Thermo Fisher Scientific 10-Q Q3 2007 for the period ended September 29, 2007


 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
____________________________________________________

FORM 10-Q

(mark one)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended September 29, 2007

o
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-8002
THERMO FISHER SCIENTIFIC INC.
(Exact name of Registrant as specified in its charter)

Delaware
04-2209186
(State of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
81 Wyman Street, P.O. Box 9046
 
Waltham, Massachusetts
02454-9046
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code: (781) 622-1000

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.  Large Accelerated Filer x  Accelerated Filer o  Non-Accelerated Filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of Common Stock, as of the latest practicable date.

 
 
Class
 
Outstanding at September 29, 2007
 
 
Common Stock, $1.00 par value
 
420,064,580
 

 
 


 

PART I — FINANCIAL INFORMATION 
 
Item 1 — Financial Statements

THERMO FISHER SCIENTIFIC INC.

Consolidated Balance Sheet

Assets

   
September 29,
 
December 31,
 
(In millions)
 
2007
 
2006
 
 
 (Unaudited)
       
               
Current Assets:
             
  Cash and cash equivalents
 
$
830.8
 
$
667.4
 
Short-term investments, at quoted market value (amortized cost of $22.0 and $23.8)
   
15.4
   
23.8
 
Accounts receivable, less allowances of $50.1 and $45.0
   
1,458.1
   
1,392.7
 
Inventories:
             
Raw materials
   
321.6
   
307.7
 
Work in process
   
131.6
   
121.7
 
Finished goods
   
753.0
   
735.1
 
Deferred tax assets
   
159.3
   
209.2
 
Other current assets
   
238.6
   
201.9
 
               
     
3,908.4
   
3,659.5
 
               
Property, Plant and Equipment, at Cost
   
1,636.8
   
1,533.0
 
Less: Accumulated depreciation and amortization
   
398.2
   
276.3
 
               
     
1,238.6
   
1,256.7
 
               
   Acquisition-related Intangible Assets, net of Accumulated Amortization of $723.9 and $276.4
   
7,096.9
   
7,511.6
 
               
Other Assets
   
379.3
   
309.4
 
               
Goodwill
   
8,549.2
   
8,525.0
 
               
   
$
21,172.4
 
$
21,262.2
 
 
 
 
 
2

 
THERMO FISHER SCIENTIFIC INC.
 
Consolidated Balance Sheet (continued)

Liabilities and Shareholders’ Equity

   
September 29,
 
December 31,
 
(In millions except share amounts)
 
2007
 
2006
 
 
 (Unaudited)
       
               
Current Liabilities:
             
   Short-term obligations and current maturities of long-term obligations
 
$
19.6
 
$
483.3
 
Accounts payable
   
661.5
   
630.8
 
Accrued payroll and employee benefits
   
239.0
   
253.3
 
Accrued income taxes
   
18.2
   
60.3
 
Deferred revenue
   
130.9
   
121.3
 
Other accrued expenses (Notes 2, 10 and 11)
   
561.7
   
603.3
 
               
     
1,630.9
   
2,152.3
 
               
Deferred Income Taxes
   
2,365.5
   
2,557.5
 
               
Other Long-term Liabilities
   
552.0
   
459.9
 
               
Long-term Obligations (Note 9)
   
2,181.1
   
2,180.7
 
               
Shareholders’ Equity:
             
   Preferred stock, $100 par value, 50,000 shares authorized; none issued
             
   Common stock, $1 par value, 1,200,000,000 shares authorized; 437,798,302 and 424,240,292 shares issued
   
437.8
   
424.2
 
Capital in excess of par value
   
12,202.2
   
11,810.4
 
Retained earnings
   
2,294.7
   
1,773.4
 
Treasury stock at cost, 17,733,722 and 7,635,184 shares
   
(795.0
)
 
(246.4
)
Accumulated other comprehensive items (Note 6)
   
303.2
   
150.2
 
               
     
14,442.9
   
13,911.8
 
               
   
$
21,172.4
 
$
21,262.2
 




 


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
 
   
September 29,
 
September 30,
 
(In millions except per share amounts)
 
2007
 
2006
 
               
Revenues
 
$
2,401.2
 
$
724.9
 
               
Costs and Operating Expenses:
             
Cost of revenues
   
1,453.1
   
388.1
 
Selling, general and administrative expenses
   
626.5
   
217.9
 
Research and development expenses
   
58.8
   
38.6
 
Restructuring and other costs, net (Note 11)
   
8.8
   
5.2
 
               
     
2,147.2
   
649.8
 
               
Operating Income
   
254.0
   
75.1
 
Other Expense, Net (Note 4)
   
(18.7
)
 
(5.8
)
               
Income from Continuing Operations Before Provision for Income Taxes
   
235.3
   
69.3
 
Provision for Income Taxes
   
(16.7
)
 
(20.5
)
               
Income from Continuing Operations
   
218.6
   
48.8
 
   Loss from Discontinued Operations (net of income tax benefit of $0.1 in 2007; Note 14)
   
(0.1
)
 
 
               
Net Income
 
$
218.5
 
$
48.8
 
               
Earnings per Share from Continuing Operations (Note 5):
             
Basic
 
$
.52
 
$
.31
 
               
Diluted
 
$
.49
 
$
.30
 
               
Earnings per Share (Note 5):
             
Basic
 
$
.51
 
$
.31
 
               
Diluted
 
$
.49
 
$
.30
 
               
Weighted Average Shares (Note 5):
             
Basic
   
424.3
   
157.7
 
               
Diluted
   
446.6
   
162.2
 








The accompanying notes are an integral part of these consolidated financial statements.
 
4


THERMO FISHER SCIENTIFIC INC.

Consolidated Statement of Income
(Unaudited)

   
Nine Months Ended
 
   
September 29,
 
September 30,
 
(In millions except per share amounts)
 
2007
 
2006
 
               
Revenues
 
$
7,125.3
 
$
2,122.7
 
               
Costs and Operating Expenses:
             
Cost of revenues
   
4,360.8
   
1,148.7
 
Selling, general and administrative expenses
   
1,873.3
   
627.3
 
Research and development expenses
   
177.3
   
118.0
 
Restructuring and other costs, net (Note 11)
   
24.5
   
13.6
 
               
     
6,435.9
   
1,907.6
 
               
Operating Income
   
689.4
   
215.1
 
Other Expense, Net (Note 4)
   
(66.1
)
 
(12.9
)
               
Income from Continuing Operations Before Provision for Income Taxes
   
623.3
   
202.2
 
Provision for Income Taxes
   
(78.0
)
 
(60.8
)
               
Income from Continuing Operations
   
545.3
   
141.4
 
   Income from Discontinued Operations
   
   
 
   (Loss) Gain on Disposal of Discontinued Operations, Net (includes income tax provision of $1.8 and
        $1.3; Note 14)
   
(24.0
)
 
2.2
 
               
Net Income
 
$
521.3
 
$
143.6
 
               
Earnings per Share from Continuing Operations (Note 5):
             
Basic
 
$
1.29
 
$
.88
 
               
Diluted
 
$
1.23
 
$
.86
 
               
Earnings per Share (Note 5):
             
Basic
 
$
1.23
 
$
.89
 
               
Diluted
 
$
1.17
 
$
.88
 
               
Weighted Average Shares (Note 5):
             
Basic
   
422.8
   
160.7
 
               
Diluted
   
444.7
   
164.9
 







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

 
5


THERMO FISHER SCIENTIFIC INC.

Consolidated Statement of Cash Flows
(Unaudited)
 
   
Nine Months Ended 
 
   
September 29,
 
September 30,
 
(In millions)
 
2007
 
2006
 
               
Operating Activities:
             
Net income
 
$
521.3
 
$
143.6
 
Loss (Gain) on disposal of discontinued operations, net
   
24.0
   
(2.2
)
               
Income from continuing operations
   
545.3
   
141.4
 
               
   Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
             
         Depreciation and amortization
   
560.0
   
116.2
 
         Change in deferred income taxes
   
(10.5
)
 
(28.5
)
         Noncash equity compensation
   
39.3
   
20.1
 
Noncash charges for sale of inventories revalued at the date of acquisition
   
48.0
   
0.7
 
         Other noncash expenses, net
   
25.4
   
(0.6
)
 Changes in current accounts, excluding the effects of acquisitions and dispositions:
             
          Accounts receivable
   
(57.1
)
 
42.7
 
           Inventories
   
(65.3
)
 
(31.0
)
               Other current assets
   
(23.3
)
 
(14.4
)
               Accounts payable
   
11.2
   
(8.3
)
               Other current liabilities
   
(122.4
)
 
(37.9
)
               
Net cash provided by continuing operations
   
950.6
   
200.4
 
Net cash used in discontinued operations
   
(2.4
)
 
(0.2
)
               
Net cash provided by operating activities
   
948.2
   
200.2
 
               
Investing Activities:
             
Acquisitions, net of cash acquired
   
(93.8
)
 
(59.2
)
Refund of acquisition purchase price
   
4.6
   
 
Proceeds from sale of available-for-sale investments
   
7.7
   
151.0
 
Purchases of available-for-sale investments
   
(8.0
)
 
(84.0
)
Purchases of property, plant and equipment
   
(118.2
)
 
(31.8
)
Proceeds from sale of property, plant and equipment
   
14.9
   
4.6
 
Proceeds from sale of product lines
   
   
8.9
 
Collection of notes receivable
   
48.2
   
2.8
 
Proceeds from sale of other investments
   
   
1.9
 
Increase in other assets
   
(22.5
)
 
(2.4
)
               
Net cash used in continuing operations
   
(167.1
)
 
(8.2
)
Net cash provided by discontinued operations
   
31.3
   
5.3
 
               
Net cash used in investing activities
 
$
(135.8
)
$
(2.9
)

 
6


THERMO FISHER SCIENTIFIC INC.

Consolidated Statement of Cash Flows (continued)
(Unaudited)
 
   
Nine Months Ended
 
   
September 29,
 
September 30,
 
(In millions)
 
2007
 
2006
 
               
Financing Activities:
             
(Decrease) increase in short-term notes payable
 
$
(458.3
)
$
(66.9
)
Purchases of company common stock
   
(540.2
)
 
(228.0
)
Net proceeds from issuance of company common stock
   
308.5
   
26.4
 
Tax benefits from exercised stock options
   
64.0
   
6.7
 
Redemption and repayment of long-term obligations
   
(9.5
)
 
 
Other
   
   
(0.2
)
               
Net cash used in financing activities
   
(635.5
)
 
(262.0
)
               
Exchange Rate Effect on Cash of Continuing Operations
   
(13.5
)
 
8.4
 
               
Increase (Decrease) in Cash and Cash Equivalents
   
163.4
   
(56.3
)
Cash and Cash Equivalents at Beginning of Period
   
667.4
   
214.3
 
               
Cash and Cash Equivalents at End of Period
 
$
830.8
 
$
158.0
 
               
Supplemental Cash Flow Information:
             
Fair value of assets of acquired businesses
 
$
98.6
 
$
91.6
 
Cash paid for acquired businesses
   
(82.2
)
 
(61.0
)
               
Liabilities assumed of acquired businesses
 
$
16.4
 
$
30.6
 
               
Conversion of subordinated convertible debentures
 
$
0.4
 
$
 
               
Issuance of restricted stock
 
$
15.8
 
$
1.3
 





 



The accompanying notes are an integral part of these consolidated financial statements.
 
7

 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)

1.
General

The interim consolidated financial statements presented herein have been prepared by Thermo Fisher Scientific Inc. (the company or Thermo Fisher), 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 September 29, 2007, the results of operations for the three- and nine-month periods ended September 29, 2007, and September 30, 2006, and the cash flows for the nine-month periods ended September 29, 2007, and September 30, 2006. Certain prior-period amounts have been reclassified to conform to the presentation in the current financial statements. Interim results are not necessarily indicative of results for a full year.

The consolidated balance sheet presented as of December 31, 2006, 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 of the information that is included in the annual financial statements and notes of the company. The consolidated financial statements and notes included in this report should be read in conjunction with the financial statements and notes included in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Securities and Exchange Commission (SEC).

2.
Acquisitions

On January 15, 2007, the company’s Analytical Technologies segment acquired the Spectronex AG and Flux AG businesses (Spectronex/Flux) of Swiss Analytic Group AG. These Switzerland-based businesses include a distributor of mass spectrometry, chromatography and surface science instruments and a manufacturer of high performance liquid chromatography pumps and software. The purchase price totaled $24 million, net of cash acquired. The acquisition broadened the segment’s mass spectrometry offerings. Revenues of Spectronex/Flux totaled $22 million in fiscal 2006. The purchase price exceeded the fair value of the acquired net assets and, accordingly, $9 million was allocated to goodwill, none of which is tax deductible.

On September 4, 2007, the company’s Laboratory Products and Services segment acquired the instrument sales business of Davis Inotek Instruments, LLC. The U.S.-based business is a leading provider of test, measurement and process control instruments, serving customers in a wide range of industries through its extensive catalog and e-commerce sales channels. The purchase price totaled $24 million, net of cash acquired. The acquisition strengthens the segment’s ability to meet customers’ needs through a range of convenient purchasing options. Revenues of the instrument sales business of Davis Inotek totaled approximately $33 million in 2006. The purchase price exceeded the fair value of the acquired net assets and, accordingly, $12 million was allocated to goodwill, all of which is tax deductible.

In addition to the acquisitions of Spectronex/Flux and Davis, in the first nine months of 2007 the Analytical Technologies segment acquired a manufacturer of electrostatic discharge products and the intellectual property of a diagnostics business, and the Laboratory Products and Services segment acquired an independent test and research laboratory and a cell culture product line, for aggregate consideration of $34 million. The company also paid transaction costs and post-closing and contingent purchase price adjustments aggregating $12 million in the first nine months of 2007 for various acquisitions completed prior to 2007. The company obtained a refund of $5 million in the first quarter of 2007 related to a post-closing adjustment for the 2006 acquisition of GV Instruments Limited (GVI).

The company’s acquisitions have historically been made at prices above the fair value of the acquired assets, resulting in goodwill, due to expectations of synergies of combining the businesses. These synergies include elimination of duplicative facilities, functions and staffing; use of the company’s existing infrastructure such as sales force, distribution channels and customer relations to expand sales of the acquired businesses’ products; and use of the infrastructure of the acquired businesses to cost-effectively expand sales of company products.
 
8

 
THERMO FISHER SCIENTIFIC INC.

2.
Acquisitions (continued)

These 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. Allocation of the purchase price for acquisitions was based on estimates of the fair value of the net assets acquired and, for acquisitions completed within the past year, is subject to adjustment upon finalization of the purchase price allocation. The company is not aware of any information that indicates the final purchase price allocations will differ materially from the preliminary estimates.

The components of the preliminary purchase price allocation for 2007 acquisitions are as follows:

(In millions)
 
Spectronex/
Flux
 
Davis
 
Other
 
Total
 
                           
Purchase Price:
                         
Cash paid (a)
 
$
25.8
 
$
24.0
 
$
34.5
 
$
84.3
 
Cash acquired
   
(1.8
)
 
   
(0.3
)
 
(2.1
)
                           
   
$
24.0
 
$
24.0
 
$
34.2
 
$
82.2
 
                           
Allocation:
                         
Current assets
 
$
8.1
 
$
6.2
 
$
4.2
 
$
18.5
 
Property, plant and equipment
   
0.4
   
   
5.5
   
5.9
 
Acquired intangible assets
   
14.8
   
9.2
   
20.0
   
44.0
 
Goodwill
   
9.1
   
11.7
   
9.4
   
30.2
 
Liabilities assumed
   
(8.4
)
 
(3.1
)
 
(4.9
)
 
(16.4
)
                           
   
$
24.0
 
$
24.0
 
$
34.2
 
$
82.2
 

(a)
Includes transaction costs.

Acquired intangible assets for 2007 acquisitions are as follows:

(In millions)
 
Spectronex/
Flux
 
Davis
 
Other
 
Total
 
                           
Customer Relationships
 
$
12.9
 
$
4.9
 
$
5.0
 
$
22.8
 
Product Technology
   
1.5
   
   
13.5
   
15.0
 
Tradenames
   
0.4
   
4.3
   
1.5
   
6.2
 
                           
   
$
14.8
 
$
9.2
 
$
20.0
 
$
44.0
 

The weighted-average amortization periods for the customer relationships, product technology and tradenames acquired in 2007 are 6 years, 5 years and 9 years, respectively. The weighted-average amortization period for all intangible assets acquired in 2007 is 6 years.
 
 
9

 
THERMO FISHER SCIENTIFIC INC.
 

 
2.
Acquisitions (continued)

During the first quarter of 2007, the company refined estimates recorded in the fourth quarter of 2006 of acquisition-related intangible assets related to the November 2006 merger with Fisher Scientific International Inc. and the December 2006 acquisition of Cohesive Technologies Inc. and finalized the valuation of such intangible assets. The purchase price allocations for Fisher and Cohesive, as revised, are as follows:

(In millions)
 
Fisher
 
Cohesive
 
               
Fair Value of Common Stock Issued to Fisher Shareholders
 
$
9,777.8
 
$
 
     Fair Value of Fisher Stock Options and Warrants Converted into Options in
         Company Common Stock
   
502.3
   
 
Debt Assumed
   
2,284.7
   
 
Cash Paid Including Transaction Costs
   
42.1
   
71.3
 
Cash Acquired
   
(392.0
)
 
(0.3
)
               
   
$
12,214.9
 
$
71.0
 
               
Allocation:
             
Current assets
 
$
1,928.7
 
$
5.6
 
Property, plant and equipment
   
950.2
   
1.0
 
Acquired intangible assets
   
7,076.2
   
37.0
 
Goodwill
   
6,553.5
   
32.9
 
Other assets
   
353.8
   
 
Liabilities assumed
   
(4,100.7
)
 
(5.5
)
Fair value of convertible debt allocable to equity
   
(546.8
)
 
 
               
   
$
12,214.9
 
$
71.0
 

The acquired intangible assets from the merger with Fisher and the acquisition of Cohesive are as follows:

(In millions)
 
Fisher
 
Cohesive
 
               
Indefinite Lives:
             
Trademarks
 
$
1,326.9
 
$
 
               
Definite Lives:
             
Customer relationships
   
4,269.5
   
19.0
 
Product technology
   
844.8
   
14.6
 
Tradenames
   
635.0
   
3.4
 
               
   
$
7,076.2
 
$
37.0
 

The weighted-average amortization periods for intangible assets with definite lives are: 14 years for customer relationships, 9 years for product technology and 10 years for tradenames. The weighted-average amortization period for all intangible assets with definite lives in the above table is 13 years.
 
 
10


THERMO FISHER SCIENTIFIC INC.

 
2.
Acquisitions (continued)

In November 2006, the company merged with Fisher. Had the merger with Fisher been completed as of the beginning of 2006, the company’s pro forma results for 2006 would have been as follows:

   
Three Months Ended
 
Nine Months Ended
 
(In millions except per share amounts)
 
September 30, 2006 (a)
 
September 30, 2006 (b)
 
               
Revenues
 
$
2,237.5
 
$
6,522.6
 
               
Net Income
 
$
136.8
 
$
229.9
 
               
     Earnings per Share from Continuing Operations:
             
Basic
 
$
.33
 
$
.55
 
Diluted
 
$
.32
 
$
.53
 
               
Earnings Per Share:
             
Basic
 
$
.34
 
$
.56
 
Diluted
 
$
.32
 
$
.54
 

(a)
Includes $7 million pre-tax charge to cost of revenues for sale of Fisher inventories revalued at the date of merger.
(b)
Includes $121 million pre-tax charge to cost of revenues for the sale of Fisher inventories revalued at the date of merger, $15 million pre-tax charge for Fisher’s in-process research and development and $37 million pre-tax charge for accelerated vesting of equity-based awards resulting from the change in control occurring at the date of the Fisher merger.

The company’s results for 2006 would not have been materially different from its reported results had the company’s other 2006 and 2007 acquisitions occurred at the beginning of 2006.

The company has undertaken restructuring activities at acquired businesses. These activities, which were accounted for in accordance with Emerging Issues Task Force (EITF) Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” have primarily included reductions in staffing levels and the abandonment of excess facilities. In connection with these restructuring activities, as part of the cost of acquisitions, the company established reserves, primarily for severance and excess facilities. In accordance with EITF Issue No. 95-3, the company finalizes its restructuring plans no later than one year from the respective dates of the acquisitions. Upon finalization of restructuring plans or settlement of obligations for less than the expected amount, any excess reserves are reversed with a corresponding decrease in goodwill or other intangible assets when no goodwill exists. Accrued acquisition expenses are included in other accrued expenses in the accompanying balance sheet. No accrued acquisition expenses have been established for 2007 acquisitions.
 
 
11

 
THERMO FISHER SCIENTIFIC INC.

 
2.
Acquisitions (continued)

The changes in accrued acquisition expenses for acquisitions completed during 2006 are as follows:
 
(In millions)  
 Severance
   
 
 
Abandonment
of Excess
Facilities
   
 
 
 
Other
    Total  
                           
Balance at December 31, 2006
 
$
26.0
 
$
3.1
 
$
1.3
 
$
30.4
 
Reserves established
   
9.7
   
3.8
   
1.9
   
15.4
 
Payments
   
(26.7
)
 
(0.5
)
 
(0.9
)
 
(28.1
)
   Decrease recorded as a reduction in goodwill
   
(0.1
)
 
(0.6
)
 
   
(0.7
)
Currency translation
   
0.1
   
   
0.1
   
0.2
 
                           
Balance at September 29, 2007
 
$
9.0
 
$
5.8
 
$
2.4
 
$
17.2
 

The principal acquisition expenses for 2006 acquisitions were for severance for approximately 296 employees across all functions and cost associated with various facility consolidations, primarily related to the company’s merger with Fisher.

The changes in accrued acquisition expenses for acquisitions completed prior to 2006 are as follows:
 
(In millions)  
 Severance
   
Abandonment
of Excess
Facilities
   
Other
   
Total
 
                           
Balance at December 31, 2006
 
$
2.2
 
$
2.7
 
$
0.1
 
$
5.0
 
Payments
   
(1.8
)
 
(0.6
)
 
   
(2.4
)
   Decrease recorded as a reduction in goodwill
   
(0.3
)
 
   
   
(0.3
)
Currency translation
   
0.2
   
0.1
   
(0.1
)
 
0.2
 
                           
Balance at September 29, 2007
 
$
0.3
 
$
2.2
 
$
 
$
2.5
 

The remaining amounts accrued for pre-2006 acquisitions include severance related to the company’s acquisition of Kendro in 2005 and abandoned facilities primarily related to the company’s acquisitions of Life Sciences International PLC in 1997, the product monitoring businesses of Graseby Limited in 1998 and Kendro in 2005. The abandoned facilities for the 1997 and 1998 acquisitions include three operating facilities in England with leases expiring through 2014. In some instances, the facilities have been subleased but certain restoration obligations are payable at the end of the lease. The remaining amounts accrued for abandoned facilities also include facility obligations for a Kendro building vacated in Tennessee. The amounts captioned as “other” primarily represent employee relocation, contract termination and other exit costs. The severance and other costs are expected to be paid in 2007.
 
 
12


THERMO FISHER SCIENTIFIC INC.

 
3.
Business Segment Information

Following the merger with Fisher in November 2006, the company reorganized management responsibility and its continuing operations now fall into two business segments: Analytical Technologies and Laboratory Products and Services. Prior year results have been reclassified to conform to the new segments.
 
   
Three Months Ended
 
Nine Months Ended
 
   
September 29,
 
September 30,
 
September 29,
 
September 30,
 
(In millions)
 
2007
 
2006
 
2007
 
2006
 
                           
Revenues:
                         
Analytical Technologies
 
$
1,044.2
 
$
540.7
 
$
3,088.9
 
$
1,576.8
 
Laboratory Products and Services
   
1,446.5
   
184.2
   
4,296.7
   
545.9
 
Eliminations
   
(89.5
)
 
   
(260.3
)
 
 
                           
Consolidated revenues
 
$
2,401.2
 
$
724.9
 
$
7,125.3
 
$
2,122.7
 
                           
Operating Income:
                         
Analytical Technologies (a)
 
$
202.5
 
$
80.8
 
$
598.0
 
$
229.8
 
Laboratory Products and Services (a)
   
202.2
   
27.9
   
586.8
   
79.8
 
                           
Subtotal reportable segments (a)
   
404.7
   
108.7
   
1,184.8
   
309.6
 
                           
Cost of revenues charges
   
(0.4
)
 
(2.0
)
 
(48.0
)
 
(3.3
)
Restructuring and other costs, net
   
(8.8
)
 
(5.2
)
 
(24.5
)
 
(13.6
)
   Amortization of acquisition-related intangible assets
   
(141.5
)
 
(26.4
)
 
(422.9
)
 
(77.6
)
                           
Consolidated operating income
   
254.0
   
75.1
   
689.4
   
215.1
 
Other expense, net (b)
   
(18.7
)
 
(5.8
)
 
(66.1
)
 
(12.9
)
                           
   Income from continuing operations before provision for income taxes
 
$
235.3
 
$
69.3
 
$
623.3
 
$
202.2
 
                           
Depreciation:
                         
Analytical Technologies
 
$
21.2
 
$
7.5
 
$
62.0
 
$
22.2
 
Laboratory Products and Services
   
24.9
   
5.9
   
75.1
   
16.4
 
                           
Consolidated depreciation
 
$
46.1
 
$
13.4
 
$
137.1
 
$
38.6
 

(a)
Represents operating income before certain charges to cost of revenues; restructuring and other costs, net and amortization of acquisition-related intangibles.
(b)
The company does not allocate other income and expenses to its segments.

 
 
13


THERMO FISHER SCIENTIFIC INC.

 
4.
Other Expense, Net

The components of other expense, net, in the accompanying statement of income are as follows:
 
   
Three Months Ended
 
Nine Months Ended
 
   
September 29,
 
September 30,
 
September 29,
 
September 30,
 
(In millions)
 
2007
 
2006
 
2007
 
2006
 
                           
Interest Income
 
$
13.6
 
$
2.8
 
$
33.1
 
$
9.7
 
Interest Expense
   
(32.5
)
 
(9.3
)
 
(102.9
)
 
(25.0
)
Other Items, Net
   
0.2
   
0.7
   
3.7
   
2.4
 
                           
   
$
(18.7
)
$
(5.8
)
$
(66.1
)
$
(12.9
)

5.
Earnings per Share

Basic and diluted earnings per share were calculated as follows:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
(In millions)
 
 September 29, 2007
 
 September 30,
2006
 
 September 29,
2007
 
 September 30, 2006
 
                           
     Income from Continuing Operations
 
$
218.6
 
$
48.8
 
$
545.3
 
$
141.4
 
     Income from Discontinued Operations
   
(0.1
)
 
   
   
 
     (Loss) Gain on Disposal of Discontinued Operations
   
   
   
(24.0
)
 
2.2
 
                           
     Net Income for Basic Earnings per Share
   
218.5
   
48.8
   
521.3
   
143.6
 
Effect of Convertible Debentures
   
   
0.4
   
   
1.2
 
                           
     Income Available to Common Shareholders, as Adjusted for Diluted
        Earnings per Share
 
$
218.5
 
$
49.2
 
$
521.3
 
$
144.8
 
                           
Basic Weighted Average Shares
   
424.3
   
157.7
   
422.8
   
160.7
 
Effect of:
                         
Convertible debentures
   
14.3
   
1.8
   
13.2
   
1.8
 
   Stock options, restricted stock awards and warrants
   
8.0
   
2.7
   
8.7
   
2.4
 
                           
     Diluted Weighted Average Shares
   
446.6
   
162.2
   
444.7
   
164.9
 
                           
Basic Earnings per Share:
                         
   Continuing operations
 
$
.52
 
$
.31
 
$
1.29
 
$
.88
 
Discontinued operations
   
   
   
(.06
)
 
.01
 
                           
   
$
.51
 
$
.31
 
$
1.23
 
$
.89
 
                           
Diluted Earnings per Share:
                         
   Continuing operations
 
$
.49
 
$
.30
 
$
1.23
 
$
.86
 
Discontinued operations
   
   
   
(.05
)
 
.01
 
                           
   
$
.49
 
$
.30
 
$
1.17
 
$
.88
 

Options to purchase 2.6 million, 3.0 million, 4.8 million and 3.1 million shares of common stock were not included in the computation of diluted earnings per share for the third quarter of 2007 and 2006 and the first nine months of 2007 and 2006, respectively, because their effect would have been antidilutive.
 
 
14


THERMO FISHER SCIENTIFIC INC.

6.
Comprehensive Income

Comprehensive income combines net income and other comprehensive items. Other comprehensive items represents certain amounts that are reported as components of shareholders’ equity in the accompanying balance sheet, including currency translation adjustments; unrealized gains and losses, net of tax, on available-for-sale investments and hedging instruments; and pension and other postretirement benefit liability adjustments. During the third quarter of 2007 and 2006, the company had comprehensive income of $302 million and $66 million, respectively. During the first nine months of 2007 and 2006, the company had comprehensive income of $674 million and $194 million, respectively.

7.
Equity-based Compensation Expense

The components of pre-tax equity-based compensation are as follows:
 
   
  Three Months Ended
 
  Nine Months Ended
 
(In millions)  
  September 29,
2007
 
  September 30,
2006
 
  September 29,
2007
 
  September 30,
2006
 
                           
Stock Option Awards
 
$
9.4
 
$
6.7
 
$
27.0
 
$
18.5
 
Restricted Share/Unit Awards
   
3.8
   
0.4
   
12.3
   
1.6
 
                           
     Total Equity-based Compensation Expense
 
$
13.2
 
$
7.1
 
$
39.3
 
$
20.1
 
 
 
Equity-based compensation expense is included in the accompanying statement of income as follows:
 
   
 Three Months Ended
 
 Nine Months Ended
 
(In millions)  
 September 29,
2007
 
 September 30,
2006
 
 September 29,
2007
 
 September 30, 2006
 
                           
Cost of Revenues
 
$
1.0
 
$
0.8
 
$
3.1
 
$
2.1
 
     Selling, General and Administrative Expenses
   
12.1
   
5.9
   
35.0
   
16.9
 
Research and Development Expenses
   
0.1
   
0.4
   
1.2
   
1.1
 
                           
     Total Equity-based Compensation Expense
 
$
13.2
 
$
7.1
 
$
39.3
 
$
20.1
 

No equity-based compensation expense has been capitalized in inventories due to immateriality.

Equity-based compensation reduced diluted earnings per share by $.02, $.03, $.06 and $.08 in the third quarter of 2007 and 2006 and the first nine months of 2007 and 2006, respectively.

Unrecognized compensation cost related to unvested stock options and restricted stock total approximately $62 million and $28 million, respectively, as of September 29, 2007, and is expected to be recognized over weighted average periods of 3 years and 2 years, respectively.

During the first nine months of 2007, the company made equity compensation grants to employees consisting of 45,500 restricted shares and options to purchase 440,000 shares.

 
 
15


THERMO FISHER SCIENTIFIC INC.


8.
Defined Benefit Pension 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 has a postretirement healthcare program in which certain employees are eligible to participate. Net periodic benefit costs for the company’s pension plans include the following components:
 
   
 Three Months Ended
 
 Nine Months Ended
 
(In millions)  
 September 29,
2007
 
 September 30,
2006
 
 September 29,
2007
 
 September 30,
1007
 
                           
Service Cost
 
$
4.1
 
$
1.5
 
$
12.3
 
$
4.4
 
Interest Cost on Benefit Obligation
   
14.1
   
3.7
   
42.0
   
10.9
 
Expected Return on Plan Assets
   
(14.9
)
 
(3.1
)
 
(44.2
)
 
(9.2
)
Amortization of Net Loss
   
0.9
   
0.9
   
2.7
   
2.8
 
Amortization of Prior Service Costs
   
   
2.5
   
   
2.6
 
                           
Net Periodic Benefit Cost
 
$
4.2
 
$
5.5
 
$
12.8
 
$
11.5
 

Net periodic benefit costs for the company’s other postretirement benefit plans (which were assumed in the Fisher merger) include the following components:
 


   
Three Months Ended
 
Nine Months Ended
(In millions)
 
September 29, 2007
 
September 29, 2007
               
Service Cost
 
$
0.2
 
$
0.6
 
Interest Cost on Benefit Obligation
   
0.4
   
1.2
 
               
Net Periodic Benefit Cost
 
$
0.6
 
$
1.8
 

 
9.
Swap Arrangement
 

During 2002, the company entered into interest-rate swap arrangements for its $128.7 million principal amount 7 5/8% senior notes, due in 2008, with the objective of reducing interest costs. The arrangements provide that the company will receive a fixed interest rate of 7 5/8% and will pay a variable rate of 90-day LIBOR plus 2.19% (7.3% as of September 29, 2007). The swaps have terms expiring at the maturity of the debt. The swaps are designated as fair-value hedges and as such, are carried at fair value, which resulted in an increase in other long-term assets and long-term debt totaling $3.5 million at September 29, 2007. The swap arrangements are with different counterparties than the holders of the underlying debt. Management believes that any credit risk associated with the swaps is remote based on the creditworthiness of the financial institutions issuing the swaps.
 
 
 
16


THERMO FISHER SCIENTIFIC INC.

 
10.
Warranty Obligations

Product warranties are included in other accrued expenses in the accompanying balance sheet. The changes in the carrying amount of warranty obligations are as follows:
 
   
 Nine Months Ended
 
(In millions)  
 September 29,
2007
   
September 30,
2006
 
               
Beginning Balance
 
$
45.5
 
$
33.4
 
Provision charged to income
   
29.9
   
28.8
 
Usage
   
(27.3
)
 
(27.2
)
Acquisitions
   
0.6
   
0.4
 
Adjustments to previously provided warranties, net
   
(0.1
)
 
(0.6
)
Other, net (a)
   
2.5
   
1.4
 
               
Ending Balance
 
$
51.1
 
$
36.2
 

(a)
Primarily represents the effects of currency translation.

11.
Restructuring and Other Costs, Net

Restructuring costs prior to 2006 primarily related to actions to reduce costs and redundancies, principally through headcount reductions and consolidation of facilities. Restructuring costs in 2006 included charges to close a plant in Massachusetts and consolidate its operations with those of a facility in North Carolina, charges for consolidation of a U.K. facility into an existing factory in Germany, the move of manufacturing operations in New Mexico to other plants in the U.S. and Europe and remaining costs of prior actions. Restructuring costs in 2007 include charges for the consolidation of anatomical pathology operations currently in Pennsylvania with a Fisher site in Michigan, as well as consolidation of other U.S. operations and consolidation of a process control equipment site in the UK with a plant in Germany. The company has substantially finalized its plan for restructuring actions at Fisher or within existing businesses with which Fisher is being integrated. Such actions have included rationalization of product lines, consolidation of facilities and reductions in staffing levels. The cost of actions at Fisher businesses has been charged to the cost of the acquisition while the cost of actions at existing businesses being integrated with Fisher is charged to restructuring expense.

During the third quarter of 2007, the company recorded net restructuring and other costs by segment as follows:

  (In millions)
 
Analytical
Technologies
 
Laboratory
Products and
Services
 
Corporate
 
Total
 
                           
  Cost of Revenues
 
$
0.4
 
$
 
$
 
$
0.4
 
 Restructuring and Other Costs, Net
   
5.5
   
2.3
   
1.0
   
8.8
 
                           
   
$
5.9
 
$
2.3
 
$
1.0
 
$
9.2
 

 
 
 
17



THERMO FISHER SCIENTIFIC INC.

 
11.
Restructuring and Other Costs, Net (continued)

During the first nine months of 2007, the company recorded net restructuring and other costs by segment as follows:

  (In millions)
 
Analytical
Technologies
 
Laboratory
Products and
Services
 
Corporate
 
Total
 
                           
  Cost of Revenues
 
$
40.7
 
$
7.3
 
$
 
$
48.0
 
 Restructuring and Other Costs, Net
   
13.5
   
3.6
   
7.4
   
24.5
 
                           
   
$
54.2
 
$
10.9
 
$
7.4
 
$
72.5
 

The components of net restructuring and other costs by segment are as follows:

Analytical Technologies

The Analytical Technologies segment recorded $5.9 million of net restructuring and other charges in the third quarter of 2007. The segment recorded charges to cost of revenues of $0.4 million, primarily for the sale of inventories revalued at the date of acquisition, and $5.5 million of other costs, net. These other costs consisted of $5.4 million of cash costs, principally associated with facility consolidations, including $1.4 million of severance for approximately 115 employees primarily in sales, service and manufacturing functions; $0.6 million of abandoned-facility costs; and $3.4 million of other cash costs, primarily retention, relocation and contract termination expenses associated with facility consolidations.

In the second quarter of 2007, this segment recorded $16.1 million of net restructuring and other charges. The segment recorded charges to cost of revenues of $11.2 million, primarily for the sale of inventories revalued at the date of acquisition and $4.9 million of other costs, net. These other costs consisted of $4.8 million of cash costs, principally associated with facility consolidations, including $2.2 million of severance for approximately 215 employees across all functions; $0.5 million of abandoned-facility costs; and $2.1 million of other cash costs, primarily relocation expenses associated with facility consolidations.

In the first quarter of 2007, this segment recorded $32.2 million of net restructuring and other charges. This amount consisted of charges to cost of revenues of $29.1 million, primarily for the sale of inventories revalued at the date of acquisition, and $3.1 million of other costs, net. These other costs consisted of $3.0 million of cash costs, principally associated with facility consolidations, including $2.0 million of severance for 10 employees across all functions; $0.4 million of abandoned-facility costs, primarily for charges associated with facilities vacated in prior periods where estimates of sub-tenant rental income have changed or for costs that could not be recorded until incurred; and $0.6 million of other cash costs, primarily relocation expenses associated with facility consolidations.

Laboratory Products and Services

The Laboratory Products and Services segment recorded $2.3 million of net restructuring and other charges in the third quarter of 2007. These costs consisted of $0.8 million of cash costs, including $0.1 million of severance for 10 employees primarily in research and development functions, and $0.7 million of other cash costs, principally related to facility consolidations. The segment also recorded a loss of $1.5 million on the sale of a small business.

In the second quarter of 2007, this segment recorded $0.7 million of net restructuring and other charges. These costs consisted of $0.5 million of cash costs, including $0.2 million of severance for 35 employees primarily in sales, service and manufacturing functions, and $0.3 million of other cash costs.

In the first quarter of 2007, this segment recorded $7.9 million of net restructuring and other charges. This amount consisted of charges to cost of revenues of $7.3 million, primarily for the sale of inventories revalued at the date of acquisition; and $0.6 million of other costs, net, all of which were cash costs. These cash costs consisted of $0.3 million of severance for 10 employees primarily in sales and service functions; $0.2 million of abandoned-facility costs; and $0.1 million of other cash costs.

 
 
 
18


THERMO FISHER SCIENTIFIC INC.

 
11.
Restructuring and Other Costs, Net (continued)

Corporate

The company recorded $1.0 million of restructuring and other charges at its corporate office in the third quarter of 2007. These costs consisted of $0.8 million of cash costs which were primarily for merger-related expenses and retention agreements with certain Fisher employees. Retention costs are accrued ratably over the period the employees must work to qualify for the payment, generally through November 2007.

In the first and second quarters of 2007, the company recorded $3.7 million and $2.7 million, respectively, of restructuring and other charges at its corporate office, all of which were cash costs. These cash costs were primarily for merger-related expenses and retention agreements with certain Fisher employees.

General 

The following table summarizes the cash components of the company’s restructuring plans. The noncash components and other amounts reported as restructuring and other costs, net, in the accompanying 2007 statement of income have been summarized in the notes to the table. Accrued restructuring costs are included in other accrued expenses in the accompanying balance sheet.

 
 
(In millions)
 
 
 
Severance
 
Employee
Retention (a)
 
Abandonment
of Excess
Facilities
 
 
 
Other
 
 
 
Total
 
                                 
Pre-2006 Restructuring Plans
                               
Balance at December 31, 2006
 
$
1.8
 
$
0.3
 
$
9.4
 
$
0.6
 
$
12.1
 
Costs incurred in 2007 (b)
   
1.5