Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements (see Index on page F-1 of this report)
(2) All schedules are omitted because they are not applicable or not required, or because the required information is included either in the consolidated financial statements or in the notes thereto.
(b) Exhibits | | |
See the Exhibit Index on page 31. |
Item 16. Form 10-K Summary
None.
THERMO FISHER SCIENTIFIC INC.
EXHIBIT INDEX
| | | | | | | | |
Exhibit Number | | Description of Exhibit |
2.1 | | |
3.1 | | |
3.2 | | |
3.3 | | |
3.4 | | |
| | 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. |
4.1 | | |
4.2 | | |
4.3 | | Eighth Supplemental Indenture, dated as of November 24, 2014, among the Company, The Bank of New York Mellon Trust Company, N.A., as trustee, and The Bank of New York Mellon, London Branch, as paying agent (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed November 24, 2014 [File No. 1-8002] and incorporated in this document by reference). |
4.4 | | |
4.5 | | |
4.6 | | |
4.7 | | |
4.8 | | |
4.9 | | |
4.10 | | |
4.11 | | |
4.12 | | |
4.13 | | |
4.14 | | |
4.15 | | |
THERMO FISHER SCIENTIFIC INC.
EXHIBIT INDEX
| | | | | | | | |
Exhibit Number | | Description of Exhibit |
4.16 | | Indenture, dated as of August 9, 2016, among Thermo Fisher International, as issuer, the Company, as guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed August 9, 2016 [File No. 1-8002] and incorporated in this document by reference). |
4.17 | | Third Supplemental Indenture, dated as of October 18, 2021, among Thermo Fisher Scientific (Finance I) B.V. (Thermo Fisher International), as issuer, the Company, as guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed October 18, 2021 [File No. 1-8002] and incorporated in this document by reference). |
4.18 | | Fourth Supplemental Indenture, dated as of November 18, 2021, among Thermo Fisher Scientific (Finance I) B.V. (Thermo Fisher International), as issuer, the Company, as guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed August 9, 2016 [File No. 1-8002] and incorporated in this document by reference). |
4.19 | | |
10.1 | | |
10.2 | | |
10.3 | | Form of Amended and Restated Indemnification Agreement between the Registrant and its directors and officers (filed as Exhibit 10.2 to the Registrant’s Registration Statement on Form S-4 [Reg. No. 333-90661] and incorporated in this document by reference).* |
10.4 | | |
10.5 | | |
10.6 | | Retirement Plan for Non-Employee Directors of Fisher Scientific International Inc. (filed as Exhibit 10.12 to Fisher Scientific International Inc.’s Annual Report on Form 10-K for the year ended December 31, 1992 [File No. 1-10920] and incorporated in this document by reference).* |
10.7 | | |
10.8 | | |
10.9 | | |
10.10 | | |
10.11 | | |
10.12 | | |
10.13 | | |
10.14 | | |
10.15 | | |
10.16 | | |
THERMO FISHER SCIENTIFIC INC.
EXHIBIT INDEX
| | | | | | | | |
Exhibit Number | | Description of Exhibit |
10.17 | | |
10.18 | | |
10.19 | | |
10.20 | | |
10.21 | | |
10.22 | | |
10.23 | | |
10.24 | | |
10.25 | | Patheon N.V. 2016 Omnibus Incentive Plan (filed as Exhibit 10.2 to the Current Report on Form 8-K filed by Patheon N.V. on July 26, 2016 [File No. 001-37837] and incorporated in this document by reference).* |
10.26 | | |
10.27 | | |
10.28 | | |
10.29 | | |
10.30 | | |
10.31 | | |
10.32 | | |
10.33 | | |
10.34 | | |
10.35 | | |
10.36 | | |
THERMO FISHER SCIENTIFIC INC.
EXHIBIT INDEX
| | | | | | | | |
Exhibit Number | | Description of Exhibit |
10.37 | | |
10.38 | | |
10.39 | | |
10.40 | | |
10.41 | | |
10.42 | | |
10.43 | | |
10.44 | | |
10.45 | | |
10.46 | | |
10.47 | | |
21 | | |
22 | | |
23.1 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
101.INS | | 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). |
_______________________
*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.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. | | | | | | | | | | | |
Date: | February 23, 2023 | THERMO FISHER SCIENTIFIC INC. |
| | | |
| | | |
| | By: | /s/ Marc N. Casper |
| | | Marc N. Casper |
| | | Chairman, President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, as of February 23, 2023. | | | | | | | | | | | | | | |
| | | | |
| | | | |
By: | /s/ Marc N. Casper | | By: | /s/ R. Alexandra Keith |
| Marc N. Casper | | | R. Alexandra Keith |
| Chairman, President and Chief Executive Officer | | | Director |
| (Principal Executive Officer) | | | |
| | | | |
| | | | |
By: | /s/ Stephen Williamson | | By: | /s/ Jim P. Manzi |
| Stephen Williamson | | | Jim P. Manzi |
| Senior Vice President and Chief Financial Officer | | | Director |
| (Principal Financial Officer) | | | |
| | | | |
| | | | |
By: | /s/ Joseph R. Holmes | | By: | /s/ James C. Mullen |
| Joseph R. Holmes | | | James C. Mullen |
| Vice President and Chief Accounting Officer | | | Director |
| (Principal Accounting Officer) | | | |
| | | | |
| | | | |
By: | /s/ Nelson J. Chai | | By: | /s/ Lars R. Sørensen |
| Nelson J. Chai | | | Lars R. Sørensen |
| Director | | | Director |
| | | | |
| | | | |
By: | /s/ Ruby R. Chandy | | By: | /s/ Debora L. Spar |
| Ruby R. Chandy | | | Debora L. Spar |
| Director | | | Director |
| | | | |
| | | | |
By: | /s/ C. Martin Harris | | By: | /s/ Scott M. Sperling |
| C. Martin Harris | | | Scott M. Sperling |
| Director | | | Director |
| | | | |
| | | | |
By: | /s/ Tyler E. Jacks | | By: | /s/ Dion J. Weisler |
| Tyler E. Jacks | | | Dion J. Weisler |
| Director | | | Director |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
THERMO FISHER SCIENTIFIC INC.
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS
The following Consolidated Financial Statements of the Registrant and its subsidiaries are required to be included in Item 15:
| | | | | |
| |
| |
| |
| Page |
| |
Report of Independent Registered Public Accounting Firm (PCAOB ID 238) | |
| |
Consolidated Balance Sheet as of December 31, 2022 and 2021 | |
| |
Consolidated Statement of Income for the years ended December 31, 2022, 2021 and 2020 | |
| |
Consolidated Statement of Comprehensive Income for the years ended December 31, 2022, 2021 and 2020 | |
| |
Consolidated Statement of Cash Flows for the years ended December 31, 2022, 2021 and 2020 | |
| |
Consolidated Statement of Redeemable Noncontrolling Interest and Equity for the years ended December 31, 2022, 2021 and 2020 | |
| |
Notes to Consolidated Financial Statements | |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Thermo Fisher Scientific Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheet of Thermo Fisher Scientific Inc. and its subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of income, of comprehensive income, of redeemable noncontrolling interest and equity and of cash flows for each of the three years in the period ended December 31, 2022, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Income taxes
As described in Note 8 to the consolidated financial statements, the Company’s provision for income taxes for the year ended December 31, 2022 was $703 million. The Company has deferred tax liabilities, net, of $1,984 million (including a valuation allowance of $1,322 million) and unrecognized tax benefits of $572 million as of December 31, 2022. As disclosed by management, the Company operates in numerous countries under many legal forms and, as a result, is subject to the jurisdiction of numerous domestic and non-U.S. tax authorities, as well as to tax agreements and treaties among these governments. Determination of taxable income in any jurisdiction requires management to interpret the related tax laws and regulations and to use estimates and assumptions regarding significant future events, such as the amount, timing and character of deductions, permissible revenue recognition methods under the tax law and the sources and character of income and tax credits. Management assesses income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, management has recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Management estimates the degree to which tax assets will result in a benefit, after consideration of all positive and negative evidence, and provides a valuation allowance for tax assets that it believes will more likely than not go unused. In situations in which management has been able to determine that the Company’s deferred tax assets will be realized, that determination generally relies on future reversals of taxable temporary differences and expected future taxable income. If it becomes more likely than not that a tax asset will be used, management reverses the related valuation allowance.
The principal considerations for our determination that performing procedures relating to income taxes is a critical audit matter are (i) the significant judgment by management when interpreting the numerous and complex tax laws and regulations as it relates to determining the provision for income taxes, deferred tax assets and liabilities, including the valuation allowance, and liabilities for unrecognized tax benefits, (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence related to the provision for income taxes, deferred tax assets and liabilities, including the valuation allowance, and liabilities for unrecognized tax benefits, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the provision for income taxes, deferred tax assets and liabilities, including the valuation allowance, and liabilities for unrecognized tax benefits. These procedures also included, among others (i) testing the accuracy of the provision for income taxes, including the rate reconciliation and permanent and temporary differences, (ii) evaluating whether the data utilized in the calculations of the provision for income taxes, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits were appropriate and consistent with evidence obtained in other areas of the audit, (iii) evaluating management’s assessment of the realizability of deferred tax assets on a jurisdictional basis, (iv)
evaluating the identification of liabilities for unrecognized tax benefits and the reasonableness of the more likely than not determination in consideration of court decisions, legislative actions, statutes of limitations, and developments in tax examinations by jurisdiction, (v) testing the calculation of the liability for unrecognized tax benefits by jurisdiction, including estimates of the amount of income tax benefit expected to be sustained, and (vi) evaluating the adequacy of the Company’s disclosures. Professionals with specialized skill and knowledge were used to assist in evaluating the reasonableness of management’s judgments and estimates related to the application of foreign and domestic tax laws and regulations.
/s/PricewaterhouseCoopers LLP
Boston, Massachusetts
February 23, 2023
We have served as the Company’s auditor since 2002.
THERMO FISHER SCIENTIFIC INC.
CONSOLIDATED BALANCE SHEET | | | | | | | | | | | | | | |
| | December 31, | | December 31, |
(In millions except share and per share amounts) | | 2022 | | 2021 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 8,524 | | | $ | 4,477 | |
Accounts receivable, less allowances of $189 and $150 | | 8,115 | | | 7,977 | |
Inventories | | 5,634 | | | 5,051 | |
Contract assets, net | | 1,312 | | | 968 | |
| | | | |
Other current assets | | 1,644 | | | 1,640 | |
Total current assets | | 25,229 | | | 20,113 | |
Property, plant and equipment, net | | 9,280 | | | 8,333 | |
Acquisition-related intangible assets, net | | 17,442 | | | 20,113 | |
Other assets | | 4,007 | | | 4,640 | |
Goodwill | | 41,196 | | | 41,924 | |
Total assets | | $ | 97,154 | | | $ | 95,123 | |
| | | | |
Liabilities, redeemable noncontrolling interest and equity | | | | |
Current liabilities: | | | | |
Short-term obligations and current maturities of long-term obligations | | $ | 5,579 | | | $ | 2,537 | |
Accounts payable | | 3,381 | | | 2,867 | |
Accrued payroll and employee benefits | | 2,095 | | | 2,427 | |
Contract liabilities | | 2,601 | | | 2,655 | |
Other accrued expenses | | 3,354 | | | 2,950 | |
Total current liabilities | | 17,010 | | | 13,436 | |
Deferred income taxes | | 2,849 | | | 3,837 | |
Other long-term liabilities | | 4,238 | | | 4,540 | |
Long-term obligations | | 28,909 | | | 32,333 | |
Commitments and contingencies (Note 12) | | | | |
Redeemable noncontrolling interest | | 116 | | | 122 | |
Equity: | | | | |
Thermo Fisher Scientific Inc. shareholders’ equity: | | | | |
Preferred stock, $100 par value, 50,000 shares authorized; none issued | | | | |
Common stock, $1 par value, 1,200,000,000 shares authorized; 440,668,112 and 439,154,741 shares issued | | 441 | | | 439 | |
Capital in excess of par value | | 16,743 | | | 16,174 | |
Retained earnings | | 41,910 | | | 35,431 | |
Treasury stock at cost, 50,157,275 and 44,720,112 shares | | (12,017) | | | (8,922) | |
Accumulated other comprehensive items | | (3,099) | | | (2,329) | |
Total Thermo Fisher Scientific Inc. shareholders’ equity | | 43,978 | | | 40,793 | |
Noncontrolling interests | | 54 | | | 62 | |
Total equity | | 44,032 | | | 40,855 | |
Total liabilities, redeemable noncontrolling interest and equity | | $ | 97,154 | | | $ | 95,123 | |
The accompanying notes are an integral part of these consolidated financial statements.
THERMO FISHER SCIENTIFIC INC.
CONSOLIDATED STATEMENT OF INCOME | | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, | | December 31, | | December 31, |
(In millions except per share amounts) | | 2022 | | 2021 | | 2020 |
Revenues | | | | | | |
Product revenues | | $ | 28,548 | | | $ | 30,361 | | | $ | 25,306 | |
Service revenues | | 16,367 | | | 8,850 | | | 6,912 | |
Total revenues | | 44,915 | | | 39,211 | | | 32,218 | |
| | | | | | |
Costs and operating expenses: | | | | | | |
Cost of product revenues | | 14,247 | | | 13,594 | | | 11,407 | |
Cost of service revenues | | 11,697 | | | 5,979 | | | 4,807 | |
Selling, general and administrative expenses | | 8,993 | | | 8,007 | | | 6,930 | |
Research and development expenses | | 1,471 | | | 1,406 | | | 1,181 | |
Restructuring and other costs | | 114 | | | 197 | | | 99 | |
Total costs and operating expenses | | 36,522 | | | 29,183 | | | 24,424 | |
Operating income | | 8,393 | | | 10,028 | | | 7,794 | |
Interest income | | 272 | | | 43 | | | 65 | |
Interest expense | | (726) | | | (536) | | | (553) | |
Other income/(expense) | | (104) | | | (694) | | | (76) | |
Income before income taxes | | 7,835 | | | 8,841 | | | 7,230 | |
Provision for income taxes | | (703) | | | (1,109) | | | (850) | |
Equity in earnings/(losses) of unconsolidated entities | | (172) | | | (4) | | | (3) | |
Net income | | 6,960 | | | 7,728 | | | 6,377 | |
Less: net income attributable to noncontrolling interests and redeemable noncontrolling interest | | 10 | | | 3 | | | 2 | |
Net income attributable to Thermo Fisher Scientific Inc. | | $ | 6,950 | | | $ | 7,725 | | | $ | 6,375 | |
| | | | | | |
Earnings per share attributable to Thermo Fisher Scientific Inc. | | | | | | |
Basic | | $ | 17.75 | | | $ | 19.62 | | | $ | 16.09 | |
Diluted | | $ | 17.63 | | | $ | 19.46 | | | $ | 15.96 | |
| | | | | | |
Weighted average shares | | | | | | |
Basic | | 392 | | | 394 | | | 396 | |
Diluted | | 394 | | | 397 | | | 399 | |
The accompanying notes are an integral part of these consolidated financial statements.
THERMO FISHER SCIENTIFIC INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME | | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, | | December 31, | | December 31, |
(In millions) | | 2022 | | 2021 | | 2020 |
Comprehensive income | | | | | | |
Net income | | $ | 6,960 | | | $ | 7,728 | | | $ | 6,377 | |
Other comprehensive items: | | | | | | |
Currency translation adjustment: | | | | | | |
Currency translation adjustment (net of tax provision (benefit) of $173, $231 and $(221)) | | (822) | | | 373 | | | (118) | |
| | | | | | |
Unrealized gains and losses on hedging instruments: | | | | | | |
Unrealized losses on hedging instruments (net of tax benefit of $0, $0 and $20) | | — | | | — | | | (65) | |
Reclassification adjustment for losses included in net income (net of tax benefit of $1, $17 and $14) | | 2 | | | 56 | | | 45 | |
Pension and other postretirement benefit liability adjustments: | | | | | | |
Pension and other postretirement benefit liability adjustments arising during the period (net of tax provision (benefit) of $9, $11 and $(1)) | | 38 | | | 36 | | | (8) | |
Amortization of net loss and prior service benefit included in net periodic pension cost (net of tax benefit of $3, $6 and $4) | | 5 | | | 13 | | | 18 | |
Total other comprehensive items | | (777) | | | 478 | | | (128) | |
Comprehensive income | | 6,183 | | | 8,206 | | | 6,249 | |
Less: comprehensive income attributable to noncontrolling interests and redeemable noncontrolling interest | | 3 | | | 2 | | | 2 | |
Comprehensive income attributable to Thermo Fisher Scientific Inc. | | $ | 6,180 | | | $ | 8,204 | | | $ | 6,247 | |
The accompanying notes are an integral part of these consolidated financial statements.
THERMO FISHER SCIENTIFIC INC.
CONSOLIDATED STATEMENT OF CASH FLOWS | | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, | | December 31, | | December 31, |
(In millions) | | 2022 | | 2021 | | 2020 |
Operating activities | | | | | | |
Net income | | $ | 6,960 | | | $ | 7,728 | | | $ | 6,377 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation of property, plant and equipment | | 986 | | | 831 | | | 658 | |
Amortization of acquisition-related intangible assets | | 2,395 | | | 1,761 | | | 1,667 | |
Change in deferred income taxes | | (995) | | | (647) | | | (552) | |
| | | | | | |
Stock-based compensation | | 307 | | | 230 | | | 196 | |
Loss on early extinguishment of debt | | 26 | | | 767 | | | — | |
Other non-cash expenses | | 524 | | | 190 | | | 338 | |
Changes in assets and liabilities, excluding the effects of acquisitions and disposition: | | | | | | |
Accounts receivable | | (430) | | | (204) | | | (1,302) | |
Inventories | | (825) | | | (1,065) | | | (508) | |
Accounts payable | | 648 | | | 479 | | | 59 | |
Contributions to retirement plans | | (41) | | | (34) | | | (96) | |
Other | | (401) | | | (724) | | | 1,452 | |
Net cash provided by operating activities | | 9,154 | | | 9,312 | | | 8,289 | |
| | | | | | |
Investing activities | | | | | | |
Acquisitions, net of cash acquired | | (39) | | | (19,395) | | | (38) | |
| | | | | | |
Purchase of property, plant and equipment | | (2,243) | | | (2,523) | | | (1,474) | |
Proceeds from sale of property, plant and equipment | | 24 | | | 20 | | | 8 | |
Other investing activities, net | | 99 | | | (34) | | | (6) | |
Net cash used in investing activities | | (2,159) | | | (21,932) | | | (1,510) | |
| | | | | | |
Financing activities | | | | | | |
Net proceeds from issuance of debt | | 3,193 | | | 18,137 | | | 3,464 | |
Repayment of debt | | (375) | | | (11,738) | | | (710) | |
Proceeds from issuance of commercial paper | | 1,526 | | | 2,512 | | | 383 | |
Repayments of commercial paper | | (3,690) | | | — | | | (387) | |
Purchases of company common stock | | (3,000) | | | (2,000) | | | (1,500) | |
Dividends paid | | (455) | | | (395) | | | (337) | |
| | | | | | |
Other financing activities, net | | (9) | | | 65 | | | 46 | |
Net cash (used in) provided by financing activities | | (2,810) | | | 6,581 | | | 959 | |
| | | | | | |
Exchange rate effect on cash | | (139) | | | 194 | | | 176 | |
Increase (decrease) in cash, cash equivalents and restricted cash | | 4,046 | | | (5,845) | | | 7,914 | |
Cash, cash equivalents and restricted cash at beginning of year | | 4,491 | | | 10,336 | | | 2,422 | |
Cash, cash equivalents and restricted cash at end of year | | $ | 8,537 | | | $ | 4,491 | | | $ | 10,336 | |
The accompanying notes are an integral part of these consolidated financial statements.
THERMO FISHER SCIENTIFIC INC.
CONSOLIDATED STATEMENT OF REDEEMABLE NONCONTROLLING INTEREST AND EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Redeemable Noncontrolling Interest | | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Items | | Total Thermo Fisher Scientific Inc. Shareholders’ Equity | | Noncontrolling Interests | | Total Equity |
(In millions) | | | | Shares | | Amount | | | | Shares | | Amount | | | | |
Balance at December 31, 2019 | | $ | — | | | | 434 | | | $ | 434 | | | $ | 15,064 | | | $ | 22,092 | | | 36 | | | $ | (5,236) | | | $ | (2,679) | | | $ | 29,675 | | | $ | 9 | | | $ | 29,684 | |
Cumulative effect of accounting changes | | — | | | | — | | | — | | | — | | | (1) | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
| | | | | | | | | | | | | | | | | | | | | | | |
Issuance of shares under employees' and directors' stock plans | | — | | | | 3 | | | 3 | | | 319 | | | — | | | — | | | (82) | | | — | | | 240 | | | — | | | 240 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | | — | | | — | | | 196 | | | — | | | — | | | — | | | — | | | 196 | | | — | | | 196 | |
Purchases of company common stock | | — | | | | — | | | — | | | — | | | — | | | 4 | | | (1,500) | | | — | | | (1,500) | | | — | | | (1,500) | |
Dividends declared ($0.88 per share) | | — | | | | — | | | — | | | — | | | (350) | | | — | | | — | | | — | | | (350) | | | — | | | (350) | |
Net income | | — | | | | — | | | — | | | — | | | 6,375 | | | — | | | — | | | — | | | 6,375 | | | 2 | | | 6,377 | |
Other comprehensive items | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | (128) | | | (128) | | | — | | | (128) | |
Contributions from (distributions to) noncontrolling interests | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2020 | | — | | | | 437 | | | 437 | | | 15,579 | | | 28,116 | | | 40 | | | (6,818) | | | (2,807) | | | 34,507 | | | 10 | | | 34,517 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Issuance of shares under employees' and directors' stock plans | | — | | | | 2 | | | 2 | | | 324 | | | — | | | 1 | | | (104) | | | — | | | 222 | | | — | | | 222 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | | — | | | — | | | 230 | | | — | | | — | | | — | | | — | | | 230 | | | — | | | 230 | |
Purchases of company common stock | | — | | | | — | | | — | | | — | | | — | | | 4 | | | (2,000) | | | — | | | (2,000) | | | — | | | (2,000) | |
Dividends declared ($1.04 per share) | | — | | | | — | | | — | | | — | | | (410) | | | — | | | — | | | — | | | (410) | | | — | | | (410) | |
Recognition upon acquisition | | 122 | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Net income | | 1 | | | | — | | | — | | | — | | | 7,725 | | | — | | | — | | | — | | | 7,725 | | | 2 | | | 7,727 | |
Other comprehensive items | | (1) | | | | — | | | — | | | — | | | — | | | — | | | — | | | 478 | | | 478 | | | — | | | 478 | |
Contributions from (distributions to) noncontrolling interests | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 50 | | | 50 | |
Other | | — | | | | — | | | — | | | 41 | | | — | | | — | | | — | | | — | | | 41 | | | — | | | 41 | |
Balance at December 31, 2021 | | 122 | | | | 439 | | | 439 | | | 16,174 | | | 35,431 | | | 45 | | | (8,922) | | | (2,329) | | | 40,793 | | | 62 | | | 40,855 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Issuance of shares under employees' and directors' stock plans | | — | | | | 2 | | | 2 | | | 262 | | | — | | | — | | | (95) | | | — | | | 169 | | | — | | | 169 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Stock-based compensation | | — | | | | — | | | — | | | 307 | | | — | | | — | | | — | | | — | | | 307 | | | — | | | 307 | |
Purchases of company common stock | | — | | | | — | | | — | | | — | | | — | | | 5 | | | (3,000) | | | — | | | (3,000) | | | — | | | (3,000) | |
Dividends declared ($1.20 per share) | | — | | | | — | | | — | | | — | | | (471) | | | — | | | — | | | — | | | (471) | | | — | | | (471) | |
| | | | | | | | | | | | | | | | | | | | | | | |
Net income | | 15 | | | | — | | | — | | | — | | | 6,950 | | | — | | | — | | | — | | | 6,950 | | | (5) | | | 6,945 | |
Other comprehensive items | | (6) | | | | — | | | — | | | — | | | — | | | — | | | — | | | (770) | | | (770) | | | (1) | | | (771) | |
Contributions from (distributions to) noncontrolling interests | | (15) | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | |
| | | | | | | | | | | | | | | | | | | | | | | |
Balance at December 31, 2022 | | $ | 116 | | | | 441 | | | $ | 441 | | | $ | 16,743 | | | $ | 41,910 | | | 50 | | | $ | (12,017) | | | $ | (3,099) | | | $ | 43,978 | | | $ | 54 | | | $ | 44,032 | |
The accompanying notes are an integral part of these consolidated financial statements.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, increase laboratory productivity, and improve patient health through diagnostics and the development and manufacture of life-changing therapies. Markets served include pharmaceutical and biotech, academic and government, industrial and applied, as well as healthcare and diagnostics.
Principles of Consolidation
The accompanying financial statements include the accounts of the company and its wholly and majority-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. The company accounts for investments in businesses using the equity method when it has the ability to exercise significant influence but not control (generally between 20% and 50% ownership), is not the primary beneficiary and has not elected the fair value option. At December 31, 2022 and 2021, the company had such investments with carrying amounts of $369 million and $576 million, respectively. The company has elected the fair value option of accounting for certain of its investments with readily determinable fair values that would otherwise be accounted for under the equity method. At December 31, 2022 and 2021, the fair value of such investments was $7 million and $217 million, respectively.
Redeemable Noncontrolling Interest
The company owns 60% of its consolidated subsidiary PPD-SNBL K.K. The 40% ownership interest held by a third party is classified as a redeemable noncontrolling interest on the consolidated balance sheet due to certain put options under which the third party may require the company to purchase the remaining ownership interest at a premium upon the occurrence of certain events.
Presentation
Certain reclassifications of prior year amounts have been made to conform to the current year presentation.
Revenue Recognition
Consumables revenues consist of single-use products and are recognized at a point in time following the transfer of control of such products to the customer, which generally occurs upon shipment. Instruments revenues typically consist of longer-lived assets that, for the substantial majority of sales, are recognized at a point in time in a manner similar to consumables. Service revenues (primarily clinical research, pharmaceutical, and instrument and enterprise services) are recognized over time as customers receive and consume the benefits of such services. For revenues recognized over time, the company generally uses costs accumulated relative to total estimated costs to measure progress as this method approximates satisfaction of the performance obligation. For contracts that contain multiple performance obligations, the company allocates the consideration to which it expects to be entitled (i.e., the transaction price) to each performance obligation based on relative standalone selling prices and recognizes the related revenues when or as control of each individual performance obligation is transferred to customers. The company exercises judgment in determining the timing of revenue by analyzing the point in time or the period over which the customer has the ability to direct the use of and obtain substantially all of the remaining benefits of the asset. The company immediately expenses contract costs that would otherwise be capitalized and amortized over a period of less than one year.
Changes to the scope of services contracts generally also include changes in the transaction price. Typically, these contract modifications are not distinct from existing services provided under the contract, and result in cumulative adjustments to revenue on the modification date.
Payments from customers for most instruments and consumables are typically due in a fixed number of days after shipment or delivery of the product. Service arrangements commonly call for payments in advance of performing the work (e.g., extended service contracts), upon completion of the service (e.g., pharmaceutical services) or a mix of both. Some arrangements include variable amounts of consideration that arise from discounts, rebates, and other programs and practices. In such arrangements, the company estimates the amount by which to reduce the stated contract amount to reflect the transaction price. The company records reimbursement for third-party pass-through and out-of-pocket costs as revenues and the related expenses as costs of revenues.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Contract-related Balances
Accounts receivable include unconditional rights to consideration from customers, which generally represent billings that do not bear interest. The company maintains allowances for doubtful accounts for estimates of expected losses resulting from the inability of its customers to pay amounts due. The allowance for doubtful accounts is the company’s best estimate of the amount of probable credit losses in existing accounts receivable. The company determines the allowance based on history of similarly aged receivables, the creditworthiness of the customer, reasons for delinquency, current economic conditions, expectations associated with future events and circumstances where reasonable and supportable forecasts are available and any other information that is relevant to the judgment. Receivables from academic and government customers as well as large, well-capitalized commercial customers have historically experienced less collectability risk. Account balances are charged off against the allowance when the company believes it is probable the receivable will not be recovered. The company does not have any off-balance-sheet credit exposure related to customers.
Contract assets include revenues recognized in advance of billings where the company’s right to bill includes something other than the passage of time. Such amounts are recorded net of estimated losses resulting from the inability to invoice customers, which is primarily due to risk associated with the company’s performance. Contract assets are classified as current or noncurrent based on the amount of time expected to lapse until the company's right to consideration becomes unconditional.
Contract liabilities include billings in excess of revenues recognized, such as those resulting from customer advances and deposits and unearned revenues on service contracts. Contract liabilities are classified as current or noncurrent based on the periods over which remaining performance obligations are expected to be transferred to customers. Contract assets and liabilities are presented on a net basis in the consolidated balance sheet if they arise from different performance obligations in the same contract.
Warranty Obligations
The company provides for the estimated cost of standard product warranties, primarily from historical information, in cost of product revenues at the time product revenues are recognized. The liability for warranties is included in other accrued expenses in the accompanying balance sheet. Extended warranty agreements are considered service contracts, which are discussed above. Costs of service contracts are recognized as incurred.
Leases
Operating leases that have commenced are included in other assets, other accrued expenses and other long-term liabilities in the consolidated balance sheet. Finance leases that have commenced are included in property, plant and equipment, net, current maturities of long-term obligations and long-term obligations in the consolidated balance sheet. Classification of 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. 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 operating lease expense on a straight-line basis over the lease term. Finance lease expense includes depreciation, which is recognized on a straight-line basis over the expected life of the leased asset, and an immaterial amount of interest expense.
Because most of the company’s leases do not provide an implicit interest 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 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.
Research and Development
The company conducts research and development activities to increase its depth of capabilities in technologies, software and services. Research and development costs include employee compensation and benefits, consultants, facilities related costs, material costs, depreciation and travel. Research and development costs are expensed as incurred.
Restructuring Costs
Accounting for the timing and amount of termination benefits provided by the company to employees is determined based on whether: (a) the company has a substantive plan to provide such benefits, (b) the company has a written employment
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
contract with the affected employees that includes a provision for such benefits, (c) the termination benefits are due to the occurrence of an event specified in an existing plan or agreement, or (d) the termination benefits are a one-time benefit. In certain circumstances, employee termination benefits may meet more than one of the characteristics listed above and therefore, may have individual elements that are subject to different accounting models.
From time to time when executing a restructuring or exit plan, the company also incurs costs other than termination benefits, such as lease termination costs, that are not associated with or will not be incurred to generate revenues. These include costs that represent amounts under contractual obligations that exist prior to the restructuring plan communication date and will either continue after the restructuring plan is completed with no economic benefit or result in a penalty to cancel a contractual obligation. Such costs are recognized when incurred, which generally occurs at the contract termination or over the period from when a plan to abandon a leased facility is approved through the cease-use date but charges may continue over the remainder of the original contractual period.
Income Taxes
The company recognizes deferred income taxes based on the expected future tax consequences of differences between the financial statement basis and the tax basis of assets and liabilities, calculated using enacted tax rates in effect for the year in which the differences are expected to be reflected in the tax return. A valuation allowance is provided for tax assets that will more likely than not go unused.
The financial statements reflect expected future tax consequences of uncertain tax positions that the company has taken or expects to take on a tax return presuming the taxing authorities’ full knowledge of the positions and all relevant facts, but without discounting for the time value of money.
Earnings per Share
Basic earnings per share has been computed by dividing net income attributable to Thermo Fisher Scientific Inc. by the weighted average number of shares outstanding during the year. Except where the result would be antidilutive to net income attributable to Thermo Fisher Scientific Inc., diluted earnings per share has been computed using the treasury stock method for outstanding stock options and restricted units.
Cash and Cash Equivalents
Cash equivalents consists principally of money market funds, commercial paper and other marketable securities purchased with an original maturity of three months or less. These investments are carried at cost, which approximates market value.
Inventories
Inventories are valued at the lower of cost or net realizable value, cost being determined by the first-in, first-out (FIFO) method. As discussed below, prior to the third quarter of 2021 certain of the company's businesses utilized the last-in, first-out (LIFO) method. The company periodically reviews quantities of inventories on hand and compares these amounts to the expected use of each product or product line. In addition, the company has certain inventory that is subject to fluctuating market pricing. The company records a charge to cost of sales for the amount required to reduce the carrying value of inventory to net realizable value. Costs associated with the procurement of inventories, such as inbound freight charges, purchasing and receiving costs, and internal transfer costs, are included in cost of revenues in the accompanying statement of income. The components of inventories are as follows: | | | | | | | | | | | | | | |
| | December 31, | | December 31, |
(In millions) | | 2022 | | 2021 |
Raw materials | | $ | 2,405 | | | $ | 1,922 | |
Work in process | | 660 | | | 676 | |
Finished goods | | 2,569 | | | 2,453 | |
Inventories | | $ | 5,634 | | | $ | 5,051 | |
Prior to the third quarter of 2021, certain of the company’s businesses utilized the LIFO method of accounting for inventories. During the third quarter of 2021, these businesses, which comprised approximately 5% of consolidated inventories, changed from the LIFO method to the FIFO method. The company believes this change is preferable as it will provide a consistent, uniform costing method for all inventories across the company, better reflect the current value of inventories, and improve comparability with peers. Prior financial statements have not been retrospectively adjusted due to immateriality. The cumulative pre-tax effect of this change in accounting principle of $33 million was recorded as an increase to inventories and a decrease to cost of product revenues in the third quarter of 2021. This change was recorded in the Laboratory Products and
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Biopharma Services ($20 million) and Specialty Diagnostics ($13 million) segments. Reductions to cost of revenues as a result of the liquidation of LIFO inventories were nominal during 2020 and the first half of 2021.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. The costs of additions and improvements are capitalized, while maintenance and repairs are charged to expense as incurred. The company generally provides for depreciation and amortization using the straight-line method over the estimated useful lives of the property as follows: buildings and improvements, 25 to 40 years; machinery and equipment (including software), 3 to 10 years; and leasehold improvements, the shorter of the term of the lease or the life of the asset. When assets are retired or otherwise disposed of, the assets and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is reflected in the accompanying statement of income. Property, plant and equipment consists of the following: | | | | | | | | | | | | | | |
| | December 31, | | December 31, |
(In millions) | | 2022 | | 2021 |
Land | | $ | 454 | | | $ | 431 | |
Buildings and improvements | | 3,153 | | | 2,575 | |
Machinery, equipment and leasehold improvements | | 7,967 | | | 7,020 | |
Construction in progress | | 2,695 | | | 2,567 | |
Property, plant and equipment, at cost | | 14,269 | | | 12,593 | |
Less: Accumulated depreciation and amortization | | 4,989 | | | 4,260 | |
Property, plant and equipment, net | | $ | 9,280 | | | $ | 8,333 | |
Acquisition-related Intangible Assets
Acquisition-related intangible assets include the costs of acquired customer relationships, product technology, tradenames, backlog and other specifically identifiable intangible assets, and are being amortized using the straight-line method over their estimated useful lives, which range up to 20 years. The company reviews these intangible assets for impairment when indication of potential impairment exists, such as a significant reduction in cash flows associated with the assets. When impairment indicators exist, the company determines whether the carrying value of its intangible assets exceeds the related undiscounted cash flows. In these situations, the carrying value is written down to fair value.
In addition, the company has tradenames and in-process research and development that have indefinite lives and which are not amortized. Intangible assets with indefinite lives are reviewed for impairment annually or whenever events or changes in circumstances indicate they may be impaired. The company may perform an optional qualitative assessment. If the company determines that the fair value of the indefinite-lived intangible asset is more likely than not greater than its carrying amount, no additional testing is necessary. If not, or if the company bypasses the optional qualitative assessment, it writes the carrying value down to the fair value, if applicable.
Acquisition-related intangible assets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at December 31, 2022 | | Balance at December 31, 2021 |
(In millions) | | Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
Definite lived: | | | | | | | | | | | | |
Customer relationships | | $ | 21,792 | | | $ | (8,330) | | | $ | 13,462 | | | $ | 22,802 | | | $ | (7,792) | | | $ | 15,010 | |
Product technology | | 5,882 | | | (4,360) | | | 1,522 | | | 6,041 | | | (3,977) | | | 2,064 | |
Tradenames | | 1,635 | | | (1,008) | | | 627 | | | 1,722 | | | (919) | | | 803 | |
Backlog | | 1,038 | | | (442) | | | 596 | | | 1,060 | | | (59) | | | 1,001 | |
| | 30,347 | | | (14,140) | | | 16,207 | | | 31,625 | | | (12,747) | | | 18,878 | |
Indefinite lived: | | | | | | | | | | | | |
Tradenames | | 1,235 | | | N/A | | 1,235 | | | 1,235 | | | N/A | | 1,235 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Acquisition-related intangible assets | | $ | 31,582 | | | $ | (14,140) | | | $ | 17,442 | | | $ | 32,860 | | | $ | (12,747) | | | $ | 20,113 | |
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The estimated future amortization expense of acquisition-related intangible assets with definite lives as of December 31, 2022 is as follows: | | | | | | | | |
(In millions) | | |
2023 | | $ | 2,279 | |
2024 | | 1,863 | |
2025 | | 1,582 | |
2026 | | 1,322 | |
2027 | | 1,296 | |
2028 and thereafter | | 7,865 | |
Estimated future amortization expense of definite-lived intangible assets | | $ | 16,207 | |
Other Assets
Other assets in the accompanying balance sheet include operating lease right-of-use assets, investments, deferred tax assets, pension assets, cash surrender value of life insurance, insurance recovery receivables related to product liability matters, certain intangible assets and other assets.
At December 31, 2022 and 2021, the company had $36 million and $33 million, respectively, of intangible assets not derived from acquisitions, net of accumulated amortization, which are being amortized using the straight-line method over their estimated useful lives, which range up to 20 years.
Equity investments that do not have readily determinable fair values and are not eligible for the net asset value (NAV) practical expedient are measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investments of the same issuer. The company performs qualitative assessments to identify impairments of these investments. At December 31, 2022 and 2021, the company had such investments with carrying amounts of $55 million and $22 million, respectively, and investments measured at NAV of $22 million and $16 million, respectively, which are included in other assets.
Goodwill
The company assesses goodwill for impairment at the reporting unit level annually and whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Such events or circumstances generally include the occurrence of operating losses or a significant decline in earnings associated with one or more of the company’s reporting units. The company is permitted to first assess qualitative factors to determine whether the quantitative goodwill impairment test is necessary. If the qualitative assessment results in a determination that the fair value of a reporting unit is more likely than not less than its carrying amount, the company performs a quantitative goodwill impairment test. The company may bypass the qualitative assessment for the reporting unit in any period and proceed directly to the goodwill impairment test. The company estimates the fair value of its reporting units by using forecasts of discounted future cash flows and peer market multiples. The company would record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (limited to the amount of goodwill). The company determined that no impairments existed in 2022, 2021 or 2020.
The changes in the carrying amount of goodwill by segment are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Life Sciences Solutions | | Analytical Instruments | | Specialty Diagnostics | | Laboratory Products and Biopharma Services | | Total |
Balance at December 31, 2020 | | $ | 8,590 | | | $ | 5,079 | | | $ | 3,370 | | | $ | 9,002 | | | $ | 26,041 | |
Acquisitions | | 1,560 | | | 56 | | | 8 | | | 14,400 | | | 16,024 | |
| | | | | | | | | | |
| | | | | | | | | | |
Currency translation | | (7) | | | (92) | | | (101) | | | 59 | | | (141) | |
| | | | | | | | | | |
Balance at December 31, 2021 | | 10,143 | | | 5,043 | | | 3,277 | | | 23,461 | | | 41,924 | |
Acquisitions | | — | | | 24 | | | — | | | — | | | 24 | |
Finalization of purchase price allocations for 2021 acquisitions | | 9 | | | — | | | — | | | 168 | | | 177 | |
| | | | | | | | | | |
Currency translation | | (6) | | | (102) | | | (186) | | | (635) | | | (929) | |
| | | | | | | | | | |
Balance at December 31, 2022 | | $ | 10,146 | | | $ | 4,965 | | | $ | 3,091 | | | $ | 22,994 | | | $ | 41,196 | |
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Loss Contingencies
Accruals are recorded for various contingencies, including legal proceedings, environmental, workers’ compensation, product, general and auto liabilities, self-insurance and other claims that arise in the normal course of business. The accruals are based on management’s judgment, historical claims experience, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel and actuarial estimates. Additionally, the company records receivables from third-party insurers up to the amount of the loss when recovery has been determined to be probable. Certain liabilities acquired in acquisitions have been recorded at readily determinable fair values and, as such, were discounted to present value at the dates of acquisition.
Currency Translation
All assets and liabilities of the company’s subsidiaries operating in non-U.S. dollar currencies are translated at period-end exchange rates. Resulting translation adjustments are reflected in the “accumulated other comprehensive items” component of shareholders’ equity. Revenues and expenses are translated at average exchange rates for the period. Currency transaction gains are included in the accompanying statement of income and in aggregate were $62 million, $25 million and $24 million in 2022, 2021 and 2020, respectively.
Derivative Contracts
The company is exposed to certain risks relating to its ongoing business operations including changes to interest rates and currency exchange rates. The company uses derivative instruments primarily to manage currency exchange and interest rate risks. The company recognizes derivative instruments as either assets or liabilities and measures those instruments at fair value. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of the hedged item through earnings or recognized in other comprehensive items until the hedged item is recognized in earnings. Derivatives that are not designated as hedges are recorded at fair value through earnings.
The company uses short-term forward and option currency exchange contracts primarily to hedge certain balance sheet and operational exposures resulting from changes in currency exchange rates, predominantly intercompany loans and cash balances that are denominated in currencies other than the functional currencies of the respective operations. The currency-exchange contracts principally hedge transactions denominated in euro, British pounds sterling, Singapore dollars, Japanese yen, Hong Kong dollars, Czech koruna and Swedish krona. The company does not hold or engage in transactions involving derivative instruments for purposes other than risk management.
Cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative is reported as a component of other comprehensive items and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item.
Fair value hedges. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in earnings.
Net investment hedges. The company uses foreign currency-denominated debt, certain foreign-denominated payables, and cross-currency interest rate swaps to partially hedge its net investments in foreign operations against adverse movements in exchange rates. A portion of the company’s euro-denominated senior notes, certain foreign-denominated payables, and its 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 certain foreign-denominated payables, 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.
Government Assistance
From time to time, the company receives assistance from various governmental agencies generally in the form of cash or non-income tax credits. These programs help offset the costs of certain research and development activities, facility construction and expansion efforts, or hiring objectives. When the company believes that it is probable that it will meet the conditions tied to the assistance, it offsets the associated expense in the consolidated income statement. Such amounts were not material to the consolidated financial statements as of and for the year ended December 31, 2022.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
The company’s estimates include, among others, asset reserve requirements as well as the amounts of future cash flows associated with certain assets and businesses that are used in assessing the risk of impairment. Risks and uncertainties associated with the ongoing COVID-19 global pandemic materially adversely affected certain of the company’s businesses in 2020, particularly in the Analytical Instruments segment and, to a lesser extent, some businesses within the other three segments. The negative impacts significantly lessened in 2021 and 2022. The extent and duration of negative impacts in the future, which may include inflationary pressures and supply chain disruptions, are uncertain and may require changes to estimates. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In September 2022, the FASB issued new guidance to require entities to disclose information about supplier finance programs. Among other things, the new guidance requires expanded disclosure about key program terms, payment terms, and amounts outstanding for obligations under these programs for each period presented. The company will adopt some aspects of this guidance in 2023 using a retrospective method and other aspects in 2024 using a prospective method. The adoption of this guidance is not expected to have a material impact on the company’s disclosures; however, the impact in future periods will be dependent on the extent of arrangements of this nature entered into by the company
In November 2021, the FASB issued new guidance to require entities to disclose information about certain types of government assistance they receive, including cash grants and tax credits. Among other things, the new guidance requires expanded disclosure regarding the qualitative and quantitative characteristics of the nature, amount, timing, and significant terms and conditions of transactions with a government arising from a grant or other forms of assistance accounted for under a contribution model. The company adopted this guidance in the fourth quarter of 2022 using a prospective method. The adoption of this guidance did not have a material impact on the company’s disclosures; however, the impact in future periods will be dependent on the extent of future transactions of this nature entered into by the company.
In October 2021, the FASB amended guidance to recognize and measure contract assets and contract liabilities acquired in a business combination. Generally, this new guidance will result in the company recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree. The company adopted this guidance in the fourth quarter of 2021 retrospectively to all business combinations completed in the first three quarters of 2021 and prospectively to all future business combinations. The adoption of this guidance did not have a material impact on the company’s consolidated financial statements for acquisitions that closed in 2021 and 2022; however, the impact in future periods will be dependent on the contract assets and contract liabilities acquired in future business combinations.
In July 2021, the FASB amended guidance to require lessors to classify leases as operating leases if they have certain variable lease payment structures and would have selling losses if they were classified as sales-type or direct financing leases. The company adopted the guidance in the third quarter of 2021 using a prospective method. The adoption of this guidance did not have a material impact on the company’s consolidated financial statements.
In December 2019, the FASB issued new guidance to simplify the accounting for income taxes. Among other things, the new guidance requires the effects of enacted changes in tax laws or rates to be reflected in the annual effective tax rate computation in the interim period that includes the enactment date. The company adopted this guidance in 2021 using a prospective method. The adoption of this guidance did not have a material impact on the company’s consolidated financial statements; however, the impact in future periods will be dependent on the extent of future events or conditions that would be affected such as enacted changes in tax laws or rates.
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 adopted the guidance in 2020 using a modified retrospective method. The adoption of this guidance reduced accounts receivable and retained earnings by $1 million on January 1, 2020.
Note 2. Acquisitions
The company’s acquisitions have historically been made at prices above the determined fair value of the acquired identifiable net assets, resulting in goodwill, primarily due to expectations of the synergies that will be realized by combining
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the businesses and the benefits that will be gained from the assembled workforces. 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 services; and use of the commercial infrastructure of the acquired businesses to cost-effectively expand sales of company products and services.
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.
2023
On January 3, 2023, the company acquired, within the Specialty Diagnostics segment, The Binding Site Group, a U.K.-based provider of specialty diagnostic assays and instruments to improve the diagnosis and management of blood cancers and immune system disorders. The acquisition expands the segment’s portfolio with the addition of pioneering innovation in diagnostics and monitoring for multiple myeloma. The goodwill recorded as a result of this business combination is not expected to be tax deductible.
The components of the purchase price and net assets acquired are as follows: | | | | | | | | | | | | | | | | | | |
(In billions) | | The Binding Site | | | | | | | | | | |
Purchase price | | | | | | | | | | | | |
Cash paid | | $ | 2.42 | | | | | | | | | | | |
Debt settled | | 0.31 | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cash acquired | | (0.02) | | | | | | | | | | | |
| | $ | 2.71 | | | | | | | | | | | |
| | | | | | | | | | | | |
Net assets acquired | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Definite-lived intangible assets | | $ | 1.07 | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Goodwill | | 1.77 | | | | | | | | | | | |
Net tangible assets | | 0.15 | | | | | | | | | | | |
| | | | | | | | | | | | |
Deferred tax assets (liabilities) | | (0.28) | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | $ | 2.71 | | | | | | | | | | | |
The weighted-average amortization period for definite-lived intangible assets is 17 years.
The preliminary allocation of the purchase price for the acquisition of The Binding Site is based on estimates of the fair value of the net assets acquired and is subject to adjustment upon finalization, largely with respect to acquired intangible assets and the related deferred taxes. Measurements of these items inherently require significant estimates and assumptions.
2022
In 2022, the company acquired, within the Analytical Instruments segment, a U.S.-based developer of Fourier-transform infrared gas analysis technologies.
2021
On January 15, 2021, the company acquired, within the Laboratory Products and Biopharma Services segment, the Belgium-based European viral vector manufacturing business of Groupe Novasep SAS. The European viral vector manufacturing business provides manufacturing services for vaccines and therapies to biotechnology companies and large biopharma customers. The acquisition expands the segment’s capabilities for cell and gene vaccines and therapies. The goodwill recorded as a result of this business combination is not tax deductible.
On February 25, 2021, the company acquired, within the Life Sciences Solutions segment, Mesa Biotech, Inc., a U.S.-based molecular diagnostic company. Mesa Biotech has developed and commercialized a polymerase chain reaction (PCR) based rapid point-of-care testing platform available for detecting infectious diseases including COVID-19. The acquisition enables the company to accelerate the availability of reliable and accurate advanced molecular diagnostics at the point of care. The goodwill recorded as a result of this business combination is not tax deductible.
On September 30, 2021, the company assumed operating responsibility, within the Laboratory Products and Biopharma Services segment, of a new state-of-the-art biologics manufacturing facility in Lengnau, Switzerland from CSL Limited to perform pharma services for CSL with capacity to serve other customers as well. The goodwill recorded as a result of this business combination is not tax deductible.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On December 8, 2021, the company acquired, within the Laboratory Products and Biopharma Services segment, PPD, Inc., a U.S.-based global provider of clinical research services to the pharma and biotech industry. The addition of PPD’s clinical research services enhances our offering to biotech and pharma customers by enabling them to accelerate innovation and increase their productivity within the drug development process. The goodwill recorded as a result of this business combination is not tax deductible.
On December 30, 2021, the company acquired, within the Life Sciences Solutions segment, PeproTech, Inc., a U.S.-based developer and manufacturer of recombinant proteins. PeproTech provides bioscience reagents known as recombinant proteins, including cytokines and growth factors. The acquisition expands the segment’s bioscience offerings. The goodwill recorded as a result of this business combination is not tax deductible.
In addition, in 2021, the company acquired, within the Life Sciences Solutions segment, cell sorting technology assets, an Ireland-based life sciences distributor and a developer of a digital PCR platform; within the Analytical Instruments segment, a Belgium-based developer of micro-chip based technology for liquid chromatography columns; and within the Specialty Diagnostics segment, a transplant diagnostics information system provider.
The components of the purchase price and net assets acquired for 2021 acquisitions are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | PPD | | PeproTech | | European Viral Vector Business | | Mesa Biotech | | Lengnau biologics manufacturing facility | | Other |
Purchase price | | | | | | | | | | | | |
Cash paid | | $ | 17,237 | | | $ | 1,946 | | | $ | 848 | | | $ | 421 | | | $ | 17 | | | $ | 298 | |
Fair value of equity awards exchanged | | 43 | | | — | | | — | | | — | | | — | | | — | |
Fair value of contingent consideration | | — | | | — | | | — | | | 65 | | | 1 | | | 117 | |
| | | | | | | | | | | | |
Cash acquired | | (1,244) | | | (83) | | | (18) | | | (14) | | | — | | | (12) | |
| | $ | 16,036 | | | $ | 1,863 | | | $ | 830 | | | $ | 472 | | | $ | 18 | | | $ | 403 | |
| | | | | | | | | | | | |
Net assets acquired | | | | | | | | | | | | |
Current assets | | $ | 2,477 | | | $ | 58 | | | $ | 39 | | | $ | 54 | | | $ | — | | | $ | 12 | |
Property, plant and equipment | | 527 | | | 18 | | | 59 | | | 2 | | | 93 | | | 2 | |
Definite-lived intangible assets: | | | | | | | | | | | | |
Customer relationships | | 6,257 | | | 510 | | | 302 | | | — | | | — | | | 2 | |
Product technology | | — | | | 282 | | | 25 | | | 279 | | | — | | | 224 | |
Tradenames | | 594 | | | — | | | — | | | 2 | | | — | | | 2 | |
Backlog | | 1,038 | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Goodwill | | 13,949 | | | 1,198 | | | 600 | | | 237 | | | 18 | | | 198 | |
Other assets | | 1,060 | | | 11 | | | 3 | | | 3 | | | 364 | | | 2 | |
Contract liabilities | | (1,539) | | | — | | | (59) | | | — | | | — | | | (1) | |
Deferred tax assets (liabilities) | | (1,782) | | | (192) | | | (80) | | | (72) | | | — | | | (27) | |
Finance lease liabilities | | (90) | | | — | | | (24) | | | — | | | (82) | | | — | |
Debt assumed | | (4,299) | | | — | | | — | | | — | | | — | | | — | |
Other liabilities assumed | | (2,034) | | | (22) | | | (35) | | | (33) | | | (375) | | | (11) | |
Redeemable noncontrolling interest | | (122) | | | — | | | — | | | — | | | — | | | — | |
| | $ | 16,036 | | | $ | 1,863 | | | $ | 830 | | | $ | 472 | | | $ | 18 | | | $ | 403 | |
During 2022, we finalized the allocations of the purchase price for the Lengnau biologics manufacturing facility, PPD, Inc. and PeproTech, Inc., largely with respect to definite-lived intangible assets, property, plant and equipment, contract liabilities,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
equity method investments, asset retirement obligations, defined benefit pension plans, assumed contingent consideration and the related deferred taxes. The adjustments to the income statement recorded during 2022 were not material.
The weighted-average amortization periods for definite-lived intangible assets acquired in 2021 are 17 years for customer relationships, 11 years for product technology, 7 years for tradenames and 3 years for backlog. The weighted average amortization period for all definite-lived intangible assets acquired in 2021 is 14 years.
Unaudited Pro Forma Information
The following unaudited pro forma information provides the effect of the company's 2021 acquisition of PPD as if the acquisition had occurred on January 1, 2020:
| | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, | | December 31, |
(In millions) | | 2021 | | 2020 |
Revenues | | $ | 44,886 | | | $ | 36,887 | |
| | | | |
Net income attributable to Thermo Fisher Scientific Inc. | | $ | 7,369 | | | $ | 5,361 | |
The historical consolidated financial information of the company and PPD has been adjusted in the pro forma information to give effect to pro forma events that are directly attributable to the acquisitions and related financing arrangements and are factually supportable.
To reflect the acquisition of PPD as if it had occurred on January 1, 2020, the unaudited pro forma results include adjustments to reflect, among other things, the incremental intangible asset amortization to be incurred based on the preliminary values of each identifiable intangible asset and the interest expense from debt financings obtained to partially fund the cash consideration transferred. Pro forma adjustments were tax effected at the company's historical statutory rates in effect for the respective periods. The unaudited pro forma amounts are not necessarily indicative of the combined results of operations that would have been realized had the acquisitions and related financings occurred on the aforementioned dates, nor are they meant to be indicative of any anticipated combined results of operations that the company will experience after the transaction. In addition, the amounts do not include any adjustments for actions that may be taken following the completion of the transaction, such as expected cost savings, operating synergies, or revenue enhancements that may be realized subsequent to the transaction.
Pro forma net income attributable to Thermo Fisher Scientific Inc. for the year ended December 31, 2021, excludes $312 million of transaction costs, initial restructuring costs, and debt extinguishment costs directly attributable to the PPD acquisition that were included in the determination of net income attributable to Thermo Fisher Scientific Inc. for that period. These items have reduced pro forma net income attributable to Thermo Fisher Scientific Inc. for the year ended December 31, 2020, by $197 million.
The company’s results would not have been materially different from its pro forma results had the company’s other 2021 acquisitions occurred at the beginning of 2020.
PPD’s revenues and losses attributable to Thermo Fisher Scientific Inc. in 2021, subsequent to the acquisition date, were $378 million and $(60) million, respectively. The loss includes non-recurring transaction and compensation costs.
2020
In 2020, the company acquired, within the Life Sciences Solutions segment, a U.S.-based provider of a spectral dye platform for high-resolution biology applications which will extend the company’s existing tools for protein and cell analysis applications.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Revenues and Contract-related Balances
Disaggregated Revenues
Revenues by type are as follows: | | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Revenues | | | | | | |
Consumables | | $ | 20,624 | | | $ | 22,608 | | | $ | 18,527 | |
Instruments | | 7,924 | | | 7,753 | | | 6,779 | |
Services | | 16,367 | | | 8,850 | | | 6,912 | |
Consolidated revenues | | $ | 44,915 | | | $ | 39,211 | | | $ | 32,218 | |
Revenues by geographic region based on customer location are as follows: | | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Revenues | | | | | | |
North America | | $ | 24,594 | | | $ | 19,659 | | | $ | 17,081 | |
Europe | | 10,762 | | | 11,134 | | | 8,284 | |
Asia-Pacific | | 8,115 | | | 7,218 | | | 5,822 | |
Other regions | | 1,444 | | | 1,200 | | | 1,031 | |
Consolidated revenues | | $ | 44,915 | | | $ | 39,211 | | | $ | 32,218 | |
Each reportable segment earns revenues from consumables, instruments and services in North America, Europe, Asia-Pacific and other regions. See Note 4 for revenues 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 December 31, 2022 was $26.97 billion. The company will recognize revenues for these performance obligations as they are satisfied, approximately 55% of which is expected to occur within the next twelve months. Amounts expected to occur thereafter generally relate to contract manufacturing, clinical research and extended warranty service agreements, which typically have durations of three to five years.
Contract-related Balances
Noncurrent contract assets and noncurrent contract liabilities are included within other assets and other long-term liabilities in the accompanying balance sheet, respectively. Contract asset and liability balances are as follows: | | | | | | | | | | | | | | |
| | December 31, | | December 31, |
(In millions) | | 2022 | | 2021 |
Current contract assets, net | | $ | 1,312 | | | $ | 968 | |
Noncurrent contract assets, net | | 7 | | | 9 | |
Current contract liabilities | | 2,601 | | | 2,655 | |
Noncurrent contract liabilities | | 1,179 | | | 1,238 | |
Substantially all of the current contract liabilities balance at December 31, 2021 and 2020 was recognized in revenues during 2022 and 2021, respectively.
Note 4. Business Segment and Geographical Information
The company’s financial performance is reported in four segments. A description of each segment follows.
Life Sciences Solutions: provides an extensive portfolio of reagents, instruments and consumables used in biological and medical research, discovery and production of new drugs and vaccines as well as diagnosis of infection and disease. These products and services are used by customers in pharmaceutical, biotechnology, agricultural, clinical, healthcare, academic, and government markets.
Analytical Instruments: provides a broad offering of instruments and the supporting consumables, software and services that are used for a range of applications in the laboratory and in the field. These products and services are used by customers in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
pharmaceutical, biotechnology, academic, government, environmental and other research and industrial markets, as well as the clinical laboratory.
Specialty Diagnostics: offers a wide range of diagnostic test kits, reagents, culture media, instruments and associated products to serve customers in healthcare, clinical, pharmaceutical, industrial, and food safety laboratories. Our healthcare products are used to increase the speed and accuracy of diagnoses, which improves patient care in a more cost-efficient manner.
Laboratory Products and Biopharma Services: offers virtually everything needed for the laboratory. Our unique combination of self-manufactured and sourced products and extensive service offering enables our customers to focus on their core activities and helps them to be more efficient, productive and cost-effective. The segment also includes a comprehensive offering of outsourced services used by the pharmaceutical and biotech industries for drug development, clinical research, clinical trials services and commercial drug manufacturing.
The company’s management evaluates segment operating performance based on operating income before certain charges/credits to cost of revenues and selling, general and administrative expenses, principally associated with acquisition accounting; restructuring and other costs/income including costs arising from facility consolidations such as severance and abandoned lease expense and gains and losses from the sale of real estate and product lines as well as from significant litigation-related matters; and amortization of acquisition-related intangible assets. The company uses this measure because it helps management understand and evaluate the segments’ core operating results and facilitates comparison of performance for determining compensation.
Business Segment Information | | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Revenues | | | | | | |
Life Sciences Solutions | | $ | 13,532 | | | $ | 15,631 | | | $ | 12,168 | |
Analytical Instruments | | 6,624 | | | 6,069 | | | 5,124 | |
Specialty Diagnostics | | 4,763 | | | 5,659 | | | 5,343 | |
Laboratory Products and Biopharma Services | | 22,511 | | | 14,862 | | | 12,245 | |
Eliminations | | (2,515) | | | (3,010) | | | (2,662) | |
Consolidated revenues | | 44,915 | | | 39,211 | | | 32,218 | |
| | | | | | |
Segment Income | | | | | | |
Life Sciences Solutions | | 5,582 | | | 7,817 | | | 6,109 | |
Analytical Instruments | | 1,507 | | | 1,197 | | | 808 | |
Specialty Diagnostics | | 1,024 | | | 1,280 | | | 1,368 | |
Laboratory Products and Biopharma Services | | 2,872 | | | 1,844 | | | 1,271 | |
Subtotal reportable segments | | 10,985 | | | 12,138 | | | 9,556 | |
Cost of revenues adjustments | | (46) | | | (8) | | | (6) | |
Selling, general and administrative expenses adjustments | | (37) | | | (144) | | | 10 | |
Restructuring and other costs | | (114) | | | (197) | | | (99) | |
Amortization of acquisition-related intangible assets | | (2,395) | | | (1,761) | | | (1,667) | |
Consolidated operating income | | 8,393 | | | 10,028 | | | 7,794 | |
Interest income | | 272 | | | 43 | | | 65 | |
Interest expense | | (726) | | | (536) | | | (553) | |
Other income/(expense) | | (104) | | | (694) | | | (76) | |
Consolidated income before taxes | | $ | 7,835 | | | $ | 8,841 | | | $ | 7,230 | |
| | | | | | |
Depreciation | | | | | | |
Life Sciences Solutions | | $ | 214 | | | $ | 197 | | | $ | 140 | |
Analytical Instruments | | 83 | | | 83 | | | 76 | |
Specialty Diagnostics | | 75 | | | 128 | | | 100 | |
Laboratory Products and Biopharma Services | | 614 | | | 423 | | | 342 | |
Consolidated depreciation | | $ | 986 | | | $ | 831 | | | $ | 658 | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cost of revenues charges included in the above table consist of charges for the sale of inventories revalued at the date of acquisition, inventory write-downs associated with large-scale abandonments of product lines, and accelerated depreciation on fixed assets to estimated salvage value in connection with the consolidation of operations. Selling, general and administrative charges/credits included in the above table consist of significant transaction/integration costs (including reimbursement thereof) related to recent/terminated acquisitions, charges/credits for changes in estimates of contingent acquisition consideration, and charges/credits related to product liability litigation.
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Total assets | | | | | | |
Life Sciences Solutions | | $ | 21,848 | | | $ | 22,751 | | | $ | 20,209 | |
Analytical Instruments | | 10,019 | | | 9,692 | | | 9,773 | |
Specialty Diagnostics | | 5,542 | | | 6,010 | | | 6,534 | |
Laboratory Products and Biopharma Services | | 51,281 | | | 52,639 | | | 22,711 | |
Corporate/other (a) | | 8,464 | | | 4,031 | | | 9,825 | |
Consolidated total assets | | $ | 97,154 | | | $ | 95,123 | | | $ | 69,052 | |
| | | | | | |
Capital expenditures | | | | | | |
Life Sciences Solutions | | $ | 490 | | | $ | 810 | | | $ | 392 | |
Analytical Instruments | | 140 | | | 79 | | | 74 | |
Specialty Diagnostics | | 112 | | | 167 | | | 175 | |
Laboratory Products and Biopharma Services | | 1,403 | | | 1,327 | | | 772 | |
Corporate/other | | 98 | | | 140 | | | 61 | |
Consolidated capital expenditures | | $ | 2,243 | | | $ | 2,523 | | | $ | 1,474 | |
(a)Corporate assets consist primarily of cash and cash equivalents and property and equipment at the company's corporate offices.
Geographical Information | | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Revenues (b) | | | | | | |
United States | | $ | 23,820 | | | $ | 18,907 | | | $ | 16,435 | |
China | | 3,793 | | | 3,444 | | | 2,797 | |
Other | | 17,302 | | | 16,860 | | | 12,986 | |
Consolidated revenues | | $ | 44,915 | | | $ | 39,211 | | | $ | 32,218 | |
| | | | | | |
Long-lived Assets (c) | | | | | | |
United States | | $ | 6,308 | | | $ | 5,578 | | | $ | 3,686 | |
Other | | 4,565 | | | 4,286 | | | 3,001 | |
Consolidated long-lived assets | | $ | 10,873 | | | $ | 9,864 | | | $ | 6,687 | |
(b)Revenues are attributed to countries based on customer location.
(c)Includes property, plant and equipment, net, and operating lease ROU assets.
Note 5. Other Income/(Expense)
In all periods, other income/(expense) includes currency transaction gains and losses on non-operating 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 2022, other income/(expense) includes $161 million of net losses on investments, $67 million of net gains on derivative instruments to address certain foreign currency risks, $26 million of losses on the early extinguishment of debt (Note 10), and $2 million of net settlement gains on pension plans.
In 2021, other income/(expense) includes $767 million of losses on the early extinguishment of debt (Note 10), $36 million of financing costs associated with obtaining bridge financing commitments in connection with the agreement to acquire PPD (Note 2), offset in part by $66 million of net gains on investments. The company had a cash outlay of $36 million in 2021 associated with obtaining the bridge financing commitments, included in other financing activities, net, in the accompanying statement of cash flows.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In 2020, other income/(expense) includes $81 million of financing costs for a terminated acquisition, primarily for loan commitment fees and entering into hedging contracts and $42 million reclassified from accumulated other comprehensive items related to a hedge arrangement (Note 14), offset in part by $10 million of net gains on investments. The company had a cash outlay of $51 million in 2020 associated with obtaining the loan commitments included in other financing activities, net, in the accompanying statement of cash flows.
Note 6. Stock-based Compensation Expense
The company has stock-based compensation plans for its key employees, directors and others. These plans permit the grant of a variety of stock and stock-based awards, including restricted stock units, stock options or performance-based shares, as determined by the compensation committee of the company’s Board of Directors or, for certain non-officer grants, by the company’s employee equity committee, which consists of its chief executive officer. The company generally issues new shares of its common stock to satisfy option exercises and restricted unit vesting. Grants of stock options and restricted units generally provide that in the event of both a change in control of the company and a qualifying termination of an option or unit holder’s employment, all options and service-based restricted unit awards held by the recipient become immediately vested (unless an employment or other agreement with the employee provides for different treatment).
Compensation cost is based on the grant-date fair value and is recognized ratably over the requisite vesting period or to the date based on qualifying retirement eligibility, if earlier, and is primarily included in selling, general and administrative expenses.
Stock Options
The company’s practice is to grant stock options at fair market value. Options vest over 3-5 years with terms of 7-10 years, assuming continued employment with certain exceptions. Vesting of the option awards is contingent upon meeting certain service conditions. The fair value of most option grants is estimated using the Black-Scholes option pricing model. For option grants that require the achievement of both service and market conditions, a lattice model is used to estimate fair value. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the historical volatility of the company’s stock. Historical data on exercise patterns is the basis for estimating the expected life of an option. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term which approximates the expected life assumed at the date of grant. The expected annual dividend rate was calculated by dividing the company’s annual dividend, based on the most recent quarterly dividend rate, by the closing stock price on the grant date. The compensation expense recognized for all stock-based awards is net of estimated forfeitures. Forfeitures are estimated based on an analysis of actual option forfeitures.
The weighted average assumptions used in the Black-Scholes option pricing model are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Expected stock price volatility | | 26 | % | | 26 | % | | 22 | % |
Risk free interest rate | | 2.0 | % | | 0.8 | % | | 1.1 | % |
Expected life of options (years) | | 4.7 | | 4.3 | | 4.3 |
Expected annual dividend | | 0.2 | % | | 0.2 | % | | 0.3 | % |
The weighted average per share grant-date fair values of options granted during 2022, 2021 and 2020 were $135.07, $123.97 and $61.19, respectively. The total intrinsic value of options exercised during the same periods was $336 million, $501 million and $457 million, respectively. The intrinsic value is the difference between the market value of the shares on the exercise date and the exercise price of the option.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the company’s option activity for the year ended December 31, 2022 is presented below: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Shares (in millions) | | Weighted average exercise price | | Weighted average remaining contractual term (in years) | | Aggregate intrinsic value (in millions) |
Outstanding at December 31, 2021 | | 6.0 | | | $ | 319.95 | | | | | |
Granted | | 0.8 | | | 530.48 | | | | | |
| | | | | | | | |
Exercised | | (0.9) | | | 199.85 | | | | | |
Canceled/expired | | (0.3) | | | 503.76 | | | | | |
Outstanding at December 31, 2022 | | 5.6 | | | $ | 359.27 | | | 4.2 | | $ | 1,125 | |
Vested and unvested expected to vest at December 31, 2022 | | 5.3 | | | $ | 351.97 | | | 4.7 | | $ | 1,114 | |
Exercisable at December 31, 2022 | | 2.9 | | | $ | 251.44 | | | 2.8 | | $ | 891 | |
As of December 31, 2022, there was $228 million of total unrecognized compensation cost related to unvested stock options granted. The cost is expected to be recognized through 2026 with a weighted average amortization period of 2.4 years.
Restricted Share/Unit Awards
Awards of restricted units convert into an equivalent number of shares of common stock. The awards generally vest over 3-4 years, assuming continued employment, with some exceptions. Vesting of the awards is contingent upon meeting certain service conditions and may also be contingent upon meeting certain performance and/or market conditions. The fair market value of the award at the time of the grant is amortized to expense over the requisite service period of the award, which is generally the vesting period. Recipients of restricted units have no voting rights but are entitled to accrue dividend equivalents. The fair value of service- and performance-based restricted unit awards is determined based on the number of units granted and the market value of the company’s shares on the grant date. For awards with market-based vesting conditions, the company uses a lattice model to estimate the grant-date fair value of the award.
A summary of the company’s restricted unit activity for the year ended December 31, 2022 is presented below: | | | | | | | | | | | | | | |
| | Units (in millions) | | Weighted average grant-date fair value |
Unvested at December 31, 2021 | | 0.8 | | | $ | 425.39 | |
Granted | | 0.4 | | | 520.83 | |
| | | | |
Vested | | (0.4) | | | 375.77 | |
Forfeited | | (0.1) | | | 510.37 | |
Unvested at December 31, 2022 | | 0.7 | | | $ | 495.39 | |
The total fair value of shares vested during 2022, 2021 and 2020 was $163 million, $151 million and $126 million, respectively.
As of December 31, 2022, there was $200 million of total unrecognized compensation cost related to unvested restricted stock unit awards. The cost is expected to be recognized through 2026 with a weighted average amortization period of 1.9 years.
Employee Stock Purchase Plans
Qualifying employees are eligible to participate in an employee stock purchase plan sponsored by the company. Shares may be purchased under the program at 95% of the fair market value at the end of the purchase period and the shares purchased are not subject to a holding period. Shares are purchased through payroll deductions of up to 10% of each participating employee’s qualifying gross wages. The company issued 0.2 million, 0.1 million and 0.2 million shares, respectively, of its common stock in 2022, 2021 and 2020 under the employee stock purchase plan.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 7. Pension and Other Postretirement Benefit Plans
401(k) Savings Plan and Other Defined Contribution Plans
The company’s 401(k) savings and other defined contribution plans cover the majority of the company’s eligible U.S. and certain non-U.S. employees. Contributions to the plans are made by both the employee and the company. Company contributions are based on the level of employee contributions. Company contributions to these plans are based on formulas determined by the company. In 2022, 2021 and 2020, the company charged to expense $402 million, $299 million and $254 million, respectively, related to its defined contribution plans.
Defined Benefit Pension Plans
Employees of a number of the company’s non-U.S. and certain U.S. subsidiaries participate in defined benefit pension plans covering substantially all full-time employees at those subsidiaries. Some of the plans are unfunded, as permitted under the plans and applicable laws. The company also maintains postretirement healthcare programs at several acquired businesses where certain employees are eligible to participate. The liabilities and costs associated with the company’s postretirement healthcare programs are generally funded on a self-insured and insured-premium basis and are not material for any period presented.
The company recognizes the funded status of defined benefit pension and other postretirement benefit plans as an asset or liability. This amount is defined as the difference between the fair value of plan assets and the benefit obligation. The company is required to recognize as a component of other comprehensive items, net of tax, the actuarial gains/losses and prior service costs/credits that arise but were not previously required to be recognized as components of net periodic benefit cost. Other comprehensive items is adjusted as these amounts are later recognized in income as components of net periodic benefit cost.
When a company with a pension plan is acquired, any excess of projected benefit obligation over the plan assets is recognized as a liability and any excess of plan assets over the projected benefit obligation is recognized as an asset. The recognition of a new liability or a new asset results in the elimination of (a) previously existing unrecognized net gain or loss and (b) unrecognized prior service cost or credits.
The company funds annually, at a minimum, the statutorily required minimum amount as actuarially determined. During 2022, 2021 and 2020, the company made cash contributions of approximately $41 million, $34 million and $96 million, respectively. Contributions to the plans included in the following table are estimated at between $30 and $50 million for 2023.
The following table provides a reconciliation of benefit obligations and plan assets of the company’s domestic and non-U.S. pension plans: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Domestic pension benefits | | Non-U.S. pension benefits |
(In millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Accumulated benefit obligation | | $ | 995 | | | $ | 1,260 | | | $ | 1,016 | | | $ | 1,475 | |
Change in projected benefit obligations | | | | | | | | |
Projected benefit obligation at beginning of year | | $ | 1,260 | | | $ | 1,302 | | | $ | 1,552 | | | $ | 1,486 | |
Acquisitions | | — | | | — | | | 51 | | | 170 | |
Service costs | | — | | | — | | | 34 | | | 27 | |
Interest costs | | 27 | | | 23 | | | 20 | | | 11 | |
Settlements | | — | | | — | | | (31) | | | (7) | |
Plan participants' contributions | | — | | | — | | | 9 | | | 6 | |
Actuarial (gains) losses | | (210) | | | 20 | | | (447) | | | (57) | |
Benefits paid | | (82) | | | (85) | | | (19) | | | (30) | |
Currency translation and other | | — | | | — | | | (100) | | | (54) | |
Projected benefit obligation at end of year | | $ | 995 | | | $ | 1,260 | | | $ | 1,069 | | | $ | 1,552 | |
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Domestic pension benefits | | Non-U.S. pension benefits |
(In millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Change in fair value of plan assets | | | | | | | | |
Fair value of plan assets at beginning of year | | $ | 1,226 | | | $ | 1,267 | | | $ | 1,302 | | | $ | 1,160 | |
Acquisitions | | — | | | — | | | 14 | | | 158 | |
Actual return on plan assets | | (212) | | | 37 | | | (347) | | | 14 | |
Employer contributions | | 5 | | | 7 | | | 36 | | | 27 | |
Settlements | | — | | | — | | | (31) | | | (7) | |
Plan participants' contributions | | — | | | — | | | 9 | | | 6 | |
Benefits paid | | (82) | | | (85) | | | (19) | | | (30) | |
Currency translation and other | | — | | | — | | | (96) | | | (26) | |
Fair value of plan assets at end of year | | $ | 937 | | | $ | 1,226 | | | $ | 868 | | | $ | 1,302 | |
Funded status | | $ | (58) | | | $ | (34) | | | $ | (201) | | | $ | (250) | |
Amounts recognized in balance sheet | | | | | | | | |
Noncurrent assets | | $ | — | | | $ | 32 | | | $ | 81 | | | $ | 205 | |
Current liability | | (6) | | | (7) | | | (11) | | | (10) | |
Noncurrent liabilities | | (52) | | | (59) | | | (271) | | | (445) | |
Net amount recognized | | $ | (58) | | | $ | (34) | | | $ | (201) | | | $ | (250) | |
Amounts recognized in accumulated other comprehensive items | | | | | | | | |
Net actuarial loss | | $ | 200 | | | $ | 157 | | | $ | 74 | | | $ | 167 | |
Prior service credits | | — | | | — | | | (4) | | | (3) | |
Net amount recognized | | $ | 200 | | | $ | 157 | | | $ | 70 | | | $ | 164 | |
For domestic pension plans, actuarial gains experienced in 2022 were driven by increases in the weighted average discount rates used to determine the projected benefit obligation, as well as differences between actual and expected returns on plan assets for certain portions of plan benefits indexed to asset returns. For non-U.S. pension plans, actuarial gains experienced in 2022 were principally driven by increases in the weighted average discount rates used to determine the projected benefit obligation.
For domestic pension plans, actuarial losses experienced in 2021 were driven by differences between actual and expected returns on plan assets for certain portions of plan benefits indexed to asset returns, which were partially offset by actuarial gains due to increases in the weighted average discount rates used to determine the projected benefit obligation differences. For non-U.S. pension plans, actuarial gains experienced in 2021 were principally driven by increases in the weighted average discount rates used to determine the projected benefit obligation.
The actuarial assumptions used to compute the funded status for the plans are based upon information available as of December 31, 2022 and 2021 and are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Domestic pension benefits | | Non-U.S. pension benefits |
| | 2022 | | 2021 | | 2022 | | 2021 |
Weighted average assumptions used to determine projected benefit obligations | | | | | | | | |
Discount rate for determining benefit obligation | | 5.01 | % | | 2.70 | % | | 3.91 | % | | 1.45 | % |
Interest crediting rate for cash balance plans | | 4.96 | % | | 2.58 | % | | 2.19 | % | | 1.25 | % |
Average rate of increase in employee compensation | | N/A | | N/A | | 2.78 | % | | 2.73 | % |
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The actuarial assumptions used to compute the net periodic pension benefit cost (income) are based upon information available as of the beginning of the year, as presented in the following table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Domestic pension benefits | | Non-U.S. pension benefits |
| | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Weighted average assumptions used to determine net benefit cost (income) | | | | | | | | | | | | |
Discount rate - service cost | | N/A | | N/A | | N/A | | 1.00 | % | | 0.65 | % | | 1.21 | % |
Discount rate - interest cost | | 2.70 | % | | 2.33 | % | | 3.13 | % | | 1.36 | % | | 0.80 | % | | 1.44 | % |
Average rate of increase in employee compensation | | N/A | | N/A | | N/A | | 2.73 | % | | 2.30 | % | | 2.27 | % |
Expected long-term rate of return on assets | | 4.75 | % | | 4.25 | % | | 5.00 | % | | 2.33 | % | | 2.02 | % | | 2.33 | % |
The discount rate reflects the rate the company would have to pay to purchase high-quality investments that would provide cash sufficient to settle its current pension obligations. The discount rate is determined based on a range of factors, including the rates of return on high-quality, fixed-income corporate bonds and the related expected duration of the obligations or, in certain instances, the company has used a hypothetical portfolio of high quality instruments with maturities that mirror the benefit obligation in order to accurately estimate the discount rate relevant to a particular plan.
The company utilizes a full yield curve approach in the estimation of these components by applying the specific spot-rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows.
The expected long-term rate of return on plan assets reflects the average rate of earnings expected on the funds invested, or to be invested, to provide for the benefits included in the projected benefit obligations. In determining the expected long-term rate of return on plan assets, the company considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes and economic and other indicators of future performance. In addition, the company may consult with and consider the opinions of financial and other professionals in developing appropriate return benchmarks.
Asset management objectives include maintaining an adequate level of diversification to reduce interest rate and market risk and providing adequate liquidity to meet immediate and future benefit payment requirements.
The expected rate of compensation increase reflects the long-term average rate of salary increases and is based on historic salary increase experience and management’s expectations of future salary increases.
The projected benefit obligation and fair value of plan assets for the company’s qualified and non-qualified pension plans with projected benefit obligations in excess of plan assets are as follows: | | | | | | | | | | | | | | |
| | Pension plans |
(In millions) | | 2022 | | 2021 |
Pension plans with projected benefit obligations in excess of plan assets | | | | |
Projected benefit obligation | | $ | 1,636 | | | $ | 2,010 | |
Fair value of plan assets | | 1,296 | | | 1,521 | |
The accumulated benefit obligation and fair value of plan assets for the company's qualified and non-qualified pension plans with accumulated benefit obligations in excess of plan assets are as follows: | | | | | | | | | | | | | | |
| | Pension plans |
(In millions) | | 2022 | | 2021 |
Pension plans with accumulated benefit obligations in excess of plan assets | | | | |
Accumulated benefit obligation | | $ | 1,583 | | | $ | 1,937 | |
Fair value of plan assets | | 1,294 | | | 1,521 | |
The measurement date used to determine benefit information is December 31 for all plan assets and benefit obligations.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The net periodic pension benefit cost (income) includes the following components: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Domestic pension benefits | | Non-U.S. pension benefits |
(In millions) | | 2022 | | 2021 | | 2020 | | 2022 | | 2021 | | 2020 |
Components of net benefit cost (income) | | | | | | | | | | | | |
Service cost | | $ | — | | | $ | — | | | $ | — | | | $ | 34 | | | $ | 27 | | | $ | 24 | |
Interest cost on benefit obligation | | 27 | | | 23 | | | 35 | | | 20 | | | 11 | | | 18 | |
Expected return on plan assets | | (45) | | | (40) | | | (47) | | | (26) | | | (19) | | | (19) | |
Amortization of actuarial net loss | | 4 | | | 7 | | | 6 | | | 7 | | | 12 | | | 10 | |
Amortization of prior service benefit | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
Settlement/curtailment loss | | — | | | — | | | — | | | (2) | | | — | | | 8 | |
| | | | | | | | | | | | |
Net periodic benefit cost (income) | | $ | (14) | | | $ | (10) | | | $ | (6) | | | $ | 32 | | | $ | 31 | | | $ | 40 | |
Expected benefit payments are estimated using the same assumptions used in determining the company’s benefit obligation at December 31, 2022. Benefit payments will depend on future employment and compensation levels, average years employed and average life spans, among other factors, and changes in any of these factors could significantly affect these estimated future benefit payments. Estimated future benefit payments during the next five years and in the aggregate for the five fiscal years thereafter, are as follows: | | | | | | | | | | | | | | |
(In millions) | | Domestic pension benefits | | Non-U.S. pension benefits |
Expected benefit payments | | | | |
2023 | | $ | 85 | | | $ | 47 | |
2024 | | 81 | | | 48 | |
2025 | | 81 | | | 51 | |
2026 | | 80 | | | 55 | |
2027 | | 79 | | | 55 | |
2028-2032 | | 373 | | | 313 | |
Domestic Pension Plan Assets
The company’s overall objective is to manage the assets in a liability framework where investments are selected that are expected to have similar changes in fair value as the related liabilities will have upon changes in interest rates. The company invests in a portfolio of both return-seeking and liability-hedging assets, primarily through the use of institutional collective funds, to achieve long-term growth and to insulate the funded position from interest rate volatility. The strategic asset allocation uses a combination of risk controlled and index strategies in fixed income and global equities. The target allocations for the investments are approximately 10% to funds investing in U.S. equities, approximately 10% to funds investing in international equities and approximately 80% to funds investing in fixed income securities. The portfolio maintains enough liquidity at all times to meet the near-term benefit payments.
Non-U.S. Pension Plan Assets
The company maintains specific plan assets for many of the individual pension plans outside the U.S. The investment strategy of each plan has been uniquely established based on the country specific standards and characteristics of the plans. Several of the plans have contracts with insurance companies whereby the market risks of the benefit obligations are borne by the insurance companies. When assets are held directly in investments, generally the objective is to invest in a portfolio of diversified assets with a variety of fund managers. The investments may include equity funds, fixed income funds, hedge funds, multi-asset funds, alternative investments and derivative funds with the target asset allocations ranging from approximately 0% - 25% for equity funds, 30% - 90% for fixed income funds, 0% - 35% for multi-asset funds, and 0% - 45% for funds holding derivatives. The derivatives held by the funds are primarily interest rate swaps intended to match the movements in the plan liabilities. Each plan maintains enough liquidity at all times to meet the near-term benefit payments.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The fair values of the company’s plan assets at December 31, 2022 and 2021, by asset category are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | Quoted prices in active markets | | Significant other observable inputs | | Significant unobservable inputs | | Not subject to leveling (a) |
(In millions) | | 2022 | | (Level 1) | | (Level 2) | | (Level 3) | |
Domestic pension plan assets | | | | | | | | | | |
U.S. equity funds | | $ | 89 | | | $ | — | | | $ | — | | | $ | — | | | $ | 89 | |
International equity funds | | 91 | | | — | | | — | | | — | | | 91 | |
Fixed income funds | | 739 | | | — | | | — | | | — | | | 739 | |
| | | | | | | | | | |
Money market funds | | 18 | | | — | | | — | | | — | | | 18 | |
Total domestic pension plans | | $ | 937 | | | $ | — | | | $ | — | | | $ | — | | | $ | 937 | |
Non-U.S. pension plan assets | | | | | | | | | | |
Equity funds | | $ | 8 | | | $ | — | | | $ | — | | | $ | — | | | $ | 8 | |
Fixed income funds | | 299 | | | — | | | — | | | — | | | 299 | |
| | | | | | | | | | |
Multi-asset funds | | 56 | | | — | | | — | | | — | | | 56 | |
Derivative funds | | 190 | | | — | | | — | | | — | | | 190 | |
| | | | | | | | | | |
Insurance contracts | | 306 | | | — | | | 306 | | | — | | | — | |
Cash / money market funds | | 9 | | | 4 | | | — | | | — | | | 5 | |
Total non-U.S. pension plans | | $ | 868 | | | $ | 4 | | | $ | 306 | | | $ | — | | | $ | 558 | |
(a) Investments measured at the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | Quoted prices in active markets | | Significant other observable inputs | | Significant unobservable inputs | | Not subject to leveling (a) |
(In millions) | | 2021 | | (Level 1) | | (Level 2) | | (Level 3) | |
Domestic pension plan assets | | | | | | | | | | |
U.S. equity funds | | $ | 124 | | | $ | — | | | $ | — | | | $ | — | | | $ | 124 | |
International equity funds | | 117 | | | — | | | — | | | — | | | 117 | |
Fixed income funds | | 966 | | | — | | | — | | | — | | | 966 | |
| | | | | | | | | | |
Money market funds | | 19 | | | — | | | — | | | — | | | 19 | |
Total domestic pension plans | | $ | 1,226 | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,226 | |
Non-U.S. pension plan assets | | | | | | | | | | |
Equity funds | | $ | 17 | | | $ | — | | | $ | — | | | $ | — | | | $ | 17 | |
Fixed income funds | | 651 | | | — | | | — | | | — | | | 651 | |
Hedge funds | | 3 | | | — | | | — | | | — | | | 3 | |
Multi-asset funds | | 73 | | | — | | | — | | | — | | | 73 | |
Derivative funds | | 253 | | | — | | | — | | | — | | | 253 | |
Alternative investments | | 1 | | | — | | | — | | | — | | | 1 | |
Insurance contracts | | 295 | | | — | | | 295 | | | — | | | — | |
Cash / money market funds | | 9 | | | 5 | | | — | | | — | | | 4 | |
Total non-U.S. pension plans | | $ | 1,302 | | | $ | 5 | | | $ | 295 | | | $ | — | | | $ | 1,002 | |
(a) Investments measured at the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. |
The tables above present the fair value of the company’s plan assets in accordance with the fair value hierarchy (Note 14). Certain investments that are measured at fair value using the net asset value per share practical expedient have not been classified in the fair value hierarchy. The fair value amounts of these investments presented in the above tables are intended to permit reconciliation of the fair value hierarchy to the amounts presented for the total pension plan assets. These investments were also redeemable at the balance sheet date or within limited time restrictions.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 8. Income Taxes
The components of income before provision for income taxes are as follows: | | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
U.S. | | $ | 3,859 | | | $ | 3,340 | | | $ | 4,762 | |
Non-U.S. | | 3,976 | | | 5,501 | | | 2,468 | |
Income before income taxes | | $ | 7,835 | | | $ | 8,841 | | | $ | 7,230 | |
The components of the provision for income taxes are as follows: | | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Current income tax provision | | | | | | |
Federal | | $ | 813 | | | $ | 446 | | | $ | 521 | |
Non-U.S. | | 633 | | | 1,148 | | | 423 | |
State | | 254 | | | 160 | | | 175 | |
| | 1,700 | | | 1,754 | | | 1,119 | |
Deferred income tax provision (benefit) | | | | | | |
Federal | | $ | (611) | | | $ | (227) | | | $ | (237) | |
Non-U.S. | | (314) | | | (399) | | | (18) | |
State | | (72) | | | (19) | | | (14) | |
| | (997) | | | (645) | | | (269) | |
Provision for income taxes | | $ | 703 | | | $ | 1,109 | | | $ | 850 | |
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 income taxes due to the following: | | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Statutory federal income tax rate | | 21 | % | | 21 | % | | 21 | % |
Provision for income taxes at statutory rate | | $ | 1,645 | | | $ | 1,857 | | | $ | 1,518 | |
Increases (decreases) resulting from: | | | | | | |
Foreign rate differential | | (329) | | | (255) | | | (223) | |
Income tax credits | | (202) | | | (315) | | | (335) | |
Global intangible low-taxed income | | 96 | | | 76 | | | 86 | |
Foreign-derived intangible income | | (149) | | | (119) | | | (156) | |
Excess tax benefits from stock options and restricted stock units | | (80) | | | (124) | | | (114) | |
Provision for (reversal of) tax reserves, net | | (544) | | | (17) | | | (26) | |
Intra-entity transfers | | (18) | | | (284) | | | — | |
| | | | | | |
Domestication transaction | | — | | | — | | | (263) | |
Valuation allowances | | 344 | | | 36 | | | 379 | |
| | | | | | |
Withholding taxes | | 84 | | | 164 | | | 115 | |
| | | | | | |
| | | | | | |
| | | | | | |
Tax return reassessments and settlements | | (210) | | | 1 | | | (196) | |
State income taxes, net of federal tax | | 111 | | | 82 | | | 147 | |
Other, net | | (45) | | | 7 | | | (82) | |
Provision for income taxes | | $ | 703 | | | $ | 1,109 | | | $ | 850 | |
The company has operations and a taxable presence in approximately 70 countries outside the U.S. The company's effective income tax rate differs from the U.S. federal statutory rate each year due to certain operations that are subject to tax incentives, state and local taxes, and foreign taxes that are different than the U.S. federal statutory rate.
During 2022, the company settled an IRS audit relating to the 2017 and 2018 tax years. The company recorded a $208 million net tax benefit primarily from this settlement and related impacts, which resulted in a decrease in the company’s unrecognized tax benefits of $658 million. The company recorded $49 million of charges for expired tax credits and other related components of the settlement. The company recorded a charge of $395 million to establish a valuation allowance against
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
certain U.S. foreign tax credits which the company believes will more likely than not expire unutilized. The company also recorded $101 million of additional net unrecognized tax benefit liabilities related to other tax audits.
During 2021, the company recorded a $188 million income tax benefit related to the deferred tax implications of an intra-entity transfer of assets. Also in 2021, the company recorded a $96 million income tax benefit related to a capital loss resulting from certain intra-entity transactions.
During 2020, the company settled an IRS audit relating to the 2014, 2015, and 2016 tax years. The company recorded a $25 million net tax benefit primarily from this settlement and related impacts, which resulted in a decrease in the company’s unrecognized tax benefits of $378 million, of which $144 million was reclassified to income taxes payable. The company recorded $53 million of charges for expired tax credits and other related components of the settlement. The company recorded a charge of $156 million to establish a valuation allowance against certain U.S. foreign tax credits which the company believes will more likely than not expire unutilized.
In 2020, the company recorded a $263 million income tax benefit related to a domestication transaction involving the transfer of certain non-U.S. subsidiaries to the U.S., including interest expense of those subsidiaries. The company also recorded a valuation allowance of $212 million against the amount of interest expense that the company believes will more likely than not go unused.
The foreign tax credits discussed below are the result of foreign earnings and profits remitted or deemed remitted to the U.S. during the reporting year and the U.S. treatment of taxes paid in the foreign jurisdictions in the years those profits were originally earned.
In 2020, the company implemented foreign tax credit planning in Sweden which resulted in $96 million of foreign tax credits, with no related incremental U.S. income tax expense.
The company generally receives a tax deduction upon the exercise of non-qualified stock options by employees, or the vesting of restricted stock units held by employees, for the difference between the exercise price and the market price of the underlying common stock on the date of exercise. The company uses the incremental tax benefit approach for utilization of tax attributes. These excess tax benefits reduce the tax provision. In 2022, 2021 and 2020, the company's tax provision was reduced by $80 million, $124 million and $114 million, respectively, of such benefits.
Net deferred tax asset (liability) in the accompanying balance sheet consists of the following: | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 |
Deferred tax asset (liability) | | | | |
Depreciation and amortization | | $ | (4,277) | | | $ | (4,687) | |
Net operating loss and credit carryforwards | | 1,951 | | | 1,652 | |
Reserves and accruals | | 140 | | | 162 | |
Accrued compensation | | 259 | | | 318 | |
Inventory basis difference | | 364 | | | 181 | |
Deferred interest | | 445 | | | 295 | |
Research and development and other capitalized costs | | 220 | | | — | |
Unrealized (gains) losses on hedging instruments | | (199) | | | (33) | |
Other, net | | 435 | | | 251 | |
Deferred tax liabilities, net before valuation allowance | | (662) | | | (1,861) | |
Less: Valuation allowance | | 1,322 | | | 968 | |
Deferred tax liabilities, net | | $ | (1,984) | | | $ | (2,829) | |
The company estimates the degree to which tax assets and loss and credit carryforwards will result in a benefit based on expected profitability by tax jurisdiction and provides a valuation allowance for tax assets and loss and credit carryforwards that it believes will more likely than not expire unutilized. At December 31, 2022, all of the company’s valuation allowance relates to deferred tax assets, primarily net operating losses and disallowed interest expense carryforward, for which any subsequently recognized tax benefits will reduce income tax expense.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The changes in the valuation allowance are as follows: | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(In millions) | | 2022 | | 2021 | | 2020 |
Beginning balance | | $ | 968 | | | $ | 933 | | | $ | 408 | |
Additions (reductions) charged to income tax provision, net | | 344 | | | 24 | | | 514 | |
Additions due to acquisitions | | 14 | | | 30 | | | — | |
| | | | | | |
| | | | | | |
Currency translation and other | | (4) | | | (19) | | | 11 | |
Ending balance | | $ | 1,322 | | | $ | 968 | | | $ | 933 | |
At December 31, 2022, the company had net federal, state and non-U.S. net operating loss carryforwards of $68 million, $97 million and $1.16 billion, respectively. Use of the carryforwards is limited based on the future income of certain subsidiaries. Of the federal net operating loss carryforwards, $33 million expire in the years 2023 through 2037, and the remainder do not expire. The state net operating loss carryforwards expire in the years 2023 through 2042. Of the net non-U.S. net operating loss carryforwards, $422 million expire in the years 2025 through 2042, and the remainder do not expire.
At December 31, 2022, the company had foreign tax credit carryforwards of $551 million and deferred interest carryforwards of $445 million. The foreign tax credit carryforwards will expire in the years 2025 through 2032 while deferred interest carryforwards do not expire.
U.S. federal taxes have been recorded on approximately $29 billion of undistributed foreign earnings as of December 31, 2022. A provision has not been made for certain U.S. state income taxes or additional non-U.S. taxes that would be due when cash is repatriated to the U.S. as the company’s undistributed foreign earnings are intended to be reinvested outside of the U.S. indefinitely. The determination of the amount of the unrecognized deferred tax liability related to the undistributed foreign earnings is not practicable due to the uncertainty in the manner in which these earnings will be distributed. The company’s intent is to only make distributions from non-U.S. subsidiaries in the future when they can be made at no net tax cost.
Unrecognized Tax Benefits
As of December 31, 2022, the company had $0.57 billion of unrecognized tax benefits substantially all of which, if recognized, would reduce the effective tax rate.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows: | | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Beginning balance | | $ | 1,124 | | | $ | 1,091 | | | $ | 1,552 | |
Additions due to acquisitions | | 15 | | | 26 | | | — | |
| | | | | | |
Additions for tax positions of current year | | 104 | | | 32 | | | 8 | |
Additions for tax positions of prior years | | 24 | | | 60 | | | — | |
Reductions for tax positions of prior years | | (659) | | | (5) | | | (296) | |
Closure of tax years | | (4) | | | (27) | | | — | |
Settlements | | (32) | | | (53) | | | (173) | |
Ending balance | | $ | 572 | | | $ | 1,124 | | | $ | 1,091 | |
Substantially all of the unrecognized tax benefits are classified as long-term liabilities. The company does not expect its unrecognized tax benefits to change significantly over the next twelve months.
During 2022, the company’s unrecognized tax benefits increased by $143 million as a result of uncertain tax positions relating to foreign tax positions and decreased $610 million relating to U.S. federal and state tax positions which included $658 million from the settlement of the IRS audit of the 2017 and 2018 tax years. The company also assumed $15 million of uncertain tax benefits as part of the acquisition of PPD.
During 2021, the company’s unrecognized tax benefits increased by $80 million as a result of uncertain tax positions relating to foreign tax positions and decreased $75 million relating to U.S. federal and state tax positions. The company also assumed $26 million of uncertain tax benefits as part of the acquisition of PPD.
During 2020, the company’s unrecognized tax benefits decreased $51 million as a result of uncertain tax positions relating to foreign tax positions and $410 million relating to U.S. federal and state tax positions which included $378 million from the settlement of the IRS audit of the 2014, 2015 and 2016 tax years.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The company classified interest and penalties related to unrecognized tax benefits as income tax expense. The total amount of interest and penalties related to uncertain tax positions and recognized in the balance sheet as of December 31, 2022 and 2021 was $74 million and $59 million, respectively.
The company conducts business globally and, as a result, Thermo Fisher or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, Canada, China, Denmark, Finland, France, Germany, Japan, Singapore, Sweden, the United Kingdom and the United States. With few exceptions, the company is no longer subject to U.S. state and local or non-U.S. income tax examinations for years before 2012 and no longer subject to U.S. federal income tax examinations for years before 2019.
Note 9. Earnings per Share
| | | | | | | | | | | | | | | | | | | | |
(In millions except per share amounts) | | 2022 | | 2021 | | 2020 |
Net income attributable to Thermo Fisher Scientific Inc. | | $ | 6,950 | | | $ | 7,725 | | | $ | 6,375 | |
| | | | | | |
Basic weighted average shares | | 392 | | | 394 | | | 396 | |
Plus effect of: stock options and restricted stock units | | 2 | | | 3 | | | 3 | |
Diluted weighted average shares | | 394 | | | 397 | | | 399 | |
| | | | | | |
Basic earnings per share | | $ | 17.75 | | | $ | 19.62 | | | $ | 16.09 | |
Diluted earnings per share | | $ | 17.63 | | | $ | 19.46 | | | $ | 15.96 | |
| | | | | | |
Antidilutive stock options excluded from diluted weighted average shares | | 2 | | | 1 | | | 1 | |
Note 10. Debt and Other Financing Arrangements
| | | | | | | | | | | | | | | | | | | | |
| | Effective interest rate at December 31, | | December 31, | | December 31, |
(Dollars in millions) | | 2022 | | 2022 | | 2021 |
Commercial Paper | | 2.60 | % | | $ | 310 | | | $ | 2,522 | |
| | | | | | |
Floating Rate (SOFR + 0.35%) 1.5-Year Senior Notes, Due 4/18/2023 | | | | 1,000 | | | 1,000 | |
Floating Rate (SOFR + 0.39%) 2-Year Senior Notes, Due 10/18/2023 | | | | 500 | | | 500 | |
0.797% 2-Year Senior Notes, Due 10/18/2023 | | 1.03 | % | | 1,350 | | | 1,350 | |
Floating Rate (EURIBOR + 0.20%) 2-Year Senior Notes Due 11/18/2023 (euro-denominated) | | 1.85 | % | | 1,819 | | | 1,933 | |
0.000% 2-Year Senior Notes Due 11/18/2023 (euro-denominated) | | 0.06 | % | | 589 | | | 625 | |
0.75% 8-Year Senior Notes, Due 9/12/2024 (euro-denominated) | | 0.93 | % | | 1,071 | | | 1,137 | |
Floating Rate (SOFR + 0.53%) 3-Year Senior Notes, Due 10/18/2024 | | | | 500 | | | 500 | |
1.215% 3-Year Senior Notes, Due 10/18/2024 | | 1.42 | % | | 2,500 | | | 2,500 | |
0.125% 5.5-Year Senior Notes, Due 3/1/2025 (euro-denominated) | | 0.40 | % | | 857 | | | 910 | |
2.00% 10-Year Senior Notes, Due 4/15/2025 (euro-denominated) | | 2.09 | % | | 686 | | | 728 | |
0.853% 3-Year Senior Notes, Due 10/20/2025 (yen-denominated) | | 1.05 | % | | 170 | | | — | |
0.000% 4-Year Senior Notes Due 11/18/2025 (euro-denominated) | | 0.15 | % | | 589 | | | 625 | |
3.65% 10-Year Senior Notes, Due 12/15/2025 | | | | — | | | 350 | |
3.20% 3-Year Senior Notes, Due 1/21/2026 (euro-denominated) | | 3.38 | % | | 535 | | | — | |
1.40% 8.5-Year Senior Notes, Due 1/23/2026 (euro-denominated) | | 1.52 | % | | 749 | | | 796 | |
1.45% 10-Year Senior Notes, Due 3/16/2027 (euro-denominated) | | 1.65 | % | | 535 | | | 568 | |
1.75% 7-Year Senior Notes, Due 4/15/2027 (euro-denominated) | | 1.96 | % | | 642 | | | 682 | |
1.054% 5-Year Senior Notes, Due 10/20/2027 (yen-denominated) | | 1.18 | % | | 221 | | | — | |
4.80% 5-Year Senior Notes, Due 11/21/2027 | | 5.00 | % | | 600 | | | — | |
0.50% 8.5-Year Senior Notes, Due 3/1/2028 (euro-denominated) | | 0.77 | % | | 857 | | | 910 | |
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | |
| | Effective interest rate at December 31, | | December 31, | | December 31, |
(Dollars in millions) | | 2022 | | 2022 | | 2021 |
1.375% 12-Year Senior Notes, Due 9/12/2028 (euro-denominated) | | 1.46 | % | | 642 | | | 682 | |
1.750% 7-Year Senior Notes, Due 10/15/2028 | | 1.89 | % | | 700 | | | 700 | |
1.95% 12-Year Senior Notes, Due 7/24/2029 (euro-denominated) | | 2.07 | % | | 749 | | | 796 | |
2.60% 10-Year Senior Notes, Due 10/1/2029 | | 2.74 | % | | 900 | | | 900 | |
1.279% 7-Year Senior Notes, Due 10/19/2029 (yen-denominated) | | 1.44 | % | | 36 | | | — | |
0.80% 9-Year Senior Notes, Due 10/18/2030 (euro-denominated) | | 0.88 | % | | 1,873 | | | 1,990 | |
0.875% 12-Year Senior Notes, Due 10/1/2031 (euro-denominated) | | 1.13 | % | | 963 | | | 1,023 | |
2.00% 10-Year Senior Notes, Due 10/15/2031 | | 2.23 | % | | 1,200 | | | 1,200 | |
2.375% 12-Year Senior Notes, Due 4/15/2032 (euro-denominated) | | 2.54 | % | | 642 | | | 682 | |
1.49% 10-Year Senior Notes, Due 10/20/2032 (yen-denominated) | | 1.60 | % | | 48 | | | — | |
4.95% 10-Year Senior Notes, Due 11/21/2032 | | 5.09 | % | | 600 | | | — | |
1.125% 12-Year Senior Notes, Due 10/18/2033 (euro-denominated) | | 1.20 | % | | 1,606 | | | 1,706 | |
3.65% 12-Year Senior Notes, Due 11/21/2034 (euro-denominated) | | 3.76 | % | | 803 | | | — | |
2.875% 20-Year Senior Notes, Due 7/24/2037 (euro-denominated) | | 2.94 | % | | 749 | | | 796 | |
1.50% 20-Year Senior Notes, Due 10/1/2039 (euro-denominated) | | 1.73 | % | | 963 | | | 1,023 | |
2.80% 20-Year Senior Notes, Due 10/15/2041 | | 2.90 | % | | 1,200 | | | 1,200 | |
1.625% 20-Year Senior Notes, Due 10/18/2041 (euro-denominated) | | 1.77 | % | | 1,339 | | | 1,421 | |
2.069% 20-Year Senior Notes, Due 10/20/2042 (yen-denominated) | | 2.13 | % | | 111 | | | — | |
5.30% 30-Year Senior Notes, Due 2/1/2044 | | 5.37 | % | | 400 | | | 400 | |
4.10% 30-Year Senior Notes, Due 8/15/2047 | | 4.23 | % | | 750 | | | 750 | |
1.875% 30-Year Senior Notes, Due 10/1/2049 (euro-denominated) | | 1.98 | % | | 1,071 | | | 1,137 | |
2.00% 30-Year Senior Notes, Due 10/18/2051 (euro-denominated) | | 2.06 | % | | 803 | | | 853 | |
2.382% 30-Year Senior Notes, Due 10/18/2052 (yen-denominated) | | 2.43 | % | | 254 | | | — | |
Other | | | | 79 | | | 76 | |
Total borrowings at par value | | | | 34,561 | | | 34,971 | |
| | | | | | |
Unamortized discount | | | | (112) | | | (117) | |
Unamortized debt issuance costs | | | | (171) | | | (184) | |
Total borrowings at carrying value | | | | 34,278 | | | 34,670 | |
Finance lease liabilities | | | | 210 | | | 200 | |
Less: Short-term obligations and current maturities | | | | 5,579 | | | 2,537 | |
Long-term obligations | | | | $ | 28,909 | | | $ | 32,333 | |
SOFR - Secured Overnight Financing Rate
EURIBOR - Euro Interbank Offered Rate
The effective interest rates for the fixed-rate debt include the stated interest on the notes, the accretion of any discounts/premiums and the amortization of any debt issuance costs.
See Note 14 for fair value information pertaining to the company’s long-term borrowings.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2022, the annual repayment requirements for debt obligations are as follows: | | | | | | | | | | | | | | |
(In millions) | | Borrowings | | Finance Lease Liabilities |
2023 | | $ | 5,583 | | | $ | 11 | |
2024 | | 4,071 | | | 16 | |
2025 | | 2,298 | | | 12 | |
2026 | | 1,285 | | | 11 | |
2027 | | 1,999 | | | 10 | |
2028 and thereafter | | 19,325 | | | 150 | |
| | $ | 34,561 | | | $ | 210 | |
In addition to available borrowings under the company’s revolving credit agreements, discussed below, the company had unused lines of credit of $72 million as of December 31, 2022. These unused lines of credit generally provide for short-term unsecured borrowings at various interest rates.
Credit Facilities
The company has a revolving credit facility (the Facility) with a bank group that provides for up to $5.00 billion of unsecured multi-currency revolving credit. The Facility expires on January 7, 2027. The revolving credit agreement calls for interest at either a Term SOFR, 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 the Facility include a Consolidated Net Interest Coverage Ratio (Consolidated EBITDA to Consolidated Net 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 minimum Consolidated Net Interest Coverage Ratio of 3.5:1.0 as of the last day of any fiscal quarter. As of December 31, 2022, no borrowings were outstanding under the Facility, although available capacity was reduced by immaterial outstanding letters of credit.
Commercial Paper Programs
The company has commercial paper programs pursuant to which it may issue and sell unsecured, short-term promissory notes (CP Notes). Under the U.S. program, a) maturities may not exceed 397 days from the date of issue and b) the CP Notes are issued on a private placement basis under customary terms in the commercial paper market and are not redeemable prior to maturity nor subject to voluntary prepayment. Under the euro program, maturities may not exceed 183 days and may be denominated in euro, U.S. dollars, Japanese yen, British pounds sterling, Swiss franc, Canadian dollars or other currencies. Under both programs, the CP Notes are issued at a discount from par (or premium to par, in the case of negative interest rates), or, alternatively, are sold at par and bear varying interest rates on a fixed or floating basis. As of December 31, 2022, there were $0.31 billion of outstanding borrowings under these programs.
Senior Notes
Interest is payable quarterly on the floating rate senior notes, annually on the euro-denominated fixed rate senior notes and semi-annually on all other senior notes. Each of the fixed rate senior notes may be redeemed at a redemption price of 100% of the principal amount plus a specified make-whole premium and accrued interest. Except for the euro-denominated floating rate senior notes, which may not be redeemed early, the floating rate senior notes may be redeemed in whole or in part on or after their applicable call dates at a redemption price of 100% of the principal amount plus 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. The company was in compliance with all covenants at December 31, 2022.
In 2022 the company completed the full allocation of an amount equal to the net proceeds from the 0.000% senior notes due 2025 to finance or refinance, in whole or in part, certain COVID-19 response projects.
In 2022, the company redeemed all of its 3.650% Senior Notes due 2025. In connection with the redemption, the company incurred $26 million of losses on the early extinguishment of debt included in other income/(expense) on the accompanying statement of income.
In 2021, the company redeemed some of its existing senior notes. In connection with these redemptions, the company incurred $767 million of losses on the early extinguishment of debt included in other income/(expense) on the accompanying statement of income. Upon redemption of the senior notes, the company terminated the related fixed to floating rate interest rate
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
swap arrangements and received $22 million, included in other financing activities, net, in the accompanying statement of cash flows.
Thermo Fisher Scientific (Finance I) B.V. (Thermo Fisher International), a wholly-owned finance subsidiary of the company, issued each of the Floating Rate Senior Notes due 2023, the 0.00% Senior Notes due 2023, the 0.00% Senior Notes due 2025, the 0.80% Senior Notes due 2030, the 1.125% Senior Notes due 2033, the 1.625% Senior Notes due 2041, and the 2.00% Senior Notes due 2051 included in the table above (collectively, the “Euronotes”) in registered public offerings. The company has fully and unconditionally guaranteed all of Thermo Fisher International’s obligations under the Euronotes and all of Thermo Fisher International’s other debt securities, and no other subsidiary of the company will guarantee these obligations. Thermo Fisher International is a “finance subsidiary” as defined in Rule 13-01(a)(4)(vi) of the Exchange Act, with no assets or operations other than those related to the issuance, administration and repayment of the Euronotes and other debt securities issued by Thermo Fisher International from time to time. The financial condition, results of operations and cash flows of Thermo Fisher International are consolidated in the financial statements of the company.
Note 11. Leases
As a lessee, the company leases certain logistics, office, and manufacturing facilities, as well as vehicles, copiers, and other equipment. These operating leases generally have remaining lease terms between 1 month and 30 years, and some include options to extend (generally for 1 to 10 years) or have options to terminate the arrangement within 1 year.
The company has guaranteed the residual value of three leased operating facilities with lease terms ending in 2023, 2024 and 2025. The company has agreed with the lessor to comply with certain financial covenants consistent with its other debt arrangements (Note 10). The aggregate maximum guarantee under these three lease arrangements is $147 million. Operating lease ROU assets and lease liabilities for these lease arrangements are recorded on the consolidated balance sheet as of December 31, 2022, but exclude any amounts for residual value guarantees.
As a lessee, the consolidated financial statements include the following relating to operating leases: | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | 2022 | | 2021 | | 2020 |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Statement of income | | | | | | |
Operating lease costs | | $ | 351 | | | $ | 254 | | | $ | 224 | |
Variable lease costs | | 109 | | | 66 | | | 49 | |
| | | | | | |
Statement of cash flows | | | | | | |
Cash used in operating activities for payments of amounts included in the measurement of operating lease liabilities | | $ | 289 | | | $ | 288 | | | $ | 222 | |
Operating lease ROU assets obtained in exchange for new operating lease liabilities | | 430 | | | 293 | | | 202 | |
| | | | | | |
Balance sheet | | | | | | |
ROU assets | | $ | 1,593 | | | $ | 1,531 | | | |
Operating lease liabilities - current | | 272 | | | 266 | | | |
Operating lease liabilities - noncurrent | | 1,313 | | | 1,203 | | | |
| | | | | | |
Weighted average at end of year | | | | | | |
Remaining operating lease term | | 9.4 years | | 9.9 years | | |
Discount rate | | 3.2 | % | | 2.6 | % | | |
ROU assets are classified in other assets in the consolidated balance sheet. Operating lease liabilities are classified in other accrued expenses and other long-term liabilities, respectively, in the consolidated balance sheet.
Lease costs arising from finance leases, short-term leases, and sublease income are not material. See Note 10 for additional information relating to finance leases.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2022, future payments of operating lease liabilities are as follows: | | | | | | | | |
(In millions) | | |
2023 | | $ | 321 | |
2024 | | 293 | |
2025 | | 220 | |
2026 | | 172 | |
2027 | | 136 | |
2028 and thereafter | | 730 | |
Total lease payments | | 1,872 | |
Less: imputed interest | | 287 | |
Total operating lease liability | | $ | 1,585 | |
As a lessor, operating leases, sales-type leases and direct financing leases are not material.
Note 12. Commitments and Contingencies
Purchase Obligations
The company has entered into unconditional purchase obligations, in the ordinary course of business, that include agreements to purchase goods, services or fixed assets and to pay royalties that are enforceable and legally binding and that specify all significant terms including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable at any time without penalty. The aggregate amount of the company’s unconditional purchase obligations totaled $2.40 billion at December 31, 2022 and the majority of these obligations are expected to be settled during 2023.
The Analytical Instruments segment recorded a charge to cost of product revenues for $108 million in 2020 related to an existing supply contract for components of electron microscopy instruments. The agreement requires the company to make future minimum purchases through 2025. The company developed and launched an alternative product beginning in 2020 and based on the expected demand for the internally developed product vs. the third-party product, the company does not expect to use all of the product it will be required to buy, resulting in a loss on the purchase commitment.
Letters of Credit, Guarantees and Other Commitments
Outstanding letters of credit and bank guarantees totaled $297 million at December 31, 2022. Substantially all of these letters of credit and guarantees expire before 2040.
Outstanding surety bonds and other guarantees totaled $84 million at December 31, 2022. The expiration of these bonds and guarantees ranges through 2024.
The letters of credit, bank guarantees and surety bonds principally secure performance obligations, and allow the holder to draw funds up to the face amount of the letter of credit, bank guarantee or surety bond if the applicable business unit does not perform as contractually required.
The company is a guarantor of pension plan obligations of a divested business. The purchaser of the divested business has agreed to pay for the pension benefits, however the company was required to guarantee payment of these pension benefits should the purchaser fail to do so. The amount of the guarantee at December 31, 2022 was $28 million.
In connection with the sale of businesses of the company, the buyers have assumed certain contractual obligations of such businesses and have agreed to indemnify the company with respect to those assumed liabilities. In the event a third-party to a transferred contract does not recognize the transfer of obligations or a buyer defaults on its obligations under the transferred contract, the company could be liable to the third-party for such obligations. However, in such event, the company would be entitled to seek indemnification from the buyer.
Indemnifications
In conjunction with certain transactions, primarily divestitures, the company has agreed to indemnify the other parties with respect to certain liabilities related to the businesses that were sold or leased properties that were abandoned (e.g., retention of certain environmental, tax, employee and product liabilities). The scope and duration of such indemnity obligations vary from transaction to transaction. Where probable, an obligation for such indemnifications is recorded as a liability. Generally, a
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
maximum obligation cannot be reasonably estimated. Other than obligations recorded as liabilities at the time of divestiture, historically the company has not made significant payments for these indemnifications.
In connection with the company’s efforts to reduce the number of facilities that it occupies, the company has vacated some of its leased facilities or sublet them to third parties. When the company sublets a facility to a third-party, it remains the primary obligor under the master lease agreement with the owner of the facility. As a result, if a third-party vacates the sublet facility, the company would be obligated to make lease or other payments under the master lease agreement. The company believes that the financial risk of default by sublessors is individually and in the aggregate not material to the company’s financial position or results of operations.
In connection with the sale of products in the ordinary course of business, the company often makes representations affirming, among other things, that its products do not infringe on the intellectual property rights of others and agrees to indemnify customers against third-party claims for such infringement. The company has not been required to make material payments under such provisions.
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 input from 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 December 31, 2022, the company’s total environmental liability was approximately $75 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 and cash flows.
Litigation and Related Contingencies
The company is involved in various disputes, governmental and/or regulatory inspections, inquiries, investigations and proceedings, and litigation matters that arise from time to time in the ordinary course of business. The disputes and litigation matters include 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, 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
The company is involved in various proceedings and litigation that arise from time to time in connection with product liability, workers compensation and other personal injury matters. The range of probable loss for product liability, workers compensation and other personal injury matters of the company’s continuing operations at December 31, 2022, was
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
approximately $223 million to $384 million on an undiscounted basis. The portion of these liabilities assumed in the 2006 merger with Fisher was recorded at its fair (present) value at the date of merger. The company’s accrual for all such matters in total, including the discounted liabilities, was $229 million at December 31, 2022 (or $232 million undiscounted). The accrual includes estimated defense costs and is gross of estimated amounts due from insurers of $95 million at December 31, 2022 (or $98 million undiscounted) that are included in other assets in the accompanying balance sheet. The portion of these insurance assets assumed in the merger with Fisher was also recorded at its fair value at the date of merger. In addition to the above accrual, as of December 31, 2022, the company had a product liability accrual of $17 million (undiscounted) relating to divested businesses.
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, which could have a material adverse effect on the company’s results of operations, financial position, and cash flows. 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.
Note 13. Comprehensive Income and Shareholders' Equity
Comprehensive Income (Loss)
Changes in each component of accumulated other comprehensive items, net of tax are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | | Currency translation adjustment | | Unrealized losses on hedging instruments | | Pension and other postretirement benefit liability adjustment | | Total |
Balance at December 31, 2021 | | $ | (2,065) | | | $ | (35) | | | $ | (229) | | | $ | (2,329) | |
Other comprehensive items before reclassifications | | (822) | | | — | | | 38 | | | (784) | |
Amounts reclassified from accumulated other comprehensive items | | 7 | | | 2 | | | 5 | | | 14 | |
Net other comprehensive items | | (815) | | | 2 | | | 43 | | | (770) | |
Balance at December 31, 2022 | | $ | (2,880) | | | $ | (33) | | | $ | (186) | | | $ | (3,099) | |
Shareholders’ Equity
At December 31, 2022, the company had reserved 22 million unissued shares of its common stock for possible issuance under stock-based compensation plans.
Early in the first quarter of 2023, the company repurchased $3.00 billion of the company's common stock (5.2 million shares).
Note 14. 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 2022. The company’s financial assets and liabilities carried at fair value are primarily comprised of investments in publicly traded securities, insurance contracts, investments in 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.
Assets and liabilities carried at fair value are 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.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present information about the company’s financial assets and liabilities measured at fair value on a recurring basis: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | Quoted prices in active markets | | Significant other observable inputs | | Significant unobservable inputs | | |
(In millions) | | 2022 | | (Level 1) | | (Level 2) | | (Level 3) | |
Assets | | | | | | | | | | |
Cash equivalents | | $ | 5,804 | | | $ | 5,804 | | | $ | — | | | $ | — | | | |
Investments | | 25 | | | 25 | | | — | | | — | | | |
Warrants | | 12 | | | — | | | 12 | | | — | | | |
Insurance contracts | | 162 | | | — | | | 162 | | | — | | | |
Derivative contracts | | 79 | | | — | | | 79 | | | — | | | |
Total assets | | $ | 6,082 | | | $ | 5,829 | | | $ | 253 | | | $ | — | | | |
Liabilities | | | | | | | | | | |
Derivative contracts | | $ | 101 | | | $ | — | | | $ | 101 | | | $ | — | | | |
Contingent consideration | | 174 | | | — | | | — | | | 174 | | | |
Total liabilities | | $ | 275 | | | $ | — | | | $ | 101 | | | $ | 174 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | Quoted prices in active markets | | Significant other observable inputs | | Significant unobservable inputs | | |
(In millions) | | 2021 | | (Level 1) | | (Level 2) | | (Level 3) | |
Assets | | | | | | | | | | |
Cash equivalents | | $ | 2,210 | | | $ | 2,210 | | | $ | — | | | $ | — | | | |
Investments | | 298 | | | 298 | | | — | | | — | | | |
Warrants | | 15 | | | — | | | 15 | | | — | | | |
Insurance contracts | | 181 | | | — | | | 181 | | | — | | | |
Derivative contracts | | 36 | | | — | | | 36 | | | — | | | |
Total assets | | $ | 2,740 | | | $ | 2,508 | | | $ | 232 | | | $ | — | | | |
Liabilities | | | | | | | | | | |
Derivative contracts | | $ | 1 | | | $ | — | | | $ | 1 | | | $ | — | | | |
Contingent consideration | | 317 | | | — | | | — | | | 317 | | | |
Total liabilities | | $ | 318 | | | $ | — | | | $ | 1 | | | $ | 317 | | | |
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 initially measures the fair value of acquisition-related contingent consideration based on amounts expected to be transferred (probability-weighted) discounted to present value. Changes to the fair value of contingent consideration are recorded in selling, general and administrative expense.
The following table provides a rollforward of the fair value, as determined by level 3 inputs (such as likelihood of achieving production or revenue milestones, as well as changes in the fair values of the investments underlying a recapitalization investment portfolio), of the contingent consideration.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 |
Contingent consideration | | | | |
Beginning balance | | $ | 317 | | | $ | 70 | |
Acquisitions (including assumed balances) | | (18) | | | 403 | |
Payments | | (66) | | | (109) | |
Changes in fair value included in earnings | | (59) | | | (47) | |
Ending balance | | $ | 174 | | | $ | 317 | |
Derivative Contracts
The following table provides the aggregate notional value of outstanding derivative contracts. | | | | | | | | | | | | | | |
| | December 31, | | December 31, |
(In millions) | | 2022 | | 2021 |
Notional amount | | | | |
| | | | |
| | | | |
Cross-currency interest rate swaps - designated as net investment hedges | | $ | 2,100 | | | $ | 900 | |
| | | | |
Currency exchange contracts | | 2,434 | | | 2,149 | |
While certain derivatives are subject to netting arrangements with counterparties, the company does not offset derivative assets and liabilities within the balance sheet. The following tables present the fair value of derivative instruments in the accompanying balance sheet and statement of income. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair value – assets | | Fair value – liabilities |
| | December 31, | | December 31, | | December 31, | | December 31, |
(In millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Derivatives designated as hedging instruments | | | | | | | |
| | | | | | | | |
Cross-currency interest rate swaps (a) | | $ | 77 | | | $ | 25 | | | $ | 85 | | | $ | — | |
Derivatives not designated as hedging instruments | | | | | | | |
Currency exchange contracts (b) | | 2 | | | 11 | | | 16 | | | 1 | |
| | | | | | | | |
Total derivatives | | $ | 79 | | | $ | 36 | | | $ | 101 | | | $ | 1 | |
(a)The fair value of the cross-currency interest rate swaps is included in the accompanying balance sheet under the caption other assets or other long-term liabilities.
(b)The fair value of the currency exchange contracts is included in the accompanying balance sheet under the captions other current assets or other accrued expenses.
| | | | | | | | | | | | | | |
| | Gain (loss) recognized |
(In millions) | | 2022 | | 2021 |
Fair value hedging relationships | | | | |
Cross-currency interest rate swaps | | | | |
Hedged long-term obligations - included in other income/(expense) | | $ | 77 | | | $ | — | |
Derivatives designated as hedging instruments - included in other income/(expense) | | (81) | | | — | |
Interest rate swaps | | | | |
Hedged long-term obligations - included in other income/(expense) | | — | | | 25 | |
Derivatives designated as hedging instruments - included in other income/(expense) | | — | | | (3) | |
Derivatives designated as cash flow hedges | | | | |
Interest rate swaps | | | | |
| | | | |
Amount reclassified from accumulated other comprehensive items to other income/(expense) | | (3) | | | (73) | |
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | |
| | Gain (loss) recognized |
(In millions) | | 2022 | | 2021 |
Financial instruments designated as net investment hedges | | | | |
Foreign currency-denominated debt and other payables | | | | |
Included in currency translation adjustment within other comprehensive items | | 695 | | | 922 | |
Cross-currency interest rate swaps | | | | |
Included in currency translation adjustment within other comprehensive items | | 52 | | | 71 | |
Included in other income/(expense) | | 19 | | | 8 | |
Derivatives not designated as hedging instruments | | | | |
Currency exchange contracts | | | | |
Included in cost of product revenues | | 6 | | | 12 | |
Included in other income/(expense) | | 102 | | | 162 | |
| | | | |
| | | | |
Gains and losses recognized on currency exchange contracts and the interest rate swaps designated as fair value hedges are included in the accompanying statement of income together with the corresponding, offsetting losses and gains on the underlying hedged transactions.
The company uses foreign currency-denominated debt, certain foreign-denominated payables, and cross-currency interest rate swaps to partially hedge its net investments in foreign operations against adverse movements in exchange rates. A portion of the company’s euro-denominated senior notes, certain foreign-denominated payables, and its 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 certain foreign-denominated payables, 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.
See Note 1 and Note 10 for additional information on the company’s risk management objectives and strategies.
Cash Flow Hedge Arrangements
In 2020 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 the planned fixed-rate debt issues. The aggregate fair value of the terminated hedges, net of tax, has been classified as a reduction to accumulated other comprehensive items and will be amortized to interest expense over the term of the related debt issuances. The company had cash outlays aggregating $85 million in 2020 associated with termination of the arrangements, included in other financing activities, net, in the accompanying statement of cash flows.
In late 2020, the company determined that the previously anticipated debt offerings were probable of not occurring and reclassified $42 million from accumulated other comprehensive items to other income/(expense). During 2021, in connection with the extinguishment of debt (Note 10), the company reclassified $65 million from accumulated other comprehensive items to other income/(expense).
Fair Value of Other Financial Instruments
The carrying value and fair value of the company’s debt instruments are as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | Carrying | | Fair | | Carrying | | Fair |
(In millions) | | value | | value | | value | | value |
Senior notes | | $ | 33,889 | | | $ | 29,901 | | | $ | 32,072 | | | $ | 33,449 | |
| | | | | | | | |
Commercial paper | | 310 | | | 310 | | | 2,522 | | | 2,522 | |
Other | | 79 | | | 79 | | | 76 | | | 76 | |
| | $ | 34,278 | | | $ | 30,290 | | | $ | 34,670 | | | $ | 36,047 | |
The fair value of debt instruments 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.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15. Supplemental Cash Flow Information
| | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Cash paid for: | | | | | | |
Interest | | $ | 667 | | | $ | 555 | | | $ | 471 | |
Income taxes | | 1,234 | | | 2,182 | | | 1,324 | |
| | | | | | |
Non-cash investing and financing activities | | | | | | |
Acquired but unpaid property, plant and equipment | | 393 | | | 379 | | | 347 | |
Fair value of equity awards exchanged | | — | | | 43 | | | — | |
Fair value of acquisition contingent consideration | | — | | | 183 | | | — | |
Finance lease ROU assets obtained in exchange for new finance lease liabilities | | 33 | | | 15 | | | 5 | |
Declared but unpaid dividends | | 119 | | | 104 | | | 89 | |
Issuance of stock upon vesting of restricted stock units | | 241 | | | 265 | | | 217 | |
Cash, cash equivalents and restricted cash is included in the consolidated balance sheet as follows: | | | | | | | | | | | | | | |
| | December 31, | | December 31, |
(In millions) | | 2022 | | 2021 |
Cash and cash equivalents | | $ | 8,524 | | | $ | 4,477 | |
Restricted cash included in other current assets | | 12 | | | 13 | |
Restricted cash included in other assets | | 1 | | | 1 | |
Cash, cash equivalents and restricted cash | | $ | 8,537 | | | $ | 4,491 | |
Amounts included in restricted cash primarily represent funds held as collateral for bank guarantees and incoming cash in China awaiting government administrative clearance.
Note 16. Restructuring and Other Costs
Restructuring and other costs in 2022 primarily included impairment of long-lived assets and continuing charges for headcount reductions and facility consolidations in an effort to streamline operations. In 2022, severance actions associated with facility consolidations and cost reduction measures affected less than 2% of the company’s workforce.
Restructuring and other costs in 2021 primarily included charges for impairments of an acquired technology asset and a tradename asset, and, to a lesser extent, compensation due to employees at acquired businesses on the date of acquisition. In 2021, severance actions associated with facility consolidations and cost reduction measures affected less than 1% of the company’s workforce.
Restructuring and other costs in 2020 primarily included continuing charges for headcount reductions and facility consolidations in an effort to streamline operations, and charges for the write-off of acquired technology. In 2020, severance actions associated with facility consolidations and cost reduction measures affected approximately 1% of the company’s workforce.
As of February 23, 2023, the company has identified restructuring actions that will result in additional charges of approximately $60 million, primarily in 2023, and expects to identify additional actions in future periods which will be recorded when specified criteria are met, such as communication of benefit arrangements or when the costs have been incurred.
THERMO FISHER SCIENTIFIC INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restructuring and other costs by segment are as follows: | | | | | | | | | | | | | | | | | | | | |
(In millions) | | 2022 | | 2021 | | 2020 |
Life Sciences Solutions | | $ | 30 | | | $ | 129 | | | $ | 34 | |
Analytical Instruments | | 1 | | | 6 | | | 26 | |
Specialty Diagnostics | | 68 | | | 18 | | | 9 | |
Laboratory Products and Biopharma Services | | 12 | | | 35 | | | 23 | |
Corporate | | 3 | | | 9 | | | 7 | |
| | $ | 114 | | | $ | 197 | | | $ | 99 | |
The following table summarizes the changes in the company’s accrued restructuring balance. Other amounts reported as restructuring and other costs in the accompanying statement of income have been summarized in the notes to the table. Accrued restructuring costs are included in other accrued expenses in the accompanying balance sheet. | | | | | | | | |
(In millions) | | Total (a) |
Balance at December 31, 2019 | | $ | 34 | |
| | |
Net restructuring charges incurred in 2020 (b) | | 51 | |
Payments | | (57) | |
Currency translation | | (7) | |
Balance at December 31, 2020 | | 21 | |
Net restructuring charges incurred in 2021 (c) | | 37 | |
Payments | | (40) | |
Currency translation | | (1) | |
Balance at December 31, 2021 | | 17 | |
Net restructuring charges incurred in 2022 (d) | | 68 | |
Payments | | (44) | |
| | |
Balance at December 31, 2022 | | $ | 41 | |
(a)The movements in the restructuring liability principally consist of severance and other costs such as 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)Excludes $48 million of charges, principally $32 million for impairment of acquired technology in the Life Sciences Solutions segment resulting from a reduction in expected cash flows and, to a lesser extent, charges across the company’s segments for fixed asset writedowns and costs associated with environmental remediation at abandoned/previously owned facilities.
(c)Excludes $160 million of charges, principally $122 million for impairments of an acquired technology asset and a tradename asset in the Life Sciences Solutions and Laboratory Products and Biopharma Services segment, principally resulting from a reduction in expected cash flows, and $35 million of charges for compensation contractually due to employees of acquired businesses at the date of acquisition in the Life Sciences Solutions and Laboratory Products and Biopharma Services segments.
(d)Excludes $46 million of net charges, primarily charges for impairment of long-lived assets in the Specialty Diagnostic segment.
The company expects to pay accrued restructuring costs primarily through 2023.
Thermo Fisher Scientific (NYSE:TMO)
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