Document


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended
June 30, 2018
¨ 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.)
 
 
168 Third Avenue
 
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 ý  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 ý  No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý                                              Accelerated filer o                                       Non-accelerated filer o
Smaller reporting company o                                      Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  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 ý
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 June 30, 2018
 
 
Common Stock, $1.00 par value
 
402,796,251
 





THERMO FISHER SCIENTIFIC INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2018
 
TABLE OF CONTENTS
 
 
 
Page
 
PART I
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
 
 
 
 
 

2


THERMO FISHER SCIENTIFIC INC.

PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements
CONSOLIDATED BALANCE SHEET
(Unaudited)
 
 
June 30,

 
December 31,

(In millions except share and per share amounts)
 
2018

 
2017

 
 
 
 
 
Assets
 
 
 
 
Current Assets:
 
 
 
 
Cash and cash equivalents
 
$
937

 
$
1,335

Accounts receivable, less allowances of $115 and $109
 
3,911

 
3,879

Inventories
 
2,866

 
2,971

Refundable income taxes
 
530

 
432

Other current assets
 
1,230

 
804

 
 
 
 
 
Total current assets
 
9,474

 
9,421

 
 
 
 
 
Property, Plant and Equipment, Net
 
3,952

 
4,047

Acquisition-related Intangible Assets, Net
 
15,680

 
16,684

Other Assets
 
1,177

 
1,227

Goodwill
 
25,120

 
25,290

 
 
 
 
 
Total Assets
 
$
55,403

 
$
56,669

 
 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
 
Current Liabilities:
 
 
 
 
Short-term obligations and current maturities of long-term obligations
 
$
1,711

 
$
2,135

Accounts payable
 
1,359

 
1,428

Accrued payroll and employee benefits
 
755

 
918

Contract liabilities
 
816

 

Deferred revenue
 

 
719

Other accrued expenses
 
1,339

 
1,848

 
 
 
 
 
Total current liabilities
 
5,980

 
7,048

 
 
 
 
 
Deferred Income Taxes
 
2,599

 
2,766

Other Long-term Liabilities
 
2,670

 
2,569

Long-term Obligations
 
17,709

 
18,873

 
 
 
 
 
Shareholders' Equity:
 
 
 
 
Preferred stock, $100 par value, 50,000 shares authorized; none issued
 


 


Common stock, $1 par value, 1,200,000,000 shares authorized; 429,925,100 and 428,327,873 shares issued
 
430

 
428

Capital in excess of par value
 
14,408

 
14,177

Retained earnings
 
17,226

 
15,914

Treasury stock at cost, 27,128,849 and 27,013,311 shares
 
(3,128
)
 
(3,103
)
Accumulated other comprehensive items
 
(2,491
)
 
(2,003
)
 
 
 
 
 
Total shareholders' equity
 
26,445

 
25,413

 
 
 
 
 
Total Liabilities and Shareholders' Equity
 
$
55,403

 
$
56,669


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

3



THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,

 
July 1,

 
June 30,

 
July 1,

(In millions except per share amounts)
 
2018

 
2017

 
2018

 
2017

 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Product revenues
 
$
4,708

 
$
4,298

 
$
9,236

 
$
8,400

Service revenues
 
1,370

 
692

 
2,695

 
1,355

 
 
 
 
 
 
 
 
 
Total revenues
 
6,078

 
4,990

 
11,931

 
9,755

 
 
 
 
 
 
 
 
 
Costs and Operating Expenses:
 
 
 
 
 
 
 
 
Cost of product revenues
 
2,390

 
2,244

 
4,715

 
4,373

Cost of service revenues
 
950

 
462

 
1,898

 
905

Selling, general and administrative expenses
 
1,542

 
1,291

 
3,057

 
2,625

Research and development expenses
 
242

 
222

 
476

 
437

Restructuring and other costs, net
 
17

 
22

 
62

 
46

 
 
 
 
 
 
 
 
 
Total costs and operating expenses
 
5,141

 
4,241

 
10,208

 
8,386

 
 
 
 
 
 
 
 
 
Operating Income
 
937

 
749

 
1,723

 
1,369

Other Expense, Net
 
(131
)
 
(123
)
 
(283
)
 
(240
)
 
 
 
 
 
 
 
 
 
Income from Continuing Operations Before Income Taxes
 
806

 
626

 
1,440

 
1,129

(Provision for) Benefit from Income Taxes
 
(54
)
 
(13
)
 
(109
)
 
35

 
 
 
 
 
 
 
 
 
Income from Continuing Operations
 
752

 
613

 
1,331

 
1,164

Loss from Discontinued Operations (net of income tax benefit of $0, $0, $0 and $0)
 

 
(1
)
 

 
(1
)
 
 
 
 
 
 
 
 
 
Net Income
 
$
752

 
$
612

 
$
1,331

 
$
1,163

 
 
 
 
 
 
 
 
 
Earnings per Share from Continuing Operations
 
 
 
 
 
 
 
 
Basic
 
$
1.87

 
$
1.57

 
$
3.31

 
$
2.98

Diluted
 
$
1.85

 
$
1.56

 
$
3.28

 
$
2.96

 
 
 
 
 
 
 
 
 
Earnings per Share
 
 
 
 
 
 
 
 
Basic
 
$
1.87

 
$
1.57

 
$
3.31

 
$
2.98

Diluted
 
$
1.85

 
$
1.56

 
$
3.28

 
$
2.95

 
 
 
 
 
 
 
 
 
Weighted Average Shares
 
 
 
 
 
 
 
 
Basic
 
403

 
390

 
402

 
390

Diluted
 
406

 
393

 
406

 
394

 
 
 
 
 
 
 
 
 
Cash Dividends Declared per Common Share
 
$
0.17

 
$
0.15

 
$
0.34

 
$
0.30


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


4


THERMO FISHER SCIENTIFIC INC.

 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,

 
July 1,

 
June 30,

 
July 1,

(In millions)
 
2018

 
2017

 
2018

 
2017

 
 
 
 
 
 
 
 
 
Comprehensive Income
 
 
 
 
 
 
 
 
Net Income
 
$
752

 
$
612

 
$
1,331

 
$
1,163

 
 
 
 
 
 
 
 
 
Other Comprehensive Items:
 
 
 
 
 
 
 
 
Currency translation adjustment (net of tax provision of $94, $0, $47 and $0)
 
(462
)
 
219

 
(415
)
 
379

Unrealized gains and losses on available-for-sale investments:
 
 
 
 
 
 
 
 
Unrealized holding gains arising during the period (net of tax provision of $0, $1, $0 and $1)
 

 
1

 

 
2

Reclassification adjustment for (gains) losses included in net income (net of tax (provision) benefit of $0, ($1), $0 and ($1))
 

 
(1
)
 

 
(1
)
Unrealized gains and losses on hedging instruments:
 
 
 
 
 
 
 
 
Reclassification adjustment for losses included in net income (net of tax benefit of $1, $1, $2 and $2)
 
2

 
2

 
4

 
4

Pension and other postretirement benefit liability adjustments:
 
 
 
 
 
 
 
 
Pension and other postretirement benefit liability adjustments arising during the period (net of tax provision (benefit) of $2, ($2), $1 and ($3))
 
5

 
(7
)
 
3

 
(9
)
Amortization of net loss and prior service benefit included in net periodic pension cost (net of tax benefit of $2, $1, $3 and $2)
 
6

 
3

 
8

 
5

 
 
 
 
 
 
 
 
 
Total other comprehensive items
 
(449
)
 
217

 
(400
)
 
380

 
 
 
 
 
 
 
 
 
Comprehensive Income
 
$
303

 
$
829

 
$
931

 
$
1,543


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


5


THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
 
 
Six Months Ended
 
 
June 30,

 
July 1,

(In millions)
 
2018

 
2017

 
 
 
 
 
Operating Activities
 
 
 
 
Net income
 
$
1,331

 
$
1,163

Loss from discontinued operations
 

 
1

 
 
 
 
 
Income from continuing operations
 
1,331

 
1,164

 
 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
1,146

 
942

Change in deferred income taxes
 
(99
)
 
(299
)
Non-cash stock-based compensation
 
91

 
71

Non-cash charges for sale of inventories revalued at the date of acquisition
 
8

 
31

Other non-cash expenses, net
 
55

 
46

Changes in assets and liabilities, excluding the effects of acquisitions and dispositions:
 
 
 
 
Accounts receivable
 
(97
)
 
(127
)
Inventories
 
(195
)
 
(146
)
Other assets
 
(247
)
 
(178
)
Accounts payable
 
(20
)
 
49

Other liabilities
 
(408
)
 
(161
)
Contributions to retirement plans
 
(43
)
 
(181
)
 
 
 
 
 
Net cash provided by continuing operations
 
1,522

 
1,211

Net cash used in discontinued operations
 

 
(1
)
 
 
 
 
 
Net cash provided by operating activities
 
1,522

 
1,210

 
 
 
 
 
Investing Activities
 
 

 
 

Acquisitions, net of cash acquired
 
(59
)
 
(307
)
Purchase of property, plant and equipment
 
(301
)
 
(181
)
Proceeds from sale of property, plant and equipment
 
3

 
2

Other investing activities, net
 
(7
)
 
9

 
 
 
 
 
Net cash used in investing activities
 
$
(364
)
 
$
(477
)


6


THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
 
 
Six Months Ended
 
 
June 30,

 
July 1,

(In millions)
 
2018

 
2017

 
 
 
 
 
Financing Activities
 
 
 
 
Net proceeds from issuance of debt
 
$

 
$
519

Repayment of debt
 
(1,353
)
 
(1,329
)
Proceeds from issuance of commercial paper
 
2,761

 
4,487

Repayments of commercial paper
 
(2,655
)
 
(3,991
)
Purchases of company common stock
 

 
(750
)
Dividends paid
 
(129
)
 
(118
)
Net proceeds from issuance of company common stock under employee stock plans
 
78

 
99

Other financing activities
 
(50
)
 

 
 
 
 
 
Net cash used in financing activities
 
(1,348
)
 
(1,083
)
 
 
 
 
 
Exchange Rate Effect on Cash
 
(215
)
 
168

 
 
 
 
 
Decrease in Cash, Cash Equivalents and Restricted Cash
 
(405
)
 
(182
)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period
 
1,361

 
811

 
 
 
 
 
Cash, Cash Equivalents and Restricted Cash at End of Period
 
$
956

 
$
629

 
 
 
 
 
See Note 12 for supplemental cash flow information.

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


7


THERMO FISHER SCIENTIFIC INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
 
 
Common Stock
 
Capital in Excess of Par Value

 
Retained Earnings

 
Treasury Stock
 
Accumulated Other Comprehensive Items

 
Total Shareholders' Equity

(In millions)
 
Shares

 
Amount

 
 
 
Shares

 
Amount

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
 
415

 
$
415

 
$
12,140

 
$
13,927

 
22

 
$
(2,306
)
 
$
(2,636
)
 
$
21,540

Issuance of shares under employees' and directors' stock plans
 
2

 
2

 
120

 

 

 
(14
)
 

 
108

Stock-based compensation
 

 

 
71

 

 

 

 

 
71

Purchases of company common stock
 

 

 

 

 
5

 
(750
)
 

 
(750
)
Dividends declared
 

 

 

 
(118
)
 

 

 

 
(118
)
Net income
 

 

 

 
1,163

 

 

 

 
1,163

Other comprehensive items
 

 

 

 

 

 

 
380

 
380

Other
 

 

 
(3
)
 

 

 

 

 
(3
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at July 1, 2017
 
417

 
$
417

 
$
12,328

 
$
14,972

 
27

 
$
(3,070
)
 
$
(2,256
)
 
$
22,391

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
 
428

 
$
428

 
$
14,177

 
$
15,914

 
27

 
$
(3,103
)
 
$
(2,003
)
 
$
25,413

Cumulative effect of accounting changes
 

 

 

 
118

 

 

 
(88
)
 
30

Issuance of shares under employees' and directors' stock plans
 
2

 
2

 
113

 

 

 
(25
)
 

 
90

Stock-based compensation
 

 

 
91

 

 

 

 

 
91

Dividends declared
 

 

 

 
(137
)
 

 

 

 
(137
)
Net income
 

 

 

 
1,331

 

 

 

 
1,331

Other comprehensive items
 

 

 

 

 

 

 
(400
)
 
(400
)
Other
 

 

 
27

 

 

 

 

 
27

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at June 30, 2018
 
430

 
$
430

 
$
14,408

 
$
17,226

 
27

 
$
(3,128
)
 
$
(2,491
)
 
$
26,445


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

8


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 or Thermo Fisher) 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, academic and government, industrial and applied, as well as healthcare and diagnostics.
Interim Financial Statements
The interim consolidated financial statements presented herein have been prepared by the company, 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 June 30, 2018, the results of operations for the three- and six-month periods ended June 30, 2018 and July 1, 2017, and the cash flows for the six-month periods ended June 30, 2018 and July 1, 2017. Interim results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 31, 2017, 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 information that is included in the annual financial statements and notes thereto of the company. The consolidated financial statements and notes included in this report should be read in conjunction with the 2017 financial statements and notes included in the company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC).
Note 1 to the consolidated financial statements for 2017 describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. Except for the accounting for revenue arising from contracts with customers, as noted below, there have been no material changes in the company’s significant accounting policies during the six months ended June 30, 2018.
Revenue Recognition
The company recognizes revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
Consumables revenues consist of single-use products and are recognized at a point in time following the transfer of control of such products to the customer, which generally occurs upon shipment. Instruments revenues typically consist of longer-lived assets that, for the substantial majority of sales, are recognized at a point in time in a manner similar to consumables. Service revenues (clinical trial logistics, pharmaceutical development and manufacturing services, asset management, diagnostic testing, training, service contracts, and field services including related time and materials) are recognized over time as customers receive and consume the benefits of such services. For revenues recognized over time, the company generally uses costs accumulated as inputs to measure progress. For contracts that contain multiple performance obligations, the company allocates the consideration to which it expects to be entitled to each performance obligation based on relative standalone selling prices and recognizes the related revenue when or as control of each individual performance obligation is transferred to customers. The company exercises judgment in determining the timing of revenue by analyzing the point in time or the period over which the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the asset. The company immediately expenses contract costs that would otherwise be capitalized and amortized over a period of less than one year.
Payments from customers for most instruments, consumables and services are typically due in a fixed number of days after shipment or delivery of the product. Service arrangements commonly call for payments in advance of performing the work (e.g. extended service contracts), upon completion of the service (e.g. pharmaceutical development and manufacturing) or a mix of both.
See Note 3 for revenue disaggregated by type and by geographic region as well as further information about remaining performance obligations.
Contract-related Balances
Contract assets include revenues recognized in advance of billings and are recorded net of estimated losses resulting from the inability to invoice customers. Contract assets are classified as current or noncurrent based on the amount of time expected

9


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

to lapse until the company's right to consideration becomes unconditional. Current contract assets and noncurrent contract assets are included within other current assets and other assets, respectively, in the accompanying balance sheet.
Contract liabilities include billings in excess of revenues recognized, such as those resulting from customer advances and deposits and unearned revenue on service contracts. Contract liabilities are classified as current or noncurrent based on the periods over which remaining performance obligations are expected to be transferred to customers. Noncurrent contract liabilities are included within other long-term liabilities in the accompanying balance sheet.
Contract asset and liability balances are as follows:
 
 
June 30,

 
January 1,

(In millions)
 
2018

 
2018

 
 
 
 
 
Current Contract Assets, Net
 
$
471

 
$
396

Current Contract Liabilities
 
816

 
805

Noncurrent Contract Liabilities
 
337

 
302

Noncurrent contract assets were immaterial in 2018. In the first six months of 2018, the company recognized revenue of $483 million that was included in the contract liabilities balance at January 1, 2018.
Warranty Obligations
The liability for warranties is included in other accrued expenses in the accompanying balance sheet. The changes in the carrying amount of standard product warranty obligations are as follows:
 
 
Six Months Ended
 
 
June 30,

 
July 1,

(In millions)
 
2018

 
2017

 
 
 
 
 
Beginning Balance
 
$
87

 
$
78

Provision charged to income
 
58

 
54

Usage
 
(53
)
 
(51
)
Acquisitions
 

 
1

Adjustments to previously provided warranties, net
 
(2
)
 
(1
)
Currency translation
 
(2
)
 
2

 
 
 
 
 
Ending Balance
 
$
88

 
$
83

Inventories
The components of inventories are as follows:
 
 
June 30,

 
December 31,

(In millions)
 
2018

 
2017

 
 
 
 
 
Raw Materials
 
$
776

 
$
708

Work in Process
 
415

 
505

Finished Goods
 
1,675

 
1,758

 
 
 
 
 
Inventories
 
$
2,866

 
$
2,971


10


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

Property, Plant and Equipment
Property, plant and equipment consists of the following:
 
 
June 30,

 
December 31,

(In millions)
 
2018

 
2017

 
 
 
 
 
Land
 
$
398

 
$
401

Buildings and Improvements
 
1,668

 
1,662

Machinery, Equipment and Leasehold Improvements
 
4,408

 
4,276

 
 
 
 
 
Property, Plant and Equipment, at Cost
 
6,474

 
6,339

Less: Accumulated Depreciation and Amortization
 
2,522

 
2,292

 
 
 
 
 
Property, Plant and Equipment, Net
 
$
3,952

 
$
4,047

Acquisition-related Intangible Assets
Acquisition-related intangible assets are as follows:
 
 
Balance at June 30, 2018
 
Balance at December 31, 2017
(In millions)
 
Gross

 
Accumulated Amortization

 
Net

 
Gross

 
Accumulated Amortization

 
Net

 
 
 
 
 
 
 
 
 
 
 
 
 
Definite Lived:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
17,129

 
$
(6,336
)
 
$
10,793

 
$
17,356

 
$
(5,902
)
 
$
11,454

Product technology
 
6,012

 
(3,024
)
 
2,988

 
6,046

 
(2,811
)
 
3,235

Tradenames
 
1,516

 
(884
)
 
632

 
1,538

 
(817
)
 
721

Other
 
33

 
(33
)
 

 
34

 
(34
)
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
24,690

 
(10,277
)
 
14,413

 
24,974

 
(9,564
)
 
15,410

Indefinite Lived:
 
 
 
 
 
 
 
 
 
 
 
 
Tradenames
 
1,235

 
N/A

 
1,235

 
1,235

 
N/A

 
1,235

In-process research and development
 
32

 
N/A

 
32

 
39

 
N/A

 
39

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,267

 
N/A

 
1,267

 
1,274

 
N/A

 
1,274

 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition-related Intangible Assets
 
$
25,957

 
$
(10,277
)
 
$
15,680

 
$
26,248

 
$
(9,564
)
 
$
16,684

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 fair value of acquired intangible assets (Note 2) and the ultimate loss from abandoning leases at facilities being exited (Note 13). Actual results could differ from those estimates.
Recent Accounting Pronouncements
In February 2018, the FASB issued new guidance to allow reclassifications from accumulated other comprehensive items (AOCI) to retained earnings for certain tax effects on items within AOCI resulting from the Tax Cuts and Jobs Act of 2017 (the Tax Act). The company adopted this guidance in January 2018 and recorded the reclassifications in the period of adoption. The balance sheet impact of adopting this guidance is included in the table below. This guidance only relates to the effects of the

11


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

Tax Act. For all other tax law changes that have occurred or may occur in the future, the company reclassifies the tax effects to the consolidated statement of income on an item-by-item basis when the pre-tax item in AOCI is reclassified to income.
In December 2017, the SEC staff issued guidance to address the application of accounting guidance in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act enacted on December 22, 2017. The company reported provisional amounts in its 2017 financial statements for certain income tax effects of the Tax Act for which a reasonable estimate could be determined but for which the accounting impact may change. For example, these estimates may be impacted by the need for further analysis and future clarification and guidance regarding available tax accounting methods and elections, earnings and profits computations and state tax conformity to federal changes. Adjustments to provisional amounts identified during the measurement period, which may be up to December 22, 2018, will be included as adjustments to Provision for Income Taxes in the period the amounts are determined (Note 6).
In August 2017, the FASB issued new guidance to simplify the application of hedge accounting guidance. Among other things, the new guidance will permit more hedging strategies to qualify for hedge accounting, allow for additional time to perform an initial assessment of a hedge’s effectiveness, and permit a qualitative effectiveness test for certain hedges after initial qualification. The company adopted this guidance in January 2018. The balance sheet impact of adopting this guidance is included in the table below.
In March 2017, the FASB issued new guidance intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires the service cost component of net periodic cost be reported in the same line item(s) as other employee compensation costs and all other components of the net periodic cost be reported in the income statement below operating income. The company adopted this guidance on January 1, 2018 and applied the changes to the statement of income retrospectively. As a result of adoption of this guidance, the accompanying 2017 statement of income reflects the following changes from previously reported amounts:
 
 
Three Months Ended

 
Six Months Ended

 
 
July 1,

 
July 1,

(In millions)
 
2017

 
2017

 
 
 
 
 
Increase in Total Costs and Operating Expenses (principally Selling, General and Administrative Expenses)
 
$
3

 
$
5

Decrease in Operating Income
 
3

 
5

Increase in Other Income (Expense)
 
3

 
5

In January 2017, the FASB issued new guidance clarifying the definition of a business and providing criteria to determine when an integrated set of assets and activities is not defined as a business. The new guidance requires such integrated sets to be defined as an asset (and not a business) if substantially all of the fair value of the gross assets acquired or disposed is concentrated in a single identifiable asset or a group of similar identifiable assets. The adoption of this guidance as of January 1, 2018 did not have a material impact on the company’s consolidated financial statements.
In October 2016, the FASB issued new guidance eliminating the deferral of the tax effects of intra-entity asset transfers. The impact of this guidance in future periods will be dependent on the extent of future asset transfers which usually occur in connection with planning around acquisitions and other business structuring activities. The balance sheet impact of adopting this guidance as of January 1, 2018 is included in the table below.
In February 2016, the FASB issued new guidance which requires lessees to record most leases on their balance sheets as lease liabilities, initially measured at the present value of the future lease payments, with corresponding right-of-use assets. The new guidance also sets forth new disclosure requirements related to leases. The company plans to adopt the guidance in 2019 using a modified retrospective method. The company is currently evaluating the impact of this guidance by considering which practical expedients to elect, deploying a software tool to assist in the accounting calculations, surveying functional groups that oversee vendor relationships, and developing processes and controls to manage the changes in the lease guidance and gather information for the required disclosures. The company expects that assets and liabilities will increase upon adoption for right-of-use assets and lease liabilities. The company’s future commitments under lease obligations are summarized in Note 10 to the consolidated financial statements for 2017 included in the company's Annual Report on Form 10-K, filed with the SEC.

12


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

In January 2016, the FASB issued new guidance which affects the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. This guidance requires equity investments to be measured at fair value with subsequent changes recognized in net income, except for those accounted for under the equity method or requiring consolidation. The guidance also changes the accounting for investments without a readily determinable fair value and that do not qualify for the practical expedient permitted by the guidance to estimate fair value. The balance sheet impact of adopting this guidance as of January 1, 2018 is included in the table below.
In May 2014, the FASB issued new revenue recognition guidance which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most previous revenue recognition guidance. The new standard also requires significantly expanded disclosures regarding the qualitative and quantitative information of an entity's nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. During 2016 and 2017, the FASB issued additional guidance and clarification, including the elimination of certain SEC Staff Guidance. The guidance is effective for the company in 2018. The company has elected to adopt this guidance through application of the modified retrospective method by applying it to contracts that were not completed as of December 31, 2017 (in addition to new contracts in 2018).
Adoption of new guidance that became effective on January 1, 2018, impacted the company's Consolidated Balance Sheet as follows:
(In millions)
 
December 31,
2017
as Reported

 
Impact of Adopting New Revenue Guidance

 
Impact of Adopting New Equity Investment Guidance

 
Impact of Adopting New Intra-entity Tax Guidance

 
Impact of Adopting New Hedge Accounting Guidance

 
Impact of Adopting New Tax Effects on Items in AOCI Guidance

 
January 1, 2018
as Adopted

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accounts Receivable, Less Allowances
 
$
3,879

 
$
(8
)
 
$

 
$

 
$

 
$

 
$
3,871

Inventories
 
2,971

 
(252
)
 

 

 

 

 
2,719

Other Current Assets
 
804

 
296

 

 

 

 

 
1,100

Other Assets
 
1,227

 

 

 
(77
)
 

 

 
1,150

Contract Liabilities
 

 
805

 

 

 

 

 
805

Deferred Revenue
 
719

 
(719
)
 

 

 

 

 

Other Accrued Expenses
 
1,848

 
(153
)
 

 

 

 

 
1,695

Deferred Income Taxes
 
2,766

 

 

 
(57
)
 

 
2

 
2,711

Other Long-term Liabilities
 
2,569

 
54

 

 

 

 

 
2,623

Long-term Obligations
 
18,873

 

 

 

 
(3
)
 

 
18,870

Retained Earnings
 
15,914

 
49

 
(1
)
 
(20
)
 
3

 
87

 
16,032

Accumulated Other Comprehensive Items
 
(2,003
)
 

 
1

 

 

 
(89
)
 
(2,091
)
Had the company continued to use the revenue recognition guidance in effect prior to 2018, no material changes would have resulted to the consolidated statements of income, comprehensive income, or cash flows for the three and six months ended June 30, 2018, from amounts reported therein. However, inventories would have been $295 million higher and other current assets would have been $335 million lower as of June 30, 2018, primarily as a result of differences in the accounting for pharmaceutical development and manufacturing services under the new revenue guidance. Under the prior guidance, costs of these services were recorded in inventory while under the new guidance, costs are expensed as the manufacturing service is performed and the company's rights to consideration are recorded as contract assets and included in other current assets.


13


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

Note 2.
Acquisitions
The company’s acquisitions have historically been made at prices above the determined fair value of the acquired identifiable net assets, resulting in goodwill, due to expectations of the synergies that will be realized by combining the businesses. These synergies include the elimination of redundant facilities, functions and staffing; use of the company’s existing commercial infrastructure to expand sales of the acquired businesses’ products; and use of the commercial infrastructure of the acquired businesses to cost-effectively expand sales of company products.
Acquisitions have been accounted for using the purchase method of accounting, and the acquired companies’ results have been included in the accompanying financial statements from their respective dates of acquisition. Acquisition transaction costs are recorded in selling, general and administrative expenses as incurred.
2018
In 2018, the company acquired, within the Life Sciences Solutions segment, IntegenX Inc., a North America-based provider of a rapid DNA platform for use in forensics and law enforcement applications, for an aggregate purchase price of $65 million.
The company has entered into an agreement to acquire Gatan, Inc., a wholly owned subsidiary of Roper Technologies, Inc., for approximately $925 million in cash. Gatan is a leading manufacturer of instrumentation and software used to enhance and extend the operation and performance of electron microscopes. The transaction, which is expected to be completed by the end of 2018, is subject to customary closing conditions, including regulatory approvals.

Note 3.
Revenue
Disaggregated Revenue
Revenue by type is as follows:
 
 
Three Months Ended

 
Six Months Ended

 
 
June 30,

 
June 30,

(In millions)
 
2018

 
2018

 
 
 
 
 
Revenues
 
 
 
 
Consumables
 
3,178

 
$
6,289

Instruments
 
1,530

 
2,947

Services
 
1,370

 
2,695

 
 
 
 
 
Consolidated revenues
 
$
6,078

 
$
11,931

Revenue by geographic region is as follows:
 
 
Three Months Ended

 
Six Months Ended

 
 
June 30,

 
June 30,

(In millions)
 
2018

 
2018

 
 
 
 
 
Revenues
 
 
 
 
North America
 
$
3,042

 
$
5,945

Europe
 
1,549

 
3,067

Asia-Pacific
 
1,294

 
2,558

Other regions
 
193

 
361

 
 
 
 
 
Consolidated revenues
 
$
6,078

 
$
11,931


14


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

Each reportable segment earns revenues from consumables, instruments and services in North America, Europe, Asia-Pacific and other regions. See note 4 for revenue by reportable segment and other geographic data.
Remaining Performance Obligations
The aggregate amount of the transaction price allocated to the remaining performance obligations for all open customer contracts as of June 30, 2018 was $5.12 billion. The company will recognize revenue for these performance obligations as they are satisfied, approximately 90% of which is expected to occur within the next twelve months.

Note 4.
Business Segment and Geographical Information
The company’s financial performance is reported in four segments. A description of each segment follows.
Life Sciences Solutions: provides an extensive portfolio of reagents, instruments and consumables used in biological and medical research, discovery and production of new drugs and vaccines as well as diagnosis of disease. These products and services are used by customers in pharmaceutical, biotechnology, agricultural, clinical, academic, and government markets.
Analytical Instruments: provides a broad offering of instruments, 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 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 for customers in research, academic, government, industrial and healthcare settings. The segment also includes a comprehensive offering of outsourced services used by the pharmaceutical and biotech industries for drug development, clinical trials logistics and commercial drug manufacturing.
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 as well as from significant litigation-related matters; 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.

15


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

Business Segment Information
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,

 
July 1,

 
June 30,

 
July 1,

(In millions)
 
2018

 
2017

 
2018

 
2017

 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
Life Sciences Solutions
 
$
1,569

 
$
1,405

 
$
3,068

 
$
2,768

Analytical Instruments
 
1,311

 
1,166

 
2,568

 
2,218

Specialty Diagnostics
 
932

 
862

 
1,879

 
1,728

Laboratory Products and Services
 
2,550

 
1,792

 
4,963

 
3,491

Eliminations
 
(284
)
 
(235
)
 
(547
)
 
(450
)
 
 
 
 
 
 
 
 
 
Consolidated revenues
 
6,078

 
4,990

 
11,931

 
9,755

 
 
 
 
 
 
 
 
 
Segment Income (a)
 
 
 
 
 
 
 
 
Life Sciences Solutions
 
522

 
448

 
1,039

 
881

Analytical Instruments
 
291

 
232

 
537

 
424

Specialty Diagnostics
 
253

 
234

 
496

 
467

Laboratory Products and Services
 
337

 
245

 
617

 
461

 
 
 
 
 
 
 
 
 
Subtotal reportable segments (a)
 
1,403

 
1,159

 
2,689

 
2,233

 
 
 
 
 
 
 
 
 
Cost of revenues charges
 
(5
)
 
(1
)
 
(8
)
 
(32
)
Selling, general and administrative charges, net
 
(3
)
 
(7
)
 
(11
)
 
(38
)
Restructuring and other costs, net
 
(17
)
 
(22
)
 
(62
)
 
(46
)
Amortization of acquisition-related intangible assets
 
(441
)
 
(380
)
 
(885
)
 
(748
)
 
 
 
 
 
 
 
 
 
Consolidated operating income
 
937

 
749

 
1,723

 
1,369

Other expense, net (b)
 
(131
)
 
(123
)
 
(283
)
 
(240
)
 
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
 
$
806

 
$
626

 
$
1,440

 
$
1,129

 
 
 
 
 
 
 
 
 
Depreciation
 
 
 
 
 
 
 
 
Life Sciences Solutions
 
$
29

 
$
32

 
$
60

 
$
65

Analytical Instruments
 
17

 
17

 
35

 
34

Specialty Diagnostics
 
18

 
18

 
37

 
35

Laboratory Products and Services
 
66

 
30

 
129

 
60

 
 
 
 
 
 
 
 
 
Consolidated depreciation
 
$
130

 
$
97

 
$
261

 
$
194

(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.

16


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

Geographical Information
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,

 
July 1,

 
June 30,

 
July 1,

(In millions)
 
2018

 
2017

 
2018

 
2017

 
 
 
 
 
 
 
 
 
Revenues (c)
 
 
 
 
 
 
 
 
United States
 
$
2,914

 
$
2,484

 
$
5,670

 
$
4,861

China
 
648

 
512

 
1,189

 
953

Other
 
2,516

 
1,994

 
5,072

 
3,941

 
 
 
 
 
 
 
 
 
Consolidated revenues
 
$
6,078

 
$
4,990

 
$
11,931

 
$
9,755

(c)
Revenues are attributed to countries based on customer location.

Note 5.
Other Expense, Net
The components of other expense, net, in the accompanying statement of income are as follows:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,

 
July 1,

 
June 30,

 
July 1,

(In millions)
 
2018

 
2017

 
2018

 
2017

 
 
 
 
 
 
 
 
 
Interest Income
 
$
31

 
$
18

 
$
51

 
$
36

Interest Expense
 
(170
)
 
(134
)
 
(333
)
 
(269
)
Other Items, Net
 
8

 
(7
)
 
(1
)
 
(7
)
 
 
 
 
 
 
 
 
 
Other Expense, Net
 
$
(131
)
 
$
(123
)
 
$
(283
)
 
$
(240
)
Other Items, Net
In all periods, other items, net includes currency transaction gains and losses on monetary assets and liabilities and net periodic pension benefit cost/income, excluding the service cost component which is included in operating expenses on the accompanying statement of income.


17


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

Note 6.
Income Taxes
The provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate to income before provision for income taxes due to the following:
 
 
Six Months Ended
 
 
June 30,

 
July 1,

(In millions)
 
2018

 
2017

 
 
 
 
 
Statutory Federal Income Tax Rate
 
21
%
 
35
%
 
 
 
 
 
Provision for Income Taxes at Statutory Rate
 
$
302

 
$
395

 
 
 
 
 
Increases (Decreases) Resulting From:
 
 
 
 
Foreign rate differential
 
(116
)
 
(190
)
Income tax credits
 
(119
)
 
(114
)
Global intangible low-taxed income
 
81

 

Foreign-derived intangible income
 
(22
)
 

Singapore tax holiday
 
(19
)
 
(10
)
Impact of change in tax laws and apportionment on deferred taxes
 
9

 
(63
)
Transition tax and other initial impacts of U.S. tax reform
 
70

 

Reversal of tax reserves, net
 
(49
)
 

Excess tax benefits from stock options and restricted stock units
 
(36
)
 
(35
)
Other, net
 
8

 
(18
)
 
 
 
 
 
Provision for (benefit from) income taxes
 
$
109

 
$
(35
)
The company has operations and a taxable presence in approximately 50 countries outside the U.S. Some of these countries have lower tax rates than the U.S. The company’s ability to obtain a benefit from lower tax rates outside the U.S. is dependent on its relative levels of income in countries outside the U.S. and on the statutory tax rates in those countries.
In the first quarter of 2018, the company recorded a net tax provision of $21 million to adjust the estimated initial impacts of U.S. tax reform recorded in 2017, consisting of an incremental provision of $70 million offset in part by a $49 million reduction of related unrecognized tax benefits established in 2017. The adjustment was required based on new U.S. Treasury guidance released in the first quarter of 2018.
The company has significant activities in Singapore and has received considerable tax incentives. The local taxing authority granted the company pioneer company status which provides an incentive encouraging companies to undertake activities that have the effect of promoting economic or technological development in Singapore. This incentive equates to a tax exemption on earnings associated with most of the company’s manufacturing activities in Singapore and continues through December 31, 2026. In 2018 and 2017, the impact of this tax holiday decreased the annual effective tax rates by 1.3 percentage points and 0.9 percentage point, respectively, and increased diluted earnings per share by approximately $0.05 and $0.03, respectively.
Unrecognized Tax Benefits
As of June 30, 2018, the company had $1.29 billion of unrecognized tax benefits substantially all of which, if recognized, would reduce the effective tax rate.

18


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

A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
(In millions)
 
2018

 
 
 
Balance at beginning of year
 
$
1,409

Reductions due to acquisitions
 
(9
)
Additions for tax positions of current year
 
3

Additions for tax positions of prior years
 
5

Reductions for tax positions of prior years
 
(69
)
Settlements
 
(52
)
 
 
 
Balance at end of period
 
$
1,287


Note 7.
Earnings per Share
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,

 
July 1,

 
June 30,

 
July 1,

(In millions except per share amounts)
 
2018

 
2017

 
2018

 
2017

 
 
 
 
 
 
 
 
 
Income from Continuing Operations
 
$
752

 
$
613

 
$
1,331

 
$
1,164

Loss from Discontinued Operations
 

 
(1
)
 

 
(1
)
 
 
 
 
 
 
 
 
 
Net Income
 
$
752

 
$
612

 
$
1,331

 
$
1,163

 
 
 
 
 
 
 
 
 
Basic Weighted Average Shares