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.
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.
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
|
|
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.
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 compensatio
n. 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.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
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
|
|
T
he 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.
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.
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.
|
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
I
n 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.
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
|
|
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.
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:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
1.19
|
|
|
$
|
1.19
|
|
|
$
|
3.50
|
|
|
$
|
3.42
|
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share
|
|
$
|
1.19
|
|
|
$
|
1.18
|
|
|
$
|
3.50
|
|
|
$
|
3.42
|
|
Options to purchase
0.1 million
,
3.5 million
,
1.8 million
and
3.7 million
shares of common stock were not included in the computation of diluted earnings per share for the
third
quarter of
2016
and
2015
and the first
nine
months of
2016
and
2015
, respectively, because their effect would have been antidilutive.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
|
|
Note
9
.
|
Debt and Other Financing Arrangements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Interest Rate at October 1,
|
|
|
October 1,
|
|
|
December 31,
|
|
(Dollars in millions)
|
|
2016
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Commercial Paper
|
|
1.32
|
%
|
|
$
|
820.5
|
|
|
$
|
49.6
|
|
Term Loan
|
|
1.70
|
%
|
|
1,950.0
|
|
|
—
|
|
2.25% 5-Year Senior Notes, Due 8/15/2016
|
|
|
|
—
|
|
|
1,000.0
|
|
1.30% 3-Year Senior Notes, Due 2/1/2017
|
|
1.21
|
%
|
|
900.0
|
|
|
900.0
|
|
1.85% 5-Year Senior Notes, Due 1/15/2018
|
|
2.01
|
%
|
|
500.0
|
|
|
500.0
|
|
Floating Rate 2-Year Senior Notes, Due 8/9/2018 (euro-denominated)
|
|
0.15
|
%
|
|
674.1
|
|
|
—
|
|
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
|
|
2.98
|
%
|
|
750.0
|
|
|
750.0
|
|
4.70% 10-Year Senior Notes, Due 5/1/2020
|
|
4.23
|
%
|
|
300.0
|
|
|
300.0
|
|
1.50% 5-Year Senior Notes, Due 12/1/2020 (euro-denominated)
|
|
1.61
|
%
|
|
477.5
|
|
|
461.6
|
|
5.00% 10-Year Senior Notes, Due 1/15/2021
|
|
3.24
|
%
|
|
400.0
|
|
|
400.0
|
|
4.50% 10-Year Senior Notes, Due 3/1/2021
|
|
3.48
|
%
|
|
1,000.0
|
|
|
1,000.0
|
|
3.60% 10-Year Senior Notes, Due 8/15/2021
|
|
3.15
|
%
|
|
1,100.0
|
|
|
1,100.0
|
|
3.30% 7-Year Senior Notes, Due 2/15/2022
|
|
3.43
|
%
|
|
800.0
|
|
|
800.0
|
|
2.15% 7-Year Senior Notes, Due 7/21/2022 (euro-denominated)
|
|
2.28
|
%
|
|
561.8
|
|
|
543.1
|
|
3.15% 10-Year Senior Notes, Due 1/15/2023
|
|
3.31
|
%
|
|
800.0
|
|
|
800.0
|
|
3.00% 7-Year Senior Notes Due 4/15/2023
|
|
3.18
|
%
|
|
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)
|
|
0.94
|
%
|
|
1,123.5
|
|
|
—
|
|
2.00% 10-Year Senior Notes, Due 4/15/2025 (euro-denominated)
|
|
2.09
|
%
|
|
719.0
|
|
|
695.2
|
|
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
|
|
|
—
|
|
1.375% 12-Year Senior Notes, 9/12/2028 (euro-denominated)
|
|
1.46
|
%
|
|
674.1
|
|
|
—
|
|
5.30% 30-Year Senior Notes, Due 2/1/2044
|
|
5.37
|
%
|
|
400.0
|
|
|
400.0
|
|
Other
|
|
|
|
13.7
|
|
|
16.3
|
|
|
|
|
|
|
|
|
Total Borrowings at Par Value
|
|
|
|
18,864.2
|
|
|
12,415.8
|
|
Fair Value Hedge Accounting Adjustments
|
|
|
|
73.9
|
|
|
6.2
|
|
Unamortized Premium, Net
|
|
|
|
56.5
|
|
|
104.7
|
|
Unamortized Debt Issuance Costs (Note 1)
|
|
|
|
(82.1
|
)
|
|
(54.7
|
)
|
|
|
|
|
|
|
|
Total Borrowings at Carrying Value
|
|
|
|
18,912.5
|
|
|
12,472.0
|
|
Less: Short-term Obligations and Current Maturities
|
|
|
|
1,972.1
|
|
|
1,051.8
|
|
|
|
|
|
|
|
|
Long-term Obligations
|
|
|
|
$
|
16,940.4
|
|
|
$
|
11,420.2
|
|
The effective interest rates for the fixed-rate debt include the stated interest on the notes, the accretion of any discount or amortization of any premium, the amortization of any debt issuance costs and, if applicable, adjustments related to hedging.
See Note
12
for fair value information pertaining to the company’s long-term obligations.
Credit Facilities
In July 2016, the company replaced its existing revolving credit facility with a new 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
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Leverage Ratio of debt to EBITDA (as defined in the agreement) below
4.5
to 1.0 for the first two consecutive quarters after the closing date of the acquisition of FEI (see Note 2), stepping down to
4.0
to 1.0 for the two immediately following fiscal quarters and then stepping down to
3.5
to 1.0 each fiscal 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
October 1, 2016
,
no
borrowings were outstanding under the facility, although available capacity was reduced by approximately
$67 million
as a result of outstanding letters of credit.
Term Loans
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.
In the first quarter of 2016, in connection with the acquisition of Affymetrix, the company entered into a 364-day
$1.00 billion
unsecured term loan agreement. In August 2016, the company used the proceeds from the issuance of the floating rate senior notes due 2018 to repay the remaining balance of this term loan.
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.
In April 2016, the company issued
$1.00 billion
principal amount of 3.00% Senior Notes due 2023 and used the proceeds to repay all of the 2.25% Senior Notes due 2016. Prior to issuing the 3.00% Senior Notes due 2023, the company had entered into an agreement to hedge its exposure related to the interest rate on the anticipated borrowings (described under the heading "
Cash Flow Hedge Arrangements
"
in Note
12
) that was terminated in April 2016. The company had a cash outlay of
$75 million
early in the second quarter of 2016 associated with termination of the arrangement, included in other financing activities, net, in the accompanying statement of cash flows.
In August 2016, Thermo Fisher Scientific (Finance I) B.V., a wholly-owned finance subsidiary of the company issued the Floating Rate Senior Notes due 2018 included in the table above. This subsidiary has no independent function other than financing activities. The Floating Rate Senior Notes due 2018 are fully and unconditionally guaranteed by the company and no other subsidiaries of the company have guaranteed the obligations.
During the third quarter of 2016, the company issued the 0.75% Senior Notes due 2024, the 2.95% Senior Notes due 2026 and the 1.375% Senior Notes due 2028, included in the table above. The proceeds from these issuances, along with the proceeds from the 3-year unsecured term loan facility described above, were used to fund the acquisition of FEI and, in October 2016, to redeem the 1.30% Senior Notes due 2017.
Interest Rate Swap Arrangements
In the first quarter of 2016, the company terminated certain of its fixed to floating rate swap arrangements. The terminated swaps were accounted for as fair value hedges. As a result of terminating these arrangements, the company received
$61 million
(excluding accrued interest) in cash in the second quarter of 2016, included in other financing activities, net, in the accompanying statement of cash flows. The proceeds were recorded as part of the carrying value of the underlying debt and will be amortized as a reduction to interest expense over the remaining terms of the respective debt instruments. Subsequently, the company entered into new swap arrangements which are included in the table below.
The company has entered into LIBOR-based interest rate swap arrangements with various banks on several of its outstanding senior notes. The aggregate amounts of the swaps are equal to the principal amounts of the notes and the payment dates of the swaps coincide with the interest payment dates of the notes. The swap contracts provide for the company to pay a
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
variable interest rate and receive a fixed rate. The variable interest rates reset monthly. The swaps have been accounted for as fair value hedges of the notes. See Note
12
for additional information. The following table summarizes the outstanding interest rate swap arrangements on the company's senior notes at
October 1, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Notional Amount
|
|
|
|
|
Pay Rate as of
|
|
|
|
(Dollars in millions)
|
|
|
Pay Rate
|
|
October 1,
2016
|
|
|
Receive Rate
|
|
|
|
|
|
|
|
|
|
|
1.30% Senior Notes due 2017
|
|
$
|
900.0
|
|
|
1-month LIBOR + 0.6616%
|
|
1.1888
|
%
|
|
1.30
|
%
|
4.50% Senior Notes due 2021
|
|
1,000.0
|
|
|
1-month LIBOR + 3.4420%
|
|
3.9692
|
%
|
|
4.50
|
%
|
3.60% Senior Notes due 2021
|
|
1,100.0
|
|
|
1-month LIBOR + 2.5150%
|
|
3.0393
|
%
|
|
3.60
|
%
|
3.00% Senior Notes due 2023
|
|
1,000.0
|
|
|
1-month LIBOR + 1.7640%
|
|
2.2883
|
%
|
|
3.00
|
%
|
|
|
Note
10
.
|
Commitments and Contingencies
|
Environmental Matters
The company is currently involved in various stages of investigation and remediation related to environmental matters. The company cannot predict all potential costs related to environmental remediation matters and the possible impact on future operations given the uncertainties regarding the extent of the required cleanup, the complexity and interpretation of applicable laws and regulations, the varying costs of alternative cleanup methods and the extent of the company’s responsibility. Expenses for environmental remediation matters related to the costs of installing, operating and maintaining groundwater-treatment systems and other remedial activities related to historical environmental contamination at the company’s domestic and international facilities were not material in any period presented. The company records accruals for environmental remediation liabilities, based on current interpretations of environmental laws and regulations, when it is probable that a liability has been incurred and the amount of such liability can be reasonably estimated. The company calculates estimates based upon several factors, including reports prepared by environmental specialists and management’s knowledge of and experience with these environmental matters. The company includes in these estimates potential costs for investigation, remediation and operation and maintenance of cleanup sites. At
October 1, 2016
, the company’s total environmental liability was approximately
$49 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
2015
Annual Report on Form 10-K filed with the SEC,
nor are material losses deemed probable for such matters. It is reasonably possible, however, that an unfavorable outcome that exceeds the company’s current accrual estimate, if any, for one or more of the matters described below could have a material adverse effect on the company’s results of operations, financial position and cash flows.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 alleges infringement of patents relating to methods of analyzing nucleic acid sequences using emulsion amplification, which plaintiff alleges are impermissibly used in Ion Torrent sequencing workflows. Plaintiff seeks damages for alleged willful infringement, attorneys’ fees and costs, and injunctive relief.
On June 6, 2004, Enzo Biochem, Enzo Life Sciences and Yale University filed a complaint against Life Technologies in United States District Court for the District of Connecticut. The plaintiffs allege patent infringement by Applera’s labeled DNA terminator products used in DNA sequencing and fragment analysis. The plaintiff sought damages for alleged willful infringement, attorneys’ fees, costs, prejudgment interest, and injunctive relief. In November 2012, the jury awarded damages of
$49 million
. Prejudgment interest of
$12 million
was also granted. The
$61 million
judgment and interest was accrued by Life Technologies and the liability was assumed by the company as of the date of the acquisition. In March 2015 the United States Court of Appeals for the Federal Circuit vacated the judgment and returned the case to the District Court for further proceedings. In February 2016, the District Court granted the company’s motion for summary judgment of non-infringement and entered judgment in its favor. Enzo appealed that decision to the Federal Circuit in March 2016. The company has maintained the
$61 million
accrual, pending appeals.
On 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 is stayed in the District Court pending the outcome of the Supreme Court’s review. The company has maintained the
$52 million
accrual, pending conclusion of this matter.
On December 27, 2011, Illumina Inc. filed a complaint against Life Technologies in the United States District Court for the Southern District of California alleging infringement of a patent relating to methods for making bead arrays by Ion Torrent’s semiconductor sequencing systems. Plaintiff seeks damages for alleged willful infringement, attorneys’ fees, costs, pre- and post-judgment interest, and injunctive relief.
On June 3, 2013, Unisone Strategic IP filed a complaint against Life Technologies in the United States District Court for the Southern District of California alleging patent infringement by Life Technologies’ supply chain management system software, which operates with product “supply centers” installed at customer sites. Plaintiff seeks damages for alleged willful infringement, attorneys’ fees, costs, and injunctive relief.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
|
|
Note
11
.
|
Comprehensive Income and Shareholders' Equity
|
Comprehensive Income (Loss)
Comprehensive income (loss) combines net income and other comprehensive items. Other comprehensive items represent certain amounts that are reported as components of shareholders’ equity in the accompanying balance sheet.
Changes in each component of accumulated other comprehensive items, net of tax are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Currency
Translation
Adjustment
|
|
|
Unrealized
Gains on
Available-for-
Sale
Investments
|
|
|
Unrealized
Losses on
Hedging
Instruments
|
|
|
Pension and
Other
Postretirement
Benefit
Liability
Adjustment
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
(1,776.7
|
)
|
|
$
|
1.8
|
|
|
$
|
(26.6
|
)
|
|
$
|
(195.8
|
)
|
|
$
|
(1,997.3
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
(127.8
|
)
|
|
(1.0
|
)
|
|
(36.6
|
)
|
|
(1.1
|
)
|
|
(166.5
|
)
|
Amounts reclassified from accumulated other comprehensive items
|
|
—
|
|
|
0.7
|
|
|
4.3
|
|
|
4.1
|
|
|
9.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Net other comprehensive items
|
|
(127.8
|
)
|
|
(0.3
|
)
|
|
(32.3
|
)
|
|
3.0
|
|
|
(157.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2016
|
|
$
|
(1,904.5
|
)
|
|
$
|
1.5
|
|
|
$
|
(58.9
|
)
|
|
$
|
(192.8
|
)
|
|
$
|
(2,154.7
|
)
|
|
|
Note
12
.
|
Fair Value Measurements and Fair Value of Financial Instruments
|
Fair Value Measurements
The company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during
2016
. The company’s financial assets and liabilities carried at fair value are primarily comprised of insurance contracts, investments in money market funds, derivative contracts, mutual funds holding publicly traded securities and other investments in unit trusts held as assets to satisfy outstanding deferred compensation and retirement liabilities; and acquisition-related contingent consideration.
The fair value accounting guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities that the company has the ability to access.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data such as quoted prices, interest rates and yield curves.
Level 3: Inputs are unobservable data points that are not corroborated by market data.
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
October 1, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
Quoted
Prices in
Active
Markets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
(In millions)
|
|
2016
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
851.0
|
|
|
$
|
851.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Bank time deposits
|
|
2.0
|
|
|
2.0
|
|
|
—
|
|
|
—
|
|
Investments in mutual funds and other similar instruments
|
|
17.3
|
|
|
17.3
|
|
|
—
|
|
|
—
|
|
Warrants
|
|
2.8
|
|
|
—
|
|
|
2.8
|
|
|
—
|
|
Insurance contracts
|
|
117.8
|
|
|
—
|
|
|
117.8
|
|
|
—
|
|
Derivative contracts
|
|
27.8
|
|
|
—
|
|
|
27.8
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,018.7
|
|
|
$
|
870.3
|
|
|
$
|
148.4
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
$
|
11.0
|
|
|
$
|
—
|
|
|
$
|
11.0
|
|
|
$
|
—
|
|
Contingent consideration
|
|
1.0
|
|
|
—
|
|
|
—
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
12.0
|
|
|
$
|
—
|
|
|
$
|
11.0
|
|
|
$
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Quoted
Prices in
Active
Markets
|
|
|
Significant
Other
Observable
Inputs
|
|
|
Significant
Unobservable
Inputs
|
|
(In millions)
|
|
2015
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
54.6
|
|
|
$
|
54.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Bank time deposits
|
|
2.0
|
|
|
2.0
|
|
|
—
|
|
|
—
|
|
Investments in mutual funds and other similar instruments
|
|
7.6
|
|
|
7.6
|
|
|
—
|
|
|
—
|
|
Warrants
|
|
3.4
|
|
|
—
|
|
|
3.4
|
|
|
—
|
|
Insurance contracts
|
|
108.1
|
|
|
—
|
|
|
108.1
|
|
|
—
|
|
Derivative contracts
|
|
13.8
|
|
|
—
|
|
|
13.8
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
189.5
|
|
|
$
|
64.2
|
|
|
$
|
125.3
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
$
|
41.8
|
|
|
$
|
—
|
|
|
$
|
41.8
|
|
|
$
|
—
|
|
Contingent consideration
|
|
1.9
|
|
|
—
|
|
|
—
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
43.7
|
|
|
$
|
—
|
|
|
$
|
41.8
|
|
|
$
|
1.9
|
|
The company determines the fair value of its insurance contracts by obtaining the cash surrender value of the contracts from the issuer. The fair value of derivative contracts is the estimated amount that the company would receive/pay upon liquidation of the contracts, taking into account the change in interest rates and currency exchange rates. The company determines the fair value of acquisition-related contingent consideration based on assessment of the probability that the company would be required to make such future payment. Changes to the fair value of contingent consideration are recorded in selling, general and administrative expense.
The notional amounts of derivative contracts outstanding, consisting of interest rate swaps and currency exchange contracts, totaled
$8.28 billion
and
$6.63 billion
at
October 1, 2016
and
December 31, 2015
, respectively.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
While certain derivatives are subject to netting arrangements with counterparties, the company does not offset derivative assets and liabilities within the consolidated balance sheet. The following tables present the fair value of derivative instruments in the consolidated balance sheet and statement of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value – Assets
|
|
Fair Value – Liabilities
|
|
|
October 1,
|
|
|
December 31,
|
|
|
October 1,
|
|
|
December 31,
|
|
(In millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Hedging Instruments
|
|
|
|
|
|
|
|
Interest rate swaps (a)
|
|
$
|
13.0
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
|
$
|
16.4
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
Currency exchange contracts (b)
|
|
14.8
|
|
|
13.6
|
|
|
11.0
|
|
|
25.4
|
|
|
|
(a)
|
The fair value of the interest rate swaps is included in the consolidated balance sheet under the captions other assets or other long-term liabilities.
|
|
|
(b)
|
The fair value of the currency exchange contracts is included in the consolidated balance sheet under the captions other current assets or other accrued expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
October 1,
|
|
|
September 26,
|
|
|
October 1,
|
|
|
September 26,
|
|
(In millions)
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Derivatives Designated as Fair Value Hedges
|
|
|
|
|
|
|
|
|
Interest rate swaps - effective portion
|
|
$
|
4.9
|
|
|
$
|
9.5
|
|
|
$
|
17.0
|
|
|
$
|
25.7
|
|
Interest rate swaps - ineffective portion (a)
|
|
1.1
|
|
|
(0.2
|
)
|
|
1.6
|
|
|
(7.4
|
)
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
Currency exchange contracts
|
|
|
|
|
|
|
|
|
Included in cost of revenues
|
|
$
|
(3.7
|
)
|
|
$
|
(6.0
|
)
|
|
$
|
(18.7
|
)
|
|
$
|
11.5
|
|
Included in other expense, net
|
|
1.2
|
|
|
(6.4
|
)
|
|
(42.9
|
)
|
|
130.6
|
|
|
|
(a)
|
The ineffective portion of the loss recognized on interest rate swaps during the
nine months ended September 26, 2015
includes
$7.5 million
of costs associated with entering into the swap arrangements.
|
Gains and losses recognized on currency exchange contracts and the effective portion of interest rate swaps are included in the consolidated statement of income together with the corresponding, offsetting losses and gains on the underlying hedged transactions. Gains and losses recognized on the ineffective portion of interest rate swaps are included in other expense, net in the accompanying statement of income.
The company also uses foreign currency-denominated debt to partially hedge its net investments in foreign operations against adverse movements in exchange rates. The company’s euro-denominated senior notes have been designated as, and are effective as, economic hedges of part of the net investment in a foreign operation. Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments are included in currency translation adjustment within other comprehensive income and shareholders’ equity.
In the first
nine
months of
2016
and
2015
, pre-tax net (losses)/gains of
$(54) million
and
$43 million
, respectively, from the euro-denominated notes were included in currency translation adjustment.
Cash Flow Hedge Arrangements
In 2015, the company entered into interest rate swap arrangements to mitigate the risk of interest rates rising prior to completion of a debt offering in 2016. Based on the company’s conclusion that a debt offering was probable as a result of debt maturing in 2016 and that such debt would carry semi-annual interest payments over a
10
-year term, the swaps hedged the cash flow risk for each of the semi-annual fixed-rate interest payments on
$1.00 billion
of principal amount of the planned fixed-rate debt issue. The change in the fair value of the hedge during
2016
,
$37 million
, net of tax, was classified as
a decrease
to accumulated other comprehensive items within shareholders’ equity. The hedge was terminated in advance of completing a debt offering in April 2016 (Note 9). The fair value of the hedge at that time,
$46 million
, net of tax, was classified as a reduction to accumulated other comprehensive items and is being amortized to interest expense over the term of the debt.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Fair Value of Other Financial Instruments
The carrying value and fair value of the company’s notes receivable and debt obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2016
|
|
December 31, 2015
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(In millions)
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
Notes Receivable
|
|
$
|
12.4
|
|
|
$
|
14.4
|
|
|
$
|
12.1
|
|
|
$
|
14.9
|
|
|
|
|
|
|
|
|
|
|
Debt Obligations:
|
|
|
|
|
|
|
|
|
Senior notes
|
|
$
|
16,132.3
|
|
|
$
|
16,816.1
|
|
|
$
|
12,406.1
|
|
|
$
|
12,618.8
|
|
Term loan
|
|
1,946.0
|
|
|
1,950.0
|
|
|
—
|
|
|
—
|
|
Commercial paper
|
|
820.5
|
|
|
820.5
|
|
|
49.6
|
|
|
49.6
|
|
Other
|
|
13.7
|
|
|
13.7
|
|
|
16.3
|
|
|
16.3
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,912.5
|
|
|
$
|
19,600.3
|
|
|
$
|
12,472.0
|
|
|
$
|
12,684.7
|
|
The fair value of debt obligations was determined based on quoted market prices and on borrowing rates available to the company at the respective period ends which represent level 2 measurements.
|
|
Note
13
.
|
Supplemental Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
October 1,
|
|
|
September 26,
|
|
(In millions)
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
Non-cash Activities
|
|
|
|
|
Fair value of assets of acquired businesses
|
|
$
|
6,969.7
|
|
|
$
|
315.6
|
|
Cash paid for acquired businesses
|
|
(5,599.2
|
)
|
|
(307.6
|
)
|
|
|
|
|
|
Liabilities assumed of acquired businesses
|
|
$
|
1,370.5
|
|
|
$
|
8.0
|
|
|
|
|
|
|
Declared but unpaid dividends
|
|
$
|
60.2
|
|
|
$
|
61.1
|
|
|
|
|
|
|
Issuance of stock upon vesting of restricted stock units
|
|
$
|
125.2
|
|
|
$
|
129.4
|
|
|
|
Note
14
.
|
Restructuring and Other Costs, Net
|
Restructuring and other costs in the first
nine
months of
2016
included continuing charges for headcount reductions and facility consolidations in an effort to streamline operations, including the closure and consolidation of operations within several facilities in the U.S., Europe and Asia; third-party acquisition transaction and integration costs primarily associated with the acquisitions of FEI and Affymetrix; sales of inventories revalued at the date of acquisition; costs to conform the accounting policies of FEI and Affymetrix with the company's accounting policies; costs to achieve synergies related to acquisitions, including severance and abandoned facility costs; and net charges for litigation matters. These charges were partially offset by gains on sales of real estate. In the first
nine
months of
2016
, severance actions associated with facility consolidations and cost reduction measures affected approximately
2%
of the company’s workforce.
As of
November 4, 2016
, the company has identified restructuring actions that will result in additional charges of approximately
$70 million
, primarily in
2016
and
2017
, which will be recorded when specified criteria are met, such as communication of benefit arrangements and abandonment of leased facilities.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Third Quarter
of
2016
During the
third
quarter of
2016
, the company recorded net restructuring and other costs by segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Cost of
Revenues
|
|
|
Selling,
General and
Administrative
Expenses
|
|
|
Restructuring
and Other
Costs, Net
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Life Sciences Solutions
|
|
$
|
10.8
|
|
|
$
|
6.2
|
|
|
$
|
10.2
|
|
|
$
|
27.2
|
|
Analytical Instruments
|
|
21.6
|
|
|
39.1
|
|
|
30.9
|
|
|
91.6
|
|
Specialty Diagnostics
|
|
—
|
|
|
—
|
|
|
11.7
|
|
|
11.7
|
|
Laboratory Products and Services
|
|
—
|
|
|
—
|
|
|
1.5
|
|
|
1.5
|
|
Corporate
|
|
—
|
|
|
17.2
|
|
|
0.6
|
|
|
17.8
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32.4
|
|
|
$
|
62.5
|
|
|
$
|
54.9
|
|
|
$
|
149.8
|
|
The components of net restructuring and other costs by segment are as follows:
Life Sciences Solutions
In the
third
quarter of
2016
, the Life Sciences Solutions segment recorded
$27.2 million
of net restructuring and other charges, including charges to cost of revenues of
$10.8 million
for sales of inventories revalued at the date of acquisition. The segment also recorded
$6.2 million
of charges to selling, general and administrative expenses principally for third-party transaction and integration costs related to the acquisition of Affymetrix. In addition, the segment recorded
$10.2 million
of restructuring and other costs, net, most of which were cash costs associated with headcount reductions and actions to achieve related synergies in the U.S.
Analytical Instruments
In the
third
quarter of
2016
, the Analytical Instruments segment recorded
$91.6 million
of net restructuring and other charges. The segment recorded charges to cost of revenues of
$21.6 million
, including
$16.1 million
to conform the accounting policies of FEI with the company's accounting policies and
$5.5 million
for the sales of inventory revalued at the date of acquisition. The segment recorded
$39.1 million
of charges to selling, general, and administrative expense, including
$30.5 million
for third-party transaction costs related to the acquisition of FEI (Note
2
), as well as
$8.5 million
to conform the accounting policies of FEI with the company's accounting policies. The segment also recorded
$30.9 million
of cash restructuring costs, primarily for severance obligations payable to former FEI executives.
Specialty Diagnostics
In the
third
quarter of
2016
, the Specialty Diagnostics segment recorded
$11.7 million
of net restructuring and other costs, including
$10.0 million
of charges for litigation-related matters, with the remainder principally for severance associated with headcount reductions in Europe.
Laboratory Products and Services
In the
third
quarter of
2016
, the Laboratory Products and Services segment recorded
$1.5 million
of net restructuring and other charges, including
$2.2 million
of cash restructuring costs primarily for employee severance and other costs associated facility consolidations in the U.S. These cash costs were partially offset by
$0.7 million
of net gains associated with litigation-related matters of a divested business.
Corporate
In the
third
quarter of
2016
, the company recorded
$17.8 million
of restructuring and other costs, principally within selling, general, and administrative expense, including
$17.2 million
of charges for product liability litigation. The company also recorded
$0.6 million
of cash restructuring costs associated with facility consolidation at its corporate operations.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
First
Nine
Months of
2016
During the first
nine
months of
2016
, the company recorded net restructuring and other costs by segment as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Cost of
Revenues
|
|
|
Selling,
General and
Administrative
Expenses
|
|
|
Restructuring
and Other
Costs, Net
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Life Sciences Solutions
|
|
$
|
30.9
|
|
|
$
|
32.6
|
|
|
$
|
57.4
|
|
|
$
|
120.9
|
|
Analytical Instruments
|
|
21.6
|
|
|
40.9
|
|
|
55.4
|
|
|
117.9
|
|
Specialty Diagnostics
|
|
—
|
|
|
—
|
|
|
11.6
|
|
|
11.6
|
|
Laboratory Products and Services
|
|
7.9
|
|
|
0.5
|
|
|
15.4
|
|
|
23.8
|
|
Corporate
|
|
—
|
|
|
21.2
|
|
|
1.1
|
|
|
22.3
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60.4
|
|
|
$
|
95.2
|
|
|
$
|
140.9
|
|
|
$
|
296.5
|
|
The components of net restructuring and other costs by segment are as follows:
Life Sciences Solutions
In the first
nine
months of
2016
, the Life Sciences Solutions segment recorded
$120.9 million
of net restructuring and other charges. The segment recorded charges to cost of revenues of
$30.9 million
, including
$27.0 million
for sales of inventories revalued at the date of acquisition and
$3.9 million
to conform the accounting policies of Affymetrix with the company's accounting policies. The segment also recorded
$32.6 million
of charges to selling, general and administrative expenses, including
$30.9 million
of third-party transaction and integration costs related to the acquisition of Affymetrix and
$3.6 million
for accelerated depreciation at facilities closing due to real estate consolidation, which were offset in part by credits of
$1.9 million
from contingent acquisition consideration. In addition, the segment recorded
$62.3 million
of cash restructuring costs, including
$44.6 million
of severance and related costs primarily to achieve acquisition synergies, and
$17.7 million
of abandoned facilities costs principally for the consolidation of facilities in the U.S. These costs were offset in part by
$4.3 million
of net gains on litigation-related matters at acquired businesses and
$0.6 million
of other non-cash income, net.
Analytical Instruments
In the first
nine
months of
2016
, the Analytical Instruments segment recorded
$117.9 million
of net restructuring and other charges. The segment recorded charges to cost of revenues of
$21.6 million
, including
$16.1 million
to conform the accounting policies of FEI with the company's accounting policies and
$5.5 million
for the sales of inventory revalued at the date of acquisition. The segment recorded
$40.9 million
of charges to selling, general, and administrative expense, including
$32.2 million
for third-party transaction costs related to the acquisition of FEI, as well as
$8.5 million
of charges to conform the accounting policies of FEI with the company's accounting policies. The segment also recorded
$58.1 million
of cash restructuring costs primarily for severance obligations payable to former FEI executives, and charges associated with abandoned facilities, including remediation and other closure costs of a manufacturing facility in the U.S. These costs were offset in part by
$2.7 million
of gains on the sale of real estate.
Specialty Diagnostics
In the first
nine
months of
2016
, the Specialty Diagnostics segment recorded
$11.6 million
of net restructuring and other charges including
$10.0 million
of charges for litigation-related matters, as well as
$3.7 million
of cash restructuring costs for severance and other costs associated with headcount reductions and facility consolidations. These charges were partially offset by
$2.1 million
of other income, primarily gains on the sale of real estate.
Laboratory Products and Services
In the first
nine
months of
2016
, the Laboratory Products and Services segment recorded
$23.8 million
of net restructuring and other charges. The segment recorded charges to cost of revenues of
$7.9 million
, including
$6.2 million
for sales of inventories revalued at the date of acquisition, and
$1.7 million
for accelerated depreciation at facilities closing due to real estate consolidation. The segment also recorded
$0.5 million
of charges to selling, general and administrative expenses for accelerated depreciation at facilities closing due to real estate consolidation. The company recorded
$10.1 million
of cash restructuring costs, primarily for employee severance and other costs associated with headcount reductions and facility
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
consolidations. In addition, the segment recorded
$6.8 million
of charges for an increase in environmental remediation cost estimates associated with a Superfund site in the U.S., offset in part by
$1.3 million
of gain on the settlement of litigation.
Corporate
In the first
nine
months of
2016
, the company recorded
$22.3 million
of restructuring and other costs, principally within selling, general, and administrative expenses, including
$17.2 million
of charges for product liability litigation and
$4.0 million
of accelerated depreciation on information system to be abandoned due to integration synergies. The segment also recorded
$1.5 million
of restructuring charges for severance and costs associated with facility consolidation at its corporate operations. These charges were offset in part by
$0.4 million
of income from the settlement of a retirement plan.
The following table summarizes the cash components of the company’s restructuring plans. The non-cash components and other amounts reported as restructuring and other costs, net, in the accompanying statement of income have been summarized in the notes to the tables. Accrued restructuring costs are included in other accrued expenses in the accompanying balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Severance
|
|
|
Abandonment
of Excess
Facilities
|
|
|
Other (a)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
15.2
|
|
|
$
|
13.1
|
|
|
$
|
3.0
|
|
|
$
|
31.3
|
|
Costs incurred in 2016 (c)
|
|
84.9
|
|
|
43.4
|
|
|
8.5
|
|
|
136.8
|
|
Reserves reversed (b)
|
|
(0.7
|
)
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
(1.1
|
)
|
Payments
|
|
(36.2
|
)
|
|
(16.6
|
)
|
|
(8.9
|
)
|
|
(61.7
|
)
|
Currency translation
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2016
|
|
$
|
63.4
|
|
|
$
|
39.7
|
|
|
$
|
2.4
|
|
|
$
|
105.5
|
|
|
|
(a)
|
Other includes relocation and moving expenses associated with facility consolidations, as well as employee retention costs which are accrued ratably over the period through which employees must work to qualify for a payment.
|
|
|
(b)
|
Represents reductions in cost of plans.
|
|
|
(c)
|
Excludes
$5.2 million
of charges, net, primarily associated with environmental and litigation-related matters and sales of real estate.
|
The company expects to pay accrued restructuring costs as follows: severance, employee-retention obligations and other costs, primarily through
2016
; and abandoned-facility payments, over lease terms expiring through
2027
.
THERMO FISHER SCIENTIFIC INC.