tmoq310.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 October 2, 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 October 2, 2010
Common Stock, $1.00 par value
 
397,477,634
 
 
 


 

 
 

 

PART I          FINANCIAL INFORMATION

Item 1.           Financial Statements
 
THERMO FISHER SCIENTIFIC INC.

Consolidated Balance Sheet
(Unaudited)
 
   
October 2,
 
December 31,
 
(In millions)
 
2010
 
2009
 
           
Assets
         
Current Assets:
         
   Cash and cash equivalents
  $ 930.2   $ 1,564.1  
   Short-term investments, at quoted market value (cost of $9.8 and $7.7)
    9.1     7.1  
   Accounts receivable, less allowances of $45.4 and $47.2
    1,562.1     1,409.6  
Inventories:               
      Raw materials
    295.0     262.8  
      Work in process
    131.1     115.5  
      Finished goods
    781.6     753.1  
   Deferred tax assets
    169.1     160.0  
   Other current assets
    292.8     258.7  
               
      4,171.0     4,530.9  
               
Property, Plant and Equipment, at Cost
    2,212.4     2,071.8  
   Less: Accumulated depreciation and amortization
    (846.4 )   (738.4 )
               
      1,366.0     1,333.4  
               
Acquisition-related Intangible Assets, net of Accumulated Amortization of $2,508.3 and $2,074.1
    6,186.9     6,337.0  
               
Other Assets
    527.5     440.8  
               
Goodwill
    9,285.6     8,982.9  
               
    $ 21,537.0   $ 21,625.0  
 
 
 
2

 
 
THERMO FISHER SCIENTIFIC INC.
 
Consolidated Balance Sheet (continued)
(Unaudited)
 
   
October 2,
 
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
  $ 104.4   $ 117.5  
   Accounts payable
    581.9     533.6  
   Accrued payroll and employee benefits
    319.8     286.0  
   Accrued income taxes
    56.7     28.4  
   Deferred revenue
    165.5     139.8  
   Other accrued expenses
    542.3     534.0  
               
      1,770.6     1,639.3  
               
Deferred Income Taxes
    1,768.4     1,933.8  
               
Other Long-term Liabilities
    540.5     555.1  
               
Long-term Obligations
    2,057.6     2,064.0  
               
               
Incremental Convertible Debt Obligation
    3.3     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; 425,996,420 and 423,875,260 shares issued
    426.0     423.9  
   Capital in excess of par value
    11,048.9     11,140.7  
   Retained earnings
    5,088.9     4,350.8  
   Treasury stock at cost, 28,518,786 and 14,564,637 shares
    (1,246.4 )   (576.5 )
   Accumulated other comprehensive items
    79.2     92.0  
               
      15,396.6     15,430.9  
               
    $ 21,537.0   $ 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
 
Nine Months Ended
 
   
October 2,
 
September 26,
 
October 2,
 
September 26,
 
(In millions except per share amounts)
 
2010
 
2009
 
2010
 
2009
 
                   
Revenues
                 
  Product revenues
  $ 2,268.4   $ 2,140.6   $ 6,797.0   $ 6,129.9  
  Service revenues
    415.1     390.5     1,210.6     1,140.4  
                           
      2,683.5     2,531.1     8,007.6     7,270.3  
                           
Costs and Operating Expenses:
                         
  Cost of product revenues
    1,344.1     1,285.8     4,029.5     3,717.8  
  Cost of service revenues
    241.9     234.1     701.3     666.1  
  Selling, general and administrative expenses
    696.7     662.1     2,108.3     1,948.0  
  Research and development expenses
    71.9     60.5     209.0     176.8  
  Restructuring and other costs, net
    10.3     13.1     35.9     37.0  
                           
      2,364.9     2,255.6     7,084.0     6,545.7  
                           
Operating Income
    318.6     275.5     923.6     724.6  
Other Expense, Net
    (15.4 )   (28.6 )   (77.1 )   (78.4 )
                           
Income from Continuing Operations Before Provision for Income Taxes
    303.2     246.9     846.5     646.2  
Provision for Income Taxes
    (34.7 )   (25.7 )   (110.9 )   (69.2 )
                           
Income from Continuing Operations
    268.5     221.2     735.6     577.0  
Gain on Disposal of Discontinued Operations, Net (net of income tax benefit of $1.5 in 2010)
            2.5      
                           
Net Income
  $ 268.5   $ 221.2   $ 738.1   $ 577.0  
                           
Earnings per Share from Continuing Operations
                         
  Basic
  $ .67   $ .54   $ 1.81   $ 1.39  
  Diluted
  $ .66   $ .53   $ 1.78   $ 1.36  
                           
Earnings per Share
                         
  Basic
  $ .67   $ .54   $ 1.82   $ 1.39  
  Diluted
  $ .66   $ .53   $ 1.79   $ 1.36  
                           
Weighted Average Shares
                         
  Basic
    400.7     407.9     406.5     413.6  
  Diluted
    404.5     420.2     412.9     423.0  
 

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

 
4

 
 
THERMO FISHER SCIENTIFIC INC.
 
Consolidated Statement of Cash Flows
(Unaudited)
 
   
Nine Months Ended
 
   
October 2,
 
September 26,
 
(In millions)
 
2010
 
2009
 
           
Operating Activities
         
   Net Income
  $ 738.1   $ 577.0  
   Gain on disposal of discontinued operations
    (2.5 )    
               
   Income from continuing operations
    735.6     577.0  
               
   Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
             
      Depreciation and amortization
    579.4     580.1  
      Change in deferred income taxes
    (198.1 )   (182.6 )
      Non-cash stock-based compensation
    62.6     56.4  
      Non-cash interest expense on convertible debt
    7.2     17.1  
      Tax benefits from stock-based compensation awards
    (7.9 )   (1.7 )
      Other non-cash expenses, net
    42.8     44.5  
      Changes in assets and liabilities, excluding the effects of acquisitions and dispositions:
             
         Accounts receivable
    (133.9 )   47.3  
         Inventories
    (62.2 )   54.5  
         Other assets
    (37.6 )   17.3  
         Accounts payable
    47.4     31.5  
         Other liabilities
    39.6     (82.6 )
         Contributions to retirement plans
    (14.9 )   (37.3 )
               
            Net cash provided by continuing operations
    1,060.0     1,121.5  
            Net cash used in discontinued operations
    (0.4 )   (0.9 )
               
            Net cash provided by operating activities
    1,059.6     1,120.6  
               
Investing Activities
             
   Acquisitions, net of cash acquired
    (545.4 )   (155.5 )
   Purchase of property, plant and equipment
    (173.6 )   (125.8 )
   Proceeds from sale of property, plant and equipment
    4.2     9.6  
   Proceeds from sale of available-for-sale investments
    0.5     0.6  
   Proceeds from sale of businesses, net of cash divested
        2.7  
   Decrease (increase) in other assets
    3.6     (8.4 )
               
            Net cash used in continuing operations
    (710.7 )   (276.8 )
            Net cash provided by discontinued operations
    4.1      
               
            Net cash used in investing activities
  $ (706.6 ) $ (276.8 )
 

 
5

 
 
THERMO FISHER SCIENTIFIC INC.
 
Consolidated Statement of Cash Flows (continued)
(Unaudited)
 
   
Nine Months Ended
 
   
October 2,
 
September 26,
 
(In millions)
   2010    2009  
           
Financing Activities
         
   Net proceeds from issuance of long-term debt
  $ 741.3   $ 4.2  
   Settlement of convertible debt
    (600.8 )    
   Redemption and repayment of long-term obligations
    (502.9 )   (0.5 )
   Purchases of company common stock
    (662.5 )   (414.6 )
   Net proceeds from issuance of company common stock
    52.6     17.5  
   Tax benefits from stock-based compensation awards
    7.9     1.7  
   Decrease in short-term notes payable
    (8.7 )   (13.4 )
               
            Net cash used in financing activities
    (973.1 )   (405.1 )
               
Exchange Rate Effect on Cash of Continuing Operations
    (13.8 )   26.5  
               
Increase (Decrease) in Cash and Cash Equivalents
    (633.9 )   465.2  
Cash and Cash Equivalents at Beginning of Period
    1,564.1     1,280.5  
               
Cash and Cash Equivalents at End of Period
  $ 930.2   $ 1,745.7  
               
Supplemental Cash Flow Information
             
   Fair value of assets of acquired businesses
  $ 726.6   $ 179.7  
   Cash paid for acquired businesses
    (584.2 )   (147.2 )
               
      Fair value of liabilities assumed of acquired businesses
  $ 142.4   $ 32.5  
               
   Issuance of restricted stock
  $ 1.4   $ 1.1  
               
   Issuance of stock upon vesting of restricted stock units
  $ 15.6   $ 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 October 2, 2010, the results of operations for the three- and nine-month periods ended October 2, 2010, and September 26, 2009, and the cash flows for the nine-month periods ended October 2, 2010, and September 26, 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, $24 million was allocated to goodwill, none of which is tax deductible.
 
In July 2010, the company’s Analytical Technologies segment acquired Fermentas International Inc., a manufacturer and global distributor of enzymes, reagents and kits for molecular and cellular biology research, with principal operations in Lithuania, for $260 million, net of cash acquired. The acquisition expands the company’s ability to provide complete workflows for genomics research. Fermentas reported revenues of approximately $55 million in 2009.  The purchase price exceeded the fair value of the acquired net assets and, accordingly, $123 million was allocated to goodwill, none of which is tax deductible.
 
In addition, in the first nine 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.
 
 
7

 
 
THERMO FISHER SCIENTIFIC INC.

Notes to Consolidated Financial Statements
(Unaudited)

2.         Acquisitions (continued)

    The company made contingent purchase price payments totaling $4 million in the first nine 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.
 
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:
 
 
 
8

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

2.         Acquisitions (continued)
 
(In millions)
 
Ahura Scientific
 
Finnzymes
 
Fermentas
 
Other
 
Total
 
                       
Purchase Price
                     
  Cash paid
  $ 164.0   $ 59.0   $ 278.0   $ 83.2   $ 584.2  
  Debt assumed
    0.6         3.6     0.8     5.0  
  Purchase price payable
            0.7         0.7  
  Fair value of contingent consideration
    19.6             3.9     23.5  
  Cash acquired
    (17.8 )   (0.7 )   (21.9 )   (2.3 )   (42.7 )
                                 
    $ 166.4   $ 58.3   $ 260.4   $ 85.6   $ 570.7  
                                 
Allocation
                               
  Current assets
  $ 22.3   $ 6.0   $ 16.3   $ 9.7   $ 54.3  
  Property, plant and equipment
    3.3     3.4     9.6     0.4     16.7  
  Intangible assets:
                               
  Customer relationships
    46.1     16.1     67.9     15.5     145.6  
  Product technology
    30.4     18.6     73.6     19.4     142.0  
  In-process research and development
                4.4     4.4  
  Tradenames and other
    0.4     0.2     5.3     1.8     7.7  
  Goodwill
    109.9     24.4     122.9     43.6     300.8  
  Other assets
    0.1     1.9     3.0     7.4     12.4  
  Liabilities assumed
    (46.1 )   (12.3 )   (38.2 )   (16.6 )   (113.2 )
                                 
    $ 166.4   $ 58.3   $ 260.4   $ 85.6   $ 570.7  

The weighted-average amortization periods for intangible assets acquired in 2010 are 10 years for customer relationships, 9 years for product technology and 12 years for tradenames and other. The weighted average amortization period for all intangible assets in the above table is 10 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.
 

 
9

 
 
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
 
Nine Months Ended
 
   
October 2,
 
September 26,
 
October 2,
 
September 26,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
                   
Revenues
                 
  Analytical Technologies
  $ 1,163.0   $ 1,018.6   $ 3,371.4   $ 2,960.7  
  Laboratory Products and Services
    1,650.8     1,631.3     5,026.5     4,653.6  
  Eliminations
    (130.3 )   (118.8 )   (390.3 )   (344.0 )
                           
    Consolidated revenues
    2,683.5     2,531.1     8,007.6     7,270.3  
                           
Segment Income
                         
  Analytical Technologies (a)
    249.9     202.7     709.3     577.6  
  Laboratory Products and Services (a)
    221.4     234.8     695.4     627.5  
                           
    Subtotal reportable segments (a)
    471.3     437.5     1,404.7     1,205.1  
                           
  Cost of revenues charges
    (2.5 )   (1.0 )   (11.3 )   (1.9 )
  Selling, general and administrative charges, net
    (0.5 )   0.3     (1.4 )   (1.0 )
  Restructuring and other costs, net
    (10.3 )   (13.1 )   (35.9 )   (37.0 )
  Amortization of acquisition-related intangible assets
    (139.4 )   (148.2 )   (432.5 )   (440.6 )
                           
    Consolidated operating income
    318.6     275.5     923.6     724.6  
  Other expense, net (b)
    (15.4 )   (28.6 )   (77.1 )   (78.4 )
                           
  Income from continuing operations before provision for income taxes
  $ 303.2   $ 246.9   $ 846.5   $ 646.2  
                           
Depreciation
                         
  Analytical Technologies
  $ 22.7   $ 21.4   $ 66.7   $ 63.1  
  Laboratory Products and Services
    26.4     25.9     80.2     76.4  
                           
    Consolidated depreciation
  $ 49.1   $ 47.3   $ 146.9   $ 139.5  

(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.
 


 
10

 
 
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
 
Nine Months Ended
 
   
October 2,
 
September 26,
 
October 2,
 
September 26,
 
(In millions)
   2010    2009    2010    2009  
                   
Interest Income
  $ 3.4   $ 2.5   $ 8.7   $ 12.5  
Interest Expense
    (19.1 )   (29.2 )   (65.2 )   (89.0 )
Other Items, Net
    0.3     (1.9 )   (20.6 )   (1.9 )
                           
    $ (15.4 ) $ (28.6 ) $ (77.1 ) $ (78.4 )
 
    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    Nine Months Ended  
      October 2,   September 26,    October 2,   September 26,  
(In millions)
    2010    2009    2010    2009  
                   
Stock Option Awards
  $ 12.9   $ 13.5   $ 37.3   $ 36.9  
Restricted Share/Unit Awards
    8.3     7.1     25.3     19.5  
                           
Total Stock-based Compensation Expense
  $ 21.2   $ 20.6   $ 62.6   $ 56.4  
 
    Stock-based compensation expense is included in the accompanying statement of income as follows:
 
   
Three Months Ended
 
Nine Months Ended
 
   
October 2,
 
September 26,
 
October 2,
 
September 26,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
                   
Cost of Revenues
  $ 1.6   $ 1.3   $ 4.6   $ 4.7  
Selling, General and Administrative Expenses
    19.1     18.8     56.6     50.0  
Research and Development Expenses
    0.5     0.5     1.4     1.7  
                           
Total Stock-based Compensation Expense
  $ 21.2   $ 20.6   $ 62.6   $ 56.4  

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 $96 million and $53 million, respectively, as of October 2, 2010, and is expected to be recognized through 2015 with weighted average periods of 2.8 years and 2.5 years, respectively.
 
During the first nine 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.
 
 
11

 
 
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 defined benefit pension plans include the following components:
 
   
Three Months Ended
 
Nine Months Ended
 
   
October 2,
 
September 26,
 
October 2,
 
September 26,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
                   
Service Cost
  $ 3.8   $ 2.7   $ 9.1   $ 7.7  
Interest Cost on Benefit Obligation
    13.1     12.6     39.1     37.0  
Expected Return on Plan Assets
    (13.8 )   (13.1 )   (41.0 )   (38.0 )
Amortization of Net Loss
    0.5     0.4     1.5     1.2  
Amortization of Prior Service Benefit
                0.1  
Settlement/Curtailment Gain
    (0.8 )       (0.8 )   (0.2 )
Special Termination Benefits
    0.1         0.4     0.3  
                           
Net Periodic Benefit Cost
  $ 2.9   $ 2.6   $ 8.3   $ 8.1  
 
    Net periodic benefit costs for the company's other postretirement benefit plans include the following components:
 
   
Three Months Ended
 
Nine Months Ended
 
   
October 2,
 
September 26,
 
October 2,
 
September 26,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
                   
Service Cost
  $ 0.1   $ 0.2   $ 0.3   $ 0.4  
Interest Cost on Benefit Obligation
    0.4     0.4     1.4     1.2  
Amortization of Net Gain
    (0.1 )       (0.3 )    
                           
Net Periodic Benefit Cost
  $ 0.4   $ 0.6   $ 1.4   $ 1.6  

 
12

 
 
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
 
Nine Months Ended
 
   
October 2,
 
September 26,
 
October 2,
 
September 26,
 
(In millions except per share amounts)
 
2010
 
2009
 
2010
 
2009
 
                   
Income from Continuing Operations
  $ 268.5   $ 221.2   $ 735.6   $ 577.0  
Gain on Disposal of Discontinued Operations, Net
            2.5      
                           
Net Income
    268.5     221.2     738.1     577.0  
                           
Income Allocable to Participating Securities
        (0.1 )   (0.2 )   (0.4 )
                           
Net Income for Earnings per Share
  $ 268.5   $ 221.1   $ 737.9   $ 576.6  
                           
Basic Weighted Average Shares
    400.7     407.9     406.5     413.6  
Effect of:
                         
  Convertible debentures
    1.1     10.2     3.3     7.9  
  Stock options, restricted stock/units
    2.7     2.1     3.1     1.5  
                           
Diluted Weighted Average Shares
    404.5     420.2     412.9     423.0  
                           
Basic Earnings per Share:
                         
  Continuing operations
  $ .67   $ .54   $ 1.81   $ 1.39  
  Discontinued operations
            .01      
                           
    $ .67   $ .54   $ 1.82   $ 1.39  
                           
Diluted Earnings per Share:
                         
  Continuing operations
  $ .66   $ .53   $ 1.78   $ 1.36  
  Discontinued operations
            .01      
                           
    $ .66   $ .53   $ 1.79   $ 1.36  

Options to purchase 8.3 million, 7.0 million, 8.2 million and 13.1 million shares of common stock were not included in the computation of diluted earnings per share for the third quarter of 2010 and 2009 and the first nine months of 2010 and 2009, respectively, because their effect would have been antidilutive.
 

 
13

 
 
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 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 October 2, 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 half 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 $17 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. The debt, temporary equity and equity components recognized for the company’s convertible debt are as follows:
 
   
October 2,
 
December 31,
 
(In millions)
 
2010
 
2009
 
           
Principal Amount of Convertible Debt
  $ 329.3   $ 668.8  
Unamortized Discount
    3.3     10.9  
Net Carrying Amount
    326.0     657.9  
Incremental Convertible Debt Obligation (Temporary Equity)
    3.3     1.9  
Capital in Excess of Par Value
    14.8     30.7  

 
14

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

8.         Debt and Other Financing Arrangements (continued)
 
At October 2, 2010, the unamortized discount had a remaining weighted average recognition period of 6 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
 
Nine Months Ended
 
   
October 2,
 
September 26,
 
October 2,
 
September 26,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
                   
Contractual Coupon Interest
  $ 2.7   $ 4.5   $ 8.3   $ 14.2  
Amortization of Discount on Convertible Debt
    1.9     5.8     7.2     17.1  
                           
Interest Expense
  $ 4.6   $ 10.3   $ 15.5   $ 31.3  
                           
Effective Interest Rate
    5.6%     4.4%     4.5%     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 these 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. 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.
 
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.
 
 
15

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

9.         Litigation and Related Contingencies (continued)
 
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 third quarters of 2010 and 2009, the company had comprehensive income of $498 million and $296 million, respectively. During the first nine months of 2010 and 2009, the company had comprehensive income of $725 million and $802 million, respectively. The third quarter of 2010 was favorably affected by an increase in the cumulative translation adjustment of $228 million due to movements in currency exchange rates, the effects of which are recorded in shareholders’ equity. The first nine months of 2010 were unfavorably affected by a decrease in the cumulative translation adjustment of $15 million. 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.
 

 
16

 
 
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 October 2, 2010:
 

   
October 2,
 
Quoted Prices
in Active
Markets
 
Significant
Other
Observable
Inputs
 
Significant Unobservable Inputs
 
(In millions)
 
2010
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
                   
Assets
                 
  Cash equivalents
  $ 293.3   $ 293.3   $   $  
  Investments in mutual funds, unit trusts and other similar instruments
    37.0     37.0          
  Insurance contracts
    32.6         32.6      
  Auction rate securities
    4.7             4.7  
  Derivative contracts
    63.5         63.5      
                           
    Total Assets
  $ 431.1   $ 330.3   $ 96.1   $ 4.7  
                           
Liabilities
                         
  Derivative contracts
  $ 4.0   $   $ 4.0   $  
                           
    Total Liabilities
  $ 4.0   $   $ 4.0   $  

 
17

 
 
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
 
Nine Months Ended
 
   
October 2,
 
September 26,
 
October 2,
 
September 26,
 
(In millions)
 
2010
 
2009
 
2010
 
2009
 
                   
Beginning Balance
  $ 4.9   $ 6.0   $ 5.4   $ 5.7  
Total impairment losses included in earnings
        (0.3 )       (0.3 )
Sale of securities
    (0.1 )       (0.5 )    
Total unrealized losses included in other comprehensive income
    (0.1 )   (0.3 )   (0.2 )    
                           
Ending Balance
  $ 4.7   $ 5.4   $ 4.7   $ 5.4  

The notional amounts of derivative contracts outstanding totaled $1.71 billion and $1.24 billion at October 2, 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.
 
 
18

 
 
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  
     
October 2,
  December 31,    
October 2,
  December 31,  
(In millions)
   
2010
   
2009
   
2010
   
2009
 
                           
Derivatives Designated as Hedging Instruments                          
      Interest rate swaps (a)
  $ 62.7   $   $   $ 9.5  
Derivatives Not Designated as Hedging Instruments
                         
  Foreign currency exchange contracts (b)
    0.8     4.5     4.0     0.8  
                           
   Total derivatives
  $ 63.5   $ 4.5   $ 4.0   $ 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     Nine Months Ended  
     
October 2,
  September 26,    
October 2,
  September 26,  
(In millions)
   
2010
   
2009
   
2010
   
2009
 
                           
Derivatives Designated as Fair Value Hedges
                         
      Interest rate contracts   $ 5.7   $ —    $ 14.2   $  
Derivatives Not Designated as Fair Value Hedges
                         
  Foreign currency exchange contracts
    (20.7 )   (5.4 )   18.3     (12.7 )
 
    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.
 
 
19

 
 
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:
 
   
October 2, 2010
 
December 31, 2009
 
   
Carrying
 
Fair
 
Carrying
 
Fair
 
(In millions)
 
Value
 
Value
 
Value
 
Value
 
                   
Notes Receivable
  $ 5.5   $ 5.5   $ 6.8   $ 6.8  
                           
Debt Obligations:
                         
  Convertible obligations
    326.0     391.7     657.9     992.0  
  Senior notes
    1,810.2     1,874.3     989.6     1,016.1  
  Senior subordinated notes
            500.0     520.1  
  Other
    25.8     25.8     34.0     34.0  
                           
    $ 2,162.0   $ 2,291.8   $ 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:
 
   
Nine Months Ended
 
   
October 2,
 
September 26,
 
(In millions)
 
2010
 
2009
 
           
Beginning Balance
  $ 45.2   $ 44.1  
   Provision charged to income
    31.0     25.6  
   Usage
    (31.9 )   (31.3 )
   Acquisitions
    0.2     0.2  
   Adjustments to previously provided warranties, net
        1.5  
   Other, net (a)
    0.2     0.8  
               
Ending Balance
  $ 44.7   $ 40.9  
 
(a) Primarily represents the effects of currency translation.
 

 
20

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

13.       Restructuring and Other Costs, Net
 
Restructuring costs in the first nine 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 November 5, 2010, the company has identified restructuring actions that will result in additional charges of approximately $28 million, primarily in the remainder of 2010 and in 2011.
 
During the third 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
  $ 1.4   $ 1.1   $   $ 2.5  
Selling, General and Administrative Expenses
    0.5             0.5  
Restructuring and Other Costs, Net
    5.0     5.1     0.2     10.3  
                           
    $ 6.9   $ 6.2   $ 0.2   $ 13.3  
 
    During the first nine 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
  $ 7.8   $ 3.5   $   $ 11.3  
Selling, General and Administrative Expenses
    1.6     (0.2 )       1.4  
Restructuring and Other Costs, Net
    17.5     18.0     0.4     35.9  
                           
    $ 26.9   $ 21.3   $ 0.4   $ 48.6  

The components of net restructuring and other costs by segment are as follows:
 
Analytical Technologies
 
The Analytical Technologies segment recorded $6.9 million of net restructuring and other charges in the third quarter of 2010. The segment recorded charges to cost of revenues of $1.4 million primarily for the sale of inventories revalued at the date of acquisition; charges to selling, general and administrative expenses of $0.5 million for transaction costs, net, primarily related to the Fermentas acquisition (Note 2); and $5.0 million of other restructuring costs, substantially all of which were cash costs. These cash costs were primarily associated with headcount reductions and facility consolidations to streamline operations, including $3.4 million of severance for approximately 110 employees; $0.9 million of abandoned facility costs; and $0.5 million of other cash costs, primarily retention, relocation and moving expenses associated with facility consolidations as well as other costs associated with restructuring actions.
 
 
 
21

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

13.       Restructuring and Other Costs, Net (continued)
 
    In the second quarter of 2010, this segment recorded $7.0 million of net restructuring and other charges. The segment recorded charges to cost of revenues of $2.5 million for the sale of inventories revalued at the date of acquisition and accelerated depreciation at facilities closing due to real estate consolidation and $4.5 million of other restructuring costs, principally cash costs. These cash costs were primarily associated with headcount reductions and facility consolidations to streamline operations, including $3.6 million of severance for approximately 40 employees; $0.3 million of abandoned facility costs; and $0.5 million of other cash costs, primarily retention, relocation and moving expenses associated with facility consolidations as well as other costs associated with restructuring actions.
 
In the first quarter of 2010, this segment recorded $13.0 million of net restructuring and other charges. These costs consisted of charges to cost of revenues of $3.9 million for the sale of inventories revalued at the date of acquisition and accelerated depreciation at facilities closing due to real estate consolidation; charges to selling, general and administrative expenses of $1.1 million for transaction costs related to the Finnzymes acquisition (Note 2); and $8.0 million of cash restructuring costs, net. These cash costs were primarily associated with headcount reductions and facility consolidations to streamline operations, including $5.4 million of severance for approximately 65 employees; $1.4 million of abandoned facility costs; and $1.2 million of other cash costs, primarily retention, relocation and moving expenses associated with facility consolidations as well as other costs associated with restructuring actions.
 
Laboratory Products and Services
 
The Laboratory Products and Services segment recorded $6.2 million of net restructuring and other charges in the third quarter of 2010. The segment recorded charges to cost of revenues of $1.1 million for the sale of inventories revalued at the date of acquisition and accelerated depreciation at facilities closing due to real estate consolidation and $3.1 million of cash costs. The cash costs, which were associated with headcount reductions and facility consolidations to streamline operations, included $1.0 million of severance; $0.5 million of abandoned facility costs; and $1.6 million of other cash costs, primarily retention, relocation, moving and related expenses associated with facility consolidations. In addition, the segment recorded $2.0 million of non-cash charges, net, primarily asset write-downs for abandoned facilities held for sale.
 
    In the second quarter of 2010, this segment recorded $4.6 million of net restructuring and other charges. The segment recorded charges to cost of revenues of $1.2 million for accelerated depreciation at facilities closing due to real estate consolidation and $3.6 million in cash costs. The cash costs, which were associated with headcount reductions and facility consolidations to streamline operations, included $0.7 million of severance; $1.2 million of abandoned facility costs; and $1.7 million of other cash costs, primarily retention, relocation, moving and related expenses associated with facility consolidations.
 
In the first quarter of 2010, this segment recorded $10.5 million of net restructuring and other charges. These costs consisted of charges to cost of revenues of $1.2 million for accelerated depreciation at facilities closing due to real estate consolidation; $3.5 million in cash costs; and $5.8 million in other costs, net. The cash costs, which were associated with headcount reductions and facility consolidations to streamline operations, included $0.3 million of severance; $1.7 million of abandoned facility costs; and $1.5 million of other cash costs, primarily retention, relocation, moving and related expenses associated with facility consolidations. The non-cash costs of $5.8 million were primarily due to a charge related to a patent infringement claim initiated prior to a business unit’s acquisition by the company which remains unpaid pending appeals.
 
 
 
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THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)

13.       Restructuring and Other Costs, Net (continued)
 
Corporate
 
The company recorded $0.4 million in restructuring and other charges at its corporate office, all of which were cash costs, in the first nine months of 2010.
 
            The following table summarizes the cash components of the company’s restructuring plans. The non-cash components and other amounts reported as restructuring and other costs, net, in the accompanying statement of income have been summarized in the notes to the tables. Accrued restructuring costs are included in other accrued expenses in the accompanying balance sheet.
 
(In millions)
 
Severance
 
Abandonment
of Excess
Facilities
 
Other (a)
 
Total
 
                   
Pre-2009 Restructuring Plans
                 
  Balance At December 31, 2009
  $ 2.5   $ 4.3   $ 0.3   $ 7.1  
  Costs incurred in 2010 (b)
        1.7     0.1     1.8  
  Reserves reversed
        (0.3 )       (0.3 )
  Payments
    (1.6 )   (2.1 )   (0.4 )   (4.1 )
  Currency translation
    (0.1 )           (0.1 )
                           
  Balance At October 2, 2010
  $ 0.8   $ 3.6   $   $ 4.4  
                           
2009 Restructuring Plans
                         
  Balance At December 31, 2009
  $ 21.0   $ 2.3   $ 1.8   $ 25.1  
  Costs incurred in 2010 (b)
    9.5     3.7     4.8     18.0  
  Reserves reversed
    (1.2 )   (0.1 )   (0.3 )   (1.6 )
  Payments
    (17.4 )   (3.4 )   (5.8 )   (26.6 )
  Currency translation
    (1.9 )   0.5         (1.4 )
                           
  Balance At October 2, 2010
  $ 10.0   $ 3.0   $ 0.5   $ 13.5  
                           
2010 Restructuring Plans
                         
  Costs incurred in 2010 (b)
  $ 6.3   $ 1.1   $ 2.5   $ 9.9  
  Payments
    (5.2 )   (0.8 )   (2.4 )   (8.4 )
  Currency translation
    0.4             0.4  
                           
  Balance At October 2, 2010
  $ 1.5   $ 0.3   $ 0.1   $ 1.9  

(a)
Other includes employee retention costs which are accrued ratably over the period through which employees must work to qualify for a payment.
(b)
Excludes an aggregate of $8 million non-cash charges, net, which are detailed by segment above.
 
The company expects to pay accrued restructuring costs as follows: severance and other costs, primarily through 2011; and abandoned-facility payments, over lease terms expiring through 2016.
 
 
23

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

14.       Recent Accounting Pronouncements
 
In September 2009, the Emerging Issues Task Force issued new rules pertaining to the accounting for revenue arrangements with multiple customer deliverables and for software-enabled products. The new rule pertaining to arrangements under which the company has multiple customer deliverables provides an alternative method for establishing the fair value of a deliverable when vendor specific objective evidence does not exist. The guidance requires the determination of the best estimate of selling price to separate deliverables and allows the allocation of the customer’s consideration using this relative selling price model. The new guidance pertaining to software-enabled products revised the existing software accounting guidance to exclude equipment where the software is more than incidental to the value of the product. Under the new standard, such equipment is accounted for under revenue recognition criteria applicable to equipment instead of that applicable to software. The company adopted the rules prospectively on January 1, 2010. Adoption did not materially affect the company’s results of operations or financial position.
 
Effective, January 1, 2010, the company adopted new accounting guidance pertaining to the consolidation assessment of variable interest entities. The new guidance requires the company to determine whether its variable interests in third party entities give the company a controlling financial interest in the entities. This amended guidance replaces the previous quantitative approach for identifying when enterprises should consolidate variable interest entities with a qualitative analysis, based on which enterprise has both (1) the power to direct the economic activities of a variable interest entity and (2) the obligation to absorb losses or receive benefits from the entity that could be significant to the variable interest entity. Adoption of this standard did not have an impact on the company’s results of operations or financial position.
 

 
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THERMO FISHER SCIENTIFIC INC.
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934 are made throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. While the company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the company’s estimates change, and readers should not rely on those forward-looking statements as representing the company’s views as of any date subsequent to the date of the filing of this Quarterly Report.
 
A number of important factors could cause the results of the company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading “Risk Factors” in Part II, Item 1A of this report on Form 10-Q.
 
Overview of Results of Operations and Liquidity
 
The company develops, manufactures, sells and purchases for resale a broad range of products that are sold worldwide. The company expands the product lines and services it offers by developing and commercializing its own technologies and by making strategic acquisitions of complementary businesses. The company’s continuing operations fall into two business segments: Analytical Technologies and Laboratory Products and Services.
 
   
Three Months Ended
 
Nine Months Ended
 
   
October 2,
 
September 26,
 
October 2,
 
September 26,
 
(Dollars in millions)
 
2010
 
2009
 
2010
 
2009
 
                                   
Revenues
                                 
Analytical Technologies
  $ 1,163.0   43.3%   $ 1,018.6   40.2%   $ 3,371.4   42.1%   $ 2,960.7   40.7%  
Laboratory Products and Services
    1,650.8   61.5%     1,631.3   64.5%     5,026.5   62.8%     4,653.6   64.0%  
Eliminations
    (130.3 ) (4.8)%     (118.8 ) (4.7)%     (390.3 ) (4.9)%     (344.0 ) (4.7)%  
                                           
    $ 2,683.5   100%   $ 2,531.1   100%   $ 8,007.6   100%   $ 7,270.3   100%  

Sales in the third quarter of 2010 were $2.68 billion, an increase of $152 million from the third quarter of 2009. Aside from the effects of currency translation and acquisitions, net of divestitures (discussed in total and by segment below), revenues increased from 2009 by $106 million (4%) primarily due to increased demand. Sales rebounded from a weak third quarter of 2009 when the company believes a global economic slowdown reduced demand. The increase in revenues was offset in part by lower sales resulting from cessation of a supply contract and a milder flu season than in 2009. These factors decreased sales by approximately 2 percentage points.
 
The company’s strategy is to augment internal growth at existing businesses with complementary acquisitions such as those completed in 2010 and 2009. The company’s principal acquisitions are described below.
 
·  
Fermentas, a manufacturer and global distributor of enzymes, reagents and kits for molecular and cellular biology research, was acquired in July 2010 to expand the company’s ability to provide complete workflows for genomics research.
 
·  
Finnzymes, a Finland-based provider of integrated tools for molecular biology analysis, including reagents, instruments, consumables and kits, was acquired in March 2010 to expand the company’s portfolio of reagents and other consumables for the molecular biology research and diagnostics markets.
 
 
 
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THERMO FISHER SCIENTIFIC INC.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Overview of Results of Operations and Liquidity (continued)
 
·  
Ahura Scientific, a provider of handheld spectroscopy instruments that are used worldwide in the identification of chemicals for safety, security and pharmaceutical applications, was acquired in February 2010 to expand the company’s portfolio of portable analytical devices.
 
·  
B.R.A.H.M.S. AG, a leading provider of specialty diagnostic tests based on patented biomarkers for sepsis, cardiovascular and pulmonary diseases, as well as intensive care treatments and prenatal screening, was acquired in October 2009 to increase the breadth of the company’s specialty diagnostics portfolio and provide a significant reagent manufacturing center in Europe.
 
·  
Biolab, an Australia-based provider of analytical instruments, life science consumables and laboratory equipment, was acquired in April 2009 to broaden the geographic reach of the company’s customer channels.
 
In the third quarter of 2010, operating income and operating income margin were $319 million and 11.9%, respectively, compared with $276 million and 10.9%, respectively, in 2009. The increases in operating income and operating margin were primarily due to profit on incremental sales and, to a lesser extent, productivity improvements including lower operating costs following restructuring actions and global sourcing initiatives. In addition, amortization expense decreased by $9 million in the third quarter of 2010, primarily due to the completion of amortization of acquisition-related intangibles from a 2005 acquisition.
 
The company’s effective tax rates were 11.4% and 10.4% in the third quarter of 2010 and 2009, respectively. The increase in the effective tax rate was primarily due to increased earnings in higher tax jurisdictions. The tax provision in the third quarter of 2010 was favorably affected by $6.7 million, or 2.2 percentage points, resulting from the settlement of a tax audit and the impact on deferred tax balances of newly enacted tax rates in the United Kingdom. The company expects its effective tax rate for the full year 2010 to be between 13.5% and 15.5% based on currently forecasted profitability in the countries in which the company conducts business.
 
Income from continuing operations increased to $269 million in the third quarter of 2010, from $221 million in the third quarter of 2009, primarily due to the items discussed above that increased operating income offset in part by a higher tax rate.
 
During the first nine months of 2010, the company’s cash flow from operations totaled $1.06 billion, compared with $1.12 billion for the first nine months of 2009. The decrease resulted primarily from increases in working capital items, particularly accounts receivable and inventories to support the growth in sales.
 
As of October 2, 2010, the company’s outstanding debt totaled $2.16 billion, of which approximately $0.33 billion is convertible debt, at a conversion price of $40.20 per share. Upon an investor’s election to convert, the company is required to pay the principal portion of these debentures in cash, and the balance of the conversion value in either cash or stock, at the company's election. For holders electing to convert the company’s convertible debentures in the next 12 months or electing to put the debt to the company at the first date on which this is permitted (March 2011), the company intends to draw on its revolving credit facility to fund any principal payments in excess of $100 million which has been classified as a current liability in the accompanying balance sheet. The facility is an unsecured revolving credit agreement expiring in 2012 with available capacity of $952 million at October 2, 2010.
 
The company believes that its existing cash and short-term investments of $939 million as of October 2, 2010, and the company’s future cash flow from operations together with available borrowing capacity under its revolving credit agreement, are sufficient to meet the cash requirements of its existing businesses for the foreseeable future, including at least the next 24 months.
 
 
 
26

 
 
THERMO FISHER SCIENTIFIC INC.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
Critical Accounting Policies and Estimates
 
Preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements of the company’s Form 10-K for 2009, describe the significant accounting estimates and policies used in preparation of the consolidated financial statements. Actual results in these areas could differ from management’s estimates. There have been no significant changes in the company’s critical accounting policies during the first nine months of 2010.
 
Results of Operations
 
Third Quarter 2010 Compared With Third Quarter 2009
 
Continuing Operations
 
   
Three Months Ended
                 
   
October 2,
 
September 26,
 
Total
 
Currency
 
Acquisitions/
     
(In millions)
 
2010
 
2009
 
Change
 
Translation
 
Divestitures
 
Operations
 
                           
Revenues
                         
Analytical Technologies
  $ 1,163.0   $ 1,018.6   $ 144.4   $ (17.6 ) $ 79.9   $ 82.1  
Laboratory Products and Services
    1,650.8     1,631.3     19.5     (16.2 )   (1.3 )   37.0  
Eliminations
    (130.3 )   (118.8 )   (11.5 )   1.1     0.1     (12.7 )
                                       
Consolidated Revenues
  $ 2,683.5   $ 2,531.1   $ 152.4   $ (32.7 ) $ 78.7   $ 106.4  

Sales in the third quarter of 2010 were $2.68 billion, an increase of $152 million from the third quarter of 2009. The unfavorable effects of currency translation resulted in a decrease in revenues of $33 million in 2010. Sales increased $79 million due to acquisitions, net of divestitures. Aside from the effects of currency translation and acquisitions, net of divestitures, revenues increased $106 million (4%) primarily due to increased demand. Sales rebounded from a weak third quarter of 2009 when the company believes global economic slowdown reduced demand. Sales growth was consistent across the company’s principal geographic regions. The increase in revenues was offset in part by lower sales resulting from cessation of a supply contract and a milder flu season than in 2009, as discussed below. These factors decreased sales by approximately 2 percentage points.
 
In the third quarter of 2010, operating income and operating income margin were $319 million and 11.9%, respectively, compared with $276 million and 10.9%, respectively, in 2009. The increases in operating income and operating margin were primarily due to profit on incremental sales and, to a lesser extent, productivity improvements including lower operating costs following restructuring actions and global sourcing initiatives. In addition, amortization expense decreased by $9 million in the third quarter of 2010, primarily due to the completion of amortization of acquisition-related intangibles from a 2005 acquisition.
 
 
 
27

 
 
THERMO FISHER SCIENTIFIC INC.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations (continued)
 
In the third quarter of 2010, the company recorded restructuring and other costs, net, of $13 million, including $2.5 million of charges to cost of revenues related to the sale of inventories revalued at the date of acquisition and accelerated depreciation on manufacturing assets to be abandoned due to facility consolidations and $0.5 million of charges to selling, general and administrative expenses for transaction costs, net, primarily related to the acquisition of Fermentas. The company incurred $8 million of cash costs, primarily for actions initiated in 2009 and, to a lesser extent, 2010 in response to the downturn in the economy and reduced revenues, including severance to reduce headcount at several businesses and abandoned facility expenses at businesses that have been or are being consolidated. The company also incurred $2 million of non-cash asset writedowns associated with abandoned facilities held for sale. (Note 13). In 2009, the company recorded restructuring and other costs, net, of $14 million, including $1 million of charges to cost of revenues related to accelerated depreciation on manufacturing assets to be abandoned due to facility consolidations and a net gain of $0.3 million in selling, general and administrative expenses primarily for settlement of certain pre-merger Fisher product liability-related matters, offset in part by transaction costs related to the acquisition of B.R.A.H.M.S. The company incurred $12 million of cash costs primarily for actions in response to the downturn in the economy and reduced revenues including severance to reduce headcount at several businesses and abandoned facility expenses at businesses that have been or are being consolidated. The company also incurred non-cash costs of $1 million, primarily for asset write-downs at abandoned facilities.
 
As of November 5, 2010, the company has identified restructuring actions that will result in additional charges of approximately $28 million in 2010 and 2011 and expects to identify additional actions during the remainder of 2010. The restructuring actions initiated in 2009 and the first nine months of 2010 are expected to result in annual cost savings of approximately $136 million, including $92 million for actions taken through the end of the third quarter of 2010 and $44 million for actions that have been approved and will be completed primarily in the remainder of 2010 and in 2011.
 
Segment Results
 
The company’s management evaluates segment operating performance using operating income before certain charges/credits to cost of revenues and selling, general and administrative expenses, principally associated with acquisitions; restructuring and other costs/income including costs arising from facility consolidations such as severance and abandoned lease expense and gains and losses from the sale of real estate and product lines; and amortization of acquisition-related intangible assets. The company uses these measures because it helps management understand and evaluate the segments’ core operating results and facilitate comparison of performance for determining compensation (Note 3). Accordingly, the following segment data is reported on this basis.
 
 
 
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THERMO FISHER SCIENTIFIC INC.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations (continued)
 
   
Three Months Ended
 
   
October 2,
 
September 26,
     
(Dollars in millions)
 
2010
 
2009
 
Change
 
               
Revenues
             
   Analytical Technologies
  $ 1,163.0   $ 1,018.6   14%  
   Laboratory Products and Services
    1,650.8     1,631.3   1%  
   Eliminations
    (130.3 )   (118.8 ) 10%  
                   
   Consolidated Revenues
  $ 2,683.5   $ 2,531.1   6%  
                   
Segment Income
                 
   Analytical Technologies
  $ 249.9   $ 202.7   23%  
   Laboratory Products and Services
    221.4     234.8   (6)%  
                   
   Subtotal Reportable Segments
    471.3     437.5   8%  
                   
   Cost of Revenues Charges
    (2.5 )   (1.0 )    
   Selling, General and Administrative Charges, Net
    (0.5 )   0.3      
   Restructuring and Other Costs, Net
    (10.3 )   (13.1 )    
   Amortization of Acquisition-related Intangible Assets
    (139.4 )   (148.2 )    
                   
   Consolidated Operating Income
  $ 318.6   $ 275.5   16%  
                   
Reportable Segments Operating Income Margin
    17.6%     17.3%      
                   
Consolidated Operating Income Margin
    11.9%     10.9%      

Income from the company’s reportable segments increased 8% to $471 million in the third quarter of 2010 due primarily to profit on incremental sales and, to a lesser extent, productivity improvements including global sourcing and lower operating costs following restructuring actions. The company also refers to this measure as adjusted operating income.
 
   Analytical Technologies
 
     Three Months Ended  
     October 2,   September 26,      
(Dollars in millions)
   2010    2009    Change  
               
Revenues
  $ 1,163.0   $ 1,018.6   14%  
                   
Operating Income Margin
    21.5%     19.9%   1.6  

Sales in the Analytical Technologies segment increased $144 million to $1.16 billion in the third quarter of 2010. The unfavorable effects of currency translation resulted in a decrease in revenue of $18 million in 2010. Sales increased $80 million due to acquisitions. In addition to the changes in revenue resulting from currency translation and acquisitions, revenues increased $82 million (8%) primarily due to increased demand. Demand was particularly strong for process instruments and equipment, mass spectrometry instruments, clinical diagnostics and bioscience offerings. These increases were offset in part by lower revenues from microbiology products due to a milder flu season.
 
 
29

 
 
THERMO FISHER SCIENTIFIC INC.
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations (continued)
 
Operating income margin was 21.5% in the third quarter of 2010 and 19.9% in the third quarter of 2009. The increase resulted from profit on incremental sales and, to a lesser extent, productivity improvements, including lower operating costs following restructuring actions and global sourcing initiatives. These increases were offset in part by higher spending on research and development initiatives.
 
   Laboratory Products and Services
 
     Three Months Ended  
     October 2,   September 26,      
(Dollars in millions)    2010    2009    Change  
               
Revenues
  $ 1,650.8   $ 1,631.3   1%  
                   
Operating Income Margin
    13.4%     14.4%   (1.0 )

Sales in the Laboratory Products and Services segment increased $20 million to $1.65 billion in the third quarter of 2010. The unfavorable effects of currency translation resulted in a decrease in revenues of $16 million in 2010. Sales decreased $1 million due to divestitures, net of acquisitions. In addition to the changes in revenue resulting from currency translation and divestitures, net of acquisitions, revenues increased $37 million (2%) primarily due to stronger demand. Demand for laboratory equipment, which had been particularly weak in 2009, improved in 2010. These increases were offset in part by $41 million of lower revenues following termination of a supply contract discussed below and, to a lesser extent, decreased revenues associated with flu products due to milder flu conditions in 2010 compared to 2009 when demand was partly driven by the H1N1 flu. The company expects that cessation of the supply contract will continue to unfavorably affect revenue growth through the first half of 2011.
 
In November 2009, a significant supplier of the company’s healthcare market channel notified the company that it intended to cease an existing supply arrangement in mid-2010. The company believes this was in part a response to the company’s strategic decision to expand its product offerings to provide its customers with a broader menu of diagnostic solutions. The company has signed an agreement with an alternative supplier of laboratory products and has begun selling these and other products from the new supplier offsetting a portion of the drop in revenue. As a result of these events, sales were unfavorably affected by $41 million, net, in the third quarter of 2010 compared with the third quarter of 2009. The company expects a net reduction of revenues related to these matters of approximately $33 million in the remainder of 2010 compared with the fourth quarter of 2009.
 
Operating income margin decreased to 13.4% in the third quarter of 2010 from 14.4% in the third quarter of 2009, primarily due to strategic investments including expansion of the commercial organization in the Asia/Pacific region and information technology initiatives in Europe.
 
Other Expense, Net
 
The company reported other expense, net, of $15 million and $29 million in the third quarter of 2010 and 2009, respectively (Note 4). Other expense, net includes interest income, interest expense, equity in earnings of unconsolidated subsidiaries and other items, net. Interest expense decreased to $19 million from $29 million in the third quarter of 2009 primarily as a result of lower interest rates on variable rate debt following the refinancings completed in November 2009 and the first half of 2010.
 
 
 
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THERMO FISHER SCIENTIFIC INC.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations (continued)
 
Provision for Income Taxes
 
The company’s effective tax rates were 11.4% and 10.4% in the third quarter of 2010 and 2009, respectively. The increase in the effective tax rate was primarily due to increased earnings in higher tax jurisdictions. The tax provision in the third quarter of 2010 was favorably affected by $6.7 million, or 2.2 percentage points, resulting from the settlement of a tax audit and the impact on deferred tax balances of newly enacted tax rates in the United Kingdom. The company expects its effective tax rate for the full year 2010 to be between 13.5% and 15.5% based on currently forecasted profitability in the countries in which the company conducts business.
 
In the third quarter of 2010, the US Congress enacted legislation that the company expects will reduce the amount of foreign tax credits available to the company beginning in 2011. While detailed regulations have yet to be issued, the company is studying the possible effect of the legislation and has identified tax planning and mitigating actions it will likely undertake to reduce the adverse impact on the company’s tax provision of a loss of foreign tax credits.
 
Contingent Liabilities
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