tmoq210.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 July 3, 2010

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 July 3, 2010
Common Stock, $1.00 par value
 
407,430,585
 
 
 


 

 
 

 

PART I           FINANCIAL INFORMATION

Item 1.            Financial Statements
 
THERMO FISHER SCIENTIFIC INC.
 
Consolidated Balance Sheet
(Unaudited)
 
 
 
July 3,
 
December 31,
 
(In millions)
 
2010
 
2009
 
 
 
 
 
 
 
Assets
 
 
 
 
 
Current Assets:
 
 
 
 
 
   Cash and cash equivalents
  $ 1,307.4   $ 1,564.1  
   Short-term investments, at quoted market value (cost of $9.9 and $7.7)
    9.2     7.1  
   Accounts receivable, less allowances of $42.1 and $47.2
    1,472.5     1,409.6  
   Inventories:
             
      Raw materials
    282.7     262.8  
      Work in process
    120.5     115.5  
      Finished goods
    745.3     753.1  
   Deferred tax assets
    162.9     160.0  
   Other current assets
    247.5     258.7  
 
             
 
    4,348.0     4,530.9  
 
             
Property, Plant and Equipment, at Cost
    2,088.5     2,071.8  
   Less: Accumulated depreciation and amortization
    (790.8 )   (738.4 )
 
             
 
    1,297.7     1,333.4  
 
             
Acquisition-related Intangible Assets, net of Accumulated Amortization of $2,326.6 and $2,074.1
    6,052.9     6,337.0  
 
             
Other Assets
    482.1     440.8  
 
             
Goodwill
    9,100.2     8,982.9  
 
             
 
  $ 21,280.9   $ 21,625.0  

 
2

 
 
THERMO FISHER SCIENTIFIC INC.
 
Consolidated Balance Sheet (continued)
(Unaudited)

 
 
July 3,
 
December 31,
 
(In millions except share amounts)
 
2010
 
2009
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
   Short-term obligations and current maturities of long-term obligations
  $ 106.0   $ 117.5  
   Accounts payable
    568.5     533.6  
   Accrued payroll and employee benefits
    248.9     286.0  
   Accrued income taxes
    16.1     28.4  
   Deferred revenue
    163.8     139.8  
   Other accrued expenses
    512.7     534.0  
 
             
 
    1,616.0     1,639.3  
 
             
Deferred Income Taxes
    1,752.5     1,933.8  
 
             
Other Long-term Liabilities
    534.5     555.1  
 
             
Long-term Obligations
    2,027.6     2,064.0  
 
             
 
             
Incremental Convertible Debt Obligation
    5.2     1.9  
 
             
Shareholders' Equity:
             
   Preferred stock, $100 par value, 50,000 shares authorized; none issued
             
   Common stock, $1 par value, 1,200,000,000 shares authorized; 425,837,821 and 423,875,260 shares issued
    425.8     423.9  
   Capital in excess of par value
    11,019.9     11,140.7  
   Retained earnings
    4,820.4     4,350.8  
   Treasury stock at cost, 18,407,236 and 14,564,637 shares
    (770.9 )   (576.5 )
   Accumulated other comprehensive items
    (150.1 )   92.0  
 
             
 
    15,345.1     15,430.9  
 
             
 
  $ 21,280.9   $ 21,625.0  

 
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
 
Six Months Ended
 
 
 
July 3,
 
June 27,
 
July 3,
 
June 27,
 
(In millions except per share amounts)
 
2010
 
2009
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
  Product revenues
  $ 2,247.6   $ 2,090.7   $ 4,528.6   $ 3,989.3  
  Service revenues
    401.4     393.4     795.5     749.9  
 
                         
 
    2,649.0     2,484.1     5,324.1     4,739.2  
 
                         
Costs and Operating Expenses:
                         
  Cost of product revenues
    1,335.0     1,272.3     2,685.4     2,432.0  
  Cost of service revenues
    231.0     223.5     459.4     432.0  
  Selling, general and administrative expenses
    692.5     660.9     1,411.6     1,285.9  
  Research and development expenses
    70.3     58.1     137.1     116.3  
  Restructuring and other costs, net
    8.2     10.3     25.6     23.9  
 
                         
 
    2,337.0     2,225.1     4,719.1     4,290.1  
 
                         
Operating Income
    312.0     259.0     605.0     449.1  
Other Expense, Net
    (36.8 )   (26.9 )   (61.7 )   (49.8 )
 
                         
Income from Continuing Operations Before Provision for Income Taxes
    275.2     232.1     543.3     399.3  
Provision for Income Taxes
    (37.9 )   (25.2 )   (76.2 )   (43.5 )
 
                         
Income from Continuing Operations
    237.3     206.9     467.1     355.8  
Gain on Disposal of Discontinued Operations, Net (net of income tax benefit of $1.5 in 2010)
            2.5      
 
                         
Net Income
  $ 237.3   $ 206.9   $ 469.6   $ 355.8  
 
                         
Earnings per Share from Continuing Operations
                         
  Basic
  $ .58   $ .50   $ 1.14   $ .85  
  Diluted
  $ .57   $ .49   $ 1.12   $ .84  
 
                         
Earnings per Share
                         
  Basic
  $ .58   $ .50   $ 1.15   $ .85  
  Diluted
  $ .57   $ .49   $ 1.13   $ .84  
 
                         
Weighted Average Shares
                         
  Basic
    409.3     415.3     409.4     416.5  
  Diluted
    415.9     423.7     417.1     424.5  
 
 
The accompanying notes are an integral part of these consolidated financial statements.

 
4

 
 
THERMO FISHER SCIENTIFIC INC.
 
Consolidated Statement of Cash Flows
(Unaudited)
 
 
 
Six Months Ended
 
 
 
July 3,
 
June 27,
 
(In millions)
 
2010
 
2009
 
 
 
 
 
 
 
Operating Activities
 
 
 
 
 
    Net Income
  $ 469.6   $ 355.8  
    Gain on disposal of discontinued operations
    (2.5 )    
 
             
    Income from continuing operations
    467.1     355.8  
 
             
    Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
             
      Depreciation and amortization
    390.9     384.6  
      Change in deferred income taxes
    (134.4 )   (117.6 )
      Non-cash stock-based compensation
    41.4     35.8  
      Non-cash interest expense on convertible debt
    5.3     11.3  
      Tax benefits from stock-based compensation awards
    (7.8 )   (1.3 )
      Other non-cash expenses, net
    30.5     28.1  
      Changes in assets and liabilities, excluding the effects of acquisitions and dispositions:
             
          Accounts receivable
    (100.6 )   41.4  
          Inventories
    (51.1 )   20.5  
          Other assets
    (9.4 )   34.6  
          Accounts payable
    51.7     34.6  
          Other liabilities
    (47.9 )   (85.0 )
          Contributions to retirement plans
    (8.7 )   (8.1 )
 
             
             Net cash provided by continuing operations
    627.0     734.7  
             Net cash used in discontinued operations
    (0.2 )   (0.7 )
 
             
             Net cash provided by operating activities
    626.8     734.0  
 
             
Investing Activities
             
    Acquisitions, net of cash acquired
    (287.8 )   (146.0 )
    Purchase of property, plant and equipment
    (109.0 )   (83.0 )
    Proceeds from sale of property, plant and equipment
    2.3     7.6  
    Proceeds from sale of available-for-sale investments
    0.4     0.4  
    Proceeds from sale of businesses, net of cash divested
        2.7  
    Increase in other assets
    (0.5 )   (0.3 )
 
             
             Net cash used in continuing operations
    (394.6 )   (218.6 )
             Net cash provided by discontinued operations
    4.1      
 
             
             Net cash used in investing activities
  $ (390.5 ) $ (218.6 )

 
5

 

THERMO FISHER SCIENTIFIC INC.
 
Consolidated Statement of Cash Flows (continued)
(Unaudited)
 
    Six Months Ended   
(In millions)  
 July 3,
2010
 
 June 27,
2009
 
 
 
 
 
 
 
Financing Activities
 
 
 
 
 
    Net proceeds from issuance of long-term debt
  $ 741.6   $ 4.1  
    Settlement of convertible debt
    (600.8 )    
    Redemption and repayment of long-term obligations
    (502.2 )   (0.1 )
    Purchases of company common stock
    (187.5 )   (414.6 )
    Net proceeds from issuance of company common stock
    49.4     11.9  
    Tax benefits from stock-based compensation awards
    7.8     1.3  
    Increase (decrease) in short-term notes payable
    (0.1 )   0.4  
 
             
             Net cash used in financing activities
    (491.8 )   (397.0 )
 
             
Exchange Rate Effect on Cash of Continuing Operations
    (1.2 )   18.5  
 
             
Increase (Decrease) in Cash and Cash Equivalents
    (256.7 )   136.9  
Cash and Cash Equivalents at Beginning of Period
    1,564.1     1,280.5  
 
             
Cash and Cash Equivalents at End of Period
  $ 1,307.4   $ 1,417.4  
 
             
Supplemental Cash Flow Information
             
    Fair value of assets of acquired businesses
  $ 406.1   $ 171.4  
    Cash paid for acquired businesses
    (305.4 )   (137.2 )
 
             
      Fair value of liabilities assumed of acquired businesses
  $ 100.7   $ 34.2  
 
             
    Issuance of restricted stock
  $ 1.4   $ 1.1  
 
             
    Issuance of stock upon vesting of restricted stock units
  $ 15.5   $ 7.0  


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

 
6

 
 
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 July 3, 2010, the results of operations for the three- and six-month periods ended July 3, 2010, and June 27, 2009, and the cash flows for the six-month periods ended July 3, 2010, and June 27, 2009. Interim results are not necessarily indicative of results for a full year.
 
The consolidated balance sheet presented as of December 31, 2009, 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, 2009, filed with the Securities and Exchange Commission (SEC).
 
2.          Acquisitions
 
            In February 2010, the company’s Analytical Technologies segment acquired Ahura Scientific, Inc., a U.S.-based provider of handheld spectroscopy instruments that are used worldwide in the identification of chemicals for safety, security and pharmaceutical applications, for $147 million, net of cash acquired, plus up to $25 million of additional contingent consideration based upon the achievement of specified operating results in 2010, of which the company recorded $20 million as the fair value at the acquisition date. The acquisition expands the segment’s portfolio of portable analytical devices. Revenues of Ahura Scientific totaled $ 45 million in 2009. The purchase price exceeded the fair value of the acquired net assets and, accordingly, $110 million was allocated to goodwill, none of which is tax deductible.
 
In March 2010, the company’s Analytical Technologies segment acquired Finnzymes, a Finland-based provider of integrated tools for molecular biology analysis, including reagents, instruments, consumables and kits, for $58 million, net of cash acquired. The acquisition expands the company’s portfolio of reagents and other consumables for the molecular biology research and diagnostics markets. Finnzymes reported revenues of $20 million in 2009. The purchase price exceeded the fair value of the acquired net assets and, accordingly, $26 million was allocated to goodwill, none of which is tax deductible.
 
In addition, in the first six months of 2010, the Analytical Technologies segment acquired a developer of tunable diode-based spectroscopy systems; a provider of liquid chromatography and software solutions for proteomics analysis; a developer and manufacturer of miniature handheld near-infrared analyzers and a developer and manufacturer of low-frequency microwave moisture analyzers. The aggregate consideration for these acquisitions was $82 million plus up to $ 7 million of additional contingent consideration.
 
The company made contingent purchase price payments totaling $3 million in the first six months of 2010, for acquisitions completed prior to 2010.
 
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.
 
 
7

 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
2.          Acquisitions (continued)
 
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. 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 purchase price allocations for 2010 acquisitions are as follows:
 
(In millions)
 
Ahura Scientific
 
Finnzymes
 
Other
 
Total
 
 
 
 
 
 
 
 
 
 
 
Purchase Price
 
 
 
 
 
 
 
 
 
  Cash paid
  $ 164.0   $ 59.3   $ 82.1   $ 305.4  
  Debt assumed
    0.6         0.8     1.4  
  Purchase price payable (receivable)
        (0.3 )   1.1     0.8  
  Fair value of contingent consideration
    19.6         3.9     23.5  
  Cash acquired
    (17.8 )   (0.7 )   (2.4 )   (20.9 )
 
                         
 
  $ 166.4   $ 58.3   $ 85.5   $ 310.2  
 
                         
Allocation
                         
  Current assets
  $ 22.3   $ 6.0   $ 9.7   $ 38.0  
  Property, plant and equipment
    3.3     3.4     0.4     7.1  
  Intangible assets:
                         
    Customer relationships
    46.1     16.1     15.5     77.7  
    Product technology
    30.4     18.6     19.4     68.4  
    In-process research and development
            4.4     4.4  
    Tradenames and other
    0.4     0.2     1.8     2.4  
  Goodwill
    109.9     26.3     43.6     179.8  
  Other assets
    0.1         7.3     7.4  
  Liabilities assumed
    (46.1 )   (12.3 )   (16.6 )   (75.0 )
 
                         
 
  $ 166.4   $ 58.3   $ 85.5   $ 310.2  

The weighted-average amortization periods for intangible assets acquired in 2010 are 8 years for customer relationships, 8 years for product technology and 4 years for tradenames and other. The weighted average amortization period for all intangible assets in the above table is 8 years.
 
The company’s results would not have been materially different from its reported results had the company’s 2010 and 2009 acquisitions occurred at the beginning of 2009.
 

 
8

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
3.         Business Segment Information
 
            The company’s continuing operations fall into two business segments.
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
July 3,
 
June 27,
 
July 3,
 
June 27,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
  Analytical Technologies
  $ 1,101.4   $ 1,003.3   $ 2,208.4   $ 1,942.1  
  Laboratory Products and Services
    1,680.5     1,599.3     3,375.7     3,022.3  
  Eliminations
    (132.9 )   (118.5 )   (260.0 )   (225.2 )
 
                         
    Consolidated revenues
    2,649.0     2,484.1     5,324.1     4,739.2  
 
                         
Segment Income
                         
  Analytical Technologies (a)
    227.0     201.4     459.4     374.9  
  Laboratory Products and Services (a)
    238.7     217.2     474.0     392.7  
 
                         
    Subtotal reportable segments (a)
    465.7     418.6     933.4     767.6  
 
                         
  Cost of revenues charges
    (3.7 )   (0.9 )   (8.8 )   (0.9 )
  Selling, general and administrative charges, net
    0.2     (1.3 )   (0.9 )   (1.3 )
  Restructuring and other costs, net
    (8.2 )   (10.3 )   (25.6 )   (23.9 )
  Amortization of acquisition-related intangible assets
    (142.0 )   (147.1 )   (293.1 )   (292.4 )
 
                         
    Consolidated operating income
    312.0     259.0     605.0     449.1  
  Other expense, net (b)
    (36.8 )   (26.9 )   (61.7 )   (49.8 )
 
                         
  Income from continuing operations before provision for income taxes
  $ 275.2   $ 232.1   $ 543.3   $ 399.3  
 
                         
Depreciation
                         
  Analytical Technologies
  $ 22.0   $ 21.4   $ 44.0   $ 41.7  
  Laboratory Products and Services
    27.2     25.8     53.8     50.5  
 
                         
    Consolidated depreciation
  $ 49.2   $ 47.2   $ 97.8   $ 92.2  

(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.
 


 
9

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
4.          Other Expense, Net
 
            The components of other expense, net, in the accompanying statement of income are as follows:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
July 3,
 
June 27,
 
July 3,
 
June 27,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Interest Income
  $ 2.9   $ 4.7   $ 5.3   $ 10.0  
Interest Expense
    (23.8 )   (29.6 )   (46.1 )   (59.8 )
Other Items, Net
    (15.9 )   (2.0 )   (20.9 )    
 
                         
 
  $ (36.8 ) $ (26.9 ) $ (61.7 ) $ (49.8 )
 
            Other items, net, includes charges for early extinguishment of debt in 2010 (Note 8).
 
5.          Stock-based Compensation Expense
 
            The components of pre-tax stock-based compensation expense are as follows:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
July 3,
 
June 27,
 
July 3,
 
June 27,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Stock Option Awards
  $ 12.8   $ 13.3   $ 24.4   $ 23.4  
Restricted Share/Unit Awards
    9.5     7.3     17.0     12.4  
 
                         
Total Stock-based Compensation Expense
  $ 22.3   $ 20.6   $ 41.4   $ 35.8  
 
            Stock-based compensation expense is included in the accompanying statement of income as follows:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
July 3,
 
June 27,
 
July 3,
 
June 27,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Cost of Revenues
  $ 1.6   $ 1.9   $ 3.0   $ 3.4  
Selling, General and Administrative Expenses
    20.3     18.0     37.5     31.2  
Research and Development Expenses
    0.4     0.7     0.9     1.2  
 
                         
Total Stock-based Compensation Expense
  $ 22.3   $ 20.6   $ 41.4   $ 35.8  

No stock-based compensation expense has been capitalized in inventories due to immateriality.
 
Unrecognized compensation cost related to unvested stock options and restricted stock totaled approximately $109 million and $61 million, respectively, as of July 3, 2010, and is expected to be recognized through 2015 with weighted average periods of 2.9 years and 2.6 years, respectively.
 
During the first six months of 2010, the company made equity compensation grants to employees consisting of 0.7 million restricted shares/units and options to purchase 4.2 million shares.

 
10

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
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 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
 
Six Months Ended
 
 
 
July 3,
 
June 27,
 
July 3,
 
June 27,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Service Cost
  $ 2.5   $ 2.5   $ 5.3   $ 5.0  
Interest Cost on Benefit Obligation
    12.8     12.4     26.0     24.4  
Expected Return on Plan Assets
    (13.4 )   (12.6 )   (27.2 )   (24.9 )
Amortization of Net Loss
    0.5     0.5     1.0     0.8  
Amortization of Prior Service Benefit
                0.1  
Settlement/Curtailment Gain
        (0.2 )       (0.2 )
Special Termination Benefits
    0.3     0.1     0.3     0.3  
 
                         
Net Periodic Benefit Cost
  $ 2.7   $ 2.7   $ 5.4   $ 5.5  
 
            Net periodic benefit costs for the company's other postretirement benefit plans include the following components:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
July 3,
 
June 27,
 
July 3,
 
June 27,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Service Cost
  $ 0.1   $ 0.1   $ 0.2   $ 0.2  
Interest Cost on Benefit Obligation
    0.5     0.4     1.0     0.8  
Amortization of Net Gain
    (0.1 )       (0.2 )    
 
                         
Net Periodic Benefit Cost
  $ 0.5   $ 0.5   $ 1.0   $ 1.0  

 
11

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
7.          Earnings per Share
 
            Basic and diluted earnings per share were calculated as follows:
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
July 3,
 
June 27,
 
July 3,
 
June 27,
 
(In millions except per share amounts)
 
2010
 
2009
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Income from Continuing Operations
  $ 237.3   $ 206.9   $ 467.1   $ 355.8  
Gain on Disposal of Discontinued Operations, Net
            2.5      
 
                         
Net Income
    237.3     206.9     469.6     355.8  
 
                         
Income Allocable to Participating Securities
    (0.1 )   (0.2 )   (0.1 )   (0.3 )
 
                         
Net Income for Earnings per Share
  $ 237.2   $ 206.7   $ 469.5   $ 355.5  
 
                         
Basic Weighted Average Shares
    409.3     415.3     409.4     416.5  
Effect of:
                         
  Convertible debentures
    3.2     7.0     4.3     6.7  
  Stock options, restricted stock/units
    3.4     1.4     3.4     1.3  
 
                         
Diluted Weighted Average Shares
    415.9     423.7     417.1     424.5  
 
                         
Basic Earnings per Share:
                         
  Continuing operations
  $ .58   $ .50   $ 1.14   $ .85  
  Discontinued operations
            .01      
 
                         
 
  $ .58   $ .50   $ 1.15   $ .85  
 
                         
Diluted Earnings per Share:
                         
  Continuing operations
  $ .57   $ .49   $ 1.12   $ .84  
  Discontinued operations
            .01      
 
                         
 
  $ .57   $ .49   $ 1.13   $ .84  

Options to purchase 8.2 million, 15.7 million, 8.2 million and 16.2 million shares of common stock were not included in the computation of diluted earnings per share for the second quarter of 2010 and 2009 and the first six months of 2010 and 2009, respectively, because their effect would have been antidilutive.
 

 
12

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
8.          Debt and Other Financing Arrangements
 
            On April 27, 2010, the company issued $ 450 million principal amount of 3.20% Senior Notes due 2015. Interest on the notes is payable on May 1 and November 1 of each year. The notes may be redeemed at any time 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, the most restrictive of which limits the ability of the company to pledge principal properties as security under borrowing arrangements.
 
At the issuance of this debt, the company entered into six-month LIBOR-based interest rate swap arrangements with various banks. The aggregate amount of the swaps is equal to the principal amount of the 3.20% Notes and the payment dates of the swaps coincide with the payment dates of the notes. The swap contracts provide for the company to pay a variable interest rate of six-month USD LIBOR plus a spread of 0.4512% (0.96% at July 3, 2010) and to receive a fixed interest rate of 3.20%. The variable interest rate resets semi-annually. The swaps have been accounted for as a fair value hedge of the 3.20% Notes.
 
On April 27, 2010, the company also issued $300 million principal amount of 4.70% Senior Notes due 2020. Interest on the notes is payable on May 1 and November 1 of each year. The notes may be redeemed at any time 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, the most restrictive of which limits the ability of the company to pledge principal properties as security under borrowing arrangements.
 
The company used the proceeds of the 3.20% and 4.70% Notes to redeem all outstanding 6 1/8% Senior Subordinated Notes due 2015 at a redemption price of $1,030.63 per $1,000 on July 1, 2010. An aggregate principal amount of $500 million was redeemed for a total cash outlay of $515 million plus accrued interest. The company used the remaining proceeds, in addition to cash on hand, to settle the Floating Rate Convertible Debentures conversions described below.
 
During the first six months of 2010, following issuance of a redemption notice by the company, holders of the company’s Floating Rate Convertible Senior Debentures due 2033 exercised conversion rights for the remaining $326 million in par value. The company paid the principal and the premium due upon conversion in cash for a total outlay of $573 million. Additionally, the company purchased substantially all of the remaining $13 million aggregate principal amount of the company’s 2.5% Senior Convertible Notes due 2023 for an aggregate of $28 million. As a result of the redemption of the 6 1/8% Senior Subordinated Notes and these conversions of debt, the company recorded charges totaling $16 million on the early extinguishment of debt in other expense, net in the accompanying statement of income.
 
The company separately accounts for the debt and equity components of its convertible debt in a manner that reflects the company’s nonconvertible debt borrowing rate when interest cost is recognized. The debt, temporary equity and equity components recognized for the company’s convertible debt are as follows:
 

 
 
July 3,
 
December 31,
 
(In millions)
 
2010
 
2009
 
 
 
 
 
 
 
Principal Amount of Convertible Debt
  $ 329.3   $ 668.8  
Unamortized Discount
    5.2     10.9  
Net Carrying Amount
    324.1     657.9  
Incremental Convertible Debt Obligation (Temporary Equity)
    5.2     1.9  
Capital in Excess of Par Value
    12.9     30.7  

 
13

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
8.          Debt and Other Financing Arrangements (continued)
 
At July 3, 2010, the unamortized discount had a remaining weighted average recognition period of 9 months, to the first redemption date 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
 
Six Months Ended
 
 
 
July 3,
 
June 27,
 
July 3,
 
June 27,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Contractual Coupon Interest
  $ 2.7   $ 4.6   $ 5.6   $ 9.6  
Amortization of Discount on Convertible Debt
    1.9     5.7     5.3     11.3  
 
                         
Interest Expense
  $ 4.6   $ 10.3   $ 10.9   $ 20.9  
 
                         
Effective Interest Rate
    4.4%     4.4%     4.2%     4.5%  

9.          Litigation and Related Contingencies
 
            There are various lawsuits and claims pending against the company involving product liability, contract, commercial and other issues. In view of the company’s financial condition and the accruals established for related matters, management does not believe that the ultimate liability, if any, related to these matters will have a material adverse effect on the company’s financial condition, results of operations or cash flows.
 
The company establishes a liability that is an estimate of amounts needed to pay damages in the future for events that have already occurred. The accrued liabilities are based on management’s judgment as to the probability of losses and, where applicable, actuarially determined estimates. The reserve estimates are adjusted as additional information becomes known or payments are made.
 
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 probable loss when a range of probable loss can be estimated. The company records estimated amounts due from insurers as an asset. Although the company believes that the amounts reserved 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. For example, there are pending lawsuits with certain of the company’s insurers concerning which state’s laws should apply to the insurance policies and how such laws affect the policies. Should these actions resolve unfavorably, the estimated amount due from insurers of $92 million would require adjustment that could be material to the company’s results of operations. 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 financial condition and ratings of its insurers on an ongoing basis.
 

 
14

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
9.          Litigation and Related Contingencies (continued)
 
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 permit requirements and 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.
 
            Management believes that its reserves for environmental matters are adequate for the remediation costs the company expects to incur. As a result, the company believes that the ultimate liability with respect to environmental remediation matters will not have a material adverse effect on the company’s financial position, results of operations or cash flows. However, 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. Although these environmental remediation liabilities do not include third-party recoveries, the company may be able to bring indemnification claims against third parties for liabilities relating to certain sites.
 
10.        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 second quarters of 2010 and 2009, the company had comprehensive income of $135 million and $469 million, respectively. During the first six months of 2010 and 2009, the company had comprehensive income of $228 million and $506 million, respectively. The second quarter and first six months of 2010 were unfavorably affected by decreases in the cumulative translation adjustment of $103 million and $243 million, respectively, due to movements in currency exchange rates, the effects of which are recorded in shareholders’ equity. The second quarter and first six months of 2009 were favorably affected by an increase in the cumulative translation adjustment of $264 million and $151 million, respectively.
 

 
15

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
11.        Fair Value Measurements and Fair Value of Financial Instruments
 
The company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during 2010. The company’s financial assets and liabilities carried at fair value are primarily comprised of investments in money market funds, mutual funds holding publicly traded securities, derivative contracts used to hedge the company’s currency and interest rate risks 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 July 3, 2010:
 

 
 
July 3,
 
Quoted Prices in Active Markets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
(In millions)
 
2010
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
  Cash equivalents
  $ 579.7   $ 579.7   $   $  
  Investments in mutual funds, unit trusts and other similar instruments
    34.8     34.8          
  Insurance contracts
    29.4         29.4      
  Auction rate securities
    4.9             4.9  
  Derivative contracts
    32.2         32.2      
 
                         
    Total Assets
  $ 681.0   $ 614.5   $ 61.6   $ 4.9  
 
                         
Liabilities
                         
  Derivative contracts
  $ 6.7   $   $ 6.7   $  
 
                         
    Total Liabilities
  $ 6.7   $   $ 6.7   $  

 
16

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
11.        Fair Value Measurements and Fair Value of Financial Instruments (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, 2009:

 
 
December 31,
 
Quoted Prices in Active Markets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
(In millions)
 
2009
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
  Cash equivalents
  $ 1,081.7   $ 1,081.7   $   $  
  Investments in mutual funds, unit trusts and other similar instruments
    32.9     32.9          
  Insurance contracts
    31.9         31.9      
  Auction rate securities
    5.4             5.4  
  Derivative contracts
    4.5         4.5      
 
                         
    Total Assets
  $ 1,156.4   $ 1,114.6   $ 36.4   $ 5.4  
 
                         
Liabilities
                         
  Derivative contracts
  $ 10.3   $   $ 10.3   $  
 
                         
    Total Liabilities
  $ 10.3   $   $ 10.3   $  

The company determines the fair value of its insurance contracts by obtaining the cash surrender value of the contracts from the issuer. The company determines the fair value of the auction rate securities by obtaining indications of value from brokers/dealers. The following table is a rollforward of the fair value, as determined by Level 3 inputs, of the auction rate securities.
 
 
 
Three Months Ended
 
Six Months Ended
 
 
 
July 3,
 
June 27,
 
July 3,
 
June 27,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance
  $ 5.2   $ 6.3   $ 5.4   $ 5.7  
Sale of securities
    (0.2 )       (0.4 )    
Total unrealized gains (losses) included in other comprehensive income
    (0.1 )   (0.3 )   (0.1 )   0.3  
 
                         
Ending Balance
  $ 4.9   $ 6.0   $ 4.9   $ 6.0  

The notional amounts of derivative contracts outstanding totaled $1.69 billion and $1.24 billion at July 3, 2010 and December 31, 2009, respectively. The fair value of such contracts is the estimated amount that the company would receive upon liquidation of the contracts, taking into account the change in currency exchange rates, based on data from an independent third-party pricing service.
 

 
17

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
11.        Fair Value Measurements and Fair Value of Financial Instruments (continued)
 
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
 
 
 
July 3,
 
December 31,
 
July 3,
 
December 31,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
 
 
 
 
 
 
 
 
 
 
Derivatives Designated as Hedging Instruments
 
 
 
 
 
 
 
 
 
  Interest rate swaps (a)
  $ 31.1   $   $   $ 9.5  
Derivatives Not Designated as Hedging Instruments
                         
  Foreign currency exchange contracts (b)
    1.1     4.5     6.7     0.8  
 
                         
    Total derivatives
  $ 32.2   $ 4.5   $ 6.7   $ 10.3  
 
(a)
The fair value of the interest rate swaps are included in the consolidated balance sheet under the captions other assets or other long-term liabilities.
(b)
The fair value of the foreign currency exchange contracts are included in the consolidated balance sheet under the captions other current assets or other accrued expenses.

    Gain (Loss) Recognized  
    Three Months Ended    Six Months Ended   
(In millions)  
July 3,
2010
 
 June 27,
2009
 
 July 3,
2010
 
June 27,
2009 
 
 
 
 
 
 
 
 
 
 
 
Derivatives Designated as Fair Value Hedges
 
 
 
 
 
 
 
 
 
  Interest rate contracts
  $ 5.2   $   $ 8.6   $  
Derivatives Not Designated as Fair Value Hedges
                         
  Foreign currency exchange contracts
    21.1     (18.2 )   39.0     (7.2 )
 
            Gains and losses recognized on interest rate and foreign currency exchange contracts are included in the consolidated statement of income under the caption other expense, net, together with the corresponding, offsetting losses and gains on the underlying transactions.
 

 
18

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
11.        Fair Value Measurements and Fair Value of Financial Instruments (continued)
 
Fair Value of Other Financial Instruments
 
The carrying amount and fair value of the company’s notes receivable and debt obligations are as follows:
 
 
 
July 3, 2010
 
December 31, 2009
 
 
 
Carrying
 
Fair
 
Carrying
 
Fair
 
(In millions)
 
Value
 
Value
 
Value
 
Value
 
 
 
 
 
 
 
 
 
 
 
Notes Receivable
  $ 7.0   $ 7.0   $ 6.8   $ 6.8  
 
                         
Debt Obligations:
                         
  Convertible obligations
    324.1     403.4     657.9     992.0  
  Senior notes
    1,778.5     1,813.5     989.6     1,016.1  
  Senior subordinated notes
            500.0     520.1  
  Other
    31.0     31.0     34.0     34.0  
 
                         
 
  $ 2,133.6   $ 2,247.9   $ 2,181.5   $ 2,562.2  
 
            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.
 
12.       Warranty Obligations
 
            Product warranties are included in other accrued expenses in the accompanying balance sheet. The changes in the carrying amount of warranty obligations is as follows:
 
 
 
Six Months Ended
 
 
 
July 3,
 
June 27,
 
(In millions)
 
2010
 
2009
 
 
 
 
 
 
 
Beginning Balance
  $ 45.2   $ 44.1  
   Provision charged to income
    20.9     15.9  
   Usage
    (20.5 )   (20.9 )
   Acquisitions
    0.2     0.1  
   Adjustments to previously provided warranties, net
    0.2     0.9  
   Other, net (a)
    (2.0 )    
 
             
Ending Balance
  $ 44.0   $ 40.1  
 
(a)  Primarily represents the effects of currency translation.
 
 
19

 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
13.        Restructuring and Other Costs, Net
 
            Restructuring costs in the first six months of 2010 in both segments primarily included continuing charges for actions initiated in 2009 in response to the downturn in the economy and reduced revenues in several businesses, as well as the consolidation of manufacturing and research and development operations at a site in Germany with an existing site in the U.S. and the consolidation of production operations at a plant in Iowa with plants in Ohio and North Carolina. As of August 4, 2010, the company has identified restructuring actions that will result in additional charges of approximately $23 million, primarily in the remainder of 2010.
 
            During the second quarter of 2010, 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
  $ 2.5   $ 1.2   $   $ 3.7  
Selling, General and Administrative Expenses
        (0.2 )       (0.2 )
Restructuring and Other Costs, Net
    4.5     3.6     0.1     8.2  
 
                         
 
  $ 7.0   $ 4.6   $ 0.1   $ 11.7  
 
            During the first six months of 2010, 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
  $ 6.4   $ 2.4   $   $ 8.8  
Selling, General and Administrative Expenses
    1.1     (0.2 )       0.9  
Restructuring and Other Costs, Net
    12.5     12.9     0.2     25.6  
 
                         
 
  $ 20.0   $