ý Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended
September 29, 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.
Accounts receivable, less allowances of $116 and $109
3,852
3,879
Inventories
2,982
2,971
Refundable income taxes
405
432
Other current assets
1,229
804
Total current assets
9,566
9,421
Property, Plant and Equipment, Net
3,978
4,047
Acquisition-related Intangible Assets, Net
15,219
16,684
Other Assets
1,173
1,227
Goodwill
25,142
25,290
Total Assets
$
55,078
$
56,669
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term obligations and current maturities of long-term obligations
$
1,014
$
2,135
Accounts payable
1,344
1,428
Accrued payroll and employee benefits
817
918
Contract liabilities
797
—
Deferred revenue
—
719
Other accrued expenses
1,224
1,848
Total current liabilities
5,196
7,048
Deferred Income Taxes
2,550
2,766
Other Long-term Liabilities
2,682
2,569
Long-term Obligations
17,760
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; 431,007,744 and 428,327,873 shares issued
431
428
Capital in excess of par value
14,526
14,177
Retained earnings
17,866
15,914
Treasury stock at cost, 28,431,362 and 27,013,311 shares
(3,414
)
(3,103
)
Accumulated other comprehensive items
(2,519
)
(2,003
)
Total shareholders' equity
26,890
25,413
Total Liabilities and Shareholders' Equity
$
55,078
$
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
Nine Months Ended
September 29,
September 30,
September 29,
September 30,
(In millions except per share amounts)
2018
2017
2018
2017
Revenues
Product revenues
$
4,571
$
4,232
$
13,807
$
12,632
Service revenues
1,349
884
4,044
2,239
Total revenues
5,920
5,116
17,851
14,871
Costs and Operating Expenses:
Cost of product revenues
2,357
2,174
7,072
6,547
Cost of service revenues
948
642
2,846
1,547
Selling, general and administrative expenses
1,490
1,400
4,547
4,025
Research and development expenses
240
217
716
654
Restructuring and other (income) costs, net
(27
)
49
35
95
Total costs and operating expenses
5,008
4,482
15,216
12,868
Operating Income
912
634
2,635
2,003
Other Expense, Net
(102
)
(154
)
(385
)
(394
)
Income from Continuing Operations Before Income Taxes
810
480
2,250
1,609
(Provision for) Benefit from Income Taxes
(101
)
54
(210
)
89
Income from Continuing Operations
709
534
2,040
1,698
Loss from Discontinued Operations (net of income tax benefit of $0, $0, $0 and $0)
—
—
—
(1
)
Net Income
$
709
$
534
$
2,040
$
1,697
Earnings per Share from Continuing Operations
Basic
$
1.76
$
1.35
$
5.07
$
4.33
Diluted
$
1.75
$
1.34
$
5.03
$
4.29
Earnings per Share
Basic
$
1.76
$
1.35
$
5.07
$
4.32
Diluted
$
1.75
$
1.34
$
5.03
$
4.29
Weighted Average Shares
Basic
402
396
402
392
Diluted
406
400
406
396
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
Nine Months Ended
September 29,
September 30,
September 29,
September 30,
(In millions)
2018
2017
2018
2017
Comprehensive Income
Net Income
$
709
$
534
$
2,040
$
1,697
Other Comprehensive Items:
Currency translation adjustment (net of tax provision of $13, $0, $60 and $0)
(32
)
73
(447
)
452
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 $0)
—
(2
)
—
—
Reclassification adjustment for (gains) losses included in net income (net of tax (provision) benefit of $0, $0, $0 and ($1))
—
—
—
(1
)
Unrealized gains and losses on hedging instruments:
Reclassification adjustment for losses included in net income (net of tax benefit of $1, $1, $3 and $3)
2
2
6
6
Pension and other postretirement benefit liability adjustments:
Pension and other postretirement benefit liability adjustments arising during the period (net of tax provision (benefit) of $0, ($2), $1 and ($5))
—
(2
)
3
(11
)
Amortization of net loss and prior service benefit included in net periodic pension cost (net of tax benefit of $0, $1, $3 and $3)
2
2
10
7
Total other comprehensive items
(28
)
73
(428
)
453
Comprehensive Income
$
681
$
607
$
1,612
$
2,150
The accompanying notes are an integral part of these consolidated financial statements.
5
THERMO FISHER SCIENTIFIC INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 29,
September 30,
(In millions)
2018
2017
Operating Activities
Net income
$
2,040
$
1,697
Loss from discontinued operations
—
1
Income from continuing operations
2,040
1,698
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
1,709
1,459
Change in deferred income taxes
(317
)
(484
)
Non-cash stock-based compensation
137
116
Non-cash charges for sale of inventories revalued at the date of acquisition
10
47
Other non-cash expenses, net
67
67
Changes in assets and liabilities, excluding the effects of acquisitions and dispositions:
Accounts receivable
(64
)
(161
)
Inventories
(333
)
(208
)
Other assets
(137
)
(233
)
Accounts payable
(45
)
—
Other liabilities
(247
)
24
Contributions to retirement plans
(78
)
(184
)
Net cash provided by continuing operations
2,742
2,141
Net cash used in discontinued operations
—
(2
)
Net cash provided by operating activities
2,742
2,139
Investing Activities
Acquisitions, net of cash acquired
(59
)
(7,160
)
Purchase of property, plant and equipment
(474
)
(293
)
Proceeds from sale of property, plant and equipment
6
4
Other investing activities, net
(5
)
3
Net cash used in investing activities
$
(532
)
$
(7,446
)
6
THERMO FISHER SCIENTIFIC INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
Nine Months Ended
September 29,
September 30,
(In millions)
2018
2017
Financing Activities
Net proceeds from issuance of debt
$
690
$
6,459
Repayment of debt
(2,048
)
(2,552
)
Proceeds from issuance of commercial paper
3,378
6,030
Repayments of commercial paper
(3,842
)
(5,809
)
Purchases of company common stock
(250
)
(750
)
Dividends paid
(198
)
(177
)
Net proceeds from issuance of company common stock
—
1,690
Net proceeds from issuance of company common stock under employee stock plans
97
108
Other financing activities
(51
)
(1
)
Net cash (used in) provided by financing activities
(2,224
)
4,998
Exchange Rate Effect on Cash
(236
)
256
Decrease in Cash, Cash Equivalents and Restricted Cash
(250
)
(53
)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period
1,361
811
Cash, Cash Equivalents and Restricted Cash at End of Period
$
1,111
$
758
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
Three Months Ended September 29, 2018
Balance at June 30, 2018
430
$
430
$
14,408
$
17,226
27
$
(3,128
)
$
(2,491
)
$
26,445
Issuance of shares under employees' and directors' stock plans
1
1
72
—
—
(36
)
—
37
Stock-based compensation
—
—
46
—
—
—
—
46
Purchases of company common stock
—
—
—
—
1
(250
)
—
(250
)
Dividends declared ($0.17 per share)
—
—
—
(69
)
—
—
—
(69
)
Net income
—
—
—
709
—
—
—
709
Other comprehensive items
—
—
—
—
—
—
(28
)
(28
)
Balance at September 29, 2018
431
$
431
$
14,526
$
17,866
28
$
(3,414
)
$
(2,519
)
$
26,890
Three Months Ended September 30, 2017
Balance at July 1, 2017
417
$
417
$
12,328
$
14,972
27
$
(3,070
)
$
(2,256
)
$
22,391
Issuance of shares under employees' and directors' stock plans
1
1
53
—
—
(31
)
—
23
Issuance of shares
10
10
1,680
—
—
—
—
1,690
Stock-based compensation
—
—
45
—
—
—
—
45
Dividends declared ($0.15 per share)
—
—
—
(60
)
—
—
—
(60
)
Net income
—
—
—
534
—
—
—
534
Other comprehensive items
—
—
—
—
—
—
73
73
Other
—
—
6
—
—
—
—
6
Balance at September 30, 2017
428
$
428
$
14,112
$
15,446
27
$
(3,101
)
$
(2,183
)
$
24,702
Nine Months Ended September 29, 2018
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
3
3
185
—
—
(61
)
—
127
Stock-based compensation
—
—
137
—
—
—
—
137
Purchases of company common stock
—
—
—
—
1
(250
)
—
(250
)
Dividends declared ($0.51 per share)
—
—
—
(206
)
—
—
—
(206
)
Net income
—
—
—
2,040
—
—
—
2,040
Other comprehensive items
—
—
—
—
—
—
(428
)
(428
)
Other
—
—
27
—
—
—
—
27
Balance at September 29, 2018
431
$
431
$
14,526
$
17,866
28
$
(3,414
)
$
(2,519
)
$
26,890
Nine Months Ended September 30, 2017
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
3
3
173
—
—
(45
)
—
131
Issuance of shares
10
10
1,680
—
—
—
—
1,690
Stock-based compensation
—
—
116
—
—
—
—
116
Purchases of company common stock
—
—
—
—
5
(750
)
—
(750
)
Dividends declared ($0.45 per share)
—
—
—
(178
)
—
—
—
(178
)
Net income
—
—
—
1,697
—
—
—
1,697
Other comprehensive items
—
—
—
—
—
—
453
453
Other
—
—
3
—
—
—
—
3
Balance at September 30, 2017
428
$
428
$
14,112
$
15,446
27
$
(3,101
)
$
(2,183
)
$
24,702
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 September 29, 2018, the results of operations for the three- and nine-month periods ended September 29, 2018 and September 30, 2017, and the cash flows for the nine-month periods ended September 29, 2018 and September 30, 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 nine months ended September 29, 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:
September 29,
January 1,
(In millions)
2018
2018
Current Contract Assets, Net
$
462
$
396
Current Contract Liabilities
797
805
Noncurrent Contract Liabilities
349
302
Noncurrent contract assets were immaterial in 2018. In the first nine months of 2018, the company recognized revenue of $591 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:
Nine Months Ended
September 29,
September 30,
(In millions)
2018
2017
Beginning Balance
$
87
$
78
Provision charged to income
89
76
Usage
(80
)
(75
)
Acquisitions
—
1
Adjustments to previously provided warranties, net
(3
)
(2
)
Currency translation
(2
)
3
Ending Balance
$
91
$
81
Inventories
The components of inventories are as follows:
September 29,
December 31,
(In millions)
2018
2017
Raw Materials
$
807
$
708
Work in Process
433
505
Finished Goods
1,742
1,758
Inventories
$
2,982
$
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:
September 29,
December 31,
(In millions)
2018
2017
Land
$
392
$
401
Buildings and Improvements
1,677
1,662
Machinery, Equipment and Leasehold Improvements
4,536
4,276
Property, Plant and Equipment, at Cost
6,605
6,339
Less: Accumulated Depreciation and Amortization
2,627
2,292
Property, Plant and Equipment, Net
$
3,978
$
4,047
Acquisition-related Intangible Assets
Acquisition-related intangible assets are as follows:
Balance at September 29, 2018
Balance at December 31, 2017
(In millions)
Gross
Accumulated Amortization
Net
Gross
Accumulated Amortization
Net
Definite Lived:
Customer relationships
$
17,092
$
(6,592
)
$
10,500
$
17,356
$
(5,902
)
$
11,454
Product technology
6,003
(3,143
)
2,860
6,046
(2,811
)
3,235
Tradenames
1,512
(920
)
592
1,538
(817
)
721
Other
33
(33
)
—
34
(34
)
—
24,640
(10,688
)
13,952
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
$
25,907
$
(10,688
)
$
15,219
$
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 August 2018, the FASB issued new guidance to align the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software and hosting arrangements that include an internal-use software license. Under the new guidance, certain implementation costs that previously were required to be expensed will be capitalized and amortized over the term of the hosting arrangement. The company plans to adopt the guidance in the fourth quarter of 2018 prospectively to all
11
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
implementation costs incurred after the date of adoption. The adoption of this guidance is not expected to have a material impact on the company’s consolidated financial statements.
In August 2018, the FASB issued new guidance to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The company expects to adopt the guidance when it is effective in 2020 using a retrospective method. The adoption of this guidance is not expected to have a material impact on the company’s disclosures.
In August 2018, the FASB issued new guidance to modify the disclosure requirements on fair value measurements. The company expects to adopt the guidance when it is effective in 2020 with some items requiring a prospective method and others requiring a retrospective method. The adoption of this guidance is not expected to have a material impact on the company’s disclosures.
In August 2018, the SEC adopted amendments to certain disclosure requirements effective November 5, 2018, including those relating to an interim presentation of the statement of shareholders’ equity. The adoption of this guidance is not expected to have a material impact on the company’s disclosures.
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 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
Nine Months Ended
September 30,
September 30,
(In millions)
2017
2017
Increase in Total Costs and Operating Expenses (principally Selling, General and Administrative Expenses)
$
2
$
7
Decrease in Operating Income
2
7
Increase in Other Income (Expense)
2
7
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
12
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 June 2016, the FASB issued new guidance to require a financial asset measured at amortized cost basis, such as accounts receivable, to be presented at the net amount expected to be collected based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The guidance is effective for the company in 2020 using a modified retrospective method and early adoption is permitted. The company is currently evaluating the timing of adoption. The adoption of this guidance is not expected to have a material impact on the company’s consolidated financial statements.
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. During 2017 and 2018, the FASB issued additional guidance and clarification. The company plans to adopt the guidance on January 1, 2019, using a modified retrospective method, by applying the transition approach as of the beginning of the period of adoption. Comparative periods will not be restated. 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; however, the adoption of this guidance is not expected to have a material impact on the company’s results of operations or cash flows. 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.
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 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:
13
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(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 nine months ended September 29, 2018, from amounts reported therein. However, inventories would have been $329 million higher and other current assets would have been $339 million lower as of September 29, 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.
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.
On October 25, 2018, the company acquired, within the Life Sciences Solutions segment, Becton Dickinson and Company's Advanced Bioprocessing business for $477 million in cash, subject to post-closing adjustment. This North America-based business adds complementary cell culture products that expand the segment's bioproduction offerings to help customers increase yield during production of biologic drugs. Revenues of the Advanced Bioprocessing business were $100 million in 2017. The company expects to determine the preliminary purchase price allocation prior to the end of the fourth quarter of 2018.
14
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
Unaudited Pro Forma Information
The following unaudited pro forma information provides the effect of the company's acquisition of Patheon as if the acquisition had occurred on January 1, 2016:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(In millions except per share amounts)
2017
2017
Revenues
$
5,393
$
16,076
Net Income
$
522
$
1,671
The historical consolidated financial information of the company and Patheon has been adjusted in the pro forma information to give effect to pro forma events that are directly attributable to the acquisition and related financing arrangements, are expected to have a continuing impact on the company, and are factually supportable.
To reflect the acquisition of Patheon as if it had occurred on January 1, 2016, the unaudited pro forma results include adjustments to reflect, among other things, the incremental intangible asset amortization to be incurred based on the values of each identifiable intangible asset and the interest expense from debt financing obtained to partially fund the cash consideration transferred. Pro forma adjustments were tax effected at the company's historical statutory rates in effect for the respective periods. The unaudited pro forma amounts are not necessarily indicative of the combined results of operations that would have been realized had the acquisition of Patheon and related financing occurred on January 1, 2016, nor are they meant to be indicative of any anticipated combined results of operations that the company will experience after the transaction. In addition, the amounts do not include any adjustments for actions that may be taken following the completion of the transaction, such as expected cost savings, operating synergies, or revenue enhancements that may be realized subsequent to the transaction.
Pro forma net income for the nine months ended September 30, 2017, excludes certain items associated with the Patheon acquisition that were included in the determination of net income for that period. These items have been included in the determination of pro forma net income for the nine months ended October 1, 2016 and are as follows: $42 million of direct transaction costs, $33 million of accounting policy conformity adjustments, $18 million of initial restructuring costs, $18 million reduction of revenues for revaluing the deferred revenue obligations to fair value, and $15 million of expense related to the fair value adjustment to acquisition-date inventories.
The company’s results would not have been materially different from its pro forma results had the company’s other 2018 or 2017 acquisitions occurred at the beginning of 2017 or 2016, respectively.
15
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 3.
Revenue
Disaggregated Revenue
Revenue by type is as follows:
Three Months Ended
Nine Months Ended
September 29,
September 29,
(In millions)
2018
2018
Revenues
Consumables
3,056
$
9,345
Instruments
1,515
4,462
Services
1,349
4,044
Consolidated revenues
$
5,920
$
17,851
Revenue by geographic region is as follows:
Three Months Ended
Nine Months Ended
September 29,
September 29,
(In millions)
2018
2018
Revenues
North America
$
3,030
$
8,975
Europe
1,454
4,521
Asia-Pacific
1,251
3,809
Other regions
185
546
Consolidated revenues
$
5,920
$
17,851
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 September 29, 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.
16
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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.
17
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Business Segment Information
Three Months Ended
Nine Months Ended
September 29,
September 30,
September 29,
September 30,
(In millions)
2018
2017
2018
2017
Revenues
Life Sciences Solutions
$
1,504
$
1,382
$
4,572
$
4,150
Analytical Instruments
1,333
1,189
3,901
3,407
Specialty Diagnostics
894
844
2,773
2,572
Laboratory Products and Services
2,470
1,933
7,433
5,424
Eliminations
(281
)
(232
)
(828
)
(682
)
Consolidated revenues
5,920
5,116
17,851
14,871
Segment Income (a)
Life Sciences Solutions
495
452
1,534
1,333
Analytical Instruments
294
257
831
681
Specialty Diagnostics
223
218
719
685
Laboratory Products and Services
299
243
916
704
Subtotal reportable segments (a)
1,311
1,170
4,000
3,403
Cost of revenues credits (charges), net
1
(45
)
(7
)
(77
)
Selling, general and administrative credits (charges), net
4
(37
)
(7
)
(75
)
Restructuring and other income (costs), net
27
(49
)
(35
)
(95
)
Amortization of acquisition-related intangible assets
(431
)
(405
)
(1,316
)
(1,153
)
Consolidated operating income
912
634
2,635
2,003
Other expense, net (b)
(102
)
(154
)
(385
)
(394
)
Income from continuing operations before income taxes