tmoq113.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 March 30, 2013

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 March 30, 2013
Common Stock, $1.00 par value
 
358,921,241

 
 


 

 
 

 
 

THERMO FISHER SCIENTIFIC INC.
 
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 30, 2013


 
TABLE OF CONTENTS
 
     
   
Page
 
PART I
 
     
Item 1.
Financial Statements
3
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
36
     
Item 4.
Controls and Procedures
36
     
 
PART II
 
     
Item 1A.
Risk Factors
37
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
44
     
Item 5.
Other Events
44
     
Item 6.
Exhibits
45
     
     

 
2

 
 
 
THERMO FISHER SCIENTIFIC INC.
 
PART I                 FINANCIAL INFORMATION

Item 1.                 Financial Statements
 
CONSOLIDATED BALANCE SHEET
(Unaudited)
 
 
March 30,
   
December 31,
 
(In millions)
 
2013
   
2012
 
             
Assets
           
Current Assets:
           
Cash and cash equivalents
  $ 1,004.1     $ 851.0  
Short-term investments, at quoted market value (cost of $4.7 and $4.8)
    4.2       4.3  
Accounts receivable, less allowances of $56.0 and $55.5
    1,904.5       1,804.9  
Inventories
    1,474.6       1,443.3  
Deferred tax assets
    182.0       182.0  
Other current assets
    566.7       549.3  
                 
      5,136.1       4,834.8  
                 
Property, Plant and Equipment, at Cost, Net
    1,685.8       1,726.4  
                 
Acquisition-related Intangible Assets, Net
    7,560.9       7,804.5  
                 
Other Assets
    583.8       604.4  
                 
Goodwill
    12,444.1       12,474.5  
                 
    $ 27,410.7     $ 27,444.6  

 
3

 
 
 
THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED BALANCE SHEET (Continued)
(Unaudited)
 
   
March 30,
   
December 31,
 
(In millions except share amounts)
 
2013
   
2012
 
             
Liabilities and Shareholders' Equity
           
Current Liabilities:
           
Short-term obligations and current maturities of long-term obligations
  $ 394.0     $ 93.1  
Accounts payable
    660.6       641.4  
Accrued payroll and employee benefits
    312.2       388.0  
Deferred revenue
    226.1       196.5  
Other accrued expenses
    709.9       774.3  
                 
      2,302.8       2,093.3  
                 
Deferred Income Taxes
    1,997.6       2,047.2  
                 
Other Long-term Liabilities
    786.4       808.2  
                 
Long-term Obligations
    6,724.4       7,031.2  
                 
Shareholders' Equity:
               
Preferred stock, $100 par value, 50,000 shares authorized; none issued
               
Common stock, $1 par value, 1,200,000,000 shares authorized; 416,509,225 and
      413,491,691 shares issued
    416.5       413.5  
Capital in excess of par value
    10,638.3       10,501.1  
Retained earnings
    7,979.5       7,697.3  
Treasury stock at cost, 57,587,984 and 56,047,926 shares
    (3,105.5 )     (2,996.8 )
Accumulated other comprehensive items
    (329.3 )     (150.4 )
                 
      15,599.5       15,464.7  
                 
    $ 27,410.7     $ 27,444.6  



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

 
4

 
 
 
THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
 
   
Three Months Ended
 
   
March 30,
   
March 31,
 
(In millions except per share amounts)
 
2013
   
2012
 
             
Revenues
           
Product revenues
  $ 2,723.5     $ 2,628.8  
Service revenues
    468.0       428.0  
                 
      3,191.5       3,056.8  
                 
Costs and Operating Expenses:
               
Cost of product revenues
    1,533.1       1,502.0  
Cost of service revenues
    322.1       265.1  
Selling, general and administrative expenses
    829.5       824.3  
Research and development expenses
    98.2       91.7  
Restructuring and other costs, net
    21.5       12.2  
                 
      2,804.4       2,695.3  
                 
Operating Income
    387.1       361.5  
Other Expense, Net
    (44.2 )     (50.4 )
                 
Income from Continuing Operations Before Income Taxes
    342.9       311.1  
Provision for Income Taxes
    (2.1 )     (30.3 )
                 
Income from Continuing Operations
    340.8       280.8  
Loss from Discontinued Operations (net of income tax benefit of $0.2 and $2.3)
    (0.4 )     (3.8 )
(Loss) Gain on Disposal of Discontinued Operations, Net (net of income tax (benefit)
     provision of $(2.8) and $0.2)
    (4.2 )     0.3  
                 
Net Income
  $ 336.2     $ 277.3  
                 
Earnings per Share from Continuing Operations
               
Basic
  $ .95     $ .76  
Diluted
  $ .94     $ .76  
                 
Earnings per Share
               
Basic
  $ .94     $ .76  
Diluted
  $ .93     $ .75  
                 
Weighted Average Shares
               
Basic
    358.1       367.3  
Diluted
    361.7       370.1  
                 
Cash Dividends Declared per Common Share
  $ .15     $ .13  



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

 
5

 
 
 
THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
 
   
Three Months Ended
 
   
March 30,
   
March 31,
 
(In millions)
 
2013
   
2012
 
             
Comprehensive Income (Loss)
           
Net Income
  $ 336.2     $ 277.3  
                 
Other Comprehensive Items:
               
Currency translation adjustment
    (179.3 )     248.5  
Unrealized gains and losses on available-for-sale investments
               
Unrealized holding gains arising during the period (net of tax provision of $0.4
      and $0.0)
    1.2        
Reclassification adjustment for gains included in net income (net of tax provision
      of $2.5 and $0.0)
    (8.0 )      
Unrealized gains and losses on hedging instruments
               
Reclassification adjustment for losses included in net income (net of tax benefit
      of $0.5 and $0.5)
    0.8       0.8  
Pension and other postretirement benefit liability adjustment
               
Pension and other postretirement benefit liability adjustments arising during the
      period (net of tax provision (benefit) of $1.6 and $(0.5))
    4.5       (1.8 )
Amortization of net loss and prior service benefit included in net periodic pension
      cost (net of tax benefit of $0.9 and $0.6)
    1.9       1.1  
                 
      (178.9 )     248.6  
                 
    $ 157.3     $ 525.9  



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

 
6

 
 
 
THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
   
Three Months Ended
 
   
March 30,
   
March 31,
 
(In millions)
 
2013
   
2012
 
             
Operating Activities
           
Net Income
  $ 336.2     $ 277.3  
Loss from discontinued operations
    0.4       3.8  
Loss (gain) on disposal of discontinued operations
    4.2       (0.3 )
                 
Income from continuing operations
    340.8       280.8  
                 
Adjustments to reconcile income from continuing operations to net cash
   provided by operating activities:
               
  Depreciation and amortization
    251.0       242.5  
  Change in deferred income taxes
    (16.0 )     (43.2 )
  Non-cash stock-based compensation
    20.4       17.2  
  Non-cash charges for sale of inventories revalued at the date of acquisition
    11.9       26.0  
  Tax benefits from stock-based compensation awards
    (16.2 )     (7.7 )
  Other non-cash expenses, net
    (1.2 )     11.7  
  Changes in assets and liabilities, excluding the effects of acquisitions
     and dispositions:
               
   Accounts receivable
    (130.8 )     (58.4 )
   Inventories
    (67.9 )     (77.0 )
   Other assets
    (27.2 )     (34.3 )
   Accounts payable
    42.5       67.3  
   Other liabilities
    (88.6 )     (18.5 )
   Contributions to retirement plans
    (19.6 )     (8.5 )
                 
   Net cash provided by continuing operations
    299.1       397.9  
   Net cash used in discontinued operations
    (0.8 )     (5.9 )
                 
   Net cash provided by operating activities
    298.3       392.0  
                 
Investing Activities
               
Acquisitions, net of cash acquired
    (3.8 )     (0.5 )
Purchase of property, plant and equipment
    (66.0 )     (69.2 )
Proceeds from sale of property, plant and equipment
    3.0       4.0  
Other investing activities, net
    (0.3 )     (0.9 )
                 
   Net cash used in continuing operations
    (67.1 )     (66.6 )
   Net cash provided by discontinued operations
          0.4  
                  
   Net cash used in investing activities
  $ (67.1 )   $ (66.2 )

 
7

 
 
 
THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
 
   
Three Months Ended
 
   
March 30,
   
March 31,
 
(In millions)
 
2013
   
2012
 
             
Financing Activities
           
Decrease in commercial paper, net
  $     $ (349.6 )
Redemption and repayment of long-term obligations
    (0.5 )     (0.4 )
Purchases of company common stock
    (89.8 )     (300.0 )
Dividends paid
    (54.0 )      
Net proceeds from issuance of company common stock
    101.8       55.1  
Tax benefits from stock-based compensation awards
    16.2       7.7  
(Decrease) increase in short-term notes payable
    (1.5 )     2.2  
                 
   Net cash used in financing activities
    (27.8 )     (585.0 )
                 
Exchange Rate Effect on Cash
    (50.3 )     31.2  
                 
Increase (Decrease) in Cash and Cash Equivalents
    153.1       (228.0 )
Cash and Cash Equivalents at Beginning of Period
    851.0       1,016.3  
                 
Cash and Cash Equivalents at End of Period
  $ 1,004.1     $ 788.3  
 
See Note 12 for supplemental cash flow information.


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

 
8

 
 

THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
 
                                       
Accumulated
       
               
Capital in
                     
Other
   
Total
 
   
Common Stock
   
Excess of
   
Retained
   
Treasury Stock
   
Comprehensive
   
Shareholders'
 
(In millions)
 
Shares
   
Amount
   
Par Value
   
Earnings
   
Shares
   
Amount
   
Items
   
Equity
 
                                                 
Balance at December 31, 2011
    406.4     $ 406.4     $ 10,152.0     $ 6,716.3       35.0     $ (1,837.1 )   $ (399.5 )   $ 15,038.1  
                                                                 
Issuance of shares under
    employees' and directors'
    stock plans
    2.1       2.1       56.5             0.2       (8.9 )           49.7  
Stock-based compensation
                17.3                               17.3  
Tax benefit related to employees'
    and directors' stock plans
                6.0                               6.0  
Purchases of company common
    stock
                            6.0       (300.0 )           (300.0 )
Dividends declared
                      (48.0 )                       (48.0 )
Net income
                      277.3                         277.3  
Other comprehensive items
                                        248.6       248.6  
                                                                 
Balance at March 31, 2012
    408.5     $ 408.5     $ 10,231.8     $ 6,945.6       41.2     $ (2,146.0 )   $ (150.9 )   $ 15,289.0  
                                                                 
                                                                 
Balance at December 31, 2012
    413.5     $ 413.5     $ 10,501.1     $ 7,697.3       56.0     $ (2,996.8 )   $ (150.4 )   $ 15,464.7  
Issuance of shares under
    employees' and directors'
    stock plans
    3.0       3.0       102.7             0.3       (18.9 )           86.8  
Stock-based compensation
                20.4                               20.4  
Tax benefit related to employees'
    and directors' stock plans
                14.1                               14.1  
Purchases of company common
    stock
                            1.3       (89.8 )           (89.8 )
Dividends declared
                      (54.0 )                       (54.0 )
Net income
                      336.2                         336.2  
Other comprehensive items
                                        (178.9 )     (178.9 )
                                                                 
Balance at March 30, 2013
    416.5     $ 416.5     $ 10,638.3     $ 7,979.5       57.6     $ (3,105.5 )   $ (329.3 )   $ 15,599.5  



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

 
9

 
 
THERMO FISHER SCIENTIFIC INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1.
Nature of Operations and Summary of Significant Accounting Policies
 
Nature of Operations
 
Thermo Fisher Scientific Inc. (the company) enables customers to make the world healthier, cleaner and safer by providing analytical instruments, equipment, reagents and consumables, software and services for research, manufacturing, analysis, discovery and diagnostics. Markets served include pharmaceutical and biotech companies, hospitals and clinical diagnostic labs, universities, research institutions and government agencies, as well as environmental and industrial process control settings.
 
Interim Financial Statements
 
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 March 30, 2013, the results of operations for the three-month periods ended March 30, 2013, and March 31, 2012, and the cash flows for the three-month periods ended March 30, 2013, and March 31, 2012. Interim results are not necessarily indicative of results for a full year.
 
The consolidated balance sheet presented as of December 31, 2012, has been derived from the audited consolidated financial statements as of that date. The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain all of the information that is included in the annual financial statements and notes of the company. The consolidated financial statements and notes included in this report should be read in conjunction with the 2012 financial statements and notes included in the company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on February 27, 2013.
 
Note 1 to the consolidated financial statements for 2012 describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the company’s significant accounting policies during the three months ended March 30, 2013.
 
Presentation
 
Certain reclassifications of prior year amounts have been made to conform to the current year presentation.
 
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:
 
   
Three Months Ended
 
   
March 30,
   
March 31,
 
(In millions)
 
2013
   
2012
 
             
Beginning Balance
  $ 48.7     $ 42.2  
Provision charged to income
    17.8       13.2  
Usage
    (18.9 )     (14.3 )
Adjustments to previously provided warranties, net
    0.2        
Other, net
    (0.7 )     0.4  
                 
Ending Balance
  $ 47.1     $ 41.5  
 

 
10

 
 

THERMO FISHER SCIENTIFIC INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Inventories
 
The components of inventories are as follows:
 
   
March 30,
   
December 31,
 
(In millions)
 
2013
   
2012
 
             
Raw Materials
  $ 363.5     $ 362.0  
Work in Process
    162.5       149.7  
Finished Goods
    948.6       931.6  
                 
    $ 1,474.6     $ 1,443.3  

Property, Plant and Equipment
 
Property, plant and equipment consists of the following:
 
   
March 30,
   
December 31,
 
(In millions)
 
2013
   
2012
 
             
Land
  $ 211.7     $ 216.6  
Buildings and Improvements
    794.9       805.5  
Machinery, Equipment and Leasehold Improvements
    1,842.8       1,829.9  
                 
      2,849.4       2,852.0  
Less: Accumulated Depreciation and Amortization
    1,163.6       1,125.6  
                 
    $ 1,685.8     $ 1,726.4  

Acquisition-related Intangible Assets
 
Acquisition-related intangible assets are as follows:
 
   
March 30, 2013
   
December 31, 2012
 
         
Accumulated
               
Accumulated
       
(In millions)
 
Gross
   
Amortization
   
Net
   
Gross
   
Amortization
   
Net
 
                                     
Definite Lives
  $ 10,305.9     $ (4,085.6 )   $ 6,220.3     $ 10,403.1     $ (3,939.2 )   $ 6,463.9  
Indefinite Lives
    1,340.6             1,340.6       1,340.6             1,340.6  
                                                 
    $ 11,646.5     $ (4,085.6 )   $ 7,560.9     $ 11,743.7     $ (3,939.2 )   $ 7,804.5  
 
Use of Estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In addition, significant estimates were made in estimating future cash flows to assess potential impairment of assets, and in determining the ultimate loss from selling discontinued operations and abandoning leases at facilities being exited (Note 13). Actual results could differ from those estimates.
 

 
11

 
 

THERMO FISHER SCIENTIFIC INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Recent Accounting Pronouncements
 
In February 2013, the FASB issued new guidance which requires disclosure of information about significant reclassification adjustments from accumulated other comprehensive income in a single note or on the face of the financial statements. This guidance became effective for the company in 2013. Adoption of this standard, which is related to disclosure only, did not have an impact on the company’s consolidated financial position, results of operations or cash flows.
 
In July 2012, the FASB modified existing rules to allow entities to use a qualitative approach to test indefinite-lived intangible asset for impairment. The revised standard allows an entity the option to first assess qualitatively whether it is more likely than not (that is, a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. This guidance became effective for the company in 2013. Adoption of this standard did not have an impact on the company’s consolidated financial position, results of operations or cash flows.
 
In December 2011, the FASB issued new guidance which requires enhanced disclosures on offsetting amounts within the balance sheet, including disclosing gross and net information about instruments and transactions eligible for offset or subject to a master netting or similar agreement. Adoption of this standard, which is related to disclosure only, did not have an impact on the company’s consolidated financial position, results of operations or cash flows.
 
Note 2.
Acquisitions and Dispositions
 
The company made contingent purchase price and post closing adjustment payments totaling $4 million in the first three months of 2013, for acquisitions completed prior to 2013. The contingent purchase price payments were contractually due to the sellers upon achievement of certain performance criteria at the acquired businesses.
 
Unaudited Pro Forma Information
 
The company acquired One Lambda in September 2012. Had the acquisition of One Lambda been completed as of the beginning of 2011, the company’s pro forma results for the first three months of 2012 would have been as follows:
 
   
Three Months Ended
 
   
March 31,
 
(In millions except per share amounts)
 
2012
 
       
Revenues
  $ 3,107.4  
         
Income from Continuing Operations
  $ 295.4  
         
Net Income
  $ 291.9  
         
Earnings per Share from Continuing Operations:
       
Basic
  $ 0.80  
Diluted
  $ 0.80  
         
Earnings per Share:
       
Basic
  $ 0.79  
Diluted
  $ 0.79  

The company’s results would not have been materially different from its pro forma results had the company’s other 2012 acquisitions occurred at the beginning of 2011.
 

 
12

 
 

THERMO FISHER SCIENTIFIC INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Dispositions
 
On October 22, 2012, the company sold its laboratory workstations business (See Note 14).
 
Note 3.
Business Segment and Geographical Information
 
The company’s continuing operations fall into three business segments as follows:
 
Analytical Technologies: provides a broad offering of instruments, reagents, consumables, software and services that are used for a range of applications in the laboratory, on the production line and in the field. These products and services are used by customers in pharmaceutical, biotechnology, academic, government, environmental and other research and industrial markets, as well as the clinical laboratory.
 
Specialty Diagnostics: provides a wide range of diagnostic test kits, reagents, culture media, instruments and associated products used to increase the speed and accuracy of diagnoses. These products are used primarily by customers in healthcare, clinical, pharmaceutical, industrial and food safety laboratories.
 
Laboratory Products and Services: provides virtually everything needed for the laboratory, including a combination of self-manufactured and sourced products and an extensive service offering. These products and services are used by customers in pharmaceutical, biotechnology, academic, government and other research and industrial markets, as well as the clinical laboratory.
 
In February 2013, in connection with a change in management responsibility for two product lines, the company transferred its water analysis and research serum media product lines to the Laboratory Products and Services segment from the Analytical Technologies segment. The company has historically moved a product line between segments when a shift in strategic focus of either the product line or a segment more closely aligns the product line with a segment different than that in which it had previously been reported. Prior period segment information has been reclassified to reflect these transfers.
 
The company’s management evaluates segment operating performance based on 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 this measure because it helps management understand and evaluate the segments’ core operating results and facilitates comparison of performance for determining compensation.
 

 
13

 
 

THERMO FISHER SCIENTIFIC INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Business Segment Information
 
   
Three Months Ended
 
   
March 30,
   
March 31,
 
(In millions)
 
2013
   
2012
 
             
Revenues
           
Analytical Technologies
  $ 977.8     $ 980.0  
Specialty Diagnostics
    805.6       731.9  
Laboratory Products and Services
    1,544.3       1,475.8  
Eliminations
    (136.2 )     (130.9 )
                 
Consolidated revenues
    3,191.5       3,056.8  
                 
Segment Income
               
Analytical Technologies (a)
    176.1       178.8  
Specialty Diagnostics (a)
    221.7       186.9  
Laboratory Products and Services (a)
    217.3       210.8  
                 
Subtotal reportable segments (a)
    615.1       576.5  
                 
Cost of revenues charges
    (13.2 )     (26.6 )
Selling, general and administrative charges (income), net
    (1.3 )     7.7  
Restructuring and other costs, net
    (21.5 )     (12.2 )
Amortization of acquisition-related intangible assets
    (192.0 )     (183.9 )
                 
Consolidated operating income
    387.1       361.5  
Other expense, net (b)
    (44.2 )     (50.4 )
                 
Income from continuing operations before income taxes
  $ 342.9     $ 311.1  
                 
Depreciation
               
Analytical Technologies
  $ 15.3     $ 16.4  
Specialty Diagnostics
    18.5       17.7  
Laboratory Products and Services
    25.2       24.5  
                 
Consolidated depreciation
  $ 59.0     $ 58.6  
 
(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.
 

 
14

 
 

THERMO FISHER SCIENTIFIC INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Note 4.
Other Expense, Net
 
The components of other expense, net, in the accompanying statement of income are as follows:
 
   
Three Months Ended
 
   
March 30,
   
March 31,
 
(In millions)
 
2013
   
2012
 
             
Interest Income
  $ 7.2     $ 6.4  
Interest Expense
    (64.4 )     (57.7 )
Other Items, Net
    13.0       0.9  
                 
    $ (44.2 )   $ (50.4 )

Other Items, Net
 
In the first quarter of 2013, the company irrevocably contributed appreciated available-for-sale investments that had a fair value of $27 million to two of its U.K. defined benefit plans, resulting in realization of a previously unrecognized gain of $11 million.
 
Note 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
 
 
March 30,
 
March 31,
 
(In millions)
2013
 
2012
 
             
Stock Option Awards
  $ 9.6     $ 10.1  
Restricted Share/Unit Awards
    10.8       7.1  
                 
Total Stock-based Compensation Expense
  $ 20.4     $ 17.2  
 
   Stock-based compensation expense is included in the accompanying statement of income as follows:
 
   
Three Months Ended
 
   
March 30,
   
March 31,
 
(In millions)
 
2013
   
2012
 
             
Cost of Revenues
  $ 1.5     $ 1.2  
Selling, General and Administrative Expenses
    18.2       15.5  
Research and Development Expenses
    0.7       0.5  
                 
Total Stock-based Compensation Expense
  $ 20.4     $ 17.2  
 
    As of March 30, 2013, there was $99 million of total unrecognized compensation cost related to unvested stock options granted. The cost is expected to be recognized through 2017 with a weighted average amortization period of 2.7 years.
 

 
15

 
 

THERMO FISHER SCIENTIFIC INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
As of March 30, 2013, there was $103 million of total unrecognized compensation cost related to unvested restricted stock unit awards. The cost is expected to be recognized through 2016 with a weighted average amortization period of 2.5 years.
 
During the first three months of 2013, the company made equity compensation grants to employees consisting of 0.8 million restricted stock units and options to purchase 1.8 million shares.
 
Note 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
 
   
March 30,
   
March 31,
 
(In millions)
 
2013
   
2012
 
             
Service Cost - Benefits Earned
  $ 3.6     $ 3.1  
Interest Cost on Benefit Obligation
    12.0       12.8  
Expected Return on Plan Assets
    (13.2 )     (13.8 )
Amortization of Net Loss
    2.8       1.7  
Amortization of Prior Service Benefit
    (0.1 )      
Special Termination Benefits
    0.1       0.2  
                 
Net Periodic Benefit Cost
  $ 5.2     $ 4.0  
 
    Net periodic benefit costs for the company's other postretirement benefit plans include the following components:
 
   
Three Months Ended
 
   
March 30,
   
March 31,
 
(In millions)
 
2013
   
2012
 
             
Service Cost - Benefits Earned
  $ 0.2     $ 0.2  
Interest Cost on Benefit Obligation
    0.4       0.5  
Amortization of Net Loss
    0.1        
                 
Net Periodic Benefit Cost
  $ 0.7     $ 0.7  


 
16

 
 

THERMO FISHER SCIENTIFIC INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Note 7.
Earnings per Share
 
   
Three Months Ended
 
   
March 30,
   
March 31,
 
(In millions except per share amounts)
 
2013
   
2012
 
             
Income from Continuing Operations
  $ 340.8     $ 280.8  
Loss from Discontinued Operations
    (0.4 )     (3.8 )
(Loss) Gain on Disposal of Discontinued Operations, Net
    (4.2 )     0.3  
                 
Net Income
  $ 336.2     $ 277.3  
                 
Basic Weighted Average Shares
    358.1       367.3  
Plus Effect of:
               
Stock options and restricted units
    3.6       2.8  
                 
Diluted Weighted Average Shares
    361.7       370.1  
                 
Basic Earnings per Share:
               
Continuing operations
  $ .95     $ .76  
Discontinued operations
    (.01 )     (.01 )
                 
    $ .94     $ .76  
                 
Diluted Earnings per Share:
               
Continuing operations
  $ .94     $ .76  
Discontinued operations
    (.01 )     (.01 )
                 
    $ .93     $ .75  

Options to purchase 1.9 million and 9.2 million shares of common stock were not included in the computation of diluted earnings per share for the first quarter of 2013 and 2012, respectively, because their effect would have been antidilutive.
 
Note 8.
Debt and Other Financing Arrangements
 
Credit Facilities
 
The company has a revolving credit facility with a bank group that provides for up to $1.5 billion of unsecured multi-currency revolving credit consisting of a $1 billion 5-year credit agreement, with the ability to request an additional $500 million. The facility expires in April 2017, however, the company expects to renegotiate the terms prior to closing the Life Technologies acquisition (Note 15). The agreement calls for interest at either a LIBOR-based rate or a rate based on the prime lending rate of the agent bank, at the company’s option. 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 a Consolidated Leverage Ratio of debt to EBITDA (as defined in the agreements) below 3.5 to 1.0. The credit agreement permits the company to use the facility for working capital; acquisitions; repurchases of common stock, debentures and other securities; the refinancing of debt; and general corporate purposes. The credit agreement allows for the issuance of letters of credit, which reduces the amount available for borrowing. If the company borrows under this facility, it intends to leave undrawn an amount equivalent to outstanding commercial paper ($50 million at March 30, 2013) to provide a source of funds in the event that commercial paper markets are not available. As of March 30, 2013, no borrowings were outstanding under the facility, although available capacity was reduced by approximately $53 million as a result of outstanding letters of credit.
 

 
17

 
 

THERMO FISHER SCIENTIFIC INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Note 9.
Commitments and 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.
 
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.
 
Note 10.
Comprehensive Income and Shareholders’ Equity
 
Comprehensive Income
 
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.
 

 
18

 
 

THERMO FISHER SCIENTIFIC INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Changes in each component of accumulated other comprehensive items, net of tax are as follows:
 
(In millions)
 
Currency
Translation
Adjustment
   
Unrealized
Gains
(Losses) on
Available-for-
Sale
Investments
   
Unrealized
Gains
(Losses) on
Hedging
Instruments
   
Pension and
Other
Postretirement
Benefit
Liability
Adjustment
   
Total
 
                               
Balance at December 31, 2012
  $ 87.4     $ 7.7     $ (32.9 )   $ (212.6 )   $ (150.4 )
Other comprehensive income (loss)
      before reclassifications
    (179.3 )     1.2             4.5       (173.6 )
Amounts reclassified from
      accumulated other
      comprehensive items
          (8.0 )     0.8       1.9       (5.3 )
                                         
Net other comprehensive items
    (179.3 )     (6.8 )     0.8       6.4       (178.9 )
                                         
Balance at March 30, 2013
  $ (91.9 )   $ 0.9     $ (32.1 )   $ (206.2 )   $ (329.3 )

The amounts reclassified out of accumulated other comprehensive items are as follows:
 
       
Three Months Ended
 
   
Affected Line Item in the
 
March 30,
   
March 31,
 
(In millions)
 
 Statement of Income
 
2013
   
2012
 
                 
Amounts Reclassified From Accumulated Other
      Comprehensive Items
               
      Unrealized gains and losses on available-for-sale
            investments
               
            Realized (gain) loss on sale or transfer of
                 available-for-sale investments
 
Other Expense, Net
  $ (10.5 )   $  
            Tax provision (benefit)
 
Provision for Income Taxes
    2.5        
                     
        $ (8.0 )   $  
                     
      Unrealized gains and losses on hedging instruments
                   
            Realized loss on interest rate swaps and locks
 
Other Expense, Net
  $ 1.3     $ 1.3  
            Tax provision (benefit)
 
Provision for Income Taxes
    (0.5 )     (0.5 )
                     
        $ 0.8     $ 0.8  
                     
      Pension and other postretirement benefit liability
            adjustment
                   
            Amortization of actuarial losses
 
Net Periodic Benefit Cost -
  $ 2.9     $ 1.7  
            Amortization of prior service benefit
 
see Note 6 for details
    (0.1 )      
                     
                 Total before tax
        2.8       1.7  
            Tax provision (benefit)
 
Provision for Income Taxes
    (0.9 )     (0.6 )
                     
        $ 1.9     $ 1.1  
                     
                 Total reclassifications
      $ (5.3 )   $ 1.9  
 

 
19

 
 

THERMO FISHER SCIENTIFIC INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Note 11.         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 2013. The company’s financial assets and liabilities carried at fair value are primarily comprised of investments in money market funds; insurance contracts, mutual funds holding publicly traded securities and other investments in unit trusts held as assets to satisfy outstanding deferred compensation and retirement liabilities; and acquisition-related contingent consideration.
 
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 March 30, 2013:
 
   
March 30,
   
Quoted
 Prices in
Active
 Markets
   
Significant
Other
 Observable
 Inputs
   
Significant
Unobservable
 Inputs
 
(In millions)
 
2013
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Assets
                       
Cash equivalents
  $ 331.2     $ 331.2     $     $  
Investments in mutual funds, unit trusts and other
    similar instruments
    9.9       9.9              
Insurance contracts
    65.2             65.2        
Auction rate securities
    4.2                   4.2  
Derivative contracts
    2.1             2.1        
                                 
Total Assets
  $ 412.6     $ 341.1     $ 67.3     $ 4.2  
                                 
Liabilities
                               
Derivative contracts
  $ 0.7     $     $ 0.7     $  
Contingent consideration
    20.0                   20.0  
                                 
Total Liabilities
  $ 20.7     $     $ 0.7     $ 20.0  
 

 
20

 
 

THERMO FISHER SCIENTIFIC INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

    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, 2012:
 
   
December 31,
   
Quoted
Prices in
Active
Markets
   
Significant
Other
Observable
Inputs
   
Significant
Unobservable
Inputs
 
(In millions)
 
2012
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
                         
Assets
                       
Cash equivalents
  $ 73.6     $ 73.6     $     $  
Investments in mutual funds, unit trusts and other
    similar instruments
    36.6       36.6              
Insurance contracts
    62.5             62.5        
Auction rate securities
    4.3                   4.3  
Derivative contracts
    1.6             1.6        
                                 
Total Assets
  $ 178.6     $ 110.2     $ 64.1     $ 4.3  
                                 
Liabilities
                               
Derivative contracts
  $ 0.8     $     $ 0.8     $  
Contingent consideration
    20.1                   20.1  
                                 
Total Liabilities
  $ 20.9     $     $ 0.8     $ 20.1  

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
 
   
March 30,
   
March 31,
 
(In millions)
 
2013
   
2012
 
             
Auction Rate Securities
           
Beginning Balance
  $ 4.3     $ 4.3  
Sale of securities
    (0.1 )      
                 
Ending Balance
  $ 4.2     $ 4.3  
 

 
21

 
 

THERMO FISHER SCIENTIFIC INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)

 
The company has the ability and intent to hold the auction rate securities to maturity unless they are redeemed earlier by the issuer.
 
   
Three Months Ended
 
   
March 30,
   
March 31,
 
(In millions)
 
2013
   
2012
 
             
Contingent Consideration
           
Beginning Balance
  $ 20.1     $ 1.7  
Payments
          (0.3 )
Currency translation
    (0.1 )      
                 
Ending Balance
  $ 20.0     $ 1.4  

The notional amounts of derivative contracts outstanding, consisting of foreign currency exchange contracts, totaled $873 million and $719 million at March 30, 2013 and December 31, 2012, respectively.
 
While certain derivatives are subject to netting arrangements with counterparties, the company does not offset derivative assets and liabilities within the consolidated balance sheet. 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
     
March 30,
 
December 31,
March 30,
 
December 31,
(In millions)
 
2013 
 
2012 
 
2013 
 
2012 
                         
Derivatives Not Designated as Hedging Instruments
                       
 
Foreign currency exchange contracts (a)
 
$
 2.1 
 
$
 1.6 
 
$
 0.7 
 
$
 0.8 
 
(a) 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
 
   
March 30,
   
March 31,
 
(In millions)
 
2013
   
2012
 
             
Derivatives Not Designated as Fair Value Hedges
           
Foreign currency exchange contracts
           
Included in cost of revenues
  $ 1.0     $ 1.3  
Included in other expense, net
    16.7       (0.5 )

Gains and losses recognized on foreign currency exchange contracts are included in the consolidated statement of income together with the corresponding, offsetting losses and gains on the underlying hedged transactions.
 
 

 
22

 
 

THERMO FISHER SCIENTIFIC INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
 
Fair Value of Other Financial Instruments
 
The carrying amount and fair value of the company’s notes receivable and debt obligations are as follows:
 
   
March 30, 2013
   
December 31, 2012
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
(In millions)
 
Value
   
Value
   
Value
   
Value
 
                         
Notes Receivable
  $ 3.8     $ 3.8     $ 4.7     $ 4.7  
                                 
Debt Obligations:
                               
Senior notes
    7,015.7       7,360.9       7,019.5       7,455.2  
Commercial paper
    50.0       50.0       50.0       50.0  
Other
    52.7       52.7       54.8       54.8  
                                 
    $ 7,118.4     $ 7,463.6     $ 7,124.3     $ 7,560.0  

    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 which represent level 2 measurements.
 
Note 12.
Supplemental Cash Flow Information
 
   
Three Months Ended
 
   
March 30,
   
March 31,
 
(In millions)
 
2013
   
2012
 
             
Non-cash Activities
           
Fair value of available-for-sale investments contributed to defined benefit plans
  $ 27.1     $  
                 
Declared but unpaid dividends
  $ 54.7     $ 48.0