tmoq311.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 1, 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 October 1, 2011
Common Stock, $1.00 par value
 
378,279,984

 
 


 

 
 

 

PART I          FINANCIAL INFORMATION

Item 1.           Financial Statements

THERMO FISHER SCIENTIFIC INC.

Consolidated Balance Sheet
(Unaudited)

   
October 1,
 
December 31,
 
(In millions)
 
2011
 
2010
 
           
Assets
         
Current Assets:
         
   Cash and cash equivalents
  $ 890.3   $ 917.1  
   Short-term investments, at quoted market value (cost of $8.4 and $9.6)
    8.0     8.9  
   Accounts receivable, less allowances of $61.1 and $39.2
    1,811.0     1,473.8  
   Inventories:
             
      Raw materials
    363.7     309.2  
      Work in process
    147.1     108.4  
      Finished goods
    895.3     755.3  
   Deferred tax assets
    204.1     181.3  
   Other current assets
    415.1     381.0  
               
      4,734.6     4,135.0  
               
Property, Plant and Equipment, at Cost
    2,594.4     2,199.2  
   Less: Accumulated depreciation and amortization
    (965.2 )   (839.0 )
               
      1,629.2     1,360.2  
               
Acquisition-related Intangible Assets, net of Accumulated Amortization of $2,988.9 and $2,539.1
    8,058.6     5,913.7  
               
Other Assets
    565.3     944.8  
               
Goodwill
    12,003.8     8,995.7  
               
    $ 26,991.5   $ 21,349.4  

 
2

 

THERMO FISHER SCIENTIFIC INC.

Consolidated Balance Sheet (continued)
(Unaudited)

   
October 1,
 
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
  $ 1,018.6   $ 105.8  
   Accounts payable
    610.6     546.7  
   Accrued payroll and employee benefits
    326.8     304.5  
   Deferred revenue
    192.6     158.2  
   Other accrued expenses
    643.9     594.6  
               
      2,792.5     1,709.8  
               
Deferred Income Taxes
    2,262.4     1,626.1  
               
Other Long-term Liabilities
    625.4     621.2  
               
Long-term Obligations
    6,115.3     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; 406,272,124 and 401,779,152 shares issued
    406.3     401.8  
   Capital in excess of par value
    10,128.5     10,019.7  
   Retained earnings
    6,427.4     5,386.4  
   Treasury stock at cost, 27,992,140 and 10,409,268 shares
    (1,486.9 )   (490.5 )
   Accumulated other comprehensive items
    (279.4 )   43.6  
               
      15,195.9     15,361.0  
               
    $ 26,991.5   $ 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
 
Nine Months Ended
 
   
October 1,
 
October 2,
 
October 1,
 
October 2,
 
(In millions except per share amounts)
 
2011
 
2010
 
2011
 
2010
 
                   
Revenues
                 
 Product revenues
  $ 2,555.9   $ 2,270.3   $ 7,364.6   $ 6,801.7  
 Service revenues
    417.6     358.4     1,227.7     1,049.6  
                           
      2,973.5     2,628.7     8,592.3     7,851.3  
                           
Costs and Operating Expenses:
                         
 Cost of product revenues
    1,499.9     1,343.7     4,314.9     4,029.6  
 Cost of service revenues
    249.8     223.5     767.1     644.9  
 Selling, general and administrative expenses
    809.7     677.0     2,295.6     2,048.5  
 Research and development expenses
    86.8     71.5     244.9     207.2  
 Restructuring and other costs, net
    12.3     10.3     67.5     35.9  
                           
      2,658.5     2,326.0     7,690.0     6,966.1  
                           
Operating Income
    315.0     302.7     902.3     885.2  
Other Expense, Net
    (50.3 )   (15.4 )   (83.0 )   (77.1 )
                           
Income from Continuing Operations Before Provision for Income Taxes
    264.7     287.3     819.3     808.1  
Benefit from (Provision for) Income Taxes
    0.6     (28.5 )   (89.2 )   (96.0 )
                           
Income from Continuing Operations
    265.3     258.8     730.1     712.1  
Income from Discontinued Operations (net of income tax provision of $0.0, $6.2, $3.6 and $14.9)
        9.7     5.5     23.5  
Gain on Disposal of Discontinued Operations, Net (net of income tax (benefit) provision of $(0.1),
      $0.0, $190.8 and $1.5)
    0.1         305.4     2.5  
                           
Net Income
  $ 265.4   $ 268.5   $ 1,041.0   $ 738.1  
                           
Earnings per Share from Continuing Operations
                         
 Basic
  $ .70   $ .65   $ 1.90   $ 1.75  
 Diluted
  $ .69   $ .64   $ 1.88   $ 1.72  
                           
Earnings per Share
                         
 Basic
  $ .70   $ .67   $ 2.72   $ 1.82  
 Diluted
  $ .69   $ .66   $ 2.68   $ 1.79  
                           
Weighted Average Shares
                         
 Basic
    379.5     400.7     383.3     406.5  
 Diluted
    382.7     404.5     387.7     412.9  

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 1,
 
October 2,
 
(In millions)
 
2011
 
2010
 
           
Operating Activities
         
   Net Income
  $ 1,041.0   $ 738.1  
   Income from discontinued operations
    (5.5 )   (23.5 )
   Gain on disposal of discontinued operations
    (305.4 )   (2.5 )
               
   Income from continuing operations
    730.1     712.1  
               
   Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
             
Depreciation and amortization
    616.6     561.3  
Change in deferred income taxes
    (182.2 )   (194.4 )
Non-cash stock-based compensation
    60.7     61.7  
Non-cash interest expense on convertible debt
    1.4     7.2  
Non-cash charges for sale of inventories revalued at the date of acquisition
    40.5     7.4  
Tax benefits from stock-based compensation awards
    (16.6 )   (7.9 )
Other non-cash expenses, net
    35.6     35.3  
Changes in assets and liabilities, excluding the effects of acquisitions and dispositions:
             
   Accounts receivable
    (81.1 )   (129.9 )
   Inventories
    (64.2 )   (62.0 )
   Other assets
    (52.6 )   (37.4 )
   Accounts payable
    25.4     47.5  
   Other liabilities
    (55.4 )   40.6  
   Contributions to retirement plans
    (16.8 )   (14.9 )
               
      Net cash provided by continuing operations
    1,041.4     1,026.6  
      Net cash provided by discontinued operations
    12.6     33.0  
               
      Net cash provided by operating activities
    1,054.0     1,059.6  
               
Investing Activities
             
   Acquisitions, net of cash acquired
    (5,699.4 )   (545.4 )
   Purchase of property, plant and equipment
    (185.5 )   (168.7 )
   Proceeds from sale of property, plant and equipment
    6.2     4.2  
   Proceeds from sale of business, net of cash divested
    13.8      
   Other investing activities, net
    (2.2 )   4.1  
               
      Net cash used in continuing operations
    (5,867.1 )   (705.8 )
      Net cash provided by (used in) discontinued operations
    797.7     (0.8 )
               
      Net cash used in investing activities
  $ (5,069.4 ) $ (706.6 )
 
 
5

 

THERMO FISHER SCIENTIFIC INC.

Consolidated Statement of Cash Flows (continued)
(Unaudited)

   
Nine Months Ended
 
   
October 1,
 
October 2,
 
(In millions)
 
2011
 
2010
 
           
Financing Activities
         
   Net proceeds from issuance of debt
  $ 4,254.4   $ 741.3  
   Increase in commercial paper, net
    999.3      
   Settlement of convertible debt
    (452.0 )   (600.8 )
   Redemption and repayment of long-term obligations
    (0.9 )   (502.9 )
   Purchases of company common stock
    (987.5 )   (662.5 )
   Net proceeds from issuance of company common stock
    153.7     52.6  
   Tax benefits from stock-based compensation awards
    16.6     7.9  
   Increase (decrease) in short-term notes payable
    9.3     (8.7 )
   Other financing activities, net
    4.1      
               
      Net cash provided by (used in) financing activities
    3,997.0     (973.1 )
               
Exchange Rate Effect on Cash
    (8.4 )   (13.8 )
               
Decrease in Cash and Cash Equivalents
    (26.8 )   (633.9 )
Cash and Cash Equivalents at Beginning of Period
    917.1     1,564.1  
               
Cash and Cash Equivalents at End of Period
  $ 890.3   $ 930.2  
               
               
Supplemental Cash Flow Information
             
   Fair value of assets of acquired businesses
  $ 7,055.1   $ 726.6  
   Cash paid for acquired businesses
    (5,902.7 )   (584.2 )
               
      Fair value of liabilities assumed of acquired businesses
  $ 1,152.4   $ 142.4  
               
   Issuance of restricted stock
  $   $ 1.4  
               
   Issuance of stock upon vesting of restricted stock units
  $ 22.1   $ 15.6  


 
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 1, 2011, the results of operations for the three- and nine-month periods ended October 1, 2011, and October 2, 2010, and the cash flows for the nine-month periods ended October 1, 2011, and October 2, 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 2010 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 herein and in the aforementioned Form 8-K have been adjusted to conform to this presentation.
   
    Beginning in the third quarter of 2011, the company’s continuing operations fall into three business segments (see Note 3): Analytical Technologies, Specialty Diagnostics and Laboratory Products and Services. Prior period segment results have been adjusted to conform to this presentation.
   
    Recent Accounting Pronouncements
 
    In September 2011, FASB issued revised guidance requiring entities to provide additional qualitative and quantitative disclosures about an employer’s participation and financial obligations in a multiemployer pension plan. The new rule is intended to increase transparency about an employer’s participation in a multiemployer pension plan. The new guidance is effective for fiscal years that end after December 15, 2011. Adoption of this standard will not have an impact on the company’s results of operations or financial position.
   
    In September 2011, FASB modified existing rules to allow entities to use a qualitative approach to test goodwill for impairment. The revised guidance permits an entity to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If impairment is deemed more likely than not, management would perform the currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. This guidance will be effective for the company on January 1, 2012 although early adoption is permitted. Adoption of this standard will not have an impact on the company’s results of operations or financial position.
   
    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.
 

 
7

 

THERMO FISHER SCIENTIFIC INC.

Notes to Consolidated Financial Statements
(Unaudited)

1.        General (continued)
 
    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
 
Acquisitions
 
    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. Phadia develops, manufactures and markets complete blood-test systems to support the clinical diagnosis and monitoring of allergy and autoimmune diseases. Phadia has been a pioneer in bringing new allergy diagnostic tests to market and is a global leader for in vitro allergy diagnostics and a European leader in autoimmunity diagnostics. The Specialty Diagnostics segment completed the acquisition in August 2011, for a total purchase price of $3.54 billion, net of cash acquired, including the repayment of $2.14 billion of indebtedness owed by Phadia to the seller and third-party lenders. Phadia’s revenues in 2010 totaled €367 million (approximately $525 million based on exchange rates at the time of the acquisition agreement announcement). The purchase price exceeded the fair value of the acquired net assets and, accordingly, $1.82 billion was recorded as goodwill, substantially none of which is tax deductible.
 
    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 recorded as goodwill, substantially none of which is tax deductible.
 
    In addition, in the first nine months of 2011, the Laboratory Products and Services segment acquired a U.S.-based manufacturer of clinical and diagnostic assays and platforms for rapid and sensitive protein biomarker analysis; a U.S.-based manufacturer of laboratory workstations and fume hoods; 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 Specialty Diagnostics segment also acquired a provider of microbiology solutions, including blood culture identification and antibiotic susceptibility testing products with operations in both the U.S. and U.K. The aggregate consideration paid for these acquisitions was $106 million.
   
    The company made contingent purchase price and post closing adjustment payments totaling $36 million in the first nine 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.
 

 
8

 
 

THERMO FISHER SCIENTIFIC INC.

Notes to Consolidated Financial Statements
(Unaudited)

2.        Acquisitions and Dispositions (continued)
 
    Acquisitions have been accounted for using the purchase method of accounting, and the acquired companies’ results have been included in the accompanying financial statements from their respective dates of acquisition. Acquisition transaction costs are recorded in selling, general and administrative expenses. Allocation of the purchase price for acquisitions was based on estimates of the fair value of the net assets acquired and, for acquisitions completed within the past year, is subject to adjustment upon finalization of the purchase price allocation. The company is not aware of any information that indicates the final purchase price allocations will differ materially from the preliminary estimates.
 
    The components of the purchase price allocations for 2011 acquisitions are as follows:
 
(In millions)
 
Phadia
 
Dionex
 
Other
 
Total
 
                   
Purchase Price
                 
 Cash paid
  $ 3,655.2   $ 2,140.8   $ 106.7   $ 5,902.7  
 Debt assumed
    0.3     3.2         3.5  
 Purchase price payable
            0.4     0.4  
 Fair value of contingent consideration
            1.4     1.4  
 Cash acquired
    (117.2 )   (114.9 )   (1.1 )   (233.2 )
                           
    $ 3,538.3   $ 2,029.1   $ 107.4   $ 5,674.8  
                           
Allocation
                         
 Current assets
  $ 302.8   $ 227.8   $ 34.1   $ 564.7  
 Property, plant and equipment
    150.1     87.1     33.8     271.0  
 Intangible assets:
                         
   Customer relationships
    976.6     495.3     17.6     1,489.5  
   Product technology
    696.3     350.2     20.0     1,066.5  
   In-process research and development
        18.3         18.3  
   Tradenames and other
    132.5     35.7     3.7     171.9  
 Goodwill
    1,818.6     1,318.1     30.2     3,166.9  
 Other assets
    67.9     4.1     1.1     73.1  
 Liabilities assumed
    (606.5 )   (507.5 )   (33.1 )   (1,147.1 )
                           
    $ 3,538.3   $ 2,029.1   $ 107.4   $ 5,674.8  
 
    The weighted-average amortization periods for intangible assets acquired in 2011 are 14 years for customer relationships, 11 years for product technology and 14 years for tradenames and other. The weighted average amortization period for all intangible assets in the above table is 13 years.
 

 
9

 
 

THERMO FISHER SCIENTIFIC INC.

Notes to Consolidated Financial Statements
(Unaudited)

2.        Acquisitions and Dispositions (continued)
 
        Had the acquisitions of Phadia and 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
 
Nine Months Ended
 
 
October 1,
 
October 2,
 
October 1,
 
October 2,
 
(In millions except per share amounts)
 
2011
 
2010
 
2011
 
2010
 
                   
Revenues
  $ 3,048.4   $ 2,836.7   $ 9,143.6   $ 8,517.1  
                           
Income from Continuing Operations
  $ 290.3   $ 244.1   $ 824.1   $ 552.1  
                           
Net Income
  $ 290.4   $ 253.8   $ 1,135.1   $ 578.1  
                           
Earnings per Share from Continuing Operations:
                         
 Basic
  $ 0.77   $ 0.61   $ 2.15   $ 1.36  
 Diluted
  $ 0.76   $ 0.60   $ 2.13   $ 1.34  
                           
Earnings per Share:
                         
 Basic
  $ 0.77   $ 0.63   $ 2.96   $ 1.42  
 Diluted
  $ 0.76   $ 0.63   $ 2.93   $ 1.40  
 
    Pro forma results include the following non-recurring pro forma adjustments that were directly attributable to the business combinations:
 
            ·  
Pre-tax reduction in revenue of $2.1 million and $12.6 million for the three and nine months ended October 2, 2010, respectively, and $1.1 million in the nine months ended October 1, 2011, due to the impact of revaluing Dionex deferred revenue obligations to fair value.
 
            ·  
Pre-tax charge to cost of revenues of $19.9 million and $89.6 million for the three and nine months ended October 2, 2010, respectively, for the sale of Phadia and Dionex inventories revalued at the date of acquisition.
 
            ·  
Pre-tax charge of $21.6 million for the nine months ended October 2, 2010 relating to monetizing equity awards held by Dionex employees at the date of acquisition.
 
            ·  
Pre-tax charge of $80.7 million for the nine months ended October 2, 2010 for acquisition-related transaction costs incurred by both the company and the acquirees.
 
    The company’s results would not have been materially different from its pro forma 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 the sale of $3 million, included in restructuring and other costs, net. Operating results of the business were not material.
 
 
10

 
 

THERMO FISHER SCIENTIFIC INC.

Notes to Consolidated Financial Statements
(Unaudited)

2.        Acquisitions and Dispositions (continued)
   
    On April 4, 2011, the company sold, in separate transactions, its Athena Diagnostics business (Athena) for $740 million in cash and its Lancaster Laboratories business (Lancaster) 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
 
Nine Months Ended
 
 
October 2,
 
October 1,
 
October 2,
 
(In millions)
2010
 
2011
 
2010
 
               
Revenues
  $ 57.1   $ 54.3   $ 162.2  
Pre-tax Income
    16.0     9.1     38.5  
 
   
December 31,
 
   
2010
 
       
Other Current Assets
  $ 64.8  
Other Assets
    451.0  
Other Accrued Expenses
    17.6  
Other Long-term Liabilities
    58.4  

3.        Business Segment Information
 
    During the third quarter of 2011, the company established a new financial reporting segment, called Specialty Diagnostics, following the acquisition of Phadia (see Note 2). In addition, the company transferred management responsibility and the related financial reporting and monitoring for a product line between segments. The company has historically moved a product line between segments when a shift in strategic focus of either the product line or a segment more closely aligns the product line with a segment different than that in which it had previously been reported. Prior period segment information has been reclassified to reflect this transfer and the new segment reporting.
   
    The company’s continuing operations fall into three business segments as follows:
 
    Analytical Technologies: serves research scientists, as well as customers in manufacturing and in the field, with a comprehensive offering of advanced analytical technologies, including instruments, bioscience reagents, consumables and software, primarily for life science research and use in scientific, environmental and process applications.
 
    Specialty Diagnostics: serves customers in healthcare and clinical laboratories with a range of diagnostic test kits, reagents and instruments used to increase the speed and accuracy of diagnoses to improve patient care. The segment also includes the company’s healthcare market customer channel consisting of catalog, e-commerce and direct sales.
 
    Laboratory Products and Services: serves laboratory customers with a market-leading offering of equipment and consumables that improve productivity, as well as a range of biopharma outsourcing services such as clinical trials management and logistics. The segment also includes the company’s research and safety market customer channels consisting of catalog, e-commerce and direct sales.
 

 
11

 
 

THERMO FISHER SCIENTIFIC INC.

Notes to Consolidated Financial Statements
(Unaudited)

3.        Business Segment Information (continued)

   
Three Months Ended
 
Nine Months Ended
 
   
October 1,
 
October 2,
 
October 1,
 
October 2,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Revenues
                 
 Analytical Technologies
  $ 1,006.5   $ 827.9   $ 2,765.9   $ 2,358.0  
 Specialty Diagnostics
    614.7     513.1     1,760.8     1,613.4  
 Laboratory Products and Services
    1,483.3     1,407.7     4,454.4     4,236.0  
 Eliminations
    (131.0 )   (120.0 )   (388.8 )   (356.1 )
                           
   Consolidated revenues
    2,973.5     2,628.7     8,592.3     7,851.3  
                           
Segment Income
                         
 Analytical Technologies (a)
    195.9     143.5     491.9     385.3  
 Specialty Diagnostics (a)
    150.1     118.1     427.7     368.9  
 Laboratory Products and Services (a)
    200.8     189.5     615.7     599.2  
                           
   Subtotal reportable segments (a)
    546.8     451.1     1,535.3     1,353.4  
                           
 Cost of revenues charges
    (24.3 )   (2.5 )   (42.6 )   (11.3 )
 Selling, general and administrative charges, net
    (20.6 )   (0.5 )   (61.7 )   (1.4 )
 Restructuring and other costs, net
    (12.3 )   (10.3 )   (67.5 )   (35.9 )
 Amortization of acquisition-related intangible assets
    (174.6 )   (135.1 )   (461.2 )   (419.6 )
                           
   Consolidated operating income
    315.0     302.7     902.3     885.2  
 Other expense, net (b)
    (50.3 )   (15.4 )   (83.0 )   (77.1 )
                           
 Income from continuing operations before provision for income taxes
  $ 264.7   $ 287.3   $ 819.3   $ 808.1  
                           
Depreciation
                         
 Analytical Technologies
  $ 15.9   $ 13.9   $ 44.5   $ 40.4  
 Specialty Diagnostics
    12.9     9.0     32.6     27.0  
 Laboratory Products and Services
    26.3     24.4     78.3     74.3  
                           
   Consolidated depreciation
  $ 55.1   $ 47.3   $ 155.4   $ 141.7  
 
 
   
October 1,
 
December 31,
 
(In millions)
 
2011
 
2010
 
           
Total Assets
         
  Analytical Technologies
  $ 6,654.0   $ 4,258.5  
  Specialty Diagnostics
    8,444.1     4,582.3  
  Laboratory Products and Services
    10,949.4     10,888.0  
  Corporate/Other (c)
    944.0     1,620.6  
               
      Consolidated total assets
  $ 26,991.5   $ 21,349.4  
 
 
(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.
(c)  Corporate assets consist primarily of cash and cash equivalents, short-term investments, property and equipment at the company’s corporate offices and, in 2010, assets of
       the discontinued operations.
 

 
12

 
 

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 1,
 
October 2,
 
October 1,
 
October 2,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Interest Income
  $ 6.8   $ 3.4   $ 18.4   $ 8.7  
Interest Expense
    (49.5 )   (19.1 )   (116.2 )   (65.2 )
Other Items, Net
    (7.6 )   0.3     14.8     (20.6 )
                           
    $ (50.3 ) $ (15.4 ) $ (83.0 ) $ (77.1 )
 
    In the three-month period ended October 1, 2011, other items, net includes $5 million of losses on currency exchange contracts associated with the acquisition of Phadia (see Note 12). In the nine-month period ended October 1, 2011, other items, net includes $28 million of gains on currency exchange contracts associated with the acquisition of Phadia, offset in part by $10 million of fees associated with a short-term financing commitment to fund the Phadia acquisition. In the three- and nine- month periods ended October 2, 2010, other items, net includes $1 million and $17 million, respectively, of charges for the early extinguishment of debt.
 

 
13

 
 

THERMO FISHER SCIENTIFIC INC.

Notes to Consolidated Financial Statements
(Unaudited)

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
 
Nine Months Ended
 
   
October 1,
 
October 2,
 
October 1,
 
October 2,
 
(In millions)
   2011    2010    2011    2010  
                   
Stock Option Awards
  $ 12.0   $ 12.6   $ 37.3   $ 36.5  
Restricted Share/Unit Awards
    6.8     8.3     23.4     25.2  
                           
Total Stock-based Compensation Expense
  $ 18.8   $ 20.9   $ 60.7   $ 61.7  
 
    Stock-based compensation expense is included in the accompanying statement of income as follows:

   
Three Months Ended
 
Nine Months Ended
 
   
October 1,
 
October 2,
 
October 1,
 
October 2,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Cost of Revenues
  $ 1.4   $ 1.6   $ 4.3   $ 4.5  
Selling, General and Administrative Expenses
    16.9     18.8     54.9     55.9  
Research and Development Expenses
    0.5     0.5     1.5     1.3  
                           
Total Stock-based Compensation Expense
  $ 18.8   $ 20.9   $ 60.7   $ 61.7  
 
    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 $93 million and $48 million, respectively, as of October 1, 2011, and is expected to be recognized through 2015 with weighted average amortization periods of 2.8 years and 2.2 years, respectively.
 
    During the first nine months of 2011, the company made equity compensation grants to employees consisting of 0.6 million restricted units and options to purchase 3.6 million shares.
 

 
14

 
 

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 maintains postretirement healthcare programs at several acquired businesses where certain employees are eligible to participate. The costs of the postretirement healthcare programs 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 1,
 
October 2,
 
October 1,
 
October 2,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Service Cost
  $ 3.0   $ 3.8   $ 9.1   $ 9.1  
Interest Cost on Benefit Obligation
    13.6     13.1     40.7     39.1  
Expected Return on Plan Assets
    (14.4 )   (13.8 )   (43.1 )   (41.0 )
Amortization of Net Loss
    0.8     0.5     2.3     1.5  
Settlement/Curtailment Gain
        (0.8 )       (0.8 )
Special Termination Benefits
        0.1     0.1     0.4  
                           
Net Periodic Benefit Cost
  $ 3.0   $ 2.9   $ 9.1   $ 8.3  
 
    Net periodic benefit costs for the company's other postretirement benefit plans include the following components:
 
   
Three Months Ended
 
Nine Months Ended
 
   
October 1,
 
October 2,
 
October 1,
 
October 2,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Service Cost
  $ 0.1   $ 0.1   $ 0.5   $ 0.3  
Interest Cost on Benefit Obligation
    0.4     0.4     1.4     1.4  
Amortization of Net Gain
        (0.1 )   (0.2 )   (0.3 )
                           
Net Periodic Benefit Cost
  $ 0.5   $ 0.4   $ 1.7   $ 1.4  

7.         Income Taxes
 
    The company’s liability for unrecognized tax benefits increased to $106 million at October 1, 2011 from $62 million at December 31, 2010, primarily due to additional unrecognized tax benefits associated with liquidation of a subsidiary, utilization of capital loss carryforwards and 2011 acquisitions.
 

 
15

 

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
 
Nine Months Ended
 
   
October 1,
 
October 2,
 
October 1,
 
October 2,
 
(In millions except per share amounts)
 
2011
 
2010
 
2011
 
2010
 
                   
Income from Continuing Operations
  $ 265.3   $ 258.8   $ 730.1   $ 712.1  
Income from Discontinued Operations
        9.7     5.5     23.5  
Gain on Disposal of Discontinued Operations, Net
    0.1         305.4     2.5  
                           
Net Income
    265.4     268.5     1,041.0     738.1  
                           
Income Allocable to Participating Securities
                (0.2 )
                           
Net Income for Earnings per Share
  $ 265.4   $ 268.5   $ 1,041.0   $ 737.9  
                           
Basic Weighted Average Shares
    379.5     400.7     383.3     406.5  
Effect of:
                         
 Convertible debentures
        1.1     0.7     3.3  
 Stock options and restricted stock/units
    3.2     2.7     3.7     3.1  
                           
Diluted Weighted Average Shares
    382.7     404.5     387.7     412.9  
                           
Basic Earnings per Share:
                         
 Continuing operations
  $ .70   $ .65   $ 1.90   $ 1.75  
 Discontinued operations
        .02     .81     .06  
                           
    $ .70   $ .67   $ 2.72   $ 1.82  
                           
Diluted Earnings per Share:
                         
 Continuing operations
  $ .69   $ .64   $ 1.88   $ 1.72  
 Discontinued operations
        .02     .80     .06  
                           
    $ .69   $ .66   $ 2.68   $ 1.79  
 
    Options to purchase 5.5 million, 8.3 million, 5.8 million and 8.2 million shares of common stock were not included in the computation of diluted earnings per share for the third quarter of 2011 and 2010 and the first nine months of 2011 and 2010, respectively, because their effect would have been antidilutive.
 

 
16

 

THERMO FISHER SCIENTIFIC INC.

Notes to Consolidated Financial Statements
(Unaudited)

9.        Debt and Other Financing Arrangements
 
Short-term Financing
 
Short-term Credit Facility
 
    In June 2011, the company obtained a short-term revolving credit facility that expires in June 2012 which permits borrowings up to $1 billion. The purpose of this revolver is to be available in the event borrowings are not possible under the company’s commercial paper program, discussed below, due to credit market conditions or other events. Interest on the credit facility 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 1.19% at October 1, 2011. The agreement contains affirmative, negative and financial covenants, and events of default customary for financings of this type. The financial covenant requires the company to maintain total leverage below a certain maximum level. As of October 1, 2011, there were no borrowings under this revolver.
 
Commercial Paper Program
 
    In August 2011, the Company established a U.S. commercial paper program pursuant to which it may issue and sell unsecured, short-term promissory notes (CP Notes). Maturities may not exceed 397 days from the date of issue and the CP Notes rank pari passu with all of the company’s other unsecured and unsubordinated indebtedness. CP Notes are issued on a private placement basis under customary terms in the commercial paper market and are not redeemable prior to maturity nor subject to voluntary prepayment. CP Notes are issued at a discount from par, or, alternatively, are sold at par and bear varying interest rates on a fixed or floating basis. As of October 1, 2011, outstanding borrowings under this program were $1.00 billion, with a weighted average remaining period to maturity of 30 days. The interest rates on the outstanding CP Notes as of October 1, 2011 were between 0.30% and 0.70% with a weighted average of 0.37%. Borrowings under this program were used to partially fund the acquisition of Phadia (see Note 2).
 
Termination of Interest Rate Swap Arrangements
 
    In August 2011, the company terminated its fixed to floating rate swap arrangements on its 2.15% Senior Notes due 2012, 2.05% Senior Notes due 2014, 3.25% Senior Notes due 2014 and 3.20% Senior Notes due 2015. As a result of terminating these arrangements, the company received $63 million (excluding accrued interest) in cash. The proceeds were recorded as part of the carrying value of the underlying debt, which will be amortized as a reduction of interest expense over the remaining terms of the respective debt instruments. This amortization will reduce the effective interest rate on the underlying debt as follows:
 
   
Reduction in Effective
Interest Rate (Basis Points)
 
       
Underlying Debt Instrument
     
  2.15% Senior Notes due 2012
  126  
  2.05% Senior Notes due 2014
  95  
  3.25% Senior Notes due 2014
  174  
  3.20% Senior Notes due 2015
  172  

Issuance of Senior Notes
 
    On August 9, 2011, the company issued $2.1 billion principal amount of senior notes, as detailed below, to partially fund its acquisition of Phadia:
 

 
17

 

THERMO FISHER SCIENTIFIC INC.

Notes to Consolidated Financial Statements
(Unaudited)

9.        Debt and Other Financing Arrangements (continued)
 
2.25% Senior Notes due 2016
 
    On August 9, 2011, the company issued $1 billion principal amount of 2.25% Senior Notes due 2016. Interest on the notes is payable on February 15 and August 15 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.
 
3.60% Senior Notes due 2021
 
    On August 9, 2011, the company issued $1.1 billion principal amount of 3.60% Senior Notes due 2021. Interest on the notes is payable on February 15 and August 15 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.
 
    Prior to issuing this debt, the company entered into hedging agreements (treasury locks) with several banks 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 was probable and that such debt would carry semi-annual interest payments over a 10-year term, the agreements hedged the cash flow risk for each of the semi-annual fixed-rate interest payments on a significant portion of principal amount of the 10-year fixed rate debt issue (or subsequent financings of such debt). The company paid $59 million at the termination of this agreement. The unfavorable change in the fair value of the hedge upon termination was $37 million, net of tax, and was classified as a reduction of accumulated other comprehensive items within shareholders’ equity and is being amortized to interest expense over the term of the debt through 2021, resulting in an increase in the effective interest rate on the $1.1 billion principal amount of this debt of 67 basis points.
 
    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 this debt, the company entered into six-month LIBOR-based interest rate swap arrangements with various banks. The aggregate amount of the swaps was equal to the principal amount of the 2.05% Notes. The swaps have been accounted for as a fair value hedge of the 2.05% Notes. In August 2011, the company terminated the swap arrangements, as described above.
 
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.
 

 
18

 

THERMO FISHER SCIENTIFIC INC.

Notes to Consolidated Financial Statements
(Unaudited)

9.        Debt and Other Financing Arrangements (continued)
 
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.
 
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.
 
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.
 

 
19

 

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
 
Nine Months Ended
 
   
October 1,
 
October 2,
 
October 1,
 
October 2,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Net Income
  $ 265.4   $ 268.5   $ 1,041.0   $ 738.1  
                           
Other Comprehensive Items:
                         
 Currency translation adjustment
    (505.7 )   228.1     (289.8 )   (15.1 )
 Unrealized gains on available-for-sale investments, net of tax
    0.8     0.8     2.0     1.1  
 Unrealized gains (losses) on hedging instruments, net of tax
    (42.1 )   0.1     (36.1 )   0.2  
 Pension and other postretirement benefit liability adjustments, net of tax
    1.6     0.3     0.9     1.0  
                           
      (545.4 )   229.3     (323.0 )   (12.8 )
                           
Comprehensive Income (Loss)
  $ (280.0 ) $ 497.8   $ 718.0   $ 725.3  


 
20

 

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 October 1, 2011:
 
   
October 1,
 
Quoted Prices
in Active Markets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
 
(In millions)
 
2011
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
                   
Assets
                 
 Cash equivalents
  $ 333.8   $ 333.8   $   $  
 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
    31.0         31.0      
                           
   Total Assets
  $ 455.7   $ 371.4   $ 79.9   $ 4.4  
                           
Liabilities
                         
 Derivative contracts
  $ 0.9   $   $ 0.9   $  
 Contingent consideration
    2.9             2.9  
                           
   Total Liabilities
  $ 3.8   $   $ 0.9   $ 2.9  


 
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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 of contingent consideration 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
 
Nine Months Ended
 
   
October 1,
 
October 2,
 
October 1,
 
October 2,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Auction Rate Securities
                 
Beginning Balance
  $ 4.4   $ 4.9   $ 4.6   $ 5.4  
Sale of securities
    (0.2 )   (0.1 )   (0.5 )   (0.5 )
Total unrealized gains (losses) included inother comprehensive income
    0.2     (0.1 )   0.3     (0.2 )
                           
Ending Balance
  $ 4.4   $ 4.7   $ 4.4   $ 4.7  

 
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THERMO FISHER SCIENTIFIC INC.

Notes to Consolidated Financial Statements
(Unaudited)

12.      Fair Value Measurements and Fair Value of Financial Instruments (continued)
 
   
Three Months Ended
 
Nine Months Ended
 
   
October 1,
 
October 2,
 
October 1,
 
October 2,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Contingent Consideration
                 
Beginning Balance
  $ 3.8   $ 24.1   $ 28.7   $ 0.6  
Additions
    1.4         1.4     23.5  
Payments
    (2.2 )       (27.3 )    
Currency translation
    (0.1 )       0.1      
                           
Ending Balance
  $ 2.9   $ 24.1   $ 2.9   $ 24.1  
 
    The notional amounts of derivative contracts outstanding, primarily consisting of foreign currency exchange contracts and, in 2010, interest rate swaps, totaled $5.52 billion and $1.78 billion at October 1, 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
 
   
October 1,
 
December 31,
 
October 1,
 
December 31,
 
(In millions)
 
2011
 
2010
 
2011
 
2010
 
                   
Derivatives Designated as Hedging Instruments
                 
 Interest rate swaps (a)
  $   $ 37.3   $   $  
Derivatives Not Designated as Hedging Instruments
                         
 Foreign currency exchange contracts (b)
    31.0     2.8     0.9     3.5  
                           
Total derivatives
  $ 31.0   $ 40.1   $ 0.9   $ 3.5  
 
(a)  The fair value of the interest rate swaps is included in the consolidated balance sheet under the caption other 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
 
Nine Months Ended
 
   
October 1,
 
October 2,
 
October 1,
 
October 2,
 
(In millions)
    2011   2010   2011   2010  
                   
Derivatives Designated as Fair Value Hedges
                 
 Interest rate swaps
  $ 3.2   $ 5.7   $ 16.5   $ 14.2  
Derivatives Not Designated as Fair Value Hedges
                         
 Foreign currency exchange contracts
    25.0     (20.7 )   31.9     18.3  

 
23

 

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 swap 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 repayment of multi-currency debt on the Phadia books. The currencies purchased 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 was marked to market through income/expense, resulting in a $28 million gain included in other expense, net, during the nine months ended October 1, 2011. In conjunction with completion of the Phadia acquisition in August 2011, these currency forward contracts were effectively terminated through the sale of offsetting contracts although final settlement will occur on November 1, 2011 and therefore the gain is included in other current assets at October 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:
 
   
October 1, 2011
 
December 31, 2010
 
   
Carrying
 
Fair
 
Carrying
 
Fair
 
(In millions)
 
Value
 
Value
 
Value
 
Value
 
                   
Notes Receivable
  $ 6.4   $ 6.4   $ 7.4   $ 7.4  
                           
Debt Obligations:
                         
  Convertible obligations
  $   $   $ 327.9   $ 461.4  
  Senior notes
    6,097.8     6,423.1     1,784.9     1,806.3  
  Commercial paper
    1,000.0     1,000.0          
  Other
    36.1     36.1     24.3     24.3  
                           
    $ 7,133.9   $ 7,459.2   $ 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.
 

 
24

 

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:
 
   
Nine Months Ended
 
   
October 1,
 
October 2,
 
(In millions)
 
2011
 
2010
 
           
Beginning Balance
  $ 41.7   $ 45.2  
   Provision charged to income
    39.5     31.0  
   Usage
    (41.3 )   (31.9 )
   Acquisitions
    3.0     0.2  
   Adjustments to previously provided warranties, net
    (1.5 )    
   Other, net
    0.5     0.2  
               
Ending Balance
  $ 41.9   $ 44.7  

14.      Restructuring and Other Costs, Net
 
    Restructuring and other costs in the first nine months of 2011 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 and the consolidation of several Massachusetts facilities. As of November 4, 2011, the company has identified restructuring actions that will result in additional charges of approximately $40 million, primarily in the remainder of 2011 and beginning of 2012.
 
    During the third quarter of 2011, the company recorded net restructuring and other costs by segment as follows:
 
(In millions)
 
Analytical Technologies
 
Specialty Diagnostics
 
Laboratory
Products and Services
 
Corporate
 
Total
 
                       
Cost of Revenues
  $ 14.3   $ 9.6   $ 0.4   $   $ 24.3  
Selling, General and Administrative Expenses
    1.6     16.0         3.0     20.6  
Restructuring and Other Costs, Net
    5.5     1.9     4.9         12.3  
                                 
    $ 21.4   $ 27.5   $ 5.3   $ 3.0   $ 57.2  

 
25

 

THERMO FISHER SCIENTIFIC INC.

Notes to Consolidated Financial Statements
(Unaudited)

14.      Restructuring and Other Costs, Net (continued)
 
    During the first nine months of 2011, the company recorded net restructuring and other costs by segment as follows:

(In millions)
 
Analytical Technologies
 
Specialty Diagnostics
 
Laboratory
Products and Services
 
Corporate
 
Total
 
                       
Cost of Revenues
  $ 29.9   $ 10.0   $ 2.7   $   $ 42.6  
Selling, General and Administrative Expenses
    34.6     24.1         3.0     61.7  
Restructuring and Other Costs, Net
    43.5     4.2     19.2     0.6     67.5  
                                 
    $ 108.0   $ 38.3   $ 21.9   $ 3.6   $ 171.8  
 
    The components of net restructuring and other costs by segment are as follows:
 
Analytical Technologies
 
    The Analytical Technologies segment recorded $21.4 million of net restructuring and other charges in the third quarter of 2011. The segment recorded charges to cost of revenues of $14.3 million for the sale of inventories revalued at the date of acquisition; charges to selling, general and administrative expenses of $1.6 million primarily for transaction costs related to the Dionex acquisition (Note 2); and $5.5 million of other restructuring costs, all of which were cash costs. These costs, which were primarily associated with headcount reductions and facility consolidations to streamline operations, consisted of $3.8 million of severance for approximately 180 employees; $1.5 million of abandoned facility costs; and $0.2 million of other cash costs.
 
    In the first nine months of 2011, the Analytical Technologies segment recorded $108.0 million of net restructuring and other charges. The segment recorded charges to cost of revenues of $29.9 million primarily for the sale of inventories revalued at the date of acquisition; charges to selling, general and administrative expenses of $34.6 million primarily for transaction costs related to the Dionex acquisition; and $43.5 million of other restructuring costs, net, 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 $15.4 million of severance for approximately 270 employees; $5.9 million of abandoned facility costs; and $0.8 million of other cash costs, primarily retention, relocation and moving expenses associated with facility consolidations.
 
Specialty Diagnostics
 
    The Specialty Diagnostics segment recorded $27.5 million of net restructuring and other charges in the third quarter of 2011. The segment recorded charges to cost of revenues of $9.6 million for the sale of inventories revalued at the date of acquisition; charges to selling, general and administrative expenses of $16.0 million primarily for transaction costs related to the Phadia acquisition (Note 2); and $1.9 million of other restructuring costs, including non-cash costs of $1.1 million for writedowns to estimated disposal value of real estate held for sale and cash costs of $0.8 million including $0.4 million of severance for approximately 10 employees; $0.3 million of abandoned facility costs; and $0.1 million of other cash costs associated with restructuring actions.
 

 
26

 

THERMO FISHER SCIENTIFIC INC.

Notes to Consolidated Financial Statements
(Unaudited)

14.      Restructuring and Other Costs, Net (continued)
 
    In the first nine months of 2011, the Specialty Diagnostics segment recorded $38.3 million of net restructuring and other charges. The segment recorded charges to cost of revenues of $10.0 million primarily for the sale of inventories revalued at the date of acquisition; charges to selling, general and administrative expenses of $24.1 million primarily for transaction costs related to the Phadia acquisition; and $4.2 million of other restructuring costs, including $1.1 million of writedowns to estimated disposal value of real estate held for sale and cash costs of $3.1 million associated with headcount reductions and facility consolidations to streamline operations. The cash costs consisted of $2.0 million of severance for approximately 50 employees; $0.6 million of abandoned facility costs; and $0.5 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 $5.3 million of net restructuring and other charges in the third quarter of 2011. The segment recorded charges to cost of revenues of $0.4 million for accelerated depreciation at facilities closing due to real estate consolidation and $4.9 million of other restructuring costs, net, $5.3 million of which were cash costs associated with headcount reductions and facility consolidations. The cash costs included $4.0 million of severance for approximately 260 employees; $0.2 million of abandoned facility costs; and $1.1 million of other cash costs, primarily retention, relocation and moving expenses associated with facility consolidations. The segment recorded $0.4 million of income, net, primarily for gains on the sale of real estate and used equipment.
 
    In the first nine months of 2011, the Laboratory Products and Services segment recorded $21.9 million of net restructuring and other charges. The segment recorded charges to cost of revenues of $2.7 million for the sale of inventories revalued at the date of acquisition and accelerated depreciation at facilities closing due to real estate consolidation and $19.2 million of other restructuring costs, net, $16.6 million of which were cash costs. The cash costs, which were associated with headcount reductions and facility consolidations, included $13.3 million of severance for approximately 570 employees; $1.6 million of abandoned facility costs; and $1.7 million of other cash costs, primarily retention, relocation and moving expenses associated with facility consolidations. The segment recorded $2.6 million of non-cash expense, net, primarily related to a loss on sale of a heating equipment business.
 
Corporate
 
    The company recorded $3.6 million in restructuring and other charges at its corporate operations, including a charge to selling, general and administrative expense of $3.0 million associated with product liability litigation and $0.6 million of cash costs for non-executive severance, in the first nine 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.
 

 
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THERMO FISHER SCIENTIFIC INC.

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

       
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)
    0.2     1.1     0.1     1.4  
 Reserves reversed
    (0.3 )           (0.3 )
 Payments
    (3.3 )   (2.8 )   (0.1 )   (6.2 )
 Currency translation
    0.2             0.2  
                           
 Balance At October 1, 2011
  $ 3.9   $ 3.1   $ 0.1   $ 7.1  
                           
2010 Restructuring Plans
                         
 Balance At December 31, 2010
  $ 3.2   $ 0.9   $ 0.1   $ 4.2  
 Costs incurred in 2011 (b)
    2.4     0.3     1.0     3.7  
 Payments
    (3.1 )   (0.7 )   (1.1 )   (4.9 )
 Currency translation
                 
                           
 Balance At October 1, 2011
  $ 2.5   $ 0.5   $   $ 3.0  
                           
2011 Restructuring Plans
                         
 Costs incurred in 2011 (b)
  $ 28.9   $ 6.8   $ 23.5   $ 59.2  
 Payments
    (16.7 )   (4.6 )   (17.2 )   (38.5 )
 Currency translation
    (0.4 )           (0.4 )
                           
 Balance At October 1, 2011
  $ 11.8   $ 2.2   $ 6.3   $ 20.3  
 
(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 $4 million of non-cash expense, net, including a loss on sale of a heating equipment business.

    The company expects to pay accrued restructuring costs as follows: severance and other costs, primarily through 2012; and abandoned-facility payments, over lease terms expiring through 2018.
 

 
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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 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. Beginning in the third quarter of 2011, the company’s continuing operations fall into three business segments (see Note 3): Analytical Technologies, Specialty Diagnostics and Laboratory Products and Services. Prior period segment results have been adjusted to conform to this presentation.
 
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
 
Nine Months Ended
 
   
October 1,
 
October 2,
 
October 1,
 
October 2,
 
(Dollars in millions)
 
2011
 
2010
 
2011
 
2010
 
                                   
Revenues
                                 
Analytical Technologies
  $ 1,006.5   33.8%   $ 827.9   31.5%   $ 2,765.9   32.2%   $ 2,358.0   30.0%  
Specialty Diagnostics
    614.7   20.7%     513.1   19.5%     1,760.8   20.5%     1,613.4   20.5%  
Laboratory Products and Services
    1,483.3   49.9%     1,407.7   53.6%     4,454.4   51.8%     4,236.0   54.0%