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(Exact name of Registrant as specified
in its charter)
iDelaware
i04-2209186
(State
of incorporation)
(I.R.S. Employer Identification No.)
i168 Third Avenue
iWaltham, iMassachusettsi02451
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: (i781) i622-1000
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock, $1.00 par value
iTMO
iNew York Stock Exchange
iFloating
Rate Notes due 2020
iTMO /20A
iNew York
Stock Exchange
i2.150% Notes due 2022
iTMO 22A
iNew
York Stock Exchange
i0.750% Notes due 2024
iTMO 24A
iNew
York Stock Exchange
i0.125% Notes due 2025
iTMO 25B
iNew
York Stock Exchange
i2.000% Notes due 2025
iTMO 25
iNew
York Stock Exchange
i1.400% Notes due 2026
iTMO 26A
iNew
York Stock Exchange
i1.450% Notes due 2027
iTMO 27
iNew
York Stock Exchange
i0.500% Notes due 2028
iTMO 28A
iNew
York Stock Exchange
i1.375% Notes due 2028
iTMO 28
iNew
York Stock Exchange
i1.950% Notes due 2029
iTMO 29
iNew
York Stock Exchange
i0.875% Notes due 2031
iTMO 31
iNew
York Stock Exchange
i2.875% Notes due 2037
iTMO 37
iNew
York Stock Exchange
i1.500% Notes due 2039
iTMO 39
iNew
York Stock Exchange
i1.875% Notes due 2049
iTMO 49
iNew
York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months. iYes☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company
or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
The
accompanying notes are an integral part of these consolidated financial statements.
7
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
i
Note
1.
Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Thermo Fisher Scientific Inc. (the company or Thermo Fisher) enables customers to make the world healthier, cleaner and safer by helping them accelerate life sciences research, solve complex analytical challenges, improve patient diagnostics, deliver medicines to market and increase laboratory productivity. Markets served include pharmaceutical and biotech, academic and government, industrial and applied, as well as healthcare and diagnostics.
Interim Financial Statements
The
interim consolidated financial statements presented herein have been prepared by the company, are unaudited and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary for a fair statement of the financial position at September 28, 2019, the results of operations for the three- and nine-month periods endedSeptember 28, 2019 and September 29, 2018, and the cash flows for the nine-month periods endedSeptember 28,
2019 and September 29, 2018. Interim results are not necessarily indicative of results for a full year.
The consolidated balance sheet presented as of December 31, 2018, has been derived from the audited consolidated financial statements as of that date. The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain all information that is included in the annual financial statements and notes thereto of the company. The consolidated financial statements and notes included in this report should be read in conjunction with the 2018 financial
statements and notes included in the company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC).
Note 1 to the consolidated financial statements for 2018 describes the significant accounting estimates and policies used in preparation of the consolidated financial statements. Except for the accounting for leases, as noted below, there have been no material changes in the company’s significant accounting policies during the nine months ended September 28, 2019.
i
Leases
The
company determines whether an arrangement is, or contains, a lease at inception. Prior to 2019, the company generally accounted for operating lease payments by charging them to expense as incurred. Beginning in 2019, operating leases that have commenced are included in other assets, other accrued expenses and other long-term liabilities in the consolidated balance sheet. Classification of operating lease liabilities as either current or noncurrent is based on the expected timing of payments due under the company’s obligations.
Right-of-use (ROU) assets represent the company’s right to use an underlying asset for the lease term and lease liabilities represent the
company’s obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. The company recognizes lease expense for these leases on a straight-line basis over the lease term.
Because most of the company’s leases do not provide an implicit rate, the company estimates incremental borrowing rates based on the information available at the commencement date in determining the present value of lease payments. The
company uses the implicit rate when readily determinable. Lease terms may include the effect of options to extend or terminate the lease when it is reasonably certain that the company will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term.
As a lessee, the company accounts for the lease and non-lease components as a single lease component.
See Note 9 additional information about the company's leases.
Current contract assets and noncurrent contract assets are included within other current assets and other assets, respectively, in the accompanying balance sheet.Noncurrent contract liabilities are included within other long-term liabilities in the accompanying balance sheet.iContract
asset and liability balances are as follows:
8
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
the first nine months of 2019, the company recognized revenue of $i654 million that was included in the contract liabilities balance at December 31,2018. Contract assets increased in the first nine months of 2019 due to the timing of billing. Contract liabilities increased during the first nine months of 2019 primarily due to an advance payment from a customer and an acquisition.
i
Warranty
Obligations
The liability for warranties is included in other accrued expenses in the accompanying balance sheet.The changes in the carrying amount of standard product warranty obligations are as follows:
Nine Months Ended
September
28,
September 29,
(In millions)
2019
2018
Beginning
Balance
$
i92
$
i87
Provision
charged to income
i80
i89
Usage
(i83
)
(i80
)
Adjustments
to previously provided warranties, net
(i1
)
(i3
)
Currency
translation
(i2
)
(i2
)
Ending
Balance
$
i86
$
i91
/i
Inventories
The
components of inventories are as follows:
September 28,
December 31,
(In millions)
2019
2018
Raw
Materials
$
i943
$
i812
Work
in Process
i514
i430
Finished
Goods
i1,851
i1,763
Inventories
$
i3,308
$
i3,005
/i
Use
of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
i
Recent
Accounting Pronouncements
In August 2018, the FASB issued new guidance to modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The company expects to adopt the guidance when it is effective in 2020 using a retrospective method. The adoption of this guidance is not expected to have a material impact on the company’s disclosures.
In August 2018, the FASB issued new guidance to modify the disclosure requirements on fair value measurements. The company expects to adopt the guidance when it is effective in 2020 with some items requiring a prospective method
and others
9
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
requiring a retrospective method. The adoption of this guidance is not expected to have a material impact on the company’s disclosures.
In June 2016, the FASB issued new guidance to require a financial asset measured at amortized cost basis, such as accounts receivable, to be presented at the net amount expected to be collected based on relevant information about
past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. During 2018 and 2019, the FASB issued additional guidance and clarification. The company expects to adopt the guidance when it is effective in 2020 using a modified retrospective method. The adoption of this guidance is not expected to have a material impact on the company’s consolidated financial statements.
In February 2016, the FASB issued new guidance which requires lessees to record most leases on their balance sheets as lease liabilities, initially measured at the present value of the future lease payments, with corresponding right-of-use assets. The new guidance also sets forth new
disclosure requirements related to leases. During 2017 - 2019, the FASB issued additional guidance and clarification. The guidance became effective for the company in 2019. The company has elected to adopt the guidance using a modified retrospective method, by applying the transition approach as of the beginning of the period of adoption. Comparative periods have not been restated. As permitted upon transition, the company did not reassess whether any expired or existing contracts were or contained embedded leases, the lease classification for any expired or existing leases, initial direct costs for any leases, or whether land easements
met the definition of a lease if they were not accounted for as leases under the prior guidance. Adoption of the new guidance impacted the company’s Consolidated Balance Sheet as follows:
The company’s acquisitions have historically been made at prices above the determined fair value of the acquired identifiable net assets, resulting in goodwill, due to expectations of the synergies that will be realized by combining the businesses. These synergies include the elimination of redundant facilities, functions and staffing; use of the
company’s existing commercial infrastructure to expand sales of the acquired businesses’ products; and use of the commercial infrastructure of the acquired businesses to cost-effectively expand sales of company products.
Acquisitions have been accounted for using the acquisition method of accounting, and the acquired companies’ results have been included in the accompanying financial statements from their respective dates of acquisition. Acquisition transaction costs are recorded in selling, general and administrative expenses as incurred.
On April 30, 2019, the company acquired, within the Laboratory Products and Services segment, Brammer Bio for approximately $i1.67
billion in cash. Brammer Bio is a leading viral vector contract development and manufacturing organization for gene and cell therapies. The acquisition expands the segment's contract manufacturing capabilities. Revenues of Brammer Bio were approximately $i140
million in 2018. The purchase price exceeded the fair value of the identifiable net assets and, accordingly, $i938 million was allocated to goodwill, $i405
million of which is tax deductible.
In addition, in the nine months ended September 28, 2019the company acquired, within the Analytical Instruments segment, a Slovakia-based provider of mass spectrometry software used for identification of compounds, for an aggregate purchase price of$i14
million.
10
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
The components of the purchase price and net assets acquired for Brammer Bio are as follows:
The
weighted-average amortization periods for definite-lived intangible assets acquired in 2019 are i14 years for customer relationships, i13
years for product technology and i2 years for tradenames. The weighted average amortization period for all definite-lived intangible assets acquired in 2019 is i14
years.
Disposition
On June 28, 2019, the company sold its Anatomical Pathology business to PHC Holdings Corporation for $i1.13
billion, net of cash divested. The business was part of the Specialty Diagnostics segment. The sale of this business resulted in a pre-tax gain of approximately $i482 million, included in restructuring
and other (income) costs, net. Revenues in 2019, through the date of sale, and the full year 2018 of the business sold were approximately $i115 million and $i238
million, respectively, net of retained sales through the company's healthcare market and research and safety market channel businesses. The assets and liabilities of the Anatomical Pathology business were as follows on December 31, 2018:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
Note 3.
Revenue
i
Disaggregated
Revenue
Revenue by type is as follows:
Three Months Ended
Nine Months Ended
September
28,
September 29,
September 28,
September 29,
(In millions)
2019
2018
2019
2018
Revenues
Consumables
i3,228
i3,056
$
i9,726
i9,345
Instruments
i1,570
i1,515
i4,619
i4,462
Services
i1,474
i1,349
i4,368
i4,044
Consolidated
revenues
$
i6,272
$
i5,920
$
i18,713
$
i17,851
Revenue
by geographic region is as follows:
Three Months Ended
Nine Months Ended
September
28,
September 29,
September 28,
September 29,
(In millions)
2019
2018
2019
2018
Revenues
(a)
North America
$
i3,220
$
i3,030
$
i9,509
$
i8,975
Europe
i1,514
i1,454
i4,569
i4,521
Asia-Pacific
i1,349
i1,251
i4,080
i3,809
Other
regions
i189
i185
i555
i546
Consolidated
revenues
$
i6,272
$
i5,920
$
i18,713
$
i17,851
/
(a)
Revenues
are attributed to regions based on customer location.
Each reportable segment earns revenues from consumables, instruments and services in North America, Europe, Asia-Pacific and other regions. See Note 4 for revenue by reportable segment and other geographic data.
Remaining Performance Obligations
The aggregate amount of the transaction price allocated to the remaining performance obligations for all open customer contracts as of September 28, 2019 was $i6.76
billion. The company will recognize revenue for these performance obligations as they are satisfied, approximately i70% of which is expected to occur within the next itwelve
months.
12
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
Note
4.
Business Segment and Geographical Information
The company’s management evaluates segment operating performance based on operating income before certain charges/credits to cost of revenues and selling, general and administrative expenses, principally associated with acquisition accounting; restructuring and other costs/income including costs arising from facility consolidations such as severance and abandoned lease expense and gains and losses from the sale of real estate and product lines as well as from significant litigation-related matters; and amortization of acquisition-related intangible assets. The
company uses this measure because it helps management understand and evaluate the segments’ core operating results and facilitates comparison of performance for determining compensation.
ii
Business
Segment Information
Three Months Ended
Nine Months Ended
September
28,
September 29,
September 28,
September 29,
(In millions)
2019
2018
2019
2018
Revenues
Life
Sciences Solutions
$
i1,701
$
i1,504
$
i5,018
$
i4,572
Analytical
Instruments
i1,358
i1,333
i4,004
i3,901
Specialty
Diagnostics
i879
i894
i2,779
i2,773
Laboratory
Products and Services
i2,619
i2,470
i7,765
i7,433
Eliminations
(i285
)
(i281
)
(i853
)
(i828
)
Consolidated
revenues
i6,272
i5,920
i18,713
i17,851
Segment
Income (a)
Life Sciences Solutions
i586
i495
i1,756
i1,534
Analytical
Instruments
i311
i294
i879
i831
Specialty
Diagnostics
i223
i223
i707
i719
Laboratory
Products and Services
i303
i299
i933
i916
Subtotal
reportable segments (a)
i1,423
i1,311
i4,275
i4,000
Cost
of revenues (charges) credits, net
(i5
)
i1
(i16
)
(i7
)
Selling,
general and administrative (charges) credits, net
(i7
)
i4
(i54
)
(i7
)
Restructuring
and other (costs) income, net
(i31
)
i27
i442
(i35
)
Amortization
of acquisition-related intangible assets
(i434
)
(i431
)
(i1,285
)
(i1,316
)
Consolidated
operating income
i946
i912
i3,362
i2,635
Other
expense, net (b)
(i124
)
(i102
)
(i330
)
(i385
)
Income
before income taxes
$
i822
$
i810
$
i3,032
$
i2,250
(a)
Represents
operating income before certain charges to cost of revenues and selling, general and administrative expenses; restructuring and other costs/income, net; and amortization of acquisition-related intangibles.
//
(b)
The company does not allocate other expense, net to its segments.
13
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
Geographical Information
Three
Months Ended
Nine Months Ended
September 28,
September 29,
September 28,
September
29,
(In millions)
2019
2018
2019
2018
Revenues (c)
United
States
$
i3,096
$
i2,918
$
i9,117
$
i8,588
China
i694
i629
i2,072
i1,818
Other
i2,482
i2,373
i7,524
i7,445
Consolidated
revenues
$
i6,272
$
i5,920
$
i18,713
$
i17,851
/
(c)
Revenues
are attributed to countries based on customer location.
i
Note 5.
Other Expense, Net
i
The
components of other expense, net, in the accompanying statement of income are as follows:
Three Months Ended
Nine Months Ended
September
28,
September 29,
September 28,
September 29,
(In millions)
2019
2018
2019
2018
Interest
Income
$
i52
$
i41
$
i179
$
i92
Interest
Expense
(i164
)
(i162
)
(i534
)
(i495
)
Other
Items, Net
(i12
)
i19
i25
i18
Other
Expense, Net
$
(i124
)
$
(i102
)
$
(i330
)
$
(i385
)
/
Other
Items, Net
In all periods, other items, net includes currency transaction gains and losses on monetary assets and liabilities and net periodic pension benefit cost/income, excluding the service cost component which is included in operating expenses on the accompanying statement of income.
In 2019, other items, net in the above table includes $i42 million of losses on the early extinguishment of debt
(see Note 8). As discussed in Note 15, the company incurred additional losses on the early extinguishment of debt in the fourth quarter of 2019.
14
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
Note
6.
Income Taxes
i
The provision for income taxes in the accompanying statement of income differs from the provision calculated by applying the statutory federal income tax rate to income before provision for income taxes due to the following:
Nine
Months Ended
September 28,
September 29,
(In millions)
2019
2018
Statutory
Federal Income Tax Rate
i21
%
i21
%
Provision
for Income Taxes at Statutory Rate
$
i637
$
i473
Increases
(Decreases) Resulting From:
Foreign rate differential
(i172
)
(i177
)
Foreign
exchange loss on inter-company debt refinancing
(i62
)
—
Income tax credits
(i242
)
(i183
)
Global
intangible low-taxed income
i160
i124
Foreign-derived
intangible income
(i68
)
(i34
)
Withholding
taxes
i30
—
Singapore
tax holiday
(i20
)
(i29
)
Transition
tax and other impacts of U.S. tax reform
i8
i117
Provision
for (reversal of) tax reserves, net
i16
(i49
)
Excess
tax benefits from stock options and restricted stock units
(i68
)
(i59
)
Basis
difference on disposal of business
i72
i—
Other,
net
i47
i27
Provision
for income taxes
$
i338
$
i210
/
The
company has operations and a taxable presence in approximately 50 countries outside the U.S. Some of these countries have lower tax rates than the U.S. The company’s ability to obtain a benefit from lower tax rates outside the U.S. is dependent on its relative levels of income in countries outside the U.S. and on the statutory tax rates in those countries.
In 2019, the company recorded a $i62
million income tax benefit related to a foreign exchange loss for tax purposes on certain intercompany financing arrangements as well as a tax provision of $i191 million related to the gain on sale of the Anatomical Pathology business. In addition, the company implemented foreign tax credit planning in Sweden which resulted in $i75
million of foreign tax credits, with no related incremental U.S. income tax expense.
During 2019, the company recorded a net tax provision of $i1 million to adjust the impacts of U.S. tax reform based on final regulations issued by the U.S. Treasury in 2019. The income tax provision consists of an incremental charge of $i8
million offset by a $i7 million reduction of related unrecognized tax benefits.
The company has significant operations 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 iDecember 31, 2026. In 2019
and 2018, the impact of this tax holiday decreased the annual effective tax rates by i0.6 percentage points and i1.3
percentage points, respectively, and increased diluted earnings per share by approximately $i0.05 and $i0.07,
respectively.
Unrecognized Tax Benefits
As of September 28, 2019, the company had $i1.47 billion of unrecognized tax benefits substantially all of which, if recognized, would reduce the effective tax rate.
15
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows:
(In millions)
2019
Balance
at Beginning of Year
$
i1,442
Additions for tax positions of current year
i6
Additions
for tax positions of prior years
i35
Reductions for tax positions of prior years
(i7
)
Settlements
(i5
)
Balance
at End of Period
$
i1,471
/
i
Note
7.
Earnings per Share
i
Three
Months Ended
Nine Months Ended
September 28,
September 29,
September 28,
September
29,
(In millions except per share amounts)
2019
2018
2019
2018
Net
Income
$
i760
$
i709
$
i2,694
$
i2,040
Basic
Weighted Average Shares
i401
i402
i400
i402
Plus
Effect of:
Stock options and restricted units
i3
i4
i3
i4
Diluted
Weighted Average Shares
i404
i406
i403
i406
Basic
Earnings per Share
$
i1.89
$
i1.76
$
i6.73
$
i5.07
Diluted
Earnings per Share
$
i1.88
$
i1.75
$
i6.68
$
i5.03
Antidilutive
Stock Options Excluded from Diluted Weighted Average Shares
i1
i2
i1
i2
/
16
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
Note 8.
Debt and Other Financing Arrangements
i
Effective
Interest Rate at September 28,
September 28,
December 31,
(Dollars in millions)
2019
2019
2018
Commercial
Paper
i0.84
%
$
i683
$
i693
Floating
Rate 2-Year Senior Notes, Due 7/24/2019 (euro-denominated)
—
i574
6.00%
10-Year Senior Notes, Due 3/1/2020
i2.99
%
i750
i750
4.70%
10-Year Senior Notes, Due 5/1/2020
—
i300
Floating
Rate 2-Year Senior Notes, Due 8/7/2020 (euro-denominated)
i0.16
%
i656
i688
1.50%
5-Year Senior Notes, Due 12/1/2020 (euro-denominated)
i1.62
%
i465
i487
5.00%
10-Year Senior Notes, Due 1/15/2021
i3.25
%
i400
i400
4.50%
10-Year Senior Notes, Due 3/1/2021
i5.66
%
i1,000
i1,000
3.60%
10-Year Senior Notes, Due 8/15/2021
i5.19
%
i1,100
i1,100
3.30%
7-Year Senior Notes, Due 2/15/2022
i3.42
%
i800
i800
2.15%
7-Year Senior Notes, Due 7/21/2022 (euro-denominated)
i2.27
%
i547
i574
3.15%
10-Year Senior Notes, Due 1/15/2023
—
i800
3.00%
7-Year Senior Notes, Due 4/15/2023
i5.29
%
i1,000
i1,000
4.15%
10-Year Senior Notes, Due 2/1/2024
i4.16
%
i1,000
i1,000
0.75%
8-Year Senior Notes, Due 9/12/2024 (euro-denominated)
i0.93
%
i1,094
i1,147
2.00%
10-Year Senior Notes, Due 4/15/2025 (euro-denominated)
i2.09
%
i700
i734
3.65%
10-Year Senior Notes, Due 12/15/2025
i3.77
%
i350
i350
1.40%
8.5-Year Senior Notes, Due 1/23/2026 (euro-denominated)
i1.53
%
i766
i802
2.95%
10-Year Senior Notes, Due 9/19/2026
i3.19
%
i1,200
i1,200
1.45%
10-Year Senior Notes, Due 3/16/2027 (euro-denominated)
i1.65
%
i547
i574
3.20%
10-Year Senior Notes, Due 8/15/2027
i3.39
%
i750
i750
1.375%
12-Year Senior Notes, Due 9/12/2028 (euro-denominated)
i1.46
%
i656
i688
1.95%
12-Year Senior Notes, Due 7/24/2029 (euro-denominated)
i2.08
%
i766
i802
2.875%
20-Year Senior Notes, Due 7/24/2037 (euro-denominated)
i2.94
%
i766
i802
5.30%
30-Year Senior Notes, Due 2/1/2044
i5.37
%
i400
i400
4.10%
30-Year Senior Notes, Due 8/15/2047
i4.23
%
i750
i750
Other
i20
i21
Total
Borrowings at Par Value
i17,166
i19,186
Fair
Value Hedge Accounting Adjustments
(i10
)
(i93
)
Unamortized
Discount, Net
(i34
)
(i21
)
Unamortized
Debt Issuance Costs
(i69
)
(i82
)
Total
Borrowings at Carrying Value
i17,053
i18,990
Less:
Short-term Obligations and Current Maturities
i661
i1,271
Long-term
Obligations
$
i16,392
$
i17,719
/
The
effective interest rates for the fixed-rate debt include the stated interest on the notes, the accretion of any discount or amortization of any premium, the amortization of any debt issuance costs and, if applicable, adjustments related to hedging.
See Note 12 for fair value information pertaining to the company’s long-term obligations.
As discussed in Note 15, early in the fourth quarter of 2019, the company issued new long-term senior notes and is using the proceeds to redeem the outstanding commercial paper, the 6.00% Senior Notes due 2020, the 1.5% Senior Notes due 2020, the 5.00% Senior Notes due 2021, the 4.50% Senior Notes
due 2021, the 3.60% Senior Notes due 2021 and the 3.30% Senior Notes due 2022 included in the table above. Accordingly, all of this debt has been reported as long-term at September 28, 2019.
17
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Credit Facilities
The company has a revolving credit facility with a bank group that provides for up to $i2.50
billion of unsecured multi-currency revolving credit. The facility expires in July 2021. The agreement calls for interest at either a LIBOR-based rate, a EURIBOR-based rate (for funds drawn in euro) or a rate based on the prime lending rate of the agent bank, at the company’s option. The agreement contains affirmative, negative and financial covenants, and events of default customary for facilities of this type. The covenants in our revolving credit facility (the Facility) include a Consolidated Leverage Ratio (total debt-to-Consolidated EBITDA) and a Consolidated Interest Coverage Ratio (Consolidated EBITDA to Consolidated Interest Expense), as such terms are defined in the Facility. Specifically, the company
has agreed that, so long as any lender has any commitment under the Facility, any letter of credit is outstanding under the Facility, or any loan or other obligation is outstanding under the Facility, it will maintain a maximum Consolidated Leverage Ratio of i3.5:1.0. The company has also agreed that so long as any lender
has any commitment under the Facility or any letter of credit is outstanding under the Facility, or any loan or other obligation is outstanding under the Facility, it will maintain a minimum Consolidated Interest Coverage Ratio of i3.0:1.0 as of the last day of any fiscal quarter. As of September 28, 2019, ino
borrowings were outstanding under the Facility, although available capacity was reduced by approximately $i80 million as a result of outstanding letters of credit.
Commercial Paper Programs
The company has commercial paper programs pursuant to which it may issue and sell unsecured,
short-term promissory notes (CP Notes). Under the U.S. program, a) maturities may not exceed i397 days from the date of issue and b) the CP Notes are issued on a private placement basis under customary terms in the commercial paper market and are not redeemable prior to maturity nor subject to voluntary prepayment. Under the euro program, maturities may not exceed i183
days and may be denominated in euro, U.S. dollars, Japanese yen, British pounds sterling, Swiss franc, Canadian dollars or other currencies. Under both programs, the CP Notes are issued at a discount from par (or premium to par, in the case of negative interest rates), or, alternatively, are sold at par and bear varying interest rates on a fixed or floating basis. As of September 28, 2019, outstanding borrowings under these programs were $i683
million with a weighted average remaining period to maturity of i41 days.
Senior Notes
Interest on the floating rate senior notes is payable quarterly. Interest is payable annually on the other euro-denominated senior notes and semi-annually on all other senior notes. iEach
of the notes may be redeemed at a redemption price of 100% of the principal amount plus a specified make-whole premium and accrued interest.The company is subject to certain affirmative and negative covenants under the indentures governing the senior notes, the most restrictive of which limits the ability of the company to pledge principal properties as security under borrowing arrangements.
In September 2019, the company redeemed its 4.70% Senior Notes due 2020 and its 3.15% Senior Notes due 2023. In connection with these redemptions,
the company incurred $i42 million of losses on the early extinguishment of debt included in Other Expense, Net on the accompanying statement of income.
In 2018, Thermo Fisher Scientific (Finance I) B.V., a wholly-owned finance subsidiary of the company, issued the Floating Rate Senior Notes due 2020 included
in the table above. This subsidiary has no independent function other than financing activities. The Floating Rate Senior Notes due 2020 are fully and unconditionally guaranteed by the company and no other subsidiaries of the company have guaranteed the obligations.
Interest Rate Swap Arrangements and related Cross-currency Interest Rate Swap Arrangements
The company has entered into LIBOR-based interest rate swap arrangements with various banks on several of its outstanding senior notes. The aggregate amounts of the swaps
are equal to the principal amounts of the notes and the payment dates of the swaps coincide with the interest payment dates of the notes. The swap contracts provide for the company to pay a variable interest rate and receive a fixed rate. The variable interest rates reset monthly. The swaps have been accounted for as fair value hedges of the notes. See Note 12 for additional information on the interest rate swap arrangements and related cross-currency interest rate swap arrangements. The following table summarizes the outstanding interest rate swap arrangements on the company's senior notes at September 28,
2019:
18
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
payments on $i1.8 billion notional value of these interest rate swaps are offset in part by cross-currency interest rate swaps which effectively reduced the pay rate as of September 28, 2019 from a weighted average of i4.50%
to a weighted average of i1.78%.
The company has entered into $i1.8
billion notional value of cross-currency interest rate swaps, which effectively convert a portion of the semi-annual payments related to the variable rate, U.S. dollar denominated, LIBOR-based interest rate swaps to payments on variable rate, euro denominated, EURIBOR-based cross-currency interest rate swaps.
As discussed above and in Note 15, early in the fourth quarter of 2019, the company redeemed its 4.50% Senior Notes due 2021 and its 3.60% Senior Notes due 2021 and settled the related interest rate and cross-currency interest rate swaps.
i
Note
9.
Leases
As a lessee, the company leases certain logistics, office, and manufacturing facilities, as well as vehicles, copiers, and other equipment. These operating leases generally have remaining lease terms between i1 month and i30
years, and some include options to extend (generally for i1 to i10 years) or have options to terminate the arrangement within i1
year. The company’s finance leases are not material.
The company has guaranteed the residual value of three leased operating facilities with lease terms ending in 2020, 2023 and 2024. The company has agreed with the lessor to comply with certain financial covenants consistent with its other debt arrangements (Note 8). The aggregate maximum guarantee under these three lease arrangements is $i147
million. Operating lease ROU assets and lease liabilities for these lease arrangements are recorded on the consolidated balance sheet as of September 28, 2019, but exclude any amounts for residual value guarantees.
As a lessee, the consolidated statement of income includes pre-tax operating lease costs of $i51 million and $i149
million and pre-tax variable lease costs of $i10 million and $i31 million for the three and nine months ended
September 28, 2019, respectively. Lease costs arising from finance leases, short-term leases, and sublease income are not material.
Cash used in operating activities for payments of amounts included in the measurement of operating lease liabilities was $i149 million in the nine months ended September 28, 2019. Operating lease ROU assets of $i108
million were obtained in exchange for new operating lease liabilities in the nine months ended September 28, 2019.
The weighted-average remaining operating lease term was i6.3 years and the weighted average discount rate was i4.0%
as of September 28, 2019.
ROU assets of $i645 million as of September 28, 2019, are classified in other assets in the consolidated balance sheet. Operating lease liabilities of $i158
million and $i529 million as of September 28, 2019, are classified in other accrued expenses and other long-term liabilities, respectively, in the consolidated balance sheet.
As of September 28, 2019, future paymentsi
of operating lease liabilities are as follows:
19
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(In millions)
Remainder
of 2019
$
i51
2020
i180
2021
i138
2022
i106
2023
i76
2024
i55
2025
and Thereafter
i175
Total Lease Payments
i781
Less:
Imputed Interest
i94
Total Operating Lease
Liability
$
i687
As a lessor, operating leases, sales-type leases and direct financing leases are not material.
i
As
previously disclosed in the company's 2018 Annual Report on Form 10-K and under previous lease accounting guidance, the following is a summary of annual future minimum lease and rental commitments under noncancelable operating leases as of December 31, 2018:
(In millions)
2019
$
i192
2020
i158
2021
i118
2022
i86
2023
i58
2024
and Thereafter
i177
$
i789
/
i
Note
10.
Commitments and Contingencies
Environmental Matters
The company is currently involved in various stages of investigation and remediation related to environmental matters. The company cannot predict all potential costs related to environmental remediation matters and the possible impact on future operations given the uncertainties regarding the extent of the required cleanup, the complexity and interpretation of applicable laws and regulations, the varying costs of alternative cleanup methods and the extent of the
company’s responsibility. Expenses for environmental remediation matters related to the costs of installing, operating and maintaining groundwater-treatment systems and other remedial activities related to historical environmental contamination at the company’s domestic and international facilities were not material in any period presented. The company records accruals for environmental remediation liabilities, based on current interpretations of environmental laws and regulations, when it is probable that a liability has been incurred and the amount of such liability can be reasonably estimated. The company calculates estimates based upon several factors, including reports prepared by environmental specialists and management’s
knowledge of and experience with these environmental matters. The company includes in these estimates potential costs for investigation, remediation and operation and maintenance of cleanup sites. At September 28, 2019, the company’s total environmental liability was approximately $i63 million.
While management believes the accruals for environmental remediation are adequate based on current estimates of remediation costs, the company may be subject to additional remedial or compliance costs due to future events such as changes in existing laws and regulations, changes in agency direction or enforcement policies, developments in remediation technologies or changes in the conduct of the company’s operations, which could have a material adverse effect on the company’s financial position, results of operations or cash flows.
20
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Litigation and Related Contingencies
There are various lawsuits and claims pending against the company including matters involving product liability, intellectual property, employment and commercial issues. The company determines the probability and range of possible loss based on the current status of each of these matters. A liability is recorded in the financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. The
company establishes a liability that is an estimate of amounts expected to be paid in the future for events that have already occurred. The company accrues the most likely amount or at least the minimum of the range of probable loss when a range of probable loss can be estimated. The accrued liabilities are based on management’s judgment as to the probability of losses for asserted and unasserted claims and, where applicable, actuarially determined estimates. Accrual estimates are adjusted as additional information becomes known or payments are made. The amount of ultimate loss may differ from these estimates. Due to the inherent uncertainties associated with pending litigation or claims, the company cannot predict the outcome, nor, with respect to certain pending litigation or claims where no liability
has been accrued, make a meaningful estimate of the reasonably possible loss or range of loss that could result from an unfavorable outcome. The company has no material accruals for pending litigation or claims for which accrual amounts are not disclosed below or in the company's 2018 financial statements and notes included in the company's Annual Report on Form 10-K filed with the SEC, nor are material losses deemed probable for such matters. It is reasonably possible, however, that an unfavorable outcome that exceeds the company’s current accrual estimate,
if any, for one or more of the matters described below could have a material adverse effect on the company’s results of operations, financial position and cash flows.
Product Liability, Workers Compensation and Other Personal Injury Matters
For product liability, workers compensation and other personal injury matters, the company accrues the most likely amount or at least the minimum of the range of possible loss when a range of possible loss can be estimated. The company records estimated amounts due from insurers related to certain product liabilities as an asset. Although the
company believes that the amounts accrued and estimated recoveries are probable and appropriate based on available information, including actuarial studies of loss estimates, the process of estimating losses and insurance recoveries involves a considerable degree of judgment by management and the ultimate amounts could vary materially. Insurance contracts do not relieve the company of its primary obligation with respect to any losses incurred. The collectability of amounts due from its insurers is subject to the solvency and willingness of the insurer to pay, as well as the legal sufficiency of the insurance claims. Management monitors the payment history as well as the financial condition and ratings of its insurers on an ongoing basis.
Intellectual
Property Matters
On June 3, 2013, Unisone Strategic IP filed a complaint against Life Technologies in the United States District Court for the Southern District of California alleging patent infringement by Life Technologies’ supply chain management system software, which operates with product "supply centers" installed at customer sites. Plaintiff seeks damages for alleged willful infringement, attorneys’ fees, costs, and injunctive relief. On August 24, 2017, Unisone filed an appeal from a decision by the Patent Trial and Appeal Board (PTAB) that found the challenged patent claims invalid. The United States Court of Appeals for the Federal Circuit upheld the PTAB’s ruling finding the challenged claims in the Unisone patent invalid. Unisone had until March 11, 2019 to
file an appeal with the United States Supreme Court. Unisone did not appeal that decision, and consequently the case before the United States District Court, which had been stayed pending the outcome of the PTAB decision, has resumed with respect to similar Unisone patent claims that were not included in the PTAB proceeding.
21
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
Note
11.
Comprehensive Income
Comprehensive income combines net income and other comprehensive items. Other comprehensive items represent certain amounts that are reported as components of shareholders’ equity in the accompanying balance sheet.
i
Changes in each component of accumulated other comprehensive items, net of tax, are as follows:
(In
millions)
Currency Translation Adjustment
Unrealized Losses on Hedging Instruments
Pension and Other Postretirement Benefit Liability Adjustment
Fair Value Measurements and Fair Value of Financial Instruments
Fair Value Measurements
The company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during 2019. The company’s financial assets and liabilities carried at fair value are primarily comprised of insurance contracts, investments in money market funds, derivative contracts,
mutual funds holding publicly traded securities and other investments in unit trusts held as assets to satisfy outstanding deferred compensation and retirement liabilities; and acquisition-related contingent consideration.
The fair value accounting guidance requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities that the company has the ability to access.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data such as quoted prices, interest rates and yield curves.
Level 3: Inputs are unobservable data points that are not corroborated by market data.
i
The following tables present information about the company’s financial assets and liabilities measured at fair value on a recurring basis as of September 28,
2019 and December 31, 2018:
22
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
September
28,
Quoted Prices in Active Markets
Significant Other Observable Inputs
Significant Unobservable Inputs
(In millions)
2019
(Level
1)
(Level 2)
(Level 3)
Assets
Cash
equivalents
$
i166
$
i166
$
—
$
—
Investments
in common stock, mutual funds and other similar instruments
The
company uses the Black-Scholes model to value its warrants. The company determines the fair value of its insurance contracts by obtaining the cash surrender value of the contracts from the issuer. The fair value of derivative contracts is the estimated amount that the company would receive/pay upon liquidation of the contracts, taking into account the change in interest rates and currency exchange rates. The
company determines the fair value of acquisition-related contingent consideration based on the probability-weighted discounted cash flows associated with such future payments. Changes to the fair value of contingent consideration are recorded in selling, general and administrative expense.iThe following table provides a rollforward of the fair value, as determined by level 3 inputs, of the contingent consideration.
23
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As
discussed in Note 15, early in the fourth quarter of 2019, the company settled certain of its interest rate swaps and cross-currency interest rate swaps upon the redemption of the related debt securities.
/
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.
The
fair value of the interest rate swaps is included in the consolidated balance sheet under the caption other long-term liabilities.
(b)
The fair value of the cross-currency interest rate swaps is included in the consolidated balance sheet under the caption other assets.
(c)
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.
/
24
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The following amounts related to cumulative basis adjustments for fair value hedges were included in the consolidated balance sheet under the caption long-term obligations:
Carrying
Amount of the Hedged Liability
Cumulative Amount of Fair Value Hedging Adjustment - Increase (Decrease) Included in Carrying Amount of Liability (d)
September 28,
December 31,
September 28,
December
31,
(In millions)
2019
2018
2019
2018
Long-term
Obligations
$
i3,078
$
i3,291
$
(i10
)
$
(i93
)
(d)
Includes
increases in the carrying amount of $i20 million and $i30
million at September 28, 2019 and December 31, 2018, respectively, on discontinued hedging relationships.
i
Gain
(Loss) Recognized
Three Months Ended
Nine Months Ended
September 28,
September 29,
September
28,
September 29,
(In millions)
2019
2018
2019
2018
Fair
Value Hedging Relationships
Interest rate swaps
Hedged
long-term obligations - included in other expense, net
$
(i14
)
$
i8
$
(i95
)
$
i60
Derivatives
designated as hedging instruments - included in other expense, net
i15
(i8
)
i98
(i57
)
Derivatives
Designated as Cash Flow Hedges
Interest rate swaps
Included
in unrealized losses on hedging instruments within other comprehensive items
(i50
)
i—
(i50
)
i—
Amount
reclassified from accumulated other comprehensive items to other expense, net
(i3
)
(i3
)
(i10
)
(i9
)
Financial
Instruments Designated as Net Investment Hedges
Foreign currency-denominated debt
Included
in currency translation adjustment within other comprehensive items
i261
i50
i320
i250
Cross-currency
interest rate swaps
Included in currency translation adjustment within other comprehensive items
Gains
and losses recognized on currency exchange contracts and the interest rate swaps designated as fair value hedges are included in the consolidated statement of income together with the corresponding, offsetting losses and gains on the underlying hedged transactions.
The company also uses foreign currency-denominated debt and cross-currency interest rate swaps to partially hedge its net investments in foreign operations against adverse movements in exchange rates. The majority of the company’s euro-denominated senior notes and cross-currency interest rate swaps have been designated as, and are effective as, economic hedges of part of the net investment in a foreign operation.
Accordingly, foreign currency transaction gains or losses due to spot rate fluctuations on the euro-denominated debt instruments and contract fair value changes on the cross-currency interest rate swaps, excluding interest accruals, are included in currency translation adjustment within other comprehensive items and shareholders’ equity.
25
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
See Note 1 to the consolidated financial statements for 2018
included in the company's Annual Report on Form 10-K and Note 8 herein for additional information on the company's risk management objectives and strategies.
Cash Flow Hedge Arrangements
In September 2019, the company entered into interest rate swap arrangements to mitigate the risk of interest rates rising prior to completion of debt offerings. Based on the company's conclusion that the debt offerings were probable, the swaps hedged the cash flow risk for each of
the interest payments on €i1.80 billion plus $i900
million aggregate principal amounts of the planned fixed-rate debt issues. The hedges were terminated in the third quarter of 2019, in connection with the early fourth quarter debt offerings (Note 15). The aggregate fair value of the hedges at that time, $i38 million, net of tax, has been classified as a reduction to accumulated
other comprehensive items and will be amortized to interest expense over the terms of the related debt issuances. The company had a cash outlay of $i50 million in 2019 associated with termination of the arrangements,
included in other financing activities, net, in the accompanying statement of cash flows.
Fair Value of Other Financial Instruments
ii
The carrying value and fair value of
the company’s notes receivable and debt obligations are as follows:
The
fair value of debt obligations was determined based on quoted market prices and on borrowing rates available to the company at the respective period ends which represent level 2 measurements.
//
i
Note
13.
Supplemental Cash Flow Information
i
Nine
Months Ended
September 28,
September 29,
(In millions)
2019
2018
Non-cash
Investing and Financing Activities
Declared but unpaid dividends
$
i77
$
i69
Issuance
of stock upon vesting of restricted stock units
i179
i167
/i
Cash,
cash equivalents and restricted cash is included in the consolidated balance sheet as follows:
September 28,
December 31,
(In millions)
2019
2018
Cash
and Cash Equivalents
$
i1,273
$
i2,103
Restricted
Cash Included in Other Current Assets
i31
i12
Restricted
Cash Included in Other Assets
i1
i2
Cash,
Cash Equivalents and Restricted Cash
$
i1,305
$
i2,117
/
Amounts
included in restricted cash represent funds held as collateral for bank guarantees and incoming cash in China awaiting government administrative clearance.
26
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
i
Note
14.
Restructuring and Other Costs (Income), Net
Restructuring and other costs (income), net, in the first nine months of 2019 primarily included the gain on the sale of the company's Anatomical Pathology business, and, to a lesser extent, transaction/integration costs related to acquisitions and a divestiture; sales of inventories revalued at the date of acquisition; and 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. and Europe. In the first
nine months of 2019, severance actions associated with facility consolidations and cost reduction measures affected approximately i1% of the company’s workforce.
As of November 1, 2019,
the company has identified restructuring actions that will result in additional charges of approximately $i80 million, primarily in 2019 and 2020, and expects to identify additional actions during 2019 which will be recorded when specified criteria are met, such as communication of benefit arrangements or when the costs have been incurred.
i
During
the third quarter of 2019, the company recorded net restructuring and other costs (income) by segment as follows:
(In millions)
Cost of Revenues
Selling, General
and Administrative Expenses
Restructuring and Other Costs (Income), Net
Total
Life
Sciences Solutions
$
i5
$
—
$
i3
$
i8
Analytical
Instruments
—
—
i1
i1
Specialty
Diagnostics
—
—
i23
i23
Laboratory
Products and Services
—
i8
i4
i12
Corporate
—
(i1
)
—
(i1
)
$
i5
$
i7
$
i31
$
i43
During
the first nine months of 2019, the company recorded net restructuring and other costs (income) by segment as follows:
(In millions)
Cost of Revenues
Selling, General
and Administrative Expenses
Restructuring and Other Costs (Income), Net
Total
Life
Sciences Solutions
$
i16
$
—
$
i14
$
i30
Analytical
Instruments
—
i24
i10
i34
Specialty
Diagnostics
—
i4
(i480
)
(i476
)
Laboratory
Products and Services
—
i27
i12
i39
Corporate
—
(i1
)
i2
i1
$
i16
$
i54
$
(i442
)
$
(i372
)
/
The
principal components of net restructuring and other costs (income) by segment are as follows:
Life Sciences Solutions
In the first nine months of 2019, the Life Sciences Solutions segment recorded $i30 million of net restructuring and other costs, principally charges to cost of
revenues of $i16 million for the sales of inventory revalued at the date of acquisition. The segment also recorded $i14
million of restructuring and other charges for the impairment of acquired technology in development, and severance and other costs associated with facility consolidations in the U.S. and Europe.
Analytical Instruments
In the first nine months of 2019, the Analytical Instruments segment recorded $i34
million of net restructuring and other charges, including $i24 million of charges to selling, general, and administrative expense, principally transaction costs related to the acquisition of Gatan, subsequently terminated. The segment also recorded $i10
million of restructuring and other costs, primarily for employee severance and other costs associated with facility consolidations in the U.S. and Europe.
27
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Specialty Diagnostics
In the first nine months of 2019, the Specialty Diagnostics segment recorded $i476
million of net restructuring and other income, primarily a gain on the divestiture of its Anatomical Pathology business (see Note 2). The segment also recorded $i4 million of charges to selling, general, and administrative expense for transaction costs in connection with the sale of the Anatomical Pathology business.
Laboratory Products and Services
In
the first nine months of 2019, the Laboratory Products and Services segment recorded $i39 million of net restructuring and other charges. The segment recorded $i27
million of charges to selling, general, and administrative expense, principally transaction costs related to the acquisition and integration of Brammer Bio. The segment also recorded $i12 million of restructuring and other costs, primarily for employee severance at businesses streamlining operations and employee compensation due at Brammer Bio on the date of acquisition.
Corporate
In
the first nine months of 2019, the company recorded $i1 million of net restructuring and other costs for severance at its corporate operations, partially offset by income from favorable results of product liability litigation.
i
The
following table summarizes the cash components of the company’s restructuring plans. The non-cash components and other amounts reported as restructuring and other costs (income), net, in the accompanying statement of income have been summarized in the notes to the tables. Accrued restructuring costs are included in other accrued expenses in the accompanying balance sheet.
Other
includes relocation and moving expenses associated with facility consolidations, as well as employee retention costs which are accrued ratably over the period through which employees must work to qualify for a payment.
(b)
Impact of adopting new lease accounting guidance on January 1, 2019.
(c)
Represents reductions in cost of plans.
/
(d)
Excludes
$i486 million net gain on the sale of businesses; $i6
million of impairment of acquired in-process research and development; $i3 million of compensation due to employees on the date of acquisition; and $i2
million of other non-cash charges, net.
The company expects to pay accrued restructuring costs primarily through i2019.
28
THERMO
FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
Note 15.
i
Subsequent Events
Debt Issuances and Redemptions
Early
in the fourth quarter of i2019, the company issued the following senior notes:
(In millions)
Principal
Value Issued
0.125% 5.5-Year Senior Notes, Due 3/1/2025 (euro-denominated)
€
i800
0.500%
8.5-Year Senior Notes, Due 3/1/2028 (euro-denominated)
€
i800
2.600%
10-Year Senior Notes, Due 10/1/2029
$
i900
0.875% 12-Year Senior Notes,
Due 10/1/2031 (euro-denominated)
€
i900
1.500% 20-Year Senior Notes,
Due 10/1/2039 (euro-denominated)
€
i900
1.875% 30-Year Senior Notes,
Due 10/1/2049 (euro-denominated)
€
i1,000
Net
proceeds from the issuance of the notes in the table above was approximately $i5.6 billion, after deducting underwriting discounts and estimated offering expenses. The company is using the proceeds to repay commercial paper obligations and to redeem the following senior notes:
(In
millions)
Principal Value Redeemed
6.00% 10-Year Senior Notes, Due 3/1/2020
$
i750
1.50%
5-Year Senior Notes, Due 12/1/2020 (euro-denominated)
€
i425
5.00% 10-Year
Senior Notes, Due 1/15/2021
$
i400
4.50% 10-Year Senior Notes, Due 3/1/2021
$
i1,000
3.60%
10-Year Senior Notes, Due 8/15/2021
$
i1,100
3.30% 7-Year Senior Notes, Due
2/15/2022
$
i800
In connection with the redemptions,
the company paid $i21 million upon the termination of the fixed to floating rate swap arrangements on the redeemed senior notes and received $i47
million upon termination of the related cross-currency interest rate swap arrangements (see Note 8).
The company incurred approximately $i142 million of losses on the early extinguishment of debt in October 2019 due to the redemptions and
related interest rate swap terminations discussed above.
29
THERMO FISHER SCIENTIFIC INC.
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, including without limitation statements regarding: projections of revenue, expenses, earnings, margins, tax rates, tax provisions, cash flows, pension and benefit obligations and funding requirements, our liquidity position; cost reductions, restructuring activities, new product and service developments, competitive strengths or market position, acquisitions or divestitures; growth, declines and other trends in markets we sell into; new or modified laws, regulations and accounting pronouncements; outstanding claims, legal proceedings, tax audits and assessments and other contingent liabilities; foreign currency exchange rates and fluctuations in those rates; general economic and capital markets conditions; the timing
of any of the foregoing; assumptions underlying any of the foregoing; and any other statements that address events or developments that Thermo Fisher intends or believes will or may occur in the future. Without limiting the foregoing, the words "believes,""anticipates,""plans,""expects,""seeks,""estimates," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements are accompanied by such words. 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 4): Life Sciences Solutions, Analytical Instruments, Specialty Diagnostics and Laboratory Products and Services.
Recent Acquisitions and Divestiture
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 October 25, 2018, the company acquired, within the Life Sciences Solutions segment, Becton Dickinson and Company's Advanced Bioprocessing business for$477 million in cash. This North America-based business adds complementary cell culture products that expand the segment's bioproduction offerings to help customers increase yield during production of biologic drugs. Revenues of the Advanced Bioprocessing business were $100 million in 2017.
On April 30, 2019, the
company acquired, within the Laboratory Products and Services segment, Brammer Bio for approximately $1.7 billion in cash. Brammer Bio is a leading viral vector contract development and manufacturing organization for gene and cell therapies. The acquisition expands the segment's contract manufacturing capabilities. Revenues of Brammer Bio were approximately $140 million in 2018.
On June 28, 2019, the company sold its Anatomical Pathology business to PHC Holdings Corporation for $1.13 billion,
net of cash divested. The business was part of the Specialty Diagnostics segment. The sale of this business resulted in a pre-tax gain of approximately $482 million, included in restructuring and other (income) costs, net. Revenues in 2019, through the date of sale, and the full year 2018 of the business sold were approximately $115 million and $238 million, respectively, net of retained sales through the company's healthcare market and research and safety market channel businesses.
30
THERMO
FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview of Results of Operations and Liquidity
Three
Months Ended
Nine Months Ended
September 28,
September 29,
September 28,
September 29,
(Dollars in millions)
2019
2018
2019
2018
Revenues
Life
Sciences Solutions
$
1,701
27.1
%
$
1,504
25.4
%
$
5,018
26.8
%
$
4,572
25.6
%
Analytical
Instruments
1,358
21.7
%
1,333
22.5
%
4,004
21.4
%
3,901
21.9
%
Specialty
Diagnostics
879
14.0
%
894
15.1
%
2,779
14.9
%
2,773
15.5
%
Laboratory
Products and Services
2,619
41.8
%
2,470
41.7
%
7,765
41.5
%
7,433
41.6
%
Eliminations
(285
)
(4.6
)%
(281
)
(4.7
)%
(853
)
(4.6
)%
(828
)
(4.6
)%
$
6,272
100
%
$
5,920
100
%
$
18,713
100
%
$
17,851
100
%
Sales
in the third quarter of 2019 were $6.27 billion, an increase of $352 million from 2018. Sales increased$27 million due to acquisitions, net of a divestiture. The unfavorable effects of currency translation resulted in a decrease in revenues of $83 million in the third quarter of 2019. Aside from the effects of acquisitions and currency translation, revenues increased$408 million (7%) primarily due to increased demand in the quarter compared to the 2018 quarter. Sales to customers in each of the company's primary end markets grew except for sales to industrial customers which were flat. Sales to customers in the biotech and pharmaceutical industry remained particularly strong. Sales growth was strong in Europe, Asia and North America.
In the third quarter of 2019, total company operating income and operating income margin were $946 million and 15.1%, respectively, compared with $912 million
and 15.4%, respectively, in 2018. The increase in operating income was primarily due to profit on higher sales and, to a lesser extent, productivity improvements, net of inflationary cost increases. These increases were offset in part by strategic growth investments, reversal of a litigation accrual in the 2018 period and, to a lesser extent, unfavorable sales mix.The company’s references to strategic growth investments generally refer to targeted spending for enhancing commercial capabilities, including expansion of geographic sales reach and e-commerce platforms, marketing initiatives, expanded service and operational infrastructure, focused research projects and other expenditures
to enhance the customer experience. 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, and low cost region manufacturing.
The company's effective tax rate was 7.6% for the third quarter of 2019. The company expects its effective tax rate for all of 2019 will be between 8% and 11% based on currently forecasted rates of profitability in the countries in which the
company conducts business and expected generation of foreign tax credits. 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 $725 to $775 million in 2019.The company's effective tax rate was 12.5% for the third quarter of 2018 including a net tax provision of $47 million to adjust the impacts of U.S. tax reform.
Net income increased to $760 million in the third quarter of 2019
from $709 million in the third quarter of 2018, primarily due to the increase in operating income and decrease in income tax provision in the 2019 period (both discussed above) offset in part by $42 million of losses on the early extinguishment of debt in the third quarter of 2019.
During the first nine months of 2019, the company’s cash flow from operations totaled $3.06 billion compared with $2.74 billion
for 2018. The increase primarily resulted from lower investment in working capital in 2019 as well as higher income before amortization and depreciation.
As of September 28, 2019, the company’s short-term debt totaled $661 million consisting principally of senior notes due within the next twelve months.The company has a revolving credit facility with a bank group that provides up to $2.50 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 28, 2019, no borrowings were outstanding under the company’s revolving credit facility, although available capacity was reduced by approximately $80 million as a result of outstanding letters of credit. The company completed a refinancing of $5.6 billion
of debt early in the fourth quarter as discussed in Note 15.
31
THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview of Results of Operations and Liquidity (continued)
The company believes that its existing cash and cash equivalents of $1.27 billion as of September 28,
2019 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, revenue and expenses and related disclosure of contingent liabilities. On an on-going basis, management evaluates its estimates, including those related to intangible assets and goodwill, income taxes, contingencies and litigation, and pension costs. 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 bases its estimates on historical experience, current market and economic conditions and other assumptions that management believes are reasonable. The results of these estimates form the basis for judgments about the carrying value of assets and liabilities where the values are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements of the company’s Form 10-K for 2018, describe the significant accounting estimates and policies used in preparation of the consolidated financial statements. While there have been no significant changes in the company's critical accounting policies during the first nine months of 2019, as described in Note 1, the company changed the manner in which it accounts for leases under guidance that became effective January 1, 2019.
* Currency
Translation/Other for the Laboratory Products and Services segment includes a reduction of revenue of $35 million for the impact of a change in the method of reporting certain intersegment sales with no impact on consolidated results.
Sales in the third quarter of 2019 were $6.27 billion, an increase of $352 million from the third quarter of 2018. Sales increased$27 million due to acquisitions, net of a divestiture. The unfavorable effects of currency translation resulted
in a decrease in revenues of $83 million in 2019. Aside from the effects of acquisitions/divestitures and currency translation, revenues increased$408 million (7%) primarily due to increased demand in the quarter compared to the 2018 quarter. Sales to customers in each of the company's primary end markets grew except for sales to industrial customers which were flat. Sales to customers in the biotech and pharmaceutical industry remained particularly strong. Sales growth was strong in Europe, Asia and North America.
In the third
quarter of 2019, total company operating income and operating income margin were $946 million and 15.1%, respectively, compared with $912 million and 15.4%, respectively, in 2018. The increase in operating income was primarily due to profit on higher sales and, to a lesser extent, productivity improvements, net of inflationary cost increases. These increases were offset in part by strategic growth investments, reversal of a litigation accrual in the 2018 period and, to a lesser extent, unfavorable sales mix.
In the third quarter of 2019,
the company recorded restructuring and other costs, net, of $43 million, including $19 million of net charges associated with sales of businesses in prior periods, including post-closing adjustments. The company recorded
32
THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results
of Operations (continued)
$5 million of charges to cost of revenues for the sale of inventories revalued at the date of acquisition. The company also recorded $7 million of charges to selling, general and administrative expenses, principally transaction and integration-related costs for recent acquisitions. In addition, the company recorded $12 million of cash restructuring charges, primarily for employee severance and abandoned facilities costs associated with the closure and consolidation of facilities in the U.S. and Europe. See Note 14 for restructuring charges expected in future
periods.
In the third quarter of 2018, the company recorded restructuring and other income, net, of $32 million, including $4 million of net credits to selling, general and administrative expenses, primarily income from favorable results of product liability litigation, offset in part by third-party transaction/integration costs related to recent and pending acquisitions. The company recorded $24 million of cash restructuring costs, including severance and abandoned facilities costs associated with the closure and consolidation of facilities in the U.S. and Europe. The
company also recorded $51 million of other income, net, principally for the favorable resolution of a litigation matter.
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 uses this measure because it helps management understand and
evaluate the segments’ core operating results and facilitate comparison of performance for determining compensation (Note 4). Accordingly, the following segment data is reported on this basis.
Three Months Ended
September
28,
September 29,
(Dollars in millions)
2019
2018
Change
Revenues
Life
Sciences Solutions
$
1,701
$
1,504
13
%
Analytical Instruments
1,358
1,333
2
%
Specialty
Diagnostics
879
894
(2
)%
Laboratory Products and Services
2,619
2,470
6
%
Eliminations
(285
)
(281
)
1
%
Consolidated
Revenues
$
6,272
$
5,920
6
%
Segment
Income
Life Sciences Solutions
$
586
$
495
18
%
Analytical
Instruments
311
294
6
%
Specialty Diagnostics
223
223
—
%
Laboratory
Products and Services
303
299
1
%
Subtotal
Reportable Segments
1,423
1,311
9
%
Cost
of Revenues Charges (Credits), Net
(5
)
1
Selling, General and Administrative Charges (Credits), Net
(7
)
4
Restructuring
and Other Costs (Income), Net
(31
)
27
Amortization of Acquisition-related Intangible Assets
(434
)
(431
)
Consolidated
Operating Income
$
946
$
912
4
%
Reportable
Segments Operating Income Margin
22.7
%
22.1
%
Consolidated
Operating Income Margin
15.1
%
15.4
%
33
THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Income from the company’s reportable segments increased 9% to $1.42 billion in the third quarter of 2019 due primarily to profit on higher sales and, to a lesser extent, productivity improvements, net of inflationary cost increases, offset in part by strategic growth investments and, to a lesser extent, unfavorable sales mix.
Life Sciences Solutions
Three
Months Ended
September 28,
September 29,
(Dollars in millions)
2019
2018
Change
Revenues
$
1,701
$
1,504
13
%
Operating
Income Margin
34.5
%
32.9
%
1.6 pt
Sales in the Life Sciences Solutions segment increased$197 million to $1.70 billion in the third
quarter of 2019. Sales increased $194 million (13%) due to higher revenues at existing businesses and $24 million due to an acquisition. The unfavorable effects of currency translation resulted in a decrease in revenues of $21 million. The increase in revenue at existing businesses was primarily due to increased demand in each of the segment's principal businesses with particular strength in sales of bioproduction and biosciences products.
Operating income margin was 34.5% in the third quarter of 2019
compared to 32.9% in the third quarter of 2018. The increase resulted primarily from profit on higher sales, offset in part by strategic growth investments and, to a lesser extent, unfavorable sales mix.
Analytical Instruments
Three
Months Ended
September 28,
September 29,
(Dollars in millions)
2019
2018
Change
Revenues
$
1,358
$
1,333
2
%
Operating
Income Margin
23.0
%
22.0
%
1 pt
Sales in the Analytical Instruments segment increased$25 million to $1.36 billion in the third
quarter of 2019. Sales increased$44 million (3%) due to higher revenues at existing businesses. The unfavorable effects of currency translation resulted in a decrease in revenues of $19 million. The increase in revenue at existing businesses was primarily due to increased demand for chromatography and mass spectrometry products.
Operating income margin was 23.0% in the third quarter of 2019 compared to 22.0% in the third
quarter of 2018. The increase resulted primarily from profit on higher sales and productivity improvements, net of inflationary cost increases, offset in part by unfavorable sales mix and, to a lesser extent, strategic growth investments.
Specialty Diagnostics
Three Months Ended
September
28,
September 29,
(Dollars in millions)
2019
2018
Change
Revenues
$
879
$
894
(2
)%
Operating
Income Margin
25.3
%
25.0
%
0.3 pt
Sales in the Specialty Diagnostics segment decreased$15 million to $879 million in the third
quarter of 2019. The divestiture of Anatomical Pathology business resulted in a decrease in sales of $63 million. The unfavorable effects of currency translation resulted in a decrease in revenues of $11 million. These decreases were offset in part by $59 million (7%) of higher revenues at existing businesses. The increase in revenue at existing businesses was due to higher demand in each of the
34
THERMO
FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
segment's principal businesses with particular strength in sales of products sold through the segment's healthcare market channel business as well as immunodiagnostic products.
Operating income margin was 25.3% in the third quarter of 2019 and 25.0% in the third quarter of 2018. The increase
was primarily due to profit on higher sales and productivity improvements, net of inflationary cost increases, offset in part by strategic growth investments and unfavorable sales mix.
Laboratory Products and Services
Three Months Ended
September
28,
September 29,
(Dollars in millions)
2019
2018
Change
Revenues
$
2,619
$
2,470
6
%
Operating
Income Margin
11.6
%
12.1
%
-0.5 pt
Sales in the Laboratory Products and Services segment increased$149 million to $2.62 billion in the third
quarter of 2019. Sales increased$150 million (6%) due to higher revenues at existing businesses and $68 million due to an acquisition. The unfavorable effects of currency translation resulted in a decrease in revenues of $34 million. Revenues decreased $35 million due primarily to a change in the method of reporting certain intersegment sales with no impact to consolidated results. The increase in revenue at existing businesses was primarily due to increased demand for products sold through its research and safety market channel business and service offerings of the segment's pharma services business.
Operating income margin was 11.6%
in the third quarter of 2019 and 12.1% in the third quarter of 2018. The decrease was primarily due to strategic growth investments and, to a lesser extent, unfavorable sales mix offset in part by profit on higher sales and, to a lesser extent, productivity improvements, net of inflationary cost increases.
Other Expense, Net
The company reported other expense, net, of $124 million and $102 million in the third
quarter of 2019 and 2018, respectively (Note 5). In the third quarter of 2019, the company recorded $42 million of losses on the early extinguishment of debt). An increasein interest income of$11 millionin 2019 was offset in part byan increase in interest expense of $2 million. The
company expects to incur an additional$142 million of losses on the early extinguishment of debt in the fourth quarter of 2019 (see Note 15).
Provision for Income Taxes
The company's effective tax rate was 7.6% for the third quarter of 2019. The company expects its effective tax rate for all of 2019 will be between 8% and 11% based on currently forecasted rates of profitability in the countries in which the company conducts business and expected generation of foreign tax credits. 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 $725 to $775 million in 2019.The company's effective tax rate was 12.5% for the third quarter of 2018 including a net tax provision of $47 million to adjust the impacts of U.S. tax reform.
The company has operations and a taxable presence in approximately 50 countries outside the U.S. Some of these countries have lower tax rates than the U.S. The company’s ability
to obtain a benefit from lower tax rates outside the U.S. is dependent on its relative levels of income in countries outside the U.S. and on the statutory tax rates in those countries. 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.
35
THERMO
FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
First Nine Months of 2019 Compared With First Nine Months of 2018
* Currency
Translation/Other for the Laboratory Products and Services segment includes a reduction of revenue of $35 million for the impact of a change in the method of reporting certain intersegment sales with no impact on consolidated results.
Sales in the first nine months of 2019 were $18.71 billion, an increase of $862 million from the first nine months of 2018. Sales increased$112 million due to acquisitions, net of a divestiture. The unfavorable effects of currency translation
resulted in a decrease in revenues of $395 million in 2019. Aside from the effects of currency translation and acquisitions, revenues increased$1.15 billion (6%) primarily due to increased demand. Sales to customers in each of the company's primary end markets grew with particular strength in sales to customers in the biotech and pharmaceutical industry. Sales growth was strong in each of the company's primary geographic areas, particularly Asia.
In the first nine
months of 2019, total company operating income and operating income margin were $3.36 billion and 18.0%, respectively, compared with $2.64 billion and 14.8%, respectively, in the first nine months of 2018. The increase in operating income was primarily due to profit on higher sales, the gain on the sale of the Anatomical Pathology business and, to a lesser extent, productivity improvements, net of inflationary cost increases. These increases were offset in part by strategic growth investments, unfavorable sales mix and unfavorable foreign currency exchange.
In the
first nine months of 2019, the company recorded restructuring and other income, net, of $372 million, including $482 million of net gains on the sale of businesses, principally the Anatomical Pathology business (see Note 2). The company also recorded $16 million of charges to cost of revenues for the sale of inventories revalued at the date of acquisition, and $54 million of net charges to selling, general and administrative expenses, principally transaction and integration-related costs related to acquisitions and a divestiture. In
addition, the company recorded $33 million of cash restructuring charges, net, primarily for employee severance and abandoned facilities costs associated with the closure and consolidation of facilities in the U.S. and Europe (see Note 14).
In the first nine months of 2018, the company recorded restructuring and other costs, net, of $49 million, including $7 million of charges to cost of revenues primarily for the sale of inventories revalued at the date of acquisition. The
company recorded $7 million of charges to selling, general and administrative expenses, primarily for third-party transaction and integration costs associated with recent and pending acquisitions, offset in part by income from the favorable results of product liability litigation. In addition, the company recorded $75 million of cash restructuring costs in its continuing effort to streamline operations, including severance at several businesses and abandoned facility expenses at businesses that have been or are being consolidated in the U.S., Europe and Asia. The company also recorded $40 million of other income, net, principally for resolution of a litigation matter.
36
THERMO
FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Segment Results
Nine Months Ended
September
28,
September 29,
(Dollars in millions)
2019
2018
Change
Revenues
Life
Sciences Solutions
$
5,018
$
4,572
10
%
Analytical Instruments
4,004
3,901
3
%
Specialty
Diagnostics
2,779
2,773
—
%
Laboratory Products and Services
7,765
7,433
4
%
Eliminations
(853
)
(828
)
3
%
Consolidated
Revenues
$
18,713
$
17,851
5
%
Segment
Income
Life Sciences Solutions
$
1,756
$
1,534
14
%
Analytical
Instruments
879
831
6
%
Specialty Diagnostics
707
719
(2
)%
Laboratory
Products and Services
933
916
2
%
Subtotal
Reportable Segments
4,275
4,000
7
%
Cost
of Revenues Charges
(16
)
(7
)
Selling, General and Administrative Charges, Net
(54
)
(7
)
Restructuring
and Other Income (Costs), Net
442
(35
)
Amortization of Acquisition-related Intangible Assets
(1,285
)
(1,316
)
Consolidated
Operating Income
$
3,362
$
2,635
28
%
Reportable
Segments Operating Income Margin
22.8
%
22.4
%
Consolidated
Operating Income Margin
18.0
%
14.8
%
Income from the company’s reportable segments increased 7% to $4.28 billion in the first nine
months of 2019 due primarily to profit on higher sales and, to a lesser extent, productivity improvements, net of inflationary cost increases, offset in part by strategic growth investments, unfavorable sales mix and unfavorable foreign currency exchange.
Life Sciences Solutions
Nine Months Ended
September
28,
September 29,
(Dollars in millions)
2019
2018
Change
Revenues
$
5,018
$
4,572
10
%
Operating
Income Margin
35.0
%
33.5
%
1.5 pt
Sales in the Life Sciences Solutions segment increased$446 million to $5.02 billion in the first nine
months of 2019. Sales increased$471 million (10%) due to higher revenues at existing businesses and $83 million due to an acquisition. The unfavorable effects of currency translation resulted in a decrease in revenues of $108 million. The increase in revenue at existing businesses was primarily due to increased demand in each of the segment's principal businesses with particular strength in sales of bioproduction and biosciences products.
37
THERMO
FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
Operating income margin was 35.0% in the first nine months of 2019 compared to 33.5% in the first nine months of 2018. The increase resulted primarily from profit on higher sales offset in part by strategic growth investments and, to a lesser extent, unfavorable sales mix and unfavorable foreign currency exchange.
Analytical
Instruments
Nine Months Ended
September 28,
September
29,
(Dollars in millions)
2019
2018
Change
Revenues
$
4,004
$
3,901
3
%
Operating
Income Margin
22.0
%
21.3
%
0.7 pt
Sales in the Analytical Instruments segment increased$103 million to $4.00 billion in the first nine
months of 2019. Sales increased $188 million (5%) due to higher revenues at existing businesses. The unfavorable effects of currency translation resulted in a decrease in revenues of $85 million. The increase in revenue at existing businesses was due to increased demand for products sold by each of the segment's primary businesses with particular strength in chromatography and mass spectrometry instruments.
Operating income margin was 22.0% in the first nine months of 2019 compared to 21.3%
in the first nine months of 2018. The increase resulted primarily from profit on higher sales and, to a lesser extent, productivity improvements, net of inflationary cost increases. These increases were offset in part by unfavorable sales mix and strategic growth investments.
Specialty Diagnostics
Nine
Months Ended
September 28,
September 29,
(Dollars in millions)
2019
2018
Change
Revenues
$
2,779
$
2,773
—
%
Operating
Income Margin
25.5
%
25.9
%
-0.4 pt
Sales in the Specialty Diagnostics segment increased$6 million to $2.78 billion in the first nine
months of 2019. Sales increased $127 million (5%) due to higher revenues at existing businesses. The unfavorable effects of currency translation resulted in a decrease in revenues of $58 million and the divestiture of Anatomical Pathology business decreased revenue by $63 million. The increase in revenue at existing businesses was due to increased demand for products sold through the segment's healthcare market channel as well as clinical diagnostic and immunodiagnostic products.
Operating income margin was 25.5% in the
first nine months of 2019 compared to 25.9% in the first nine months of 2018. The decrease was primarily due to strategic growth investments offset in part by profit on higher sales and, to a lesser extent, productivity improvements, net of inflationary cost increases.
Laboratory Products and Services
Nine
Months Ended
September 28,
September 29,
(Dollars in millions)
2019
2018
Change
Revenues
$
7,765
$
7,433
4
%
Operating
Income Margin
12.0
%
12.3
%
-0.3 pt
Sales in the Laboratory Products and Services segment increased$332 million to $7.77 billion in 2019.
Sales increased$427 million (6%) due to higher revenues at existing businesses and $94 million due to an acquisition. The unfavorable effects of currency translation resulted in a decrease in revenues of $154 million. Revenues decreased $35 million due primarily to a change in the method of reporting certain intersegment sales with no impact to consolidated results. The increase in revenue at
38
THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations (continued)
existing businesses was primarily due to increased demand in each of the segment's principal businesses with particular strength in service offerings of its pharma services business and products sold through its research and safety market channel business.
Operating income margin was 12.0% in the first nine months of 2019 compared to 12.3% in the first nine months of 2018. The decrease
was primarily due to strategic growth investments and unfavorable sales mix offset in part by productivity improvements, net of inflationary cost increases, and profit on higher sales.
Other Expense, Net
The company reported other expense, net, of $330 million and $385 million in the first nine months of 2019 and 2018, respectively (Note 5). An increase in interest income of $87 millionwas offset in part byan increase in interest expense of $39 million. In2019, the company recorded $42 million of losses on the early extinguishment of debt. The company expects to incur an additional$142 million of losses on the early extinguishment of debt in the fourth quarter of 2019 (see Note 15).
Provision for Income Taxes
The
company recorded a $338 million provision for income taxes in the first nine months of 2019 including $191 million related to the gain on the sale of the Anatomical Pathology business. In addition, in 2019, the company recorded a $62 million income tax benefit related to a foreign exchange loss for tax purposes on certain intercompany financing arrangements and implemented foreign tax credit planning in Sweden which resulted in $75 million of foreign tax credits, with no related incremental U.S. income tax expense.
The
company recorded a $210 million provision for income taxes in the first nine months of 2018. In 2018, the company recorded a net tax provision of $68 million to adjust the estimated initial impacts of U.S. tax reform recorded in 2017, consisting of an incremental provision of $117 million offset in part by a $49 million reduction of related unrecognized tax benefits established in 2017. These adjustments were required based on new U.S. Treasury guidance and further analysis of available tax accounting methods and elections, legislative updates, regulations, earnings and profit computations and foreign taxes.
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,""Intellectual Property Matters" and "Commercial
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 (current assets less current liabilities) was $4.67 billion at September 28, 2019, compared with $4.48 billion at December 31, 2018.
Included in working capital were cash and cash equivalents of $1.27 billion at September 28, 2019 and $2.10 billion at December 31, 2018.
First Nine Months of 2019
Cash provided by operating activities was $3.06 billion during the first nine months of 2019. Cash provided by income was offset in part by investments in working capital. Increases in accounts receivable and
inventories used cash of $321 million and $449 million, respectively, primarily to support growth in sales. An increase in other assets used cash of $186 million primarily due to the timing of customer billings. Other liabilities increased by $172 million primarily due to advance payments from customers. Cash payments for income taxes increased to $589 million during the first nine months of 2019, compared with $449 million in
the first nine months of 2018. The company made cash contributions to its pension and postretirement benefit plans totaling $40 million during the first nine months of 2019. Payments for restructuring actions, principally severance costs and lease and other expenses of real estate consolidation, used cash of $45 million during the first nine months of 2019.
During the first nine months of 2019,
the company’s investing activities used $1.15 billion of cash. Acquisitions used cash of $1.69 billion. Proceeds from the sale of the Anatomical Pathology business provided $1.13 billion. The company's investing
39
THERMO FISHER SCIENTIFIC INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity
and Capital Resources (continued)
activities also included the purchase of $637 million of property, plant and equipment. On September 30, 2019, the company acquired an active pharmaceutical ingredient manufacturing site in Cork, Ireland for approximately €90 million in cash.
The company’s financing activities used$2.60 billion of cash during the first nine months of 2019. Repayment of senior notes used cash of $1.70
billion. A net increase in commercial paper obligations provided cash of $3 million. The company’s financing activities also included the repurchase of $750 million of the company's common stock and the payment of $221 million in cash dividends, offset in part by $115 million of net proceeds from employee stock option exercises. On September 7, 2018, the Board of Directors authorized the repurchase of up to $2.00 billion of the
company’s common stock. Early in the fourth quarter of 2019, the company repurchased $750 million of the company's common stock. At November 1, 2019, authorization remained for $500 million of future repurchases of the company’s common stock. As discussed in Note 15, early in the fourth quarter of 2019, the company issued new senior notes for net proceeds of $5.6
billion and is using those proceeds to redeem existing debt.
The company's commitments for purchases of property, plant and equipment, contractual obligations and other commercial commitments did not change materially between December 31, 2018 and September 28, 2019. The company expects that for all of 2019, expenditures for property, plant and equipment, net of disposals, will approximate $925 and $975 million.
As
of September 28, 2019, the company’s short-term debt totaled $661 million consisting principally of senior notes due within the next twelve months.The company has a revolving credit facility with a bank group that provides up to $2.50 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 28, 2019, no borrowings were outstanding under the company’s revolving credit facility, although available capacity was reduced by approximately $80 million as a result of outstanding letters of credit.
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. dividend received deduction or foreign tax credit equals 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 $1.27 billion as of September 28, 2019 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 2018
Cash provided by operating activities was $2.74 billion during the first nine months of 2018. Cash provided by income was offset in part by investments in working capital. Increases in accounts receivable and inventories used cash of $64 million and $333 million, respectively, primarily to support growth in sales. An increase
in other assets used cash of $185 million primarily due to the timing of customer billings and income tax refunds. Other liabilities decreased by $199 million primarily due to the timing of payments for income taxes and, to a lesser extent, incentive compensation. Cash payments for income taxes totaled $449 million. The company made cash contributions to its pension and postretirement benefit plans totaling $78 million during the first nine months of 2018. Payments for restructuring actions, principally severance costs and lease
and other expenses of real estate consolidation, used cash of $62 million during the first nine months of 2018.
During the first nine months of 2018, the company’s investing activities used $532 million of cash. Acquisitions used cash of $59 million. The company’s investing activities also included the purchase of $474 million of property, plant and equipment.
The
company’s financing activities used$2.22 billion of cash during the first nine months of 2018. Repayment of senior notes used cash of $2.05 billion. New long-term borrowings provided cash of $690 million. A net decrease in commercial paper obligations used cash of $464 million. The company’s financing activities also included the payment of $198 million in cash dividends, offset in part by $97 million
of net proceeds from employee stock option exercises.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
The company's exposure to market risk from changes in interest rates and currency exchange rates has not changed materially from its exposure at year-end 2018.
40
THERMO
FISHER SCIENTIFIC INC.
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, has evaluated the effectiveness of the
company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the company’s chief executive officer and chief financial officer concluded that, as of the end of such period, 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 28, 2019, 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 commercial issues. 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 30.
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. Our growth depends in part on the growth of the markets which we serve. Any decline or lower than expected growth in our served markets could diminish demand for our products and services, which would adversely affect our results of operations and financial condition. 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;
41
THERMO
FISHER SCIENTIFIC INC.
Risk Factors (continued)
•
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.
We may not be able to successfully implement these strategies, and these strategies may not result in the expected growth of our business.
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;
•
causing supply interruptions which could disrupt our ability to produce our products; and
•
creating longer sales cycles and greater difficulty in collecting sales proceeds.
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.
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.
Economic, political, foreign currency and other risks associated with international sales and operations could adversely affect our 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. As 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 2019, currency translation had an
unfavorable effect of $395 million on revenues due to the strengthening of the U.S. dollar relative to other currencies in which the company sells products and services.
In addition, many of our employees, contract manufacturers, suppliers, job functions, outsourcing activities and manufacturing facilities are located outside the United States. Accordingly, our future results could be harmed by a variety of factors, including:
•
interruption
to transportation flows for delivery of parts to us and finished goods to our customers;
•
changes in a specific country's or region's political, economic or other conditions;
•
changes in diplomatic and trade relationships, including new tariffs, trade protection measures, import or export licensing requirements, trade embargoes and sanctions and other trade barriers;
•
tariffs
imposed by the U.S. on goods from other countries and tariffs imposed by other countries on U.S. goods, including the tariffs recently adopted by the U.S. government on various imports from China and by the Chinese government on certain U.S. goods;
•
negative consequences from changes in tax laws;
42
THERMO FISHER SCIENTIFIC INC.
Risk Factors (continued)
•
difficulty
in staffing and managing widespread operations;
•
differing labor regulations;
•
differing protection of intellectual property;
•
unexpected changes in regulatory requirements; and
•
geopolitical
uncertainty or turmoil, including terrorism and war.
Significant developments stemming from the U.S. administration or the U.K.’s referendum on membership in the EU could have an adverse effect on us. The U.S. administration has called for substantial changes to trade agreements and is imposing significant increases on tariffs on goods imported into the United States. The administration has also indicated an intention to request Congress to make significant changes, replacement or elimination of the Patient Protection and Affordable Care Act, and government negotiation/regulation of drug prices paid by government programs. Changes in U.S. social, political, regulatory and economic conditions or laws and policies governing the health care system and drug prices, foreign trade, manufacturing, and development and investment in the territories and countries where we or our customers operate
could adversely affect our operating results and our business.
Additionally, on June 23, 2016, the United Kingdom held a referendum and voted in favor of leaving the European Union, or EU. This referendum has created political and economic uncertainty, particularly in the United Kingdom and the EU, and this uncertainty may last for years. Our business could be affected during this period of uncertainty, and perhaps longer, by the impact of the United Kingdom’s referendum. In addition, our business could be negatively affected by new trade agreements between the United Kingdom and other countries, including the United States, and by the possible imposition of trade or other regulatory barriers in the United Kingdom. These possible negative impacts, and others resulting from the United Kingdom’s actual or threatened withdrawal from the EU, may adversely affect our operating results
and our customers’ businesses.
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.
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.
Third parties may assert claims against us to the effect that we are infringing on their intellectual property rights. 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.
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
43
THERMO
FISHER SCIENTIFIC INC.
Risk Factors (continued)
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.
Our pharma services offerings are highly complex, and if we are unable to provide quality and timely offerings to our customers, our business could suffer. Our pharma services offerings are highly exacting and complex, due in part to strict quality and regulatory requirements. Our operating results in this business depend on our ability to execute and, when necessary, improve our quality management strategy and systems, and our ability to effectively train and maintain our employee base with respect
to quality management. A failure of our quality control systems could result in problems with facility operations or preparation or provision of products. In each case, such problems could arise for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials or environmental factors and damage to, or loss of, manufacturing operations. Such problems could affect production of a particular batch or series of batches of products, requiring the destruction of such products or a halt of facility production altogether.
In addition, our failure to meet required quality standards may result in our failure to timely deliver products to our customers, which in turn could damage our reputation for quality and service. Any such failure could, among other things, lead to increased costs, lost revenue, reimbursement to customers for lost drug product, registered
intermediates, registered starting materials, and active pharmaceutical ingredients, other customer claims, damage to and possibly termination of existing customer relationships, time and expense spent investigating the cause and, depending on the cause, similar losses with respect to other batches or products. Production problems in our drug and biologic manufacturing operations could be particularly significant because the cost of raw materials for such manufacturing is often high. If problems in preparation or manufacture of a product or failures to meet required quality standards for that product are not discovered before such product is released to the market, we may be subject to adverse regulatory actions, including product recalls, product seizures, injunctions to halt manufacture and distribution, restrictions on our operations, civil sanctions, including monetary sanctions, and criminal actions. In addition, such problems or failures could subject us to litigation
claims, including claims from our customers for reimbursement for the cost of lost or damaged active pharmaceutical ingredients, the cost of which could be significant.
We are subject to product and other liability risks for which we may not have adequate insurance coverage. We may be named as a defendant in product liability lawsuits, which may allege that products or services we have provided from our pharma services offerings have resulted or could result in an unsafe condition or injury to consumers. Additionally, 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.
Our inability to complete any 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.
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 $25.62 billion and $1.25 billion, respectively, as of September 28, 2019. In addition, we have definite-lived intangible assets totaling $13.06 billion as of September 28, 2019. 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.
44
THERMO FISHER SCIENTIFIC INC.
Risk Factors (continued)
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.
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.
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.
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.
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. We are subject to various local, state, federal, foreign and transnational laws and regulations, which include the operating and security standards of the U.S. Federal Drug Administration (the FDA), the U.S. Drug Enforcement Agency (the DEA), various state boards of pharmacy, state health departments, the U.S. Department of Health and Human Services (the DHHS), the European Medicines Agency (the EMA), in Europe, the EU member states and other comparable agencies and, in the future, any changes to such laws and regulations could adversely affect us. In particular, we are subject to laws and regulations concerning current good manufacturing practices and drug safety. Our subsidiaries may be required to register for permits and/or licenses with, and may be required
to comply with the laws and regulations of the DEA, the FDA, the DHHS, foreign agencies including the EMA, and other various state boards of pharmacy, state health departments and/or comparable state agencies as well as certain accrediting bodies depending upon the type of operations and location of product distribution, manufacturing and sale.
The manufacture, distribution and marketing of many of our products and services, including medical devices and pharma services, are subject to extensive ongoing regulation by the FDA, the DEA, the EMA, and other equivalent local, state, federal and non-U.S. regulatory authorities. In addition, we are subject to inspections by these regulatory authorities. Failure by us or by our customers to comply with the requirements of these regulatory authorities, including without limitation, remediating any inspectional observations to the satisfaction of these regulatory authorities, could
result in warning letters, product recalls or seizures, monetary sanctions, injunctions to halt manufacture and distribution, restrictions on our operations, civil or criminal sanctions, or withdrawal of existing or denial of pending approvals, including those relating to products or facilities. In addition, such a failure could expose us to contractual or product liability claims, contractual claims from our customers, including claims for reimbursement for lost or damaged active pharmaceutical ingredients, as well as ongoing remediation and increased compliance costs, any or all of which could be significant. We are the sole manufacturer of a number of pharmaceuticals for many of our customers and a negative regulatory event could impact our customers' ability to provide products to their customers.
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
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THERMO FISHER SCIENTIFIC INC.
Risk Factors (continued)
classified as hazardous, and our business practices in the U.S. and abroad such as anti-corruption, anti-competition and privacy and data protection laws. Any noncompliance by us with applicable laws and regulations or the failure to maintain, renew or obtain necessary permits and licenses could result in criminal, civil and administrative penalties and could have an adverse effect on our
results of operations.
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, hurricanes 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.
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.
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.
A significant disruption in, or breach in security of, our information technology systems or violation of data privacy laws could adversely affect our business. 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 disrupt our ability to provide quotes, take customer orders and otherwise run our business in a timely manner. When we upgrade or change systems, we may suffer interruptions in service, loss of data or reduced functionality. 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.
We also rely on our information technology systems to process, transmit and store electronic information (including sensitive data such as confidential business information and personally identifiable data relating to employees, customers and other business partners) and to manage or support
a variety of critical business processes and activities (such as interacting with suppliers, selling our products and services, fulfilling orders and billing, collecting and making payments, shipping products, providing services and support to customers, tracking customer activity, fulfilling contractual obligations and otherwise conducting business). Our systems may be vulnerable to damage or interruption from natural disasters, power loss, telecommunication failures, terrorist attacks, computer hackers, computer viruses, ransomware, phishing, computer denial-of-service attacks, unauthorized access to customer or employee data or company trade secrets, and other attempts to harm our systems. 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. Any of the cyber-attacks, breaches or other disruptions or damage described above, if significant, could materially interrupt our operations, delay production and shipments, result in theft of our and our customers’ intellectual property and trade secrets, damage customer, business partner and employee relationships and our reputation or result in defective products or services, legal claims and proceedings, liability and penalties under privacy laws and increased cost for security and remediation, each of which could adversely affect our business and financial results.
If we are unable to maintain reliable information technology systems and appropriate controls with respect to global data privacy and security requirements and prevent data breaches, we may suffer regulatory consequences in addition to business consequences. As a global organization, we are subject to data privacy and security laws, regulations,
and customer-imposed controls in numerous jurisdictions as a result of having access to and processing confidential, personal and/or sensitive data in the course of our business. For example, in the United States, individual states regulate data breach and security requirements and multiple governmental bodies assert authority over aspects of the protection of personal privacy. European laws require us
46
THERMO FISHER SCIENTIFIC INC.
Risk Factors (continued)
to have an approved legal mechanism to transfer personal data out of Europe, and the recently-enacted
EU General Data Protection Regulation, which took effect in May 2018, imposes significantly stricter requirements in how we collect and process personal data. Several countries, such as China and Russia, have passed laws that require personal data relating to their citizens to be maintained on local servers and impose additional data transfer restrictions. Government enforcement actions can be costly and interrupt the regular operation of our business, and data breaches or violations of data privacy laws can result in fines, reputational damage and civil lawsuits, any of which may adversely affect our business, reputation and financial statements.
Our debt may restrict our investment opportunities or limit our activities. As of September 28, 2019, we had approximately $17.05 billion
in outstanding indebtedness. In addition, we have availability to borrow under a revolving credit facility that provides for up to $2.50 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.
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.
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.
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, merge or consolidate with other entities, make investments, create liens, sell assets and enter into transactions with affiliates. The covenants in our revolving credit facility (the Facility) include a Consolidated Leverage Ratio (total debt-to-Consolidated EBITDA) and a Consolidated Interest Coverage Ratio (Consolidated EBITDA to Consolidated Interest Expense), as
such terms are defined in the Facility. Specifically, the company has agreed that, so long as any lender has any commitment under the Facility, any letter of credit is outstanding under the Facility, or any loan or other obligation is outstanding under the Facility, it will maintain a maximum Consolidated Leverage Ratio of 3.5:1.0. The company has also agreed that so long as any lender has any commitment under the Facility or any letter of credit is outstanding under the Facility, or any loan or other obligation is outstanding under the Facility, it will maintain a minimum Consolidated Interest Coverage Ratio of 3.0:1.0 as of the last day of any fiscal quarter.
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.
Item
2.
Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
There was no share repurchase activity for the company's third quarter of 2019. On September 7, 2018, the Board of Directors authorized the repurchase of up to $2.00 billion of the company’s common stock. At September 28,
2019, $1.25 billion was available for future repurchases of the company’s common stock under this authorization. Early in the fourth quarter of 2019, the company repurchased $750 million of the company's common stock, leaving $500 million remaining under this authorization.
Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline
XBRL document.
101.SCH
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Calculation Linkbase Document.
101.DEF
XBRL Taxonomy Definition Linkbase Document.
101.LAB
XBRL
Taxonomy Label Linkbase Document.
101.PRE
XBRL Taxonomy Presentation Linkbase Document.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
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.
_______________________
* Indicates management contract or compensatory plan, contract or arrangement.
** 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.
49
Dates Referenced Herein and Documents Incorporated by Reference
