tmoq211.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 2, 2011

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 2, 2011
Common Stock, $1.00 par value
 
381,873,011


 
 

 

PART I          FINANCIAL INFORMATION

Item 1.           Financial Statements
 
THERMO FISHER SCIENTIFIC INC.
 
Consolidated Balance Sheet
(Unaudited)
 
   
July 2,
 
December 31,
 
(In millions)
 
2011
 
2010
 
           
Assets
         
Current Assets:
         
    Cash and cash equivalents
  $ 1,356.1   $ 917.1  
    Short-term investments, at quoted market value (cost of $8.2 and $9.6)
    7.6     8.9  
    Accounts receivable, less allowances of $39.9 and $39.2
    1,683.4     1,473.8  
    Inventories:
             
        Raw materials
    321.4     281.6  
        Work in process
    139.3     108.4  
        Finished goods
    889.7     782.9  
    Deferred tax assets
    195.2     181.3  
    Other current assets
    412.0     381.0  
               
      5,004.7     4,135.0  
               
Property, Plant and Equipment, at Cost
    2,492.6     2,199.2  
    Less: Accumulated depreciation and amortization
    (983.1 )   (839.0 )
               
      1,509.5     1,360.2  
               
Acquisition-related Intangible Assets, net of Accumulated Amortization of $2,868.4 and $2,539.1
    6,650.6     5,913.7  
               
Other Assets
    536.2     944.8  
               
Goodwill
    10,372.8     8,995.7  
               
    $ 24,073.8   $ 21,349.4  

 
2

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

   
July 2,
 
December 31,
 
(In millions except share amounts)
 
2011
 
2010
 
           
Liabilities and Shareholders' Equity
         
Current Liabilities:
         
    Short-term obligations and current maturities of long-term obligations
  $ 18.5   $ 105.8  
    Accounts payable
    632.9     546.7  
    Accrued payroll and employee benefits
    262.8     304.5  
    Accrued income taxes
    31.1     59.2  
    Deferred revenue
    205.0     158.2  
    Other accrued expenses
    666.5     535.4  
               
      1,816.8     1,709.8  
               
Deferred Income Taxes
    1,956.8     1,626.1  
               
Other Long-term Liabilities
    625.7     621.2  
               
Long-term Obligations
    4,008.8     2,031.3  
               
Shareholders' Equity:
             
    Preferred stock, $100 par value, 50,000 shares authorized; none issued
             
    Common stock, $1 par value, 1,200,000,000 shares authorized; 405,896,457 and 401,779,152 shares issued
    405.9     401.8  
    Capital in excess of par value
    10,093.6     10,019.7  
    Retained earnings
    6,162.0     5,386.4  
    Treasury stock at cost, 24,023,446 and 10,409,268 shares
    (1,261.8 )   (490.5 )
    Accumulated other comprehensive items
    266.0     43.6  
               
      15,665.7     15,361.0  
               
    $ 24,073.8   $ 21,349.4  

 


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 2,
 
July 3,
 
July 2,
 
July 3,
 
(In millions except per share amounts)
 
2011
 
2010
 
2011
 
2010
 
                   
Revenues
                 
   Product revenues
  $ 2,472.6   $ 2,249.0   $ 4,808.7   $ 4,531.4  
   Service revenues
    424.8     346.7     810.1     691.2  
                           
      2,897.4     2,595.7     5,618.8     5,222.6  
                           
Costs and Operating Expenses:
                         
   Cost of product revenues
    1,460.2     1,335.8     2,815.0     2,685.9  
   Cost of service revenues
    271.0     211.0     517.3     421.4  
   Selling, general and administrative expenses
    777.2     673.2     1,485.9     1,371.5  
   Research and development expenses
    83.3     69.6     158.1     135.7  
   Restructuring and other costs, net
    39.9     8.2     55.2     25.6  
                           
      2,631.6     2,297.8     5,031.5     4,640.1  
                           
Operating Income
    265.8     297.9     587.3     582.5  
Other Expense, Net
    (10.2 )   (36.8 )   (32.7 )   (61.7 )
                           
Income from Continuing Operations Before Provision for Income Taxes
    255.6     261.1     554.6     520.8  
Provision for Income Taxes
    (38.0 )   (32.4 )   (89.8 )   (67.5 )
                           
Income from Continuing Operations
    217.6     228.7     464.8     453.3  
Income from Discontinued Operations (net of income tax provision of $0.0, $5.5,
      $3.6 and $8.7)
        8.6     5.5     13.8  
Gain on Disposal of Discontinued Operations, Net (net of income tax provision of
      $191.2, $0.0, $190.9 and $1.5)
    305.8         305.3     2.5  
                           
Net Income
  $ 523.4   $ 237.3   $ 775.6   $ 469.6  
                           
Earnings per Share from Continuing Operations
                         
   Basic
  $ .57   $ .56   $ 1.21   $ 1.11  
   Diluted
  $ .56   $ .55   $ 1.19   $ 1.09  
                           
Earnings per Share
                         
   Basic
  $ 1.37   $ .58   $ 2.01   $ 1.15  
   Diluted
  $ 1.36   $ .57   $ 1.99   $ 1.13  
                           
Weighted Average Shares
                         
   Basic
    381.9     409.3     385.3     409.4  
   Diluted
    385.9     415.9     390.3     417.1  
 
 
 
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 2,
 
July 3,
 
(In millions)
 
2011
 
2010
 
           
Operating Activities
         
    Net Income
  $ 775.6   $ 469.6  
    Income from discontinued operations
    (5.5 )   (13.8 )
    Gain on disposal of discontinued operations
    (305.3 )   (2.5 )
               
    Income from continuing operations
    464.8     453.3  
               
    Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
             
        Depreciation and amortization
    386.9     378.9  
        Change in deferred income taxes
    (78.9 )   (132.0 )
        Non-cash stock-based compensation
    41.9     40.8  
        Non-cash interest expense on convertible debt
    1.4     5.3  
        Non-cash charges for sale of inventories revalued at the date of acquisition
    16.6     6.0  
        Tax benefits from stock-based compensation awards
    (15.4 )   (7.8 )
        Other non-cash expenses, net
    23.6     24.4  
        Changes in assets and liabilities, excluding the effects of acquisitions and dispositions:
             
              Accounts receivable
    (66.6 )   (99.5 )
              Inventories
    (64.6 )   (50.9 )
              Other assets
    (9.6 )   (9.4 )
              Accounts payable
    57.7     51.6  
               Other liabilities
    (64.8 )   (43.0 )
                Contributions to retirement plans
    (12.8 )   (8.7 )
               
               Net cash provided by continuing operations
    680.2     609.0  
               Net cash provided by discontinued operations
    13.1     17.8  
               
               Net cash provided by operating activities
    693.3     626.8  
               
Investing Activities
             
    Acquisitions, net of cash acquired
    (2,091.3 )   (287.8 )
    Purchase of property, plant and equipment
    (122.9 )   (105.4 )
    Proceeds from sale of property, plant and equipment
    3.2     2.4  
    Proceeds from sale of business, net of cash divested
    13.8      
    Other investing activities, net
    (2.9 )   (0.2 )
               
               Net cash used in continuing operations
    (2,200.1 )   (391.0 )
               Net cash provided by discontinued operations
    834.2     0.5  
               
               Net cash used in investing activities
  $ (1,365.9 ) $ (390.5 )

 
5

 

 
THERMO FISHER SCIENTIFIC INC.
 
Consolidated Statement of Cash Flows (continued)
(Unaudited)
 
   
Six Months Ended
 
   
July 2,
 
July 3,
 
(In millions)
 
2011
 
2010
 
           
Financing Activities
         
    Net proceeds from issuance of debt
  $ 2,174.4   $ 741.6  
    Settlement of convertible debt
    (452.0 )   (600.8 )
    Redemption and repayment of long-term obligations
    (0.5 )   (502.2 )
    Purchases of company common stock
    (762.5 )   (187.5 )
    Net proceeds from issuance of company common stock
    141.8     49.4  
    Tax benefits from stock-based compensation awards
    15.4     7.8  
    Increase (decrease) in short-term notes payable
    9.2     (0.1 )
               
               Net cash provided by (used in) financing activities
    1,125.8     (491.8 )
               
Exchange Rate Effect on Cash
    (14.2 )   (1.2 )
               
Increase (Decrease) in Cash and Cash Equivalents
    439.0     (256.7 )
Cash and Cash Equivalents at Beginning of Period
    917.1     1,564.1  
               
Cash and Cash Equivalents at End of Period
  $ 1,356.1   $ 1,307.4  
               
               
Supplemental Cash Flow Information
             
    Fair value of assets of acquired businesses
  $ 2,708.1   $ 406.1  
    Cash paid for acquired businesses
    (2,182.3 )   (305.4 )
               
        Fair value of liabilities assumed of acquired businesses
  $ 525.8   $ 100.7  
               
    Issuance of restricted stock
  $   $ 1.4  
               
    Issuance of stock upon vesting of restricted stock units
  $ 21.9   $ 15.5  

 


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 2, 2011, the results of operations for the three- and six-month periods ended July 2, 2011, and July 3, 2010, and the cash flows for the six-month periods ended July 2, 2011, and July 3, 2010. Interim results are not necessarily indicative of results for a full year.
 
The consolidated balance sheet presented as of December 31, 2010, has been derived from the audited consolidated financial statements as of that date, as adjusted for the reclassification of discontinued operations discussed below. The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain all of the information that is included in the annual financial statements and notes of the company. The consolidated financial statements and notes included in this report should be read in conjunction with the financial statements and notes included in the company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (SEC) on July 12, 2011.
 
The results of two businesses have been classified and presented as discontinued operations in the accompanying financial statements (Note 2). Prior period results have been adjusted to conform to this presentation.
 
Recent Accounting Pronouncements
 
In June 2011, new guidance was issued pertaining to the presentation of comprehensive income. The new rule eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. The standard is intended to provide a more consistent method of presenting non-owner transactions that affect the company’s equity. Under the new guidance, an entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. The new guidance is effective for fiscal years that begin after December 15, 2011. Adoption of this standard will not have an impact on the company’s results of operations or financial position.
 
In May 2011, the FASB amended existing rules covering fair value measurement and disclosure to clarify guidance and minimize differences between U.S. GAAP and International Financial Reporting Standards (IFRS). The new guidance requires entities to provide information about valuation techniques and unobservable inputs used in Level 3 fair value measurements and provide a narrative description of the sensitivity of Level 3 measurements to changes in unobservable inputs. The guidance will be effective for the company on January 1, 2012 and is not expected to have a material impact on its financial statements.
 
2.      Acquisitions and Dispositions
 
Pending Acquisition

On May 19, 2011, the company entered into an agreement to acquire the Phadia group, a global leader in allergy and autoimmunity diagnostics, headquartered in Sweden, for approximately €1.05 billion in cash and the repayment of certain indebtedness owed by Phadia to the seller and third party lenders. As of the date of the agreement, the amount of this debt totaled approximately €1.41 billion, making the total purchase price approximately $3.51 billion, based on exchange rates at the time of the announcement. The acquisition will be part of the Analytical Technologies segment. The company has available cash on hand and committed short-term financing arrangements of up to $3 billion to purchase Phadia. The company expects, however, to issue long-term debt to replace the short-term financing arrangements. The closing of the transaction is subject to certain conditions, including the receipt of regulatory approvals. Phadia’s revenues in 2010 totaled €367 million (approximately $525 million based on exchange rates at the time of the announcement).
 
 
 
7

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
2.      Acquisitions and Dispositions (continued)
 
Acquisitions
 
On December 13, 2010, the company and Dionex Corporation, a leading manufacturer and marketer of chromatography systems, announced that their Boards of Directors unanimously approved a transaction under which Thermo Fisher would acquire all of the outstanding shares of Dionex. Dionex, headquartered in Sunnyvale, California, is a global leader in the manufacturing and marketing of ion and liquid chromatography and sample preparation systems, consumables, and software for chemical analysis. Dionex systems are used worldwide in environmental analysis and by the life sciences, chemical, petrochemical, food and beverage, power generation, and electronics industries. Their expertise in applications and instrumentation helps analytical scientists to evaluate and develop pharmaceuticals, establish environmental regulations, and produce better industrial products. The Analytical Technologies segment completed the acquisition in May 2011, for a total purchase price of $2.03 billion, net of cash acquired. Revenues of Dionex totaled $420 million in its fiscal year ended June 30, 2010. The purchase price exceeded the fair value of the acquired net assets and, accordingly, $1.32 billion was allocated to goodwill, substantially none of which is tax deductible.
 
In addition, in the first six months of 2011, the Laboratory Products and Services segment acquired a U.K. based provider of single-use plastic products serving the microbiology, life sciences and clinical markets and certain operating assets of a Singapore-based distributor of laboratory equipment and consumables. The aggregate consideration for these acquisitions was $42 million.
 
The company made contingent purchase price and post closing adjustment payments totaling $30 million in the first six months of 2011, for acquisitions completed prior to 2011. The contingent purchase price payments were contractually due to the sellers upon achievement of certain performance criteria at the acquired businesses.
 
The company’s acquisitions have historically been made at prices above the fair value of the acquired identifiable assets, resulting in goodwill, due to expectations of the synergies that will be realized by combining the businesses. These synergies include the elimination of redundant facilities, functions and staffing; use of the company’s existing commercial infrastructure to expand sales of the acquired businesses’ products; and use of the commercial infrastructure of the acquired businesses to cost-effectively expand sales of company products.
 
Acquisitions have been accounted for using the purchase method of accounting, and the acquired companies’ results have been included in the accompanying financial statements from their respective dates of acquisition. Acquisition transaction costs are recorded in selling, general and administrative expenses. 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 2011 acquisitions are as follows:
 
 
 
8

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
2.      Acquisitions and Dispositions (continued)
 
(In millions)
 
Dionex
 
Other
 
Total
 
               
Purchase Price
             
    Cash paid
  $ 2,140.8   $ 41.5   $ 2,182.3  
    Debt assumed
    3.1         3.1  
    Purchase price payable
        0.6     0.6  
    Cash acquired
    (114.9 )   (0.6 )   (115.5 )
                     
    $ 2,029.0   $ 41.5   $ 2,070.5  
                     
Allocation
                   
    Current assets
  $ 228.4   $ 12.4   $ 240.8  
    Property, plant and equipment
    87.1     16.0     103.1  
    Intangible assets:
                   
         Customer relationships
    495.3     9.4     504.7  
         Product technology
    350.2     6.3     356.5  
         In-process research and development
    18.3         18.3  
         Tradenames and other
    35.7     0.7     36.4  
    Goodwill
    1,317.4     11.3     1,328.7  
    Other assets
    4.1         4.1  
    Liabilities assumed
    (507.5 )   (14.6 )   (522.1 )
                     
    $ 2,029.0   $ 41.5   $ 2,070.5  

The weighted-average amortization periods for intangible assets acquired in 2011 are 9 years for customer relationships, 10 years for product technology and 9 years for tradenames and other. The weighted average amortization period for all intangible assets in the above table is 10 years.
 
Had the acquisition of Dionex been completed as of the beginning of 2010, the company’s pro forma results for 2011 and 2010 would have been as follows:
 
   
Three Months Ended
 
Six Months Ended
 
 
July 2,
 
July 3,
 
July 2,
 
July 3,
 
(In millions except per share amounts)
 
2011
 
2010
 
2011
 
2010
 
                   
Revenues
  $ 2,953.7   $ 2,696.8   $ 5,795.1   $ 5,427.1  
                           
Income from Continuing Operations
  $ 253.3   $ 214.7   $ 492.5   $ 361.0  
                           
Net Income
  $ 559.1   $ 223.3   $ 803.3   $ 377.3  
                           
Earnings per Share from Continuing Operations:
                         
   Basic
  $ 0.66   $ 0.52   $ 1.28   $ 0.88  
   Diluted
  $ 0.66   $ 0.52   $ 1.26   $ 0.87  
                           
Earnings per Share:
                         
   Basic
  $ 1.46   $ 0.55   $ 2.08   $ 0.92  
   Diluted
  $ 1.45   $ 0.54   $ 2.06   $ 0.90  
 
 
 
9

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
2.      Acquisitions and Dispositions (continued)
 
Pro forma results include the following non-recurring pro forma adjustments that were directly attributable to the business combination:
 
         ·  
Pre-tax reduction in revenue of $3.8 million and $10.5 million for the three and six months ended July 3, 2010, respectively, and $1.1 million in
the six months ended July 2, 2011, due to the impact of revaluing Dionex deferred revenue obligations to fair value.
 
         ·  
Pre-tax charge to cost of revenues of $24.3 million for the six months ended July 3, 2010 for the sale of Dionex inventories revalued at the date of
acquisition.
 
         ·  
Pre-tax charge of $21.6 million for the six months ended July 3, 2010 relating to monetizing equity awards held by Dionex employees at the date of
acquisition.
 
         ·  
Pre-tax charge of $54.8 million for the six months ended July 3, 2010 for acquisition-related transaction costs incurred by both the company and
Dionex.
 
The company’s results would not have been materially different from its reported results had the company’s other 2011 and 2010 acquisitions occurred at the beginning of 2010.
 
Dispositions
 
In May 2011, the company sold a manufacturer of heating equipment for $14 million and recorded a pre-tax loss on sale of $3 million, included in restructuring and other costs, net. Operating results of the business were not material.
 
On April 4, 2011, the company sold, in separate transactions, its Athena Diagnostics business (Athena), part of the Analytical Technologies segment, for $740 million in cash and its Lancaster Laboratories business (Lancaster), part of the Laboratory Products and Services segment, for $180 million in cash and escrowed proceeds of $20 million, due in October 2012. The sale of these businesses resulted in an after-tax gain of approximately $304 million or $0.78 per diluted share. Athena provides diagnostic testing for neurological and other diseases, with an emphasis on gene-based tests. Lancaster is a contract-testing laboratory that provides analytical laboratory services. The results of both businesses have been included in the accompanying financial statements as discontinued operations for all periods presented. Operating results and balance sheet data of the discontinued operations were as follows:
 
    Three          
    Months Ended  
Six Months Ended
 
    July 3,  
July 2,
 
July 3,
 
(In millions)    2010    2011    2010  
               
Revenues
  $ 55.2   $ 54.3   $ 105.1  
Pre-tax Income
    14.0     9.1     22.5  
 
   
December 31,
 
   
2010
 
       
Other Current Assets
  $ 64.8  
Other Assets
    451.0  
Other Accrued Expenses
    17.6  
Other Long-term Liabilities
    58.4  

 
10

 

 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
3.      Business Segment Information
 
The company’s continuing operations fall into two business segments, Analytical Technologies and Laboratory Products and Services.
 
   
Three Months Ended
 
Six Months Ended
 
   
July 2,
 
July 3,
 
July 2,
 
July 3,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Revenues
                 
   Analytical Technologies
  $ 1,282.3   $ 1,074.9   $ 2,460.0   $ 2,158.3  
   Laboratory Products and Services
    1,756.9     1,653.7     3,442.2     3,324.3  
   Eliminations
    (141.8 )   (132.9 )   (283.4 )   (260.0 )
                           
      Consolidated revenues
    2,897.4     2,595.7     5,618.8     5,222.6  
                           
Segment Income
                         
   Analytical Technologies (a)
    271.2     213.8     518.8     437.1  
   Laboratory Products and Services (a)
    239.1     233.6     469.7     465.2  
                           
      Subtotal reportable segments (a)
    510.3     447.4     988.5     902.3  
                           
   Cost of revenues charges
    (15.4 )   (3.7 )   (18.3 )   (8.8 )
   Selling, general and administrative charges, net
    (38.0 )   0.2     (41.1 )   (0.9 )
   Restructuring and other costs, net
    (39.9 )   (8.2 )   (55.2 )   (25.6 )
   Amortization of acquisition-related intangible assets
    (151.2 )   (137.8 )   (286.6 )   (284.5 )
                           
      Consolidated operating income
    265.8     297.9     587.3     582.5  
   Other expense, net (b)
    (10.2 )   (36.8 )   (32.7 )   (61.7 )
                           
   Income from continuing operations before provision for income taxes
  $ 255.6   $ 261.1   $ 554.6   $ 520.8  
                           
Depreciation
                         
   Analytical Technologies
  $ 24.5   $ 21.6   $ 47.0   $ 43.3  
   Laboratory Products and Services
    26.9     25.9     53.3     51.1  
                           
      Consolidated depreciation
  $ 51.4   $ 47.5   $ 100.3   $ 94.4  
 
(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.
 

 
 
11

 

 
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 2,
 
July 3,
 
July 2,
 
July 3,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Interest Income
  $ 6.6   $ 2.9   $ 11.6   $ 5.3  
Interest Expense
    (38.9 )   (23.8 )   (66.7 )   (46.1 )
Other Items, Net
    22.1     (15.9 )   22.4     (20.9 )
                           
    $ (10.2 ) $ (36.8 ) $ (32.7 ) $ (61.7 )

In the three- and six-month periods ended July 2, 2011, other items, net includes $33 million of gains on currency exchange contracts associated with the pending acquisition of Phadia (see Note 12), offset in part by $10 million of fees associated with a short-term financing commitment to fund the Phadia acquisition (see Note 9). In the three- and six- month periods ended July 3, 2010, other items, net includes $15 million and $16 million, respectively, of charges for the early extinguishment of debt.
 
5.      Stock-based Compensation Expense
 
         The components of pre-tax stock-based compensation expense for the company’s continuing operations are as follows:
 
    Three Months Ended    Six Months Ended  
      July 2,   July 3,   July 2,    July 3,  
(In millions)    2011    2010    2011    2010  
                   
Stock Option Awards
  $ 12.3   $ 12.5   $ 25.3   $ 23.9  
Restricted Share/Unit Awards
    8.0     9.5     16.6     16.9  
                           
Total Stock-based Compensation Expense
  $ 20.3   $ 22.0   $ 41.9   $ 40.8  
 
   Stock-based compensation expense is included in the accompanying statement of income as follows:
 
   
Three Months Ended
 
Six Months Ended
 
   
July 2,
 
July 3,
 
July 2,
 
July 3,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Cost of Revenues
  $ 1.4   $ 1.6   $ 2.9   $ 2.9  
Selling, General and Administrative Expenses
    18.4     20.0     38.0     37.1  
Research and Development Expenses
    0.5     0.4     1.0     0.8  
                           
Total Stock-based Compensation Expense
  $ 20.3   $ 22.0   $ 41.9   $ 40.8  

No stock-based compensation expense has been capitalized in inventories due to immateriality.
 
 
 
12

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
5.      Stock-based Compensation Expense (continued)
 
Unrecognized compensation cost related to unvested stock options and restricted stock totaled approximately $105 million and $54 million, respectively, as of July 2, 2011, and is expected to be recognized through 2015 with weighted average amortization periods of 2.9 years and 2.3 years, respectively.
 
During the first six months of 2011, the company made equity compensation grants to employees consisting of 0.5 million restricted units and options to purchase 3.4 million shares.
 
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 postretirement healthcare programs at several acquired businesses in which certain employees at those businesses 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
 
Six Months Ended
 
   
July 2,
 
July 3,
 
July 2,
 
July 3,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Service Cost
  $ 3.0   $ 2.5   $ 6.1   $ 5.3  
Interest Cost on Benefit Obligation
    13.7     12.8     27.1     26.0  
Expected Return on Plan Assets
    (14.4 )   (13.4 )   (28.7 )   (27.2 )
Amortization of Net Loss
    0.1     0.5     1.5     1.0  
Special Termination Benefits
    0.1     0.3     0.1     0.3  
                           
Net Periodic Benefit Cost
  $ 2.5   $ 2.7   $ 6.1   $ 5.4  
 
   Net periodic benefit costs for the company's other postretirement benefit plans include the following components:
 
   
Three Months Ended
 
Six Months Ended
 
   
July 2,
 
July 3,
 
July 2,
 
July 3,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Service Cost
  $ 0.2   $ 0.1   $ 0.4   $ 0.2  
Interest Cost on Benefit Obligation
    0.5     0.5     1.0     1.0  
Amortization of Net Gain
    (0.1 )   (0.1 )   (0.2 )   (0.2 )
                           
Net Periodic Benefit Cost
  $ 0.6   $ 0.5   $ 1.2   $ 1.0  
 
7.      Income Taxes
 
The company’s liability for unrecognized tax benefits increased to $106 million at July 2, 2011 from $62 million at December 31, 2010, primarily due to tax benefits associated with liquidation of a subsidiary, utilization of capital loss carryforwards and 2011 acquisitions.
 

 
13

 

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

8.      Earnings per Share
 
Basic and diluted earnings per share were calculated as follows:
 
   
Three Months Ended
 
Six Months Ended
 
   
July 2,
 
July 3,
 
July 2,
 
July 3,
 
(In millions except per share amounts)
 
2011
 
2010
 
2011
 
2010
 
                   
Income from Continuing Operations
  $ 217.6   $ 228.7   $ 464.8   $ 453.3  
Income from Discontinued Operations
        8.6     5.5     13.8  
Gain on Disposal of Discontinued Operations, Net
    305.8         305.3     2.5  
                           
Net Income
    523.4     237.3     775.6     469.6  
                           
Income Allocable to Participating Securities
        (0.1 )       (0.1 )
                           
Net Income for Earnings per Share
  $ 523.4   $ 237.2   $ 775.6   $ 469.5  
                           
Basic Weighted Average Shares
    381.9     409.3     385.3     409.4  
Effect of:
                         
   Convertible debentures
        3.2     1.1     4.3  
   Stock options and restricted stock/units
    4.0     3.4     3.9     3.4  
                           
Diluted Weighted Average Shares
    385.9     415.9     390.3     417.1  
                           
Basic Earnings per Share:
                         
   Continuing operations
  $ .57   $ .56   $ 1.21   $ 1.11  
   Discontinued operations
    .80     .02     .81     .04  
                           
    $ 1.37   $ .58   $ 2.01   $ 1.15  
                           
Diluted Earnings per Share:
                         
   Continuing operations
  $ .56   $ .55   $ 1.19   $ 1.09  
   Discontinued operations
    .79     .02     .80     .04  
                           
    $ 1.36   $ .57   $ 1.99   $ 1.13  

Options to purchase 3.7 million, 8.2 million, 6.0 million and 8.2 million shares of common stock were not included in the computation of diluted earnings per share for the second quarter of 2011 and 2010 and the first six months of 2011 and 2010, respectively, because their effect would have been antidilutive.
 

 
14

 

 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
9.      Debt and Other Financing Arrangements
 
Short-term Financing
 
In May 2011, the company obtained short-term financing commitments to fund $3 billion of the purchase price for the pending acquisition of Phadia (see Note 2). The commitment consists of a short-term revolving credit facility for up to $1 billion and short-term bridge financing for up to $2 billion. Interest on the debt would be computed, at the company’s election, based on one of several Federal Funds, Prime or LIBOR-based rates, the most favorable of which was 1.16% at July 2, 2011. The company expects, however, to arrange long-term financing to fund the acquisition of Phadia in the near-term.
 
Treasury Locks
 
In June 2011, in connection with plans to issue long-term debt to fund its pending acquisition of Phadia, the company entered into hedging agreements (treasury locks) with several banks for a portion of the expected borrowing to mitigate the risk of interest rates rising prior to completion of a debt offering. Based on the company’s conclusion that a debt offering is probable and that such debt would carry semi-annual interest payments over a 10-year term, the agreements hedge the cash flow risk that exists on a component of each of the semi-annual fixed-rate interest payments on a portion of the principal amount of a planned 10-year fixed rate debt issue (or subsequent financings of such debt). The change in the fair value of the hedge, $6 million, net of tax, as of July 2, 2011, was classified as an increase to accumulated other comprehensive items within shareholders’ equity.
 
Redemption of Convertible Notes
 
During the first quarter of 2011, following issuance of a redemption notice by the company, holders of the company’s 3.25% Senior Subordinated Convertible Notes due 2024 exercised conversion rights for substantially all of the remaining $329 million principal outstanding. The balance not converted by holders was redeemed by the company. The company paid the principal and the premium due upon conversion/redemption in cash for a total outlay of $452 million. The premium was charged to capital in excess of par value when paid.
 
Issuance of Senior Notes
 
On February 22, 2011, the company issued $2.2 billion principal amount of senior notes, as detailed below, to fund its acquisition of Dionex (see Note 2) and for general corporate purposes.
 
2.05% Senior Notes due 2014
 
On February 22, 2011, the company issued $300 million principal amount of 2.05% Senior Notes due 2014. Interest on the notes is payable on February 21 and August 21 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 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 2.05% Notes and the payment dates of the swaps coincide with the payment dates of the 2.05% Notes. The swap contracts provide for the company to pay a variable interest rate of six-month USD LIBOR plus a spread of 0.4112% (0.88% at July 2, 2011) and to receive a fixed interest rate of 2.05%. The variable interest rate resets semi-annually. The swaps have been accounted for as a fair value hedge of the 2.05% Notes.
 
 
 
15

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
9.      Debt and Other Financing Arrangements (continued)
 
3.20% Senior Notes due 2016
 
On February 22, 2011, the company issued $900 million principal amount of 3.20% Senior Notes due 2016. Interest on the notes is payable on March 1 and September 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.
 
4.50% Senior Notes due 2021
 
On February 22, 2011, the company issued $1.00 billion principal amount of 4.50% Senior Notes due 2021. Interest on the notes is payable on March 1 and September 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.
 
10.     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 for asserted and unasserted claims 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.
 
 
 
16

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
10.    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.
 
11.     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. The components of comprehensive income are as follows:
 
   
Three Months Ended
 
Six Months Ended
 
   
July 2,
 
July 3,
 
July 2,
 
July 3,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Net Income
  $ 523.4   $ 237.3   $ 775.6   $ 469.6  
                           
Other Comprehensive Items:
                         
   Currency translation adjustment
    96.1     (102.7 )   215.9     (243.2 )
   Unrealized gains on available-for-sale investments, net of tax
    0.8         1.2     0.3  
   Unrealized gains on hedging instruments, net of tax
    5.9         6.0     0.1  
   Pension and other postretirement benefit liability adjustments, net of tax
    (0.8 )   (0.1 )   (0.7 )   0.7  
                           
      102.0     (102.8 )   222.4     (242.1 )
                           
Comprehensive Income
  $ 625.4   $ 134.5   $ 998.0   $ 227.5  


 
17

 

 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
           
12.     Fair Value Measurements and Fair Value of Financial Instruments
 
Fair Value Measurements
 
The company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during 2011. 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 2, 2011:
 
   
July 2,
 
Quoted Prices
 in Active Markets
 
Significant
 Other Observable Inputs
 
Significant Unobservable Inputs
 
(In millions)
 
2011
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
                   
Assets
                 
   Cash equivalents
  $ 611.1   $ 611.1   $   $  
   Investments in mutual funds, unit trusts and other similar instruments
    37.6     37.6          
   Insurance contracts
    48.9         48.9      
   Auction rate securities
    4.4             4.4  
   Derivative contracts
    92.0         92.0      
                           
      Total Assets
  $ 794.0   $ 648.7   $ 140.9   $ 4.4  
                           
Liabilities
                         
   Derivative contracts
  $ 5.2   $   $ 5.2   $  
   Contingent consideration
    3.8             3.8  
                           
      Total Liabilities
  $ 9.0   $   $ 5.2   $ 3.8  

 
18

 

 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
12.     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, 2010:
 
   
December 31,
 
Quoted Prices
 in Active
 Markets
 
Significant
 Other
 Observable Inputs
 
Significant Unobservable Inputs
 
(In millions)
 
2010
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
                   
Assets
                 
   Cash equivalents
  $ 301.6   $ 301.6   $   $  
   Investments in mutual funds, unit trusts and other similar instruments
    36.3     36.3          
   Insurance contracts
    42.6         42.6      
   Auction rate securities
    4.6             4.6  
   Derivative contracts
    40.1         40.1      
                           
      Total Assets
  $ 425.2   $ 337.9   $ 82.7   $ 4.6  
                           
Liabilities
                         
   Derivative contracts
  $ 3.5   $   $ 3.5   $  
   Contingent consideration
    28.7             28.7  
                           
      Total Liabilities
  $ 32.2   $   $ 3.5   $ 28.7  

The company determines the fair value of its insurance contracts by obtaining the cash surrender value of the contracts from the issuer. The fair value of derivative contracts is the estimated amount that the company would receive/pay upon liquidation of the contracts, taking into account the change in currency exchange rates. The company determines the fair value of the auction rate securities by obtaining indications of value from brokers/dealers. The company determines the fair value of acquisition-related contingent consideration based on assessment of the probability that the company would be required to make such future payment. Changes to the fair value are recorded in selling, general and administrative expense. The following tables provide a rollforward of the fair value, as determined by Level 3 inputs, of the auction rate securities and contingent consideration.
 
   
Three Months Ended
 
Six Months Ended
 
   
July 2,
 
July 3,
 
July 2,
 
July 3,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Auction Rate Securities
                 
Beginning Balance
  $ 4.5   $ 5.2   $ 4.6   $ 5.4  
Sale of securities
    (0.2 )   (0.2 )   (0.3 )   (0.4 )
Total unrealized gains (losses) included in other comprehensive income
    0.1     (0.1 )   0.1     (0.1 )
                           
Ending Balance
  $ 4.4   $ 4.9   $ 4.4   $ 4.9  
 
 
 
19

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
12.     Fair Value Measurements and Fair Value of Financial Instruments (continued)
 
   
Three Months Ended
 
Six Months Ended
 
   
July 2,
 
July 3,
 
July 2,
 
July 3,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Contingent Consideration
                 
Beginning Balance
  $ 3.8   $ 22.3   $ 28.7   $ 0.6  
Additions
        1.8         23.5  
Payments
    (0.1 )       (25.1 )    
Currency translation
    0.1         0.2      
                           
Ending Balance
  $ 3.8   $ 24.1   $ 3.8   $ 24.1  

The notional amounts of derivative contracts outstanding, primarily consisting of foreign currency exchange contracts, interest rate swaps, and interest rate locks, totaled $5.41 billion and $1.78 billion at July 2, 2011 and December 31, 2010, respectively.
 
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 2,
 
December 31,
 
July 2,
 
December 31,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Derivatives Designated as Hedging Instruments
                 
   Interest rate swaps and treasury locks (a)
  $ 59.0   $ 37.3   $   $  
Derivatives Not Designated as Hedging Instruments
                         
   Foreign currency exchange contracts (b)
    33.0     2.8     5.2     3.5  
                           
      Total derivatives
  $ 92.0   $ 40.1   $ 5.2   $ 3.5  
 
(a)  The fair value of the interest rate swaps is included in the consolidated balance sheet under the captions other assets or other long-term liabilities. The
      fair value of the treasury locks is included in the consolidated balance sheet under the caption other current assets.
(b)  The fair value of the foreign currency exchange contracts is included in the consolidated balance sheet under the captions other current assets or other
       accrued expenses.
 
     Gain (Loss) Recognized  
     Three Months Ended    Six Months Ended  
     July 2,    July 3,    July 2,   July 3,  
(In millions)
   2011    2010    2011    2010  
                   
Derivatives Designated as Fair Value Hedges
                 
   Interest rate swaps
  $ 6.9   $ 5.2   $ 13.3   $ 8.6  
Derivatives Not Designated as Fair Value Hedges
                         
   Foreign currency exchange contracts
    33.6     21.1     6.9     39.0  
 
 
 
20

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
12.     Fair Value Measurements and Fair Value of Financial Instruments (continued)
 
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 hedged transactions except for the exchange rate hedges entered in June 2011 in anticipation of completing the Phadia acquisition (discussed below). The gains on these contracts have no underlying offset in the company's income statement.
 
On May 19, 2011, in connection with the planned acquisition of Phadia, the company entered into several foreign currency forward contracts to partly mitigate the currency exchange risk associated with the payment of the Euro-denominated purchase price and the planned repayment of multi-currency debt on the Phadia books. As of July 2, 2011, the currencies hedged included the Euro, Swedish krona and Japanese yen, with the aggregate notional amount totaling $2.34 billion. These currency forward contracts were not able to be designated as hedging instruments and therefore the change in the derivative fair value is marked to market through income/expense, resulting in a $33 million gain included in other expense, net, during the three months ended July 2, 2011. The maturity date of these currency forward contracts is November 1, 2011.
 
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 2, 2011
 
December 31, 2010
 
   
Carrying
 
Fair
 
Carrying
 
Fair
 
(In millions)
 
Value
 
Value
 
Value
 
Value
 
                   
Notes Receivable
  $ 6.5   $ 6.5   $ 7.4   $ 7.4  
                           
Debt Obligations:
                         
   Convertible obligations
  $   $   $ 327.9   $ 461.4  
   Senior notes
    3,990.6     4,101.1     1,784.9     1,806.3  
   Other
    36.7     36.7     24.3     24.3  
                           
    $ 4,027.3   $ 4,137.8   $ 2,137.1   $ 2,292.0  
 
   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.
 

 
21

 

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

13.     Warranty Obligations
 
Product warranties are included in other accrued expenses in the accompanying balance sheet. The changes in the carrying amount of warranty obligations are as follows:
 
   
Six Months Ended
 
   
July 2,
 
July 3,
 
(In millions)
 
2011
 
2010
 
           
Beginning Balance
  $ 41.7   $ 45.2  
   Provision charged to income
    24.6     20.9  
   Usage
    (27.3 )   (20.5 )
   Acquisitions
    2.9     0.2  
   Adjustments to previously provided warranties, net
    (0.3 )   0.2  
   Other, net
    1.9     (2.0 )
               
Ending Balance
  $ 43.5   $ 44.0  
 
14.     Restructuring and Other Costs, Net
 
Restructuring and other costs in the first six months of 2011 in both segments primarily included cash compensation from monetizing equity awards held by Dionex employees at the date of acquisition as well as continuing charges for headcount reductions and facility consolidations in an effort to streamline operations, including the consolidation of facilities in Finland and Australia of acquired businesses with existing facilities in those countries. As of August 5, 2011, the company has identified restructuring actions that will result in additional charges of approximately $40 million, primarily in the remainder of 2011.
 
During the second quarter of 2011, 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
  $ 15.2   $ 0.2   $   $ 15.4  
Selling, General and Administrative Expenses
    38.0             38.0  
Restructuring and Other Costs, Net
    28.7     10.8     0.4     39.9  
                           
    $ 81.9   $ 11.0   $ 0.4   $ 93.3  
 
 
 
22

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
14.    Restructuring and Other Costs, Net (continued)
 
         During the first six months of 2011, 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
  $ 16.0   $ 2.3   $   $ 18.3  
Selling, General and Administrative Expenses
    41.1             41.1  
Restructuring and Other Costs, Net
    40.3     14.3     0.6     55.2  
                           
    $ 97.4   $ 16.6   $ 0.6   $ 114.6  
 
   The components of net restructuring and other costs by segment are as follows:
 
Analytical Technologies
 
The Analytical Technologies segment recorded $81.9 million of net restructuring and other charges in the second quarter of 2011. The segment recorded charges to cost of revenues of $15.2 million primarily for the sale of inventories revalued at the date of acquisition; charges to selling, general and administrative expenses of $38.0 million for transaction costs, net, related to the Dionex and Phadia acquisitions (Note 2); and $28.7 million of other restructuring costs, substantially all of which were cash costs. These costs included $21.6 million of cash compensation from monetizing equity awards held by Dionex employees at the date of acquisition. The remaining cash costs, which were primarily associated with headcount reductions and facility consolidations to streamline operations, consisted of $6.0 million of severance for approximately 40 employees; $0.7 million of abandoned facility costs; and $0.4 million of other cash costs, primarily retention, relocation and moving expenses associated with facility consolidations.
 
In the first six months of 2011, the Analytical Technologies segment recorded $97.4 million of net restructuring and other charges. The segment recorded charges to cost of revenues of $16.0 million primarily 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 $41.1 million for transaction costs, net, primarily related to the Dionex and Phadia acquisitions; and $40.3 million of other restructuring costs, substantially all of which were cash costs. These costs included $21.6 million of cash compensation from monetizing equity awards held by Dionex employees at the date of acquisition. The Analytical Technologies segment also recorded continuing cash costs associated with headcount reductions and facility consolidations to streamline operations, including the consolidation of a manufacturing and sales facility in Finland of an acquired business with an existing facility in that country, which consisted of $13.2 million of severance for approximately 120 employees; $4.7 million of abandoned facility costs; and $1.0 million of other cash costs, primarily retention, relocation and moving expenses associated with facility consolidations.
 
Laboratory Products and Services
 
The Laboratory Products and Services segment recorded $11.0 million of net restructuring and other charges in the second quarter of 2011. The segment recorded charges to cost of revenues of $0.2 million primarily for the sale of inventories revalued at the date of acquisition and $10.8 million of other restructuring costs, $7.8 million of which were cash costs. The cash costs, which were associated with headcount reductions and facility consolidations, included $6.5 million of severance for approximately 200 employees; $1.1 million of abandoned facility costs; and $0.2 million of other cash costs associated with restructuring actions. The costs include expenses related to consolidation of several facilities of an acquired business in Australia with an existing facility in that country. The $3.0 million of non-cash costs were primarily related to a loss on sale of a heating equipment business.
 
In the first six months of 2011, the Laboratory Products and Services segment recorded $16.6 million of net restructuring and other charges. The segment recorded charges to cost of revenues of $2.3 million for the sale of inventories revalued at the date of acquisition and accelerated depreciation at facilities closing due to real estate consolidation and $14.3 million of other restructuring costs, $11.3 million of which were cash costs. The cash costs, which were associated with headcount reductions and facility consolidations, included $9.2 million of severance for approximately 310 employees; $1.5 million of abandoned facility costs; and $0.6 million of other cash costs associated with restructuring actions. The $3.0 million of non-cash costs were primarily related to a loss on sale of a heating equipment business.
 
 
 
23

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
14.     Restructuring and Other Costs, Net (continued)
 
Corporate
 
The company recorded $0.6 million in restructuring charges at its corporate operations, all of which were cash costs for non-executive severance, in the first six months of 2011.
 
         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.
 
       
Abandonment
         
(In millions)
 
Severance
 
of Excess Facilities
 
Other (a)
 
Total
 
                   
Pre-2010 Restructuring Plans
                 
   Balance At December 31, 2010
  $ 7.1   $ 4.8   $ 0.1   $ 12.0  
   Costs incurred in 2011 (b)
    0.1     0.8     0.1     1.0  
   Reserves reversed
    (0.1 )           (0.1 )
   Payments
    (2.7 )   (2.0 )   (0.1 )   (4.8 )
   Currency translation
    0.4     0.1         0.5  
                           
   Balance At July 2, 2011
  $ 4.8   $ 3.7   $ 0.1   $ 8.6  
                           
2010 Restructuring Plans
                         
   Balance At December 31, 2010
  $ 3.2   $ 0.9   $ 0.1   $ 4.2  
   Costs incurred in 2011 (b)
    4.1     0.1     0.5     4.7  
   Payments
    (2.6 )   (0.5 )   (0.5 )   (3.6 )
   Currency translation
    0.2             0.2  
                           
   Balance At July 2, 2011
  $ 4.9   $ 0.5   $ 0.1   $ 5.5  
                           
2011 Restructuring Plans
                         
   Costs incurred in 2011 (b)
  $ 18.9   $ 5.3   $ 22.6   $ 46.8  
   Payments
    (9.1 )   (2.7 )   (0.7 )   (12.5 )
   Currency translation
    0.1     0.2         0.3  
                           
   Balance At July 2, 2011
  $ 9.9   $ 2.8   $ 21.9   $ 34.6  
 
(a)  Other includes cash compensation from monetizing equity awards held by Dionex employees at the date of acquisition and 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 $3 million of non-cash expense, net.
 
 
 
24

 
 
THERMO FISHER SCIENTIFIC INC.
 
Notes to Consolidated Financial Statements
(Unaudited)
 
14.    Restructuring and Other Costs, Net (continued)

         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 2018.
 


 
25

 
 
 
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 and sells 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.
 
The results of two businesses sold on April 4, 2011, have been classified and presented as discontinued operations in the accompanying financial statements. Prior period results have been adjusted to conform to this presentation. The results discussed below refer to the company’s continuing operations unless otherwise noted.
 
   
Three Months Ended
 
Six Months Ended
 
   
July 2,
 
July 3,
 
July 2,
 
July 3,
 
(Dollars in millions)
 
2011
 
2010
 
2011
 
2010
 
                                   
Revenues
                                 
Analytical Technologies
  $ 1,282.3   44.3%   $ 1,074.9   41.4%   $ 2,460.0   43.8%   $ 2,158.3   41.3%  
Laboratory Products and Services
    1,756.9   60.6%     1,653.7   63.7%     3,442.2   61.3%     3,324.3   63.7%  
Eliminations
    (141.8 ) (4.9)%     (132.9 ) (5.1)%     (283.4 ) (5.1)%     (260.0 ) (5.0)%  
                                           
    $ 2,897.4   100%   $ 2,595.7   100%   $ 5,618.8   100%   $ 5,222.6   100%  

Sales in the second quarter of 2011 were $2.90 billion, an increase of $302 million from the second quarter of 2010. The increase was due to the favorable effects of currency translation, acquisitions, including Dionex, and, to a lesser extent, higher sales at existing businesses. Had Dionex and the company been combined from the beginning of 2010, pro forma revenues would have increased $253 million over pro forma 2010 revenues. Aside from the effects of currency translation and other acquisitions, net of divestitures, pro forma revenues increased $97 million (4%) over pro forma 2010 revenues (discussed in total and by segment below). The increase was primarily due to increased demand, offset in part by lower sales resulting from cessation of a supply contract, discussed below, which decreased sales by approximately 1 percentage point.
 
The company’s strategy is to augment internal growth at existing businesses with complementary acquisitions such as those completed in 2011 and 2010. The company’s principal recent acquisitions are described below.
 
         ·  
Dionex, a global leader in the manufacturing and marketing of ion and liquid chromatography and sample preparation systems, consumables, and
software for chemical analysis, was acquired in May 2011 to expand the company’s chromatography system portfolio.
 
 
 
26

 
 
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)
 
         ·  
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 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.
 
         ·  
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.
 
   On May 19, 2011, the company entered into an agreement to acquire the Phadia group, a global leader in allergy and autoimmunity diagnostics, headquartered in Sweden, for approximately €1.05 billion in cash and the repayment of certain indebtedness owed by Phadia to the seller and third party lenders. As of the date of the agreement, the amount of this debt totaled approximately €1.41 billion, making the total purchase price approximately $3.51 billion, based on exchange rates at the time of the announcement. The acquisition will be part of the Analytical Technologies segment. The closing of the transaction is subject to certain conditions, including the receipt of regulatory approvals. Phadia’s revenues in 2010 totaled €367 million (approximately $525 million based on exchange rates at the time of the announcement).
 
In the second quarter of 2011, total company operating income and operating income margin were $266 million and 9.2%, respectively, compared with $298 million and 11.5%, respectively, in 2010. The decreases in operating income and operating income margin were primarily due to acquisition-related charges totaling $75 million and an increase in amortization expense of $13 million in the second quarter of 2011, following the acquisition of Dionex, offset in part by productivity improvements, global sourcing initiatives, lower operating costs following restructuring actions and, to a lesser extent, profit on incremental sales including from acquisitions and existing businesses.
 
The company’s effective tax rates were 14.9% and 12.4% in the second quarter of 2011 and 2010, respectively. The company expects its effective tax rate for the full year 2011 to be between 15% and 16% based on currently forecasted profitability in the countries in which the company conducts business. The tax provision in the second quarter of 2010 was favorably affected by $5.8 million or 2.2 percentage points resulting from a loss on the early extinguishment of debt.
 
Income from continuing operations decreased to $218 million in the second quarter of 2011, from $229 million in the second quarter of 2010, primarily due to the items discussed above that decreased operating income and a higher tax rate, offset in part by lower other expense in 2011.
 
During the first six months of 2011, the company’s cash flow from operations totaled $693 million (including $13 million from discontinued operations), compared with $627 million (including $18 million from discontinued operations) for the first six months of 2010. The increase resulted from reduced investment in several working capital components, offset in part by the timing of income tax payments.
 
As of July 2, 2011, the company’s outstanding debt totaled $4.03 billion. In addition, the company has an unsecured revolving credit agreement expiring in August 2012 with available capacity of $952 million at July 2, 2011 and in May 2011, the company obtained short-term financing commitments to fund $3 billion of the purchase price of the pending Phadia acquisition. The commitment consists of a short-term revolving credit facility for up to $1 billion and short-term bridge financing for up to $2 billion (See Note 9). The company expects to arrange long-term financing to fund the acquisition of Phadia in the near-term.
 
The company believes that its existing cash and short-term investments of $1.36 billion as of July 2, 2011, and the company’s future cash flow from operations together with available borrowing capacity under its revolving credit agreement and short-term financing commitments, are sufficient to fund the acquisition of Phadia and to meet the cash requirements of its existing businesses for the foreseeable future, including at least the next 24 months.
 
 
 
27

 
 
THERMO FISHER SCIENTIFIC INC.
 
Item 2.           Management's Discussion and Analysis of Financial Condition and Results of Operations (continued)
 
Critical Accounting Policies and Estimates
 
The company’s discussion and analysis of its financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities. 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 2010, describe the significant accounting estimates and policies used in preparation of the consolidated financial statements. Actual results in these areas may differ from management’s estimates under different assumptions or conditions. There have been no significant changes in the company’s critical accounting policies during the first six months of 2011.
 
Results of Operations
 
Second Quarter 2011 Compared With Second Quarter 2010
 
Continuing Operations
 
Sales in the second quarter of 2011 were $2.90 billion, an increase of $302 million from the second quarter of 2010. The increase was due to the favorable effects of currency translation acquisitions, including Dionex, and, to a lesser extent, higher sales at existing businesses. Had Dionex and the company been combined from the beginning of 2010, pro forma revenues would have increased $253 million over pro forma second quarter of 2010 revenues, including $32 million due to other acquisitions, net of divestitures, $124 million due to the favorable effects of currency translation and $97 million (4%) due to higher revenues at existing businesses. The increase in revenues at existing businesses was primarily due to increased demand and, to a lesser extent, price increases, offset in part by lower sales resulting from cessation of a supply contract, discussed below, which decreased sales by approximately 1 percentage point. Sales growth was strong in Asia, modest in North America and down slightly in Europe. Sales in North America were affected by the cessation of the supply contract.
 
In the second quarter of 2011, total company operating income and operating income margin were $266 million and 9.2%, respectively, compared with $298 million and 11.5%, respectively, in 2010. The decreases in operating income and operating income margin were primarily due to acquisition-related charges totaling $75 million and an increase in amortization expense of $13 million in the second quarter of 2011, following the acquisition of Dionex, offset in part by productivity improvements, global sourcing initiatives, lower operating costs following restructuring actions and, to a lesser extent, profit on incremental sales including from acquisitions and existing businesses.
 
In the second quarter of 2011, the company recorded restructuring and other costs, net, of $93 million, including $15 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 $38 million of charges to selling, general and administrative expenses for transaction costs, net, primarily related to the acquisitions of Dionex and Phadia. The company incurred $37 million of cash costs, including $22 million of cash compensation from monetizing equity awards held by Dionex employees at the date of acquisition. The cash costs also include continuing costs associated with headcount reductions and facility consolidations in an effort to streamline operations, including severance to reduce headcount at several businesses and abandoned facility expenses at businesses that have been or are being consolidated, such as the consolidation of facilities of acquired businesses in Finland and Australia with existing facilities in those countries. The company recorded $3 million of non-cash costs primarily for a loss on sale of a heating equipment business (see Note 14).
 
 
 
28

 
 
THERMO FISHER SCIENTIFIC INC.
 
Item 2.           Management's Discussion and Analysis of Financial Condition and Results of Operations –
                      Results of Operations (continued)
 
In the second quarter of 2010, the company recorded restructuring and other costs, net, of $12 million, including $4 million of charges to cost of revenues related to the sale of inventory revalued at the date of acquisition and accelerated depreciation on manufacturing assets to be abandoned due to facility consolidations. The company incurred $8 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.
 
As of August 5, 2011, the company has identified restructuring actions that will result in additional charges of approximately $40 million in 2011 and expects to identify additional actions during the remainder of 2011. The restructuring actions initiated in the first six months of 2011 are expected to result in annual cost savings of approximately $40 million.
 
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 acquisition accounting; restructuring and other costs/income including costs arising from facility consolidations such as severance and abandoned lease expense and gains and losses from the sale of real estate and product lines; 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.
 
   
Three Months Ended
 
   
July 2,
 
July 3,
     
(Dollars in millions)