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x
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended September 26, 2015
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Delaware
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04-2209186
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(State of incorporation or organization)
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(I.R.S. Employer Identification No.)
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81 Wyman Street
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Waltham, Massachusetts
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02451
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(Address of principal executive offices)
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(Zip Code)
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Class
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Outstanding at September 26, 2015
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Common Stock, $1.00 par value
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399,097,699
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Page
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PART I
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Item 1.
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Financial Statements (Unaudited)
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3
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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32
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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46
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Item 4.
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Controls and Procedures
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46
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PART II
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||
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Item 1.
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Legal Proceedings
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47
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Item 1A.
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Risk Factors
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47
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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53
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Item 5.
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Other Events
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53
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Item 6.
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Exhibits
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53
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PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
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CONSOLIDATED BALANCE SHEET
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||||||||||
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(Unaudited)
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September 26,
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December 31,
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|||||||
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(In millions except share and per share amounts)
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2015
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2014
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||||||
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Assets
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||||||||
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Current Assets:
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||||||||
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Cash and cash equivalents
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$ | 503.4 | $ | 1,343.5 | ||||
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Accounts receivable, less allowances of $77.7 and $74.1
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2,543.9 | 2,473.6 | ||||||
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Inventories
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1,987.2 | 1,859.5 | ||||||
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Deferred tax assets
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263.3 | 303.3 | ||||||
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Other current assets
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728.1 | 559.9 | ||||||
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Total current assets
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6,025.9 | 6,539.8 | ||||||
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Property, Plant and Equipment, Net
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2,392.2 | 2,426.5 | ||||||
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Acquisition-related Intangible Assets, Net
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13,015.1 | 14,110.1 | ||||||
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Other Assets
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967.6 | 933.1 | ||||||
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Goodwill
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18,746.3 | 18,842.6 | ||||||
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Total Assets
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$ | 41,147.1 | $ | 42,852.1 | ||||
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Liabilities and Shareholders' Equity
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||||||||
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Current Liabilities:
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||||||||
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Short-term obligations and current maturities of long-term obligations
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$ | 3,034.0 | $ | 2,212.4 | ||||
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Accounts payable
|
783.3 | 820.7 | ||||||
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Accrued payroll and employee benefits
|
549.3 | 668.9 | ||||||
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Accrued income taxes
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51.4 | 165.1 | ||||||
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Deferred revenue
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320.9 | 311.9 | ||||||
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Other accrued expenses
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996.2 | 1,170.8 | ||||||
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Total current liabilities
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5,735.1 | 5,349.8 | ||||||
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Deferred Income Taxes
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3,031.7 | 3,430.7 | ||||||
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Other Long-term Liabilities
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1,252.2 | 1,171.9 | ||||||
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Long-term Obligations
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10,277.9 | 12,351.6 | ||||||
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Shareholders' Equity:
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||||||||
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Preferred stock, $100 par value, 50,000 shares authorized; none issued
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||||||||
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Common stock, $1 par value, 1,200,000,000 shares authorized; 411,407,252 and
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||||||||
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408,461,670 shares issued
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411.4 | 408.5 | ||||||
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Capital in excess of par value
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11,732.8 | 11,473.6 | ||||||
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Retained earnings
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11,599.7 | 10,406.9 | ||||||
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Treasury stock at cost, 12,309,553 and 7,991,782 shares
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(1,007.3 | ) | (455.9 | ) | ||||
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Accumulated other comprehensive items
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(1,886.4 | ) | (1,285.0 | ) | ||||
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Total shareholders' equity
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20,850.2 | 20,548.1 | ||||||
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Total Liabilities and Shareholders' Equity
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$ | 41,147.1 | $ | 42,852.1 | ||||
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Three Months Ended
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Nine Months Ended
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|||||||||||||||
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September 26,
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September 27,
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September 26,
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September 27,
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|||||||||||||
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(In millions except per share amounts)
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2015
|
2014
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2015
|
2014
|
||||||||||||
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Revenues
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||||||||||||||||
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Product revenues
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$ | 3,570.3 | $ | 3,628.5 | $ | 10,635.1 | $ | 10,781.9 | ||||||||
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Service revenues
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552.9 | 542.9 | 1,677.8 | 1,614.9 | ||||||||||||
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Total revenues
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4,123.2 | 4,171.4 | 12,312.9 | 12,396.8 | ||||||||||||
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Costs and Operating Expenses:
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||||||||||||||||
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Cost of product revenues
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1,853.9 | 1,873.9 | 5,481.7 | 5,920.1 | ||||||||||||
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Cost of service revenues
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386.0 | 363.9 | 1,183.6 | 1,076.6 | ||||||||||||
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Selling, general and administrative expenses
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1,133.3 | 1,228.7 | 3,421.7 | 3,659.5 | ||||||||||||
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Research and development expenses
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171.6 | 175.2 | 512.0 | 508.6 | ||||||||||||
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Restructuring and other costs (income), net
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15.5 | (110.6 | ) | 67.9 | (631.9 | ) | ||||||||||
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Total costs and operating expenses
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3,560.3 | 3,531.1 | 10,666.9 | 10,532.9 | ||||||||||||
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Operating Income
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562.9 | 640.3 | 1,646.0 | 1,863.9 | ||||||||||||
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Other Expense, Net
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(94.8 | ) | (101.1 | ) | (292.3 | ) | (313.8 | ) | ||||||||
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Income from Continuing Operations Before Income Taxes
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468.1 | 539.2 | 1,353.7 | 1,550.1 | ||||||||||||
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Benefit from (Provision for) Income Taxes
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9.2 | (69.3 | ) | 20.3 | (258.6 | ) | ||||||||||
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Income from Continuing Operations
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477.3 | 469.9 | 1,374.0 | 1,291.5 | ||||||||||||
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(Loss) Gain from Discontinued Operations (net of income tax (benefit) provision of
($0.7), $1.0, ($0.7) and $1.0)
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(1.2 | ) | 1.7 | (1.2 | ) | 1.7 | ||||||||||
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Net Income
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$ | 476.1 | $ | 471.6 | $ | 1,372.8 | $ | 1,293.2 | ||||||||
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Earnings per Share from Continuing Operations
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||||||||||||||||
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Basic
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$ | 1.20 | $ | 1.17 | $ | 3.45 | $ | 3.25 | ||||||||
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Diluted
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$ | 1.19 | $ | 1.16 | $ | 3.42 | $ | 3.21 | ||||||||
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Earnings per Share
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||||||||||||||||
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Basic
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$ | 1.19 | $ | 1.18 | $ | 3.45 | $ | 3.25 | ||||||||
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Diluted
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$ | 1.18 | $ | 1.17 | $ | 3.42 | $ | 3.22 | ||||||||
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Weighted Average Shares
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||||||||||||||||
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Basic
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399.0 | 399.9 | 398.4 | 397.5 | ||||||||||||
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Diluted
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402.0 | 403.7 | 401.7 | 401.7 | ||||||||||||
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Cash Dividends Declared per Common Share
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$ | .15 | $ | .15 | $ | .45 | $ | .45 | ||||||||
| The accompanying notes are an integral part of these consolidated financial statements. |
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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
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||||||||||||||||
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(Unaudited)
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||||||||||||||||
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Three Months Ended
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Nine Months Ended
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|||||||||||||||
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September 26,
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September 27,
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September 26,
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September 27,
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|||||||||||||
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(In millions)
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2015
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2014
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2015
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2014
|
||||||||||||
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Comprehensive Income (Loss)
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||||||||||||||||
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Net Income
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$ | 476.1 | $ | 471.6 | $ | 1,372.8 | $ | 1,293.2 | ||||||||
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Other Comprehensive Items:
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||||||||||||||||
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Currency translation adjustment
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(263.6 | ) | (619.5 | ) | (605.6 | ) | (655.9 | ) | ||||||||
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Unrealized gains on available-for-sale investments:
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||||||||||||||||
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Unrealized holding (losses) gains arising during the period (net of tax benefit of
$0.2, $0.2, $0.2 and $0.1)
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(0.2 | ) | (0.1 | ) | (0.2 | ) | 1.7 | |||||||||
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Reclassification adjustment for gains included in net income (net of tax provision of $0.0)
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— | — | — | (1.4 | ) | |||||||||||
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Unrealized losses on hedging instruments:
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||||||||||||||||
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Unrealized loss on hedging instruments (net of tax benefit of $17.7 and $3.6)
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(28.7 | ) | — | (5.7 | ) | — | ||||||||||
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Reclassification adjustment for losses included in net income (net of tax benefit of
$0.5, $0.5, $1.1 and $1.4)
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0.6 | 0.7 | 2.5 | 2.2 | ||||||||||||
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Pension and other postretirement benefit liability adjustment:
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||||||||||||||||
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Pension and other postretirement benefit liability adjustments arising during the
period (net of tax (benefit) provision of ($0.2), $2.1, $1.5 and $1.2)
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(1.0 | ) | 4.9 | 2.4 | 2.3 | |||||||||||
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Amortization of net loss and prior service benefit included in net periodic pension
cost (net of tax benefit of $0.7, $0.5, $1.9 and $1.7)
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1.6 | 1.4 | 5.2 | 4.0 | ||||||||||||
| Total other comprehensive items | (291.3 | ) | (612.6 | ) | (601.4 | ) | (647.1 | ) | ||||||||
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Comprehensive Income (Loss)
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$ | 184.8 | $ | (141.0 | ) | $ | 771.4 | $ | 646.1 | |||||||
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The accompanying notes are an integral part of these consolidated financial statements.
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CONSOLIDATED STATEMENT OF CASH FLOWS
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||||||||
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(Unaudited)
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||||||||
|
Nine Months Ended
|
||||||||
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September 26,
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September 27,
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|||||||
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(In millions)
|
2015
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2014
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||||||
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Operating Activities
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||||||||
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Net income
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$ | 1,372.8 | $ | 1,293.2 | ||||
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Loss (income) from discontinued operations
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1.2 | (1.7 | ) | |||||
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Income from continuing operations
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1,374.0 | 1,291.5 | ||||||
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Adjustments to reconcile net income to net cash provided by operating activities:
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||||||||
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Depreciation and amortization
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1,263.7 | 1,256.1 | ||||||
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Change in deferred income taxes
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(285.9 | ) | (583.8 | ) | ||||
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Net gains on sale of businesses
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(7.6 | ) | (894.4 | ) | ||||
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Non-cash stock-based compensation
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91.8 | 86.6 | ||||||
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Tax benefits from stock-based compensation awards
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(55.6 | ) | (61.1 | ) | ||||
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Non-cash charges for sale of inventories revalued at the date of acquisition
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0.7 | 303.1 | ||||||
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Other non-cash expenses, net
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39.5 | 27.8 | ||||||
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Changes in assets and liabilities, excluding the effects of acquisitions and dispositions:
|
||||||||
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Accounts receivable
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(145.9 | ) | (117.3 | ) | ||||
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Inventories
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(175.3 | ) | (109.1 | ) | ||||
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Other assets
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(213.7 | ) | 205.8 | |||||
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Accounts payable
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(26.9 | ) | (3.3 | ) | ||||
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Other liabilities
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(236.3 | ) | 304.8 | |||||
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Contributions to retirement plans
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(25.7 | ) | (37.3 | ) | ||||
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Net cash provided by continuing operations
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1,596.8 | 1,669.4 | ||||||
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Net cash used in discontinued operations
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(8.0 | ) | (3.5 | ) | ||||
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Net cash provided by operating activities
|
1,588.8 | 1,665.9 | ||||||
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Investing Activities
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||||||||
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Acquisitions, net of cash acquired
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(306.0 | ) | (13,056.1 | ) | ||||
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Proceeds from sale of businesses, net of cash divested
|
— | 1,520.0 | ||||||
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Purchase of property, plant and equipment
|
(293.5 | ) | (270.9 | ) | ||||
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Proceeds from sale of property, plant and equipment
|
7.5 | 19.7 | ||||||
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Proceeds from sale of investments
|
9.8 | 84.4 | ||||||
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Decrease in restricted cash
|
7.9 | 50.2 | ||||||
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Other investing activities, net
|
(1.7 | ) | (4.0 | ) | ||||
|
Net cash used in investing activities
|
$ | (576.0 | ) | $ | (11,656.7 | ) | ||
|
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
|
||||||||
|
(Unaudited)
|
||||||||
|
Nine Months Ended
|
||||||||
|
September 26,
|
September 27,
|
|||||||
|
(In millions)
|
2015
|
2014
|
||||||
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Financing Activities
|
||||||||
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Net proceeds from issuance of long-term debt
|
$ | 542.8 | $ | 4,999.6 | ||||
|
Repayment of long-term obligations
|
(2,481.0 | ) | (3,430.3 | ) | ||||
|
Increase in commercial paper, net
|
725.5 | 212.2 | ||||||
|
Decrease in short-term notes payable
|
— | (28.2 | ) | |||||
|
Purchases of company common stock
|
(500.0 | ) | — | |||||
|
Dividends paid
|
(180.7 | ) | (174.8 | ) | ||||
|
Net proceeds from issuance of company common stock
|
— | 2,942.0 | ||||||
|
Net proceeds from issuance of company common stock under employee stock plans
|
96.6 | 132.7 | ||||||
|
Tax benefits from stock-based compensation awards
|
55.6 | 61.1 | ||||||
|
Other financing activities, net
|
(5.9 | ) | (7.5 | ) | ||||
|
Net cash (used in) provided by financing activities
|
(1,747.1 | ) | 4,706.8 | |||||
|
Exchange Rate Effect on Cash
|
(105.8 | ) | (7.7 | ) | ||||
|
Decrease in Cash and Cash Equivalents
|
(840.1 | ) | (5,291.7 | ) | ||||
|
Cash and Cash Equivalents at Beginning of Period
|
1,343.5 | 5,826.0 | ||||||
|
Cash and Cash Equivalents at End of Period
|
$ | 503.4 | $ | 534.3 | ||||
|
See Note 13 for supplemental cash flow information.
|
||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
|
|
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
|
||||||||||||||||||||||||||||||||
|
(Unaudited)
|
||||||||||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||||||||||
|
Capital in
|
Other
|
Total
|
||||||||||||||||||||||||||||||
|
Common Stock
|
Excess of
|
Retained
|
Treasury Stock
|
Comprehensive
|
Shareholders'
|
|||||||||||||||||||||||||||
|
(In millions)
|
Shares
|
Amount
|
Par Value
|
Earnings
|
Shares
|
Amount
|
Items
|
Equity
|
||||||||||||||||||||||||
|
Balance at December 31, 2013
|
369.6 | $ | 369.6 | $ | 8,222.6 | $ | 8,753.3 | (7.6 | ) | $ | (412.2 | ) | $ | (77.2 | ) | $ | 16,856.1 | |||||||||||||||
|
Issuance of shares under employees'
and directors' stock plans
|
3.5 | 3.5 | 139.0 | — | (0.4 | ) | (43.2 | ) | — | 99.3 | ||||||||||||||||||||||
|
Issuance of shares
|
34.9 | 34.9 | 2,907.4 | — | — | — | — | 2,942.3 | ||||||||||||||||||||||||
|
Stock-based compensation
|
— | — | 86.6 | — | — | — | — | 86.6 | ||||||||||||||||||||||||
|
Tax benefit related to employees'
and directors' stock plans
|
— | — | 60.9 | — | — | — | — | 60.9 | ||||||||||||||||||||||||
|
Dividends declared
|
— | — | — | (180.5 | ) | — | — | — | (180.5 | ) | ||||||||||||||||||||||
|
Net income
|
— | — | — | 1,293.2 | — | — | — | 1,293.2 | ||||||||||||||||||||||||
|
Other comprehensive items
|
— | — | — | — | — | — | (647.1 | ) | (647.1 | ) | ||||||||||||||||||||||
|
Other
|
— | — | (0.2 | ) | — | — | — | — | (0.2 | ) | ||||||||||||||||||||||
|
Balance at September 27, 2014
|
408.0 | $ | 408.0 | $ | 11,416.3 | $ | 9,866.0 | (8.0 | ) | $ | (455.4 | ) | $ | (724.3 | ) | $ | 20,510.6 | |||||||||||||||
|
Balance at December 31, 2014
|
408.5 | $ | 408.5 | $ | 11,473.6 | $ | 10,406.9 | (8.0 | ) | $ | (455.9 | ) | $ | (1,285.0 | ) | $ | 20,548.1 | |||||||||||||||
|
Issuance of shares under employees'
and directors' stock plans
|
2.9 | 2.9 | 112.6 | — | (0.4 | ) | (51.4 | ) | — | 64.1 | ||||||||||||||||||||||
|
Stock-based compensation
|
— | — | 91.8 | — | — | — | — | 91.8 | ||||||||||||||||||||||||
|
Tax benefit related to employees'
and directors' stock plans
|
— | — | 54.8 | — | — | — | — | 54.8 | ||||||||||||||||||||||||
|
Purchases of company common
stock
|
— | — | — | — | (3.9 | ) | (500.0 | ) | — | (500.0 | ) | |||||||||||||||||||||
|
Dividends declared
|
— | — | — | (180.0 | ) | — | — | — | (180.0 | ) | ||||||||||||||||||||||
|
Net income
|
— | — | — | 1,372.8 | — | — | — | 1,372.8 | ||||||||||||||||||||||||
|
Other comprehensive items
|
— | — | — | — | — | — | (601.4 | ) | (601.4 | ) | ||||||||||||||||||||||
|
Balance at September 26, 2015
|
411.4 | $ | 411.4 | $ | 11,732.8 | $ | 11,599.7 | (12.3 | ) | $ | (1,007.3 | ) | $ | (1,886.4 | ) | $ | 20,850.2 | |||||||||||||||
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
(Unaudited)
|
|
|
|
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 companies, hospitals and clinical diagnostic labs, universities, research institutions and government agencies, as well as environmental and industrial process control settings.
|
|
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 26, 2015, the results of operations for the three- and nine-month periods ended September 26, 2015, and September 27, 2014, and the cash flows for the nine-month periods ended September 26, 2015, and September 27, 2014. Interim results are not necessarily indicative of results for a full year.
|
|
The consolidated balance sheet presented as of December 31, 2014, 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 2014 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 2014 describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. There have been no material changes in the company’s significant accounting policies during the nine months ended September 26, 2015.
|
|
|
|
Product warranties are 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 26,
|
September 27,
|
|||||||
|
(In millions)
|
2015
|
2014
|
||||||
|
Beginning Balance
|
$ | 57.5 | $ | 49.8 | ||||
|
Provision charged to income
|
59.9 | 57.6 | ||||||
|
Usage
|
(59.0 | ) | (58.0 | ) | ||||
|
Acquisitions
|
0.5 | 7.1 | ||||||
|
Adjustments to previously provided warranties, net
|
(2.1 | ) | 1.0 | |||||
|
Currency translation
|
(2.2 | ) | (1.3 | ) | ||||
|
Ending Balance
|
$ | 54.6 | $ | 56.2 | ||||
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
The components of inventories are as follows:
|
|
September 26,
|
December 31,
|
|||||||
|
(In millions)
|
2015
|
2014
|
||||||
|
Raw Materials
|
$ | 460.8 | $ | 441.6 | ||||
|
Work in Process
|
241.2 | 207.6 | ||||||
|
Finished Goods
|
1,285.2 | 1,210.3 | ||||||
|
Inventories
|
$ | 1,987.2 | $ | 1,859.5 | ||||
|
Property, plant and equipment consists of the following:
|
|
September 26,
|
December 31,
|
|||||||
|
(In millions)
|
2015
|
2014
|
||||||
|
Land
|
$ | 278.9 | $ | 281.8 | ||||
|
Buildings and Improvements
|
987.3 | 955.1 | ||||||
|
Machinery, Equipment and Leasehold Improvements
|
2,765.7 | 2,632.0 | ||||||
|
Property, Plant and Equipment, at Cost
|
4,031.9 | 3,868.9 | ||||||
|
Less: Accumulated Depreciation and Amortization
|
1,639.7 | 1,442.4 | ||||||
|
Property, Plant and Equipment, Net
|
$ | 2,392.2 | $ | 2,426.5 | ||||
|
Acquisition-related intangible assets are as follows:
|
|
September 26, 2015
|
December 31, 2014
|
|||||||||||||||||||||||
|
Accumulated
|
Accumulated
|
|||||||||||||||||||||||
|
(In millions)
|
Gross
|
Amortization
|
Net
|
Gross
|
Amortization
|
Net
|
||||||||||||||||||
|
Definite Lived:
|
||||||||||||||||||||||||
|
Customer relationships
|
$ | 11,783.0 | $ | (3,917.6 | ) | $ | 7,865.4 | $ | 11,866.8 | $ | (3,340.6 | ) | $ | 8,526.2 | ||||||||||
|
Product technology
|
4,825.2 | (1,728.2 | ) | 3,097.0 | 4,898.1 | (1,501.3 | ) | 3,396.8 | ||||||||||||||||
|
Tradenames
|
1,312.1 | (526.0 | ) | 786.1 | 1,333.0 | (448.7 | ) | 884.3 | ||||||||||||||||
|
Other
|
33.6 | (33.2 | ) | 0.4 | 34.2 | (33.3 | ) | 0.9 | ||||||||||||||||
| 17,953.9 | (6,205.0 | ) | 11,748.9 | 18,132.1 | (5,323.9 | ) | 12,808.2 | |||||||||||||||||
|
Indefinite Lived:
|
||||||||||||||||||||||||
|
Tradenames
|
1,234.8 | — | 1,234.8 | 1,234.8 | — | 1,234.8 | ||||||||||||||||||
|
In-process research
and development
|
31.4 | — | 31.4 | 67.1 | — | 67.1 | ||||||||||||||||||
| 1,266.2 | — | 1,266.2 | 1,301.9 | — | 1,301.9 | |||||||||||||||||||
|
Acquisition-related
Intangible Assets
|
$ | 19,220.1 | $ | (6,205.0 | ) | $ | 13,015.1 | $ | 19,434.0 | $ | (5,323.9 | ) | $ | 14,110.1 | ||||||||||
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
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 September 2015, the FASB issued new guidance which eliminates the requirement for an acquirer in a business combination to restate prior period financial statements for measurement period adjustments. The new guidance requires that the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The new guidance also sets forth new disclosure requirements related to the adjustments. The guidance is effective for the company in 2017. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the company’s consolidated financial statements.
|
|
In July 2015, the FASB issued new guidance which requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. This guidance does not apply to inventory that is measured using last-in, first-out (LIFO). The guidance is effective for the company in 2017. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the company’s consolidated financial statements.
|
|
In April 2015, the FASB issued new guidance which requires the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability, consistent with the current treatment of debt discounts. The guidance is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. Adoption of this standard will not have a material impact on the company’s consolidated balance sheet.
|
|
In January 2015, the FASB issued new guidance to simplify income statement classification by removing the concept of extraordinary items from U.S. GAAP. As a result, items that are both unusual and infrequent will no longer be separately reported net of tax after continuing operations. The company adopted this guidance effective January 2015. The adoption of this standard in 2015 did not have a material impact on the company’s consolidated financial statements.
|
|
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 will supersede most current 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. The guidance is currently effective for the company in 2018. Early adoption is permitted in 2017. The company is currently evaluating the impact the standard will have on its consolidated financial statements.
|
|
In April 2014, the FASB issued new guidance on reporting discontinued operations and disclosures of disposals. Under the new guidance, only disposals representing a strategic shift that has or will have a major effect on operations will be presented as discontinued operations. The new guidance also requires disclosure of the pre-tax income attributable to a disposal of a significant part of the company that does not qualify for discontinued operations reporting. The company adopted this guidance effective January 2015. The adoption of this standard in 2015 did not have a material impact on the company’s consolidated financial statements.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
The company’s acquisitions have historically been made at prices above the determined fair value of the acquired identifiable assets, resulting in goodwill, due to expectations of the synergies that will be realized by combining the businesses. These synergies include the elimination of redundant facilities, functions and staffing; use of the company’s existing commercial infrastructure to expand sales of the acquired businesses’ products; and use of the commercial infrastructure of the acquired businesses to cost-effectively expand sales of company products.
|
|
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.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
The components of the purchase price and net assets acquired for 2015 acquisitions completed prior to September 26, 2015 are as follows:
|
||||||||||||
|
(In millions)
|
Advanced
Scientifics
|
Other
|
Total
|
|||||||||
|
Purchase Price
|
||||||||||||
|
Cash paid
|
$ | 289.1 | $ | 18.5 | $ | 307.6 | ||||||
|
Purchase price payable
|
— | 1.3 | 1.3 | |||||||||
|
Cash acquired
|
(0.3 | ) | (1.3 | ) | (1.6 | ) | ||||||
| $ | 288.8 | $ | 18.5 | $ | 307.3 | |||||||
|
Net Assets Acquired
|
||||||||||||
|
Current assets
|
$ | 27.8 | $ | 4.6 | $ | 32.4 | ||||||
|
Property, plant and equipment
|
10.6 | 0.1 | 10.7 | |||||||||
|
Definite-lived intangible assets:
|
||||||||||||
|
Customer relationships
|
90.0 | 7.9 | 97.9 | |||||||||
|
Product technology
|
36.5 | — | 36.5 | |||||||||
|
Tradenames and other
|
2.3 | — | 2.3 | |||||||||
|
Goodwill
|
125.1 | 8.9 | 134.0 | |||||||||
|
Other assets
|
0.2 | — | 0.2 | |||||||||
|
Liabilities assumed
|
(3.7 | ) | (3.0 | ) | (6.7 | ) | ||||||
| $ | 288.8 | $ | 18.5 | $ | 307.3 | |||||||
|
The weighted-average amortization periods for definite-lived intangible assets acquired in 2015 are 16 years for customer relationships, 10 years for product technology and 10 years for tradenames and other. The weighted average amortization period for all definite-lived intangible assets acquired in 2015 is 14 years.
|
|
Nine
Months
Ended
|
|||||
|
September 27,
|
|||||
|
(In millions except per share amounts)
|
2014
|
||||
|
Revenues
|
$
|
12,675.0
|
|||
|
Net Income
|
$
|
1,592.6
|
|||
|
Earnings per Share:
|
|||||
|
Basic
|
$
|
3.99
|
|||
|
Diluted
|
$
|
3.95
|
|||
|
These pro forma results of operations have been prepared for comparative purposes only, and they do not purport to be indicative of the results of operations that actually would have resulted had the acquisition occurred on the date indicated or that may result in the future.
|
|
The company’s results would not have been materially different from its pro forma results had the company’s other 2014 or 2015 acquisitions occurred at the beginning of 2013 or 2014, respectively.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
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 and an extensive service offering. These products and services are used by customers in pharmaceutical, biotechnology, academic, government and other research and industrial markets, as well as the clinical laboratory.
|
|
The company’s management evaluates segment operating performance based on operating income before certain charges/credits to cost of revenues and selling, general and administrative expenses, principally associated with acquisition accounting; restructuring and other costs/income including costs arising from facility consolidations such as severance and abandoned lease expense and gains and losses from the sale of real estate and product lines; and amortization of acquisition-related intangible assets. The company uses this measure because it helps management understand and evaluate the segments’ core operating results and facilitates comparison of performance for determining compensation.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
Business Segment Information
|
|||||||||||||||||
|
Three Months Ended
|
Nine Months Ended
|
||||||||||||||||
|
September 26,
|
September 27,
|
September 26,
|
September 27,
|
||||||||||||||
|
(In millions)
|
2015
|
2014
|
2015
|
2014
|
|||||||||||||
|
Revenues
|
|||||||||||||||||
| Life Sciences Solutions | $ | 1,080.4 | $ | 1,071.9 | $ | 3,229.6 | $ | 3,010.5 | |||||||||
| Analytical Instruments | 778.5 | 786.5 | 2,282.9 | 2,349.8 | |||||||||||||
| Specialty Diagnostics | 776.9 | 811.8 | 2,379.2 | 2,480.6 | |||||||||||||
| Laboratory Products and Services | 1,638.2 | 1,628.7 | 4,844.9 | 4,918.6 | |||||||||||||
| Eliminations | (150.8 | ) | (127.5 | ) | (423.7 | ) | (362.7 | ) | |||||||||
| Consolidated revenues | 4,123.2 | 4,171.4 | 12,312.9 | 12,396.8 | |||||||||||||
|
Segment Income (a)
|
|||||||||||||||||
| Life Sciences Solutions | 332.7 | 306.3 | 954.9 | 850.0 | |||||||||||||
| Analytical Instruments | 146.5 | 137.8 | 407.8 | 399.1 | |||||||||||||
| Specialty Diagnostics | 204.9 | 224.3 | 646.2 | 681.7 | |||||||||||||
| Laboratory Products and Services | 249.6 | 246.6 | 731.7 | 738.3 | |||||||||||||
| Subtotal reportable segments (a) | 933.7 | 915.0 | 2,740.6 | 2,669.1 | |||||||||||||
| Cost of revenues charges | (0.8 | ) | (2.1 | ) | (2.5 | ) | (326.7 | ) | |||||||||
| Selling, general and administrative charges, net | (24.6 | ) | (20.3 | ) | (35.4 | ) | (118.0 | ) | |||||||||
| Restructuring and other (costs) income, net | (15.5 | ) | 110.6 | (67.9 | ) | 631.9 | |||||||||||
| Amortization of acquisition-related intangible assets | (329.9 | ) | (362.9 | ) | (988.8 | ) | (992.4 | ) | |||||||||
| Consolidated operating income | 562.9 | 640.3 | 1,646.0 | 1,863.9 | |||||||||||||
| Other expense, net (b) | (94.8 | ) | (101.1 | ) | (292.3 | ) | (313.8 | ) | |||||||||
| Income from continuing operations before incometaxes | $ | 468.1 | $ | 539.2 | $ | 1,353.7 | $ | 1,550.1 | |||||||||
|
Depreciation
|
|||||||||||||||||
| Life Sciences Solutions | $ | 38.4 | $ | 37.1 | $ | 106.7 | $ | 97.4 | |||||||||
| Analytical Instruments | 9.9 | 9.4 | 28.6 | 29.0 | |||||||||||||
| Specialty Diagnostics | 18.8 | 19.4 | 54.6 | 57.4 | |||||||||||||
| Laboratory Products and Services | 30.7 | 26.9 | 85.0 | 79.9 | |||||||||||||
| Consolidated depreciation | $ | 97.8 | $ | 92.8 | $ | 274.9 | $ | 263.7 | |||||||||
| (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. |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
The components of other expense, net, in the accompanying statement of income are as follows:
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 26,
|
September 27,
|
September 26,
|
September 27,
|
|||||||||||||
|
(In millions)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||
|
Interest Income
|
$ | 7.2 | $ | 10.5 | $ | 21.9 | $ | 38.4 | ||||||||
|
Interest Expense
|
(100.6 | ) | (116.8 | ) | (311.9 | ) | (363.7 | ) | ||||||||
|
Other Items, Net
|
(1.4 | ) | 5.2 | (2.3 | ) | 11.5 | ||||||||||
|
Other Expense, Net
|
$ | (94.8 | ) | $ | (101.1 | ) | $ | (292.3 | ) | $ | (313.8 | ) | ||||
|
In the first nine months of 2015, other items, net includes costs of $7.5 million associated with entering into interest rate swap arrangements and losses of $6 million on the early extinguishment of debt. In the first nine months of 2014, other items, net includes $9 million of gains from investments.
|
|
The components of stock-based compensation expense are primarily included in selling, general and administrative expenses and include the following:
|
||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 26, | September 27, | September 26, | September 27, | |||||||||||||
|
(In millions)
|
2015 | 2014 | 2015 | 2014 | ||||||||||||
|
Stock Option Awards
|
$ | 11.1 | $ | 11.7 | $ | 32.4 | $ | 34.1 | ||||||||
|
Restricted Unit Awards
|
21.4 | 18.9 | 59.4 | 52.5 | ||||||||||||
|
Total Stock-based Compensation Expense
|
$ | 32.5 | $ | 30.6 | $ | 91.8 | $ | 86.6 | ||||||||
|
As of September 26, 2015, there was $84 million of total unrecognized compensation cost related to unvested stock options granted. The cost is expected to be recognized through 2019 with a weighted average amortization period of 2.4 years.
|
|
As of September 26, 2015, there was $140 million of total unrecognized compensation cost related to unvested restricted stock unit awards. The cost is expected to be recognized through 2019 with a weighted average amortization period of 2.2 years.
|
|
During the first nine months of 2015, the company made equity compensation grants to employees consisting of 0.9 million service- and performance-based restricted stock units and options to purchase 1.8 million shares.
|
|
Certain pre-acquisition equity awards of Life Technologies were converted to rights to receive future cash payments over the remaining vesting period. In addition to stock-based compensation, which is included in the above table, in the third quarter of 2015 and 2014 and first nine months of 2015 and 2014, the company recorded expense for cash-in-lieu of equity of $4.2 million, $9.2 million, $18.1 million and $26.3 million, respectively, related to these arrangements.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
Net periodic benefit costs for the company’s defined benefit pension plans include the following components:
|
||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 26, | September 27, | September 26, | September 27, | |||||||||||||
| (In millions) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
|
Service Cost-Benefits Earned
|
$ | 7.7 | $ | 8.0 | $ | 20.0 | $ | 17.6 | ||||||||
|
Interest Cost on Benefit Obligation
|
19.4 | 23.6 | 58.1 | 67.2 | ||||||||||||
|
Expected Return on Plan Assets
|
(23.4 | ) | (25.0 | ) | (70.0 | ) | (71.2 | ) | ||||||||
|
Amortization of Actuarial Net Loss
|
2.3 | 1.9 | 7.0 | 5.9 | ||||||||||||
|
Other
|
(0.1 | ) | 0.2 | (0.1 | ) | 0.1 | ||||||||||
|
Net Periodic Benefit Cost
|
$ | 5.9 | $ | 8.7 | $ | 15.0 | $ | 19.6 | ||||||||
|
The provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate of 35% to income from continuing operations before provision for income taxes due to the following:
|
||||||||
|
Nine Months Ended
|
||||||||
|
September 26,
|
September 27,
|
|||||||
|
(In millions)
|
2015
|
2014
|
||||||
|
Provision for Income Taxes at Statutory Rate
|
$ | 473.8 | $ | 542.5 | ||||
|
Increases (Decreases) Resulting From:
|
||||||||
|
Foreign rate differential
|
(148.9 | ) | (187.6 | ) | ||||
|
Income tax credits
|
(241.4 | ) | (122.5 | ) | ||||
|
Manufacturing deduction
|
(27.2 | ) | (26.6 | ) | ||||
|
Singapore tax holiday
|
(11.5 | ) | (10.3 | ) | ||||
|
Impact of change in tax laws and apportionment on deferred taxes
|
(13.5 | ) | (26.0 | ) | ||||
|
Nondeductible expenses
|
6.9 | 9.6 | ||||||
|
Provision (reversal) of tax reserves, net
|
— | 25.3 | ||||||
|
Basis difference on disposal of businesses
|
— | 26.3 | ||||||
|
Tax return reassessments
|
(51.0 | ) | (1.5 | ) | ||||
|
State income taxes, net of federal tax
|
(4.8 | ) | 27.7 | |||||
|
Other, net
|
(2.7 | ) | 1.7 | |||||
|
Provision for (benefit from) income taxes
|
$ | (20.3 | ) | $ | 258.6 | |||
|
In 2015, the company implemented tax planning initiatives related to non-U.S. subsidiaries. As a result of these initiatives, the company generated U.S. foreign tax credits of $112 million, offset in part by additional U.S. income taxes of $39 million on the related foreign income which reduced the benefit from the foreign tax rate differential in 2015.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
In 2015, the company recorded discrete benefits totaling $51 million related to additional prior year foreign tax and other credits as well as restructuring and other costs associated with the 2014 acquisition of Life Technologies.
|
|
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, 2021. The impact of this tax holiday decreased the annual effective tax rate by 0.8% and increased diluted earnings per share by approximately $0.03 in the first nine months of 2015.
|
|
The company’s unrecognized tax benefits increased to $274.4 million at September 26, 2015, from $214.1 million at December 31, 2014. Of the total increase, $70.0 million resulted from the utilization of deferred tax assets, offset in part by a reduction of $9.7 million from a resolution of an IRS audit of Life Technologies for which a reserve had previously been established.
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 26,
|
September 27,
|
September 26,
|
September 27,
|
|||||||||||||
|
(In millions except per share amounts)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||
|
Income from Continuing Operations
|
$ | 477.3 | $ | 469.9 | $ | 1,374.0 | $ | 1,291.5 | ||||||||
|
(Loss) Income from Discontinued Operations
|
(1.2 | ) | 1.7 | (1.2 | ) | 1.7 | ||||||||||
|
Net Income
|
$ | 476.1 | $ | 471.6 | $ | 1,372.8 | $ | 1,293.2 | ||||||||
|
Basic Weighted Average Shares
|
399.0 | 399.9 | 398.4 | 397.5 | ||||||||||||
|
Plus Effect of:
|
||||||||||||||||
|
Equity forward arrangement
|
— | — | — | 0.2 | ||||||||||||
|
Stock options and restricted units
|
3.0 | 3.8 | 3.3 | 4.0 | ||||||||||||
|
Diluted Weighted Average Shares
|
402.0 | 403.7 | 401.7 | 401.7 | ||||||||||||
|
Basic Earnings per Share:
|
||||||||||||||||
|
Continuing operations
|
$ | 1.20 | $ | 1.17 | $ | 3.45 | $ | 3.25 | ||||||||
|
Discontinued operations
|
— | — | — | — | ||||||||||||
|
Basic Earnings per Share
|
$ | 1.19 | $ | 1.18 | $ | 3.45 | $ | 3.25 | ||||||||
|
Diluted Earnings per Share:
|
||||||||||||||||
|
Continuing operations
|
$ | 1.19 | $ | 1.16 | $ | 3.42 | $ | 3.21 | ||||||||
|
Discontinued operations
|
— | — | — | — | ||||||||||||
|
Diluted Earnings per Share
|
$ | 1.18 | $ | 1.17 | $ | 3.42 | $ | 3.22 | ||||||||
|
Options to purchase 3.5 million, 2.4 million, 3.7 million and 2.4 million shares of common stock were not included in the computation of diluted earnings per share for the third quarter of 2015 and 2014 and first nine months of 2015 and 2014, respectively, because their effect would have been antidilutive.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
Effective
|
||||||||||||
|
Interest Rate at
|
||||||||||||
|
September 26,
|
September 26,
|
December 31,
|
||||||||||
|
(Dollars in millions)
|
2015
|
2015
|
2014
|
|||||||||
|
Commercial Paper
|
1.01 | % | $ | 727.6 | $ | — | ||||||
|
Term Loan
|
— | 1,275.0 | ||||||||||
|
4.40% 5-Year Senior Notes, Due 3/1/2015
|
— | 500.0 | ||||||||||
|
3.20% 5-Year Senior Notes, Due 5/1/2015
|
— | 450.0 | ||||||||||
|
5.00% 10-Year Senior Notes, Due 6/1/2015
|
— | 250.0 | ||||||||||
|
3.50% 5-Year Senior Notes, Due 1/15/2016
|
1.06 | % | 400.0 | 400.0 | ||||||||
|
3.20% 5-Year Senior Notes, Due 3/1/2016
|
3.21 | % | 900.0 | 900.0 | ||||||||
|
2.25% 5-Year Senior Notes, Due 8/15/2016
|
2.29 | % | 1,000.0 | 1,000.0 | ||||||||
|
1.30% 3-Year Senior Notes, Due 2/1/2017
|
0.70 | % | 900.0 | 900.0 | ||||||||
|
1.85% 5-Year Senior Notes, Due 1/15/2018
|
1.85 | % | 500.0 | 500.0 | ||||||||
|
2.40% 5-Year Senior Notes, Due 2/1/2019
|
2.44 | % | 900.0 | 900.0 | ||||||||
|
6.00% 10-Year Senior Notes, Due 3/1/2020
|
2.98 | % | 750.0 | 750.0 | ||||||||
|
4.70% 10-Year Senior Notes, Due 5/1/2020
|
3.03 | % | 300.0 | 300.0 | ||||||||
|
5.00% 10-Year Senior Notes, Due 1/15/2021
|
3.25 | % | 400.0 | 400.0 | ||||||||
|
4.50% 10-Year Senior Notes, Due 3/1/2021
|
2.93 | % | 1,000.0 | 1,000.0 | ||||||||
|
3.60% 10-Year Senior Notes, Due 8/15/2021
|
2.63 | % | 1,100.0 | 1,100.0 | ||||||||
|
3.30% 7-Year Senior Notes, Due 2/15/2022
|
3.30 | % | 800.0 | 800.0 | ||||||||
|
2.15% 7-Year Senior Notes, Due 7/21/2022 (euro-denominated)
|
2.18 | % | 559.8 | — | ||||||||
|
3.15% 10-Year Senior Notes, Due 1/15/2023
|
3.21 | % | 800.0 | 800.0 | ||||||||
|
4.15% 10-Year Senior Notes, Due 2/1/2024
|
4.07 | % | 1,000.0 | 1,000.0 | ||||||||
|
2.00% 10-Year Senior Notes, Due 4/15/2025 (euro-denominated)
|
2.03 | % | 716.5 | 774.3 | ||||||||
|
5.30% 30-Year Senior Notes, Due 2/1/2044
|
5.30 | % | 400.0 | 400.0 | ||||||||
|
Other
|
17.4 | 23.2 | ||||||||||
|
Total Borrowings at Par Value
|
13,171.3 | 14,422.5 | ||||||||||
|
Fair Value Hedge Accounting Adjustments
|
26.9 | (0.5 | ) | |||||||||
|
Unamortized Premium, Net
|
113.7 | 142.0 | ||||||||||
|
Total Borrowings at Carrying Value
|
13,311.9 | 14,564.0 | ||||||||||
|
Less: Short-term Obligations and Current Maturities
|
3,034.0 | 2,212.4 | ||||||||||
|
Long-term Obligations
|
$ | 10,277.9 | $ | 12,351.6 | ||||||||
|
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 and, if applicable, adjustments related to hedging.
|
|
See Note 12 for fair value information pertaining to the company’s long-term obligations.
|
|
The company has a revolving credit facility with a bank group that provides for up to $2.00 billion of unsecured multi-currency revolving credit. The facility expires in July 2018. The agreement calls for interest at either a LIBOR-based rate or a rate based on the prime lending rate of the agent bank, at the company’s option. The agreement contains affirmative, negative and financial covenants, and events of default customary for financings of this type. The financial covenant requires the company to maintain a Consolidated Leverage Ratio of debt to EBITDA (as defined in the agreement) below 3.5 to 1.0 and an Interest Coverage Ratio of EBITDA (as defined in the agreement) to interest expense of 3.0 to 1.0. The credit agreement permits the company to use the facility for working capital; acquisitions; repurchases of common stock, debentures and other securities; the refinancing of debt; and general corporate purposes. The credit agreement allows for the issuance of letters of credit, which reduces the amount available for borrowing. If the company borrows under this facility, it intends to leave undrawn an amount equivalent to outstanding commercial paper to provide a source of funds in the event that commercial paper markets are not available. As of September 26, 2015, no borrowings were outstanding under the facility, although available capacity was reduced by approximately $62 million as a result of outstanding letters of credit.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
Commercial Paper Program
|
|
The company has a U.S. commercial paper program pursuant to which it may issue and sell unsecured, short-term promissory notes (CP Notes). Maturities may not exceed 397 days from the date of issue and the CP Notes rank pari passu with all of the company’s other unsecured and unsubordinated indebtedness. CP Notes are issued on a private placement basis under customary terms in the commercial paper market and are not redeemable prior to maturity nor subject to voluntary prepayment. CP Notes are issued at a discount from par, or, alternatively, are sold at par and bear varying interest rates on a fixed or floating basis. As of September 26, 2015, outstanding borrowings under this program were $728 million, with a weighted average remaining period to maturity of 33 days and are classified as short-term obligations in the accompanying balance sheet.
|
|
Term Loan
|
|
Senior Notes
|
|
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.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
The following table summarizes the outstanding interest rate swap arrangements on the company's senior notes at September 26, 2015:
|
||||||||||
|
Aggregate
|
Pay Rate as of
|
|||||||||
|
Notional
|
September 26,
|
|||||||||
|
(Dollars in millions)
|
Amount
|
Pay Rate
|
2015
|
Receive Rate
|
||||||
|
1.30% Senior Notes due 2017
|
$ | 900.0 |
1-month LIBOR + 0.6616%
|
0.8586% | 1.30% | |||||
|
4.70% Senior Notes due 2020
|
$ | 300.0 |
1-month LIBOR + 3.1560%
|
3.3530% | 4.70% | |||||
|
4.50% Senior Notes due 2021
|
$ | 1,000.0 |
1-month LIBOR + 2.8680%
|
3.0650% | 4.50% | |||||
|
3.60% Senior Notes due 2021
|
$ | 1,100.0 |
1-month LIBOR + 1.9370%
|
2.1436% | 3.60% | |||||
|
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 September 26, 2015 and December 31, 2014, the company’s total environmental liability was approximately $35 million and $32 million, respectively. 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.
|
|
There are various lawsuits and claims pending against the company involving product liability, intellectual property, employment, and contractual 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, and, with respect to certain pending litigation or claims where no liability has been accrued, to 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 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 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.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
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.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
On December 27, 2011, Illumina Inc. filed a complaint against Life Technologies in the United States District Court for the Southern District of California alleging infringement of a patent relating to methods for making bead arrays by Ion Torrent’s semiconductor sequencing systems. Plaintiff seeks damages for alleged willful infringement, attorneys’ fees, costs, pre- and post-judgment interest, and injunctive relief.
|
|
On April 26, 2012, Esoterix Genetic Laboratories filed a complaint against Life Technologies in the United States District Court for the Middle District of North Carolina alleging infringement of patents relating to detection of subpopulations of cells with mutated sequences and multiplexed DNA amplification by Life Technologies’ OpenArray systems, next generation SOLiD sequencing system, and Ion Torrent semiconductor sequencing systems. Plaintiff sought damages for alleged willful infringement, attorneys’ fees, costs, prejudgment interest, and injunctive relief. On October 31, 2012, Esoterix Genetic Laboratories and The Johns Hopkins University filed a complaint against Life Technologies in the United States District Court for the Middle District of North Carolina alleging infringement of patents relating to methods of determining a ratio of genetic sequences in a population of genetic sequences and methods of determining allelic imbalances in a biological sample by Life Technologies’ OpenArray systems, next generation SOLiD sequencing system, and Ion Torrent semiconductor sequencing systems. Plaintiffs sought damages for alleged willful infringement, attorneys’ fees, costs, prejudgment interest, and injunctive relief. On September 4, 2015, the parties settled these disputes with a payment by the company, that had been previously accrued, and the cases were dismissed with prejudice on September 21, 2015.
|
|
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.
|
|
Comprehensive Income (Loss)
|
|
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
Gains on
Available-for-
Sale
Investments
|
Unrealized
Gains
(Losses) on
Hedging
Instruments
|
Pension and
Other
Postretirement
Benefit
Liability
Adjustment
|
Total
|
|||||||||||||||
|
Balance at December 31, 2014
|
$ | (1,070.6 | ) | $ | 1.3 | $ | (20.9 | ) | $ | (194.8 | ) | $ | (1,285.0 | ) | ||||||
|
Other comprehensive income (loss)
before reclassifications
|
(605.6 | ) | (0.2 | ) | (5.7 | ) | 2.4 | (609.1 | ) | |||||||||||
|
Amounts reclassified from
accumulated other
comprehensive items
|
— | — | 2.5 | 5.2 | 7.7 | |||||||||||||||
|
Net other comprehensive items
|
(605.6 | ) | (0.2 | ) | (3.2 | ) | 7.6 | (601.4 | ) | |||||||||||
|
Balance at September 26, 2015
|
$ | (1,676.2 | ) | $ | 1.1 | $ | (24.1 | ) | $ | (187.2 | ) | $ | (1,886.4 | ) | ||||||
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
Fair Value Measurements
|
|
The company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during 2015. The company’s financial assets and liabilities carried at fair value are primarily comprised of investments in money market funds; derivative contracts, insurance contracts, mutual funds holding publicly traded securities and other investments in unit trusts held as assets to satisfy outstanding deferred compensation and retirement liabilities; and acquisition-related contingent consideration.
|
|
The fair value accounting guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
|
|
Level 1: Quoted market prices in active markets for identical assets or liabilities that the company has the ability to access.
|
|
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data such as quoted prices, interest rates and yield curves.
|
|
Level 3: Inputs are unobservable data points that are not corroborated by market data.
|
|
The following table presents information about the company’s financial assets and liabilities measured at fair value on a recurring basis as of September 26, 2015:
|
||||||||||||||||
|
September 26,
|
Quoted
Prices in
Active
Markets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
|||||||||||||
|
(In millions)
|
2015
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||||
|
Assets
|
||||||||||||||||
|
Cash equivalents
|
$ | 65.8 | $ | 65.8 | $ | — | $ | — | ||||||||
|
Bank time deposits
|
2.0 | 2.0 | — | — | ||||||||||||
|
Investments in mutual funds, unit trusts and other
similar instruments
|
7.4 | 7.4 | — | — | ||||||||||||
|
Insurance contracts
|
105.2 | — | 105.2 | — | ||||||||||||
|
Derivative contracts
|
25.2 | — | 25.2 | — | ||||||||||||
|
Total Assets
|
$ | 205.6 | $ | 75.2 | $ | 130.4 | $ | — | ||||||||
|
Liabilities
|
||||||||||||||||
|
Derivative contracts
|
$ | 27.4 | $ | — | $ | 27.4 | $ | — | ||||||||
|
Contingent consideration
|
2.3 | — | — | 2.3 | ||||||||||||
|
Total Liabilities
|
$ | 29.7 | $ | — | $ | 27.4 | $ | 2.3 | ||||||||
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
The following table presents information about the company’s financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2014:
|
||||||||||||||||
|
December 31,
|
Quoted
Prices in
Active
Markets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
|||||||||||||
|
(In millions)
|
2014
|
(Level 1)
|
(Level 2)
|
(Level 3)
|
||||||||||||
|
Assets
|
||||||||||||||||
|
Cash equivalents
|
$ | 617.3 | $ | 617.3 | $ | — | $ | — | ||||||||
|
Bank time deposits
|
8.5 | 8.5 | — | — | ||||||||||||
|
Investments in mutual funds, unit trusts and other
similar instruments
|
8.7 | 8.7 | — | — | ||||||||||||
|
Insurance contracts
|
102.5 | — | 102.5 | — | ||||||||||||
|
Derivative contracts
|
20.2 | — | 20.2 | — | ||||||||||||
|
Total Assets
|
$ | 757.2 | $ | 634.5 | $ | 122.7 | $ | — | ||||||||
|
Liabilities
|
||||||||||||||||
|
Derivative contracts
|
$ | 10.4 | $ | — | $ | 10.4 | $ | — | ||||||||
|
Contingent consideration
|
29.6 | — | — | 29.6 | ||||||||||||
|
Total Liabilities
|
$ | 40.0 | $ | — | $ | 10.4 | $ | 29.6 | ||||||||
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 26,
|
September 27,
|
September 26,
|
September 27,
|
|||||||||||||
|
(In millions)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||
|
Contingent Consideration
|
||||||||||||||||
|
Beginning Balance
|
$ | 7.6 | $ | 32.0 | $ | 29.6 | $ | 5.1 | ||||||||
|
Acquisition
|
— | 0.8 | — | 29.9 | ||||||||||||
|
Payments
|
(3.1 | ) | (4.2 | ) | (11.1 | ) | (10.3 | ) | ||||||||
|
Change in fair value included in earnings
|
(2.1 | ) | 4.4 | (2.6 | ) | 8.0 | ||||||||||
|
Sale of a product line
|
— | — | (13.4 | ) | — | |||||||||||
|
Currency translation
|
(0.1 | ) | (0.3 | ) | (0.2 | ) | — | |||||||||
|
Ending Balance
|
$ | 2.3 | $ | 32.7 | $ | 2.3 | $ | 32.7 | ||||||||
|
The notional amounts of derivative contracts outstanding, consisting of interest rate swaps and currency exchange contracts, totaled $6.87 billion and $3.74 billion at September 26, 2015 and December 31, 2014, respectively.
|
|
While certain derivatives are subject to netting arrangements with counterparties, the company does not offset derivative assets and liabilities within the consolidated balance sheet. The following tables present the fair value of derivative instruments in the consolidated balance sheet and statement of income.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
| Fair Value – Assets | Fair Value – Liabilities | |||||||||||||||
|
|
September 26, | December 31, | September 26, | December 31, | ||||||||||||
| (In millions) | 2015 | 2014 | 2015 | 2014 | ||||||||||||
|
Derivatives Designated as Hedging Instruments
|
||||||||||||||||
|
Interest rate swaps (a)
|
$ | 18.9 | $ | — | $ | 9.3 | $ | 3.7 | ||||||||
|
Derivatives Not Designated as Hedging Instruments
|
||||||||||||||||
|
Currency exchange contracts (b)
|
6.3 | 20.2 | 18.1 | 6.7 | ||||||||||||
|
(a)
|
The fair value of the interest rate swaps is included in the consolidated balance sheet under the captions other assets or other accrued expenses in 2015 and in other long-term liabilities in 2014.
|
||||||||||||||||||||||||||||
|
(b)
|
The fair value of the currency exchange contracts is included in the consolidated balance sheet under the captions other current assets or other accrued expenses.
|
||||||||||||||||||||||||||||
|
Gain (Loss) Recognized
|
||||||||||||||||
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||
|
September 26,
|
September 27,
|
September 26,
|
September 27,
|
|||||||||||||
|
(In millions)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||
|
Derivatives Designated as Fair Value Hedges
|
||||||||||||||||
|
Interest rate swaps - effective portion
|
$ | 9.5 | $ | 1.1 | $ | 25.7 | $ | 3.2 | ||||||||
|
Interest rate swaps - ineffective portion (a)
|
(0.2 | ) | (2.3 | ) | (7.4 | ) | (0.5 | ) | ||||||||
|
Derivatives Not Designated as Fair Value Hedges
|
||||||||||||||||
|
Currency exchange contracts
|
||||||||||||||||
|
Included in cost of revenues
|
$ | (6.0 | ) | $ | 7.0 | $ | 11.5 | $ | 11.2 | |||||||
|
Included in other expense, net
|
(6.4 | ) | 75.9 | 130.6 | 76.1 | |||||||||||
|
(a)
|
The ineffective portion of the loss recognized on interest rate swaps during the nine months ended September 26, 2015 includes $7.5 million of costs associated with entering into the swap arrangements.
|
||||||||||||||||||||||||||||
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
Fair Value of Other Financial Instruments
The carrying value and fair value of the company's notes receivable and debt obligations are as follows:
|
|
September 26, 2015
|
December 31, 2014
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
(In millions)
|
Value
|
Value
|
Value
|
Value
|
||||||||||||
|
Notes Receivable
|
$ | 11.3 | $ | 11.3 | $ | 8.3 | $ | 8.3 | ||||||||
|
Debt Obligations:
|
||||||||||||||||
|
Senior notes
|
$ | 12,566.9 | $ | 12,737.1 | $ | 13,265.8 | $ | 13,590.6 | ||||||||
|
Term loan
|
— | — | 1,275.0 | 1,275.0 | ||||||||||||
|
Commercial paper
|
727.6 | 727.6 | — | — | ||||||||||||
|
Other
|
17.4 | 17.4 | 23.2 | 23.2 | ||||||||||||
| $ | 13,311.9 | $ | 13,482.1 | $ | 14,564.0 | $ | 14,888.8 | |||||||||
|
Nine Months Ended
|
||||||||
|
September 26,
|
September 27,
|
|||||||
|
(In millions)
|
2015
|
2014
|
||||||
|
Non-cash Activities
|
||||||||
|
Fair value of assets of acquired businesses
|
$ | 315.6 | $ | 19,622.8 | ||||
|
Cash paid for acquired businesses
|
(307.6 | ) | (13,530.6 | ) | ||||
|
Liabilities assumed of acquired businesses
|
$ | 8.0 | $ | 6,092.2 | ||||
|
Declared but unpaid dividends
|
$ | 61.1 | $ | 61.6 | ||||
|
Issuance of stock upon vesting of restricted stock units
|
$ | 129.4 | $ | 176.7 | ||||
|
Restructuring and other costs in the first nine months of 2015 primarily included continuing charges for headcount reductions and facility consolidations in an effort to streamline operations, including the closure and consolidation of operations within several facilities in the U.S., Europe and Asia; charges associated with product liability litigation; and, to a lesser extent, third-party acquisition transaction and integration costs related to recent acquisitions and charges associated with litigation at acquired and divested businesses. These charges were partially offset by gains on the sale of a small product line and real estate, as well as income for changes in estimates of contingent consideration. In the first nine months of 2015, severance actions associated with facility consolidations and cost reduction measures affected approximately 2% of the company’s workforce.
|
|
As of October 30, 2015, the company has identified restructuring actions that will result in additional charges of approximately $65 million, primarily in the remainder of 2015 and the first half of 2016, which will be recorded when specified criteria are met, such as abandonment of facilities.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
Third Quarter of 2015
|
|
During the third quarter of 2015, the company recorded net restructuring and other costs by segment as follows:
|
|
(In millions)
|
Cost of
Revenues
|
Selling,
General and
Administrative
Expenses
|
Restructuring
and Other
Costs, Net
|
Total
|
||||||||||||
|
Life Sciences Solutions
|
$ | 0.4 | $ | 2.7 | $ | 5.0 | $ | 8.1 | ||||||||
|
Analytical Instruments
|
0.1 | — | 4.1 | 4.2 | ||||||||||||
|
Specialty Diagnostics
|
0.3 | (0.4 | ) | 1.6 | 1.5 | |||||||||||
|
Laboratory Products and Services
|
— | 0.8 | 4.8 | 5.6 | ||||||||||||
|
Corporate
|
— | 21.5 | — | 21.5 | ||||||||||||
| $ | 0.8 | $ | 24.6 | $ | 15.5 | $ | 40.9 | |||||||||
|
The components of net restructuring and other costs by segment are as follows:
|
|
Life Sciences Solutions
|
|
Analytical Instruments
|
|
The Analytical Instruments segment recorded $4.2 million of net restructuring and other charges in the third quarter of 2015, primarily for abandoned facilities costs associated with the remediation and closure of a manufacturing facility in the U.S, as well as charges for employee severance and other costs associated with headcount reductions.
|
|
Specialty Diagnostics
|
|
The Specialty Diagnostics segment recorded $1.5 million of net restructuring and other charges in the third quarter of 2015. The segment recorded charges to cost of revenues of $0.3 million for accelerated depreciation at facilities closing due to real estate consolidation; $0.4 million of income to selling, general and administrative expenses for changes in estimates of contingent consideration; and $1.6 million of restructuring and other costs, net, primarily cash costs associated with headcount reductions as well as consolidation of facilities in the U.S. and Europe.
|
|
Laboratory Products and Services
|
|
The Laboratory Products and Services segment recorded $5.6 million of net restructuring and other charges in the third quarter of 2015. The segment recorded charges to selling, general and administrative expenses of $0.8 million for accelerated depreciation at facilities closing due to real estate consolidation and third-party transaction costs related to the acquisition of Alfa Aesar, and $2.4 million of cash restructuring costs, primarily severance costs associated with headcount reductions. The segment also recorded $2.4 million of charges associated with a litigation-related matter of a divested business.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
Corporate
|
|
|
|
During the first nine months of 2015, the company recorded net restructuring and other costs by segment as follows:
|
|
(In millions)
|
Cost of
Revenues
|
Selling,
General and
Administrative
Expenses
|
Restructuring
and Other
Costs, Net
|
Total
|
||||||||||||
|
Life Sciences Solutions
|
$ | 1.8 | $ | 8.9 | $ | 31.1 | $ | 41.8 | ||||||||
|
Analytical Instruments
|
0.1 | — | 22.5 | 22.6 | ||||||||||||
|
Specialty Diagnostics
|
0.6 | (0.4 | ) | 6.3 | 6.5 | |||||||||||
|
Laboratory Products and Services
|
— | 1.6 | 7.7 | 9.3 | ||||||||||||
|
Corporate
|
— | 25.3 | 0.3 | 25.6 | ||||||||||||
| $ | 2.5 | $ | 35.4 | $ | 67.9 | $ | 105.8 | |||||||||
|
The components of net restructuring and other costs by segment are as follows:
|
|
Life Sciences Solutions
|
|
Analytical Instruments
|
|
In the first nine months of 2015, the Analytical Instruments segment recorded $22.6 million of net restructuring and other charges, $17.9 million of which were cash costs associated with abandoned facilities, including remediation and other closure costs, and, to a lesser extent, headcount reductions. The segment also recorded $4.6 million of non-cash expense primarily for real estate writedowns of abandoned facilities held for sale.
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
Specialty Diagnostics
|
|
In the first nine months of 2015, the Specialty Diagnostics segment recorded $6.5 million of net restructuring and other charges. The segment recorded charges to cost of revenues of $0.6 million for accelerated depreciation at facilities closing due to real estate consolidation; $0.4 million of income to selling, general and administrative expenses for changes in estimates of contingent consideration; and $6.3 million of restructuring and other costs, net, primarily cash costs for employee severance and other costs associated with headcount reductions, as well as consolidation of facilities in the U.S. and Europe.
|
|
Laboratory Products and Services
|
|
Corporate
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
(Unaudited)
|
|
Abandonment
|
||||||||||||||||
|
(In millions)
|
Severance
|
of Excess
Facilities
|
Other (a)
|
Total
|
||||||||||||
|
Pre-2014 Restructuring Plans
|
||||||||||||||||
|
Balance At December 31, 2014
|
$ | 6.2 | $ | 7.5 | $ | 1.8 | $ | 15.5 | ||||||||
|
Costs incurred in 2015 (b)
|
0.6 | 0.7 | 2.1 | 3.4 | ||||||||||||
|
Reserves reversed
|
(1.7 | ) | (0.1 | ) | (0.1 | ) | (1.9 | ) | ||||||||
|
Payments
|
(2.1 | ) | (2.2 | ) | (3.3 | ) | (7.6 | ) | ||||||||
|
Currency translation
|
(0.1 | ) | (0.2 | ) | (0.1 | ) | (0.4 | ) | ||||||||
|
Balance At September 26, 2015
|
$ | 2.9 | $ | 5.7 | $ | 0.4 | $ | 9.0 | ||||||||
|
2014 Restructuring Plans
|
||||||||||||||||
|
Balance At December 31, 2014
|
$ | 31.5 | $ | 2.3 | $ | 4.1 | $ | 37.9 | ||||||||
|
Costs incurred in 2015 (b)
|
8.9 | 1.3 | 5.0 | 15.2 | ||||||||||||
|
Reserves reversed
|
(7.1 | ) | (0.2 | ) | (1.6 | ) | (8.9 | ) | ||||||||
|
Payments
|
(30.3 | ) | (3.3 | ) | (5.4 | ) | (39.0 | ) | ||||||||
|
Currency translation
|
(0.8 | ) | (0.1 | ) | (0.1 | ) | (1.0 | ) | ||||||||
|
Balance At September 26, 2015
|
$ | 2.2 | $ | — | $ | 2.0 | $ | 4.2 | ||||||||
|
2015 Restructuring Plans
|
||||||||||||||||
|
Costs incurred in 2015 (b)
|
$ | 36.0 | $ | 11.9 | $ | 4.6 | $ | 52.5 | ||||||||
|
Payments
|
(25.9 | ) | (3.4 | ) | (3.4 | ) | (32.7 | ) | ||||||||
|
Balance At September 26, 2015
|
$ | 10.1 | $ | 8.5 | $ | 1.2 | $ | 19.8 | ||||||||
|
(a)
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
|
Forward-looking statements, within the meaning of Section 21E of the Securities Exchange Act of 1934 are made throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. While the company may elect to update forward-looking statements in the future, it specifically disclaims any obligation to do so, even if the company’s estimates change, and readers should not rely on those forward-looking statements as representing the company’s views as of any date subsequent to the date of the filing of this Quarterly Report.
|
|
A number of important factors could cause the results of the company to differ materially from those indicated by such forward-looking statements, including those detailed under the heading “Risk Factors” in Part II, Item 1A of this report on Form 10-Q.
|
|
Overview
|
|
The company develops, manufactures and sells a broad range of products that are sold worldwide. The company expands the product lines and services it offers by developing and commercializing its own technologies and by making strategic acquisitions of complementary businesses. The company’s continuing operations fall into four business segments (see Note 3): Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics and Laboratory Products and Services.
|
|
Recent Acquisitions and Divestitures
|
|
The company’s strategy is to augment internal growth at existing businesses with complementary acquisitions. The company’s principal recent acquisitions and divestitures are described below.
|
|
On February 3, 2014, the company completed the acquisition of Life Technologies Corporation for a total purchase price of $15.30 billion, net of cash acquired, including the assumption of $2.28 billion of debt. The company issued debt and common stock in late 2013 and early 2014 to partially fund the acquisition. Life Technologies was integrated into the Life Sciences Solutions segment and provides innovative products and services to customers conducting scientific research and genetic analysis, as well as those in applied markets, such as forensics and food safety testing. Life Technologies’ revenues totaled $3.87 billion in 2013.
|
|
On March 21, 2014, the company sold its legacy sera and media, gene modulation and magnetic beads businesses to GE Healthcare for $1.06 billion, net of cash divested. The sale of these businesses resulted in a pre-tax gain of approximately $761 million included in restructuring and other costs (income), net. The businesses fell principally in the Life Sciences Solutions segment. Divestiture of these businesses was a condition to obtaining antitrust approval for the Life Technologies acquisition. Revenues and operating income of the businesses sold were approximately $250 million and $64 million, respectively, for the year ended December 31, 2013 and $61 million and $12 million, respectively, in 2014 through the date of sale.
|
|
On August 15, 2014, the company sold its Cole-Parmer specialty channel business, part of the Laboratory Products and Services segment, for $480 million in cash, net of cash divested. The sale of this business resulted in a pre-tax gain of approximately $134 million, included in restructuring and other costs (income), net. Revenues and operating income of the business sold were approximately $232 million and $43 million, respectively, for the year ended December 31, 2013 and $149 million and $28 million, respectively, in 2014 through the date of sale.
|
|
On February 4, 2015, the company acquired Advanced Scientifics, Inc., a North America-based global provider of single-use technologies for customized bioprocessing solutions, for approximately $289 million. Advanced Scientifics was integrated into the Life Sciences Solutions segment and expands the company’s bioprocessing offerings. Revenues of Advanced Scientifics were approximately $80 million in 2014.
|
|
|
|
Overview of Results of Operations and Liquidity
|
|
Three Months Ended
|
Nine Months Ended
|
|||||||||||||||||||||||||||||||
|
September 26,
|
September 27,
|
September 26,
|
September 27,
|
|||||||||||||||||||||||||||||
|
(Dollars in millions)
|
2015
|
2014
|
2015
|
2014
|
||||||||||||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||||||||||
|
Life Sciences Solutions
|
$ | 1,080.4 | 26.2 | % | $ | 1,071.9 | 25.7 | % | $ | 3,229.6 | 26.2 | % | $ | 3,010.5 | 24.3 | % | ||||||||||||||||
|
Analytical Instruments
|
778.5 | 18.9 | % | 786.5 | 18.9 | % | 2,282.9 | 18.5 | % | 2,349.8 | 19.0 | % | ||||||||||||||||||||
|
Specialty Diagnostics
|
776.9 | 18.8 | % | 811.8 | 19.5 | % | 2,379.2 | 19.3 | % | 2,480.6 | 20.0 | % | ||||||||||||||||||||
|
Laboratory Products
and Services
|
1,638.2 | 39.7 | % | 1,628.7 | 39.0 | % | 4,844.9 | 39.3 | % | 4,918.6 | 39.7 | % | ||||||||||||||||||||
|
Eliminations
|
(150.8 | ) | (3.6 | )% | (127.5 | ) | (3.1 | )% | (423.7 | ) | (3.3 | )% | (362.7 | ) | (3.0 | )% | ||||||||||||||||
| $ | 4,123.2 | 100 | % | $ | 4,171.4 | 100 | % | $ | 12,312.9 | 100 | % | $ | 12,396.8 | 100 | % | |||||||||||||||||
|
Sales in the third quarter of 2015 were $4.12 billion, a decrease of $48 million from the third quarter of 2014. Aside from the effects of currency translation and acquisitions, net of dispositions (discussed in total and by segment under the caption “Results of Operations”), revenues in the third quarter of 2015 increased $186 million (4%) over the third quarter of 2014 revenues, primarily due to increased demand. Sales to customers in each of the company’s primary end markets grew. Demand from customers in pharmaceutical and biotech industries was particularly strong.
|
|
Revenues and operating income of the company’s non-U.S. operations are translated into U.S. dollars to report consolidated results. Based on weakening of currency exchange rates against the U.S. dollar that occurred in late 2014 and 2015, the company currently expects that there will be a significant adverse effect on reported amounts of revenues and operating income in the remainder of 2015 as a result of the stronger U.S. dollar.
|
|
In the third quarter of 2015, total company operating income and operating income margin were $563 million and 13.7%, respectively, compared with $640 million and 15.3%, respectively, in 2014. The decreases in operating income and margin were primarily due to a gain of $133 million on the sale of the Cole-Parmer businesses in the 2014 quarter and, to a lesser extent, unfavorable foreign currency exchange in 2015, offset in part by productivity improvements, net of inflationary cost increases. The company’s references throughout this discussion to productivity improvements generally refer to improved cost efficiencies from its Practical Process Improvement (PPI) business system, reduced costs resulting from global sourcing initiatives, a lower cost structure following restructuring actions, including headcount reductions and consolidation of facilities, low cost region manufacturing and, where applicable, acquisition cost synergies.
|
|
The company recorded a benefit from income taxes in the third quarter of 2015 including discrete benefits totaling $44 million related to additional prior year foreign tax and other credits as well as restructuring and other costs associated with the 2014 acquisition of Life Technologies. Due primarily to the non-deductibility of intangible asset amortization for tax purposes, the company’s cash payments for income taxes are higher than its income tax expense for financial reporting purposes and are expected to total $550 to $575 million in 2015. The provision for income taxes in the third quarter of 2014 included $137 million related to the gain on the sale of the Cole-Parmer business. Aside from the discrete tax on the gain, the company recorded a benefit from income taxes in the third quarter of 2014 due to restructuring and other costs associated with the acquisition of Life Technologies as well as an increase in the expected benefit from foreign tax credits. The effective tax rate in both periods was also affected by relatively significant earnings in lower tax jurisdictions.
|
|
Income from continuing operations increased to $477 million in the third quarter of 2015, compared to $470 million in the third quarter of 2014 primarily due to an increase in the income tax benefit in the 2015 period (discussed above) and, to a lesser extent, a reduction in other expense, net (discussed under the caption “Results of Operations”) offset substantially by the decrease in operating income in the 2015 period (discussed above).
|
|
During the first nine months of 2015, the company’s cash flow from operations totaled $1.59 billion, compared with $1.67 billion for the first nine months of 2014. The decrease resulted from higher payments for incentive compensation and interest following the Life Technologies acquisition as well as higher income tax payments, offset in part by cash disbursements in the 2014 period totaling $309 million related to the acquisition of Life Technologies, including severance obligations, third-party transaction/integration costs and monetizing certain equity awards held by Life Technologies employees at the date of acquisition.
|
|
As of September 26, 2015, the company’s short-term debt totaled $3.03 billion, including $2.30 billion of senior notes, due in the next twelve months and $0.73 billion of commercial paper obligations. The company has a revolving credit facility with a bank group that provides up to $2.00 billion of unsecured multi-currency revolving credit. If the company borrows under this facility, it intends to leave undrawn an amount equivalent to outstanding commercial paper to provide a source of funds in the event that commercial paper markets are not available. As of September 26, 2015, no borrowings were outstanding under the company’s revolving credit facility, although available capacity was reduced by approximately $62 million as a result of outstanding letters of credit. The company funded the fourth quarter 2015 acquisition of Alfa Aesar principally through additional commercial paper borrowings.
|
|
The company believes that its existing cash and cash equivalents of $503 million as of September 26, 2015 and its future cash flow from operations together with available borrowing capacity under its revolving credit agreement will be sufficient to meet the cash requirements of its existing businesses for the foreseeable future, including at least the next 24 months.
|
|
Critical Accounting Policies and Estimates
|
|
The company’s discussion and analysis of its financial condition and results of operations is based upon its financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent liabilities. Management believes the most complex and sensitive judgments, because of their significance to the consolidated financial statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements of the company’s Form 10-K for 2014, describe the significant accounting estimates and policies used in preparation of the consolidated financial statements. Actual results in these areas may differ from management’s estimates under different assumptions or conditions. There have been no significant changes in the company’s critical accounting policies during the first nine months of 2015.
|
|
Results of Operations
|
|
Third Quarter 2015 Compared With Third Quarter 2014
|
|
Continuing Operations
|
|
Three Months Ended
|
||||||||||||||||||||||||
|
September 26,
|
September 27,
|
Total
|
Currency
|
Acquisitions/
|
||||||||||||||||||||
|
(In millions)
|
2015
|
2014
|
Change
|
Translation
|
Divestitures
|
Operations
|
||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||
|
Life Sciences Solutions
|
$ | 1,080.4 | $ | 1,071.9 | $ | 8.5 | $ | (70.3 | ) | $ | 27.6 | $ | 51.2 | |||||||||||
|
Analytical Technologies
|
778.5 | 786.5 | (8.0 | ) | (45.6 | ) | 0.6 | 37.0 | ||||||||||||||||
|
Specialty Diagnostics
|
776.9 | 811.8 | (34.9 | ) | (49.5 | ) | 2.8 | 11.8 | ||||||||||||||||
|
Laboratory Products
and Services
|
1,638.2 | 1,628.7 | 9.5 | (77.7 | ) | (25.7 | ) | 112.9 | ||||||||||||||||
|
Eliminations
|
(150.8 | ) | (127.5 | ) | (23.3 | ) | 3.5 | — | (26.8 | ) | ||||||||||||||
|
Consolidated Revenues
|
$ | 4,123.2 | $ | 4,171.4 | $ | (48.2 | ) | $ | (239.6 | ) | $ | 5.3 | $ | 186.1 | ||||||||||
|
Sales in the third quarter of 2015 were $4.12 billion, a decrease of $48 million from the third quarter of 2014. The unfavorable effects of currency translation resulted in a decrease in revenues of $240 million in 2015. Sales increased $5 million due to acquisitions, net of divestitures. Aside from the effects of currency translation, acquisitions and divestitures, revenues increased $186 million (4%) primarily due to increased demand. Sales to customers in each of the company’s primary end markets grew. Demand from customers in pharmaceutical and biotech industries was particularly strong. Sales growth was moderate in North America and Europe and strong in Asia. Revenues and operating income of the company’s non-U.S. operations are translated into U.S. dollars to report consolidated results. Based on weakening of currency exchange rates against the U.S. dollar that occurred in late 2014 and early 2015, the company currently expects that there will be a significant adverse effect on reported amounts of revenues and operating income in the remainder of 2015 as a result of the stronger U.S. dollar.
|
|
In the third quarter of 2015, total company operating income and operating income margin were $563 million and 13.7%, respectively, compared with $640 million and 15.3%, respectively, in 2014. The decreases in operating income and margin were primarily due to a gain of $133 million on the sale of the Cole-Parmer businesses in the 2014 quarter and, to a lesser extent, unfavorable foreign currency exchange in 2015, offset in part by productivity improvements, net of inflationary cost increases. The company’s references throughout this discussion to productivity improvements generally refer to improved cost efficiencies from its Practical Process Improvement (PPI) business system, reduced costs resulting from global sourcing initiatives, a lower cost structure following restructuring actions, including headcount reductions and consolidation of facilities, low cost region manufacturing and, where applicable, acquisition cost synergies.
|
|
In the third quarter of 2015, the company recorded restructuring and other costs, net, of $41 million primarily for charges associated with product liability litigation and costs of streamlining operations, including severance and other costs associated with headcount reductions at several businesses. These charges also were for actions to achieve synergies from the Life Technologies acquisition (see Note 14).
|
|
In the third quarter of 2014, the company recorded restructuring and other income, net, of $88 million, including net gains on the sale of businesses of $133 million, offset in part by $2 million of charges to cost of revenues primarily from accelerated depreciation at facilities closing due to real estate consolidation and the sale of inventories revalued at the date of acquisition, and $20 million of charges to selling, general and administrative expenses primarily for transaction costs related to the acquisition of Life Technologies and, to a lesser extent, a charge associated with product liability litigation as well as for changes in estimates of contingent consideration for an acquisition. The company incurred $22 million of cash restructuring costs primarily for actions to achieve synergies from the Life Technologies acquisition. In addition, the company’s other businesses incurred costs for continued headcount reductions and facility consolidations in an effort to streamline operations, including severance at several businesses and abandoned facility expenses at businesses that have been or are being consolidated, including the consolidation of operations within several facilities in the U.S., Europe and Asia.
|
|
As of October 30, 2015, the company has identified restructuring actions that will result in additional charges of approximately $65 million, primarily in the remainder of 2015 and the first half of 2016, and expects to identify additional actions during the remainder of 2015. The additional charges will be recorded when specified criteria are met, such as abandonment of facilities.
|
|
Segment Results
|
|
The company’s management evaluates segment operating performance using operating income before certain charges/credits to cost of revenues and selling, general and administrative expenses, principally associated with acquisition-related activities; restructuring and other costs/income including costs arising from facility consolidations such as severance and abandoned lease expense and gains and losses from the sale of real estate and product lines; and amortization of acquisition-related intangible assets. The company also refers to this measure as adjusted operating income. The company uses this measure because it helps management understand and evaluate the segments’ core operating results and facilitate comparison of performance for determining compensation (Note 3). Accordingly, the following segment data is reported on this basis.
|
|
Three Months Ended
|
||||||||||||
|
September 26,
|
September 27,
|
|||||||||||
|
(Dollars in millions)
|
2015
|
2014
|
Change
|
|||||||||
|
Revenues
|
||||||||||||
|
Life Sciences Solutions
|
$ | 1,080.4 | $ | 1,071.9 | 1 | % | ||||||
|
Analytical Instruments
|
778.5 | 786.5 | (1 | )% | ||||||||
|
Specialty Diagnostics
|
776.9 | 811.8 | (4 | )% | ||||||||
|
Laboratory Products and Services
|
1,638.2 | 1,628.7 | 1 | % | ||||||||
|
Eliminations
|
(150.8 | ) | (127.5 | ) | 18 | % | ||||||
|
Consolidated Revenues
|
$ | 4,123.2 | $ | 4,171.4 | (1 | )% | ||||||
|
Segment Income
|
||||||||||||
|
Life Sciences Solutions
|
$ | 332.7 | $ | 306.3 | 9 | % | ||||||
|
Analytical Instruments
|
146.5 | 137.8 | 6 | % | ||||||||
|
Specialty Diagnostics
|
204.9 | 224.3 | (9 | )% | ||||||||
|
Laboratory Products and Services
|
249.6 | 246.6 | 1 | % | ||||||||
|
Subtotal Reportable Segments
|
933.7 | 915.0 | 2 | % | ||||||||
|
Cost of Revenues Charges
|
(0.8 | ) | (2.1 | ) | ||||||||
|
Selling, General and Administrative Charges, Net
|
(24.6 | ) | (20.3 | ) | ||||||||
|
Restructuring and Other Costs, Net
|
(15.5 | ) | 110.6 | |||||||||
|
Amortization of Acquisition-related Intangible Assets
|
(329.9 | ) | (362.9 | ) | ||||||||
|
Consolidated Operating Income
|
$ | 562.9 | $ | 640.3 | (12 | )% | ||||||
|
Reportable Segments Operating Income Margin
|
22.6 | % | 21.9 | % | ||||||||
|
Consolidated Operating Income Margin
|
13.7 | % | 15.3 | % | ||||||||
|
Income from the company’s reportable segments increased 2% to $934 million in the third quarter of 2015 due primarily to productivity improvements, net of inflationary costs increases and, to a lesser extent, profit on higher sales in local currencies offset in part by the unfavorable impact of foreign exchange.
|
|
Life Sciences Solutions
|
|
Three Months Ended
|
||||||||||||
|
September 26,
|
September 27,
|
|||||||||||
|
(Dollars in millions)
|
2015
|
2014
|
Change
|
|||||||||
|
Revenues
|
$ | 1,080.4 | $ | 1,071.9 | 1 | % | ||||||
|
Operating Income Margin
|
30.8 | % | 28.6 | % |
2.2pt
|
|||||||
|
Sales in the Life Sciences Solutions segment increased $9 million to $1.08 billion in the third quarter of 2015. Sales increased $51 million (5%) due to higher revenues at existing businesses and $28 million due to an acquisition offset in part by a decrease of $70 million due to the unfavorable effects of currency translation. The increase in revenue at existing businesses was primarily due to increased demand for biosciences products as well as bioprocess production products.
|
|
Operating income margin was 30.8% in the third quarter of 2015 and 28.6% in the third quarter of 2014. The increase resulted primarily from productivity improvements (including acquisition cost synergies), net of inflationary cost increases and, to a lesser extent, favorable sales mix, offset by unfavorable foreign exchange effects.
|
|
Analytical Instruments
|
|
Three Months Ended
|
||||||||||||
|
September 26,
|
September 27,
|
|||||||||||
|
(Dollars in millions)
|
2015
|
2014
|
Change
|
|||||||||
|
Revenues
|
$ | 778.5 | $ | 786.5 | (1 | )% | ||||||
|
Operating Income Margin
|
18.8 | % | 17.5 | % |
1.3pt
|
|||||||
|
Sales in the Analytical Instruments segment decreased $8 million to $779 million in the third quarter of 2015. Sales decreased $46 million due to the unfavorable effects of currency translation offset in part by $37 million (5%) of higher revenues at existing businesses and $1 million due to acquisitions. The increase in revenue at existing businesses was primarily due to increased demand for chromatography products and, to a lesser extent, sales of service offerings. These increases were offset in part by lower sales of chemical analysis products due primarily to softness in certain commodity materials markets.
|
|
Operating income margin was 18.8% in the third quarter of 2015 and 17.5% in the third quarter of 2014. The increase resulted primarily from productivity improvements, net of inflationary cost increases and, to a lesser extent, favorable sales mix, offset in part by the impact of unfavorable foreign currency exchange and strategic growth investments.
|
|
Specialty Diagnostics
|
|
Three Months Ended
|
||||||||||||
|
September 26,
|
September 27,
|
|||||||||||
|
(Dollars in millions)
|
2015
|
2014
|
Change
|
|||||||||
|
Revenues
|
$ | 776.9 | $ | 811.8 | (4 | )% | ||||||
|
Operating Income Margin
|
26.4 | % | 27.6 | % |
(1.2)pt
|
|||||||
|
Sales in the Specialty Diagnostics segment decreased $35 million to $777 million in the third quarter of 2015. Sales decreased $50 million due to the unfavorable effects of currency translation offset in part by $12 million (1%) due to higher revenues at existing businesses and $3 million due to an acquisition. The increase in revenue at existing businesses was primarily due to increased demand for clinical diagnostics and products sold through the segment’s healthcare market channel, offset in part by lower sales due to the expiration, in late 2014, of an OEM contract following the acquisition of the customer by a competitor.
|
|
Operating income margin was 26.4% in the third quarter of 2015 and 27.6% in the third quarter of 2014. The decrease resulted primarily from strategic growth investments and unfavorable foreign currency exchange, offset in part by productivity improvements, net of inflationary cost increases.
|
|
Three Months Ended
|
||||||||||||
|
September 26,
|
September 27,
|
|||||||||||
|
(Dollars in millions)
|
2015
|
2014
|
Change
|
|||||||||
|
Revenues
|
$ | 1,638.2 | $ | 1,628.7 | 1 | % | ||||||
|
Operating Income Margin
|
15.2 | % | 15.1 | % |
0.1pt
|
|||||||
|
Sales in the Laboratory Products and Services segment increased $9 million to $1.64 billion in the third quarter of 2015. Sales increased $113 million (7%) due to higher revenues at existing businesses offset in part by decreases of $78 million due to the unfavorable effects of currency translation and $26 million due to a divestiture. The increase in revenue at existing businesses was primarily due to strong growth in each of the segment’s principal businesses.
|
|
Operating income margin was 15.2% in the third quarter of 2015 and 15.1% in the third quarter of 2014. The increase resulted primarily from productivity improvements, net of inflationary cost increases, offset in part by strategic growth investments.
|
|
Other Expense, Net
|
|
The company reported other expense, net, of $95 million and $101 million in the third quarter of 2015 and 2014, respectively (Note 4). Other expense, net includes interest income, interest expense, equity in earnings of unconsolidated subsidiaries, investment gains and losses, and other items, net. Interest expense decreased $16 million primarily due to a reduction in outstanding debt and lower interest rates. In 2015, other items, net includes a $3 million loss on the early extinguishment of debt.
|
|
Provision for Income Taxes
|
|
The company recorded a benefit from income taxes in the third quarter of 2015 including discrete benefits totaling $44 million related to additional prior year foreign tax and other credits as well as restructuring and other costs associated with the 2014 acquisition of Life Technologies. Due primarily to the non-deductibility of intangible asset amortization for tax purposes, the company’s cash payments for income taxes are higher than its income tax expense for financial reporting purposes and are expected to total $550 to $575 million in 2015. The provision for income taxes in the third quarter of 2014 included $137 million related to the gain on the sale of the Cole-Parmer business. Aside from the discrete tax on the gain, the company recorded a benefit from income taxes in the third quarter of 2014 due to restructuring and other costs associated with the acquisition of Life Technologies as well as an increase in the expected benefit from foreign tax credits. The effective tax rate in both periods was also affected by relatively significant earnings in lower tax jurisdictions.
|
|
The company has operations and a taxable presence in approximately 50 countries outside the U.S. All of these countries except one have a lower tax rate than the U.S. The countries in which the company has a material presence that have significantly lower tax rates than the U.S. include Germany, the Netherlands, Singapore, Sweden, Switzerland and the United Kingdom. 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. Based on the dispersion of the company’s non-U.S. income tax provision among many countries, the company believes that a change in the statutory tax rate in any individual country is not likely to materially affect the company’s income tax provision or net income, aside from any resulting one-time adjustment to the company’s deferred tax balances to reflect a new rate.
|
|
First Nine Months of 2015 Compared With First Nine Months of 2014
|
|
Continuing Operations
|
|
Nine Months Ended
|
||||||||||||||||||||||||
|
September 26,
|
September 27,
|
Total
|
Currency
|
Acquisitions/
|
||||||||||||||||||||
|
(In millions)
|
2015
|
2014
|
Change
|
Translation
|
Divestitures
|
Operations
|
||||||||||||||||||
|
Revenues
|
||||||||||||||||||||||||
|
Life Sciences Solutions
|
$ | 3,229.6 | $ | 3,010.5 | $ | 219.1 | $ | (205.3 | ) | $ | 285.6 | $ | 138.8 | |||||||||||
|
Analytical Instruments
|
2,282.9 | 2,349.8 | (66.9 | ) | (145.8 | ) | 3.3 | 75.6 | ||||||||||||||||
|
Specialty Diagnostics
|
2,379.2 | 2,480.6 | (101.4 | ) | (158.9 | ) | 7.7 | 49.8 | ||||||||||||||||
|
Laboratory Products
and Services
|
4,844.9 | 4,918.6 | (73.7 | ) | (238.0 | ) | (131.6 | ) | 295.9 | |||||||||||||||
|
Eliminations
|
(423.7 | ) | (362.7 | ) | (61.0 | ) | 11.0 | (7.1 | ) | (64.9 | ) | |||||||||||||
|
Consolidated Revenues
|
$ | 12,312.9 | $ | 12,396.8 | $ | (83.9 | ) | $ | (737.0 | ) | $ | 157.9 | $ | 495.2 | ||||||||||
|
Sales in the first nine months of 2015 were $12.31 billion, a decrease of $84 million from the first nine months of 2014. The unfavorable effects of currency translation resulted in a decrease in revenues of $737 million in 2015. Sales increased $158 million due to acquisitions, principally Life Technologies, net of divestitures. Aside from the effects of currency translation, acquisitions and divestitures, revenues increased $495 million (4%) primarily due to increased demand. Sales to customers in the company’s primary end markets grew. Demand from customers in pharmaceutical and biotech industries was particularly strong. Sales growth was moderate in North America and Europe and strong in Asia.
|
|
In the first nine months of 2015, total company operating income and operating income margin were $1.65 billion and 13.4%, respectively, compared with $1.86 billion and 15.0%, respectively, in the first nine months of 2014. The decreases in operating income and operating income margin were primarily due to gains of $762 million on the sale of businesses in the 2014 period, offset in part by $421 million of charges in the 2014 period associated with the February 2014 acquisition of Life Technologies. The unfavorable impact of foreign currency exchange also contributed to the decrease in profitability. These factors that reduced operating income in 2015 were offset in part by productivity improvements, net of inflationary cost increases and, to a lesser extent, profit on higher sales in local currencies.
|
|
In the first nine months of 2015, the company recorded restructuring and other costs, net, of $106 million, including $3 million of charges to cost of revenues for accelerated depreciation at facilities closing due to real estate consolidation and the sale of inventories revalued at the date of acquisition; $35 million of charges to selling, general and administrative expenses primarily for charges associated with product liability litigation, third-party transaction and integration costs related to the acquisitions of Life Technologies and Alfa Aesar, and, to a lesser extent, accelerated depreciation at facilities closing due to real estate consolidation. In addition, the company recorded $66 million of cash restructuring costs primarily for actions to achieve synergies from the Life Technologies acquisition and for abandoned facilities costs associated with a manufacturing facility in the U.S. The company’s other businesses incurred costs for continued headcount reductions and facility consolidations in an effort to streamline operations, including severance at several businesses and abandoned facility expenses at businesses that have been or are being consolidated, including the consolidation of operations within several facilities in the U.S., Europe and Asia. The company also recorded charges for litigation-related matters associated with acquired and divested business. These costs were partially offset by gains on the sale of a small product line and real estate (see Note 14).
|
|
In the first nine months of 2014, the company recorded restructuring and other income, net, of $187 million, including net gains on the sale of businesses of $894 million, offset in part by $327 million of charges to cost of revenues primarily related to the sale of inventories revalued at the date of acquisition and $118 million of charges to selling, general and administrative expenses primarily for transaction costs related to the acquisition of Life Technologies. The company incurred $249 million of cash restructuring costs primarily associated with the Life Technologies acquisition including cash compensation to monetize certain equity awards held by Life Technologies employees at the date of acquisition and severance obligations to former executives and employees of Life Technologies. In addition, the company’s other businesses incurred costs for continued headcount reductions and facility consolidations in an effort to streamline operations, including severance at several businesses and abandoned facility expenses at businesses that were being consolidated, including the consolidation of operations within several facilities in the U.S., Europe and Asia.
|
|
Segment Results
|
|
Nine Months Ended
|
||||||||||||
|
September 26,
|
September 27,
|
|||||||||||
|
(Dollars in millions)
|
2015
|
2014
|
Change
|
|||||||||
|
Revenues
|
||||||||||||
|
Life Sciences Solutions
|
$ | 3,229.6 | $ | 3,010.5 | 7 | % | ||||||
|
Analytical Instruments
|
2,282.9 | 2,349.8 | (3 | )% | ||||||||
|
Specialty Diagnostics
|
2,379.2 | 2,480.6 | (4 | )% | ||||||||
|
Laboratory Products and Services
|
4,844.9 | 4,918.6 | (1 | )% | ||||||||
|
Eliminations
|
(423.7 | ) | (362.7 | ) | 17 | % | ||||||
|
Consolidated Revenues
|
$ | 12,312.9 | $ | 12,396.8 | (1 | )% | ||||||
|
Segment Income
|
||||||||||||
|
Life Sciences Solutions
|
$ | 954.9 | $ | 850.0 | 12 | % | ||||||
|
Analytical Instruments
|
407.8 | 399.1 | 2 | % | ||||||||
|
Specialty Diagnostics
|
646.2 | 681.7 | (5 | )% | ||||||||
|
Laboratory Products and Services
|
731.7 | 738.3 | (1 | )% | ||||||||
|
Subtotal Reportable Segments
|
2,740.6 | 2,669.1 | 3 | % | ||||||||
|
Cost of Revenues Charges
|
(2.5 | ) | (326.7 | ) | ||||||||
|
Selling, General and Administrative Charges, Net
|
(35.4 | ) | (118.0 | ) | ||||||||
|
Restructuring and Other Income (Costs), Net
|
(67.9 | ) | 631.9 | |||||||||
|
Amortization of Acquisition-related Intangible Assets
|
(988.8 | ) | (992.4 | ) | ||||||||
|
Consolidated Operating Income
|
$ | 1,646.0 | $ | 1,863.9 | (12 | )% | ||||||
|
Reportable Segments Operating Income Margin
|
22.3 | % | 21.5 | % | ||||||||
|
Consolidated Operating Income Margin
|
13.4 | % | 15.0 | % | ||||||||
|
Income from the company’s reportable segments increased 3% to $2.74 billion in the first nine months of 2015 due primarily to productivity improvements, net of inflationary costs increases and, to a lesser extent, profit on higher sales in local currencies, offset in part by the unfavorable impact of foreign exchange and strategic growth investments.
|
|
Life Sciences Solutions
|
|
Nine Months Ended
|
||||||||||||
|
September 26,
|
September 27,
|
|||||||||||
|
(Dollars in millions)
|
2015
|
2014
|
Change
|
|||||||||
|
Revenues
|
$ | 3,229.6 | $ | 3,010.5 | 7 | % | ||||||
|
Operating Income Margin
|
29.6 | % | 28.2 | % |
1.4pt
|
|||||||
|
Sales in the Life Sciences Solutions segment increased $219 million to $3.23 billion in the first nine months of 2015 primarily due to the acquisition of Life Technologies, net of divestitures. Had the acquisition of Life Technologies been completed at the beginning of 2013, pro forma revenues for the 2015 period would have decreased $50 million compared to pro forma 2014 revenues, including a decrease of $220 million due to the unfavorable effects of currency translation, offset in part by an increase of $150 million (5%) due to higher revenues at existing businesses and an increase of $19 million due to other acquisitions, net of dispositions. The increase in pro forma revenue at existing businesses was primarily due to increased demand for biosciences products as well as bioprocess production products.
|
|
Operating income margin was 29.6% in the first nine months of 2015 compared to 28.2% in the first nine months of 2014. The increase resulted primarily from productivity improvements (including acquisition cost synergies), net of inflationary cost increases and favorable sales mix. These increases were offset in part by the unfavorable impact of foreign currency exchange and, to a lesser extent, by exclusion in 2014 of January’s lower margin results for Life Technologies. Results for January commonly have a lower margin rate than results for the balance of the quarter, due to the phasing of revenue and costs.
|
|
Analytical Instruments
|
|
Nine Months Ended
|
||||||||||||
|
September 26,
|
September 27,
|
|||||||||||
|
(Dollars in millions)
|
2015
|
2014
|
Change
|
|||||||||
|
Revenues
|
$ | 2,282.9 | $ | 2,349.8 | (3 | )% | ||||||
|
Operating Income Margin
|
17.9 | % | 17.0 | % |
0.9pt
|
|||||||
|
Sales in the Analytical Instruments segment decreased $67 million to $2.28 billion in the first nine months of 2015. Sales decreased $146 million due to the unfavorable effects of currency translation offset in part by increases of $76 million (3%) due to higher revenues at existing businesses and $3 million due to acquisitions. The increase in revenue at existing businesses was primarily due to increased demand for chromatography products and, to a lesser extent, sales of service offerings. These increases were offset in part by modestly lower sales of chemical analysis products due primarily to softness in certain commodity materials markets.
|
|
Operating income margin was 17.9% in the first nine months of 2015 compared to 17.0% in the first nine months of 2014. The increase resulted primarily from productivity improvements, net of inflationary cost increases, offset in part by strategic growth investments and the impact of unfavorable foreign currency exchange.
|
|
Specialty Diagnostics
|
|
Nine Months Ended
|
||||||||||||
|
September 26,
|
September 27,
|
|||||||||||
|
(Dollars in millions)
|
2015
|
2014
|
Change
|
|||||||||
|
Revenues
|
$ | 2,379.2 | $ | 2,480.6 | (4 | )% | ||||||
|
Operating Income Margin
|
27.2 | % | 27.5 | % |
(0.3)pt
|
|||||||
|
Sales in the Specialty Diagnostics segment decreased $101 million to $2.38 billion in the first nine months of 2015. Sales decreased $159 million due to the unfavorable effects of currency translation offset in part by $50 million (2%) due to higher revenues at existing businesses and $8 million due to an acquisition net of a divestiture. The increase in revenue at existing businesses was primarily due to increased demand for clinical diagnostics products, products sold through the segment’s healthcare market channel and immunodiagnostics products. These increases were offset in part by lower sales due to the expiration, in late 2014, of an OEM contract following the acquisition of the customer by a competitor.
|
|
Operating income margin was 27.2% in the first nine months of 2015 and 27.5% in the first nine months of 2014. The decrease resulted primarily from strategic growth investments and unfavorable foreign currency exchange, offset in part by productivity improvements, net of inflationary cost increases.
|
|
Laboratory Products and Services
|
|
Nine Months Ended
|
||||||||||||
|
September 26,
|
September 27,
|
|||||||||||
|
(Dollars in millions)
|
2015
|
2014
|
Change
|
|||||||||
|
Revenues
|
$ | 4,844.9 | $ | 4,918.6 | (1 | )% | ||||||
|
Operating Income Margin
|
15.1 | % | 15.0 | % |
0.1pt
|
|||||||
|
Sales in the Laboratory Products and Services segment decreased $74 million to $4.84 billion in the first nine months of 2015. Sales decreased $238 million due to the unfavorable effects of currency translation and $132 million due to a disposition. These decreases were offset in part by $296 million (6%) due to higher revenues at existing businesses. The increase in revenue at existing businesses was primarily due to increased demand for products in each of the segment’s principal businesses.
|
|
Operating income margin was 15.1% in the first nine months of 2015 and 15.0% in the first nine months of 2014. The increase was primarily due to productivity improvements, net of inflationary cost increases offset in part by strategic growth investments and unfavorable sales mix.
|
|
Other Expense, Net
|
|
The company reported other expense, net, of $292 million and $314 million in the first nine months of 2015 and 2014, respectively (Note 4). Interest expense decreased $52 million primarily due to a reduction in outstanding debt and effective interest rates. In 2015, other items, net includes costs of $7.5 million associated with entering into interest rate swap arrangements and a $6 million loss on the early extinguishment of debt. In 2014, other items, net includes net gains of $9 million on the sale of investments.
|
|
Provision for Income Taxes
|
|
The company recorded a benefit from income taxes in the first nine months of 2015. In 2015, the company implemented tax planning initiatives related to non-U.S. subsidiaries. These initiatives resulted in additional foreign tax credits of $112 million, offset in part by additional U.S. income taxes of $39 million on the related foreign income (net benefit of $73 million), which was a discrete item that reduced the company’s effective rate by 5.4 percentage points. In addition, the company recorded discrete benefits totaling $51 million, or 3.8 percentage points, related to additional prior year foreign tax and other credits as well as restructuring and other costs associated with the 2014 acquisition of Life Technologies. Based on the discrete items described above, and currently forecasted rates of profitability in the countries in which the company conducts business, the company expects to record a benefit from income taxes for the full year 2015. The company’s effective tax rate was 16.7% in the first nine months of 2014. The provision for income taxes in the 2014 period includes $390 million related to gains on the sales of businesses. Aside from the discrete tax on the gains, the company had a benefit from income taxes. In the first nine months of 2014 the company recognized a discrete tax benefit of $15.4 million, or 1.0 percentage points, attributable to tax rulings related to non-U.S. subsidiaries. In the first nine months of 2014 the company implemented tax planning initiatives related to non-U.S. subsidiaries. The majority of the benefit derived from these initiatives resulted in additional foreign tax credits with benefits of $24.0 million which was a discrete item that reduced the company’s effective tax rate by 1.5 percentage points. The tax provision in the 2015 and 2014 periods were favorably affected by $13.5 million, or 1.0 percentage points, and $10.6 million, or 0.7 percentage points, respectively, as a result of adjustments to deferred tax balances due to changes in tax rates. The effective tax rate in both periods was also affected by relatively significant earnings in lower tax jurisdictions.
|
|
Recent Accounting Pronouncements
|
|
A description of recently issued accounting standards is included under the heading “Recent Accounting Pronouncements” in Note 1.
|
|
Contingent Liabilities
|
|
The company is contingently liable with respect to certain legal proceedings and related matters. An unfavorable outcome that differs materially from current accrual estimates, if any, for one or more of the matters described under the headings “Product Liability, Workers Compensation and Other Personal Injury Matters” and “Intellectual Property Matters” in Note 10 could have a material adverse effect on the company’s financial position as well as its results of operations and cash flows.
|
|
Liquidity and Capital Resources
|
|
Consolidated working capital was $0.29 billion at September 26, 2015, compared with $1.19 billion at December 31, 2014. Included in working capital were cash and cash equivalents of $503 million at September 26, 2015 and $1.34 billion at December 31, 2014. The decrease in working capital is primarily due to an increase in short-term debt of $822 million.
|
|
First Nine Months of 2015
|
|
Cash provided by operating activities was $1.59 billion during the first nine months of 2015. Increases in accounts receivable and inventories used cash of $146 million and $175 million, respectively, primarily to support growth in sales in local currencies. An increase in other assets used cash of $214 million primarily related to the timing of tax refunds. Other liabilities decreased by $236 million primarily due to the timing of payments for incentive compensation and income taxes. Cash payments for income taxes increased to $426 million during the first nine months of 2015, compared with $321 million in 2014. The company made cash contributions to its pension and postretirement benefit plans totaling $26 million during the first nine months of 2015. Payments for restructuring actions, principally severance costs and lease and other expenses of real estate consolidation, used cash of $79 million during the first nine months of 2015.
|
|
During the first nine months of 2015, the company’s investing activities used $576 million of cash. Acquisitions used cash of $306 million. The company’s investing activities also included the purchase of $294 million of property, plant and equipment. On September 30, 2015, the company acquired Alfa Aesar for £257 million (approximately $389 million) in cash.
|
|
The company’s financing activities used $1.75 billion of cash during the first nine months of 2015. Repayments of long-term debt totaled $2.48 billion. Issuance of euro denominated senior notes provided cash of $543 million and an increase in commercial paper obligations provided cash of $726 million. The company’s financing activities also included the repurchase of $500 million of the company’s common stock and the payment of $181 million in cash dividends, offset in part by $97 million of proceeds from employee stock option exercises. On November 8, 2012, the Board of Directors authorized the repurchase of up to $1.00 billion of the company’s common stock beginning January 1, 2013. At September 26, 2015, $410 million was available for future repurchases of the company’s common stock under this authorization.
|
|
The company’s commitments for purchases of property, plant and equipment, contractual obligations and other commercial commitments did not change materially between December 31, 2014 and September 26, 2015. The company expects that for all of 2015, expenditures for property, plant and equipment, net of disposals, will approximate between $395 to $410 million.
|
|
As of September 26, 2015, the company’s short-term debt totaled $3.03 billion, including $2.30 billion of senior notes, due in the next twelve months and $0.73 billion of commercial paper obligations. The company has a revolving credit facility with a bank group that provides up to $2.00 billion of unsecured multi-currency revolving credit. If the company borrows under this facility, it intends to leave undrawn an amount equivalent to outstanding commercial paper to provide a source of funds in the event that commercial paper markets are not available. As of September 26, 2015, no borrowings were outstanding under the company’s revolving credit facility, although available capacity was reduced by approximately $62 million as a result of outstanding letters of credit. The company funded the fourth quarter 2015 acquisition of Alfa Aesar principally through additional commercial paper borrowings.
|
|
Approximately half of the company’s cash balances and cash flows from operations are from outside the U.S. The company uses its non-U.S. cash for needs outside of the U.S. including acquisitions and repayment of acquisition-related intercompany debt to the U.S. In addition, the company also transfers cash to the U.S. using non-taxable returns of capital as well as dividends where the related U.S. foreign tax credit equals or exceeds any tax cost arising from the dividends. As a result of using such means of transferring cash to the U.S., the company does not expect any material adverse liquidity effects from its significant non-U.S. cash balances for the foreseeable future.
|
|
The company believes that its existing cash and cash equivalents of $503 million as of September 26, 2015 and its future cash flow from operations together with available borrowing capacity under its revolving credit agreement will be sufficient to meet the cash requirements of its existing businesses for the foreseeable future, including at least the next 24 months.
|
|
First Nine Months of 2014
|
|
Cash provided by operating activities was $1.67 billion during the first nine months of 2014. Increases in accounts receivable and inventories used cash of $117 million and $109 million, respectively, primarily to support growth in sales. Other assets decreased by $206 million primarily due to collection of tax refunds including those related to legacy Life Technologies’ operations. Other liabilities increased by $305 million primarily due to the timing of payments for income taxes. In the first nine months of 2014, the company made cash payments including monetizing certain equity awards, severance obligations and transaction costs totaling $309 million related to the acquisition of Life Technologies. The company made cash contributions to its pension and postretirement benefit plans totaling $37 million during the first nine months of 2014. Cash payments for income taxes totaled $321 million.
|
|
During the first nine months of 2014, the company’s investing activities used $11.66 billion of cash, principally for the acquisition of Life Technologies. Acquisitions used cash of $13.06 billion. Proceeds from the sale of businesses provided $1.52 billion. The company’s investing activities also included the purchase of $271 million of property, plant and equipment.
|
|
The company’s financing activities provided $4.71 billion of cash during the first nine months of 2014. To partially fund the acquisition of Life Technologies, the company borrowed $5.00 billion under an unsecured term loan and issued 34.9 million shares of its common stock for net proceeds of $2.94 billion in cash. Repayments of long-term debt, principally the term loan, totaled $3.43 billion. An increase in commercial paper obligations provided cash of $212 million. The company’s financing activities also included the receipt of $133 million of proceeds from employee stock option exercises offset by the payment of $175 million in cash dividends.
|
|
Item 3. Quantitative and Qualitative Disclosures About Market Risk
|
|
The company’s exposure to market risk from changes in interest rates, currency exchange rates and commodity prices has not changed materially from its exposure at year-end 2014.
|
|
Item 4. Controls and Procedures
|
|
Management’s Evaluation of Disclosure Controls and Procedures
|
|
The company’s management, with the participation of the company’s chief executive officer and chief financial officer, evaluated the effectiveness of the company’s disclosure controls and procedures as of September 26, 2015. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of the company’s disclosure controls and procedures as of September 26, 2015, the company’s chief executive officer and chief financial officer concluded that, as of such date, the company’s disclosure controls and procedures were effective at the reasonable assurance level.
|
|
Changes in Internal Control over Financial Reporting
|
|
There have been no changes in the company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the fiscal quarter ended September 26, 2015, that have materially affected or are reasonably likely to materially affect the company’s internal control over financial reporting.
|
|
PART II OTHER INFORMATION
|
|
Item 1. Legal Proceedings
|
|
There are various lawsuits and claims against the company involving product liability, intellectual property, employment, and contractual issues. The company settled two of these disputes (those with Esoterix Genetic Laboratories (and in one case, The Johns Hopkins University)) on September 4, 2015, and the cases involving the parties were dismissed with prejudice on September 21, 2015. See “Note 10 to our Consolidated Financial Statements – Commitments and Contingencies.”
|
|
Item 1A. Risk Factors
|
|
Set forth below are the risks that we believe are material to our investors. This section contains forward-looking statements. You should refer to the explanation of the qualifications and limitations on forward-looking statements beginning on page 32.
|
|
We must develop new products, adapt to rapid and significant technological change and respond to introductions of new products by competitors to remain competitive. Our growth strategy includes significant investment in and expenditures for product development. We sell our products in several industries that are characterized by rapid and significant technological changes, frequent new product and service introductions and enhancements and evolving industry standards. Competitive factors include technological innovation, price, service and delivery, breadth of product line, customer support, e-business capabilities and the ability to meet the special requirements of customers. Our competitors may adapt more quickly to new technologies and changes in customers’ requirements than we can. Without the timely introduction of new products, services and enhancements, our products and services will likely become technologically obsolete over time, in which case our revenue and operating results would suffer.
|
|
Many of our existing products and those under development are technologically innovative and require significant planning, design, development and testing at the technological, product and manufacturing-process levels. Our customers use many of our products to develop, test and manufacture their own products. As a result, we must anticipate industry trends and develop products in advance of the commercialization of our customers’ products. If we fail to adequately predict our customers’ needs and future activities, we may invest heavily in research and development of products and services that do not lead to significant revenue.
|
|
It may be difficult for us to implement our strategies for improving internal growth. Some of the markets in which we compete have been flat or declining over the past several years. To address this issue, we are pursuing a number of strategies to improve our internal growth, including:
|
| ● | strengthening our presence in selected geographic markets; | ||
| ● | allocating research and development funding to products with higher growth prospects; | ||
| ● | developing new applications for our technologies; | ||
| ● | expanding our service offerings; | ||
| ● | continuing key customer initiatives; | ||
| ● | combining sales and marketing operations in appropriate markets to compete more effectively; | ||
| ● | finding new markets for our products; and | ||
| ● | continuing the development of commercial tools and infrastructure to increase and support cross-selling opportunities of products and services to take advantage of our depth in product offerings. |
|
Our business is affected by general economic conditions and related uncertainties affecting markets in which we operate. Our business is affected by general economic conditions, both inside and outside the U.S. If the global economy and financial markets, or economic conditions in Europe, the U.S. or other key markets, are unstable, it could adversely affect the business, results of operations and financial condition of the company and its customers, distributors, and suppliers, having the effect of:
|
| ● | reducing demand for some of our products; | ||
| ● | increasing the rate of order cancellations or delays; | ||
| ● | increasing the risk of excess and obsolete inventories; | ||
| ● | increasing pressure on the prices for our products and services; and | ||
| ● | creating longer sales cycles and greater difficulty in collecting sales proceeds. |
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For example, recent developments in Europe have created uncertainty with respect to the ability of certain European countries to continue to service their sovereign debt obligations. This debt crisis could result in customers in Europe taking longer to pay for products they have purchased from us, or being unable to pay at all. The continued weakness in world economies makes the strength and timing of any economic recovery uncertain, and there can be no assurance that global economic conditions will not deteriorate further.
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Demand for some of our products depends on capital spending policies of our customers and on government funding policies. Our customers include pharmaceutical and chemical companies, laboratories, universities, healthcare providers, government agencies and public and private research institutions. Many factors, including public policy spending priorities, available resources and product and economic cycles, have a significant effect on the capital spending policies of these entities.
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Spending by some of these customers fluctuates based on budget allocations and the timely passage of the annual federal budget. An impasse in federal government budget decisions could lead to substantial delays or reductions in federal spending. In fiscal year 2013, the U.S. Government was unable to reach agreement on budget reduction measures required by the Budget Control Act of 2011. As a result, in early 2013, an enforcement mechanism known as sequestration went into effect, which triggered one year of budget reductions. Despite agreement not to impose similar cuts in fiscal years 2014 and 2015, it is possible that Congress will allow similar cuts to occur again in fiscal year 2016 and beyond.
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Unless Congress and the Administration take further action, government funding would be reduced for certain of our customers, including those who are dependent on funding from the National Institutes of Health, which would likely have a significant effect on these entities’ spending policies. These policies in turn can have a significant effect on the demand for our products.
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As a multinational corporation, we are exposed to fluctuations in currency exchange rates, which could adversely affect our cash flows and results of operations. International markets contribute a substantial portion of our revenues, and we intend to continue expanding our presence in these regions. The exposure to fluctuations in currency exchange rates takes on different forms. International revenues and costs are subject to the risk that fluctuations in exchange rates could adversely affect our reported revenues and profitability when translated into U.S. dollars for financial reporting purposes. These fluctuations could also adversely affect the demand for products and services provided by us. As a multinational corporation, our businesses occasionally invoice third-party customers in currencies other than the one in which they primarily do business (the “functional currency”). Movements in the invoiced currency relative to the functional currency could adversely impact our cash flows and our results of operations. Should our international sales grow, exposure to fluctuations in currency exchange rates could have a larger effect on our financial results. In the first nine months of 2015, currency translation had an unfavorable effect of $737 million on revenues due to the strengthening of the U.S. dollar relative to other currencies in which the company sells products and services. For the remainder of 2015, the company is expecting a significant negative impact on revenues and operating income due to the stronger U.S. dollar.
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Healthcare reform legislation could adversely impact us. The Patient Protection and Affordable Care Act could have an adverse impact on us. Some of the potential consequences, such as a reduction in governmental support of healthcare services or adverse changes to the delivery or pricing of healthcare services or products or mandated benefits, may cause healthcare-industry participants to purchase fewer of our products and services or to reduce the prices they are willing to pay for our products or services.
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Our inability to protect our intellectual property could have a material adverse effect on our business. In addition, third parties may claim that we infringe their intellectual property, and we could suffer significant litigation or licensing expense as a result. We place considerable emphasis on obtaining patent and trade secret protection for significant new technologies, products and processes because of the length of time and expense associated with bringing new products through the development process and into the marketplace. Our success depends in part on our ability to develop patentable products and obtain and enforce patent protection for our products both in the United States and in other countries. We own numerous U.S. and foreign patents, and we intend to file additional applications, as appropriate, for patents covering our products. Patents may not be issued for any pending or future patent applications owned by or licensed to us, and the claims allowed under any issued patents may not be sufficiently broad to protect our technology. Any issued patents owned by or licensed to us may be challenged, invalidated or circumvented, and the rights under these patents may not provide us with competitive advantages. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture increased market position. We could incur substantial costs to defend ourselves in suits brought against us or in suits in which we may assert our patent rights against others. An unfavorable outcome of any such litigation could materially adversely affect our business and results of operations.
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We also rely on trade secrets and proprietary know-how with which we seek to protect our products, in part, by confidentiality agreements with our collaborators, employees and consultants. These agreements may be breached and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently developed by our competitors.
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Third parties may assert claims against us to the effect that we are infringing on their intellectual property rights. With our acquisition of Life Technologies, we became party to several lawsuits in which plaintiffs claim we infringe their intellectual property (Note 10). We could incur substantial costs and diversion of management resources in defending these claims, which could have a material adverse effect on our business, financial condition and results of operations. In addition, parties making these claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief, which could effectively block our ability to make, use, sell, distribute, or market our products and services in the United States or abroad. In the event that a claim relating to intellectual property is asserted against us, or third parties not affiliated with us hold pending or issued patents that relate to our products or technology, we may seek licenses to such intellectual property or challenge those patents. However, we may be unable to obtain these licenses on commercially reasonable terms, if at all, and our challenge of the patents may be unsuccessful. Our failure to obtain the necessary licenses or other rights could prevent the sale, manufacture, or distribution of our products and, therefore, could have a material adverse effect on our business, financial condition and results of operations.
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Changes in governmental regulations may reduce demand for our products or increase our expenses. We compete in many markets in which we and our customers must comply with federal, state, local and international regulations, such as environmental, health and safety and food and drug regulations. We develop, configure and market our products to meet customer needs created by those regulations. Any significant change in regulations could reduce demand for our products or increase our expenses. For example, many of our instruments are marketed to the pharmaceutical industry for use in discovering and developing drugs. Changes in the U.S. Food and Drug Administration’s regulation of the drug discovery and development process could have an adverse effect on the demand for these products.
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If our security products do not operate as designed and fail to detect explosives or radiation, we could be exposed to product liability and related claims for which we may not have adequate insurance coverage. Products currently or previously sold by our environmental and process instruments and radiation measurement and security instruments businesses include fixed and portable instruments used for chemical, radiation and trace explosives detection. These products are used in airports, embassies, cargo facilities, border crossings and other high-threat facilities for the detection and prevention of terrorist acts. If any of these products were to malfunction, it is possible that explosive or radioactive material could fail to be detected by our product, which could lead to product liability claims. There are also many other factors beyond our control that could lead to liability claims, such as the reliability and competence of the customers’ operators and the training of such operators. Any such product liability claims brought against us could be significant and any adverse determination may result in liabilities in excess of our insurance coverage. Although we carry product liability insurance, we cannot be certain that our current insurance will be sufficient to cover these claims or that it can be maintained on acceptable terms, if at all.
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Our inability to complete pending acquisitions or to successfully integrate any new or previous acquisitions could have a material adverse effect on our business. Our business strategy includes the acquisition of technologies and businesses that complement or augment our existing products and services. Certain acquisitions may be difficult to complete for a number of reasons, including the need for antitrust and/or other regulatory approvals. Any acquisition we may complete may be made at a substantial premium over the fair value of the net identifiable assets of the acquired company. Further, we may not be able to integrate acquired businesses successfully into our existing businesses, make such businesses profitable, or realize anticipated cost savings or synergies, if any, from these acquisitions, which could adversely affect our business.
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Moreover, we have acquired many companies and businesses. As a result of these acquisitions, we recorded significant goodwill and indefinite-lived intangible assets (primarily tradenames) on our balance sheet, which amount to approximately $18.75 billion and $1.27 billion, respectively, as of September 26, 2015. In addition, we have definite-lived intangible assets totaling $11.75 billion as of September 26, 2015. We assess the realizability of goodwill and indefinite-lived intangible assets annually as well as whenever events or changes in circumstances indicate that these assets may be impaired. We assess the realizability of definite-lived intangible assets whenever events or changes in circumstances indicate that these assets may be impaired. These events or circumstances would generally include operating losses or a significant decline in earnings associated with the acquired business or asset. Our ability to realize the value of the goodwill and intangible assets will depend on the future cash flows of these businesses. These cash flows in turn depend in part on how well we have integrated these businesses. If we are not able to realize the value of the goodwill and intangible assets, we may be required to incur material charges relating to the impairment of those assets.
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We are subject to laws and regulations governing government contracts, and failure to address these laws and regulations or comply with government contracts could harm our business by leading to a reduction in revenue associated with these customers. We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. The laws governing government contracts differ from the laws governing private contracts and government contracts may contain pricing terms and conditions that are not applicable to private contracts. We are also subject to investigation for compliance with the regulations governing government contracts. A failure to comply with these regulations could result in suspension of these contracts, criminal, civil and administrative penalties or debarment.
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Because we compete directly with certain of our larger customers and product suppliers, our results of operations could be adversely affected in the short term if these customers or suppliers abruptly discontinue or significantly modify their relationship with us. Our largest customer in the laboratory products business is also a significant competitor. Our business may be harmed in the short term if our competitive relationship in the marketplace with certain of our large customers results in a discontinuation of their purchases from us. In addition, we manufacture products that compete directly with products that we source from third-party suppliers. We also source competitive products from multiple suppliers. Our business could be adversely affected in the short term if any of our large third-party suppliers abruptly discontinues selling products to us.
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Because we rely heavily on third-party package-delivery services, a significant disruption in these services or significant increases in prices may disrupt our ability to ship products, increase our costs and lower our profitability. We ship a significant portion of our products to our customers through independent package delivery companies, such as Federal Express in the U.S. and DHL in Europe. We also maintain a small fleet of vehicles dedicated to the delivery of our products and ship our products through other carriers, including national and regional trucking firms, overnight carrier services and the U.S. Postal Service. If one or more of these third-party package-delivery providers were to experience a major work stoppage, preventing our products from being delivered in a timely fashion or causing us to incur additional shipping costs we could not pass on to our customers, our costs could increase and our relationships with certain of our customers could be adversely affected. In addition, if one or more of these third-party package-delivery providers were to increase prices, and we were not able to find comparable alternatives or make adjustments in our delivery network, our profitability could be adversely affected.
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We are required to comply with a wide variety of laws and regulations, and are subject to regulation by various federal, state and foreign agencies. For example, some of our operations are subject to regulation by the U.S. Food and Drug Administration and similar international agencies. These regulations govern a wide variety of product activities, from design and development to labeling, manufacturing, promotion, sales and distribution. If we fail to comply with the U.S. Food and Drug Administration’s regulations or those of similar international agencies, we may have to recall products and/or cease their manufacture and distribution, which would increase our costs and reduce our revenues.
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We are also subject to a variety of federal, state, local and international laws and regulations that govern, among other things, the importation and exportation of products, the handling, transportation and manufacture of substances that could be classified as hazardous, and our business practices in the U.S. and abroad such as anti-corruption and anti-competition laws. A failure to comply with these laws and regulations could result in criminal, civil and administrative penalties.
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Regulations related to “conflict minerals” may cause us to incur additional expenses and could limit the supply and increase the cost of certain metals used in manufacturing our products. In 2012 the SEC adopted a rule requiring disclosures by public companies of specified minerals, known as conflict minerals, that are necessary to the functionality or production of products manufactured or contracted to be manufactured. The rule requires an annual disclosure report to be filed, and requires companies to perform due diligence and disclose and report whether or not such minerals originate from the Democratic Republic of Congo or an adjoining country. The rule could affect sourcing at competitive prices and availability in sufficient quantities of certain minerals used in the manufacture of our products, including tantalum, tin, gold and tungsten. The number of suppliers who provide conflict-free minerals may be limited. In addition, there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, or sources of supply as a consequence of such verification activities. As our supply chain is complex, we may not be able to sufficiently verify the origins of the relevant minerals used in our products through the due diligence procedures that we undertake, which may harm our reputation. In addition, we may encounter challenges to satisfy those customers who require that all of the components of our products be certified as conflict-free, which could place us at a competitive disadvantage if we are unable to do so.
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Our business could be adversely affected by disruptions at our sites. We rely upon our manufacturing operations to produce many of the products we sell and our warehouse facilities to store products, pending sale. Any significant disruption of those operations for any reason, such as strikes or other labor unrest, power interruptions, fire, or other events beyond our control could adversely affect our sales and customer relationships and therefore adversely affect our business. We have significant operations in California, near major earthquake faults, which make us susceptible to earthquake risk. Although most of our raw materials are available from a number of potential suppliers, our operations also depend upon our ability to obtain raw materials at reasonable prices. If we are unable to obtain the materials we need at a reasonable price, we may not be able to produce certain of our products or we may not be able to produce certain of these products at a marketable price, which could have an adverse effect on our results of operations.
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Fluctuations in our effective tax rate may adversely affect our results of operations and cash flows. As a global company, we are subject to taxation in numerous countries, states and other jurisdictions. In preparing our financial statements, we record the amount of tax that is payable in each of the countries, states and other jurisdictions in which we operate. Our future effective tax rate, however, may be lower or higher than experienced in the past due to numerous factors, including a change in the mix of our profitability from country to country, changes in accounting for income taxes and recently enacted and future changes in tax laws in jurisdictions in which we operate. Any of these factors could cause us to experience an effective tax rate significantly different from previous periods or our current expectations, which could have an adverse effect on our business, results of operations and cash flows.
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We may incur unexpected costs from increases in fuel and raw material prices, which could reduce our earnings and cash flow. Our primary commodity exposures are for fuel, petroleum-based resins and steel. While we may seek to minimize the impact of price increases through higher prices to customers and various cost-saving measures, our earnings and cash flows could be adversely affected in the event these measures are insufficient to cover our costs.
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Unforeseen problems with the implementation and maintenance of our information systems could have an adverse effect on our operations. As a part of our ongoing effort to upgrade our current information systems, we periodically implement new enterprise resource planning software and other software applications to manage certain of our business operations. As we implement and add functionality, problems could arise that we have not foreseen. Such problems could adversely impact our ability to provide quotes, take customer orders and otherwise run our business in a timely manner. In addition, if our new systems fail to provide accurate pricing and cost data our results of operations and cash flows could be adversely affected.
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We also rely on our technology infrastructure, among other functions, to interact with suppliers, sell our products and services, fulfill orders and bill, collect and make payments, ship products, provide services and support to customers, track customers, fulfill contractual obligations and otherwise conduct business. Our systems may be vulnerable to damage or interruption from natural disasters, power loss, telecommunication failures, terrorist attacks, computer viruses, computer denial-of-service attacks, unauthorized access to customer or employee data or company trade secrets, and other attempts to harm our systems. When we upgrade or change systems, we may suffer interruptions in service, loss of data or reduced functionality. Certain of our systems are not redundant, and our disaster recovery planning is not sufficient for every eventuality. Despite any precautions we may take, such problems could result in, among other consequences, interruptions in our services, which could harm our reputation and financial results.
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Our debt may restrict our investment opportunities or limit our activities. As of September 26, 2015, we had approximately $13.31 billion in outstanding indebtedness. In addition, we have a revolving credit facility that provides for up to $2.00 billion of unsecured multi-currency revolving credit. We may also obtain additional long-term debt and lines of credit to meet future financing needs, which would have the effect of increasing our total leverage.
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Our leverage could have negative consequences, including increasing our vulnerability to adverse economic and industry conditions, limiting our ability to obtain additional financing and limiting our ability to acquire new products and technologies through strategic acquisitions.
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Our ability to make scheduled payments, refinance our obligations or obtain additional financing will depend on our future operating performance and on economic, financial, competitive and other factors beyond our control. Our business may not generate sufficient cash flow to meet our obligations. If we are unable to service our debt, refinance our existing debt or obtain additional financing, we may be forced to delay strategic acquisitions, capital expenditures or research and development expenditures.
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Additionally, the agreements governing our debt require that we maintain certain financial ratios, and contain affirmative and negative covenants that restrict our activities by, among other limitations, limiting our ability to incur additional indebtedness, make investments, create liens, sell assets and enter into transactions with affiliates. The covenants in our revolving credit facility include a total debt-to-EBITDA ratio and an interest coverage ratio. Specifically, the company has agreed that, so long as any lender has any commitment under the facility, or any loan or other obligation is outstanding under the facility, or any letter of credit is outstanding under the facility, it will not permit (as the following terms are defined in the facility) the Consolidated Leverage Ratio (the ratio of consolidated Indebtedness to Consolidated EBITDA) as at the last day of any fiscal quarter to be greater than 3.5 to 1.0 or the Consolidated Interest Coverage Ratio (the ratio of Consolidated EBITDA to Consolidated Interest Expense) to be less than 3.0 to 1.0.
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Our ability to comply with these financial restrictions and covenants is dependent on our future performance, which is subject to prevailing economic conditions and other factors, including factors that are beyond our control such as foreign exchange rates and interest rates. Our failure to comply with any of these restrictions or covenants may result in an event of default under the applicable debt instrument, which could permit acceleration of the debt under that instrument and require us to prepay that debt before its scheduled due date. Also, an acceleration of the debt under certain of our debt instruments would trigger an event of default under other of our debt instruments.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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Issuer Purchases of Equity Securities
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There was no share repurchase activity for the company’s third quarter of 2015. On November 8, 2012, the company announced a repurchase program authorizing the purchase of up to $1 billion of the company's common stock beginning January 1, 2013. At September 26, 2015, $410 million was available for future repurchases of the company’s common stock under this authorization.
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Item 5. Other Events
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On September 29, 2015, the company’s Rights Agreement, dated as of September 15, 2005, between the company and American Stock Transfer & Trust Company, as Rights Agent, as amended (the “Rights Agreement”), expired in accordance with its terms. The Rights Agreement created the right of company shareholders to purchase units of preferred shares following certain events related to the acquisition of 15% or more of the company’s common stock.
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Item 6. Exhibits
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See Exhibit Index on page 55.
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Date: October 30, 2015
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THERMO FISHER SCIENTIFIC INC.
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/s/ Stephen Williamson
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Stephen Williamson
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Senior Vice President and Chief Financial Officer
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/s/ Peter E. Hornstra
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Peter E. Hornstra
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Vice President and Chief Accounting Officer
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Exhibit
Number
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Description of Exhibit
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10.1
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Noncompetition Agreement between the Registrant and Mark Stevenson, dated September 10, 2015.*
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31.1
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Certification of Chief Executive Officer required by Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of Chief Financial Officer required by Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification of Chief Executive Officer required by Exchange Act Rules 13a-14(b) and 15d-14(b), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
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32.2
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Certification of Chief Financial Officer required by Exchange Act Rules 13a-14(b) and 15d-14(b), as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
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101.INS
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XBRL Instance Document.
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101.SCH
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XBRL Taxonomy Extension Schema Document.
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101.CAL
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XBRL Taxonomy Calculation Linkbase Document.
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101.DEF
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XBRL Taxonomy Definition Linkbase Document.
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101.LAB
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XBRL Taxonomy Label Linkbase Document.
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101.PRE
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XBRL Taxonomy Presentation Linkbase Document.
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The Registrant agrees, pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, to furnish to the Commission, upon request, a copy of each instrument with respect to long-term debt of the Registrant or its consolidated subsidiaries.
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*Indicates management contract or compensatory plan, contract or arrangement.
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Certification is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. Such certification is not deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act except to the extent that the registrant specifically incorporates it by reference.
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