tmoq309.htm


 
UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549
____________________________________________________

FORM 10-Q

x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended September 26, 2009

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
 
Waltham, Massachusetts
02451
(Address of principal executive offices)
(Zip Code)

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

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).
Yes x  No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x  Accelerated filer o  Non-accelerated filer o  Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o  No 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 26, 2009
Common Stock, $1.00 par value
 
 408,314,630
 
 
 


 
 
 
 

 

PART 1 — FINANCIAL INFORMATION

Item 1.            Financial Statements

THERMO FISHER SCIENTIFIC INC.
 
 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheet
(Unaudited)
 
 
 
September 26,
 
December 31,
 
(In millions)
 
2009
 
2008
 
 
 
 
 
 
 
Assets
 
 
 
 
 
Current Assets:
 
 
 
 
 
    Cash and cash equivalents
  $ 1,745.7   $ 1,280.5  
    Short-term investments, at quoted market value (amortized cost of $11.4 and $8.5)     
    10.6     7.5  
    Accounts receivable, less allowances of $49.4 and $43.1
    1,482.0     1,478.1  
    Inventories:
             
       Raw materials
    291.8     310.6  
       Work in process
    123.5     120.3  
       Finished goods
    754.3     740.5  
    Deferred tax assets
    162.3     161.7  
    Other current assets
    227.4     246.7  
                            
             
 
    4,797.6     4,345.9  
 
             
Property, Plant and Equipment, at Cost
    1,976.0     1,854.8  
    Less: Accumulated depreciation and amortization
    (703.7 )   (579.5 )
 
             
 
    1,272.3     1,275.3  
 
             
Acquisition-related Intangible Assets, net of Accumulated Amortization of $1,902.3 and $1,433.2
    6,144.0     6,423.2  
 
             
Other Assets
    416.0     367.9  
 
             
Goodwill
    8,788.6     8,677.7  
 
             
 
  $ 21,418.5   $ 21,090.0  

 
2

 
 
THERMO FISHER SCIENTIFIC INC.

Consolidated Balance Sheet (continued)
(Unaudited)
 
 
 
September 26,
 
December 31,
 
(In millions except share amounts)
 
2009
 
2008
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
    Short-term obligations and current maturities of long-term obligations
  $ 70.1   $ 14.8  
    Accounts payable
    593.5     539.5  
    Accrued payroll and employee benefits
    280.1     296.2  
    Accrued income taxes
    26.1     32.9  
    Deferred revenue
    139.5     135.3  
    Other accrued expenses
    484.5     521.5  
 
             
 
    1,593.8     1,540.2  
 
             
Deferred Income Taxes
    1,873.8     1,994.2  
 
             
Other Long-term Liabilities
    586.9     601.7  
 
             
Long-term Obligations
    1,952.2     2,003.2  
 
             
 
             
Incremental Convertible Debt Obligation
    12.4     24.2  
 
             
Shareholders' Equity:
             
    Preferred stock, $100 par value, 50,000 shares authorized; none issued
             
    Common stock, $1 par value, 1,200,000,000 shares authorized; 422,829,078 and 421,791,009 shares issued
    422.8     421.8  
    Capital in excess of par value
    11,394.5     11,301.3  
    Retained earnings
    4,077.5     3,500.5  
    Treasury stock at cost, 14,514,448 and 3,825,245 shares
    (574.2 )   (151.3 )
    Accumulated other comprehensive items
    78.8     (145.8 )
 
             
 
    15,399.4     14,926.5  
 
             
 
  $ 21,418.5   $ 21,090.0  


 


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 26,
 
September 27,
 
(In millions except per share amounts)
 
2009
 
2008
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
    Product revenues
  $ 2,140.6   $ 2,167.2  
    Service revenues
    390.5     420.9  
 
             
 
    2,531.1     2,588.1  
 
             
Costs and Operating Expenses:
             
    Cost of product revenues
    1,285.8     1,313.4  
    Cost of service revenues
    234.1     241.9  
    Selling, general and administrative expenses
    662.1     669.3  
    Research and development expenses
    60.5     61.8  
    Restructuring and other costs, net
    13.1     15.4  
 
             
 
    2,255.6     2,301.8  
 
             
Operating Income
    275.5     286.3  
Other Expense, Net
    (28.6 )   (27.7 )
 
             
Income from Continuing Operations Before Provision for Income Taxes
    246.9     258.6  
Provision for Income Taxes
    (25.7 )   (43.7 )
 
             
Income from Continuing Operations
    221.2     214.9  
Gain on Disposal of Discontinued Operations (net of income tax provision of $1.8 in 2008)
        3.2  
 
             
Net Income
  $ 221.2   $ 218.1  
 
             
Earnings per Share from Continuing Operations
             
    Basic
  $ .54   $ .51  
 
             
    Diluted
  $ .53   $ .49  
 
             
Earnings per Share
             
    Basic
  $ .54   $ .52  
 
             
    Diluted
  $ .53   $ .50  
 
             
Weighted Average Shares
             
    Basic
    407.9     419.0  
 
             
    Diluted
    420.2     438.3  


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 26,
 
September 27,
 
(In millions except per share amounts)
 
2009
 
2008
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
    Product revenues
  $ 6,129.9   $ 6,612.7  
    Service revenues
    1,140.4     1,239.0  
 
             
 
    7,270.3     7,851.7  
 
             
Costs and Operating Expenses:
             
    Cost of product revenues
    3,717.8     3,982.8  
    Cost of service revenues
    666.1     729.7  
    Selling, general and administrative expenses
    1,948.0     2,029.2  
    Research and development expenses
    176.8     188.2  
    Restructuring and other costs, net
    37.0     14.9  
 
             
 
    6,545.7     6,944.8  
 
             
Operating Income
    724.6     906.9  
Other Expense, Net
    (78.4 )   (74.0 )
 
             
Income from Continuing Operations Before Provision for Income Taxes
    646.2     832.9  
Provision for Income Taxes
    (69.2 )   (145.0 )
 
             
Income from Continuing Operations
    577.0     687.9  
Gain on Disposal of Discontinued Operations (net of income tax provision of $3.7 in 2008)
        6.0  
 
             
Net Income
  $ 577.0   $ 693.9  
 
             
Earnings per Share from Continuing Operations
             
    Basic
  $ 1.39   $ 1.64  
 
             
    Diluted
  $ 1.36   $ 1.57  
 
             
Earnings per Share
             
    Basic
  $ 1.39   $ 1.66  
 
             
    Diluted
  $ 1.36   $ 1.58  
 
             
Weighted Average Shares
             
    Basic
    413.6     418.2  
 
             
    Diluted
    423.0     437.1  


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 26,
 
September 27,
 
(In millions)
 
2009
 
2008
 
 
 
 
 
 
 
Operating Activities
 
 
 
 
 
    Net Income
  $ 577.0   $ 693.9  
    Gain on disposal of discontinued operations
        (6.0 )
 
             
    Income from continuing operations
    577.0     687.9  
 
             
    Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
             
       Depreciation and amortization
    580.1     598.3  
       Change in deferred income taxes
    (182.6 )   (118.0 )
       Non-cash stock-based compensation
    56.4     43.5  
       Non-cash interest expense on convertible debt
    17.1     16.4  
       Tax benefits from stock-based compensation awards
    (1.7 )   (20.1 )
       Other non-cash expenses, net
    44.5     23.1  
       Changes in assets and liabilities, excluding the effects of acquisitions and dispositions:
             
           Accounts receivable
    47.3     (73.2 )
           Inventories
    54.5     (97.6 )
           Other assets
    17.3     (25.3 )
           Accounts payable
    31.5     (43.5 )
           Other liabilities
    (82.6 )   (14.2 )
           Contributions to retirement plans
    (37.3 )   (16.3 )
 
             
              Net cash provided by continuing operations
    1,121.5     961.0  
              Net cash used in discontinued operations
    (0.9 )   (1.1 )
 
             
              Net cash provided by operating activities
    1,120.6     959.9  
 
             
Investing Activities
             
    Acquisitions, net of cash acquired
    (155.5 )   (153.1 )
    Purchase of property, plant and equipment
    (125.8 )   (159.8 )
    Proceeds from sale of property, plant and equipment
    9.6     9.8  
    Purchase of available-for-sale investments
        (0.1 )
    Proceeds from sale of available-for-sale investments
    0.6     0.6  
    Proceeds from sale of businesses, net of cash divested
    2.7     3.5  
    Increase in other assets
    (8.4 )   (8.6 )
 
             
              Net cash used in continuing operations
    (276.8 )   (307.7 )
              Net cash provided by discontinued operations
        7.9  
 
             
              Net cash used in investing activities
  $ (276.8 ) $ (299.8 )

 
6

 

THERMO FISHER SCIENTIFIC INC.
 
Consolidated Statement of Cash Flows (continued)
(Unaudited)
 
 
 
Nine Months Ended
 
 
 
September 26,
 
September 27,
 
(In millions)
 
2009
 
2008
 
 
 
 
 
 
 
Financing Activities
 
 
 
 
 
    Decrease in short-term notes payable
  $ (13.4 ) $ (19.3 )
    Purchases of company common stock
    (414.6 )   (102.0 )
    Net proceeds from issuance of company common stock
    17.5     81.7  
    Tax benefits from stock-based compensation awards
    1.7     20.1  
    Borrowings (redemption and repayment) of long-term obligations
    3.7     (2.6 )
 
             
              Net cash used in financing activities
    (405.1 )   (22.1 )
 
             
Exchange Rate Effect on Cash of Continuing Operations
    26.5     (22.8 )
 
             
Increase in Cash and Cash Equivalents
    465.2     615.2  
Cash and Cash Equivalents at Beginning of Period
    1,280.5     625.1  
 
             
Cash and Cash Equivalents at End of Period
  $ 1,745.7   $ 1,240.3  
 
             
 
             
Supplemental Cash Flow Information
             
    Fair value of assets of acquired businesses
  $ 179.7   $ 191.4  
    Cash paid for acquired businesses
    (147.2 )   (141.7 )
 
             
       Liabilities assumed of acquired businesses
  $ 32.5   $ 49.7  
 
             
    Issuance of restricted stock
  $ 1.1   $ 21.9  
 
             
    Issuance of stock upon vesting of restricted stock units
  $ 7.0   $ 20.0  






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 26, 2009, the results of operations for the three- and nine-month periods ended September 26, 2009, and September 27, 2008, and the cash flows for the nine-month periods ended September 26, 2009, and September 27, 2008. The company has evaluated events and transactions occurring after the balance sheet date through October 30, 2009 for recognition or disclosure in the consolidated financial statements and notes. Interim results are not necessarily indicative of results for a full year.

The consolidated balance sheet presented as of December 31, 2008, has been derived from the audited consolidated financial statements as of that date, as adjusted for adoption of a new accounting pronouncement, discussed below. 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 Current Report on Form 8-K filed with the Securities and Exchange Commission (SEC) on July 9, 2009.

In May 2008, the FASB issued new rules on the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement of such debt instruments. The rules require the issuers of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components in a manner that reflects the issuer's nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. The new guidance was effective for the company beginning January 1, 2009. The rules required adjustment of prior periods to conform to current accounting. The company’s cash payments for interest have not been affected, but adoption increased the company’s reported interest expense for all periods presented in a manner that reflects interest rates of similar non-convertible debt.

            The incremental effects of applying this convertible debt accounting on individual line items in the consolidated balance sheet at December 31, 2008, were as follows:

(Dollars in millions)
 
Before
Adoption
 
Cumulative
Effect of Adoption
 
As Adjusted
 
 
 
 
 
 
 
 
 
Deferred Income Taxes
  $ 1,978.0   $ 16.2   $ 1,994.2  
Long-term Obligations
    2,043.5     (40.3 )   2,003.2  
Incremental Convertible Debt Obligation
        24.2     24.2  
Capital in Excess of Par Value
    11,273.2     28.1     11,301.3  
Retained Earnings
    3,528.7     (28.2 )   3,500.5  

            When any of the convertible debt instruments are convertible at the balance sheet date, the excess of the amount of cash required to be paid to the holder upon conversion over the current carrying amount of the long-term obligation is classified on the balance sheet as temporary equity under the caption “incremental convertible debt obligation.”


 
8

 

THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
1.         General (continued)
 
    The debt, temporary equity and equity components recognized for the company’s convertible debt are as follows:

 
 
September 26,
 
December 31,
 
(In millions)
 
2009
 
2008
 
 
 
 
 
 
 
Principal Amount of Convertible Debt
  $ 969.0   $ 969.1  
Unamortized Discount
    23.2     40.3  
Net Carrying Amount
    945.8     928.8  
Incremental Convertible Debt Obligation (Temporary Equity)
    12.4     24.2  
Capital in Excess of Par Value
    39.9     28.1  

            At September 26, 2009, the unamortized discount had a remaining weighted average recognition period of 1.2 years, to the respective first redemption dates of the convertible debt. The amount of interest expense on the convertible debt recognized in the accompanying statement of income is as follows:

 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 26,
 
September 27,
 
September 26,
 
September 27,
 
(In millions)
 
2009
 
2008
 
2009
 
2008
 
 
 
 
 
 
 
 
 
 
 
Contractual Coupon Interest
  $ 4.5   $ 5.9   $ 14.2   $ 19.3  
Amortization of Discount on Convertible Debt
    5.8     5.6     17.1     16.4  
 
                         
Interest Expense
  $ 10.3   $ 11.5   $ 31.3   $ 35.7  
 
                         
Effective Interest Rate
    4.4%     5.0%     4.5%     5.2%  

            In June 2008, the FASB issued guidance on determining whether instruments granted in share-based payment transactions are participating securities. This guidance clarifies that share-based payment awards that entitle their holders to receive nonforfeitable dividends before vesting should be considered participating securities. The guidance was effective for the company beginning January 1, 2009. The rule required adjustment of prior periods to conform to current accounting. Adoption had a nominal effect on the numerator and, for diluted presentation, the denominator in the calculation of earnings per share for all periods presented.

            The incremental effects of applying the convertible debt and participating security rules on individual line items in the consolidated statements of income for the three- and nine-month periods ended September 27, 2008, were as follows:

 
9

 

THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
1.         General (continued)
 
(Dollars in millions except per share amounts)
 
Before
Adoption
 
Effect of Adoption
 
As Adjusted
 
 
 
 
 
 
 
 
 
Three Months Ended September 27, 2008
 
 
 
 
 
 
 
Other Expense, Net
  $ 22.1   $ 5.6   $ 27.7  
Provision for Income Taxes
    45.9     (2.2 )   43.7  
Income from Continuing Operations
    218.3     (3.4 )   214.9  
Net Income
    221.5     (3.4 )   218.1  
Earnings per Share from Continuing Operations
                   
  Basic
  $ .52   $ (.01 ) $ .51  
  Diluted
  $ .50   $ (.01 ) $ .49  
Earnings per Share
                   
  Basic
  $ .53   $ (.01 ) $ .52  
  Diluted
  $ .51   $ (.01 ) $ .50  
Diluted Weighted Average Shares
    438.5     (0.2 )   438.3  
     
                   
Nine Months Ended September 27, 2008
                   
Other Expense, Net
  $ 57.6   $ 16.4   $ 74.0  
Provision for Income Taxes
    151.3     (6.3 )   145.0  
Income from Continuing Operations
    698.0     (10.1 )   687.9  
Net Income
    704.0     (10.1 )   693.9  
Earnings per Share from Continuing Operations
                   
  Basic
  $ 1.67   $ (.03 ) $ 1.64  
  Diluted
  $ 1.60   $ (.03 ) $ 1.57  
Earnings per Share
                   
  Basic
  $ 1.68   $ (.02 ) $ 1.66  
  Diluted
  $ 1.61   $ (.03 ) $ 1.58  
Diluted Weighted Average Shares
    437.3     (0.2 )   437.1  

2.         Acquisitions

            In December 2007, the FASB revised the accounting rules concerning business combinations. This revised guidance does the following: requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose certain information to enable users to understand the nature and financial effect of the business combination. The rules require that cash outflows such as transaction costs and post-acquisition restructuring be charged to expense instead of capitalized as a cost of the acquisition. Contingent purchase price will be recorded at its initial fair value and then re-measured as time passes through adjustments to net income. The revised guidance was effective for the company, on a prospective basis, beginning January 1, 2009. The company applied this revised accounting to the acquisitions discussed below. There was no material impact upon adoption; however, the rule changes may materially affect the accounting for any future business combinations.

 
10

 

THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
2.         Acquisitions (continued)
 
            In April 2009, the Laboratory Products and Services segment acquired Biolab, an Australia-based provider of analytical instruments, life science consumables and laboratory equipment, for AUD 180 million (USD $132 million), net of cash acquired. The acquisition broadened the geographic reach of the company’s customer channels. Revenue of Biolab totaled AUD 178 million in its fiscal year ended May 2009. The purchase price exceeded the fair value of the acquired net assets and, accordingly, $62 million was allocated to goodwill, none of which is tax deductible.

In addition, in the first nine months of 2009, the Analytical Technologies segment acquired a culture media manufacturer and distributor in Malaysia and Singapore and the controlling interest in a Mexico-based manufacturer and distributor of bulk weighing products; and the Laboratory Products and Services segment acquired a Spain-based distributor of laboratory instrumentation and equipment and a Sweden-based distributor of clinical chemistry analysis instruments. The aggregate consideration for these acquisitions was $17 million.

The company paid contingent purchase price obligations of $10 million in the first nine months of 2009, for several acquisitions completed prior to 2009.

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 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. Allocation of the purchase price for acquisitions was based on estimates of the fair value of the net assets acquired and, for acquisitions recently completed, 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.

 
11

 

THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
2.         Acquisitions (continued)
 
(In millions)
 
Biolab
 
Other
 
Total
 
 
 
 
 
 
 
 
 
Purchase Price
 
 
 
 
 
 
 
  Cash paid
  $ 132.9   $ 14.3   $ 147.2  
  Debt assumed
        0.9     0.9  
  Purchase price payable
        1.2     1.2  
  Cash acquired
    (1.3 )   (0.1 )   (1.4 )
  Other
        0.9     0.9  
 
                   
 
  $ 131.6   $ 17.2   $ 148.8  
 
                   
Allocation
                   
  Current assets
  $ 38.6   $ 5.6   $ 44.2  
  Property, plant and equipment
    3.3     0.7     4.0  
  Customer relationships
    51.4     6.0     57.4  
  Product technology
    0.9         0.9  
  Tradenames and other
    1.3     0.3     1.6  
  Goodwill
    61.9     9.2     71.1  
  Liabilities assumed
    (25.8 )   (4.6 )   (30.4 )
 
                   
 
  $ 131.6   $ 17.2   $ 148.8  

            The weighted-average amortization periods for intangible assets acquired in 2009 are 10 years for customer relationships, 8 years for product technology and 5 years for tradenames and other. The weighted average amortization period for all intangible assets in the above table is 9 years.

The company’s results for 2008 or 2009 would not have been materially different from its reported results had the company’s 2008 and 2009 acquisitions occurred at the beginning of 2008.

Dispositions

The company sold three small business units in the first nine months of 2009 and recorded gains aggregating $1.2 million, included in restructuring and other costs, net, in the accompanying statement of income. The net cash proceeds were $2.7 million. Operating results of the businesses were not material.
 
3.         Business Segment Information
 
    The company’s continuing operations fall into two business segments: Analytical Technologies and Laboratory Products and Services. During the first quarter of 2009, the company transferred management responsibility and the related financial reporting and monitoring for a small product line between segments. The company has historically moved a product line between segments when a shift in strategic focus of either the product line or a segment more closely aligns the product line with a segment different than that in which it had previously been reported. Prior period segment information has been reclassified to reflect these transfers.

 
12

 

THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
3.         Business Segment Information (continued)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 26,
 
September 27,
 
September 26,
 
September 27,
 
(In millions)
 
2009
 
2008
 
2009
 
2008
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
   Analytical Technologies
  $ 1,018.6   $ 1,085.9   $ 2,960.7   $ 3,332.6  
   Laboratory Products and Services
    1,631.3     1,610.4     4,653.6     4,836.1  
   Eliminations
    (118.8 )   (108.2 )   (344.0 )   (317.0 )
 
                         
      Consolidated revenues
  $ 2,531.1   $ 2,588.1   $ 7,270.3   $ 7,851.7  
 
                         
Segment Income
                         
   Analytical Technologies (a)
  $ 202.7   $ 228.8   $ 577.6   $ 701.7  
   Laboratory Products and Services (a)
    234.8     224.9     627.5     675.7  
 
                         
      Subtotal reportable segments (a)
    437.5     453.7     1,205.1     1,377.4  
 
                         
   Cost of revenues charges
    (1.0 )       (1.9 )   (0.8 )
   Selling, general and administrative (costs) income, net
    0.3         (1.0 )    
   Restructuring and other (costs) income, net
    (13.1 )   (15.4 )   (37.0 )   (14.9 )
   Amortization of acquisition-related intangible assets
    (148.2 )   (152.0 )   (440.6 )   (454.8 )
 
                         
      Consolidated operating income
    275.5     286.3     724.6     906.9  
   Other expense, net (b)
    (28.6 )   (27.7 )   (78.4 )   (74.0 )
 
                         
   Income from continuing operations before provision for income taxes
  $ 246.9   $ 258.6   $ 646.2   $ 832.9  
 
                         
Depreciation
                         
   Analytical Technologies
  $ 21.4   $ 21.9   $ 63.1   $ 66.2  
   Laboratory Products and Services
    25.9     25.8     76.4     77.3  
 
                         
      Consolidated depreciation
  $ 47.3   $ 47.7   $ 139.5   $ 143.5  
 
 
(a)  Represents operating income before certain charges/credits 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 income and expense to its segments.  

4.         Other Expense, Net
 
    As discussed in Note 1, although the company’s cash interest payments have not been affected, the adoption of the new convertible debt accounting guidance has increased the company’s reported interest expense in a manner that reflects interest rates of similar non-convertible debt. The rule required adjustment of prior periods to conform to current accounting.

The components of other expense, net, in the accompanying statement of income are as follows:

 
13

 

THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
4.         Other Expense, Net (continued)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 26,
 
September 27,
 
September 26,
 
September 27,
 
(In millions)
 
2009
 
2008
 
2009
 
2008
 
 
 
 
 
 
 
 
 
 
 
Interest Income
  $ 2.5   $ 14.9   $ 12.5   $ 40.1  
Interest Expense
    (29.2 )   (39.7 )   (89.0 )   (117.5 )
Other Items, Net
    (1.9 )   (2.9 )   (1.9 )   3.4  
 
                         
 
  $ (28.6 ) $ (27.7 ) $ (78.4 ) $ (74.0 )

5.         Earnings per Share
 
    Basic and diluted earnings per share were calculated as follows:

 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 26,
 
September 27,
 
September 26,
 
September 27,
 
(In millions except per share amounts)
 
2009
 
2008
 
2009
 
2008
 
 
 
 
 
 
 
 
 
 
 
Income from Continuing Operations
  $ 221.2   $ 214.9   $ 577.0   $ 687.9  
Gain on Disposal of Discontinued Operations
        3.2         6.0  
 
                         
Net Income
    221.2     218.1     577.0     693.9  
 
                         
Income Allocable to Participating Securities
    (0.1 )   (0.3 )   (0.4 )   (1.1 )
 
                         
Net Income for Earnings per Share
  $ 221.1   $ 217.8   $ 576.6   $ 692.8  
 
                         
Basic Weighted Average Shares
    407.9     419.0     413.6     418.2  
Effect of:
                         
   Convertible debentures
    10.2     15.8     7.9     15.3  
   Stock options, restricted stock awards and warrants
    2.1     3.5     1.5     3.6  
 
                         
Diluted Weighted Average Shares
    420.2     438.3     423.0     437.1  
 
                         
Basic Earnings per Share:
                         
   Continuing operations
  $ .54   $ .51   $ 1.39   $ 1.64  
   Discontinued operations
        .01         .01  
 
                         
 
  $ .54   $ .52   $ 1.39   $ 1.66  
 
                         
Diluted Earnings per Share:
                         
   Continuing operations
  $ .53   $ .49   $ 1.36   $ 1.57  
   Discontinued operations
        .01         .01  
 
                         
 
  $ .53   $ .50   $ 1.36   $ 1.58  
 
 
14


THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
5.         Earnings per Share (continued)
 
    Options to purchase 7.0 million, 0.1 million, 13.1 million and 1.6 million shares of common stock were not included in the computation of diluted earnings per share for the third quarter of 2009 and 2008 and the first nine months of 2009 and 2008, respectively, because their effect would have been antidilutive.
 
6.         Comprehensive Income and Shareholders’ Equity
 
    Comprehensive income 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, 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 2009 and 2008, the company had comprehensive income of $296 million and $3 million, respectively. During the first nine months of 2009 and 2008, the company had comprehensive income of $802 million and $594 million, respectively. The third quarter and first nine months of 2009 were favorably affected by an increase in the cumulative translation adjustment of $73 million and $224 million, respectively, due to movements in currency exchange rates, the effects of which are recorded in shareholders’ equity. The third quarter and first nine months of 2008 were unfavorably affected by a decrease in the cumulative translation adjustment of $213 million and $99 million, respectively.
 
7.         Stock-based Compensation Expense
 
    The components of pre-tax stock-based compensation are as follows:

 
    Three Months Ended  
Nine Months Ended
 
 
September 26,
 
September 27,
 
September 26,
 
September 27,
 
(In millions)
 
2009
 
2008
 
2009
 
2008
 
 
 
 
 
 
 
 
 
 
 
Stock Option Awards
  $ 13.5   $ 9.8   $ 36.9   $ 25.8  
Restricted Share/Unit Awards
    7.1     6.0     19.5     17.7  
 
                         
Total Stock-based Compensation Expense
  $ 20.6   $ 15.8   $ 56.4   $ 43.5  
 
            Stock-based compensation expense is included in the accompanying statement of income as follows:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 26,
 
September 27,
 
September 26,
 
September 27,
 
(In millions)
 
2009
 
2008
 
2009
 
2008
 
 
 
 
 
 
 
 
 
 
 
Cost of Revenues
  $ 1.3   $ 1.0   $ 4.7   $ 3.0  
Selling, General and Administrative Expenses
    18.8     14.4     50.0     39.3  
Research and Development Expenses
    0.5     0.4     1.7     1.2  
 
                         
Total Stock-based Compensation Expense
  $ 20.6   $ 15.8   $ 56.4   $ 43.5  

            No stock-based compensation expense has been capitalized in inventories due to immateriality.
 
 
15


THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
7.         Stock-based Compensation Expense (continued)
 
    Unrecognized compensation cost related to unvested stock options and restricted stock totaled approximately $90.1 million and $31.9 million, respectively, as of September 26, 2009, and is expected to be recognized over weighted average periods of 2.3 years and 2.1 years, respectively.

During the first nine months of 2009, the company made equity compensation grants to employees consisting of 1.0 million restricted shares/units and options to purchase 6.5 million shares.

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. The costs of the healthcare program are funded on a self-insured and insured-premium basis. Net periodic benefit costs for the company’s pension plans include the following components:

 
 
Three Months Ended
 
Nine Months Ended
 
 
 
September 26,
 
September 27,
 
September 26,
 
September 27,
 
(In millions)
 
2009
 
2008
 
2009
 
2008
 
 
 
 
 
 
 
 
 
 
 
Service Cost
  $ 2.7   $ 3.4   $ 7.7   $ 11.1  
Interest Cost on Benefit Obligation
    12.6     13.9     37.0     42.7  
Expected Return on Plan Assets
    (13.1 )   (15.5 )   (38.0 )   (47.2 )
Amortization of Net Loss
    0.4     0.4     1.2     1.2  
Amortization of Prior Service Benefit
            0.1      
Settlement/Curtailment Gain
            (0.2 )   (18.5 )
Special Termination Benefits
            0.3     0.2  
 
                         
Net Periodic Benefit Cost (Income)
  $ 2.6   $ 2.2   $ 8.1   $ (10.5 )
 
    Net periodic benefit costs for the company's other postretirement benefit plans include the following components:
 
 
    Three Months Ended  
Nine Months Ended
 
 
September 26,
 
September 27,
 
September 26,
 
September 27,
 
(In millions)
 
2009
 
2008
 
2009
 
2008
 
 
 
 
 
 
 
 
 
 
 
Service Cost
  $ 0.2   $ 0.2   $ 0.4   $ 0.6  
Interest Cost on Benefit Obligation
    0.4     0.5     1.2     1.5  
 
                         
Net Periodic Benefit Cost
  $ 0.6   $ 0.7   $ 1.6   $ 2.1  

9.         Fair Value Measurements
 
    The company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during the nine months ended September 26, 2009. The company’s financial assets and liabilities carried at fair value are primarily comprised of investments in money market funds, mutual funds holding publicly
 
 
16


THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
9.         Fair Value Measurements (continued)
 
traded securities, derivative contracts used to hedge the company’s currency risk and other investments in unit trusts and insurance contracts held as assets to satisfy outstanding retirement liabilities.

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.

The following table presents information about the company’s financial assets and liabilities measured at fair value on a recurring basis as of September 26, 2009:

(In millions)
 
September 26,
2009
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
   Cash equivalents
  $ 1,066.1   $ 1,066.1   $   $  
   Investments in mutual funds, unit trusts and other similar instruments
    35.5     35.5          
   Cash surrender value of life insurance
    28.1         28.1      
   Auction rate securities
    5.4             5.4  
   Derivative contracts
    3.3         3.3      
 
                         
      Total Assets
  $ 1,138.4   $ 1,101.6   $ 31.4   $ 5.4  
 
                         
Liabilities
                         
   Derivative contracts
  $ 0.2   $   $ 0.2   $  
 
                         
      Total Liabilities
  $ 0.2   $   $ 0.2   $  

 
17

 

THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
9.         Fair Value Measurements (continued)
 
    The following table presents information about the company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2008:
 
(In millions)
 
December 31,
2008
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
   Cash equivalents
  $ 560.8   $ 560.8   $   $  
   Investments in mutual funds, unit trusts and other similar instruments
    24.0     24.0          
   Cash surrender value of life insurance
    21.3         21.3      
   Auction rate securities
    5.7             5.7  
   Marketable equity securities
    1.0     1.0          
   Derivative contracts
    3.3         3.3      
 
                         
      Total Assets
  $ 616.1   $ 585.8   $ 24.6   $ 5.7  
 
                         
Liabilities
                         
   Derivative contracts
  $ 4.0   $   $ 4.0   $  
 
                         
      Total Liabilities
  $ 4.0   $   $ 4.0   $  
   
    The following table is a rollforward of the fair value, as determined by Level 3 inputs, of the company's auction rate securities, which are included in short-term investments on the consolidated balance sheet.
 
(In millions)
 
Three Months
Ended
September 26,
2009
 
Nine Months Ended
September 26,
2009
 
 
 
 
 
 
 
Beginning Balance
  $ 6.0   $ 5.7  
Total impairment losses included in earnings
    (0.3 )   (0.3 )
Total unrealized losses included in other comprehensive income
    (0.3 )    
 
             
Balance at September 26, 2009
  $ 5.4   $ 5.4  
 
    The company determines the fair value of the auction rate securities by obtaining indications of value from broker/dealers.
 
Fair Value of Other Financial Instruments

The carrying amount and fair value of the company’s notes receivable and debt obligations are as follows:

 
18

 

THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
9.         Fair Value Measurements (continued)
 
 
 
September 26, 2009
 
December 31, 2008
 
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
(In millions)
 
Value
 
Value
 
Value
 
Value
 
 
 
 
 
 
 
 
 
 
 
Notes Receivable
  $ 5.6   $ 5.6   $ 2.7   $ 2.7  
 
                         
Debt Obligations:
                         
   Convertible obligations
    945.8     1,479.8     928.8     1,227.7  
   Senior notes
    250.0     246.2     250.0     209.3  
   Senior subordinated notes
    805.6     815.0     806.3     675.9  
   Other
    20.9     20.9     32.9     32.9  
 
                         
 
  $ 2,022.3   $ 2,561.9   $ 2,018.0   $ 2,145.8  
 
    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.
 
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
 
 
 
September 26,
 
September 27,
 
(In millions)
 
2009
 
2008
 
 
 
 
 
 
 
Beginning Balance
  $ 44.1   $ 50.6  
Provision charged to income
    25.6     25.8  
Usage
    (31.3 )   (28.8 )
Acquisitions/divestitures
    0.2     0.3  
Adjustments to previously provided warranties, net