at the beginning of 2015 or 2016, respectively.
Revenues of the FEI and Affymetrix acquisitions in the first three months of 2017 were $265 million and $78 million, respectively. Operating loss of the FEI acquisition totaled $17 million in the first three months of 2017 primarily due to acquisition-related and restructuring costs related to synergy planning. The Affymetrix acquisition has been integrated with other parts of the Life Sciences Solutions business and it is not practical to determine its separate operating results beginning in 2017.

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.
In January 2017, in connection with a change in management responsibility for certain product lines, the company transferred its plastics for cell culture and vaccines/biologics; sample preparation and analysis; and production chemicals product lines to the Life Sciences Solutions segment from the Laboratory Products and Services segment and transferred its biochemical product line from the Life Sciences Solutions segment to the Laboratory Products and Services segment. These moves are consistent with the company’s historical practice of moving a product line between segments when a shift in strategic focus of either the product line or a segment more closely aligns the product line with a segment different than that in which it had previously been reported. Prior period segment information has been reclassified to reflect these transfers.
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
 
 
April 1,

 
April 2,

(In millions)
 
2017

 
2016

 
 
 
 
 
Revenues
 
 
 
 
Life Sciences Solutions
 
$
1,363.5

 
$
1,217.7

Analytical Instruments
 
1,052.0

 
759.3

Specialty Diagnostics
 
866.4

 
854.6

Laboratory Products and Services
 
1,699.0

 
1,648.8

Eliminations
 
(215.9
)
 
(185.6
)
 
 
 
 
 
Consolidated revenues
 
4,765.0

 
4,294.8

 
 
 
 
 
Segment Income (a)
 
 
 
 
Life Sciences Solutions
 
433.9

 
351.3

Analytical Instruments
 
191.8

 
111.7

Specialty Diagnostics
 
233.9

 
230.1

Laboratory Products and Services
 
216.2

 
236.9

 
 
 
 
 
Subtotal reportable segments (a)
 
1,075.8

 
930.0

 
 
 
 
 
Cost of revenues charges
 
(30.9
)
 
(10.6
)
Selling, general and administrative charges, net
 
(31.5
)
 
(28.9
)
Restructuring and other costs, net
 
(23.5
)
 
(50.6
)
Amortization of acquisition-related intangible assets
 
(367.5
)
 
(322.0
)
 
 
 
 
 
Consolidated operating income
 
622.4

 
517.9

Other expense, net (b)
 
(119.5
)
 
(94.9
)
 
 
 
 
 
Income from continuing operations before income taxes
 
$
502.9

 
$
423.0

 
 
 
 
 
Depreciation
 
 
 
 
Life Sciences Solutions
 
$
32.7

 
$
37.0

Analytical Instruments
 
16.9

 
9.6

Specialty Diagnostics
 
17.2

 
18.0

Laboratory Products and Services
 
30.2

 
29.5

 
 
 
 
 
Consolidated depreciation
 
$
97.0

 
$
94.1

(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
 
 
April 1,

 
April 2,

(In millions)
 
2017

 
2016

 
 
 
 
 
Interest Income
 
$
18.5

 
$
10.8

Interest Expense
 
(135.4
)
 
(106.2
)
Other Items, Net
 
(2.6
)
 
0.5

 
 
 
 
 
Other Expense, Net
 
$
(119.5
)
 
$
(94.9
)

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 1,

 
April 2,

(In millions)
 
2017

 
2016

 
 
 
 
 
Stock Option Awards
 
$
10.2

 
$
10.6

Restricted Unit Awards
 
22.8

 
22.8

 
 
 
 
 
Total Stock-based Compensation Expense
 
$
33.0

 
$
33.4

During the first three months of 2017, the company made equity compensation grants to employees consisting of 0.7 million service- and performance-based restricted stock units and options to purchase 1.8 million shares.
As of April 1, 2017, there was $105 million of total unrecognized compensation cost related to unvested stock options granted. The cost is expected to be recognized through 2021 with a weighted average amortization period of 2.7 years.
As of April 1, 2017, there was $196 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 2.4 years.


16


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

Note 6.
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 1,

 
April 2,

(In millions)
 
2017

 
2016

 
 
 
 
 
Provision for Income Taxes at Statutory Rate
 
$
176.0

 
$
148.1

 
 
 
 
 
Increases (Decreases) Resulting From:
 
 
 
 
Foreign rate differential
 
(84.4
)
 
(47.3
)
Income tax credits
 
(41.4
)
 
(77.8
)
Manufacturing deduction
 
(7.7
)
 
(6.7
)
Singapore tax holiday
 
(4.6
)
 
(3.7
)
Impact of change in tax laws and apportionment on deferred taxes
 
(62.9
)
 
8.9

Nondeductible expenses
 
2.5

 
1.7

Excess tax benefits from stock options and restricted stock units
 
(23.9
)
 

Tax return reassessments and settlements
 

 
(2.0
)
State income taxes, net of federal tax
 
(0.8
)
 
(1.5
)
Other, net
 
(1.3
)
 
1.0

 
 
 
 
 
(Benefit from) Provision for income taxes
 
$
(48.5
)
 
$
20.7

The company has operations and a taxable presence in approximately 50 countries outside the U.S. All of these countries except one have a lower tax rate than the U.S. The countries in which the company has a material presence that have significantly lower tax rates than the U.S. include Germany, the Netherlands, Singapore, Sweden, Switzerland and the United Kingdom. The company’s ability to obtain a benefit from lower tax rates outside the U.S. is dependent on its relative levels of income in countries outside the U.S. and on the statutory tax rates in those countries.
The company receives a tax deduction upon exercise of non-qualified stock options by employees, or the vesting of restricted stock units held by employees, for the difference between the exercise price and the market price of the underlying common stock on the date of exercise. Prior to 2017, the amount of the tax deduction in excess of compensation cost recognized was allocated to capital in excess of par value. Beginning in 2017, these excess tax benefits reduce the tax provision as described in Note 1. In the first three months of 2017, the company's tax provision was reduced by $24 million of such benefits.
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, 2026. In 2017 and 2016, the impact of this tax holiday decreased the annual effective tax rates by 0.9% and 0.9%, respectively, and increased diluted earnings per share by approximately $0.01 and $0.01, respectively. In connection with the March 2017 extension of this agreement until 2026, the company recorded a benefit of approximately $65 million ($0.16 per diluted share) for the effect on deferred tax balances of the extended tax holiday.
The company’s unrecognized tax benefits decreased to $789 million at April 1, 2017, from $802 million at December 31, 2016. The decrease of $13 million resulted from an adjustment to a prior year amended tax filing.




17


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

Note 7.
Earnings per Share
 
 
Three Months Ended
 
 
April 1,

 
April 2,

(In millions except per share amounts)
 
2017

 
2016

 
 
 
 
 
Income from Continuing Operations
 
$
551.4

 
$
402.3

Loss from Discontinued Operations
 

 
(0.1
)
 
 
 
 
 
Net Income
 
$
551.4

 
$
402.2

 
 
 
 
 
Basic Weighted Average Shares
 
391.0

 
395.8

Plus Effect of:
 
 
 
 
Stock options and restricted units
 
3.1

 
2.9

 
 
 
 
 
Diluted Weighted Average Shares
 
394.1

 
398.7

 
 
 
 
 
Basic Earnings per Share:
 
 
 
 
Continuing operations
 
$
1.41

 
$
1.02

Discontinued operations
 

 

 
 
 
 
 
Basic Earnings per Share
 
$
1.41

 
$
1.02

 
 
 
 
 
Diluted Earnings per Share:
 
 
 
 
Continuing operations
 
$
1.40

 
$
1.01

Discontinued operations
 

 

 
 
 
 
 
Diluted Earnings per Share
 
$
1.40

 
$
1.01

Options to purchase 2.6 million and 3.6 million shares of common stock were not included in the computation of diluted earnings per share for the first three months of 2017 and 2016, respectively, because their effect would have been antidilutive.

18



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

Note 8.
Debt and Other Financing Arrangements
 
 
Effective Interest Rate at April 1,

 
April 1,

 
December 31,

(Dollars in millions)
 
2017

 
2017

 
2016

 
 
 
 
 
 
 
Commercial Paper
 
0.34
%
 
$
1,530.2

 
$
953.3

Term Loan
 
2.20
%
 
625.0

 
825.0

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


 

 
500.0

Floating Rate 2-Year Senior Notes, Due 8/9/2018 (euro-denominated)
 
0.12
%
 
639.1

 
631.0

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)
 
1.62
%
 
452.7

 
447.0

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
 
4.57
%
 
1,000.0

 
1,000.0

3.60% 10-Year Senior Notes, Due 8/15/2021
 
4.43
%
 
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)
 
2.27
%
 
532.6

 
525.9

3.15% 10-Year Senior Notes, Due 1/15/2023
 
3.30
%
 
800.0

 
800.0

3.00% 7-Year Senior Notes Due 4/15/2023
 
4.64
%
 
1,000.0

 
1,000.0

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

 
1,000.0

0.75% 8-Year Senior Notes, Due 9/12/2024 (euro-denominated)
 
0.93
%
 
1,065.2

 
1,051.7

2.00% 10-Year Senior Notes, Due 4/15/2025 (euro-denominated)
 
2.09
%
 
681.7

 
673.1

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

 
350.0

2.95% 10-Year Senior Notes, Due 9/19/2026
 
3.19
%
 
1,200.0

 
1,200.0

1.45% 10-Year Senior Notes, Due 3/16/2027 (euro-denominated)
 
1.64
%
 
532.6

 

1.375% 12-Year Senior Notes, 9/12/2028 (euro-denominated)
 
1.46
%
 
639.1

 
631.0

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

 
400.0

Other
 
 
 
12.5

 
13.0

 
 
 
 
 
 
 
Total Borrowings at Par Value
 
 
 
17,160.7

 
16,701.0

Fair Value Hedge Accounting Adjustments
 
 
 
(55.5
)
 
(49.3
)
Unamortized Premium, Net
 
 
 
40.6

 
52.2

Unamortized Debt Issuance Costs
 
 
 
(75.0
)
 
(76.0
)
 
 
 
 
 
 
 
Total Borrowings at Carrying Value
 
 
 
17,070.8

 
16,627.9

Less: Short-term Obligations and Current Maturities
 
 
 
1,882.4

 
1,255.5

 
 
 
 
 
 
 
Long-term Obligations
 
 
 
$
15,188.4

 
$
15,372.4

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 11 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 $2.50 billion of unsecured multi-currency revolving credit. The facility expires in July 2021. The agreement calls for interest at either a LIBOR-based rate, a EURIBOR-based rate (for funds drawn in Euro) 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 covenants require the company to maintain a Consolidated Leverage Ratio of debt to EBITDA (as defined in the agreement) below 4.0 to 1.0 for the first two quarters of 2017 and then stepping down to 3.5 to 1.0 each fiscal

19


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

quarter thereafter. The agreement also requires the company to maintain 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 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 1, 2017, no borrowings were outstanding under the facility, although available capacity was reduced by approximately $73 million as a result of outstanding letters of credit.
Commercial Paper Programs
The company has commercial paper programs pursuant to which it may issue and sell unsecured, short-term promissory notes (CP Notes). Under the U.S. program, a) maturities may not exceed 397 days from the date of issue and b) the CP Notes are issued on a private placement basis under customary terms in the commercial paper market and are not redeemable prior to maturity nor subject to voluntary prepayment. Under the euro program, maturities may not exceed 183 days and may be denominated in euro, U.S. dollars, Japanese yen, British pounds sterling, Swiss franc, Canadian dollars or other currencies. Under both programs, the CP Notes are issued at a discount from par (or premium to par, in the case of negative interest rates), or, alternatively, are sold at par and bear varying interest rates on a fixed or floating basis. As of April 1, 2017, outstanding borrowings under these programs were $1.53 billion, with a weighted average remaining period to maturity of 71 days and are classified as short-term obligations in the accompanying balance sheet.
Term Loan
In 2016, in connection with the acquisition of FEI, the company entered into a term loan agreement. The term loan agreement is a 3-year unsecured $2.00 billion term loan facility. The agreement calls for interest at either a LIBOR-based rate, a EURIBOR-based rate (for funds drawn under the term loan in Euro) or a rate based on the prime lending rate of the agent bank, at the company’s option. The agreements contain affirmative, negative and financial covenants, and events of default customary for financings of this type. The financial covenants are consistent with those in the revolving credit facility described above.
Senior Notes
Interest on the floating rate senior notes is payable quarterly. Interest is payable annually on the other euro-denominated senior notes and semi-annually on all other senior notes. 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.
Interest Rate Swap Arrangements
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 11 for additional information. The following table summarizes the outstanding interest rate swap arrangements on the company's senior notes at April 1, 2017:
 
 
Aggregate Notional Amount

 
 
 
Pay Rate as of

 
 
(Dollars in millions)
 
 
Pay Rate
 
April 1,
2017

 
Receive Rate

 
 
 
 
 
 
 
 
 
4.50% Senior Notes due 2021
 
1,000.0

 
1-month LIBOR + 3.4420%
 
4.2264
%
 
4.50
%
3.60% Senior Notes due 2021
 
1,100.0

 
1-month LIBOR + 2.5150%
 
3.4272
%
 
3.60
%
3.00% Senior Notes due 2023
 
1,000.0

 
1-month LIBOR + 1.7640%
 
2.6762
%
 
3.00
%


20


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

Note 9.
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 1, 2017, the company’s total environmental liability was approximately $43 million. 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, employment and commercial 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 2016 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 Systems, Inc., Life Technologies Corp., and Thermo Fisher Scientific Inc. in the United States District Court for the District of Delaware and in Germany. Plaintiff alleged infringement of patents relating to methods of analyzing nucleic acid sequences using emulsion amplification, which plaintiff alleged are impermissibly used in Ion Torrent sequencing workflows. In March 2017,

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

the parties reached a settlement of this litigation pursuant to which the company licensed the related technology from 454 Life Sciences for $25 million in cash and granted plaintiff's parent a license to certain company technology.
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 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. Life Technologies' petition to the U.S. Supreme Court seeking review of the Court of Appeals’ judgment was granted on June 27, 2016, and the case was stayed in the District Court pending the outcome of the Supreme Court’s review. On February 22, 2017, the Supreme Court issued a decision reversing the Court of Appeals’ judgment and remanding the case to the Court of Appeals for further proceedings in view of the Supreme Court’s legal interpretation of the patent law statute in question. 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 sought damages for alleged willful infringement, attorneys’ fees, costs, pre- and post-judgment interest, and injunctive relief. In April 2017, the companies executed a settlement agreement resolving this litigation for immaterial financial terms.
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.
Commercial Matters
On May 5, 2015, and February 12, 2016, the Academy of Allergy & Asthma in Primary Care and United Biologics, LLC d/b/a United Allergy Services, a provider of on-site services to physicians in the delivery of testing and treatment of allergies, filed a complaint against Phadia U.S. Inc. (a subsidiary of the company) and Thermo Fisher Scientific Inc., respectively, in the United States District Court for the Western District of Texas. The plaintiffs allege various claims of anticompetitive activities in violation of antitrust laws, tortious interference with contracts and existing and prospective business relations, and civil conspiracy. On March 28, 2016, the company filed a counterclaim against United Biologics, LLC alleging tortious interference with business relations and seeking a declaratory judgment and injunctive relief. The plaintiffs seek damages, attorneys’ fees, costs, and injunctive relief. The company expects this matter will be scheduled for trial in 2017.


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

Note 10.
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, 2016
 
$
(2,343.4
)
 
$
0.9

 
$
(57.1
)
 
$
(236.7
)
 
$
(2,636.3
)
Other comprehensive income (loss) before reclassifications
 
160.0

 
1.1

 

 
(2.0
)
 
159.1

Amounts reclassified from accumulated other comprehensive items
 

 

 
1.8

 
1.9

 
3.7

 
 
 
 
 
 
 
 
 
 
 
Net other comprehensive items
 
160.0

 
1.1

 
1.8

 
(0.1
)
 
162.8

 
 
 
 
 
 
 
 
 
 
 
Balance at April 1, 2017
 
$
(2,183.4
)
 
$
2.0

 
$
(55.3
)
 
$
(236.8
)
 
$
(2,473.5
)

Note 11.
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 2017. 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.

23


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 1, 2017 and December 31, 2016:
 
 
April 1,

 
Quoted
Prices in
Active
Markets

 
Significant
Other
Observable
 Inputs

 
Significant
Unobservable
Inputs

(In millions)
 
2017

 
(Level 1)

 
(Level 2)

 
(Level 3)

 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
Cash equivalents
 
$
75.6

 
$
75.6

 
$

 
$

Bank time deposits
 
2.0

 
2.0

 

 

Investments in mutual funds and other similar instruments
 
16.0

 
16.0

 

 

Warrants
 
3.1

 

 
3.1

 

Insurance contracts
 
104.4

 

 
104.4

 

Derivative contracts
 
11.6

 

 
11.6