Note 1. Nature of Operations and Summary of Significant Accounting Policies
Note 2. Acquisitions and Dispositions
Note 3. Revenue
Note 4. Business Segment and Geographical Information
Note 5. Other Expense, Net
Note 6. Income Taxes
Note 7. Earnings per Share
Note 8. Debt and Other Financing Arrangements
Note 9. Leases
Note 10. Commitments and Contingencies
Note 11. Comprehensive Income
Note 12. Fair Value Measurements and Fair Value of Financial Instruments
Note 13. Supplemental Cash Flow Information
Note 14. Restructuring and Other Costs, Net
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
Exhibits
EX-10.1
tmoq1201910qex101.htm
EX-10.2
tmoq1201910qex102.htm
EX-31.1
tmoq1201910qex311.htm
EX-31.2
tmoq1201910qex312.htm
EX-32.1
tmoq1201910qex321.htm
EX-32.2
tmoq1201910qex322.htm
Thermo Fisher Scientific Earnings 2019-03-30
TMO 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 q1201910q.htm THERMO FISHER SCIENTIFIC INC., FORM 10-Q, DATED MARCH 30, 2019 Q1 2019 10Q
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
March 30, 2019
¨ 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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.00 par value
TMO
New York Stock Exchange
Floating Rate Notes due 2019
TMO 19A
New York Stock Exchange
Floating Rate Notes due 2020
TMO /20A
New York Stock Exchange
1.500% Notes due 2020
TMO 20A
New York Stock Exchange
2.150% Notes due 2022
TMO 22A
New York Stock Exchange
0.750% Notes due 2024
TMO 24A
New York Stock Exchange
2.000% Notes due 2025
TMO 25
New York Stock Exchange
1.400% Notes due 2026
TMO 26A
New York Stock Exchange
1.450% Notes due 2027
TMO 27
New York Stock Exchange
1.375% Notes due 2028
TMO 28
New York Stock Exchange
1.950% Notes due 2029
TMO 29
New York Stock Exchange
2.875% Notes due 2037
TMO 37
New York Stock Exchange
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 $114 and $117
4,155
4,136
Inventories
3,124
3,005
Other current assets
1,554
1,381
Total current assets
9,939
10,625
Property, Plant and Equipment, Net
4,192
4,165
Acquisition-related Intangible Assets, Net
14,489
14,978
Other Assets
1,740
1,117
Goodwill
25,236
25,347
Total Assets
$
55,596
$
56,232
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term obligations and current maturities of long-term obligations
$
1,336
$
1,271
Accounts payable
1,462
1,615
Accrued payroll and employee benefits
704
982
Contract liabilities
967
809
Other accrued expenses
1,429
1,470
Total current liabilities
5,898
6,147
Deferred Income Taxes
2,145
2,265
Other Long-term Liabilities
3,048
2,515
Long-term Obligations
16,812
17,719
Shareholders' Equity:
Preferred stock, $100 par value, 50,000 shares authorized; none issued
Common stock, $1 par value, 1,200,000,000 shares authorized; 432,856,849 and 431,566,561 shares issued
433
432
Capital in excess of par value
14,771
14,621
Retained earnings
19,439
18,696
Treasury stock at cost, 32,875,709 and 29,444,882 shares
(4,441
)
(3,665
)
Accumulated other comprehensive items
(2,509
)
(2,498
)
Total shareholders' equity
27,693
27,586
Total Liabilities and Shareholders' Equity
$
55,596
$
56,232
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
March 30,
March 31,
(In millions except per share amounts)
2019
2018
Revenues
Product revenues
$
4,720
$
4,528
Service revenues
1,405
1,325
Total revenues
6,125
5,853
Costs and Operating Expenses:
Cost of product revenues
2,414
2,325
Cost of service revenues
1,004
948
Selling, general and administrative expenses
1,528
1,515
Research and development expenses
248
234
Restructuring and other costs, net
11
45
Total costs and operating expenses
5,205
5,067
Operating Income
920
786
Other Expense, Net
(103
)
(152
)
Income Before Income Taxes
817
634
Provision for Income Taxes
(2
)
(55
)
Net Income
$
815
$
579
Earnings per Share
Basic
$
2.04
$
1.44
Diluted
$
2.02
$
1.43
Weighted Average Shares
Basic
400
402
Diluted
403
406
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
March 30,
March 31,
(In millions)
2019
2018
Comprehensive Income
Net Income
$
815
$
579
Other Comprehensive Items:
Currency translation adjustment (net of tax provision (benefit) of $45 and ($47))
(15
)
47
Unrealized gains and losses on hedging instruments:
Reclassification adjustment for losses included in net income (net of tax benefit of $1 and $1)
2
2
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 and ($1))
1
(2
)
Amortization of net loss and prior service benefit included in net periodic pension cost (net of tax benefit of $1 and $1)
1
2
Total other comprehensive items
(11
)
49
Comprehensive Income
$
804
$
628
The accompanying notes are an integral part of these consolidated financial statements.
5
THERMO FISHER SCIENTIFIC INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Three Months Ended
March 30,
March 31,
(In millions)
2019
2018
Operating Activities
Net income
$
815
$
579
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment
133
131
Amortization of acquisition-related intangible assets
422
444
Change in deferred income taxes
(106
)
(121
)
Non-cash stock-based compensation
44
43
Other non-cash expenses, net
18
27
Changes in assets and liabilities, excluding the effects of acquisitions:
Accounts receivable
(29
)
(71
)
Inventories
(140
)
(124
)
Other assets
(117
)
(241
)
Accounts payable
(129
)
(94
)
Other liabilities
(230
)
(471
)
Contributions to retirement plans
(32
)
(24
)
Net cash provided by operating activities
649
78
Investing Activities
Acquisitions, net of cash acquired
(1
)
(57
)
Purchase of property, plant and equipment
(201
)
(118
)
Proceeds from sale of property, plant and equipment
6
2
Other investing activities, net
15
(6
)
Net cash used in investing activities
(181
)
(179
)
Financing Activities
Repayment of debt
(1
)
(453
)
Proceeds from issuance of commercial paper
100
1,306
Repayments of commercial paper
(787
)
(1,124
)
Purchases of company common stock
(750
)
—
Dividends paid
(68
)
(60
)
Net proceeds from issuance of company common stock under employee stock plans
81
39
Other financing activities
—
(50
)
Net cash used in financing activities
(1,425
)
(342
)
Exchange Rate Effect on Cash
(32
)
57
Increase in Cash, Cash Equivalents and Restricted Cash
(989
)
(386
)
Cash, Cash Equivalents and Restricted Cash at Beginning of Period
2,117
1,361
Cash, Cash Equivalents and Restricted Cash at End of Period
$
1,128
$
975
The accompanying notes are an integral part of these consolidated financial statements.
6
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 March 30, 2019
Balance at December 31, 2018
432
$
432
$
14,621
$
18,696
29
$
(3,665
)
$
(2,498
)
$
27,586
Cumulative effect of accounting change
—
—
—
4
—
—
—
4
Issuance of shares under employees' and directors' stock plans
1
1
106
—
1
(26
)
—
81
Stock-based compensation
—
—
44
—
—
—
—
44
Purchases of company common stock
—
—
—
—
3
(750
)
—
(750
)
Dividends declared ($0.19 per share)
—
—
—
(76
)
—
—
—
(76
)
Net income
—
—
—
815
—
—
—
815
Other comprehensive items
—
—
—
—
—
—
(11
)
(11
)
Balance at March 30, 2019
433
$
433
$
14,771
$
19,439
33
$
(4,441
)
$
(2,509
)
$
27,693
Three Months Ended March 31, 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
1
1
72
—
—
(22
)
—
51
Stock-based compensation
—
—
43
—
—
—
—
43
Dividends declared ($0.17 per share)
—
—
—
(69
)
—
—
—
(69
)
Net income
—
—
—
579
—
—
—
579
Other comprehensive items
—
—
—
—
—
—
49
49
Other
—
—
27
—
—
—
—
27
Balance at March 31, 2018
429
$
429
$
14,319
$
16,542
27
$
(3,125
)
$
(2,042
)
$
26,123
The accompanying notes are an integral part of these consolidated financial statements.
7
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 helping them accelerate life sciences research, solve complex analytical challenges, improve patient diagnostics, deliver medicines to market and increase laboratory productivity. 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 March 30, 2019, the results of operations for the three-month periods ended March 30, 2019 and March 31, 2018, and the cash flows for the three-month periods ended March 30, 2019 and March 31, 2018. Interim results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 31, 2018, 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 2018 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 2018 describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. Except for the accounting for leases, as noted below, there have been no material changes in the company’s significant accounting policies during the three months ended March 30, 2019.
Leases
The company determines whether an arrangement is, or contains, a lease at inception. Prior to 2019, the company generally accounted for operating lease payments by charging them to expense as incurred. Beginning in 2019, operating leases that have commenced are included in other assets, other accrued expenses and other long-term liabilities in the consolidated balance sheet. Classification of operating lease liabilities as either current or noncurrent is based on the expected timing of payments due under the company’s obligations.
Right-of-use (ROU) assets represent the company’s right to use an underlying asset for the lease term and lease liabilities represent the company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. The company recognizes lease expense for these leases on a straight-line basis over the lease term.
Because most of the company’s leases do not provide an implicit rate, the company estimates incremental borrowing rates based on the information available at the commencement date in determining the present value of lease payments. The company uses the implicit rate when readily determinable. Lease terms may include the effect of options to extend or terminate the lease when it is reasonably certain that the company will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term.
As a lessee, the company accounts for the lease and non-lease components as a single lease component.
See Note 9 additional information about the company's leases.
Contract-related Balances
Current contract assets and noncurrent contract assets are included within other current assets and other assets, respectively, in the accompanying balance sheet. Noncurrent contract liabilities are included within other long-term liabilities in the accompanying balance sheet. Contract asset and liability balances are as follows:
8
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
March 30,
December 31,
(In millions)
2019
2018
Current Contract Assets, Net
$
545
$
459
Noncurrent Contract Assets, Net
15
15
Current Contract Liabilities
967
809
Noncurrent Contract Liabilities
497
355
In the first three months of 2019, the company recognized revenue of $336 million that was included in the contract liabilities balance at December 31, 2018. Contract liabilities increased during the first quarter of 2019 primarily due to an advance payment from a customer.
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:
Three Months Ended
March 30,
March 31,
(In millions)
2019
2018
Beginning Balance
$
92
$
87
Provision charged to income
27
31
Usage
(28
)
(28
)
Adjustments to previously provided warranties, net
(1
)
(1
)
Currency translation
—
1
Ending Balance
$
90
$
90
Inventories
The components of inventories are as follows:
March 30,
December 31,
(In millions)
2019
2018
Raw Materials
$
867
$
812
Work in Process
472
430
Finished Goods
1,785
1,763
Inventories
$
3,124
$
3,005
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 14). Actual results could differ from those estimates.
Recent Accounting Pronouncements
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.
9
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
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 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. During 2018, the FASB issued additional guidance and clarification. The company expects to adopt the guidance when it is effective in 2020 using a modified retrospective method. 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 - 2019, the FASB issued additional guidance and clarification. The guidance became effective for the company in 2019. The company has elected to adopt the guidance using a modified retrospective method, by applying the transition approach as of the beginning of the period of adoption. Comparative periods have not been restated. As permitted upon transition, the company did not reassess whether any expired or existing contracts were or contained embedded leases, the lease classification for any expired or existing leases, initial direct costs for any leases, or whether land easements met the definition of a lease if they were not accounted for as leases under the prior guidance. Adoption of the new guidance impacted the company’s Consolidated Balance Sheet as follows:
(In millions)
December 31, 2018 as Reported
Impact of Adopting New Lease Guidance
January 1, 2019 As Adopted
Other Assets
$
1,117
$
641
$
1,758
Other Accrued Expenses
1,470
132
1,602
Other Long-term Liabilities
2,515
505
3,020
Retained Earnings
18,696
4
18,700
Note 2.
Acquisitions and Dispositions
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.
On April 30, 2019, the company acquired, within the Laboratory Products and Services segment, Brammer Bio for approximately $1.7 billion in cash. Brammer Bio is a leading viral vector contract development and manufacturing organization for gene and cell therapies. Revenues of Brammer Bio were approximately $140 million in 2018. The company expects to determine the preliminary purchase price allocation prior to the end of the second quarter of 2019.
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 is subject to customary closing conditions, including regulatory approvals. Upon successful completion of the regulatory approval process, Gatan will become part of the Analytical Instruments segment.
Disposition
On January 28, 2019, the company entered into an agreement to sell its Anatomical Pathology business to PHC Holdings Corporation for approximately $1.14 billion. The business is part of the Specialty Diagnostics segment. Revenues in the first
10
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
three months of 2019 and the full year 2018 of the business to be sold were approximately $85 million and $344 million, respectively. The sale is subject to customary closing conditions and is expected to close in the second quarter of 2019. The assets and liabilities of the Anatomical Pathology business were as follows on March 30, 2019:
(In millions)
March 30, 2019
Current Assets
$
85
Long-term Assets
540
Current Liabilities
32
Long-term Liabilities
33
Note 3.
Revenue
Disaggregated Revenue
Revenue by type is as follows:
Three Months Ended
March 30,
March 31,
(In millions)
2019
2018
Revenues
Consumables
$
3,230
3,111
Instruments
1,490
1,417
Services
1,405
1,325
Consolidated revenues
$
6,125
$
5,853
Revenue by geographic region is as follows:
Three Months Ended
March 30,
March 31,
(In millions)
2019
2018
Revenues (a)
North America
$
3,059
$
2,903
Europe
1,519
1,518
Asia-Pacific
1,363
1,264
Other regions
184
168
Consolidated revenues
$
6,125
$
5,853
(a)
Revenues are attributed to regions based on customer location.
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 March 30, 2019 was $5.57 billion. The company will recognize revenue for these performance obligations as they are satisfied, approximately 85% of which is expected to occur within the next twelve months.
11
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 4.
Business Segment and Geographical Information
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.
Business Segment Information
Three Months Ended
March 30,
March 31,
(In millions)
2019
2018
Revenues
Life Sciences Solutions
$
1,607
$
1,499
Analytical Instruments
1,322
1,257
Specialty Diagnostics
957
947
Laboratory Products and Services
2,513
2,413
Eliminations
(274
)
(263
)
Consolidated revenues
6,125
5,853
Segment Income (a)
Life Sciences Solutions
561
517
Analytical Instruments
282
246
Specialty Diagnostics
242
243
Laboratory Products and Services
285
280
Subtotal reportable segments (a)
1,370
1,286
Cost of revenues charges, net
(6
)
(3
)
Selling, general and administrative charges, net
(11
)
(8
)
Restructuring and other costs, net
(11
)
(45
)
Amortization of acquisition-related intangible assets
(422
)
(444
)
Consolidated operating income
920
786
Other expense, net (b)
(103
)
(152
)
Income from continuing operations before income taxes
$
817
$
634
(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.
12
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Geographical Information
Three Months Ended
March 30,
March 31,
(In millions)
2019
2018
Revenues (c)
United States
$
2,918
$
2,756
China
654
541
Other
2,553
2,556
Consolidated revenues
$
6,125
$
5,853
(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
March 30,
March 31,
(In millions)
2019
2018
Interest Income
$
67
$
20
Interest Expense
(189
)
(163
)
Other Items, Net
19
(9
)
Other Expense, Net
$
(103
)
$
(152
)
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.
13
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:
Three Months Ended
March 30,
March 31,
(In millions)
2019
2018
Statutory Federal Income Tax Rate
21
%
21
%
Provision for Income Taxes at Statutory Rate
$
172
$
133
Increases (Decreases) Resulting From:
Foreign rate differential
(36
)
(51
)
Foreign exchange loss on inter-company debt refinancing
(62
)
—
Income tax credits
(72
)
(41
)
Global intangible low-taxed income
70
32
Foreign-derived intangible income
(12
)
(9
)
Singapore tax holiday
(7
)
(8
)
Transition tax and other impacts of U.S. tax reform
(20
)
70
Reversal of tax reserves, net
(5
)
(49
)
Excess tax benefits from stock options and restricted stock units
(36
)
(25
)
Other, net
10
3
Provision for income taxes
$
2
$
55
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 2019, the company recorded a $62 million income tax benefit related to a foreign exchange loss for tax purposes on certain intercompany financing arrangements. In addition, the company recorded a net tax benefit of $27 million in the first quarter of 2019, consisting of an incremental benefit of $20 million and a $7 million reduction of related unrecognized tax benefits, to adjust the impacts of U.S. tax reform based on final regulations issued by the U.S. Treasury in January 2019.
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 2019 and 2018, the impact of this tax holiday decreased the annual effective tax rates by 0.9 percentage points and 1.3 percentage points, respectively, and increased diluted earnings per share by approximately $0.02 and $0.02, respectively.
Unrecognized Tax Benefits
As of March 30, 2019, the company had $1.43 billion of unrecognized tax benefits substantially all of which, if recognized, would reduce the effective tax rate.
14
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)
2019
Balance at Beginning of Year
$
1,442
Additions for tax positions of current year
2
Reductions for tax positions of prior years
(7
)
Settlements
(5
)
Balance at End of Period
$
1,432
Note 7.
Earnings per Share
Three Months Ended
March 30,
March 31,
(In millions except per share amounts)
2019
2018
Net Income
$
815
$
579
Basic Weighted Average Shares
400
402
Plus Effect of:
Stock options and restricted units
3
4
Diluted Weighted Average Shares
403
406
Basic Earnings per Share
$
2.04
$
1.44
Diluted Earnings per Share
$
2.02
$
1.43
Antidilutive Stock Options Excluded from Diluted Weighted Average Shares
2
2
15
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 8.
Debt and Other Financing Arrangements
Effective Interest Rate at March 30,
March 30,
December 31,
(Dollars in millions)
2019
2019
2018
Commercial Paper
$
—
$
693
Floating Rate 2-Year Senior Notes, Due 7/24/2019 (euro-denominated)
0.10
%
561
574
6.00% 10-Year Senior Notes, Due 3/1/2020
2.97
%
750
750
4.70% 10-Year Senior Notes, Due 5/1/2020
4.23
%
300
300
Floating Rate 2-Year Senior Notes, Due 8/7/2020 (euro-denominated)
0.17
%
673
688
1.50% 5-Year Senior Notes, Due 12/1/2020 (euro-denominated)
1.62
%
477
487
5.00% 10-Year Senior Notes, Due 1/15/2021
3.24
%
400
400
4.50% 10-Year Senior Notes, Due 3/1/2021
6.78
%
1,000
1,000
3.60% 10-Year Senior Notes, Due 8/15/2021
6.42
%
1,100
1,100
3.30% 7-Year Senior Notes, Due 2/15/2022
3.42
%
800
800
2.15% 7-Year Senior Notes, Due 7/21/2022 (euro-denominated)
2.28
%
561
574
3.15% 10-Year Senior Notes, Due 1/15/2023
3.30
%
800
800
3.00% 7-Year Senior Notes, Due 4/15/2023
6.63
%
1,000
1,000
4.15% 10-Year Senior Notes, Due 2/1/2024
4.16
%
1,000
1,000
0.75% 8-Year Senior Notes, Due 9/12/2024 (euro-denominated)
0.94
%
1,122
1,147
2.00% 10-Year Senior Notes, Due 4/15/2025 (euro-denominated)
2.09
%
718
734
3.65% 10-Year Senior Notes, Due 12/15/2025
3.77
%
350
350
1.40% 8.5-Year Senior Notes, Due 1/23/2026 (euro-denominated)
1.53
%
785
802
2.95% 10-Year Senior Notes, Due 9/19/2026
3.19
%
1,200
1,200
1.45% 10-Year Senior Notes, Due 3/16/2027 (euro-denominated)
1.65
%
561
574
3.20% 10-Year Senior Notes, Due 8/15/2027
3.39
%
750
750
1.375% 12-Year Senior Notes, Due 9/12/2028 (euro-denominated)
1.46
%
673
688
1.95% 12-Year Senior Notes, Due 7/24/2029 (euro-denominated)
2.08
%
785
802
2.875% 20-Year Senior Notes, Due 7/24/2037 (euro-denominated)
2.94
%
785
802
5.30% 30-Year Senior Notes, Due 2/1/2044
5.37
%
400
400
4.10% 30-Year Senior Notes, Due 8/15/2047
4.23
%
750
750
Other
19
21
Total Borrowings at Par Value
18,320
19,186
Fair Value Hedge Accounting Adjustments
(68
)
(93
)
Unamortized Discount, Net
(26
)
(21
)
Unamortized Debt Issuance Costs
(78
)
(82
)
Total Borrowings at Carrying Value
18,148
18,990
Less: Short-term Obligations and Current Maturities
1,336
1,271
Long-term Obligations
$
16,812
$
17,719
The effective interest rates for the fixed-rate debt include the stated interest on the notes, the accretion of any discount or amortization of any premium, the amortization of any debt issuance costs and, if applicable, adjustments related to hedging.
See Note 12 for fair value information pertaining to the company’s long-term obligations.
Credit Facilities
The company has a revolving credit facility with a bank group that provides for up to $2.50 billion of unsecured multi-currency revolving credit. The facility expires in July 2021. The agreement calls for interest at either a LIBOR-based rate, a EURIBOR-based rate (for funds drawn in Euro) 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 facilities of
16
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
this type. The covenants in our revolving credit facility (the Facility) include a Consolidated Leverage Ratio (total debt-to-Consolidated EBITDA) and a Consolidated Interest Coverage Ratio (Consolidated EBITDA to Consolidated Interest Expense), as such terms are defined in the Facility. Specifically, the company has agreed that, so long as any lender has any commitment under the Facility, any letter of credit is outstanding under the Facility, or any loan or other obligation is outstanding under the Facility, it will maintain a maximum Consolidated Leverage Ratio of 3.5:1.0. The company has also agreed that so long as any lender has any commitment under the Facility or any letter of credit is outstanding under the Facility, or any loan or other obligation is outstanding under the Facility, it will maintain a minimum Consolidated Interest Coverage Ratio of 3.0:1.0 as of the last day of any fiscal quarter. As of March 30, 2019, no borrowings were outstanding under the Facility, although available capacity was reduced by approximately $87 million as a result of outstanding letters of credit.
Commercial Paper Programs
The company has commercial paper programs pursuant to which it may issue and sell unsecured, short-term promissory notes (CP Notes). Under the U.S. program, a) maturities may not exceed 397 days from the date of issue and b) the CP Notes are issued on a private placement basis under customary terms in the commercial paper market and are not redeemable prior to maturity nor subject to voluntary prepayment. Under the euro program, maturities may not exceed 183 days and may be denominated in euro, U.S. dollars, Japanese yen, British pounds sterling, Swiss franc, Canadian dollars or other currencies. Under both programs, the CP Notes are issued at a discount from par (or premium to par, in the case of negative interest rates), or, alternatively, are sold at par and bear varying interest rates on a fixed or floating basis. As of March 30, 2019, there were no outstanding borrowings under these programs.
Senior Notes
Interest on the floating rate senior notes is payable quarterly. Interest is payable annually on the other euro-denominated senior notes and semi-annually on all other senior notes. Each of the notes may be redeemed at a redemption price of 100% of the principal amount plus a specified make-whole premium and accrued interest. The company is subject to certain affirmative and negative covenants under the indentures governing the senior notes, the most restrictive of which limits the ability of the company to pledge principal properties as security under borrowing arrangements.
In 2018, Thermo Fisher Scientific (Finance I) B.V., a wholly-owned finance subsidiary of the company, issued the Floating Rate Senior Notes due 2020 included in the table above. This subsidiary has no independent function other than financing activities. The Floating Rate Senior Notes due 2020 are fully and unconditionally guaranteed by the company and no other subsidiaries of the company have guaranteed the obligations.
Interest Rate Swap Arrangements and related Cross-currency Interest Rate Swap Arrangements
The company has entered into LIBOR-based interest rate swap arrangements with various banks on several of its outstanding senior notes. The aggregate amounts of the swaps are equal to the principal amounts of the notes and the payment dates of the swaps coincide with the interest payment dates of the notes. The swap contracts provide for the company to pay a variable interest rate and receive a fixed rate. The variable interest rates reset monthly. The swaps have been accounted for as fair value hedges of the notes. See Note 12 for additional information on the interest rate swap arrangements and related cross-currency interest rate swap arrangements. The following table summarizes the outstanding interest rate swap arrangements on the company's senior notes at March 30, 2019:
Aggregate Notional Amount
Pay Rate as of
(Dollars in millions)
Pay Rate
March 30, 2019
Receive Rate
4.50% Senior Notes due 2021 (a)
1,000
1-month LIBOR + 3.4420%
5.9313
%
4.50
%
3.60% Senior Notes due 2021
1,100
1-month LIBOR + 2.5150%
4.9988
%
3.60
%
3.00% Senior Notes due 2023 (a)
1,000
1-month LIBOR + 1.7640%
4.2478
%
3.00
%
(a)
The payments on $1.8 billion notional value of these interest rate swaps are offset in part by cross-currency interest rate swaps which effectively reduced the pay rate as of March 30, 2019 from a weighted average of 4.93% to a weighted average of 1.86%.
The company has entered into $1.8 billion notional value of cross-currency interest rate swaps, which effectively convert a portion of the semi-annual payments related to the variable rate, U.S. dollar denominated, LIBOR-based interest rate swaps to payments on variable rate, euro denominated, EURIBOR-based cross-currency interest rate swaps.
17
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 9.
Leases
As a lessee, the company leases certain logistics, office, and manufacturing facilities, as well as vehicles, copiers, and other equipment. These operating leases generally have remaining lease terms between 1 month and 30 years, and some include options to extend (generally for 1 to 10 years) or have options to terminate the arrangement within 1 year. The company’s finance leases are not material.
The company has guaranteed the residual value of three leased operating facilities with initial lease terms ending in 2019, 2020 and 2023. The company has agreed with the lessor to comply with certain financial covenants consistent with its other debt arrangements (Note 8). The aggregate maximum guarantee under these three lease arrangements is $147 million. Operating lease ROU assets and lease liabilities for these lease arrangements are recorded on the consolidated balance sheet as of March 30, 2019, but exclude any amounts for residual value guarantees.
As a lessee, the consolidated statement of income includes pre-tax operating lease costs and variable lease costs of $48 million and $9 million for the three months ended March 30, 2019. Lease costs arising from finance leases, short-term leases, and sublease income are not material.
Cash used in operating activities for payments of amounts included in the measurement of operating lease liabilities was $48 million in the three months ended March 30, 2019. Operating lease ROU assets of $13 million were obtained in exchange for new operating lease liabilities in the three months ended March 30, 2019.
The weighted-average remaining operating lease term was 6.2 years and the weighted average discount rate was 4.0% as of March 30, 2019.
ROU assets of $600 million as of March 30, 2019, are classified in other assets in the consolidated balance sheet. Operating lease liabilities of $156 million and $487 million as of March 30, 2019, are classified in other accrued expenses and other long-term liabilities, respectively, in the consolidated balance sheet.
As of March 30, 2019, future payments of operating lease liabilities are as follows:
(In millions)
Remainder of 2019
$
140
2020
158
2021
116
2022
84
2023
57
2024
39
2025 and Thereafter
134
Total Lease Payments
728
Less: Imputed Interest
85
Total Operating Lease Liability
$
643
As a lessor, operating leases, sales-type leases and direct financing leases are not material.
18
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
As previously disclosed in the company's 2018 Annual Report on Form 10-K and under previous lease accounting guidance, the following is a summary of annual future minimum lease and rental commitments under noncancelable operating leases as of December 31, 2018:
(In millions)
2019
$
192
2020
158
2021
118
2022
86
2023
58
2024 and Thereafter
177
$
789
Note 10.
Commitments and Contingencies
Environmental Matters
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 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. At March 30, 2019, the company’s total environmental liability was approximately $66 million. While management believes the accruals for environmental remediation are adequate based on current estimates of remediation costs, 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.
Litigation and Related Contingencies
There are various lawsuits and claims pending against the company including matters involving product liability, intellectual property, employment and commercial issues. The company determines the probability and range of possible loss based on the current status of each of these matters. A liability is recorded in the financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The company establishes a liability that is an estimate of amounts expected to be paid in the future for events that have already occurred. 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 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. Accrual estimates are adjusted as additional information becomes known or payments are made. The amount of ultimate loss may differ from these estimates. Due to the inherent uncertainties associated with pending litigation or claims, the company cannot predict the outcome, nor, with respect to certain pending litigation or claims where no liability has been accrued, make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. The company has no material accruals for pending litigation or claims for which accrual amounts are not disclosed below or in the company's 2018 financial statements and notes included in the company's Annual Report on Form 10-K filed with the SEC, nor are material losses deemed probable for such matters. It is reasonably possible, however, that an unfavorable outcome that exceeds the company’s current accrual estimate, if
19
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
any, for one or more of the matters described below could have a material adverse effect on the company’s results of operations, financial position and cash flows.
Product Liability, Workers Compensation and Other Personal Injury Matters
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 possible loss when a range of possible loss can be estimated. The company records estimated amounts due from insurers related to certain product liabilities as an asset. Although the company believes that the amounts accrued 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 payment history as well as the financial condition and ratings of its insurers on an ongoing basis.
Intellectual Property Matters
On June 3, 2013, Unisone Strategic IP filed a complaint against Life Technologies in the United States District Court for the Southern District of California alleging patent infringement by Life Technologies’ supply chain management system software, which operates with product "supply centers" installed at customer sites. Plaintiff seeks damages for alleged willful infringement, attorneys’ fees, costs, and injunctive relief. On August 24, 2017, Unisone filed an appeal from a decision by the Patent Trial and Appeal Board (PTAB) that found the challenged patent claims invalid. The United States Court of Appeals for the Federal Circuit upheld the PTAB’s ruling finding the challenged claims in the Unisone patent invalid. Unisone had until March 11, 2019 to file an appeal with the United States Supreme Court. Unisone did not appeal that decision, and consequently the case before the United States District Court, which had been stayed pending the outcome of the PTAB decision, will resume with respect to similar Unisone patent claims that were not included in the PTAB proceeding.
Note 11.
Comprehensive Income
Comprehensive income (loss) 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.
Changes in each component of accumulated other comprehensive items, net of tax are as follows:
(In millions)
Currency Translation Adjustment
Unrealized Losses on Hedging Instruments
Pension and Other Postretirement Benefit Liability Adjustment
Total
Balance at December 31, 2018
$
(2,243
)
$
(52
)
$
(203
)
$
(2,498
)
Other comprehensive income (loss) before reclassifications
(15
)
—
1
(14
)
Amounts reclassified from accumulated other comprehensive items
—
2
1
3
Net other comprehensive items
(15
)
2
2
(11
)
Balance at March 30, 2019
$
(2,258
)
$
(50
)
$
(201
)
$
(2,509
)
20
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 12.
Fair Value Measurements and Fair Value of Financial Instruments
Fair Value Measurements
The company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during 2019. The company’s financial assets and liabilities carried at fair value are primarily comprised of insurance contracts, investments in money market funds, derivative 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 tables present information about the company’s financial assets and liabilities measured at fair value on a recurring basis as of March 30, 2019 and December 31, 2018:
March 30,
Quoted Prices in Active Markets
Significant Other Observable Inputs
Significant Unobservable Inputs
(In millions)
2019
(Level 1)
(Level 2)
(Level 3)
Assets
Cash equivalents
$
77
$
77
$
—
$
—
Bank time deposits
2
2
—
—
Investments in common stock, mutual funds and other similar instruments
19
19
—
—
Warrants
6
—
6
—
Insurance contracts
120
—
120
—
Derivative contracts
75
—
75
—
Total Assets
$
299
$
98
$
201
$
—
Liabilities
Derivative contracts
$
103
$
—
$
103
$
—
Contingent consideration
37
—
—
37
Total Liabilities
$
140
$
—
$
103
$
37
21
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
December 31,
Quoted Prices in Active Markets
Significant Other Observable Inputs
Significant Unobservable Inputs
(In millions)
2018
(Level 1)
(Level 2)
(Level 3)
Assets
Cash equivalents
$
769
$
769
$
—
$
—
Bank time deposits
2
2
—
—
Investments in mutual funds and other similar instruments
10
10
—
—
Warrants
8
—
8
—
Insurance contracts
113
—
113
—
Derivative contracts
31
—
31
—
Total Assets
$
933
$
781
$
152
$
—
Liabilities
Derivative contracts
$
145
$
—
$
145
$
—
Contingent consideration
37
—
—
37
Total Liabilities
$
182
$
—
$
145
$
37
The company uses the Black-Scholes model to value its warrants. 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 interest rates and currency exchange rates. The company determines the fair value of acquisition-related contingent consideration based on the probability-weighted discounted cash flows associated with such future payments. Changes to the fair value of contingent consideration are recorded in selling, general and administrative expense. The following table provides a rollforward of the fair value, as determined by level 3 inputs, of the contingent consideration.